TheCorporateCounsel.net

Two weeks ago, Liz noted the SEC’s announcement that it is suing ISS in federal court to compel compliance with an outstanding administrative subpoena. The SEC’s Division of Examinations had initiated an examination of ISS back in March, and requested that ISS produce data relating to proxy recommendations and votes, including information such as the names of clients who received proxy recommendations and information about votes cast on their behalf.

On Friday, ISS announced that it had filed a brief in the U.S. District Court for the Eastern District of Pennsylvania challenging the SEC’s demand for data as unconstitutional. The announcement notes:

“As a regulated investment adviser, ISS has a duty to protect confidential client information, particularly when the government cannot articulate a legitimate investigative purpose for reviewing this data,” said Subodh Mishra, spokesman for ISS. “The dispute cannot be separated from the broader, coordinated campaign by government actors and outside activists to pressure proxy advisory firms — including through state laws that federal courts have already barred states from enforcing against ISS. They are now targeting the investors themselves based on their relationship with ISS and their protected speech. ISS will not allow its clients’ First Amendment and privacy rights to be sacrificed to government overreach.”

With respect to the First Amendment arguments included in the brief, the announcement highlights the following quotes:

“Where clients communicate their voting objectives and strategies to ISS, many of which concern ‘public issues and political matters,’ their communications are ‘at the heart of protected speech’ under the First Amendment.”

“In this context, confidentiality is critical, as many of ISS’ clients may be unlikely to express their views as freely if they are concerned that their voting choices on sensitive topics will be disclosed, particularly to a government that disagrees with their votes.”

“The First Amendment chilling effect is even more pronounced with respect to other agencies. The Executive Order that launched the investigation against ISS also commanded a whole-of-government effort to target both ISS and its clients for adverse action.”

The brief goes on to note that “[t]he evidence shows that the SEC’s request here is part of a broader campaign to retaliate against ISS and its clients for expressing disfavored political views.” Further, the brief states:

“ISS clients that have voted in ways that the current Administration might disagree with reasonably fear reprisal from the Administration. Indeed, some have already expressed fears of retaliation to ISS. The Executive Order specifically directs federal agencies to single out such clients for adverse administrative action. And the SEC has already begun conducting intrusive examinations of ISS’ clients, with the SEC’s inquiries specifically probing those clients’ voting decisions and their relationships with ISS.”

The outcome of this fight will undoubtedly have broader implications beyond the SEC’s interest in the proxy advisory firms, given the potential impact on the clients of those firms who are utilizing the proxy voting recommendations.

– Dave Lynn