Back in February, in ISS v. SEC, the D.C. Federal District Court vacated the SEC’s 2020 rule that advice from proxy advisory firms was a “solicitation” under the proxy rules. Both the SEC and National Association of Manufacturers filed notices of appeal in that case, but then the SEC mysteriously dropped out of that contest: both the SEC and Gensler moved to voluntarily dismiss their appeal. Why? That remains a mystery: the SEC did not provide any reason. The SEC’s dismissal did not, however, impact NAM’s separate appeal as Intervenor-Appellant, except that NAM became the sole appellant in the case. In a statement to Bloomberg at the time, a NAM representative said that NAM was “surprised and extremely disappointed that the SEC has chosen not to exercise its authority to defend America’s world-leading capital markets from the outsized and completely unregulated authority of proxy advisory firms.” Now, NAM has filed its brief in the case.
Happy Thanksgiving!
Background. For years, many companies and business lobbies, such as NAM and the Chamber of Commerce, repeatedly raised concerns about proxy advisory firms’ concentrated power and significant influence over corporate elections and other matters put to shareholder votes, leading to questions about whether these firms should be subject to more regulation and accountability. (See, e.g., this PubCo post, this PubCo post and this PubCo post.) Whether and how to regulate proxy advisory firms has long been a contentious issue, with some arguing that their vote recommendations were plagued by conflicts of interest and often erroneous, while others saw no reason for regulation, given that the clients of these firms were satisfied with their services. Some have even thrown proxy advisory firms into the current culture wars over ESG, arguing that proxy advisors have a predisposition to view these ESG programs positively.
In September 2019, the SEC, under then-Chair Jay Clayton (nominated to be U.S. Attorney for the SDNY), published in the Federal Register a new interpretation and guidance directed at proxy advisors, confirming that their vote recommendations were considered to be “solicitations” under the proxy rules and subject to the anti-fraud provisions, and providing some “suggestions” about disclosures that would help avoid liability. (See this PubCo post.) Not surprisingly, the proxy advisory firms were none too happy with the new interpretation and guidance, leading one, ISS, to sue the SEC. (See this PubCo post.) But the SEC was, at the time, considering new rules on the topic, and the case was held in abeyance until that process was complete. Then, in 2020, the SEC adopted amendments to the proxy rules that codified the SEC’s interpretation regarding proxy advisors and “solicitations.” The 2020 rules added to the exemptions from those solicitation rules two significant new conditions, both viewed favorably by many companies and business organizations, such as NAM and the Chamber—one requiring disclosure of conflicts of interest and the second designed to facilitate effective engagement between proxy advisory firms and the companies that were the subjects of their advice. (See this PubCo post.) The case was then reactivated and both parties filed for summary judgment.
In June, soon after assuming his position as SEC Chair, Gary Gensler directed the staff to take another look at the 2020 rules, and the staff announced that it would decline to recommend enforcement in the interim. Once again, the Court held the case in abeyance as the SEC contemplated new regulatory action that could have narrowed or eliminated the issues raised. In 2022, the SEC adopted new amendments to the proxy advisor rules reversing some of those key company-favorable provisions governing proxy voting advice that were adopted in July 2020 (discussed further below). Importantly, however, under the 2022 amendments, proxy voting advice would still be considered a “solicitation” under the proxy rules and proxy advisors would still be subject to the requirement to disclose conflicts of interest. (See this PubCo post.) Because, when the SEC ultimately took action, it did not change the definition of the term “solicitation” from the 2019 interpretation and guidance and the 2020 amendments, and the SEC’s interpretation of that term was the subject of Counts I and II of ISS’s amended complaint, the case was again reactivated.
In its amended complaint, ISS contended that the interpretation in the release and the subsequent rules were both unlawful for a number of reasons, including that the SEC’s determination that providing proxy advice is a “solicitation” is contrary to law, that the SEC failed to comply with the Administrative Procedure Act and that the views expressed in the release were arbitrary and capricious. NAM, which favored the 2020 amendments, intervened on the side of the SEC (and also became a defendant). Over four years later, the D.C. District Court agreed, holding that the “SEC acted contrary to law and in excess of statutory authority when it amended the proxy rules’ definition of ‘solicit’ and ‘solicitation’ to include proxy voting advice for a fee.”
Opinion. After a lengthy examination of various historical dictionary and judicial definitions, the district court granted ISS’s motion for summary judgment, holding that, when the SEC amended the proxy rules’ definition of “solicit” and “solicitation” to include proxy voting advice for a fee, it acted “contrary to law and in excess of statutory authority.” Applying the Chevron test (which SCOTUS has now overruled in Loper Bright, see this PubCo post), the court held that “at Chevron step one, the ordinary meaning of ‘solicit’ at the time of Section 14(a)’s enactment does not reach proxy voting advice for a fee. Nor does the Exchange Act’s history and purpose support the SEC’s reading. The court therefore has no cause to move to Chevron step two and afford deference to the agency’s position.” Although the Exchange Act does not define the term “solicit,” the court said, the SEC “has long defined the terms ‘solicit’ and ‘solicitation’ to include a ‘communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.’” Moreover, according to the court, the “ordinary meaning of those terms when Congress enacted the Exchange Act in 1934 did not encompass voting advice delivered by a person or firm with no interest in the outcome of the vote,” and none of the cases cited supported the SEC’s “position that proxy voting advice for a fee is ‘solicitation’ within the ordinary meaning of the term.” In addition, the court reasoned that “the casting of a client-shareholder’s vote does not turn the advisor’s advice into a ‘solicitation.’” The court also concluded that ISS’s position “better reflects the purposes and history of Section 14(a).” (See this PubCo post.)
Appeal. In April, both NAM and the SEC (along with SEC Chair Gary Gensler) filed one-page notices of appeal, NAM first on April 16, with the SEC following a week later on April 23. However, as noted above, the appeal of the SEC and Gensler was voluntarily dismissed. (But will a new Administration—which, on the one hand, has indicated that it seeks to reduce regulation, but, on the other hand, might have a greater interest in regulating the proxy advisory firms and, therefore, in reversing the decision of the D.C. District Court—seek somehow to revive its appeal?)
In its brief, NAM observed that ISS was “tremendously powerful”; together with Glass Lewis, they “control 97% of the proxy advice market and together influence nearly 40% of the U.S. shareholder vote…. And their impact is not limited to their clients, but reaches all investors.” Proxy advisory firms have always been subject to SEC regulation, NAM contended, given that “their entire business is telling shareholders how to vote…. As proxy advisory firms have grown in influence, the need for greater oversight became apparent.” As a result, NAM asserted, the SEC undertook a 10-year reassessment of its approach, “ultimately codifying in a 2020 Rule its longstanding interpretation that proxy firms ‘solicit’ proxies and are thus subject to SEC regulation. The SEC also imposed modest reporting requirements designed to increase transparency and promote the free flow of information.” ISS challenged the rule, arguing that it did not “solicit” proxies and the district court agreed. But, NAM contended, “in so holding, it misread the record, which shows that proxy firms ‘solicit’ proxies under any reasonable definition. It also misconstrued the statute, disregarding the SEC’s explicit authority to define terms like ‘solicit,’ adopting an artificially narrow definition, and imposing a severe limitation on the SEC’s regulatory power that finds no footing in the statutory text whatsoever. This Court should reverse.”
NAM argued first that proxy firms do “solicit” proxies. According to NAM, the “SEC’s proxy rules have long applied to a broad swath of communications that may influence proxy voters, an understanding unchallenged for sixty years.” Under “any reasonable definition,” NAM contended, proxy firms “solicit” proxies, first, through robo-proxy voting for their clients, and second, by inserting “themselves into the proxy voting process, marketing themselves as experts to be trusted”… and providing “persuasive reports telling clients how they should vote.” Not only does the “highly influential” voting advice that proxy firms produce reflect their “idiosyncratic views about good corporate governance,” but NAM maintained, they also “sometimes even have an interest in ballot outcomes, due to conflicts of interest and ideological ambitions.” Accordingly, under any governing definition of “solicit,” NAM contended, “proxy firms fall within its ambit.” In this context, NAM contended, the district court failed to take into account “the SEC’s robust factual findings regarding the role proxy firms play in the marketplace.”
In addition, NAM professed that, in its statutory analysis, the district court made “three fatal errors.” First, NAM claimed, the district court failed to take into account “Congress’s express delegation of authority to the SEC to define statutory terms like ‘solicit.’” Citing Loper Bright (see this PubCo post), NAM contended, “when Congress expressly gives an agency definitional authority, the court must ‘independently identify and respect such delegations of authority, police the outer statutory boundaries of those delegations, and ensure that agencies exercise their discretion consistent with the APA.’” In adopting its definition of “solicit”—a definition that “falls within the word’s acknowledged range of meanings”—the SEC was acting pursuant to Congress’s delegation, NAM asserted. As a result, NAM argued, the district court “should have ‘respect[ed]’ Congress’s explicit delegation, not overridden it in favor of a narrower interpretation.” This case, NAM argued, “presents a question of statutory construction: whether the SEC’s definitional amendment regarding ‘solicit‘ is consistent with the Exchange Act. That is the Court’s domain, not the SEC’s.”
Second, NAM looked to the “ordinary tools of statutory interpretation” to find a broad meaning for the term “solicit”: according to NAM, this broad scope is supported by contemporaneous authorities, the structure of Section 14(a), the “historical circumstances and remedial purpose of the Exchange Act,” and the “near-century worth of enforcement.” Third, NAM contended that “the district court rewrote the statute by concluding that the SEC may only regulate proxy solicitors who have an interest in the underlying corporate ballot measure. The Exchange Act contains no such requirement.” Nothing about the term “solicit,” NAM argued, necessarily implies that the solicitor has an underlying interest in the matter submitted for a vote. “If a person asks a shareholder for their proxy—soliciting it in the most literal sense—and then votes based on a coinflip, that person would surely be subject to SEC regulation, despite lacking an interest in the measure’s outcome. The district court’s conclusion to the contrary yields disastrous and absurd results. The Court should reverse.”
The brief of ISS is now due in mid-January.
