Maintaining proxy adviser guidance just approved by the Securities and Exchange Commission in August is “unlawful,” Institutional Shareholder Services (ISS) has filed a lawsuit in federal court in Washington D.C. seeking to have the guidance set aside.

The complaint, filed in the U.S. District Court for the District of Columbia on Oct. 31, names both the SEC and Chairman Jay Clayton as defendants in the action.

Rockville, Md.-based ISS is “deeply concerned” the SEC guidance “will be used or interpreted in a way that could impede our ability to deliver our data, research, and analyses in an independent and timely manner,” said Gary Retelny, the organization’s president and CEO, at the time the lawsuit was announced. As a full-service proxy adviser, ISS covers about 44,000 shareholder meetings every year.

The lawsuit is necessary, Retelny maintained, “to prevent the chill of proxy advisers’ protected speech.”

Inappropriate regulation?

ISS argues that in issuing the guidance, the SEC has added another layer of regulation to proxy advisers, who normally are subject to the requirements of the Investment Advisers Act of 1940. Proxy advisers are independent third parties hired by investors to provide suggestions on how investors should vote their shares, ISS explained in the complaint. Proxy advisers owe their clients duties of care and loyalty when providing advice on voting shares.

Now, however, in its guidance, the SEC maintains—“for the first time,” according to ISS—expert proxy voting advice given at the request of investors would also be subject to the requirements for proxy solicitation under the Securities Exchange Act of 1934.

ISS says proxy advisers offer advice and research to their clients about how to vote their shares based on guidelines selected by the client. These advisers are not interested in the ultimate outcome of a shareholder vote and are not seeking any particular result. In contrast, someone who solicits proxies “urges shareholders to vote a certain way in order to achieve a specific outcome in a shareholder vote,” ISS asserted in its complaint.

“The SEC lacks authority to regulate proxy advice as though it were a solicitation,” ISS maintained.

ISS pointed out the Commission only approved the proxy adviser guidance by a 3 to 2 vote. Commissioner Allison Herren Lee, who voted against the guidance, said at the time it was approved that it would create “significant risks to the free and full exercise of shareholder voting rights.”

A few other things

ISS also asserts the SEC’s guidance is actually a rule that was not issued pursuant to required notice-and-comment procedures specified by the Administrative Procedure Act.

“The SEC lacks authority to regulate proxy advice as though it were a solicitation.”


The ISS claims the guidance is “arbitrary and capricious” because, even though it makes a significant change in requirements applicable to proxy advice, the SEC has actually “denied that it is changing its position at all.” The SEC has “flouted the basic requirement of reasoned decision making that it at least display awareness that it is changing its position,” the ISS wrote.

Not backing down

“The SEC’s so-called proxy adviser reform seems to be driven by a concerted effort by corporate interests and their Washington lobbying groups to tamp down the voice of their shareholders,” Retelny wrote in an op-ed piece published Nov. 5.

The same day, the SEC voted to propose amendments to its rules on proxy solicitations to improve the quality of material conflicts disclosures that proxy voting advice businesses give to their clients. The proposed changes would expand the meaning of the terms “solicit” and “solicitation” to “specify the circumstances when a person who furnishes proxy voting advice will be deemed to be engaged in a solicitation subject to the proxy rules,” the SEC wrote in a press release announcing the action.

The proposed amendments “recognize the important role proxy voting advice businesses play in our markets and would benefit our Main Street investors—who, more and more, invest through funds where the asset managers rely on the advice, services, and reports of proxy voting advice businesses,” said Clayton when the vote was announced.

Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues.