Document ID: SEC-2020-1412-0001
Agency: sec
Document Type: Rule
Title: Exemptions From the Proxy Rules for Proxy Voting Advice
Posted Date: 2020-09-03T04:00Z

[Federal Register Volume 85, Number 172 (Thursday, September 3, 2020)]
[Rules and Regulations]
[Pages 55082-55155]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16337]

[[Page 55081]]

Vol. 85

Thursday,

No. 172

September 3, 2020

Part II

Securities and Exchange Commission

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17 CFR Parts 240 and 276

Exemptions From the Proxy Rules for Proxy Voting Advice; Supplement to 
Commission Guidance Regarding Proxy Voting Responsibilities of 
Investment Advisers; Final Rules

  Federal Register / Vol. 85 , No. 172 / Thursday, September 3, 2020 / 
Rules and Regulations  

[[Page 55082]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-89372; File No. S7-22-19]
RIN 3235-AM50

Exemptions From the Proxy Rules for Proxy Voting Advice

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting amendments to its rules governing proxy solicitations so that 
investors who use proxy voting advice receive more transparent, 
accurate, and complete information on which to make their voting 
decisions, without imposing undue costs or delays that could adversely 
affect the timely provision of proxy voting advice. The amendments add 
conditions to the availability of certain existing exemptions from the 
information and filing requirements of the Federal proxy rules that are 
commonly used by proxy voting advice businesses. These conditions 
require compliance with disclosure and procedural requirements, 
including conflicts of interest disclosures by proxy voting advice 
businesses and two principles-based requirements. In addition, the 
amendments codify the Commission's interpretation that proxy voting 
advice generally constitutes a solicitation within the meaning of the 
Securities Exchange Act of 1934. Finally, the amendments clarify when 
the failure to disclose certain information in proxy voting advice may 
be considered misleading within the meaning of the antifraud provision 
of the proxy rules, depending upon the particular facts and 
circumstances.

DATES: Effective date: The rules are effective November 2, 2020.
    Compliance dates: See Section II.E.

FOR FURTHER INFORMATION CONTACT: Daniel S. Greenspan, Senior Counsel, 
Office of Rulemaking, at (202) 551-3430 or Valian Afshar, Special 
Counsel, Office of Mergers and Acquisitions, at (202) 551-3440, in the 
Division of Corporation Finance, U.S. Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are adopting amendments to 17 CFR 
240.14a-1(l) (``Rule 14a-1(l)''), 17 CFR 240.14a-2 (``Rule 14a-2''), 
and 17 CFR 240.14a-9 (``Rule 14a-9'') under the Securities Exchange Act 
of 1934 [15 U.S.C. 78a et seq.] (``Exchange Act'').\1\
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    \1\ Unless otherwise noted, when we refer to the Exchange Act, 
or any paragraph of the Exchange Act, we are referring to 15 U.S.C. 
78a of the United States Code, at which the Exchange Act is 
codified, and when we refer to rules under the Exchange Act, or any 
paragraph of these rules, we are referring to title 17, part 240 of 
the Code of Federal Regulations [17 CFR 240], in which these rules 
are published.
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Table of Contents

I. Introduction
II. Discussion of Final Amendments
    A. Codification of the Commission's Interpretation of 
``Solicitation'' Under Rule 14a-1(l) and Section 14(a)
    1. Proposed Amendments
    2. Comments Received
    3. Final Amendments
    B. Amendments to Rule 14a-2(b): Conflicts of Interest
    1. Proposed Amendments
    2. Comments Received
    3. Final Amendments
    C. Amendments to Rule 14a-2(b): Notice of Proxy Voting Advice 
and Response
    1. Proposed Amendments
    2. Comments Received
    3. Final Amendments
    D. Amendments to Rule 14a-9
    1. Proposed Amendments
    2. Comments Received
    3. Final Amendments
    E. Compliance Dates
III. Other Matters
IV. Economic Analysis
    A. Introduction
    1. Overview of Proxy Voting Advice Businesses' Role in the Proxy 
Process
    2. Commenter Concerns Regarding the Rule's Economic 
Justification
    B. Economic Baseline
    1. Affected Parties and Current Market Practices
    2. Current Regulatory Framework
    C. Benefits and Costs
    1. Overview of Benefits and Costs and Comments Received
    2. Codification of the Commission's Interpretation of 
``Solicitation'' Under Rule 14a-1(l) and Section 14(a)
    3. Amendments to Rule 14a-2(b)
    4. Amendments to Rule 14a-(9)
    5. Effect on Smaller Entities
    D. Effects on Efficiency, Competition, and Capital Formation
    1. Efficiency
    2. Competition
    3. Capital Formation
    E. Reasonable Alternatives
    1. Use a More Prescriptive Approach in the Final Amendments
    2. Require Proxy Voting Advice Businesses To Include Full 
Registrant Response in the Businesses' Voting Advice
    3. Public Disclosure of Conflicts of Interest
    4. Require Additional or Alternative Mandatory Disclosures in 
Proxy Voting Advice
    5. Require Disabling or Suspension of Pre-Populated and 
Automatic Submission of Votes
    6. Exempt Smaller Proxy Voting Advice Businesses From the 
Additional Conditions to the Exemptions
    7. Require a Narrower Scope of Registrant Notice
V. Paperwork Reduction Act
    A. Background
    B. Summary of Comment Letters to PRA Estimates
    C. Burden and Cost Estimates for the Amendments
    1. Impact on Affected Parties
    2. Aggregate Increase in Burden
    3. Increase in Annual Responses
    4. Incremental Change in Compliance Burden for Collection of 
Information
    5. Program Change and Revised Burden Estimates
VI. Final Regulatory Flexibility Analysis
    A. Need for, and Objectives of, the Final Amendments
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Final Amendments
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    E. Agency Action To Minimize Effect on Small Entities
VII. Statutory Authority

I. Introduction

    Annual and special meetings of publicly traded corporations, where 
shareholders are provided the opportunity to vote on various matters, 
are a key component of corporate governance. The applicable laws are 
set by the state in which the corporation is incorporated. For various 
reasons, including the widely dispersed nature of public share 
ownership, most shareholders do not attend these meetings in person. 
Rather, most shareholders of publicly traded companies exercise their 
right to vote on corporate matters through the use of proxies.\2\ 
Congress vested in the Commission the broad authority to oversee the 
proxy solicitation process when it originally enacted the Securities 
Exchange Act of 1934 (the ``Exchange Act'').\3\ As the securities 
markets have become increasingly more sophisticated and complex, and 
the intermediation of share ownership and participation of various 
market participants has grown in kind,\4\ the Commission's interest in

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ensuring fair, honest, and informed markets, underpinned by a properly 
functioning proxy system, dictates that we regularly assess whether the 
system is serving investors as it should.\5\
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    \2\ See Concept Release on the U.S. Proxy System, Release No. 
34-62495 (Jul. 14, 2010) [75 FR 42982 (July 22, 2010)] (``Concept 
Release''), at 42984.
    \3\ See Regulation of Communications Among Shareholders, Release 
No. 34-31326 (Oct. 16, 1992) [57 FR 48276 (Oct. 22, 1992)] 
(``Communications Among Shareholders Adopting Release''), at 48277 
(``Underlying the adoption of Section 14(a) of the Exchange Act was 
a Congressional concern that the solicitation of proxy voting 
authority be conducted on a fair, honest and informed basis. 
Therefore, Congress granted the Commission the broad `power to 
control the conditions under which proxies may be solicited'. . . 
.'').
    \4\ See Concept Release at 42983 (``This complexity stems, in 
large part, from the nature of share ownership in the United States, 
in which the vast majority of shares are held through securities 
intermediaries such as broker-dealers or banks. . . .'').
    \5\ See, e.g., id. at 43020 (``The U.S. proxy system is the 
fundamental infrastructure of shareholder suffrage since the 
corporate proxy is the principal means by which shareholders 
exercise their voting rights. The development of issuer, securities 
intermediary, and shareholder practices over the years, spurred in 
part by technological advances, has made the system complex and, as 
a result, less transparent to shareholders and to issuers. It is our 
intention that this system operate with the reliability, accuracy, 
transparency, and integrity that shareholders and issuers should 
rightfully expect.'').
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    In today's financial markets, which are characterized by 
significant intermediation and institutional investor participation,\6\ 
proxy voting advice businesses \7\ have come to play an important role 
in the proxy voting process by providing an array of voting services 
that can help investment advisers and institutional investor clients 
manage their substantive and procedural proxy voting needs.\8\ 
Investment advisers and institutional investors often retain proxy 
voting advice businesses to assist them in making their voting 
determinations on behalf of their own clients and to handle other 
aspects of the voting process, which for certain investment advisers 
has become increasingly complex and demanding over time.\9\ Investment 
advisers voting on behalf of clients (including retail investors) and 
institutional investors, by virtue of their holdings in many public 
companies, including as a result of indexing and other broad portfolio 
management strategies, must manage the logistics of voting in 
potentially hundreds, if not thousands, of shareholder meetings and on 
thousands of proposals that are presented at these meetings each year, 
with the significant portion of those voting decisions concentrated in 
a period of a few months.\10\
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    \6\ See Amendments to Exemptions from the Proxy Rules for Proxy 
Voting Advice, Release No. 34-87457 (Nov. 5, 2019) [84 FR 66518 
(Dec. 4, 2019)] (``Proposing Release'') at 66519.
    \7\ For purposes of this release, we refer to firms that advise 
investment advisers and institutional investors on their voting 
determinations, and any person who markets and sells such advice, as 
``proxy voting advice businesses.'' Unless otherwise indicated, the 
term ``proxy voting advice'' as used in this release refers to the 
voting recommendations provided by proxy voting advice businesses on 
specific matters presented at a registrant's shareholder meeting, or 
for which written consents or authorizations from shareholders are 
sought in lieu of a meeting, and the analysis and research 
underlying the voting recommendations that are delivered to the 
proxy voting advice business's clients through any means, such as in 
a standalone written report or multiple reports, an integrated 
electronic voting platform established by the proxy voting advice 
businesses, or any combination thereof. The reference to ``proxy 
voting advice,'' as used in this release, is not intended to 
encompass (1) administrative or ministerial services, (2) data or 
research that is not used by a proxy voting advice business to 
formulate its voting recommendations, or (3) the identity of any of 
the proxy voting advice business's clients that receive such advice. 
To the extent any data or research underlies a proxy voting advice 
business's voting recommendations but is not delivered to its 
clients (such as internal work product), such data or research also 
would not constitute that business's proxy voting advice. Further, 
we recognize that, in formulating its voting recommendations, a 
proxy voting advice business may use data and research that was 
prepared by another party, such as market intelligence and database 
providers. For the avoidance of doubt, the fact that a third party's 
data and research is used by the proxy voting advice business would 
not, by itself, cause such third party to be a proxy voting advice 
business. However, if a proxy voting advice business uses a third 
party's data and research in formulating its voting recommendations 
and delivers such data and research to its clients, then the data 
and research would constitute part of the proxy voting advice 
business's proxy voting advice.
    \8\ See Proposing Release at 66520, n.17.
    \9\ Id. at 66519, n.9.
    \10\ Id. at n.8.
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    Proxy voting advice businesses typically provide investment 
advisers, institutional investors, and other clients with a variety of 
services that relate to the substance of voting decisions, such as: 
Providing research and analysis regarding the matters subject to a 
vote; promulgating their generally applicable benchmark voting policies 
(a ``benchmark policy'') or specialty voting policies (a ``specialty 
policy''), such as a socially responsible policy, a sustainability 
policy, or a Taft-Hartley labor policy,\11\ that their clients can use; 
and making specific voting recommendations to their clients on matters 
subject to a shareholder vote, either based on the proxy voting advice 
business's benchmark or specialty policies or based on custom voting 
policies that are proprietary to a proxy voting advice business's 
clients (``custom policy'').\12\ This advice is often an important 
factor in the clients' proxy voting decisions. Clients may use the 
proxy voting advice business's recommendations in a variety of ways, 
including as an alternative or supplement to their own internal 
resources in analyzing matters when deciding how to vote.\13\
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    \11\ For example, the various benchmark and specialty policies 
of one proxy voting advice business, Institutional Shareholder 
Services (ISS), are set forth on the following web page: https://www.issgovernance.com/policy-gateway/voting-policies/. The various 
benchmark and specialty policies of another proxy voting advice 
business, Egan-Jones, are set forth on the following web page: 
https://www.ejproxy.com/methodologies/.
    \12\ See Proposing Release at 66519. As discussed infra Section 
II.C.3.c.i., we are excluding from the requirements of new Rule 14a-
2(b)(9)(ii) proxy voting advice to the extent that such advice is 
based on custom policies. Custom policies would not include the 
proxy voting advice businesses' benchmark or specialty policies, 
even if those benchmark or specialty policies were to be adopted by 
proxy voting advice businesses' clients. See infra note 394 for a 
discussion of how a proxy voting advice business may satisfy the 
requirements of new Rule 14a-2(b)(9)(ii) in situations in which a 
client's custom policy is identical to the benchmark or specialty 
policies.
    \13\ Id.
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    Proxy voting advice businesses may also provide services that 
assist clients in handling the administrative tasks of the voting 
process, typically through an electronic platform that enables their 
clients to cast votes more efficiently.\14\ In some cases, proxy voting 
advice businesses are given authority to execute votes on behalf of 
their clients in accordance with the clients' general guidance or 
specific instructions.\15\
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    \14\ Id.
    \15\ Id.
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    Although estimates vary, each year proxy voting advice businesses 
provide voting advice to thousands of clients that exercise voting 
authority over a sizable number of shares.\16\ Because proxies have 
become the predominant means by which shareholders of publicly traded 
companies exercise their right to vote on corporate matters,\17\ and 
institutional investors hold a significant and increasing number of 
shares, proxy voting advice businesses have become uniquely situated in 
today's market to influence,\18\ and in many cases directly execute, 
these investors' voting decisions.\19\
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    \16\ Id. at 66520, n.18.
    \17\ Id. at 66518, n.2.
    \18\ See, e.g., letter from Council of Inst. Investors (Nov. 14, 
2019) (``CII I'') (noting that proxy voting advice businesses' 
``recommendations and related analysis'' may be ``market-moving'').
    \19\ See also infra note 36 for a discussion of the increased 
institutional investor holdings in the U.S. markets.
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    In recognition of the important and unique role that proxy voting 
advice businesses play in the proxy voting process \20\ and in the 
voting decisions of investment advisers and institutional investors 
\21\ who often vote on behalf of retail investors, the Commission 
proposed amendments to the Federal proxy rules in November 2019 to 
enhance the transparency, accuracy, and completeness of the information 
provided to clients of proxy voting advice businesses in connection 
with their voting decisions.\22\
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    \20\ Id. at 66520.
    \21\ Id.
    \22\ See generally Proposing Release.
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    Specifically, the Commission proposed amendments to codify its 
interpretation that proxy voting advice generally constitutes a 
solicitation within the meaning of Exchange Act Section 14(a) and 
therefore is subject to the Federal proxy rules. In addition, the 
Commission proposed to condition the

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availability of certain existing exemptions from the information and 
filing requirements of the Federal proxy rules commonly used by proxy 
voting advice businesses upon compliance with additional disclosure and 
procedural requirements. Finally, the Commission proposed to amend 
Exchange Act Rule 14a-9, the antifraud provision of the Federal proxy 
rules, to clarify that, depending upon the particular facts and 
circumstances at issue, the failure to disclose certain information in 
proxy voting advice may be considered materially misleading within the 
meaning of the rule.
    We received many comment letters in response to the Proposing 
Release.\23\ After considering the public comments, we are adopting the 
proposed rules with certain modifications as described, and for the 
reasons set forth, below. Consistent with the proposal, we are adhering 
to--and adopting an amendment to Rule 14a-1(l) to codify--our 
longstanding view that proxy voting advice generally constitutes a 
``solicitation'' under Section 14(a).\24\ Absent an applicable 
exemption, a person providing such proxy voting advice would be subject 
to the Federal proxy rules' information and filing requirements, 
including the obligation to file and furnish definitive proxy 
statements. For reasons previously stated in the Proposing Release, we 
believe that proxy voting advice businesses should be eligible to rely 
on an exemption from such information and filing requirements for their 
proxy voting advice, but only to the extent that such exemption is 
appropriately tailored to their unique role in the proxy process and 
facilitates the transparency, accuracy, and completeness of the 
information available to those making voting decisions. As such, under 
the new rules that we are adopting, persons furnishing proxy voting 
advice constituting a solicitation as defined in new 17 CFR 240.14a-
1(l)(1)(iii)(A) (``Rule 14a-1(l)(1)(iii)(A)'') will be eligible to rely 
on the exemptions in 17 CFR 240.14a-2(b)(1) (``Rule 14a-2(b)(1)'') and 
17 CFR 240.14a-2(b)(3) (``Rule 14a-2(b)(3)'') \25\ only upon 
satisfaction of the conditions of new 17 CFR 240.14a-2(b)(9) (``Rule 
14a-2(b)(9)'').
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    \23\ See generally letters submitted in connection with the 
Proposing Release, available at https://www.sec.gov/comments/s7-22-19/s72219.htm. Unless otherwise specified, all references in this 
release to comment letters are to those relating to the Proposing 
Release. In addition, the SEC's Investment Advisory Committee 
adopted recommendations asking the Commission to: prioritize 
improvements to the proxy system (end-to-end vote confirmations, 
reconciliations, and universal proxies); improve conflict-of-
interest disclosure generally; enhance the discussion about the 
value of proxy advisors and shareholder proposals; and expand the 
economic cost-benefit analysis. See U.S. Securities & Exchange 
Commission Investor Advisory Committee, Recommendation of the SEC 
Investor Advisory Committee Relating to SEC Guidance and Rule 
Proposals on Proxy Advisors and Shareholder Proposals (Jan. 24, 
2020) (``IAC Recommendation''), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/sec-guidance-and-rule-proposals-on-proxy-advisors-and-shareholder-proposals.pdf. These 
recommendations were not unanimously approved by the members of the 
Investor Advisory Committee; see letters from Stephen Holmes (Jan. 
27, 2020) (``S. Holmes''); Paul G. Mahoney and J.W. Verret (Jan. 30, 
2020) (``P. Mahoney and J.W. Verret''); Heidi Stam (Jan. 27, 2020). 
We address the substance of the IAC Recommendation, together with 
related public comments, in the discussion that follows. Finally, 
the 2019 Small Business Forum Report included a recommendation that 
the Commission provide ``for effective oversight of proxy advisory 
firms under Rule 14a-2(b), with a focus on conflicts of interest, 
accuracy, transparency, and issuer-specific decision making.'' This 
recommendation was tied for first place in the priority ranking 
assigned by the participants of the breakout group session. See 
Final Report of the 2019 SEC Government-Business Forum on Small 
Business Capital Formation (December 2019) (``2019 Small Business 
Forum''), available at https://www.sec.gov/files/small-business-forum-report-2019.pdf.
    \24\ See infra Section II.A.3.
    \25\ Proxy voting advice businesses have typically relied upon 
the exemptions in Rule 14a-2(b)(1) and (b)(3) to provide advice 
without complying with the filing and information requirements of 
the proxy rules. See Proposing Release at 66525 and n.68.
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    As described in more detail below, we have modified these 
conditions in a number of respects in response to comments received to 
provide appropriate flexibility to proxy voting advice businesses to 
meet the principles that underlie the objectives of the rule, and to 
avoid unnecessary potential disruptions to their ability to provide 
their clients with timely voting advice. In addition, consistent with 
the amendments to 17 CFR 240.14a-2(b) (``Rule 14a-2(b)''), we are 
amending Rule 14a-1(l) to make clarifying changes to the definition of 
solicitation as it relates to proxy voting advice and amending Rule 
14a-9 to add to the list of examples provided in the Note to that rule. 
We are adopting these amendments to Rule 14a-1(l) and Rule 14a-9 
substantially in the form proposed, with certain modifications as 
described in the discussion that follows.
    We recognize that for some shareholders, the services provided by 
proxy voting advice businesses can be an important component of the 
larger proxy voting process and, as such, help facilitate the 
participation of shareholders in corporate governance through the 
exercise of their voting rights.\26\ We are also mindful that the 
efficacy and effectiveness of the proxy voting system depend on the 
ability of shareholders to obtain transparent, accurate, and materially 
complete information from an array of relevant parties before making 
their proxy voting decisions. To enable shareholders to make informed 
voting decisions, Congress and the Commission have placed varying 
obligations on participants in the proxy voting process, including 
through Commission rulemakings pursuant to the broad authority granted 
by Congress to regulate proxy solicitation.\27\
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    \26\ See Proposing Release at 66525.
    \27\ See infra notes 55-60 and accompanying text for a 
discussion of the multifaceted nature of the Federal securities 
laws' security holder voting and ownership disclosure regulatory 
framework.
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    For example, registrants and others who engage in a proxy 
solicitation generally must furnish shareholders with a definitive 
proxy statement containing numerous specified disclosures.\28\ They 
must also generally file all of their additional soliciting materials 
with the Commission, which ensures that all shareholders and interested 
parties have access to their soliciting statements and have an ability 
to consider such statements as part of their voting decisions and, in 
certain situations such as in a proxy contest, respond to them.\29\ The 
Commission, however, has long recognized that these general 
requirements applicable to registrants and others engaged in a proxy 
solicitation may not be necessary under certain circumstances and, 
throughout the years, has tailored the application of these 
requirements as needed. For example, shareholders who beneficially own 
more than $5 million of securities and who do not seek proxy voting 
authority are exempt from the requirement to file a definitive proxy 
statement when they engage in a solicitation, but they still must 
publicly file with the Commission any written soliciting materials sent 
to security holders and are subject to the antifraud provisions of Rule 
14a-9 with respect to the content of those soliciting materials.\30\ 
Parties conducting certain other solicitation activities, including the 
furnishing of proxy voting advice, have relied on other exemptions from 
the requirement to file proxy statements.\31\ Still other activity has

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been entirely exempt from the proxy rules, including Rule 14a-9.\32\
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    \28\ 17 CFR 240.14a-3; 17 CFR 240.14a-101.
    \29\ 17 CFR 240.14a-6(b).
    \30\ 17 CFR 240.14a-2(b)(1); 17 CFR 240.14a-6(g).
    \31\ 17 CFR 240.14a-2(b). Rules 14a-2(a) and (b) set forth a 
number of activities that fall within the definition of a 
solicitation but for which the requirement to file a definitive 
proxy statement does not apply. This includes, for example, the 
delivery of registrants' proxy materials by securities 
intermediaries to their clients and the securities intermediaries' 
request for voting instructions from their clients (Rule 14a-
1(a)(1)), solicitations by or on behalf of a person who does not 
seek proxy authority (Rule 14a-2(b)(1)), solicitations of no more 
than ten persons (Rule 14a-2(b)(2)), the furnishing of proxy voting 
advice by advisors to their clients under certain circumstances 
(Rule 14a-2(b)(3)), the publication or distribution by a broker or a 
dealer of research reports under specified conditions (Rule 14a-
2(b)(5)), and the solicitations through electronic shareholder 
forums by persons who do not seek proxy voting authority (Rule 14a-
2(b)(6)).
    \32\ 17 CFR 240.14a-2(a).
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    The Commission has periodically adjusted the proxy rules in 
response to market developments, including to provide shareholders with 
additional sources of information.\33\ In calibrating the rules and 
exemptions, the Commission has generally sought to avoid unnecessary 
burdens that may deter the expression of views on matters presented for 
a vote while ensuring that shareholders have transparent, accurate, and 
materially complete information upon which to make their voting 
decisions.\34\ In this regard, the Commission has been guided by the 
``fundamental conclusion that the interests of shareholders are best 
served by more, and not less, discussion of matters presented for a 
vote.'' \35\ This same principle guides us again as we update the 
Commission's rules in light of current market practices and 
circumstances.
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    \33\ For example, the Commission has recalibrated the exemptions 
``to provide shareholders with additional sources of information, 
opinions and views'' to inform their voting decisions, and to remove 
impediments that it determined ``unduly hindered free discussion'' 
among registrants, shareholders, and other interested parties. 
Communications Among Shareholders Adopting Release; see also Concept 
Release (``The Commission has actively monitored the proxy process 
since the 1930s and has made changes when the process was not 
functioning in a manner that adequately protected the interests of 
investors.'').
    \34\ See Communications Among Shareholders Adopting Release 
(noting concerns about ``secret'' solicitations, as well as concerns 
about the burden on shareholders).
    \35\ Id.
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    As explained in the Proposing Release, proxy voting advice 
businesses have become an increasingly important and prominent part of 
the proxy voting process as institutional investors, who own a majority 
of the outstanding shares in today's market,\36\ often retain proxy 
voting advice businesses to assist them in making their voting 
determinations and voting their shares on behalf of clients. In recent 
years, registrants, investors, and others have expressed concerns about 
the role of proxy voting advice businesses. These concerns include the 
accuracy and soundness of the information, and the transparency of the 
methodologies, used to formulate proxy voting advice businesses' 
recommendations. Concerns have also focused on potential conflicts of 
interest that may affect the recommendations made by the proxy voting 
advice businesses.\37\ In addition, questions have been raised about 
whether registrants have an adequate opportunity to review and respond 
to proxy voting advice before votes, informed by such advice, are cast 
and whether shareholders have an adequate opportunity to review the 
proxy voting advice, including in the context of any response from the 
registrant or others, before casting their votes.\38\ These concerns 
and changing market conditions, as discussed above, prompted the 
Commission to consider amendments to the exemptions commonly used by 
proxy voting advice businesses, which had been crafted before proxy 
voting advice businesses played the significant role that they now do 
in the proxy voting process and in the voting decisions of investment 
advisers and institutional investors.\39\ A number of the comment 
letters we received in response to the Proposing Release continue to 
express these concerns.\40\
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    \36\ See, e.g., A. De La Cruz et al., OECD, Owners of the 
World's Listed Companies 22 (2019), available at https://www.oecd.org/corporate/Owners-of-the-Worlds-Listed-Companies.pdf 
(``In the United States, institutional investors hold around 72% of 
the domestic stock market value.'').
    \37\ See Proposing Release at 66525.
    \38\ See id. at 66529.
    \39\ See id. at 66519-21.
    \40\ See, e.g., letters from Mark A. Bloomfield, President and 
CEO, American Council for Capital Formation (Jan. 27, 2020) 
(``ACCF''); Kyle Isakower, Senior Vice Pres. of Reg. & Energy 
Policy, American Council for Capital Formation (July 7, 2020) 
(``ACCF II''); Cameron Arterton, Vice President, Biotechnology 
Innovation Organization (Feb. 3, 2020) (``BIO''); Business 
Roundtable (Feb. 3, 2020) (``BRT''); Tom Quaadman, Vice President, 
U.S. Chamber of Commerce Center for Capital Markets Competitiveness 
(Jan. 31, 2020) (``CCMC''); Henry D. Eickelberg, Chief Operating 
Officer, Center on Executive Compensation (Feb. 3, 2020) (``CEC''); 
Corporate Governance Coalition for Investor Value (Feb. 3, 2020) 
(``CGC''); Neil A. Hanson, Vice President, Investor Relations and 
Secretary, Exxon Mobil Corporation (Feb. 3, 2020) (``Exxon Mobil''); 
Rick E. Hansen, Assistant General Counsel and Corporate Secretary, 
General Motors Company (Feb. 25, 2020) (``GM''); Clifton A. Pemble, 
President and CEO, Garmin International, Inc. (Jan. 27, 2020) 
(``Garmin''); Brian S. Roman, Global General Counsel (Feb. 3, 2020) 
(``Mylan''); Chris Netram, Vice President, Tax & Domestic Economic 
Policy, National Association of Manufacturers (Feb. 3, 2020) 
(``NAM''); Tony M. Edwards, Senior Executive Vice President, and 
Victoria P. Rostow, Senior Vice President & Deputy General Counsel 
(Feb. 3, 2020) (``Nareit''); John A. Zecca, Executive Vice 
President, Chief Legal and Regulatory Officer, Nasdaq, Inc. (Feb. 3, 
2020) (``Nasdaq''); Gary A. LaBranche, President & CEO, National 
Investor Relations Institute (Feb. 3, 2020) (``NIRI''); Darla 
Stuckey, President and CEO, Society for Corporate Governance (Feb. 
3, 2020) (``SCG'') .
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    In updating our rules to facilitate better informed proxy voting, 
we do not believe that it is necessary to subject proxy voting advice 
businesses to the Federal proxy rules' information and filing 
requirements applicable to registrants and certain others, such as the 
filing and furnishing of definitive proxy statements, as long as they 
satisfy certain requirements tailored to their role in the proxy 
process. In particular, we believe that concerns raised regarding the 
increase in intermediation and complexity in the market and the 
increased dependence on proxy voting advice can be addressed, and the 
goal of ensuring that shareholders receive more transparent, accurate, 
and complete information can be furthered, without the full set of 
disclosures that would be required with a definitive proxy statement. 
We also recognize that a requirement to publicly file proxy voting 
advice with the Commission and disseminate proxy materials to the 
shareholders of every registrant covered by the advice could result in 
the addition of significant substantive and procedural changes in the 
current operations of proxy voting advice businesses and could 
adversely impact their business models. For example, such a requirement 
would effectively allow investment advisers, institutional investors, 
and other investors who do not subscribe to the services of proxy 
voting advice businesses to obtain certain proxy voting advice services 
free of charge.
    For these reasons, we believe that as a general matter these 
businesses should continue to be eligible for the benefits of 
conditional, tailored exemptions from the information and filing 
requirements of the Federal proxy rules generally applicable to 
registrants and others. In light of the significant role proxy voting 
advice plays in the voting decisions of institutional investors and 
others, however, we also believe that the exemptions need to be 
fashioned both to elicit adequate disclosure and to enable proxy voting 
advice businesses' clients to have reasonable and timely access to 
transparent, accurate, and complete information material to matters 
presented for a vote--thereby ensuring that the continued use of the 
exemptions facilitates informed voting decisions and does not undermine 
the purposes of the Federal proxy rules.
    Some commenters argued that the Investment Advisers Act of 1940 
(the ``Advisers Act'') is the proper regulatory regime for proxy voting 
advice businesses, and that the Advisers Act and an investment 
adviser's fiduciary duty already address the stated

[[Page 55086]]

objectives of the proposed rules.\41\ We disagree. The Advisers Act and 
Section 14(a) serve distinct, though overlapping, regulatory purposes. 
The Advisers Act is a principles-based regulatory framework, at the 
center of which is a federal fiduciary duty to clients that is based on 
equitable common law principles.\42\ Section 14(a) grants the 
Commission broad power to adopt rules to control the conditions under 
which proxies may be solicited in order to address a Congressional 
concern that the solicitation of proxy voting authority be conducted on 
a fair, honest, and informed basis.\43\
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    \41\ See, e.g., letter from Gary Retelny, CEO, Institutional 
Shareholder Services, Inc. (Jan. 31, 2020) (``ISS'').
    \42\ See Commission Interpretation Regarding Standard of Conduct 
for Investment Advisers, Release No. IA-5248 at 6 (June 5, 2019), 84 
FR 33669, 33670 (July 12, 2019) (``Standard of Conduct for 
Investment Advisers''); SEC v. Capital Gains Research Bureau, Inc., 
375 U.S. 180, 194 (1963) (noting that the Advisers Act ``reflects a 
congressional recognition `of the delicate fiduciary nature of an 
investment advisory relationship,' as well as a congressional intent 
to eliminate, or at least to expose, all conflicts of interest which 
might incline an investment adviser--consciously or unconsciously--
to render advice which was not disinterested'').
    \43\ See Communications Among Shareholders Adopting Release at 
48277; Proposing Release at n.3.
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    As a preliminary matter, we note that proxy voting advice 
businesses differ as to whether they believe they fall within the 
definition of an investment adviser under the Advisers Act and should 
be registered as investment advisers. The Commission has stated 
previously that when proxy voting advice businesses provide certain 
services, they meet the definition of investment adviser under the 
Advisers Act and thus are subject to regulation under the Act.\44\ 
Specifically, a person is an ``investment adviser'' if the person, for 
compensation, engages in the business of providing advice to others as 
to the value of securities, whether to invest in, purchase, or sell 
securities, or issues reports or analyses concerning securities.\45\ 
Proxy voting advice businesses provide analyses of shareholder 
proposals, director candidacies, or corporate actions and provide 
advice concerning particular votes in a manner designed to assist their 
institutional clients to achieve their investment goals with respect to 
the voting of securities they hold.\46\ In other words, proxy voting 
advice businesses, for compensation, engage in the business of issuing 
reports or analyses concerning securities and providing advice to 
others as to the value of securities and would therefore meet the 
definition of an investment adviser unless an exclusion applies.\47\
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    \44\ See Concept Release at 43010.
    \45\ Advisers Act Section 202(a)(11) [15 U.S.C. 80b-2(a)(11)]. 
Sections 202(a)(11)(A) through (G) of the Advisers Act address 
exclusions to the definition of the term ``investment adviser.'' [15 
U.S.C. 80b-2(a)(11)(A) through (G)].
    \46\ See Concept Release at 43010.
    \47\ Id.
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    One such exclusion from the definition of an investment adviser 
under the Advisers Act is the ``publisher's exclusion.'' Specifically, 
Section 202(a)(11)(D) of the Advisers Act excludes from the definition 
of an investment adviser a ``publisher of any bona fide newspaper, news 
magazine or business or financial publication of general and regular 
circulation.'' \48\ At least one large proxy voting advice business has 
taken the position that if it was deemed to be an investment adviser, 
it could rely on the exclusion for publishers contained in Section 
202(a)(11)(D) of the Advisers Act.\49\
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    \48\ Lowe v. SEC, 472 U.S. 181 (1985). The U.S. Supreme Court 
has interpreted the ``publisher's exclusion'' to include 
publications that offer impersonal investment advice to the general 
public on a regular basis. To qualify for the section 202(a)(11)(D) 
exclusion, the publication must be: (1) Of a general and impersonal 
nature, in that the advice provided is not adapted to any specific 
portfolio or any client's particular needs; (2) ``bona fide'' or 
genuine, in that it contains disinterested commentary and analysis 
as opposed to promotional material; and (3) of general and regular 
circulation, in that it is not timed to specific market activity or 
to events affecting, or having the ability to affect, the securities 
industry.
    \49\ See letter from Katherine Rabin, CEO, Glass Lewis & Co., 
LLC (Nov. 14, 2018), available at https://www.glasslewis.com/wp-content/uploads/2018/11/GL-SEC-Roundtable-Statement-111418.pdf. The 
Government Accountability Office in its Report about proxy advisory 
firms to the Committee on Banking, Housing, and Urban Affairs of the 
U.S. Senate in 2016 also took note of the differences in 
registration status of proxy advisory firms. The Report observed 
that one large proxy voting advice business is not registered with 
the SEC as an investment adviser, while another is, and a third is 
registered as a nationally recognized statistical rating 
organization. See Report to the Chairman, Subcommittee on Economic 
Policy, Committee on Banking, Housing, and Urban Affairs, U.S. 
Senate, Corporate Shareholder Meetings, Proxy Advisory Firms' Role 
in Voting and Corporate Governance Practices from the U.S. 
Government Accountability Office (Nov. 2016), available at https://www.gao.gov/assets/690/681050.pdf.
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    Regardless of the applicability of the Advisers Act, however, we 
believe the concerns motivating the rules we are adopting are squarely 
subject to, and appropriately addressed through, regulation under 
Section 14(a).\50\ As we noted in the Proposing Release, proxy voting 
advice businesses provide voting advice to clients that exercise voting 
authority over a sizable number of shares that are voted annually, and 
these businesses are uniquely situated in today's market to influence 
investors' voting decisions.\51\ This advice also implicates interests 
beyond those of the clients who utilize it when voting. Because these 
clients vote shares they hold on behalf of thousands of retail 
investors, this advice affects the interests of these underlying 
investors. Further, in light of proxy voting advice businesses' 
clients' ability to affect the outcome of the vote on a particular 
matter through their voting power, the proxy voting advice guiding the 
clients' votes potentially affects the interests of all shareholders 
\52\ of the registrant, the registrant, and the proxy system in 
general.\53\
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    \50\ Whether an entity meets the definition of an investment 
adviser or is eligible for an exclusion does not impact the analysis 
of whether it is engaged in ``solicitation'' for purposes of Section 
14(a). Relatedly, the retention of a proxy voting advice business 
does not relieve an investment adviser of its obligations under the 
Advisers Act to its clients. See Commission Guidance Regarding Proxy 
Voting Responsibilities of Investment Advisers, Release No. IA-5325, 
pp. 5-6 (Aug. 21, 2019) [84 FR 47420, 42421 (Sept. 10, 2019)] 
(``Commission Guidance on Proxy Voting Responsibilities''), Question 
No. 2 at 12, 84 FR 47423 (discussing steps that an investment 
adviser that has assumed the authority to vote proxies on behalf of 
clients could take to demonstrate that it is making voting 
determinations in a client's best interest); see also Supplement to 
Commission Guidance Regarding Proxy Voting Responsibilities of 
Investment Advisers, Release No. IA-5547 (July 22, 2020) 
(``Supplemental Proxy Voting Guidance'').
    \51\ See Proposing Release at 66520.
    \52\ See supra note 18.
    \53\ Cf. J. I. Case Co. v. Borak, 377 U.S. 426, 432 (1964) 
(``The injury which a stockholder suffers from corporate action 
pursuant to a deceptive proxy solicitation ordinarily flows from the 
damage done the corporation, rather than from the damage inflicted 
directly upon the stockholder. The damage suffered results not from 
the deceit practiced on him alone but rather from the deceit 
practiced on the stockholders as a group.'').
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    In the areas of proxy voting, proxy solicitation, and related 
activities, the Advisers Act, Section 14(a), and various other statutes 
and Commission rules do not operate independently from each other and 
are not mutually exclusive. Rather, depending on the activity and 
status of the person involved, more than one statutory provision and 
related rules may apply, with the various provisions complementing each 
other. For example, Section 13(d) of the Exchange Act and the related 
rules \54\ are designed to ensure that market participants are informed 
when any shareholder (or group of shareholders) acquires more than five 
percent of a class of equity securities registered under Exchange Act 
Section 12.\55\ Section 13(d) and the related rules generally require 
these holders to disclose publicly their ownership and other 
information mandated by the Commission, such as any plans that the 
holders may have to change the board of directors or management or to 
engage in

[[Page 55087]]

extraordinary transactions (such as mergers or material asset sales), 
for so long as the holdings exceed the five percent threshold as well 
as any material changes to these disclosures.\56\ These mandated 
disclosures, which are provided in Schedule 13D, along with the short-
form Schedule 13G adopted pursuant to Exchange Act Section 13(g),\57\ 
have proven important to investor protection by providing public notice 
of significant accumulations of securities by a person that may affect 
the control of the company and, ultimately, the interests of all 
security holders in the company, including in the context of proxy 
voting.
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    \54\ 17 CFR 240.13d-1 through 13d-102 (``Rules 13d-1 through 
13d-102'').
    \55\ 15 U.S.C. 78m(d).
    \56\ 17 CFR 240.13d-101.
    \57\ 15 U.S.C. 78m(g).
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    Yet, the obligation for a shareholder to file Schedules 13D or 13G 
does not obviate the shareholder's obligation to comply with Section 
14(a) and the Federal proxy rules to the extent that the shareholder 
engages in activities that constitute a proxy solicitation. For 
example, a dissident shareholder seeking to solicit proxy authority to 
elect its own director nominees to a registrant's board in a contested 
election must still file and furnish a definitive proxy statement even 
though the dissident shareholder may have previously disclosed in its 
Schedule 13D the plan to change the board of directors. This is the 
result of Congress establishing these two separate statutory provisions 
with different purposes, with Section 13(d) focused on providing notice 
about concentration of voting power and the use of that power, 
including to change or influence the control of the issuer, and Section 
14(a) focused on providing information needed for informed shareholder 
voting, and the fact that a shareholder may engage in an activity that 
triggers obligations under both provisions.
    The two statutory obligations often complement each other. For 
example, Exchange Act Rule 13d-1 provides certain shareholders, 
including many classes of institutional shareholders, with a tailored, 
conditional exemption from the general requirements of Section 13(d) if 
the shareholder has acquired the securities ``in the ordinary course of 
business and not with the purpose nor with the effect of changing or 
influencing the control of the issuer.'' \58\ In various circumstances 
where shareholders are voting by proxy, and solicitation activity is 
ongoing--for example, the election of directors or the approval of an 
extraordinary corporate transaction--the information required to be 
disclosed publicly by Section 13(d) may be material to a voting 
decision and, accordingly, important to the regulation of the proxy 
voting process. Similarly, the Commission--noting that Section 13(d) 
already sets forth the circumstances for when public disclosures of 
such plans, proposals, or agreements are needed--adopted the Rule 14a-
2(b)(1) exemption despite concerns from some commenters that proxy 
filings are needed for disclosure of a shareholder's plans or proposals 
regarding the registrant or shareholders' voting agreements on a 
particular matter.\59\ At the same time, the exemption is not available 
for solicitations by any person who, while not seeking proxy authority, 
is nevertheless required to file a Schedule 13D or has disclosed in the 
Schedule 13D an intent (or reserved the right) to engage in a change of 
control transaction or a contested director election, given the 
heightened need for the proxy disclosures from a person contemplating 
such transformative transactions or contests.
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    \58\ 17 CFR 240.13d-1(b)(1)(i).
    \59\ See Communications Among Shareholders Adopting Release at 
48278 (``When and under what circumstances a large shareholder, or 
group of shareholders acting together, must reveal to the SEC, the 
company, other shareholders, and the market its plans and proposals 
regarding the company has been addressed by Congress, but not 
through the provisions governing proxy solicitations. Section 13(d) 
of the Exchange Act, as implemented by the Commission in its 
regulations adopted thereunder, sets forth the circumstances when 
public disclosure of plans and proposals by significant 
shareholders, as well as agreements among shareholders to act 
together with respect to voting matters, must be disclosed to the 
market.''). See also Release No. 34-39538 (Jan. 12, 1998) [63 FR 
2854 (Jan. 16, 1998)] (stating the Commission's views on when a 
significant shareholder's proxy soliciting activities and 
communications could be viewed as having the purpose or effect of 
changing or influencing control of the company and thereby 
triggering the obligation to file a Schedule 13D). Under Section 
13(d) and Section 13(g), a ``group'' is formed when two or more 
persons act together for the purpose of acquiring, holding, voting 
or disposing of the securities. Congress created the ``group'' 
concept to prevent persons who seek to pool their voting or other 
interests in the securities of an issuer from evading the Section 
13(d) or 13(g) obligations because no one person owns more than five 
percent of the securities. Use of a proxy voting advice business by 
investors as a vehicle for the purpose of coordinating their voting 
decisions regarding an issuer's securities without complying with 
the filing obligations of Section 13(d) or 13(g) would raise 
compliance concerns under the beneficial ownership reporting 
requirements.
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    Other statutes that often play an important and complementary role 
in furthering all aspects of the Commission's mission in the context of 
proxy voting and proxy solicitation include Sections 5, 11, and 12 of 
the Securities Act of 1933 (the ``Securities Act''), in particular in 
circumstances where the vote being solicited is in connection with a 
significant transaction, such as a merger, in which new securities may 
be issued to the shareholders who are voting on the transaction. In 
such a situation, both the registration and prospectus requirements of 
Securities Act Section 5 and the proxy solicitation requirements of 
Exchange Act Section 14(a) apply, with public companies often filing a 
joint proxy statement/prospectus to fulfill both statutory obligations.
    This framework--complementary and overlapping statutes and rules 
that are based on principles, facts and circumstances, and each 
participant's actions as well as status--applies similarly in other key 
areas of the Commission's mandate, including the offer and sale of 
securities in both the public and private markets, securities trading, 
and the provision of investment advice to retail and institutional 
investors. Moreover, this framework is consistent with Congressional 
intent as reflected in the enactment of the Securities Act, the 
Exchange Act, the Advisers Act, and various other key statutes, 
including Section 14(a), and has proven to be an effective and 
efficient means to regulate an important, multi-faceted and ever-
evolving aspect of commerce. Accordingly, given the importance of a 
properly functioning proxy system to investors and the capital markets, 
even if other provisions of the federal securities laws may apply to 
certain of their activities, it is appropriate for voting advice 
furnished by proxy voting advice businesses to be subject to the rules 
under Section 14(a), which are designed specifically to enhance the 
transparency and integrity of the proxy voting process, with the 
ultimate aim of facilitating informed voting decisions.\60\
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    \60\ See Proposing Release at 66520.
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II. Discussion of Final Amendments

A. Codification of the Commission's Interpretation of ``Solicitation'' 
Under Rule 14a-1(l) and Section 14(a)

    Exchange Act Section 14(a) \61\ makes it unlawful for any person to 
``solicit'' any proxy with respect to any security registered under 
Exchange Act Section 12 in contravention of such rules and regulations 
prescribed by the Commission.\62\ The purpose of Section 14(a) is to 
prevent ``deceptive or inadequate disclosure'' from being made to 
shareholders in a proxy solicitation.\63\

[[Page 55088]]

Section 14(a) grants the Commission broad authority to establish rules 
and regulations to govern proxy solicitations ``as necessary or 
appropriate in the public interest or for the protection of 
investors.'' \64\
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    \61\ 15 U.S.C. 78n(a).
    \62\ Registrants only reporting pursuant to Exchange Act Section 
15(d) are not subject to the federal proxy rules, while foreign 
private issuers are exempt from the requirements of Section 14(a). 
17 CFR 240.3a12-3(b).
    \63\ Borak, 377 U.S. at 432; see S. Rep. No. 1455, 73d Cong., 2d 
Sess., 74 (1934) (``In order that the stockholder may have adequate 
knowledge as to the manner in which his interests are being served, 
it is essential that he be enlightened not only as to the financial 
condition of the corporation, but also as to the major questions of 
policy, which are decided at stockholders' meetings.''); 
Communications Among Shareholders Adopting Release at 48277.
    \64\ 15 U.S.C. 78n(a); see Borak, 377 U.S. at 432 (noting the 
``broad remedial purposes'' evidenced by the language of Section 
14(a)).
---------------------------------------------------------------------------

    The Exchange Act does not define what constitutes a 
``solicitation'' for purposes of Section 14(a) and the Commission's 
proxy rules. Accordingly, the Commission has exercised its rulemaking 
authority over the years to define what communications are 
solicitations and to prescribe rules and regulations when necessary and 
appropriate in the public interest and to protect investors in the 
proxy voting process.\65\ The Commission first promulgated rules in 
1935 to define a solicitation to include any request for a proxy, 
consent, or authorization or the furnishing of a proxy, consent, or 
authorization to security holders.\66\ Since then, the Commission has 
amended the definition as needed to respond to new and changing market 
practices that have raised the concerns underlying Section 14(a).\67\
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    \65\ See 15 U.S.C. 78n(a); 78c(b); 78w.
    \66\ See Order Execution Obligations, Release No. 34-378 (Sept. 
24, 1935) 1935 WL 29270.
    \67\ The Commission revised the definition in 1938 to include 
any request for a proxy, regardless of whether the request is 
accompanied by or included in a written form of proxy. See Release 
No. 34-1823 (Aug. 11, 1938) [3 FR 1991 (Aug. 13, 1938)], at 1992. It 
subsequently revised the definition in 1942 to include ``any request 
to revoke or not execute a proxy.'' See Release No. 34-3347 (Dec. 
18, 1942) [7 FR 10653 (Dec. 22, 1942)], at 10656. Courts have also 
taken a broad view of solicitation. See infra notes 141-146 and 
accompanying text.
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    In particular, the Commission expanded the definition of a 
solicitation in 1956 to include not only requests for proxies, but also 
any ``communication to security holders under circumstances reasonably 
calculated to result in the procurement, execution, or revocation of a 
proxy.'' \68\ This expanded definition was prompted by recognition that 
some market participants were distributing written communications 
designed to affect shareholders' voting decisions well in advance of 
any formal request for a proxy that would have triggered the filing and 
information requirements of the federal proxy rules.\69\
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    \68\ 17 CFR 240.14a-1(l)(1)(iii); see Adoption of Amendments to 
Proxy Rules, Release No. 34-5276 (Jan. 17, 1956) [21 FR 577 (Jan. 
26, 1956)], at 577; see also Broker-Dealer Participation in Proxy 
Solicitations, Release No. 34-7208 (Jan. 7, 1964) [29 FR 341 (Jan. 
15, 1964)] (``Broker-Dealer Release''), at 341 (``Section 14 and the 
proxy rules apply to any person--not just management, or the 
opposition. This coverage is necessary in order to assure that all 
materials specifically directed to stockholders and which are 
related to, and influence their voting will meet the standards of 
the rules.'').
    \69\ See generally Communications Among Shareholders Adopting 
Release.
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    Since 1956, the Commission has recognized that its definition of a 
solicitation was broad and applicable regardless of whether persons 
communicating with shareholders were seeking proxy authority for 
themselves.\70\ In light of the breadth of this definition, the 
Commission adopted an exemption from the information and filing 
requirements of the Federal proxy rules for communications by persons 
not seeking proxy authority, but continued to include such 
communications within the definition of a ``solicitation.'' \71\ The 
Commission also adopted another exemption from the information and 
filing requirements for proxy voting advice given by advisors to their 
clients under certain circumstances, but likewise continued to include 
such advice within the definition of ``solicitation,'' subject to an 
exception discussed below.\72\ By adopting these tailored exemptions, 
the Commission removed certain filing and other requirements that were 
considered unnecessary for such solicitations in order to facilitate 
shareholder access to more sources of information when voting, though 
the antifraud provisions of the proxy rules continued to apply.
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    \70\ Id. at 48276 (adopting Exchange Act Rule 14a-2(b)(1)).
    \71\ See id.
    \72\ See Shareholder Communications, Shareholder Participation 
in Corporate Electoral Process and Corporate Governance Generally, 
Release No. 34-16356 (Nov. 21, 1979) [44 FR 68764 (Nov. 29, 1979)] 
(``1979 Adopting Release''), at 68766.
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    The Commission has previously observed that the definition of a 
solicitation for purposes of Section 14(a) may result in proxy voting 
advice businesses being subject to the Federal proxy rules because they 
provide recommendations that are reasonably calculated to result in the 
procurement, withholding, or revocation of a proxy and thus, as a 
general matter, the furnishing of proxy voting advice constitutes a 
solicitation.\73\ In 2019, the Commission issued an interpretative 
release regarding the application of the Federal proxy rules to proxy 
voting advice.\74\ As the Commission explained in that release, the 
determination of whether a communication is a solicitation for purposes 
of Section 14(a) depends upon both the specific nature, content, and 
timing of the communication and the circumstances under which the 
communication is transmitted.\75\ The Commission noted several factors 
that indicate proxy voting advice businesses generally engage in 
solicitations when they provide proxy voting advice to their clients, 
including:
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    \73\ See Concept Release at 43009. See also Proposing Release at 
66522; Broker-Dealer Release at 341.
    \74\ Commission Interpretation and Guidance Regarding the 
Applicability of the Proxy Rules to Proxy Voting Advice, Release No. 
34-86721 (Aug. 21, 2019) [84 FR 47416 (Sept. 10, 2019)] 
(``Commission Interpretation on Proxy Voting Advice'').
    \75\ See Commission Interpretation on Proxy Voting Advice at 
47417. See also Proposing Release at 66522; Concept Release at 43009 
n.244.
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     The proxy voting advice 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;
     Proxy voting advice businesses market their expertise in 
researching and analyzing matters that are subject to a proxy vote for 
the purpose of assisting their clients in making voting decisions;
     Many clients of proxy voting advice businesses retain and 
pay a fee to these firms to provide detailed analyses of various 
issues, including advice regarding how the clients should vote through 
their proxies on the proposals to be considered at the registrant's 
upcoming meeting or on matters for which shareholder approval is 
sought; and
     Proxy voting advice businesses typically provide their 
recommendations shortly before a shareholder meeting or authorization 
vote,\76\ enhancing the likelihood that their recommendations will 
influence their clients' voting determinations.\77\
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    \76\ See, e.g., letter from Maria Ghazal, Senior Vice President 
and Counsel, Business Roundtable (June 3, 2019) at 9 (``[R]ecent 
survey results support the contention that a spike in voting follows 
adverse voting recommendations by ISS during the three-business day 
period immediately after the release of the recommendation.''); 
Transcript of Roundtable on the Proxy Process, at 242 (Nov. 15, 
2018), available at https://www.sec.gov/files/proxy-round-table-transcript-111518.pdf; Frank Placenti, Are Proxy Advisors Really A 
Problem?, American Council for Capital Formation 3 (Oct. 2018), 
available at http://accfcorpgov.org/wp-content/uploads/2018/10/ACCF_ProxyProblemReport_FINAL.pdf.
    \77\ Commission Interpretation on Proxy Voting Advice at 47418. 
See also Proposing Release at 66522.
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    The Commission observed that where these or other significant 
factors (or a significant subset of these or other factors) are 
present,\78\ the proxy voting advice businesses' voting advice

[[Page 55089]]

generally would constitute a solicitation subject to the Commission's 
proxy rules because such advice would be ``a communication to security 
holders under circumstances reasonably calculated to result in the 
procurement, withholding or revocation of a proxy.'' \79\ Furthermore, 
the Commission explained that such advice generally would be a 
solicitation even if the proxy voting advice business is providing 
recommendations based on the client's own custom policies, and even if 
the client chooses not to follow the advice.\80\ In addition, the fact 
that proxy voting advice businesses may provide additional services, 
such as consulting services to investment advisers and issuers and 
general market commentary, does not diminish their role in the proxy 
solicitation process.
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    \78\ Such other factors may include the fact that many proxy 
voting advice businesses' recommendations are typically distributed 
broadly.
    \79\ See Commission Interpretation on Proxy Voting Advice at 
47418. See also Proposing Release at 66522.
    \80\ See Commission Interpretation on Proxy Voting Advice at 
47418. See also Proposing Release at 66522.
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1. Proposed Amendments
    In the Proposing Release, the Commission proposed to amend 17 CFR 
240.14a-1(l)(1)(iii) (``Rule 14a-1(l)(1)(iii)'') to add paragraph (A) 
to make clear 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.\81\ 
The proposed amendment would codify the long-held Commission view that 
the furnishing of proxy voting advice generally constitutes a 
solicitation governed by the federal proxy rules.
---------------------------------------------------------------------------

    \81\ Proposing Release at 66522, 66557.
---------------------------------------------------------------------------

    In connection with the proposed amendment to Rule 14a-1(l)(1)(iii), 
the Commission recognized that the major proxy voting advice businesses 
may use more than one voting policy or set of guidelines in formulating 
their voting recommendations on a particular matter to be voted at a 
shareholder meeting (or for which written consents or authorizations 
are sought in lieu of a meeting). For example, a proxy voting advice 
business may offer differing voting recommendations on a matter based 
on the application of its benchmark policy or various specialty 
policies. Under the proposal, the voting recommendations formulated 
under the benchmark policy and each of the specialty policies would be 
considered to be a separate communication of proxy voting advice under 
proposed Rule 14a-1(l)(1)(iii)(A). In addition to voting 
recommendations formulated pursuant to a proxy voting advice business's 
benchmark and specialty policies, the Commission also proposed to 
include voting recommendations formulated pursuant to a proxy voting 
advice business's client's own custom policies within the scope of the 
term ``solicitation,'' consistent with its prior interpretation.\82\
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    \82\ Proposing Release at 66522.
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    Lastly, the Commission proposed to amend Rule 14a-1(l)(2), which 
currently lists activities and communications that do not constitute a 
solicitation, to add paragraph (v) to make clear that the terms 
``solicit'' and ``solicitation'' exclude any proxy voting advice 
furnished by a person who furnishes such advice only in response to an 
unprompted request.\83\ Doing so would codify the Commission's 
historical view that such a communication should not be regarded as a 
solicitation subject to the proxy rules.\84\
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    \83\ Id. at 66523, 66557.
    \84\ Commission Interpretation on Proxy Voting Advice at 47419 
(``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 solicitation.''); 
1979 Adopting Release at 68766. See also Broker-Dealer Release at 
341 (setting forth the opinion of the SEC's General Counsel that a 
broker is not engaging in a ``solicitation'' if it is merely 
responding to his customer's request for advice and ``not actively 
initiating the communication'').
---------------------------------------------------------------------------

2. Comments Received
    Commenters expressed a mix of views on the Commission's proposed 
amendments to the definitions of ``solicit'' and ``solicitation'' in 17 
CFR 240.14a-1(l)(1) (``Rule 14a-1(l)(1)''). A number of commenters 
supported codifying the Commission's interpretation of those 
definitions as proposed.\85\ Some of these commenters described the 
proposed amendments as consistent with the Commission's existing 
interpretation of the term ``solicitation'' \86\ and noted that the 
advice provided by proxy voting advice businesses is the kind of 
information that Congress intended Section 14(a) to address.\87\ Two 
commenters agreed with the Commission's position that the definition of 
``solicitation'' should not be limited to a request to obtain proxy 
authority or to obtain shareholder support for a preferred outcome.\88\ 
Those two commenters also agreed with the Commission's view that each 
voting recommendation formulated pursuant to a benchmark policy or a 
specialty policy should be considered a separate ``solicitation.'' \89\ 
Other commenters added that the analysis of what constitutes a 
``solicitation'' should not turn on whether the proxy voting advice 
business's voting recommendations are based on an investor's custom 
policy or the proxy voting advice business's benchmark policy.\90\ 
Finally, a few commenters that supported the proposed amendments 
recommended that the Commission include in the definition of 
``solicitation'' any reports and ratings by environmental, social, and 
governance ratings firms or environmental and sustainability rating 
firms.\91\
---------------------------------------------------------------------------

    \85\ See letters from BIO; BRT; CCMC; CEC; CGC; Michael 
McCormick, Executive Vice President, General Counsel Secretary, 
Ecolab Inc. (Feb. 3, 2020) (``Ecolab''); Exxon Mobil; Dennis E. 
Nixon, President, International Bancshares Corporation (Jan. 23, 
2020) (``IBC''); NAM; Nareit; Nasdaq; David Dixon, President, and 
David L. Dragics, Advocacy Ambassador, NIRI Capital Area Chapter 
(Feb. 6, 2020) (``NIRI-Capital''); Phil Gramm (Feb. 3, 2020) (``P. 
Gramm''); Niels Holch, Executive Director, Shareholder 
Communications Coalition (Feb. 3, 2020) (``SCC I''); SCG; 
Stakeholders Empowerment Service (Jan. 31, 2020) (``SES'').
    \86\ See letters from BRT; CCMC; NAM; Nasdaq; NIRI-Capital.
    \87\ See letters from BRT; CCMC; Exxon Mobil; NAM; Nareit; SCC 
I.
    \88\ See letters from NAM; SCG.
    \89\ See letters from NAM; SCG.
    \90\ See letters from Exxon Mobil; NAM; SCG.
    \91\ See letters from Exxon Mobil; Garmin; NAM.
---------------------------------------------------------------------------

    Other commenters opposed codifying the Commission's interpretation 
of ``solicit'' and ``solicitation.'' \92\ Some

[[Page 55090]]

commenters asserted that the Commission does not have the authority to 
regulate proxy voting advice businesses under Section 14(a) \93\ or 
other provisions of the Exchange Act.\94\ Some described the proposal 
as inconsistent with the Commission's historical treatment of Section 
14(a).\95\ Some commenters added that proxy voting advice differs from 
proxy solicitation and should not be treated as such under the proxy 
rules.\96\ Specifically, these commenters asserted that proxy 
solicitation differs from proxy advice in that proxy solicitors play an 
advocacy role on behalf of an interested party, whereas proxy voting 
advice businesses are independent third parties, hired by shareholders 
to provide objective advice that the recipients are not required to 
follow.\97\ One commenter also asserted that the proposal incorrectly 
equates proxy voting advice with the right to vote on another's behalf 
and in a manner that would benefit a particular party.\98\ Two other 
commenters, which were identified as proxy voting advice businesses in 
the Proposing Release,\99\ asserted that even if the Commission amends 
the definition of ``solicitation'' as proposed, their activities will 
not constitute ``solicitations'' under the revised definition because 
they vote on behalf of their clients rather than providing them with 
research reports and voting recommendations.\100\
---------------------------------------------------------------------------

    \92\ See letters from Anat Admati, George G.C. Parker Professor 
of Finance and Economics, Stanford Graduate School of Business, et 
al. (Jan. 15, 2020) (``62 Professors''); Brandon Rees, Deputy 
Director, Corporations at Capital Markets, AFL-CIO (Feb. 3, 2020) 
(``AFL-CIO II''); Robert Arnold and Matthew Aquiline, Trustees, 
Bricklayers & Trowel Trades International Pension Fund (Jan. 31, 
2020) (``Bricklayers''); Marcie Frost, Chief Executive Officer, 
CalPERS (Feb. 3, 2020) (``CalPERS''); Aeisha Mastagni, Portfolio 
Manager, California State Teachers' Retirement System (Feb. 3, 2020) 
(``CalSTRS''); Marcia Moffat, Board Chair, Canadian Coalition for 
Good Governance (Feb. 3, 2020) (``Canadian Governance Coalition''); 
James Allen, Head, and Matt Orsagh, Senior Director, Capital Markets 
Policy, CFA Institute (Feb. 3, 2020) (``CFA Institute I''); Kenneth 
A. Bertsch, Executive Director, and Jeffrey P. Mahoney, General 
Counsel, Council of Institutional Investors (Jan. 30, 2020) (``CII 
IV''); Rob Collins, Council for Investor Rights and Corporate 
Accountability (Feb. 3, 2020) (``CIRCA''); Ron Baker, Executive 
Director, Colorado Public Employees' Retirement Association (Feb. 3, 
2020) (``Colorado Retirement''); Duane Roberts, Director of 
Equities, Dana Investment Advisors (Dec. 5, 2019) (``Dana''); 
Richard B. Zabel, General Counsel and Chief Legal Officer, Elliott 
Management Corporation (Jan. 31, 2020) (``Elliott I''); Hans-
Christoph Hirt, Executive Director and Head, Hermes Equity Ownership 
Services Limited (Feb. 3, 2020) (``Hermes''); ISS, Josh Zinner, CEO, 
Interfait Center on Corporate Responsibility (Feb. 3, 2020) 
(``Interfaith Center II''); Kevin Cameron, Executive Chair, Glass 
Lewis (Feb. 3, 2020) (``Glass Lewis II''); Jonathan Grabel, Chief 
Investment Officer, LACERA (Feb. 3, 2020) (``LA Retirement''), Sarah 
Wilson, CEO, Minerva Analytics (Jan. 2, 2020) (``Minerva I''); 
Thomas P. DiNapoli, New York State Comptroller (Feb. 3, 2020) (``New 
York Comptroller II''); Karen Carraher, Executive Director, and 
Patti Brammer, Corporate Governance Officer, Ohio Public Employees 
Retirement System (Feb. 3, 2020) (``Ohio Public Retirement''); PIRC, 
on behalf of Local Authority Pension Fund Form (LAPFF) (Feb. 3, 
2020) (``PIRC''); Fiona Reynolds, Chief Executive Officer, 
Principles for Responsible Investment (Feb. 3, 2020) (``PRI II''); 
Konstantinos Sergakis, Professor of Capital Markets Law and 
Corporate Governance, University of Glasgow (Dec. 26, 2019) (``Prof. 
Sergakis''); Craig M. Rosenberg, President, ProxyVote Plus, LLC 
(Feb. 3, 2020) (``ProxyVote II''); Hank Kim, Executive Director & 
Counsel, National Conference of Public Employee Retirement Systems 
(Feb. 3, 2020) (``Public Retirement Systems''); Maureen O'Brien, 
Vice President, Corporate Governance Director, Segal Margo Advisors 
(Feb. 3, 2020) (``Segal Marco II''); Andrew E. Oster, CFP, AIF, 
President & CCO, Triton Wealth Advisors LLC (Feb. 22, 2020) 
(``Triton''); Nell Minow, Vice Chair, ValueEdge (Jan. 31, 2020) 
(``ValueEdge I''); Theresa Whitmarsh, Executive Director, Washington 
State Investment Board (Jan. 22, 2020) (``Washington State 
Investment'').
    \93\ See letters from AFL-CIO II; CII IV; Elliott I; Glass Lewis 
II; ISS; Richard A. Kirby and Beth-ann Roth, RK Invest Law, PBC 
(Feb. 3, 2020) (``RK Invest Law''); ProxyVote II.
    \94\ See letter from ISS.
    \95\ See letters from CalPERS; CII IV; Elliott I; Glass Lewis 
II; ISS; ProxyVote II.
    \96\ See letters from Bricklayers; CalPERS; CII IV; CIRCA; 
Elliott I; Glass Lewis II; ISS; New York Comptroller II; Segal Marco 
II.
    \97\ See letters from Bricklayers; CII IV; CIRCA; Glass Lewis 
II; ISS; New York Comptroller II; Segal Marco II.
    \98\ See letter from CalPERS.
    \99\ See Proposing Release at 66542, n.190.
    \100\ See letters from ProxyVote II; Segal Marco II. Similarly, 
another commenter noted that it executes votes directly on behalf 
of--but does not provide voting recommendations to--its clients. See 
letter from Mary Beth Gallagher, Executive Director, Investor 
Advocates for Social Justice (Feb. 3, 2020) (``IASJ''). See also 
letters from Sean P. Bannon, Chief Financial Officer, Felician 
Sisters of North America (Feb. 3, 2020) (``Felician Sisters II''); 
Toni Palamar, Province Business Administrator, Sisters of the Good 
Shepherd (Feb. 3, 2020) (``Good Shepherd''); Interfaith Center II; 
Patricia A. Daly, Corporate Responsibility Representative, Sisters 
of St. Dominic of Caldwell (Feb. 3, 2020) (``St. Dominic of 
Caldwell'').
---------------------------------------------------------------------------

    In addition, some commenters stated that the proposed codification 
of ``solicitation'' would increase proxy voting advice businesses' 
costs \101\ or interfere with their ability to provide services to 
their clients.\102\ Specifically, these commenters asserted that the 
proposed amendments would increase litigation risks facing proxy voting 
advice businesses \103\ and interfere with the relationship between 
investors and proxy voting advice businesses in a way that would 
increase costs and complexity and bias voting recommendations in favor 
of corporate management.\104\ Two commenters further expressed concern 
that treating proxy advice as a solicitation could have a chilling 
effect on shareholder communication.\105\
---------------------------------------------------------------------------

    \101\ See letters from 62 Professors; CalSTRS; Elliott I; 
Interfaith Center II; New York Comptroller II; Public Retirement 
Systems; Washington State Investment.
    \102\ See letters from CalSTRS; CIRCA; Elliott I; Interfaith 
Center II; New York Comptroller II; Ohio Public Retirement; Prof. 
Sergakis; Public Retirement Systems.
    \103\ See letters from CIRCA; Elliott I; New York Comptroller 
II; Ohio Public Retirement; PRI II.
    \104\ See letters from New York Comptroller II; PRI II.
    \105\ See letters from CalPERS; Washington State Investment.
---------------------------------------------------------------------------

    Some commenters asserted that the Commission has not provided 
reliable evidence that existing communications between proxy voting 
advice businesses and their institutional investor clients present a 
significant risk to investor protection to justify the proposed 
amendment.\106\ Several commenters expressed concern that the 
Commission disregarded the findings and views of its 2018 Roundtable on 
the Proxy Process, the Office of Investor Advocate, and the Investor 
Advisory Committee and called into question the legitimacy of other 
comment letters.\107\ One commenter requested that the Commission 
clarify the benefits of treating proxy advice as a solicitation.\108\ 
Two commenters also expressed concern that the proposal would overlap 
with regulations that proxy voting advice businesses are already 
subject to, including as ``investment advisers'' under the Advisers Act 
and as fiduciaries under the Employee Retirement Income Security Act of 
1974.\109\
---------------------------------------------------------------------------

    \106\ See letters from CII IV; Elliott I.
    \107\ See letters from CII IV; Elliott I; Glass Lewis II; ISS.
    \108\ See letter from CalPERS.
    \109\ See letters from ISS; ProxyVote II.
---------------------------------------------------------------------------

    Finally, some commenters that generally opposed the proposal 
recommended that, if the Commission ultimately decides to amend Rule 
14a-1(l), it should make the following revisions to narrow the scope of 
the proposals: \110\
---------------------------------------------------------------------------

    \110\ See letters from CII IV; ISS; New York Comptroller II; PRI 
II; ProxyVote II; Segal Marco II.
---------------------------------------------------------------------------

     Clarify whether ``proxy voting advice'' under Rule 14a-
1(l)(1)(iii)(A) would include data and research that may inform a proxy 
analysis or be described in a proxy research report but that is 
marketed separately to investors; \111\
---------------------------------------------------------------------------

    \111\ See letter from ISS. The commenter further opined that the 
inclusion of such data and research in the scope of ``proxy voting 
advice'' would be ``highly inappropriate.'' Id.
---------------------------------------------------------------------------

     Exclude advice based on investors' custom policies from 
the definition of ``solicitation''; \112\
---------------------------------------------------------------------------

    \112\ See letters from ISS; New York Comptroller II; Matthew 
DiGuiseppe, Head of Asset Stewardship, Americas, and Benjamin 
Colton, Head of Asset Stewardship, Asia Pacific, State Street Global 
Advisors (Feb. 3, 2020) (``State Street'').
---------------------------------------------------------------------------

     Modify the proposal to recognize the difference between 
proxy voting advice businesses and proxy voting agent businesses, the 
latter of which ``vote solely on behalf of clients, in accordance with 
such clients' preset voting guidelines, based upon third-party 
research'' and should not be subject to regulation as a proxy voting 
advice business; \113\ and
---------------------------------------------------------------------------

    \113\ See letter from Segal Marco II.
---------------------------------------------------------------------------

     Clarify that the reference to ``other forms of investment 
advice'' in Proposed Rule 14a-1(l)(1)(iii)(A) is not intended to 
exclude only advice from an ``investment adviser'' and thereby sweep 
into the scope of the term ``solicitation'' communications made in the 
normal course of business by other professionals (e.g., management-
consulting firms, lawyers, accountants, broker-dealers, etc.).\114\
---------------------------------------------------------------------------

    \114\ See letter from Hermes.
---------------------------------------------------------------------------

    With respect to the proposed amendment to Rule 14a-1(l)(2), some 
commenters supported the proposal to exclude from the definition of a 
``solicitation'' any proxy voting advice furnished by a person only in 
response to an unprompted request.\115\ Another

[[Page 55091]]

commenter, however, opposed the proposal, asserting that it would be 
unworkable because investment advisers and broker-dealers may be 
hesitant to announce a willingness to provide voting advice out of 
concern that the Commission would determine they had ``invited and 
encouraged'' their clients to ask for advice.\116\ This commenter added 
that the proposed amendment would be counterproductive to investor 
protection goals because the Commission would be regulating experts 
with proxy advice-related skills and resources (i.e., proxy voting 
advice businesses), but would not regulate parties with no relevant 
expertise who engage in the same activities (i.e., any person that 
furnishes proxy voting advice in response to an unprompted 
request).\117\ Finally, one commenter recommended that the Commission 
narrow the proposed exclusion to cover only proxy voting advice 
provided pursuant to an unprompted request ``and not for 
compensation.'' \118\
---------------------------------------------------------------------------

    \115\ See letters from Andrew Cave, Head of Governance and 
Sustainability, Baillie Gifford & Co (Feb. 3, 2020) (``Baillie 
Gifford''); BRT; CCMC; Exxon Mobil; IBC.
    \116\ See letter from ISS.
    \117\ Id.
    \118\ See letter from Exxon Mobil.
---------------------------------------------------------------------------

3. Final Amendments
    We are adopting the amendments to Rule 14a-1(l)(1)(iii) and 17 CFR 
240.14a-1(l)(2) (``Rule 14a-1(l)(2)'') as proposed, with some minor 
changes to the proposed amendment to Rule 14a-1(l)(1)(iii).
    With respect to Rule 14a-1(l)(1)(iii), consistent with the 
Proposing Release, we are adding paragraph (A) \119\ to make clear that 
the terms ``solicit'' and ``solicitation'' include any proxy voting 
advice \120\ 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.
---------------------------------------------------------------------------

    \119\ The amendment is intended to make clear that proxy voting 
advice provided under the specified circumstances constitutes a 
solicitation under current Rule 14a-1(l)(1)(iii). It is not intended 
to amend, limit, or otherwise affect the scope of Rule 14a-
1(l)(1)(iii).
    \120\ As noted above, one commenter requested clarification as 
to whether the term ``proxy voting advice'' would include data and 
research that may inform a proxy analysis or be described in a proxy 
research report but that is marketed separately to investors. See 
supra note 111 and accompanying text. We have clarified the scope of 
that term. Compare supra note 7, with Proposing Release at 66519 & 
n.11.
---------------------------------------------------------------------------

    As noted above, the determination of whether a communication is a 
solicitation ultimately depends on the specific nature, content, and 
timing of the communication and the circumstances under which the 
communication is transmitted.\121\ A number of factors illuminate that 
determination, and, as set forth above, application of those factors 
indicate that the advice that proxy voting advice businesses provide to 
their clients generally constitutes a ``solicitation.'' \122\ This 
amendment, therefore, codifies the Commission's interpretation that 
proxy voting advice generally constitutes a ``solicitation'' under Rule 
14a-1(l).\123\ As we noted in the Proposing Release, we believe the 
furnishing of proxy voting advice by a person who has decided to offer 
such advice, separately from other forms of investment advice, to 
shareholders for a fee, with the expectation that its advice will be 
part of the shareholders' voting decision-making process, is conducting 
the type of activity that raises the concerns about inadequate or 
materially misleading disclosures that Section 14(a) and the 
Commission's proxy rules are intended to address.\124\ We also believe 
that the regulatory framework of Section 14(a) and the Commission's 
proxy rules, with their focus on the information received by 
shareholders as part of the voting process, are well-suited to 
enhancing the quality and availability of the information that clients 
of proxy voting advice businesses are likely to consider as part of 
their voting determinations.\125\
---------------------------------------------------------------------------

    \121\ See supra note 75 and accompanying text.
    \122\ See supra notes 75-79 and accompanying text; see also 
infra note 144.
    \123\ As noted above, some commenters expressed concern that the 
amendments are not supported by the relevant evidence and that the 
Commission may have disregarded the findings and views of more 
reliable observers, and called into question the legitimacy of other 
comments. See supra notes 106-107 and accompanying text. Very 
shortly after learning of the concerns raised about these comment 
letters, the Chairman referred the matter to the SEC's Office of 
Inspector General to investigate. That investigation is ongoing. We 
have now learned that some of the commenters who submitted certain 
of the letters appear to have signed declarations provided to 
Members of Congress regarding the authenticity of those letters. Our 
decision to adopt the amendments to Rule 14a-1(l), is not predicated 
upon the input we received with respect to the quality of the 
services provided by proxy voting advice businesses or the 
independence thereof. Rather, these amendments largely codify the 
Commission's longstanding interpretations of the scope of the terms 
``solicit'' and ``solicitation,'' which, as discussed below, are 
based on an assessment of the text, structure, history, and purpose 
of Section 14(a) of the Exchange Act, as well as judicial precedent. 
See infra notes 132-156 and accompanying text. Moreover, although 
certain members of the Commission may have cited some of the letters 
described above during the Commission's open meeting at which the 
amendments discussed herein were proposed, neither the Commission's 
interpretations of the scope of the terms ``solicit'' and 
``solicitation,'' nor our decision to adopt the other amendments 
herein, rest on those letters or their validity. Further, as 
discussed below, the Commission's interpretations of the scope of 
the terms ``solicit'' and ``solicitation'' are longstanding and far 
predate the cited comment letters. See infra notes 150-154 and 
accompanying text.
    \124\ We understand that investment advisers may discuss their 
views on proxy voting with clients or prospective clients as part of 
their portfolio management services or other common investment 
advisory services. Such discussions could be unprompted or prompted 
(such as in the case of a client or prospective client that has 
asked the adviser for its views on a particular transaction). For 
example, a mutual fund board may request that a prospective 
subadviser discuss its views on proxy voting, including votes on 
particular types of transactions such as mergers or corporate 
governance. As noted in the Proposing Release, the amendment is not 
intended to include these types of communications as solicitations 
for purposes of Section 14(a). In response to certain comments we 
received, we also are clarifying the amendment is not intended to 
include communications made in the normal course of business by 
other professionals to their clients that may relate to proxy 
voting. Instead, the amendment is intended to apply to entities that 
market their proxy voting advice as a service that is separate from 
other forms of investment advice to clients or prospective clients 
and sell such advice for a fee.
    \125\ We understand that a proxy voting advice business might, 
if applicable requirements are met, be registered as an investment 
adviser and subject to additional regulation under the Advisers Act, 
including 17 CFR part 275. However it is not unusual for a 
registrant under one provision of the securities laws to be subject 
to other provisions of the securities laws when engaging in conduct 
that falls within the other provisions. Given the focus of Section 
14(a) and the Commission's proxy rules on protecting investors who 
receive communications regarding their proxy votes, it is 
appropriate that proxy voting advice businesses be subject to 
applicable rules under Section 14(a) when they provide proxy voting 
advice. See supra notes 41-60 and accompanying text for a discussion 
of why we believe Section 14(a), together with the Commission's 
proxy rules, is an appropriate regulatory regime for such 
communications by proxy voting advice businesses, regardless of 
whether they are registered under the Advisers Act.
---------------------------------------------------------------------------

    In addition, we are aware of at least two proxy voting advice 
businesses, ISS and Egan-Jones, that use more than one proprietary 
voting policy or set of guidelines--oftentimes, a benchmark policy and 
one or more specialty policies--in formulating proxy voting advice as 
to a particular matter to be voted on at a shareholder meeting (or for 
which written consents or authorizations are sought in lieu of a 
meeting).\126\ Consistent with the Proposing Release, we view the proxy 
voting advice formulated pursuant to each separate policy or set of 
guidelines as distinct solicitations under Rule 14a-1(l)(1)(iii)(A). 
Similarly, as discussed in more detail below,\127\ proxy voting advice 
formulated pursuant to a custom policy constitutes a distinct 
solicitation under the final rule as well.
---------------------------------------------------------------------------

    \126\ See supra note 11 and accompanying text.
    \127\ See infra notes 165-169 and accompanying text.
---------------------------------------------------------------------------

    We recognize that some commenters opposed our amendments to Rule 
14a-

[[Page 55092]]

1(l)(1). As noted above, some commenters stated that the Commission is 
not authorized to regulate proxy voting advice as a ``solicitation'' 
under the Exchange Act.\128\ One commenter specifically asserted that 
the amendments would be contrary to (1) the legislative history of 
Section 14(a), (2) the case law that has construed the terms 
``solicit'' and ``solicitation'' under Section 14(a) and Rule 14a-1(l), 
and (3) the plain meaning of the term ``solicit.'' \129\ According to 
some opposing commenters, the scope of Section 14(a) is limited to 
soliciting activities by management, other corporate insiders, 
dissident shareholders seeking to take control of a company, or parties 
otherwise having an interest in the outcome of a shareholder vote. 
These commenters asserted, therefore, that as a matter of statutory 
interpretation, Section 14(a) cannot extend to communications or 
activities by persons who do not have an interest in the outcome of the 
matter being voted upon at the shareholder meeting or who do not seek 
proxy authority for themselves.\130\ These commenters further assert 
that, as a matter of fact, proxy voting advice businesses satisfy both 
of these criteria (i.e., no interest in the outcome of a vote and no 
request for authority to vote).\131\
---------------------------------------------------------------------------

    \128\ See supra notes 93-94 and accompanying text.
    \129\ See letter from ISS.
    \130\ See, e.g., supra notes 96-97 and accompanying text.
    \131\ Id.
---------------------------------------------------------------------------

    We reject this narrow interpretation of Section 14(a). The 
Commission's longstanding view that a ``solicitation'' includes any 
communication reasonably calculated to result in the procurement, 
withholding, or revocation of a proxy--and that this encompasses the 
furnishing of proxy voting advice--accords with the text, history, and 
structure of Section 14(a) of the Exchange Act, as well as judicial 
precedent and our own rules.
    The structure of Section 14(a) grants the Commission broad 
authority. It authorizes the Commission to prescribe rules and 
regulations to govern proxy solicitations ``as necessary or appropriate 
in the public interest or for the protection of investors,'' and it 
makes it unlawful for any person to ``solicit any proxy'' with respect 
to any security registered under Section 12 of the Exchange Act in 
contravention of such rules and regulations.\132\ Furthermore, rather 
than defining what constitutes a proxy solicitation, the Exchange Act 
leaves those terms undefined, while at the same time specifically 
empowering the Commission to define such terms consistent with the 
Act's ``provisions and purposes'' \133\ and, more broadly, to make 
rules and regulations, including rules that classify ``transactions, 
statements, applications, reports, and other materials.'' \134\
---------------------------------------------------------------------------

    \132\ See S. Rep. No. 73-792, 2d Sess., at 12 (1934) (``The 
committee recommends that the solicitation and issuance of proxies 
be left to regulation by the Commission.''); H.R. Rep. No. 1383, 73d 
Cong., 2d Sess., 14 (1934) (explaining the intention to give the 
Commission the ``power to control the conditions under which proxies 
may be solicited'').
    \133\ 15 U.S.C. 78c(b).
    \134\ 15 U.S.C. 78w(a)(1).
---------------------------------------------------------------------------

    In light of that context, the phrase ``solicit any proxy'' is not 
as narrow or mechanical as some commenters have claimed. Citing a 
dictionary definition, one commenter suggested that the ordinary 
meaning of the term ``solicit'' is ``to endeavor to obtain.'' \135\ 
Under this definition, what matters is the subjective intent of the 
person engaging in the solicitation, and thus no person would be 
soliciting a proxy unless they intend to obtain proxy authority. Some 
commenters likewise claimed that no person would be soliciting a proxy 
unless they intend to obtain a shareholder's support for a preferred 
outcome.\136\ However, dictionaries at the time Section 14(a) was 
enacted indicate that the term ``solicit'' had other meanings that did 
not depend on the interest or subjective intent of the person engaging 
in the solicitation. The term ``solicit'' also meant ``[t]o move to 
action.'' \137\ Under this definition, what matters is not the 
subjective intent to obtain a proxy, but rather the effect on a 
recipient's proxy vote. A person solicits a proxy by influencing a 
shareholder to act. As between these two meanings, we view the latter 
as more consistent with Section 14(a)'s provisions and purposes, as any 
inducement that may move a shareholder to vote a proxy in a certain way 
implicates the Commission's charge to ensure that necessary and 
appropriate regulations are in place for the protection of investors. 
That is why the Commission has recognized since 1956 that persons who 
do not seek proxy authority themselves nevertheless engage in 
solicitation when they communicate with shareholders in a manner 
reasonably calculated to ``result'' in a proxy vote.
---------------------------------------------------------------------------

    \135\ See letter from ISS.
    \136\ See, e.g., supra notes 96-97 and accompanying text. In 
arguing that the plain meaning of ``solicit'' supports its view, one 
commenter relied on the dictionary definition ``to endeavor to 
obtain,'' even though the commenter elsewhere acknowledged that 
Section 14(a) has long been understood to encompass communications 
that do not seek to obtain a proxy--and thus would not meet that 
narrow definition. See letter from ISS.
    \137\ See Webster's New International Dictionary (2d ed. 1934) 
(providing multiple definitions of the term ``solicit,'' including 
``[t]o move to action'' or ``[t]o urge'' or ``insist upon'').
---------------------------------------------------------------------------

    The context and history of Section 14(a) accord with this 
conclusion. Congress considered different versions of the Exchange Act 
that set forth the applicable proxy standards with more specificity in 
the analog to Section 14(a) and rejected them in favor of the broad 
authority granted to the Commission in Section 14(a), as enacted.\138\ 
While Congress may have been motivated to enact Section 14(a) in 1934 
due to the particular abuses by corporate insiders or dissident 
shareholders that occurred during that time, nothing in either the text 
or legislative history of Section 14(a) indicates that Congress 
intended to limit its scope to solicitations conducted by those 
parties. Rather, where Congress intended to exempt certain classes of 
market participants, transactions, or activities from the statutory 
provisions of the Securities Act and the Exchange Act (as enacted in 
1933 and 1934, respectively) or limit the Commission's rulemaking 
authority with regard to those market participants, transactions or 
activities, it generally did so by expressly including language in the 
relevant statutory provision.\139\

[[Page 55093]]

Indeed, Section 14(a) itself excludes any ``exempted security'' from 
its scope, but otherwise facially applies to ``any person'' without 
carving out any class of market participants.\140\
---------------------------------------------------------------------------

    \138\ See Louis Loss et. al., Securities Regulation, Sec.  6.C.2 
(6th ed. 2018) (``In Sec.  14(a) of the Exchange Act, Congress, 
abandoning the more specific standards of the original bills, left 
the solicitation of proxies to the SEC under broad public interest 
standards.'') (citing S. 2693, H.R. 7852, 73d Cong., 2d Sess. Sec.  
13(a) (1934)).
    \139\ See, e.g., Securities Exchange Act of 1934, Public Law 73-
291, 48 Stat. 881, Sec.  3(a)(4) (1934) (``Exchange Act (as enacted 
in 1934)'') (stating that the definition of the term ``broker'' 
``does not include a bank''); Exchange Act (as enacted in 1934) 
Sec.  3(a)(5) (stating that the definition of the term ``dealer'' 
``does not include a bank, or any person insofar as he buys or sells 
securities for his own account, either individually or in some 
fiduciary capacity, but not as part of a regular business''); 
Exchange Act (as enacted in 1934) Sec.  3(a)(10) (defining the term 
``security'' but expressly stating that the term ``shall not include 
currency or any note, draft, bill of exchange, or banker's 
acceptance which has a maturity at the time of issuance of not 
exceeding nine months, exclusive of days of grace, or any renewal 
thereof the maturity of which is likewise limited''); Exchange Act 
(as enacted in 1934) Sec.  15(l) (restricting broker-dealers' over-
the-counter market activity, but expressly exempting from these 
restrictions certain exempt securities, commercial paper, and other 
instruments); Exchange Act (as enacted in 1934) Sec.  24(a) 
(limiting the Commission's authority to require the ``revealing of 
trade secrets or processes in any application, report, or document 
filed with the Commission under this title''); Securities Act of 
1933, Public Law 73-22, 48 Stat. 74, Sec.  2(a)(10) (1933) 
(``Securities Act (as enacted in 1933)'') (defining the term 
``prospectus'' and expressly excluding certain written 
communications from this definition); Securities Act (as enacted in 
1933) Sec.  2(a)(11) (carving out from the statutory definition of 
``underwriter'' any ``person whose interest is limited to a 
commission from an underwriter or dealer not in excess of the usual 
and customary distributors' or sellers' commission''); Securities 
Act (as enacted in 1933) Sec.  2(a)(3) (carving out from the 
statutory definition of the terms ``sale'', ``sell'', ``offer to 
sell'', and ``offer for sale'' ``preliminary negotiations or 
agreements between an issuer and any underwriter'').
    \140\ See 15 U.S.C. 78n(a).
---------------------------------------------------------------------------

    Nor does the case law construing Section 14(a) mandate that a party 
must have an ``interest'' in the outcome of a shareholder vote in order 
for a solicitation to occur, as certain commenters contended.\141\ 
Courts have articulated a broad definition of the term ``solicit'' such 
that the proxy rules ``apply not only to direct requests to furnish, 
revoke, or withhold proxies, but also to communications which may 
indirectly accomplish such a result or constitute a step in the chain 
of communications ultimately designed to accomplish such a result.'' 
\142\ Moreover, relying on the ``subjective intent of the person 
furnishing the communication'' to determine whether a particular 
communication constitutes a solicitation ``is at odds with the plain 
and unambiguous meaning of the regulation.'' \143\ Instead, the phrase 
``reasonably calculated to result in the procurement, withholding or 
revocation of a proxy'' in Rule 14a-1(l)(1)(iii) requires an objective 
inquiry that focuses ``on the manner in which the communicator 
attempted to influence a shareholder's proxy decision from the 
perspective of the shareholder who received the material.'' \144\ 
Courts also have broadly understood a ``solicitation'' to encompass 
``communications which may indirectly [result in a proxy being 
furnished, revoked or withheld],'' \145\ an interpretation that does 
not, by its terms, require inquiry into the speakers' interest or 
subjective intention. To inject a subjective element into the test of 
whether a communication is a ``solicitation'' under Rule 14a-
1(l)(1)(iii) as argued by one commenter (i.e., determining whether the 
speaker is ``completely indifferent to the outcome of the matter as to 
which shareholder approval was sought'' \146\) runs counter to this 
case law.
---------------------------------------------------------------------------

    \141\ See, e.g., letter from ISS. Although we do not believe 
that Section 14(a) requires that a party have an interest in the 
outcome of a vote, we also do not accept commenters' assertion that, 
as a matter of fact, proxy voting advice businesses necessarily do 
not have an interest in the outcome of matters being voted upon at 
shareholder meetings or do not seek proxy authority for themselves. 
While this may be true in many instances, we do not think this is 
always the case. See U.S. Gov't Accountability Office, GAO-17-47, 
Report to the Chairman, Subcommittee on Economic Policy, Committee 
on Banking, Housing, and Urban Affairs, U.S. Senate, Corporate 
Shareholder Meetings: Proxy Advisory Firms' Role in Voting and 
Corporate Governance Practices, 18 (2016), available at https://www.gao.gov/assets/690/681050.pdf (``2016 GAO Report'') (``Officials 
from one proxy advisory firm with whom we spoke stated that they 
agree that proxy advisory firms have influence on corporate 
governance practices. . . . They noted that such influence is good 
and ultimately they want to have a positive influence on their 
clients because they view that as part of their responsibility--to 
promote good governance.''); Kevin E. McManus, CEO Compensation was 
a Joke Before Covid-19, Now It is Just Obnoxious, Egan-Jones Proxy 
Services (June 11, 2020), available at https://www.ejproxy.com/weekly-wreck/36/ceo-compensation-was-joke-covid-19-now-it-just-obnoxious/ (criticizing executive compensation at certain 
registrants and making policy-based recommendations to regulate 
executive compensation). See also infra Section II.B.1. (noting 
examples of circumstances where the interests of a proxy voting 
advice business may diverge materially from the interests of the 
clients who utilize their advice, including a proxy voting advice 
business providing advice on a matter in which its affiliates or one 
of its clients has a material interest, such as a business 
transaction or a shareholder proposal put forward by or actively 
supported by that client).
    \142\ Long Island Lighting Co. v. Barbash, 779 F.2d 793, 796 (2d 
Cir. 1985) (emphasis added); see also Capital Real Estate Inv'rs Tax 
Exempt Fund Ltd. P'ship v. Schwartzberg, 917 F.Supp. 1050, 1059 
(S.D.N.Y. 1996).
    \143\ Gas Natural Inc. v. Osbourne, 624 Fed. Appx. 944, 950 (6th 
Cir. 2015) (unpublished).
    \144\ Id. (citing Broker-Dealer Release at 342 (noting that 
communications from broker-dealers to shareholders ``may constitute 
a solicitation requiring compliance with the proxy rules'' depending 
``upon the content of the material, upon the conditions under which 
it is transmitted, and upon surrounding circumstances'')). See also 
Long Island Lighting Co., 779 F.2d at 796 (``Determination of the 
purpose of the communication depends upon the nature of the 
communication and the circumstances under which it was 
distributed.''); Sargent v. Genesco, Inc., 492 F.2d 750, 767 (5th 
Cir. 1974) (``Whether or not a particular communication is a 
solicitation within the meaning of 14(a) is a question of fact 
dependent upon the nature of the communication and the circumstances 
under which it is transmitted.''); Dyer v. SEC, 291 F.2d 774, 777-78 
(8th Cir. 1961) (indicating that the determination of whether a 
communication constitutes a solicitation depends on the ``nature and 
circumstances'' of a communication and whether it can be rationally 
inferred that the speaker ``knew or could be expected to foresee 
that the things which he said might on their implication and 
innuendo affect the action of a stockholder in his granting of proxy 
authority,'' regardless of ``whatever [the speaker] may have had in 
his mind''); Schwartzberg, 929 F.Supp. at 113-14 (noting that if a 
statement ``presents the transaction in a manner objectively likely 
to predispose security holders toward or against it . . . it must 
comply with the proxy rules''). Among the factors relevant to the 
objective inquiry into whether a communication constitutes a 
``solicitation'' are (1) ``the contents of the communication,'' (2) 
``the conditions under which the communication is distributed,'' and 
(3) ``[t]he timing of the communication in relation to the relevant 
surrounding circumstances.'' Gas Natural Inc., 624 Fed. Appx. at 
950. As described above, the proxy voting advice that proxy voting 
advice businesses send their clients generally constitutes 
``solicitations'' under each of those three factors. See supra notes 
75-79 and accompanying text.
    \145\ Long Island Lighting Co., 779 F.2d at 796.
    \146\ See letter from ISS.
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    Relying on its broad rulemaking authority, the Commission has since 
1956 defined a solicitation to include any ``communication to security 
holders under circumstances reasonably calculated to result in the 
procurement, execution, or revocation of a proxy.'' \147\ This 
definition advances Section 14(a)'s overarching purpose of ensuring 
that communications to shareholders about their proxy voting decisions 
contain materially complete and accurate information.\148\ It would be 
inconsistent with that goal if a person whose business is to offer and 
sell voting advice broadly to large numbers of shareholders, with the 
expectation that their advice will factor into shareholders' voting 
decisions, were beyond the reach of Section 14(a). The fact that 
shareholders may retain providers of proxy voting advice to advance 
their own interests does not obviate these concerns.
---------------------------------------------------------------------------

    \147\ 17 CFR 240.14a-1(l)(1)(iii).
    \148\ Borak, 377 U.S. at 432; see also S. Rep. No. 1455, 73d 
Cong., 2d Sess., 74 (1934) (``In order that the stockholder may have 
adequate knowledge as to the manner in which his interests are being 
served, it is essential that he be enlightened not only as to the 
financial condition of the corporation, but also as to the major 
questions of policy, which are decided at stockholders' 
meetings.''); H.R. Rep. No. 1383, 73d Cong., 2d Sess., 14 (1934) 
(explaining the need for ``adequate disclosure'' and 
``explanation''); Communications Among Shareholders Adopting Release 
at 48277.
---------------------------------------------------------------------------

    As described above, some commenters also asserted that the proposed 
amendment to Rule 14a-1(l)(1)(iii) conflicts with well-established 
practice in the proxy voting advice business industry and the 
Commission's historical treatment thereof.\149\ As an initial matter, 
and as noted in the Interpretive Release and the Proposing Release, the 
amendment to Rule 14a-1(l)(1)(iii) is in accordance with, and 
represents a codification of, the Commission's longstanding view that 
proxy voting advice generally constitutes a ``solicitation.'' This view 
was originally set forth in a 1964 release \150\ and reiterated by the 
Commission in 1979 \151\ and 2010.\152\ The cited releases did not 
limit the scope of the term ``solicitation'' so as to

[[Page 55094]]

exclude proxy voting advice provided by ``disinterested persons.'' 
Instead, the Commission articulated its view that proxy voting advice 
generally constitutes a ``solicitation,'' without reference to a 
particular class of market participants that must be providing such 
advice.\153\ Any suggestion otherwise requires reading into the 
releases an additional qualification that the Commission did not 
articulate.\154\
---------------------------------------------------------------------------

    \149\ See supra note 95 and accompanying text.
    \150\ See Broker-Dealer Release at 341 (``Material distributed 
during a period while proxy solicitation is in progress, which 
comments upon the issues to be voted on or which suggests how the 
stockholder should vote, would constitute soliciting material.'').
    \151\ See 1979 Adopting Release at 68766; Shareholder 
Communications, Shareholder Participation in the Corporate Electoral 
Process and Corporate Governance Generally, Release No. 34-16104 
(Aug. 13, 1979) [44 FR 48938 (Aug. 20, 1979)], at 48941 n.25.
    \152\ Concept Release at 43009 (``As a general matter, the 
furnishing of proxy voting advice constitutes a `solicitation' 
subject to the information and filing requirements in the proxy 
rules.'').
    \153\ Although the Commission's view was originally articulated 
in the context of an opinion by its General Counsel regarding 
participation by broker-dealer firms in proxy solicitations, nothing 
in the language of that release indicates that its position could 
not also be extended to other independent, disinterested parties 
engaged in the same activity. See Broker-Dealer Release.
    \154\ The commenters also cite the 1979 and 1992 releases as 
evidence that the Commission intended to narrow the scope of the 
term ``solicitation'' so as to avoid including communications by 
disinterested fiduciaries. See, e.g., letter from ISS (citing 
Communications Among Shareholders Adopting Release; 1979 Adopting 
Release). However, those releases reinforced the Commission's view 
of the breadth of the term by creating additional exemptions from 
the proxy filing rules. See Communications Among Shareholders 
Adopting Release at 48278 (creating an exemption from the proxy 
filing rules for solicitations by persons not seeking proxy 
authority who do not have a substantial interest in the matter 
subject to a vote); 1979 Adopting Release at 68766-67 (creating an 
exemption from the proxy filing rules for voting advice provided to 
persons with whom a financial advisor has a business relationship). 
In other words, the Commission recognized that certain classes of 
market participants were conducting activities that constituted 
``solicitations,'' but sought to grant them relief from the proxy 
filing rules by adopting applicable exemptions. Had the Commission 
interpreted the term ``solicitation'' as not applying to those 
market participants' activities, no such exemption from the proxy 
filing rules would have been necessary in the first place. Also, had 
the Commission intended to narrow the scope of the term 
``solicitation'' to avoid its application to those classes of market 
participants, it would have amended the definition thereof in Rule 
14a-1(l) appropriately. In fact, in the 1992 release, the Commission 
acknowledged that even though it considered (but did not ultimately 
adopt) proposed amendments exempting from the proxy filing rules all 
communications by ```disinterested' persons who are not seeking 
proxy authority,'' such communications under that proposal would 
still have constituted ``solicitations'' and ``remained subject to 
antifraud standards.'' Communications Among Shareholders Adopting 
Release at 48278.
---------------------------------------------------------------------------

    We further note that these commenters' position is inconsistent 
with the treatment of other disinterested parties under the current 
proxy regulatory scheme. Shareholders today exercise their voting 
rights through an intricate proxy process involving numerous 
intermediaries, such as broker-dealers, that each play an important 
role. Most shareholders own their securities in ``street name,'' with 
their broker-dealers and banks generally holding the securities in 
their name on behalf of their customers and possessing the legal 
authority to vote those shares. Under the current proxy process and 
rules, these broker-dealers and banks must forward a company's proxy 
materials to their customers and seek voting instructions (often called 
``voting instruction forms'') from the customers on whose behalf they 
hold those shares. These activities are currently treated as 
solicitations under the proxy rules, with the Commission generally 
exempting them from the informational and filing requirements, despite 
the fact that the broker-dealers and banks have no interest in the 
outcome of the matters being presented for a vote and no involvement in 
the preparation of the materials being sent to the customers.\155\ 
Those who have considered the issue, including at least one court, have 
recognized that the forwarding of a company's proxy materials and 
requests for voting instructions by broker-dealers constitute a form of 
soliciting activity subject to the Commission's rules.\156\
---------------------------------------------------------------------------

    \155\ See 17 CFR 240.14a-2(a)(1); see also Jill E. Fisch, 
Standing Voting Instructions: Empowering the Excluded Retail 
Investor, 120 Minn. L. Rev. 11, 40-41 (2017) (noting that broker-
dealers' requests for voting instructions from their customers 
``fall[] within the SEC's definition of a proxy solicitation'' and 
that Rule 14a-2(a)(1) ``exempts the broker from the filing 
requirements and the obligation to furnish a proxy statement'').
    \156\ See, e.g., Walsh & Levine v. The Peoria & E. R. Co., 222 
F.Supp. 516, 518-19 (S.D.N.Y. 1963) (``[I]f brokers transmit some 
but not all proxy solicitations to those for whose benefit they hold 
in street name, they are acting in contravention of the Commission 
rules if they fail to fulfill the duties required of active proxy 
solicitors.''); Broker-Dealer Release at 342 (``[I]t is quite clear 
. . . that the transmission to customers of proxy material furnished 
by the issuer or any other person who is soliciting a proxy, is 
clearly itself the solicitation of a proxy, since the material is 
transmitted under circumstances reasonably calculated to result in 
the procurement, withholding or revocation of a proxy.''); Fisch, 
supra note 155 at 40; Council of Institutional Investors, Client 
Directed Voting: Selected Issues and Design Perspectives (August 
2010) (``Rule 14a-(l) under the Exchange Act defines solicitation to 
include the `furnishing of a form of proxy or other communication to 
security holders under circumstances reasonably calculated to result 
in the procurement, withholding or revocation of a proxy,' subject 
to certain exceptions. Communications sent by brokers to encourage 
participation in a [client directed voting] model would appear to 
fall within this definition absent an exemption, and the SEC staff 
agrees with this conclusion. As such, brokers would have to comply 
with the proxy solicitation rules, including principally the 
disclosure and SEC filing requirements applicable to proxy 
materials.'').
---------------------------------------------------------------------------

    In addition, market observers, including proxy voting advice 
businesses themselves, have long recognized that the provision of proxy 
voting advice may constitute a ``solicitation'' subject to the proxy 
rules.\157\ Notably, one proxy voting advice business that now argues 
that the Commission lacks authority to regulate proxy voting advice as 
a ``solicitation'' submitted a letter to the Division of Corporation 
Finance in 1988 requesting no-action relief from the Commission's proxy 
filing rules.\158\ The proxy voting advice business did not request 
relief on the basis that its proxy voting advice should not be 
considered a ``solicitation.'' Instead, the letter appears to 
implicitly assume that such advice could be a ``solicitation'' by 
requesting relief from the proxy filing rules under the predecessor 
exemption to current Rule 14a-2(b)(3) on the basis that its proxy 
voting advice was provided to persons with whom it had a business 
relationship.\159\ Further, as recently as 2016, the CEO of another 
proxy voting advice business testified that ``[p]roxy advisory firms 
also are subject to the Securities and Exchange Commission's proxy 
solicitation rules under the [Exchange Act].'' \160\ The CEO further 
testified that ``proxy voting advisors operating today . . . are 
generally deemed by the SEC as qualifying for the exemptions based on 
rules 14a-2(b)(1) and 14a-2(b)(3).'' \161\ These statements suggest 
that the proxy voting advice business industry has understood for over 
30 years that its proxy voting advice constitutes a ``solicitation'' 
under Rule 14a-1(l), or at least that the Commission may consider their 
proxy voting advice to constitute a ``solicitation.''
---------------------------------------------------------------------------

    \157\ See, e.g., Sagiv Edelman, Proxy Advisory Firms: A Guide 
for Regulatory Reform, 62 Emory L.J. 1369, 1378 (2013) (``Due to the 
expansive definition of solicitation, proxy advisory firms would be 
subject to federal proxy rules if not for the exemption found in 
Exchange Act Rule 14a-2(b)(3).''); Douglas G. Smith, A Comparative 
Analysis of the Proxy Machinery in Germany, Japan, and the United 
States: Implications for the Political Theory of American Corporate 
Finance, 58 U. Pitt. L. Rev. 145, 201 n.284 (1996) (``Furnishing of 
proxy voting advice by an investment advisor is exempt [from the 
proxy filing rules] under certain circumstances.''); John C. Coffee, 
Jr., Liquidity Versus Control: The Institutional Investor as 
Corporate Monitor, 91 Colum. L. Rev. 1277, 1358 (1991) (``The legal 
issue is whether the provision of proxy advice amounts to a proxy 
`solicitation' under SEC Rule 14a-1. Clearly, the definition of 
solicitation reaches this far . . . .''); Bernard S. Black, 
Shareholder Passivity Reexamined, 89 Mich. L. Rev. 520, 530 (1990) 
(``Nor are the Proxy Rules limited to communications by the 
contestants. A third party who proffers voting advice is 
`soliciting' votes.''). See also infra notes 158-161 and 
accompanying text.
    \158\ Institutional Shareholder Services, Inc., 1991 SEC No-Act. 
LEXIS 17 (Dec. 15, 1988).
    \159\ See id.
    \160\ Katherine H. Rabin, Chief Executive Officer, Glass, Lewis 
& Co., Statement to the U.S. House of Representatives Committee on 
Financial Services: Markup of H.R. 5983, the ``Financial CHOICE Act 
of 2016,'' at 3 (September 13, 2016), available at https://www.glasslewis.com/wp-content/uploads/2016/09/2016_0912_Glass-Lewis-Statement-re-H.R.-5983_final.pdf.
    \161\ Id.
---------------------------------------------------------------------------

    Some commenters also asserted that our amendments to Rule 14a-
1(l)(1)(iii) will increase proxy voting advice businesses' costs or 
interfere with their

[[Page 55095]]

ability to provide services to their clients. Specifically, commenters 
indicated that the amendments could increase litigation risks for proxy 
voting advice businesses or have a chilling effect on shareholder 
communications.\162\ Although we acknowledge that compliance with the 
new conditions we are adopting to the exemptions in Rules 14a-2(b)(1) 
and 14a-2(b)(3) may increase the resources that proxy voting advice 
businesses apply to ensuring compliance with applicable law and 
regulation,\163\ we disagree that our amendments to Rule 14a-
1(l)(1)(iii), taken in isolation, will have a material impact on the 
operation of a proxy voting advice business.\164\ To the contrary, the 
fact that both the Commission and the market generally, including proxy 
voting advice businesses, have long recognized that proxy voting advice 
generally constitutes a ``solicitation'' indicates that any impact from 
codifying this aspect of the definition of a solicitation likely is 
already reflected in the manner in which proxy voting advice 
businesses' provide their services and the pricing thereof.
---------------------------------------------------------------------------

    \162\ See supra notes 101-105 and accompanying text.
    \163\ See infra Section IV.
    \164\ To the extent that some proxy voting advice businesses did 
not previously understand their proxy voting advice to constitute a 
solicitation and thus subject to Rule 14a-9 liability, it is 
possible that the codification of the Commission's longstanding view 
could have some economic effects. See infra Section IV.B.
---------------------------------------------------------------------------

    Finally, in the Interpretive Release, we stated our view that proxy 
voting advice based on a proxy voting advice business's application of 
custom policies generally should be considered a ``solicitation'' under 
Rule 14a-1(l).\165\ We continue to hold that view for the reasons 
stated in the Interpretive Release. As a result, such proxy voting 
advice is subject to Rule 14a-9, and persons who provide such advice in 
reliance on the exemptions in either Rule 14a-2(b)(1) or (b)(3) must 
comply with the conflicts of interest disclosure requirements set forth 
in new 17 CFR 240.14a-2(b)(9)(i) (``Rule 14a-2(b)(9)(i)'').\166\ Some 
commenters recommended that we amend Rule 14a-1(l) to exclude from the 
definitions of ``solicit'' and ``solicitation'' proxy voting advice 
that is based on investors' custom policies.\167\ These commenters' 
concerns, however, focused largely on subjecting investors' custom 
policies, and the proxy voting advice that is based thereon, to the 
proposed review and response mechanism outlined in the Proposing 
Release.\168\ As discussed in more detail below, new 17 CFR 
240.14a(b)(9)(v) (``Rule 14a-2(b)(9)(v)'') excludes from the notice 
requirement of new 17 CFR 240.14a-2(b)(9)(ii) (``Rule 14a-
2(b)(9)(ii)'') proxy voting advice to the extent such advice is based 
on custom policies.\169\ As such, notwithstanding the fact that we are 
not excluding from the definitions of ``solicit'' and ``solicitation'' 
proxy voting advice that is based on custom policies, we believe that 
we have appropriately taken into account the substance of these 
commenters' concerns.
---------------------------------------------------------------------------

    \165\ Commission Interpretation on Proxy Voting Advice at 47418. 
For a description of the services that one major proxy voting advice 
business offers in connection with its clients' custom policies, see 
ISS, Custom Pol'y & Res., available at https://www.issgovernance.com/solutions/governance-advisory-services/custom-policy-research/(last visited Jun. 19 2020).
    \166\ See infra Section II.D. for a discussion of the amendments 
we are adopting to Rule 14a-9 and Section II.B infra for a 
discussion of new Rule 14a-2(b)(9)(i).
    \167\ See supra note 112 and accompanying text.
    \168\ See, e.g., letter from ISS (expressing concern about 
disclosing ``clients' proprietary custom voting policies and the 
recommendations based thereon'' and doubt as to the ``investor 
protection to be gained by allowing issuers to vet the methodologies 
and assumptions institutional investors choose to implement for 
their own portfolios'').
    \169\ See infra Section II.C.3.c.i.
---------------------------------------------------------------------------

    As noted above, one commenter asserted that proxy voting agent 
businesses should not be subject to the same regulations as proxy 
voting advice businesses.\170\ The commenter's position that its 
services differ from a proxy voting advice business's and should not be 
considered a ``solicitation'' appears to be based, in part, on the fact 
that it only votes its clients' shares in accordance with its clients' 
custom policies.\171\ As with any other person, including any proxy 
voting advice business, to the extent a business is providing proxy 
voting advice to a client--regardless of whether such advice is based 
on its proprietary benchmark or specialty policies or its client's 
custom policies--such advice will constitute a ``solicitation'' under 
Rule 14a-1(l)(1)(iii)(A). However, the commenter and another 
commenter--both of which are investment advisers and were identified as 
proxy voting advice businesses in the Proposing Release--also asserted 
that their activities do not constitute ``solicitations'' because they 
vote their clients' shares on behalf of their clients rather than 
providing them with voting recommendations.\172\ We agree that to the 
extent a business that provides proxy voting services is not providing 
any voting recommendations and is instead exercising delegated voting 
authority on behalf of its clients, such services generally will not 
constitute ``proxy voting advice''--and, therefore, not be a 
``solicitation''--under Rule 14a-1(l)(1)(iii)(A).\173\
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    \170\ See supra note 113 and accompanying text.
    \171\ See letter from Segal Marco II.
    \172\ See supra notes 99-100 and accompanying text.
    \173\ Separately, we note that the Commission has provided 
guidance to investment advisers which discusses how the fiduciary 
duty and rule 206(4)-6 under the Advisers Act relate to an 
investment adviser's exercise of voting authority. See infra note 
400.
---------------------------------------------------------------------------

    With respect to Rule 14a-1(l)(2), we are also amending this 
provision as proposed to add paragraph (v) to make clear that the terms 
``solicit'' and ``solicitation'' do not include any proxy voting advice 
provided by a person who furnishes such advice only in response to an 
unprompted request. This amendment codifies the Commission's historical 
view that such a communication should not be regarded as a solicitation 
subject to the proxy rules.\174\ As we explained in the Proposing 
Release, we believe that a proxy voting advice business providing 
voting advice to a client where the client's request for the advice has 
been invited and encouraged by such business's marketing, offering, and 
selling, such advice should be distinguished from advice provided by a 
person only in response to an unprompted request from its client. In 
our view, the information and filing requirements of the proxy rules 
(including the filing and furnishing of a proxy statement with 
information about the registrant and proxy cards with means for casting 
votes) or compliance with the new conditions we are adopting to the 
exemptions described below, are appropriate for a person who chooses to 
actively market and sell its proxy voting advice as that person's 
actions are reasonably designed to result in the procurement, 
withholding, or revocation of a proxy. Those requirements, however, are 
ill-suited for a person who receives an unprompted request from a 
client for its views on an upcoming matter to be presented for 
shareholder approval. For example, a person who does not sell voting 
advice as a business and who provides such advice only in response to 
an unprompted request from its client is unlikely to anticipate the 
need to establish the internal processes necessary to comply with the 
new conditions we are adopting to the exemptions in Rules 14a-2(b)(1) 
and 14a-2(b)(3).
---------------------------------------------------------------------------

    \174\ See supra note 84.
---------------------------------------------------------------------------

    We also believe, based on our understanding of the dynamics of the 
proxy voting advice market as it currently operates, that a person that 
provides proxy voting advice only in

[[Page 55096]]

response to unprompted requests and does not market its expertise in 
such services is less likely to present an investor protection or 
market integrity concern. For example, we believe such one-off advice 
to individual clients lacks the system-wide significance of advice 
provided by proxy voting advice businesses who, as described above, 
have come to occupy a unique and important position in that 
process.\175\ Although one commenter recommended that 17 CFR 240.14a-
1(l)(2)(v) (``Rule 14a-1(l)(2)(v)'') be narrowed to exclude only proxy 
voting advice furnished pursuant to an unprompted request if such 
advice is also provided ``not for compensation,'' \176\ we consider 
that amendment unnecessary. In our view, any compensation that may be 
received for such unprompted proxy voting advice does not present the 
same investor protection or regulatory concerns because such persons 
are less likely to engage in widespread marketing of their expertise in 
providing proxy voting advice.
---------------------------------------------------------------------------

    \175\ See supra notes 6-10 and accompanying text.
    \176\ See letter from Exxon Mobil.
---------------------------------------------------------------------------

    As noted above, one commenter opposed the amendment to Rule 14a-
1(l)(2) on the basis that investment advisers and broker-dealers may 
avoid announcing their willingness to provide voting advice on Forms 
ADV and CRS out of concern that they would fall outside the scope of 
new Rule 14a-1(l)(2)(v) and be deemed to be prompting a request for 
proxy voting advice.\177\ We believe, however, that the text of new 
Rule 14a-1(l)(1)(iii)(A) is sufficiently precise to avoid this concern. 
Where an investment adviser or broker-dealer is describing the services 
it provides to its clients or customers, which may include proxy voting 
advice, we believe that such investment adviser or broker-dealer should 
not be deemed to be ``market[ing] its expertise as a provider of such 
proxy voting advice, separately from other forms of investment advice, 
and sell[ing] such proxy voting advice for a fee.'' \178\ This same 
commenter also expressed concern that the amendment to Rule 14a-1(l)(2) 
could be counterproductive from an investor protection standpoint as 
the proxy rules would apply to experts with proxy advice-related skills 
and resources but not to individuals with less relevant expertise who 
engage in the same activities.\179\ We disagree. As we noted in the 
Proposing Release,\180\ we believe that those persons providing voting 
advice in response to unprompted requests likely will be furnishing 
such advice to a client with whom there is an existing business 
relationship. As noted above, proxy voting advice provided under these 
circumstances does not present the same investor protection or 
regulatory concerns as proxy voting advice businesses engaged in 
widespread marketing and sale of proxy voting advice to large numbers 
of investment advisers and institutional investors who are often voting 
on behalf of other investors.\181\
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    \177\ See letter from ISS.
    \178\ 17 CFR 240.14a-1(l)(1)(iii)(A); see also supra notes 124-
125.
    \179\ See supra note 117 and accompanying text.
    \180\ See Proposing Release at 66523.
    \181\ See supra text accompanying note 176.
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B. Amendments to Rule 14a-2(b): Conflicts of Interest

1. Proposed Amendments
    Over the years, many observers have noted that some proxy voting 
advice businesses engage in activities or have relationships that could 
reasonably be expected to affect the objectivity or reliability of 
their advice.\182\ Examples of circumstances where the interests of a 
proxy voting advice business may diverge materially from the interests 
of the clients who utilize their advice include:
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    \182\ See Proposing Release at 66525 n.73.
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     A proxy voting advice business providing voting advice to 
its clients on proposals to be considered at the annual meeting of a 
registrant while the proxy voting advice business also earns fees (or 
is seeking to earn fees) from that registrant for providing advice on 
corporate governance and compensation policies; \183\
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    \183\ See id. at n.74.
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     A proxy voting advice business providing voting advice on 
a matter in which its affiliates or one or more of its clients has a 
material interest, such as a business transaction or a shareholder 
proposal put forward by or actively supported by that client or group 
of clients;
     A proxy voting advice business providing ratings to 
institutional investors of registrants' corporate governance practices 
while at the same time consulting for, or seeking to consult with, 
registrants that are the subject of the ratings for a fee to help 
increase their corporate governance scores;
     A proxy voting advice business providing voting advice 
with respect to a registrant's shareholder meeting while affiliates of 
the proxy voting advice business hold a significant ownership interest 
in the registrant, sit on the registrant's board of directors, or have 
relationships with a shareholder presenting a proposal covered by the 
proxy voting advice; and
     A proxy voting advice business providing voting advice on 
a matter on which it or its affiliates have provided advice to a 
registrant, a proponent, or other party regarding how to structure or 
present the matter or the business terms to be offered in such matter.
    These and similar types of circumstances create a risk that the 
proxy voting advice business's voting advice could be influenced by the 
business's own interests, which may call into question the objectivity 
and independence of its advice.\184\ The clients of the proxy voting 
advice business would generally need to be informed of such activities 
and relationships in order to be in a position to reasonably assess the 
impact and materiality of any actual or potential conflicts of interest 
with respect to the proxy voting advice they receive.\185\ If they do 
not have access to sufficiently detailed disclosure about the full 
extent and nature of any conflicts that are relevant to the voting 
advice, and any measures taken to mitigate such conflicts, these 
clients may not have sufficient information to reasonably understand 
and adequately assess these potential conflicts and remedial measures 
when they evaluate the voting advice and make their voting 
determinations.\186\ A range of proxy voting advice business clients 
may find it important to have sufficient information to support their 
understanding and assessment, including, for example, investment 
advisers that undertake proxy voting duties on a client's behalf.\187\
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    \184\ See id. at n.75.
    \185\ See id. at n.72.
    \186\ See id. at 66526 n.78 and infra note 193.
    \187\ Commission Guidance on Proxy Voting Responsibilities at 
47425 (``[A]n investment adviser's decision regarding whether to 
retain a proxy advisory firm should also include a reasonable review 
of the proxy advisory firm's policies and procedures regarding how 
it identifies and addresses conflicts of interest.'').
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    In light of these concerns, the Commission proposed amendments to 
further ensure that sufficient information about material conflicts of 
interest would be provided consistently across proxy voting advice 
businesses and in a manner readily accessible to the clients of the 
proxy voting advice businesses. Accordingly, the proposed amendments 
included a requirement that persons who provide proxy voting 
advice,\188\ in order to rely on the

[[Page 55097]]

exemptions contained in Rule 14a-2(b)(1) and (b)(3), must include in 
such advice (and in any electronic medium used to deliver the advice) 
the following disclosures specifically tailored to proxy voting advice 
businesses and the nature of their conflicts of interest:
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    \188\ Consistent with the Commission's proposed amendments to 
the definition of solicitation under the proxy rules, the 
requirement would apply only to proxy voting advice falling within 
the scope of amended Rule 14a-1(l)(1)(iii)(A). See supra Section 
II.A., ``Codification of Commission's Interpretation of 
Solicitation.''
---------------------------------------------------------------------------

     Any material interests, direct or indirect, of the proxy 
voting advice business (or its affiliates \189\) in the matter or 
parties concerning which it is providing the advice;
---------------------------------------------------------------------------

    \189\ The term ``affiliate,'' as used in proposed Rule 14a-
2(b)(9)(i), would have the meaning specified in Exchange Act Rule 
12b-2.
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     Any material transaction or relationship between the proxy 
voting advice business (or its affiliates) and (i) the registrant (or 
any of the registrant's affiliates \190\), (ii) another soliciting 
person (or its affiliates), or (iii) a shareholder proponent (or its 
affiliates), in connection with the matter covered by the proxy voting 
advice;
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    \190\ The Commission recognized that proxy voting advice 
businesses may not necessarily have access to the information needed 
to determine whether an entity is an affiliate of a registrant, 
another soliciting person, or the shareholder proponent. Therefore, 
as proposed, proxy voting advice businesses would only be required 
to use publicly-available information to determine whether an entity 
is an affiliate of registrants, other soliciting persons, or 
shareholder proponents.
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     Any other information regarding the interest, transaction, 
or relationship of the proxy voting advice business (or its affiliates) 
that is material to assessing the objectivity of the proxy voting 
advice in light of the circumstances of the particular interest, 
transaction, or relationship; and
     Any policies and procedures used to identify, as well as 
the steps taken to address, any such material conflicts of interest 
arising from such interest, transaction, or relationship.\191\
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    \191\ This would include a description of the material features 
of the policies and procedures that are necessary to understand and 
evaluate them. Examples include the types of transactions or 
relationships covered by the policies and procedures and the persons 
responsible for administering these policies and procedures.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated that the 
disclosures provided under these provisions should be sufficiently 
detailed so that clients of proxy voting advice businesses could 
understand the nature and scope of the interest, transaction, or 
relationship to appropriately assess the objectivity and reliability of 
the proxy voting advice they receive.\192\ This might include, for 
example, the identities of the parties or affiliates involved in the 
interest, transaction, or relationship triggering the proposed 
disclosure requirement and, when necessary for the client to adequately 
assess the potential effects of the conflict of interest, the 
approximate dollar amount involved in the interest, transaction, or 
relationship. Boilerplate language, including language stating that 
``such relationships or interests may or may not exist,'' would be 
insufficient for purposes of satisfying this condition to the 
exemptions.
---------------------------------------------------------------------------

    \192\ Proposing Release at 66526.
---------------------------------------------------------------------------

2. Comments Received
    Many commenters agreed with the general principle that providing 
clients of proxy voting advice businesses with adequate conflicts of 
interest disclosure helps to ensure transparency and fairness in the 
voting process and is vital to the clients' ability to make informed 
voting decisions.\193\ Some commenters expressed the view that proxy 
voting advice businesses currently do not satisfactorily mitigate the 
risk that conflicts of interest may impair their objectivity and, 
consequently, that their ability to provide impartial voting advice is 
often undermined by the prevalence of conflicts.\194\
---------------------------------------------------------------------------

    \193\ See letters from commenters generally opposed to the 
proposals, e.g., CalSTRS (``We agree that conflict of interest 
disclosure is important for a well-functioning and unbiased proxy 
voting system. Investors should be informed when there may be 
potential conflicts of interest that could affect proxy advisor 
recommendations. Investors need confidence that the research being 
considered when voting is unbiased and fact based . . . .''); CFA 
Institute I; CII IV; ISS; and the IAC Recommendation. See also 
letters from commenters generally supporting the proposals, e.g., 
ACCF (``Investors need to be fully informed of the biases and 
conflicts inherent in [the] powerful vote recommendations [of proxy 
voting advice businesses].''); BRT (``. . . conflicts of interest 
that may arise for proxy advisors should be disclosed in order for 
their clients to assess for themselves the effect and materiality of 
any actual or potential conflicts of interest with respect to a 
voting recommendation . . . We agree with the Commission's 
assessment that institutional investors and investment advisers who 
rely on proxy advisors for voting guidance cannot identify potential 
risks if they do not have access to sufficiently detailed disclosure 
about the full extent and nature of any conflicts that are relevant 
to the voting advice they receive.''); Exxon Mobil Corp., (Feb. 3, 
2020) (``ExxonMobil''); Tao Li, Ph.D., Assistant Professor of 
Finance, University of Florida (Jan. 30, 2020) (``Prof. Li'') (``. . 
. it remains imperative that market participants are aware of any 
potential conflicts of interest within the industry and whether 
those conflicts are impeding the role of proxy advisors as 
independent providers of information and recommendations.''); NAM; 
Nareit; Nasdaq; SCG; CCMC.
    \194\ See, e.g., letters from ACCF (citing its May 2018 research 
paper: ``The Conflicted Role of Proxy Advisors''); BIO; BRT; CEC; 
CCMC; ExxonMobil; Jason Ward, Managing Partner, Amrop Industrial 
Search LLC (Feb. 3, 2020) (``J. Ward''); NAM; Nareit; Nasdaq; SCG. 
To substantiate their claims that conflicts of interest are 
pervasive in proxy voting advice, several commenters pointed to the 
results of various opinion surveys of selected companies and 
individuals reflecting significant concerns about conflicts of 
interest. See, e.g., letters from CCMC; Ashley Baker, Director of 
Public Policy, The Committee for Justice, (Feb. 3, 2020) 
(``Committee for Justice''); J. Ward; Nareit; Nasdaq; P. Mahoney and 
J.W. Verret; SCG; Seven Corners Capital Management, LLC (Apr. 8, 
2020) (``Seven Corners'').
---------------------------------------------------------------------------

    Some commenters opposed the proposed amendments,\195\ asserting 
that additional conflict disclosure requirements were not justified 
\196\ and, therefore, would impose unnecessary additional costs and 
burdens on proxy voting advice businesses and their clients.\197\ These 
commenters challenged, among other things, the claims that proxy voting 
advice businesses' conflicts of interest disclosures were materially 
deficient,\198\ and contended that the businesses' existing policies 
and procedures (such as their disclosure practices and maintenance of 
internal firewalls to guard against conflicts) adequately addressed the 
risk of conflicts.\199\ In support of this view, commenters noted that 
the predominant opinion among the

[[Page 55098]]

businesses' own clients was that the measures taken to mitigate 
conflicts of interest were satisfactory.\200\ Moreover, commenters 
argued that adding new disclosure requirements to the proxy rules was 
unnecessary in light of existing provisions in the Advisers Act and in 
Rule 14a-2(b) under the Exchange Act that already address conflicts of 
interest, as well as inappropriate because the Advisers Act generally 
governs the activities of investment advisers, including proxy voting 
advice businesses.\201\ In addition, some commenters believed that the 
proposed conflicts disclosure requirements would likely compromise the 
internal firewalls designed by proxy voting advice businesses to 
mitigate their risk of conflicts,\202\ and could have a detrimental 
effect on competition in an industry that is already cost-prohibitive 
for new entrants.\203\
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    \195\ See, e.g., letters from CalPERS; Canadian Governance 
Coalition; CII IV; JoAnn Hanson, President and CEO, Church 
Investment Group (Jan. 29, 2020) (``Church Investment Group''); 
Colorado PERA; Henry Beck, Maine State Treasurer, et al., Democratic 
Treasurers Association (Jan. 30, 2020) (``DTA''); Holly A. Testa, 
Director, Shareowner Engagement, First Affirmative Financial Network 
(Jan. 3, 2020) (``First Affirmative''); Jeffery W. Perkins, 
Executive Director, Friends Fiduciary Corporation (Feb. 2, 2020) 
(``Friends''); Glass Lewis II; ISS; Interfaith Center II; J. Coates, 
Professor of Law and Economics, Harvard Law School, and Barbara 
Roper, Consumer Federation of America (Jan. 30, 2020) (``Prof. 
Coates''); New York Comptroller II; PIAC II; Public Retirement 
Systems; ValueEdge I.
    \196\ See, e.g., letters from Colorado PERA (``PERA utilizes 
research reports from Glass Lewis and ISS to assist with its 
evaluation of items on a proxy ballot. PERA has analyzed each firm's 
disclosures and management of conflicts of interest. We concluded 
that the potential conflicts are harmless to the independence of the 
research, would not sway an investor's opinion, and the existing 
firewalls to prevent contamination of objectivity--where applicable 
to specific proxy advisors--are sufficient''); CalSTRS; Glass Lewis 
II; ISS.
    \197\ See, e.g., letters from CalPERS; Canadian Governance 
Coalition; CII IV; Church Investment Group; DTA; First Affirmative; 
Friends; Glass Lewis II; ISS; Interfaith Center II; New York 
Comptroller II; Colorado PERA; PIAC II; Prof. Coates; Public 
Retirement Systems; ValueEdge I.
    \198\ See, e.g., letters from CalPERS (``We see no evidence that 
conflicts of interest with proxy advisors have led to voting advice 
that conflicts with our voting policies . . . It is not clear to 
what extent the SEC has reviewed all of the disclosures that proxy 
voting advice businesses already provide.''); CalSTRS; CII IV; Glass 
Lewis II; ISS; New York Comptroller II; Colorado PERA; PIAC II; 
ValueEdge I.
    \199\ See, e.g., letters from CalSTRS (stating that while it is 
generally supportive of conflict of interest disclosure, it does 
``not believe the SEC needs to create a new regulatory structure to 
enforce such [conflict of interest] disclosure'' and its general 
belief ``that proxy advisors are currently providing adequate 
disclosures that meet the needs of investors, and any modifications 
to disclosures can be enforced through existing SEC authority.''); 
ISS; Glass Lewis II; CalPERS; New York Comptroller II.
    \200\ See, e.g., letters from ISS (``. . . the fact that the 
most vocal critics of ISS in this area [regarding conflicts of 
interest] are those who speak on behalf of corporate management, and 
not the investors who rely on ISS' research and vote 
recommendations, indicates that ISS is managing this potential 
conflict extremely well.''); CalPERS; CalSTRS; Glass Lewis II; New 
York Comptroller II.
    \201\ See, e.g., letter from ISS (asserting that ``the proposal 
ignores the relevance of the Advisers Act regime and makes no 
attempt to explain why this framework is inadequate to address the 
Commission's purported concerns about proxy advice''). As noted 
above, it is not unusual for a registrant under one provision of the 
securities laws to be subject to other provisions of the securities 
laws when engaging in conduct that falls within the other 
provisions. See supra notes 41 through 60 and accompanying text for 
a discussion of why we believe it is appropriate that proxy voting 
advice businesses be subject to applicable rules under Section 14(a) 
when they provide proxy voting advice, regardless of whether they 
are registered under the Advisers Act.
    \202\ For example, according to ISS, it maintains a firewall 
between ISS Global Research, its core institutional business, and 
ISS Corporate Solutions, Inc. (``ICS''), a subsidiary which provides 
governance tools and services to corporate issuer clients. In its 
comment letter, ISS states that ``a key goal of the firewall is to 
keep the ISS Global Research team from knowing the identity of ICS' 
clients,'' which could be jeopardized by disclosure of the details 
of ICS' business and potentially result in vote recommendations that 
are biased in favor of corporate management. As part of its 
conflicts of interest policies, Glass Lewis blocks its research 
analysts from any access to the holdings, custom policies and/or 
voting activity of its two co-owners, the Ontario Teachers' Pension 
Plan Board and Alberta Investment Management Corp. See e.g., letters 
from CII IV; Glass Lewis II; ISS. See also IAC Recommendation.
    \203\ See, e.g., letters from CalPERS; CII IV; ISS; PERA (``This 
disclosure of . . . anything that may potentially be deemed a 
conflict of interest could result in advisors losing their 
competitive advantage.''); and the IAC Recommendation. See also 
letter from CFA Institute I (``We do not object to such increased 
transparency as long as these further disclosures do not compromise 
the competitiveness of a proxy adviser by forcing them to divulge 
trade secrets or other proprietary information, the disclosure of 
which would be deleterious to the specific adviser'').
---------------------------------------------------------------------------

    Both those supporting and those opposing the proposed Rule 14a-
2(b)(9)(i) recommended modifications to the proposed new disclosure 
requirements,\204\ ranging from very specific suggestions intended to 
standardize the presentation of conflicts disclosures,\205\ expand the 
breadth of required disclosure,\206\ and capture certain detailed 
information,\207\ to those that were less prescriptive and leaned 
toward a more principles-based approach,\208\ with an emphasis on 
materiality.\209\ Other commenters recommended certain substantive 
changes that would have widened the scope of the proposed amendments 
beyond conflicts disclosure.\210\
---------------------------------------------------------------------------

    \204\ See, e.g., letters from Lynette C. Fallon, EVP HR/Legal 
and General Counsel, Axcelis Technologies, Inc. (Jan. 20, 2020) 
(``Axcelis''); Baillie Gifford; BRT; CEC; CII IV; CIRCA; Exxon 
Mobil; Garmin; Glass Lewis II; ISS; Jonathan Chanis, New Tide Asset 
Management, LLC (Jan. 30, 2020) (``J. Chanis''); Mylan; Ann 
McGinnis, Co-President et al., Los Angeles Chapter, National 
Investor Relations Institute, Los Angeles Chapter (Feb. 3, 2020) 
(``NIRI-LA''); David Erickson, President, et. al., National Investor 
Relations Institute, Orange County Chapter (Feb. 4, 2020) (``NIRI-
OC''); June M. Vecellio, President, and James B. Bragg, Advocacy 
Ambassador, National Investor Relations Institute, Connecticut/
Westchester County Chapter (Feb. 6, 2020) (``NIRI-Westchester''); 
Nasdaq; Prof. Li; SCG; Seven Corners; SES; Linda Moore, President 
and CEO, TechNet, (Feb. 3, 2020) (``TechNet'').
    \205\ See, e.g., letters from Nasdaq; NIRI-LA; NIRI-OC; NIRI-WC; 
TechNet (calling for conflicts of interest to be disclosed on the 
front page of proxy voting advice).
    \206\ See, e.g., letters from ExxonMobil (supporting a 
requirement for specific disclosures about proxy voting advice 
businesses' specialty reports that are driven by goals other than 
maximizing shareholder value); SCG (recommending that proxy voting 
advice businesses be required to disclose ``any interest, 
transaction or relationship that may present a conflict of interest, 
and the dollar amount thereof'').
    \207\ See, e.g., letters from ExxonMobil (recommending that 
required conflict disclosures cover details similar to the 
requirements of Item 404(a) of Regulation S-K and enumerating a list 
of specific items that should be addressed by disclosure); PIRC 
(suggesting that disclosure of specific amounts of compensation 
received from various clients could be helpful).
    \208\ See, e.g., letters from Baillie Gifford (cautioning that 
requiring disclosure of policies and procedures would lead to 
boilerplate disclosure); CII IV (asserting that allowing proxy 
voting advice businesses to choose the vehicle by which they 
disclose conflicts of interest would mitigate the widespread 
distribution of information that could affect competitive or other 
concerns); CIRCA (stating that a principles-based approach ``would 
prevent proxy advisors from giving boilerplate disclosures . . . 
without creating unprecedented and excessive burdens.''); ISS 
(stating that ``there is no reason to treat conflict disclosure by 
proxy advisers any differently from the way conflict disclosure by 
portfolio managers or any other type of investment adviser is 
treated.''); S. Holmes.
    \209\ See, e.g., letter from Baillie Gifford.
    \210\ See, e.g., letters from Garmin (recommending that the 
Commission require proxy voting advice businesses to separate their 
proxy advisory businesses from their consulting businesses); J. 
Chanis (recommending that the Commission prohibit proxy voting 
advice businesses from also providing consulting services to 
companies that are the subject of their proxy voting advice).
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3. Final Amendments
    We are adopting amendments to Rule 14a-2(b) to require that persons 
who provide proxy voting advice in reliance on the exemptions in either 
Rule 14a-2(b)(1) or (b)(3) must include in their voting advice to 
clients the conflicts of interest disclosure specified in new Rule 14a-
2(b)(9)(i). The Commission is adopting these amendments substantially 
as proposed, but with certain modifications as discussed below, to 
clarify and streamline the rule in response to commenters' concerns and 
suggestions.
    As adopted, Rule 14a-2(b)(9)(i) establishes a principles-based 
requirement, based on a standard of materiality, that will apply to all 
proxy voting advice that is provided in reliance on the exemptions in 
Rules 14a-2(b)(1) and (b)(3). Contrary to the views of some commenters, 
we do not see this requirement as imposing an entirely new regulatory 
regime or structure.\211\ Rather, we view Rule 14a-2(b)(9)(i) as 
enhancing the existing conflicts of interest disclosures that proxy 
voting advice businesses currently provide in order to rely on the 
exemptions from the proxy rules' information and filing requirements. 
By articulating a standard for disclosure that focuses on information 
that would be material to assessing the objectivity of the proxy voting 
advice, the new rule is expected to result in disclosure that is more 
tailored and comprehensive than would be required under either Rule 
14a-2(b)(1) or (b)(3).\212\ Given the significant role played by proxy 
voting advice businesses in the voting process, we believe that the 
articulation of clear minimum disclosure standards is appropriate to 
better ensure transparency, accuracy, and completeness in the 
information provided, as well as the integrity of the proxy voting 
process. Rule 14a-2(b)(9)(i)

[[Page 55099]]

is intended to harmonize the conflicts of interest disclosure that 
proxy voting advice businesses provide to their clients, helping to 
ensure that sufficient information about material conflicts of interest 
is disclosed more consistently across proxy voting advice businesses 
and in a manner readily accessible to the clients of such businesses. 
As a consequence, we believe the rule will enable clients of proxy 
voting advice businesses to make more informed voting decisions, 
including with regard to how proxy voting advice businesses identify 
and address conflicts of interest on a business-specific and relative 
basis and help in Commission oversight of the proxy voting 
process.\213\
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    \211\ See, e.g., letters from CalSTRS ([W]e do not believe the 
SEC needs to create a new regulatory structure to enforce such 
disclosure.''); Glass Lewis II (``Accordingly, this issue [of 
conflicts of interest disclosure] does not present a basis for a 
wholesale new and burdensome regulatory regime . . . .'').
    \212\ The exemption in Rule 14a-2(b)(1) does not currently 
require conflicts of interest disclosure, while Rule 14a-2(b)(3)(ii) 
requires disclosure of ``any significant relationship with the 
registrant or any of its affiliates, or a security holder proponent 
of the matter on which advice is given, as well as any material 
interests in such matter.'' 17 CFR 240.14a-2(b)(3)(ii). It should be 
noted that both exemptions were adopted by the Commission before 
proxy voting advice businesses played the significant role that they 
now do in the proxy voting process and in the voting decisions of 
investment advisers and institutional investors.
    \213\ Currently, proxy voting advice businesses differ in how 
they disclose their conflicts of interest. For example, ISS 
discloses the details of its potential conflicts of interest, such 
as the identities of the parties and the amounts involved, through 
its ProxyExchange platform, while Glass Lewis states that its 
disclosures appear on the front cover of the report with its proxy 
voting advice. See ISS, FAQs Regarding Recent Guidance from the U.S. 
Securities and Exchange Commission Regarding Proxy Voting 
Responsibilities of Investment Advisers (2019) (``ISS FAQs''), 
available at https://www.issgovernance.com/file/faq/ISS_Guidance_FAQ_Document.pdf. See also Proposing Release at 66527, 
n. 90; letter from Glass Lewis II.
---------------------------------------------------------------------------

    Although some proxy voting advice businesses and others have 
asserted that the businesses' existing practices and procedures 
adequately address conflicts of interest concerns,\214\ we believe that 
the absence of a disclosure requirement specifically contemplating the 
conflicts of interest that can arise for proxy voting advice businesses 
in relation to proxy voting advice means that there has not been a 
sufficient standard against which clients may assess the quality of the 
conflicts disclosures they receive. Conditioning the exemptions in 
Rules 14a-2(b)(1) and (3) for proxy voting advice on the proxy voting 
advice business's adherence to a set of minimum, principles-based 
disclosure standards will make clear what constitutes basic information 
regarding conflicts of interest that all parties can expect when 
receiving voting advice and will bolster the completeness and 
consistency of such disclosure by making it a regulatory requirement. 
This should in turn foster greater confidence in the services proxy 
voting advice businesses offer to their clients and provide greater 
assurance to market participants that shareholders' interests are being 
properly considered through a well-functioning proxy system.\215\
---------------------------------------------------------------------------

    \214\ See supra note 200 and Proposing Release at 66544 n.226.
    \215\ See infra Section IV.A.
---------------------------------------------------------------------------

    To that end, Rule 14a-2(b)(9)(i) sets forth a concise framework 
that applies to any person providing proxy voting advice within the 
scope of proposed Rule 14a-1(l)(1)(iii)(A) who wishes to utilize the 
exemption in either Rule 14a-2(b)(1) or (b)(3). Such persons must 
include in their voting advice (or in any electronic medium used to 
deliver the advice) prominent disclosure of:
     Any information regarding an interest, transaction, or 
relationship \216\ of the proxy voting advice business (or its 
affiliates) that is material to assessing the objectivity of the proxy 
voting advice in light of the circumstances of the particular interest, 
transaction, or relationship; \217\ and
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    \216\ Such information may include disclosure about certain 
business practices in which the proxy voting advice business engages 
that might reasonably be expected to call into question its 
objectivity and the independence of its advice. For example, it may 
be appropriate in some circumstances under the rule for a proxy 
voting advice business to disclose its practice of selectively 
consulting with certain clients before issuing its benchmark voting 
recommendation on a specific matter (e.g., a contested director 
election or merger). This may particularly be the case in situations 
in which the clients with whom the proxy voting advice business 
consults are not directly involved as a party to the specific matter 
but are expected to receive proxy voting advice on the matter. Such 
a practice could allow for those consulted clients' voting 
preferences to influence recommendations given to other clients that 
were not consulted and importantly, without the knowledge of those 
clients not consulted.
    \217\ Rule 14a-2(b)(9)(i)(A).
---------------------------------------------------------------------------

     Any policies and procedures used to identify, as well as 
the steps taken to address, any such material conflicts of interest 
arising from such interest, transaction, or relationship.\218\
---------------------------------------------------------------------------

    \218\ Rule 14a-2(b)(9)(i)(B).
---------------------------------------------------------------------------

    The rule, as adopted, reflects our intent to avoid an overly 
prescriptive disclosure requirement with specific monetary thresholds, 
in favor of a more principles-based rule that is sufficiently flexible 
to encompass a wide variety of circumstances that may not fall within 
pre-determined parameters but nevertheless could materially impact a 
client's assessment of the proxy voting advice business's objectivity. 
This approach also is consistent with the views of several commenters 
who favored a principles-based disclosure requirement that could more 
easily accommodate a variety of different facts and circumstances.\219\ 
As such, Rule 14a-2(b)(9)(i) establishes a general standard for 
conflicts of interest disclosure, but allows the proxy voting advice 
business to apply its judgment and unique knowledge of the facts to 
determine the materiality of conflicts that might pose a risk to the 
objectivity of its advice.
---------------------------------------------------------------------------

    \219\ See, e.g., letters from Baillie Gifford; CII IV; CIRCA, 
Glass Lewis II; ISS (``Proxy advisers should be governed by a 
principles-based regulatory regime. For this reason, the Commission 
should not require such firms to disclose specific qualitative or 
quantitative information or impose prescriptive standards regarding 
the method of conflict disclosure.'').
---------------------------------------------------------------------------

    The final rule also gives the proxy voting advice business 
flexibility to determine the precise level of detail needed about any 
identified conflicts of interest,\220\ or whether a relationship or 
interest that has been terminated should nevertheless be 
disclosed.\221\ In each particular case, the rule gives the proxy 
voting advice business the discretion to determine which situations 
merit disclosure and the specific details to provide to its clients 
about any conflicts of interest identified. The key determinant will be 
whether the information is material to an evaluation of the proxy 
voting advice business's objectivity.
---------------------------------------------------------------------------

    \220\ For example, the proxy voting advice business would have 
the discretion, on a case-by-case basis, to determine whether 
specific monetary amounts related to any potential and/or actual 
conflicts identified should be disclosed. See letter from CII IV 
(``We do not believe that proxy voting advice businesses should be 
required to disclose the specific amounts that they receive from the 
relationships or interests covered by the proposed conflicts of 
interest disclosures . . . there is no reliable evidence indicating 
that institutional investor clients believe that level of detail is 
necessary in all circumstances. To the extent that investors want 
this information, they are at liberty to seek it from the proxy 
advisory firm(s) they hire, and make it a condition for hiring a 
proxy advisor.''). We note, however, that Rule 14a-2(b)(9)(i) should 
not be interpreted to mean that disclosure of specific amounts would 
never be necessary. There may be situations, depending on the 
particular facts and circumstances, in which this information would 
be material to assessing the objectivity of the proxy voting advice 
and therefore should be disclosed. Similarly, the proxy voting 
advice business would have the discretion to determine whether the 
number of instances of substantive engagement it has had with 
existing clients as well as any other third parties providing 
substantive input to the proxy voting advice business as it develops 
its advice may have created a material conflict of interest that 
should be disclosed.
    \221\ See, e.g., letter from Baillie Gifford (``A more 
principles-based requirement is preferable because whether a matter 
is material to the proxy advice will depend on the facts and 
circumstances. For example, in some situations it may be relevant 
that a proxy advisor had an historical relationship with a 
registrant, albeit that the relationship is no longer live, if the 
relationship were very significant in terms of duration or value. In 
other cases, less significant relationships will cease to be 
relevant as soon as they come to an end. It should be for the proxy 
advisors to make the assessment and for their clients to understand 
how the advisor makes this determination as part of regular due 
diligence.'').
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    A more prescriptive disclosure requirement, while relying less on 
the proxy voting advice business's judgment, risks being either under- 
or over-inclusive. For instance, there may be scenarios or 
relationships of which we are not aware or that, at this point in time, 
do not exist that present or would present material conflicts.\222\

[[Page 55100]]

Instead, by adopting a rule with materiality as its focus, we have 
opted for an approach that is more adaptable to varied circumstances. 
The concept of materiality is at the core of our disclosure framework 
and has served our markets and investors well. Therefore, we believe 
that requiring proxy voting advice businesses to base their conflicts 
of interest disclosures on assessments of materiality is a more 
effective way to ensure that their clients have sufficient information 
to weigh the voting advice they are given.
---------------------------------------------------------------------------

    \222\ See discussion supra pp. 51-52.
---------------------------------------------------------------------------

    Substantively, Rule 14a-2(b)(9)(i) is consistent with the 
Commission's proposal, but we have modified the wording in an effort to 
further simplify the requirement. We agree with a commenter who 
suggested that the proposed regulatory text could be streamlined to 
both capture the full scope of conflicts-related disclosure and retain 
the focus on principles of materiality.\223\ Therefore, consistent with 
the suggestions of these commenters, the rule condenses proposed 
subsections (A), (B), and (C) of paragraph (b)(9)(i) into a single 
subsection (A) that requires disclosure of ``any information regarding 
an interest, transaction, or relationship of the proxy voting advice 
business (or its affiliates) that is material to assessing the 
objectivity of the proxy voting advice in light of the circumstances of 
the particular interest, transaction, or relationship.'' \224\
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    \223\ See letter from ISS.
    \224\ Rule 14a-2(b)(9)(i)(A), as adopted, substantially 
resembles proposed subsection (C) that was designed as a catch-all 
to elicit disclosure of any information not otherwise captured by 
the other provisions of the rule regarding an interest, transaction, 
or relationship that would be material to a reasonable investor's 
assessment of the objectivity of the proxy voting advice. In 
addition, we note that the final amendment does not retain the 
concept from proposed subsection (B) providing that required 
disclosures would be determined using publicly available 
information. Although this provision was intended to limit the scope 
of a proxy voting advice business's disclosure obligation, we agree 
with commenters that any interest, transaction or relationship of 
which a proxy voting advice business is not already aware logically 
could not bias the business's proxy advice. See letter from ISS 
(``If such a search [of publicly available information] uncovers a 
possible affiliation ISS was not otherwise aware of, there would be 
no benefit to offset the cost and delay because any such 
relationship could not have compromised the integrity of the proxy 
advice in the first place.'').
---------------------------------------------------------------------------

    We note that some commenters recommended ways to improve the 
proposal by including additional substantive requirements or specific 
parameters designed to more clearly indicate the disclosure obligations 
of proxy voting advice businesses under the rule.\225\ For example, one 
commenter suggested that more guidance was needed regarding the 
timeframe for which the disclosure of conflicts should be 
provided.\226\ As discussed above, however, we believe that a more 
principles-based approach will best serve to provide the clients of 
proxy voting advice businesses with adequate disclosure regarding 
conflicts while balancing the varied and unique circumstances of such 
businesses. We are therefore not persuaded that more prescriptive 
modifications are necessary or preferable to the rule, as adopted, 
which describes a general principle rather than delineating particular 
disclosure items.
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    \225\ See, e.g., letters from CEC (recommending that the rule 
include examples of per se conflicts of interest and illustrations 
of compliant disclosures); Mylan (recommending that disclosure be 
required for ``every instance of substantive engagement'' between a 
proxy voting advice business and existing clients, as well as any 
other third party providing substantive input regarding the proxy 
voting advice business's recommendations); PIRC; Prof. Li; SCG 
(recommending that disclosure of the dollar amount of any interest, 
transaction, or relationship that may present a conflict of interest 
for the proxy voting advice business should be required and asking 
for clarification of what constitutes a ``material'' interest, 
transaction, or relationship (e.g., revenue, terms of the contracts, 
etc.)).
    \226\ See, e.g., letter from Prof. Li.
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    Because our concern is with ensuring that proxy voting advice 
business clients have the ability to assess the objectivity, and 
ultimately the reliability, of proxy voting advice, we believe it would 
not serve the interests of those who depend on voting advice to place 
precise limits on what would be considered material information. For 
example, if a proxy voting advice business has been retained by a 
shareholder to provide voting advice regarding a registrant for which 
the business once provided consulting services, and if it has had no 
business relationship with the registrant for some years and is not 
seeking a business relationship with the registrant, it may be unlikely 
that the nature of its relationships with the registrant would be 
deemed material to an assessment of the business's ability to 
objectively advise its client. In that circumstance, the proxy voting 
advice business, which is in the best position to make such a judgment, 
would need to consider, based on the relevant facts and circumstances, 
whether that prior engagement is currently material and should be 
disclosed to clients.
    Another benefit of the principles-based nature of Rule 14a-
2(b)(9)(i) is that it will provide proxy voting advice businesses 
significant flexibility over the manner in which conflicts information 
is disclosed, so long as the basic requirements are met. The rule 
requires that prominent disclosure of material conflicts of interest be 
included in the voting advice to ensure that this information is 
readily accessible to clients and facilitates their ability to consider 
such disclosure together with the proxy voting advice at the time they 
make their voting decisions.\227\ It does not, however, dictate the 
particular location or presentation of the disclosure in the advice or 
the manner of its conveyance as some commenters recommended.\228\ Doing 
so would undermine our intent to give latitude to proxy voting 
businesses to fashion their disclosure as they judge best, in 
recognition of the varied circumstances in which they provide their 
services.
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    \227\ A proxy voting advice business that only provides such 
disclosures upon request from the client would not be in compliance 
with the required disclosure in Rule 14a-2(b)(9)(i) and, therefore, 
would not satisfy the conditions of the exemptions in Rules 14a-
2(b)(1) or (b)(3). We believe that imposing an affirmative duty on 
proxy voting advice businesses to provide the required disclosures 
of material conflicts of interest is consistent with obligations to 
disclose potential conflicts of interest in other contexts. See 
Proposing Release at 66527, n. 88.
    \228\ See, e.g., letters from BRT; Exxon Mobil; Nasdaq; NIRI-LA; 
NIRI-OC; SCG; SES; TechNet.
---------------------------------------------------------------------------

    Along these lines, the final rule differs from the proposal 
regarding the conveyance of conflicts disclosure. As proposed, the rule 
would have required a proxy voting advice business to include conflicts 
of interest disclosure ``in its proxy voting advice and in any 
electronic medium used to deliver the advice,'' \229\ to ensure that 
the information is prominently disclosed regardless of the means by 
which the advice is disseminated. However, some commenters were 
concerned that this was overly prescriptive and would interfere with 
proxy voting advice businesses' existing conflict management policies 
and procedures designed to safeguard information and prevent it from 
undermining the objectivity and independence of the businesses' voting 
advice.\230\ These commenters pointed out that displaying conflict 
disclosures in every piece of proxy advice, including written proxy 
research reports, would compromise the ability of proxy voting advice 
businesses

[[Page 55101]]

to mitigate their risk of conflicts and expressed concern that the 
proposal would increase compliance costs for proxy voting advice 
businesses.\231\
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    \229\ Proposed Rule 14a-2(b)(9)(i).
    \230\ See, e.g., letters from Glass Lewis II (discussing the 
restrictions in place to prevent its analysts from accessing 
information about the interests and voting activities of Glass 
Lewis' owners); ISS (discussing the firewall that it maintains 
between its core institutional proxy advisory business and its 
subsidiary that provides governance tools and services to corporate 
issuer clients and stating that ``ISS has implemented a 
comprehensive and robust set of conflict controls . . . which would 
be compromised if conflict information were required to be publicly 
disclosed, or if disclosure were required to be displayed in or on a 
research report, instead of `around' the report as is currently the 
case'').
    \231\ See id.
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    We agree that proxy voting advice businesses should have the 
latitude to convey their conflict disclosures to clients in a manner 
that does not run afoul of the businesses' own mechanisms for 
mitigating the risk of biased advice, such as establishing internal 
firewalls to maintain the objectivity of the advice, so long as their 
conflict disclosures are readily accessible to their clients and 
provided as part of the proxy voting advice they receive. Accordingly, 
the rule we are adopting gives a proxy voting advice business the 
option to include the required disclosure either in its proxy voting 
advice or in an electronic medium used to deliver the proxy voting 
advice, such as a client voting platform, which allows the business to 
segregate the information, as necessary, to limit access exclusively to 
the parties for which it is intended.\232\
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    \232\ Rule 14a-2(b)(9)(i). This approach also accords with the 
views of commenters who requested that the Commission permit the 
proxy voting advice businesses flexibility over the manner in which 
they convey their proxy advice to clients. See, e.g., CII IV: ('' 
[W]e would not object to the SEC permitting the proxy voting advice 
businesses flexibility in the vehicle used to disseminate the 
disclosures to clients if the Commission believes such flexibility 
is appropriate to limit the competitive or other concerns that could 
accompany the widespread distribution of the information.'').
---------------------------------------------------------------------------

    Similarly, 17 CFR 240.14a-2(b)(9)(i)(B) (``Rule 14a-
2(b)(9)(i)(B)''),\233\ which requires proxy voting advice businesses to 
disclose ``any policies and procedures used to identify, as well as the 
steps taken to address,'' any material conflicts of interest identified 
pursuant to subsection (A), does not specify the extent to or manner in 
which the required disclosure must be presented. As with the 
disclosures required by subsection (A), proxy voting advice businesses 
are given wide latitude to determine what information would best serve 
their clients' interests. Moreover, Rule 14a-2(b)(9)(i) is not intended 
to supplant or interfere with a business's course of practice and 
standard operating procedures if it is already providing disclosure to 
its clients sufficient to enable them to understand the business's 
processes and methodology for identifying and addressing material 
conflicts, as well as any measures taken in light of specific conflicts 
identified. In addition, by giving proxy voting advice businesses the 
flexibility to satisfy the principle-based requirement with their 
existing methods of disclosure, we believe the costs of implementation 
should not be unduly burdensome.\234\ Similarly, while the adoption of 
Rule 14a-2(b)(9)(i) will create an expanded compliance obligation, we 
do not believe it will have a detrimental effect on competition as the 
flexibility afforded under the final rule should allow new businesses 
to adapt the required disclosures to their specific business models and 
thus avoid imposing a significant new barrier to entry for the proxy 
voting advice business market.\235\
---------------------------------------------------------------------------

    \233\ Subsection (B) of Rule 14a-2(b)(9)(i) was proposed as 
subsection (D), but has been re-designated in the final rule and is 
otherwise adopted as proposed.
    \234\ See supra note 197.
    \235\ See supra note 203 and accompanying text.
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    Contrary to the concerns expressed by some commenters about certain 
implications of the proposed amendments,\236\ we note that Rule 14a-
2(b)(9)(i)(B) does not require proxy voting advice businesses to 
include detailed compliance manuals in their proxy advice \237\ or 
duplicative disclosures in both their proxy voting advice and in the 
electronic medium used to deliver such advice regarding the businesses' 
policies and procedures describing how they identify and address 
conflicts.\238\ Provided the disclosure is conveyed either in its proxy 
voting advice or in an electronic medium used to deliver the proxy 
voting advice (such as a client voting platform), such that its client 
is able to readily access the information as it reviews and considers 
the voting advice, a proxy voting advice business has the discretion 
under the rule to choose the solution it deems suitable for each 
particular client. This may include, for example, a proxy voting advice 
business providing an active hyperlink or ``click-through'' feature on 
its platform allowing clients to quickly refer from the voting advice 
to a more comprehensive description of the business's general policies 
and procedures governing conflicts of interest.\239\
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    \236\ See, e.g., letters from CII (``We believe such a provision 
is overly broad and may in fact detract from the more important 
conflict information currently provided by proxy advisors.''); Glass 
Lewis. See also IAC Recommendation.
    \237\ See, e.g., IAC Recommendation.
    \238\ See, e.g., letter from Glass Lewis (expressing concern 
that ``including a `discussion' of Glass Lewis' conflict policies 
and procedures twice with each conflict disclosure,'' once in the 
proxy voting advice report and again in the electronic medium used 
to deliver such advice, ``would be wasteful and potentially obscure 
the important information investors expect and would want to focus 
on'').
    \239\ Such hyperlinked description of the proxy voting advice 
business's general policies and procedures governing conflicts of 
interest could, for example, be maintained on the business's 
publicly available website. See id. (``Glass Lewis has one set of 
policies and procedures that describes how it identifies and 
addresses conflicts, which it makes available on its website.'').
---------------------------------------------------------------------------

    More generally, we believe that increased transparency regarding a 
proxy voting advice business's conflicts of interest may prompt a more 
informed dialogue between such businesses and their clients. For 
example, as a result of the increased transparency of a proxy voting 
advice business's conflicts of interest, clients of the business, 
including investment advisers, would be in a better position to 
understand these conflicts and how they may affect the business's proxy 
voting advice and other services. If this information improves the 
ability of the proxy voting advice business's clients to identify the 
kinds of information and details that would be valuable to them in 
assessing the business's conflicts, this dialogue may also result in a 
proxy voting advice business enhancing its approach to disclosure of 
conflicts of interest in response. Such a dynamic regarding conflict 
disclosure among investors (those who ultimately bear the costs and 
benefits of voting), clients of proxy voting advice businesses, and 
proxy voting advice businesses, each of which have different 
incentives, may increase the benefits of the rule to the shareholder 
voting process more generally.

C. Amendments to Rule 14a-2(b): Notice of Proxy Voting Advice and 
Response

    The ability of investors to make informed decisions, on the basis 
of disclosure of material information, is a bedrock tenet on which the 
federal securities laws were founded. This principle informs not only 
our consideration of this rulemaking, but also, more broadly, the proxy 
rules we administer \240\ and, as a more general matter, the 
Commission's interest in the continued vitality, fairness, and 
efficiency of our capital markets.\241\ Given the importance of the 
shareholder proxy in today's markets,\242\ it is imperative that proxy 
solicitations be conducted on a fair, honest, and informed basis. 
Consistent with these

[[Page 55102]]

aims, and in light of the unique role played by proxy voting advice 
businesses in many investors' voting decisions,\243\ it is important 
that clients of these businesses, when making their voting decisions, 
have access to transparent, accurate, and materially complete 
information. We believe proxy voting is improved by robust discussion 
among parties in advance of the voting decision, similar to the 
vigorous engagement that may occur if all parties attended an annual or 
special meeting in person.
---------------------------------------------------------------------------

    \240\ See, e.g., Regulation of Communications Among 
Shareholders, Release No. 34-31326 (Oct. 16, 1992) [57 FR 48276 
(Oct. 22, 1992)] (``Communications Among Shareholders Adopting 
Release''), at 48277 (``Underlying the adoption of section 14(a) of 
the Exchange Act was a Congressional concern that the solicitation 
of proxy voting authority be conducted on a fair, honest and 
informed basis. Therefore, Congress granted the Commission the broad 
`power to control the conditions under which proxies may be 
solicited' . . . .'').
    \241\ See supra notes 2-5 and accompanying text.
    \242\ Id.
    \243\ See Proposing Release at 10.
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    As the Commission has noted, however, a number of commenters, 
particularly within the registrant community, have expressed concern 
about the current system for providing proxy voting advice under the 
Commission's rules, and the resulting effect on the mix of information 
available to shareholders, including the ability of shareholders to 
benefit from robust discussion. While proxy voting advice businesses 
can play an influential role in shareholders' proxy voting decisions, 
the present proxy rules exempt them from the requirement to publicly 
file their recommendations with the Commission, as registrants and 
certain other soliciting parties must do for their own solicitations. 
As a result, some commenters have expressed concern that registrants 
lack an adequate opportunity to engage with and respond to influential 
proxy voting advice before shareholders vote, potentially inhibiting 
the accuracy, transparency, and completeness of the information 
available to those making voting determinations.\244\ They also 
highlight what they characterize as the limited ability to address any 
deficiencies in proxy voting advice such as factual errors, 
incompleteness, or methodological weaknesses that could materially 
affect the reliability of proxy voting advice businesses' voting 
recommendations and adversely impact voting outcomes.\245\
---------------------------------------------------------------------------

    \244\ See Proposing Release at 41-2.
    \245\ See Proposing Release at 39, n. 94.
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1. Proposed Amendments
    With the foregoing background in mind, the Commission proposed 
review and response mechanisms for proxy voting advice, as discussed 
below, that would apply any time proxy voting advice businesses provide 
voting advice to their clients in reliance on either the Rule 14a-
2(b)(1) or (b)(3) exemptions from the proxy rules. By conditioning the 
availability of these proposed exemptions in this way, the Commission 
intended to (1) facilitate dialogue between proxy voting advice 
businesses and registrants (and certain other soliciting persons, such 
as dissident shareholders engaged in a proxy contest) before the 
dissemination of proxy voting advice to clients of the proxy voting 
advice business, when most shareholder votes have yet to be cast, and 
(2) provide a means for registrants and certain other soliciting 
persons to timely communicate their views about the advice to 
shareholders, thereby assuring that the proxy voting advice businesses' 
clients could consider this information along with any other data and 
analysis they use to make their voting decisions. More generally, these 
actions were intended to enhance transparency, accuracy, and 
completeness.
a. Review of Proxy Voting Advice by Registrants and Other Soliciting 
Persons
    The Commission proposed new Rule 14a-2(b)(9)(ii) to require, as a 
condition to the exemptions in Rules 14a-2(b)(1) and (b)(3), that a 
proxy voting advice business provide registrants and certain other 
soliciting persons covered by its proxy voting advice a limited amount 
of time to review and provide feedback on the advice before it is 
disseminated to the business's clients, with the length of time 
provided depending on how far in advance of the shareholder meeting the 
registrant or other soliciting person has filed its definitive proxy 
statement.\246\ This review and feedback period would be followed by a 
final notice of voting advice, which would include any revisions to 
such advice made by the proxy voting advice business as a result of the 
review and feedback period, thereby allowing the registrant and/or 
soliciting person time to determine whether to respond to the advice 
before it is delivered to clients of the proxy voting advice 
business.\247\ By providing a standardized opportunity for registrants 
and certain other soliciting persons to review proxy voting advice 
before it is finalized and delivered to clients of proxy voting advice 
businesses, the Commission believed that these proposed amendments had 
the potential to greatly improve the overall mix of information 
available to the businesses' clients, who use proxy voting advice as an 
important, often critical, element in formulating their voting 
decisions.\248\
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    \246\ See proposed Rule 14a-2(b)(9)(ii).
    \247\ See proposed Rule 14a-2(b)(9)(ii)(B). Under the proposed 
rules, this final notice would contain a copy of the proxy voting 
advice that the proxy voting advice business would deliver to its 
clients and be provided by the proxy voting advice business no later 
than two business days prior to delivery of the proxy voting advice 
to its client.
    \248\ See Proposing Release at 44.
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    To address concerns that allowing registrants or other soliciting 
persons advance access to the proxy voting advice could result in 
premature release of the advice to unauthorized and unintended parties, 
the proposed rules specified that proxy voting advice businesses could 
require that registrants and other soliciting persons agree to keep the 
information confidential, and refrain from commenting publicly on it, 
as a condition of receiving the proxy voting advice.\249\
---------------------------------------------------------------------------

    \249\ See Note 2 to paragraph (ii) of proposed Rule 14a-2(b)(9), 
providing that the terms of such agreement apply until the proxy 
voting advice business disseminates its proxy voting advice to one 
or more clients and could be no more restrictive than similar types 
of confidentiality agreements the proxy voting advice business uses 
with its clients.
---------------------------------------------------------------------------

b. Response to Proxy Voting Advice by Registrants and Other Soliciting 
Persons
    In addition to the review and feedback mechanism, the Commission 
proposed that registrants and certain other soliciting persons also be 
given the option to request that proxy voting advice businesses include 
in their proxy voting advice (and on any electronic medium used to 
distribute the advice) a hyperlink or other analogous electronic medium 
directing the recipient of the advice to a written statement prepared 
by the registrant (or other soliciting person, as applicable) that sets 
forth its views on the advice.\250\ As proposed, registrants and other 
eligible soliciting persons would be able to exercise this right by 
notifying the proxy voting advice business no later than the expiration 
of the minimum two-business day period corresponding to the final 
notice of voting advice.\251\ If so requested, the proxy voting advice 
business would then be required to include in its proxy voting advice 
the relevant hyperlink or analogous electronic medium directing the 
client to the registrant's or other soliciting person's respective 
statement regarding the voting advice.\252\
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    \250\ See proposed Rule 14a-2(b)(9)(iii). Consistent with the 
proposed review and feedback process, the proposed right to request 
inclusion of a statement would only have extended to registrants and 
certain other soliciting persons (i.e., persons conducting non-
exempt solicitations). See id. (``If requested by the registrant or 
any other person conducting a solicitation (other than a 
solicitation exempt under Sec.  240.14a-2). . .'').
    \251\ Id.
    \252\ Id.
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    In addition to the other proposed amendments to Rule 14a-2, 
proposed 17 CFR 240.14a-2(b)(9)(iii) (``Rule 14a-2(b)(9)(iii)'') was 
intended to enable those who rely on proxy voting advice,

[[Page 55103]]

whether for their own interests or on behalf of shareholders who have 
entrusted them with proxy voting authority, to have information 
available to them to effectively assess the recommendations provided by 
proxy voting advice businesses and thereby make more informed voting 
decisions.
2. Comments Received
a. Comments on Proposed Review of Proxy Voting Advice by Registrants 
and Other Soliciting Persons
    A number of commenters supported the proposed amendments and 
asserted that the changes would improve the completeness, accuracy, and 
reliability of the information underlying the voting advice,\253\ which 
in turn would facilitate more informed decision-making by investors and 
investment advisers.\254\ Many of these commenters stated that a review 
and feedback mechanism was warranted to ameliorate the incidence of 
errors, mistakes, and deficiencies in voting advice that they believe 
exists.\255\ Several commenters also expressed the opinion that 
registrants and other soliciting persons had been disadvantaged under 
the existing system because very few were afforded the opportunity to 
review proxy voting advice in advance \256\ or were given meaningful 
opportunities to engage with proxy voting advice businesses to remedy 
any perceived deficiencies they identified in voting advice.\257\ 
Commenters supporting the proposal also stated that even when 
registrants do receive draft voting advice from proxy voting advice 
businesses in advance of its publication, they typically are not given 
sufficient time for a thorough review and response.\258\
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    \253\ See, e.g., letters from BIO; BRT; CCMC; CEC; CGC; 
ExxonMobil; Mark R. Allen, Executive Vice President, FedEx 
Corporation (Feb. 3, 2020) (``FedEx''); GM; IBC; Nasdaq; SCG.
    \254\ See, e.g., letters from BRT; CCMC; CEC (``The ability of 
issuers to review and provided feedback on both draft and final 
proxy reports prior to publication is an important step in 
preserving the integrity of the proxy voting process. . . .''); NIRI 
(``Overall, we believe the proposed rules . . . address and rectify 
significant issues that have hindered investment advisers in making 
informed determinations on investors' behalf.''); ExxonMobil; Mylan; 
SCG; Bernard S. Sharfman, Chairman, Advisory Council, Main Street 
Investors Coalition (Dec. 20, 2019) (``B. Sharfman I'') (asserting 
that the proposed review process ``should be a good thing for 
shareholders because the back and forth between the company and the 
proxy advisor . . . should make each party better informed, allowing 
them to make sure that factual errors and inadequate analytics are 
not tainting their respective voting recommendations.'').
    \255\ See, e.g., letters from ACCF (referring to its 2018 paper 
exploring the analytical and methodological errors in proxy 
advisors' recommendations: Are Proxy Advisors Really a Problem?); 
ACCF II (referring to its 2020 paper, Are Proxy Advisors Still a 
Problem?); BIO; BRT (``Business Roundtable has long been concerned 
that proxy advisors produce reports that frequently include errors, 
factually inaccurate information and incomplete analysis.''); CCMC 
(citing ``frequent and significant errors in analysis and 
methodology'' and a ``high incidence of factual and analytical 
errors in proxy advisor reports.''); CEC; CGC (``[The proposal to 
allow review of proxy voting advice] would help address one of the 
biggest flaws of the current proxy advice system, which is the 
tendency of proxy advisory firms to make egregious errors in vote 
recommendations''); ExxonMobil; Garmin; NAM (asserting that ``Proxy 
firm reports and recommendations feature a profusion of errors and 
misleading statements''); Nareit; Nasdaq (``Factual errors have . . 
. been identified by 95% of Business Roundtable members and `all 
raise concerns regarding the rigor and integrity of the proxy 
advisory firms' internal fact-collection and analysis processes' . . 
. The ability to identify and correct errors is crucial for accuracy 
and accountability.''); NIRI; SCG.
    \256\ See, e.g., letters from CGC; CEC (``[T]he lack of any 
reasonable access by all issuers--not just the largest issuers--to 
draft and final proxy reports and the inability of those issuers to 
adequately review both reports before publication is highly 
problematic . . . . Providing all companies with the ability to 
review the draft proxy report is an important step to ensuring the 
integrity of the data within the proxy report.''); Richard R. 
Dykhouse, Executive Vice President, General Counsel & Corporate 
Secretary, Charter Communications, Inc. (Feb. 3, 2020) 
(``Charter''); Penny Somer-Greif, Chair, and Gregory T. Lawrence, 
Vice-Chair, Committee on Securities Law, Maryland Bar Association 
(Feb. 3, 2020) (``MSBA''); Nareit; Nasdaq (describing current 
opportunities available to registrants for review of draft proxy 
voting advice as ``an uneven playing field''); NIRI.
    \257\ See, e.g., letters from ACCF; BRT; CCMC; CEC; GM, Mylan; 
NAM; Nareit; Nasdaq, NIRI; SCG.
    \258\ See, e.g., letters from BRT (noting the limited window 
that ISS allows for comment on draft reports that it provides to S&P 
500 companies); CCMC; CEC; CGC; Charter; GM; NAM; Nasdaq; NIRI; SCG 
(``ISS provides its reports to S&P 500 companies in advance and 
takes comment on any factual errors in a 48-hour timeframe, although 
companies are sometimes given less response time.''). In support of 
their views on needed improvements to proxy voting advice, several 
commenters cited the results of various surveys. See, e.g., letters 
from ACCF; BRT; CCMC; Nareit; Nasdaq; SCG. But see, e.g., letters 
from CII IV; Elliott I; Glass Lewis II; SWIB (questioning the rigor, 
and therefore the usefulness, of such surveys).
---------------------------------------------------------------------------

    In many cases, commenters who supported the opportunity for advance 
review provided by proposed Rule 14a-2(b)(9)(ii) disagreed with the 
suggestion of other commenters that the proposal would compromise the 
independence of proxy voting advice businesses, with some pointing to 
the fact that a number of registrants were already participating in 
advance review programs offered by proxy voting advice businesses.\259\
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    \259\ See, e.g., letters from SCG (``It is difficult to 
understand how, if ISS' voluntary review and comment processes do 
not currently compromise the independence of their advice the 
Proposed Rule's review and comment period for all public companies 
would do so.''); BIO; ExxonMobil.
---------------------------------------------------------------------------

    Several commenters that were in favor of the proposal offered 
suggested modifications intended to increase the rule's efficacy,\260\ 
such as giving registrants more time to review reports than was 
proposed; \261\ explicitly including within the scope of the advanced 
review process proxy voting advice based on custom policies \262\ and 
mandating that proxy voting advice businesses make certain public 
disclosures to enhance transparency (e.g., publishing proxy voting 
advice following shareholder meetings).\263\
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    \260\ See, e.g., letters from ExxonMobil; GM; MSBA; Nasdaq; SCC 
I.
    \261\ See, e.g., letters from BIO; BRT; Nasdaq.
    \262\ See, e.g., letter from BRT (``The majority of our member 
companies surveyed indicated that voting advice formulated under a 
clients' custom policies should be subject to the proposed review 
and feedback period. Member companies noted that the same need to 
correct factual inaccuracies exists with these reports. . . .''). 
But see, e.g., letters from CII IV; Heidi W. Hardin, Executive Vice 
President and General Counsel, MFS Investment Management (Feb. 3, 
2020) (``MFS Investment'') (stating that advice based on custom 
policies should be excluded from the review framework as any 
research provided by proxy voting advice businesses under the MFS 
internal proxy voting is ``proprietary and commensurate with [MFS'] 
overall investment approach''); PIAC II.
    \263\ See, e.g., letters from BRT (suggesting a requirement that 
proxy voting advice businesses issue final reports tallying final 
voting figures and comparing the results to the businesses' voting 
recommendations to clients); SCC I (asserting that publication would 
facilitate and encourage more public discussions about corporate 
governance standards and permit more informed feedback about the 
analyses and conclusions in company reports prepared by proxy voting 
advice businesses).
---------------------------------------------------------------------------

    While many commenters supported the proposed review and feedback 
provisions, a substantial number of commenters were opposed.\264\ Many

[[Page 55104]]

such commenters argued that there was an absence of compelling evidence 
of frequent errors or significant deficiencies in proxy voting advice 
to warrant such a requirement.\265\ Moreover, commenters emphasized 
that the clients of proxy voting advice businesses generally have been 
satisfied with the quality of the advice they receive.\266\ In support 
of this view, commenters pointed to the absence of complaints from 
clients of proxy voting advice businesses, as distinguished from the 
large volume of complaints from registrants and their advocates.\267\
---------------------------------------------------------------------------

    \264\ See, e.g., letters from 62 Professors; AFL-CIO II; Sharon 
Fay, Co-Head Equities, and Linda Giuliano, Head of Responsible 
Investment, AllianceBernstein (Feb. 3, 2020) 
(``AllianceBernstein''); Chelsea J. Linsley, Staff Attorney, and 
Danielle Fugere, President & Chief Counsel, As You Sow (Feb. 3, 
2020) (``As You Sow II''); Baillie Gifford; Dennis M. Kelleher, 
President & CEO, et al., Better Markets, Inc. (Feb.3, 2020) 
(``Better Markets''), David Sneyd, Vice President, Analyst, 
Responsible Investment, BMO Global Asset Management (Jan. 31, 2020) 
(``BMO''); Lauren Compere, Managing Director, Boston Common Asset 
Management (Feb. 3, 2020) (``Boston Common'') (asserting that the 
proposal would ``allow corporations to intercept recommendations 
critical of the corporation or its management[, undermining] the 
checks and balances necessary for functioning markets''); Amy D. 
Augustine, Director of ESG Investing, and Timothy H. Smith, Director 
of ESG Shareowner Engagement, Boston Trust Walden (Nov. 20, 2019) 
(``Boston Trust''); Bricklayers; CalPERS (``While the release 
suggests that the Proposed Rule is necessary to protect investors 
from potentially incomplete or conflicted advice, the reality is 
that there has been no investor demand for the Proposed Rule.''); 
CalSTRS; CFA Institute I; CII IV; CIRCA (characterizing the proposed 
review and feedback process as ``an unprecedented intrusion into 
proxy voting''); Kevin E. McManus, Director of Proxy Services, Egan-
Jones Proxy Services (Feb. 3, 2020) (``Egan-Jones''); Glass Lewis 
II; ICI; ISS; Cynthia M. Ruiz, Board President, Los Angeles City 
Employees' Retirement System (LACERS) (Feb. 18, 2020) (``LACERS''); 
MFS Investment; Scott M. Stringer, New York City Comptroller (Nov. 
20, 2019) (``NYC Comptroller''); New York Comptroller II; Ohio 
Public Retirement; Richard Stensrud, Executive Director, School 
Employees Retirement System of Ohio (Jan. 30, 2020) (``Ohio School 
Retirement''); Olshan Shareholder Activism Group (Feb. 3, 2020) 
(``Olshan LLP''); PIAC II; PRI II; Seven Corners; Segal Marco II; 
Amy M. O'Brien, Senior Managing Director, Head of Responsible 
Investing, and Yves P. Denize, Senior Managing Director, Division 
General Counsel, Teachers Insurance and Annuity Association of 
America (TIAA) (Feb. 3, 2020) (``TIAA''); William J. Stromberg, 
President and CEO, T. Rowe Price (Jan. 29, 2020) (``TRP''); Third 
Point LLC (Feb. 3, 2020) (``Third Point LLC''); Jonas D. Kron, 
Senior Vice President, Trillium Asset Management, LLC (Feb. 3, 2020) 
(``Trillium''); ValueEdge I. See also IAC Recommendation.
    \265\ See, e.g., letters from AFL-CIO II (``The Commission has 
not made any showing of factual errors or methodological weaknesses 
in proxy voting advice [that] need correction by companies before it 
is distributed to clients.''); AllianceBernstein; As You Sow II 
(``The Commission has failed to evidence any problem with the 
current state of affairs. . .''); Better Markets; BMO; Bricklayers; 
CalPERS; CalSTRS; CFA Institute I; CII IV (``[T]he paucity of 
evidence of pervasive factual errors by proxy advisors suggests 
that, in fact, no regulatory intervention is necessary or 
justified.''); CIRCA; Glass Lewis II; Michael W. Frerichs, Illinois 
State Treasurer (Jan. 16, 2020) (``Illinois Treasurer''); ISS; NYC 
Comptroller; New York Comptroller II; Ohio Public Retirement; PERA; 
PRI II; Jeffrey S. Davis, Executive Director, and Jason Malinowski, 
Chief Investment Officer, Seattle City Employees' Retirement System 
(SCERS) (Jan. 31, 2020) (``Seattle Retirement System''); Segal Marco 
II; TIAA; Trillium; TRP; Third Point LLC; ValueEdge I. One commenter 
also noted that at the Commission's 2018 Roundtable on the Proxy 
Process, ``not one single participant . . . saw a need to impose 
additional regulation on proxy advisers . . . .'' See letter from 
ISS. See also IAC Recommendation.
    \266\ See, e.g., letters from Better Markets (``There is little 
evidence to support [the] claim [that the proposed changes are for 
the benefit of investors] . . . . To the contrary, institutional 
investors who manage trillions of dollars of Americans' savings and 
retirement funds are urging the SEC not to proceed with the 
misguided policies set forth in the Release.''); CalPERS (``It is 
worth noting that no institutional investors have suggested that 
[mandatory review periods for registrants] would enhance the 
quality, quantity, or timeliness of advice.'').
    \267\ See, e.g., letters from CalPERS (``[T]he reality is that 
there has been no investor demand for the Proposed Rule. The push 
for reforms in this area is not from investors who are obtaining the 
advice . . . but instead is from the companies that are subjects of 
the advice sought.'' . . . Existing clients have few complaints 
about the quality of proxy voting advice . . . .'');ValueEdge I.
---------------------------------------------------------------------------

    Commenters opposing the proposal also expressed their concern that 
requiring advance review of proxy voting advice by registrants would 
confer an unfair advantage to company management in disputed proxy 
matters \268\ and would compromise the ability of proxy voting advice 
businesses to provide disinterested, independent advice.\269\ Several 
such commenters stated that giving registrants the priority to review 
voting advice before the clients of proxy voting advice businesses was 
incompatible with the Commission's own published views,\270\ as well as 
the principle behind FINRA Rule 2241, which governs conflicts of 
interest in connection with the publication of equity research reports 
and public appearances by research analysts.\271\
---------------------------------------------------------------------------

    \268\ See, e.g., letters from Olshan LLP; PRI II (asserting that 
the proposal ``biases advice towards favoring managers, reducing the 
accuracy and independence of proxy voting advice,'' because it 
imposes costs only on recommendations that management opposes); SES 
(expressing concern regarding the possibility that the right of 
advance review creates information asymmetries favoring 
registrants).
    \269\ See, e.g., letters from AFL-CIO II; AllianceBernstein; 
Baillie Gifford; CalPERS; CFA Institute I.; CII IV (`` [W]e believe 
the proposed requirement will be reasonably perceived as impairing 
the independence of the proxy advisor research, particularly since 
the proxy advisor is required to seek review and receive feedback 
from self-interested companies before sharing the draft report with 
their own paying client . . . .''); MFS Investment; New York 
Comptroller I; Ohio Public Retirement; PRI II; TRP.
    \270\ See, e.g., letters from CII IV; ISS, New York Comptroller 
II; Sanford Lewis, Director, Shareholder Rights Group (Feb. 3, 2020) 
(``Shareholder Rights II''), referring to Communications Among 
Shareholders Adopting Release at 48279. In that release, the 
Commission stated: ``A regulatory scheme that inserted the 
Commission staff and corporate management into every exchange and 
conversation among shareholders, their advisors and other parties on 
matters subject to a vote certainly would raise serious questions 
under the free speech clause of the First Amendment, particularly 
where no proxy authority is being solicited by such persons. This is 
especially true where such intrusion is not necessary to achieve the 
goals of the federal securities laws.'' [48279]
    \271\ See, e.g., letters from AFL-CIO II; As You Sow II; BMO; 
Boston Trust, CII IV; NYC Comptroller; New York Comptroller II; PIAC 
II; TRP.
---------------------------------------------------------------------------

    Some commenters were also concerned that the right of advance 
review would increase the risk of insider trading of material, non-
public information \272\ and, more generally, expressed doubts about 
the effectiveness of the proposal's framework for safeguarding the 
confidentiality of materials provided by proxy voting advice businesses 
to registrants.\273\ Along these lines, some commenters asked for 
clarification about how the proposed confidentiality provision would 
work in practice,\274\ and others suggested ways the provision and its 
implementation could be improved, including by reconsidering the 
duration of confidentiality and setting specific standardized 
terms.\275\
---------------------------------------------------------------------------

    \272\ See, e.g., letters from CII IV; ISS.
    \273\ For example, some commenters thought the confidentiality 
provision in Note 1 to proposed Rule 14a-2(b)(9)(ii) would be 
unwieldy and exacerbate delays. See, e.g., letters from Baillie 
Gifford; CalPERS; CCMC; Glass Lewis II; ISS; Olshan LLP (stating 
that the proposals significantly underestimate the time and expense 
of negotiating confidentiality agreements and providing detailed 
reasons as to why the proposals would be so time consuming and 
costly); SES (asserting that needing to sign individual 
confidentiality agreements between every registrant and proxy voting 
advice business would be cumbersome ``without any tangible 
benefit''). See also letter from ExxonMobil (advocating in favor of 
a ``simple and straightforward confidentiality notice with a 
consent'' and against a ``complex or signed contractual agreement 
[which] could undermine the review process or registrants' other 
legal rights''). Other commenters were critical of the proposed 
stipulation that any confidentiality agreements could be ``no more 
restrictive than similar types of confidentiality agreements'' the 
proxy voting advice business uses with its clients.'' These 
commenters asserted that it was not feasible to use client 
agreements as a model for the terms of confidentiality with 
registrants. See, e.g., letters from Glass Lewis II; ISS.
    \274\ See, e.g., letter from Baillie Gifford.
    \275\ See, e.g., letters from CII IV (suggesting that more 
consideration be given to the duration of confidentiality over proxy 
voting advice businesses' proxy advice and the businesses' permitted 
recourse when the terms of confidentiality are violated); Nasdaq 
(asserting that ``standardizing and streamlining this process would 
reduce legal costs and time spent negotiating each confidentiality 
agreement and help ensure that such agreements contain standardized 
restrictions and disclaimers'').
---------------------------------------------------------------------------

    A substantial number of commenters opposed the proposed review and 
feedback process on the grounds that it would significantly impede the 
ability of proxy voting advice businesses to deliver timely and high 
quality advice to their clients \276\ and, as a consequence, would 
weaken the ability of their clients to thoughtfully consider the advice 
and make informed decisions.\277\ Many such commenters were doubtful 
that the proposed rules governing the advance review and feedback of 
proxy advice was a viable framework \278\ and expressed concern

[[Page 55105]]

that it would create numerous logistical and practical challenges that 
would be highly disruptive to the proxy voting system.\279\ Commenters 
also noted the likelihood of significant costs associated with the 
proposal that would be incurred by proxy voting advice businesses, 
which many asserted would ultimately be borne by the businesses' 
clients.\280\
---------------------------------------------------------------------------

    \276\ See, e.g., letters from AFL-CIO II; As You Sow II; Baillie 
Gifford; BMO; Boston Trust; CalPERS; CII IV; Elliott I; NYC 
Comptroller (stating its view that under the proposed review and 
feedback framework proxy voting advice businesses ``will have less 
time to collect, verify, analyze and present data and provide their 
research reports to clients well in advance of the annual 
meeting''); New York Comptroller II; PIAC II; TIAA; TRP (asserting 
that the time periods allotted for the review and feedback process 
``have the very real potential to diminish the time needed for 
registered investment advisers to fulfill essential fiduciary 
obligations related to proxy voting'').
    \277\ See, e.g., letters from As You Sow II; BMO; Bricklayers; 
CalPERS; CII IV; PERA; TRP.
    \278\ See, e.g., letters from CIRCA; Paul Schott Stevens, 
President and CEO, Investment Company Institute (Feb. 3, 2020) 
(``ICI'') (stating that the proposed framework ``would affect 
substantially and adversely the timeliness and cost of proxy 
advisory firms' advice, and thus its overall value to funds and 
their shareholders''); Interfaith Center II; TRP (stating, among 
other criticisms, that the review and feedback process would be 
logistically impracticable and ``unworkable within the current time 
constraints of the intensely seasonal proxy voting cycle'').
    \279\ This included the impracticability of applying the rules 
in the context of proxy contests or M&A transactions. See, e.g., 
letters from CII IV; Olshan LLP (providing detailed reasons why the 
proposals would be challenging in proxy contests).
    \280\ See, e.g., letters from 62 Professors; AFL-CIO II, Baillie 
Gifford; BMO; Bricklayers; CalPERS; CFA Institute I; CII IV; Egan-
Jones; ICI; MFS Investment; NYC Comptroller; New York Comptroller 
II; Ohio Public Retirement; Ohio School Retirement; Olshan LLP; 
Segal Marco II; TIAA; Mark D. Epley, Executive Vice-President & 
Managing Director, General Counsel, Managed Funds Association, and 
Ji[rcaron][iacute] Kr[oacute]l, Deputy CEO, Global Head of 
Government Affairs, Alternative Investment (Feb. 3, 2020) (``MFA & 
AIMA'').
---------------------------------------------------------------------------

    In addition to addressing practical challenges of the review and 
feedback process, commenters identified a number of potential 
unintended consequences that might result,\281\ including diminished 
competition among proxy voting advice businesses,\282\ limitation of 
market choice for consumers of proxy voting advice,\283\ reduction in 
shareholder voting,\284\ and a decline in the utility of proxy voting 
advice,\285\ which some commenters warned might be watered down to 
lessen the risk of litigation \286\ and would be influenced by the 
self-interested views of registrants before the advice was seen by 
clients.\287\ Some commenters also raised the possibility that the 
proposal was unconstitutional because it violated the right of free 
speech under the First Amendment \288\ and the takings clause of the 
Fifth Amendment.\289\
---------------------------------------------------------------------------

    \281\ See, e.g., letters from 62 Professors; AFL-CIO II, Fran 
Seegull (Feb. 2, 2020) (``Alliance''), As You Sow II, BMO, 
Bricklayers; CalPERS, CFA Institute I; CII IV; Shawn T. Wooden, 
Connecticut State Treasurer (Jan. 31, 2020) (``CT Treasurer''); 
Egan-Jones; Elliott I; Diandra Soobiah, Head of Responsible 
Investment, NEST--National Employment Savings Trust (Jan. 27, 2020) 
(``Employment Savings''); Hermes; ISS; LA Retirement; MFA & AIMA; 
New York Comptroller II; TIAA.
    \282\ See, e.g., letters from 62 Professors; Baillie Gifford 
(``It seems likely that the proposed amendments would be perceived 
as onerous and deter new entrants to the proxy advisory industry''); 
AFL-CIO II (``The additional burdens created by the proposed 
regulations and increase in market concentration if smaller proxy 
voting providers cannot stay in the business will significantly 
increase costs for investors. By limiting competition and creating 
barriers to entry, the Commission's proposed rulemaking is likely to 
result in an even greater reliance by investors on Institutional 
Shareholder Services and Glass Lewis''); BMO; Bricklayers; CalPERS, 
CII IV (arguing that mandatory ``pre-review'' requirements will be 
prohibitively costly for proxy voting advice businesses and 
therefore ``likely to preclude new entrants, eliminate one or more 
incumbents, and potentially lead any survivor to follow a business 
model that includes providing consulting services to issuers, 
compounding concerns on influencing of proxy advisor reports''); 
Prof. Sergakis; TIAA.
    \283\ See, e.g., letters from CII IV (noting that some of its 
members switched from ISS to Glass Lewis because they believed ISS's 
practice of providing some companies the right to pre-review reports 
compromised the independence of the ISS analysis); Elliott I.
    \284\ See, e.g., letters from Alliance, As You Sow II (``The 
Proposed Rule may increase the liability of proxy advisory services, 
or the perception of legal liability, causing proxy advisors to 
decline to issue recommendations where issuers challenge findings, 
thereby limiting the number of shareholders willing or able to 
conduct their own research sufficient to vote for a shareholder 
proposal''); BMO; CII IV.
    \285\ See, e.g., letters from Bricklayers (stating that the 
additional burdens imposed by the proposal ``would almost certainly 
lead to . . . shrinking the overall market for proxy advisory 
services . . . , the Proposed Amendments thus would burden 
competition without serving the Exchange Act's purposes''); CalPERS; 
CII IV; ICI; New York Comptroller II; MFA & AIMA.
    \286\ See, e.g., letters from BMO (discussing its concern that 
the proposal would ``significantly increas[e] the regulatory burden 
on proxy advisers through increasing litigation risk); CalPERS (``We 
recognize that the proxy advisors are not required to revise advice, 
but a heavy hammer is placed over their heads by the added emphasis 
on Rule 14a-9 liability . . . Although the Release states there is 
no new private right of action created by the new Rule 14a-2(b)(9), 
the process and greater focus on Rule 14a-9 will make it more likely 
that proxy voting advice businesses will be sued under the new 
rules.''); CFA Institute I (noting the possible consequence that 
commentary from analysts, who might be encouraged to self-censor, 
would be ``less forthright''); Ohio Public Retirement (questioning 
whether Rule 14a-9 liability might be used ``to threaten or pressure 
proxy advisory firms to incorporate issuer feedback or accept 
revisions to their voting advice''); NYC Comptroller; PRI II.
    \287\ See, e.g., letters from Baillie Gifford (``In relation to 
the influence of registrants, allowing registrants to also comment 
on analysis and dispute methodology and opinion, in conjunction with 
the proposed anti-fraud amendments, could render proxy advisors 
vulnerable to litigation if these matters are not incorporated into 
the advice. This is clearly inappropriate as these matters are 
necessarily subjective. This could result in the watering down of 
advice to avoid potential actions, rendering the advice too bland to 
be of use.''); Bricklayers (``Another potential negative impact of 
the Proposed Amendments would be to advantage the viewpoints of 
corporate management.'').
    \288\ See, e.g., letters from CFA Institute I; CII IV (noting 
the ``potential implications of the First Amendment on the 
independence of the research reports of proxy advisors if subject to 
required company review and feedback''); CIRCA (arguing that 
establishing a mandatory registrant review process of proxy voting 
advice would constitute an unconstitutional restraint on the speech 
of proxy advisory firms''); Elliot; Glass Lewis II; ISS; Interfaith 
Center II; New York Comptroller II; Mari C. Schwartzer, Director of 
Shareholder Activism and Engagement, NorthStar Asset Management, 
Inc. (Feb. 3, 2020) (``NorthStar''); Shareholder Rights II; Nell 
Minow, Vice Chair, ValueEdge Advisors (Mar. 10, 2020) (``ValueEdge 
III''); Washington State Investment. We discuss our response to 
certain Constitutional objections to the proposed amendments in 
Section II.C.3.d. infra.
    \289\ See, e.g., letters from CalPERS (``Enabling a non-client 
to review the work product before actual clients . . . arguably 
violates the Constitution by taking private property for public use 
without compensation''); ISS. We discuss our response to certain 
Constitutional objections to the proposed amendments in Section 
II.C.3.d. infra.
---------------------------------------------------------------------------

    Many of the commenters who generally opposed the proposals also 
offered suggested modifications to the extent that the Commission 
elected to proceed to adoption of final rules.\290\ This included 
shorter mandatory review periods provided to registrants,\291\ limiting 
advance review to the factual information included in proxy voting 
advice,\292\ allowing issuers to opt-in to the review and feedback 
procedures,\293\ adjusting the timeline contemplated by the rule to 
require that proxy statements be filed a certain number of days in 
advance of the meeting in excess of what was proposed,\294\ concurrent 
review by registrants and clients rather than advance review by 
registrants,\295\ and other changes designed to make the review and 
feedback process more cost-effective and efficient.\296\ In addition, 
several commenters asked for more clarification with regard to certain 
interpretive issues, including a more

[[Page 55106]]

precise understanding of which persons would be subject to the 
rule.\297\
---------------------------------------------------------------------------

    \290\ See, e.g., letters from AFL-CIO II; AllianceBernstein; 
Baillie Gifford; BMO; CII IV; CIRCA; Elliott I; Glass Lewis II; ICI; 
Illinois Treasurer; Interfaith Center II; MFS Investment; Ohio 
Public Retirement; Olshan LLP; PIAC II; Seven Corners; TIAA. See 
also IAC Recommendation.
    \291\ See, e.g., letters from IAA; PIRC.
    \292\ See, e.g., letters from Baillie Gifford; BMO; CII IV; 
CIRCA; Elliott I; ICI; ISS; MFA & AIMA; Ohio Public Retirement. See 
also IAC Recommendation.
    \293\ See, e.g., letter from Glass Lewis II (asserting that this 
would enable proxy voting advice businesses to collect important 
information before the process begins, potentially reducing some of 
the burden on the proxy voting advice businesses).
    \294\ See, e.g., letters from CII IV (suggesting a timeline 
requiring registrants to file 50 or more days prior to the annual 
meeting; ICI; Interfaith Center II; ISS; Christopher Gerold, 
President, North American Securities Administrators Association 
(NASAA) (Feb. 3, 2020) (``NASAA''); TIAA.
    \295\ See, e.g., letters from AllianceBernstein; Kevin A. 
Beaugez (June 3, 2020) (``K. Beaugez''); BMO; James Allen, Head, and 
Matt Orsagh, Director, Capital Markets Policy, CFA Institute (May 
13, 2020) (``CFA Institute II''); CII IV; CIRCA; ICI; MFS 
Investment; SES (stating that its business model is to provide its 
voting advice report to clients and companies simultaneously 15 days 
prior to the meeting, and then provide an addendum should any 
corrections, changes, etc. be required). See also IAC 
Recommendation. But see letter from Niels Holch, Executive Director, 
Shareholder Communications Coalition (May 1, 2020) (``SCC II'') 
(``The Coalition strongly opposes the concurrent review 
recommendation.'').
    \296\ See, e.g., letters from IAA (recommending that the 
proposed review and feedback process be replaced with a single 
review of the facts); ICI (recommending that proxy voting advice 
businesses be permitted to provide a draft of their reports to 
registrants and other soliciting persons for comment while 
simultaneously publishing it for public review).
    \297\ See, e.g., letters from AFL-CIO II; CII IV; Glass Lewis 
II; ISS.
---------------------------------------------------------------------------

    As an alternative to the proposed framework for review and 
feedback, which they viewed as too rigid and prescriptive, some 
commenters urged the Commission to consider a more flexible, 
principles-based, and less intrusive solution.\298\ One commenter noted 
that many of the practical concerns it expressed in its letter 
regarding the proposed review and feedback mechanism ``could be 
addressed by moving to a principles-based rule and using Commission or 
Staff guidance to ensure that the mechanisms are being administered in 
a fair and efficient manner.'' \299\ Several commenters also pointed 
out that there already were existing mechanisms in place sufficient to 
address the concerns raised in the Proposing Release, including 
existing proxy voting advice business programs and policies for 
registrants to provide feedback,\300\ antifraud liability under Rule 
14a-9,\301\ and ``counter-speech'' measures for registrants (such as 
filing additional proxy soliciting materials).\302\
---------------------------------------------------------------------------

    \298\ See, e.g., letters from Baillie Gifford; Canadian Gov. 
Coal; CII IV; Glass Lewis II; ISS; Prof. Sergakis (describing the 
treatment of proxy voting advice businesses under the proposal as 
too ``formalistic'' and stringent'' by comparison to the regulation 
of such businesses in different parts of the world and recommending 
a more flexible, principles-based system).
    \299\ Glass Lewis II (``For example, the exemptive condition 
could be as concise as a requirement that proxy advisors `maintain 
policies and procedures that provide registrants (and certain other 
soliciting persons) a meaningful opportunity to comment on proxy 
advice and final notice of any proxy advice,' with Staff or 
Commission guidance filling in the timing and other elements.'').
    \300\ See, e.g., letters from Better Markets (``Both Glass Lewis 
and ISS already have systems in place to allow companies to correct 
factual errors in their reports and recommendations `and respond to 
some aspect of their proxy voting advice' before they are sent to 
their clients.''); BMO; CII IV; Glass Lewis II; Ohio Public 
Retirement; Segal Marco II.
    \301\ See, e.g., letters from AllianceBernstein; As You Sow II; 
Better Markets; Elliott I; ISS; Glass Lewis II; CalPERS; CII IV; New 
York Comptroller II; Segal Marco II; Seven Corners; Shareholder 
Rights II. See also IAC Recommendation.
    \302\ See, e.g., letters from AllianceBernstein; As You Sow II 
(``Companies have the ability to make arguments in a variety of ways 
including in their proxies, by calling investor meetings, or sending 
out information to shareholders, among others. There is no reason to 
afford issuers yet another avenue to provide their views, especially 
when it is likely to dramatically interfere with what is already a 
time-constrained and difficult process for proxy advisory firms and 
shareholders''); Better Markets; CalPERS; CFA Institute I (noting 
that ``registrants already have many opportunities to communicate 
with investors,'' including the registrant's own proxy materials and 
``the full array of social media avenues to reiterate and confirm 
their positions . . .''); CII IV; Elliott I; Glass Lewis II; SS; New 
York Comptroller II; PIAC II (``Issuers already provide their views 
via proxy statements and other communications from management that 
are easily accessible should they be needed. Giving companies the 
opportunity for additional participation in the recommendations of 
proxy advisors would detract from, rather than contribute to, the 
objectivity of those recommendations.''); Segal Marco II; Seven 
Corners; Shareholder Rights II. See also IAC Recommendation.
---------------------------------------------------------------------------

b. Comments on Proposed Response to Proxy Voting Advice by Registrants 
and Other Soliciting Persons
    A number of commenters supported the proposal as a means to improve 
the overall mix of information available to investors.\303\ Commenters 
argued that registrants do not have a timely and effective method for 
conveying their views and assessments about proxy voting advice to 
clients of proxy voting advice businesses before many clients vote in 
reliance on such advice.\304\
---------------------------------------------------------------------------

    \303\ See, e.g., letters from Baillie Gifford; BIO; Michele 
Nellenbach, Director of Strategic Initiatives, Bipartisan Policy 
Center (Feb. 3, 2020) (``BPC'') (stating that the hyperlink is a 
cost-effective way to provide current information to investors), 
BRT; CEC (``The Commission's proposed changes ensure investors will 
have a full picture of the information from which they can then make 
an informed, proposal-specific voting decision.''); CCMC; CEC; CGC; 
ExxonMobil (``Timely access to both of these viewpoints [in the 
proxy voting advice and the registrant's response to the advice] 
each proxy season is critical for investors to make informed 
decisions at minimal cost.''); FedEx; GM; NAM; Nareit; Nasdaq 
(noting its belief that the hyperlink would improve the accuracy of 
proxy voting advice and the overall mix of information available to 
investors, especially given the lack of a requirement in the 
proposed rules that proxy voting advice businesses revise their 
recommendations based on registrant feedback); NIRI (``Shareholders 
will be better informed as a result of the inclusion of [the 
registrant's] response. Doing so will result in greater transparency 
in the proxy voting advice process, allowing investors to see both 
sides of the issue . . .''); SCG (asserting that ``factual errors 
have frequently been found after the voting recommendation has been 
disseminated'' and that ``the impact of additional proxy materials 
can be limited''); TechNet.
    \304\ See, e.g., letters from BRT; CEC (``The problems facing 
issuers and the wider market occur due to the extreme difficulty in 
engaging with proxy advisory firms during the proxy season and the 
immediate and near irrecoverable impact the issuance of the proxy 
report has on voting results''); Charter; ExxonMobil (``Timely 
access to both of these viewpoints each proxy season is critical for 
investors to make informed decisions at minimal cost. Our experience 
is that supplemental proxy materials filed with the SEC after the 
release of the proxy advisors' reports, which are intended to 
supplement such reports, are ineffective.'').
---------------------------------------------------------------------------

    Other commenters, however, opposed the proposal.\305\ A number of 
these commenters raised concerns about costs and delays in the timely 
receipt of advice that they asserted would result from the 
proposal.\306\ Many commenters asserted the proposal is unnecessary 
given the ability of registrants to conduct investor outreach and file 
supplemental proxy materials to address any concerns with the voting 
advice.\307\ Some commenters also objected on the grounds that the 
proposed amendment was unconstitutional under the First Amendment.\308\
---------------------------------------------------------------------------

    \305\ See, e.g., letters from AFL-CIO II; CII IV; Elliott I; 
Glass Lewis II; ISS; Lars Dijkstra, Chief Investment Officer, and 
Eszter Vitorino, Senior Responsible Investment Advisor, Kempen 
Capital Management (Jan. 6, 2020) (``Kempen'') (asserting that such 
requirement would be duplicative of the information already filed in 
company proxy statements and meeting notices, adding burden without 
additional value); New York Comptroller II; Ohio Public Retirement; 
PERA; PRI II; Public Retirement Systems; ValueEdge III.
    \306\ See, e.g., letter from CII IV (arguing that the proposed 
requirement would delay the timely receipt of proxy voting advice 
because proxy voting advice businesses will need to coordinate 
timing of the filing of supplementary proxy materials with 
registrants and that it would increase the businesses' direct costs 
(e.g., costs to include a hyperlink in reports), which would likely 
be passed on to clients and their beneficiaries).
    \307\ See, e.g., letters from Glass Lewis II; Public Retirement 
Systems.
    \308\ See, e.g., letters from AFL-CIO II; CII IV; CIRCA; Elliott 
I; Glass Lewis II (characterizing the proposed requirement for a 
proxy voting advice business to publish a registrant's response to 
proxy voting advice in the form of a hyperlink as compelled speech 
and citing to legal precedent for the proposition that compelling a 
party to publish or otherwise provide access to speech with which 
the party may disagree violates the First Amendment); ISS (``Supreme 
Court precedent is clear that the government may not `co-opt' a 
person's speech `to deliver [a] message' from someone else.''); New 
York Comptroller II. We discuss our response to certain 
Constitutional objections to the proposed amendments in Section 
II.C.3.d. infra.
---------------------------------------------------------------------------

    Supporters and opponents of the proposal provided a variety of 
suggested modifications to proposed Rule 14a-2(b)(9)(iii).\309\ For 
example, some supporters recommended allowing registrants more time 
than the proposed two business days in which to provide their statement 
of response.\310\ Others were in favor of requiring proxy voting advice 
businesses to include the full written statement of registrants in the 
proxy advice, rather than just a hyperlink.\311\ Other commenters 
requested that the Commission clarify certain points, such as whether a 
proxy voting advice business would be subject to Rule 14a-9 liability 
for omissions of a registrant's response,\312\ and whether it would be 
a violation of an investment adviser's fiduciary duty if it chose not 
to review a registrant's hyperlinked response.\313\ Because of concerns 
that clients may not take the time to review registrants' hyperlinked 
statements, commenters also recommended that the Commission require 
proxy voting advice businesses to disable pre-populated voting 
mechanisms or the automatic

[[Page 55107]]

submission of votes in instances where companies respond to a proxy 
voting advice business's adverse voting recommendation, along the lines 
of the alternative described in the Proposal.\314\
---------------------------------------------------------------------------

    \309\ See, e.g., letters from BIO; ExxonMobil; Nasdaq; CII IV; 
CFA Institute II; Hermes; ISS.
    \310\ See, e.g., letter from BIO.
    \311\ See, e.g., letters from BIO; NAM.
    \312\ See letters from BRT; ExxonMobil.
    \313\ See letter from Nasdaq.
    \314\ See, e.g., letters from BIO (``Accordingly, [we] support 
measures that would increase the likelihood that the registrant's 
statement is taken into account, such as disabling the auto-
submission of votes when a registrant has submitted a response, or 
disabling auto-submission unless the client accesses the 
registrant's response or otherwise confirms the pre-populated voting 
choices.''); BRT; CGC; ExxonMobil (asserting that the failure to 
address automatic submissions would render the proposed rules 
ineffective, with ``limited practical impact.''); NAM; Nareit; SCC 
II.
---------------------------------------------------------------------------

    Some commenters who objected to the proposal nevertheless 
recommended changes should the Commission adopt a response mechanism. 
Several such commenters encouraged the Commission to codify the view 
that a proxy voting advice business will not be held liable for the 
content of a registrant's response, whether provided as a hyperlink or 
included in the proxy statement in its entirety.\315\ Additional 
suggestions included setting reasonable guidelines and limitations on 
the content of a registrant's response,\316\ requiring that registrants 
provide their hyperlink to the proxy voting advice business before the 
end of the review period (not just request that it be included) to 
ensure that the hyperlink is provided in a timely manner,\317\ 
requiring that the hyperlink be active when provided,\318\ and 
permitting proxy voting advice businesses to require registrants to 
indemnify them for any loss or claim arising out of the hyperlinked 
content, its transmission, or use.\319\
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    \315\ See, e.g., letters from Baillie Gifford; CII IV; Glass 
Lewis II; ISS.
    \316\ See, e.g., letter from Glass Lewis II.
    \317\ Id.
    \318\ Id.
    \319\ Id.
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3. Final Amendments
a. Overview
    Based on commenter feedback, we are adopting amendments to Rule 
14a-2(b) that we believe achieve the important objectives of the 
proposal but are modified in a number of respects to do so in a less 
prescriptive, more principles-based manner. We recognize the practical 
challenges faced by market participants--investors, registrants, 
investment advisers, proxy voting advice businesses, and others--to 
participate in, and fulfill their respective obligations in respect of, 
the proxy process. To varying extents, market participants must convey, 
assimilate, and give thoughtful consideration to relevant information 
from various parties on a potentially wide range of topics in what is 
generally viewed as a short time frame. In light of this, we believe a 
more principles-based approach is appropriate.
    As reflected in the large number of public comments received, there 
is a wide range of opinions and competing views about the most 
effective way to ensure that market participants, including users of 
proxy voting advice, have access to adequate information when making 
their voting decisions. Although some commenters argued that there was 
insufficient evidence of inaccuracies or other problems with proxy 
voting advice to justify regulation, and asserted that clients of proxy 
voting advice businesses are satisfied with the quality of the advice 
they receive, the proposed amendments were not motivated solely by the 
Commission's interest in the factual accuracy of proxy voting advice. 
As we explained in the Proposing Release, even where proxy voting 
advice is not adverse to the registrant's recommendation or where there 
are no errors in the advice, facilitating investor access to enhanced 
discussion of proxy voting matters contributes to more informed proxy 
voting decisions.\320\ Indeed, the principle that more complete and 
robust information and discussion leads to more informed investor 
decision-making, and therefore results in choices more closely aligned 
with investors' interests, has shaped our federal securities laws since 
their inception and is a principal factor in the Commission's adoption 
of these amendments. Regardless of the incidence of errors in proxy 
voting advice, we believe it is appropriate to adopt reasonable 
measures designed to promote the reliability and completeness of 
information available to investors and those acting on their behalf at 
the time they make voting determinations. In particular, we reiterate 
the far-reaching implications that proxy voting advice can have in the 
market \321\ and accordingly continue to believe that measured changes 
designed to facilitate more complete and robust dialogue and 
information sharing among proxy voting advice businesses, their 
clients, and registrants would improve the proxy voting system, and 
ultimately lead to more informed decision-making, to the benefit of all 
participants, including shareholders that do not use proxy voting 
advice and yet may be affected by the recommendations of proxy voting 
advice businesses. We also believe that such measured changes, while 
not an exact substitution, would more closely approximate the 
discussion that could occur at a meeting with physical attendance and 
participation by shareholders and other parties. We therefore believe 
that ensuring that registrants have timely notice of proxy voting 
advice and that proxy voting advice businesses provide clients with a 
mechanism by which they can reasonably be expected to become aware of 
any written response by registrants to that advice--in a timely 
manner--will increase confidence across participants in the proxy 
system that clients of proxy voting advice businesses, whether those 
clients are investors or are acting on behalf of investors, have timely 
access to transparent, accurate, and complete information material to 
their voting decisions.
---------------------------------------------------------------------------

    \320\ See Proposing Release at 66530.
    \321\ See supra notes 51-53 and accompanying text.
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    The Commission is aware of the risk that introducing new rules into 
a complex system like proxy voting, which has evolved over many years 
in response to changes in the marketplace as well as the interests and 
needs of market participants, could inadvertently disrupt the system 
and impose unnecessary costs if not carefully calibrated. For example, 
we understand the timing pressures and logistical challenges faced by 
shareholders, investment advisers, registrants, and, as a result, proxy 
voting advice businesses and their clients, particularly during the 
peak of proxy season.\322\ We also acknowledge the concerns expressed 
by a number of commenters that the adoption of an overly prescriptive 
framework governing aspects of the proxy voting advice system could, 
depending on various facts and circumstances, impede the ability of 
proxy voting advice businesses to provide their clients with timely 
voting advice.\323\ Ultimately, we are guided by the principle that 
informed decision-making by shareholders is the foundation on which the 
legitimacy of the proxy voting system rests \324\ and believe that a 
well-functioning proxy system benefits from the ability of clients of 
proxy voting advice businesses to obtain more complete information on 
which to base their voting decisions.\325\
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    \322\ See Proposing Release at 52, n. 134.
    \323\ See, e.g., letters from Baillie Gifford; Canadian Gov. 
Coal; CII IV; Glass Lewis II; ISS; Prof. Sergakis.
    \324\ See supra notes 2-5 and accompanying text.
    \325\ This is consistent with the Commission's views regarding 
steps an investment adviser could take when it retains a proxy 
voting advice business and it becomes aware of potential factual 
errors, potential incompleteness, or potential methodological 
weaknesses in the proxy voting advice business's analysis that may 
materially affect one or more of the investment adviser's voting 
determinations. See Commission Guidance on Proxy Voting 
Responsibilities at 21-22 (``In reviewing its use of a proxy 
advisory firm, an investment adviser should also consider the 
effectiveness of the proxy advisory firm's policies and procedures 
for obtaining current and accurate information relevant to matters 
included in its research and on which it makes voting 
recommendations . . . As part of this assessment, investment 
advisers should consider . . . [t]he proxy advisory firm's 
engagement with issuers, including the firm's process for ensuring 
that it has complete and accurate information about the issuer and 
each particular matter, and the firm's process, if any, for 
investment advisers to access the issuer's views about the firm's 
voting recommendations in a timely and efficient manner. . . .'').

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[[Page 55108]]

    As noted above, some commenters asserted that certain existing 
mechanisms in the proxy system suffice to address the concerns raised 
in the Proposing Release and obviate the need for the proposed 
rules.\326\ Those mechanisms include proxy voting advice businesses' 
existing programs and policies for registrants to provide feedback, 
``counter-speech'' measures already available to registrants (e.g., 
filing supplemental proxy materials), and antifraud liability under 
Rule 14a-9.\327\ Contrary to the views of those commenters, however, we 
do not believe that those mechanisms, as currently implemented, suffice 
to achieve our goal of ensuring that clients of proxy voting advice 
businesses have timely access to a more complete mix of relevant 
information and exchange of views. Although it is encouraging that some 
proxy voting advice businesses have programs in place pursuant to which 
some registrants have the opportunity to review and provide feedback on 
or responses to proxy voting advice, those programs have not been 
universally adopted by proxy voting advice businesses and do not 
uniformly provide registrants (and their investors) with the same 
opportunities for (and benefits of) review, feedback, and 
response.\328\
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    \326\ See supra notes 300-302 and accompanying text.
    \327\ See, e.g., letters from AllianceBernstein; As You Sow II; 
Better Markets; Elliott I; ISS; Glass Lewis II; CalPERS; CII IV; New 
York Comptroller II; Segal Marco II; Seven Corners; Shareholder 
Rights II. See also IAC Recommendation.
    \328\ See supra notes 256-258 and accompanying text; Proposing 
Release at 66529-30 (``[S]ome proxy voting advice businesses do not 
provide registrants with an opportunity to review their reports 
containing voting advice in advance of distribution to their 
clients. Even those proxy voting advice businesses that provide such 
review opportunities do not provide all registrants with an advance 
copy of their reports containing their voting advice.'').
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    As to ``counter-speech'' measures, under current market practices 
registrants are not systematically informed of proxy voting advice in a 
timely manner such that they can provide investors a response to such 
advice, let alone a response sufficiently in advance of the relevant 
meeting to allow investors to consider the response prior to casting 
their vote.\329\ In addition, while the potential for liability under 
Rule 14a-9 helps to ensure that proxy voting advice is not materially 
false or misleading, it does not address the need for investors to have 
timely access to transparent, accurate, and complete information--
including any written response by the registrant to the advice--that is 
material to their voting determinations.\330\
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    \329\ See Proposing Release at 66533 (``Although registrants are 
able, under the existing proxy rules, to file supplemental proxy 
materials to respond to negative proxy voting recommendations and to 
alert investors to any disagreements they have identified with a 
proxy voting advice business's voting advice, the efficacy of these 
responses may be limited, particularly given the high incidence of 
voting that takes place very shortly after a proxy voting advice 
business's voting advice is released to clients and before such 
supplemental proxy materials can be filed.'').
    \330\ Id. at 66530 (noting that ``[t]he registrant . . . may 
have disagreements that extend beyond the accuracy of the data used, 
such as differing views about the proxy advisor's methodological 
approach or other differences of opinion,'' the communication of 
which ``could improve the overall mix of information available when 
the clients make their voting decisions'').
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    As we explained in the Proposing Release, under existing 
mechanisms, it can be difficult to ensure that those making voting 
decisions have timely access to materially complete information prior 
to voting.\331\ Without notice of the proxy voting advice business's 
recommendations, registrants are often unable to provide a response 
prior to votes being cast. Also, given the high incidence of voting 
that takes place very shortly after a proxy voting advice business's 
advice is distributed to its clients, without a mechanism by which 
clients can reasonably be expected to become aware of any response in a 
timely manner (as they and other investors would if the discussion were 
taking place at a meeting where shareholders are physically attending 
and participating), votes may be cast on less complete information. 
Because proxy voting advice businesses have control over the timing of 
the dissemination of their proxy voting advice, we believe they are the 
best-positioned parties in the proxy system to both (1) make their 
proxy voting advice available to registrants and (2) provide clients 
with a mechanism by which they can reasonably be expected to become 
aware of a registrant's written response to their proxy voting advice 
in a timely manner.
---------------------------------------------------------------------------

    \331\ Id. at 66528-30.
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    Although we do not believe the existing voluntary forms of outreach 
to registrants and other market participants discussed above are alone 
sufficient, we have carefully considered the views of a number of 
commenters, including the two largest proxy voting advice businesses. 
Those commenters indicated that a more principles-based approach would 
be appropriate and one of whom specifically indicated that such an 
approach would achieve the Commission's goals while avoiding many of 
the complexities and practical concerns arising from the approach taken 
in the proposal.\332\ We agree and are therefore adopting amendments 
that articulate a set of principles, distilled from the proposed rules, 
upon which a proxy voting advice business may design its own policies 
and procedures. We believe this approach will provide proxy voting 
advice businesses the flexibility to satisfy their compliance 
obligations in a customized and cost-effective manner and avoid 
exacerbating the challenges posed by timing and logistical 
constraints,\333\ while achieving the objective of ensuring that proxy 
voting advice businesses' clients have timely access to more 
transparent, accurate, and complete information upon which to base 
voting decisions. We believe such an approach addresses a number of 
concerns raised by commenters, is better equipped to fit the needs of 
participants in the proxy voting process, and will be adaptable as 
circumstances change.
---------------------------------------------------------------------------

    \332\ See supra notes 298-299 and accompanying text.
    \333\ See Proposing Release at 52, n. 135.
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b. Policies and Procedures To Facilitate Informed Decision-Making by 
Clients of Proxy Voting Advice Businesses [Rule 14a-2(b)(9)(ii)]
    Consistent with the discussion above, we are adopting new Rule 14a-
2(b)(9)(ii) to require, as a separate condition to the availability of 
the exemptions in Rules 14a-2(b)(1) and (b)(3), that a proxy voting 
advice business \334\ adopt and publicly disclose

[[Page 55109]]

written policies and procedures reasonably designed to ensure that:
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    \334\ As adopted, Rule 14a-2(b)(9) defines ``proxy voting advice 
business'' as ``a person furnishing proxy voting advice covered by 
Sec.  240.14a-1(l)(1)(iii)(A).'' Some commenters opposed the use of 
this term. See letters from ISS (stating generally with respect to 
proposed Rule 14a-9 that the Commission should refer to entities 
subject to the rules as ``proxy advisers'' or ``proxy advisory 
firms,'' rather than creating a new term (``proxy voting advice 
business'')); CII IV (asserting that there is no evidence that the 
current terminology is inadequate). While we acknowledge commenters' 
concern about introducing a new term to the proxy rules, we believe 
that it is appropriate to clarify the type of proxy voting advice 
that the new rules are intended to address and accordingly scope in 
businesses that provide such advice, rather than basing application 
of the rules on the types of businesses that currently provide such 
services. We believe this avoids inadvertently scoping in other 
services that such businesses may provide, and also provides 
flexibility for the rule to address future business models that may 
involve the type of advice the rules are intended to address.
---------------------------------------------------------------------------

    (A) Registrants that are the subject of proxy voting advice have 
such advice made available to them at or prior to the time when such 
advice is disseminated to the proxy voting advice business's clients; 
\335\ and
---------------------------------------------------------------------------

    \335\ Rule 14a-2(b)(9)(ii)(A).
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    (B) The proxy voting advice business provides its clients with a 
mechanism by which they can reasonably be expected to become aware of 
any written statements regarding its proxy voting advice by registrants 
that are the subject of such advice, in a timely manner before the 
shareholder meeting (or, if no meeting, before the votes, consents, or 
authorizations may be used to effect the proposed action).\336\
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    \336\ Rule 14a-2(b)(9)(ii)(B). See infra Section II.C.3.c. for a 
discussion of Rules 14a-2(b)(9)(v) and (vi), which exclude certain 
types of proxy voting advice from the application of Rule 14a-
2(b)(9)(ii).
---------------------------------------------------------------------------

    While we appreciate the input of commenters that recommended we 
adopt the more prescriptive requirements of the proposed rule with 
modifications,\337\ we believe that the objectives of the rule are 
better achieved through a principles-based requirement that is firmly 
rooted in our historic and proven disclosure framework and will provide 
proxy voting advice businesses with the ability to tailor their 
policies and procedures to ensure compliance with the requirements on a 
basis that is efficient and best serves the evolving needs of their 
clients and the practical realities of their individual business 
models.
---------------------------------------------------------------------------

    \337\ See, e.g., letters from BRT; Exxon Mobil; GM; MFA & AIMA; 
MSBA; Nasdaq; Scott Hirst, Assoc. Prof., Boston University Law 
School (Feb. 3, 2020) (``Prof. Hirst''); Representatives Bryan 
Steil, et al., U.S. House of Representatives (Jan. 6, 2020) (``Rep. 
Steil''); SCC I.
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i. Notice to Registrants and Safe Harbor
    Paragraph (A) of Rule 14a-2(b)(9)(ii) reflects the Commission's 
judgment that effective engagement between proxy voting advice 
businesses and registrants, in which registrants are timely informed of 
proxy voting advice that bears on the solicitation of their 
shareholders, will further the goal of ensuring that proxy voting 
advice businesses' clients have more complete, accurate, and 
transparent information to consider when making their voting decisions. 
This will, by extension, benefit the shareholders on whose behalf those 
clients may be voting.
    As adopted, 17 CFR 240.a-2(b)(9)(ii)(A) (``Rule 14a-
2(b)(9)(ii)(A)'') does not dictate the manner or specific timing in 
which proxy voting advice businesses interact with registrants, and 
instead leaves it within the discretion of the proxy voting advice 
business to choose how best to implement the principles embodied in the 
rule and incorporate them into the business's policies and procedures. 
The rule does not require that proxy voting advice businesses provide 
registrants or other soliciting persons \338\ with the opportunity to 
review proxy voting advice in advance of its dissemination to the 
businesses' clients, although providing registrants with the 
opportunity to review their proxy voting advice in advance would 
satisfy the principle and is encouraged to the extent feasible.\339\ 
The rule requires that proxy voting advice businesses must have adopted 
and publicly \340\ disclosed policies and procedures reasonably 
designed to ensure that proxy voting advice \341\ is made available to 
registrants ``at or prior to the time when such advice is disseminated 
to the proxy voting advice business's clients.'' \342\ The rule does 
not, however, require proxy voting advice businesses to ensure that 
proxy voting advice be made available to registrants after being 
initially provided to clients, if it is later revised or updated in 
light of subsequent events, as we recognize that

[[Page 55110]]

such a requirement could be unduly burdensome given the timing 
constraints of the proxy process. We believe the final rules continue 
to advance the Commission's interest in improving the mix of 
information available to shareholders in a manner that is compatible 
with the complex and time-sensitive proxy voting advice infrastructure 
that currently exists and, in particular, the proxy voting advice 
businesses that many shareholders or those acting on their behalf use 
in connection with proxy voting, including meeting their voting 
obligations to investors.
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    \338\ We believe that it could have been unduly burdensome on 
proxy voting advice businesses to extend the requirements of Rule 
14a-2(b)(9)(ii)(A) to other soliciting persons (in addition to the 
relevant registrants). We are mindful of the costs and potential 
logistical complications that could arise if a proxy voting advice 
business were required to ensure that multiple soliciting persons 
were informed of its proxy voting advice in a timely manner. 
Notwithstanding such costs and potential complications, proxy voting 
advice businesses may structure their policies and procedures to 
inform other soliciting persons of their proxy voting advice if they 
wish to do so. Further, as we noted in the Proposing Release, 
neither shareholder proponents nor persons conducting exempt 
solicitations are required to file substantive disclosure documents 
with the Commission or to make public statements. Proposing Release 
at 66532. Because such disclosure documents and public statements 
generally contain substantive information that likely would form the 
basis of proxy voting advice businesses' analyses, there may be an 
information asymmetry as to proxy voting advice provided with 
respect to registrants' solicitations as compared to shareholder 
proponents' or exempt solicitations. Consistent therewith, we stated 
in the Proposing Release that proxy voting advice businesses would 
be required to extend the proposed review and feedback and final 
notice opportunities to parties other than the registrant only in 
those instances in which the registrant's solicitation is contested 
by soliciting persons who intend to deliver their own proxy 
statements and proxy cards to shareholders. Id. However, as 
discussed below (see infra Section II.C.3.c.ii.), we are adopting 
Rule 14a-2(b)(9)(vi) that, in part, excludes from the requirements 
of Rule 14a-2(b)(9)(ii) the portions of the proxy voting advice that 
relate to solicitations regarding contested matters, regardless of 
who is making such solicitation. See Rule 14a-2(b)(9)(vi).
    \339\ As noted above, we understand that certain proxy voting 
advice businesses currently provide at least some issuers with the 
opportunity to review and respond to their proxy voting advice in 
advance of its dissemination to their clients. See Proposing Release 
at 66529 (``In the United States, ISS offers the constituent 
companies of the Standard and Poor's 500 Index the opportunity to 
review a draft of ISS' voting advice before it is delivered to 
clients. Glass Lewis has a program that allows registrants who 
participate to receive a data-only version of its voting advice 
before publication to clients.''). Although such advance review 
opportunity is not required by Rule 14a-2(b)(ii), we encourage proxy 
voting advice businesses that are currently providing registrants 
with this opportunity to continue doing so as it furthers the 
objectives of this rule.
    \340\ The requirement that such policies and procedures be 
``publicly'' disclosed would be satisfied if, for example, they were 
publicly available on a proxy voting advice business's website. This 
is consistent with the approach that at least some proxy voting 
advice businesses are currently taking with respect to the 
opportunities they provide registrants to review their proxy voting 
advice. See, e.g., Glass Lewis, Report Feedback Statement (last 
visited June 11, 2020), available at https://www.glasslewis.com/report-feedback-statement/; ISS, ISS Draft Review Process for U.S. 
Issuers (last visited June 11, 2020), available at https://www.issgovernance.com/iss-draft-review-process-u-s-issuers/. Given 
the flexibility that proxy voting advice businesses have with 
respect to the method by which they satisfy the principle set forth 
in Rule 14a-2(b)(9)(ii)(A), we believe that the public disclosure of 
such policies and procedures is critical to ensuring that 
registrants understand how they can become informed of the relevant 
proxy voting advice. We also believe that the transparency created 
by such public disclosure may yield ancillary benefits, including 
increased assurance of compliance by proxy voting advice businesses 
with Rule 14a-2(b)(9)(ii).
    \341\ See supra note 7 for the definition of ``proxy voting 
advice'' as used in this release.
    \342\ Rule 14a-2(b)(9)(ii)(A). The goal of the principle is to 
provide registrants with enough time to respond to the proxy voting 
advice, should they choose to, sufficiently in advance of investors 
casting their final votes. Practically speaking, the most efficient 
way for proxy voting advice businesses to achieve this goal is to 
disseminate the reports containing their proxy voting advice to 
registrants (or otherwise provide registrants with access to such 
reports) either at the same time or before they disseminate such 
reports to their clients. We recognize that some commenters that 
supported the proposed rules indicated that even when registrants do 
have the opportunity to review proxy voting advice in advance, they 
do not have sufficient time for a thorough review and response. See 
supra note 258 and accompanying text. Although the proposed advanced 
review and feedback process likely would have afforded registrants 
more lead time to review and respond to proxy voting advice, we are 
conscious of the corresponding costs that other commenters 
identified. See infra notes 351-355 and accompanying text. We 
further note that even if some clients of proxy voting advice 
businesses make their voting decision after receiving such 
businesses' recommendations but before the registrant has had the 
opportunity to respond thereto, those clients retain the ability to 
change their vote prior to the meeting date. Under the final rules, 
therefore, registrants should have the opportunity to respond to 
proxy voting advice sufficiently in advance of the meeting date. 
Accordingly, clients of proxy voting advice businesses are more 
likely to become aware of a registrant's response pursuant to Rule 
14a-2(b)(9)(ii)(B) and should have the opportunity to consider 
whether to adjust their votes based thereon. See infra note 387 and 
accompanying text.
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    In addition, paragraph (iii) of Rule 14a-2(b)(9) includes a non-
exclusive safe harbor provision that, if followed, will give assurance 
to a proxy voting advice business that it has met the principles-based 
requirement of new Rule 14a-2(b)(9)(ii)(A). In accordance with this 
safe harbor, a proxy voting advice business will be deemed to satisfy 
Rule 14a-2(b)(9)(ii)(A) if it has written policies and procedures that 
are reasonably designed to provide registrants with a copy of its proxy 
voting advice, at no charge, no later than the time it is disseminated 
to the business's clients.\343\ Such policies and procedures may 
include conditions requiring that such registrants have:
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    \343\ Rule 14a-2(b)(9)(iii).
---------------------------------------------------------------------------

    (A) Filed their definitive proxy statement at least 40 calendar 
days before the shareholder meeting; \344\ and
---------------------------------------------------------------------------

    \344\ Rule 14a-2(b)(9)(iii)(A). Where the registrant is 
soliciting written consents or authorizations from shareholders for 
an action in lieu of a meeting, a proxy voting advice business's 
written policies and procedures may require that the registrant must 
file its definitive soliciting materials at least 40 calendar days 
before the action is effective in order to receive a copy of its 
proxy voting advice.
---------------------------------------------------------------------------

    (B) Expressly acknowledged that they will only use the proxy voting 
advice for their internal purposes and/or in connection with the 
solicitation and it will not be published or otherwise shared except 
with the registrant's employees or advisers.\345\
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    \345\ Rule 14a-2(b)(9)(iii)(B).
---------------------------------------------------------------------------

    Under this safe harbor, the proxy voting advice business may 
structure its written policy however it wishes so long as the policy 
has been reasonably designed to provide \346\ any registrant that meets 
the conditions of (A) and (B) above with a copy of the business's proxy 
voting advice with respect to that registrant at least concurrently 
with the delivery of such advice to its clients.\347\
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    \346\ In terms of the method by which a proxy voting advice 
business provides a copy of its advice to a registrant, it could do 
so by, for example, sending the registrant an email either attaching 
an electronic copy of the relevant report or including an active 
hyperlink to the report.
    \347\ Under the terms of the safe harbor, registrants are not 
required to reimburse proxy voting advice businesses for the cost of 
providing a copy of the proxy voting advice. See Rule 14a-
2(b)(9)(iii). While some commenters favored a requirement that 
registrants reimburse proxy voting advice businesses for reasonable 
expenses associated with the proposed review and feedback period 
(see letters from CII IV; New York Comptroller II), others asserted 
that proxy voting advice businesses should not be able to seek 
reimbursement from registrants for the costs to provide their 
reports (see letters from Exxon Mobil; GM; NAM; SCG). For purposes 
of the safe harbor, we believe that the benefit to investors of more 
timely, complete, and reliable information upon which to make 
informed voting decisions should not be lessened by making a 
registrant's ability to review proxy voting advice dependent on the 
registrant's willingness to pay for it. See infra note 412 for our 
discussion of how the final rules address certain comments we 
received on the proposed rules expressing concern regarding the 
takings clause of the Fifth Amendment.
---------------------------------------------------------------------------

    We believe the 40 calendar-day aspect of the safe harbor \348\ 
affords the proxy voting advice business a reasonable amount of time to 
provide the advisory materials to registrants, without adversely 
affecting the business's ability to provide timely voting advice to its 
clients. Proxy voting advice businesses perform much of the work 
related to their voting advice only after the filing of the definitive 
proxy statements describing the matters presented for a proxy vote and 
are subject to time pressure to deliver their research and analysis to 
their clients sufficiently in advance of the shareholder meeting.\349\ 
Accordingly, we do not believe that it would be practicable to impose 
additional administrative and logistical burdens on proxy voting advice 
businesses in cases in which registrants' definitive proxy statements 
are filed closer to the date of the shareholder meeting.\350\ However, 
if they wish to do so, proxy voting advice businesses may structure 
their policies to accommodate registrants that may file less than 40 
calendar days before the shareholder meeting and remain within the safe 
harbor.
---------------------------------------------------------------------------

    \348\ Rule 14a-2(b)(9)(iii)(A).
    \349\ See e.g., letters from CII IV; Glass Lewis II; ISS 
(describing the timing and processes involved in the preparation and 
delivery of their proxy voting advice to clients). See also 
Proposing Release at 66531, n. 119.
    \350\ Based on the information we received from commenters, it 
is our understanding that 40 calendar days prior to the shareholder 
meeting is well within the customary range when definitive proxy 
statements are filed. See e.g., letters from CII IV; Glass Lewis II. 
By comparison, we note that the Commission's proposal would have 
required proxy voting advice businesses to provide registrants with 
an opportunity for advance review and feedback of the proxy voting 
advice if the registrant filed its definitive proxy statement at 
least 25 calendar days before the shareholder meeting. See proposed 
Rule 14a-2(b)(2)(9)(ii); Proposing Release at 66531. We also note 
that such 40 calendar day-period exceeds the minimum number of days 
that some proxy voting advice businesses currently require that 
registrants file their definitive proxy statements prior to the 
shareholder meeting in order to review at least a portion of their 
proxy voting advice in advance of its dissemination. See, e.g., 
Glass Lewis, Issuer Data Report (last visited June 11, 2020), 
available at https://www.glasslewis.com/issuer-data-report/ (noting 
that in order for a registrant to review an issuer data report in 
advance of the proxy voting advice being disseminated to clients, 
registrants must ``disclose their meeting documents at least 30 days 
in advance of their meeting date''); ISS, ISS Draft Review Process 
for U.S. Issuers (last visited June 11, 2020), available at https://www.issgovernance.com/iss-draft-review-process-u-s-issuers/ (``To 
ensure timely delivery of our analyses to our clients, we cannot 
provide a draft to any company that files its definitive proxy less 
than 30 days before its meeting.'').
---------------------------------------------------------------------------

    The concurrent dissemination of proxy voting advice to clients and 
registrants specified in the safe harbor addresses concerns expressed 
by commenters that the proposed review mechanism, which would have 
allowed registrants to review and provide feedback on voting advice 
before distribution to the clients of proxy voting advice businesses, 
could have undermined the ability of proxy voting advice businesses to 
provide impartial advice to their clients,\351\ increased the risk of 
insider trading of material non-public information,\352\ and impinged 
on proxy voting advice businesses' rights of free speech.\353\ As 
discussed above, several commenters objected on the grounds that 
permitting registrants to review and comment on draft proxy voting 
advice in advance of a proxy voting advice business's clients would 
interfere in shareholders' communications with their advisors on 
matters subject to a vote.\354\ In particular, some commenters argued 
that the review process, as proposed, gave preferential treatment to 
registrants over a proxy voting advice business's

[[Page 55111]]

own clients and would tend to promote management's interests because it 
allowed registrants to influence the content of advice at a critical 
stage of its production without granting similar access to 
shareholders.\355\
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    \351\ See supra note 269. We believe that the concurrent 
dissemination of proxy voting advice to clients and registrants 
pursuant to the safe harbor will achieve the objectives of this 
rulemaking and address commenters' concerns regarding a registrant's 
practical ability to review, consider, and respond to proxy voting 
advice. See supra note 342.
    \352\ See supra note 272. Proxy voting advice may, depending on 
the facts and circumstances, constitute material, non-public 
information. We expect proxy voting advice businesses, their 
clients, and registrants receiving non-public information in this 
process to take reasonable measures to safeguard any material, non-
public information in their possession by, for example, adopting and 
implementing effective policies and procedures to ensure that its 
use and dissemination is consistent with applicable law. See also 
infra note 400; Institutional S'holder Servs. Inc., Release No. IA-
3611, 106 SEC. Docket 1681, 2013 WL 11113059, at *5 (May 23, 2013) 
(``In this case, ISS violated Section 204A [of the Advisers Act] 
because it failed to establish and enforce policies and procedures 
reasonably designed to prevent the misuse of ISS' shareholder 
advisory clients' material, nonpublic proxy voting information.'').
    \353\ See supra note 288.
    \354\ See supra notes 276-277.
    \355\ See supra note 268.
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    Several commenters who were opposed to the concept of advance 
review suggested concurrent review as a preferable alternative.\356\ In 
the view of such commenters, a concurrent review would provide 
registrants with access to proxy voting advice, but it would be on an 
equal footing with the clients of proxy voting advice businesses and 
therefore would avoid many of the potential adverse consequences that 
commenters associated with mandating an opportunity for registrants' 
advance review.\357\ We agree with this approach and believe that, for 
example, the receipt of a copy of proxy voting advice by a registrant 
who is the subject of such advice no later than the date upon which it 
is distributed to the proxy voting advice business's clients would 
bring about many of the same benefits for which the proposed registrant 
review was intended, particularly in conjunction with (1) a 
registrant's ability to file additional soliciting materials to 
communicate their views regarding the advice to shareholders and (2) 
the new requirement, described below,\358\ that proxy voting advice 
businesses adopt written policies and procedures reasonably designed to 
ensure that they provide clients with a mechanism by which they can 
become aware of a registrant's statements of its views about such 
advice in a timely manner.
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    \356\ See supra note 295.
    \357\ Id.
    \358\ See infra Section II.C.3.b.ii.
---------------------------------------------------------------------------

    Under the proposed rules, a proxy voting advice business would have 
been able to require registrants to enter into confidentiality 
agreements for materials provided during the proposed review and 
feedback period as a condition of receiving the proxy voting advice on 
terms ``no more restrictive'' than similar types of confidentiality 
agreements the business has with its clients, which would cease to 
apply once the business released its proxy reports to clients.\359\ 
Some commenters suggested this formulation would be unworkable in 
practice because the confidentiality agreements used with clients were 
not comparable and therefore would not be a suitable template.\360\ In 
addition, commenters objected to the mandated cessation of the 
registrant's confidentiality agreement, as the risk of harm that would 
be suffered by the proxy voting advice business due to misuse of its 
confidential information could continue well into the future.\361\ 
Moreover, a number of commenters expressed concern that requiring 
confidentiality agreements between proxy voting advice businesses and 
registrants would necessitate the parties' negotiation over contractual 
terms, an additional complication that could mire the proposed review 
and feedback process, and therefore the timely provision of voting 
advice to shareholders, in unmanageable delays.\362\ Some commenters 
also noted that such negotiation would be costly.\363\
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    \359\ See Note 2 to paragraph (b)(9)(ii) of proposed Rule 14a-
2(b)(9); Proposing Release at 66532.
    \360\ See, e.g., letter from SES (asserting that needing to sign 
individual confidentiality agreements between every issuer and proxy 
voting advice business would be cumbersome ``without any tangible 
benefit'').
    \361\ See, e.g., letter from Glass Lewis II (recommending that 
the Commission remove the statement in the proposal that any 
confidentiality agreement ``shall cease to apply once the proxy 
voting advice business provides its advice to one or more 
recipients'').
    \362\ See, e.g., letter from Olshan LLP (stating that the 
proposal significantly underestimates the time and expense of 
negotiating confidentiality agreements and providing detailed 
reasons as to why the proposal would be so time consuming and 
costly).
    \363\ See infra note 613.
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    We believe that shifting to a principles-based requirement, which 
allows the report to be provided to registrants at the same time it is 
provided to clients, should eliminate or mitigate many of the concerns 
expressed. In light of these changes, we believe that negotiating a 
formal confidentiality agreement may not be necessary in all 
circumstances. We therefore believe it is appropriate to make clear 
that a proxy voting advice business may receive assurances from a 
registrant regarding the use of the proxy voting advice through less 
prescriptive means. Accordingly, paragraph (B) of the safe harbor in 
Rule 14a-2(b)(9)(iii) permits proxy voting advice businesses to include 
in their policies and procedures conditions requiring registrants to 
limit their use of the advice in order to receive a copy of the proxy 
voting advice. Such written policies and procedures may, but are not 
required to, specify that registrants must first acknowledge that their 
use of the proxy voting advice is restricted to the registrant's own 
internal purposes and/or in connection with the solicitation and will 
not be published or otherwise shared except with the registrants' 
employees or advisers.\364\ Such acknowledgement could take a variety 
of forms at the discretion of the proxy voting advice business, 
including with respect to the duration of the acknowledgment. For 
example, a policy under the safe harbor could specify that the 
acknowledgement can or must be in the form of a written representation 
or an oral acknowledgement, or the policy could prescribe that a 
registrant must check a box or provide another electronic means of 
confirming that the registrant agrees to standardized terms of service 
before the materials could be accessed. To qualify for the safe harbor, 
the terms of the acknowledgement could not be more restrictive than 
those set forth in paragraph (B); however, if a proxy voting advice 
business wishes to impose more tailored or restrictive conditions, it 
could do so outside of the safe harbor, provided the policies and 
procedures do not unreasonably inhibit timely notice to the registrant 
consistent with the principles-based requirements of 14a-
2(b)(9)(ii)(A).
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    \364\ A registrant's advisers would include, for example, its 
attorneys and proxy solicitors.
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    We also note that, unlike the proposal, the safe harbor does not 
mandate the provision of draft proxy voting advice to registrants 
before dissemination to clients of the proxy voting advice business, 
which, as commenters noted, poses a higher risk of unintentional or 
unauthorized release of the information and its potential misuse.\365\ 
Instead, compliance with the safe harbor requires only that the proxy 
voting advice business provide its voting advice to registrants no 
later than the time it is released to the business's clients.
---------------------------------------------------------------------------

    \365\ See, e.g., letters from Clem Geraghty, Ardevora Asset 
Management LLP (Nov. 27, 2020) (``Ardevora''); CII IV; Elliott I; 
ISS (expressing concern that the proposal would require a proxy 
voting advice business to disclose material non-public information 
to any registrant or eligible soliciting person who signs a 
confidentiality agreement, even if that party is a known insider 
trader, and stating that such an outcome would interfere with the 
proxy voting advice business's obligations under the Investment 
Advisers Act to establish, maintain, and enforce policies and 
procedures reasonably designed to ensure compliance with insider 
trading laws); SES (noting that the proposal could result in certain 
company statements and information being made available to proxy 
voting advice businesses and their clients, but not to other 
shareholders).
---------------------------------------------------------------------------

    A proxy voting advice business that has a policy in place that 
satisfies the principles-based requirements of Rule 14a-2(b)(9)(ii)(A), 
such as a policy elucidated in, or that is consistent with, the safe-
harbor in Rule 14a-2(b)(9)(iii), will be under no obligation to provide 
its proxy voting advice to registrants that fail to file a definitive 
proxy statement early enough to meet the 40-day stipulation, or fail to 
acknowledge the limitations on its use of the voting advice. Moreover, 
in order to qualify for

[[Page 55112]]

the safe harbor, the proxy voting advice business's policy is not 
required to contemplate that the business repeat the process of 
providing a copy of its proxy voting advice to registrants if its 
advice is later revised or updated in light of subsequent events. The 
safe harbor does not impose any obligation on the proxy voting advice 
business to provide registrants with additional opportunities to review 
its proxy voting advice with respect to the same shareholder meeting. 
In response to concerns raised by commenters, in order to limit the 
logistical and other burdens imposed on proxy voting advice businesses, 
as well as to lessen potential uncertainty over questions of 
compliance,\366\ proxy voting advice businesses may, but will not be 
required to, provide the registrant with additional materials that 
update or supplement proxy voting advice previously provided.
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    \366\ For example, if proxy voting advice businesses were 
required under the safe harbor to redistribute proxy voting advice 
to registrants as a result of any updates or addenda to the advice, 
in many cases it might pose a difficult logistical challenge for the 
businesses to meet their production deadlines, satisfy rapid turn-
around times and fulfill their delivery obligations to clients, 
thereby exacerbating the businesses' difficulty in meeting an 
already aggressive timeline so close to the date of the shareholder 
meeting. In addition, the determination of which kinds of materials 
would be covered by such a rule could lead to confusion and make 
administration of the rule unnecessarily complex and time-consuming.
---------------------------------------------------------------------------

    So long as the proxy voting advice business meets the conditions of 
the safe harbor in Rule 14a-2(b)(9)(iii), it will be deemed to satisfy 
Rule 14a-2(b)(9)(ii)(A). Assuming it also satisfies the principles-
based requirement in new 17 CFR 240.14a-2(b)(9)(ii)(B) (``Rule 14a-
2(b)(9)(ii)(B)''); discussed below and otherwise meets the requirements 
of Rule 14a-2(b)(9), the proxy voting advice business would be eligible 
to rely on the exemptions in Rules 14a-2(b)(1) or (3) (subject to the 
satisfaction of the other conditions of those exemptions).
    By adopting this approach, as discussed above, we believe we have 
addressed the concerns raised by commenters regarding the potential 
unintended consequences of requiring a proxy voting advice business to 
engage with a registrant in connection with its proxy voting advice, 
including those related to timing \367\ and the risk of affecting the 
independence of the advice \368\ or diminishing competition in the 
proxy voting advice business industry.\369\ Specifically, because Rule 
14a-2(b)(9)(ii) does not require proxy voting advice businesses to 
adopt policies that would provide registrants with the opportunity to 
review and provide feedback on their proxy voting advice before such 
advice is disseminated to clients, the rule does not create the risk 
that such advice would be delayed or that the independence thereof 
would be tainted as a result of a registrant's pre-dissemination 
involvement.\370\ Similarly, because proxy voting advice businesses are 
not required to adopt policies that would provide notice to, or 
otherwise require interaction with, registrants until they disseminate 
advice to their clients, any concerns that commenters had regarding 
increased marginal costs--and, correspondingly, diminished 
competition--associated with preparing proxy voting advice as a result 
of the proposed advance review and feedback process should be 
alleviated. Commenters also identified potential unintended 
consequences that could result from a heightened litigation risk that 
proxy voting advice businesses could face as a result of the proposed 
rules,\371\ which may have been viewed as more significant in 
circumstances where differing views persisted following engagement with 
the registrant. As with the other unintended consequences discussed 
above, this concern is mitigated by the fact that under the principles-
based approach we are adopting, proxy voting advice businesses will not 
be required to give registrants the opportunity to provide feedback on 
their proxy voting advice before it is disseminated to clients.
---------------------------------------------------------------------------

    \367\ See supra notes 276-279 and accompanying text.
    \368\ See supra note 287 and accompanying text. A number of 
commenters expressed concerns that the proposed advance review and 
feedback process would conflict with FINRA Rule 2241, which 
prohibits review of an analyst's research report by a subject 
company for purposes other than factual verification. See letters 
from AFL-CIO II; As You Sow II; BMO; Boston Trust; CII IV; NYC 
Comptroller; New York Comptroller II; PIAC II; TRP. The final rules 
address these concerns, as neither Rule 14a-2(b)(9)(ii)(A) nor Rule 
14a-2(b)(9)(iii) requires that registrants be given the opportunity 
to review or provide feedback on proxy voting advice before proxy 
voting advice businesses provide such advice to their clients.
    \369\ The competition-based unintended consequences that 
commenters identified included diminished competition among proxy 
voting advice businesses, a limitation in the market choice for 
consumers of proxy voting advice, and a decline in the utility of 
proxy voting advice. See supra notes 282, 283, 285 and accompanying 
text.
    \370\ Some commenters challenged the proposition that proxy 
voting advice businesses currently provide disinterested, 
independent advice. See, e.g., letters from BIO; BRT; CEC; CCMC; J. 
Ward; NAM; Nareit; Nasdaq; SCG. As to commenters' concerns that the 
proposed advance review mechanism could compromise the ability of 
proxy voting advice businesses to provide disinterested, independent 
advice, we note that according to its current procedures governing 
registrants' advance review of its draft proxy analysis, rating, or 
other research report, ISS states that it retains sole discretion 
whether to accept any change recommended by the registrant. See 
infra note 530 and accompanying text.
    \371\ See supra notes 284, 286 and accompanying text.
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    It is not a condition of this safe harbor, nor the principles-based 
requirement, that the proxy voting advice business negotiate or 
otherwise engage in a dialogue with the registrant, or revise its 
voting advice in response to any feedback. The proxy voting advice 
business is free to interact with the registrant to whatever extent and 
in whatever manner it deems appropriate, provided it has a written 
policy that satisfies its obligations. Although the Commission 
encourages cooperation and an open dialogue between the parties to the 
extent that it facilitates productive efforts to improve the quality of 
proxy voting advice for the benefit of shareholders, the rule that we 
are adopting does not prescribe the manner in which the parties conduct 
themselves in this regard, and leaves the content of proxy voting 
advice, as well as the specific methods and processes used to produce 
it, within the proxy voting advice business's discretion.
    As noted above, the safe harbor is intended to provide a proxy 
voting advice business with a non-exclusive means to meet the 
requirements of Rule 14a-2(b)(9)(ii)(A). Proxy voting advice businesses 
may nonetheless choose to structure a policy that, though not within 
the parameters of the safe harbor, is reasonably designed to ensure 
that proxy voting advice is made available to registrants at or prior 
to the time when the advice is disseminated to clients. We acknowledge 
that there are different ways that a proxy voting advice business could 
structure such a policy consistent with the rule, and the safe harbor 
is not intended to become the de facto means by which the requirement 
of Rule 14a-2(b)(9)(ii)(A) may be met.
ii. Mechanism To Become Aware of Registrant's Response and Safe Harbor
    The Commission's proposal to require that proxy voting advice 
businesses, at the request of a registrant, include in their voting 
advice a hyperlink (or other analogous electronic medium) to the 
registrant's statement about the voting advice was intended as an 
efficient and timely means of providing the businesses' clients with 
additional information that would assist them in assessing and 
contextualizing the voting advice.\372\ In particular, the inclusion of 
the hyperlink with the proxy voting advice would have permitted 
clients, including investment advisers voting shares on behalf of other 
shareholders, to consider the registrants' views at the same time as 
the proxy voting advice

[[Page 55113]]

and before making their voting determinations. As the Commission has 
noted, although registrants are able under the existing proxy rules to 
file supplemental proxy materials to respond to proxy voting 
recommendations that they may know about and to alert investors to any 
disagreements with such proxy voting advice, the efficacy of these 
responses may be limited, particularly given the high incidence of 
voting that takes place very shortly after a proxy voting advice 
business's voting advice is released to clients and before such 
supplemental proxy materials can be filed.\373\
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    \372\ Proposing Release at 66533.
    \373\ Id. at n.136. As we noted in the Proposing Release, 
although shareholders have the ability to change their vote at any 
time prior to a meeting--including as a result of supplemental proxy 
materials filed by registrants in response to proxy voting advice--
to our knowledge, this seldom occurs. Id. at 66530 n.107. It is 
possible, however, that under the final amendments, as a result of 
proxy voting advice businesses' compliance with Rule 14a-
2(b)(9)(ii)(B), clients of proxy voting advice businesses will be 
made aware of a registrant's response to proxy voting advice and, 
therefore, more likely to change votes that were cast after 
receiving such advice.
---------------------------------------------------------------------------

    As with the Commission's proposed review and response mechanism, 
however, commenters have raised practical challenges and limitations 
that the parties would face in implementing processes and systems 
necessary to comply with the proposed rule's prescriptive 
requirements.\374\ Accordingly, we believe that our objectives are 
better addressed by a principles-based requirement, particularly in 
light of the complexities and time pressures inherent in the proxy 
system. By broadly outlining the overarching principles and allowing 
the proxy voting advice businesses themselves to design a system of 
compliance best suited to their operations, our aim is to promote 
adherence to these principles in a flexible and minimally intrusive 
manner.
---------------------------------------------------------------------------

    \374\ See, e.g., letters from CII IV; Glass Lewis II.
---------------------------------------------------------------------------

    Consequently, paragraph (B) of Rule 14a-2(b)(9)(ii) sets forth an 
additional principle that a proxy voting advice business must observe 
in order to avail itself of the exemptions found in Rules 14a-2(b)(1) 
and (3). Specifically, a proxy voting advice business must adopt and 
publicly \375\ disclose written policies and procedures reasonably 
designed to ensure that it provides clients with a mechanism by which 
they can reasonably be expected to become aware of a registrant's 
written statements about the proxy voting advice in a timely manner 
\376\ before the shareholder meeting (or, if no meeting, before the 
vote, consent, or authorization may be used to effect the proposed 
action).
---------------------------------------------------------------------------

    \375\ See supra note 340 for an example of how proxy voting 
advice businesses may satisfy the requirement that such policies and 
procedures be ``publicly'' disclosed and a discussion of the reasons 
why we believe such requirement is important in the context of 
paragraph (A) of Rule 14a-2(b)(9)(ii). With respect to paragraph 
(B), it is likely that the clients of proxy voting advice businesses 
would be provided with such policies and procedures even absent a 
requirement that they be publicly disclosed. That said, in addition 
to the ancillary transparency-based benefits discussed supra note 
340, we believe that the public disclosure of such policies and 
procedures will assist potential clients of proxy voting advice 
businesses in evaluating the service offerings that the various 
providers make available. Similarly, such public disclosure may 
assist the investors on whose behalf such clients act in evaluating 
whether any proxy voting decisions made on their behalf are informed 
by both the relevant proxy voting advice and any registrant response 
thereto.
    \376\ In this context, a proxy voting advice business will have 
become aware of a registrant's response to the proxy voting advice 
in a ``timely manner'' if such client has sufficient time to 
consider such response in connection with a vote.
---------------------------------------------------------------------------

    By shifting to a principles-based requirement, the rule allows the 
proxy voting advice business to determine its specific manner of 
compliance, while preserving the Commission's objective to facilitate 
the ability of the business's clients to benefit from more complete 
information when considering how to vote their proxies. As such, it 
reflects the Commission's view that shareholders should have ready 
access to a more complete mix of information to make informed voting 
decisions. Rule 14a-2(b)(9)(ii)(B) is thus intended to help ensure that 
proxy voting advice businesses provide clients with a mechanism by 
which they can reasonably be expected to become aware of and access 
more complete information, including the input and views of registrants 
on proxy voting advice, in the compressed time period between when they 
receive the advice and vote their proxies.
    We believe access to the registrant's views on proxy advice may 
benefit a proxy voting advice business's clients regardless of whether 
the voting recommendation is adverse to the registrant's 
recommendation. The registrant may have disagreements that extend 
beyond the voting recommendation itself, such as noting factual errors 
in the advice, differing views about the proxy voting advice business's 
methodological approach or other perspectives that it believes are 
relevant to the voting advice.\377\ Or the registrant may wish to 
emphasize a particular point that the proxy voting advice business may 
have noted or may not have noted in its advice. In circumstances where 
the registrant largely or entirely agrees with the proxy voting advice 
business's methodology or conclusions, that fact would likely be 
relevant to and enhance a client's decision-making.
---------------------------------------------------------------------------

    \377\ See, e.g., IAC Recommendation (``The very differences in 
such judgments [between corporate managers and proxy advisors] are 
part of the value that independent advisors add to the proxy system 
. . . . By advancing their views . . . proxy advisors create 
meaningful public discussion of such topics. . . .'').
---------------------------------------------------------------------------

    A number of commenters argued that registrants' ability to file 
supplemental proxy materials is sufficient to facilitate informed 
shareholder voting decisions.\378\ Commenters have indicated, however, 
that the clients of proxy voting advice businesses often cast their 
votes before registrants can file such materials.\379\ Rule 14a-
2(b)(9)(ii)(B) requires that proxy voting advice businesses provide 
clients with a mechanism by which they can reasonably be expected to 
become aware that a registrant has filed such materials about the proxy 
voting advice in time to consider the materials before they cast their 
final vote. Due to the existing time constraints that proxy voting 
advice business clients have identified in their comments to the 
proposed rule,\380\ the rule will ensure that such clients have an 
efficient means by which they can reasonably be expected to become 
aware of additional information that may affect their analysis of the 
proxy voting advice, and thereby their voting decisions, in the manner 
that each proxy voting advice business determines is most cost-
efficient and best serves its clients.
---------------------------------------------------------------------------

    \378\ See, e.g., letters from Public Retirement System; AFL-CIO 
2; CII IV; Glass Lewis II; ISS; New York Comptroller I. See also 
note 373.
    \379\ See, e.g., letters from NAREIT, NAM, Exxon Mobil. See also 
Proposing Release at 53, n. 136.
    \380\ See, e.g., letters from ACSI; BMO; CII VI; Florida Board; 
Glass Lewis II; Hermes; ICI; New York Comptroller II; Ohio Public 
Retirement; Olshan LLP; PRI II; Stewart; TIAA; TRP.
---------------------------------------------------------------------------

    As with Rule 14a-2(b)(9)(ii)(A), we recognize that proxy voting 
advice businesses may benefit from greater legal certainty about how to 
satisfy this general principle. We are therefore providing a non-
exclusive safe harbor in new 17 CFR 240.14a-2(b)(9)(iv) (``Rule 14a-
2(b)(9)(iv)'') pursuant to which proxy voting advice businesses will be 
deemed to satisfy the principle-based requirement of paragraph (ii)(B). 
To satisfy this safe harbor, a proxy voting advice business must have 
written policies and procedures reasonably designed to inform clients 
who have received proxy voting advice about a particular registrant in 
the event that such registrant notifies the proxy voting advice 
business that the registrant either intends to file or has filed 
additional soliciting materials with the Commission setting forth its 
views

[[Page 55114]]

regarding such advice.\381\ The safe harbor sets forth two methods by 
which the proxy voting advice business may provide such notice to its 
clients. It may either:
---------------------------------------------------------------------------

    \381\ If a registrant notifies a proxy voting advice business 
that the registrant intends to file additional soliciting materials 
setting forth its views regarding the proxy voting advice business's 
advice, then proxy voting advice business should consider whether, 
for purposes of complying with this safe harbor requirement, it 
needs to send two separate notices to the business's clients: (1) 
One notice regarding the registrant's intent to file and (2) another 
notice regarding the registrant's actual filing. Depending on the 
particular facts and circumstances, the first notice may be needed 
to inform clients of the fact that the registrant may be providing 
views that could be material to their voting decisions and to allow 
the clients to determine whether they wish to await these views 
before submitting their votes, and with the second notice providing 
the clients with the hyperlink to the registrant's soliciting 
material once it is filed on EDGAR. We note that Rule 14a-
2(b)(9)(ii)(B), which is a principles-based requirement, gives proxy 
voting advice businesses the option of formulating alternatives to 
this approach as long as those alternatives achieve the principle 
set forth in the rule.
---------------------------------------------------------------------------

    (A) Provide notice on its electronic client platform that the 
registrant has filed, or has informed the proxy voting advice business 
that it intends to file, additional soliciting materials (and include 
an active hyperlink to those materials on EDGAR when available); \382\ 
or
---------------------------------------------------------------------------

    \382\ Rule 14a-2(b)(9)(iv)(A).
---------------------------------------------------------------------------

    (B) Provide notice through email or other electronic means that the 
registrant has filed, or has informed the proxy voting advice business 
that it intends to file, additional soliciting materials (and include 
an active hyperlink to those materials on EDGAR when available).\383\
---------------------------------------------------------------------------

    \383\ Rule 14a-2(b)(9)(iv)(B).
---------------------------------------------------------------------------

    The safe harbor in Rule 14a-2(b)(9)(iv) establishes a convenient 
mechanism by which the clients of a proxy voting advice business can 
stay informed of, and timely consider, additional information with 
respect to the proxy voting advice that the registrant believes is 
material to the shareholders' voting determination. The safe harbor 
provides a direct and simple means of alerting clients to the 
availability of the views of the registrant as they consider the voting 
advice.
    The inclusion of the hyperlink required under Rule 14a-2(b)(9)(iv) 
would not, by itself, make the proxy voting advice business liable for 
the content of the hyperlinked registrant's statement. The Commission 
has previously stated a person's responsibility for hyperlinked 
information depends on whether the person has involved itself in the 
preparation of the information or explicitly or implicitly endorsed or 
approved the information.\384\ As we explained in the Proposing 
Release, we believe our view is consistent with this framework as a 
proxy voting advice business likely would not be involved in the 
preparation of the hyperlinked statement and likely would be including 
the hyperlink to comply with the requirements of the Rule 14a-
2(b)(9)(iv) safe harbor, and not to endorse or approve the content of 
the statement. Our view also extends to a proxy voting advice business 
that chooses to satisfy the principle-based requirement of Rule 14a-
(b)(9)(ii)(B) outside of the Rule 14a-2(b)(9)(iv) safe harbor by 
adopting written policies and procedures that contemplate the delivery 
of a hyperlink to the registrant's statement to its clients.
---------------------------------------------------------------------------

    \384\ See Use of Electronic Media, Release No. 34-42728 (Apr. 
28, 2000) [65 FR 25843 (May 4, 2000)].
---------------------------------------------------------------------------

    We note that proxy voting advice businesses will retain a 
significant amount of discretion to formulate their own policies and 
procedures and dictate the mechanics of notification in ways they 
believe are most suitable to meet their clients' needs and compatible 
with their operations, including specifying the preferred channel by 
which registrants must notify the proxy voting advice business of 
supplemental proxy filings, provided they comply with the broad 
outlines of the safe harbor.
    As discussed above, although proxy voting advice businesses may 
prefer the legal certainty afforded by the safe harbor in Rule 14a-
2(b)(9)(iv), these provisions are not the exclusive means by which such 
businesses may satisfy the principle-based requirement set forth in 
Rule 14a-2(b)(9)(ii)(B). Proxy voting advice businesses may instead 
develop their own policies and procedures outside of the safe harbor 
that are reasonably designed to ensure that they provide clients with a 
mechanism by which they can reasonably be expected to become aware of a 
registrant's written response to the proxy voting advice in a timely 
manner. We acknowledge that there are different ways that a proxy 
voting advice business could structure such a policy consistent with 
the rule, and the safe harbor is not intended to become the de facto 
means by which the requirement of Rule 14a-2(b)(9)(ii)(B) may be met.
    The proposed rules included a provision that would have excused 
immaterial or unintentional failures to comply with the conditions of 
Rule 14a-2(b)(9).\385\ This provision was motivated by our recognition 
of a potentially significant adverse result for a proxy voting advice 
business if it were to lose the ability to rely on the exemptions set 
forth in Rules 14a-2(b)(1) or (b)(3) and be required to comply with the 
federal proxy rules' information and filing requirements.\386\ Although 
we recognize those potentially adverse results, we no longer view that 
provision as necessary in light of the principles-based approach of the 
final rules. Rule 14a-2(b)(9)(ii), as adopted, requires proxy voting 
advice businesses to adopt written policies and procedures that are 
reasonably designed to ensure satisfaction of paragraphs (A) and (B) 
thereof. We believe the framework we are adopting is sufficiently 
flexible to accomplish the Commission's objectives in ensuring 
shareholders have available to them more transparent, accurate, and 
complete information on which to base their voting determinations and 
thereby promote informed decision-making, without unnecessarily 
interfering with or burdening the complex infrastructure that is 
important to the proper functioning of the proxy system. We also 
believe that the principle of ensuring that proxy voting advice 
businesses provide clients with a mechanism by which they can 
reasonably be expected to become aware of registrants' written 
statements regarding the proxy voting advice in a timely manner will 
facilitate in particular the use and review of such advice by 
investment advisers.\387\
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    \385\ Proposing Release at 66535 (``[T]he proposed amendments 
provide that such failure will not result in the loss of the 
exemptions in Rules 14a-2(b)(1) or 14a-2(b)(3) so long as (A) the 
proxy voting advice business made a good faith and reasonable effort 
to comply and (B) to the extent that it is feasible to do so, the 
proxy voting advice business uses reasonable efforts to 
substantially comply with the condition as soon as practicable after 
it becomes aware of its noncompliance.'').
    \386\ Id. at n.146 (``[W]ithout such an exception, a proxy 
voting advice business that failed to give a registrant the full 
number of days for review of the proxy voting advice due to 
technical complications beyond its control, even if only a few hours 
shy of the requirement, would be unable to rely on the exemptions in 
Rule 14a-2(b)(1) and (b)(3). Without an applicable exemption on 
which to rely, the proxy voting advice business likely would be 
subject to the proxy filing requirements found in Regulation 14A and 
its proxy voting advice required to be publicly filed.'').
    \387\ The Commission previously issued guidance discussing how 
the fiduciary duty and rule 206(4)-6 under the Advisers Act relate 
to an investment adviser's exercise of voting authority on behalf of 
clients and also provided examples to help facilitate investment 
advisers' compliance with their proxy voting responsibilities. See 
Commission Guidance on Proxy Voting Responsibilities. We expect that 
Rule 14a-2(b)(9)(ii)(A) will result in registrants being made aware 
of recommendations by proxy voting advice businesses in a timeframe 
that will permit those registrants to make any views regarding those 
recommendations available in a more timely manner than was 
previously the case. We therefore are concurrently supplementing 
that guidance to investment advisers in a separate Commission 
release. See Supplemental Proxy Voting Guidance.

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[[Page 55115]]

    We wish to emphasize that the principles-based approach we are 
adopting in Rule 14a-2(b)(9)(ii) is intended to be adaptable to a 
variety of circumstances and business models. Various policies and 
procedures, beyond those in the safe harbors set forth in Rules 14a-
2(b)(9)(iii) and (iv), may be used to satisfy these principles. Whether 
a proxy voting advice business has complied with the principles-based 
requirements will be determined by the particular facts and 
circumstances of the business's adopted written policies and procedures 
and whether such facts and circumstances support the conclusion that 
the particular policies and procedures are reasonably designed to 
ensure that (1) registrants that are the subject of the proxy voting 
advice have such advice made available to them at or prior to the time 
when such advice is disseminated to the proxy voting advice business's 
clients and (2) the proxy voting advice business provides its clients 
with a mechanism by which they can reasonably be expected to become 
aware that registrants have filed additional proxy materials that are 
responsive to the proxy voting advice in a timely manner before the 
shareholder meeting. Some relevant factors to be used in the analysis 
include:
     The degree to which a registrant has time to respond and 
whether the policy ensures prompt conveyance of information to the 
registrant.
     The extent to which the mechanism provided to clients is 
an efficient means by which they can reasonably be expected to become 
aware of the registrant's written response, once it is filed, such that 
the client has sufficient time to consider such response in connection 
with a vote.
     The reasonableness, based on facts and circumstances, of 
any fees charged by a proxy voting advice business to a registrant as a 
condition to receiving a copy of its proxy voting advice and the extent 
to which such fees may dissuade a registrant from seeking to review and 
provide a response to such proxy voting advice.
    We reiterate that these factors are not exclusive and no single 
factor or combination of factors will control the determination of 
whether a proxy voting advice business has complied with the 
principles-based requirements.
c. Exclusions From Rule 14a-2(b)(9)(ii) [Rules 14a-2(b)(9)(v) and (vi)]
    Notwithstanding the benefits that we expect will accrue to clients 
of proxy voting advice businesses, as well as the proxy voting system 
as a whole, we recognize that the requirements of Rule 14a-2(b)(9)(ii) 
may not be appropriate in all contexts. As such, pursuant to new Rules 
14a-2(b)(9)(v) and (vi), respectively, proxy voting advice businesses 
need not comply with Rule 14a-2(b)(9)(ii) in order to rely on either 
the Rule 14a-2(b)(1) or (b)(3) exemption (1) to the extent that their 
proxy voting advice is based on a custom policy \388\ or (2) if they 
provide proxy voting advice as to non-exempt solicitations regarding 
certain mergers and acquisitions or contested matters.\389\
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    \388\ See Rule 14a-2(b)(9)(v).
    \389\ See Rule 14a-2(b)(9)(vi).
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i. Custom Policies
    As noted above,\390\ some commenters recommended--in the context of 
our proposed amendments to Rule 14a-1(l)--that we amend the definitions 
of ``solicit'' and ``solicitation'' to exclude proxy voting advice 
based on custom policies.\391\ Specifically, one commenter that is a 
proxy voting advice business noted that it ``does not own, and is 
prohibited from disclosing, clients' custom policies and the 
recommendations based thereon.'' \392\ That commenter also expressed 
doubt as to the efficacy, from an investor protection standpoint, of 
``allowing issuers to vet the methodologies and assumptions 
institutional investors choose to implement for their own portfolios.'' 
\393\ Although we reaffirm our prior interpretation of the scope of the 
terms ``solicit'' and ``solicitation'' and decline to amend their 
definitions as those commenters suggested, we find these points to be 
compelling with respect to the application of certain requirements of 
Rule 14a-2(b)(9). We also understand these commenters' concerns 
regarding the potential costs that would be imposed upon investors, as 
well as their doubts regarding the corresponding investor protection-
based benefits, if the requirements of Rule 14a-2(b)(9)(ii) were to be 
applied to proxy voting advice based on a custom policy.
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    \390\ See supra note 112 and accompanying text.
    \391\ See letters from ISS; New York Comptroller II; State 
Street. See also supra note 165 for a link to a description of the 
services that one major proxy voting advice business offers in 
connection with its clients' custom policies.
    \392\ Letter from ISS. See also letter from Glass Lewis II 
(``Mandating that custom voting recommendations go through the 
issuer review and feedback mechanisms would expose these investors' 
confidential, proprietary information and force Glass Lewis to 
breach its commitments to these clients.'').
    \393\ Letter from ISS.
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    In light of these concerns, we are adopting new Rule 14a-
2(b)(9)(v), which excludes from the scope of Rule 14a-2(b)(9)(ii) proxy 
voting advice to the extent that such advice is based on custom 
policies that are proprietary to a proxy voting advice business's 
client.\394\
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    \394\ Rule 14a-2(b)(9)(v). The term ``custom policies'' for 
purposes of Rule 14a-2(b)(9)(v) would not include a proxy voting 
advice business's benchmark or specialty policies, even if those 
benchmark or specialty policies were to be adopted by a proxy voting 
advice business's client as its own policy. See supra note 12. If, 
however, a proxy voting advice business's client adopts a benchmark 
or specialty policy as its own policy, then the proxy voting advice 
business would have to satisfy the requirements of Rule 14a-
2(b)(9)(ii) only with respect to the proxy voting advice that is 
based on the benchmark or specialty policy. For the avoidance of 
doubt, Rule 14a-2(b)(9)(ii)(A) does not require that the proxy 
voting advice business make available to the registrant multiple 
copies of the same voting advice, and for purposes of Rule 14a-
2(b)(9)(ii)(B), the proxy voting advice business's policies and 
procedures should be reasonably designed to provide such client with 
a mechanism by which the client could reasonably be expected to 
become aware of any written statement regarding the benchmark or 
specialty policy.
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    Our adoption of new Rule 14a-2(b)(9)(v) is not only motivated by 
the potential costs that commenters identified, it also reflects our 
belief that many of the goals of this rulemaking will still be achieved 
with respect to proxy voting advice that is based on a custom policy, 
notwithstanding the fact that such advice will not be subject to Rule 
14a-2(b)(9)(ii). For example, as noted above and consistent with prior 
Commission statements,\395\ such proxy voting advice will constitute a 
``solicitation'' subject to Rule 14a-9, and persons who provide such 
advice in reliance on the exemptions in either Rule 14a-2(b)(1) or 
(b)(3) must comply with the conflicts of interest disclosure 
requirements set forth in new Rule 14a-2(b)(9)(i). We further note that 
proxy voting advice businesses generally use substantially the same 
data to produce most of their voting advice (including reports 
containing proxy voting advice based on benchmark, specialty, or custom 
policies).\396\ In addition, it is our understanding of the proxy 
voting advice market as it currently operates that proxy voting advice 
businesses' clients that receive proxy voting advice pursuant to their 
custom policies generally also receive the businesses' voting advice 
based on the businesses' benchmark policies. Such benchmark policy 
proxy voting advice contains the bulk of the data, research, and 
analysis underlying custom policy proxy voting advice. Thus, because 
the proxy voting advice based on the benchmark policies--including the 
data, research, and analysis therein--would be subject to Rule 14a-
2(b)(9)(ii), clients that receive proxy voting advice pursuant to their 
custom policies generally will

[[Page 55116]]

benefit from an awareness of any responses that the registrants may 
file thereto.
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    \395\ See supra text accompanying note 166.
    \396\ See letter from ISS (``Because substantially the same data 
are used to produce all ISS voting reports . . . .'').
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ii. Merger and Acquisition Transactions and Contested Solicitations
    Solicitations involving merger and acquisition (``M&A'') 
transactions or contested matters, such as contested director elections 
where a dissident soliciting party proposes its own slate of director-
nominees, are generally fast-moving and can be subject to frequent 
changes and short time windows.\397\ This often results in proxy voting 
advice businesses having to deliver their advice to clients on a 
tighter deadline, and with less lead time before the applicable 
meeting, than they would under normal circumstances.\398\ As noted 
above, some commenters expressed concerns regarding the practical 
challenges and potential disruptions that the proposed review and 
feedback mechanism, with its specified time frames for each step of the 
process, would have caused in the context of M&A transactions or 
contested solicitations.\399\ Commenters also expressed concerns about 
the heightened risk that the proposed review and feedback mechanism, 
which would involve reviews of proxy voting advice before it is 
disseminated to clients, could pose regarding the disclosure of market-
moving or material, non-public information in the context of M&A 
transactions or contested solicitations.\400\ We expect that these 
concerns will be significantly alleviated, if not eliminated entirely, 
by the fact that Rule 14a-2(b)(9)(ii), as adopted, does not include the 
proposed advance review and feedback mechanism and, with its 
principles-based requirements, provides proxy voting advice businesses 
with added flexibility. For example, absent the proposed advanced 
review and feedback mechanism, Rule 14a-2(b)(9)(ii)(A) does not 
increase the risk that proxy voting advice businesses will disseminate 
potentially market-moving or material, non-public information 
selectively to registrants (or any other soliciting persons) before 
they otherwise would disseminate such information to their clients.
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    \397\ See, e.g., letter from Glass Lewis II (``[O]ur experience 
is that contested situations are often much more fluid with both 
sides making supplemental filings on a continuing basis as the 
meeting date approaches.'').
    \398\ See, e.g., id. (``Glass Lewis' data shows that report 
preparation and delivery timing varies significantly for mergers and 
acquisitions and other special situations. On average, proxy 
research reports were delivered to clients 14 days before the 
meeting date [in] M&A transactions and 13 days in contested 
situations.'').
    \399\ See supra note 279 and accompanying text. See also letters 
from ISS (stating that the proposal would hinder ``the ability of 
proxy advice to be appropriately responsive to important and often 
fast-moving situations such as proxy fights and contested mergers 
and acquisitions''); Glass Lewis II (``[I]t is important for a proxy 
advisor, when appropriate to best meet its clients' needs, to be 
able to defer providing its advice until near-final information is 
available and to be able to quickly amend already-provided advice, 
as needed.'').
    \400\ See letters from CII I (``It is not clear whether the PA 
Proposal creates the potential for insider trading on certain 
market-moving recommendations and related analysis, particularly in 
connection with mergers and acquisitions (M&A), and how the SEC 
staff thought about such a risk in proposing the five-day review and 
`final notice' periods.''); Elliott I (``The risks of insider 
trading and leaks involving proxy voting advice are also higher when 
a shareholder vote involves a material event. The Proposal would put 
the draft proxy voting advice--potentially market-moving 
information--in the hands of issuers before it is provided to the 
investors who will act on it. This selective disclosure would 
necessarily increase the risk that the information will be misused 
or leaked, whether accidentally or deliberately.''); ISS (noting 
that it currently ``safeguard[s] [material, non-public information] 
by not pre-releasing potentially market-moving draft reports and 
vote recommendations'' and allowing ``selected issuers a limited 
review right of draft reports only for annual meetings, not special 
meetings'' and asserting that the proposal ``rais[es] significant 
concerns about confidentiality'' and ``selective disclosure of 
material non-public information''); Glass Lewis II (``[W]e note that 
commentators have raised significant questions about how the advance 
knowledge gained in the review processes could be misused in 
contested situations that should be addressed and resolved before 
adopting any rule mandating review in this context.''). As they 
likely are already aware (based on the concerns expressed in the 
foregoing comment letters), we remind proxy voting advice businesses 
that they have a responsibility to safeguard any material, non-
public information in their possession. Although that responsibility 
is heightened in the context of shareholder meetings regarding M&A 
transactions or contested matters, when such information is 
particularly sensitive and potentially market-moving, we expect 
proxy voting advice businesses to discharge that responsibility in 
all situations.
---------------------------------------------------------------------------

    To further address concerns raised by commenters, we are also 
adopting new 17 CFR 240.14a-2(b)(9)(vi) (``Rule 14a-2(b)(9)(vi)''), 
which excludes from the requirements of Rule 14a-2(b)(9)(ii) any 
portion of the proxy voting advice that makes a recommendation, as well 
as any analysis and research underlying such recommendation that is 
furnished along therewith, as to a solicitation subject to Rule 14a-
3(a) \401\:
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    \401\ 17 CFR 240.14a-3(a).
---------------------------------------------------------------------------

    (A) To approve any transaction specified in Rule 145(a) of the 
Securities Act; \402\ or
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    \402\ Rule 14a-2(b)(9)(vi)(A). Rule 145(a) lists and describes 
certain M&A transactions that are broadly categorized as 
reclassifications, mergers of consolidation, and transfers of 
assets. See 17 CFR 230.145(a).
---------------------------------------------------------------------------

    (B) By any person or group of persons for the purpose of opposing a 
solicitation subject to Regulation 14A by any other person or group of 
persons.\403\
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    \403\ Rule 14a-2(b)(9)(vi)(B).
---------------------------------------------------------------------------

    As a result of new Rule 14a-2(b)(9)(vi), proxy voting advice 
businesses would be permitted (but not required) to adopt written 
policies and procedures pursuant to which the businesses would not make 
available to registrants any portion of the proxy voting advice 
relating to M&A transactions and contested matters at or prior to the 
time such advice is disseminated to clients and to exclude the 
registrant's response to such advice from the requirement of Rule 14a-
2(b)(9)(ii)(B). To be eligible to rely on Rule 14a-2(b)(9)(vi), a proxy 
voting advice business must be providing advice with respect to a 
solicitation subject to Rule 14a-3(a). This requirement is intended to 
limit the scope of Rule 14a-2(b)(9)(vi) to proxy voting advice with 
respect to solicitations that are subject to the Federal proxy rules' 
information and filing requirements, including the requirement to file 
and furnish a definitive proxy statement. By contrast, proxy voting 
advice businesses providing advice with respect to any exempt 
solicitations (including solicitations as to M&A transactions or 
contested matters) would be ineligible to rely on the exception in Rule 
14a-2(b)(9)(vi).
    For the avoidance of doubt, this exception from the requirements of 
Rule 14a-2(b)(9)(ii) applies only to the portions of the proxy voting 
advice relating to the applicable M&A transaction \404\ or contested 
matters and not to proxy voting advice regarding other matters 
presented at the relevant meeting. If, therefore, there is a 
shareholder meeting at which the only items presented for approval are 
the applicable M&A transaction or contested matters, a proxy voting 
advice business could have written policies and procedures that permit 
the entirety of the proxy voting advice provided with respect to that 
meeting to be

[[Page 55117]]

excluded from the requirements set forth in Rule 14a-2(b)(9)(ii). If, 
however, additional matters are presented for shareholder approval at 
such meeting, then only the portion of the proxy voting advice provided 
with respect to the applicable M&A transaction or contested matters 
could be excluded from the requirements set forth in Rule 14a-
2(b)(9)(ii).
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    \404\ We recognize that a registrant or other soliciting person 
may present at the shareholder meeting other matters that, while not 
directly approving an M&A transaction or a contested matter, are 
nevertheless closely related to such transaction or contested 
matter. For example, a registrant's definitive proxy statement may 
seek approval of a proposed M&A transaction, approval of the 
issuance of the registrant's securities to finance the M&A 
transaction, and an advisory vote on the ``golden parachute'' 
payments to be made in connection with the M&A transaction. In such 
a situation, the latter two matters may be sufficiently integral to 
the M&A transaction such that redaction of the proxy voting advice 
on the M&A transaction alone would render the proxy voting advice on 
the remaining matters to be confusing for a registrant reading such 
advice. In such a case, the Rule 14a-2(b)(9)(vi) exception would be 
available for all three matters. The determination of whether a 
matter is sufficiently integral to an M&A transaction or contested 
matter to fall within the Rule 14a-2(b)(9)(vi) exception will depend 
on the particular facts and circumstances.
---------------------------------------------------------------------------

    We understand that proxy voting advice businesses often provide 
their proxy voting advice on all matters for which security holders are 
solicited at a particular meeting (e.g., contested and uncontested 
matters, M&A- and non-M&A-related matters, etc.) together in a single 
report.\405\ If a proxy voting advice business takes this approach but 
wishes to avail itself of the exception set forth in Rule 14a-
2(b)(9)(vi), it can do so, for example, by redacting the portion of the 
report that contains proxy voting advice as to the applicable M&A 
transaction or contested matters in the version of such report that is 
provided to a registrant pursuant to Rule 14a-2(b)(9)(ii)(A). We 
further understand that at least one proxy voting advice business 
currently provides its clients with a separate, standalone report that 
provides recommendations only with respect to the M&A transactions or 
contested matters presented at the meeting.\406\ If a proxy voting 
advice business adopts this approach with respect to M&A transactions 
and contested matters, then, under Rule 14a-2(b)(9)(vi), the 
requirements of Rule 14a-2(b)(9)(ii) would not be applicable to such 
standalone report. Finally, to the extent that a proxy voting advice 
business finds it too burdensome to either redact or bifurcate its 
reports, it is not required to avail itself of the exception set forth 
in Rule 14a-2(b)(9)(vi). Instead, the proxy voting advice business can 
choose to subject all of its proxy voting advice--including its advice 
as to the applicable M&A transaction and contested matters--to the 
requirements of Rule 14a-2(b)(9)(ii), subject to the proxy voting 
advice business's obligation to safeguard material, non-public 
information in its possession.\407\
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    \405\ Proposing Release at n.112 (``It is also common for a 
proxy voting advice business to present in a single, integrated 
written report its voting recommendations on all matters to be voted 
at the registrant's meeting . . . .'').
    \406\ See ISS, Special Situations Research, available at https://www.issgovernance.com/solutions/governance-advisory-services/special-situations-research/ (last visited on May 28, 2020).
    \407\ If a proxy voting advice business decides not to avail 
itself of the exception set forth in Rule 14a-2(b)(9)(vi) and 
subjects its advice as to the applicable M&A transaction or 
contested matter to Rule 14a-2(b)(9)(ii), we believe that many of 
the concerns commenters expressed will be mitigated by the changes 
we made from the proposal. For example, to the extent that proxy 
voting advice businesses generally deliver their advice with respect 
to M&A transactions or contested matters to clients with less lead 
time before the applicable meeting, the principles-based 
requirements of Rule 14a-2(b)(9)(ii)(A) allows proxy voting advice 
businesses to design and implement policies and procedures that work 
best for their clients' needs and timing concerns. In addition, to 
the extent that proxy voting advice businesses amend their advice 
with respect to M&A transactions or contested matters in light of 
subsequent events, Rule 14a-2(b)(9)(ii)(A) does not require that 
proxy voting advice businesses make available to registrants such 
amended advice.
---------------------------------------------------------------------------

    As with proxy voting advice that is based on a custom policy, proxy 
voting advice that is excluded from the scope of Rule 14a-2(b)(9)(ii) 
pursuant to new paragraph (vi) will constitute a ``solicitation'' 
subject to Rule 14a-9. Similarly, persons who provide such advice in 
reliance on the exemptions in either Rule 14a-2(b)(1) or (b)(3) must 
comply with the conflicts of interest disclosure requirements set forth 
in new Rule 14a-2(b)(9)(i).
d. Response to Constitutional Objections
    Some commenters raised First Amendment objections to the proposed 
amendments.\408\ Their concerns focused primarily on the proposed 
registrant review and feedback provisions and the requirement that 
proxy voting advice businesses include in their advice a hyperlink to 
the registrant's response. The final amendments incorporate substantial 
modifications that address these concerns.
---------------------------------------------------------------------------

    \408\ See, e.g., letters from CFA Institute I; CII IV; CIRCA; 
Elliott I; Glass Lewis II; ISS; Interfaith Center II; New York 
Comptroller II; NorthStar; Shareholder Rights II; Washington State 
Investment; ValueEdge III (stating that it has contacted the 
Department of Justice to review this proposal and recommends the 
Commission do the same). Most of these commenters generally opposed 
the proposed amendments on Constitutional grounds. Further, to the 
extent such commenters suggested potential alternative regulatory 
solutions, no commenters offered a more tailored solution that we 
believe would still achieve the objectives of this rulemaking.
---------------------------------------------------------------------------

    As discussed above, the proposed amendments requiring that proxy 
voting advice businesses give registrants an opportunity to review and 
provide feedback on their advice before the advice is disseminated to 
clients have not been included in the final amendments. Under the final 
amendments, proxy voting advice businesses can satisfy Rule 14a-
2(b)(9)(ii)(A) by ensuring that their advice is made available to 
registrants at or prior to the time when such advice is disseminated to 
the proxy voting advice business's clients.\409\ Commenters also argued 
that requiring proxy voting advice businesses to share with registrants 
proxy voting advice that is based on custom policies would 
unconstitutionally compel them to disclose confidential client 
information.\410\ Our decision to exclude such advice from Rule 14a-
2(b)(9)(ii) should eliminate that concern.\411\ Moreover, under the 
safe harbor in Rule 14a-2(b)(9)(iii), a proxy voting advice business 
has no obligation to provide a copy of its advice to a registrant 
unless such registrant acknowledges certain limits on its use of the 
advice.\412\ Nor must a proxy voting advice business that avails itself 
of such safe harbor share its proxy voting advice if the registrant 
files its definitive proxy statement less than 40 calendar days before 
the shareholder meeting.
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    \409\ Rule 14a-2(b)(ii)(A). See also supra note 342 and 
accompanying text. We note that at least one proxy voting advice 
business already makes its proxy reports available for purchase by 
registrants upon their release to client. See Glass Lewis: Purchase 
a Proxy Paper, available at https://www.glasslewis.com/request-a-proxy-paper-or-alert/ (last visited on May 26, 2020).
    \410\ See supra note 408.
    \411\ See Rule 14a-2(b)(9)(v).
    \412\ We also believe that these modifications from the 
proposal--among others, the fact that proxy voting advice businesses 
are not required to give registrants an opportunity to review proxy 
advice before its dissemination to clients and need not share the 
advice at all unless registrants acknowledge restrictions on its 
use--address the concerns raised by some commenters under the 
takings clause of the Fifth Amendment. See letters from CalPERS; 
ISS.
---------------------------------------------------------------------------

    In addition, we have replaced the proposed requirement that proxy 
voting advice businesses include in their proxy voting advice a 
hyperlink to the registrant's response with a principles-based 
obligation to adopt policies and procedures reasonably designed to 
ensure that proxy voting advice businesses provide clients with a 
mechanism by which they can reasonably be expected to become aware of 
the registrant's written response in a timely manner. Rule 14a-
2(b)(9)(ii)(B) gives proxy voting advice businesses flexibility in 
determining how to achieve compliance with this requirement in the 
manner best suited to their business. They also have the option of 
relying on the safe harbor set forth in Rule 14a-2(b)(9)(iv), which 
involves adopting policies and procedures to provide clients a 
hyperlink to the registrant's written response once the registrant 
gives notice that a response has been filed. However, Rule 14a-
2(b)(9)(ii)(B) does not mandate that specific approach as a condition 
of the exemption.\413\
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    \413\ For example, we understand that some proxy voting advice 
businesses already provide access to the registrant's proxy filings, 
including any supplemental proxy materials, automatically through 
their electronic platform. This kind of approach would generally be 
consistent with the principle.

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[[Page 55118]]

    We believe that the amendments, as modified from the proposal, are 
consistent with the First Amendment. In today's market, the proxy 
process represents the primary means by which registrants and their 
shareholders communicate to determine how the registrant governs 
itself. They exchange their respective views about the registrants' 
business operations and other registrant matters, and generally engage 
in discussions integral to the exercise of the shareholder 
franchise.\414\ The Commission has a strong interest in ensuring that 
investors are able to obtain and evaluate information pertinent to 
proxy voting decisions before the vote is held.\415\ The amendments are 
intended to facilitate the kind of robust discussion on which informed 
shareholder voting decisions depend in light of changing market 
conditions. Specifically, as discussed above, proxy voting advice 
businesses today are uniquely situated to influence the voting 
decisions of institutional investors, which hold an increasingly 
significant portion of shares in U.S. public companies.\416\ The 
provision of proxy voting advice by these businesses therefore 
implicates a fundamental concern of our proxy rules.\417\ Yet, because 
a significant percentage of proxy votes are typically cast shortly 
after a proxy voting advice business delivers its advice, and because 
currently proxy voting advice is not required to be publicly filed, 
many voting decisions are made before registrants have a meaningful 
opportunity to engage with that advice--for example, to address any 
material factual errors or omissions, or to offer views with respect to 
the proxy voting advice business's methodologies or conclusions--and to 
make investors aware of their views in time for investors to benefit 
from such an exchange.\418\
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    \414\ Pac. Gas & Elec. Co. v. Pub. Utils. Comm'n of Ca., 475 
U.S. 1, 14 n.10 (1986).
    \415\ Communications Among Shareholders Adopting Release at 
48277; Concept Release at 42983; see also Business Roundtable, 905 
F.2d at 410 (``The goal of federal proxy regulation was to improve 
[communications with potential absentee voters] and thereby to 
enable proxy voters to control the corporation as effectively as 
they might have by attending a shareholder meeting.'').
    \416\ See supra note 18.
    \417\ See supra notes 6 through 17 and accompanying text.
    \418\ See supra note 373 and accompanying text.
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    As previously discussed, the Commission has occasionally adjusted 
the proxy rules based on market developments to promote informed proxy 
voting decision-making.\419\ The developments described above have 
convinced us of the need to update the application of the proxy rules 
to proxy voting advice businesses to facilitate the kind of robust 
discussion that would be possible at a meeting before a vote occurs. 
But at this time we do not believe it is necessary to subject proxy 
voting advice businesses to the full panoply of information and filing 
requirements that apply to registrants when seeking proxy authority. 
While registrants must publicly file soliciting materials and 
disseminate them to all shareholders, the Commission believes its 
objectives with respect to proxy voting advice businesses can be 
achieved by more tailored and far less burdensome and intrusive means.
---------------------------------------------------------------------------

    \419\ See supra notes 33-35 and accompanying text. Contrary to 
the suggestion of some commenters, the Commission's measured pursuit 
of a similar objective in the amendments adopted in this document 
does not contradict our past recognition that applying governmental 
filing requirements to every communication among shareholders and 
other parties on matters subject to a proxy vote would raise First 
Amendment concerns. See supra note 270 and accompanying text.
---------------------------------------------------------------------------

    We are therefore adopting amendments that allow proxy voting advice 
businesses to continue to be exempt from the filing and information 
requirements of the proxy rules, conditioned on their inclusion in the 
proxy voting advice of the conflicts of interest disclosure specified 
in Rule 14a-2(b)(9)(i) and their adoption and public disclosure of 
policies and procedures specified in Rule 14a-2(b)(9)(ii).\420\ These 
principles-based requirements are tailored to minimize the burden on 
proxy voting advice businesses, while still directly advancing the 
Commission's regulatory objectives.
---------------------------------------------------------------------------

    \420\ See supra Sections II.B.3; II.C.3.
---------------------------------------------------------------------------

    Although some commenters argued that the proposed amendments 
discriminated based on viewpoint,\421\ our decision to impose exemption 
conditions on proxy voting advice businesses is unrelated to their 
viewpoint or message. The conditions apply regardless of the position a 
proxy voting advice business takes on any particular matter, and 
regardless of whether voting advice is supportive or adverse to 
registrants or to others. Proxy voting advice is subject to our proxy 
rules because it constitutes a ``solicitation'' under the Exchange Act. 
We have tailored the application of those rules to accommodate the 
unique business model of proxy voting advice businesses while also 
accounting for the consequential role those businesses have come to 
play in the proxy process.\422\ The amendments to the proxy rules that 
we adopt in this document--like the rules that apply to registrants and 
other interested parties under the comprehensive regulatory scheme 
governing the proxy solicitation process--are intended to facilitate 
investor access, in a timely manner, to more accurate, complete, and 
transparent information and robust debate, as would occur at a meeting 
where shareholders are physically attending and participating. Indeed, 
the exemption conditions for proxy voting advice apply regardless of 
the content of the advice on any matter, and far from disapproving of 
the speech of proxy voting advice businesses, the Commission has 
recognized the important function proxy voting advice businesses serve 
in today's markets to some investors.\423\
---------------------------------------------------------------------------

    \421\ See, e.g., letters from Better Markets (expressing concern 
that apprehensions regarding the accuracy of proxy voting advice 
businesses' advice have been driven by potentially self-interested 
corporate management that view proxy voting advice businesses as 
adversarial); CalPERS; Florida Board; Glass Lewis II; ISS; NYC 
Comptroller; New York Comptroller II; Public Citizen; Segal Marco 
II; TRP.
    \422\ See SEC v. Wall Street Publishing Inst., Inc., 851 F.2d 
365, 372 (D.C. Cir. 1988) (``Where the federal government 
extensively regulates a field of economic activity, communication of 
the regulated parties often bears directly on the particular 
economic objectives sought by the government, . . . and regulation 
of such communications has been upheld [as consistent with the First 
Amendment].''); cf. Full Value Advisors, LLC v. SEC, 633 F.3d 1101, 
1109 (D.C. Cir. 2011) (``Securities regulation involves a different 
balance of concerns and calls for different applications of First 
Amendment principles.'') (internal quotation marks omitted).
    \423\ See supra Section II.A.3.
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D. Amendments to Rule 14a-9

1. Proposed Amendments
    Rule 14a-9 prohibits any proxy solicitation from containing false 
or misleading statements with respect to any material fact at the time 
and in light of the circumstances under which the statements are 
made.\424\ In addition, such solicitation must not omit to state any 
material fact necessary in order to make the statements therein not 
false or misleading.\425\ Even solicitations that are exempt from the 
federal proxy rules' information and filing requirements are subject to 
this prohibition, as ``a necessary means of assuring that 
communications which may influence shareholder voting decisions are not

[[Page 55119]]

materially false or misleading.'' \426\ This includes proxy voting 
advice that is exempt under Rules 14a-2(b)(1) and (b)(3). The 
Commission has previously stated that the furnishing of proxy voting 
advice, while exempt from the information and filing requirements, 
remains subject to the prohibition on false and misleading statements 
in Rule 14a-9.\427\ We continue to believe that subjecting proxy voting 
advice businesses to the same antifraud standard as registrants and 
other persons engaged in soliciting activities, including those engaged 
in exempt solicitations, is appropriate in the public interest and for 
the protection of investors. Indeed, the Commission recently issued 
guidance specifically addressing the application of Rule 14a-9 to proxy 
voting advice,\428\ stating that ``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 advice or which would affect its analysis and 
judgments, that would be required to make the advice not misleading.'' 
\429\ To illustrate this point, the Commission gave a list of examples 
of types of information that a provider of proxy voting advice should 
consider disclosing in order to avoid a potential violation of Rule 
14a-9.\430\ This included the methodology used to formulate proxy 
voting advice, sources of information on which the advice is based, and 
material conflicts of interest that arise in connection with providing 
proxy voting advice, without which the advice could be misleading, 
depending on the specific statements at issue.\431\
---------------------------------------------------------------------------

    \424\ 17 CFR 240.14a-9. See also Exchange Act Release No. 34-
1350, 1937 WL 29099 (Aug. 13. 1937) (``The purpose of [the 
Commission's proxy] rules is to prevent the dissemination to the 
security holders and to the general public of untruths, half-truths, 
and otherwise misleading information which would stand in the way of 
a fair appraisal of a plan upon its merits by the security 
holders.'').
    \425\ 17 CFR 240.14a-9.
    \426\ See 1979 Adopting Release at 48942.
    \427\ See Concept Release at 43010.
    \428\ See Question and Response 2 of Commission Interpretation 
and Guidance Regarding the Applicability of the Proxy Rules to Proxy 
Voting Advice, Release No. 34-86721 (Aug. 21, 2019) [84 FR 47416 
(Sept. 10, 2019)] (``Commission Interpretation and Guidance'').
    \429\ Id. at 12.
    \430\ Id. The Commission also noted that some proxy voting 
advice businesses currently may be providing some of the disclosures 
described in the list of examples. Id. at n. 33.
    \431\ Id.
---------------------------------------------------------------------------

    Currently, the text of Rule 14a-9 provides four examples of things 
that may be misleading within the meaning of the rule, depending upon 
particular facts and circumstances.\432\ These are:
---------------------------------------------------------------------------

    \432\ Rule 14a-9 provides a note preceding the list of examples 
that reads: ``The following are some examples of what, depending 
upon particular facts and circumstances, may be misleading within 
the meaning of this section.'' This note and the examples provided 
were adopted in their current form by the Commission in 1956. See 
Release No. 34-5276 (Jan. 17, 1956) [21 FR 577 (Jan. 26, 1956)], 
1956 WL 7757.
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     Predictions as to specific future market values;
     Material which directly or indirectly impugns character, 
integrity or personal reputation, or directly or indirectly makes 
charges concerning improper, illegal or immoral conduct or 
associations, without factual foundation;
     Failure to so identify a proxy statement, form of proxy 
and other soliciting material as to clearly distinguish it from the 
soliciting material of any other person or persons soliciting for the 
same meeting or subject matter; and
     Claims made prior to a meeting regarding the results of a 
solicitation.
    The Commission proposed to amend this list of examples in Rule 14a-
9 to include certain additional types of information that a proxy 
voting advice business may, depending on the particular facts and 
circumstances, need to disclose to avoid potentially violating the 
rule. As proposed, and consistent with the Commission's recent 
guidance, this included the proxy advice business's methodology, 
sources of information and/or conflicts of interest to the extent that, 
under the particular facts and circumstances, the omission of such 
information would be materially misleading.
    In addition, the Commission proposed to amend Rule 14a-9 to address 
concerns that have arisen when proxy voting advice businesses make 
negative voting recommendations based on their evaluation that a 
registrant's conduct or disclosure is inadequate, notwithstanding that 
the conduct or disclosure meets applicable Commission 
requirements.\433\ The Commission explained that, without additional 
context or clarification, some clients may mistakenly infer that the 
negative voting recommendation is based on a registrant's failure to 
comply with the applicable Commission requirements when, in fact, the 
negative recommendation is based on the proxy voting advice business's 
determination that the registrant did not satisfy the specific criteria 
used by the proxy voting advice business. If the use of the criteria 
and the material differences between the criteria and the applicable 
Commission requirements are not clearly conveyed to proxy voting advice 
businesses' clients, there is a risk that some clients may make their 
voting decisions based on a misapprehension that a registrant is not in 
compliance with the Commission's standards or requirements. Similar 
concerns exist if, due to the lack of clear disclosure, clients are led 
to mistakenly believe that the unique criteria used by the proxy voting 
advice businesses were approved or set by the Commission.
---------------------------------------------------------------------------

    \433\ See Proposing Release at 66538 n.160.
---------------------------------------------------------------------------

    Accordingly, the Commission proposed to add as an example in Rule 
14a-9 of what may be misleading within the meaning of the rule, 
depending upon the particular facts and circumstances, the failure to 
disclose the use of standards or requirements in proxy voting advice 
that materially differ from relevant standards or requirements that the 
Commission sets or approves.\434\
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    \434\ See note (e) to proposed Rule 14a-9. Examples of standards 
or requirements that the Commission approves are the listing 
standards of the national securities exchanges, such as the New York 
Stock Exchange (NYSE). The Commission supervises, and is authorized 
to approve rules promulgated by, the NYSE and other national 
securities exchanges pursuant to Section 19 of the Exchange Act.
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2. Comments Received
    Commenters were divided in their views about the proposed 
amendment.\435\ Those in favor of the proposal thought it would have a 
beneficial impact, reasoning that it would tend to improve the quality 
of voting advice by making proxy voting advice businesses more 
accountable for any misleading statements in their advice \436\ and 
incentivizing them to provide more robust information about their 
methods and sources so that their clients would be in a better position 
to assess the businesses' recommendations and make informed voting 
decisions.\437\

[[Page 55120]]

Several such commenters voiced concerns that proxy voting advice 
businesses were not sufficiently transparent about their methodologies, 
models, and formulas used to generate their recommendations.\438\ Some 
commenters also believed that proxy voting advice businesses do not 
adequately adjust their methodologies to take into account the unique 
circumstances of different companies and therefore more transparent 
disclosure of methodologies would help investors discern the extent to 
which voting advice may be based on a ``one-size-fits-all'' 
approach.\439\
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    \435\ See letters from commenters supporting the proposal, e.g., 
ACCF (asserting that the proposals will increase accountability); 
Axcelis; John D. Campbell, Vice President, Government Relations, 
Ball Corporation (Jan. 31, 2020) (``Ball Corp.''); BIO; BRT; CCMC; 
CGC; Charter; Ecolab; ExxonMobil; FedEx; GM; IBC; NAM; Nareit; 
Nasdaq; SCG; James L. Setterlund, Executive Director, Shareholder 
Advocacy Forum (Feb. 3, 2020) (``Shareholder Advocacy''); TechNet. 
But see letters from commenters opposing the proposal, e.g., Baillie 
Gifford; CalPERS; CII IV; CIRCA; Elliott I; Glass Lewis II; ISS; MFA 
& AIMA; PIAC II (although it agreed that proxy voting advice 
businesses should disclose material information relating to their 
methodology, sources of information, and conflicts of interest, the 
commenter indicated that it was satisfied with the disclosures 
currently provided and did not believe specific regulation on this 
point was necessary).
    \436\ See, e.g., letters from ExxonMobil (supporting the 
proposal's clarification that Rule 14a-9 applies to material 
information concerning a proxy voting advice business's methodology, 
sources of information, and conflicts of interest); GM.
    \437\ See, e.g., letters from BRT (``[I]t is important that 
proxy advisors not omit the disclosure of information underlying the 
basis of their advice or which would affect its analysis and 
judgment''); ExxonMobil; Nasdaq (``We agree with the Commission that 
the amendments are in the public interest, promote investor 
protection, and help ensure that investors are provided the 
information they need to make fully informed voting decisions.''); 
SCG.
    \438\ See, e.g., letters from BRT (``Proxy advisors offer little 
transparency into their internal standards, procedures, and 
methodologies. Neither ISS nor Glass Lewis fully discloses the 
methodologies used to develop their voting recommendations''); CEC; 
FedEx; GM; NAM; Nasdaq; TechNet.
    \439\ See, e.g., letters from CCMC (noting that proxy voting 
advice businesses have been criticized for ``a one-size-fits-all 
approach of voting recommendations that ignores the unique 
characteristics and operations of individual companies and 
industries''); FedEx; Nasdaq; NAM; Nareit; TechNet (further noting 
that ``one-size-fits-all'' methodologies across different subject 
areas often fail to account for unique differences between 
companies).
---------------------------------------------------------------------------

    Other commenters specifically approved of the proposed amendment's 
reference to a proxy voting advice business's use of standards that 
materially differ from relevant Commission standards or 
requirements.\440\ These commenters were concerned that not all 
investors were fully aware when proxy voting advice businesses applied 
their own analytical standards that differed from the Commission's or 
other applicable regulatory standards.\441\
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    \440\ See, e.g., letters from BRT; CCMC; GM (``[N]egative voting 
recommendations from a proxy advisor may not align with the 
Commission's requirements, which can mislead or cause confusion 
among proxy voters. We therefore believe that proxy voters should 
have the benefit of this additional context to ensure that they are 
fully informed and understand the standards employed by a proxy 
advisor when reviewing their voting recommendations.''); Nareit; 
Nasdaq (``In Nasdaq's own experience, ISS has determined that a 
director was not independent under its criteria even though the 
director was independent under Nasdaq and SEC rules.''); SCG.
    \441\ See, e.g., letters from BIO (stating ``that it is 
important for proxy voting advice businesses to clarify when a 
negative voting recommendation is based on the proxy voting advice 
business's own determination that a registrant's conduct or 
disclosure is inadequate, notwithstanding that the conduct or 
disclosure meets applicable SEC requirements''); BRT (``Business 
Roundtable member companies are concerned that, when making 
recommendations, proxy advisors rely upon information not included 
in the company's public SEC filings or on factors other than the 
actual regulatory requirements to which companies are subject. For 
instance, proxy advisors have their own guidelines for determining 
the independence of directors. This has resulted in situations where 
a proxy advisor recommends against a director's election because it 
decided that the director is not independent under its standards, 
despite the fact that the company's board of directors--carrying out 
its fiduciary duties-- determined that the director in question was 
independent under the Commission's requirements, the company's stock 
exchange listing rules and its corporate governance guidelines.''); 
Charter; SCG (asserting that proxy voting advice businesses ``apply 
standards or policies that differ from SEC and/or stock exchange 
listing requirements frequently enough that it strains credulity to 
believe that the reasonable investor always understands whether a 
voting recommendation reflects (non)compliance with existing rules/
regulations/standards or simply proxy advisor judgment'').
---------------------------------------------------------------------------

    On the other hand, some commenters contended that, in general, the 
proposed amendment to Rule 14a-9 would heighten legal uncertainty and 
litigation risk for proxy voting advice businesses because it would 
broaden the concept of materiality and create a new source of liability 
for proxy voting advice businesses, the scope of which is not 
sufficiently clear.\442\ Two commenters also suggested that the 
proposed amendment may be prohibited by the First Amendment.\443\
---------------------------------------------------------------------------

    \442\ See, e.g., letters from Carl C. Icahn (Feb. 7, 2020) (``C. 
Icahn''); CalPERS; CIRCA; Elliott I; Glass Lewis II (asserting that 
the Commission does not adequately explain how, for example, a 
failure to disclose information regarding ``use of standards that 
materially differ from relevant standards or requirements that the 
Commission sets or approves'' could mislead shareholders); MFA & 
AIMA.
    \443\ See letters from CII IV; ISS. Our clarification below that 
differences of opinion are not actionable under the final amendment 
to Rule 14a-9 resolves these constitutional concerns.
---------------------------------------------------------------------------

    Commenters that opposed the proposed amendment's reference to a 
proxy voting advice business's use of standards that materially differ 
from relevant Commission standards or requirements argued that it was 
unnecessary and based on the flawed premise that clients are either 
unaware of, or lack the sophistication necessary to appreciate, the 
distinction between a company's failure to satisfy the particular 
analytical standards employed by a proxy voting advice business and a 
company's failure to comply with relevant regulatory standards.\444\ 
Commenters made the point that most clients are well aware of such 
differences and often maintain custom policies that are more rigorous 
than relevant regulatory standards and require the proxy voting advice 
business to apply such policies when preparing their proxy voting 
advice.\445\ Moreover, commenters stated that in many cases clients 
hire proxy voting advice businesses precisely because they are aware 
and approve of these businesses using certain standards that exceed 
applicable regulations.\446\ In addition, other commenters asserted 
that the proxy voting advice businesses' disclosures about the use of 
differing standards were already sufficiently clear.\447\
---------------------------------------------------------------------------

    \444\ See, e.g., letters from CalPERS (``We think it would be 
rare for the professionals that actually use proxy voting advice to 
make such a mistaken inference.''); CII IV; Glass Lewis II.
    \445\ See, e.g., letters from CalPERS (``Existing clients . . . 
already know when proxy voting advice businesses produce their own 
guidance as opposed to report on the minimal requirements of the 
SEC.''); CII IV; Glass Lewis II.
    \446\ See, e.g., letter from PIAC II (``Proxy advisors are paid 
to make recommendations based on governance best practices rather 
than legal or regulatory minimums and PIAC members expect the 
standards of proxy advisors to exceed those minimums.'').
    \447\ See, e.g., letters from CalPERS (``[The Proposing Release] 
provides examples highlighting a problem that does not exist in 
reality because proxy voting advice businesses already distinguish 
their advice from SEC guidance . . . Competent lay people doing a 
minimal amount of research will find that proxy advisors routinely 
inform clients about where the standards come from because clients 
want to know.''); CII IV (noting that the Commission did not produce 
examples of research reports to support its assertions in the 
Proposing Release).
---------------------------------------------------------------------------

    Finally, some commenters recommended modifications to the proposal 
that would have added a number of specific examples to the list in Rule 
14a-9 of information that may be material and needs to be disclosed in 
certain circumstances.\448\ Others requested further clarification on 
questions related to the scope and application of the proposed 
amendment \449\ or suggested that Rule 14a-9 be modified to exclude the 
content of recommendations or differences of opinion between management 
and proxy voting advice businesses.\450\
---------------------------------------------------------------------------

    \448\ See, e.g., letters from BRT; CCMC (``[W]e would expand the 
`relevant standards or requirements' to also include those set by 
any relevant stock exchange. As another example, we would also list 
a proxy advisor's failure to disclose whether a registrant disputes 
any findings in the proxy advisor's report or whether a proxy 
advisor diverges from its own publicly disclosed guidelines.''); 
Exxon Mobil (suggesting that the rules should also address proxy 
voting advice that is ``not designed to maximize shareholder value, 
like SRI specialty reports'' and require ``risk factor'' style 
disclosures about the value of an investment when a proxy voting 
advice businesses applies a standard other than shareholder value); 
Nareit (requesting the Commission to expand the list to require 
disclosure ``when voting is predicated on an advisory firm's 
standard that materially differs from relevant statutory 
requirements of the state in which the issuer is chartered''); 
Nasdaq; TechNet.
    \449\ See, e.g., letters from Baillie Gifford (inquiring, among 
other things, whether failure to disclose conflicts of interest 
would be a breach of Rule 14a-9); K. Beaugez; BRT (``Additionally, 
the Commission should specifically make clear whether these anti-
fraud provisions [of Rule 14a-9] apply when proxy advisors' voting 
reports include information, statements or opinions that have not 
been included in material filed with the Commission''); Exxon Mobil; 
CIRCA.
    \450\ See letter from PRI II.

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[[Page 55121]]

3. Final Amendments
    We are adopting amendments to Rule 14a-9 that will add to the 
examples of what may be misleading within the meaning of the rule, 
largely as proposed, but with one modification in response to comments 
received. Consistent with the Commission's guidance on proxy voting 
advice,\451\ the Note to Rule 14a-9 will include new paragraph (e) to 
provide that the failure to disclose material information regarding 
proxy voting advice, ``such as the proxy voting advice business's 
methodology, sources of information, or conflicts of interest'' could, 
depending upon particular facts and circumstances, be misleading within 
the meaning of the rule. However, for the reasons given in the 
discussion that follows, new paragraph (e) will not include the 
proposed clause ``or use of standards that materially differ from 
relevant standards or requirements that the Commission sets or 
approves.''
---------------------------------------------------------------------------

    \451\ See supra notes 428 through 431 and accompanying text.
---------------------------------------------------------------------------

    The ability of a client of a proxy voting advice business to make 
voting decisions is affected by the adequacy of the information it uses 
to formulate such decisions. Consistent with the Commission 
Interpretation on Proxy Voting Advice, the final amendments are 
designed to further clarify the potential implications of Rule 14a-9 
for proxy voting advice specifically, and to help ensure that proxy 
voting advice businesses' clients are provided with the material 
information they need to make fully informed decisions.
    Although we acknowledge commenters' concerns around the potential 
for heightened litigation risk associated with the proposed changes to 
Rule 14a-9,\452\ we reiterate that Rule 14a-9 is grounded in 
materiality, and amending the rule to include updated examples of 
potentially misleading disclosure, depending on the facts and 
circumstances, in no way changes its application or scope. The 
amendment to Rule 14a-9 does not broaden the concept of materiality 
\453\ or create a new cause of action, as some have suggested. As 
discussed above, the Commission has long taken the view that proxy 
voting advice generally constitutes a ``solicitation.'' \454\ Because 
Rule 14a-9 applies to all solicitations, even those made in reliance on 
an exemption from the information and filing requirements of the 
federal proxy rules, proxy voting advice businesses and other market 
participants should have been on notice that Rule 14a-9 applies to 
proxy voting advice. The amendment also does not make ``mere 
differences of opinion'' actionable under Rule 14a-9.\455\ Rather, it 
further clarifies what has long been true about the application of Rule 
14a-9 to proxy voting advice and, more generally, proxy solicitations 
as a whole: No solicitation may contain any statement which, at the 
time and in light of the circumstances under which it is made, is false 
or misleading with respect to any material fact, or which omits to 
state any material fact necessary in order to make the statements 
therein not false or misleading.\456\ The addition of paragraph (e) to 
the Note to Rule 14a-9, the substance of which has not been updated for 
over six decades, to account for contemporary market practices 
(including the prevalent use of proxy voting advice by institutional 
investors and others),\457\ further clarifies that proxy voting advice 
is subject to Rule 14a-9. The addition of paragraph (e) also 
underscores that the examples are among the types of information that 
may provide material context without which, depending on the facts and 
circumstances, the proxy voting advice may run afoul of the rule. The 
examples are illustrative only, and are not intended to be exhaustive 
or absolute, or supersede the materiality principle or the facts and 
circumstances analysis required in each particular case.
---------------------------------------------------------------------------

    \452\ See, e.g., letters from C. Icahn; CalPERS; CIRCA; Elliott 
I; Glass Lewis II; MFA & AIMA; Minerva I.
    \453\ See letter from CalPERS.
    \454\ See supra notes 149 through 154 and accompanying text.
    \455\ See, e.g., letter from PRI II (``[The Commission] . . . 
should . . . narrow the scope of the Proposed Rule to avoid chilling 
litigation over proxy advice, for example, by ensuring that Rule 
14a-9 does not cover the content on recommendations or mere 
differences of opinion between management and proxy firms.'').
    \456\ See Rule 14a-9.
    \457\ See supra note 432.
---------------------------------------------------------------------------

    As noted above, however, we have determined not to adopt the 
proposed example related to the use of standards that materially differ 
from relevant standards or requirements that the Commission sets or 
approves. To the extent that a proxy voting advice business does not 
make clear to its clients that it is making a negative voting 
recommendation based on its own criteria, notwithstanding that the 
registrant has complied with the applicable standards established or 
approved by the Commission, there is a risk that the proxy voting 
advice business's clients may misunderstand the basis for the proxy 
voting advice business's recommendation. The proposed amendment 
regarding use of standards or requirements in proxy voting advice that 
materially differ from relevant standards or requirements that the 
Commission sets or approves was designed to help ensure that proxy 
voting advice businesses' clients are provided the information they 
need to make a ``fair appraisal'' \458\ of the recommendation and to 
clarify the potential implications of Rule 14a-9.
---------------------------------------------------------------------------

    \458\ See supra note 424.
---------------------------------------------------------------------------

    Nevertheless, we understand the concerns expressed by some 
commenters who asserted that the perceived lack of clarity regarding 
the scope of the proposed clause ``or use of standards that materially 
differ from relevant standards or requirements that the Commission sets 
or approves,'' which was not discussed in the earlier guidance, may 
increase legal uncertainty and litigation risks to both proxy voting 
advice businesses and registrants, and that the lack of legal certainty 
could affect the quality of analyses provided by proxy voting advice 
businesses.\459\ We continue to believe that there could well be 
occasions where, for example, the omission or distortion of essential 
context from a proxy voting advice business's explanation of its 
methodologies may be misleading under a materiality principle and the 
particular facts and circumstances, such that a shareholder's ability 
to make an informed voting decision is subverted. However, we also 
believe that the existing principles of Rule 14a-9 are sufficiently 
robust to encompass such a situation, which ultimately will come down 
to a question of facts and circumstances. For that reason, we do not 
think it is necessary to memorialize this potentially nuanced situation 
with an illustrative example that, because it is by definition a 
generalization, could create more confusion than clarity.
---------------------------------------------------------------------------

    \459\ See, e.g., letters from C. Icahn; CalPERS; Glass Lewis II; 
MFA & AIMA.
---------------------------------------------------------------------------

    Therefore, we are adopting the amendment to Rule 14a-9 without this 
example. However, this does not negate the fact that Rule 14a-9's 
prohibition against materially misleading solicitations applies to 
proxy voting advice where the disclosures are so materially deficient 
that the investor could not be reasonably expected to understand that 
the proxy voting advice business is applying a different standard to 
its analysis, and therefore may vote based on such misapprehension. For 
similar reasons, we are also not electing to expand the list of 
examples beyond

[[Page 55122]]

what was proposed, as suggested by some commenters.\460\
---------------------------------------------------------------------------

    \460\ See, e.g., letters from BRT; CCMC; CII IV; Exxon Mobil; 
NAM; Nareit; Nasdaq; TechNet.
---------------------------------------------------------------------------

E. Compliance Dates

    The Commission proposed a one-year transition period after the 
publication of the final rule in the Federal Register to give affected 
parties sufficient time to comply with the proposed new requirements, 
including the development of any necessary processes and systems.\461\
---------------------------------------------------------------------------

    \461\ See Proposing Release at 66539.
---------------------------------------------------------------------------

    Some commenters, however, thought that a longer transition period 
would be necessary given their expectation that affected parties, 
particularly proxy voting advice businesses, would need to devote 
significant time and resources in order to bring their systems and 
processes into compliance.\462\ As an alternative, two commenters 
suggested extending the transition period to eighteen months.\463\ 
Other commenters recommended that small entities be given an extended 
timeframe for compliance.\464\ One commenter also suggested that the 
Commission consider a phased implementation schedule that would not 
interfere with the peak of proxy season that typically occurs during 
the spring each year.\465\
---------------------------------------------------------------------------

    \462\ See letters from CalPERS; CII IV; Felician Sisters II; 
Glass Lewis II; Good Shepherd; IASJ; Interfaith Center II; New York 
Comptroller II; St. Dominic of Caldwell.
    \463\ See letters from CII IV; Glass Lewis II (additionally 
recommending that the effectiveness of final rules be delayed 
pending resolution of ongoing litigation that could impact the 
statutory and constitutional bases for the rulemaking).
    \464\ See letters from Felician Sisters II; Good Shepherd; IASJ; 
Interfaith Center II; St. Dominic of Caldwell.
    \465\ See letter from Glass Lewis II.
---------------------------------------------------------------------------

    We continue to believe that a transition period for compliance with 
new Rule 14a-2(b)(9) is appropriate. Based on commenter feedback, as 
well as the Commission's interest in limiting unnecessary disruptions 
during the peak proxy season, proxy voting advice businesses subject to 
the final rules will not be required to comply with the amendments to 
Rule 14a-2(b)(9) until December 1, 2021. We believe that the length of 
the transition period will accommodate the need of affected parties to 
have sufficient time to prepare for compliance with Rule 14a-2(b)(9) 
while also recognizing that our adoption of a principles-based 
framework should allow proxy voting advice businesses and other parties 
the flexibility to leverage their existing practices and mechanisms to 
more efficiently integrate their operations with the new requirements. 
The compliance date for Rule 14a-2(b)(9) is intended to sufficiently 
precede the typical commencement of the proxy season for 2022, so as to 
minimize disruption to the normal functioning of the proxy system. 
However, we welcome early compliance with the amendment. We note that 
the transition period only applies with respect to the amendments to 
Rule 14a-2(b)(9) and does not extend to the amendments to Rule 14a-1(l) 
and Rule 14a-9. Because these other amendments codify existing 
Commission interpretations and guidance, and do not impose new 
obligations that necessitate significant time for preparation, we do 
not believe the same rationale for a transition period exists.

III. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application. For example, the amendments to Rule 
14a-2(b)(9)(i) operate independently from the amendments to Rule 14a-
2(b)(9)(ii), and both provisions operate independently from the 
amendments to Rules 14a-1(1) and 14a-9.
    Pursuant to the Congressional Review Act, the Office of Information 
and Regulatory Affairs has designated these rules a ``major rule,'' as 
defined by 5 U.S.C. 804(2).

IV. Economic Analysis

    The discussion below addresses the economic effects of the 
amendments, including their anticipated costs and benefits, as well as 
the likely effects of the amendments on efficiency, competition, and 
capital formation.\466\ We also analyze the potential costs and 
benefits of reasonable alternatives to the amendments. Where 
practicable, we have attempted to quantify the economic effects of the 
amendments; however, in certain cases, we are unable to do so because 
either the necessary data are unavailable or certain effects are not 
quantifiable. In the Proposing Release, we requested comment on our 
analysis of these effects. A few commenters provided quantitative 
estimates, and we have addressed and incorporated, where appropriate, 
those estimates into our analysis below. We also provide qualitative 
economic assessments for effects for which we are unable to provide 
quantitative estimates.
---------------------------------------------------------------------------

    \466\ Section 3(f) of the Exchange Act [17 U.S.C. 78c(f)] 
directs the Commission, when engaging in rulemaking where it is 
required to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation. Further, Section 23(a)(2) of the 
Exchange Act [17 U.S.C. 78w(a)(2)] requires the Commission, when 
making rules under the Exchange Act, to consider the impact that the 
rules would have on competition, and prohibits the Commission from 
adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the 
Exchange Act.
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A. Introduction

    We are adopting amendments to Exchange Act Rule 14a-2(b) to 
condition the availability of existing exemptions from the information 
and filing requirements of the proxy rules on proxy voting advice 
businesses satisfying certain additional disclosure and procedural 
requirements. These conditions will require proxy voting advice 
businesses to provide enhanced conflicts of interest disclosure. They 
will also separately require proxy voting advice businesses to: (i) 
Adopt and publicly disclose written policies and procedures reasonably 
designed to ensure that the proxy voting advice business's proxy voting 
advice is made available to registrants at or prior to the time when 
such advice is disseminated to the proxy voting advice business's 
clients; and (ii) adopt and publicly disclose written policies and 
procedures reasonably designed to ensure that the proxy voting advice 
business provides clients with a mechanism by which they can reasonably 
be expected to become aware of a registrant's written statements about 
the proxy voting advice in a timely manner before the shareholder 
meeting. We also are codifying the Commission's interpretation that, as 
a general matter, proxy voting advice constitutes a solicitation within 
the meaning of Exchange Act Rule 14a-1(l). Finally, we are amending 
Exchange Act Rule 14a-9 to add as an example of a potentially material 
misstatement or omission within the meaning of the rule, depending upon 
particular facts and circumstances, the failure to disclose material 
information related to the proxy voting advice business's methodology, 
sources of information, or conflicts of interest.
    We have considered the economic effects of the final amendments, 
including their effects on competition, efficiency, and capital 
formation. The purpose of the final amendments is to help ensure that 
investors who use proxy voting advice have access to more complete, 
accurate, and transparent information and are able to benefit from

[[Page 55123]]

a robust discussion of views--similar to what is possible at a meeting 
where shareholders and other parties are physically attending and 
participating--when making their voting decisions. We generally expect 
the final amendments to reduce information asymmetries between proxy 
voting advice businesses and their clients by eliciting more tailored 
and comprehensive disclosure of conflicts of interest and by 
facilitating client access to more complete information on matters that 
are the subject of proxy voting advice. We also believe that the final 
amendments may mitigate certain agency costs associated with the 
clients' use of proxy advice voting businesses and thereby facilitate 
more efficient use of the services provided by such businesses while 
preserving their economies of scale.\467\
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    \467\ Researchers define a contract under which one or more 
persons (the principals) engage another person (the agent) to 
perform some service on their behalf as an agency relationship. 
``Agency costs'' in the principal-agent relationship consist of: The 
cost to the principal of monitoring the agent to limit aberrant 
activities; ``bonding'' costs to the agent to reassure the client 
that the agent will not take certain actions that would harm the 
principal or that the principal will be compensated if the agent 
takes such actions; and the ``residual loss,'' or the loss of 
welfare to the principal from the divergence of activities by the 
agent from the interests of the principal. See Michael C. Jensen & 
William H. Meckling, Theory of the Firm: Managerial Behavior, Agency 
Costs and Ownership Structure, 3 J. Fin. Econ. 305 (1976).
---------------------------------------------------------------------------

    As a threshold matter, the relationship between a proxy voting 
advice business client and a proxy voting advice business is an example 
of an agency relationship. As in any principal-agent relationship, the 
agent (the proxy voting advice business) may not always act in the best 
interests of the principal (the client).\468\ The conditions imposed on 
proxy voting advice businesses by the final amendments may reduce the 
costs that arise from this divergence of interests. For example, by 
requiring proxy voting advice businesses to provide clients with more 
tailored and comprehensive conflict of interest disclosure than is 
currently required, the amendments may make it possible for proxy 
voting advice businesses to more credibly reassure their clients that 
relevant conflicts have been disclosed, and potentially addressed (by 
reducing the ability of proxy voting advice businesses to obfuscate 
information about conflicts or selectively disclose conflicts), than is 
otherwise achieved by the current system of conflict disclosure. In 
addition, to the extent that relevant conflicts are better understood 
by a client as a result of the more tailored and comprehensive 
disclosure, the client will be better able to assess the objectivity of 
proxy voting advice against the influence of potentially competing 
interests and thus to monitor proxy voting advice business services. 
Moreover, by separately ensuring that registrants receive notice of 
proxy voting advice and a proxy voting advice business provides clients 
with a mechanism by which they can become more readily aware of 
registrant responses to that advice, the final amendments may reduce 
the costs clients might otherwise incur to acquire information relevant 
to assessing proxy voting advice and increase the efficiency of this 
segment of the proxy system. At the same time, the final amendments 
will likely impose certain additional direct costs on proxy voting 
advice businesses which may offset this reduction in agency costs. 
However, as we detail in later sections, we expect the flexibility 
afforded by the final amendments and current practices of at least the 
three major proxy voting advice businesses in the United States will 
serve to limit those direct costs.
---------------------------------------------------------------------------

    \468\ For example, agents may benefit by enhancing revenues, 
decreasing costs, both, or by taking actions other than those that 
are in the principals' best interest. Id.
---------------------------------------------------------------------------

    As explained in more detail below, many of the economic effects of 
the amendments cannot be reliably quantified. Consequently, while we 
have attempted to quantify the economic effects expected from the 
amendments wherever practicable, much of the discussion remains 
qualitative in nature. Where we are unable to quantify the potential 
economic effects of the final amendments, we provide a qualitative 
assessment of these effects as well as the potential impacts of the 
amendments on efficiency, competition, and capital formation.
1. Overview of Proxy Voting Advice Businesses' Role in the Proxy 
Process
    Every year, retail investors, institutional investors, and 
investment advisers face decisions on whether and how to vote on a 
significant number of matters that are subject to a proxy vote.\469\ 
These matters range from the election of directors and the approval of 
equity compensation plans to shareholder proposals submitted under 
Exchange Act Rule 14a-8. In addition to matters presented at a 
company's annual shareholder meeting, investors and investment advisers 
also make voting determinations when a matter is presented to 
shareholders for approval at a special meeting, such as a merger or 
acquisition or a sale of all or substantially all of the assets of the 
company. As described above, investment advisers and institutional 
investors play a large role in proxy voting for various reasons, 
including because institutional investors and clients of investment 
advisers individually or collectively own a large aggregate fraction of 
many U.S. public companies.\470\ We understand that voting can be 
resource intensive for investors that hold or investment advisers that 
manage diversified portfolios. It involves organizing proxy materials, 
performing due diligence on portfolio companies and matters to be voted 
on, determining whether and how votes should be cast, and submitting 
proxy cards to be counted. Proxy voting advice businesses offer to 
perform a variety of tasks related to voting, including the following:
---------------------------------------------------------------------------

    \469\ 17 CFR 240.14a-8; see, e.g., letters from Barbara Novick, 
Vice Chairman, BlackRock, Inc. (Feb. 3, 2020) (``BlackRock'') 
(``BlackRock acts as a fiduciary for its clients. In this capacity, 
we engage with thousands of companies globally and we vote in 
proxies at over 16,000 company meetings annually.''); NYC 
Comptroller (``For the year ending June 30, 2019, my office voted on 
126,775 individual ballot items at 13,122 shareowner meetings in 86 
markets around the world. . . .''); see also letter in response to 
the SEC Staff Roundtable on the Proxy Process from Ohio Public 
Retirement (Dec. 18, 2018) (``OPERS receives in excess of 10,000 
proxies in any given proxy season.'').
    \470\ See supra note 10 and accompanying text. See also 
Broadridge & PwC, 2019 Proxy Season Review, ProxyPulse (2019), at 1, 
available at https://www.broadridge.com/_assets/pdf/broadridge-proxypulse-2019-review.pdf (estimating that institutions own 70% of 
public company shares) (``Broadridge PwC 2019 Report''); Charles 
McGrath, 80% of Equity Market Cap Held by Institutions, Pensions & 
Investments (Apr. 25, 2017), available at https://www.pionline.com/article/20170425/INTERACTIVE/170429926/80-of-equity-market-cap-held-by-institutions.
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     Analyze and make voting recommendations on the matters 
presented for shareholder vote and included in the registrants' proxy 
statements;
     Execute proxy votes (or voting instruction forms) in 
accordance with their benchmark policy, a specialty policy, or a custom 
policy; \471\
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    \471\ See letter from ISS.
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     Assist with the administrative tasks associated with 
voting and keep track of the large number of voting determinations; and
     Provide research and identify potential risk factors 
related to corporate governance.
    We also understand that, in the absence of the services offered by 
proxy voting advice businesses, investment advisers and other clients 
of these businesses may expend considerable resources to independently 
conduct the work necessary to analyze, recommend, and make voting 
determinations. As a consequence, we understand that some

[[Page 55124]]

investment advisers and institutional investors find it efficient to 
hire proxy voting advice businesses to perform various voting and 
voting-related services, rather than performing them in-house.\472\ 
Proxy voting advice businesses generally are able to capture 
significant economies of scale that are not available to many 
investment advisers and institutional investors on an individual 
basis.\473\
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    \472\ See Concept Release at 42983.
    \473\ See Chester S. Spatt, Proxy Advisory Firms, Governance, 
Market Failure, and Regulation 7 (2019), available at https://www.milkeninstitute.org/sites/default/files/reports-pdf/Proxy%20Advisory%20Firms%20FINAL.pdf (``Spatt (2019)''). Commenters 
also suggest that proxy voting advice businesses are an economically 
efficient means of collecting information and analyzing voting 
issues. See, e.g., letter from CEC.
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    In 2007, the U.S. Government Accountability Office (``GAO'') found 
that among 31 institutions, including mutual funds, pension funds, and 
asset managers, large institutions relied less than small institutions 
on the research and recommendations offered by proxy voting advice 
businesses. Large institutions indicated that their reliance on proxy 
voting advice businesses was limited because they: (i) Conduct their 
own research and analyses to make voting determinations and use the 
research and recommendations offered by proxy voting advice businesses 
only to supplement such analyses; (ii) develop their own voting 
policies, which the proxy voting advice businesses are responsible for 
executing; and (iii) contract with more than one proxy voting advice 
business to gain a broader range of information on proxy issues.\474\ 
In contrast, small institutions said they had limited resources to 
conduct their own research and tended to rely more heavily on the 
research and recommendations offered by proxy voting advice 
businesses.\475\ The findings of a 2016 GAO study that surveyed 13 
institutional investors were similar.\476\
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    \474\ See U.S. Gov't Accountability Office, GAO-07-765, Report 
to Congressional Requesters, Corporate Shareholder Meetings: Issues 
Relating to the Firms that Advise Institutional Investors on Proxy 
Voting, 17-18 (2007), available at https://www.gao.gov/new.items/d07765.pdf (``2007 GAO Report''); see also Letters in response to 
the SEC Staff Roundtable on the Proxy Process from BlackRock (Nov. 
16, 2018) (``BlackRock's Investment Stewardship team has more than 
40 professionals responsible for developing independent views on how 
we should vote proxies on behalf of our clients.''); NYC Comptroller 
(Jan. 2, 2019) (``We have five full-time staff dedicated to proxy 
voting during peak season, and our least-tenured investment analyst 
has 12 years' experience applying the NYC Funds' domestic proxy 
voting guidelines.''); Transcript of the Roundtable on the Proxy 
Process at 194 (comments of Mr. Scot Draeger) (``If you've ever 
actually reviewed the benchmarks, whether it's ISS or anybody else, 
they're very extensive and much more detailed than small firm[s] 
like ours could ever develop with our own independent research.'').
    \475\ 2007 GAO Report, supra note 474, at 17-18.
    \476\ See 2016 GAO Report, supra note 141, at 2.
---------------------------------------------------------------------------

    As discussed in Section I above, proxy voting advice businesses 
have the potential to influence many investors' voting decisions and, 
as a result, the overall vote. Clients of proxy voting advice 
businesses number in the thousands, and they exercise voting authority 
or influence over a sizable number of shares that are voted annually. 
Commenters described the informational benefits that clients derive 
from proxy voting advice \477\ and how proxy voting advice businesses 
enable them to make informed voting determinations on behalf of 
investors and beneficiaries.\478\
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    \477\ See letter from Kenneth A. Bertsch, Executive Director, 
and Jeffrey P. Mahoney, General Counsel, Council of Inst. Investors 
(Feb. 20, 2020) (``CII VIII'').
    \478\ See, e.g., letters from MFA & AIMA; New York Comptroller 
II.
---------------------------------------------------------------------------

    To the extent that proxy voting advice businesses influence voting 
decisions, they also may indirectly impose certain costs on 
shareholders. Recent theoretical research on the role of proxy voting 
advice suggests that the presence of proxy voting advice businesses may 
induce investors to over-rely on information produced by these 
businesses to make voting decisions. This over-reliance arises because 
shareholders do not internalize the benefits for other shareholders of 
their own independent research of matters put to a vote. Instead 
shareholders find it privately efficient to outsource the analysis of 
voting decisions to proxy voting advice businesses.\479\ Additionally, 
if proxy voting advice businesses significantly influence voting,\480\ 
registrants and other market participants may seek to engage with proxy 
voting advice businesses rather than engaging directly with investors 
or registrants. Thus, the presence of proxy voting advice businesses 
may negatively affect the ability of certain investors to engage with 
and influence registrants and other investors. On the other hand, from 
a transactions cost perspective, being able to engage with a few large 
and important intermediaries, compared to engaging bi-laterally with 
multiple shareholders, may be more efficient for registrants and 
investors.
---------------------------------------------------------------------------

    \479\ See generally Andrey Malenko & Nadya Malenko, Proxy 
Advisory Firms: The Economics of Selling Information to Voters, 74 
J. Fin. 2441 (2019). In their theoretical model, the authors assume 
shareholders have perfectly aligned incentives, with all 
shareholders agreeing on share value maximization as the singular 
goal of the firm so the applicability of their results is limited by 
the extent to which investors have goals other than, or in addition 
to, share value maximization. The authors further assume that proxy 
advice is provided by a single monopolistic proxy advisory firm, and 
that shareholders follow proxy advisory firm advice without 
exception. Additionally, the authors assume that when deciding 
whether to invest in their own independent research, shareholders 
believe that their votes will be pivotal to the vote outcome. The 
ownership structure of the company is key to the reported findings: 
The paper shows that proxy advisory services are valuable when 
ownership is sufficiently dispersed. In contrast, proxy advisory 
services are likely to have negative effects for companies with more 
concentrated ownership because they discourage independent 
information acquisition by shareholders. However, their results also 
imply that when ownership is very concentrated shareholders again 
find proxy advisory services to be valuable because each 
shareholder's vote is more likely to be pivotal.
    \480\ See infra notes 481 and 482.
---------------------------------------------------------------------------

    Although the economic incentives to concentrate voting power and 
influence in proxy voting advice businesses are strong, research on the 
role of proxy voting advice businesses in influencing voting, however, 
has produced a wide range of results. For example, a number of studies 
suggest that proxy voting advice has substantial influence on proxy 
votes,\481\ while others suggest a more limited influence.\482\ We note 
that existing academic studies examine the relationship between proxy 
votes and proxy voting advice businesses' recommendations based on 
benchmark policies. The relationship between proxy votes cast and 
voting recommendations provided to clients using clients' custom 
policies has not, to date, been the subject of academic study.\483\
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    \481\ See, e.g., Cindy R. Alexander et al., Interim News and the 
Role of Proxy Voting Advice, 23 Rev. Fin. Stud. 4419, 4422 (2010); 
Alon Brav et al., Picking Friends Before Picking (Proxy) Fights: How 
Mutual Fund Voting Shapes Proxy Contests (Columbia Bus. Sch., 
Research Paper No. 18-16, 2019) at 4, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3101473 (``Brav et al. 
(2019)''); James R. Copland, David F. Larcker, & Brian Tayan, The 
Big Thumb on the Scale: An Overview of the Proxy Advisory Industry 
(Stanford Bus. Sch. Closer Look Series, May 30, 2018) at 3, 
available at https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-closer-look-72-big-thumb-proxy-advisory.pdf; 
James R. Copland, David F. Larcker, & Brian Tayan, Proxy Advisory 
Firms: Empirical Evidence and the Case for Reform, Manhattan 
Institute (May 2018) at 6, available at https://media4.manhattan-institute.org/sites/default/files/R-JC-0518-v2.pdf (``Copland et al. 
(2018)''); Albert Verdam, An Exploration of the Role of Proxy 
Advisors in Proxy Voting (Working Paper, 2006) at 23, available at 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=978835 (``Verdam 
(2006)''); See letter from Chong Shu, University of Southern 
California, Marshall School of Business (Jun. 22, 2020).
    \482\ See Stephen Choi, Jill Fisch, & Marcel Kahan, The Power of 
Proxy Advisors: Myth or Reality?, 59 Emory L.J. 869, 905-06 (2010). 
See also Brav et al. (2019), supra note 481, at 35. The authors find 
that larger mutual fund families cast votes ``in ways completely 
independent from what are recommended by the advisors.''
    \483\ Commenters stated that a large majority of proxy votes are 
cast by proxy advice business clients who provide custom policies to 
proxy voting advice businesses and, in return, receive customized 
voting recommendations based on these policies. See letter from ISS. 
To our knowledge, however, no academic study examines the relation 
between proxy votes and the voting recommendations provided under 
the client's custom policies. It is our understanding that clients 
who receive voting recommendations based on custom policies also 
receive the proxy voting advice business's benchmark reports.

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[[Page 55125]]

    Research on the role of proxy voting advice businesses in proxy 
voting has also produced inconclusive results with respect to the 
quality of voting advice. For example, proxy voting advice businesses 
have been the subject of criticism for potentially being influenced by 
conflicts of interest,\484\ producing reports that contain 
inaccuracies, and utilizing one-size-fits-all methodologies when 
evaluating a diverse array of registrants or when providing services to 
a diverse array of clients.\485\
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    \484\ For example, some proxy voting advice businesses provide 
consulting services to registrants on corporate governance or 
executive compensation matters, such as assistance in developing 
proposals to be submitted for shareholder vote. See Concept Release 
at 42989. As a result, some proxy voting advice businesses provide 
advice regarding a registrant to their institutional investor 
clients on matters for which they may also provide consulting 
services to the registrant. One commenter submitted research that 
attempts to identify and quantify the impact of conflicts of 
interest on recommendations and the effect of competition between 
proxy voting advice businesses on the likelihood of biased 
recommendations. The research finds that competition reduces 
recommendations in favor of management, and that biased 
recommendations have negative effects on registrants. The ability to 
identify the provision of consulting services and to measure biases 
in recommendations, however, represents a significant data challenge 
for the estimation of the purported effects. See letter from Prof. 
Li.
    \485\ See letter from CCMC.
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    To assess the quality of voting advice, studies have sought to 
examine stock market reactions to registrants' announcements that they 
will adopt policies consistent with proxy voting advice businesses' 
recommendations.\486\ These studies hypothesize that the value of such 
policies should be impounded in stock prices, and if investors expect 
adoption of a particular policy to increase the value of a registrant, 
an announcement that the registrant plans to adopt the policy should be 
associated with a positive stock price reaction. This reasoning assumes 
clients aim to increase a registrant's share price and that proxy 
voting advice businesses tailor voting recommendations to achieve this 
aim. Proxy voting advice businesses and certain of their clients, 
however, may have goals other than, or in addition to, maximizing the 
current value of a registrant's shares. Furthermore, the attribution of 
stock price reactions to the adoption of policies by a registrant may 
be challenging due to multiple announcements and other information 
about the registrant that may be released concurrently. Together, these 
limitations make it difficult for researchers to conclusively infer 
recommendation quality from stock market reactions to implementation of 
proxy voting advice business recommendations.\487\
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    \486\ See generally David F. Larcker, Allan L. McCall, & Gaizka 
Ormazabal, Outsourcing Shareholder Voting to Proxy Advisory Firms, 
58 J.L. & Econ. 173 (2015) (finding that when registrants adjust 
their compensation program to be more consistent with 
recommendations of proxy voting advice businesses, the stock market 
reaction is statistically negative).
    \487\ Proxy voting advice business clients may have goals other 
than, or in addition to, maximizing the value of a registrant's 
shares, or these clients may have investment objectives that would 
not be achieved solely on the basis of a positive market reaction. 
See Spatt (2019), supra note 473, at 4; Patrick Bolton et al., 
Investor Ideology (Nat'l Bureau of Econ. Research, Working Paper No. 
25717, 2019), available at https://www.nber.org/papers/w25717.pdf; 
Gregor Matvos & Michael Ostrovsky, Heterogeneity and Peer Effects in 
Mutual Fund Proxy Voting, 98 J. Fin. Econ. 90 (2010); Copland et al. 
(2018), supra note 481, at 6; Verdam (2006), supra note 481, at 12.
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2. Commenter Concerns Regarding the Rule's Economic Justification
    In response to the Proposing Release, commenters expressed a range 
of views regarding the rule's economic justification. Some commenters 
asserted that there are failures in the market for proxy advice that 
justify the final rule.\488\ In addition to a variety of anecdotal 
evidence, some commenters provided surveys of registrants,\489\ 
corporate governance professionals,\490\ and retail investors \491\ 
that indicated concerns about factual inaccuracies and conflicts of 
interest in the proxy voting process.
---------------------------------------------------------------------------

    \488\ See, e.g., letters from CEC; BPC; Mylan; Exxon Mobil; 
Nareit; ACCF; BRT; Timothy M. Doyle (Feb. 3, 2020) (``T. Doyle''); 
CGC; State Street; Nasdaq; SCG; Charter; NAM; J. Ward; BIO; 
Christopher A. Iacovella, Chief Executive Officer, American 
Securities Association (Feb. 3, 2020) (``ASA''); Shareholder 
Advocacy; Michael Hietpas (Feb. 3, 2020) (``M. Hietpas''); John 
Endean, President, American Business Conference (Feb. 19, 2020) 
(``ABC'').
    \489\ See letter from Nasdaq.
    \490\ See letter from SCG.
    \491\ See letter from J.W. Verret, Associate Professor of Law, 
George Mason University Antonin Scalia School of Law (Jan. 22, 2020) 
(``Prof. Verret'') (updating prior Spectrem survey results). One 
commenter disputed the methodology used in the survey of retail 
investors, claiming it used leading questions and ultimately showed 
that retail investors are generally uninformed about the proxy 
voting advice market. See letter from Prof. Coates.
---------------------------------------------------------------------------

    Other commenters stated, generally, that there is no principal-
agent problem or other market failure and that the proposed rule's 
economic analysis failed to describe or provide demonstrable evidence 
of a problem in the market for proxy advice that cannot be solved via 
contractual arrangements in the private sector, other market based 
mechanisms, or existing Commission rules (e.g., Rule 206(4)-6 under the 
Investment Advisers Act).\492\ For example, one commenter disputed the 
claims cited in the Proposing Release that proxy voting advice contains 
inaccuracies or errors significant enough to require regulatory 
intervention, stating that proxy voting advice businesses ``have every 
incentive to conduct credible research and provide accurate 
recommendations.'' \493\ Another commenter provided analysis showing 
that two proxy voting advice businesses are more likely to recommend 
their clients vote with management than a typical investor is to vote 
with management, casting doubt on claims that proxy voting advice 
businesses tend to encourage shareholders to oppose management 
proposals.\494\ Another commenter provided independent analysis of the 
dynamics of proxy vote recommendations, showing that they change over 
time in response to events

[[Page 55126]]

and new information, suggesting they are not ``monolithic.'' \495\
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    \492\ See, e.g., letters from Segal Marco II; TRP; PRI II; 
ProxyVote II; Laura Chappel, Chief Executive, Brunel Pension 
Partnership Limited (Feb. 3, 2020) (``Brunel''); Michael J. Clark, 
Founder and Director, Ario Advisory (Feb. 3, 2020) (``Ario''); CII 
IV; Prof. Coates; Kevin Thomas, Chief Executive Officer, Shareholder 
Association for Research and Education (Jan. 30, 2020) (``SHARE 
II''); Louise Davidson, Chief Executive Officer, Australian Council 
of Superannuation Investors (Jan. 31, 2020) (``ACSI''); BMO; Proxy 
Insight (Jan. 31, 2020) (``Proxy Insight''); Elliott I; Better 
Markets; New York Comptroller II; AFL-CIO II; Joel Schneider, Chair, 
Corporate Governance Committee, Dimensional Fund Advisors (Feb. 3, 
2020) (``Dimensional''); Ron Baker, Executive Director, Colorado 
Public Employees' Retirement Association (Feb. 3, 2020) (``Colorado 
PERA''); Ashbel C. Williams, Executive Director & CIO, State Board 
of Administration of Florida (Feb. 3, 2020) (``Florida Board''); 
David Villa, Executive Director & Chief Investment Officer, et al., 
State of Wisconsin Investment Board (Feb. 3, 2020) (``SWIB''); CFA 
Institute I; CIRCA; AllianceBernstein; LA Retirement; Glass Lewis II 
(noting that no market failure is identified in the release and that 
other jurisdictions' regulators, including ESMA, have concluded that 
there is no market failure in the proxy voting advice business 
industry); ISS; Michael Passoff, CEO, Proxy Impact (Feb. 3, 2020) 
(``Proxy Impact''); Kenneth A. Bertsch, Executive Director, and 
Jeffrey P. Mahoney, General Counsel, Council of Inst. Investors 
(Feb. 4, 2020) (``CII V''); C. Icahn; ValueEdge I; CII VIII. See 
also IAC Recommendation (stating that, rather than citing reliable 
evidence of material problems with proxy voting advice businesses, 
the SEC asserts that problems ``may'' or ``could'' exist, based on 
claims from private interests (who are biased in favor of issuers) 
that problems exist).
    \493\ See letter from New York Comptroller II. See also letter 
in response to the SEC Staff Roundtable on the Proxy Process from 
CII (stating that ``[p]roxy advisers' business model depends on 
factual accuracy and their incentives are thus aligned with issuers 
and institutional investors alike.'').
    \494\ See letter from Proxy Insight.
    \495\ See letter from PRI II.
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    One commenter suggested that there is a different source of market 
failure inherent to the proxy voting process and proxy voting advice 
businesses stemming from the collective action problem inherent in 
shareholder voting.\496\ According to the commenter, investors do not 
value expending resources to determine their position on a given proxy 
vote because, on the margin, their vote does not matter and they do not 
fully internalize all of the benefits associated with any resources 
they do expend.\497\ The commenter further asserts that proxy voting 
advice businesses, in turn, can therefore only charge modest fees for 
their services, which leads them to be resource constrained in 
performing their own research. Thus, according to the commenter, this 
arrangement leads to voting recommendations that are not adequately 
informed or precise, and thus imposes negative externalities on 
shareholders. The commenter argues that, because market forces are 
unable to improve the quality of voting recommendations and reduce 
these externalities, there is a need for regulatory action.\498\ 
Another commenter offered a different perspective, arguing instead that 
proxy voting advice businesses represented a private market solution to 
shareholders' collective action problem, rendering regulatory 
intervention unnecessary.\499\ Other commenters posited that the 
underlying concentration among proxy voting advice businesses and 
conflicts of interest are the result of past regulatory action that 
created demand for the services of proxy voting advice businesses.\500\
---------------------------------------------------------------------------

    \496\ See letter from B. Sharfman I. See also letter from Bryce 
C. Tingle, N. Murray Edwards Chair in Business Law, Faculty of Law, 
University of Calgary (Jan. 31, 2020) (``Prof. Tingle'') (similarly 
asserting that both fund managers and proxy voting advice business 
are not incentivized to expend significant resources in producing 
and evaluating voting advice, but without attributing this lack of 
incentives to a collective action problem on the part of 
shareholders.).
    \497\ Academic research has shown, theoretically, that the 
inability of shareholders to fully internalize the benefits of 
developing an informed position on matters put to a shareholder vote 
can cause shareholders to over-rely on proxy voting advice under 
certain conditions. See supra note 479.
    \498\ See letter from B. Sharfman I.
    \499\ See letter from Glass Lewis II.
    \500\ See, e.g., letter from P. Mahoney and J.W. Verret.
---------------------------------------------------------------------------

    We believe that the important role proxy voting advice businesses 
currently play in facilitating clients' participation in the proxy 
process, as well as the importance of ensuring that clients have access 
to more complete information regarding matters to be voted on, and the 
material conflicts of interest proxy voting advice businesses may have, 
support the final amendments. As discussed in Section I above, the 
purpose of the amendments is to help ensure that investors who use 
proxy voting advice have access to more transparent, accurate, and 
complete information and benefit from a robust discussion of views--
similar to what is possible at a meeting where shareholders are 
physically attending and participating--when making their voting 
decisions, while minimizing costs or delays that could adversely affect 
the timely provision of proxy voting advice. The amendments are 
expected to reduce the costs incurred by clients of proxy voting advice 
businesses in monitoring for conflicts of interest or acquiring 
information relevant to assessing proxy voting advice. In this way, the 
amendments should improve the overall efficiency associated with this 
segment of the proxy system. Proxy voting advice businesses often act 
as the intermediary for their clients' participation in the proxy 
system, and the requirements of the rule will facilitate clients' 
timely access to, and awareness of, more complete information prior to 
voting. This has the potential to benefit not just those clients and 
the immediate shareholders they serve but also investors in our public 
markets more generally.

B. Economic Baseline

    The baseline against which the costs, benefits, and the impact on 
efficiency, competition, and capital formation of the final amendments 
are measured consists of the current regulatory requirements applicable 
to registrants, proxy voting advice businesses, investment advisers, 
and other clients of these businesses, as well as current industry 
practices used by these entities in connection with the preparation, 
distribution, and use of proxy voting advice.
1. Affected Parties and Current Market Practices
a. Proxy Voting Advice Businesses
    Proxy voting advice businesses will be affected by the final 
amendments. As the Commission has previously stated, voting advice 
provided by a firm such as a proxy voting advice business that markets 
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) generally 
constitutes a solicitation subject to 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.'' \501\
---------------------------------------------------------------------------

    \501\ See Commission Interpretation on Proxy Voting Advice at 
47417.
---------------------------------------------------------------------------

    Several commenters noted that certain firms involved in the proxy 
process do not supply research, analysis, and recommendations to 
support the voting decisions of their clients.\502\ To the extent such 
firms are not providing any voting recommendations and are instead 
exercising delegated voting authority on behalf of their clients, we 
agree that such services generally will not constitute ``proxy voting 
advice'' under Rule 14a-1(l)(1)(iii)(A) and have adjusted our baseline 
accordingly.\503\
---------------------------------------------------------------------------

    \502\ Specifically, commenters indicated that two additional 
firms included in the set of affected proxy voting advice businesses 
in the Proposing Release, ProxyVote Plus and Marco Consulting Group 
did not advise investment advisers and institutional investors on 
their voting determinations and would therefore not be affected by 
the proposed amendments. See supra note 100 and accompanying text. 
See also letters from Segal Marco II; ProxyVote II; CII IV.
    \503\ See supra notes 170-173 and accompanying text.
---------------------------------------------------------------------------

    As of July 22, 2020, to our knowledge, the proxy voting advice 
industry in the United States consists of three major firms: ISS, Glass 
Lewis, and Egan-Jones.
     ISS, founded in 1985, is a privately-held company that 
provides research and analysis of proxy issues, custom policy 
implementation, vote recommendations, vote execution, governance data, 
and related products and services.\504\ ISS also provides advisory/
consulting services, analytical tools, and other products and services 
to corporate registrants through ISS Corporate Solutions, Inc. (a 
wholly owned subsidiary).\505\ As of April 2020, ISS had nearly 2,000 
employees in 30 locations, and covered approximately 44,000 shareholder 
meetings in 115 countries, annually.\506\ ISS states that it executes 
about 10.2 million ballots annually on behalf of those clients 
representing 4.2 trillion shares.\507\ ISS is registered with the 
Commission as an investment adviser and identifies its

[[Page 55127]]

work as pension consultant as the basis for registering as an 
adviser.\508\
---------------------------------------------------------------------------

    \504\ See 2016 GAO Report, supra note 141, at 6.
    \505\ Id.
    \506\ See About ISS, available at https://www.issgovernance.com/about/about-iss/ (last visited May 22, 2020). See also supra note 
10.
    \507\ See About ISS, available at https://www.issgovernance.com/about/about-iss/ (last visited May 22, 2020).
    \508\ See Form ADV filing for ISS, available at https://adviserinfo.sec.gov/IAPD/content/ViewForm/crd_iapd_stream_pdf.aspx?ORG_PK=111940 (last accessed April 23, 
2020). See also 2016 GAO Report, supra note 141, at 9.
---------------------------------------------------------------------------

     Glass Lewis, established in 2003, is a privately-held 
company that provides research and analysis of proxy issues, custom 
policy implementation, vote recommendations, vote execution, and 
reporting and regulatory disclosure services to institutional 
investors.\509\ As of April 2020, Glass Lewis had more than 380 
employees worldwide that provide services to more than 1,300 clients 
that collectively manage more than $35 trillion in assets.\510\ Glass 
Lewis states that it covers more than 20,000 shareholder meetings 
across approximately 100 global markets annually.\511\ Glass Lewis is 
not registered with the Commission in any capacity.
---------------------------------------------------------------------------

    \509\ Id. at 7.
    \510\ See Glass Lewis Company Overview, available at https://www.glasslewis.com/company-overview/(last visited Apr. 26, 2020).
    \511\ Id.
---------------------------------------------------------------------------

     Egan-Jones was established in 2002 as a division of Egan-
Jones Ratings Company.\512\ Egan-Jones is a privately-held company that 
provides proxy services, such as notification of meetings, research and 
recommendations on selected matters to be voted on, voting guidelines, 
execution of votes, and regulatory disclosure.\513\ As of September 
2016, Egan-Jones' proxy research or voting clients mostly consisted of 
mid- to large-sized mutual funds,\514\ and the firm covered 
approximately 40,000 companies.\515\ Egan-Jones Ratings Company (Egan-
Jones' parent company) is registered with the Commission as a 
Nationally Recognized Statistical Ratings Organization.\516\
---------------------------------------------------------------------------

    \512\ See 2016 GAO Report, supra note 141, at 7.
    \513\ Id.
    \514\ Id.
    \515\ Id. While ISS and Glass Lewis have published updated 
coverage statistics on their websites, the most recent data 
available for Egan-Jones was compiled in the 2016 GAO Report.
    \516\ See Order Granting Registration of Egan-Jones Rating 
Company as a Nationally Recognized Statistical Rating Organization, 
Exchange Act Release No. 34-57031 (Dec. 21, 2007), available at 
https://www.sec.gov/ocr/ocr-current-nrsros.html#egan-jones.
---------------------------------------------------------------------------

    Of the three proxy voting advice businesses identified, ISS and 
Glass Lewis are the largest and most often used for proxy voting 
advice.\517\ We do not have access to general financial information for 
ISS, Glass Lewis, and Egan-Jones such as annual revenues, earnings 
before interest, taxes, depreciation, and amortization, and net income. 
We also do not have access to client-specific financial information or 
more general or aggregate information regarding the economics of the 
proxy voting advice business.
---------------------------------------------------------------------------

    \517\ See 2016 GAO Report, supra note 141, at 8, 41 (``In some 
instances, we focused our review on Institutional Shareholder 
Services (ISS) and Glass Lewis and Co. (Glass Lewis) because they 
have the largest number of clients in the proxy advisory firm market 
in the United States.''); see also letters in response to the SEC 
Staff Roundtable on the Proxy Process from Center on Executive 
Compensation (Mar. 7, 2019) (noting that there are ``two firms 
controlling roughly 97% of the market share for such services''); 
Society for Corporate Governance (Nov. 9, 2018) (``While there are 
five primary proxy advisory firms in the U.S., today the market is 
essentially a duopoly consisting of Institutional Shareholder 
Services . . . and Glass Lewis & Co. . . . .'').
---------------------------------------------------------------------------

    Several commenters stated that the economic analysis in the 
Proposing Release failed to consider effects of the proposal on smaller 
firms that provide proxy voting services, such as Investor Advocates 
for Social Justice (``IASJ'').\518\ Further, commenters stated that the 
final amendments could affect the propensity of non-U.S. firms to 
compete with U.S. proxy voting advice businesses.\519\ Based on the 
information available to the Commission,\520\ including comments on the 
Proposing Release, we are not aware of smaller firms that currently 
supply research, analysis, and recommendations in the United States to 
support the voting decisions of their clients that would fall within 
the definition of ``solicitation.'' We acknowledge that any smaller 
firms or non-U.S. proxy voting advice businesses could be affected by 
the final amendments to the extent they provide proxy voting advice on 
registrants who have filed proxy materials with the Commission, or if 
the final amendments affect their willingness to enter the market to 
supply proxy voting advice in the United States.
---------------------------------------------------------------------------

    \518\ See letter from IASJ. We understand that this firm 
typically does not make voting recommendations to its institutional 
investor clients but rather assists those ``who seek a partner to 
carry out their proxy voting.'' Id. To the extent a firm does not 
make voting recommendations to its clients and is instead exercising 
delegated authority on their behalf, it would not be engaged in a 
``solicitation'' within the meaning of Rule 14a-1(l)(1)(iii)(A). See 
supra notes 170-173 and accompanying text. Therefore, based on our 
understanding of its current activities, this commenter (and others 
engaged in similar conduct) would not appear to be subject to 
compliance with Rule 14a-2(b)(9). See also letters from Felician 
Sisters II; Good Shepherd; Interfaith Center II; ProxyVote II; Segal 
Marco II; St. Dominic of Caldwell.
    \519\ See letters from Minerva I; PIRC.
    \520\ Our awareness of providers of proxy voting services may be 
limited because firms that provide proxy voting services, including 
proxy voting advice businesses, do not always engage in activities 
that would require them to register with the Commission. See supra 
Section I.
---------------------------------------------------------------------------

    In a principal-agent relationship, such as the relationship between 
a proxy voting advice business and a client, to the extent that the 
principals' and agents' interests are not perfectly aligned, agents can 
expend resources to assure principals that they will act in the 
principals' best interest. When agents operate in a competitive market 
soliciting business from principals, they have an incentive to expend 
resources to assure principals that they will act in the principals' 
best interest, or risk putting themselves at a competitive 
disadvantage.\521\ Where the agent's interest and the principal's 
interest diverge, there can be a strong counterweight to this incentive 
and where a relationship is multifaceted the agent may emphasize areas 
of alignment and de-emphasize areas of conflict. In the proxy voting 
advice market, certain practices by proxy voting advice businesses 
serve as mechanisms to assure their clients that proxy voting advice 
businesses will take actions that are in clients' best interest. All 
three major proxy voting advice businesses have policies, procedures, 
and disclosures in place that are intended to reduce clients' costs of 
monitoring the businesses' behavior.\522\
---------------------------------------------------------------------------

    \521\ Agents have an incentive to expend resources to assure 
principals that they will act in the principals' best interest as 
long as the cost of providing the assurance is less than the value 
of the assurance to principals.
    \522\ See, e.g., letter from Glass Lewis II.
---------------------------------------------------------------------------

    Proxy voting advice businesses' reliance on information available 
to all shareholders is one example of how current market practices may 
mitigate agency costs. One commenter noted that facing the prospect of 
having their work checked by clients can discipline proxy voting advice 
businesses that might otherwise act based on conflicts of interest when 
developing proxy advice.\523\ The same commenter included use of 
publicly available information as a step it has taken to ``ensure 
quality and minimize error in its published research.'' \524\ The three 
major proxy voting advice businesses state that they base their 
recommendations exclusively on information that is publicly available. 
Relying on publicly available information to develop proxy advice 
enables clients to validate the inputs that proxy voting advice 
businesses provide, rather than expending effort to obtain proprietary, 
and potentially commercially sensitive, information

[[Page 55128]]

directly from registrants or other sources.
---------------------------------------------------------------------------

    \523\ See letter from ISS.
    \524\ See id.
---------------------------------------------------------------------------

    As part of our consideration of the baseline for the final rules, 
we focus on two industry practices that are particularly relevant for 
the new conditions in Rule 14a-2(b): Conflicts of interest disclosure 
and procedures for engagement with registrants.
i. Conflict of Interest Disclosures
    While the nature of potential conflicts related to revenues might 
be different among the three proxy voting advice businesses, all three 
proxy voting advice businesses have conflicts of interest policies and 
make disclosures to clients disclosing the nature of potential 
conflicts and the steps that they have taken to address them.\525\ 
These existing policies and disclosures are part of the economic 
baseline for the amendments.
---------------------------------------------------------------------------

    \525\ See, e.g., letters from ISS; Glass Lewis II. See also 
Egan-Jones Proxy Services Conflict of Interest Statement (Sept. 
2019), available at https://www.ejproxy.com/media/documents/Egan-Jones_Proxy_Conflict-of-Interest_Sep-2019.pdf.
---------------------------------------------------------------------------

    For example, we understand that ISS has implemented policies and 
procedures designed to prevent and manage conflicts that could arise 
from the work of ISS' research and analytics teams (``Global 
Research'') and the work of ISS Corporate Solutions (``ICS'') for 
public companies.\526\ More specifically, Global Research prepares 
proxy voting governance research, analyzes proxy issues, and provides 
ratings on, and other assessments of, public companies for the benefit 
of institutional investors. ICS provides advisory services, analytical 
tools, and publications to registrants to enable registrants to improve 
shareholder value and reduce risk. According to ISS, one of the primary 
steps the firm has taken to prevent and manage this potential conflict 
of interest is implementing a firewall with the goal of separating ICS 
from ISS. ISS notes that it makes available to its institutional 
clients information about the relationships between ICS and its clients 
in a way that is intended not to alert Global Research analysts to the 
possible existence of such relationships. ISS also notes that it adds a 
legend to each global or domestic proxy analysis advising the reader of 
the existence of ICS and offering ISS' clients the ability to learn 
more about ICS and its clients. In addition, ISS indicates that it has 
implemented a policy on the disclosure of significant relationships, 
under which ISS provides clients with ``proactive visibility'' 
regarding a range of significant relationships within the client-facing 
side of the ProxyExchange platform.\527\ ICS also discloses in all of 
its contracts that ISS' status as a registered investment adviser (as 
well as its internal policies and procedures) may require ISS to 
disclose to ISS institutional clients ICS' relationship with the 
registrant.
---------------------------------------------------------------------------

    \526\ See ISS, Best Practice Principles for Providers of 
Shareholder Voting Research & Analysis: ISS Compliance Statement 
(2017), available at https://www.issgovernance.com/file/duediligence/best-practices-principles-iss-compliance-statement-april-2017-update.pdf.
    \527\ See ISS Policy Regarding Disclosure of Significant 
Relationships, available at https://www.issgovernance.com/file/duediligence/Disclosure-of-Significant-Relationships.pdf (last 
visited Apr. 27, 2020).
---------------------------------------------------------------------------

    We understand the other two major proxy voting advice businesses 
also provide disclosure of potential conflicts of interest. Glass Lewis 
notes that it provides disclosure of potential conflicts on the cover 
of the relevant research report.\528\ This is intended to enable 
clients and any other parties with access to a Glass Lewis report 
(e.g., the media) to review potential conflicts at the same time they 
review the research, analysis, and voting recommendations contained 
therein. Egan-Jones also discloses its management of three categories 
of potential conflicts--revenue, cost, and structural--to the 
public.\529\
---------------------------------------------------------------------------

    \528\ See Glass Lewis' Policies and Procedures for Managing and 
Disclosing Conflicts of Interest (2019), available at https://www.glasslewis.com/wp-content/uploads/2019/11/GL-Policies-and-Procedures-for-Managing-and-Disclosing-Conflicts-of-Interest-050819-FINAL.pdf.
    \529\ See Egan-Jones Proxy Services Conflict of Interest 
Statement, available at https://ejproxy.com/media/documents/Egan-Jones_Proxy_Conflict-of-Interest_Sep-2019.pdf (last visited Apr. 27, 
2020).
---------------------------------------------------------------------------

    Thus, it appears that all three major proxy voting advice 
businesses have some level of conflict of interest disclosure policies 
in place and provide such disclosure to affected parties. These 
disclosures, which are intended to support the objectivity of voting 
advice and the integrity of the voting process, may overlap to a 
certain degree with the requirements in the final amendments. These 
disclosure policies, however, vary in terms of structure and coverage 
as well as the manner the in which the information is conveyed.
ii. Engagement With Registrants
    The following section discusses existing proxy voting advice 
business engagement with the subjects of proxy voting advice--one 
avenue by which such businesses may signal to their clients that the 
information underlying proxy voting advice is accurate, transparent, 
and complete.
    We understand that all three major proxy voting advice businesses 
have certain policies, procedures, and disclosures in place intended to 
assure clients that the voting advice they receive will be based on 
accurate, transparent, and complete information. In some cases, proxy 
voting advice businesses seek input from registrants to further these 
objectives. All three of these proxy voting advice businesses offer 
certain registrants some form of pre-release review of at least some of 
their proxy voting advice reports, or the data used in their reports. 
Also, all three such proxy voting advice businesses offer some 
registrants access to proxy voting reports and offer mechanisms by 
which registrants can provide feedback on those reports, in some cases 
for a fee.
    For example, ISS states that it may, in some circumstances, give 
registrants, whether or not they are ICS clients, the right to review 
draft research analyses, ratings, or other advisory research reports so 
that ISS may correct factual inaccuracies before delivering final 
voting advice. ISS acknowledges that review of draft analyses may 
provide an opportunity for registrants to unduly influence those 
analyses and reports. To avoid the appearance of impropriety, ISS 
states that it generally offers registrants an opportunity to review a 
draft proxy analysis, rating, or other research report only for the 
purposes of verifying the factual accuracy of information. ISS further 
states that it retains sole discretion whether to accept any change 
recommended by the registrant. ISS's policies also govern changes to 
analyses based on registrant feedback. According to ISS's Code of 
Ethics, if the analyst changes the proposed voting recommendation or 
other proposed conclusion, the proposed change must be reviewed by a 
senior analyst and ISS will retain in its files the documents supplied 
by the registrant detailing the factual inaccuracies.\530\
---------------------------------------------------------------------------

    \530\ See ISS Code of Ethics 7 (2020), available at https://www.issgovernance.com/file/duediligence/code-of-ethics-mar-2020.pdf.
---------------------------------------------------------------------------

    Glass Lewis introduced a ``Report Feedback Statement'' service in 
2019 that has allowed companies to submit feedback on Glass Lewis 
reports and have that feedback be transmitted directly to Glass Lewis 
clients in the proxy research papers they receive.\531\ In addition to 
these services, beginning in 2015, Glass Lewis started providing the 
subjects of its research with its

[[Page 55129]]

Issuer Data Report, which details the key facts underlying the relevant 
report for their review before the report is finalized. According to 
Glass Lewis, materials provided are deliberately limited. Glass Lewis 
has indicated that by providing the facts underlying the report, it can 
benefit from registrant review without inviting debates about Glass 
Lewis' methodology or what result that methodology should lead to in 
the context of a particular recommendation. This service has been 
available without a fee for several years and more than 1,400 companies 
currently participate in it on an annual basis.\532\
---------------------------------------------------------------------------

    \531\ See Press Release, Glass Lewis, Glass Lewis Announces that 
Company Opinions are Now Included With Research and Voting 
Recommendations (Apr. 2, 2020), available at https://glasslewis.com/report-feedback-statement-included-with-research. See also Press 
Release, Glass Lewis, Glass Lewis Launches Report Feedback Statement 
Service (Mar. 14, 2020), available at https://glasslewis.com/glass-lewis-launches-report-feedback-statement-service.
    \532\ See letter from Glass Lewis II.
---------------------------------------------------------------------------

    Egan-Jones provides several avenues for registrants to review and 
correct any material errors found in its reports. Registrants may 
obtain a ``draft,'' or pre-publication copy, of a report pertaining to 
them in order to review it. If a registrant believes there is a 
material error in an Egan-Jones report, the registrant may contact 
Egan-Jones directly. In addition, major U.S. third-party proxy 
solicitors participate in Egan-Jones' Research Preview program. Through 
that program, proxy solicitors can supply draft copies of the research 
regarding the registrant to the registrant, and convey appropriate 
documentation to Egan-Jones to correct any errors found in the research 
on behalf of the registrant.\533\
---------------------------------------------------------------------------

    \533\ See Egan-Jones Issuer Engagement, available at https://ejproxy.com/issuers (last visited Apr. 28, 2020).
---------------------------------------------------------------------------

    Although the three major proxy voting advice businesses offer 
registrants opportunities to review proxy voting advice, existing 
policies and procedures limit review in some respects. ISS, for 
example, offers only ``eligible'' registrants an opportunity to review 
draft proxy analyses and generally uses the S&P 500 constituent list to 
determine eligibility. Moreover, even for eligible companies, ISS 
provides an opportunity to review solely on a ``best-efforts'' 
basis.\534\ As noted above, Glass Lewis indicates that its registrant 
review process is limited to pre-publication review of only the key 
facts underlying each relevant report.\535\
---------------------------------------------------------------------------

    \534\ See ISS Draft Review Process for U.S. Issuers, available 
at https://issgovernance.com/iss-draft-review-process-u-s-issuers/ 
(last visited Apr. 28 2020).
    \535\ See supra note 532.
---------------------------------------------------------------------------

    Additionally, it is our understanding that some proxy voting advice 
businesses currently include links to filings by registrants that are 
the subject of proxy advice in their online platforms. These links 
provide a means by which clients may access additional definitive proxy 
materials that registrants may file in response to proxy voting advice.
    Non-U.S. proxy voting advice businesses that are signatories to the 
Best Practice Principles for Shareholder Voting Research have provided 
information about their engagement with registrants.\536\ Based on 
these public disclosures, we understand that levels of registrant 
engagement vary across non-U.S. proxy voting advice businesses. For 
example, the U.K.-based firm PIRC states that it provides pre-
publication drafts of proxy voting advice to registrants for some 
jurisdictions as a courtesy, while France-based firm Proxinvest does 
not.\537\ While acknowledging the practices of these non-U.S. proxy 
voting advice businesses, this section focuses on the three major proxy 
voting advice businesses that operate in the United States.\538\
---------------------------------------------------------------------------

    \536\ See BPP Group Signatory Statements, available at https://bppgrp.info/signatory-statements (last visited Apr. 29, 2020).
    \537\ Id.
    \538\ As noted in above, we are not aware of smaller firms that 
currently supply research, analysis, and recommendations to support 
the voting decisions of their clients that would fall within the 
definition of ``solicitation.'' Thus we do not speculate as to how 
smaller firms might engage with registrants.
---------------------------------------------------------------------------

b. Clients of Proxy Voting Advice Businesses as Well as Underlying 
Investors
    Clients that use proxy voting advice businesses for voting advice 
will be affected by the final rule amendments. In turn, investors and 
other groups on whose behalf these clients make voting determinations 
will be affected. One of the three major proxy voting advice 
businesses--ISS--is registered with the Commission as an investment 
adviser and as such, provides annually updated disclosure with respect 
to its types of clients on Form ADV. Table 1 below reports client types 
as disclosed by ISS.\539\
---------------------------------------------------------------------------

    \539\ See ISS Form ADV filing, supra note 508. ISS describes 
clients classified as ``Other'' as ``Academic, vendor, other 
companies not able to identify as above.''

                Table 1--Number of Clients by Client Type
                         [as of March 28, 2020]
------------------------------------------------------------------------
                                                             Number of
                   Type of client \a\                       clients \b\
------------------------------------------------------------------------
Banking or thrift institutions..........................             195
Pooled investment vehicles..............................             300
Pension and profit sharing plans........................             170
Charitable organizations................................             110
State or municipal government entities..................              10
Other investment advisers...............................             960
Insurance companies.....................................              40
Sovereign wealth funds and foreign official institutions              10
Corporations or other businesses not listed above.......              70
Other...................................................             225
                                                         ---------------
    Total...............................................           2,095
------------------------------------------------------------------------
\a\ The table excludes client types for which ISS indicated either zero
  clients or less than five clients.
\b\ Form ADV filers indicate the approximate number of clients
  attributable to each type of client. If the filer has fewer than five
  clients in a particular category (other than investment companies,
  business development companies, and pooled investment vehicles), it
  may indicate that it has fewer than five clients rather than reporting
  the number of clients.

    Table 1 illustrates the types of clients that utilize the services 
of one of the largest proxy voting advice businesses. For example, 
while investment advisers (``Other investment advisers'' in Table 1) 
constitute a 46 percent plurality of clients for ISS, other types of 
clients include pooled investment vehicles (14 percent) and pension and 
profit sharing plans (eight percent). Other users of the services 
offered by ISS include corporations, charitable organizations, and 
insurance companies.\540\ Certain of these users of proxy voting advice 
business services make voting determinations that affect the interests 
of a wide array of individual investors, beneficiaries, and other 
constituents.\541\
---------------------------------------------------------------------------

    \540\ Id.
    \541\ One commenter argued that the economic analysis should 
include more data and data analysis related to senior citizens since 
they make up a large portion of the mainstream investor community. 
In particular, the commenter suggested we include more data on the 
proportion of total investors that are senior citizens and some 
demographic analysis. We are sympathetic to the commenter's 
suggestion regarding the importance of senior citizens as investors, 
but we do not have data to perform the analysis the commenter 
requested and none was provided by commenters. See letter from Jim 
Martin, Chairman, et al., 60 Plus Association (Feb. 3, 2020) (``60 
Plus''). We note that, to the extent the final rules improve the mix 
of information available to shareholders when voting decisions are 
made, they will benefit the investor community generally, including 
senior citizen investors.
---------------------------------------------------------------------------

c. Registrants
    Registrants also will be affected by the final amendments. 
Registrants that have a class of equity securities registered under 
Section 12 of the Exchange Act as well as non-registrant parties that 
conduct proxy solicitations with respect to those registrants are 
subject to the

[[Page 55130]]

federal proxy rules.\542\ In addition, there are certain other 
companies that do not have a class of equity securities registered 
under Section 12 of the Exchange Act that file proxy materials with the 
Commission. Finally, Rule 20a-1 under the Investment Company Act 
subjects all registered management investment companies to the federal 
proxy rules.\543\
---------------------------------------------------------------------------

    \542\ Foreign private registrants are exempt from the Federal 
proxy rules under Rule 3a12-3(b) of the Exchange Act. See 17 CFR 
240.3a12-3. We are not aware of any asset-backed registrants that 
have a class of equity securities registered under Section 12 of the 
Exchange Act. Most asset-backed registrants are registered under 
Section 15(d) of the Exchange Act and thus are not subject to the 
federal proxy rules. Nine asset-backed registrants had a class of 
debt securities registered under Section 12 of the Exchange Act as 
of December 2018. As a result, these asset-backed registrants are 
not subject to the federal proxy rules.
    \543\ Rule 20a-1 under the Investment Company Act requires 
registered management investment companies to comply with 
regulations adopted pursuant to Section 14(a) of the Exchange Act 
that would be applicable to a proxy solicitation if it were made in 
respect of a security registered pursuant to Section 12 of the 
Exchange Act. See 17 CFR 270.20a-1. ``Registered management 
investment company'' means any investment company other than a face-
amount certificate company or a unit investment trust. See 15 U.S.C. 
80a-4.
---------------------------------------------------------------------------

    As of December 31, 2018, we estimate that 5,758 registrants had a 
class of securities registered under Section 12 of the Exchange 
Act.\544\ As of the same date, there were approximately 20 companies 
that did not have a class of securities registered under Section 12 of 
the Exchange Act that filed proxy materials.\545\ As of August 31, 2019 
there were 12,718 registered management investment companies that were 
subject to the proxy rules: (i) 12,040 open-end funds, out of which 
1,910 were Exchange Traded Funds (``ETFs'') registered as open-end 
funds or open-end funds that had an ETF share class; (ii) 664 closed-
end funds; and (iii) 14 variable annuity separate accounts registered 
as management investment companies.\546\ As of December 2018, we 
identified 98 Business Development Companies (``BDCs'') that could be 
subject to the final amendments.\547\ The summation of these estimates 
yields 18,594 companies that may be affected to a greater or lesser 
extent by the final amendments.\548\
---------------------------------------------------------------------------

    \544\ We estimate the number of registrants with a class of 
securities registered under Section 12 of the Exchange Act by 
reviewing all Forms 10-K filed during calendar year 2018 with the 
Commission and counting the number of unique registrants that 
identify themselves as having a class of securities registered under 
Section 12(b) or Section 12(g) of the Exchange Act. Foreign private 
registrants that filed Forms 20-F and 40-F and asset-backed 
registrants that filed Forms 10-D and 10-D/A during calendar year 
2018 with the Commission are excluded from this estimate. This 
estimate excludes BDCs that filed Form 10-K in 2018.
    \545\ We identify these issuers as those (1) subject to the 
reporting obligations of Exchange Act Section 15(d) but that do not 
have a class of equity securities registered under Exchange Act 
Section 12(b) or 12(g) and (2) that filed any proxy materials during 
calendar year 2018 with the Commission. The proxy materials we 
consider in our analysis are DEF14A; DEF14C; DEFA14A; DEFC14A; 
DEFM14A; DEFM14C; DEFR14A; DEFR14C; DFAN14A; N-14; PRE 14A; PRE 14C; 
PREC14A; PREM14A; PREM14C; PRER14A; PRER14C. Form N-14 can be a 
registration statement and/or proxy statement. We manually review 
all Forms N-14 filed during calendar year 2018 with the Commission 
and we exclude from our estimates Forms N-14 that are exclusively 
registration statements. To identify registrants reporting pursuant 
to Section 15(d) but not registered under Section 12(b) or Section 
12(g), we review all Forms 10-K filed in calendar year 2018 with the 
Commission and count the number of unique registrants that identify 
themselves as subject to Section 15(d) reporting obligations but 
with no class of equity securities registered under Section 12(b) or 
Section 12(g).
    \546\ We estimate the number of unique registered management 
investment companies based on Forms N-CEN filed between June 2018 
and August 2019 with the Commission. Open-end funds are registered 
on Form N-1A. Closed-end funds are registered on Form N-2. Variable 
annuity separate accounts registered as management investment 
companies are trusts registered on Form N-3. The number of 
potentially affected Section 12 and Section 15(d) registrants is 
estimated over a different time period (i.e., January 2018 to 
December 2018) than the number of potentially affected registered 
management investment companies (i.e., June 2018 to August 2019) 
because there is no complete N-CEN data for the most recent full 
calendar year (i.e., 2018). Registered management investment 
companies started submitting Form N-CEN in September 2018 for the 
period ended on June 30, 2018 with the Commission.
    \547\ BDCs are entities that have been issued an 814- reporting 
number. Our estimate includes 88 BDCs that filed Form 10-K in 2018 
as well as BDCs that may be delinquent or have filed extensions for 
their filings. Our estimate excludes six wholly-owned subsidiaries 
of other BDCs.
    \548\ The 18,594 potentially affected registrants is the sum of: 
(a) 5,758 registrants with a class of securities registered under 
Section 12 of the Exchange Act; (b) 20 registrants without a class 
of securities registered under Section 12 of the Exchange Act that 
filed proxy materials; (c) 12,718 registered management investment 
companies; and (d) 98 BDCs.
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    The above estimates are an upper bound of the number of potentially 
affected companies because not all of these registrants may file proxy 
materials related to a meeting for which a proxy voting advice business 
issues proxy voting advice in a given year. Out of the 18,594 
potentially affected registrants mentioned above, 5,690 filed proxy 
materials with the Commission during calendar year 2018.\549\ Out of 
the 5,690 registrants, 4,758 (84 percent) were Section 12 or Section 
15(d) registrants and the remaining 932 (16 percent) were registered 
management investment companies.\550\
---------------------------------------------------------------------------

    \549\ For details on the estimation of companies that filed 
proxy materials with the Commission during calendar year 2018, see 
supra note 544.
    \550\ According to data from Forms N-CEN filed with the 
Commission between June 2018 and August 2019, there were 965 
registered management investment companies that submitted matters 
for its security holders' vote during the reporting period: (i) 729 
open-end funds, out of which 86 were ETFs registered as open-end 
funds or open-end funds that had an ETF share class; (ii) 235 
closed-end funds; and (iii) one variable annuity separate account. 
See Form N-CEN Item B.10. The discrepancy in the estimated number of 
registered management investment companies submitting proxy filings 
(i.e., 932) and Form N-CEN data (i.e., 965) likely is attributable 
to the different time periods over which the two statistics are 
estimated.
---------------------------------------------------------------------------

    Whether or not proxy voting advice businesses permit registrants to 
review draft proxy voting advice, all registrants are able to respond 
to final proxy voting advice by filing additional definitive proxy 
materials. However, as discussed in the Proposing Release, some 
registrants have asserted that a large percentage of proxies are voted 
within 24 to 48 hours of proxy voting advice being issued \551\ and 
that it can be difficult for registrants to access and analyze the 
proxy voting advice, formulate a response, and file the necessary 
materials with the Commission within that time period.\552\ This is 
consistent with feedback received from commenters, who also indicated 
that registrants face time pressure in their efforts to communicate 
their responses to proxy voting advice to shareholders prior to 
votes.\553\ The Proposing Release included an analysis that estimated 
the number of additional definitive proxy material filings in 2016, 
2017, and 2018,\554\ and Commission staff subsequently refined the 
process for identifying relevant filings and published a list of the 
filings it identified in a memorandum to the public comment file.\555\ 
This list shows approximately 105, 93, and 90 filings in 2016, 2017, 
and 2018, respectively. Further, in the Proposing Release, the staff 
identified in a subset of additional definitive proxy material filings 
in 2018, where data were available, the number of business days between 
when a proxy voting advice business delivered proxy voting advice and 
when the registrant filed additional definitive proxy

[[Page 55131]]

materials, and the number of business days until the planned 
shareholder meeting. Based on this sample, staff estimated a median 
value of three business days and an average value of 3.8 business days 
between when a proxy voting advice business issues proxy voting advice 
and when a registrant responds. Further, the median (average) number of 
days between the registrant response and the shareholder meeting based 
on the sample was 9.5 (10.3) business days.\556\
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    \551\ See Proposing Release at 66545, n.235.
    \552\ See id. at 66545, n.236. As we noted above, shareholders 
have the ability to change their vote at any time prior to a 
meeting, including as a result of a registrant filing supplemental 
proxy materials in response to proxy voting advice. See supra note 
373.
    \553\ See, e.g., letters from Nareit; NAM; Exxon Mobil. See also 
Proposing Release at 66533, n.136.
    \554\ See Proposing Release at 66546, Table 2.
    \555\ See Memorandum from the U.S. Securities and Exchange 
Commission, Division of Economic Risk and Analysis, Regarding Data 
Analysis of Additional Definitive Proxy Materials Filed by 
Registrants in Response to Proxy Voting Advice (Jan. 16, 2020), 
available at https://www.sec.gov/comments/s7-22-19/s72219-6660914-203861.pdf (``Data Analysis of Additional Definitive Proxy 
Materials'').
    \556\ See Proposing Release at 66546.
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    A number of commenters interpreted our analysis in Table 2 of the 
Proposing Release to indicate that the Commission took the view that 
the ``concerns'' raised by registrants about errors or inaccuracies 
reflected actual factual errors.\557\ One commenter questioned whether 
Commission staff evaluated the merits of registrant claims presented in 
the Proposing Release \558\ and supplied its own estimates of actual 
error rates in proxy voting advice business research report based on 
its own research,\559\ as well as on supplementary information made 
available in the comment file.\560\
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    \557\ Id. at Table 2.
    \558\ See letter from CII I.
    \559\ See letter from CII IV.
    \560\ See letter from CII V. This commenter suggested that the 
error rate implied by the Commission's classification in Table 2 of 
the Proposing Release was 0.5% and that after correcting for 
registrant assertions that appear to be in error, the rate is 
reduced to 0.3%. The same commenter performed a case-by-case 
analysis of claims they believed may have been classified as errors 
in the Proposing Release's analysis, casting doubt on whether many 
of them were actually related to factual errors, and concluded that, 
after excluding analytical errors, which may just represent 
differences of opinion, the actual error rate is only 0.06%.
---------------------------------------------------------------------------

    In contrast, another commenter had a different critique of Table 2, 
arguing that estimating error rates based on filings of additional 
definitive proxy materials might actually underestimate the true error 
rate because registrants who submit filings subject themselves to 
potential liability under SEC Rule 14a-9.\561\
---------------------------------------------------------------------------

    \561\ See letter from ACCF.
---------------------------------------------------------------------------

    The method for identifying filings that contained registrant 
concerns and classifying those concerns was detailed in the Proposing 
Release and in the subsequent staff memorandum.\562\ Importantly, the 
analysis set forth in the Proposing Release took no position on the 
merits of responses. The analysis was intended to present how 
registrants currently respond to proxy voting advice and the frequency 
and timing of those responses and made no judgment as to whether the 
concerns raised by registrants in their supplemental filings were 
valid. Nor was the analysis intended to provide an ``error rate.'' 
Although we agree that reasonable readers might disagree in their 
classification of registrant concerns, lack of agreement on 
classification of specific responses does not change our assessment, 
discussed below, that the final rules would benefit clients of proxy 
voting advice businesses, and the proxy process as a whole, by 
improving client access to registrant information and analysis. Indeed, 
the fact that reviewers of additional definitive proxy materials may 
differ both in how they identify registrant concerns and how they 
classify those concerns supports the idea that clients would benefit 
from having a mechanism available by which they can reasonably be 
expected to become aware of registrant responses so they might form 
their own view of the merits of those responses.
---------------------------------------------------------------------------

    \562\ See Proposing Release at n.239. See also Data Analysis of 
Additional Definitive Proxy Materials, supra note 555.
---------------------------------------------------------------------------

2. Current Regulatory Framework
    The economic baseline includes the current regulatory framework 
that applies to proxy voting advice businesses. As explained in the 
Proposing Release, under the Commission's proxy rules, any person 
engaging in a proxy solicitation, unless exempt, is generally subject 
to filing and information requirements designed to ensure that 
materially complete and accurate information is furnished to 
shareholders solicited by the person.\563\ Over the years, the 
Commission has recognized that these filing and information 
requirements may, in certain circumstances, impose burdens that deter 
communications useful to shareholders, and in such circumstances, may 
not be necessary to protect investors in the proxy voting process.\564\ 
Accordingly, the Commission has exempted certain kinds of solicitations 
from the filing and information requirements of the proxy rules, 
subject to various conditions, where such requirements are not 
necessary for investor protection.\565\ Notwithstanding the exemptions, 
these solicitations remain subject to Rule 14a-9, the antifraud 
provisions of the federal proxy rules.\566\
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    \563\ See Proposing Release at 66524.
    \564\ See, e.g., Communications Among Shareholders Adopting 
Release at 49278 (``[S]hareholders can be deterred from discussing 
management and corporate performance by the prospect of being found 
after the fact to have engaged in a proxy solicitation. The costs of 
complying with [the proxy] rules also has meant that . . . 
shareholders and other interested persons may effectively be cut out 
of the debate regarding proposals . . . .'').
    \565\ For example, Rule 14a-2(b)(1) generally exempts 
solicitations by persons who do not seek the power to act as proxy 
for a shareholder and do not have a substantial interest in the 
subject matter of the communication beyond their interest as a 
shareholder. Another exemption, Rule 14a-2(b)(3), generally exempts 
proxy voting advice furnished by an advisor to any other person with 
whom the advisor has a business relationship.
    \566\ 17 CFR 240.14a-9.
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    Proxy voting advice businesses typically rely upon the exemptions 
in Rule 14a-2(b)(1) and (b)(3) to provide advice without complying with 
the filing and information requirements of the proxy rules.\567\ The 
existing conditions to these exemptions are designed to ensure that 
investors are protected where the Commission's filing and information 
requirements do not apply. For example, any person who wishes to rely 
on the Rule 14a-2(b)(3) exemption may not receive special commissions 
or remuneration from anyone other than the recipient of the advice and 
must disclose any significant relationship or material interest bearing 
on the voting advice.\568\ By contrast, the exemption in Rule 14a-
2(b)(1) does not currently require conflicts of interest disclosure. 
Both exemptions were adopted by the Commission before proxy voting 
advice businesses played the significant role that they now do in the 
proxy voting process and in the voting decisions of investment advisers 
and institutional investors.
---------------------------------------------------------------------------

    \567\ See Commission Interpretation on Proxy Voting Advice at 
47416 (discussing the ``two exemptions to the federal proxy rules 
that are often relied upon by proxy advisory firms'').
    \568\ The conditions to Rule 14a-2(b)(3) are: (i) The advisor 
renders financial advice in the ordinary course of his business; 
(ii) the advisor discloses to the recipient of the advice any 
significant relationship with the registrant 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 advisor in 
such matter; (iii) the advisor receives no special commission or 
remuneration for furnishing the proxy voting advice from any person 
other than a recipient of the advice and other persons who receive 
similar advice under this subsection; and (iv) the proxy voting 
advice is not furnished on behalf of any person soliciting proxies 
or on behalf of a participant in an election subject to the 
provisions of Sec.  240.14a-12(c). 17 CFR 240.14a-2(b)(3).
---------------------------------------------------------------------------

    Several commenters stated that the analysis in the Proposing 
Release did not reflect requirements to address conflicts of interest 
under existing law, including the regulatory scheme under the 
Investment Advisers Act, as well as proxy voting advice business best 
practices under the baseline.\569\ We recognize that, in addition to 
the rules governing proxy solicitation, some proxy voting advice 
businesses may be subject to other regulatory regimes.\570\

[[Page 55132]]

For example, one of the major proxy voting advice businesses, ISS, is 
also a registered investment adviser, and as such, must eliminate or 
make full and fair disclosure of all conflicts of interest to its 
clients that might cause ISS to render proxy voting advice that is not 
disinterested such that a client can provide informed consent to the 
conflict.\571\ In addition, ISS has noted that, as a registered 
investment adviser, it has a fiduciary duty of care to make a 
reasonable investigation to determine that it is not basing vote 
recommendations on materially inaccurate or incomplete 
information.\572\ Similarly, Egan-Jones is registered with the 
Commission as a Nationally Recognized Statistical Rating Organization 
(NRSRO). Registered NRSROs are required under Rule 17g-5 to disclose 
conflicts of interest relating to maintenance or issuance of a credit 
rating. However, these regulatory regimes serve distinct, though 
overlapping, regulatory purposes.\573\
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    \569\ See letters from ISS; Glass Lewis II. See also IAC 
Recommendation.
    \570\ See Proposing Release at 66527, n.88; 66529, n.99.
    \571\ See letter from ISS; see also Standard of Conduct for 
Investment Advisers.
    \572\ See letter from ISS.
    \573\ See supra notes 41 through 53 and accompanying text.
---------------------------------------------------------------------------

    One commenter also stated that the final rule's economic effects 
should be measured relative to a baseline that consists of regulation 
in effect prior to the Commission Interpretation on Proxy Voting 
Advice,\574\ noting that no cost-benefit analysis was performed in 
connection with that interpretation.\575\ Consistent with its past 
practice, the Commission continues to believe that the appropriate 
baseline for its economic analysis consists of all existing regulatory 
requirements that apply to the affected parties, including the 
Commission Interpretation on Proxy Voting Advice, as well as industry 
practice in response to those requirements. Moreover, the Commission 
Interpretation on Proxy Voting Advice did not create any new legal 
obligations under the securities laws but rather articulated the 
Commission's longstanding views on what constitutes ``solicitation.'' 
Indeed, as noted above, there is evidence that the proxy voting advice 
business industry has understood for over 30 years that its proxy 
voting advice constitutes a ``solicitation'' under Rule 14a-1(l) or at 
least that the Commission may consider such advice to constitute a 
``solicitation.'' \576\
---------------------------------------------------------------------------

    \574\ See supra note 74.
    \575\ See letter from ISS. Another commenter argued that under 
that baseline, proxy voting advice businesses were governed by the 
fiduciary standard of the Advisers Act, which already required proxy 
voting advice businesses to disclose conflicts of interest. See 
letter from Glass Lewis II. As noted above, the Commission 
acknowledges that some, but not all, proxy voting advice businesses 
may be subject to other regulatory regimes, including the Advisers 
Act.
    \576\ See supra Section II.A.3.
---------------------------------------------------------------------------

    Even if a proxy voting advice business had believed it was not 
engaged in a ``solicitation'' prior to the interpretation, and thus 
newly realized it was engaged in a ``solicitation'' upon issuance of 
the interpretation, the impact of this change would have been minimal 
given the existing exemptions from the filing and information 
requirements of the proxy rules available to proxy voting advice 
businesses. The only thing that potentially would have changed for 
proxy voting advice businesses would have been heightened awareness of 
the application of Rule 14a-9 liability, including the examples of 
specific circumstances that could result in a violation of that rule. 
To the extent that some proxy voting advice businesses did not 
previously understand their voting advice to constitute solicitations 
and thus be subject to Rule 14a-9 liability, it is possible that this 
heightened awareness could cause those businesses to take more care in 
preparing their recommendations. It is also possible that this 
heightened awareness could expose proxy voting advice businesses to 
greater risk of litigation under Rule 14a-9. However, the Commission is 
not aware of evidence--including any specific information provided by 
commenters--that the interpretation has resulted or would result in 
substantial changes in proxy voting advice businesses' practices. In 
any event, even if we were to consider Rule 14a-9 as though it were to 
apply to proxy voting advice businesses for the first time, we believe 
the benefits to investors of this antifraud rule insofar as it would 
deter proxy voting advice businesses from making materially false or 
misleading statements or omissions supports its application to proxy 
voting advice notwithstanding the costs associated with any increased 
risk of litigation. For all of these reasons, we do not expect that 
using a baseline prior to the Commission Interpretation on Proxy Voting 
Advice would have significantly altered our assessment of the economic 
effects of the proposed amendments.
    Finally, we note that--beyond the codification of our 
interpretation of solicitation--the conflicts disclosure requirements 
and principles-based engagement requirements in the final amendments 
will be new for all proxy voting advice businesses. The economic 
effects of these amendments are thus analyzed as new requirements for 
each of these businesses, regardless of whether they understood their 
proxy voting advice to constitute a ``solicitation'' prior to the 
interpretation. Accordingly, we believe that our economic analysis 
appropriately captures the anticipated economic effects of the final 
amendments.

C. Benefits and Costs

    We discuss the economic effects of the final amendments below. For 
both the benefits and the costs, we consider each piece of the final 
amendments in turn. The final amendments include: (1) Amendments to the 
definition of solicitation in Rule 14a-1(l); (2) conditioning 
availability of the exemptions in Rules 14a-2(b)(1) and (b)(3) on (a) 
proxy voting advice businesses providing disclosure regarding conflicts 
of interest and (b) proxy voting advice businesses adopting and 
publicly disclosing written policies and procedures reasonably designed 
to ensure that the proxy voting advice is made available to registrants 
at or prior to the time when such advice is disseminated to the proxy 
voting advice business's clients and that the proxy voting advice 
business provides clients with a mechanism by which they can reasonably 
be expected to become aware of a registrant's written statement about 
the proxy voting advice in a timely manner; and (3) an amendment to the 
examples in Rule 14a-9 of disclosure that, if omitted from a proxy 
solicitation and depending upon the particular facts and circumstances, 
may be misleading.
1. Overview of Benefits and Costs and Comments Received
a. Benefits
    As discussed in further detail below, we expect the rule to 
generate benefits compared to the baseline for clients of proxy voting 
advice businesses and investors, and, albeit to a lesser extent, for 
proxy voting advice businesses and registrants. We expect that the 
largest benefits will come from conditioning availability of the 
exemptions in Rules 14a-2(b)(1) and (b)(3) on proxy voting advice 
businesses providing certain disclosures and maintaining certain 
policies and procedures. In contrast, amendments to the definition of 
solicitation in Rule 14a-1(l) and to Rule 14a-9 represent less 
significant changes from the existing baseline and will likely result 
in more modest benefits for proxy voting advice businesses and their 
clients.
    Two commenters expressed support for the general benefits that the

[[Page 55133]]

proposed rules would generate.\577\ Both commenters argued that the 
shareholder proxy voting process is beset with collective-action 
problems, whereby both institutional and retail investors are not 
motivated to incur large expenses to collect information to become 
better informed about a company, particularly when the company is just 
one of a portfolio. According to the commenters, this results in 
resource-constrained proxy voting advice businesses that produce voting 
recommendations that are not adequately informed or precise. Such 
voting recommendations could lead to suboptimal voting decisions by 
clients of the proxy voting advice businesses. As we mention above, the 
purpose of the final amendments is to improve the information available 
to shareholders when making voting decisions, which could ultimately 
result in more efficient investment outcomes.
---------------------------------------------------------------------------

    \577\ See letters from James R. Copland, Senior Fellow and 
Director, Legal Policy, Manhattan Institute for Policy Research 
(Feb. 3, 2020) (``Manhattan Institute''); B. Sharfman I.
---------------------------------------------------------------------------

    In contrast, several commenters generally disputed the benefits to 
proxy voting advice businesses' clients and investors resulting from 
the proposed amendments.\578\ One commenter argued that the general 
benefits of the rule are speculative at best,\579\ while two other 
commenters characterized them as ``illusory.'' \580\ One of these 
commenters asserted that none of the amendments would create any 
benefits for proxy voting advice businesses and their clients and that 
the only beneficiaries would be self-interested corporate 
insiders.\581\ Another commenter argued that the proposed rules would 
not improve the quality of proxy advice, asserting that the benefits 
are small and uncertain.\582\
---------------------------------------------------------------------------

    \578\ See letters from Bricklayers; ISS; New York Comptroller 
II; ProxyVote II.
    \579\ See letter from ProxyVote II.
    \580\ See letters from CFA Institute I; ISS.
    \581\ See letter from ISS.
    \582\ See letter from Bricklayers.
---------------------------------------------------------------------------

    We do not agree with these assessments. While the extent of the 
benefits will depend on the existing practices of proxy voting advice 
businesses and how they choose to implement the required disclosures 
and procedures (as well as the existing practices of their clients and 
how they, in turn, adjust), we believe that the improved transparency 
that the final rules will generate will be beneficial for proxy voting 
advice businesses' clients and will likely improve the overall proxy 
voting process. Indeed, the fact that in certain circumstances, and to 
varying extents, proxy voting advice businesses already incorporate 
practices similar to the final amendments belies the notion that these 
expected benefits are speculative or illusory. For example, if proxy 
voting advice businesses saw no benefit to providing conflicts of 
interest disclosure to their clients, they would not provide such 
disclosure currently, absent a regulatory requirement. We also note 
that the final amendments reflect significant changes from the proposal 
in light of commenter input and concerns, and we believe these changes 
focus on improvements to the proxy process most likely to yield 
benefits and result in final amendments that are less costly, when 
measured against the baseline, as compared to the costs of the 
proposal.
b. Costs
    We expect that proxy voting advice businesses as well as 
registrants will incur direct costs as a result of the final 
amendments. In the following sections, we analyze the costs of the 
final amendments due to changes in proxy voting advice business 
disclosure and engagement practices relative to the baseline. Further, 
to the extent that any of the final amendments impose direct costs on 
proxy voting advice businesses that are passed along to clients, the 
final amendments could impose indirect costs on clients of proxy voting 
advice businesses, including investment advisers and institutional 
investors, and the underlying investors they serve, if applicable.
    Some commenters expressed concern that the economic analysis in the 
Proposing Release was not thorough enough or that it understated the 
costs and other negative effects that the proposed rules would have on 
proxy voting advice businesses and investors.\583\ Some of these 
commenters also commented on the costs of specific proposed amendments, 
which we discuss below. One commenter stated that, with respect to the 
quantitative cost estimates in the Commission's Paperwork Reduction Act 
(``PRA'') analysis, it believed the actual compliance costs would be 
240 times those estimated in the Proposing Release.\584\ One commenter 
urged a more thorough cost-benefit analysis or other investigation to 
gather data from which reasonable cost estimates can be 
extrapolated.\585\
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    \583\ See letters from Bricklayers; CalPERS; CFA Institute I; 
Kathryn McCloskey, Director, Social Responsibility, United Church 
Funds (Feb. 3, 2020) (``Church Funds''); CII IV; Glass Lewis II; 
Karen L. Barr, President and CEO, Investment Adviser Association, 
(Feb. 3, 2020) (``IAA''); ICI; ISS; New York Comptroller II; Ohio 
Public Retirement; Lucian Arye Bebchuk, James Barr Ames Professor of 
Law, Economics, and Finance, Harvard Law School (Feb. 3, 2020) 
(``Prof. Bebchuk''); ProxyVote II; IASJ; Segal Marco II. See also 
IAC Recommendation.
    \584\ See letter from Nichol Garzon-Mitchell, Senior Vice 
President, General Counsel, Glass Lewis (Jan. 7, 2020) (``Glass 
Lewis I'').
    \585\ See letter from Ohio Public Retirement.
---------------------------------------------------------------------------

    We acknowledge, as we did in the Proposing Release, that the final 
amendments will likely generate direct and indirect costs for proxy 
voting advice businesses and potentially their clients. To the extent 
that a large driver of the costs discussed by commenters would have 
been the proposed amendment regarding registrant review and response to 
proxy voting advice, the flexibility afforded by the principles-based 
approach reflected in the final rules, particularly as it accommodates 
practices similar to current practices, should result in lower costs 
for proxy voting advice businesses and their clients as compared to the 
more prescriptive approach we proposed.
    In the following sections, we discuss the specific costs and 
benefits for each aspect of the final amendments.
2. Codification of the Commission's Interpretation of ``Solicitation'' 
Under Rule 14a-1(l) and Section 14(a)
    We are codifying the Commission's interpretation that, as a general 
matter, proxy voting advice constitutes a solicitation within the 
meaning of the Exchange Act Rule 14a-1(l). Overall, we do not expect 
this amendment to have a significant economic impact because it 
codifies an already-existing Commission interpretation. This 
interpretation itself did not modify existing law or reflect a change 
in the Commission's position and is distinct from the amendments 
conditioning availability of the exemptions in Rules 14a-2(b)(1) and 
(b)(3) on proxy voting advice businesses providing certain disclosures 
and maintaining certain policies and procedures, which we acknowledge 
would alter the costs and benefits associated with being subject to the 
federal proxy rule regime and which we discuss in detail below.\586\ 
Nonetheless, the final amendment to Rule 14a-1 codifying this 
interpretation in the Commission's proxy rules may provide more clear 
notice that Section 14(a) and the proxy rules apply to proxy voting 
advice. Parties receiving proxy voting advice may benefit from such 
notice to the extent that it informs them that the

[[Page 55134]]

communication they receive from proxy voting advice businesses is 
subject to the protections (e.g., antifraud protections) that come from 
the fact that such communication is a solicitation. As discussed above, 
even if a proxy voting advice business had believed it was not engaged 
in a ``solicitation'' prior to the interpretation, we believe the 
impact of this change would be minimal given the existing exemptions 
from the filing and information requirements of the proxy rules 
available to proxy voting advice businesses. The Commission is unaware 
of specific evidence that the interpretation has resulted or would 
result in a substantial increase in costs due to the application of 
Rule 14a-9 to proxy voting advice.\587\
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    \586\ Several commenters suggested that the Commission should 
use a baseline that does not include the August 19 interpretation. 
See, e.g., letters from Glass Lewis II; ISS. We respond to these 
comments in supra Section IV.B.2.
    \587\ See discussion in supra Section IV.B.2.
---------------------------------------------------------------------------

    We also are amending Rule 14a-1(l)(2) to clarify that the 
furnishing of proxy voting advice by certain persons will not be deemed 
a solicitation. Specifically, voting advice from a person who furnishes 
such advice only in response to an unprompted request for the advice or 
a person who does not market its expertise as a provider of proxy 
voting advice, separately from other forms of investment advice, will 
not be deemed a solicitation. Again, we do not expect this adopted 
amendment to have a significant economic impact because it codifies the 
Commission's longstanding view that such a communication should not be 
regarded as a solicitation subject to the proxy rules.
3. Amendments to Rule 14a-2(b)
a. Conflicts of Interest--New Rule 14a-2(b)(9)(i)
i. Benefits
    We are amending Rule 14a-2(b) to make the availability of the 
exemptions in Rules 14a-2(b)(1) and (b)(3) for proxy voting advice 
businesses contingent on providing enhanced disclosure of conflicts of 
interest specifically tailored to proxy voting advice businesses and 
the nature of their services.\588\ These conflicts of interest 
disclosures are intended to augment existing requirements by eliciting 
information that may not be captured by the current requirements of 
either Rule 14a-2(b)(1) and (b)(3) and that is more tailored to proxy 
voting advice businesses and the nature of their conflicts. The final 
amendments require disclosure of conflicts that is sufficiently 
detailed such that clients of proxy voting advice businesses can 
understand the nature and scope of the interest, transaction, or 
relationship and assess the objectivity and reliability of the proxy 
voting advice they receive. In addition, proxy voting advice businesses 
availing themselves of an exemption will be required to disclose any 
policies and procedures used to identify, as well as the steps taken to 
address, any material conflicts of interest, whether actual or 
potential, arising from such relationships and transactions. The final 
amendments also will specify that the enhanced conflicts disclosures 
must be provided in the proxy voting advice and in any electronic 
medium used to deliver the advice.
---------------------------------------------------------------------------

    \588\ See supra Section II.B.3.
---------------------------------------------------------------------------

    We believe the final amendments will benefit the clients of proxy 
voting advice businesses by enabling them to better assess the 
objectivity of the proxy voting advice businesses' advice against 
potentially competing interests. Under Rule 14a-2(b)(9)(i), disclosure 
of conflicts will be more comprehensive regardless of which exemption 
the proxy voting advice business relies upon for its proxy voting 
advice.\589\ Furthermore, we believe the requirement that conflicts of 
interest disclosures be included in the voting advice will benefit 
clients of proxy voting advice businesses by making more standard the 
time and manner in which such principles-based information is disclosed 
and ensuring that the required disclosures receive due prominence and 
can be considered together with proxy voting advice at the time clients 
are making voting determinations. We believe this will, in turn, make 
it easier or more efficient for such clients to review and analyze the 
conflicts disclosure, thus reducing the agency costs associated with 
utilizing the services of proxy voting advice businesses.
---------------------------------------------------------------------------

    \589\ As noted above, Rule 14a-2(b)(3) requires disclosure of 
significant relationships with the registrant or relevant 
shareholder proponent, whereas Rule 14a-2(b)(1) does not currently 
require conflict of interest disclosures.
---------------------------------------------------------------------------

    Disclosure of material conflicts of interest can lead to more 
informed decision-making, and we anticipate that institutional 
investors and investment advisers will use information from disclosures 
of material conflicts of interest to make more informed voting 
decisions.\590\ Thus, to the extent they enable the clients of proxy 
voting advice businesses to make more informed voting decisions on 
investors' behalf, these disclosure requirements will also benefit 
investors. Further, we believe these disclosures will make it easier 
and more efficient for clients that are investment advisers to conduct 
a reasonable review of a proxy voting advice business's policies and 
procedures regarding how the proxy voting advice business identifies 
and addresses conflicts of interest.\591\
---------------------------------------------------------------------------

    \590\ See letter from CEC.
    \591\ See supra Section II.B.3.
---------------------------------------------------------------------------

    One commenter that is a proxy voting advice business and a 
registered investment adviser suggested that the benefits associated 
with Rule 14a-2(b)(9)(i) will be marginal because of proxy voting 
advice businesses' existing fiduciary duty to their clients and the 
disclosures they already provide.\592\ Relatedly, several institutional 
clients of proxy voting advice businesses stated that they believe 
existing practices provide sufficient disclosure of conflicts of 
interest under the baseline.\593\ As an initial matter, not all proxy 
voting advice businesses have registered as investment advisers and 
hence may not have the same fiduciary duty as the commenter. Moreover, 
even where certain proxy voting advice businesses provide detailed 
disclosure about conflicts of interest under existing practices or 
regulatory regimes, requiring tailored disclosure as a condition to the 
proxy rule exemptions will help to ensure that the disclosure is more 
consistently provided to consumers of proxy voting advice across the 
industry. As noted in Section IV.B.1 above, existing conflict of 
interest disclosure by proxy voting advice businesses differs across 
firms, including in structure, coverage, and manner of conveyance.
---------------------------------------------------------------------------

    \592\ See letter from ISS.
    \593\ See supra notes 195-197.
---------------------------------------------------------------------------

    Importantly, the final rule will provide users of proxy voting 
advice with timely access to such disclosure in the proxy voting advice 
and in any electronic medium used to deliver the advice. As a result, 
we believe the final rule will allow clients of proxy voting advice 
businesses to more efficiently access the conflicts disclosure and 
assess a proxy voting advice business's potential conflicts of 
interest. However, we acknowledge that, to the extent that proxy voting 
advice businesses currently provide information that meets or exceeds 
the adopted disclosure requirements, and to the extent that clients of 
proxy voting advice businesses find current disclosure practices under 
the baseline to be sufficient, the benefits described above will be 
more limited.\594\
---------------------------------------------------------------------------

    \594\ For example, ISS and Glass Lewis are signatories to a set 
of voluntary industry-developed practices which state that, as a 
matter of principle, signatories should have processes in place to 
identify and disclose conflicts of interest to their clients. See 
BPP Group Best Practice Principles for Shareholder Voting Research, 
available at https://bppgrp.info (last visited May 21, 2020).

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[[Page 55135]]

iii. Costs
    The new conflicts of interest disclosure requirements will impose a 
direct cost on proxy voting advice businesses to the extent proxy 
voting advice businesses are not already providing information that 
meets the adopted materiality-based disclosure requirements.\595\ 
Specifically, proxy voting advice businesses will bear direct costs 
associated with: (i) Reviewing and preparing disclosures describing 
their conflicts; (ii) developing and maintaining methods for tracking 
their conflicts; (iii) seeking legal or other advice; and (iv) updating 
their voting platforms. Proxy voting advice businesses that are 
investment advisers are already required to identify conflicts and to 
eliminate or make full and fair disclosure of those conflicts.\596\ 
Further, proxy voting advice businesses that are retained by investment 
advisers to assist them with proxy voting may already provide such 
conflicts disclosure in connection with the investment advisers' 
evaluation of the capacity and competency of the proxy voting advice 
business. Additionally, as discussed above, proxy voting advice 
businesses who currently rely on the Rule 14a-2(b)(3) exemption already 
must disclose any significant relationship or material interest bearing 
on the voting advice.
---------------------------------------------------------------------------

    \595\ Id.
    \596\ See Standard of Conduct for Investment Advisers.
---------------------------------------------------------------------------

    We are unable to provide quantitative estimates of these direct 
costs on proxy voting advice businesses because the facts and 
circumstances unique to each proxy voting advice business, including 
the disclosures it currently provides to its clients as well as the 
nature of its material interests, transactions, and relationships, will 
dictate the additional disclosure, if any, it must provide under the 
final rule. As discussed in Section II.B.1 above, boilerplate language 
will not be sufficient to satisfy new Rule 14a-2(b)(9)(i). Under the 
rule, a proxy voting advice business will be required to provide 
conflicts disclosure with enough specificity to enable its clients to 
adequately assess the objectivity and reliability of the proxy voting 
advice. As a result, the disclosure provided by the proxy voting advice 
business could differ depending on the circumstances (e.g., depending 
on the scope of services it provides its clients and the subject 
registrant) and may need to be updated periodically as both the 
business's and its clients' interests change. Additionally, proxy 
voting advice businesses' direct costs will depend on the extent to 
which their current practices and procedures already meet or exceed the 
new disclosure requirements.\597\
---------------------------------------------------------------------------

    \597\ See supra Section II.B.3.
---------------------------------------------------------------------------

    A number of commenters asserted that the amendments regarding 
enhanced conflict of interest disclosure would impose compliance 
costs.\598\ One commenter stated that the proposed additional 
disclosures of conflicts of interest would generate additional 
paperwork burdens but no additional benefits.\599\ Another commenter 
that addressed the PRA burdens of the new conflicts of interest 
disclosure estimated that identifying and disclosing conflicts in the 
manner specified in the proposal would result in an additional one hour 
to identify conflicts at 5,565 registrants and 0.5 hours to disclose 
conflicts at 807 issuers, for a total of 5,969 additional hours per 
year.\600\ As noted in Section V.C.1.a below, in response to that 
commenter's feedback, we have increased our PRA burden estimates of the 
enhanced conflict of interest disclosure. For PRA purposes, we estimate 
that the cost of the enhanced conflict of interest disclosure will be 
6,000 burden hours per proxy voting advice business.
---------------------------------------------------------------------------

    \598\ See, e.g., letters from ISS; IAA; Ohio Public Retirement.
    \599\ See letter from CalPERS.
    \600\ See letter from Glass Lewis I.
---------------------------------------------------------------------------

    One commenter stated that the proposed amendments would compromise 
the firewall between its proxy voting advice business and corporate 
services business,\601\ presumably by revealing the clients of the 
corporate services arm to the research arm. We note, however, that the 
rule we are adopting gives a proxy voting advice business the option to 
include the required disclosure either in its proxy voting advice or in 
an electronic medium used to deliver the proxy voting advice, such as a 
client voting platform, which allows the business to segregate the 
information, as necessary, to limit access exclusively to the parties 
for which it is intended.
---------------------------------------------------------------------------

    \601\ See letter from ISS.
---------------------------------------------------------------------------

    Another commenter argued that the enhanced conflict of interest 
disclosure could artificially and significantly inflate the number of 
conflicts reported.\602\ Because proxy voting advice businesses have 
not been providing the level of enhanced disclosure required by the 
final rule, compliance with the final rules would, according to the 
commenter, make it appear as if proxy voting advice businesses have to 
date been underreporting material conflicts of interest. According to 
the commenter, this would result in reputational harm for proxy voting 
advice businesses. While we agree that an increase in the number of 
material conflicts reported could affect the reputation of proxy voting 
advice businesses, we believe it is appropriate for proxy voting advice 
businesses that have conflicts with the potential to influence the 
recommendations they provide clients to bear the reputational effects 
and other costs associated with disclosure of those conflicts.
---------------------------------------------------------------------------

    \602\ See letter from Ohio Public Retirement.
---------------------------------------------------------------------------

    As discussed in Section II.B.3 above, the final amendments have 
been revised to streamline the requirements and provide proxy voting 
advice businesses the flexibility to determine which situations merit 
disclosure and the specific details to provide to their clients about 
any conflicts of interest identified. This less prescriptive approach 
should help alleviate concerns that the new requirement will compel 
disclosure of information that may compromise existing safeguards, 
result in unduly lengthy disclosures, or harm proxy advice voting 
businesses' reputations. In addition, the revised approach may make it 
easier for businesses to leverage their existing disclosures to satisfy 
the final rule and mitigate concerns that the rule will result in 
unnecessary paperwork burdens, while still providing more consistent 
information about conflicts of interest.
b. Notice of Proxy Voting Advice and Registrant Response--New Rule 14a-
2(b)(9)(ii)
i. Benefits
    In contrast to the Proposing Release, the final amendments to Rule 
14a-2(b)(9) set forth a principles-based approach designed to ensure 
that proxy voting advice businesses' clients have access to more 
transparent and complete information and benefit from a robust 
discussion of views when making voting decisions.\603\ The final 
amendments also provide non-exclusive safe harbors that the proxy 
voting advice businesses may use to satisfy the principles-based 
requirements in Rule 14a-2(b)(9)(ii).
---------------------------------------------------------------------------

    \603\ See supra Section II.C.3.
---------------------------------------------------------------------------

    We believe the final amendments will benefit clients of proxy 
voting advice businesses--and thereby ultimately benefit the investors 
they serve--by enhancing the overall mix of information available to 
those clients as they assess proxy voting advice and make 
determinations about how to cast votes. Providing timely notice to 
registrants of voting advice will allow registrants to more effectively 
determine

[[Page 55136]]

whether they wish to respond to the recommendation by publishing 
additional soliciting materials and to do so in a timely manner prior 
to shareholders casting their votes. Registrants may wish to do so for 
a variety of reasons, including, for example, because they have 
identified what they perceive to be factual errors or methodological 
weaknesses in the proxy voting advice businesses' analysis or because 
they have a different or additional perspective with respect to the 
recommendation. In either case, clients of proxy voting advice 
businesses may benefit from the availability of additional information 
upon which to base their voting decision. Registrants may also wish to 
respond because they agree with some or all aspects of the analysis. In 
that case, that fact also would likely be relevant to and enhance a 
client's decision-making. Further, to the extent that proxy voting 
advice businesses choose to adopt policies and procedures that permit 
them to refine their advice based on any feedback they might receive 
from registrants, users of the advice and the investors they serve (if 
applicable) could benefit from more reliable and complete voting 
advice.
    Ensuring that a proxy voting advice business provides clients with 
a mechanism by which they can reasonably be expected to become aware of 
any written response by a registrant to the proxy voting advice (i.e., 
additional soliciting materials) will benefit users of the advice--
including any underlying investors--by ensuring that they have ready 
and timely access to the registrant's perspective on such advice when 
considering how to vote. Clients of proxy voting advice businesses 
often must make voting decisions in a compressed time period. Timely 
access to registrant responses to the advice would facilitate clients' 
evaluation of the voting advice by highlighting disagreement on facts 
and data, differences of opinion, or additional perspectives before the 
client casts its votes.
    One commenter questioned the benefits to clients of proxy voting 
advice businesses from the registrants' ability to review the proxy 
voting advice.\604\ According to that commenter, accurate and complete 
advice is already being provided by proxy voting advice businesses to 
their clients. As we discuss in Section II.B.2 above, and as noted by 
several commenters,\605\ some proxy voting advice businesses currently 
have internal policies and procedures aimed at enabling feedback from 
certain registrants before they issue voting advice. This suggests that 
proxy voting advice businesses themselves recognize the potential 
benefit of such feedback, which could serve as a bonding mechanism for 
these businesses by demonstrating to clients that the proxy voting 
advice business believes the advice it provides is based on accurate 
information. Even where proxy voting advice businesses currently 
provide opportunities for review and feedback, however, these existing 
practices may be inadequate to appropriately mitigate the agency costs 
associated with use of proxy voting advice. Specifically, it does not 
appear that all proxy voting advice businesses currently provide all 
registrants with an opportunity to review proxy voting advice.\606\ 
Under Rule 14a-2(b)(9)(ii), proxy voting advice businesses' policies 
and procedures must be reasonably designed to ensure that proxy voting 
advice is made available to registrants that are the subject of such 
advice in a timely manner prior to or at the same time when such advice 
is disseminated to the proxy voting advice businesses' clients and thus 
will provide additional registrants with the ability to respond to that 
advice (if they so choose) in a timely manner, thereby enhancing the 
total mix of information available to proxy voting advice business 
clients.
---------------------------------------------------------------------------

    \604\ See letter from ISS.
    \605\ See, e.g., letters from Glass Lewis II; ISS.
    \606\ See supra Section IV.A.
---------------------------------------------------------------------------

    Rule 14a-2(b)(9)(iii) could also yield benefits to the extent that 
proxy voting advice businesses' policies and procedures encourage 
registrants to file their definitive proxy statements earlier than they 
otherwise would. Earlier filing of definitive proxy statements could 
benefit investors generally, as they will have more time to review the 
materials. As discussed below, earlier filing of these materials also 
could help mitigate potential costs for proxy voting advice businesses 
stemming from Rule 14a-2(b)(9)(iii). Under the safe harbor provided by 
the final amendments, proxy voting advice businesses may condition 
dissemination of proxy voting advice to a registrant on the registrant 
filing its definitive proxy statement at least 40 calendar days before 
the annual meeting. One commenter submitted data analysis showing that, 
for 2018, more than 87.8 percent of registrants filed proxy materials 
at least 40 calendar days before an annual meeting.\607\ Based on these 
estimates, proxy voting advice businesses that choose to avail 
themselves of the safe harbor by implementing its terms without 
modification might affect the timing of up to 12.2 percent of 
filings.\608\ We note, however, that proxy voting advice businesses may 
structure their policies to accommodate registrants that may file less 
than 40 calendar days before the shareholder meeting and remain within 
the safe harbor.
---------------------------------------------------------------------------

    \607\ See letter from CII VIII. Calculated as (2,900 + 460)/
3,828 = 0.878. The commenter stated that of 3,828 companies, 2,900 
filed proxy materials between 40 and 48 calendar days in advance of 
annual meetings and 460 filed proxy materials 50 or more days in 
advance of annual meetings.
    \608\ Under the safe harbor, a registrant may opt to forgo the 
benefits of receiving notice of proxy voting advice at the same time 
as clients if it deems accelerating the filing of its proxy 
materials to meet the 40-day threshold sufficiently costly.
---------------------------------------------------------------------------

ii. Costs
    With respect to the requirement that proxy voting advice businesses 
adopt and publicly disclose policies and procedures reasonably designed 
to ensure that (i) registrants receive in a timely manner the proxy 
voting advice report, and (ii) proxy voting advice businesses provide 
clients with a mechanism by which they can reasonably be expected to 
become aware of a registrant's additional soliciting material in 
response to the advice in a timely manner, proxy voting advice 
businesses will bear direct costs. There will also be indirect costs to 
other parties.
(a) Direct Costs
    For the principle set forth in Rule 14a-2(b)(9)(ii)(A), proxy 
voting advice businesses will bear direct costs associated with 
modifying current systems and methods, or developing and maintaining 
new systems and methods, to ensure the conditions of the exemption are 
met and with delivering the report to registrants. While some proxy 
voting advice businesses may already have systems in place to address 
some or all of these requirements,\609\ we do not have data that would 
allow us to estimate the costs associated with modifying or developing 
these systems and methods to encompass all registrants. To the extent 
proxy voting advice businesses already have similar systems in place, 
any additional direct cost may be limited. In addition, as we

[[Page 55137]]

discuss in more detail below, depending on how proxy voting advice 
businesses choose to meet the principle, they may incur direct costs 
associated with executing, obtaining, or modifying acknowledgments or 
agreements with respect to the use of any information shared with the 
registrant in the process of delivering the report to the registrant.
---------------------------------------------------------------------------

    \609\ See, e.g., letter in response to the SEC Staff Roundtable 
on the Proxy Process from Glass Lewis (Nov. 14, 2018) (``Glass Lewis 
has a resource center on its website designed specifically for the 
issuer community via which public companies, their directors and 
advisors can, among other things: (i) Submit company filings or 
supplementary publicly available information; (ii) participate in 
Glass Lewis' Issuer Data Report (`IDR') program, prior to Glass 
Lewis completing and publishing its analysis to its investor 
clients; and (iii) report a purported factual error or omission in a 
research report, the receipt of which is acknowledged immediately by 
Glass Lewis, then reviewed, tracked and dealt with internally prior 
to responding to the company in a timely manner.'').
---------------------------------------------------------------------------

    A proxy voting advice business may also incur direct costs in 
satisfying the requirement of Rule 14a-2(b)(9)(ii)(B) that it adopt and 
publicly disclose written policies and procedures reasonably designed 
to ensure that the proxy voting advice business provides clients with a 
mechanism by which they can reasonably be expected to become aware of a 
registrant's written statements about the proxy voting advice in a 
timely manner before the shareholder meeting. For example, to be 
eligible for the safe harbor in the new Rule 14a-2(b)(9)(iv), a proxy 
voting advice business could provide: (i) Notice on its electronic 
client platform that the registrant has filed, or has informed the 
proxy voting advice business that it intends to file, additional 
soliciting materials (and include an active hyperlink to those 
materials on EDGAR when available); or (ii) notice through email or 
other electronic means that the registrant has filed, or has informed 
the proxy voting advice business that it intends to file, additional 
soliciting materials (and include an active hyperlink to those 
materials on EDGAR when available). Both mechanisms for informing 
clients could involve initial set-up costs as well as ongoing costs.
    Since they are not required to rely on the safe harbor, proxy 
voting advice businesses may also put in place other mechanisms by 
which their clients may reasonably be expected to become aware of a 
registrant's written statements about the proxy voting advice in a 
timely manner, which could be more or less costly than relying on the 
safe harbor. Under the final amendments, those mechanisms also must 
ensure that clients obtain the notification in a timely manner. Because 
the final amendments permit proxy voting advice businesses substantial 
flexibility in satisfying this condition, we expect proxy voting advice 
businesses to implement mechanisms differently depending on, among 
other things, their own facts and circumstances and the nature of their 
client bases. Thus, the overall costs of satisfying this condition are 
difficult to quantify. We believe, however, that the costs of 
implementing a mechanism by which clients may reasonably be expected to 
become aware of registrants' views could involve (i) developing systems 
to gather information about the filing of additional soliciting 
materials by registrants; and (ii) modifying existing systems so that 
clients may reasonably be expected to become aware that registrants 
have filed such additional soliciting materials. To the extent proxy 
voting advice businesses already have similar systems in place, any 
additional direct cost may be limited.
    Many commenters asserted that allowing registrants to review the 
proxy voting advice that proxy voting advice businesses have prepared 
for clients, as would have been required under the proposed rules, 
would generate significant costs for proxy voting advice businesses and 
their clients.\610\ Some commenters stated that the sheer volume of 
reports that proxy voting advice businesses would have to send to 
registrants would generate large compliance costs. For example, one 
commenter noted that the number of reports it alone would need to send 
to registrants for review would increase from 450 in 2019 to 
approximately 6,500 to 25,000 post-adoption, and that it would incur 
costs of drafting at least 6,000 confidentiality agreements.\611\ 
Another commenter asserted that the compliance costs stemming from this 
amendment would be disproportionately higher for smaller proxy voting 
advice businesses.\612\ Some commenters indicated that, under the 
proposed rules, proxy voting advice businesses would have to negotiate 
and enter into confidentiality agreements with each applicable 
registrant to avoid the dissemination of sensitive information, and the 
commenters provided estimates of those burdens.\613\
---------------------------------------------------------------------------

    \610\ See, e.g., letters from CalPERS; CFA Institute I; CII IV; 
IAA; ICI; ISS; New York Comptroller II; Olshan LLP; Ohio Public 
Retirement; Prof. Bebchuk; ProxyVote II.
    \611\ See letter from ISS.
    \612\ See letter from CII IV.
    \613\ See letters from CalPERS (indicating that proxy voting 
advice businesses would need to enter into hundreds or possibly 
thousands of different agreements which would be costly); ISS 
(stating that it would incur costs of drafting at least 6,000 
confidentiality agreements); Glass Lewis I (estimating that it will 
incur a compliance burden of four hours per registrant to negotiate 
or secure confidentiality agreements with 4,912 issuers for a total 
of 19,648 hours); Olshan LLP (suggesting that negotiating such 
agreements would result in the allocation of significant time and 
cost by proxy voting advice businesses). Also, one commenter argued 
that confidentiality agreements would be ineffective at preventing 
leaks of proxy voting advice due to the large number of registrant 
employees that would have access to the information. See letter from 
Olshan LLP.
---------------------------------------------------------------------------

    We recognize the concerns raised by these commenters regarding 
compliance costs associated with the proposed registrant review and 
response process. In response, as suggested by several commenters, we 
are adopting a more principles-based approach intended to achieve many 
of the same objectives of the proposal without unduly encumbering the 
ability of proxy voting advice businesses to provide their clients with 
timely and reliable voting advice. The final amendments will require 
proxy voting advice businesses to have policies and procedures 
reasonably designed to ensure that proxy voting advice is made 
available to registrants at or prior to or at the same time it is 
disseminated to the proxy voting advice businesses' clients rather than 
within a specified period of time. Additionally, the final amendments 
impose only a one-time obligation with respect to notifying registrants 
of a given proxy voting advice. We are also adopting new Rule 14a-
2(b)(9)(v), which will exclude from the scope of Rule 14a-2(b)(9)(ii) 
proxy voting advice to the extent that such advice is based on custom 
policies, and new Rule 14a-2(b)(9)(vi), which will exclude from the 
scope of Rule 14a-2(b)(9)(ii) proxy voting advice as to non-exempt 
solicitations regarding certain mergers and acquisitions or contested 
matters.
    We believe the significant additional flexibility in the final 
amendments will enable proxy voting advice businesses to design 
policies and procedures that satisfy the new conditions of the 
exemptions but are nonetheless efficiently tailored to their specific 
business models and practices. This more flexible approach also may 
permit proxy voting advice businesses to leverage their existing 
systems and methods to satisfy the conditions. We thus believe, when 
measured against the baseline, the final amendments will impose lower 
compliance costs and result in fewer disruptions for proxy voting 
advice businesses and their clients, than the more prescriptive 
approach set forth in the proposal.
    While a more principles-based approach to regulation provides 
additional flexibility for affected parties, it also may impose certain 
costs if the parties are unsure of what measures are needed to satisfy 
the legal requirement. For example, such an approach can entail 
additional judgment on the part of management or result in parties 
doing more than what is required in order to ensure they satisfy the 
applicable standard. The non-exclusive safe harbors built into the 
final amendments will provide legal certainty to proxy voting advice 
businesses that they can rely on the solicitation exemptions in Rules 
14a-2(b)(1) and (b)(3) and therefore could further mitigate the 
compliance burdens associated with the

[[Page 55138]]

new conditions. They also may provide some guidance to proxy voting 
advice businesses about how they can design their own policies and 
procedures to satisfy the conditions.
    As noted in Section V.C.1.a below, we believe that much of the 
burden of the final amendments would be for the proxy voting advice 
business to develop policies that satisfy the principles and 
accordingly modify or develop systems and practices to implement such 
policies. The principles-based approach we implement should help reduce 
such compliance costs significantly, which would likely result in a 
lower PRA burden than the commenter estimates based on the proposal. 
Also, our revised PRA estimates take into consideration our 
understanding that some proxy voting advice businesses have systems and 
practices in place that may complement or overlap with the new 
requirements, which could substantially reduce compliance costs. For 
PRA purposes, we estimate that each proxy voting advice business would 
incur 2,845 burden hours for the notice to registrants under Rule 14a-
2(b)(9)(ii)(A) and 2,845 burden hours for the notice to clients under 
Rule 14a-2(b)(9)(ii)(B).\614\
---------------------------------------------------------------------------

    \614\ See discussion in infra Section V.B.1 for the assumptions 
we make when estimating hours and costs associated with maintaining, 
disclosing, or providing the information required by the amendments 
that constitute paperwork burdens imposed by a collection of 
information.
---------------------------------------------------------------------------

    In addition to these system-related costs, we expect that proxy 
voting advice businesses would, as a general matter, obtain 
acknowledgments or agreements with respect to the use of any 
information shared with a registrant, as we expect that the business 
would seek to limit disclosure of its report. Several of the changes to 
the final rule amendments should allow proxy voting advice businesses 
to take measures to reduce these compliance costs compared with the 
cost of the confidentiality agreements contemplated under the proposal. 
For example, under the principles-based approach that we are adopting, 
in instances where a proxy voting advice business judges the potential 
impact of the disclosure of information contained in the report to be 
high it could provide the advice to registrants at the time it is 
provided to their clients or it may choose to provide draft reports to 
registrants before making them available to clients while imposing more 
stringent confidentiality requirements or terms of use on registrants 
to prevent release of commercially sensitive information. This should 
reduce the risk that commercially sensitive information about proxy 
voting advice may be disseminated more broadly.
    Moreover, as adopted, the principles-based approach does not 
dictate the manner in which proxy voting advice businesses provide the 
report to registrants, and instead gives the proxy voting advice 
business discretion to choose how best to implement the principle of 
the rule and incorporate it into the business's policies and 
procedures, including by leveraging existing practices. In this regard, 
we note that some proxy voting advice businesses currently provide 
reports to registrants without requiring formal confidentiality 
agreements, instead requiring only an electronic acknowledgement of 
terms of use.\615\ Such an approach is likely to involve less 
negotiation between proxy voting advice business and registrants than 
formal confidentiality agreements, and thus lower compliance 
costs.\616\ Further, an acknowledgment of terms of use could be 
designed to apply prospectively, including for future proxy seasons, 
making this a one-time cost when a proxy voting advice business 
initiates coverage of a registrant. Overall, for purposes of our PRA, 
we estimate that each proxy voting advice business will incur a burden 
of between 50 and 5,690 hours per year associated with securing an 
acknowledgment or other assurance that the proxy advice will not be 
disclosed.\617\ Another potential cost for proxy voting advice 
businesses could result from new Rule 14a-2(b)(9)(vi). When additional 
matters are presented for shareholder approval at meetings with 
applicable M&A transaction or contested matters, then the portion of 
the proxy voting advice provided with respect to the applicable M&A 
transaction or contested matters will be excluded from the scope of 
Rule 14a-2(b)(9)(ii). This means that in those situations, proxy voting 
advice businesses may choose to redact the report that they have to 
deliver to registrants, which will generate costs for them. It is also 
possible, however, that proxy voting advice businesses would choose 
instead to deliver an un-redacted report, in which case they will not 
incur the costs of redaction.\618\
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    \615\ For example, Glass Lewis requires a registrant to click 
and agree to certain ``terms of use'' before being able to access 
the notice and recommendations.
    \616\ We recognize that some proxy voting advice businesses, 
irrespective of their current practices or what the final amendments 
envision, may nevertheless choose to enter into formal 
confidentiality agreements with some registrants. For such proxy 
voting advice businesses, the compliance costs may be closer to 
those estimated by the commenters.
    \617\ See discussion in infra Section V.B.1 for the assumptions 
we make when estimating hours and costs associated with maintaining, 
disclosing, or providing the information required by the amendments 
that constitute paperwork burdens imposed by a collection of 
information.
    \618\ In choosing not to redact, proxy voting advice businesses 
potentially increase their exposure to the risk that their 
recommendations will be revealed to market participants. As a 
result, we anticipate that proxy voting advice businesses will be 
less likely to offer pre-publication review to registrants of 
reports that contain recommendations related to contested matters or 
M&A transactions.
---------------------------------------------------------------------------

    A number of commenters raised concerns about the costs associated 
with the provisions in the proposed rules that would have established a 
formal process by which the registrant would be given the opportunity 
to review and provide feedback on draft voting advice.\619\ The 
principles-based approach in the final rules obviates the need for a 
prescribed process for engagement with the registrant and instead 
allows proxy voting advice businesses to decide when and how to provide 
notice of the proxy voting advice businesses' voting advice to 
registrants. Under this approach, proxy voting advice businesses are 
not required to, although they may, share pre-publication drafts with 
registrants for their feedback. Rather, they must provide the 
registrant with a copy of their advice, which could be at the same time 
as the advice is shared with clients. Moreover, as with the proposal, 
nothing in the final amendments will require proxy voting advice 
businesses to alter their advice in response to registrant feedback. 
Thus, we believe the final amendments will substantially address, if 
not eliminate altogether, the concerns raised by commenters related to

[[Page 55139]]

objectivity and timing pressure associated with the proposed engagement 
process.
---------------------------------------------------------------------------

    \619\ See, e.g., letters from Prof. Bebchuk; ISS; Kerrie Waring, 
Chief Executive Officer, International Corporate Governance Network 
(Nov. 21, 2019) (``ICGN''); Segal Marco II; TIAA; Daniel P. Hanson, 
Chief Investment Officer, Ivy Investment Management Company (Feb. 3, 
2020) (``Ivy Investment''); Olshan LLP; First Affirmative. See also 
IAC Recommendation. Some commenters expressed a concern that 
allowing a registrant or other soliciting person to review and 
provide feedback on the voting advice before the proxy voting advice 
business provides it to its clients could reduce the diversity of 
thought in the marketplace for proxy voting advice. See, e.g., 
letters from Prof. Bebchuk; CalPERS; CFA Institute I. See also, 
e.g., letter in response to the SEC Staff Roundtable on the Proxy 
Process from Glass Lewis (``We believe that allowing an issuer to 
engage with us during the solicitation period may lead to 
discussions about the registrant's proxy, thereby providing 
registrants with an opportunity to lobby Glass Lewis for a change in 
policy or a specific recommendation against management. To ensure 
our research is always objective, Glass Lewis takes this added 
precaution and postpones any engagements until after the 
solicitation period has ended . . . .''). Some commenters noted 
conflicts between SRO rules that seek to limit issuers' pre-
publication review of security analyst research reports and the 
proposed approach to pre-publication review of proxy voting advice. 
See, e.g., letter from CII IV.
---------------------------------------------------------------------------

(b) Indirect Costs
    The final rule may also impose indirect costs on other parties. 
Proxy voting advice businesses may pass through a portion of the costs 
of modifying or developing systems to meet the requirements to their 
clients through higher fees for proxy advice. Moreover, the policies 
and procedures proxy voting advice businesses develop under the final 
rule could cause registrants to incur costs. For example, a proxy 
voting advice business that chooses to rely on the safe harbor in Rule 
14a-2(b)(9)(iii) would adopt policies and procedures that provide a 
registrant with a copy of the proxy voting advice business's proxy 
voting advice, at no charge, no later than the time it is disseminated 
to the business's clients if the registrant has filed its definitive 
proxy statement at least 40 calendar days before the meeting date. A 
registrant that wishes to review proxy advice prior to the meeting date 
may incur costs to accelerate the filing of its definitive proxy 
statement to meet the 40-day threshold. However, we expect a registrant 
would incur these costs only if it expected the benefits of review to 
be sufficiently large.\620\
---------------------------------------------------------------------------

    \620\ See supra note 608.
---------------------------------------------------------------------------

    Proxy voting advice business may also bear indirect costs in the 
form of lost revenues. While all three major proxy voting advice 
business currently offer registrants access to proxy voting reports, in 
some circumstances they may charge a fee to registrants for such 
access,\621\ or make such access available only in connection with the 
purchase of consulting services from an affiliate of the proxy voting 
advice businesses. The requirement to share full reports with 
registrants under Rule 14a-2(b)(9)(ii) may result in a proxy voting 
advice business providing access to proxy voting reports at no charge 
to registrants.\622\ This would cause such proxy voting advice business 
to lose fees they otherwise would have earned from selling proxy voting 
reports to registrants. Without more detailed information about proxy 
voting advice businesses' fee schedules and information about the 
revenues they currently generate from selling proxy voting reports to 
registrants, we are unable to quantify the magnitude of these revenue 
losses.
---------------------------------------------------------------------------

    \621\ See Section IV.B.1.a.ii.
    \622\ To rely on the safe harbor in Rule 14a-2(b)(9)(iii), a 
proxy voting advice business must provide registrants with a copy of 
the proxy voting advice at no charge.
---------------------------------------------------------------------------

    Several commenters expressed concern that the economic analysis in 
the Proposing Release understated or failed to consider the costs of 
the proposals on consumers of proxy voting advice.\623\ One commenter 
asserted that costs for customers of proxy voting advice will increase 
due to both the costs of reduced time to review proxy research reports 
and a potential increase in fees, as proxy voting advice businesses 
pass their increased costs on to institutional investor clients, who, 
in turn, would pass these costs on to their individual investor 
participants and beneficiaries.\624\ Another commenter argued that such 
costs may lead some institutional investors to forgo the benefits of 
using a proxy voting advice business, which could ultimately be 
detrimental to the effectiveness of shareholder voting and 
oversight.\625\ Similarly, one commenter suggested that the proposed 
rules, by increasing the costs of the proxy advice that opposes 
management, would impede investors' ability to monitor company 
management.\626\ Another commenter, a proxy voting advice business, 
stated that the proposed changes could diminish proxy voting advice 
businesses' willingness to recommend votes against management and that 
this ``would substantially diminish the independent information 
available to investors and their ability to hold management accountable 
for their actions.'' \627\ Additionally, several commenters supplied 
empirical evidence suggesting that the quality of proxy voting advice 
depends on the time available for proxy voting advice businesses to 
conduct research.\628\ One commenter concluded from this research that 
the proposed requirements would reduce the quality of voting 
advice.\629\
---------------------------------------------------------------------------

    \623\ See, e.g., letters from CII IV; ICI; ISS; New York 
Comptroller II; PRI II; ProxyVote II; Segal Marco II; Ohio Public 
Retirement; Prof. Bebchuk.
    \624\ See letter from CII IV.
    \625\ See letter from Prof. Bebchuk.
    \626\ See letter from PRI II.
    \627\ See letter from ISS.
    \628\ See letter from Ana Albuquerque, Boston University, et al. 
(Feb 3. 2020) (``Prof. Albuquerque et al.'').
    \629\ See letter from CII IV.
---------------------------------------------------------------------------

    The principles-based approach we are adopting should mitigate many 
of these concerns because it will impose compliance costs on proxy 
voting advice businesses that are lower than the compliance costs 
associated with the approach in the Proposing Release, and hence will 
limit the potential increase in the price of proxy advice services for 
proxy voting advice businesses' clients. Further, because the 
principles-based approach does not include a registrant review and 
feedback process that requires pre-publication review, it should reduce 
concerns that registrants will lobby proxy voting advice business for 
changes to recommendations, and thus should not discourage proxy voting 
advice business from making recommendations that oppose management or 
impose additional timing constraints on proxy voting advice businesses.
    Registrants also could incur costs associated with coordinating 
with proxy voting advice businesses to receive the proxy voting advice, 
reviewing the proxy voting advice, and determining whether to prepare 
and file additional soliciting materials in response to the proxy 
voting advice. We expect a registrant would bear these costs only if it 
anticipated the benefits of such steps would exceed the costs of such a 
program. Similarly, because more registrants who are the subjects of 
proxy voting advice will have access to such proxy voting advice in 
advance of the shareholder vote, more registrants may file additional 
soliciting materials in response to proxy voting advice as a result of 
the rule amendments than currently do. Investment advisers, who can 
reasonably be expected to become aware of additional soliciting 
materials could incur additional costs in connection with the review of 
that information. Because these costs will vary depending upon the 
particular facts and circumstances of the proxy voting advice, any 
issues identified therein, the resources of the registrant or 
investment adviser, and in the case of an investment adviser, its 
policies and procedures with respect to proxy voting, it is difficult 
to provide a quantifiable estimate of these costs.
4. Amendments to Rule 14a-(9)
a. Benefits
    Finally, we are amending Rule 14a-9 to add as an example of what 
could be misleading, the failure to disclose certain material 
information about proxy voting advice, specifically information about 
the proxy voting advice business's methodology, sources of information, 
and conflicts of interest. We do not expect the amendment to the list 
of examples in Rule 14a-9 to significantly alter existing disclosure 
practices, as it will largely codify existing Commission guidance on 
the applicability of Rule 14a-9 to proxy voting advice.\630\ To the 
extent the

[[Page 55140]]

amendment prompts some proxy voting advice businesses to provide 
additional disclosure about the bases for their voting advice, the 
clients of these businesses--and the investors they serve--may benefit 
from receiving additional information that could aid in making voting 
determinations.
---------------------------------------------------------------------------

    \630\ See Commission Interpretation on Proxy Voting Advice at 
47419.
---------------------------------------------------------------------------

b. Costs
    The final amendments to Rule 14a-9 will impose direct costs on 
proxy voting advice businesses to the extent the amended rule prompts 
some proxy voting advice businesses to provide additional disclosure 
about the bases for their voting advice. We expect any such costs to be 
minimal, especially given that the examples being codified were 
included in prior Commission guidance.\631\
---------------------------------------------------------------------------

    \631\ See supra notes 46 and 67 and accompanying text.
---------------------------------------------------------------------------

    Some commenters asserted that the main cost of the Rule 14a-9 
amendments will be an increase in litigation risk for proxy voting 
advice businesses.\632\ Several commenters stated that this increased 
litigation risk would make it more expensive and burdensome for proxy 
voting advice businesses to provide their advisory services.\633\ One 
commenter asserted that the proposed changes amount to a new cause of 
action under Rule 14a-9.\634\ Two other commenters argued that the 
proxy voting advice businesses' response to the threat of litigation 
under Rule 14a-9 would be to err on the side of caution in complex or 
contentious matters, thus increasing the likelihood of the proxy voting 
advice business issuing pro-registrant proxy voting 
recommendations.\635\ We believe several factors will serve to limit 
this risk. As discussed above, Rule 14a-9 liability is grounded in the 
concept of materiality and thus would be based on the particular facts 
and circumstances and assessed from the perspective of the reasonable 
shareholder.\636\ Moreover, neither our proposed amendment to Rule 14a-
9 nor the other amendments we are adopting will broaden the concept of 
materiality or create a new cause of action, as some commenters 
suggested. Thus, the amendment does not change the scope or application 
of existing law. Therefore, we do not expect the new amendment to Rule 
14a-9 to generate significant new litigation risk for proxy voting 
advice businesses or to result in a shift to more pro-registrant proxy 
voting recommendations.
---------------------------------------------------------------------------

    \632\ See letters from IAA; ISS; Glass Lewis II; Minerva I.
    \633\ See letters from IAA; Glass Lewis II; Minerva I.
    \634\ See letter from C. Icahn.
    \635\ See letters from ISS; Elliott I.
    \636\ See discussion in supra Section II.D.3.
---------------------------------------------------------------------------

5. Effect on Smaller Entities
    Several commenters specifically stated that the economic analysis 
failed to consider the effect and cost of the proposal on smaller proxy 
voting advice businesses.\637\ One of these commenters asserted that 
small entities (defined by the commenter as those with up to $5 million 
in assets) would face significant resource and capacity burdens when 
complying with the proposed amendments, without improvements in the 
quality of voting for clients.\638\ Another commenter similarly stated 
the proposals would be particularly burdensome for small proxy voting 
advice businesses.\639\ One commenter stated that the economic analysis 
failed to consider the proposal's effect on small and medium-sized 
investment advisers and stated these entities would be 
disproportionately affected.\640\
---------------------------------------------------------------------------

    \637\ See letters from Felician Sisters II; Good Shepherd; IASJ; 
Interfaith Center II; St. Dominic of Caldwell.
    \638\ See letter from IASJ.
    \639\ See letter from Interfaith Center II.
    \640\ See letter from IAA.
---------------------------------------------------------------------------

    As mentioned in Section IV.B.1 above, the Commission is not aware 
of smaller firms that currently supply research, analysis, and 
recommendations to support the voting decisions of their clients that 
would fall within the definition of ``solicitation.'' We therefore 
cannot estimate how many small proxy voting advice businesses will be 
affected. However, we are cognizant that any smaller proxy voting 
advice businesses that operate now or in the future may incur 
proportionally higher compliance costs even under the final amendments, 
especially if some of the potential costs of the amendments are fixed. 
For example, small proxy voting advice businesses may not have 
conflicts of interest disclosure policies in place, or may not have 
mechanisms to inform clients of registrant feedback. We believe that 
the new principles-based approach we are adopting should help address 
some of the concerns about the final rule's disparate effect on smaller 
firms by providing small proxy voting advice businesses with the 
flexibility to design policies and procedures that are scaled to the 
scope of their business operations.
    Further, we believe that the principles-based approach should 
afford existing proxy voting advice businesses flexibility to leverage 
their existing practices and mechanisms to efficiently comply with the 
new requirements, reducing the compliance burdens that they might pass 
through to smaller clients. Finally, we believe that because the final 
rules promote the availability of more complete and accurate 
information to proxy voting advice clients, they are responsive to 
calls for proxy process reform by smaller issuers to ``inspire 
confidence in the voting process, drive shareholder engagement, and 
bolster long-term value creation.'' \641\ Smaller issuers may also 
benefit from the final amendments insofar as they will have greater 
opportunity to receive proxy voting advice and inform their 
shareholders of their views on such advice, relative to the 
opportunities proxy voting advice business currently offer registrants 
under voluntary review programs.\642\
---------------------------------------------------------------------------

    \641\ See 2019 Small Business Forum.
    \642\ See supra Section IV.B.1.a.ii.
---------------------------------------------------------------------------

D. Effects on Efficiency, Competition, and Capital Formation

1. Efficiency
    As discussed in Section IV.B above, proxy voting advice businesses 
perform a variety of functions for their clients, including analyzing 
and making voting recommendations on matters presented for shareholder 
vote and included in registrants' proxy statements. As an alternative 
to utilizing these services, clients of proxy voting advice businesses 
could instead conduct their own analysis and execute votes using 
internal resources.\643\
---------------------------------------------------------------------------

    \643\ Clients of proxy voting advice businesses may also rely on 
some combination of internal and external analysis.
---------------------------------------------------------------------------

    We believe that, for purposes of general analysis, it is reasonable 
to assume that the cost of analyzing matters presented for shareholder 
vote will not vary significantly with the size of the position being 
voted. Given the costs of analyzing and voting proxies, the services 
offered by proxy voting advice businesses may offer economies of scale 
relative to their clients performing those functions themselves. For 
example, a GAO study found that among 31 institutions, including mutual 
funds, pension funds, and asset managers, large institutions rely less 
than small institutions on the research and recommendations offered by 
proxy voting advice businesses.\644\ Small

[[Page 55141]]

institutional investors surveyed in the study indicated they had 
limited resources to conduct their own research.\645\
---------------------------------------------------------------------------

    \644\ See 2007 GAO Report, supra note 474, at 2; see also letter 
from BRT (stating since many institutional investors face voting on 
a large number of corporate matters every year but lack personnel 
and resources, they outsource tasks to proxy advisors); see also 
letters in response to the SEC Staff Roundtable on the Proxy Process 
from BlackRock (Nov. 16, 2018) (``BlackRock's Investment Stewardship 
team has more than 40 professionals responsible for developing 
independent views on how we should vote proxies on behalf of our 
clients.''); NYC Comptroller (Jan. 2, 2019) (``We have five full-
time staff dedicated to proxy voting during peak season, and our 
least-tenured investment analyst has 12 years' experience applying 
the NYC Funds' domestic proxy voting guidelines.'').
    \645\ See 2007 GAO Report, supra note 474, at 2; see also 
letters in response to the SEC Staff Roundtable on the Proxy Process 
from Ohio Public Retirement (Dec. 13, 2018) (``OPERS also depends 
heavily on the research reports we receive from our proxy advisory 
firm. These reports are critical to the internal analyses we perform 
before any vote is submitted. Without access to the timely and 
independent research provided by our proxy advisory firm, it would 
be virtually impossible to meet our obligations to our members.''); 
Transcript of Roundtable on the Proxy Process at 194 (comments of 
Mr. Scot Draeger) (``If you've ever actually reviewed the 
benchmarks, whether it's ISS or anybody else, they're very extensive 
and much more detailed than small firm[s] like ours could ever 
develop with our own independent research.'').
---------------------------------------------------------------------------

    By establishing requirements that promote transparency in proxy 
voting advice, the final amendments could lead to an increased demand 
for proxy voting advice businesses' voting advice. To the extent proxy 
voting advice businesses offer economies of scale relative to their 
clients performing certain functions themselves, increased demand for, 
and reliance upon, proxy voting advice business services could lead to 
greater efficiencies in the proxy voting process. At the same time, the 
final amendments will impose certain additional costs on proxy voting 
advice businesses, and these costs may be passed on to their clients. 
To the extent the costs passed on to a client are greater than the 
related benefits (or vice versa) to the client it could lead to 
decreased (or increased) demand for proxy voting advice business 
services by the client. As each client individually decides whether to 
use proxy voting advice business services, if aggregate demand for 
proxy voting advice business services increases (decreases), there will 
be more (or fewer) efficiencies in the proxy voting process.
    Some commenters asserted that the ability of registrants to review 
the advice and the threat of litigation from registrants would result 
in voting advice from proxy voting advice businesses that is less 
accurate, useful, and valuable to their clients.\646\ If clients 
perceive the amendments as affecting proxy voting advice businesses' 
objectivity and independence, this could lead to a decrease in demand 
for proxy voting advice and potentially fewer efficiencies in the proxy 
voting process.\647\ However, as discussed above, we have made a number 
of changes to the proposed amendments that we believe address these 
concerns and will lead to more accurate, transparent and complete 
information for proxy voting advice business clients.\648\ In addition, 
as discussed above, we do not expect the new amendment to Rule 14a-9 to 
generate significant new litigation risk for proxy voting advice 
businesses.\649\
---------------------------------------------------------------------------

    \646\ See, e.g., letters from Prof. Bebchuk; ISS; ICGN; PRI II; 
Torsten Jochem, Associate Professor of Finance, University of 
Amsterdam, and Anjana Rajamani, Erasmus University Rotterdam (Dec. 
16, 2019) (``Profs. Jochem and Rajamani''); Segal Marco II; TIAA; 
Ivy Investment; Olshan LLP; First Affirmative; Lisa A. Smith, Vice 
President, Advocacy and Public Policy, Catholic Health Association 
of the United States (Feb. 3, 2020) (``Catholic Health''); 
NorthStar; Rowan Finnegan (Feb. 3, 2020); NASAA; ProxyVote II; Diane 
Wade, Head of ESG, CBRE Clarion Securities (Feb. 3, 2020) 
(``CBRE''); Michael Rowland (Feb. 3, 2020); Dustyn Lanz, CEO, 
Responsible Investment Association (Feb. 3, 2020) (``RIA''); Graeme 
Black, Chair, Black Group Australia (Feb. 3, 2020) (``Black 
Group''); Ario; CII IV; ACSI; BMO; John Starcher, President and CEO, 
Bon Secours Mercy Health (Feb. 3, 2020) ``Bon Secours''); CFA 
Institute I; Baillie Gifford; CIRCA; Joanie B. (Feb. 3, 2020); 
Canadian Governance Coalition; AllianceBernstein; LA Retirement; 
Glass Lewis II; CII V; C. Icahn; CII VI; LACERS; James Elbaor (Feb. 
26, 2020); Terrence M. Burgess, Senior Managing Director, Wellington 
Management Company (Mar. 3, 2020) (``Wellington''). See also IAC 
Recommendation.
    \647\ As noted above, we do not have financial data about proxy 
advice voting businesses, including financial data by service 
provided or by client type, so making these assessments on a 
quantitative basis is difficult.
    \648\ See discussion in supra Section IV.C.3.b.ii.
    \649\ See discussion in supra Section IV.C.4.b.
---------------------------------------------------------------------------

    Several commenters also stated that the proposed amendments could 
adversely affect the efficiency of how capital is allocated in two ways 
stemming from the potential threat of litigation by registrants and 
their ability to influence proxy voting advice under the proposed 
rule.\650\ First, some of these commenters expressed concern that the 
amendments could reduce the independence of proxy voting advice 
businesses and the diversity of thought in the market for proxy advice, 
which in turn could reduce the information investors and investment 
advisers have, resulting in less efficient investment decisions.\651\ 
Second, some of these commenters stated that the amendments would have 
a silencing effect on proxy voting advice businesses, resulting in 
value-destroying decisions by managers of registrants who are held less 
accountable for their actions.\652\
---------------------------------------------------------------------------

    \650\ See, e.g., letters from Shareholder Rights II; ISS.
    \651\ See letters from Prof. Bebchuk; CalPERS; CFA Institute I.
    \652\ See letters from ISS; PRI II; Better Markets.
---------------------------------------------------------------------------

    We believe that the principles-based approach we are adopting helps 
address commenter concerns about reductions in the reliability and 
independence of proxy voting advice. The final amendments neither 
require proxy voting advice businesses to share draft proxy voting 
advice with registrants in advance of providing advice to their 
clients, nor require proxy voting advice businesses to consider 
feedback from registrants on the proxy voting advice. In this way, the 
final amendments seek to limit the presence and ameliorate the possible 
effects of the independence-related concerns raised by commenters while 
preserving many of the intended benefits of the proposed engagement 
process, such as enhancing the accuracy, transparency and completeness 
of information available to clients of proxy voting advice businesses.
    Other commenters disputed that the proposed amendments would bring 
about more accurate or transparent proxy voting advice, asserting that 
proxy voting advice businesses already provide adequate disclosure 
regarding conflicts of interest and a means for engagement with 
registrants because the price and quality of service for proxy advice 
is determined in a competitive market.\653\ In that case, the 
amendments may not result in an increase in demand for proxy advisory 
services. As discussed above, while we acknowledge that proxy voting 
advice businesses currently disclose conflicts of interest to clients 
and permit certain registrants to review proxy voting advice, the final 
rules could nevertheless increase demand for proxy voting advice to the 
extent that: (i) Clients prefer a more standardized time and means of 
receiving conflict disclosures, and (ii) proxy voting advice businesses 
expand their existing review procedures as a means of satisfying the 
new conditions. Overall, given the changes in the final amendments 
relative to the proposed amendments, we do not expect the final 
amendments to have a significant effect on the demand for proxy 
advisory services, and hence efficiency.
---------------------------------------------------------------------------

    \653\ See, e.g., letter from ISS.
---------------------------------------------------------------------------

2. Competition
    The amendments' requirements that promote transparency and more 
effective evaluation of proxy voting advice could stimulate competition 
among proxy voting advice businesses with respect to the quality of 
advice. In particular, clients of proxy voting advice businesses may be 
better able to assess conflicts of interest (and, more broadly, 
alignment of interest) and the reliability of proxy voting advice, 
which could, in turn, cause proxy voting advice businesses to compete 
more on those dimensions.

[[Page 55142]]

    As discussed above, several commenters disagreed that the proposed 
amendments would increase the quality or transparency of proxy advice, 
which they thought was sufficient under the baseline, and stated that 
the proposed amendments could reduce the quality of proxy advice if the 
rule reduces the independence and diversity of thought amongst proxy 
voting advice businesses.\654\ In that case, the rules may not increase 
competition in the proxy advice market. However, as noted above, we 
believe the final amendments' principles-based approach should address 
many of these concerns because proxy voting advice businesses may, but 
will no longer be required to, preview their proxy voting advice with 
registrants.
---------------------------------------------------------------------------

    \654\ See supra notes 646 and 651.
---------------------------------------------------------------------------

    The final amendments could also have certain adverse effects on 
competition. The final amendments will cause proxy voting advice 
businesses to incur certain additional compliance costs as discussed in 
Section II.C.2 above. How those costs will be shared between proxy 
voting advice businesses and their clients depends on the ability of 
proxy voting advice business to exercise market power in the pricing of 
their services. One commenter noted that, although complaints about 
pricing feature regularly in oligopolistic markets, proxy voting advice 
business generally are not criticized for their pricing.\655\ The 
commenter further explained that this might reflect clients' perception 
that, due to the scale economies involved in proxy research, it is less 
costly to purchase proxy voting advice than to engage in proxy research 
themselves.\656\ The presence of these scale economies may provide 
proxy voting advice businesses with substantial market power, including 
the power to pass compliance costs associated with the final rules on 
to their clients. If, however, as other commenters argued,\657\ clients 
do not place a large value on proxy voting advice, then proxy voting 
advice businesses may face limits in their ability to pass compliance 
costs through to clients. In the Proposing Release, we acknowledged 
that if costs borne by proxy voting advice businesses are large enough 
to cause some businesses to exit the market or potential entrants to 
stay out of the market, the proposed amendments could decrease 
competition.\658\ For the reasons described below, we do not believe 
this will be the case with the final amendments.
---------------------------------------------------------------------------

    \655\ See letter from C. Spatt.
    \656\ Id.
    \657\ See letters from B. Sharfman I and Manhattan Institute.
    \658\ See Proposing Release at 66550.
---------------------------------------------------------------------------

    Many commenters stated that the economic analysis in the Proposing 
Release did not adequately consider the effects of the rule on 
competition in the market for proxy advice.\659\ Some commenters 
asserted that the cost burdens of the amendments, particularly those 
associated with litigation exposure from registrants, would decrease 
competition in the proxy advice market, raising barriers to entry in 
the proxy advice market, and potentially forcing the exit of some proxy 
voting advice businesses from the market.\660\ Several other commenters 
argued that the proposed amendments would reduce competition by 
creating new barriers to entry in what historically has been an 
industry with few competitors.\661\ One commenter, a proxy voting 
advice business in the U.K., stated that the Proposed Rule made it 
highly unlikely it would enter the U.S. proxy voting advice business 
market.\662\ Another commenter, however, stated that increased barriers 
to entry would not reduce competition because, notwithstanding the 
rule, entry would not occur because investors place little value on 
proxy voting advice and financial incentives for entry are 
correspondingly low.\663\ The final amendments reflect a principles-
based approach that is intended to limit the increased compliance costs 
for proxy voting advice businesses and thus should reduce the potential 
for significant adverse effects on competition.
---------------------------------------------------------------------------

    \659\ See letters from CII IV; Richard B. Zabel, General Counsel 
& Chief Legal Officer, Elliott Management Corporation (Mar. 30, 
2020) (``Elliott II''); Felician Sisters II; Glass Lewis II; Good 
Shepherd; IASJ; ISS; Interfaith Center II; Minerva I; New York 
Comptroller II; Prof. Bebchuk; St. Dominic of Caldwell; ProxyVote 
II. See also IAC Recommendation.
    \660\ See letters from Prof. Bebchuk; TIAA; 62 Professors; CII 
IV. See also IAC Recommendation.
    \661\ See, e.g., letters from ISS; CII IV; Segal Marco II; Prof. 
Sergakis; 62 Professors.
    \662\ See letters from Minerva I.
    \663\ See letter from Manhattan Institute.
---------------------------------------------------------------------------

    Additionally, given certain industry practices, the costs 
associated with the final amendments could affect proxy voting advice 
businesses differently. For example, we understand that the three 
existing proxy voting advice businesses that will be affected by the 
final amendments already have processes in place for sharing certain 
aspects of their analysis with certain registrants prior to making a 
recommendation to clients, which they may be able to leverage to comply 
with the new conditions. In contrast, firms considering entering the 
market for proxy voting advice would need to develop such processes and 
thus may initially experience somewhat higher costs in connection with 
compliance with the final rules. A differential effect on costs across 
proxy voting advice businesses could, in turn, affect competition 
within the proxy voting advice business industry. Similarly, one 
commenter stated that, if it were subject to the proposed amendments, 
it likely would have to either significantly increase its fees or sell 
their firm to one of the two dominant competitors.\664\ While that 
commenter may not be subject to the final amendments,\665\ to the 
extent that the costs associated with the final amendments 
disproportionately affect proxy voting advice businesses without 
existing processes that can be adapted to satisfy the new conditions, 
particularly smaller proxy voting advice businesses that would 
otherwise consider entering the market for proxy advice, the final 
amendments could reduce competition in the market for proxy advisory 
services. We expect the principles-based approach reflected in the 
final amendments may help to ameliorate concerns about any differential 
effect of the final amendments by affording proxy voting advice 
businesses the flexibility to design policies and procedures that are 
scaled to the scope of their operations and client base.
---------------------------------------------------------------------------

    \664\ See letter from ProxyVote II.
    \665\ See supra notes 170-173 and accompanying text.
---------------------------------------------------------------------------

    Overall, we believe the benefits of improving the transparency, 
accuracy, and completeness of information available to shareholders 
when making voting decisions and enhancing the overall functioning of 
the proxy voting process, in furtherance of Section 14 of the Exchange 
Act would support adoption of the amendments notwithstanding any 
adverse effect on competition arising therefrom.
3. Capital Formation
    By facilitating the ability of clients of proxy voting advice 
businesses to make informed voting determinations, the final amendments 
could ultimately lead to improved investment outcomes for investors. 
This in turn could lead to a greater allocation of resources to 
investment. To the extent that the final amendments lead to more 
investment, we could expect greater demand for securities, which could, 
in turn, promote capital formation. Additionally, to the extent the 
final amendments ameliorate frictions in the market for proxy voting 
advice that may currently deter private companies from

[[Page 55143]]

becoming public reporting companies, the amendments could serve to 
encourage more companies to become public.\666\
---------------------------------------------------------------------------

    \666\ See letters from Prof. Tingle (asserting that public 
capital markets have become less attractive to companies that would 
otherwise consider going public and that proxy voting advice 
businesses have been singled out as possibly complicit in this 
trend); TechNet (supporting the Proposed Rule as part of a 
commitment to ``. . . make the U.S. the most attractive place in the 
world for anyone to start a company, grow it here, and take it 
public.'').
---------------------------------------------------------------------------

    Several commenters stated that the proposal to allow registrants to 
review draft proxy advice could lead to the misuse of material non-
public information.\667\ This possibility is predicated on an 
expectation that a proxy voting advice business's recommendation could 
have an influence on the outcome of a voting matter before 
shareholders. For example, if a proxy voting advice business's 
recommendation is likely to influence the outcome of a vote that is 
expected to generate stock price reactions, then advance knowledge of 
such a recommendation would be potentially valuable to facilitate 
insider trading. Any such misuse of material non-public information 
could reduce investor confidence in the integrity of markets and lead 
to a reduction in capital formation. However, the final amendments do 
not mandate that registrants be given prior access to draft proxy 
voting advice. In addition, as discussed above, some form of registrant 
pre-review already exists at each of the three major proxy voting 
advice businesses, and we are not aware of any misuse of such 
information.
---------------------------------------------------------------------------

    \667\ See letters from CII IV; Glass Lewis II; ISS.
---------------------------------------------------------------------------

    Overall, given the many factors that can influence the rate of 
capital formation, any effect of the final amendments on capital 
formation is expected to be small.

E. Reasonable Alternatives

1. Use a More Prescriptive Approach in the Final Amendments
    Instead of a principles-based approach that allows proxy voting 
advice businesses the flexibility to design their own measures to 
ensure that clients have more complete and transparent information on 
which to base their voting decisions, we could have used a more 
prescriptive approach, such as the approach we proposed. For example, 
we could have required proxy voting advice businesses to notify 
registrants of their advice or provide their clients with registrants' 
responses to that advice in certain specific ways and time frames. Such 
a prescriptive approach could have reduced legal uncertainty for proxy 
voting advice businesses, but it would have generated greater 
compliance costs for proxy voting advice businesses, some or all of 
which could have been passed on to their clients. The principles-based 
approach we are adopting provides a significant degree of flexibility 
to proxy voting advice businesses in deciding the best way to ensure 
that more complete and transparent information is available to their 
clients, and we expect that it will significantly reduce their 
compliance costs.
2. Require Proxy Voting Advice Businesses To Include Full Registrant 
Response in the Businesses' Voting Advice
    Rather than requiring proxy voting advice businesses to adopt and 
publicly disclose written policies and procedures reasonably designed 
to ensure that such businesses provide clients with a mechanism by 
which the clients can reasonably be expected to become aware of 
registrant responses to proxy voting advice, we could require proxy 
voting advice businesses to include the registrant's full response in 
the proxy voting advice itself. Including the registrant's full 
response in the proxy voting advice would benefit clients of proxy 
voting advice businesses by allowing them to avoid the additional step 
of accessing the response. Including a full response in the voting 
advice provided by proxy voting advice businesses also could benefit 
registrants by having their responses more prominently displayed, 
depending on where in the advice the response is included. Two 
commenters suggested this as an appropriate alternative to the proposed 
amendments.\668\
---------------------------------------------------------------------------

    \668\ See letters from NAM; BIO.
---------------------------------------------------------------------------

    However, requiring inclusion of the registrant's full response in 
the proxy voting advice provided by proxy voting advice businesses 
could disrupt the ability of such businesses to effectively design and 
prepare their reports in the manner that they and their clients prefer. 
Also, registrants would lose the flexibility to present their views in 
the manner they deem most appropriate or effective.
3. Public Disclosure of Conflicts of Interest
    The final amendments require that proxy voting advice businesses 
include in their advice (and in any electronic medium used to deliver 
the advice) certain conflicts of interest disclosures. We could require 
that those conflicts of interest disclosures be made publicly rather 
than just to clients. Public disclosure of proxy voting advice 
businesses' conflicts of interest could allow beneficial owners to 
assess the conflicts for themselves. While there may be some benefit to 
beneficial owners from having access to this information, this benefit 
may be limited given that many beneficial owners have delegated 
investment management functions to others in the first place and thus 
would not be receiving the advice. In addition, one commenter noted 
that publicly disclosing conflicts could undermine the information 
barriers put in place between the consulting and proxy advice side of a 
proxy voting advice business's operations.\669\
---------------------------------------------------------------------------

    \669\ See letter from ISS.
---------------------------------------------------------------------------

4. Require Additional or Alternative Mandatory Disclosures in Proxy 
Voting Advice
    In addition to requiring the adopted conflicts of interest 
disclosures, we could amend Rule 14a-2(b)(9) to require that proxy 
voting advice businesses include in their proxy voting advice 
additional disclosures, such as disclosure regarding the proxy voting 
advice business's methodology, sources of information, or disclosures 
regarding the use of standards that materially differ from relevant 
standards or requirements that the Commission sets or approves. Proxy 
voting advice businesses' clients may benefit from having consistent 
disclosure on such matters as they assess the voting advice and make 
decisions regarding their utilization of the voting advice. However, 
such disclosures may not be material or necessary to assess proxy 
voting advice in all instances, and would result in increased costs to 
proxy voting advice businesses. Certain information may also comprise 
proprietary information, disclosure of which, depending on the 
specificity required, may result in competitive consequences to proxy 
voting advice businesses. In light of these considerations, the adopted 
rules will not require such disclosures in all instances.
    One commenter noted a suggestion from the 2010 Concept Release that 
``proxy advisory firms could provide increased disclosure regarding the 
extent of research involved with a particular recommendation and the 
extent and/or effectiveness of its controls and procedures in ensuring 
the accuracy of registrant data.'' \670\ The commenter also highlighted 
another suggestion from the Concept Release noting that the 
Commission's rules that govern NRSROs ``may be useful

[[Page 55144]]

templates for developing a regulatory program addressing conflicts of 
interest and other issues with respect to the accuracy and transparency 
of voting recommendations provided by proxy advisory firms.'' The 
commenter stated that these two approaches should have been considered 
as alternatives to the rule. We have considered the alternative of 
requiring additional disclosure regarding the methods and procedures 
used to develop proxy voting advice, but believe it is preferable to 
avoid being overly prescriptive about the content of the report for a 
particular registrant/recommendation. Instead, for the reasons 
discussed throughout this release, we believe it is more appropriate to 
focus on principles that will allow the clients of proxy voting advice 
businesses to have access to more complete and transparent information 
upon which to make a voting decision, while providing flexibility to 
proxy voting advice businesses to determine the best means to satisfy 
those principles. Moreover, while we recognize that other regulatory 
regimes may take different approaches to similar issues, we note that 
the role of NRSROs and proxy voting advice businesses differ from one 
another and that following a similar regulatory approach might not be 
appropriate. We also recognize that the costs and benefits of NRSRO 
regulation differ from the costs and benefits of potential additional 
regulation of proxy voting advice businesses. The principles-based 
approach reflected in the final amendments is tailored to the unique 
role played by proxy voting advice businesses in the proxy process and 
is intended to be adaptable to existing market practices.
---------------------------------------------------------------------------

    \670\ See letter from Glass Lewis II.
---------------------------------------------------------------------------

5. Require Disabling or Suspension of Pre-Populated and Automatic 
Submission of Votes
    The final amendments do not condition the availability of the Rules 
14a-2(b)(1) and 14a-2(b)(3) exemptions on a proxy voting advice 
business structuring its electronic voting platform to disable or 
suspend the automatic submission of votes in instances where a 
registrant indicates that it intends to file (or has filed) a response 
to the voting advice as additional soliciting materials. Alternatively, 
we could require such a condition. Another alternative would be to 
require that the proxy voting advice business refrain from pre-
populating a client's voting choices once a registrant indicates it 
intends to file a response, indefinitely or for a period of time, and 
subject to conditions. Several commenters supported an alternative that 
would generally limit or disable the automatic submission of votes, 
claiming it would lead to more informed proxy voting, though these 
commenters did not necessarily condition such limitations on the filing 
of a registrant response.\671\
---------------------------------------------------------------------------

    \671\ See letters from BRT; NAM; BIO. But see, e.g., letters 
from CII IV; Dan Jamieson (Jan. 16, 2020); IAA; ISS; New York 
Comptroller II.
---------------------------------------------------------------------------

    We recognize that these pre-population and automatic submission 
functions may enable proxy voting advice business clients to vote their 
proxies prior to registrants being able to provide a response to the 
proxy voting advice. We also recognize that disabling or suspending 
these functions when registrants have indicated they intend to file 
responses to voting advice could benefit the clients of proxy voting 
advice businesses to the extent that it increases the likelihood that 
the clients of the proxy voting advice businesses would review the 
registrants' responses, and take them into consideration, before voting 
their proxies. At the same time, depending on how such a measure is 
implemented and conditioned, such an alternative could give rise to 
timing pressures and other logistical challenges. For example, 
disabling these functions permanently under certain circumstances could 
increase costs for clients if they need to devote greater resources to 
managing the voting process as a result, which may in turn also reduce 
the value of the services of the proxy voting advice businesses.
    We have declined to adopt such a prescriptive approach at this 
time, but rather have focused on an incremental principles-based 
approach in order to see how practice develops in light of the changes 
being adopted. The amendments we are adopting are intended to make 
clients of proxy voting advice businesses aware of a registrant's views 
about proxy voting advice in a timely manner, which could assist these 
clients in making voting determinations. Further, the Commission has 
provided investment advisers, who often engage proxy voting advice 
businesses to provide voting related services, with additional guidance 
regarding how they could consider their policies and procedures 
regarding these types of automated voting functions.\672\
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    \672\ See Supplemental Proxy Voting Guidance.
---------------------------------------------------------------------------

6. Exempt Smaller Proxy Voting Advice Businesses From the Additional 
Conditions to the Exemptions
    As discussed in Section III.C.2 above, given certain industry 
practices, the costs associated with the final amendments may be 
different for certain proxy voting advice businesses. For example, the 
three major proxy voting advice businesses have processes in place for 
sharing certain aspects of their analysis with certain registrants 
prior to making a recommendation to clients, which they may be able to 
leverage to comply with the new conditions. However, it is possible 
that entrants to this market (which could be smaller than the existing 
three major proxy voting advice businesses) would have to develop new 
processes to meet the conditions for exemption under the final 
amendments if they choose to engage in the types of activities that 
fall within the scope of Rule 14a-1(l)(1)(iii). Some of the costs of 
developing these new processes are likely fixed, and do not vary with 
the number of issuers a proxy voting advice business covers or the 
number of clients it serves. Thus, the costs associated with the final 
amendments could affect potential entrants into the market for proxy 
advice that are smaller businesses more than the existing three major 
proxy voting advice businesses. To the extent the costs associated with 
the final amendments disproportionately affect smaller proxy voting 
advice businesses that might consider entering the market in the 
future, the final amendments could reduce competition among proxy 
voting advice businesses.
    As a means of addressing the potential adverse effect on 
competition among proxy voting advice businesses, we could exempt 
smaller proxy voting advice businesses from the additional conditions 
to the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3). Several 
commenters supported such an alternative.\673\ Exempting smaller proxy 
voting advice businesses from the additional conditions would reduce 
the cost of the final amendments for such businesses, and could thus 
facilitate the entry of new proxy voting advice businesses. However, we 
expect the costs associated with the final amendments to be much 
smaller compared to the initial costs of setting up the business, 
including building a reputation for providing quality services, which 
any newcomer will have to incur. Also, such an exemption would mean 
that clients of these proxy voting advice businesses would not realize 
the same benefits as clients of incumbent firms in terms of potential 
improvements in the accuracy, completeness, and transparency of the 
information available to them when

[[Page 55145]]

they make voting decisions.\674\ Moreover, as we have discussed in 
prior sections, we anticipate that the principles-based approach we are 
adopting is likely to result in more modest costs increases for proxy 
voting advice businesses than the more prescriptive approach we 
proposed, which should moderate the impact of the final amendments on 
smaller potential entrants.
---------------------------------------------------------------------------

    \673\ See letters from SHARE II; CII IV; Manhattan Institute. 
One commenter more generally argued that the Commission should 
``adopt policies that would ease entry and participation in the 
market.'' See letters from Elliott I, Prof. Li.
    \674\ See letter from SES.
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7. Require a Narrower Scope of Registrant Notice
    A number of commenters suggested that registrants should only be 
allowed to review the facts that a proxy voting advice business uses in 
determining its voting recommendation, particularly if we proceeded 
with a requirement that registrants review draft proxy voting reports 
before they are sent to clients.\675\ For example, rather than 
providing a full copy of its voting advice, a proxy voting advice 
business could provide a summary thereof, setting forth the facts it 
uses without specifying further details.
---------------------------------------------------------------------------

    \675\ See letters from ISS at 57; MFA & AIMA at 2; State Street 
at 3; CFA Institute at 2, 8; CIRCA at 22; Glass Lewis II at 22-23; 
IAC at 8-9.
---------------------------------------------------------------------------

    We note that while the principles-based approach we are adopting 
does not dictate precisely how a proxy voting advice business provides 
notice of proxy voting advice to registrants, the final amendments 
require that proxy voting advice businesses share the full proxy voting 
report with registrants. Although we acknowledge that commenters' 
suggested alternative may be less costly for proxy voting advice 
businesses to implement, we believe that providing registrants with the 
full contents of proxy voting reports is necessary to achieve the 
Commission's objective of facilitating informed proxy voting decisions. 
Providing registrants with the full contents of the report gives 
registrants the opportunity to file additional soliciting materials 
that discuss not only the facts underlying the proxy voting advice 
business's recommendations, but also the methodology and analysis the 
proxy voting advice business used to arrive its recommendations. In 
deciding how to vote on a proxy matter, clients of proxy voting advice 
businesses may benefit from that additional discussion. As a result, we 
anticipate the final amendments will more effectively facilitate 
clients' assessment of proxy voting advice than this alternative. 
Moreover, because the final amendments do not require an opportunity 
for pre-publication review, we believe that the cost of sharing full 
reports will be more modest under the final amendments than under the 
proposed amendments.

VI. Paperwork Reduction Act

A. Background

    Certain provisions of our rules, schedules, and forms that will be 
affected by the amendments contain ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\676\ We published a notice requesting comment on changes to 
these collection of information requirements in the Proposing Release 
and submitted these requirements to the Office of Management and Budget 
(``OMB'') for review in accordance with the PRA.\677\ The hours and 
costs associated with maintaining, disclosing, or providing the 
information required by the amendments constitute paperwork burdens 
imposed by such collection of information. An agency may not conduct or 
sponsor, and a person is not required to comply with, a collection of 
information unless it displays a currently valid OMB control number. 
The title for the affected collection of information is: ``Regulation 
14A (Commission Rules 14a-1 through 14a-21 and Schedule 14A)'' (OMB 
Control No. 3235-0059).
---------------------------------------------------------------------------

    \676\ 44 U.S.C. 3501 et seq.
    \677\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    The Commission adopted existing Regulation 14A \678\ pursuant to 
the Exchange Act. Regulation 14A and its related schedules set forth 
the disclosure and other requirements for proxy statements, as well as 
the exemptions therefrom, filed by registrants and other soliciting 
persons to help investors make informed voting decisions.\679\
---------------------------------------------------------------------------

    \678\ 17 CFR 240.14a-1 et seq.
    \679\ To the extent that a person or entity incurs a burden 
imposed by Regulation 14A, it is encompassed within the collection 
of information estimates for Regulation 14A. This includes 
registrants and other soliciting persons preparing, filing, 
processing and circulating their definitive proxy and information 
statements and additional soliciting materials, as well as the 
efforts of third parties such as proxy voting advice businesses 
whose voting advice falls within the ambit of the federal rules and 
regulations that govern proxy solicitations.
---------------------------------------------------------------------------

    A detailed description of the amendments, including the need for 
the information and its use, as well as a description of the likely 
respondents, can be found in Section II above, and a discussion of the 
expected economic effects of the amendments can be found in Section IV 
above.

B. Summary of Comment Letters to PRA Estimates

    The Commission received three comment letters in response to its 
request for comment on the PRA estimates and analysis included in the 
Proposing Release.\680\ These commenters expressed concern that the 
estimates were not representative of actual impacts and that the 
analysis failed to properly account for the paperwork burden that would 
be incurred, in particular, by proxy voting advice businesses.\681\ Two 
of the commenters asserted that the Commission's analysis understated 
the magnitude of the hourly and cost burdens that the proposed 
amendments would impose.\682\ One of those commenters provided detailed 
estimates of its expected annual compliance burden for each of the 
components of the proposed amendments.\683\
---------------------------------------------------------------------------

    \680\ See letters from IASJ; Glass Lewis I; ProxyVote I.
    \681\ See id.
    \682\ See letters from Glass Lewis I; ProxyVote I.
    \683\ See letter from Glass Lewis I.
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C. Burden and Cost Estimates for the Amendments

    Below we estimate the incremental and aggregate effect on paperwork 
burden as a result of the amendments. As discussed in Section II above, 
we have made a number of changes from the proposed amendments, most 
notably to shift to a principles-based approach in Rule 14a-
2(b)(9)(ii), and we have adjusted our estimates accordingly.
    The burden estimates were calculated by (i) estimating the number 
of parties expected to expend time, effort, and/or financial resources 
to generate, maintain, retain, disclose or provide information required 
by the amendments, and then (ii) multiplying this number by the 
estimated amount of time, on average, each of these parties would 
devote in order to comply with these new requirements over and above 
their existing compliance burden associated with Regulation 14A. These 
estimates represent the average burden for all respondents, both large 
and small. In deriving our estimates, we recognize that the burdens 
will likely vary among individual respondents based on a number of 
factors, including the nature and conduct of their business.
1. Impact on Affected Parties
    As discussed above in Section IV.B.1., there are a variety of 
parties that may be affected, directly or indirectly, by the 
amendments. These include proxy voting advice businesses; the clients 
to

[[Page 55146]]

whom these businesses provide voting advice; investors and other groups 
on whose behalf the clients of proxy voting advice business make voting 
determinations; registrants who are conducting solicitations and are 
the subject of proxy voting advice; and the registrants' shareholders, 
who ultimately bear the costs and benefits to the registrant associated 
with the outcome of voting matters covered by proxy voting advice.
    Of these parties, we expect that proxy voting advice businesses 
and, to a lesser extent, registrants that are the subject of the proxy 
voting advice, would incur some additional paperwork burden resulting 
from the amendments.\684\ As discussed further below, we believe that 
any incremental burden would be attributable primarily to new Rule 14a-
2(b)(9). With respect to the amendments to Rule 14a-1(l) and Rule 14a-
9, we do not expect the economic impact of these amendments will be 
significant because they do not change existing law and therefore do 
not change respondents' legal obligations.\685\ Moreover, any impact 
arising from these amendments is not expected to materially change the 
average PRA burden hour estimates associated with Regulation 14A. We 
therefore have not made any adjustments to our PRA burden estimates in 
respect of these amendments.
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    \684\ The PRA requires that we estimate ``the total annual 
reporting and recordkeeping burden that will result from the 
collection of information.'' [5 CFR 1320.5(a)(1)(iv)(B)(5)] A 
``collection of information'' includes any requirement or request 
for persons to obtain, maintain, retain, report, or publicly 
disclose information [5 CFR 1320.3(c)]. OMB's current inventory for 
Regulation 14A, therefore, is an assessment of the paperwork burden 
associated with such requirements and requests under the regulation, 
and this PRA is an assessment of changes to such inventory expected 
to result from adoption of the amendments. While other parties, such 
as the clients of proxy voting advice businesses, may have costs 
associated with the amendments (see supra Section IV.C.), only proxy 
voting advice businesses and registrants will incur any additional 
paperwork burden in order to comply with or respond to the 
informational requirements of the amendments.
    \685\ The amendments to Rule 14a-1(l) codify existing Commission 
interpretations and views about the applicability of the Federal 
proxy rules to proxy voting advice and are not expected to have a 
significant economic impact. See supra Section IV.C.2.b. The 
amendments to Rule 14a-9 may impose direct costs on proxy voting 
advice businesses to the extent the amended rule prompts some proxy 
voting advice businesses to provide additional disclosure about the 
bases for their voting advice. However, we expect any such costs to 
be minimal, especially given that the examples in new paragraph (e) 
of the Note to Rule 14a-9 were included in prior Commission 
guidance. See supra Section IV.C.4.b. One commenter argued that 
proxy voting advice businesses and their legal counsel would devote 
significant time and effort to review and respond to feedback 
received from registrants so as to protect the business from private 
litigation claims stemming from Rule 14a-9, as amended. See letter 
from Glass Lewis I. While the commenter mentioned the proposed 
amendment to Rule 14a-9, we read this comment as primarily relating 
to the proposed review and feedback proposal, which we are not 
adopting. We do not believe that the amendment to Rule 14a-9 
represents a change to existing law, nor does it broaden the concept 
of materiality or create a new cause of action, as some commenters 
have suggested. See discussion supra Section II.D.3.
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a. Proxy Voting Advice Businesses
    In the Proposing Release, the Commission estimated that each proxy 
voting advice business would incur an aggregate yearly increase in 
burden of 500 hours due to the proposed amendments.\686\ In recognition 
of the changes from the proposal as well as in consideration of the 
comments received regarding the paperwork burdens of the proposed 
amendments,\687\ we have adjusted our estimates of the burdens on proxy 
voting advice businesses.
---------------------------------------------------------------------------

    \686\ See Proposing Release, PRA Table 1 ``Calculation of 
Increase in Burden Hours Resulting from the Proposed Amendments,'' 
at 66553. The Commission estimated that, for each proxy voting 
advice business, the burden would be 1,000 hours in the first year 
following adoption and 250 hours in each of the following years, for 
a three-year average of 500 burden hours. Id. at note d. to Table 1. 
Given the Commission's assumption at the proposing stage that there 
were five proxy voting advice businesses, the average of 500 hours 
was multiplied by five to arrive at a total of 2,500 hours.
    \687\ See supra note 682.
---------------------------------------------------------------------------

    Proxy voting advice businesses are expected to incur an increased 
burden as a result of new Rule 14a-2(b)(9), which will apply to anyone 
relying on the exemptions in Rules 14a-2(b)(1) or (b)(3) who furnishes 
proxy voting advice covered by Rule 14a-1(l)(1)(iii)(A). The amount of 
the burden will depend on a number of factors that are firm-specific 
and highly variable, which makes it difficult to provide reliable 
quantitative estimates.\688\
---------------------------------------------------------------------------

    \688\ See generally the discussion supra in Sections 
IV.C.3.a.ii. and b.ii. concerning the difficulty in providing 
quantitative estimates of the costs to proxy voting advice 
businesses imposed by the amendments.
---------------------------------------------------------------------------

    There are three components of new Rule 14a-2(b)(9) that we expect 
to result in an increased burden. First, in accordance with Rule 14a-
2(b)(9)(i), proxy voting advice businesses will be required to include 
in their proxy voting advice (or in an electronic medium used to 
deliver the advice) disclosure of conflicts of interest specifically 
tailored to proxy voting advice businesses and the nature of their 
services.\689\ Second, under Rule 14a-2(b)(9)(ii)(A), proxy voting 
advice businesses will be required to adopt and publicly disclose 
written policies and procedures reasonably designed to ensure that 
registrants that are the subject of the proxy voting advice have such 
advice made available to them at or prior to the time such advice is 
disseminated to the proxy voting advice business's clients. Third, 
under Rule 14a-2(b)(9)(ii)(B), the proxy voting advice business will be 
required to adopt and publicly disclose written policies and procedures 
reasonably designed to ensure that the proxy voting advice business 
provides clients with a mechanism by which they can reasonably be 
expected to become aware of a registrant's written statements about the 
proxy voting advice in a timely manner before the shareholder meeting. 
The amendments also provide non-exclusive safe harbors that the proxy 
voting advice businesses may use to satisfy the principle-based 
requirements in Rule 14a-2(b)(9)(ii). We address each of these three 
components in turn.
---------------------------------------------------------------------------

    \689\ Rule 14a-2(b)(9)(i).
---------------------------------------------------------------------------

    With respect to the conflicts of interest disclosure in new Rule 
14a-2(b)(9)(i), the facts and circumstances unique to each proxy voting 
advice business, including the conflicts of interest disclosures it 
currently provides to its clients as well as the nature of its material 
interests, transactions, and relationships, will dictate the additional 
disclosure, if any, it must provide under the final rule. For example, 
to the extent that proxy voting advice businesses are already providing 
the kind of conflicts of interest disclosure required by the rule, it 
would reduce their new compliance burden. Another factor that 
complicates the calculation of burden is the principles-based nature of 
the conflicts disclosure requirement, which eschews prescriptive 
disclosure standards in favor of providing proxy voting advice 
businesses the flexibility to determine which situations merit 
disclosure and the specific details to provide to their clients about 
any conflicts of interest identified. While this flexibility in the 
rule's application is beneficial for both proxy voting advice business 
and their clients, it limits our ability to predict the associated 
paperwork burden. Under the rule, a proxy voting advice business's 
disclosure could differ for each registrant and be subject to change in 
the future as both the business's and its clients' circumstances 
change.
    One proxy voting advice business estimated that its burden 
associated with the identification and disclosure of conflicts of 
information under the proposed rules would add 5,969 burden hours each 
year.\690\ While we believe

[[Page 55147]]

that the principles-based focus of the adopted requirement, in tandem 
with a proxy voting advice business's existing conflicts disclosure 
systems and practices (particularly as to registrants that have been 
the focus of the business's proxy coverage in prior years), could 
significantly mitigate any increased paperwork burden corresponding to 
the new rules, we think it is appropriate to increase our estimates to 
align more closely with this commenter's input. Accordingly, we 
estimate the conflicts of interest disclosure in new Rule 14a-
2(b)(9)(i) to result in 6,000 additional burden hours per proxy voting 
advice business.
---------------------------------------------------------------------------

    \690\ See letter from Glass Lewis I. Glass Lewis calculated that 
it issued 5,565 total proxy research reports on U.S. companies in 
2018. Assuming one hour spent for each report to identify any 
potential conflicts and another .5 hours to prepare conflicts 
disclosure regarding 807 of the 5,565 registrants for whom Glass 
Lewis determined it had disclosable conflict information, Glass 
Lewis estimated an increased burden of 5,969 hours annually to 
comply with the new conflicts of disclosure requirements in proposed 
Rule 14a-2(b)(9)(i).
---------------------------------------------------------------------------

    The remainder of the additional paperwork burden associated with 
the amendments will derive from the requirements of Rules 14a-
2(b)(9)(ii)(A) and (B). Because these rules have been designed to 
permit proxy voting advice businesses substantial flexibility over the 
manner in which they comply, we expect those businesses will implement 
mechanisms differently depending on, among other things, the facts and 
circumstances of their particular business operations and the nature of 
their client bases.\691\ Furthermore, some proxy voting advice 
businesses may already have systems sufficient to address some or all 
of the mechanics required to comply with Rules 14a-2(b)(9)(ii)(A) and 
(B),\692\ which would be expected to limit their overall burden but 
cannot be precisely estimated.
---------------------------------------------------------------------------

    \691\ As one example, to be eligible for the safe harbor in Rule 
14a-2(b)(9)(iv), a proxy voting advice business has the option to 
provide notice on its electronic client platform that the registrant 
has filed additional soliciting materials, or it could choose to 
provide notice through email or other electronic means. Both 
mechanisms for informing clients could involve initial set-up costs 
as well as ongoing costs that are hard to predict. Since they are 
not required to rely on the safe harbor, proxy voting advice 
businesses may also put in place other mechanisms to inform their 
clients of a registrant's views about the proxy voting advice, which 
could be more or less costly than satisfying the conditions of the 
safe harbor.
    \692\ See supra note 609 in Section IV.C.3.b.2.
---------------------------------------------------------------------------

    It appears that the more prescriptive nature of the proposed 
amendment regarding registrants' and certain other soliciting persons' 
advance review and response to proxy voting advice was a large driver 
of the hourly and cost burdens discussed by commenters. We believe the 
flexibility afforded by the principles-based approach reflected in the 
final rules should therefore result in significantly lower costs for 
proxy voting advice businesses and their clients than under the 
proposal.\693\
---------------------------------------------------------------------------

    \693\ For example, one commenter enumerated a number of elements 
of the proposal that it believed would have an impact on a proxy 
voting advice business's paperwork burden and provided estimates of 
the hourly burden expected to be incurred that totaled 59,999 burden 
hours. Of this amount, we have already addressed and incorporated 
the 5,969 hours estimate regarding identifying and disclosing 
conflicts. See supra note 690. We address the 19,648 hour estimate 
regarding confidentiality agreements below. We believe the remaining 
34,382 burden hours pertained to elements of the proposed rules that 
are not directly relevant in light of our revisions in favor of a 
more principle-based framework that no longer requires mandatory 
review and feedback periods. See letter from Glass Lewis I.
---------------------------------------------------------------------------

    We believe that much of the burden of the final amendments would be 
for the proxy voting advice business to develop policies that satisfy 
the principles and accordingly modify or develop systems and practices 
to implement such policies. To derive an estimate for these costs, we 
start with our estimated number of registrants filing proxy materials 
annually, which is 5,690.\694\ We estimate that the burden on a proxy 
voting advice business in setting up, modifying, and implementing such 
policies and systems would involve approximately one half-hour per 
registrant (2,845 hours) for the notice to registrants under Rule 14a-
2(b)(9)(ii)(A) and one half-hour per registrant (2,845 hours) for the 
notice to clients of any response by the registrants under Rule 14a-
2(b)(9)(ii)(B).\695\ Our revised estimates take into consideration our 
understanding that some proxy voting advice businesses have systems and 
practices in place that may complement or overlap with the new 
requirements, which could substantially mitigate any increases to their 
overall burden. Also, these estimates represent the average annual 
burden increase over three years, as we assume that the burden would be 
greatest in the first year after adoption as proxy voting advice 
businesses incorporate the new requirements into their existing 
practices and procedures, but would be less in subsequent years.
---------------------------------------------------------------------------

    \694\ See supra note 549.
    \695\ In deriving our estimates of one half-hour per registrant 
for each of Rule 14a-2(b)(9)(ii)(A) and Rule 14a-2(b)(9)(ii)(B), we 
considered estimates provided by one commenter who estimated that 
the ``Implementation of final notice period'' component of the 
proposal would impose a burden of 0.5 hours per registrant, as would 
the ``Process, review and implement requests for a hyperlinked 
response'' component. See letter from Glass Lewis I. While these two 
proposed components are not part of the final rules, they are in 
some ways analogous to the two principles for which proxy voting 
advice businesses may need to implement systems under the final 
rules. Accordingly, we believe one half-hour burden per registrant 
for each of these components is an appropriate estimate as to the 
burden on each proxy voting advice business.
---------------------------------------------------------------------------

    In addition to these system-related costs, we expect that the proxy 
voting advice businesses would, as a general matter, obtain 
acknowledgments or agreements with respect to the use of any 
information shared with a registrant, as we expect that the business 
would seek to limit disclosure of its report. Given that the rules do 
not require proxy voting advice businesses to give pre-release copies 
of proxy voting advice to registrants, in contrast to the proposal, we 
believe the need for proxy voting advice businesses to individually 
negotiate and secure detailed confidentiality agreements from 
registrants will be substantially lessened. This is particularly true 
to the extent that a proxy voting advice business already maintains a 
practice of providing copies of its proxy voting advice to registrants 
and can therefore utilize its existing practices with respect to 
confidentiality provisions. This would include, for example, the 
practice of requiring registrants to agree to or acknowledge certain 
terms of use before accessing the proxy voting advice. In this regard, 
we note that some proxy voting advice businesses currently provide 
reports to registrants without requiring formal confidentiality 
agreements, instead requiring only an electronic acknowledgement of 
terms of use.\696\
---------------------------------------------------------------------------

    \696\ See supra note 615. For example, Glass Lewis requires a 
registrant to click and acknowledge/accept/agree to certain ``terms 
of use'' before being able to access the notice and recommendations.
---------------------------------------------------------------------------

    We recognize that there nevertheless may be some hourly and cost 
burden associated with a proxy voting advice business's efforts to 
obtain acknowledgements \697\ or other kinds of agreements with 
registrants before sharing proxy voting advice materials and that there 
could be a range of approaches. One approach may be to develop a 
standardized form of acknowledgement regarding the report's terms of 
use and implementing systems to track the acknowledgments. Under such 
an approach, we estimate that each proxy voting advice business would 
incur 100 hours in the first year of compliance to draft such 
standardized terms of use and update systems to implement and track it, 
and 25 hours each year thereafter to implement the terms of use and 
systems on a going-forward basis, for a three-year average of 50 hours 
per year per proxy voting advice business associated with securing an 
acknowledgment or other assurance that the proxy advice will not

[[Page 55148]]

be disclosed. However, we recognize that proxy voting advice businesses 
could choose instead to negotiate individual terms of use with each 
registrant. As a result of modifications we have made from the proposal 
in response to commenters, we anticipate that the burden in those cases 
would nonetheless be significantly less than the four hours per issuer 
burden estimate provided by a commenter regarding the proposal.\698\ We 
estimate an average burden of one hour per registrant \699\ under those 
circumstances, for a total estimate of 5,690 hours per year associated 
with securing an acknowledgment or other assurance that the proxy 
advice will not be disclosed. Accordingly, depending on which approach 
a proxy voting advice business chooses, we expect that the burden could 
range from 50 hours to 5,690 hours per year per proxy voting advice 
business. Given current practices, we expect that proxy voting advice 
business would generally seek to rely on standardized terms of use. 
Nevertheless, for purposes of this PRA analysis, and so as to not 
underestimate the burden, we use an estimate of 5,690 hours per proxy 
voting advice business to obtain acknowledgments.
---------------------------------------------------------------------------

    \697\ See paragraph (B) of the Rule 14a-2(b)(9)(iii) safe 
harbor.
    \698\ See letter from Glass Lewis I.
    \699\ Out of the estimated 18,534 registrants that may be 
affected to a greater or lesser extent by the final amendments, 
5,690 filed proxy materials with the Commission during calendar year 
2018. See Section IV.B.1. and supra note 549.
---------------------------------------------------------------------------

    Overall, we believe that proxy voting advice businesses will incur 
an annual incremental paperwork burden to comply with Rule 14a-2(b)(9) 
as follows.

------------------------------------------------------------------------
                                           Proxy voting advice business
            New requirement                estimated incremental annual
                                                compliance burden
------------------------------------------------------------------------
Rule 14a-2(b)(9)(i)--Conflicts           Increase in paperwork burden
 Disclosure.                              corresponding to:
Proxy voting advice business must        To the extent that the proxy
 include conflicts of interest            voting advice business's
 disclosure in its proxy voting advice    current practices and
 (or electronic medium used to deliver    procedures do not already
 the advice), as well as a discussion     satisfy the requirement:
 of any policies and procedures used to   Identification and
 identify and address conflicts, and      disclosure to clients of
 any actual steps taken to address any    qualifying conflicts of
 conflicts.                               interest. Includes burden
                                          associated with internal
                                          processes and procedures for:
                                         [cir] Reviewing and preparing
                                          disclosures describing
                                          conflicts of interest,
                                          relevant conflicts policies
                                          and procedures, and actual
                                          steps taken to address
                                          conflicts identified;
                                         [cir] Developing and
                                          maintaining methods for
                                          tracking conflicts of
                                          interest;
                                            [cir] Seeking legal or other
                                             advice; and
                                            [cir] Updating electronic
                                             client platforms, as
                                             applicable.
                                         We estimate the increase in
                                          paperwork burden to be 6,000
                                          hours per proxy voting advice
                                          business.
Rule 14a-2(b)(9)(ii)(A)--Notice to       Increase in paperwork burden
 Registrants and Rule 14a-2(b)(9)(iii)    corresponding to:
 Safe Harbor.
The proxy voting advice business has     To the extent that the proxy
 adopted and publicly disclosed written   voting advice business's
 policies and procedures reasonably       current practices and
 designed to ensure that registrants      procedures are not already
 who are the subject of proxy voting      sufficient:
 advice have such advice made available   Developing new or
 to them at or prior to the time the      modifying existing systems,
 advice is disseminated to clients of     policies and methods, or
 the proxy voting advice business.        developing and maintaining new
 Safe Harbor--The proxy voting    systems, policies and methods
 advice business has written policies     to ensure that it has the
 and procedures that are reasonably       capability to timely provide
 designed to provide a registrant with    each registrant with
 a copy of the proxy voting advice        information about its proxy
 business's proxy voting advice, at no    advice necessary to satisfy
 charge, no later than the time it is     the requirement in Rule 14a-
 disseminated to the business's           2(b)(9)(ii)(A) and/or the safe
 clients. Such policies and procedures    harbor in Rule 14a-
 may include conditions requiring that:.  2(b)(9)(iii).
(A) The registrant has filed its          If applicable,
 definitive proxy statement at least 40   obtaining acknowledgments or
 calendar days before the security        agreements with respect to use
 holder meeting date (or if no meeting    of any information shared with
 is held, at least 40 calendar days       the registrant; and
 before the date the votes, consents,     Delivering copies of
 or authorizations may be used to         proxy voting advice to
 effect the proposed action); and.        registrants.
(B) The registrant has acknowledged      We estimate the increase in
 that it will only use the copy of the    paperwork burden to be 8,535
 proxy voting advice for its internal     hours per proxy voting advice
 purposes and/or in connection with the   business, consisting of 2,845
 solicitation and it will not be          hours for system updates and
 published or otherwise shared except     5,690 hours for
 with the registrant's employees or       acknowledgments regarding
 advisers.                                sharing information.

[[Page 55149]]

 
Rule 14a-2(b)(9)(ii)(B)--Notice to       Increase in paperwork burden
 Clients of Proxy Voting Advice           corresponding to:
 Businesses and Rule 14a-2(b)(9)(iv)     To the extent that the proxy
 Safe Harbor.                             voting advice business's
The proxy voting advice business has      current practices and
 adopted and publicly disclosed written   procedures are not already
 policies and procedures reasonably       sufficient:
 designed to ensure that the proxy        Developing new or
 voting advice business provides          modifying existing systems,
 clients with a mechanism by which they   policies and methods, or
 can reasonably be expected to become     developing and maintaining new
 aware of any written statements          systems, policies and methods
 regarding proxy voting advice by         capable of:
 registrants who are the subject of      [cir] Tracking whether the
 such advice, in a timely manner before   registrant has filed
 the shareholder meeting.                 additional soliciting
 Safe harbor--The proxy voting    materials;
 advice business has written policies    [cir] Ensuring that proxy
 and procedures that are reasonably       voting advice businesses
 designed to inform clients who receive   provide clients with a means
 the proxy voting advice when a           to learn of a registrant's
 registrant that is the subject of such   written statements about proxy
 voting advice notifies the proxy         voting advice in a timely
 voting advice business that it intends   manner that satisfies the
 to file or has filed additional          requirement in Rule 14a-
 soliciting materials with the            2(b)(9)(ii)(B) and/or the safe
 Commission setting forth the             harbor in Rule 14a-
 registrant's statement regarding the     2(b)(9)(iv).
 voting advice, by:.                      If relying on the safe
(A) Providing notice to its clients on    harbor in Rule 14a-
 its electronic client platform that      2(b)(9)(iv)(A) or (B), the
 the registrant intends to file or has    associated paperwork burden
 filed such additional soliciting         would include the time and
 materials and including an active        effort required of the proxy
 hyperlink to those materials on EDGAR    voting advice businesses firm
 when available; or.                      to:
(B) The proxy voting advice business     [cir] Provide notice to its
 providing notice to its clients          clients through the business's
 through email or other electronic        electronic client platform or
 means that the registrant intends to     email or other electronic
 file or has filed such additional        medium, as appropriate, that
 soliciting materials and including an    the registrant intends to file
 active hyperlink to those materials on   or has filed additional
 EDGAR when available.                    soliciting materials setting
                                          forth its views about the
                                          proxy voting advice; and
                                         [cir] include a hyperlink to
                                          the registrant's statement on
                                          EDGAR
                                         We estimate the increase in
                                          paperwork burden to be 2,845
                                          hours per proxy voting advice
                                          business.
                                        --------------------------------
    Total..............................  17,380 hours per proxy voting
                                          advice business.
------------------------------------------------------------------------

    Altogether, we estimate an annual total increase of 52,640 hours 
\700\ in compliance burden to be incurred by proxy voting advice 
businesses that would be subject to the amendments to Rule 14a-2(b)(9). 
We assume that the burden would be greatest in the first year after 
adoption, as proxy voting advice businesses incorporate the new 
requirements into their existing practices and procedures.
---------------------------------------------------------------------------

    \700\ This represents the annual total burden increase expected 
to be incurred by proxy voting advice businesses (as an average of 
the yearly burden predicted over the three-year period following 
adoption) and is intended to be inclusive of all burdens reasonably 
anticipated to be associated with compliance with the conditions of 
Rule 14a-2(b)(9). The Commission is aware of three businesses in the 
U.S. (i.e., Glass Lewis, ISS, and Egan-Jones) whose activities fall 
within the scope of proxy voting advice constituting a solicitation 
under amended Rule 14a-1(l)(1)(iii)(A). We estimate that each of 
these will have a burden of 17,380 hours per year. We recognize that 
there could be other proxy voting advice businesses, including both 
smaller firms and firms operating outside the U.S., which may also 
be subject to the final rules. However, we expect such a number to 
be small. Accordingly, rather than increasing our estimate of the 
number of affected proxy voting advice businesses beyond the three 
discussed above, we are increasing our annual total burden estimate 
by 500 hours to account for those businesses. As a result, the 
annual total burden that we estimate will result from this amendment 
will be: (17,380 x 3) + 500 = 52,640 hours.
---------------------------------------------------------------------------

b. Registrants
    In addition to proxy voting advice businesses, we anticipate that 
registrants would incur some additional paperwork burden as a result of 
the amendments. Registrants could experience increased burdens 
associated with coordinating with proxy voting advice businesses to 
receive the proxy voting advice, reviewing the proxy voting advice, and 
preparing and filing supplementary proxy materials in response to the 
proxy voting advice, if they choose to do so.
    As the rules do not require registrants to engage with proxy voting 
advice businesses or take any action in response to proxy voting 
advice, we expect a registrant would bear additional paperwork burden 
only if it anticipated the benefits of engaging with the proxy voting 
advice business would exceed the costs of participation. These costs 
will vary depending upon the particular facts and circumstances of the 
proxy voting advice and any issues identified therein, as well as the 
resources of the registrant, which makes it difficult to provide a 
reliable quantifiable estimate of these costs. Nevertheless, in the 
Proposing Release, the Commission stated its belief that the 
corresponding burden on registrants would be not significant in most 
cases, particularly when averaged among all affected registrants.\701\ 
As such, the Commission estimated that registrants would each incur, on 
average, an increase of ten additional burden hours each year, for a 
total increase among all registrants of 18,970 hours annually.\702\
---------------------------------------------------------------------------

    \701\ See Proposing Release, PRA Table 1 at 66553 and note e of 
the table.
    \702\ Id.
---------------------------------------------------------------------------

    In consideration of commenters' views that the Commission's 
estimates were too low,\703\ we have adjusted our prior burden 
estimates upward. Nevertheless, we do not believe the annual burden to 
be incurred by an individual registrant would be considerably greater 
than was reflected in the Proposing Release, particularly in light of 
the modifications we are making to the registrant review process that 
was originally proposed. For example, the rules as adopted do not 
mandate that registrants be afforded fixed periods of review of proxy 
voting advice, as was the case with the proposal.\704\ Furthermore, our 
estimates consider the extent to which some registrants' current 
practices and procedures may already involve reviewing proxy voting 
advice businesses' voting advice, filing additional soliciting 
materials, and some amount of investor outreach in response to adverse 
voting recommendations. Assuming that a

[[Page 55150]]

registrant's annual meeting of shareholders is covered by at least two 
of the three major U.S. proxy voting advice businesses, and the 
registrant has opted to review both sets of proxy advice and file 
additional soliciting materials in response, we estimate an average 
increase of 50 hours per registrant in connection with the amendments 
for a total annual increase of 284,500 hours.\705\ As discussed above, 
however, it is difficult to predict the effect of the amendments on a 
registrant's paperwork burden with a great degree of precision.
---------------------------------------------------------------------------

    \703\ See letters from Glass Lewis I (``. . . the ten hour 
estimate and resulting burden hour estimate is both unsupported and 
likely significantly understated'') and ProxyVote I (``We believe 
the Proposed Rulemaking significantly understates the actual burden 
imposed on ProxyVote and thus the actual costs we will incur.'')
    \704\ See proposed Rule 14a-2(b)(9)(ii)(2). One commenter 
criticized the Commission for not giving proper consideration to 
registrants' burden hours associated with the ``review and 
feedback'' periods. See Glass Lewis I.
    \705\ In the Proposing Release, for purposes of its PRA 
analysis, the Commission assumed that, on average, one-third of the 
5,690 registrants that filed proxy materials with the Commission 
during calendar year 2018 (1,897) would be the subject of proxy 
voting advice each year. See Proposing Release, note b. of PRA Table 
1 at 66553. Some commenters who disagreed with this assumption 
stated that this figure was too low. See letter from Glass Lewis I. 
(suggesting that the correct number was ``likely much closer to 100% 
of those that filed proxy materials with the Commission'') and 
ProxyVote I (``The appropriate number of registrants that should be 
subject to the Proposed Rulemaking's estimates should be 5,690 
registrants, not 1,897 registrants''). We also note certain 
statements from some proxy voting advice businesses indicating that 
they cover tens of thousands of shareholder meetings annually across 
global markets. See letters from Glass Lewis I and II; ISS; Egan-
Jones. Accordingly, we have reconsidered our original estimate of 
one-third, and agree that our calculations should be based on the 
larger number of 5,690 registrants, given the significant volume of 
registrants and shareholder meetings that are the subject of proxy 
voting advice each year. This results in a total annual burden 
increase of 50 x 5,690 = 284,500 hours. We note that such burden 
increase would be offset against any corresponding reduction in 
burden resulting from the registrant forgoing other methods of 
responding to the proxy voting advice (such as investor outreach) 
the registrant determines are no longer necessary or are less 
preferable in light of the new rules.
---------------------------------------------------------------------------

2. Aggregate Increase in Burden
    Table 1 summarizes the calculations and assumptions used to derive 
our estimates of the aggregate increase in burden for all affected 
parties corresponding to the amendments.

          PRA Table 1--Calculation of Aggregate Increase in Burden Hours Resulting From the Amendments
----------------------------------------------------------------------------------------------------------------
                                                                              Affected parties
                                                           -----------------------------------------------------
                                                               Proxy voting advice
                                                                    businesses                Registrants
                                                                                  (A)                        (B)
----------------------------------------------------------------------------------------------------------------
Burden Hour Increase......................................                     52,640                    284,500
----------------------------------------------------------------------------------------------------------------
Aggregate Increase in Burden Hours........................   [Column Total (A)] + [Column Total (B)] = [337,140]
----------------------------------------------------------------------------------------------------------------

3. Increase in Annual Responses
    We believe that the amendments would increase the number of annual 
responses \706\ to the existing collection of information for 
Regulation 14A. Although we do not expect registrants to file any 
different number of proxy statements as a result of our amendments, we 
do anticipate that the number of additional soliciting materials filed 
under 17 CFR 240.14a-6 may increase in proportion to the number of 
times that registrants choose to provide a statement in response to a 
proxy voting advice business's proxy voting advice as contemplated by 
Rule 14a-2(b)(9)(ii)(B) and/or the safe harbor under Rule 14a-
2(b)(9)(iv). For purposes of this PRA, we estimate that there would be 
an additional 783 annual responses to the collection of information as 
a result of the amendments.\707\
---------------------------------------------------------------------------

    \706\ For purposes of the Regulation 14A collection of 
information, the number of annual responses corresponds to the 
estimated number of new filings that will be made each year under 
Regulation 14A, which includes filings such as DEF 14A; DEFA14A; 
DEFM14A; and DEFC14A. When calculating PRA burden for any particular 
collection of information, the total number of annual burden hours 
estimated is divided by the total number of annual responses 
estimated, which provides the average estimated annual burden per 
response. The current inventory of approved collections of 
information is maintained by the Office of Information and 
Regulatory Affairs (OIRA), a division of OMB. The total annual 
burden hours and number of responses associated with Regulation 14A, 
as updated from time to time, can be found at https://www.reginfo.gov/public/do/PRAMain.
    \707\ Because a registrant's decision to review and file 
additional soliciting materials in response to proxy voting advice 
will be entirely voluntary, it is difficult to predict how 
frequently such parties will choose to do so. For purposes of the 
PRA estimate in the Proposing Release, the Commission used as its 
baseline the average number of times firms filed additional 
definitive proxy materials in response to proxy voting advice over 
the three calendar years 2016 (99), 2017 (77) and 2018 (84), or 87. 
See Proposing Release at n. 269. For purposes of its PRA analysis, 
the Commission estimated that at least three times as many 
registrants would choose to prepare responses to proxy voting advice 
and request that their hyperlink be provided to the recipients of 
the advice pursuant to proposed Rule 14a-2(b)(9)(iii) than otherwise 
had historically chosen to file additional soliciting materials. As 
a result, the Commission estimated that three times as many 
supplemental proxy filings would be made each year, which would 
increase the annual responses to the Regulation 14A collection of 
information by the same amount. For purposes of this PRA analysis, 
we apply a similar methodology. To the extent that registrants 
believe that the efficacy of providing a response to proxy voting 
advice via additional soliciting materials will be enhanced by the 
amendments, and make registrants more likely to use this mechanism 
than they have in the past, we expect that the number of annual 
responses to the Regulation 14 collection of information will 
increase correspondingly. However, it is difficult to reliably 
predict what this overall increase would be. In light of comments we 
received that, as a general matter, our PRA estimates were too low, 
we think it is appropriate to increase our estimate of additional 
soliciting materials filed each year from three times the current 
number to ten times the current number. Taking the average of the 
Rule 14a-6 filings made in years 2016, 2017, 2018 (87), we multiply 
by ten for an estimate of 870 Rule 14a-6 filings, or an increase of 
783 annual responses to the Regulation 14A collection of 
information.
---------------------------------------------------------------------------

4. Incremental Change in Compliance Burden for Collection of 
Information
    Table 2 below illustrates the incremental change to the total 
annual compliance burden for the Regulation 14A collection of 
information in hours and in costs \708\ as a result of the amendments. 
The table sets forth the percentage estimates we typically use for the 
burden allocation for each response.
---------------------------------------------------------------------------

    \708\ Our estimates assume that 75% of the burden is borne by 
the company and 25% is borne by outside counsel at $400 per hour. We 
recognize that the costs of retaining outside professionals may vary 
depending on the nature of the professional services, but for 
purposes of this PRA analysis, we estimate that such costs would be 
an average of $400 per hour. This estimate is based on consultations 
with several registrants, law firms, and other persons who regularly 
assist registrants in preparing and filing reports with the 
Commission.

[[Page 55151]]

                                   PRA Table 2--Calculation of Increase in Burden Hours Resulting From the Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                        Increase in                       Increase in      Increase in
                   Number of estimated responses                      Total increase    burden hours     Increase in      professional     professional
                                                                     in burden hours    per response    internal hours       hours            costs
(A) [dagger]                                                                    (B)                (C) = ((D) = (B) x      (E) = (B) x      (F) = (E) x
                                                                     [dagger][dagger                             0.75             0.25             $400
                                                                                  ]
--------------------------------------------------------------------------------------------------------------------------------------------------------
6,369..............................................................         337,140   [dagger][dagger         252,855           84,285      $33,714,000
                                                                                        ][dagger] 50
--------------------------------------------------------------------------------------------------------------------------------------------------------
[dagger] This number reflects an estimated increase of 783 annual responses to the existing Regulation 14A collection of information. See supra note
  707. The current OMB PRA inventory estimates that 5,586 responses are filed annually.
[dagger][dagger] Calculated as the sum of annual burden increases estimated for proxy voting advice businesses (52,640 hours) and registrants (284,500
  hours). See supra PRA Table 1.
[dagger][dagger][dagger] The estimated increases in Columns (C), (D), and (E) are rounded to the nearest whole number.

5. Program Change and Revised Burden Estimates
    Table 3 summarizes the estimated change to the total annual 
compliance burden of the Regulation 14A collection of information, in 
hours and in costs, as a result of the amendments.

                                                                  PRA Table 3--Requested Paperwork Burden Under the Amendments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Current burden                            Program change                                     Revised burden
                                                 -----------------------------------------------------------------------------------------------------------------------------------------------
                                                    Current      Current                                 Increase in    Increase in
                                                     annual       burden     Current cost   Increase in    internal    professional    Annual responses      Burden hours         Cost burden
                                                   responses      hours         burden       responses      hours          costs
                                                         (A)          (B)               (C) (D)    minus>    minus>
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Reg. 14A                                               5,586      551,101     $73,480,012          783      252,855     $33,714,000               6,369             803,956        $107,194,012
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 See Column (A) in PRA Table 2 noting an estimated increase of 783 annual responses to the existing Regulation 14A collection of information.
 See Column (D) in PRA Table 2.
 From Column (F) in PRA Table 2.

VI. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with the Regulatory Flexibility Act 
(``RFA'').\709\ It relates to the amendments to: The definition of 
``solicitation'' in Rule 14a-1(l); the proxy solicitation exemptions in 
Rule 14a-2(b); and the prohibition on false or misleading statements in 
solicitations in Rule 14a-9 of Regulation 14A under the Exchange Act. 
An Initial Regulatory Flexibility Analysis (``IRFA'') was prepared in 
accordance with the RFA and was included in the Proposing Release.
---------------------------------------------------------------------------

    \709\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

A. Need for, and Objectives of, the Final Amendments

    Given the importance of a properly functioning proxy system to 
investors and the capital markets, the purpose of the amendments is to 
help ensure that investors, or those acting on their behalf, who use 
proxy voting advice have access to more transparent and complete 
information with which to make their voting decisions, while not 
imposing undue costs or delays that could adversely affect the timely 
provision of proxy voting advice, with the ultimate aim of facilitating 
informed voting decisions. The need for, and objectives of, these 
amendments are discussed in more detail in Sections I, II, and IV 
above.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, we requested comment on any aspect of the 
IRFA, including how the proposed amendments could achieve their 
objective while lowering the burden on small entities, the number of 
small entities that would be affected by the proposed amendments, the 
existence or nature of the potential effects of the proposed amendments 
on small entities discussed in the analysis, and how to quantify the 
effects of the proposed amendments. We also requested comment on the 
number of proxy voting advice businesses that would be small entities 
subject to the proposed amendments.
    We did not receive estimates from commenters on the number of small 
entities that would be affected by the proposed amendments or the 
number of proxy voting advice businesses that would be small entities 
subject to the proposed amendments. However, several commenters 
asserted that the Commission's economic analysis failed to consider the 
cost and effect of the proposed amendments on smaller proxy voting 
advice businesses.\710\ One such commenter stated that the proposals 
would be particularly burdensome for small proxy voting advice 
businesses.\711\ Another commenter, who identified itself as a small 
entity (with under $5 million in assets) providing proxy voting 
services to institutional investor clients, asserted that small 
entities like itself would face significant resource and capacity 
burdens when complying with the proposed amendments, with no gain in 
the quality of voting or results for their clients.\712\ In addition, 
one commenter believed that small and medium-sized investment advisers 
would be disproportionately affected by increased costs that may result 
from the proposed amendments because they are less likely to be able to 
have staff solely dedicated to the proxy voting process,\713\ while 
another predicted that delays and increased costs resulting from the 
proposed amendments would most heavily impact smaller institutional 
investors, such as churches, endowments, unions, pension funds, 
etc.\714\ Several commenters stated that small entities may not have 
sufficient staffing and resources to

[[Page 55152]]

comply with the review and feedback process, and therefore should 
either be exempted from the proposals or, at a minimum, be given an 
extended timeframe for compliance.\715\ In developing the FRFA, we 
considered these comments as well as comments on the proposed 
amendments generally.\716\ As discussed throughout this release, 
including in Section VI.D below, we note that the shift to a 
principles-based approach for the final amendment should help alleviate 
a number of the concerns raised by commenters about the potential 
impact on small entities.
---------------------------------------------------------------------------

    \710\ See, e.g., letters from Felician Sisters II; Good 
Shepherd; IASJ; Interfaith Center II; St. Dominic of Caldwell.
    \711\ See letter from Interfaith Center II.
    \712\ See supra note 518.
    \713\ See letter from IAA.
    \714\ See letter from J. McRitchie I.
    \715\ See letters from Felician Sisters II; Good Shepherd; IASJ; 
Interfaith Center II; St. Dominic of Caldwell.
    \716\ See supra Sections II; IV.
---------------------------------------------------------------------------

C. Small Entities Subject to the Final Amendments

    The amendments could affect some small entities; specifically, 
those small entities that are: (i) Proxy voting advice businesses 
(i.e., persons who provide proxy voting advice that falls within the 
definition of a ``solicitation'' under Rule 14a-1(l)(1)(iii), as 
amended); and (ii) registrants conducting solicitations covered by 
proxy voting advice. Although not directly subject to the amendments, 
clients of proxy voting advice businesses and the investors on whose 
behalf such clients vote proxies may be indirectly affected by the 
amendments to the extent that the costs borne by the proxy voting 
advice businesses result in increased fees for such services.
    The RFA defines ``small entity'' to mean ``small business,'' 
``small organization,'' or ``small governmental jurisdiction.'' \717\ 
The definition of ``small entity'' does not include individuals. For 
purposes of the RFA, under our rules, an issuer of securities or a 
person, other than an investment company or an investment adviser, is a 
``small business'' or ``small organization'' if it had total assets of 
$5 million or less on the last day of its most recent fiscal year.\718\ 
An investment company, including a business development company,\719\ 
is considered to be a ``small business'' if it, together with other 
investment companies in the same group of related investment companies, 
has net assets of $50 million or less as of the end of its most recent 
fiscal year.\720\ An investment adviser generally is a small entity if 
it: (1) Has assets under management having a total value of less than 
$25 million; (2) did not have total assets of $5 million or more on the 
last day of the most recent fiscal year; and (3) does not control, is 
not controlled by, and is not under common control with another 
investment adviser that has assets under management of $25 million or 
more, or any person (other than a natural person) that had total assets 
of $5 million or more on the last day of its most recent fiscal 
year.\721\
---------------------------------------------------------------------------

    \717\ 5 U.S.C. 601(6).
    \718\ See Exchange Act Rule 0-10(a) [17 CFR 240.0-10(a)].
    \719\ Business development companies are a category of closed-
end investment company that are not registered under the Investment 
Company Act [15 U.S.C. 80a-2(a)(48); 80a-53-64].
    \720\ See Investment Company Act Rule 0-10(a) [17 CFR 270.0-
10(a)].
    \721\ See Advisers Act Rule 0-7(a) [17 CFR 275.0-7(a)].
---------------------------------------------------------------------------

    As discussed in Section IV.B.1, we are not aware of smaller 
entities that currently supply research, analysis, and recommendations 
to support the voting decisions of their clients that would fall within 
the definition of ``solicitation'' and would therefore be directly 
affected by the amendments.\722\ As far as registrants that may be 
directly affected, we estimate that there are 1,011 issuers that file 
with the Commission, other than investment companies and investment 
advisers, that may be considered small entities.\723\ In addition, we 
estimate that, as of December 31, 2019, there were 92 registered 
investment companies that may be considered small entities.\724\ 
Finally, we estimate that, as of December 31, 2019, there were 452 
investment advisers that may be considered small entities and may be 
indirectly affected by the amendments.\725\
---------------------------------------------------------------------------

    \722\ In this regard, commenters did not provide data that would 
allow us to ascertain the extent to which there are smaller entities 
that would be considered proxy voting advice businesses within the 
scope of the amendments.
    \723\ This estimate is based on staff analysis of issuers, 
excluding co-registrants, with EDGAR filings of either Form 10-K or 
amendments, filed during the calendar year of January 1, 2019 to 
December 31, 2019. The data used for this analysis were derived from 
XBRL filings, Compustat, and Ives Group Audit Analytics.
    \724\ This estimate is derived from an analysis of data obtained 
from Morningstar Direct as well as data filed with the Commission 
(Forms N-Q and N-CSR) for the period ending December 2019.
    \725\ Based on SEC-registered investment adviser responses to 
Items 5.F. and 12 of Form ADV. As discussed above, ISS, one of the 
three major firms that comprise the proxy advisory industry in the 
U.S., is also registered investment advisor. See supra Section 
IV.B.1.a.
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D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    We anticipate that any costs resulting from the amendments will 
primarily relate to Rule 14a-2(b)(9) and, as such, predominantly affect 
the proxy advice voting businesses that will be required to comply with 
Rule 14a-2(b)(9) in order to rely on the exemptions in Rule 14a-2(b)(1) 
or (b)(3).\726\ These businesses, including any affected small 
entities, will likely incur costs to ensure that their internal 
practices, procedures, and systems are sufficient to meet the conflicts 
of interest disclosure and notice requirements under Rule 14a-2(b)(9). 
As noted above, we are not aware of smaller entities that currently 
provide services that would cause them to be subject to the proposed 
amendments; nevertheless, in the interest of completeness, we have 
considered the potential effects of the amendments on smaller proxy 
voting advice businesses throughout this FRFA. Registrants of all sizes 
also could incur costs associated with coordinating with proxy voting 
advice businesses to receive the proxy voting advice, reviewing the 
proxy voting advice, and determining whether to prepare and file 
additional soliciting materials in response to the proxy voting 
advice.\727\ Compliance with the amendments may require the use of 
professional skills, including legal skills.
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    \726\ The amendments are discussed in detail in Section II, 
above. We discuss the economic impact, including the estimated costs 
and benefits, of the amendments to all affected entities, including 
small entities, in Section IV above.
    \727\ See supra Section V.C.1.b. We do not expect that the 
amendments to Rule 14a-1(l) and Rule 14a-9 will have a significant 
economic impact on affected parties, including any small entities, 
because they codify already-existing Commission positions on the 
applicability of these rules to proxy voting advice. See supra note 
685.
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    The amendments apply to small entities to the same extent as other 
entities, irrespective of size. Therefore, we expect that the nature of 
any benefits and costs associated with the amendments will be similar 
for large and small entities. Accordingly, we refer to the discussion 
of the amendments' economic effects on all affected parties, including 
small entities, in Section IV above.\728\ Consistent with that 
discussion, to the extent that any small entities currently or in the 
future may provide proxy voting advice, we anticipate that the economic 
benefits and costs likely will vary widely among such entities based on 
a number of factors, including the nature and conduct of their 
businesses, as well as the extent to which they are already meeting or 
exceeding the requirements established by the amendments, which makes 
it difficult to project the

[[Page 55153]]

economic impact on small entities with precision.\729\
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    \728\ In particular, we discuss the estimated benefits and costs 
of the amendments on all affected parties, including larger and 
smaller entities, in Section IV.C. above. We also discuss the 
estimated compliance burden associated with the amendments for 
purposes of the PRA in Section V above.
    \729\ See supra Section IV.C.5.
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    As a general matter, however, we recognize that any costs of the 
amendments borne by the affected entities, such as those related to 
compliance with the amendments, or the implementation or restructuring 
of internal systems needed to adjust to the amendments, could have a 
proportionally greater effect on small entities, as they may be less 
able than larger entities to bear such costs. Further, as discussed in 
Section IV.B.1.a., the three major proxy voting advice businesses 
currently operating in the U.S. have existing processes in place for 
identifying and disclosing conflicts of interest to their clients, as 
well as providing some registrants access to versions of the 
businesses' proxy voting advice prior to making a voting recommendation 
to clients. If competing proxy voting advice businesses do not have 
such processes in place, they could be disproportionately affected by 
the amendments. Finally, the amendments may impact competition, in 
particular for any small entities that provide proxy voting advice 
services. To the extent that a proxy voting advice business's existing 
practices and procedures do not satisfy the conditions of Rule 14a-
2(b)(9), such entities, including any affected small entities, will 
incur additional compliance costs and, consequently, may be more likely 
to exit the market for such services or less able to enter the market 
in the first place.
    We believe that the principles-based approach we are adopting 
should address many of the concerns commenters raised about the 
proposed amendments' potential disparate effect on smaller firms. By 
providing proxy voting advice businesses, including those that are 
small entities, with the flexibility to design policies and procedures 
that are scaled to the scope of their business operations, we believe 
these entities will be able to find the most cost-effective means to 
comply with the requirements.
    With respect to costs that may be incurred by registrants as a 
result of the amendments, these costs will vary depending upon the 
particular facts and circumstances of the proxy voting advice as well 
as the resources of the registrant. Consequently, as with proxy voting 
advice businesses, it is difficult to quantify these costs with 
precision, particularly since the degree to which a registrant elects 
to review and respond to proxy voting advice is entirely 
voluntary.\730\ As a function of their smaller size, registrants that 
are small entities may incur proportionally greater costs associated 
with amendments than larger entities, but the extent of such costs is 
uncertain. Importantly, while registrants of all sizes may take 
advantage of the ability to review proxy voting advice provided 
pursuant to the amendments and potentially file additional soliciting 
material in response, they are not required to do so; as a result, we 
expect that registrants would engage in the process only to the extent 
that they anticipate the benefits of such review to be greater than the 
costs.
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    \730\ For purposes of the PRA analysis in Section V, we estimate 
an annual increase of 50 burden hours per registrant in connection 
with the amendments.
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E. Agency Action To Minimize Effect on Small Entities

    The RFA directs us to consider alternatives that would accomplish 
our stated objectives, while minimizing any significant adverse impact 
on small entities. In connection with the amendments, we considered the 
following alternatives:
     Establishing different compliance or reporting 
requirements that take into account the resources available to small 
entities;
     Exempting small entities from all or part of the 
requirements;
     Using performance rather than design standards; and
     Clarifying, consolidating, or simplifying compliance and 
reporting requirements under the rules for small entities
    We do not believe that establishing different compliance or 
reporting requirements for small entities in connection with the 
amendments would accomplish the objectives of this rulemaking. The 
amendments are intended to improve the completeness and transparency of 
information available to shareholders and those acting on their behalf 
when making voting decisions and enhance the overall functioning of the 
proxy voting process, in furtherance of Section 14 of the Exchange Act. 
These objectives would not be as effectively served if we were to 
establish different conditions for smaller proxy voting advice 
businesses that wish to rely on the solicitation exemptions in Rules 
14a-2(b)(1) or (b)(3).\731\ For similar reasons, we do not believe that 
exempting smaller proxy voting advice businesses from all or part of 
the amendments would accomplish our objectives.\732\
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    \731\ Moreover, because the amendments reflect a principles-
based, rather than a more prescriptive, framework, there is no 
practicable way to establish different compliance requirements for 
smaller proxy voting advice businesses without also compromising the 
principles-based nature of the requirements. Under the rules that we 
are adopting, proxy voting advice businesses may comply in whatever 
manner they choose so long as they satisfy the principles set forth.
    \732\ See supra Section IV.E.6. Exempting smaller proxy voting 
advice businesses from the additional conditions of Rules 14a-
2(b)(1) and (3) would reduce the resulting costs of the amendments 
for such businesses, but it also would mean that their clients would 
not realize the same benefits in terms of potential improvements in 
the reliability and transparency of the voting advice they receive. 
This, in turn, could put smaller proxy voting advice businesses at a 
competitive disadvantage if they chose to avail themselves of such 
an exemption.
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    In a change from the proposal, the amendments generally use 
performance standards rather than design standards. Based on commenter 
feedback, including that related to the potential impact on smaller 
entities, we believe that moving from an approach that emphasizes 
design standards to one that emphasizes performance standards will 
provide all entities, and in particular smaller entities, with 
sufficient flexibility to find the most cost-effective means of 
compliance while still achieving our objectives. We recognize that 
using performance standards rather than design standards may increase 
the degree of uncertainty that proxy voting advice businesses and their 
clients have regarding whether such businesses are in full compliance 
with the rules. However, we also are adopting certain safe harbors that 
we believe will help mitigate such uncertainty to the extent proxy 
voting advice businesses choose to rely on them.
    In adopting these amendments, we have undertaken to provide rules 
that are clear and simple for all affected parties. We do not believe 
that further clarification, consolidation, or simplification for small 
entities is necessary.

VII. Statutory Authority

    We are adopting the rule amendments contained in this release under 
the authority set forth in Sections 3(b), 14, 16, 23(a), and 36 of the 
Securities Exchange Act of 1934, as amended.

List of Subjects in 17 CFR Part 240

    Brokers, Confidential business information, Fraud, Reporting and 
recordkeeping requirements, Securities.

    In accordance with the foregoing, we are amending title 17, chapter 
II, of the Code of Federal Regulations as follows:

[[Page 55154]]

PART 240--GENERAL RULES AND REGULATIONS UNDER THE SECURITIES 
EXCHANGE ACT OF 1934

0
1. The authority citation for part 240 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et 
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5521(e)(3); 18 U.S.C. 
1350, Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
    Sections 240.14a-1, 240.14a-3, 240.14a-13, 240.14b-1, 240.14b-2, 
240.14c-1, and 240.14c-7 also issued under secs. 12, 15 U.S.C. 781, 
and 14, Pub. L. 99-222, 99 Stat. 1737, 15 U.S.C. 78n;
* * * * *

0
2. Amend Sec.  240.14a-1 by:
0
a. Revising paragraph (l)(1)(iii);
0
b. In paragraph (l)(2)(iii), removing the word ``or'' from the end of 
the paragraph;
0
c. In paragraph (l)(2)(iv)(C), removing at the end of the paragraph 
``.'' and adding in its place ``; or'';
0
d. Adding paragraph (l)(2)(v).
    The revisions and additions read as follows:

Sec.  240.14a-1  Definitions.

* * * * *
    (l) Solicitation. (1) * * *
    (iii) The furnishing of a form of proxy or other communication to 
security holders under circumstances reasonably calculated to result in 
the procurement, withholding or revocation of a proxy, including:
    (A) Any proxy voting advice that makes a recommendation to a 
security holder as to its vote, consent, or authorization on a specific 
matter for which security holder approval is solicited, and that is 
furnished by a person that markets its expertise as a provider of such 
proxy voting advice, separately from other forms of investment advice, 
and sells such proxy voting advice for a fee.
    (B) [Reserved]
    (2) * * *
    (v) The furnishing of any proxy voting advice by a person who 
furnishes such advice only in response to an unprompted request.

0
3. Amend Sec.  240.14a-2 by adding paragraph (b)(9) to read as follows:

Sec.  240.14a-2  Solicitations to which Sec.  240.14a-3 to Sec.  
240.14a-15 apply.

* * * * *
    (b) * * *
    (9) Paragraphs (b)(1) and (b)(3) of this section shall not be 
available to a person furnishing proxy voting advice covered by Sec.  
240.14a-1(l)(1)(iii)(A) (``proxy voting advice business'') unless both 
of the conditions in (b)(9)(i) and (ii) of this section are satisfied:
    (i) The proxy voting advice business includes in its proxy voting 
advice or in an electronic medium used to deliver the proxy voting 
advice prominent disclosure of:
    (A) Any information regarding an interest, transaction, or 
relationship of the proxy voting advice business (or its affiliates) 
that is material to assessing the objectivity of the proxy voting 
advice in light of the circumstances of the particular interest, 
transaction, or relationship; and
    (B) Any policies and procedures used to identify, as well as the 
steps taken to address, any such material conflicts of interest arising 
from such interest, transaction, or relationship; and
    (ii) The proxy voting advice business has adopted and publicly 
disclosed written policies and procedures reasonably designed to ensure 
that:
    (A) Registrants that are the subject of the proxy voting advice 
have such advice made available to them at or prior to the time when 
such advice is disseminated to the proxy voting advice business's 
clients; and
    (B) The proxy voting advice business provides its clients with a 
mechanism by which they can reasonably be expected to become aware of 
any written statements regarding its proxy voting advice by registrants 
who are the subject of such advice, in a timely manner before the 
security holder meeting (or, if no meeting, before the votes, consents, 
or authorizations may be used to effect the proposed action).

    Note 1 to paragraph (b)(9)(ii): For purposes of satisfying the 
requirement in paragraph (b)(9)(ii)(A) of this section, the proxy 
voting advice business's written policies and procedures need not 
require it to make available to the registrant additional versions 
of its proxy voting advice with respect to the same meeting, vote, 
consent or authorization, as applicable, if the advice is 
subsequently revised.

    (iii) A proxy voting advice business will be deemed to satisfy the 
requirement in paragraph (b)(9)(ii)(A) of this section if it has 
written policies and procedures that are reasonably designed to provide 
a registrant with a copy of its proxy voting advice, at no charge, no 
later than the time such advice is disseminated to the proxy voting 
advice business's clients. Such policies and procedures may include 
conditions requiring that:
    (A) The registrant has filed its definitive proxy statement at 
least 40 calendar days before the security holder meeting date (or if 
no meeting is held, at least 40 calendar days before the date the 
votes, consents, or authorizations may be used to effect the proposed 
action); and
    (B) The registrant has acknowledged that it will only use the copy 
of the proxy voting advice for its internal purposes and/or in 
connection with the solicitation and such copy will not be published or 
otherwise shared except with the registrant's employees or advisers.
    (iv) A proxy voting advice business will be deemed to satisfy the 
requirement in paragraph (b)(9)(ii)(B) of this section if it has 
written policies and procedures that are reasonably designed to inform 
clients who receive proxy voting advice when a registrant that is the 
subject of such advice notifies the proxy voting advice business that 
it intends to file or has filed additional soliciting materials with 
the Commission pursuant to Sec.  240.14a-6 setting forth the 
registrant's statement regarding the advice, by:
    (A) The proxy voting advice business providing notice to its 
clients on its electronic platform that the registrant intends to file 
or has filed such additional soliciting materials and including an 
active hyperlink to those materials on EDGAR when available; or
    (B) The proxy voting advice business providing notice to its 
clients through email or other electronic means that the registrant 
intends to file or has filed such additional soliciting materials and 
including an active hyperlink to those materials on EDGAR when 
available.
    (v) Paragraph (b)(9)(ii) of this section does not apply to proxy 
voting advice to the extent such advice is based on custom voting 
policies that are proprietary to a proxy voting advice business's 
client.
    (vi) Paragraph (b)(9)(ii) of this section does not apply to any 
portion of the proxy voting advice that makes a recommendation to a 
security holder as to its vote, consent, or authorization in a 
solicitation subject to Sec.  240.14a-3(a):

[[Page 55155]]

    (A) To approve any transaction specified in Sec.  230.145(a); or
    (B) By any person or group of persons for the purpose of opposing a 
solicitation subject to this regulation by any other person or group of 
persons.
* * * * *

0
4. Amend Sec.  240.14a-9 by adding paragraph e. to the Note to read as 
follows:

Sec.  240.14a-9  False or misleading statements.

* * * * *
    Note: * * *

    e. Failure to disclose material information regarding proxy 
voting advice covered by Sec.  240.14a-1(l)(1)(iii)(A), such as the 
proxy voting advice business's methodology, sources of information, 
or conflicts of interest.
* * * * *

    By the Commission.
    Dated: July 22, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-16337 Filed 9-1-20; 8:45 am]
BILLING CODE 8011-01-P