Securities and Exchange Commission.
Guidance and interpretation.
The Securities and Exchange Commission (the “SEC” or the “Commission”) is providing an interpretation and related guidance regarding the applicability of certain rules, which the Commission has promulgated under Section 14 of the Securities Exchange Act of 1934 (the “Exchange Act” and such rules the “federal proxy rules”), to proxy voting advice.
Effective: September 10, 2019.
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FOR FURTHER INFORMATION CONTACT:
Adam F. Turk, Special Counsel, at (202) 551-3500, Office of Chief Counsel, Division of Corporation Finance, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.
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The Commission is providing an interpretation and related guidance regarding the applicability of 17 CFR 240.14-1 and 240.14a-9 [Rules 14a-1 and 14a-9] under the Exchange Act [15 U.S.C. 78a et seq.] to proxy voting advice.
Table of Contents
II. Interpretation and Guidance Regarding Applicability of Certain Federal Proxy Rules to Proxy Voting Advice
III. Other Matters
As the use of proxy advisory firms by investment advisers and other institutional investors has become more widespread and the services offered by proxy advisory firms have broadened, we and our staff have examined how proxy voting advice provided by proxy advisory firms may be solicitations under the federal proxy rules.
In addition, we and our staff have engaged with the public through various forums and statements on a variety of issues related to the proxy voting process, including those discussed below. For example, in 2010, the Commission issued a concept release that sought public comment about, among other things, the role and legal status of proxy advisory firms within the U.S. proxy system.
In 2013, the staff held a roundtable on the use of proxy advisory firm services by institutional investors and investment advisers.
In 2014, the staff of the Divisions of Investment Management and Corporation Finance issued a Staff Legal Bulletin (“SLB 20”) to provide guidance about the availability and requirements of two exemptions to the federal proxy rules that are often relied upon by proxy advisory firms.
Most recently, the staff hosted a roundtable on the proxy process in November 2018 (the “2018 Roundtable”) that included a panel on the role of proxy advisory firms and their use by investment advisers.
In connection with the 2018 Roundtable, the public was invited to provide input on questions that arise regarding the use of proxy advisory firms and their activities.
We have carefully considered the feedback received on these topics, and with the benefit of this extensive body of information, historical experience, and engagement, the Commission is today providing an interpretation and related guidance regarding the applicability of the federal proxy rules to proxy voting advice provided by proxy advisory firms.
Specifically, in Section II below, we provide an interpretation and related guidance on whether proxy voting advice constitutes a “solicitation” under the federal proxy rules, and the application of Rule 14a-9 under the Exchange Act to proxy voting advice. The interpretation and related guidance discussed below are part of the Commission's review of the overall proxy process. As part of this effort, the staff is also considering recommending that the Commission propose rule amendments to address proxy advisory firms' reliance on the proxy solicitation exemptions in Exchange Act Rule 14a-2(b).
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II. Interpretation and Guidance Regarding Applicability of Certain Federal Proxy Rules to Proxy Voting Advice
Question 1: Does proxy voting advice provided by a proxy advisory firm constitute a solicitation under the federal proxy rules?
Response: Generally, yes. Exchange Act Section 14(a) 
applies to any solicitation for a proxy with respect to any security registered under Exchange Act Section 12 and 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.
The Commission defined the term “solicitation” in Rule 14a-1(l) under the Exchange Act.
The Commission's definition is broad and includes, among other things, a “communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.” 
Consistent with the Commission's broad definition of solicitation and the case law construing that term,
the Commission has previously stated that the federal proxy rules apply to any person seeking to influence the voting of proxies by shareholders, regardless of whether the person itself is seeking authorization to act as a proxy.
As a result, a person may be engaged in a solicitation in cases where that person is not seeking the procurement, withholding, or revocation of a proxy for itself. In addition, the Commission has indicated that this analysis applies even where the person seeking to influence the vote may be indifferent to its ultimate outcome.
Consistent with these statements, the Commission has observed that the breadth of the definition of “solicitation” may result in proxy advisory firms being subject to the proxy rules because they provide recommendations that are reasonably calculated to result in the procurement, withholding, or revocation of a proxy.
In expressing this view, the Commission stated that, as a general matter, the furnishing of proxy voting advice constitutes a “solicitation” within the meaning of Exchange Act Rule 14a-1.
Whether a particular communication is a solicitation often turns on “the purpose for which the communication was published—i.e., whether the purpose was to influence the shareholders' decisions,” as evidenced by the substance of the communication and the circumstances under which it was transmitted.
With respect to the substance of the communications, the proxy voting advice provided by proxy advisory firms to their clients generally describes the specific proposals that will be presented at the registrant's upcoming meeting and presents a “vote recommendation” for each proposal that indicates how the client should vote.
Start Printed Page 47418These firms often also present their vote recommendations through online platforms established by the firms to facilitate their clients' proxy voting activities. With respect to the circumstances under which this voting advice is provided, proxy advisory firms market their expertise in researching and analyzing matters submitted to a shareholder vote for the purpose of assisting their clients in making voting decisions at shareholder meetings.
Many investment advisers retain and pay a fee to proxy advisory firms to provide detailed analyses of various issues, including advice regarding how the investment adviser should vote on the proposals at the registrant's upcoming meeting.
In many cases, as discussed below, the proxy advisory firms make recommendations for a particular investment adviser based on the advisory firms' application of the investment adviser's voting criteria.
As a fiduciary, an investment adviser owes each of its clients a duty of care and loyalty with respect to services undertaken on the client's behalf, including voting.
Proxy advisory firms provide their voting recommendations to their investment adviser clients with the expectation that those recommendations will be used by their investment adviser clients to assist in fulfilling their fiduciary duties when making their voting decisions. The fact that proxy advisory firms typically provide their recommendations shortly before a shareholder meeting further enhances the likelihood that the recommendations are designed to and will influence the final stages of the investment advisers' decision-making process on voting determinations.
Therefore, it is our view that such voting advice provided by a firm marketing its expertise in researching and analyzing proxy issues for purposes of helping its clients make proxy voting determinations (i.e., not merely performing administrative or ministerial services) should be considered a solicitation subject to the federal proxy rules because it is “a communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.” We believe this interpretation is consistent with the Commission's long-held view that an advisor who approaches a customer with proxy voting advice is engaging in a solicitation subject to the federal proxy rules.
Even if the proxy advisory firm is providing recommendations based on its application of the client's own tailored voting guidelines (i.e., not merely performing administrative or ministerial services), and recognizing that facts and circumstances may vary, it is our view that such analysis and advice regarding a voting determination generally should be considered a solicitation. The communication generally is in the form of a voting recommendation based on the firm's analysis of the proxy materials and whether a particular matter is consistent with, not consistent with, or not covered by client voting criteria; it is typically transmitted to the client shortly before the meeting to aid the client's voting determination; and it may be a factor in the client's voting determination. Also, as noted above, proxy advisory firms market their services based on their expertise in researching and analyzing proxy issues for purposes of helping their clients make proxy voting determinations. As a result, even when based on the client's own voting guidelines, we believe the communication, if it reflects more than administrative or ministerial work, should be viewed as part of a commercial service that is designed to influence the client's voting decision. We believe this to be the case even in circumstances where the client may not follow this advice.
For similar reasons, we disagree with the view that the proxy voting advice provided by proxy advisory firms falls outside the definition of a solicitation because it should not be viewed as Start Printed Page 47419“unsolicited” voting advice.
We view these services provided by proxy advisory firms as distinct from advice prompted by unsolicited inquiries from clients to their financial advisors or brokers on how they should vote their proxies, which remains outside the definition of a solicitation.
Rather than merely responding to client inquiries, the communication is invited by the proxy advisory firms themselves through the marketing of their expertise in researching and analyzing proxy issues for purposes of helping clients make proxy voting determinations.
Notwithstanding the foregoing, we note that persons engaged in a solicitation in the form of proxy voting advice, including proxy advisory firms, may avail themselves of the exemptions from the information and filing requirements of the federal proxy rules.
Nothing in this interpretation is intended to restrict or limit reliance on those exemptions.
Question 2: Does Exchange Act Rule 14a-9 apply to proxy voting advice?
Response: Yes. Solicitations that are exempt from the federal proxy rules' information and filing requirements remain subject to Exchange Act Rule 14a-9, which prohibits any solicitation from containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact.
In addition, such solicitation must not omit to state any material fact necessary in order to make the statements therein not false or misleading.
Rule 14a-9 also extends to opinions, reasons, recommendations, or beliefs that are disclosed as part of a solicitation, which may be statements of material facts for purposes of the rule.
Where such opinions, recommendations, or similar views are provided, disclosure of the underlying facts, assumptions, limitations, and other information may be needed so that these views do not raise Rule 14a-9 concerns.
Accordingly, any person engaged in a solicitation through proxy voting advice must not make materially false or misleading statements or omit material facts, such as information underlying the basis of its advice or which would affect its analysis and judgments, that would be required to make the advice not misleading. For example, the provider of the proxy voting advice should consider whether, depending on the particular statement, it may need to disclose the following types of information in order to avoid a potential violation of Rule 14a-9: 
- An explanation of the methodology used to formulate its voting advice on a particular matter (including any material deviations from the provider's publicly-announced guidelines, policies, or standard methodologies for analyzing such matters) where the omission of such information would render the voting advice materially false or misleading; 
- to the extent that the proxy voting advice is based on information other than the registrant's public disclosures, such as third-party information sources,
disclosure about these information sources and the extent to which the information from these sources differs from the public disclosures provided by the registrant if such differences are material and the failure to disclose the differences would render the voting advice false or misleading; and
- disclosure about material conflicts of interest that arise in connection with providing the proxy voting advice in reasonably sufficient detail so that the client can assess the relevance of those conflicts.
III. Other Matters
Pursuant to the Congressional Review Act,
the Office of Information and Regulatory Affairs has designated this guidance and interpretation as not a “major rule,” as defined by 5 U.S.C. 804(2).
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Amendments to the Code of Federal Regulations
For the reasons set out above, the Commission is amending title 17, chapter II of the Code of Federal Regulations as set forth below:
PART 241—INTERPRETATIVE RELEASES RELATING TO THE SECURITIES EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER
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1. An authority citation is added for part 241 to read as follows: End Amendment Part
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2. The table is amended by adding an entry for Release No. 34-86721 at the end to read as follows: Start Printed Page 47420
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|Subject||Release No.||Date||Fed. Reg. vol. and page|
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|Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice||34-86721||August 21, 2019||[Insert FR Volume Number] FR [Insert FR Page Number].|
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By the Commission.
Dated: August 21, 2019.
Vanessa A. Countryman,
[FR Doc. 2019-18355 Filed 9-9-19; 8:45 am]
BILLING CODE 8011-01-P