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ISS Sues the SEC!

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November 05, 2019 | Barbara Baksa

ISS Sues the SEC!

In a surprising development, ISS has brought a lawsuit against the SEC, claiming that recently issued SEC guidance relating to proxy advisors is unlawful.

What the Heck?

Back in August, the SEC issued two interpretive releases on proxy advisors:

  • A 14-page release that stipulates that proxy advisors are subject to regulation under the proxy solicitation rules. This expands the SEC’s authority over proxy advisors and subjects them to more onerous disclosure requirements than I guess they are currently subject to. (On the face of it, this doesn’t seem to be that damaging, but the proxy advisors seem to be pretty upset about it, so it is perhaps worse than it sounds.)
  • A 26-page release about proxy voting responsibilities for investment advisors, providing steps that mutual fund managers should consider if they become aware of potential factual errors or weaknesses in a proxy advisor’s analysis. (Full disclosure: I didn’t read this one. I “borrowed” the description of it from Broc’s August 22 blog on

I didn’t cover this development at the time that it happened because snore (even Broc had to include the phrase “better than sex” in his blog title to get people to read it). Also, it didn’t seem like it was going to have any direct or immediate impact on stock plan proposals. If anything, I thought maybe it would encourage Glass Lewis to be a little more forthcoming about their evaluation criteria.

Is That All the SEC Did?

Nope, there’s more. Just last week, the SEC announced that it would hold an open meeting today to consider proposing rules relating to proxy advisors.

ISS Sued? The SEC?

Yep, they did. On October 31, ISS announced that it has filed a lawsuit against the SEC, alleging that the guidance issued back in August exceeds the SEC’s authority and is procedurally improper, arbitrary, and capricious.

The lawsuit makes the following arguments:

  • Providing advice on how to vote is not the same thing as soliciting a proxy and, thus, proxy advisors aren’t subject to the rules governing proxy solicitation.
  • The guidance should have been subject to public comment.
  • The guidance makes a significant change to the SEC’s regulatory regime, despite the SEC’s denial of this. Thus, according to ISS’s press release, the SEC has “flouted the basic requirement of reasoned decision-making that it at least display awareness that it is changing its position.”

I guess the SEC’s guidance must have struck a nerve. It will be interesting to see what happens.

- Barbara

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