Two trade groups are challenging a recent Securities and Exchange Commission rule-making in court, alleging the commission exceeded its authority in rescinding two amendments to its rules concerning proxy-voting advice adopted under the previous administration that increased restrictions on proxy advisory firms.
The National Association of Manufacturers and the Natural Gas Services Group filed a lawsuit Thursday in U.S. District Court in San Antonio against the SEC.
The commission on July 13 approved final rule rescinding amendments adopted in 2020 that allow companies that are the subject of voting advice to be able to access that advice prior to or at the same time as the advice is disseminated to clients, and another requiring proxy advisory firms to provide clients with access to any response the company provides on voting advice before those clients vote.
The final actions go into effect Sept. 18.
The SEC’s July 13 move was “procedurally defective and arbitrary and capricious, and therefore must be set aside under the Administrative Procedure Act,” the trade group’s lawsuit stated.
“The agency has come to a completely opposite outcome to that reached only two years ago, and it has done so on the basis of the exact same factual record that drove the SEC to adopt the 2020 rule in the first place,” the lawsuit continued. “The SEC does not — no doubt because it cannot — offer any compelling justification for why the exact same factual record requires a different result this time around.”
SEC Chairman Gary Gensler said in a July 13 statement that the final amendments address “issues concerning the timeliness and independence of proxy voting advice, which would help to protect investors and facilitate shareholder democracy. It is critical that investors who are the clients of these proxy advisory firms are able to receive independent and timely advice.”
The SEC did not immediately respond to a request for comment Friday.
Institutional Shareholder Services, one of the two major proxy advisory firms, welcomed the July 13 move but is moving forward with a lawsuit of its own against the SEC over the 2020 rule-making, which also classified proxy advice as a solicitation.
Designating proxy advice as a solicitation exceeds the SEC’s “statutory authority, is contrary to law, and is arbitrary and capricious,” ISS said in a statement earlier this month.
The Council of Institutional Investors supports ISS in the case and filed a joint amicus brief in October 2020 in the U.S. District Court for the District of Columbia.
“Classifying proxy advice as solicitation potentially subjects proxy advisory firms to burdensome filing rules and challenges their independence and free speech rights in conducting the financial analysis that informs their proxy voting advice,” the council said in a July statement.
Oral arguments in the ISS case are slated to begin July 29 in U.S. District Court.