DC Circuit Questions Logic for SEC Proxy Advisory Firm Curbs (1)

A business group fighting to restrict firms that guide shareholder voting met sharp questions at the DC Circuit on Friday, as companies try to save proxy adviser limits from the first Trump administration.

Judge Neomi Rao of the US Court of Appeals for the District of Columbia Circuit pressed a lawyer for the National Association of Manufacturers on justifying the 2020 Securities and Exchange Commission regulations for Institutional Shareholder Services Inc., Glass, Lewis & Co., and other proxy advisory firms.

ISS and Glass Lewis, which dominate the proxy advice industry, long have faced Republican and business concerns that they have too much influence over pension funds and other big investors that pay for their services. The firms have disputed claims they improperly tilt vote results on board directors, environmental, social, and governance proposals, and other matters at companies’ annual meetings.

Rao, a Republican appointee, was on a three-judge panel that heard oral arguments over a 2024 lower court decision tossing the rules, which ISS had sued to scrap. The National Association of Manufacturers appealed the ruling, while saying proxy firm regulation faces significant hurdles without the rules or new laws.

The 2020 rules included anti-fraud and public filing requirements that placed proxy firms in a regulatory regime for activist investors and company managers seeking to shape the outcome of annual meeting votes through a process known as solicitation. The SEC relied on a “very strange” interpretation of solicitation to regulate proxy firms, Rao said.

“They want this advice,” she said of proxy firms’ clients. “It just doesn’t sort of fit within the ordinary understanding of solicit.”

Paul Hughes, who represented the National Association of Manufacturers at the oral arguments, defended the rules. ISS depends on money from pushing investors to act to fund its business, constituting solicitation, he said.

“It needs people to follow its advice in order to have a market for people to continue buying its advice,” said Hughes, a McDermott Will & Emery partner. “It only exists if the consumers of this advice actually follow it and find value to it.”

Jeffrey Harris, who represented ISS, disputed the claims at the oral arguments.

“No one would call a communication a solicitation when the recipient has invited and paid for it,” said Harris, a Consovoy McCarthy PLLC partner. “ISS doesn’t go around telling strangers how to vote.”

Rao heard the oral arguments with judges Bradley Garcia and Karen Henderson. President Joe Biden appointed Garcia, President George H.W. Bush picked Henderson, and President Donald Trump tapped Rao.

Judge Amit P. Mehta of the US District Court for the District of Columbia ruled in 2024 that regulations were invalid, saying the SEC lacked the authority to issue them in 2020. Both the National Association of Manufacturers and SEC appealed the decision, but the agency abandoned its challenge during the Biden administration. The agency under Trump again hasn’t rejoined the litigation.

The case is Institutional Shareholder Services, Inc. v. SEC, D.C. Cir., No. 24-5105, oral arguments held 5/2/25.