SEC and NAM appeal decision holding proxy advisor rule amendments unlawful

Cydney Posner is Special Counsel at Cooley LLP. This post is based on her Cooley memorandum.

You probably remember the saga about the SEC’s rules regarding proxy advisory firms? Back in 2019, the SEC issued interpretive guidance that proxy advisory firms’ vote recommendations were, in the view of the SEC, “solicitations” under the proxy rules and subject to the anti-fraud provisions of Rule 14a-9.  (See this PubCo post.) That guidance led ISS to sue the SEC and then-SEC Chair Jay Clayton. SEC rules codifying that interpretation were adopted in 2020.  ISS amended its complaint, contending that the interpretation in the release and the subsequent rules were unlawful for a number of reasons, including that the SEC’s determination that providing proxy advice is a “solicitation” was contrary to law, that the SEC failed to comply with the Administrative Procedure Act and that the views expressed in the release were arbitrary and capricious. The National Association of Manufacturers, which favored the 2020 amendments, intervened on the side of the SEC (and also became a defendant).  Over four years later, in February 2024, the DC District Court held that the SEC’s rules regarding proxy advisory firms were invalid, stating that the “SEC acted contrary to law and in excess of statutory authority when it amended the proxy rules’ definition of ‘solicit’ and ‘solicitation’ to include proxy voting advice for a fee.” (See this PubCo post.) Now, both NAM and the SEC have filed notices of appeal with the DC Circuit.

Background. For years, many companies and business lobbies, such as the National Association of Manufacturers, repeatedly raised concerns about proxy advisory firms’ concentrated power and significant influence over corporate elections and other matters put to shareholder votes, leading to questions about whether these firms should be subject to more regulation and accountability. (See, e.g., this PubCo postthis PubCo post and this PubCo post.)  Whether and how to regulate proxy advisory firms has long been a contentious issue, with some arguing that their vote recommendations were plagued by conflicts of interest and often erroneous, while others saw no reason for regulation, given that the clients of these firms were satisfied with their services. Some have even thrown proxy advisory firms into the current culture wars over ESG, arguing that proxy advisors have a predisposition to view these ESG programs positively.

In September 2019, the SEC published in the Federal Register a new interpretation and guidance directed at proxy advisors confirming that their vote recommendations were considered to be “solicitations” under the proxy rules and subject to the anti-fraud provisions, and providing some “suggestions” about disclosures that would help avoid liability. (See this PubCo post.) Not surprisingly, the proxy advisory firms were none too happy with the new interpretation and guidance, leading one, ISS, to sue the SEC.  (See this PubCo post.)  But the SEC was, at the time, considering new rules on the topic, and the case was held in abeyance until that process was complete. Then, in 2020, the SEC adopted amendments to the proxy rules that codified the SEC’s interpretation regarding proxy advisors and “solicitations.” The 2020 rules added to the exemptions from those solicitation rules two significant new conditions, both viewed favorably by many companies and business organizations—one requiring disclosure of conflicts of interest and the second designed to facilitate effective engagement between proxy advisory firms and the companies that were the subjects of their advice.  (See this PubCo post.) The case was then reactivated and both parties filed for summary judgment.

In June, soon after assuming his position as SEC Chair, Gary Gensler directed the staff to take another look at the 2020 rules, and the staff announced that it would decline to recommend enforcement in the interim. Once again, the Court held the case in abeyance as the SEC contemplated new regulatory action that could have narrowed or eliminated the issues raised. In 2022, the SEC adopted new amendments to the proxy advisor rules reversing some of those key company-favorable provisions governing proxy voting advice that were adopted in July 2020. Importantly, however, under the 2022 amendments, proxy voting advice would still be considered a “solicitation” under the proxy rules and proxy advisors would still be subject to the requirement to disclose conflicts of interest.  (The new amendments rescinded the second central condition that was designed to facilitate engagement between proxy advisors and the subject companies—the notice and awareness provisions—which some considered a core element of the 2020 amendments.) (See this PubCo post.) Because, when the SEC ultimately took action, it did not change the definition of the term “solicitation” from the 2019 interpretation and guidance and the 2020  amendments, and the SEC’s interpretation of that term was the subject of Counts I and II of ISS’s amended complaint, the case was again reactivated. A decision from the DC District Court was rendered in February 2024.

Opinion. After a lengthy examination of various historical dictionary and judicial definitions, the Court granted ISS’s motion for summary judgment, holding that, when the SEC amended the proxy rules’ definition of “solicit” and “solicitation” to include proxy voting advice for a fee, it acted “contrary to law and in excess of statutory authority.” Although the Exchange Act does not define the term “solicit,” the Court said, the SEC “has long defined the terms ‘solicit’ and ‘solicitation’ to include a ‘communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.’” Moreover, according to the Court, the “ordinary meaning of those terms when Congress enacted the Exchange Act in 1934 did not encompass voting advice delivered by a person or firm with no interest in the outcome of the vote,” and none of cases cited supported the SEC’s “position that proxy voting advice for a fee is ‘solicitation’ within the ordinary meaning of the term.”  In addition, the Court reasoned that “the casting of a client-shareholder’s vote does not turn the advisor’s advice into a ‘solicitation.’” The Court also concluded that the ISS’s position “better reflects the purposes and history of Section 14(a).”

Appeal. As reported above, both NAM and the SEC filed one-page notices of appeal, NAM first on April 16, with the SEC following a week later on April 23. Subsequently, the clerk of the DC Circuit filed an order consolidating the two appeals and setting out a schedule for various submissions by the parties.


As noted above, in this case brought by ISS, NAM favored the 2020 amendments, which led it to intervene on the side of the SEC (and also to its becoming a defendant). It may be a little head-spinning, but NAM also has a separate case challenging the proxy advisor rules against the SEC before the Fifth Circuit. In July 2022, NAM filed a complaint against the SEC, asking that the 2022 amendments to the proxy advisor rules—which, as noted above, reversed some of the key provisions in the 2020 rules, including the company-favorable condition that would have required company engagement—be set aside under the APA and declared unlawful and void.  In September, NAM filed a motion for summary judgment, characterizing the case as “a study in capricious agency action.” In its complaint, NAM had contended that the 2022 rules were “both procedurally defective and arbitrary and capricious.”   The SEC, NAM argued, “has come to a completely opposite outcome to that reached only two years ago, and it has done so on the basis of the exact same factual record that drove the SEC to adopt the 2020 Rule in the first place. The SEC does not—no doubt because it cannot—offer any compelling justification for why the exact same factual record requires a different result this time around.” In NAM’s subsequent motion for summary judgment, NAM contended that the 2020 rules represented a rulemaking compromise that was the result of a  “decade of bipartisan policymaking”; new Chair Gensler, NAM argued, made “an abrupt about-face.” In December 2022, the Federal District Court for the Western District of Texas issued an Order granting summary judgment to the SEC and Gensler and denying summary judgment to NAM in that litigation. (See this PubCo post.) NAM appealed, and in August 2023, a three-judge panel of the Fifth Circuit heard oral argument on NAM’s appeal. Let’s just say that the panel didn’t appear to be particularly sympathetic to the SEC’s case, with Judge Edith Jones mocking the SEC’s concern with the purported burdens on proxy advisors as “pearl-clutching.”  (See this PubCo post.) The decision has not yet been issued.

Now, the SEC and NAM have written jointly to advise the Court of their appeal in the ISS litigation. The letter advises that, while this case “addresses the SEC’s partial rescission of a 2020 rule relating to proxy voting advice businesses,… [a]mong other things, that rule codified the SEC’s existing interpretation of the term ‘solicitation’ to include providing proxy voting advice for a fee….That codification was not affected by the 2022 rescission at issue in this case.” In the ISS case, the letter continues, “the district court recently held that the provision of ‘proxy voting advice for a fee’ does not constitute ‘solicitation’ under the Exchange Act,” and the court vacated that codified definition of solicitation that was added in the 2020 amendments. Given the appeal by both the SEC and NAM in the ISS case, the “district court’s decision in ISS is therefore subject to further review; indeed, both the SEC and the NAM agree that the district court’s decision in that matter is incorrect.”

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