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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:

ISS Issues Updated FAQs and Methodology Documents

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ISS has released updated versions of its FAQs and methodology documents for the 2020 proxy season.

Equity Compensation Plans Frequently Asked Questions

This updated set of FAQs was issued December 6, 2019 and is available at:
https://www.issgovernance.com/file/policy/latest/americas/US-Equity-Compensation-Plans-FAQ.pdf

Notable changes include:

  • ISS will include limited partnership units in Common Shares Outstanding for Shareholder Value Transfer (SVT) and burn rate calculations if they are equivalent to common stock on a 1:1 basis and can be exchanged into common stock at any time at no cost to the holder.
  • How ISS will evaluate an equity plan proposal seeking approval of one or more plan amendments—usually by using its Equity Plan Scorecard (EPSC) model.
  • Confirming that evergreen features are now an overriding factor that will cause ISS to recommend against an equity plan proposal.
  • Confirming that ISS changed some EPSC factor scores in the EPSC model, but kept the weights of the three pillars (plan cost, plan features, and grant practices) the same.
  • Included the 2020 Burn Rate Benchmarks for the S&P 500, Russell 3000 (non-S&P 500) and Non-Russell 3000 groups in the Appendix.

Compensation Policies Frequently Asked Questions

ISS released this updated set of FAQs on December 6, 2019, available at:
https://www.issgovernance.com/file/policy/latest/americas/US-Compensation-Policies-FAQ.pdf

Notable changes include:

  • Confirming that the Financial Performance Assessment (FPA) will rely on four ISS-defined EVA metrics (EVA Margin, EVA Spread, EVA Momentum vs. Sales, and EVA Momentum vs. Capital), but confirming that the GAAP metrics which previously were used in the FPA will still be reported on ISS Proxy Reports.
  • ISS will now report a 3-year Multiple of Median, but it will not be factored into the ISS Quantitative Pay-for-Performance (P4P) analysis.
  • With respect to disclosure around termination and severance payments, ISS wants companies to clearly describe the type of termination (e.g., termination without cause, resignation for good reason, termination with cause, etc.) and the provision(s) by which severance payments were made under any agreement to avoid confusion and enable shareholders to assess such payments.

Pay-for-Performance Mechanics, ISS’ Qualitative and Qualitative Approach

ISS released this updated document on December 11, 2019, available at:
https://www.issgovernance.com/file/policy/latest/americas/Pay-for-Performance-Mechanics.pdf

Provides some information on how EVA measures will be used in the FPA. Note that FPA only comes into account if a company’s initial quantitative P4P score level comes in at the low bordering medium or medium concern levels.

The other change of significance is that this document details the updated thresholds for the various concern levels under the Quantitative P4P tests. For example, High Concern under the Relative Degree of Alignment (RDA) test now starts at -60 whereas before it started at -50. This change should cause fewer companies to end up with a High Concern under the RDA test.

Peer Group Selection Methodology and Issuer Submission Process, Frequently Asked Questions

This updated set of FAQs was released December 6, 2019, and is available at: https://www.issgovernance.com/file/policy/latest/americas/US-Peer-Group-FAQ.pdf

No significant changes are noted in this set of FAQs.

SEC Proposed Additional Rules for Proxy Voting Advice and Shareholder Proposals

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On November 5, 2019, the SEC issued two new proposed rules. One impacts proxy voting advice and the other impacts shareholder proposals.

Proxy Voting Advice

The proposed rule amends Exchange Act Rule 14a-2(b), which provides exemptions from the proxy rules’ filing and information requirements for certain kinds of solicitations. The amendment would call for enhanced disclosure of material conflicts of interest and would codify the August 2019 guidance’s change in the definition of “solicitation” to include proxy voting advice.

Under the proposed amendments, proxy voting advice businesses (i.e., proxy advisory firms) relying on the Exchange Act Rule 14a-2(b) exemptions from the information and filing requirements of the proxy rules would be subject to the following conditions:

  • They must include disclosure of material conflicts of interest in their proxy voting advice
  • Public companies must be given an opportunity to review and provide feedback on proxy voting advice before it is issued; and
  • Public companies may request that proxy voting advice businesses include in their voting advice a hyperlink or similar method of directing the recipient of the advice to a written statement that sets forth the public company’s views on the proxy voting advice.

The proposed amendments would permit the proxy voting advice businesses to require public companies to enter into confidentiality agreements for materials exchanged during the review and feedback period and would allow proxy voting advice businesses to rely on the exemptions where failure to comply with the new conditions was immaterial or unintentional.

The proposed rule will be subject to a 60-day public comment period.

The SEC announcement about these proposed rules changes can be found at: https://www.sec.gov/news/press-release/2019-231

Shareholder Proposals

The other rule changes that the SEC proposed involved shareholder proposals. The proposed amendments would:

  • update the criteria, including the ownership requirements, that a shareholder must satisfy to be eligible to have a shareholder proposal included in a company’s proxy statement.
  • Update the “one proposal” rule to clarify that a single person may not submit multiple proposals at the same shareholder’s meeting, whether the person submits a proposal as a shareholder or as a representative of a shareholder; and
  • Modernize the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings

The changes to the ownership requirements represent a significant increase over the current standard. Currently, the ownership requirement is met if a shareholder hold at least $2,000 or 1 percent of a company’s securities for at least one year. The $2,000 amount is retained, provided the individual has held the shares for at least 3 years but increased to $15,000 if held for at least 2 years and increased again to $25,000 if held for at least 1 year (25 times the current ownership standard!).

Even the changes to the resubmission thresholds for proposals are being increased. The current resubmission thresholds of 3 percent, 6 percent, and 10 percent for matters voted on once, twice or three or more times in the last 5 years, respectively, would be changed to 5 percent, 15 percent, and 25 percent respectively, and an overriding provision would be added for proposals that have been previously voted on three or more times in the last five years could be excluded if (1) it received less than 50 percent of votes cast, and (2) experienced a decline in shareholder support of 10 percent or more compared to the immediately preceding vote.

These proposed changes are also subject to a 60-day public comment period. It will interesting to see what comments shareholders have on these proposals as they all seem to limit the current rights of shareholders with respect to the companies in which they hold securities.

The SEC announcement about these proposed rules changes can be found at: https://www.sec.gov/news/press-release/2019-232