ISS Files Suit Against the SEC Re New Proxy Rules

The SEC is expected to reveal new proposed proxy rules next Tuesday, but ISS did not wait for their formal announcement. They have filed a lawsuit against the SEC.


ISS claims that the upcoming rulemaking is invalid. An excerpt from the complaint:

First, the Release exceeds the SEC’s statutory authority under Section 14(a) of the Exchange Act 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. Whereas a proxy adviser offers independent advice and research to its clients about how to vote their shares based on the proxy voting policy guidelines selected by the client, a person who “solicits” proxies urges shareholders to vote a certain way in order to achieve a specific outcome in a shareholder vote. The text, purpose, history, and structure of the Exchange Act and Advisers Act all confirm that proxy advice and proxy solicitation are fundamentally distinct activities that are regulated in different ways. The SEC lacks authority to regulate proxy advice as though it were a solicitation, and its holding otherwise in the Proxy Adviser Release is contrary to law….

Second, the Proxy Adviser Release 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”). See 5 U.S.C. §553….

Third, the Proxy Adviser Release must be set aside as 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. See FCC v. Fox Television Stations, 556 U.S. 502, 514-15 (2009). The SEC, moreover, has acted in an arbitrary and capricious manner by entirely “fail[ing] to consider an important aspect of the problem.”

In our opinion, as we noted a year ago, this decision alone invalidates the SEC’s action.

The full complaint:

ISS SEC Complaint — as filed

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