July 1, 2014
On June 30, 2014, the staff of the Securities and Exchange Commission’s (the "Commission") Division of Investment Management and Division of Corporation Finance (the "Staff") issued much-anticipated guidance regarding proxy advisory firms, in the form of 13 Questions and Answers. Published in Staff Legal Bulletin No. 20 ("SLB 20"), available at http://www.sec.gov/interps/legal/cfslb20.htm, the Staff’s guidance addresses both (1) investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms (Questions 1-5), and (2) the availability and requirements of two exemptions to the proxy rules often relied upon by proxy advisory firms (Questions 6-13).
SLB 20 includes an acknowledgement that investment advisers and proxy advisory firms may determine or need to make changes to their current systems and processes in light of its guidance. Accordingly, the Staff "expects any necessary changes will be made promptly, but in any event in advance of next year’s proxy season." However, the guidance is unlikely to affect public companies’ interaction with proxy advisory firms.
This alert provides an overview of SLB 20, focusing on information that public companies should know about the new Staff guidance.
I. Proxy Advisory Firms and the SEC’s Proxy Solicitation Rules
The Staff of the Division of Corporation Finance explained that a proxy advisory firm is subject to the federal proxy rules when it engages in a "solicitation," and the Commission has stated, as a general matter, that the furnishing of proxy advice constitutes a "solicitation" subject to the information and filing requirements of the federal proxy rules. However, Rule 14a-2(b)(1) under the Securities Exchange Act of 1934 (the "Solicitation Exemption") provides an exemption from the SEC’s information and filing requirements (but not from the anti-fraud rules) for "any solicitation by or on behalf of any person who does not, at any time during such solicitation, seek directly or indirectly, either on its own or another’s behalf, the power to act as a proxy for a security holder and does not furnish or otherwise request, or act on behalf of a person who furnishes or requests, a form of revocation, abstention, consent or authorization."
SLB 20 provides the Staff’s views on the scope of the Solicitation Exemption. Specifically, the Solicitation Exemption is not available for a proxy advisory firm offering a service that allows the client to establish, in advance of receiving proxy materials for a particular shareholder meeting, general guidelines or policies and then authorize the proxy advisory firm to execute a proxy or submit voting instructions on its behalf, with discretion to apply the guidelines to determine how to vote on particular proposals. In this instance, the proxy advisory firm would be viewed as having solicited the "power to act as a proxy" for its client, even if the authority is revocable by the client.
The Staff further explains that even if the Solicitation Exemption is not available, Rule 14a-2(b)(3) under the Securities Exchange Act of 1934 (the "Business Relationship Exemption") may be available. The Business Relationship Exemption exempts the furnishing of proxy voting advice by any person to another person with whom a business relationship exists, but only if: (1) "the person gives financial advice in the ordinary course of business;" (2) "discloses to the recipient of the advice any significant relationship with the company or any of its affiliates, or a security holder proponent of the matter on which advice is given, as well as any material interests of the person in such matter;" (3) "receives no special commission or remuneration for furnishing the advice from any person other than the recipient of the advice and others who receive similar advice;" and (4) "does not furnish the advice on behalf of any person soliciting proxies or on behalf of a participant in a contested election."
SLB 20 provides the following guidance on when a proxy advisory firm may rely on the Business Relationship Exemption:
II. Investment Advisers’ Proxy Voting and Use of Proxy Advisory Firms
The Staff of the Division of Investment Management explained that, as a fiduciary, an investment adviser owes its clients a duty of care and loyalty with respect to proxy voting as well as other services undertaken on the client’s behalf. Further, Rule 206(4)-6 under the Investment Advisers Act of 1940 (the "Proxy Voting Rule") provides that an investment adviser registered or required to be registered with the Commission has an obligation to adopt and implement written policies and procedures that are reasonably designed to ensure that the investment adviser votes proxies in the best interest of its clients.
SLB 20 provides guidance on an investment adviser’s responsibilities under the Proxy Voting Rule, including the following:
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following:
John F. Olson – Washington, D.C. (202-955-8522, email@example.com)
Brian J. Lane - Washington, D.C. (202-887-3646, firstname.lastname@example.org)
Ronald O. Mueller – Washington, D.C. (202-955-8671, email@example.com)
Amy L. Goodman – Washington, D.C. (202-955-8653, firstname.lastname@example.org)
James J. Moloney - Orange County, CA (949-451-4343, email@example.com)
Elizabeth Ising – Washington, D.C. (202-955-8287, firstname.lastname@example.org)
Gillian McPhee – Washington, D.C. (202-955-8201, email@example.com)
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