In October 2020, the NAM intervened in this case brought by Institutional Shareholder Services (ISS) against the Securities and Exchange Commission (SEC) to defend a rule that increases transparency and accountability for so-called “proxy advisory firms” against ISS’s challenge that the SEC lacked authority to issue the rule. In July 2020, after years of advocacy from the NAM, the SEC finalized a new rule increasing transparency and accountability of so-called proxy advisory firms—unregulated third parties with outsized influence on shareholder votes and manufacturers’ corporate governance policies. The final rule—issued under Section 14(a) of the Securities and Exchange Act of 1934—required proxy advisory firms to disclose their conflicts of interest, provide voting recommendations to companies after they are finalized, and notify investors of company perspectives on their recommendations.
On summary judgment, ISS argued that the SEC lacked authority under Section 14(a) to issue the proxy advisory firm rule. Section 14(a) makes it unlawful to “solicit” proxies “in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors[.]” ISS maintained that proxy firms’ provision of proxy voting advice is not a “solicitation” of proxies within the meaning of Section 14(a) that authorizes the SEC to regulate proxy advisory firms under the provision. The SEC and NAM disagreed. The NAM explained that a proxy advisory firm “solicits a proxy” because it both “‘endeavors to obtain’ a vote in line with its [voting] recommendation” and “‘invite[s] and encourage[s]’ an investor to hire ISS for its proxy voting advice.” The NAM further explained that the history of the Exchange Act supports its interpretation because (1) Congress had not disapproved of the SEC’s longstanding interpretation of proxy voting advice as “solicitation”; and (2) Congress has used the term “solicit any proxy” in recent legislation amending the Exchange Act.
Unfortunately, on February 23, 2024, the district court sided with ISS and held that “the ordinary meaning of ‘solicit’ at the time of Section 14(a)’s enactment does not reach proxy voting advice for a fee”; therefore, “[b]y definition the terms ‘solicit’ and ‘solicitation’ in the proxy rules to include proxy voting advice for a fee, . . . the SEC acted contrary to law and in excess of statute authority.