Proxy Advisory Reform “Minibus” Bill: Route Uncertain, Destination Unclear

By Carol Nolan Drake, J.D., Skytop Contributor / September 7th, 2021 

Carol is the CEO and Founder of Carlow Consulting, LLC, a company she created in January 2017, following a senior position with an institutional investor handling corporate governance and external relations. Before this role, Carol served in leadership positions for three Ohio governors, with appointments to the Cabinet and several boards and commissions, including as a trustee for a public pension fund. 

As an attorney, Carol worked in private practice and as an assistant attorney for the city of Columbus. She served five years on the Board of the Council of Institutional Investors (CII). Carol was the co-chair of the ICGN Shareholder Responsibilities Committee (SHREC) under which the Committee revised the Diversity and Share Lending Guidelines. 

Carol has published several articles on corporate governance, ESG and diversity, including chapters in The Handbook of Board Governance, Second Edition. She also writes about federal policy and the intersection between effective company reporting and investor expectations. Carol is a frequent speaker on governance, diversity initiatives and investor stewardship. She holds a law degree from the Claude Petit College of Law. 

On July 29, 2021, the U.S. House of Representatives passed H.R. 4502, a bill sponsored by Rep. Rosa L. DeLauro (D-CT), chair of the House Committee on Appropriations, by a vote of 219-208. Entitled the “Departments of Labor, Health and Human Services, Education, Agriculture, Rural Development, Energy and Water Development, Financial Services and General Government, Interior, Environment, Military Construction, Veterans Affairs, Transportation, and Housing and Urban Development Appropriations Act, 2022,” the bill was considered a “minibus” rather than an “omnibus” appropriations bill. The bill provided appropriations for several federal agencies until the end of the fiscal year on September 30, 2022, as listed in the Act’s title. On August 3, 2021, the bill was received in the U.S. Senate.  

In the Financial Services section of the bill, appropriations were included for the Securities and Exchange Commission (SEC). The funding for the SEC was set for Fiscal Year 2022 at $1,992,917,000, with certain requirements for lease expenditures and other funding purposes. That was not unusual language for an appropriation bill. What caught my eye was the language that curtailed the use of the funds by the SEC to implement a specific set of amendments adopted by the SEC last year.  

The Act contains the following language on page 479, lines 3-7: 

SEC. 540. None of the funds made available by this Act may be used to implement the amendments to sections 240.14a-1(l), 240.14a–2, or 240.14a-9 of title 17, Code of Federal Regulations, that were adopted by the Securities and Exchange Commission on July 22, 2020. https://www.congress.gov/117/bills/hr4502/BILLS-117hr4502eh.pdf 

The amendments referred to in the House minibus are related to the final rule that the SEC adopted on July 22, 2020, almost one year prior to the passage of the bill. The rules became effective on November 2, 2020. In  the final rule, the SEC adopted 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”). https://www.sec.gov/rules/final/2020/34-89372.pdf 

The Summary provided a narrative on the SEC’s action on July 22, 2020:  

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. 

Prior to the House passage of H.R. 4502, on June 1, 2021, SEC Chairman Gary Gensler, spoke to the SEC staff. Chairman Gensler said “I am now directing the staff to consider whether to recommend further regulatory action regarding proxy voting advice. In particular, the staff should consider whether to recommend that the Commission revisit its 2020 codification of the definition of solicitation as encompassing proxy voting advice, the 2019 Interpretation and Guidance regarding that definition, and the conditions on exemptions from the information and filing requirements in the 2020 Rule Amendments, among other matters.” SEC.gov | Statement on the application of the proxy rules to proxy voting advice 

The Division of Corporate Finance, referred to as “Corp Fin,” followed with its statement on June 1, 2021, noting: 

At the direction of the Chair, we are now considering whether to recommend that the Commission revisit the 2019 Interpretation and Guidance and the 2020 Rule Amendments. In light of this direction, the Division of Corporation Finance has determined that it will not recommend enforcement action to the Commission based on the 2019 Interpretation and Guidance or the 2020 Rule Amendments during the period in which the Commission is considering further regulatory action in this area. In addition, in the event that new regulatory action leaves the 2020 exemption conditions in place with the current December 1, 2021, compliance date, the staff will not recommend any enforcement action based on those conditions for a reasonable period of time after any resumption by Institutional Shareholder Services Inc. of its litigation challenging the 2020 amendments and the 2019 Interpretation and Guidance. ISS v. SEC, 1:19-cv-3275 (D.D.C.).  

This statement is subject to any further action that may be taken by the Commission, expresses the Division’s position on enforcement action only, and does not express any legal conclusion. SEC.gov | Statement on Compliance with the Commission’s 2019 Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice and Amended Rules 14a-1(1), 14a-2(b), 14a-9 

Shortly after the statement by Chairman Gensler and the announcement by Corp Fin, on June 2, 2021, SEC Commissioners Hester Peirce and Elad Roisman issued a joint statement, in which they stated, in part: 

We are open to seeing what, if any, changes to our rules the staff recommends and to working with our colleagues to consider such recommendations. We find it difficult, however, to imagine what has changed in the roughly ten months since the Commission last considered this issue that would call into question such recently adopted requirements. Indeed, the compliance date for the exemption conditions is still months away, which makes it challenging, if not impossible, for us to know how these requirements will work in practice. How can we evaluate the appropriateness of further changes without considering such new data or experience? We find it even harder to understand how the Commission would justify a departure from its longstanding legal interpretation about proxy solicitation. SEC.gov | Response to Chair Gensler’s and the Division of Corporation Finance’s Statements Regarding the Application of the Proxy Rules to Proxy Voting Advice 

Where will the “minibus” head next?  

The route of the minibus could take several different directions.  

Congress 

H.R. 4502 is pending in the Senate presently. In its action on August 10, 2021, to pass H.R. 3684, the “INVEST in America Act,” the Senate did not include the restriction on the use of funding by the SEC for proxy solicitations and advisory services. This was not surprising given the bipartisan approach to craft an infrastructure bill that would not be filibustered under Senate rules.  

The Senate will have its own appropriation process, most notably tied to the budget reconciliation framework that passed on a 50-49 vote on August 11, 2021. As the Senate adds appropriation language to this framework in the various Committees, the House language may be considered. The Senate appropriations bills will need to be compared with the House appropriation bills and reconciled. 

The overarching question is whether Congress will act before the current federal fiscal year ends on September 30, 2021, or need to pass a continuing resolution (CR) to give it more time. The Senate must deal with the debt ceiling as well. The Senate calendar currently reflects only 12 days of session during the month of September.  

Securities and Exchange Commission 

As of this date, the SEC has not acted to amend or otherwise revise the final rule. One course the Commission could take is to see if the Senate includes budget language to restrict the funding for the SEC to thwart action on the final rule and amendments.  

Another course could see the SEC consider the report of Corp Fin’s review before December 1, 2021, compliance date on exemption conditions, and take action prior to the deadline. 

Idling in Congress 

While the House has passed the minibus, if the Senate does not concur, the language would need to be subsumed into another relevant bill or a new bill would need to pass under regular order, which are unlikely scenarios. Without inclusion in the reconciliation package, a standalone bill would require sixty votes in the Senate for cloture, before the bill would reach the floor for a vote. It is unlikely that enough Republican Senators would support such a carveout to SEC funding. 

Estimated Time of Arrival (ETA) 

Congress 

The federal fiscal year ends on September 30, 2021. The appropriators in the House and Senate Committees will need to reconcile the various bills or pass an omnibus bill to subsume all the appropriations into one large package. With a Democratic majority in the House and a slim majority in the Senate, the reconciliation package, requiring only a simple majority in the Senate, could pass before the end of September. 

Many Routes Between the Hill and the SEC 

The rule amendments became effective on November 2, 2020. In the June 1 statement, Corp Fin indicated that “proxy voting advice businesses subject to the final rules would not be required to comply with  the new conditions in amended Rule 14a-2(b)(9) until December 1, 2021.” Therefore, any changes to the final rule would need to occur well before November 1 to give issuers and investors time to prepare for the changes. 

The journey for any bill through the halls of Congress or a rule by the SEC may take many routes. In this case, we may not have to wait too long for them to reach their final destinations.