Administrative Procedure -- active

National Association of Manufacturers & Natural Gas Services Group, Inc. v. U.S. Securities and Exchange Commission   (W.D. Tex.)

Challenging SEC’s unlawful about-face on proxy advisory firm rule

The NAM filed a lawsuit on October 21, 2021, challenging the SEC’s attempt to unilaterally suspend the lawfully promulgated proxy advisory firm rule absent any rulemaking process. In July 2020, after years of advocacy from the NAM and our members, 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 subjects proxy firms to reasonable SEC oversight just like every other participant in the securities markets. As such, the rule requires them to disclose their conflicts of interest, provide their voting recommendations to companies after they are finalized, and notify investors of company perspectives on their recommendations.

Proxy advisory firm Institutional Shareholder Services (ISS) filed suit last year to invalidate these modest reforms. After that case was fully briefed, with the SEC vigorously defending the rule, new SEC Chairman Gary Gensler announced in June 2021 that the SEC would be reviewing the proxy firm rule with the intent to revise or rescind it. SEC’s Division of Corporation Finance simultaneously announced that it would not recommend enforcement action against proxy firms for failing to comply with the rule while it is under review. And, that same day, the SEC stated in a court filing that the non-enforcement policy grants ISS and other proxy advisory businesses “relief” from the rule’s December 1, 2021 compliance date.

The NAM and co-plaintiff Natural Gas Services, Inc. (NYSE: NGS) filed a complaint on October 21, 2021 in the U.S. District Court for the Western District of Texas arguing that the SEC’s failure to undertake notice-and-comment rulemaking before amending the rule’s effective date renders its conduct unlawful. Agencies cannot simply ignore rules that they do not politically agree with. The APA prescribes a deliberative process, involving feedback from the public, that allows agencies to amend or revise rules—steps the SEC failed to take here. Indeed, the procedural provisions of the APA exist precisely to bring regularity to agency action. The NAM and NGS have asked the court to vacate SEC’s unlawful non-enforcement policy.

Related Documents:
Reply In Support of Summary Judgment  (December 22, 2021)
Motion for Summary Judgment  (November 5, 2021)
NAM complaint  (October 13, 2021)