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US Securities and Exchange Commission

U.S. Chamber Files Suit to Restore Clayton-Era Proxy Advice Rules

Bill Flook  Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 6 minute read

Bill Flook  Editor, Accounting and Compliance Alert

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 6 minute read

The U.S. Chamber of Commerce and other groups on July 28, 2022, sued to block the SEC’s recent rollback of 2020 rules imposing new requirements on the proxy advice industry. The Chamber filed the lawsuit in U.S. District Court for the Middle District of Tennessee alongside the Business Roundtable and Tennessee Chamber of Commerce & Industry.

The SEC on July 13 voted 3 to 2 to issue final rules in Release No. 34-95266Proxy Voting Advice, which rescinded some core aspects of the previous rules. (See Divided SEC Rolls Back Proxy Advice Rule Adopted in 2020 in the July 14, 2022, edition of Accounting & Compliance Alert.)

The chamber, in its complaint, is asking the court to vacate the amendments on the basis that the commission failed to adequately justify the change in position, produced an “opportunistically framed” cost-benefit analysis, and deprived interested parties of the ability to meaningfully weigh in on the proposed rules through an “unduly truncated public comment period” in violation of the Administrative Procedure Act (APA), among other points.

The SEC did not immediately respond to a request for comment.

The amendments reflected a new, friendlier posture toward proxy firms under SEC Chair Gary Gensler compared to his predecessor Jay Clayton. Proxy firms make recommendations on how institutional investors should vote on a range of topics, including director elections, executive compensation, and environmental, social, and governance (ESG) issues such as climate risk disclosure.

While institutional investors widely rely on the firms’ work, the Chamber and other critics supporting corporate management have cast the proxy advice industry as conflicted and opaque in its process for making recommendations. The Clayton-era rules, issued in Release No. 34-89372Exemptions from the Proxy Rules for Proxy Voting Advice, responded directly to those concerns.

Release No. 34-89372 set new conditions for proxy firms to remain exempt from the information and filing requirements of the proxy rules that included making new conflict-of-interest disclosures; making their recommendations available to the companies either before or the same time they provide them to clients; and providing a way for clients to access any response that the company provides to the voting advice in a timely manner before the vote. (See SEC Issues Rule Increasing Regulation of Proxy Advisers in the July 23, 2020, edition of ACA.)

The revisions approved this month in Release No. 34-95266 scrapped the latter two conditions and amended a provision related to liability for failing to disclose material information in proxy voting advice.

The chamber’s complaint characterizes the 2020 rules as “modest, common-sense reforms” designed to ensure proper disclosure by proxy firms “and improve access to transparent, accurate, and complete information for proxy vote participants and the market as a whole, reinforcing a central tenet of the securities laws and one that should be uncontroversial.”

The SEC’s change in position, the business lobby argued, “could not be justified by the administrative record before the Commission or any new information the Commission cited since its adoption of the 2020 Rule.”

The complaint describes the changes as “plainly the byproduct of political objectives.”

“But a change in the political winds does not excuse the Commission from its obligation to engage in rational rulemaking via the APA-required process,” the complaint stated. “Because such reasoned decision making did not happen here, this Court should declare the Amended Rule unlawful, enjoin the SEC’s implementation of it, and order the SEC to reinstate and enforce the 2020 Rule.”

Dave Brown, a partner at Alston & Bird LLP in Washington, by e-mail called the lawsuit “not a surprise and an unfortunate necessity.”

“The Chamber’s criticism is well founded,” he wrote. “The Chamber, other industry groups and issuers worked for more than a decade educating the SEC on the difficulties facing the issuer community from proxy advisory firms. After a robust rulemaking process (which saw the SEC respond to comments and pare back the final rule) the SEC’s rulemaking in this instance appears to be a knee-jerk political reaction. Our capital markets benefit from stability from its financial regulators, including an independent agency like the SEC.”

Brown added he is surprised the SEC did not take more seriously the concerns of public companies over factual errors in proxy advice recommendations.

Opponents of the Clayton rules, however, have long cast the 2020 amendments as unnecessary and harmful, and unwanted by investors.

“In what alternative universe did the U.S. Securities and Exchange Commission’s 2020 proxy advisor rule protect investors and reflect evidentiary based deliberations?” Amy Borrus, executive director of the Council of Institutional Investors (CII), said in an e-mailed statement in response to the Chamber lawsuit. “Investors overwhelmingly opposed it and evidence of a need for the rule was scant at best. Kudos to the SEC for reversing the rule.”

With the chamber lawsuit, the SEC now finds itself beset by legal challenges from both sides, with an ongoing suit from proxy firm Institutional Shareholder Services Inc. (ISS) attacking the 2020 rules. A federal judge in April reactivated case after a lengthy pause, with ISS arguing the proposed walk-back of the Clayton-era rules didn’t go far enough.

The Chamber litigation “will obviously take some time to play out,” Brown wrote. “It will be interesting to see what this litigation along with ISS’s continued litigation shapes the regulatory rules going forward.”

Clayton’s SEC laid the groundwork for the 2020 rules a year before by issuing guidance in Release No. 34-86721Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice, asserting that proxy voting advice generally constitutes a solicitation under federal proxy rules, and pointing to Section 14(a) of the Securities Exchange Act of 1934 that “authorizes the Commission to establish rules and regulations governing such solicitations as necessary or appropriate in the public interest or for the protection of investors.”

The most recent revisions would leave that interpretation of solicitation intact, prompting ISS to continue its legal challenge in U.S. District Court for the District of Columbia. Oral argument has been rescheduled to Sept. 2.


This article originally appeared in the July 29, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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