Last week, the DC Circuit affirmed a federal district court’s 2024 decision vacating the SEC’s 2020 rule that would have subjected proxy advisors to enhanced regulation by saying they engaged in the “solicitation” of proxies. In reaching its decision, the Court noted that the Exchange Act doesn’t define the term “solicitation,” and so it looked to evidence of its ordinary definition at the time the statute was enacted:

Contemporaneous dictionaries suggest that “to solicit” and “solicitation” entail seeking to persuade another to take a specific action. . . In short, extending the term “solicit” to encompass voting recommendations requested by another would go beyond the 1934 meaning.

And the same is true today. Between a proxy adviser and its client, it might be reasonable to say that the client “solicits” the adviser’s recommendation but that interpretation does not suggest that, in providing that recommendation, the adviser has “solicited” the client’s vote. The adviser, although it holds itself out to attract clients, does not initiate the exchange; it provides advice only in response to the client’s request. In other words, the solicitation runs in the opposite direction to the one suggested by NAM.

By contrast, a company director who hopes to obtain a particular outcome from a particular vote might “solicit” the proxy votes of shareholders in order to achieve his goal. Based on that understanding, we conclude that the ordinary meaning of “solicit” does not include entities that provide proxy voting recommendations requested by others, even if those recommendations influence the requestors’ eventual votes.

Barring an appeal to the SCOTUS, it appears that the proxy advisors have won this round – but they aren’t out of the woods yet. In addition to state initiatives like the legislation recently enacted in Texas, a new piece of proposed federal legislation was introduced in late June that would prohibit proxy advisors from issuing voting advice in any situation where they have a conflict of interest – which the proposed legislation defines as broadly as you think it would.

– John Jenkins