While there is much debate over the amendments the commission rescinded on July 13, there's another amendment — arguably the most impactful — from the 2020 rule-making that it left intact.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."