The Securities and Exchange Commission (SEC) has approved in a 3-1 vote the long-debated proxy advisory firm reforms proposed on Nov. 5, 2019. The final rule amendments adopted were modified from the original proposal in response to commentary. Most notably, the final rules do not require proxy advisory firms to provide companies an opportunity to preview and provide feedback on a proxy advisor’s voting recommendations prior to issuance to the advisor’s clients as initially proposed.

The reforms include:

• Modifying the exemptions to the proxy solicitation rules relied on by proxy advisors.
• Supplemental guidance regarding investment advisers’ use and reliance on proxy advisors relative to their proxy voting responsibilities.

In its initial release, the SEC stated that the proposed rule amendments are “to help ensure that investors who use proxy voting advice receive more accurate, transparent and complete information on which to make voting decisions.”

Among other things, the rulemaking:

• Codifies that proxy voting advice constitutes a solicitation.
• Requires a substantive conflict of interest disclosure.
• Provides for prior or concurrent disclosure of voting advice to companies and proxy advisor clients and a means for clients to access the company’s response to such advice before they vote.
• Illustrates by example circumstances under which proxy voting advice may be misleading under Rule 14a-9.

In conjunction with the rule amendments, the commission also issued supplemental guidance to investment advisers on proxy voting responsibilities.

This long-awaited action by the SEC concludes more than a decade of discussion on a highly controversial topic that ultimately changes the nature of public shareholder communications. The SEC believes that the proposed changes will encourage constructive engagement between long-term shareholders and issuers and help prevent misuse of the shareholder proposal process.

The amendments will be effective 60 days after publication in the Federal Register, but compliance by covered proxy advisors under new Rule 14a-2(b)(9) amendments is not required until Dec. 1, 2021. The supplemental guidance is effective upon its publication in the Federal Register.