Proxy advisors succeed in court as US SEC regulation attempt is struck down.

Court Ruling: SEC Regulation Attempt on Proxy Advisors Declared Unlawful

A recent federal appeals court decision has struck down US Securities and Exchange Commission (SEC) regulations aimed at controlling the actions of proxy advisors as illegal. The ruling, made by a 3-0 vote of US Court of Appeals judges for the District of Columbia Circuit, upheld a previous decision from 2024 that invalidated the controversial rules. This 2024 decision found that the SEC had overstepped its legal boundaries in attempting to regulate proxy advisory firms, as reported by Minerva Analytics. The ruling stemmed from a lawsuit brought by a US proxy advisor challenging the SEC’s 2020 regulations, with the National Association of Manufacturers supporting the Commission in defending the rules.

In 2019, the SEC had begun regulating proxy advisory firms by interpreting section 14(a) of the Exchange Act of 1934 to categorize their recommendations as “solicitations” of institutional investors’ proxy votes. The 1934 act bars any person from soliciting proxies concerning registered securities in violation of SEC-prescribed rules and regulations. The SEC issued rules in September 2020, shortly before the 2020 US presidential election, requiring proxy advisory firms to file their recommendations with the SEC unless meeting specific exemption conditions.

These exemptions included disclosing conflicts of interest, making proxy advice available to target companies, and informing clients of company responses before shareholder meetings. However, later amendments in 2022 under President Joe Biden’s administration rescinded the latter two conditions. The court, led by Judge Karen Henderson, concluded that third-party proxy-voting advice for a fee did not meet the Act’s definition of solicitation but was merely a recommendation, rendering the SEC’s definition expansion unlawful.

Despite this favorable ruling, new challenges are arising for proxy advisors. Anti-diversity, equity, and inclusion (DEI) organizations have petitioned against proxy advisors considering director nominees’ ethnicity, gender, or race in their voting advice. They aim to prevent voting recommendations based on diversity characteristics, seeking SEC intervention to restrict such practices.

Moreover, Republican Congressman Scott Fitzgerald introduced a bill targeting “acts by proxy advisory firms” to regulate their activities. Proxy advisors face mounting scrutiny and criticism from various quarters, including policymakers and business leaders like J.P. Morgan’s Jamie Dimon, who labeled them a “cancer” that should be eliminated. CEO Sarah Wilson of Minerva Analytics cautioned against further regulation of proxy advisors, emphasizing their critical role in shareholder oversight and warning of potential negative impacts on investor confidence.

In conclusion, while the court’s ruling represents a victory for proxy advisors against overbearing SEC regulation, ongoing challenges and proposed regulations signal a turbulent road ahead for these vital players in corporate governance and shareholder voting processes. The debate surrounding the role and influence of proxy advisors continues to intensify, with different stakeholders pushing for various regulatory measures, emphasizing the need for thoughtful and balanced approaches to shape the future landscape of corporate governance practices.