Proxy voting services will not fall under SEC jurisdiction

February 29th, 2024

A federal court has ruled in favour of a challenge to the Securities and Exchange Commission’s (SEC’s) rule classifying proxy voting research services as a “solicitation”.

The court ruled in favour of the Institutional Shareholder Services’ (ISS’s) challenge to the rule, which placed proxy advisory firms under the SEC’s supervision and subject to SEC regulation.

The rule makes it unlawful to “solicit” proxies “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”.

The rule came into effect after the SEC issued an interpretation of existing rules which clarified the definition of “solicit” and “solicitation” to include proxy voting advice for a fee. The amendment was first issued in 2019 and came into force in September 2020 following a consultation period.

The ISS challenged the rule and argued that proxy advisory firms do not “solicit” proxies because they do not seek proxy authority or ask shareholders to vote a certain way to achieve a particular outcome.

The court agreed that the SEC acted contrary to law and in excess of statutory authority when it amended the proxy rules’ definition of “solicit” and “solicitation” to include proxy voting advice for a fee and that the ordinary meaning of those terms when Congress enacted the Exchange Act in 1934 did not encompass voting advice delivered by a person or firm with no interest in the outcome of the vote.

The ruling also noted the rising reliance on proxy advisor firms over the past 25 years, and their growing impact on vote outcomes.

Last Updated: 29 February 2024