Proxy Advisor Pushback: Texas Sued Over Impending Regulation

July 29, 2025

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By Jack Grogan-Fenn

Major proxy advisors are suing Texas over an impending regulation which is set to demand deeper disclosures on voting recommendations, risking detrimentally impacting investors.

The proxy advisory firms have launched legal action against Texas’ Senate Bill (SB) 2337, the bill is due to come into effect on September 1 after it was signed by Texas Governor Greg Abbott, as previously reported by Minerva Analytics.

In June, Minerva Analytics reported that SB 2337 will require proxy advisors that “deviate” from acting in the “financial interest” of shareholders to “clearly disclose that fact”. 

This includes proxy advisors recommending votes based on environmental, social, or governance (ESG) investing, diversity, equity, or inclusion (DEI) factors, and social credit or sustainability scores.

Separate cases filed by two different proxy advisors have reportedly argued that the law was unconstitutional and eroding their First Amendment right to advise clients. Both firms also stated that the seemingly imminent rules are not in the financial interest of shareholders, as well as being likely to cause the loss of clients and incurring reputational damage.

SB 2337 will demand that proxy advisors offer “clear, factual disclosures” when recommending the casting of a vote for non-financial reasons or provide “conflicting advice” to multiple clients seeking to “maximise financial returns”. The bill argues this is necessary in order to “prevent fraudulent or deceptive acts and practices” in Texas.

SB 2337 would apply to proxy advisor services provided to companies and other business entities that are organised or created under Texas law, has its principal place of business in Texas, or is a foreign entity proposing to become a domestic Texas entity by merger, conversion or otherwise.

However, there are major concerns that the bill could negatively affect investors’ freedom of choice, by making it considerably more challenging to their ability to consider ESG, DEI and other risk factors into their investment decisions. SB 2337 would prohibit non-pecuniary factors from being considered investment decisions, despite ESG risks becoming increasingly and more-widely considered as financially material by investors.

Proxy advisors have faced increased scrutiny from US policymakers since the start of Donald Trump’s second term as President, as well as a heightened threat of heavy-handed regulation, amid a widespread attack on ESG and DEI.

In April, the US House of Representatives’ Committee on Financial Services held a hearing entitled “Exposing the Proxy Advisory Cartel”, which considered the “role and influence” of proxy advisory firms in “shaping corporate governance and shareholder voting outcomes”.

The same month, Minerva Analytics reported that lobbyist association Business Roundtable had recommended the affirmation of the US Securities and Exchange Commission (SEC) authority to regulate proxy advisory firms as part of a report on proxy process reforms.

This was followed in May by three Republican senators sending a letter to the leaders of US proxy advisors detailing concerns that they are “influencing” US public policy on economic, environmental and social issues while operating with “virtually no transparency, minimal accountability, and no meaningful regulatory oversight”.

Similar sentiments were echoed by Republican Congressman Scott Fitzgerald last month when introducing a bill which seeks to “prohibit certain acts by proxy advisory firms”.

Fellow US states Florida, Mississippi and Missouri have subpoenaed proxy advisors in recent months, with the attorney-general of the latter suing advisory firms.

Minerva Analytics’ CEO Sarah Wilson cautioned against introducing new regulation for proxy advisors, in a letter sent to Ann Wagner, Chair of the US House’s Subcommittee on Capital Markets, and other subcommittee member. She also penned an article warning that proxy advisors are “under siege” following a series of high-profile attacks by US policymakers.

Wilson cautioned that new rules risk undermining intellectual property rights, conflicting with financial duties, distorting market incentives and detrimentally impacting investor confidence.

She said that there was “no compelling legal, economic or fiduciary rationale for new proxy advisor regulation”. Wilson added: “Demands for proxy advisor regulation subordinate shareholder interests to corporate and advisor convenience, weaken transparency, undermine fiduciary integrity and expose the system to constitutional and competitive vulnerabilities.”

Wilson warned that the introduction of new regulation, such as complex disclosure or oversight requirements, risks creating high fixed compliance costs that disproportionately burden new entrants and further entrench incumbents.

The introduction of new regulations for proxy advisors is also not popular among institutional investors.

A survey conducted by the Council of Institutional Investors (CII) during a webinar in May found that 69% of 89 participants thought proxy advisors should not be further regulated. Meanwhile, just 17% of respondents said that additional regulation should be introduced.

The CII separately published a special report earlier this month detailing “facts and clarifications” about the relationship between proxy advisors and institutional investors.

“While most investors utilize proxy advisory services, the fact remains that investors make their own voting decisions; they do not just follow proxy advisors’ voting recommendations,” the report stated.

It also stressed that investors are neither forced to hire proxy advisors nor follow their recommendations and that most investors rely on proxy advisors for research, analysis and data rather than voting recommendations.

In the CII’s May survey, no respondents said that they completely follow the recommendations of proxy advisors, while only 9% said the recommendations “strongly influence” their voting decisions.

“Ultimately, proxy advisors serve as a resource—not a replacement—for investors’ own decision-making processes,” said the CII’s special report. “Their role enhances efficiency, transparency, and informed voting, while final authority always rests with the investor. Preserving investor choice and access to independent research is essential to protecting fiduciary responsibilities and shareholder rights.”

Research by regulators including the UK’s Financial Reporting Council and US Government Accountability Office previously found that the influence of proxy advisors and their role in corporate governance had been overstated.

Texas has separately moved to restrict the ability of shareholders to file proposals amid a wider regulatory effort to limit shareholder rights, negatively impacting on investor freedoms. As previously reported by Minerva, a bill in Texas in imposing new restrictions on shareholder eligibility to submit proposals passed by 45 to 5.

The bill would impose restrictions such as requiring shareholders to own U$1 million or 3% of voting stock, disqualifying those who have held shares for less than six months and requiring the solicitation of 67% of shareholders before a proposal can appear on the proxy.

This would go further than SEC rules ratified by a federal judge last month making it more challenging for shareholders to file proposals at companies’ AGMs, as reported by Minerva Analytics.

The attacks on ESG investing this year has included the  House Committee on Education and Workforce voting through a bill which will restrict retirement fund managers’ ability to consider ESG factors in investment decisions, as reported by Minerva Analytics. The bill, if implemented, will impact both investment managers and proxy advisors.

However, there has been some solace for proxy advisory firms. Earlier this month, proxy advisors secured a legislative victory with a federal appeals court finding that SEC regulations which sought to dictate the behaviour of proxy advisors was unlawful, as reported by Minerva Analytics.

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Last Updated: 29 July 2025