TheCorporateCounsel.net

As Dave recently predicted, it was only a matter of time before the SEC entered the multi-front battle against major proxy advisors. Sure enough, the SEC announced late last week that it is suing ISS in federal court to compel compliance with an outstanding administrative subpoena. The SEC’s announcement and its Memorandum of Law reveal that Staff from the SEC’s Division of Examinations initiated an examination of ISS back in March. (ISS is a registered investment adviser, regulated by the SEC and subject to SEC oversight and examination.)

Among other things, the SEC examination team requested that ISS produce data relating to proxy recommendations and votes – which the SEC’s Memorandum characterizes as the core of ISS’s business — including information like the names of clients who received proxy recommendations and information about votes cast on their behalf, and requested that the information, which ISS maintains in its ProxyExchange system, be produced in Excel format. The Memorandum explains:

The Division of Examinations routinely obtains client information during examinations to
ensure that registrants are complying with the federal securities laws, including to determine
whether investment advisers are acting in the best interests of specific clients. This includes
reviewing recommendations to clients, sources of revenues, expenses, client agreements and
disclosures, and other information relevant to assessing conflicts of interest and potential breaches
of fiduciary duties. Likewise, the Division of Examinations obtains and reviews client profiles and
communications to evaluate whether investment advisers are acting with care and in accordance
with instructions. A proxy advisor could violate its obligations under the securities laws by, for
example, providing voter recommendations that advance its own interests over those of its clients or
failing to vote client shares in accordance with the client’s preferences.

As the SEC tells it, ISS produced a data sample that included info for a limited number of clients. After reviewing it, the SEC said it wanted that info for all clients from July 1, 2024 to February 28, 2026. ISS ignored the request and the nine follow-ups that ensued. So, the Enforcement Division got involved – serving an investigative subpoena in July that ISS also allegedly ignored. The SEC says its subpoena seeks documents “highly relevant” to its investigation of the proxy advisor’s compliance with federal securities laws, reiterating these open questions:

– Does ISS’s advice satisfy its fiduciary duties to its clients?

– Is ISS properly disclosing conflicts of interest to clients?

– Is ISS correctly and faithfully executing its clients’ instructions in voting?

– Is ISS maintaining appropriate and complete books and records?

The SEC’s Memorandum also gives a little more color about why ISS is pushing back on portions of the data request:

The first objection, ISS explained, related to the “high level of sensitivity associated with the requested information,” including ISS’s “voting recommendations under ISS’[s] and clients’ custom policies” and “data on how ISS’[s] clients have voted their shares.” Id. ISS stated that its clients “share their confidential voting strategies, priorities, and voting decisions with ISS with an expectation of confidentiality, just as American voters cast their ballots in the privacy of voting booths. . . .” Id. at 2. ISS further claimed that its clients may suffer competitive harm from “disclosure of the data at issue.” Id.

ISS’s second objection was “based on the First Amendment rights of ISS and its clients.” Id. ISS cited the President’s December 11, 2025 Executive Order 14366 concerning proxy advisors4 and expressed “concern[s] that the Subpoena, and Request 3 in particular, poses an unlawful effort to subject ISS to retaliatory actions for having engaged in protected speech.” Id. at 3.

Finally, ISS argued disclosure of ProxyExchange data might burden ISS’s and its clients’ freedom of association because clients could “choose not to associate with ISS” if their voting data were disclosed to the Commission. Id. at 4. Instead, ISS reiterated its proposal to retain an expert to completely “anonymize” the data, but ISS again provided no timeframe for completing that task.

The SEC disagrees with those objections, for reasons it explains in detail in its application to the court. At this stage, the SEC is just seeking a court order to compel ISS to comply with the administrative subpoena. The announcement notes that continuing its fact-finding investigation and, to date, has not concluded that any individual or entity violated the federal securities laws. And so, another chapter in the saga of proxy advisor is underway. . .

– Liz Dunshee