SEC Proxy Firm Rule Repeal Survives Sixth Circuit Challenge (2)

The Sixth Circuit has upheld the SEC’s 2022 rollback of Trump-era curbs on ISS, Glass Lewis and other firms advising shareholders voting at company annual meetings, after another federal appeals court ruled against the repeal.

The Securities and Exchange Commission followed agency procedure law when it reversed parts of the 2020 rules for proxy advisory firms, the US Court of Appeals for the Sixth Circuit ruled in a 2-1 decision Tuesday. The US Chamber of Commerce sued the SEC in 2022 over the changes, saying the agency was unable to rationalize its decision to revoke the Trump-era restrictions as quickly as it did.

The US Court of Appeals for the Fifth Circuit ruled in June that the SEC violated the law when it rolled back some of the proxy firm constraints. The differences in the circuit court decisions on the rules raise the odds that the Supreme Court would review the matter, if either ruling is appealed to the high court.

The business community has long sought to restrict Institutional Shareholder Services Inc. and Glass, Lewis & Co., which dominate the proxy advice industry. Companies have claimed that ISS and Glass Lewis improperly influence the outcome of votes on board directors and environmental, social and governance-related proposals at annual meetings—allegations the firms dispute. SEC Chair Gary Gensler said in 2022 that investors needed the changes to get timely and independent advice.

The SEC in 2022 didn’t act arbitrarily and capriciously in violation of the Administrative Procedure Act, reasonably explaining the burdens of the 2020 rules outweighed the benefits, Judge Julia Gibbons wrote in an opinion for the majority. The law doesn’t permit a court to “second-guess” agency policy choices, she wrote.

The SEC under Chair Jay Clayton in 2020 required proxy firms to provide their voting advice to their clients and companies simultaneously. The agency also ordered the firms to make what companies said about the recommendations available to their clients. The agency then removed the requirements under Gensler in 2022.

“Administrative agencies are free to reevaluate old facts to reach new policy conclusions,” Gibbons wrote.

Judge Stephanie Davis joined Gibbons in the opinion. Judge John Bush, who also heard the case, dissented. Bush was appointed by President Donald Trump, while Gibbons was picked by President George W. Bush and Davis was installed by President Joe Biden.

“At stake in this appeal is whether the Securities and Exchange Commission will require proxy advisors to facilitate communication of a company’s views to shareholders as well,” Bush said in his dissent. “The Majority says that the SEC did enough to rescind its rule mandating these disclosures. I respectfully disagree.”

The SEC is “pleased that the Sixth Circuit confirmed that the Commission’s rulemaking was consistent with its legal obligations,” an agency spokesperson said.

The Chamber is weighing legal options to continue to challenge the agency’s “illegal rollback,” a spokesperson for the organization said.

The Fifth Circuit ruled that the SEC violated the Administrative Procedure Act when it undid the 2020 regulations’ “notice-and-awareness” provisions. The SEC failed to adequately explain the need for its 2022 rollback, acting “arbitrarily and capriciously,” Judge Edith Jones wrote in the Fifth Circuit’s opinion in a case brought by the National Association of Manufacturers.

The parts of the 2020 proxy firm curbs that Gensler’s SEC saved also are mired in litigation.

Judge Amit P. Mehta of the US District Court for the District of Columbia ruled in April the 2020 regulations were invalid in a case ISS brought against SEC. The SEC and the National Association of Manufacturers appealed the decision to the US Court of Appeals for the District of Columbia Circuit. But the agency dropped out of the litigation in August, leaving the manufacturers group as the sole challenger. The case is pending in the DC Circuit.

The Sixth Circuit case is US Chamber of Commerce v. SEC, 6th Cir., No. 23-05409, opinion issued 9/10/24.