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SEC Amends Whistleblower Rules

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On September 23, 2020, the SEC also amended the whistleblower rules (SEC Press Release 2020-219). These rule amendments are detailed in SEC Release No. 34-89963 (available at: https://www.sec.gov/rules/final/2020/34-89963.pdf).

The whistleblower rules (Section 21F of the Securities Exchange Act of 1934, as added by Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act) authorize the SEC to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions greater than $1 million.

The SEC based these amendments on its experience with the whistleblower rules. Under the amendments, for awards of $5 million or less, a presumption will exist that the statutory maximum amount will be awarded. For awards over $5 million, the SEC will continue to analyze the award factors specified in Rule 21F-6 when determining the size of a whistleblower award.

The amendments expand the definition of “action” to include deferred prosecution agreements and non-prosecution agreements. This ensures whistleblowers are not disadvantaged because of the particular form of an action that the SEC or Department of Justice may elect to pursue.

The amendments also adopt a uniform definition of “whistleblower” that will apply to all aspects of the whistleblower rules.

Finally, the amendments create an automatic waiver of compliance with the portion of the rules that specifies how the whistleblower must notify the SEC if the whistleblower provides the SEC with the correct form (Form TCR) within 30 days of first providing the information or within 30 days of first obtaining actual or constructive notice about the rule’s notification requirements.

The amendments offer a number of other clarifications for the whistleblower rules, which should help folks that wish to pursue a whistleblower claim.

The amendments will become effective 30 days after publication in the Federal Register.

SEC Amends Shareholder Proposal Rules

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On September 23, 2020, the SEC voted to adopt amendments to the shareholder proposal rules (Rule 14a-8) (SEC Press Release 2020-220). The SEC published a draft rule for comment in November 2019 (see my blog post, SEC Proposed Additional Rules for Proxy Voting Advice and Shareholder Proposals, for details).

On the share ownership requirements that entitle a shareholder to submit a proposal and the proposal resubmission requirements, the SEC adopted the most of the changes proposed in the draft rules released last November:

Share ownership requirements met in any of three ways:

  • $2,000 of company securities entitled to vote on the proposal held for at least 3 years;
  • $15,000 of company securities entitled to vote on the proposal held for at least 2 years; or
  • $25,000 of company securities entitled to vote on the proposal held for at least 1 year.

Shareholders will no longer be able to aggregate their shares in order to meet the minimum ownership requirements. Additionally, there will be a transition period that allows shareholders who meet the current requirement ($2,000 of company securities held for at least 1 year) to submit proposals before January 1, 2023.

As for the shareholder resubmission rules, the SEC amended them to provide that the shareholder support threshold will be increased as proposed in the draft rule amendment. A proposal that deals with substantially the same subject matter as a previous proposal or proposals included in the company’s proxy materials within the preceding 5 years may be excluded if the most recent vote was within the preceding 3 years and was:

  • Less than 5% of the votes cast if previously voted on once;
  • Less than 15% of the votes cast if voted on twice; and
  • Less than 25% of the votes cast if voted on three or more times.

The final resubmission rules differ form the proposed rules in that they do not include a provision that would permit excluding resubmitted proposals that experienced declining shareholder support.

Generally, the final rules will be effective 60 days after publication in the Federal Register.

The final SEC shareholder proposals rules are detailed in SEC Release No. 34-89964, available at: https://www.sec.gov/rules/final/2020/34-89964.pdf

SEC Issues Final Rules on Proxy Voting Advice

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On July 22, 2020, the U.S. Securities and Exchange Commission met and adopted final rules, Exemptions from the Proxy Rules for Proxy Voting Advice, SEC. Rel. 34-89732, in a 3-1 vote. These final rules will become effective 60 days after publication in the Federal Register. Of course, that presumes that a lawsuit isn’t filed against the SEC and these final rules by an interested party (such as ISS which filed such a lawsuit with the SEC’s earlier guidance affecting proxy voting advisory firms).

The final rules codify the SEC’s view that proxy voting advice generally constitutes a solicitation under the proxy rules. The SEC Press Release clarifies that the availability of two exemptions often used by proxy voting advice businesses to the proxy rules depends on compliance with tailored and comprehensive conflicts of interest disclosure requirements. The exemptions also require compliance with two principles-based requirements designed to ensure that:

(1) companies that are the subject of proxy voting advice have such advice made available to them in a timely manner, and

(2) clients of proxy voting advice businesses are provided with an efficient and timely means of becoming aware of any written responses by companies to such proxy voting advice.

ISS, GL and CII Comment Letters on the SEC’s Proposed Amendments to Rules for Proxy Voting Advice

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Last November, the SEC issued a proposed interpretation and guidance on how it would apply the proxy rule exemptions to proxy advisors regarding their provision of proxy voting advice. The exemptions would still exist, but would require proxy advisors to meet certain new conditions. (see Exequity’s November 12, 2019 Client Alert, SEC Proposed Changes to Rues Impacting Proxy Advisors and Shareholder Proposals, for details).

ISS first sued the SEC to block the rule changes and the SEC agreed to what amounts to a stand-still arrangement on the lawsuit for 1 year. Now, the two largest proxy advisors, ISS and Glass Lewis, recently submitted comments letters to the SEC regarding the SEC’s proposals. Finally, the Council of Institutional Investors (CII) has also submitted a comment letter to the SEC on its proposal.

ISS’ comment letter is 89 pages and raises three main issues:

  • Definitional—ISS argues that the SEC lacks the authority to regulate proxy voting advice as if it were a solicitation.
  • Exemptive—ISS argues that the proposed amendment of exemptions would require a proxy advisor to give the subject of its voting advice the right to review and provide feedback, and if the subject company is not happy with the proxy advisors attempt to satisfy any deficiencies, could force the proxy advisor to include a hyperlink directing the recipient of the proxy advisor’s advice to the subject company’s views on such advice.
  • Litigation risk—ISS argues that the proposed guidance would require proxy advisors to provide granular disclosure concerning their proxy voting advice, which ISS alleges has no legal basis and was not authorized by Congress.

Glass Lewis’ comments focused on its belief that the proposed interpretation and guidance would not further the SEC’s stated objectives. Glass Lewis also points out that it believes the rushed process to develop this SEC proposal failed to provide adequate time to consider the legal issues its novel approach would raise and to understand fully and analyze the consequences—economic and otherwise—of the untested, unprecedented regulatory regime it would introduce.

CII’s letter also indicates that it is not a fan of the proposal. CII’s letter focused on claims by certain corporate representatives that there are pervasive factual inaccuracies in proxy advisors’ reports, claims that it believes the SEC relied on in taking this action. CII believes that the claims of pervasive errors are unfounded and misleading and do not provide a basis for the SEC’s rulemaking.

The comment letters of CII, ISS and Glass Lewis are available at:

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