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SEC Won't Enforce Trump-Era Rule on Proxy Advisory Firms

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What You Need to Know

  • SEC Chairman Gary Gensler directed staff to review the rule and to consider whether further action is needed.
  • The Division of Corporation Finance said it “will not enforce the rule … while it considers further regulatory action.”
  • No change yet on the 2020 SEC rule that hiked stock ownership requirements to sponsor shareholder proposals.

The Securities and Exchange Commission will not enforce a Trump-era rule that restricts the practices of proxy advisory firms.

The rule requires that proxy advisory firms share their voting recommendations with the public companies that are the subject of those votes before sending them to clients or at the same time. The rule also requires those firms to inform clients about the companies’ response to their recommendation and to disclose any conflict of interest in their voting advice.

SEC Chairman Gary Gensler announced this week he was directing staff “to consider whether to recommend further regulatory action regarding proxy voting advice.” In light of that directive, the agency’s Division of Corporation Finance said it “will not enforce the rule … while it considers further regulatory action.”

The rule took effect on Nov. 2, 2020, but compliance is not required until Dec. 1 of this year. If there is no new regulatory action before Dec. 1, the Division of Corporation Finance said it will not recommend any enforcement action “for a reasonable time after any resumption” of a lawsuit by Institutional Shareholder Services challenging the SEC rule.

ISS had sued the agency in 2019 over guidance that advice provided firms like ISS constitutes a solicitation under federal proxy rules under the Exchange Act, which “authorizes the Commission to establish rules and regulations governing such solicitations as necessary or appropriate in the public interest or for the protection of investors.” It paused the suit while the SEC was working on finalizing new proxy rules, then reactivated it after the new rules were finalized.

The two SEC commissioners appointed by former President Donald Trump, Hester Peirce and Elad Roisman, criticized the latest agency action concerning the new proxy advisory firm rule.

“We find it difficult … to imagine what has changed in the roughly 10 months since the Commission last considered this issue that would call into question such recently adopted requirements,” they said in a joint statement. “Indeed, the compliance date for the exemption conditions is still months away, which makes it challenging, if not impossible, for us to know how these requirements will work in practice.”

But they said they were open to working with colleagues to consider any new recommendations.

The SEC during Trump’s term also substantially raised the ownership thresholds required to submit shareholder proposals in corporate proxy statements. For example, a shareholder would have to own at least $2,000 worth of stock for three years to sponsor a first-time proxy proposal, up from one year currently, and a group of shareholders could not aggregate holdings to meet the new, higher threshold.

Commissioner Allison Herren Lee, who was acting chair of the agency after President Joe Biden took office but before Gensler was confirmed as SEC chairman, asked staff to consider potentially revising the amended Rule 14a-8, but Gensler has not weighed in on that.


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