Proxy Advisors Prevail: Court Strikes Down US SEC Regulation Attempt

July 4, 2025

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By Jack Grogan-Fenn

A federal appeals court has found that US Securities and Exchange Commission (SEC) regulations which sought to dictate the behaviour of proxy advisors is unlawful.

In a 3-0 decision, US Court of Appeals judges for the District of Columbia Circuit upheld a 2024 decision which saw the rules scrapped. Withing the 2024 ruling, which was reported on by Minerva Analytics, a US District Court Judge for the District of Columbia determined that the SEC’s regulation of proxy advisory firms had “exceeded its lawful authority”.

In 2019, the SEC began regulating proxy advisory firms through an interpretation of section 14(a) of the Exchange Act of 1934 that framed their recommendations as “solicitations” of the proxy votes of institutional investors.

This section of the 1934 act prohibits “any person, . . . in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors, to solicit or to permit the use of his name to solicit any proxy” regarding registered securities.

A US proxy advisor sued the SEC to scrap the 2020 regulations, while the conservative National Association of Manufacturers sided with the Commission to defend the rules.

The SEC issued its rules in September 2020, just two months before the 2020 US presidential election and four months before the end of Donald Trump’s first term as President.

The rule meant that proxy advisory firms had to file their proxy recommendations with the SEC as proxy solicitations unless they met certain conditions to claim an exemption.

Exemptions could only be attained if proxy advisors complied with three stipulations. These were disclosing conflicts of interest and the steps taken to address them, adopting procedures to make their proxy advice available to the companies that are the target of that advice at least by the time the advice is disseminated to the adviser’s clients, and establishing a mechanism to inform clients of the company’s response to the firm’s advice before the applicable shareholder meeting.

The latter two conditions were rescinded in an amendment to the rule by the SEC in 2022 during the Presidency of Joe Biden.

Judge Karen Henderson stated that proxy-voting advice rendered by a third party for a fee falls outside the Exchange Act’s definition of solicitation in an opinion penned for the three judges on the DC Circuit panel.

“It is simply a recommendation,” wrote Henderson. “The SEC’s effort to expand “solicitation” to include such advice cannot be reconciled with the statutory text and its adoption of that definition in the 2020 Rule was contrary to law.”

However, there appears to be little respite from the onslaught of attempts to foist regulations on proxy advisors.

Separately, anti-DEI organisations have launched a petition which looks to prevent proxy advisors consider the ethnicity, gender or race of director nominees in voting advice issued to investors.

The petition from the American Alliance for Equal Rights and Alliance for Fair Board Recruitment called on the SEC to introduce rules that stop any proxy advisory firm voting recommendation based on a board candidate’s diversity characteristics.

The campaign by the two anti-DEI organisations is being coordinated by Edward Blum, who has previously successfully challenged corporate board diversity rules. Last year, he spearheaded litigation that saw Nasdaq rules which aimed to put more women and minorities on corporate boards narrowly struck down in a 9-8 vote.

The rules had required public companies trading on Nasdaq exchanges to have at least one woman, minority, or LGBTQ+ member on their boards from when they came into effect in late 2023, unless they explained why they would not be able to comply. 

Republican Congressman Scott Fitzgerald last week also introduced a bill which seeks to “prohibit certain acts by proxy advisory firms”.

Fitzgerald accused proxy advisory firms as having had an “outsized influence over corporate governance” while “operat[ing] in the shadows”. He also claimed that the bill will “rein in these unaccountable firms and restore fairness and transparency for American investors”.

The stated objective of the bill is to make it “unlawful for a proxy advisory firm to provide proxy voting advice if the proxy advisory firm possesses a conflict of interest, direct or indirect”.

In a recent article written for the Financial Times, Minerva Analytics’ CEO Sarah Wilson warned that proxy advisors are “under siege” following a series of high-profile attacks by US policymakers.

In recent months, proxy advisors have faced congressional hearings, legal actions and regulatory pressure, while J.P. Morgan CEO Jamie Dimon also reportedly branded proxy advisors a “cancer” and advocated for their elimination.

“The proxy advisory firms are accused of cartel-like behaviour and ideological over-reach in their corporate governance advice with critics treating the fiduciaries who manage money with disdain, painting them as manipulated victims,” said Wilson. “This should all be seen for what it is — a rejection of democratic accountability in the financial system by attempting to neuter shareholder oversight. 

In May, Minerva’s Wilson also sent a letter to Ann Wagner, Chair of the US House’s Subcommittee on Capital Markets, and other subcommittee member, warning against the introduction of new regulation for proxy advisors. She stated that there was “no compelling legal, economic or fiduciary rationale for new proxy advisor regulation”.

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

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

Last month, Minerva Analytics reported on Texas Senate Bill (SB) 2337 which is imminently set to impose rules on businesses organised or created under Texas laws or have their principle place of business in the state.

The bill was signed Texas Governor Greg Abbott, meaning the regulation will come into effect on September 1.

The regulation will require proxy advisors that “deviate” from acting in the “financial interest” of shareholders to “clearly disclose that fact”. This includes advisors recommending votes based on ESG investing, DEI factors, and social credit or sustainability scores.

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Last Updated: 4 July 2025