The Basis for ISS’ Lawsuit Against the SEC

Steven Friedman is General Counsel at Institutional Shareholder Services, Inc.

On October 31, 2019, Institutional Shareholder Services (ISS) filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) challenging interpretation and guidance put forth by the Commission in August that applies the proxy solicitation rules to the provision of proxy advice.  The lawsuit challenges the process by which the guidance was issued and, as important, the substance and legality of the SEC’s view on what constitutes a solicitation under The Securities Exchange Act of 1934.  The SEC has taken a position that we believe is inconsistent with both Congress’s intent in adopting the Exchange Act and the plain meaning of the law.

If allowed to stand, the August interpretation and guidance would effectively treat the advice proxy advisers provide to their clients in the same way that the SEC regulates proxy solicitations (meaning the communications, most typically made by the boards and management of public companies, advocating that shareholders vote to support the position favored by the person doing the solicitation).  In contrast, proxy advice is a specialized form of investment advice rendered at the direction, and in the best interest, of our institutional investor clients. As such, proxy advice is the antithesis of a “solicitation” under the securities laws.

Unlike a person or firm engaged in a proxy solicitation, ISS is indifferent to the ultimate outcome of a shareholder vote and does not seek to achieve a certain result in the shareholder action.  Our sole objective in providing analyses and recommendations is to inform and empower our clients, sophisticated institutional investors, who vote their shares in the way that they see fit.

The solicitation of a proxy and the provision of proxy advice are fundamentally different activities.

The position articulated by the SEC in August, combined with the agency’s recent announcement that it will introduce further and likely onerous rulemaking in this area—reported to include an issuer pre-review of proxy advisory reports—suggests to us that the interpretation and guidance will be used to impede our ability to deliver our data, research, and vote recommendations in an independent and timely manner.

The net effect of the SEC’s actions will be not only to diminish important investor protections by, for example, compromising the independence of proxy research and vote recommendations, but also to impair what is now a balanced, independent, transparent, and well-functioning relationship between proxy advisers and their clients that over decades has resulted in an efficient and effective system for proxy voting.

This litigation against the SEC is not something that we at ISS take lightly. We believe, however, it to be necessary to prevent the chill of ISS’ protected speech as a proxy adviser and to ensure our ability to continue to deliver to our clients the timely and independent advice that they rely on to help them make informed decisions with regard to the governance of their publicly traded portfolio companies.

We invite you to read the full complaint available here.

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