Institutional Shareholder Services, Inc. v. Securities & Exchange Commission

Proxy advisory firms charged fees to shareholders—commonly investors with large, diverse portfolios—in exchange for providing research and outside recommendations about how the shareholders should exercise their voting rights. Proxy advisory firms did not seek to achieve any specific outcome in a vote. The firms primarily provided an informational and oversight function that often sided with corporate management but sometimes exposed corporate managers who were overreaching or acting in their personal interests rather than the shareholders’ interests. The proxy advisory firms were popular with corporate investors but not necessarily with corporate managers. Under the Securities Exchange Act of 1934 § 14(a), entities that “solicit” proxies were required to follow the rules set by the Securities and Exchange Commission (SEC) (defendant) for doing so. Congress did not provide a definition of “solicit” in the statute. For years, the SEC expressly stated that proxy solicitations did not include providing proxy advisory services. Under existing law, proxy advisory firms were subject to sanction if they knowingly published a false statement, but the advice statements were not subject to the much more rigorous requirements for providing proxy solicitations under § 14(a). In 2019, in response to pressure from corporate managers, the SEC began the process for enacting a rule to redefine a proxy “solicitation” to include any proxy voting advice given in exchange for a fee, which included the services provided by proxy advisory firms. The rule was finalized in 2020 and required that proxy advisory firms meet the strict § 14(a) requirements for proxy statements any time they issued proxy advice. This change also made the firms subject to possible civil or criminal penalties for providing even accidentally misleading advice. One of the country’s largest proxy advisory firms, Institutional Shareholder Services, Inc. (ISS) (plaintiff), sued the SEC in federal district court, challenging the rule. ISS argued that the SEC had exceeded its statutory authority by expanding the definition of a proxy solicitation beyond what Congress intended when it enacted the Securities Exchange Act of 1934. The parties each filed a motion for summary judgment, and the court considered the motions.