On October 31, Institutional Shareholder Services Inc. (ISS) filed suit against the Securities and Exchange Commission in the US District Court for the District of Columbia, challenging the guidance that the SEC issued in August 2019 regarding the applicability of the federal proxy rules to proxy advisors such as ISS. The SEC’s guidance was previously discussed in the August 23, 2019 edition of Corporate & Financial Weekly Digest.

In the complaint, ISS alleges that the guidance is unlawful because it exceeds the authority granted to the SEC under Section 14(a) of the Securities Exchange Act of 1934 (Exchange Act), is procedurally improper because there was no notice-and-comment procedure, and is arbitrary and capricious.

Substantively, ISS concedes that proxy advisers are subject to regulation as investment advisers under the Investment Advisers Act of 1940 and that they owe clients fiduciary duties of care and loyalty. However, ISS objects to the SEC’s determination that proxy voting advice provided by firms such as ISS constitutes a “solicitation” within the meaning of the federal securities laws and is subject to the anti-fraud provisions of Rule 14a-9 of the Exchange Act. ISS argues that providing proxy advice is different from proxy solicitation in that a firm providing proxy advice is disinterested with respect to the outcome of the vote and does not seek to achieve a certain result. ISS contends that a proxy adviser, unlike a proxy solicitor, offers research and analysis to clients to help inform their evaluation of voting matters, but is indifferent to how clients ultimately choose to vote.

ISS is seeking both a ruling that the SEC’s guidance is procedurally invalid and a declaratory judgment that proxy voting advice provided in the course of a fiduciary relationship does not constitute a proxy solicitation.

The full text of ISS’s complaint is available here.