## Facts

- Proxy advisory firms sell research and voting recommendations to shareholders (often large institutional investors with diversified portfolios) on matters presented at public-company shareholder meetings.
- These firms typically do not seek proxy authority for themselves and do not aim to secure any particular voting result; they provide analysis and recommendations that investors may use when casting votes.
- Section 14(a) of the Securities Exchange Act of 1934 makes it unlawful to “solicit” proxies in violation of SEC rules. The statute does not define “solicit.”
- For many years, the SEC’s regulatory approach did not treat proxy advisory services as proxy “solicitations” subject to the full proxy-solicitation framework, although antifraud principles could still apply to false statements.
- In 2019, after increased attention from corporate issuers and others, the SEC issued “Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice,” stating that proxy voting advice can be a “solicitation” under the proxy rules and that Rule 14a-9’s antifraud prohibition may apply to such advice.
- In 2020, following notice-and-comment rulemaking, the SEC adopted amendments that (among other things) revised the definition of “solicitation” in Rule 14a-1(l) to include providing “proxy voting advice” for a fee, and adopted additional conditions tied to certain exemptions used by proxy advisory firms.
- Institutional Shareholder Services, Inc. (ISS), a major proxy advisory firm, sued the SEC in federal district court, arguing that the SEC exceeded its statutory authority and acted unlawfully under the Administrative Procedure Act (APA). ISS also raised procedural and First Amendment objections to parts of the 2020 framework.
- The litigation was paused while the SEC revisited the 2020 rules. In 2022, the SEC rescinded two disputed conditions (related to issuer access to advice and issuer responses) but kept the definitional change treating paid proxy voting advice as a “solicitation,” along with remaining requirements such as conflict-related disclosures.
- The case returned to the court on cross-motions for summary judgment, focusing on whether the SEC lawfully treated fee-based proxy voting advice as a solicitation and whether the agency’s actions complied with the APA.

## Issues

1. Whether Exchange Act § 14(a) permits the SEC to interpret and define “solicitation” to include providing proxy voting advice for a fee.
2. Whether the SEC’s 2019 interpretation and 2020 rulemaking were unlawful under the APA (including claims that the agency exceeded statutory authority or acted arbitrarily and capriciously).
3. Whether challenges aimed at provisions rescinded in 2022 remained live, or were moot.

## Decision

- The court denied ISS’s motion for summary judgment and granted summary judgment to the SEC.
- The court upheld the SEC’s interpretation and definitional amendment treating fee-based proxy voting advice as a “solicitation” under § 14(a).
- The court rejected ISS’s APA challenges to the SEC’s reasoning for the interpretation and rulemaking.
- To the extent ISS challenged conditions that the SEC later rescinded in 2022, the court treated those disputes as no longer presenting a basis for relief in the case.

## Legal Principles

- When Congress leaves a statutory term undefined, courts look to text, context, and the regulatory scheme to determine whether an agency’s construction is within the range the statute allows.
- Exchange Act § 14(a) gives the SEC authority to regulate proxy solicitation practices through rules the Commission finds “necessary or appropriate” in the public interest or for investor protection; that delegation can support rules reaching communications connected to shareholder voting.
- An agency may reasonably treat communications that are part of the process by which shareholders decide how to vote—including paid voting recommendations—as falling within “solicitation,” even if the speaker does not request proxy authority for itself.
- Under the APA’s arbitrary-and-capricious standard, a court upholds agency action when the agency gives a rational explanation, considers relevant comments and concerns, and draws a reasonable link between the record and the policy choice.
- An agency is not barred from changing course from earlier statements or practices, but it must acknowledge the change and give a reasoned explanation for it.
- Interpretive guidance generally is not subject to notice-and-comment requirements applicable to legislative rules, and later notice-and-comment rulemaking can address or supersede objections aimed at earlier nonbinding guidance.
- Federal courts do not decide moot disputes; when a rule provision is rescinded, claims seeking to set aside that provision may no longer support effective relief.

## Conclusion

The district court upheld the SEC’s authority under Exchange Act § 14(a) to treat proxy voting advice provided for a fee as a proxy “solicitation” and granted summary judgment to the SEC, rejecting ISS’s statutory and APA challenges and leaving the Commission’s core definitional approach in place after the SEC’s 2022 partial rescission of certain conditions.


Institutional Shareholder Services, Inc. v. Securities & Exchange Commission, 2024 WL 756783, 718 F. Supp. 3d 7 (2024)