- The SEC delivered its first action in interpreting the role and governance of proxy voting advisory firms with release of an Interpretative Release in August 2019.
- In December 2019, the SEC has proposed substantive amendments to its rules and exemptions pertaining to proxy voting advice businesses such as ISS and Glass Lewis.
- The proposed amendments stipulate that proxy voting advice by proxy advice businesses can be considered “solicitation” in regard to the Securities and Exchange Act of 1934.
- In the past, proxy voting advice businesses have relied upon two exemptions to escape the SEC proxy disclosure rules’ information and filing requirements.
- The applicable exemptions have been amended by the SEC proposal to include additional disclosure requirements for proxy advisory firms ISS and Glass Lewis, including that proxy advisory firms must disclose relationships which may pose material conflicts of interest.
- The amended exemptions also require that proxy advisory firms allow the registrant company a minimum of five days to review and return feedback concerning the advisory firm’s voting advice, provided that the company files its definitive proxy statement at least 45 calendar days before the company’s scheduled meeting date.
The Securities and Exchange Commission (SEC, or “The Commission”) recognizes five major firms as “proxy voting advice businesses”: Institutional Shareholder Services (ISS), Glass Lewis, Egan-Jones, Marco Consulting Advisors, and ProxyVote Plus. The Commission defines proxy voting advice as the act of providing voting recommendations on specific matters presented at a company’s shareholding meeting, or when written shareholder consents or authorizations are sought in lieu of a meeting, including the underlying analysis and research supporting such recommendations. Proxy voting advice businesses provide such services to institutional investors under fee-based arrangements. ISS is the largest proxy voting advisory business; as of June 2019, ISS reported having more than 1,800 employees in 30 offices in 13 countries and covering over 44,000 shareholder meetings annually. Glass Lewis is considered the second largest proxy voting advice firm. Marco Consulting Advisors and ProxyVote Plus provide their services principally to pension plan clients, and Egan-Jones has a client base which consists mostly of mid- to large-sized mutual funds. 
On December 4, 2019, the Commission proposed amendments to its proxy solicitation rules to ensure that investors using proxy voting advice businesses receive more accurate, transparent, and complete information in considering their proxy voting decisions.1 The proposed amendments stipulate that proxy voting advice by a proxy advisory firm is a solicitation as defined by the Securities and Exchange Act of 1934. Under the SEC’s new interpretation of “solicitation,” proxy voting advice businesses would be subject to the full federal information and filing requirements unless they fully comply with the new disclosure and procedural requirements offered under two proxy filing rule exemptions. The SEC has drafted substantial amendments to these two exemptions, including that the proxy advisory firm must disclose their material conflicts of interest in delivering their advice. Further, the proposed exception amendments will clarify when omitting certain information may be considered misleading.
As of the time of this publication, the proposed rule and its revised exemptions have not been finalized. The SEC provided an open comment period to the investment community which officially closed as of February 3, 2020, but the Commission has not committed to a specific date for announcing the final rules and regulations in this matter.
Details of the Proposed Rules and Exemptions
The SEC has proposed to codify its interpretation of “solicitation” by amending Rule 14a-1(l) of the Securities and Exchange Act. This change would clarify that the terms “solicit” and “solicitation” include “any proxy voting advice that makes a recommendation to a shareholder as to its vote, consent, or authorization on a specific matter for which shareholder approval is solicited, and that is furnished by a person who markets its expertise as a provider of such advice, separately from other forms of investment advice, and sells such advice for a fee.” The proposed rule would further clarify that any proxy voting advice delivered in response to an unprompted request would not be considered “solicitation” per the SEC’s codified interpretation.
Under current SEC rules, any person engaging in solicitation, unless exempt, is generally subject to the Commission’s filing and information requirements under Schedule 14A of the Securities and Exchange Act. Schedule 14A requires that the proxy statement include extensive information such as a description of matters to shareholder vote, securities ownership details of management and directors, executive compensation disclosures, and related matters. Proxy voting advice businesses have relied upon exemptions in the first and third subsections of Rule 14a-2(b) in order to provide voting advice without violating the proxy rules’ filing and information requirements. The SEC has proposed new conditions to these two exemptions that apply specifically to persons who furnish proxy voting advice that constitutes a solicitation within the scope of the proposed rule. The principal elements of the amendments include:
- When persons deliver advice, they must disclose any significant relationships and stakes which may present a material conflict of interest and affect the advice’s value;
- These advisors must also provide a scheduled amount of time for registrants (i.e., filing companies) and certain other soliciting parties to review and provide feedback on the advice rendered before it is disseminated to the advisors’ business clients. In this regard, the amount of time provided will depend upon how far in advance the company has filed its definitive proxy in relation to the shareholder meeting. If the definitive proxy statement is filed at least 45 calendar days before the meeting date, the company will have at least five days to review and provide feedback. If the definitive proxy statement is filed between 25 and 44 calendar days before the meeting date, the company will have at least three days for review and providing feedback. In the event that the company files its definitive proxy statement less than 25 calendar days before the date of the meeting, the proxy voting advisor is under no obligation to share its voting advice to the company;
- In responding to the registrant business’ request (if asked), the proxy advisor must accompany its voting advice with a hyperlink (or other analogous electronic medium) that leads to the registrant’s statement explaining the advice.
Under Rule 14a-9 of the Securities and Exchange Act, any proxy solicitation is prohibited from including false or misleading statements or excluding any material fact(s) pertinent to the voting advice; solicitations that are otherwise exempt from the federal proxy rules information and filing requirements are still subject to this prohibition. Proxy voting advice businesses may be required to disclose information such as the proxy voting advice’s methodology, information sources, or material conflicts of interest if the underlying advice could be seen as misleading.1
ISS and Glass Lewis Respond to the SEC
Numerous firms, including the Council of Institutional Investors, have submitted comments to the SEC regarding the proposed rule and exception amendments. However, the extensive comment letters from ISS and Glass Lewis were the most noteworthy., 
Both firms have expressed numerous legal concerns with the SEC proposal; chief among these is the belief that the SEC’s new interpretation and codification of “solicitation” is beyond their purview, thereby negating the SEC’s authority to decide on rules concerning proxy voting advice businesses. ISS and Glass Lewis have also challenged the matter of conflict of interest and the disclosures required thereof, opining that the proposed rule and amendments are unconstitutional because they violate the proxy advisors’ research, analysis, opinions, and recommendations with respect to their core free speech rights under the First Amendment to the United States Constitution.
Additionally, it should be noted that ISS filed a lawsuit against the SEC on October 31, 2019 challenging the interpretation and advice put forth by the Commission in August 2019 regarding proxy solicitation rules and the delivery of proxy voting advice. In August 2019, the SEC issued an “Interpretative Release” regarding the applicability of federal proxy rules to proxy voting advice, and at that time first introduced the concept that proxy voting advice delivered by proxy advisory firms like ISS would be considered a solicitation under the Securities and Exchange Act of 1934.
Pay Governance Commentary
In recent years, many critics of ISS and Glass Lewis have claimed that the proxy advisors are largely unregulated businesses and engage in practices that have not been subject to proper review and oversight. The SEC has asserted its claim as the proper governing authority to monitor and conduct the oversight required to protect shareholder interests. The SEC’s newly proposed rule and amendments are rigorous and will require the advisory firms to make certain changes in business practices. We have no predictions as to the final resolution of the SEC’s proposal, but we promise to keep you apprised of future developments in this matter.
While Pay Governance was in the process of releasing this latest Viewpoint, a new development surfaced which has a direct bearing upon the potential outcome of this matter. As reported by Bloomberg, the SEC has filed an “Unopposed Motion to Hold Case in Abeyance” regarding the ISS lawsuit filed against the SEC and its chairman, Jay Clayton, regarding the SEC’s proposed rule and exemption amendments available to proxy voting advisory businesses. The motion, which was unopposed by ISS and approved by the Court, would stay the litigation matter until the earlier of January 1, 2021 or the promulgation of final rules in the SEC’s proxy advisor rulemaking. This motion and Court approval mean that during this proxy season, companies should not expect proxy advisory firms like ISS and Glass Lewis to feel compelled to comply with the SEC proposed rule, interpretation, or guidance.
General questions about this Viewpoint can be directed to John Ellerman at firstname.lastname@example.org.
 The Securities and Exchange Commission. “Amendments to Exemptions From the Proxy Rules for Proxy Voting Advice.” Federal Register. December 4, 2019. https://www.govinfo.gov/content/pkg/FR-2019-12-04/pdf/2019-24475.pdf.
 Institutional Shareholder Services, Inc. “ISS Comment Letter on Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice.” January 31, 2020. https://corpgov.law.harvard.edu/2020/02/06/iss-comment-letter-on-amendments-to-exemptions-from-the-proxy-rules-for-proxy-voting-advice/ .
 Glass, Lewis & Co. “Glass Lewis Comment Letter to the SEC About Proposed Proxy Rules for Proxy Voting Advice.” February 3, 2020. https://corpgov.law.harvard.edu/2020/02/06/glass-lewis-comment-letter-to-the-sec-about-proposed-proxy-rules-for-proxy-voting-advice/ .
 Andrea Vittorio. “Proxy Firm ISS Agrees to Wait for Final Rule in Suit Against SEC.” Bloomberg Law. January 17, 2020. https://news.bloomberglaw.com/corporate-law/proxy-firm-iss-agrees-to-wait-for-final-rule-in-suit-against-sec .