SEC sued over proxy-firm rule changes

The regulator now faces lawsuits against a 2020 rule as well as its recent amendments to it

A major lobbying group that has fought against tougher environmental regulations has sued the Securities and Exchange Commission (SEC) over its reversal of some Trump-era restrictions on proxy advice businesses.

The National Association of Manufacturers, along with Natural Gas Services Group (NGS), filed a lawsuit last week, coming just after the SEC passed the final amendments to the 2020 rule in question.

That regulation was seen at the time as a victory for publicly traded companies. It classified proxy advice as a solicitation and required advisory firms to give notices and disclosures to the businesses about which they provided voting recommendations for shareholders.

The SEC did not walk back the classification of voting advice as a solicitation, but it did overturn some sections of the 2020 rule that the commission said were burdensome to proxy advice firms. That included deleting a requirement that shareholder advisory firms provide their intended voting advice to public companies before or at the same time they give it to clients. The SEC also tossed a requirement that proxy firms have a mechanism to make their clients aware of any responses public companies have to the voting advice.

In the recently filed lawsuit, the plaintiffs allege that the SEC ran afoul of the Administrative Procedure Act and state that the 2020 rule provisions were necessary. Advisory firms – namely Institutional Shareholder Services and Glass Lewis – “wield outsized influence on proxy voting,” and allegedly provide “false or misleading information” in the voting advice given to clients, the plaintiffs stated. The two proxy advice giants are not parties in the lawsuit.

“This creates an unacceptable potential for critical corporate decisions to be made on the basis of inaccurate or incomplete facts. And proxy advisory firms have frequently been unwilling to issue corrections even when they are notified of errors in their reporting,” the complaint read. “Grave concerns have also arisen as to whether these firms, which issue advice intentionally impacting the nation’s public markets, harbor significant conflicts of interest. ISS, for example, sells corporate governance consulting services to the very same companies about which it makes proxy voting recommendations on the basis of its governance policies, creating strong incentives for companies to purchase its consulting services.”

ISS declined to comment, and Glass Lewis did not immediately respond to a request to comment. The SEC also declined to comment.

“Over the past several years, NGS has been the subject of repeated materially misleading or factually incorrect proxy advice from proxy advisory firms. Indeed, NGS has been forced to file supplemental proxy statements in response to this misleading proxy advice in seven of the past nine annual proxy seasons, often on unreasonably short timeframes,” the groups said in the complaint. “This process has required NGS’s employees, primarily senior executives, to divert significant time and effort away from running the business in order to correct proxy firms’ misleading or incorrect statements.”

Separately, ISS has brought a case against the SEC over the same rule, seeking to have it invalidated, as the regulator allegedly exceeded its authority when it passed it in 2020.