Proxy advisory firm Institutional Shareholder Services Inc. filed a lawsuit Thursday against the Securities and Exchange Commission to halt agency guidance stipulating that proxy advisory firms must disclose how they reach their shareholder recommendations, among other changes.
The complaint, filed in the U.S. District Court for the District of Columbia, Washington, contends that the guidance issued Aug. 21 is unlawful because it exceeds the SEC's statutory authority and was not developed according to rule-making standards.
The lawsuit also contends that the guidance is arbitrary and capricious “because, even though it marks a significant change in the regulatory regime applicable to proxy advice, the SEC has denied that it is changing its position at all. The agency has thus flouted the basic requirement of reasoned decision-making that it at least display awareness that it is changing its position,’ ISS said in a release.
“We are deeply concerned that it 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,” ISS President and CEO Gary Retelny said in the release. “We believe litigation to be necessary to prevent the chill of proxy advisers' protected speech and to ensure the timeliness and independence of the advice that shareholders rely on to make decisions with regards to the governance of their publicly traded portfolio companies.”
Linda Kelly, senior vice president, legal, general counsel, and corporate secretary for the National Association of Manufacturers, said in a statement responding to the ISS lawsuit that the SEC “clearly has the authority to provide appropriate oversight of proxy advisory firms via the proxy solicitation rules. We recognize the role these firms play, but they have a track record of providing error-ridden and biased reports that pose a danger to Main Street investors' retirement savings.” NAM members, she said, “will continue to support the SEC’s efforts to restore balance to the proxy process.”
Concern over the guidance and an upcoming Nov. 5 vote on more proxy adviser rule-making is also shared by the Council of Institutional Investors, Washington. In an Oct. 24 letter to the SEC, CII Executive Director Ken Bertsch told the commissioners that the reports of pervasive factual errors in proxy adviser reports are exaggerated or based on misinformation by business groups, and urged SEC officials to gather evidence itself before moving forward on any new rules.
“If the SEC intends to impose a new regulatory structure on proxy advisory firms, it needs to develop evidence, not just leave it to assertions by the subjects of proxy adviser analysis,” Mr. Bertsch wrote.