Texas’ New Proxy Advisor Law Regulates Speech, Not Securities

Texas’ high-profile fight with proxy advisory firms is often described as another skirmish in the ESG wars. That framing misses the point and obscures the real governance risk now facing Texas-incorporated and Texas-based public companies.

The US District Court for the Western District of Texas is considering a challenge to a recent Texas statute regulating proxy advisory firms. Senate Bill 2337, passed in 2025 and codified in the Texas Business Organizations Code (Chapter 6A), requires firms that advise institutional investors how to vote their shares to make state-mandated disclosures.

In particular, the disclosures should come when recommendations diverge from management or rely on so-called nonfinancial considerations—effectively conditioning proxy advice on how it is expressed.

The proxy adviser statute now tied up in federal court isn’t a disclosure rule; it’s a speech regulation. And that distinction explains both why the law has struggled in court and why, even if revived, it would complicate rather than strengthen corporate governance.

Proxy advisory firms such as Institutional Shareholder Services and Glass Lewis & Co. play a familiar role in modern capital markets. They don’t vote shares or manage assets; they provide analysis and recommendations to institutional investors who must cast thousands of votes across hundreds of portfolio companies every proxy season.

In other words, proxy advisers function as information intermediaries—a role long recognized, and carefully regulated, in federal securities law. Their value lies in synthesizing public disclosures, governance practices, and comparative data into usable advice for investors who retain ultimate decision-making authority.

Texas’ proxy adviser law departs from that framework in a critical way. Rather than regulating conflicts of interest, accuracy, or transparency in the ordinary sense, the statute conditions proxy advice on how and why a recommendation is made, particularly when it incorporates what the statute labels “nonfinancial” considerations.

That isn’t securities regulation as traditionally understood. It’s compelled speech.

Federal courts have long distinguished between disclosure requirements that facilitate market transparency and laws that compel speakers to justify or explain their viewpoints. The former are common in securities regulation; the latter trigger constitutional scrutiny.

That distinction drove the district court’s decision to preliminarily block enforcement of the Texas statute—at least as applied to the two dominant proxy advisory firms—while litigation proceeds. The parties didn’t argue, and the court didn’t hold, that Texas lacks authority to regulate securities markets or proxy advisory firms generally.

Instead, the court concluded that the plaintiffs were likely to succeed on their First Amendment claims because key provisions of the statute regulate proxy advice as speech rather than market conduct. The statute conditions the provision of voting recommendations on content-based and compelled disclosures tied to the rationale underlying those recommendations. On that basis, the court enjoined enforcement against Institutional Shareholder Services and Glass Lewis pending further proceedings.

After the district court entered the preliminary injunction, Texas Attorney General Ken Paxton appealed the order on behalf of the state to the US Court of Appeals for the Fifth Circuit.

Procedurally, however, the merits of the proxy adviser challenges now remain before the US District Court for the Western District of Texas. Enforcement of the statute continues to be preliminarily enjoined as applied to the largest proxy advisory firms, and further merits proceedings are pending. Paxton has withdrawn the state’s appeal of the preliminary injunction, explaining in court filings that the Fifth Circuit was “highly unlikely” to rule on the state’s request before the district court proceeds to trial, making continued appellate litigation inefficient as a matter of timing.

That explanation narrows the procedural posture but does not resolve the governance implications. The statute remains on the books but unenforceable against key market participants, with its constitutionality to be decided at the trial-court level. There are First Amendment questions concerning compelled speech and viewpoint discrimination, federal preemption issues implicating the Securities Exchange Act, and Employee Retirement Income Security Act’s preference for nationally uniform investor regulation, and broader structural concerns that resonate with the Supreme Court’s recent skepticism toward regulatory regimes that stretch statutory authority to reshape market behavior.

The withdrawal of the appeal doesn’t resolve the statute’s First Amendment or federal preemption defects; it merely postpones their review until after the district court addresses them on the merits. Those issues preserve the case’s significance beyond Texas and make it a plausible candidate for eventual US Supreme Court consideration if the statute survives merits review and appellate scrutiny.

Even in its enjoined state, the proxy adviser law already affects how Texas public companies must think about governance.

First, it introduces regulatory fragmentation into what is otherwise a national—and largely uniform—proxy system. Institutional investors don’t maintain separate voting frameworks for Texas issuers. Proxy advisers don’t generate bespoke analyses by state of incorporation.

Second, the law risks misdiagnosing the source of governance accountability. Proxy advisers don’t force outcomes; they influence discussions. Boards that treat proxy recommendations as dispositive misunderstand both the legal reality and their own fiduciary role.

Third, the statute creates false comfort for boards inclined to view Texas as a management-friendly haven. The injunction should dispel that notion. When state governance experiments collide with federal constitutional limits, the resulting uncertainty exposes companies, not regulators, to risk.

Supporters of the Texas statute, including the Texas Stock Exchange and Texas Association of Business, argue that investors deserve to know when recommendations are driven by values rather than value—a distinction far less clear in practice than the law suggests. Executive compensation philosophy, board diversity, risk oversight, climate exposure, and succession planning all implicate long-term firm value.

Requiring proxy advisers to segregate “financial” from “nonfinancial” reasoning is to impose an artificial taxonomy that neither markets nor fiduciary law recognizes.

More importantly, requiring speakers to justify why they hold a particular analytical view, especially when that view diverges from management, resembles viewpoint discrimination, not neutral disclosure. That’s why the First Amendment looms so large in this case.

The proxy adviser litigation is part of a broader Texas project to reposition the state as a serious corporate law jurisdiction through business courts, flexible fiduciary standards, and regulatory competition with Delaware. That ambition depends on credibility with national and global investors.

Capital markets prize predictability, neutrality, and consistency. Laws that appear designed to influence outcomes rather than process undermine that credibility, even when motivated by legitimate policy concerns. If Texas wants to compete as a governance jurisdiction, it must distinguish between facilitating markets and directing them. Proxy adviser speech sits firmly in the former category.

Texas’ law fails because the statute confuses regulating markets with regulating speech, not because investor protection is an illegitimate goal. That confusion explains both its legal vulnerability and its limited utility for corporate governance.

For companies and their counsel, the message is clear: Durable governance frameworks are built on transparent processes and informed dialogue, not compelled explanations of how others think.

Columnist Carliss Chatman is a professor at SMU Dedman School of Law. She writes on corporate governance, contract law, race, and economic justice for Bloomberg Law’s Good Counsel column.

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