recommendation based on its own criteria, notwithstanding that the
registrant has complied with the applicable standards established or
approved by the Commission, there is a risk that the proxy voting
advice business's clients may misunderstand the basis for the proxy
voting advice business's recommendation. The proposed amendment
regarding use of standards or requirements in proxy voting advice that
materially differ from relevant standards or requirements that the
Commission sets or approves was designed to help ensure that proxy
voting advice businesses' clients are provided the information they
need to make a ``fair appraisal'' \458\ of the recommendation and to
clarify the potential implications of Rule 14a-9.
---------------------------------------------------------------------------

    \458\ See supra note 424.
---------------------------------------------------------------------------

    Nevertheless, we understand the concerns expressed by some
commenters who asserted that the perceived lack of clarity regarding
the scope of the proposed clause ``or use of standards that materially
differ from relevant standards or requirements that the Commission sets
or approves,'' which was not discussed in the earlier guidance, may
increase legal uncertainty and litigation risks to both proxy voting
advice businesses and registrants, and that the lack of legal certainty
could affect the quality of analyses provided by proxy voting advice
businesses.\459\ We continue to believe that there could well be
occasions where, for example, the omission or distortion of essential
context from a proxy voting advice business's explanation of its
methodologies may be misleading under a materiality principle and the
particular facts and circumstances, such that a shareholder's ability
to make an informed voting decision is subverted. However, we also
believe that the existing principles of Rule 14a-9 are sufficiently
robust to encompass such a situation, which ultimately will come down
to a question of facts and circumstances. For that reason, we do not
think it is necessary to memorialize this potentially nuanced situation
with an illustrative example that, because it is by definition a
generalization, could create more confusion than clarity.
---------------------------------------------------------------------------

    \459\ See, e.g., letters from C. Icahn; CalPERS; Glass Lewis II;
MFA & AIMA.
---------------------------------------------------------------------------

    Therefore, we are adopting the amendment to Rule 14a-9 without this
example. However, this does not negate the fact that Rule 14a-9's
prohibition against materially misleading solicitations applies to
proxy voting advice where the disclosures are so materially deficient
that the investor could not be reasonably expected to understand that
the proxy voting advice business is applying a different standard to
its analysis, and therefore may vote based on such misapprehension. For
similar reasons, we are also not electing to expand the list of
examples beyond

what was proposed, as suggested by some commenters.\460\
---------------------------------------------------------------------------

    \460\ See, e.g., letters from BRT; CCMC; CII IV; Exxon Mobil;
NAM; Nareit; Nasdaq; TechNet.
---------------------------------------------------------------------------

E. Compliance Dates

    The Commission proposed a one-year transition period after the
publication of the final rule in the Federal Register to give affected
parties sufficient time to comply with the proposed new requirements,
including the development of any necessary processes and systems.\461\
---------------------------------------------------------------------------

    \461\ See Proposing Release at 66539.
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    Some commenters, however, thought that a longer transition period
would be necessary given their expectation that affected parties,
particularly proxy voting advice businesses, would need to devote
significant time and resources in order to bring their systems and
processes into compliance.\462\ As an alternative, two commenters
suggested extending the transition period to eighteen months.\463\
Other commenters recommended that small entities be given an extended
timeframe for compliance.\464\ One commenter also suggested that the
Commission consider a phased implementation schedule that would not
interfere with the peak of proxy season that typically occurs during
the spring each year.\465\
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    \462\ See letters from CalPERS; CII IV; Felician Sisters II;
Glass Lewis II; Good Shepherd; IASJ; Interfaith Center II; New York
Comptroller II; St. Dominic of Caldwell.
    \463\ See letters from CII IV; Glass Lewis II (additionally
recommending that the effectiveness of final rules be delayed
pending resolution of ongoing litigation that could impact the
statutory and constitutional bases for the rulemaking).
    \464\ See letters from Felician Sisters II; Good Shepherd; IASJ;
Interfaith Center II; St. Dominic of Caldwell.
    \465\ See letter from Glass Lewis II.
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    We continue to believe that a transition period for compliance with
new Rule 14a-2(b)(9) is appropriate. Based on commenter feedback, as
well as the Commission's interest in limiting unnecessary disruptions
during the peak proxy season, proxy voting advice businesses subject to
the final rules will not be required to comply with the amendments to
Rule 14a-2(b)(9) until December 1, 2021. We believe that the length of
the transition period will accommodate the need of affected parties to
have sufficient time to prepare for compliance with Rule 14a-2(b)(9)
while also recognizing that our adoption of a principles-based
framework should allow proxy voting advice businesses and other parties
the flexibility to leverage their existing practices and mechanisms to
more efficiently integrate their operations with the new requirements.
The compliance date for Rule 14a-2(b)(9) is intended to sufficiently
precede the typical commencement of the proxy season for 2022, so as to
minimize disruption to the normal functioning of the proxy system.
However, we welcome early compliance with the amendment. We note that
the transition period only applies with respect to the amendments to
Rule 14a-2(b)(9) and does not extend to the amendments to Rule 14a-1(l)
and Rule 14a-9. Because these other amendments codify existing
Commission interpretations and guidance, and do not impose new
obligations that necessitate significant time for preparation, we do
not believe the same rationale for a transition period exists.

III. Other Matters

    If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect without the
invalid provision or application. For example, the amendments to Rule
14a-2(b)(9)(i) operate independently from the amendments to Rule 14a-
2(b)(9)(ii), and both provisions operate independently from the
amendments to Rules 14a-1(1) and 14a-9.
    Pursuant to the Congressional Review Act, the Office of Information
and Regulatory Affairs has designated these rules a ``major rule,'' as
defined by 5 U.S.C. 804(2).

IV. Economic Analysis

    The discussion below addresses the economic effects of the
amendments, including their anticipated costs and benefits, as well as
the likely effects of the amendments on efficiency, competition, and
capital formation.\466\ We also analyze the potential costs and
benefits of reasonable alternatives to the amendments. Where
practicable, we have attempted to quantify the economic effects of the
amendments; however, in certain cases, we are unable to do so because
either the necessary data are unavailable or certain effects are not
quantifiable. In the Proposing Release, we requested comment on our
analysis of these effects. A few commenters provided quantitative
estimates, and we have addressed and incorporated, where appropriate,
those estimates into our analysis below. We also provide qualitative
economic assessments for effects for which we are unable to provide
quantitative estimates.
---------------------------------------------------------------------------

    \466\ Section 3(f) of the Exchange Act [17 U.S.C. 78c(f)]
directs the Commission, when engaging in rulemaking where it is
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation. Further, Section 23(a)(2) of the
Exchange Act [17 U.S.C. 78w(a)(2)] requires the Commission, when
making rules under the Exchange Act, to consider the impact that the
rules would have on competition, and prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the
Exchange Act.
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A. Introduction

    We are adopting amendments to Exchange Act Rule 14a-2(b) to
condition the availability of existing exemptions from the information
and filing requirements of the proxy rules on proxy voting advice
businesses satisfying certain additional disclosure and procedural
requirements. These conditions will require proxy voting advice
businesses to provide enhanced conflicts of interest disclosure. They
will also separately require proxy voting advice businesses to: (i)
Adopt and publicly disclose written policies and procedures reasonably
designed to ensure that the proxy voting advice business's proxy voting
advice is made available to registrants at or prior to the time when
such advice is disseminated to the proxy voting advice business's
clients; and (ii) adopt and publicly disclose written policies and
procedures reasonably designed to ensure that the proxy voting advice
business provides clients with a mechanism by which they can reasonably
be expected to become aware of a registrant's written statements about
the proxy voting advice in a timely manner before the shareholder
meeting. We also are codifying the Commission's interpretation that, as
a general matter, proxy voting advice constitutes a solicitation within
the meaning of Exchange Act Rule 14a-1(l). Finally, we are amending
Exchange Act Rule 14a-9 to add as an example of a potentially material
misstatement or omission within the meaning of the rule, depending upon
particular facts and circumstances, the failure to disclose material
information related to the proxy voting advice business's methodology,
sources of information, or conflicts of interest.
    We have considered the economic effects of the final amendments,
including their effects on competition, efficiency, and capital
formation. The purpose of the final amendments is to help ensure that
investors who use proxy voting advice have access to more complete,
accurate, and transparent information and are able to benefit from

a robust discussion of views--similar to what is possible at a meeting
where shareholders and other parties are physically attending and
participating--when making their voting decisions. We generally expect
the final amendments to reduce information asymmetries between proxy
voting advice businesses and their clients by eliciting more tailored
and comprehensive disclosure of conflicts of interest and by
facilitating client access to more complete information on matters that
are the subject of proxy voting advice. We also believe that the final
amendments may mitigate certain agency costs associated with the
clients' use of proxy advice voting businesses and thereby facilitate
more efficient use of the services provided by such businesses while
preserving their economies of scale.\467\
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    \467\ Researchers define a contract under which one or more
persons (the principals) engage another person (the agent) to
perform some service on their behalf as an agency relationship.
``Agency costs'' in the principal-agent relationship consist of: The
cost to the principal of monitoring the agent to limit aberrant
activities; ``bonding'' costs to the agent to reassure the client
that the agent will not take certain actions that would harm the
principal or that the principal will be compensated if the agent
takes such actions; and the ``residual loss,'' or the loss of
welfare to the principal from the divergence of activities by the
agent from the interests of the principal. See Michael C. Jensen &
William H. Meckling, Theory of the Firm: Managerial Behavior, Agency
Costs and Ownership Structure, 3 J. Fin. Econ. 305 (1976).
---------------------------------------------------------------------------

    As a threshold matter, the relationship between a proxy voting
advice business client and a proxy voting advice business is an example
of an agency relationship. As in any principal-agent relationship, the
agent (the proxy voting advice business) may not always act in the best
interests of the principal (the client).\468\ The conditions imposed on
proxy voting advice businesses by the final amendments may reduce the
costs that arise from this divergence of interests. For example, by
requiring proxy voting advice businesses to provide clients with more
tailored and comprehensive conflict of interest disclosure than is
currently required, the amendments may make it possible for proxy
voting advice businesses to more credibly reassure their clients that
relevant conflicts have been disclosed, and potentially addressed (by
reducing the ability of proxy voting advice businesses to obfuscate
information about conflicts or selectively disclose conflicts), than is
otherwise achieved by the current system of conflict disclosure. In
addition, to the extent that relevant conflicts are better understood
by a client as a result of the more tailored and comprehensive
disclosure, the client will be better able to assess the objectivity of
proxy voting advice against the influence of potentially competing
interests and thus to monitor proxy voting advice business services.
Moreover, by separately ensuring that registrants receive notice of
proxy voting advice and a proxy voting advice business provides clients
with a mechanism by which they can become more readily aware of
registrant responses to that advice, the final amendments may reduce
the costs clients might otherwise incur to acquire information relevant
to assessing proxy voting advice and increase the efficiency of this
segment of the proxy system. At the same time, the final amendments
will likely impose certain additional direct costs on proxy voting
advice businesses which may offset this reduction in agency costs.
However, as we detail in later sections, we expect the flexibility
afforded by the final amendments and current practices of at least the
three major proxy voting advice businesses in the United States will
serve to limit those direct costs.
---------------------------------------------------------------------------

    \468\ For example, agents may benefit by enhancing revenues,
decreasing costs, both, or by taking actions other than those that
are in the principals' best interest. Id.
---------------------------------------------------------------------------

    As explained in more detail below, many of the economic effects of
the amendments cannot be reliably quantified. Consequently, while we
have attempted to quantify the economic effects expected from the
amendments wherever practicable, much of the discussion remains
qualitative in nature. Where we are unable to quantify the potential
economic effects of the final amendments, we provide a qualitative
assessment of these effects as well as the potential impacts of the
amendments on efficiency, competition, and capital formation.
1. Overview of Proxy Voting Advice Businesses' Role in the Proxy
Process
    Every year, retail investors, institutional investors, and
investment advisers face decisions on whether and how to vote on a
significant number of matters that are subject to a proxy vote.\469\
These matters range from the election of directors and the approval of
equity compensation plans to shareholder proposals submitted under
Exchange Act Rule 14a-8. In addition to matters presented at a
company's annual shareholder meeting, investors and investment advisers
also make voting determinations when a matter is presented to
shareholders for approval at a special meeting, such as a merger or
acquisition or a sale of all or substantially all of the assets of the
company. As described above, investment advisers and institutional
investors play a large role in proxy voting for various reasons,
including because institutional investors and clients of investment
advisers individually or collectively own a large aggregate fraction of
many U.S. public companies.\470\ We understand that voting can be
resource intensive for investors that hold or investment advisers that
manage diversified portfolios. It involves organizing proxy materials,
performing due diligence on portfolio companies and matters to be voted
on, determining whether and how votes should be cast, and submitting
proxy cards to be counted. Proxy voting advice businesses offer to
perform a variety of tasks related to voting, including the following:
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    \469\ 17 CFR 240.14a-8; see, e.g., letters from Barbara Novick,
Vice Chairman, BlackRock, Inc. (Feb. 3, 2020) (``BlackRock'')
(``BlackRock acts as a fiduciary for its clients. In this capacity,
we engage with thousands of companies globally and we vote in
proxies at over 16,000 company meetings annually.''); NYC
Comptroller (``For the year ending June 30, 2019, my office voted on
126,775 individual ballot items at 13,122 shareowner meetings in 86
markets around the world. . . .''); see also letter in response to
the SEC Staff Roundtable on the Proxy Process from Ohio Public
Retirement (Dec. 18, 2018) (``OPERS receives in excess of 10,000
proxies in any given proxy season.'').
    \470\ See supra note 10 and accompanying text. See also
Broadridge & PwC, 2019 Proxy Season Review, ProxyPulse (2019), at 1,
available at https://www.broadridge.com/_assets/pdf/broadridge-proxypulse-2019-review.pdf (estimating that institutions own 70% of
public company shares) (``Broadridge PwC 2019 Report''); Charles
McGrath, 80% of Equity Market Cap Held by Institutions, Pensions &
Investments (Apr. 25, 2017), available at https://www.pionline.com/article/20170425/INTERACTIVE/170429926/80-of-equity-market-cap-held-by-institutions.
---------------------------------------------------------------------------

     Analyze and make voting recommendations on the matters
presented for shareholder vote and included in the registrants' proxy
statements;
     Execute proxy votes (or voting instruction forms) in
accordance with their benchmark policy, a specialty policy, or a custom
policy; \471\
---------------------------------------------------------------------------

    \471\ See letter from ISS.
---------------------------------------------------------------------------

     Assist with the administrative tasks associated with
voting and keep track of the large number of voting determinations; and
     Provide research and identify potential risk factors
related to corporate governance.
    We also understand that, in the absence of the services offered by
proxy voting advice businesses, investment advisers and other clients
of these businesses may expend considerable resources to independently
conduct the work necessary to analyze, recommend, and make voting
determinations. As a consequence, we understand that some

investment advisers and institutional investors find it efficient to
hire proxy voting advice businesses to perform various voting and
voting-related services, rather than performing them in-house.\472\
Proxy voting advice businesses generally are able to capture
significant economies of scale that are not available to many
investment advisers and institutional investors on an individual
basis.\473\
---------------------------------------------------------------------------

    \472\ See Concept Release at 42983.
    \473\ See Chester S. Spatt, Proxy Advisory Firms, Governance,
Market Failure, and Regulation 7 (2019), available at https://www.milkeninstitute.org/sites/default/files/reports-pdf/Proxy%20Advisory%20Firms%20FINAL.pdf (``Spatt (2019)''). Commenters
also suggest that proxy voting advice businesses are an economically
efficient means of collecting information and analyzing voting
issues. See, e.g., letter from CEC.
---------------------------------------------------------------------------

    In 2007, the U.S. Government Accountability Office (``GAO'') found
that among 31 institutions, including mutual funds, pension funds, and
asset managers, large institutions relied less than small institutions
on the research and recommendations offered by proxy voting advice
businesses. Large institutions indicated that their reliance on proxy
voting advice businesses was limited because they: (i) Conduct their
own research and analyses to make voting determinations and use the
research and recommendations offered by proxy voting advice businesses
only to supplement such analyses; (ii) develop their own voting
policies, which the proxy voting advice businesses are responsible for
executing; and (iii) contract with more than one proxy voting advice
business to gain a broader range of information on proxy issues.\474\
In contrast, small institutions said they had limited resources to
conduct their own research and tended to rely more heavily on the
research and recommendations offered by proxy voting advice
businesses.\475\ The findings of a 2016 GAO study that surveyed 13
institutional investors were similar.\476\
---------------------------------------------------------------------------

    \474\ See U.S. Gov't Accountability Office, GAO-07-765, Report
to Congressional Requesters, Corporate Shareholder Meetings: Issues
Relating to the Firms that Advise Institutional Investors on Proxy
Voting, 17-18 (2007), available at https://www.gao.gov/new.items/d07765.pdf (``2007 GAO Report''); see also Letters in response to
the SEC Staff Roundtable on the Proxy Process from BlackRock (Nov.
16, 2018) (``BlackRock's Investment Stewardship team has more than
40 professionals responsible for developing independent views on how
we should vote proxies on behalf of our clients.''); NYC Comptroller
(Jan. 2, 2019) (``We have five full-time staff dedicated to proxy
voting during peak season, and our least-tenured investment analyst
has 12 years' experience applying the NYC Funds' domestic proxy
voting guidelines.''); Transcript of the Roundtable on the Proxy
Process at 194 (comments of Mr. Scot Draeger) (``If you've ever
actually reviewed the benchmarks, whether it's ISS or anybody else,
they're very extensive and much more detailed than small firm[s]
like ours could ever develop with our own independent research.'').
    \475\ 2007 GAO Report, supra note 474, at 17-18.
    \476\ See 2016 GAO Report, supra note 141, at 2.
---------------------------------------------------------------------------

    As discussed in Section I above, proxy voting advice businesses
have the potential to influence many investors' voting decisions and,
as a result, the overall vote. Clients of proxy voting advice
businesses number in the thousands, and they exercise voting authority
or influence over a sizable number of shares that are voted annually.
Commenters described the informational benefits that clients derive
from proxy voting advice \477\ and how proxy voting advice businesses
enable them to make informed voting determinations on behalf of
investors and beneficiaries.\478\
---------------------------------------------------------------------------

    \477\ See letter from Kenneth A. Bertsch, Executive Director,
and Jeffrey P. Mahoney, General Counsel, Council of Inst. Investors
(Feb. 20, 2020) (``CII VIII'').
    \478\ See, e.g., letters from MFA & AIMA; New York Comptroller
II.
---------------------------------------------------------------------------

    To the extent that proxy voting advice businesses influence voting
decisions, they also may indirectly impose certain costs on
shareholders. Recent theoretical research on the role of proxy voting
advice suggests that the presence of proxy voting advice businesses may
induce investors to over-rely on information produced by these
businesses to make voting decisions. This over-reliance arises because
shareholders do not internalize the benefits for other shareholders of
their own independent research of matters put to a vote. Instead
shareholders find it privately efficient to outsource the analysis of
voting decisions to proxy voting advice businesses.\479\ Additionally,
if proxy voting advice businesses significantly influence voting,\480\
registrants and other market participants may seek to engage with proxy
voting advice businesses rather than engaging directly with investors
or registrants. Thus, the presence of proxy voting advice businesses
may negatively affect the ability of certain investors to engage with
and influence registrants and other investors. On the other hand, from
a transactions cost perspective, being able to engage with a few large
and important intermediaries, compared to engaging bi-laterally with
multiple shareholders, may be more efficient for registrants and
investors.
---------------------------------------------------------------------------

    \479\ See generally Andrey Malenko & Nadya Malenko, Proxy
Advisory Firms: The Economics of Selling Information to Voters, 74
J. Fin. 2441 (2019). In their theoretical model, the authors assume
shareholders have perfectly aligned incentives, with all
shareholders agreeing on share value maximization as the singular
goal of the firm so the applicability of their results is limited by
the extent to which investors have goals other than, or in addition
to, share value maximization. The authors further assume that proxy
advice is provided by a single monopolistic proxy advisory firm, and
that shareholders follow proxy advisory firm advice without
exception. Additionally, the authors assume that when deciding
whether to invest in their own independent research, shareholders
believe that their votes will be pivotal to the vote outcome. The
ownership structure of the company is key to the reported findings:
The paper shows that proxy advisory services are valuable when
ownership is sufficiently dispersed. In contrast, proxy advisory
services are likely to have negative effects for companies with more
concentrated ownership because they discourage independent
information acquisition by shareholders. However, their results also
imply that when ownership is very concentrated shareholders again
find proxy advisory services to be valuable because each
shareholder's vote is more likely to be pivotal.
    \480\ See infra notes 481 and 482.
---------------------------------------------------------------------------

    Although the economic incentives to concentrate voting power and
influence in proxy voting advice businesses are strong, research on the
role of proxy voting advice businesses in influencing voting, however,
has produced a wide range of results. For example, a number of studies
suggest that proxy voting advice has substantial influence on proxy
votes,\481\ while others suggest a more limited influence.\482\ We note
that existing academic studies examine the relationship between proxy
votes and proxy voting advice businesses' recommendations based on
benchmark policies. The relationship between proxy votes cast and
voting recommendations provided to clients using clients' custom
policies has not, to date, been the subject of academic study.\483\
---------------------------------------------------------------------------

    \481\ See, e.g., Cindy R. Alexander et al., Interim News and the
Role of Proxy Voting Advice, 23 Rev. Fin. Stud. 4419, 4422 (2010);
Alon Brav et al., Picking Friends Before Picking (Proxy) Fights: How
Mutual Fund Voting Shapes Proxy Contests (Columbia Bus. Sch.,
Research Paper No. 18-16, 2019) at 4, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3101473 (``Brav et al.
(2019)''); James R. Copland, David F. Larcker, & Brian Tayan, The
Big Thumb on the Scale: An Overview of the Proxy Advisory Industry
(Stanford Bus. Sch. Closer Look Series, May 30, 2018) at 3,
available at https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-closer-look-72-big-thumb-proxy-advisory.pdf;
James R. Copland, David F. Larcker, & Brian Tayan, Proxy Advisory
Firms: Empirical Evidence and the Case for Reform, Manhattan
Institute (May 2018) at 6, available at https://media4.manhattan-institute.org/sites/default/files/R-JC-0518-v2.pdf (``Copland et al.
(2018)''); Albert Verdam, An Exploration of the Role of Proxy
Advisors in Proxy Voting (Working Paper, 2006) at 23, available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=978835 (``Verdam
(2006)''); See letter from Chong Shu, University of Southern
California, Marshall School of Business (Jun. 22, 2020).
    \482\ See Stephen Choi, Jill Fisch, & Marcel Kahan, The Power of
Proxy Advisors: Myth or Reality?, 59 Emory L.J. 869, 905-06 (2010).
See also Brav et al. (2019), supra note 481, at 35. The authors find
that larger mutual fund families cast votes ``in ways completely
independent from what are recommended by the advisors.''
    \483\ Commenters stated that a large majority of proxy votes are
cast by proxy advice business clients who provide custom policies to
proxy voting advice businesses and, in return, receive customized
voting recommendations based on these policies. See letter from ISS.
To our knowledge, however, no academic study examines the relation
between proxy votes and the voting recommendations provided under
the client's custom policies. It is our understanding that clients
who receive voting recommendations based on custom policies also
receive the proxy voting advice business's benchmark reports.

---------------------------------------------------------------------------

    Research on the role of proxy voting advice businesses in proxy
voting has also produced inconclusive results with respect to the
quality of voting advice. For example, proxy voting advice businesses
have been the subject of criticism for potentially being influenced by
conflicts of interest,\484\ producing reports that contain
inaccuracies, and utilizing one-size-fits-all methodologies when
evaluating a diverse array of registrants or when providing services to
a diverse array of clients.\485\
---------------------------------------------------------------------------

    \484\ For example, some proxy voting advice businesses provide
consulting services to registrants on corporate governance or
executive compensation matters, such as assistance in developing
proposals to be submitted for shareholder vote. See Concept Release
at 42989. As a result, some proxy voting advice businesses provide
advice regarding a registrant to their institutional investor
clients on matters for which they may also provide consulting
services to the registrant. One commenter submitted research that
attempts to identify and quantify the impact of conflicts of
interest on recommendations and the effect of competition between
proxy voting advice businesses on the likelihood of biased
recommendations. The research finds that competition reduces
recommendations in favor of management, and that biased
recommendations have negative effects on registrants. The ability to
identify the provision of consulting services and to measure biases
in recommendations, however, represents a significant data challenge
for the estimation of the purported effects. See letter from Prof.
Li.
    \485\ See letter from CCMC.
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    To assess the quality of voting advice, studies have sought to
examine stock market reactions to registrants' announcements that they
will adopt policies consistent with proxy voting advice businesses'
recommendations.\486\ These studies hypothesize that the value of such
policies should be impounded in stock prices, and if investors expect
adoption of a particular policy to increase the value of a registrant,
an announcement that the registrant plans to adopt the policy should be
associated with a positive stock price reaction. This reasoning assumes
clients aim to increase a registrant's share price and that proxy
voting advice businesses tailor voting recommendations to achieve this
aim. Proxy voting advice businesses and certain of their clients,
however, may have goals other than, or in addition to, maximizing the
current value of a registrant's shares. Furthermore, the attribution of
stock price reactions to the adoption of policies by a registrant may
be challenging due to multiple announcements and other information
about the registrant that may be released concurrently. Together, these
limitations make it difficult for researchers to conclusively infer
recommendation quality from stock market reactions to implementation of
proxy voting advice business recommendations.\487\
---------------------------------------------------------------------------

    \486\ See generally David F. Larcker, Allan L. McCall, & Gaizka
Ormazabal, Outsourcing Shareholder Voting to Proxy Advisory Firms,
58 J.L. & Econ. 173 (2015) (finding that when registrants adjust
their compensation program to be more consistent with
recommendations of proxy voting advice businesses, the stock market
reaction is statistically negative).
    \487\ Proxy voting advice business clients may have goals other
than, or in addition to, maximizing the value of a registrant's
shares, or these clients may have investment objectives that would
not be achieved solely on the basis of a positive market reaction.
See Spatt (2019), supra note 473, at 4; Patrick Bolton et al.,
Investor Ideology (Nat'l Bureau of Econ. Research, Working Paper No.
25717, 2019), available at https://www.nber.org/papers/w25717.pdf;
Gregor Matvos & Michael Ostrovsky, Heterogeneity and Peer Effects in
Mutual Fund Proxy Voting, 98 J. Fin. Econ. 90 (2010); Copland et al.
(2018), supra note 481, at 6; Verdam (2006), supra note 481, at 12.
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2. Commenter Concerns Regarding the Rule's Economic Justification
    In response to the Proposing Release, commenters expressed a range
of views regarding the rule's economic justification. Some commenters
asserted that there are failures in the market for proxy advice that
justify the final rule.\488\ In addition to a variety of anecdotal
evidence, some commenters provided surveys of registrants,\489\
corporate governance professionals,\490\ and retail investors \491\
that indicated concerns about factual inaccuracies and conflicts of
interest in the proxy voting process.
---------------------------------------------------------------------------

    \488\ See, e.g., letters from CEC; BPC; Mylan; Exxon Mobil;
Nareit; ACCF; BRT; Timothy M. Doyle (Feb. 3, 2020) (``T. Doyle'');
CGC; State Street; Nasdaq; SCG; Charter; NAM; J. Ward; BIO;
Christopher A. Iacovella, Chief Executive Officer, American
Securities Association (Feb. 3, 2020) (``ASA''); Shareholder
Advocacy; Michael Hietpas (Feb. 3, 2020) (``M. Hietpas''); John
Endean, President, American Business Conference (Feb. 19, 2020)
(``ABC'').
    \489\ See letter from Nasdaq.
    \490\ See letter from SCG.
    \491\ See letter from J.W. Verret, Associate Professor of Law,
George Mason University Antonin Scalia School of Law (Jan. 22, 2020)
(``Prof. Verret'') (updating prior Spectrem survey results). One
commenter disputed the methodology used in the survey of retail
investors, claiming it used leading questions and ultimately showed
that retail investors are generally uninformed about the proxy
voting advice market. See letter from Prof. Coates.
---------------------------------------------------------------------------

    Other commenters stated, generally, that there is no principal-
agent problem or other market failure and that the proposed rule's
economic analysis failed to describe or provide demonstrable evidence
of a problem in the market for proxy advice that cannot be solved via
contractual arrangements in the private sector, other market based
mechanisms, or existing Commission rules (e.g., Rule 206(4)-6 under the
Investment Advisers Act).\492\ For example, one commenter disputed the
claims cited in the Proposing Release that proxy voting advice contains
inaccuracies or errors significant enough to require regulatory
intervention, stating that proxy voting advice businesses ``have every
incentive to conduct credible research and provide accurate
recommendations.'' \493\ Another commenter provided analysis showing
that two proxy voting advice businesses are more likely to recommend
their clients vote with management than a typical investor is to vote
with management, casting doubt on claims that proxy voting advice
businesses tend to encourage shareholders to oppose management
proposals.\494\ Another commenter provided independent analysis of the
dynamics of proxy vote recommendations, showing that they change over
time in response to events

and new information, suggesting they are not ``monolithic.'' \495\
---------------------------------------------------------------------------

    \492\ See, e.g., letters from Segal Marco II; TRP; PRI II;
ProxyVote II; Laura Chappel, Chief Executive, Brunel Pension
Partnership Limited (Feb. 3, 2020) (``Brunel''); Michael J. Clark,
Founder and Director, Ario Advisory (Feb. 3, 2020) (``Ario''); CII
IV; Prof. Coates; Kevin Thomas, Chief Executive Officer, Shareholder
Association for Research and Education (Jan. 30, 2020) (``SHARE
II''); Louise Davidson, Chief Executive Officer, Australian Council
of Superannuation Investors (Jan. 31, 2020) (``ACSI''); BMO; Proxy
Insight (Jan. 31, 2020) (``Proxy Insight''); Elliott I; Better
Markets; New York Comptroller II; AFL-CIO II; Joel Schneider, Chair,
Corporate Governance Committee, Dimensional Fund Advisors (Feb. 3,
2020) (``Dimensional''); Ron Baker, Executive Director, Colorado
Public Employees' Retirement Association (Feb. 3, 2020) (``Colorado
PERA''); Ashbel C. Williams, Executive Director & CIO, State Board
of Administration of Florida (Feb. 3, 2020) (``Florida Board'');
David Villa, Executive Director & Chief Investment Officer, et al.,
State of Wisconsin Investment Board (Feb. 3, 2020) (``SWIB''); CFA
Institute I; CIRCA; AllianceBernstein; LA Retirement; Glass Lewis II
(noting that no market failure is identified in the release and that
other jurisdictions' regulators, including ESMA, have concluded that
there is no market failure in the proxy voting advice business
industry); ISS; Michael Passoff, CEO, Proxy Impact (Feb. 3, 2020)
(``Proxy Impact''); Kenneth A. Bertsch, Executive Director, and
Jeffrey P. Mahoney, General Counsel, Council of Inst. Investors
(Feb. 4, 2020) (``CII V''); C. Icahn; ValueEdge I; CII VIII. See
also IAC Recommendation (stating that, rather than citing reliable
evidence of material problems with proxy voting advice businesses,
the SEC asserts that problems ``may'' or ``could'' exist, based on
claims from private interests (who are biased in favor of issuers)
that problems exist).
    \493\ See letter from New York Comptroller II. See also letter
in response to the SEC Staff Roundtable on the Proxy Process from
CII (stating that ``[p]roxy advisers' business model depends on
factual accuracy and their incentives are thus aligned with issuers
and institutional investors alike.'').
    \494\ See letter from Proxy Insight.
    \495\ See letter from PRI II.
---------------------------------------------------------------------------

    One commenter suggested that there is a different source of market
failure inherent to the proxy voting process and proxy voting advice
businesses stemming from the collective action problem inherent in
shareholder voting.\496\ According to the commenter, investors do not
value expending resources to determine their position on a given proxy
vote because, on the margin, their vote does not matter and they do not
fully internalize all of the benefits associated with any resources
they do expend.\497\ The commenter further asserts that proxy voting
advice businesses, in turn, can therefore only charge modest fees for
their services, which leads them to be resource constrained in
performing their own research. Thus, according to the commenter, this
arrangement leads to voting recommendations that are not adequately
informed or precise, and thus imposes negative externalities on
shareholders. The commenter argues that, because market forces are
unable to improve the quality of voting recommendations and reduce
these externalities, there is a need for regulatory action.\498\
Another commenter offered a different perspective, arguing instead that
proxy voting advice businesses represented a private market solution to
shareholders' collective action problem, rendering regulatory
intervention unnecessary.\499\ Other commenters posited that the
underlying concentration among proxy voting advice businesses and
conflicts of interest are the result of past regulatory action that
created demand for the services of proxy voting advice businesses.\500\
---------------------------------------------------------------------------

    \496\ See letter from B. Sharfman I. See also letter from Bryce
C. Tingle, N. Murray Edwards Chair in Business Law, Faculty of Law,
University of Calgary (Jan. 31, 2020) (``Prof. Tingle'') (similarly
asserting that both fund managers and proxy voting advice business
are not incentivized to expend significant resources in producing
and evaluating voting advice, but without attributing this lack of
incentives to a collective action problem on the part of
shareholders.).
    \497\ Academic research has shown, theoretically, that the
inability of shareholders to fully internalize the benefits of
developing an informed position on matters put to a shareholder vote
can cause shareholders to over-rely on proxy voting advice under
certain conditions. See supra note 479.
    \498\ See letter from B. Sharfman I.
    \499\ See letter from Glass Lewis II.
    \500\ See, e.g., letter from P. Mahoney and J.W. Verret.
---------------------------------------------------------------------------

    We believe that the important role proxy voting advice businesses
currently play in facilitating clients' participation in the proxy
process, as well as the importance of ensuring that clients have access
to more complete information regarding matters to be voted on, and the
material conflicts of interest proxy voting advice businesses may have,
support the final amendments. As discussed in Section I above, the
purpose of the amendments is to help ensure that investors who use
proxy voting advice have access to more transparent, accurate, and
complete information and benefit from a robust discussion of views--
similar to what is possible at a meeting where shareholders are
physically attending and participating--when making their voting
decisions, while minimizing costs or delays that could adversely affect
the timely provision of proxy voting advice. The amendments are
expected to reduce the costs incurred by clients of proxy voting advice
businesses in monitoring for conflicts of interest or acquiring
information relevant to assessing proxy voting advice. In this way, the
amendments should improve the overall efficiency associated with this
segment of the proxy system. Proxy voting advice businesses often act
as the intermediary for their clients' participation in the proxy
system, and the requirements of the rule will facilitate clients'
timely access to, and awareness of, more complete information prior to
voting. This has the potential to benefit not just those clients and
the immediate shareholders they serve but also investors in our public
markets more generally.

B. Economic Baseline

    The baseline against which the costs, benefits, and the impact on
efficiency, competition, and capital formation of the final amendments
are measured consists of the current regulatory requirements applicable
to registrants, proxy voting advice businesses, investment advisers,
and other clients of these businesses, as well as current industry
practices used by these entities in connection with the preparation,
distribution, and use of proxy voting advice.
1. Affected Parties and Current Market Practices
a. Proxy Voting Advice Businesses
    Proxy voting advice businesses will be affected by the final
amendments. As the Commission has previously stated, voting advice
provided by a firm such as a proxy voting advice business that markets
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) generally
constitutes a solicitation subject to 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.'' \501\
---------------------------------------------------------------------------

    \501\ See Commission Interpretation on Proxy Voting Advice at
47417.
---------------------------------------------------------------------------

    Several commenters noted that certain firms involved in the proxy
process do not supply research, analysis, and recommendations to
support the voting decisions of their clients.\502\ To the extent such
firms are not providing any voting recommendations and are instead
exercising delegated voting authority on behalf of their clients, we
agree that such services generally will not constitute ``proxy voting
advice'' under Rule 14a-1(l)(1)(iii)(A) and have adjusted our baseline
accordingly.\503\
---------------------------------------------------------------------------

    \502\ Specifically, commenters indicated that two additional
firms included in the set of affected proxy voting advice businesses
in the Proposing Release, ProxyVote Plus and Marco Consulting Group
did not advise investment advisers and institutional investors on
their voting determinations and would therefore not be affected by
the proposed amendments. See supra note 100 and accompanying text.
See also letters from Segal Marco II; ProxyVote II; CII IV.
    \503\ See supra notes 170-173 and accompanying text.
---------------------------------------------------------------------------

    As of July 22, 2020, to our knowledge, the proxy voting advice
industry in the United States consists of three major firms: ISS, Glass
Lewis, and Egan-Jones.
     ISS, founded in 1985, is a privately-held company that
provides research and analysis of proxy issues, custom policy
implementation, vote recommendations, vote execution, governance data,
and related products and services.\504\ ISS also provides advisory/
consulting services, analytical tools, and other products and services
to corporate registrants through ISS Corporate Solutions, Inc. (a
wholly owned subsidiary).\505\ As of April 2020, ISS had nearly 2,000
employees in 30 locations, and covered approximately 44,000 shareholder
meetings in 115 countries, annually.\506\ ISS states that it executes
about 10.2 million ballots annually on behalf of those clients
representing 4.2 trillion shares.\507\ ISS is registered with the
Commission as an investment adviser and identifies its

work as pension consultant as the basis for registering as an
adviser.\508\
---------------------------------------------------------------------------

    \504\ See 2016 GAO Report, supra note 141, at 6.
    \505\ Id.
    \506\ See About ISS, available at https://www.issgovernance.com/about/about-iss/ (last visited May 22, 2020). See also supra note
10.
    \507\ See About ISS, available at https://www.issgovernance.com/about/about-iss/ (last visited May 22, 2020).
    \508\ See Form ADV filing for ISS, available at https://adviserinfo.sec.gov/IAPD/content/ViewForm/crd_iapd_stream_pdf.aspx?ORG_PK=111940 (last accessed April 23,
2020). See also 2016 GAO Report, supra note 141, at 9.
---------------------------------------------------------------------------

     Glass Lewis, established in 2003, is a privately-held
company that provides research and analysis of proxy issues, custom
policy implementation, vote recommendations, vote execution, and
reporting and regulatory disclosure services to institutional
investors.\509\ As of April 2020, Glass Lewis had more than 380
employees worldwide that provide services to more than 1,300 clients
that collectively manage more than $35 trillion in assets.\510\ Glass
Lewis states that it covers more than 20,000 shareholder meetings
across approximately 100 global markets annually.\511\ Glass Lewis is
not registered with the Commission in any capacity.
---------------------------------------------------------------------------

    \509\ Id. at 7.
    \510\ See Glass Lewis Company Overview, available at https://www.glasslewis.com/company-overview/(last visited Apr. 26, 2020).
    \511\ Id.
---------------------------------------------------------------------------

     Egan-Jones was established in 2002 as a division of Egan-
Jones Ratings Company.\512\ Egan-Jones is a privately-held company that
provides proxy services, such as notification of meetings, research and
recommendations on selected matters to be voted on, voting guidelines,
execution of votes, and regulatory disclosure.\513\ As of September
2016, Egan-Jones' proxy research or voting clients mostly consisted of
mid- to large-sized mutual funds,\514\ and the firm covered
approximately 40,000 companies.\515\ Egan-Jones Ratings Company (Egan-
Jones' parent company) is registered with the Commission as a
Nationally Recognized Statistical Ratings Organization.\516\
---------------------------------------------------------------------------

    \512\ See 2016 GAO Report, supra note 141, at 7.
    \513\ Id.
    \514\ Id.
    \515\ Id. While ISS and Glass Lewis have published updated
coverage statistics on their websites, the most recent data
available for Egan-Jones was compiled in the 2016 GAO Report.
    \516\ See Order Granting Registration of Egan-Jones Rating
Company as a Nationally Recognized Statistical Rating Organization,
Exchange Act Release No. 34-57031 (Dec. 21, 2007), available at
https://www.sec.gov/ocr/ocr-current-nrsros.html#egan-jones.
---------------------------------------------------------------------------

    Of the three proxy voting advice businesses identified, ISS and
Glass Lewis are the largest and most often used for proxy voting
advice.\517\ We do not have access to general financial information for
ISS, Glass Lewis, and Egan-Jones such as annual revenues, earnings
before interest, taxes, depreciation, and amortization, and net income.
We also do not have access to client-specific financial information or
more general or aggregate information regarding the economics of the
proxy voting advice business.
---------------------------------------------------------------------------

    \517\ See 2016 GAO Report, supra note 141, at 8, 41 (``In some
instances, we focused our review on Institutional Shareholder
Services (ISS) and Glass Lewis and Co. (Glass Lewis) because they
have the largest number of clients in the proxy advisory firm market
in the United States.''); see also letters in response to the SEC
Staff Roundtable on the Proxy Process from Center on Executive
Compensation (Mar. 7, 2019) (noting that there are ``two firms
controlling roughly 97% of the market share for such services'');
Society for Corporate Governance (Nov. 9, 2018) (``While there are
five primary proxy advisory firms in the U.S., today the market is
essentially a duopoly consisting of Institutional Shareholder
Services . . . and Glass Lewis & Co. . . . .'').
---------------------------------------------------------------------------

    Several commenters stated that the economic analysis in the
Proposing Release failed to consider effects of the proposal on smaller
firms that provide proxy voting services, such as Investor Advocates
for Social Justice (``IASJ'').\518\ Further, commenters stated that the
final amendments could affect the propensity of non-U.S. firms to
compete with U.S. proxy voting advice businesses.\519\ Based on the
information available to the Commission,\520\ including comments on the
Proposing Release, we are not aware of smaller firms that currently
supply research, analysis, and recommendations in the United States to
support the voting decisions of their clients that would fall within
the definition of ``solicitation.'' We acknowledge that any smaller
firms or non-U.S. proxy voting advice businesses could be affected by
the final amendments to the extent they provide proxy voting advice on
registrants who have filed proxy materials with the Commission, or if
the final amendments affect their willingness to enter the market to
supply proxy voting advice in the United States.
---------------------------------------------------------------------------

    \518\ See letter from IASJ. We understand that this firm
typically does not make voting recommendations to its institutional
investor clients but rather assists those ``who seek a partner to
carry out their proxy voting.'' Id. To the extent a firm does not
make voting recommendations to its clients and is instead exercising
delegated authority on their behalf, it would not be engaged in a
``solicitation'' within the meaning of Rule 14a-1(l)(1)(iii)(A). See
supra notes 170-173 and accompanying text. Therefore, based on our
understanding of its current activities, this commenter (and others
engaged in similar conduct) would not appear to be subject to
compliance with Rule 14a-2(b)(9). See also letters from Felician
Sisters II; Good Shepherd; Interfaith Center II; ProxyVote II; Segal
Marco II; St. Dominic of Caldwell.
    \519\ See letters from Minerva I; PIRC.
    \520\ Our awareness of providers of proxy voting services may be
limited because firms that provide proxy voting services, including
proxy voting advice businesses, do not always engage in activities
that would require them to register with the Commission. See supra
Section I.
---------------------------------------------------------------------------

    In a principal-agent relationship, such as the relationship between
a proxy voting advice business and a client, to the extent that the
principals' and agents' interests are not perfectly aligned, agents can
expend resources to assure principals that they will act in the
principals' best interest. When agents operate in a competitive market
soliciting business from principals, they have an incentive to expend
resources to assure principals that they will act in the principals'
best interest, or risk putting themselves at a competitive
disadvantage.\521\ Where the agent's interest and the principal's
interest diverge, there can be a strong counterweight to this incentive
and where a relationship is multifaceted the agent may emphasize areas
of alignment and de-emphasize areas of conflict. In the proxy voting
advice market, certain practices by proxy voting advice businesses
serve as mechanisms to assure their clients that proxy voting advice
businesses will take actions that are in clients' best interest. All
three major proxy voting advice businesses have policies, procedures,
and disclosures in place that are intended to reduce clients' costs of
monitoring the businesses' behavior.\522\
---------------------------------------------------------------------------

    \521\ Agents have an incentive to expend resources to assure
principals that they will act in the principals' best interest as
long as the cost of providing the assurance is less than the value
of the assurance to principals.
    \522\ See, e.g., letter from Glass Lewis II.
---------------------------------------------------------------------------

    Proxy voting advice businesses' reliance on information available
to all shareholders is one example of how current market practices may
mitigate agency costs. One commenter noted that facing the prospect of
having their work checked by clients can discipline proxy voting advice
businesses that might otherwise act based on conflicts of interest when
developing proxy advice.\523\ The same commenter included use of
publicly available information as a step it has taken to ``ensure
quality and minimize error in its published research.'' \524\ The three
major proxy voting advice businesses state that they base their
recommendations exclusively on information that is publicly available.
Relying on publicly available information to develop proxy advice
enables clients to validate the inputs that proxy voting advice
businesses provide, rather than expending effort to obtain proprietary,
and potentially commercially sensitive, information

directly from registrants or other sources.
---------------------------------------------------------------------------

    \523\ See letter from ISS.
    \524\ See id.
---------------------------------------------------------------------------

    As part of our consideration of the baseline for the final rules,
we focus on two industry practices that are particularly relevant for
the new conditions in Rule 14a-2(b): Conflicts of interest disclosure
and procedures for engagement with registrants.
i. Conflict of Interest Disclosures
    While the nature of potential conflicts related to revenues might
be different among the three proxy voting advice businesses, all three
proxy voting advice businesses have conflicts of interest policies and
make disclosures to clients disclosing the nature of potential
conflicts and the steps that they have taken to address them.\525\
These existing policies and disclosures are part of the economic
baseline for the amendments.
---------------------------------------------------------------------------

    \525\ See, e.g., letters from ISS; Glass Lewis II. See also
Egan-Jones Proxy Services Conflict of Interest Statement (Sept.
2019), available at https://www.ejproxy.com/media/documents/Egan-Jones_Proxy_Conflict-of-Interest_Sep-2019.pdf.
---------------------------------------------------------------------------

    For example, we understand that ISS has implemented policies and
procedures designed to prevent and manage conflicts that could arise
from the work of ISS' research and analytics teams (``Global
Research'') and the work of ISS Corporate Solutions (``ICS'') for
public companies.\526\ More specifically, Global Research prepares
proxy voting governance research, analyzes proxy issues, and provides
ratings on, and other assessments of, public companies for the benefit
of institutional investors. ICS provides advisory services, analytical
tools, and publications to registrants to enable registrants to improve
shareholder value and reduce risk. According to ISS, one of the primary
steps the firm has taken to prevent and manage this potential conflict
of interest is implementing a firewall with the goal of separating ICS
from ISS. ISS notes that it makes available to its institutional
clients information about the relationships between ICS and its clients
in a way that is intended not to alert Global Research analysts to the
possible existence of such relationships. ISS also notes that it adds a
legend to each global or domestic proxy analysis advising the reader of
the existence of ICS and offering ISS' clients the ability to learn
more about ICS and its clients. In addition, ISS indicates that it has
implemented a policy on the disclosure of significant relationships,
under which ISS provides clients with ``proactive visibility''
regarding a range of significant relationships within the client-facing
side of the ProxyExchange platform.\527\ ICS also discloses in all of
its contracts that ISS' status as a registered investment adviser (as
well as its internal policies and procedures) may require ISS to
disclose to ISS institutional clients ICS' relationship with the
registrant.
---------------------------------------------------------------------------

    \526\ See ISS, Best Practice Principles for Providers of
Shareholder Voting Research & Analysis: ISS Compliance Statement
(2017), available at https://www.issgovernance.com/file/duediligence/best-practices-principles-iss-compliance-statement-april-2017-update.pdf.
    \527\ See ISS Policy Regarding Disclosure of Significant
Relationships, available at https://www.issgovernance.com/file/duediligence/Disclosure-of-Significant-Relationships.pdf (last
visited Apr. 27, 2020).
---------------------------------------------------------------------------

    We understand the other two major proxy voting advice businesses
also provide disclosure of potential conflicts of interest. Glass Lewis
notes that it provides disclosure of potential conflicts on the cover
of the relevant research report.\528\ This is intended to enable
clients and any other parties with access to a Glass Lewis report
(e.g., the media) to review potential conflicts at the same time they
review the research, analysis, and voting recommendations contained
therein. Egan-Jones also discloses its management of three categories
of potential conflicts--revenue, cost, and structural--to the
public.\529\
---------------------------------------------------------------------------

    \528\ See Glass Lewis' Policies and Procedures for Managing and
Disclosing Conflicts of Interest (2019), available at https://www.glasslewis.com/wp-content/uploads/2019/11/GL-Policies-and-Procedures-for-Managing-and-Disclosing-Conflicts-of-Interest-050819-FINAL.pdf.
    \529\ See Egan-Jones Proxy Services Conflict of Interest
Statement, available at https://ejproxy.com/media/documents/Egan-Jones_Proxy_Conflict-of-Interest_Sep-2019.pdf (last visited Apr. 27,
2020).
---------------------------------------------------------------------------

    Thus, it appears that all three major proxy voting advice
businesses have some level of conflict of interest disclosure policies
in place and provide such disclosure to affected parties. These
disclosures, which are intended to support the objectivity of voting
advice and the integrity of the voting process, may overlap to a
certain degree with the requirements in the final amendments. These
disclosure policies, however, vary in terms of structure and coverage
as well as the manner the in which the information is conveyed.
ii. Engagement With Registrants
    The following section discusses existing proxy voting advice
business engagement with the subjects of proxy voting advice--one
avenue by which such businesses may signal to their clients that the
information underlying proxy voting advice is accurate, transparent,
and complete.
    We understand that all three major proxy voting advice businesses
have certain policies, procedures, and disclosures in place intended to
assure clients that the voting advice they receive will be based on
accurate, transparent, and complete information. In some cases, proxy
voting advice businesses seek input from registrants to further these
objectives. All three of these proxy voting advice businesses offer
certain registrants some form of pre-release review of at least some of
their proxy voting advice reports, or the data used in their reports.
Also, all three such proxy voting advice businesses offer some
registrants access to proxy voting reports and offer mechanisms by
which registrants can provide feedback on those reports, in some cases
for a fee.
    For example, ISS states that it may, in some circumstances, give
registrants, whether or not they are ICS clients, the right to review
draft research analyses, ratings, or other advisory research reports so
that ISS may correct factual inaccuracies before delivering final
voting advice. ISS acknowledges that review of draft analyses may
provide an opportunity for registrants to unduly influence those
analyses and reports. To avoid the appearance of impropriety, ISS
states that it generally offers registrants an opportunity to review a
draft proxy analysis, rating, or other research report only for the
purposes of verifying the factual accuracy of information. ISS further
states that it retains sole discretion whether to accept any change
recommended by the registrant. ISS's policies also govern changes to
analyses based on registrant feedback. According to ISS's Code of
Ethics, if the analyst changes the proposed voting recommendation or
other proposed conclusion, the proposed change must be reviewed by a
senior analyst and ISS will retain in its files the documents supplied
by the registrant detailing the factual inaccuracies.\530\
---------------------------------------------------------------------------

    \530\ See ISS Code of Ethics 7 (2020), available at https://www.issgovernance.com/file/duediligence/code-of-ethics-mar-2020.pdf.
---------------------------------------------------------------------------

    Glass Lewis introduced a ``Report Feedback Statement'' service in
2019 that has allowed companies to submit feedback on Glass Lewis
reports and have that feedback be transmitted directly to Glass Lewis
clients in the proxy research papers they receive.\531\ In addition to
these services, beginning in 2015, Glass Lewis started providing the
subjects of its research with its

Issuer Data Report, which details the key facts underlying the relevant
report for their review before the report is finalized. According to
Glass Lewis, materials provided are deliberately limited. Glass Lewis
has indicated that by providing the facts underlying the report, it can
benefit from registrant review without inviting debates about Glass
Lewis' methodology or what result that methodology should lead to in
the context of a particular recommendation. This service has been
available without a fee for several years and more than 1,400 companies
currently participate in it on an annual basis.\532\
---------------------------------------------------------------------------

    \531\ See Press Release, Glass Lewis, Glass Lewis Announces that
Company Opinions are Now Included With Research and Voting
Recommendations (Apr. 2, 2020), available at https://glasslewis.com/report-feedback-statement-included-with-research. See also Press
Release, Glass Lewis, Glass Lewis Launches Report Feedback Statement
Service (Mar. 14, 2020), available at https://glasslewis.com/glass-lewis-launches-report-feedback-statement-service.
    \532\ See letter from Glass Lewis II.
---------------------------------------------------------------------------

    Egan-Jones provides several avenues for registrants to review and
correct any material errors found in its reports. Registrants may
obtain a ``draft,'' or pre-publication copy, of a report pertaining to
them in order to review it. If a registrant believes there is a
material error in an Egan-Jones report, the registrant may contact
Egan-Jones directly. In addition, major U.S. third-party proxy
solicitors participate in Egan-Jones' Research Preview program. Through
that program, proxy solicitors can supply draft copies of the research
regarding the registrant to the registrant, and convey appropriate
documentation to Egan-Jones to correct any errors found in the research
on behalf of the registrant.\533\
---------------------------------------------------------------------------

    \533\ See Egan-Jones Issuer Engagement, available at https://ejproxy.com/issuers (last visited Apr. 28, 2020).
---------------------------------------------------------------------------

    Although the three major proxy voting advice businesses offer
registrants opportunities to review proxy voting advice, existing
policies and procedures limit review in some respects. ISS, for
example, offers only ``eligible'' registrants an opportunity to review
draft proxy analyses and generally uses the S&P 500 constituent list to
determine eligibility. Moreover, even for eligible companies, ISS
provides an opportunity to review solely on a ``best-efforts''
basis.\534\ As noted above, Glass Lewis indicates that its registrant
review process is limited to pre-publication review of only the key
facts underlying each relevant report.\535\
---------------------------------------------------------------------------

    \534\ See ISS Draft Review Process for U.S. Issuers, available
at https://issgovernance.com/iss-draft-review-process-u-s-issuers/
(last visited Apr. 28 2020).
    \535\ See supra note 532.
---------------------------------------------------------------------------

    Additionally, it is our understanding that some proxy voting advice
businesses currently include links to filings by registrants that are
the subject of proxy advice in their online platforms. These links
provide a means by which clients may access additional definitive proxy
materials that registrants may file in response to proxy voting advice.
    Non-U.S. proxy voting advice businesses that are signatories to the
Best Practice Principles for Shareholder Voting Research have provided
information about their engagement with registrants.\536\ Based on
these public disclosures, we understand that levels of registrant
engagement vary across non-U.S. proxy voting advice businesses. For
example, the U.K.-based firm PIRC states that it provides pre-
publication drafts of proxy voting advice to registrants for some
jurisdictions as a courtesy, while France-based firm Proxinvest does
not.\537\ While acknowledging the practices of these non-U.S. proxy
voting advice businesses, this section focuses on the three major proxy
voting advice businesses that operate in the United States.\538\
---------------------------------------------------------------------------

    \536\ See BPP Group Signatory Statements, available at https://bppgrp.info/signatory-statements (last visited Apr. 29, 2020).
    \537\ Id.
    \538\ As noted in above, we are not aware of smaller firms that
currently supply research, analysis, and recommendations to support
the voting decisions of their clients that would fall within the
definition of ``solicitation.'' Thus we do not speculate as to how
smaller firms might engage with registrants.
---------------------------------------------------------------------------

b. Clients of Proxy Voting Advice Businesses as Well as Underlying
Investors
    Clients that use proxy voting advice businesses for voting advice
will be affected by the final rule amendments. In turn, investors and
other groups on whose behalf these clients make voting determinations
will be affected. One of the three major proxy voting advice
businesses--ISS--is registered with the Commission as an investment
adviser and as such, provides annually updated disclosure with respect
to its types of clients on Form ADV. Table 1 below reports client types
as disclosed by ISS.\539\
---------------------------------------------------------------------------

    \539\ See ISS Form ADV filing, supra note 508. ISS describes
clients classified as ``Other'' as ``Academic, vendor, other
companies not able to identify as above.''

                Table 1--Number of Clients by Client Type
                         [as of March 28, 2020]
------------------------------------------------------------------------
                                                             Number of
                   Type of client \a\                       clients \b\
------------------------------------------------------------------------
Banking or thrift institutions..........................             195
Pooled investment vehicles..............................             300
Pension and profit sharing plans........................             170
Charitable organizations................................             110
State or municipal government entities..................              10
Other investment advisers...............................             960
Insurance companies.....................................              40
Sovereign wealth funds and foreign official institutions              10
Corporations or other businesses not listed above.......              70
Other...................................................             225
                                                         ---------------
    Total...............................................           2,095
------------------------------------------------------------------------
\a\ The table excludes client types for which ISS indicated either zero
  clients or less than five clients.
\b\ Form ADV filers indicate the approximate number of clients
  attributable to each type of client. If the filer has fewer than five
  clients in a particular category (other than investment companies,
  business development companies, and pooled investment vehicles), it
  may indicate that it has fewer than five clients rather than reporting
  the number of clients.

    Table 1 illustrates the types of clients that utilize the services
of one of the largest proxy voting advice businesses. For example,
while investment advisers (``Other investment advisers'' in Table 1)
constitute a 46 percent plurality of clients for ISS, other types of
clients include pooled investment vehicles (14 percent) and pension and
profit sharing plans (eight percent). Other users of the services
offered by ISS include corporations, charitable organizations, and
insurance companies.\540\ Certain of these users of proxy voting advice
business services make voting determinations that affect the interests
of a wide array of individual investors, beneficiaries, and other
constituents.\541\
---------------------------------------------------------------------------

    \540\ Id.
    \541\ One commenter argued that the economic analysis should
include more data and data analysis related to senior citizens since
they make up a large portion of the mainstream investor community.
In particular, the commenter suggested we include more data on the
proportion of total investors that are senior citizens and some
demographic analysis. We are sympathetic to the commenter's
suggestion regarding the importance of senior citizens as investors,
but we do not have data to perform the analysis the commenter
requested and none was provided by commenters. See letter from Jim
Martin, Chairman, et al., 60 Plus Association (Feb. 3, 2020) (``60
Plus''). We note that, to the extent the final rules improve the mix
of information available to shareholders when voting decisions are
made, they will benefit the investor community generally, including
senior citizen investors.
---------------------------------------------------------------------------

c. Registrants
    Registrants also will be affected by the final amendments.
Registrants that have a class of equity securities registered under
Section 12 of the Exchange Act as well as non-registrant parties that
conduct proxy solicitations with respect to those registrants are
subject to the

federal proxy rules.\542\ In addition, there are certain other
companies that do not have a class of equity securities registered
under Section 12 of the Exchange Act that file proxy materials with the
Commission. Finally, Rule 20a-1 under the Investment Company Act
subjects all registered management investment companies to the federal
proxy rules.\543\
---------------------------------------------------------------------------

    \542\ Foreign private registrants are exempt from the Federal
proxy rules under Rule 3a12-3(b) of the Exchange Act. See 17 CFR
240.3a12-3. We are not aware of any asset-backed registrants that
have a class of equity securities registered under Section 12 of the
Exchange Act. Most asset-backed registrants are registered under
Section 15(d) of the Exchange Act and thus are not subject to the
federal proxy rules. Nine asset-backed registrants had a class of
debt securities registered under Section 12 of the Exchange Act as
of December 2018. As a result, these asset-backed registrants are
not subject to the federal proxy rules.
    \543\ Rule 20a-1 under the Investment Company Act requires
registered management investment companies to comply with
regulations adopted pursuant to Section 14(a) of the Exchange Act
that would be applicable to a proxy solicitation if it were made in
respect of a security registered pursuant to Section 12 of the
Exchange Act. See 17 CFR 270.20a-1. ``Registered management
investment company'' means any investment company other than a face-
amount certificate company or a unit investment trust. See 15 U.S.C.
80a-4.
---------------------------------------------------------------------------

    As of December 31, 2018, we estimate that 5,758 registrants had a
class of securities registered under Section 12 of the Exchange
Act.\544\ As of the same date, there were approximately 20 companies
that did not have a class of securities registered under Section 12 of
the Exchange Act that filed proxy materials.\545\ As of August 31, 2019
there were 12,718 registered management investment companies that were
subject to the proxy rules: (i) 12,040 open-end funds, out of which
1,910 were Exchange Traded Funds (``ETFs'') registered as open-end
funds or open-end funds that had an ETF share class; (ii) 664 closed-
end funds; and (iii) 14 variable annuity separate accounts registered
as management investment companies.\546\ As of December 2018, we
identified 98 Business Development Companies (``BDCs'') that could be
subject to the final amendments.\547\ The summation of these estimates
yields 18,594 companies that may be affected to a greater or lesser
extent by the final amendments.\548\
---------------------------------------------------------------------------

    \544\ We estimate the number of registrants with a class of
securities registered under Section 12 of the Exchange Act by
reviewing all Forms 10-K filed during calendar year 2018 with the
Commission and counting the number of unique registrants that
identify themselves as having a class of securities registered under
Section 12(b) or Section 12(g) of the Exchange Act. Foreign private
registrants that filed Forms 20-F and 40-F and asset-backed
registrants that filed Forms 10-D and 10-D/A during calendar year
2018 with the Commission are excluded from this estimate. This
estimate excludes BDCs that filed Form 10-K in 2018.
    \545\ We identify these issuers as those (1) subject to the
reporting obligations of Exchange Act Section 15(d) but that do not
have a class of equity securities registered under Exchange Act
Section 12(b) or 12(g) and (2) that filed any proxy materials during
calendar year 2018 with the Commission. The proxy materials we
consider in our analysis are DEF14A; DEF14C; DEFA14A; DEFC14A;
DEFM14A; DEFM14C; DEFR14A; DEFR14C; DFAN14A; N-14; PRE 14A; PRE 14C;
PREC14A; PREM14A; PREM14C; PRER14A; PRER14C. Form N-14 can be a
registration statement and/or proxy statement. We manually review
all Forms N-14 filed during calendar year 2018 with the Commission
and we exclude from our estimates Forms N-14 that are exclusively
registration statements. To identify registrants reporting pursuant
to Section 15(d) but not registered under Section 12(b) or Section
12(g), we review all Forms 10-K filed in calendar year 2018 with the
Commission and count the number of unique registrants that identify
themselves as subject to Section 15(d) reporting obligations but
with no class of equity securities registered under Section 12(b) or
Section 12(g).
    \546\ We estimate the number of unique registered management
investment companies based on Forms N-CEN filed between June 2018
and August 2019 with the Commission. Open-end funds are registered
on Form N-1A. Closed-end funds are registered on Form N-2. Variable
annuity separate accounts registered as management investment
companies are trusts registered on Form N-3. The number of
potentially affected Section 12 and Section 15(d) registrants is
estimated over a different time period (i.e., January 2018 to
December 2018) than the number of potentially affected registered
management investment companies (i.e., June 2018 to August 2019)
because there is no complete N-CEN data for the most recent full
calendar year (i.e., 2018). Registered management investment
companies started submitting Form N-CEN in September 2018 for the
period ended on June 30, 2018 with the Commission.
    \547\ BDCs are entities that have been issued an 814- reporting
number. Our estimate includes 88 BDCs that filed Form 10-K in 2018
as well as BDCs that may be delinquent or have filed extensions for
their filings. Our estimate excludes six wholly-owned subsidiaries
of other BDCs.
    \548\ The 18,594 potentially affected registrants is the sum of:
(a) 5,758 registrants with a class of securities registered under
Section 12 of the Exchange Act; (b) 20 registrants without a class
of securities registered under Section 12 of the Exchange Act that
filed proxy materials; (c) 12,718 registered management investment
companies; and (d) 98 BDCs.
---------------------------------------------------------------------------

    The above estimates are an upper bound of the number of potentially
affected companies because not all of these registrants may file proxy
materials related to a meeting for which a proxy voting advice business
issues proxy voting advice in a given year. Out of the 18,594
potentially affected registrants mentioned above, 5,690 filed proxy
materials with the Commission during calendar year 2018.\549\ Out of
the 5,690 registrants, 4,758 (84 percent) were Section 12 or Section
15(d) registrants and the remaining 932 (16 percent) were registered
management investment companies.\550\
---------------------------------------------------------------------------

    \549\ For details on the estimation of companies that filed
proxy materials with the Commission during calendar year 2018, see
supra note 544.
    \550\ According to data from Forms N-CEN filed with the
Commission between June 2018 and August 2019, there were 965
registered management investment companies that submitted matters
for its security holders' vote during the reporting period: (i) 729
open-end funds, out of which 86 were ETFs registered as open-end
funds or open-end funds that had an ETF share class; (ii) 235
closed-end funds; and (iii) one variable annuity separate account.
See Form N-CEN Item B.10. The discrepancy in the estimated number of
registered management investment companies submitting proxy filings
(i.e., 932) and Form N-CEN data (i.e., 965) likely is attributable
to the different time periods over which the two statistics are
estimated.
---------------------------------------------------------------------------

    Whether or not proxy voting advice businesses permit registrants to
review draft proxy voting advice, all registrants are able to respond
to final proxy voting advice by filing additional definitive proxy
materials. However, as discussed in the Proposing Release, some
registrants have asserted that a large percentage of proxies are voted
within 24 to 48 hours of proxy voting advice being issued \551\ and
that it can be difficult for registrants to access and analyze the
proxy voting advice, formulate a response, and file the necessary
materials with the Commission within that time period.\552\ This is
consistent with feedback received from commenters, who also indicated
that registrants face time pressure in their efforts to communicate
their responses to proxy voting advice to shareholders prior to
votes.\553\ The Proposing Release included an analysis that estimated
the number of additional definitive proxy material filings in 2016,
2017, and 2018,\554\ and Commission staff subsequently refined the
process for identifying relevant filings and published a list of the
filings it identified in a memorandum to the public comment file.\555\
This list shows approximately 105, 93, and 90 filings in 2016, 2017,
and 2018, respectively. Further, in the Proposing Release, the staff
identified in a subset of additional definitive proxy material filings
in 2018, where data were available, the number of business days between
when a proxy voting advice business delivered proxy voting advice and
when the registrant filed additional definitive proxy

materials, and the number of business days until the planned
shareholder meeting. Based on this sample, staff estimated a median
value of three business days and an average value of 3.8 business days
between when a proxy voting advice business issues proxy voting advice
and when a registrant responds. Further, the median (average) number of
days between the registrant response and the shareholder meeting based
on the sample was 9.5 (10.3) business days.\556\
---------------------------------------------------------------------------

    \551\ See Proposing Release at 66545, n.235.
    \552\ See id. at 66545, n.236. As we noted above, shareholders
have the ability to change their vote at any time prior to a
meeting, including as a result of a registrant filing supplemental
proxy materials in response to proxy voting advice. See supra note
373.
    \553\ See, e.g., letters from Nareit; NAM; Exxon Mobil. See also
Proposing Release at 66533, n.136.
    \554\ See Proposing Release at 66546, Table 2.
    \555\ See Memorandum from the U.S. Securities and Exchange
Commission, Division of Economic Risk and Analysis, Regarding Data
Analysis of Additional Definitive Proxy Materials Filed by
Registrants in Response to Proxy Voting Advice (Jan. 16, 2020),
available at https://www.sec.gov/comments/s7-22-19/s72219-6660914-203861.pdf (``Data Analysis of Additional Definitive Proxy
Materials'').
    \556\ See Proposing Release at 66546.
---------------------------------------------------------------------------

    A number of commenters interpreted our analysis in Table 2 of the
Proposing Release to indicate that the Commission took the view that
the ``concerns'' raised by registrants about errors or inaccuracies
reflected actual factual errors.\557\ One commenter questioned whether
Commission staff evaluated the merits of registrant claims presented in
the Proposing Release \558\ and supplied its own estimates of actual
error rates in proxy voting advice business research report based on
its own research,\559\ as well as on supplementary information made
available in the comment file.\560\
---------------------------------------------------------------------------

    \557\ Id. at Table 2.
    \558\ See letter from CII I.
    \559\ See letter from CII IV.
    \560\ See letter from CII V. This commenter suggested that the
error rate implied by the Commission's classification in Table 2 of
the Proposing Release was 0.5% and that after correcting for
registrant assertions that appear to be in error, the rate is
reduced to 0.3%. The same commenter performed a case-by-case
analysis of claims they believed may have been classified as errors
in the Proposing Release's analysis, casting doubt on whether many
of them were actually related to factual errors, and concluded that,
after excluding analytical errors, which may just represent
differences of opinion, the actual error rate is only 0.06%.
---------------------------------------------------------------------------

    In contrast, another commenter had a different critique of Table 2,
arguing that estimating error rates based on filings of additional
definitive proxy materials might actually underestimate the true error
rate because registrants who submit filings subject themselves to
potential liability under SEC Rule 14a-9.\561\
---------------------------------------------------------------------------

    \561\ See letter from ACCF.
---------------------------------------------------------------------------

    The method for identifying filings that contained registrant
concerns and classifying those concerns was detailed in the Proposing
Release and in the subsequent staff memorandum.\562\ Importantly, the
analysis set forth in the Proposing Release took no position on the
merits of responses. The analysis was intended to present how
registrants currently respond to proxy voting advice and the frequency
and timing of those responses and made no judgment as to whether the
concerns raised by registrants in their supplemental filings were
valid. Nor was the analysis intended to provide an ``error rate.''
Although we agree that reasonable readers might disagree in their
classification of registrant concerns, lack of agreement on
classification of specific responses does not change our assessment,
discussed below, that the final rules would benefit clients of proxy
voting advice businesses, and the proxy process as a whole, by
improving client access to registrant information and analysis. Indeed,
the fact that reviewers of additional definitive proxy materials may
differ both in how they identify registrant concerns and how they
classify those concerns supports the idea that clients would benefit
from having a mechanism available by which they can reasonably be
expected to become aware of registrant responses so they might form
their own view of the merits of those responses.
---------------------------------------------------------------------------

    \562\ See Proposing Release at n.239. See also Data Analysis of
Additional Definitive Proxy Materials, supra note 555.
---------------------------------------------------------------------------

2. Current Regulatory Framework
    The economic baseline includes the current regulatory framework
that applies to proxy voting advice businesses. As explained in the
Proposing Release, under the Commission's proxy rules, any person
engaging in a proxy solicitation, unless exempt, is generally subject
to filing and information requirements designed to ensure that
materially complete and accurate information is furnished to
shareholders solicited by the person.\563\ Over the years, the
Commission has recognized that these filing and information
requirements may, in certain circumstances, impose burdens that deter
communications useful to shareholders, and in such circumstances, may
not be necessary to protect investors in the proxy voting process.\564\
Accordingly, the Commission has exempted certain kinds of solicitations
from the filing and information requirements of the proxy rules,
subject to various conditions, where such requirements are not
necessary for investor protection.\565\ Notwithstanding the exemptions,
these solicitations remain subject to Rule 14a-9, the antifraud
provisions of the federal proxy rules.\566\
---------------------------------------------------------------------------

    \563\ See Proposing Release at 66524.
    \564\ See, e.g., Communications Among Shareholders Adopting
Release at 49278 (``[S]hareholders can be deterred from discussing
management and corporate performance by the prospect of being found
after the fact to have engaged in a proxy solicitation. The costs of
complying with [the proxy] rules also has meant that . . .
shareholders and other interested persons may effectively be cut out
of the debate regarding proposals . . . .'').
    \565\ For example, Rule 14a-2(b)(1) generally exempts
solicitations by persons who do not seek the power to act as proxy
for a shareholder and do not have a substantial interest in the
subject matter of the communication beyond their interest as a
shareholder. Another exemption, Rule 14a-2(b)(3), generally exempts
proxy voting advice furnished by an advisor to any other person with
whom the advisor has a business relationship.
    \566\ 17 CFR 240.14a-9.
---------------------------------------------------------------------------

    Proxy voting advice businesses typically rely upon the exemptions
in Rule 14a-2(b)(1) and (b)(3) to provide advice without complying with
the filing and information requirements of the proxy rules.\567\ The
existing conditions to these exemptions are designed to ensure that
investors are protected where the Commission's filing and information
requirements do not apply. For example, any person who wishes to rely
on the Rule 14a-2(b)(3) exemption may not receive special commissions
or remuneration from anyone other than the recipient of the advice and
must disclose any significant relationship or material interest bearing
on the voting advice.\568\ By contrast, the exemption in Rule 14a-
2(b)(1) does not currently require conflicts of interest disclosure.
Both exemptions were adopted by the Commission before proxy voting
advice businesses played the significant role that they now do in the
proxy voting process and in the voting decisions of investment advisers
and institutional investors.
---------------------------------------------------------------------------

    \567\ See Commission Interpretation on Proxy Voting Advice at
47416 (discussing the ``two exemptions to the federal proxy rules
that are often relied upon by proxy advisory firms'').
    \568\ The conditions to Rule 14a-2(b)(3) are: (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 Sec.  240.14a-12(c). 17 CFR 240.14a-2(b)(3).
---------------------------------------------------------------------------

    Several commenters stated that the analysis in the Proposing
Release did not reflect requirements to address conflicts of interest
under existing law, including the regulatory scheme under the
Investment Advisers Act, as well as proxy voting advice business best
practices under the baseline.\569\ We recognize that, in addition to
the rules governing proxy solicitation, some proxy voting advice
businesses may be subject to other regulatory regimes.\570\

For example, one of the major proxy voting advice businesses, ISS, is
also a registered investment adviser, and as such, must eliminate or
make full and fair disclosure of all conflicts of interest to its
clients that might cause ISS to render proxy voting advice that is not
disinterested such that a client can provide informed consent to the
conflict.\571\ In addition, ISS has noted that, as a registered
investment adviser, it has a fiduciary duty of care to make a
reasonable investigation to determine that it is not basing vote
recommendations on materially inaccurate or incomplete
information.\572\ Similarly, Egan-Jones is registered with the
Commission as a Nationally Recognized Statistical Rating Organization
(NRSRO). Registered NRSROs are required under Rule 17g-5 to disclose
conflicts of interest relating to maintenance or issuance of a credit
rating. However, these regulatory regimes serve distinct, though
overlapping, regulatory purposes.\573\
---------------------------------------------------------------------------

    \569\ See letters from ISS; Glass Lewis II. See also IAC
Recommendation.
    \570\ See Proposing Release at 66527, n.88; 66529, n.99.
    \571\ See letter from ISS; see also Standard of Conduct for
Investment Advisers.
    \572\ See letter from ISS.
    \573\ See supra notes 41 through 53 and accompanying text.
---------------------------------------------------------------------------

    One commenter also stated that the final rule's economic effects
should be measured relative to a baseline that consists of regulation
in effect prior to the Commission Interpretation on Proxy Voting
Advice,\574\ noting that no cost-benefit analysis was performed in
connection with that interpretation.\575\ Consistent with its past
practice, the Commission continues to believe that the appropriate
baseline for its economic analysis consists of all existing regulatory
requirements that apply to the affected parties, including the
Commission Interpretation on Proxy Voting Advice, as well as industry
practice in response to those requirements. Moreover, the Commission
Interpretation on Proxy Voting Advice did not create any new legal
obligations under the securities laws but rather articulated the
Commission's longstanding views on what constitutes ``solicitation.''
Indeed, as noted above, there is evidence that the proxy voting advice
business industry has understood for over 30 years that its proxy
voting advice constitutes a ``solicitation'' under Rule 14a-1(l) or at
least that the Commission may consider such advice to constitute a
``solicitation.'' \576\
---------------------------------------------------------------------------

    \574\ See supra note 74.
    \575\ See letter from ISS. Another commenter argued that under
that baseline, proxy voting advice businesses were governed by the
fiduciary standard of the Advisers Act, which already required proxy
voting advice businesses to disclose conflicts of interest. See
letter from Glass Lewis II. As noted above, the Commission
acknowledges that some, but not all, proxy voting advice businesses
may be subject to other regulatory regimes, including the Advisers
Act.
    \576\ See supra Section II.A.3.
---------------------------------------------------------------------------

    Even if a proxy voting advice business had believed it was not
engaged in a ``solicitation'' prior to the interpretation, and thus
newly realized it was engaged in a ``solicitation'' upon issuance of
the interpretation, the impact of this change would have been minimal
given the existing exemptions from the filing and information
requirements of the proxy rules available to proxy voting advice
businesses. The only thing that potentially would have changed for
proxy voting advice businesses would have been heightened awareness of
the application of Rule 14a-9 liability, including the examples of
specific circumstances that could result in a violation of that rule.
To the extent that some proxy voting advice businesses did not
previously understand their voting advice to constitute solicitations
and thus be subject to Rule 14a-9 liability, it is possible that this
heightened awareness could cause those businesses to take more care in
preparing their recommendations. It is also possible that this
heightened awareness could expose proxy voting advice businesses to
greater risk of litigation under Rule 14a-9. However, the Commission is
not aware of evidence--including any specific information provided by
commenters--that the interpretation has resulted or would result in
substantial changes in proxy voting advice businesses' practices. In
any event, even if we were to consider Rule 14a-9 as though it were to
apply to proxy voting advice businesses for the first time, we believe
the benefits to investors of this antifraud rule insofar as it would
deter proxy voting advice businesses from making materially false or
misleading statements or omissions supports its application to proxy
voting advice notwithstanding the costs associated with any increased
risk of litigation. For all of these reasons, we do not expect that
using a baseline prior to the Commission Interpretation on Proxy Voting
Advice would have significantly altered our assessment of the economic
effects of the proposed amendments.
    Finally, we note that--beyond the codification of our
interpretation of solicitation--the conflicts disclosure requirements
and principles-based engagement requirements in the final amendments
will be new for all proxy voting advice businesses. The economic
effects of these amendments are thus analyzed as new requirements for
each of these businesses, regardless of whether they understood their
proxy voting advice to constitute a ``solicitation'' prior to the
interpretation. Accordingly, we believe that our economic analysis
appropriately captures the anticipated economic effects of the final
amendments.

C. Benefits and Costs

    We discuss the economic effects of the final amendments below. For
both the benefits and the costs, we consider each piece of the final
amendments in turn. The final amendments include: (1) Amendments to the
definition of solicitation in Rule 14a-1(l); (2) conditioning
availability of the exemptions in Rules 14a-2(b)(1) and (b)(3) on (a)
proxy voting advice businesses providing disclosure regarding conflicts
of interest and (b) proxy voting advice businesses adopting and
publicly disclosing written policies and procedures reasonably designed
to ensure that the proxy voting advice is made available to registrants
at or prior to the time when such advice is disseminated to the proxy
voting advice business's clients and that the proxy voting advice
business provides clients with a mechanism by which they can reasonably
be expected to become aware of a registrant's written statement about
the proxy voting advice in a timely manner; and (3) an amendment to the
examples in Rule 14a-9 of disclosure that, if omitted from a proxy
solicitation and depending upon the particular facts and circumstances,
may be misleading.
1. Overview of Benefits and Costs and Comments Received
a. Benefits
    As discussed in further detail below, we expect the rule to
generate benefits compared to the baseline for clients of proxy voting
advice businesses and investors, and, albeit to a lesser extent, for
proxy voting advice businesses and registrants. We expect that the
largest benefits will come from conditioning availability of the
exemptions in Rules 14a-2(b)(1) and (b)(3) on proxy voting advice
businesses providing certain disclosures and maintaining certain
policies and procedures. In contrast, amendments to the definition of
solicitation in Rule 14a-1(l) and to Rule 14a-9 represent less
significant changes from the existing baseline and will likely result
in more modest benefits for proxy voting advice businesses and their
clients.
    Two commenters expressed support for the general benefits that the

proposed rules would generate.\577\ Both commenters argued that the
shareholder proxy voting process is beset with collective-action
problems, whereby both institutional and retail investors are not
motivated to incur large expenses to collect information to become
better informed about a company, particularly when the company is just
one of a portfolio. According to the commenters, this results in
resource-constrained proxy voting advice businesses that produce voting
recommendations that are not adequately informed or precise. Such
voting recommendations could lead to suboptimal voting decisions by
clients of the proxy voting advice businesses. As we mention above, the
purpose of the final amendments is to improve the information available
to shareholders when making voting decisions, which could ultimately
result in more efficient investment outcomes.
---------------------------------------------------------------------------

    \577\ See letters from James R. Copland, Senior Fellow and
Director, Legal Policy, Manhattan Institute for Policy Research
(Feb. 3, 2020) (``Manhattan Institute''); B. Sharfman I.
---------------------------------------------------------------------------

    In contrast, several commenters generally disputed the benefits to
proxy voting advice businesses' clients and investors resulting from
the proposed amendments.\578\ One commenter argued that the general
benefits of the rule are speculative at best,\579\ while two other
commenters characterized them as ``illusory.'' \580\ One of these
commenters asserted that none of the amendments would create any
benefits for proxy voting advice businesses and their clients and that
the only beneficiaries would be self-interested corporate
insiders.\581\ Another commenter argued that the proposed rules would
not improve the quality of proxy advice, asserting that the benefits
are small and uncertain.\582\
---------------------------------------------------------------------------

    \578\ See letters from Bricklayers; ISS; New York Comptroller
II; ProxyVote II.
    \579\ See letter from ProxyVote II.
    \580\ See letters from CFA Institute I; ISS.
    \581\ See letter from ISS.
    \582\ See letter from Bricklayers.
---------------------------------------------------------------------------

    We do not agree with these assessments. While the extent of the
benefits will depend on the existing practices of proxy voting advice
businesses and how they choose to implement the required disclosures
and procedures (as well as the existing practices of their clients and
how they, in turn, adjust), we believe that the improved transparency
that the final rules will generate will be beneficial for proxy voting
advice businesses' clients and will likely improve the overall proxy
voting process. Indeed, the fact that in certain circumstances, and to
varying extents, proxy voting advice businesses already incorporate
practices similar to the final amendments belies the notion that these
expected benefits are speculative or illusory. For example, if proxy
voting advice businesses saw no benefit to providing conflicts of
interest disclosure to their clients, they would not provide such
disclosure currently, absent a regulatory requirement. We also note
that the final amendments reflect significant changes from the proposal
in light of commenter input and concerns, and we believe these changes
focus on improvements to the proxy process most likely to yield
benefits and result in final amendments that are less costly, when
measured against the baseline, as compared to the costs of the
proposal.
b. Costs
    We expect that proxy voting advice businesses as well as
registrants will incur direct costs as a result of the final
amendments. In the following sections, we analyze the costs of the
final amendments due to changes in proxy voting advice business
disclosure and engagement practices relative to the baseline. Further,
to the extent that any of the final amendments impose direct costs on
proxy voting advice businesses that are passed along to clients, the
final amendments could impose indirect costs on clients of proxy voting
advice businesses, including investment advisers and institutional
investors, and the underlying investors they serve, if applicable.
    Some commenters expressed concern that the economic analysis in the
Proposing Release was not thorough enough or that it understated the
costs and other negative effects that the proposed rules would have on
proxy voting advice businesses and investors.\583\ Some of these
commenters also commented on the costs of specific proposed amendments,
which we discuss below. One commenter stated that, with respect to the
quantitative cost estimates in the Commission's Paperwork Reduction Act
(``PRA'') analysis, it believed the actual compliance costs would be
240 times those estimated in the Proposing Release.\584\ One commenter
urged a more thorough cost-benefit analysis or other investigation to
gather data from which reasonable cost estimates can be
extrapolated.\585\
---------------------------------------------------------------------------

    \583\ See letters from Bricklayers; CalPERS; CFA Institute I;
Kathryn McCloskey, Director, Social Responsibility, United Church
Funds (Feb. 3, 2020) (``Church Funds''); CII IV; Glass Lewis II;
Karen L. Barr, President and CEO, Investment Adviser Association,
(Feb. 3, 2020) (``IAA''); ICI; ISS; New York Comptroller II; Ohio
Public Retirement; Lucian Arye Bebchuk, James Barr Ames Professor of
Law, Economics, and Finance, Harvard Law School (Feb. 3, 2020)
(``Prof. Bebchuk''); ProxyVote II; IASJ; Segal Marco II. See also
IAC Recommendation.
    \584\ See letter from Nichol Garzon-Mitchell, Senior Vice
President, General Counsel, Glass Lewis (Jan. 7, 2020) (``Glass
Lewis I'').
    \585\ See letter from Ohio Public Retirement.
---------------------------------------------------------------------------

    We acknowledge, as we did in the Proposing Release, that the final
amendments will likely generate direct and indirect costs for proxy
voting advice businesses and potentially their clients. To the extent
that a large driver of the costs discussed by commenters would have
been the proposed amendment regarding registrant review and response to
proxy voting advice, the flexibility afforded by the principles-based
approach reflected in the final rules, particularly as it accommodates
practices similar to current practices, should result in lower costs
for proxy voting advice businesses and their clients as compared to the
more prescriptive approach we proposed.
    In the following sections, we discuss the specific costs and
benefits for each aspect of the final amendments.
2. Codification of the Commission's Interpretation of ``Solicitation''
Under Rule 14a-1(l) and Section 14(a)
    We are codifying the Commission's interpretation that, as a general
matter, proxy voting advice constitutes a solicitation within the
meaning of the Exchange Act Rule 14a-1(l). Overall, we do not expect
this amendment to have a significant economic impact because it
codifies an already-existing Commission interpretation. This
interpretation itself did not modify existing law or reflect a change
in the Commission's position and is distinct from the amendments
conditioning availability of the exemptions in Rules 14a-2(b)(1) and
(b)(3) on proxy voting advice businesses providing certain disclosures
and maintaining certain policies and procedures, which we acknowledge
would alter the costs and benefits associated with being subject to the
federal proxy rule regime and which we discuss in detail below.\586\
Nonetheless, the final amendment to Rule 14a-1 codifying this
interpretation in the Commission's proxy rules may provide more clear
notice that Section 14(a) and the proxy rules apply to proxy voting
advice. Parties receiving proxy voting advice may benefit from such
notice to the extent that it informs them that the

communication they receive from proxy voting advice businesses is
subject to the protections (e.g., antifraud protections) that come from
the fact that such communication is a solicitation. As discussed above,
even if a proxy voting advice business had believed it was not engaged
in a ``solicitation'' prior to the interpretation, we believe the
impact of this change would be minimal given the existing exemptions
from the filing and information requirements of the proxy rules
available to proxy voting advice businesses. The Commission is unaware
of specific evidence that the interpretation has resulted or would
result in a substantial increase in costs due to the application of
Rule 14a-9 to proxy voting advice.\587\
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    \586\ Several commenters suggested that the Commission should
use a baseline that does not include the August 19 interpretation.
See, e.g., letters from Glass Lewis II; ISS. We respond to these
comments in supra Section IV.B.2.
    \587\ See discussion in supra Section IV.B.2.
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    We also are amending Rule 14a-1(l)(2) to clarify that the
furnishing of proxy voting advice by certain persons will not be deemed
a solicitation. Specifically, voting advice from a person who furnishes
such advice only in response to an unprompted request for the advice or
a person who does not market its expertise as a provider of proxy
voting advice, separately from other forms of investment advice, will
not be deemed a solicitation. Again, we do not expect this adopted
amendment to have a significant economic impact because it codifies the
Commission's longstanding view that such a communication should not be
regarded as a solicitation subject to the proxy rules.
3. Amendments to Rule 14a-2(b)
a. Conflicts of Interest--New Rule 14a-2(b)(9)(i)
i. Benefits
    We are amending Rule 14a-2(b) to make the availability of the
exemptions in Rules 14a-2(b)(1) and (b)(3) for proxy voting advice
businesses contingent on providing enhanced disclosure of conflicts of
interest specifically tailored to proxy voting advice businesses and
the nature of their services.\588\ These conflicts of interest
disclosures are intended to augment existing requirements by eliciting
information that may not be captured by the current requirements of
either Rule 14a-2(b)(1) and (b)(3) and that is more tailored to proxy
voting advice businesses and the nature of their conflicts. The final
amendments require disclosure of conflicts that is sufficiently
detailed such that clients of proxy voting advice businesses can
understand the nature and scope of the interest, transaction, or
relationship and assess the objectivity and reliability of the proxy
voting advice they receive. In addition, proxy voting advice businesses
availing themselves of an exemption will be required to disclose any
policies and procedures used to identify, as well as the steps taken to
address, any material conflicts of interest, whether actual or
potential, arising from such relationships and transactions. The final
amendments also will specify that the enhanced conflicts disclosures
must be provided in the proxy voting advice and in any electronic
medium used to deliver the advice.
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    \588\ See supra Section II.B.3.
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    We believe the final amendments will benefit the clients of proxy
voting advice businesses by enabling them to better assess the
objectivity of the proxy voting advice businesses' advice against
potentially competing interests. Under Rule 14a-2(b)(9)(i), disclosure
of conflicts will be more comprehensive regardless of which exemption
the proxy voting advice business relies upon for its proxy voting
advice.\589\ Furthermore, we believe the requirement that conflicts of
interest disclosures be included in the voting advice will benefit
clients of proxy voting advice businesses by making more standard the
time and manner in which such principles-based information is disclosed
and ensuring that the required disclosures receive due prominence and
can be considered together with proxy voting advice at the time clients
are making voting determinations. We believe this will, in turn, make
it easier or more efficient for such clients to review and analyze the
conflicts disclosure, thus reducing the agency costs associated with
utilizing the services of proxy voting advice businesses.
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    \589\ As noted above, Rule 14a-2(b)(3) requires disclosure of
significant relationships with the registrant or relevant
shareholder proponent, whereas Rule 14a-2(b)(1) does not currently
require conflict of interest disclosures.
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    Disclosure of material conflicts of interest can lead to more
informed decision-making, and we anticipate that institutional
investors and investment advisers will use information from disclosures
of material conflicts of interest to make more informed voting
decisions.\590\ Thus, to the extent they enable the clients of proxy
voting advice businesses to make more informed voting decisions on
investors' behalf, these disclosure requirements will also benefit
investors. Further, we believe these disclosures will make it easier
and more efficient for clients that are investment advisers to conduct
a reasonable review of a proxy voting advice business's policies and
procedures regarding how the proxy voting advice business identifies
and addresses conflicts of interest.\591\
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    \590\ See letter from CEC.
    \591\ See supra Section II.B.3.
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    One commenter that is a proxy voting advice business and a
registered investment adviser suggested that the benefits associated
with Rule 14a-2(b)(9)(i) will be marginal because of proxy voting
advice businesses' existing fiduciary duty to their clients and the
disclosures they already provide.\592\ Relatedly, several institutional
clients of proxy voting advice businesses stated that they believe
existing practices provide sufficient disclosure of conflicts of
interest under the baseline.\593\ As an initial matter, not all proxy
voting advice businesses have registered as investment advisers and
hence may not have the same fiduciary duty as the commenter. Moreover,
even where certain proxy voting advice businesses provide detailed
disclosure about conflicts of interest under existing practices or
regulatory regimes, requiring tailored disclosure as a condition to the
proxy rule exemptions will help to ensure that the disclosure is more
consistently provided to consumers of proxy voting advice across the
industry. As noted in Section IV.B.1 above, existing conflict of
interest disclosure by proxy voting advice businesses differs across
firms, including in structure, coverage, and manner of conveyance.
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    \592\ See letter from ISS.
    \593\ See supra notes 195-197.
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    Importantly, the final rule will provide users of proxy voting
advice with timely access to such disclosure in the proxy voting advice
and in any electronic medium used to deliver the advice. As a result,
we believe the final rule will allow clients of proxy voting advice
businesses to more efficiently access the conflicts disclosure and
assess a proxy voting advice business's potential conflicts of
interest. However, we acknowledge that, to the extent that proxy voting
advice businesses currently provide information that meets or exceeds
the adopted disclosure requirements, and to the extent that clients of
proxy voting advice businesses find current disclosure practices under
the baseline to be sufficient, the benefits described above will be
more limited.\594\
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    \594\ For example, ISS and Glass Lewis are signatories to a set
of voluntary industry-developed practices which state that, as a
matter of principle, signatories should have processes in place to
identify and disclose conflicts of interest to their clients. See
BPP Group Best Practice Principles for Shareholder Voting Research,
available at https://bppgrp.info (last visited May 21, 2020).

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iii. Costs
    The new conflicts of interest disclosure requirements will impose a
direct cost on proxy voting advice businesses to the extent proxy
voting advice businesses are not already providing information that
meets the adopted materiality-based disclosure requirements.\595\
Specifically, proxy voting advice businesses will bear direct costs
associated with: (i) Reviewing and preparing disclosures describing
their conflicts; (ii) developing and maintaining methods for tracking
their conflicts; (iii) seeking legal or other advice; and (iv) updating
their voting platforms. Proxy voting advice businesses that are
investment advisers are already required to identify conflicts and to
eliminate or make full and fair disclosure of those conflicts.\596\
Further, proxy voting advice businesses that are retained by investment
advisers to assist them with proxy voting may already provide such
conflicts disclosure in connection with the investment advisers'
evaluation of the capacity and competency of the proxy voting advice
business. Additionally, as discussed above, proxy voting advice
businesses who currently rely on the Rule 14a-2(b)(3) exemption already
must disclose any significant relationship or material interest bearing
on the voting advice.
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    \595\ Id.
    \596\ See Standard of Conduct for Investment Advisers.
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    We are unable to provide quantitative estimates of these direct
costs on proxy voting advice businesses because the facts and
circumstances unique to each proxy voting advice business, including
the disclosures it currently provides to its clients as well as the
nature of its material interests, transactions, and relationships, will
dictate the additional disclosure, if any, it must provide under the
final rule. As discussed in Section II.B.1 above, boilerplate language
will not be sufficient to satisfy new Rule 14a-2(b)(9)(i). Under the
rule, a proxy voting advice business will be required to provide
conflicts disclosure with enough specificity to enable its clients to
adequately assess the objectivity and reliability of the proxy voting
advice. As a result, the disclosure provided by the proxy voting advice
business could differ depending on the circumstances (e.g., depending
on the scope of services it provides its clients and the subject
registrant) and may need to be updated periodically as both the
business's and its clients' interests change. Additionally, proxy
voting advice businesses' direct costs will depend on the extent to
which their current practices and procedures already meet or exceed the
new disclosure requirements.\597\
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    \597\ See supra Section II.B.3.
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    A number of commenters asserted that the amendments regarding
enhanced conflict of interest disclosure would impose compliance
costs.\598\ One commenter stated that the proposed additional
disclosures of conflicts of interest would generate additional
paperwork burdens but no additional benefits.\599\ Another commenter
that addressed the PRA burdens of the new conflicts of interest
disclosure estimated that identifying and disclosing conflicts in the
manner specified in the proposal would result in an additional one hour
to identify conflicts at 5,565 registrants and 0.5 hours to disclose
conflicts at 807 issuers, for a total of 5,969 additional hours per
year.\600\ As noted in Section V.C.1.a below, in response to that
commenter's feedback, we have increased our PRA burden estimates of the
enhanced conflict of interest disclosure. For PRA purposes, we estimate
that the cost of the enhanced conflict of interest disclosure will be
6,000 burden hours per proxy voting advice business.
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    \598\ See, e.g., letters from ISS; IAA; Ohio Public Retirement.
    \599\ See letter from CalPERS.
    \600\ See letter from Glass Lewis I.
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    One commenter stated that the proposed amendments would compromise
the firewall between its proxy voting advice business and corporate
services business,\601\ presumably by revealing the clients of the
corporate services arm to the research arm. We note, however, that the
rule we are adopting gives a proxy voting advice business the option to
include the required disclosure either in its proxy voting advice or in
an electronic medium used to deliver the proxy voting advice, such as a
client voting platform, which allows the business to segregate the
information, as necessary, to limit access exclusively to the parties
for which it is intended.
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    \601\ See letter from ISS.
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    Another commenter argued that the enhanced conflict of interest
disclosure could artificially and significantly inflate the number of
conflicts reported.\602\ Because proxy voting advice businesses have
not been providing the level of enhanced disclosure required by the
final rule, compliance with the final rules would, according to the
commenter, make it appear as if proxy voting advice businesses have to
date been underreporting material conflicts of interest. According to
the commenter, this would result in reputational harm for proxy voting
advice businesses. While we agree that an increase in the number of
material conflicts reported could affect the reputation of proxy voting
advice businesses, we believe it is appropriate for proxy voting advice
businesses that have conflicts with the potential to influence the
recommendations they provide clients to bear the reputational effects
and other costs associated with disclosure of those conflicts.
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    \602\ See letter from Ohio Public Retirement.
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