Securities Regulation Daily Investment adviser ISS sues SEC over proxy advisor guidance
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Friday, November 1, 2019

Investment adviser ISS sues SEC over proxy advisor guidance

By Joanne Cursinella, J.D.

Institutional Shareholder Services Inc. has filed suit against the Commission seeking relief in response to its proxy guidance, calling it "unlawful."

Institutional Shareholder Services Inc. (ISS), a registered investment adviser firm, has filed a civil action in federal district court alleging that the guidance in the SEC release, Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice (August 21, 2019) ("Proxy Adviser Release") has "inappropriately altered the regulatory regime applicable to the voting advice provided by proxy advisory firms and that the Aug. 21 ‘guidance’ is unlawful" (Institutional Shareholder Services, Inc. v. SEC, October 31, 2019).

Proxy Adviser Release unlawful? The guidance in the Proxy Adviser Release highlights the issues that advisers should consider when working with proxy advisory firms and notes that the voting advice these firms provide generally constitutes a solicitation under the SEC’s proxy rules.

ISS is an investment adviser that supplies proxy voting advice and other forms of investment advice to institutional investors such as pension plans, investment companies, asset managers, asset owners, and other registered investment advisers. According to the complaint, as directly regulated by the Proxy Adviser Release, the firm says that it will incur concrete and particularized harm as a result of that release, for multiple independent reasons, such as the proxy voting advice that ISS provides to its clients in a fiduciary capacity will be deemed a solicitation of a proxy; thus, a directly regulated party under the interpretations set forth in the release. Also, ISS claims the release "opens the door" to Commission enforcement actions or potential claims by issuers who disagree with the client voting guidelines on which ISS’ recommendations are based, so that ISS may become subject to enforcement actions by the SEC or lawsuits from issuers who dispute ISS’s "opinions" or "recommendations" to its clients about how to vote their shares.

ISS contends that the guidance in the release is unlawful because:

  • It exceeds the SEC’s statutory authority under Section 14(a) of the Securities Exchange Act of 1934 and is contrary to the plain language of the statute; the provision of proxy advice is not a proxy solicitation and cannot be regulated as such.
  • It is procedurally improper because it is a substantive rule that the SEC failed to promulgate pursuant to the notice-and-comment procedures of the Administrative Procedure Act (APA).
  • It 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.

Relief sought. ISS is asking the court for a declaratory judgment holding that the Proxy Adviser Release is contrary to law and that the release is procedurally invalid under the APA because the SEC failed to promulgate it through proper notice-and-comment rulemaking procedures. ISS also is seeking a declaratory judgment and permanent injunction finding the Proxy Adviser Release invalid and setting it aside, and an injunction prohibiting the SEC from taking enforcement action against ISS based on the interpretation of proxy solicitation set forth in the Proxy Adviser Release.

"After careful review of the August guidance, 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," said ISS President & CEO, Gary Retelny, in a press 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."

The case is No. 19-cv-03275. Companies: Institutional Shareholder Services Inc.

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