The Securities and Exchange Commission's latest move on its ostensibly ever-changing rules governing proxy-voting advice has the investor community and proxy advisory firms happy and wanting further action, while the business community is displeased and mounting another legal challenge against the agency.
The sides of the debate are familiar, but the victors and the aggrieved have traded places, though neither side is completely content with where things currently stand.
"This is still something where both sides have taken issue with what the SEC has done and this may not be the end of the story," said Christina M. Thomas, a partner in Mayer Brown LLP's Washington and New York offices and a member of its capital markets practice. "We may watch this play out in the courts before there's a final resolution on the treatment of proxy-voting advice with respect to the SEC's solicitation rules."
Ms. Thomas is a former senior adviser at the SEC, serving most recently as counsel to former SEC Commissioner Elad L. Roisman, a Republican who spearheaded the commission's 2020 proxy rule-making efforts.
The SEC on July 13 voted to rescind two amendments to its rules concerning proxy-voting advice adopted under the previous administration that increased restrictions on proxy advisory firms.
In a 3-2 vote with its two Republican commissioners dissenting, the commission approved a final rule rescinding amendments adopted in 2020 that allow companies that are the subject of voting advice to be able to access that advice prior to or at the same time as it is disseminated to clients. Another amendment requires proxy advisory firms to provide clients with access to any response the company provides on voting advice before those clients vote.
The Council of Institutional Investors in Washington, no fans of the 2020 rule-making, welcomed the SEC's rollback. The "onerous provisions" the commission rescinded "could have harmed the independence, cost and timeliness of proxy-voting advice," CII said in a statement. "Institutional investors, the primary customers of proxy-voting advisory firms, did not request or support the provisions."
Another trade group with a constituency of its own, the Washington-based National Association of Manufacturers, has a different view.
"Our hope for the 2020 rules was that it would improve the mix of decision-useful information for investors so that they had the full picture of what companies and proxy firms were saying and could then cast an informed vote," said Charles Crain, Washington-based senior director of tax and domestic economic policy at the National Association of Manufacturers. "We don't have a good answer as to what the impact actually was because the SEC unlawfully did not allow the 2020 rule to take effect."
Before officially proposing rescinding the amendments in November and finalizing them in July, the SEC's division of corporation finance in June 2021 said it would not recommend enforcement actions related to the proxy rule amendments.
That prompted the National Association of Manufacturers to file a legal challenge against the SEC in October in U.S. District Court in San Antonio. Oral arguments in the case were held in May.
More recently, the National Association of Manufacturers on July 21 filed a separate lawsuit in U.S. District Court in San Antonio, alleging the commission exceeded its authority in rescinding the two amendments.
"The 2020 rule followed really a decade of bipartisan policy making, consensus building, careful deliberation and then without allowing that rule to fairly take effect, we have this really abrupt about-face which really isn't justified by any facts or any record," said Erica Klenicki, Washington-based deputy general counsel, litigation at the National Association of Manufacturers. "So this is a prime example in our view of arbitrary and capricious rule-making under the (Administrative Procedure Act)."
The National Association of Manufacturers has asked the court to "vacate the SEC's 2022 rescission rule in its entirety and issue a declaratory judgment saying the rescission was unlawful," Ms. Klenicki said.
A similar lawsuit was filed against the SEC July 28 in the U.S. District Court in Nashville by the U.S. Chamber of Commerce, the Business Roundtable and the Tennessee Chamber of Commerce & Industry.
"The SEC's harmful decision to roll back these reforms will allow proxy advisors to operate as a black box, as they have for decades, and create disincentives for companies to go, and stay, public," said Suzanne P. Clark, Washington-based U.S. Chamber president and CEO, in a statement. "Public companies are a key source of growth and innovation for our economy and an important source of wealth creation for main street investors. However, the SEC's recent actions will deteriorate the public company model, ultimately depriving main street investors and everyday Americans dynamic growth opportunities to help build wealth and save for retirement."
The rescissions take effect Sept. 18.
While there is much debate over the amendments the commission rescinded on July 13, there's another amendment — arguably the most impactful — from the 2020 rule-making that it left intact. In 2020, with Republicans in control, the commission also approved an amendment making clear that proxy-voting advice generally constitutes a solicitation.
Glass Lewis & Co., one of the two major proxy advisory firms, would like the SEC to scrap the 2020 rule in its entirety, though welcomed its partial rescission.
"While we continue to disagree with the SEC's characterization of proxy advice as a solicitation, with these changes, the United States' regulatory regime will more closely align with the approaches of most other major jurisdictions, which focus on preserving the independence, quality and timeliness of the proxy advice that institutional investors depend on," said Nichol Garzon-Mitchell, Glass Lewis' San Francisco-based chief legal officer and senior vice president of corporate development, in a statement.
The other major proxy advisory firm, Institutional Shareholder Services Inc., had a similar thought. The SEC's July 13 "action misses the mark by failing to address the most critical defect; namely, the reclassification of proxy advice provided in a fiduciary capacity as proxy solicitation," ISS said in a statement. "We firmly believe the commission's decision to regulate a form of independent investment advice as though it were a solicitation of a specific outcome in a shareholder vote exceeds the agency's statutory authority, is contrary to law, and is arbitrary and capricious."
ISS has challenged the 2020 rule-making in court, and oral arguments began July 29 in the U.S. District Court for the District of Columbia, Washington.
ISS originally filed a complaint in October 2019, after the SEC proposed the rule-making but before it was finalized in 2020. Then the SEC in June 2021 filed a motion to stay the case on the same day it announced it would revisit the proxy rule amendments. But in April, the court denied the SEC's motion for continued abeyance, noting the commission "has not proposed any change to the definition of the word 'solicitation'" and reactivated the case.
The National Association of Manufacturers has filed a motion in support of the SEC in the case while the Council of Institutional Investors, among others, has supported ISS.
"Classifying proxy advice as solicitation potentially subjects proxy advisory firms to burdensome filing rules and challenges their independence and free speech rights in conducting the financial analysis that informs their proxy-voting advice," the Council of Institutional Investors said in its statement.
But Mr. Crain of the National Association of Manufacturers said it is "very clear from the plain language of the Exchange Act that the proxy advisory firms are conducting solicitations, so therefore it makes complete sense for the commission to identify those actions as such and then to institute appropriate oversight mechanisms, which they did in 2020, to regulate that behavior."
