The nation's largest shareholder advisory firm sued the Securities and Exchange Commission over new guidelines intended to give investors more transparency in how proxy advisors make their recommendations on director choices and other corporate governance ballots.
The lawsuit from Rockville, Md. -Based Institutional Shareholder Services Inc. is at least the third recent legal action against the SEC by businesses it regulates, a sign that suing a company's regulator – an unusual and aggressive tactic – is becoming less taboo then The SEC is trying to flex its muscles.
This is the annual debate about the increasing influence of so-called proxy advisors, which guides shareholders in how to vote on issues such as executive pay and director elections. The field is dominated by industry party ISS and Glass Lewis & Co. A recommendation from one of the two companies can sway the outcome of a shareholder vote, and ask complaints from companies that the advisers have too much influence.
In late August, the SEC voted 3-2 to adopt a new guideline urging proxy advisors to take several steps to reveal how they make their shareholder recommendations. The move was a broad warning to proxy advisers that they must convey the right information to shareholders and not let conflicts of interest affect their recommendations.
The ISS sued the SEC for overturning the move, arguing in a complaint filed with the federal district court in Washington on Thursday that the new guidance constituted "arbitrary and capricious" abuse of agency power. The ISS also claims that the guidance is invalid because it was issued without a notice and comment period required by federal regulations.
"We believe there is a legal need to prevent the cooling of proxy counselors' protected speech," ISS President and Chief Executive Officer Gary Retelny said.
A SEC spokeswoman declined to comment.
This is at least the second time this year that companies have sued the SEC that wants to stop one of its regulatory actions. In February, the three largest stock exchanges in the United States sued the agency for blocking an initiative to limit the fees they may charge for trading. The lawsuit, which is ongoing, came after the Commission unanimously approved the program in December. The SEC defended its move in an oral argument in October.
Last year, the Loan Syndications and Trading Association prevailed in a lawsuit against the SEC and the Federal Reserve for undoing rules tied to how much risk managers needed for collateralised loan commitments. to hold. On its website, the LSTA called the victory “strategically litigation to limit regulation.”
Like the stock exchange initiative, the SEC's guidance for proxy advisers came after years of public debate. The National Association of Manufacturers and the US Chamber of Commerce were among the groups that urged the SEC to act, arguing that proxy advisors have too much turn over corporate governance issues.
"We recognize the role these companies play, but they have an overview of providing misguided and biased reports that pose a risk to Main Street investors' retirement savings," said Linda Kelly, NAM's General Counsel.
She said that NAM will continue to support the SEC's efforts to increase its oversight of proxy advisers. The commission will meet on November 5 to decide whether to propose additional rules affecting proxy advisors, such as a requirement to disclose material conflicts of interest, and whether to establish procedures to facilitate issuer and shareholder engagement, according to a meeting call. [1
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