All of us at Nareit hope that you, your families and colleagues remain well during these steamy July Days. Below is an update on some recent SEC developments relevant to REITs.
SEC Approves Final Proxy Advisor Rule and Related Guidance for Investment Managers. Today, in a virtual open meeting, the SEC approved final Exemptions from the Proxy Rules for Proxy Voting Advice (Proxy Amendments) and Supplemental Guidance Regarding Proxy Voting Responsibilities of Investment Advisers (Supplemental Guidance), “designed to ensure that clients of proxy voting advice businesses have reasonable and timely access to more transparent, accurate and complete information on which to make voting decisions.” SEC Chairman Jay Clayton highlighted the SEC’s historic proxy reform actions today, which are the culmination of a ten year process, in an opinion piece in the WSJ. The Final Proxy Advisor Rule will become effective 60 days after publication in the Federal Register, but proxy advisory firms will not be required to fully comply with the rule until Dec. 1, 2021. The supplemental guidance is effective immediately upon publication in the Federal Register.
Nareit has consistently supported greater transparency and accountability for proxy advisory firms such as ISS and Glass Lewis, which play a consequential role in the proxy voting process, and has submitted comments to the SEC supporting reforms in comments in advance of the SEC’s 2018 Roundtable on Proxy Reform, in additional comments to the SEC in 2019, and our comment earlier this year (which was cited nearly two dozen times in the release accompanying the final rule) responding to the SEC’s November 2019 rulemaking proposal, which preceded today’s final rule. We believe that the final Proxy Amendments adopted today, together with the Supplemental Guidance, are likely to prove beneficial to investors, public REITs and other issuers, as well as other market participants. However, as several Commissioners noted, this was an unusually contentious rulemaking process. The dissenting SEC Commissioner called the new rule “unwanted and unwarranted,” and emphasized that the comments opposing the provisions in the new rule permitting issuers to review and respond to proxy voting advice outnumbered supporting comments by a 3:1 margin. We anticipate that there will be litigation challenging these new Proxy Amendments and, if the Democrats retain the House and take control of the Senate and the Presidency, that the final Proxy Amendments could be subject to further scrutiny under the Congressional Review Act, as discussed below.
We note that the SEC did not act today on the related pending proxy reform proposal related to shareholder proposals, also supported by Nareit, which would revise the ownership requirement for submitting shareholder proposals and the voting margins required for resubmitting a failed proposal. This shareholder proposal rulemaking, which has also proved contentious, was recently targeted by some House Appropriators, who have inserted a provision in the House Appropriations bill that would defund the SEC’s rulemaking efforts on this matter. Nareit and other groups have expressed their concerns about this blocking provision to relevant lawmakers.
Final Proxy Amendments Address Transparency, Fairness and Accountability Concerns Expressed by Many Issuers. The Proxy Amendments address most of the key concerns that Nareit and many others highlighted in their submissions to the SEC supporting this rulemaking. The Proxy Amendments operate by codifying the SEC’s previous interpretations stating that proxy voting advice generally constitutes a solicitation under the securities laws and by revising the rules governing the exemptions to the solicitation rules typically relied on by proxy advisory firms to require that proxy advisors must now satisfy the following new conditions (set forth in new Rule 14a-2(b)(9)) to claim these exemptions:
- Proxy advisors must provide specified conflicts of interest disclosure in their proxy voting advice or in an electronic medium used to deliver the proxy voting advice;
- Proxy advisors must adopt and publicly disclose written policies and procedures reasonably designed to ensure that issuers 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; and,
- Proxy advisors must provide 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.
Final Proxy Amendments Include Safe Harbors for Proxy Advisors. The Proxy Amendments also provide that proxy advisor may make use of certain non-exclusive safe harbors, including one permitting proxy advisors to condition their release of proxy voting reports to issuers on a requirement that issuers: “(i) file their definitive proxy statement at least 40 calendar days before the security holder meeting and (ii) expressly acknowledge that they will only use the proxy voting advice for their internal purposes and/or in connection with the solicitation and will not publish or otherwise share the proxy voting advice except with the registrant’s employees or advisers.” An additional safe harbor deems a proxy advisor in compliance with the new rule, “if its written policies and procedures are reasonably designed to provide notice on its electronic client platform or 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 setting forth the registrant’s statement regarding the advice (and include an active hyperlink to those materials on EDGAR when available.”
SEC Supplemental Guidance for Investment Advisers Address So-Called Robo-Voting. The Supplemental Guidance issued by the SEC today, which becomes effective upon publication in the Federal Register, is intended to address the responsibilities of investment advisers that make use of automated proxy voting services provided by proxy advisors—so called robo-voting. The Supplemental Guidance addresses disclosure obligations and client consent when investment advisers use automated voting services and states that investment advisers “should consider whether its policies and procedures address circumstances where the investment adviser has become aware that an issuer intends to file or has filed additional soliciting materials with the Commission after the investment adviser has received the proxy advisory firm’s voting recommendation but before the submission deadline.”
The Proxy Amendments May be Subject to the Congressional Review Act (CRA). The 1996 CRA provides Congress with a mechanism for disapproving final rules issued by federal agencies by a simple majority vote of both houses. Notably, the CRA includes a lookback provision, which has historically been most relevant in presidential election years, permitting a subsequent session of Congress to disapprove rules issued by federal agencies during the final 60 working days of the prior session of Congress by only a majority vote. Although the COVID-19 pandemic has altered the 2020 congressional calendar, it is likely that the Proxy Amendments will fall in this 60-day period, meaning that this final SEC rule could be subject to additional scrutiny by the 117th Congress next year.
SEC Proposal on Institutional Investor Reporting, Form 13F. On July 10, 2020, the SEC approved proposed rules that, among other things, would raise the Form 13F reporting threshold for institutional investment managers from $100 million to $3.5 billion. Issuers, including REITs, often use the information in Form 13F reports in connection with proxy solicitations and other shareholder engagement efforts. These reports are also used to monitor shareholders, including activists, accumulating positions, though the form 13 F is a periodic report with a long lead time, limiting its usefulness with respect to activist investors. Regardless, we believe that this proposal could adversely impact some REIT members, whose stocks is held by smaller investment managers that would no longer be required to file Form 13Fs. Nareit is currently assessing the impact of this proposal on our members, and considering whether to comment. If you have any views, data or suggestions, relevant to this effort, please contact Victoria Rostow, per the contract information below.
Reminder–2020 Nasdaq-Chamber Proxy Season Survey. Nareit once again urges its corporate REIT members to participate in the annual Nasdaq and U.S. Chamber Proxy Season Survey by Aug. 7, 2020.
Please do not hesitate to contact Victoria P. Rostow, SVP, Regulatory Affairs & Deputy General Counsel (firstname.lastname@example.org; (202) 739-9431).