SEC, Companies to Face Off on Proxy Firm Rules in Sixth Circuit

The SEC’s reversal of Trump-era limits on firms guiding shareholder voting at annual meetings will face new judicial scrutiny after companies challenging the rollback gained traction in a federal appeals court.

The US Court of Appeals for the Sixth Circuit will hear oral arguments Oct. 26 over the 2022 Securities and Exchange Commission rule updates for Institutional Shareholder Services Inc., Glass, Lewis & Co. and other proxy advisory firms. The hearing comes after the US Court of Appeals for the Fifth Circuit raised doubts about the SEC’s turnabout in a related case in August, buoying corporate hopes that the 2020 proxy firm limits will return.

The US Chamber of Commerce, National Association of Manufacturers and other business groups lost lower court bids alleging the SEC lacked justification to toss the restrictions. The organizations appealed to the Fifth and Sixth circuits, which lean conservative. The manufacturers group brought the Fifth Circuit case; the Chamber filed the Sixth Circuit challenge.

“We’re prepared to face difficult questions,” said Tyler Badgley, senior counsel at the Chamber’s Litigation Center. “The SEC should also be prepared to face very difficult questions.”

An SEC representative declined to comment.

Proxy Firm Fights

The Chamber joined the Business Roundtable and Tennessee Chamber of Commerce and Industry to contest the new regulations in a Nashville federal court in July 2022, the same month the SEC issued them.

The revised rules eliminated requirements for proxy firms to provide their clients and companies with their voting recommendations at the same time and make companies share their voting advice with their customers. The SEC under then-Chairman Jay Clayton adopted the 2020 rules after the business community for years sought new limits on ISS and Glass Lewis, which control most of the industry for proxy advice to pensions and other large institutional investors.

Companies have claimed the proxy firms’ great reach lets them inappropriately sway vote results on board directors and proposals related to climate change and other environmental, social and governance issues, among other matters. ISS and Glass have disputed the claims, saying they provide customized advice and general voting guidelines based on their clients’ needs.

SEC Chair Gary Gensler, a Democrat, has said investors needed the 2022 rollback to get timely and independent advice, drawing rebukes from business groups.

The 2020 regulations were unwarranted government overreach, said Nell Minow, a former ISS president. Proxy firms advise sophisticated financial professionals, she said.

“Nobody is required to buy their services,” said Minow, vice chair of ValueEdge Advisors, which works with institutional investors on corporate governance. “Nobody’s required to follow their advice.”

‘The Right Thing’

The Chamber said in its lawsuit that the SEC arbitrarily reversed the 2020 proxy firm restrictions. Judge Aleta Trauger of the US District Court Middle District of Tennessee, a Clinton appointee, disagreed, upholding the revised rules in April. The SEC had the power to reconsider the rules and reach a different decision on a “debatable question,” she said.

Judge David Counts of the US District Court for the Western District of Texas, a Trump appointee, also sided with the SEC last year in the case brought by the National Association of Manufacturers, saying the agency engaged in “reasoned decision making.”

The appeals by the manufacturers group to the Fifth Circuit and the Chamber to the Sixth Circuit followed.

A panel of three Fifth Circuit judges appointed by Republican presidents closely inspected the SEC’s 2022 reversal during oral arguments for the manufacturers association’s appeal in August. Judge Edith Jones questioned whether the 2020 rules hampered the timeliness of proxy firms’ recommendations to investors, as the SEC claimed.

Daniel Matro, an SEC senior appellate counsel, said during the oral arguments “reasonable people can and do disagree” over the matter. The agency didn’t act nefariously, he said. The Fifth Circuit judges have yet to rule on the matter.

The SEC should have kept the 2020 rules to ensure consistency across different presidential administrations and avoid regulatory uncertainty, benefiting markets, said David Katz, a Wachtell, Lipton, Rosen & Katz partner, who advises companies on corporate governance matters. The SEC in 2020 addressed long-standing corporate concerns without placing overly burdensome requirements on proxy firms, he said.

“Clayton was not doing something because it was a Republican answer,” Katz said. “He believed it was the right thing to do. And I don’t think facts have changed.”

Lawyering Up

Matro will argue for the SEC again in the Cincinnati-based Sixth Circuit. Jeffrey Wall, a Sullivan & Cromwell LLP partner who heads the firm’s Supreme Court and appellate practice, will represent the Chamber at the oral arguments. Wall served as acting US solicitor general during the Trump administration.

Utah Deputy Solicitor General Christopher Bates also will participate in the oral arguments. Republican attorneys general from Utah, Florida, Texas and 23 other states filed an amicus brief in June pushing the Sixth Circuit to back the Chamber and void the SEC’s rollback.

Judges Julia Gibbons, John Bush and Stephanie Davis will hear the oral arguments. Gibbons is a George W. Bush-appointed judge, Bush is a Trump appointee and Davis is a Biden judicial pick.

Andrew Vollmer, an SEC deputy general counsel during the George W. Bush administration, said he expects the judges will question Wall about why the agency lacked the discretion to undo the 2020 regulations. Vollmer and other former SEC officials backed the Chamber and National Association of Manufacturers appeals in amicus briefs, which said the agency flouted required processes to quickly issue the 2022 regulations.

“The Chamber has a reasonable chance of success,” said Vollmer, a senior affiliated scholar with George Mason University’s Mercatus Center. “But I do think it’s a pretty evenly balanced case.”

The case is US Chamber of Commerce v. SEC, 6th Cir., No. 23-05409, oral arguments scheduled 10/26/23.