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A federal district court has ruled in favor of ISS in its lawsuit challenging the SEC’s 2020 rule that would have subjected proxy advisors to enhanced regulations by saying they engage in the “solicitation” of proxies. Bloomberg reported on the decision, and summarized it as follows:

The Securities and Exchange Commission “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,” Judge Amit P. Mehta said Feb. 23 for the US District Court for the District of Columbia. A 2022 SEC repeal of some proxy firm requirements under the rule was insufficient, he said.

It would be a vast understatement to say that proxy voting advice is a complex topic with longstanding issues (and some “bad blood”). The case that ISS just won relates all the way back to a suit that it first filed in response to Commission-level guidance that was issued in 2019, and that continued when the SEC adopted rules in 2020. Those multi-part rules would have required proxy advisors to make extra disclosures and allow companies to respond to their voting recommendations. The 2020 rules were celebrated by companies, which is why the SEC didn’t make many friends when it tried to repeal some of them in 2022. That partial repeal also obviously didn’t win over ISS, which continued with this lawsuit.

As noted by Bloomberg, ISS’s victory is disappointing news to companies and trade organizations – which are in the midst of their own challenges to the Commission’s 2022 repeal that is mentioned above. They want the 2020 rule that just got vacated to be fully back in place and are fighting that out in federal appeals courts.

The court opinion is a real treat for securities law history buffs, walking through the regulation of proxy solicitations from 1956 forward. Here’s how it describes some of the many “twists & turns” that led to the SEC getting sued by both sides:

In November 2021, the SEC announced that it had concluded its review of the Final Rule. It proposed rescinding two of the three new conditions that, if satisfied, would exempt proxy voting advice from Rule 14(a) ‘s information and filing requirements. Proxy Voting Advice, 86 Fed. Reg. 67383 , 67387 (Nov. 26, 2021). Specifically, the SEC proposed eliminating the requirements that proxy advisory firms disclose their advice to corporate issuers and provide their clients with the issuers’ responses. Id. at 67388. The conflict-of-interests disclosure condition would remain, however. Id. The agency also proposed removing the Note amendment to the anti-fraud provision, Rule 14a-9 . Id. at 67390.

Importantly, the agency did not change its position that proxy voting advice for a fee constituted “solicitation,” and it therefore left that definitional amendment unchanged. Id. at 67384. In light of ongoing rulemaking, and at the parties’ request, the court agreed to continue to hold the case “in abeyance until the earlier of March 31, 2022, or the promulgation of final rule amendments addressing proxy voting advice.” Order Granting Defs.’ Mot. to Continue Abeyance, ECF No. 58.

By the end of March 2022, the agency had not yet completed the rulemaking process and again sought to continue this matter. [*8] Defs.’ Status Report and Mot. to Continue Abeyance, ECF No. 61. This time, however, Plaintiff opposed the agency’s request. Pl.’s Opp’n to Defs.’ Mot. to Continue Abeyance, ECF No. 62. The court agreed with Plaintiff, ruling that because the SEC had not proposed to withdraw proxy voting advice from the amended definition of “solicit” and “solicitation,” the case should move forward as to the claims challenging the definitional amendment. Minute Order, Apr. 17, 2022.

On July 13, 2022, the Commission adopted a final rule that rescinded the two conditions the agency had proposed to excise in November 2021. Proxy Voting Advice, 87 Fed. Reg. 43168 (July 19, 2022) (“Amended Final Rule”). The Amended Final Rule rendered moot Count V of the Amended Complaint (the First Amendment claim) and Count III of the Amended Complaint (the Proxy Guidance challenge) to the extent those claims covered the rescinded provisions.

The opinion goes on to devote many paragraphs to the meaning of the word “solicit” – sidestepping the current Chevron debate. Here’s the conclusion:

In sum, the court holds, at Chevron step one, the ordinary meaning of “solicit” at the time of Section 14(a) ‘s enactment does not reach proxy voting advice for a fee. Nor does the Exchange Act ‘s history and purpose support the SEC’s reading. The court therefore has no cause to move to Chevron step two and afford deference to the agency’s position.

By defining the terms “solicit” and “solicitation” in the proxy rules to include proxy voting advice for a fee, see 17 C.F.R. § 240.14a-1(l)(1)(iii)(A) , the SEC acted contrary to law and in excess of statutory authority, [*21] 5 U.S.C. § 706(2)(A) , (C) . Accordingly, the court grants summary judgment in favor of Plaintiff as to Counts I and II, denies the SEC’s and NAM’s cross-motions, and vacates the definitional amendment codified at 17 C.F.R. § 240.14a-1(l)(1)(iii)(A) . See 5 U.S.C. § 706(2)(C) (stating that courts must “set aside agency action” if found to be “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right”).

The National Association of Manufacturers is considering an appeal of this decision. In the absence of a higher-level authority stepping in, it will be quite the puzzle during proxy season if one circuit says that the SEC had no business regulating proxy advisors and another circuit ends up saying that those same rules need to get reinstated.

– Liz Dunshee