Battle over proxy advisers reignites after SEC unwinds Trump-era rules

A fight over the powerful firms that advise shareholders on corporate governance issues is escalating in Washington.

Some of the country's largest business groups are challenging the Securities and Exchange Commission's decision last month to undo Trump-era restrictions on the proxy advisory firms that make recommendations to investors on how to vote on often contentious proposals put up at annual corporate meetings.

The Wall Street regulator’s rare about-face was inspired by a growing chorus of investors who worried that the 2020 overhaul would open the door for executives to exercise more influence over the independent advice they were paying the proxy advisers for, SEC Chair Gary Gensler said in July.

But the decision has opened yet another chapter in a long-running saga over the proxy system, with the U.S. Chamber of Commerce and other industry groups mounting a full-throttle legal campaign to reinstate the rules that not long ago executives had hailed as a win. One Republican lawmaker is drawing up legislation to rein in the firms.

“It’s basically a battle of who’s watching the watchers,” said Jim Angel, a finance professor at Georgetown University.

With shareholders exerting increased sway over corporate decisions, the proxy advisory business — dominated by two firms, Institutional Shareholder Services and Glass Lewis — has been the subject of an intensifying debate.

On one side are investors who rely on the firms to help them parse through the reams of proxy statements issued by public companies every year for guidance on issues like executive compensation plans, board nominees and shareholder climate proposals. On the other is the legion of business executives, lobbyists and trade groups that are concerned about the clout that the proxy advisers have to push proposals that corporate managers oppose.

Stuck in the middle is the SEC.

The regulator first took up a review of the proxy system in 2010, but it wasn’t until 10 years later that it pursued sweeping changes. Under the rules passed in 2020 by the SEC under then-Chairman Jay Clayton, proxy advisers would be required to, among other things, send any research reports to the companies in question at the same time that they go to investors. They also established a way to ensure that investors are made aware of any responses from the companies themselves.

The changes were welcomed by business and industry groups, which saw them as a much-needed step to curb the influence of the advisers. They were met with resistance from many investor advocates.

“Corporations have been pushing for this for a long, long time,” ValueEdge Advisors Vice Chair Nell Minow, a former president of ISS, said of the effort to get the SEC to impose new controls on proxy advisers. “And the commission had always resisted until the final months of the Trump administration.”

However, the Trump-era rules never went into full effect. A new administration in 2021, which included Gensler taking the SEC’s lead, prompted the regulator to eventually change course — first by declaring that it would not enforce the rules and then by officially undoing them in July.

And so began the legal fight.

On the heels of the SEC’s decision, the Chamber of Commerce, along with the Business Roundtable and the Tennessee Chamber of Commerce & Industry, filed a lawsuit against the SEC seeking to reinstate the 2020 reforms. The groups say the agency did not follow proper protocols in crafting the final rule approved in July and offered no justification for the change.

“We had a 10-year process that spanned two different political administrations, three different chairs of different political parties that led to the rule. Now we’ve had a new SEC come in and undo that in 18 months,” said Tom Quaadman, executive vice president of the U.S. Chamber’s Center for Capital Markets Competitiveness. “We had no other recourse than to go to the courts.”

The National Association of Manufacturers filed a similar lawsuit against the SEC, though the group has been in litigation with the agency since October when it sued over the SEC’s decision to not enforce the 2020 rules. Erica Klenicki, deputy general counsel for litigation at NAM, said the SEC faced a “heightened burden” in July because “the agency reversed course using on the exact same fact base that drove it to the 2020 rules.”

A spokesperson for the SEC did not respond to a request for comment.

The SEC’s rule change, finalized following a 3-2 vote among the commissioners, was reached after the agency concluded that it would be appropriate to strike “a different and improved policy balance” than what was included in the 2020 reforms.

The SEC said it was “no longer persuaded that the potential benefits of those conditions sufficiently justify the risks they pose to the cost, timeliness, and independence of proxy voting advice.” It also said proxy advisers were already voluntarily addressing some of the concerns underpinning the 2020 reforms.

The SEC did not completely do away with the 2020 rules. Notably, the regulator left intact a determination that proxy advice constitutes a form of solicitation — meaning the recommendations of ISS and Glass Lewis can be regulated in the same way as the solicitations that corporate boards send out advocating a position on a proposal. Investor groups, corporate governance experts and the proxy advisers themselves have disputed the characterization of proxy advice as a solicitation.

“Proxy advisers aren’t paid by one side or the other” to advocate for positions like solicitors, Minow said. “Nobody has to pay for their advice or follow it.”

ISS declined to comment for this story.

Glass Lewis said in a statement that while it disagrees with the SEC’s decision to maintain the solicitation comparison, it was pleased with the regulator for eliminating “the most unwarranted provisions of the novel rules put in place late in the last Administration.”

Tensions over the future regulation of proxy advisers are unlikely to subside.

Republican lawmakers have taken an interest in the issue as well — setting the stage for even more talk of proxy reform on Capitol Hill should control of Congress flip to the party come November.

In a February letter to Gensler, Reps. Bryan Steil (R-Wisc.) and Bill Huizenga (R-Mich.) wrote that the SEC had "boldly and blatantly disregarded precedent, procedure, and common practice" in amending its 2020 reforms.

"It appears that the SEC is purposefully taking steps to unravel an important rule simply because it was passed under previous Commission leadership — an overtly political act," the lawmakers said.

Steil, who introduced legislation three years ago to strengthen the regulatory obligations that proxy advisory firms need to comply with, has especially been vocal about reforms in recent years and plans to continue to do so in the wake of the SEC's latest move.

The Wisconsin Republican told POLITICO that he's working on several pieces of legislation to not only codify the 2020 reforms but to go further in beefing up Washington's supervision of the advisory firms.

“We have functionally very little oversight of these firms under the SEC,” Steil said. “How are they making their determinations? What is their process? I think more and more, as we look at some of the political positions that corporations are taking, there are a lot of questions importantly being asked about how they’re reaching these decisions.”