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Companies may be able to use the SEC’s new guidance on proxy advisory firms as leverage to push the firms to correct misinformation and inaccuracies, sources say. However, the impact of the new guidance, especially in the face of the upcoming 2020 proxy season, remains to be seen.

“This guidance puts proxy firms on notice that they have to get it right and be more transparent,” says Deborah Lifshey, managing director at Pearl Meyer, an executive compensation consulting firm. “It’s still a bit of a mystery what the impact will be on companies, but many directors will be very happy that something was done.”

The guidance reiterated that proxy advisory firm advice, including voting recommendations, is generally considered a solicitation to shareholders under Rule 14a-1. Although the proxy firm advice is exempt from other portions of the solicitation rule, including the requirement to file a proxy, the SEC honed in on the fact that the advice is still subject to anti-fraud provisions.

These provisions “prohibit any solicitation from containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact.”

Indeed, when it comes to compensation, Lifshey says proxy firms’ proprietary models are tough for issuers to get access to and even tougher to gauge if the information they used in the models was correct.

Lifshey says companies need to be careful with disclosures, as investment advisors may be more carefully looking at the facts presented and extenuating circumstances. For example, “the CD&A is more important now than it used to be.”

Also, the SEC did not complete an economic benefit analysis with this guidance, so it is unknown whether any due diligence investment advisors will have to do on proxy advisors’ methodologies could drive up costs. If imposed on the proxy advisors, the fees may ultimately be passed on to companies if they raise prices, Lifshey says.

Ultimately, some in the corporate community “don’t think [the guidance] went far enough,” Lifshey says. Sources expect rulemaking on proxy firms in the future, and the SEC is expected to take on further projects in the proxy regime, including updating the shareholder proposal submission and resubmission thresholds and improving the proxy voting process.

“This is just the first step in the giant proxy plumbing project,” Lifshey says. “This is not over in terms of how it will play out and be interpreted in the next year.”

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