Trump’s Next SEC Faces Hurdles Saving Contested Proxy Firm Curbs

A court is preparing to rule on the legality of business-backed restrictions that President-elect Donald Trump’s first SEC imposed on firms guiding shareholder voting decisions.

But don’t expect his new Securities and Exchange Commission to defend the 2020 proxy advisory firm rules in the pending legal challenge, agency observers said. The SEC also likely will avoid any major rulemaking in the space while the litigation continues, they said.

The rules target firms like Institutional Shareholder Services Inc. and Glass, Lewis & Co., which cater to investment funds seeking outside advice on how to vote their shares at companies’ annual meetings. Companies have long attacked ISS and Glass Lewis, saying the firms have too much sway over the outcome of votes on matters such as board director elections and environmental, social, and governance proposals.

The SEC’s 2020 rules placed proxy firms in a more restrictive regulatory regime and imposed directives for distributing their voting advice to companies, in addition to investors. The US Court of Appeals for the District of Columbia Circuit has the power to curtail these rules—and thwart future agency efforts to curb ISS and Glass Lewis.

That’s because ISS sued the SEC over its 2020 proxy firm regulations. The DC Circuit started reviewing ISS’s challenge in 2024 after a lower court found the rules invalid. But President Joe Biden’s SEC pulled itself out of the case, leaving a business group—the National Association of Manufacturers—to defend the rules in court alone.

If upheld, they could serve as a foundation for further proxy firm regulation, said Charles Crain, vice president of domestic policy at the National Association of Manufacturers.

“It really is the linchpin to the SEC’s ability to regulate these firms at all,” said Crain, whose group is pressing Trump to further restrict proxy firms.

Trump’s pick to lead the SEC during his second term—former Commissioner Paul Atkins—has been critical of proxy firms, saying they often give investors inaccurate information. Atkins didn’t respond to requests for comment on the ISS litigation and any plans he may have for proxy firm regulation.

An ISS spokesperson declined to comment, and a Glass Lewis representative didn’t respond to requests for comment. Both firms have denied the allegations against them.

Three Lawsuits

The proxy firm limits are a product of the SEC under Trump’s first agency chair, Jay Clayton.

The regulations subjected the proxy firms to the public filing and anti-fraud requirements that apply to activist investors and company managers looking to influence shareholder votes, a process known as proxy solicitation.

The rules also required proxy firms to simultaneously give voting recommendations to their investor customers and the companies that are the subject of the voting advice. Another requirement directed proxy firms to provide clients with access to the businesses’ responses. The two provisions have been called the “notice-and-awareness conditions.”

The commission originally passed the limits without Democratic support. In 2022, Biden’s SEC under Democratic SEC Chair Gary Gensler preserved the proxy solicitation requirements, while scrapping the notice-and-awareness provisions, over objections from the agency’s Republican commissioners.

ISS continued its lawsuit over the 2020 rules even with the notice-and-awareness provisions gone, saying the SEC’s cuts weren’t enough. The agency also faced two new lawsuits contesting the rollback from the National Association of Manufacturers and the US Chamber of Commerce.

Mixed Messages

In the business groups’ legal challenges to Gensler’s reversal, the US courts of appeal for the Fifth and Sixth circuits reached different conclusions in recent rulings, leading to disagreement about the proxy firm rules’ status. But no appeals to the Supreme Court followed, letting the divergent rulings stand.

The Fifth Circuit sided with the National Association of Manufacturers in June 2024, tossing Gensler’s repeal of the notice-and-awareness provisions. The Sixth Circuit then ruled against the Chamber in September 2024, backing Gensler’s rollback. Sixth Circuit Judge Julia Gibbons didn’t bring up the Fifth Circuit decision in her opinion for the majority supporting Gensler’s approach.

The Fifth Circuit decision against Gensler takes precedence over the Sixth Circuit ruling backing him, given the first court to rule scrapped the rollback and the second one didn’t tell the SEC to enforce it, said Erica Klenicki, deputy general counsel for litigation at the National Association of Manufacturers.

But the Sixth Circuit decision still may provide proxy firms an opening to ignore the 2020 notice-and-awareness conditions that Gensler undid, said Nell Minow, a former ISS president.

“I would definitely go under the Gensler rule and let somebody try to challenge me on it,” said Minow, now vice chair of ValueEdge Advisors, which works with institutional investors on corporate governance.

A Chamber of Commerce spokesperson declined to comment. An SEC spokesperson didn’t respond to requests for comment.

Wait and See

Meanwhile, the ISS case in the DC Circuit is still pending. The case arrived there after the SEC and the National Association of Manufacturers appealed a February 2024 decision by Judge Amit P. Mehta of the US District Court for the District of Columbia, who ruled that the 2020 proxy solicitation requirements that Gensler saved were invalid.

The manufacturers group became the sole challenger of Mehta’s ruling after the SEC abandoned its appeal. The DC Circuit likely is many months away from deciding the case as it continues its briefing process and has yet to schedule oral arguments on the matter.

If Trump’s SEC pick Atkins is installed as chair, he probably wouldn’t move quickly to adopt new proxy firm regulations, despite his concerns about the firms, said Sonia Barros, a former agency official who worked on the 2020 rules.

“Atkins is going to have a lot of things that are on his list,” said Barros, a Sidley Austin LLP partner. “And for something that’s tied up in all this litigation, I could see the SEC waiting to see how some of that plays out before they touch it.”