Institutional Shareholder Services Inc. v. Securities And Exchange Commission

Facts

Institutional Shareholder Services, Inc. (P) is one of the country's largest proxy advisory firms. It filed this action to challenge the SEC's (D) extension of the proxy rules to proxy voting advice. P contends that proxy advisory firms do not 'solicit' proxies, as that term is used in Section 14(a) of the Exchange Act because they do not seek proxy authority or ask shareholders to vote a certain way in order to achieve a particular outcome. D disagrees. Unless exempted, D's proxy rules apply to 'every solicitation of a proxy with respect to securities registered pursuant to Section 12 of the Act.' P claims that D had violated the Administrative Procedure Act (APA). P claims that proxy advisory firms do not 'solicit a proxy' under Section 14(a) of the Exchange Act and therefore the SEC's interpretation was contrary to law; D's regulation of proxy advisory firms exceeded its lawful authority; the Final Rules were arbitrary and capricious insofar as the agency 'failed to articulate a reasonable explanation for why the Final Rules were needed at all' and failed to consider why existing regulation under the Advisers Act 'is inadequate to address [the] purported concerns about proxy voting advice;' the Proxy Guidance was arbitrary and capricious for the same reasons as the Final Rule; two of the Final Rule's new exemption conditions-that proxy advisory firms disclose their voting recommendations to issuers and make issuers' responses available to their clients-abridged advisors' First Amendment right of free expression; and D failed to follow required notice-and-comment rulemaking when issuing the Proxy Guidance. The case was put in abeyance and in November 2021, D 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. D proposed eliminating the requirements that proxy advisory firms disclose their advice to corporate issuers and provide their clients with the issuers' responses. The conflict-of-interests disclosure condition would remain. The agency also proposed removing the Note amendment to the anti-fraud provision, Rule 14a-9. Id. at 67390. D did not change its position that proxy voting advice for a fee constituted 'solicitation,' and it therefore left that definitional amendment unchanged. On July 13, 2022, D adopted a final rule that rescinded the two conditions the agency had proposed to excise in November 2021. 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.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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