On February 23, 2024, the U.S. District Court for the District of Columbia, in a case dating back to 2019, vacated certain SEC rule amendments regarding proxy advisory firms, holding that “the SEC acted contrary to law and in excess of statutory authority when it amended the proxy rules’ definitions of “solicit” and “solicitation” to include proxy voting advice for a fee.”

In August 2019, the SEC issued an interpretation and related guidance in which it expressed its view that proxy voting advice furnished by proxy advisory firms generally constitutes a “solicitation” for purposes of Section 14(a) of the Securities Exchange Act of 1934 and the proxy rules.  The plaintiff in this case, proxy advisory firm Institutional Shareholder Services, Inc., filed suit in October 2019 to contest the SEC’s extension of the proxy rules to proxy voting advice, claiming that proxy advisory firms do not “solicit” proxies because proxy advisory firms “do not seek proxy authority or ask shareholders to vote a certain way to achieve a particular outcome.”  According to the SEC, proxy advisory firms move shareholders to vote or endeavor to obtain votes consistent with their advice and therefore “solicit” proxies.  In November 2019, the SEC issued a proposed rulemaking, followed by a final rulemaking in July 2020, which formally amended the proxy rules’ definitions of “solicit” and “solicitation” to expressly include the furnishing of proxy voting advice for a fee.  As outlined in the court’s opinion, this case has been stayed or otherwise suspended multiple times, pending further SEC regulatory action in this area.  The SEC issued a subsequent final rulemaking in July 2022 rescinding certain aspects of the July 2020 rulemaking, after which the case proceeded.[1]

As stated by the court, summary judgment is appropriate when “there is no genuine dispute as to any material fact in the case and the movant is entitled to judgment as a matter of law.”  In granting summary judgment in favor of the plaintiff proxy advisory firm, the court held that “the ordinary meaning of ‘solicit’ at the time of Section 14(a)’s enactment does not reach proxy voting advice for a fee” and therefore, by defining “solicit” and “solicitation” in such a way, “the SEC acted contrary to law and in excess of statutory authority.”  In its reasoning, the court noted that “a proxy advisory firm offers advice on how to vote, but it does not seek to obtain a proxy.”  Additionally, the court noted that where a proxy advisory firm casts votes on behalf of clients, the “administrative act of casting a vote consistent with its advice does not make the advice itself a ‘solicitation.’”   The court also noted that proxy advisory firms have no personal interest in a vote’s outcome.  As a result of its holding, the court vacated the definitional amendment to the proxy rules adopted by the SEC.

The court’s memorandum opinion was issued under the caption Institutional Shareholder Services Inc. v. Securities and Exchange Commission et al., Civil 19-cv-3275 (APM) (D.D.C. Feb. 23, 2024).