You might recall that, at the end of October, proxy advisory firm ISS filed suit against the SEC and its Chair, Jay Clayton (or Walter Clayton III, as he is called in the complaint) in connection with the interpretation and guidance directed at proxy advisory firms issued by the SEC in August. (See this PubCo post.) That interpretation and guidance addressed the application of the proxy rules to proxy advisory firms, confirming that proxy advisory firms’ vote recommendations are, in the view of the SEC, “solicitations” under the proxy rules, subject to the anti-fraud provisions of Rule 14a-9, and providing some suggestions for disclosures that would help avoid liability. (See this PubCo post.) Then, in November, the SEC proposed amendments to the proxy rules to add new disclosure and engagement requirements for proxy advisory firms, codifying and elaborating on some of the earlier interpretation and guidance. (See this PubCo post.) As reported in Bloomberg, the SEC has now filed an Unopposed Motion to Hold Case in Abeyance, which would stay the litigation until the earlier of January 1, 2021 or the promulgation of final rules in the SEC’s proxy advisor rulemaking. In the Motion, the SEC confirmed that, during the stay, it would not enforce the interpretation and guidance. ISS did not oppose the stay, and the Court has granted that motion. As a result, this proxy season, companies should not expect proxy advisory firms to feel compelled to comply with the SEC interpretation and guidance, including advice to proxy advisors to provide certain disclosures to avoid Rule 14a-9 concerns.
In the complaint, ISS charged that, by making proxy advisor advice subject to the separate regulatory regime for proxy solicitation under Section 14(a), the guidance was unlawful because it “exceeds the SEC’s statutory authority under Section 14(a) of the Exchange Act and is contrary to the plain language of the statute.” In addition, the complaint charged, the guidance was “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.” ISS also argued that the guidance raises serious First Amendment concerns and was “arbitrary and capricious” because the SEC did not “provide reasoned explanation for its action.”
In its Motion, the SEC observed, in explaining some of the reasons for the Motion, that the new rulemaking may narrow or substantially affect the issues in the case, and the rulemaking process would allow some of ISS’s comments and concerns to be expressed and considered as part of the process. Importantly, the SEC’s Motion states that, although
“the challenged Interpretation and Guidance advised the public of the Commission’s construction of, and potential ways to comply with, certain regulations and statutes, it is our view that the Interpretation and Guidance does not itself create any new or additional obligations and does not have the force and effect of law. Accordingly, the Defendants will not invoke the Interpretation and Guidance as an independent source of binding law in any enforcement or other regulatory action against ISS or any other party while this case is being held in abeyance—though we believe the regulations and statutes that are the subject of the Interpretation and Guidance remain binding law to the extent they are applicable, the Commission may continue to maintain its interpretation of those underlying statutes and regulations, and ISS may continue to challenge those interpretations.” [Emphasis added.]
Bloomberg reported that, according to an ISS spokesperson, ISS has “agreed to a hold ‘in the interests of judicial economy’ and ‘in light of the SEC’s representations that the guidance does not have the force and effect of law.’” Nevertheless, the spokesperson continued, “‘ISS continues to believe that the August guidance is contrary to law, procedurally improper, and arbitrary and capricious.’”
Hat tip to thecorporatecounsel.net blog.