David N. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.
The latest developments in the SEC regulation of proxy advisory firms are good news for ISS and Glass Lewis, but they are a disappointment for proponents of conscientious and consistent rulemaking. The 2020 updates to proxy advisory rules were the result of a thorough process that was conducted by Commission staff across ten years and two politically distinct administrations, yet the framework implemented by the 2020 rules has been substantially gutted in the span of just a few months—without ever having taken effect. This unwelcome instability in the regulatory environment casts unfortunate doubt on the SEC’s commitment to being a nonpartisan, market-oriented regulator. It is likely to create uncertainty regarding future rulemaking, as to proxy advisory services specifically and as to potentially controversial areas in general.
The 2020 Rules
As we have previously observed, the SEC’s 2020 proxy advisory rulemaking effort met with a predictable mix of responses. There was opposition from the proxy advisory firms and the Council of Institutional Investors, and there was approval and support from public companies and other market participants who share the concern that proxy advisory firms wield disproportionate power and influence in the proxy voting process.
From the standpoint of regulatory stability, the important feature of the 2020 rule amendments was that they were a decade in the making. The outsized role of proxy advisory firms was first addressed in a 2010 SEC concept release on the proxy voting process, and a 2014 Staff Legal Bulletin warned investment advisors that their fiduciary duties precluded over-reliance on proxy advisory firms. In 2018, the SEC held a roundtable on the proxy process and in 2019 issued interpretation and guidance that confirmed the applicability of the federal proxy solicitation rules to proxy voting advice by proxy advisory firms and elaborated the SEC’s position regarding the responsibilities of investment advisers that chose to rely on proxy advisory firms. Continued work by Commission staff under the leadership of Chair Jay Clayton led to the adoption of rules and guidance in 2020 that represented the most significant steps the SEC had taken to date in regulating the provision of proxy voting services by proxy advisory firms. The prevailing view among market participants—other than proxy advisors and some of their clients—was that the 2020 rule amendments made meaningful improvements to the proxy voting process that would promote accountability and increase transparency regarding the advice of proxy advisory firms.
