[Federal Register Volume 84, Number 175 (Tuesday, September 10, 2019)]
[Rules and Regulations]
[Pages 47416-47420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18355]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 241

[Release No. 34-86721]


Commission Interpretation and Guidance Regarding the 
Applicability of the Proxy Rules to Proxy Voting Advice

AGENCY: Securities and Exchange Commission.

ACTION: Guidance and interpretation.

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SUMMARY: The Securities and Exchange Commission (the ``SEC'' or the 
``Commission'') is providing an interpretation and related guidance 
regarding the applicability of certain rules, which the Commission has 
promulgated under Section 14 of the Securities Exchange Act of 1934 
(the ``Exchange Act'' and such rules the ``federal proxy rules''), to 
proxy voting advice.

DATES: Effective: September 10, 2019.

FOR FURTHER INFORMATION CONTACT: Adam F. Turk, Special Counsel, at 
(202) 551-3500, Office of Chief Counsel, Division of Corporation 
Finance, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is providing an 
interpretation and related guidance regarding the applicability of 17 
CFR 240.14-1 and 240.14a-9 [Rules 14a-1 and 14a-9] under the Exchange 
Act [15 U.S.C. 78a et seq.] to proxy voting advice.\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, 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 part 240], in which these rules are published.
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Table of Contents

I. Introduction
II. Interpretation and Guidance Regarding Applicability of Certain 
Federal Proxy Rules to Proxy Voting Advice
III. Other Matters

I. Introduction

    As the use of proxy advisory firms by investment advisers and other 
institutional investors has become more widespread and the services 
offered by proxy advisory firms have broadened, we and our staff have 
examined how proxy voting advice provided by proxy advisory firms may 
be solicitations under the federal proxy rules.\2\ In addition, we and 
our staff have engaged with the public through various forums and 
statements on a variety of issues related to the proxy voting process, 
including those discussed below. For example, in 2010, the Commission 
issued a concept release that sought public comment about, among other 
things, the role and legal status of proxy advisory firms within the 
U.S. proxy system.\3\ In 2013, the staff held a roundtable on the use 
of proxy advisory firm services by institutional investors and 
investment advisers.\4\ In 2014, the staff of the Divisions of 
Investment Management and Corporation Finance issued a Staff Legal 
Bulletin (``SLB 20'') to provide guidance about the availability and 
requirements of two exemptions to the federal proxy rules that are 
often relied upon by proxy advisory firms.\5\ Most recently, the staff 
hosted a roundtable on the proxy process in November 2018 (the ``2018 
Roundtable'') that included a panel on the role of proxy advisory firms 
and their use by investment advisers.\6\ In connection with the 2018 
Roundtable, the public was invited to provide input on questions that 
arise regarding the use of proxy advisory firms and their 
activities.\7\ We have carefully considered the feedback received on 
these topics, and with the benefit of this extensive body of 
information, historical experience, and engagement, the Commission is 
today providing an interpretation and related guidance regarding the 
applicability of the federal proxy rules to proxy voting advice 
provided by proxy advisory firms.
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    \2\ The Commission today is also publishing guidance regarding 
the proxy voting responsibilities of investment advisers under Rule 
206(4)-6 under the Investment Advisers Act of 1940, Form N-1A, Form 
N-2, Form N-3, and Form N-CSR under the Investment Company Act of 
1940. See Commission Guidance Regarding Proxy Voting 
Responsibilities of Investment Advisers, Release No. IA-5325 (August 
21, 2019) [ FR ] (``Investment Adviser Proxy Voting Guidance'').
    \3\ Concept Release on the U.S. Proxy System, Release No. 34-
62495 (July 14, 2010) [75 FR 42982 (July 22, 2010)] (``Concept 
Release''). The comment letters received in response to the Concept 
Release are available at https://www.sec.gov/comments/s7-14-10/s71410.shtml.
    \4\ See SEC Announces Agenda, Panelists for Roundtable on Proxy 
Advisory Services, available at https://www.sec.gov/news/press-release/2013-253. The letters received in response to the 
announcement are available at https://www.sec.gov/comments/4-670/4-670.shtml.
    \5\ SEC Staff Legal Bulletin No. 20, Proxy Voting: Proxy Voting 
Responsibilities of Investment Advisers and Availability of 
Exemptions from the Proxy Rules for Proxy Advisory Firms (June 30, 
2014). SLB 20 represents the views of the staff of the Divisions of 
Investment Management and Corporation Finance. It is not a rule, 
regulation, or statement of the Commission. Furthermore, the 
Commission has neither approved nor disapproved its content. SLB 20, 
like all staff guidance, has no legal force or effect: it does not 
alter or amend applicable law, and it creates no new or additional 
obligations for any person.
    \6\ See Chairman Jay Clayton, Statement Announcing SEC Staff 
Roundtable on the Proxy Process, available at https://www.sec.gov/news/public-statement/statement-announcing-sec-staff-roundtable-proxy-process.
    \7\ See Comments on Statement Announcing SEC Staff Roundtable on 
the Proxy Process; File No. 4-725, available at https://www.sec.gov/comments/4-725/4-725.htm.
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    Specifically, in Section II below, we provide an interpretation and 
related guidance on whether proxy voting advice constitutes a 
``solicitation'' under the federal proxy rules, and the application of 
Rule 14a-9 under the Exchange Act to proxy voting advice. The 
interpretation and related guidance discussed below are part of the 
Commission's review of the overall proxy process. As part of this 
effort, the staff is also considering recommending that the Commission 
propose rule amendments to address proxy advisory firms' reliance on 
the proxy solicitation exemptions in Exchange Act Rule 14a-2(b).\8\
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    \8\ 17 CFR 240.14a-2(b).
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[[Page 47417]]

II. Interpretation and Guidance Regarding Applicability of Certain 
Federal Proxy Rules to Proxy Voting Advice

    Question 1: Does proxy voting advice provided by a proxy advisory 
firm constitute a solicitation under the federal proxy rules?
    Response: Generally, yes. Exchange Act Section 14(a) \9\ applies to 
any solicitation for a proxy with respect to any security registered 
under Exchange Act Section 12 and authorizes the Commission to 
establish rules and regulations governing such solicitations as 
necessary or appropriate in the public interest or for the protection 
of investors.\10\ The Commission defined the term ``solicitation'' in 
Rule 14a-1(l) under the Exchange Act.\11\ The Commission's definition 
is broad and includes, among other things, a ``communication to 
security holders under circumstances reasonably calculated to result in 
the procurement, withholding or revocation of a proxy.'' \12\
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    \9\ 15 U.S.C. 78n(a). Section 14(a) makes it ``unlawful for any 
person . . . in contravention of such rules and regulations as the 
Commission may prescribe as necessary or appropriate in the public 
interest or for the protection of investors, to solicit or to permit 
the use of his name to solicit any proxy or consent or authorization 
in respect of any security . . . registered pursuant to section [12] 
of [the Act].''
    \10\ Foreign private issuers, however, are exempt from the 
requirements of Section 14(a). 17 CFR.240.3a12-3(b). In addition, 
registrants only reporting pursuant to Exchange Act Section 15(d) 
are not subject to the federal proxy rules.
    \11\ 17 CFR 240.14a-1(l).
    \12\ 17 CFR 240.14a-1(l)(iii). We note that, over the years, the 
Commission has broadened the definition of ``solicitation'' in the 
context of what was needed or appropriate in the public interest or 
for the protection of investors, consistent with the purposes of the 
Exchange Act. See, e.g., Amended Proxy Rules, Release No. 1823 (Aug. 
11, 1938) [3 FR 1991 (Aug. 13, 1938)]; Amendment of Regulation X-14, 
Release No. 2376 (Jan. 12, 1940) [5 FR 174 (Jan. 12, 1940)] (making 
clear in each case that any communication by a person soliciting 
proxy authority, not just the communication delivered with the form 
of proxy, is a solicitation); Solicitation of Proxies Under the Act, 
Release No. 3347 (Dec. 18, 1942) [7 FR 10655 (Dec. 22, 1942)] 
(amending the definition of ``solicitation'' of a proxy to include 
``any request to revoke a proxy or not to execute a proxy''); 
Adoption of Amendments to Proxy Rules, Release No. 34-5276 (Jan. 17, 
1956) [21 FR 577 (Jan. 26, 1956)] (``Amendments to Proxy Rules 
Release'') (defining a ``solicitation'' to include a ``communication 
to security holders under circumstances reasonably calculated to 
result in the procurement, withholding or revocation of a proxy''). 
The Commission has noted that this definition potentially applies 
to, among other things, communications by those who may not be 
seeking proxy authority for themselves or who may be indifferent to 
the outcome of a vote. See Regulation of Communications Among 
Shareholders, Release No. 34-31326 (Oct. 16, 1992) [57 FR 48276 
(Oct. 22, 1992)] (``Regulation of Communications Release''). In 
addressing communications by those who may not be seeking proxy 
authority for themselves or who may be indifferent to the outcome of 
a vote, the Commission did not narrow the definition of solicitation 
to exclude these communications, but instead enacted rules to exempt 
them from the information and filing requirements of the federal 
proxy rules while preserving the application of the proxy anti-fraud 
provision, Rule 14a-9. See, e.g., Shareholder Communications, 
Shareholder Participation in the Corporate Electoral Process and 
Corporate Governance Generally, Release No. 34-16356 (Nov. 21, 1979) 
[44 FR 68764 (Nov. 29, 1979)] (``Shareholder Participation Adopting 
Release'')(exempting the furnishing of proxy voting advice by any 
advisor to any other person with whom the advisor has a business 
relationship); Regulation of Communications Release (exempting 
communications among shareholders who are not seeking proxy 
authority and do not have a substantial interest in the matter 
subject to a vote).
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    Consistent with the Commission's broad definition of solicitation 
and the case law construing that term,\13\ the Commission has 
previously stated that the federal proxy rules apply to any person 
seeking to influence the voting of proxies by shareholders, regardless 
of whether the person itself is seeking authorization to act as a 
proxy.\14\ As a result, a person may be engaged in a solicitation in 
cases where that person is not seeking the procurement, withholding, or 
revocation of a proxy for itself. In addition, the Commission has 
indicated that this analysis applies even where the person seeking to 
influence the vote may be indifferent to its ultimate outcome.\15\ 
Consistent with these statements, the Commission has observed that the 
breadth of the definition of ``solicitation'' may result in proxy 
advisory firms being subject to the proxy rules because they provide 
recommendations that are reasonably calculated to result in the 
procurement, withholding, or revocation of a proxy.\16\ In expressing 
this view, the Commission stated that, as a general matter, the 
furnishing of proxy voting advice constitutes a ``solicitation'' within 
the meaning of Exchange Act Rule 14a-1.\17\
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    \13\ In considering what constitutes a ``solicitation,'' courts 
have similarly taken a broad, but flexible, view. See, e.g., Union 
Pacific Railroad Co. v. Chicago and North Western Railroad Co., 226 
F. Supp. 400, 408 (N. D. Ill. 1964) (holding that a report provided 
by a broker-dealer to shareholders of the target company in a 
contested merger constituted a solicitation because it advised the 
shareholders that one bidder's offer was ``far more attractive'' 
than the other and therefore was a communication reasonably 
calculated to affect the shareholders' voting decisions). See also 
SEC v. Okin, 132 F.2d 784 (2d Cir. 1943) (holding that the defendant 
shareholder who sent a letter to fellow shareholders in connection 
with an annual meeting asking them not to sign any proxies for the 
company was engaged in a solicitation); Sargent v. Genesco, Inc., 
492 F.2d 750 (5th Cir. 1974) (holding that a management letter 
explaining the corporation's recent financial difficulties and 
endorsing the terms of a refinancing plan was a solicitation because 
its purpose was to forestall the shareholders from blocking that 
plan, notwithstanding that the letter did not expressly call for any 
shareholder action); Reserve Life Ins. Co. v. Provident Life 
Insurance Co., 499 F.2d 715 (8th Cir. 1974) (holding that letters 
sent to voting trust certificate holders to extend the term of a 
voting trust were solicitations of proxies).
    \14\ See Amendments to Proxy Rules Release (in amending the 
definition of a ``solicitation'' to include any communications to 
security holders under circumstances reasonably calculated to result 
in the procurement, withholding, or revocation of a proxy, the 
Commission explained that this definition may include any statements 
``made for the purpose of inducing security holders to give, revoke, 
or withhold a proxy . . . by any person who has solicited or intends 
to solicit proxies, whether or not such statements are accompanied 
by an express request to give, revoke, or withhold a proxy. . .''); 
Electronic Shareholder Forums, Release No. 34-57172 (Jan. 18, 2008) 
[73 FR 4450 (Jan. 25, 2008)]. See also, Long Island Lighting Co. v. 
Barbash, 779 F.2d 793 (2d Cir. 1985) (finding newspaper and radio 
advertisements that encouraged citizens to advocate for a state-run 
utility company to be solicitations made in connection with an 
upcoming director election because such advertisements could have 
indirectly resulted in the furnishing, revocation, or withholding of 
proxies) and Brief of the Securities and Exchange Commission, Amicus 
Curiae, at p. 7, filed therein (``SEC LILCO Brief'') (``Accordingly, 
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 a chain of 
communications designed ultimately to accomplish such a result.'').
    \15\ See id.
    \16\ See Concept Release, 75 FR 43009.
    \17\ See id. See also Broker-Dealer Participation in Proxy 
Solicitations, Release No. 7208 (Jan. 7, 1964) [29 FR 341 (Jan. 15, 
1964)] (``Broker-Dealer Release''). For a discussion of whether 
proxy voting advice should be viewed as ``unsolicited'' proxy 
advice, see infra text accompanying notes 26-27.
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    Whether a particular communication is a solicitation often turns on 
``the purpose for which the communication was published--i.e., whether 
the purpose was to influence the shareholders' decisions,'' as 
evidenced by the substance of the communication and the circumstances 
under which it was transmitted.\18\ With respect to the substance of 
the communications, the proxy voting advice provided by proxy advisory 
firms to their clients generally describes the specific proposals that 
will be presented at the registrant's upcoming meeting and presents a 
``vote recommendation'' for each proposal that indicates how the client 
should vote.\19\

[[Page 47418]]

These firms often also present their vote recommendations through 
online platforms established by the firms to facilitate their clients' 
proxy voting activities. With respect to the circumstances under which 
this voting advice is provided, proxy advisory firms market their 
expertise in researching and analyzing matters submitted to a 
shareholder vote for the purpose of assisting their clients in making 
voting decisions at shareholder meetings.\20\ Many investment advisers 
retain and pay a fee to proxy advisory firms to provide detailed 
analyses of various issues, including advice regarding how the 
investment adviser should vote on the proposals at the registrant's 
upcoming meeting.\21\ In many cases, as discussed below, the proxy 
advisory firms make recommendations for a particular investment adviser 
based on the advisory firms' application of the investment adviser's 
voting criteria.\22\
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    \18\ See SEC LILCO Brief (describing the factors that should be 
considered in determining whether an advertisement published in a 
major newspaper was reasonably calculated to result in the 
procurement, withholding, or revocation of a proxy and therefore a 
solicitation).
    \19\ Examples include:
     one proxy advisory firm's report for a contested 
election of directors included a detailed evaluation of the 
candidates presented by the dissident shareholders and management, 
concluded that management's candidate ``appear[ed] to have more 
relevant experience than the dissident nominee as a public company 
director'' and recommended that ``[t]herefore a vote FOR the nominee 
[] on the management (Blue) card is warranted'';
     another proxy advisory report analyzed the registrant's 
executive compensation practices and presented a recommendation to 
vote ``AGAINST [the registrant's advisory vote to ratify named 
executive officers' compensation]'' for various reasons; and
     one proxy advisory firm evaluated a proposal submitted 
by a dissident shareholder group to repeal certain board-adopted 
bylaw amendments and recommended that a ``vote AGAINST this 
shareholder proposal is warranted as there appears to be no merit to 
the dissident campaign.''
    \20\ For example, one proxy advisor, Institutional Shareholder 
Services Inc. (``ISS''), promotes itself as ``a recognized industry 
leader in the field of corporate governance and proxy voting'' and 
explains to investment advisers that they should consider ISS' 
``proven capacity and competence in analyzing proxy issues.'' See 
ISS, Due Diligence Compliance Package (November 2017), available at 
https://www.issgovernance.com/file/duediligence/Due-Diligence-Package-November-2017.pdf (last accessed August 13, 2019).
    Another proxy advisor, Glass, Lewis & Co., LLC (``Glass 
Lewis''), describes its business as ``a leading, independent 
governance services firm that provides proxy research and vote 
management services to more than 1,300 clients throughout the 
world'' and states that ``[w]hile institutional investor clients use 
Glass Lewis research primarily to help them make proxy voting 
decisions, they also use Glass Lewis research when engaging with 
companies before and after shareholder meetings.'' See Best Practice 
Principles for Providers of Shareholder Voting Research & Analysis, 
Glass Lewis Statement of Compliance for the Period of 1 January 2018 
through 31 December 2018, available at http://www.glasslewis.com/wp-content/uploads/2019/02/GL-Compliance-Statement-2019.pdf (last 
accessed August 13, 2019).
    \21\ As of 2019, ISS reported that it had approximately 2,000 
institutional clients. See https://www.issgovernance.com/about/about-iss/ (last accessed August 13, 2019). Glass Lewis reported 
that, as of 2019, it had ``1,300+ clients, including the majority of 
the world's largest pension plans, mutual funds, and asset managers, 
who collectively manage more than $35 trillion in assets.'' See 
https://www.glasslewis.com/company-overview/ (last accessed August 
13, 2019).
    \22\ See Letter from ISS, dated Nov. 7, 2018 (``ISS Letter'') 
(``[a]s of January 1, 2018, approximately 85% of ISS' top 100 
clients used a custom proxy voting policy.''), available at https://www.sec.gov/comments/4-725/4-725.htm; and Letter from Glass Lewis, 
dated Nov. 14, 2018 (``[a]s mentioned above, the supermajority of 
Glass Lewis clients . . . vote according to a custom policy or via a 
custom process, in what is becoming the standard practice among 
institutional investors.''), available at https://www.sec.gov/comments/4-725/4-725.htm.
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    As a fiduciary, an investment adviser owes each of its clients a 
duty of care and loyalty with respect to services undertaken on the 
client's behalf, including voting.\23\ Proxy advisory firms provide 
their voting recommendations to their investment adviser clients with 
the expectation that those recommendations will be used by their 
investment adviser clients to assist in fulfilling their fiduciary 
duties when making their voting decisions. The fact that proxy advisory 
firms typically provide their recommendations shortly before a 
shareholder meeting further enhances the likelihood that the 
recommendations are designed to and will influence the final stages of 
the investment advisers' decision-making process on voting 
determinations.\24\ Therefore, it is our view that such voting advice 
provided by a firm marketing its expertise in researching and analyzing 
proxy issues for purposes of helping its clients make proxy voting 
determinations (i.e., not merely performing administrative or 
ministerial services) should be considered a solicitation subject to 
the federal proxy rules because it is ``a communication to security 
holders under circumstances reasonably calculated to result in the 
procurement, withholding or revocation of a proxy.'' We believe this 
interpretation is consistent with the Commission's long-held view that 
an advisor who approaches a customer with proxy voting advice is 
engaging in a solicitation subject to the federal proxy rules.\25\
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    \23\ See Investment Adviser Proxy Voting Guidance.
    \24\ See Letter from Center on Executive Compensation (Nov. 12, 
2018) (``. . . proxy reports are released within a short window 
before the issuer's annual meeting. The data within the reports is 
subsequently relied upon by institutional investors in fulfilling 
their fiduciary duties to vote proxies in the best interest of their 
shareholders.'').
    See also, Frank M. Placenti, Are Proxy Advisors Really A 
Problem?, American Council for Capital Formation (October 2018) (in 
the 2016 and 2017 proxy seasons, 15.3% and 19.3%, respectively, of 
shareholders' votes were cast within three days after one proxy 
advisory firm issued its recommendations), available at http://accf.org/wp-content/uploads/2018/10/ACCF_ProxyProblemReport.pdf; 
Smallwood v. Pearl Brewing Co., 489 F.2d 579, 600 (5th Cir. 1974) 
(stating that in determining whether a communication is a 
solicitation, ``[i]t is important also to know whether, when the 
questionable statement is made, proxies have been requested or the 
time for soliciting proxies is near. In general, the further removed 
the statement is from an act of shareholder suffrage, the less 
likely it is that the statement will leave its imprint upon that 
shareholder action.'').
    \25\ See Broker-Dealer Release. While the Commission recognized 
that proxy voting advice could be beneficial to shareholders, it 
nevertheless did not change its view that such advice would likely 
fall within the definition of a solicitation and instead chose to 
exempt such solicitations from the information and filing 
requirements of the proxy rules. See, generally, Shareholder 
Participation Adopting Release, enacting what is now Exchange Act 
Rule 14a-2(b)(3) [17 CFR 240.14a-2(b)(3)] to exempt the furnishing 
of proxy voting advice by any advisor to any other person with whom 
the advisor has a business relationship from the informational and 
filing requirements of the federal proxy rules, provided the 
conditions of the rule are met. Rule 14a-2(b)(3) requires that:
    (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 Exchange Act Rule 14a-12(c).) 
[17 CFR 240.14a-12(c)].
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    Even if the proxy advisory firm is providing recommendations based 
on its application of the client's own tailored voting guidelines 
(i.e., not merely performing administrative or ministerial services), 
and recognizing that facts and circumstances may vary, it is our view 
that such analysis and advice regarding a voting determination 
generally should be considered a solicitation. The communication 
generally is in the form of a voting recommendation based on the firm's 
analysis of the proxy materials and whether a particular matter is 
consistent with, not consistent with, or not covered by client voting 
criteria; it is typically transmitted to the client shortly before the 
meeting to aid the client's voting determination; and it may be a 
factor in the client's voting determination. Also, as noted above, 
proxy advisory firms market their services based on their expertise in 
researching and analyzing proxy issues for purposes of helping their 
clients make proxy voting determinations. As a result, even when based 
on the client's own voting guidelines, we believe the communication, if 
it reflects more than administrative or ministerial work, should be 
viewed as part of a commercial service that is designed to influence 
the client's voting decision. We believe this to be the case even in 
circumstances where the client may not follow this advice.
    For similar reasons, we disagree with the view that the proxy 
voting advice provided by proxy advisory firms falls outside the 
definition of a solicitation because it should not be viewed as

[[Page 47419]]

``unsolicited'' voting advice.\26\ We view these services provided by 
proxy advisory firms as distinct from advice prompted by unsolicited 
inquiries from clients to their financial advisors or brokers on how 
they should vote their proxies, which remains outside the definition of 
a solicitation.\27\ Rather than merely responding to client inquiries, 
the communication is invited by the proxy advisory firms themselves 
through the marketing of their expertise in researching and analyzing 
proxy issues for purposes of helping clients make proxy voting 
determinations.
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    \26\ See ISS Letter (distinguishing between unsolicited and 
solicited proxy advice and requesting that the Commission confirm 
that while unsolicited proxy advice is a solicitation, a registered 
investment adviser who is contractually obligated to furnish vote 
recommendations based on client-selected guidelines does not provide 
``unsolicited'' proxy voting advice, and therefore does not engage 
in a solicitation).
    \27\ See Broker-Dealer Release (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'').
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    Notwithstanding the foregoing, we note that persons engaged in a 
solicitation in the form of proxy voting advice, including proxy 
advisory firms, may avail themselves of the exemptions from the 
information and filing requirements of the federal proxy rules.\28\ 
Nothing in this interpretation is intended to restrict or limit 
reliance on those exemptions.
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    \28\ See, e.g., 17 CFR 240.14a-2(b)(1) and 17 CFR 240.14a-
2(b)(3).
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    Question 2: Does Exchange Act Rule 14a-9 apply to proxy voting 
advice?
    Response: Yes. Solicitations that are exempt from the federal proxy 
rules' information and filing requirements remain subject to Exchange 
Act Rule 14a-9, which prohibits any solicitation from containing any 
statement which, at the time and in the light of the circumstances 
under which it is made, is false or misleading with respect to any 
material fact.\29\ In addition, such solicitation must not omit to 
state any material fact necessary in order to make the statements 
therein not false or misleading.\30\ Rule 14a-9 also extends to 
opinions, reasons, recommendations, or beliefs that are disclosed as 
part of a solicitation, which may be statements of material facts for 
purposes of the rule.\31\ Where such opinions, recommendations, or 
similar views are provided, disclosure of the underlying facts, 
assumptions, limitations, and other information may be needed so that 
these views do not raise Rule 14a-9 concerns.\32\ Accordingly, any 
person engaged in a solicitation through proxy voting advice must not 
make materially false or misleading statements or omit material facts, 
such as information underlying the basis of its advice or which would 
affect its analysis and judgments, that would be required to make the 
advice not misleading. For example, the provider of the proxy voting 
advice should consider whether, depending on the particular statement, 
it may need to disclose the following types of information in order to 
avoid a potential violation of Rule 14a-9: \33\
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    \29\ See 17 CFR 240.14a-9. See also, Concept Release, 75 FR 
43010 (``Even if exempt from the informational and filing 
requirements of the federal proxy rules, the furnishing of proxy 
voting advice remains subject to the prohibition on false and 
misleading statements in Rule 14a-9.'').
    \30\ 17 CFR 240.14a-9.
    \31\ See Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 
1092 (1991) (stating that a board's recommendation that shareholders 
approve a proposed merger because it viewed the proposal as ``fair'' 
to the minority shareholders and the offered merger consideration as 
a ``high'' value were statements of material facts because ``[s]uch 
statements are factual in two senses: As statements that the 
directors do act for the reasons given or hold the belief stated and 
as statements about the subject matter of the reason or belief 
expressed'').
    \32\ See, e.g., Dowling v. Narragansett Capital Corp., 735 F. 
Supp. 1105, 1119 (D.R.I. 1990) (denying a motion to dismiss Rule 
14a-9 complaints on the basis that ``allegations regarding 
misrepresentations as to the value of . . . [a corporation's assets] 
and nondisclosure of the limitations on the information underlying . 
. . [a] fairness opinion implicate matters at the heart of the 
decision confronting shareholders.''). The Commission staff has 
previously raised questions about the appropriateness and adequacy 
of disclosure under Rule 14a-9 in proxy solicitations. See, e.g., 
Interpretative Release Relating to Proxy Rules, Release No. 34-16833 
(May 23, 1980) [45 FR 36374 (May 30, 1980)] (stating the Division of 
Corporation Finance's view that in proxy contests in which the 
disposition of a registrant's assets and distribution of the sale 
proceeds to shareholders were the dissidents' goal, the inclusion of 
valuations of the sale proceeds in the proxy soliciting material was 
only appropriate under Rule 14a-9 when, among other things, they 
were ``accompanied by disclosure which facilitate[d] shareholders' 
understanding of the basis for and the limitations on the projected 
realizable values.'').
    \33\ We understand that some proxy advisory firms currently may 
be providing some of the disclosures described in the examples 
listed in this section.
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     An explanation of the methodology used to formulate its 
voting advice on a particular matter (including any material deviations 
from the provider's publicly-announced guidelines, policies, or 
standard methodologies for analyzing such matters) where the omission 
of such information would render the voting advice materially false or 
misleading; \34\
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    \34\ To the extent that the proxy voting advice is materially 
based on a methodology using a group of peer companies selected by 
the proxy advisory firm, the disclosure may need to include the 
identities of the peer group members used as part of its 
recommendation and the reasons for selecting these peer group 
members as well as, if material, why its peer group members differ 
from those selected by the registrant. For example, such disclosure 
may be needed for a voting recommendation on a registrant's advisory 
vote on an executive compensation proposal that is based on a 
comparison of the registrant's executive compensation policies to 
those of other companies selected by the proxy advisory firm.
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     to the extent that the proxy voting advice is based on 
information other than the registrant's public disclosures, such as 
third-party information sources,\35\ disclosure about these information 
sources and the extent to which the information from these sources 
differs from the public disclosures provided by the registrant if such 
differences are material and the failure to disclose the differences 
would render the voting advice false or misleading; and
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    \35\ Such sources could include third-party research or 
publications, commercial or financial information databases, or 
ratings or rankings published by third parties.
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     disclosure about material conflicts of interest that arise 
in connection with providing the proxy voting advice in reasonably 
sufficient detail so that the client can assess the relevance of those 
conflicts.\36\
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    \36\ Relationships or interests that may create conflicts of 
interest are commonly found by courts as material information that 
should be disclosed to avoid Rule 14a-9 violations. See, e.g., 
Maldonado v. Flynn, 597 F.2d 789 (2d Cir. 1979) (noting that 
``shareholders are entitled to truthful presentation of factual 
information'' when there is a possibility of self-dealing among 
directors and emphasizing the importance of Rule 14a-9 in eliciting 
disclosures of this material information).
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III. Other Matters

    Pursuant to the Congressional Review Act,\37\ the Office of 
Information and Regulatory Affairs has designated this guidance and 
interpretation as not a ``major rule,'' as defined by 5 U.S.C. 804(2).
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    \37\ 5 U.S.C. 801 et seq.
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List of Subjects in 17 CFR Part 241

    Securities.

Amendments to the Code of Federal Regulations

    For the reasons set out above, the Commission is amending title 17, 
chapter II of the Code of Federal Regulations as set forth below:

PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES 
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
1. An authority citation is added for part 241 to read as follows:

    Authority: 15 U.S.C. 78a et seq.


0
2. The table is amended by adding an entry for Release No. 34-86721 at 
the end to read as follows:

[[Page 47420]]



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                 Subject                    Release No.              Date               Fed. Reg. vol. and page
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                                                  * * * * * * *
Commission Interpretation and Guidance          34-86721  August 21, 2019...........  [Insert FR Volume Number]
 Regarding the Applicability of the                                                    FR [Insert FR Page
 Proxy Rules to Proxy Voting Advice.                                                   Number].
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    By the Commission.

    Dated: August 21, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-18355 Filed 9-9-19; 8:45 am]
 BILLING CODE 8011-01-P


