The United States Court of Appeals for the District of Columbia Circuit recently held that the Securities and Exchange Commission (“SEC”) and the securities industry were effectively “separated by a common language.” Giving heed to the plain meaning rule when interpreting legislative intent, the Court in Institutional Shareholder Services, Inc. v. SEC, No. 24-5105, ---F.4th ---, 2025 WL 1802786 (D.C. Cir. July 1, 2025), affirmed an order of the United States District Court for the District of Columbia (see Institutional Shareholder Services, Inc. v. SEC, 718 F. Supp. 3d 7 (D.D.C. 2024)), granting summary judgment to plaintiff Institutional Shareholder Services, Inc. (“ISS”), holding that the SEC’s definition of the term “solicit” went beyond the meaning Congress contemplated when enacting Section 14(a) of the Securities and Exchange Act of 1934 (“Exchange Act”). The decision analyzed the SEC’s 2020 amendment to its rules regulating proxy advice to define the term “solicit” / “solicitation” to include the provision of client requested proxy voting advice (“2020 Rule”). The Court struck down the 2020 Rule as unlawful, reasoning that the meaning of “solicit” as Congress intended when it enacted the Exchange Act is to actively seek to obtain proxy authority or votes. The Court concluded that “the ordinary meaning of ‘solicit’ does not include entities that provide proxy voting recommendations requested by others, even if those recommendations influence the requestors’ eventual votes.” Proxy advisory firms like ISS were therefore in the clear when it comes to Section 14(a).
Section 14(a) of the Exchange Act — the bedrock for SEC regulations governing proxy solicitations — prohibits “any person” from “solicit[ing] . . . any proxy” regarding registered securities. In creating the statute, the term “solicit” / “solicitation” was not defined by Congress, however prior to the 2020 Rule, the SEC had described the term to include any “communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.” Thus, the SEC has long held the view that proxy voting advice generally constitutes a “solicitation” under the Exchange Act requiring compliance with proxy rules and regulations.
In September 2019 the SEC distributed guidance suggesting that proxy advisory services constituted “solicitation” under the proxy rules. ISS — a proxy advisory firm which provides recommendations to institutional investors on how to vote on corporate matters at shareholder meetings, and a major player in the proxy advisory market — quickly filed suit disputing whether the SEC could properly classify proxy advisory firms such as ISS as a “solicitation.” The case however was initially stayed pending completion of the SEC’s related rulemaking.
The SEC subsequently issued the final 2020 Rule in September 2020, thus expressly codifying the viewpoint from the 2019 guidance, defining “solicit” and “solicitation” to mean:
Any proxy voting advice that makes a recommendation to a security holder as to its vote, consent, or authorization on a specific matter for which security holder approval is solicited, and that is furnished by a person that markets its expertise as a provider of such proxy voting advice, separately from other forms of investment advice, and sells such proxy voting advice for a fee.
The SEC’s codified definition required that proxy advisory firms must file proxy recommendations with the SEC as proxy solicitations unless they could claim an exemption. Following the SEC’s completion of its guidance, the court proceedings were restarted, and the National Association of Manufacturers (“NAM”) — the largest manufacturing industrial trade association in the nation and an advocate for the September 2020 Rule — intervened on behalf of the SEC. The case was stayed again from June 2021 through March 2022 pending the SEC’s decision to revisit the 2020 Rule. However, in 2022 when the SEC adopted new amendments to the proxy advisor rules, only some, and not all of ISS’s claims became moot because the 2022 amendments still included the same definition of the term “solicit” / “solicitation.”
Subsequently, SEC, NAM and ISS each moved for summary judgment. The district court granted ISS’s motion, rejecting the SEC’s expanded regulatory definition of “solicit” that included disinterested proxy voting advice and finding that the September 2020 Rule was invalid.
NAM appealed arguing that the district court defined “solicit” too narrowly, and also that even if the district court defined “solicit” correctly, because “solicit” can mean “endeavor to obtain,” advisory firms like ISS “solicit” proxies by seeking to obtain votes aligned with their recommendations. The Court exercised independent judgment under Loper Bright Enters v. Raimondo, 603 U.S. 369 (2024), to consider whether the SEC’s interpretation of its governing statute was contrary to law. First, looking to the ordinary definition of the word “solicit” at the time the Exchange Act was enacted, the Court found that the term entails “seeking to persuade another to take a specific action.” Based upon this interpretation, the Court held that the SEC’s definition of the term was inconsistent with Section 14(a) of the Exchange Act. The Court found a proxy advisor is not soliciting a client’s vote when the proxy advisor gives advice that the client solicited. Even if those recommendations eventually are influential to the voting process, the proxy advisors are not seeking to persuade any particular outcome.
The structure of Section 14(a) reinforced the Court’s reasoning which presupposes that proxy solicitation involves parties actively seeking to secure votes or voting authority. Proxy advisors do not themselves seek votes or act on behalf of those who do. Thus, Section 14(a) is not intended to reach proxy advisors, who simply might influence proxy votes or provide recommendations. Therefore, the Court concluded that proxy voting advice does not fall under the legal definition of solicitation and the SEC’s attempt to regulate proxy advisory firm’s provision of advice as “solicitation” under the proxy rules exceeds its authority.
This decision significantly narrows the SEC’s regulatory power under Section 14(a) and has broad implications for the proxy voting process. No longer will proxy advisors be subject to burdensome Section 14(a) requirements when responding to requests for advice from their clients. Although Congress could move to enact legislation to clarify the SEC’s authority over proxy advisors, the probability is low with the current Washington climate forecasts. At the same time, it is a good bet that NAM and its 14,000 member companies will be looking at ways to challenge the impact of the Court’s opinion and limit proxy firm influence in shareholder decision making when votes are tallied at the all-important annual shareholder meeting. However, in the meantime the Court has “blown away the foam” on the SEC’ Section 14(a) strained interpretation and proxy advisors can get back to business with their clients knowing they can get to “the real stuff” that matters.[1]
FOOTNOTES
[1] Telling it Like it is, Boone Pickens His Life. His Legacy.