I.S.S. Sues S.E.C. Over New Proxy Advisory Rules

The suit sets up a potential showdown between the government and proxy advisors, who have become increasingly influential in setting the agenda for public-company directors.

Gary Retelny, CEO, Institutional Shareholder Services. Photo: Ben Hider

Proxy advisory firm Institutional Shareholder Services filed a lawsuit against the Securities and Exchange Commission on Thursday over new rules the regulator issued earlier this year requiring more disclosure over how the firm and its peers make their recommendations to investors in proxy votes.

The new rules, issued by the S.E.C. in August, were the latest, and most dramatic turn in the long-running battle over the role of proxy advisors in the public markets—with potentially critical implications for boards across the country.

And while it’s not uncommon for firms to push back on the government agencies that regulate them, the suit, filed Thursday in Federal court in Washington, sets up a potential legal showdown between the S.E.C. and I.S.S.—as well as its rival, Glass Lewis & Co. — who have become increasingly influential in setting the agenda for boardrooms across the U.S. and beyond.

Businesses contend they do so without any oversight, and base their recommendations on faulty data and an opaque reporting process rife with conflicts of interest. I.S.S. and Glass Lewis argue that they are already highly regulated, and serve a critical function by providing investors with unvarnished information about corporations they would be unable to get anywhere else.

“We believe litigation to be necessary to prevent the chill of proxy advisers’ protected speech,” ISS President & CEO, Gary Retelny said in a press release, “and to ensure the timeliness and independence of the advice that shareholders rely on to make decisions with regards to the governance of their publicly traded portfolio companies.”

The S.E.C.’s new guidance called for proxy advisors to be held to higher standards than they currently are for correctly collecting information about public companies, as well as being held more accountable for the accuracy of the reports they issue.

In the lawsuit, I.S.S. argues that they already “owe their clients the highest fiduciary duties of care and loyalty in providing advice about how to vote their shares” under existing regulations and the S.E.C.’s new guidance, which would treat proxy advisor’s reporting as proxy solicitation, makes no sense.

“A proxy adviser offers independent advice and research to its clients about how to vote their shares based on the proxy voting policy guidelines selected by the client,” I.S.S. argues. “A person who ‘solicits’ proxies urges shareholders to vote a certain way in order to achieve a specific outcome in a shareholder vote.”