Legal challenges may impact SEC’s decision to rescind 2020 proxy firm rules

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLPOn July 13, 2022, the Securities and Exchange Commission (SEC) voted to rescind several amendments to its rules governing proxy voting advice (the Final Amendments). The vote reversed some of the key provisions governing proxy voting advice that were adopted in July 2020 (the 2020 Rules) under then-Chairman Jay Clayton. These amendments were scheduled to become effective 60 days after publication in the Federal Register, but may be subject to further alteration depending on the outcome of pending litigation. In particular, several recent developments in lawsuits challenging the SEC’s decision to rollback the 2020 Rules will likely impact implementation of the amendments. 

Current Status of Proxy Firm Rules

On September 29, a Texas federal judge ruled that the SEC violated the Administrative Procedure Act by suspending enforcement of the 2020 Rules before providing a sufficient notice-and-comment period. The National Association of Manufacturers filed a complaint in October 2021 after the SEC stated that it would not enforce the 2020 Rules, which were adopted near the end of the Trump administration, while the Commission considered whether to formally amend the rules. At the time, proxy firms were under a December 1, 2021 deadline to comply with the new regulations.  

The National Association of Manufacturers (NAM), joined by several other trade groups, argued that the decision not to enforce the 2020 Rules violated the Administrative Procedure Act (the APA). The SEC filed a motion to dismiss the case on September 13, arguing that the Division of Corporation Finance’s statement that it would not enforce the 2020 Rules was no longer in effect, given that the Commission approved revised rules in July of this year. Judge David Counts denied the motion to dismiss, and ultimately found that the SEC violated the APA by failing to implement a notice-and-comment period before it announced that it would not recommend enforcement of the 2020 Rules. As a result of this decision, the SEC will need to reinstate a compliance date for the 2020 Rules.

The SEC’s amended proxy advisory rules are also being challenged in several other lawsuits. In addition to its lawsuit arguing that the SEC violated the APA in deciding against enforcement of the 2020 Rules, the NAM has also filed suit to challenge the SEC’s July 2022 decision to rescind the rules. Judge Counts in the Western District of Texas is also overseeing this lawsuit, and a summary judgment motion hearing is currently scheduled for December 9, 2022. 

Separately, the US Chamber of Commerce has filed a similar lawsuit alongside the Business Roundtable and the Tennessee Chamber of Commerce and Industry, arguing in part that the SEC failed to show that new facts justified the decision to rescind the 2020 Rules. The business groups filed a motion for summary judgment on September 26, 2022 in the US District Court for the Middle District of Tennessee, which has yet to be decided. A ruling in this case, or in the lawsuit filed by the NAM, could halt the SEC’s proposed changes to its proxy advisory firm rules. 

Summary of Proxy Firm Rule Amendments

The 2020 Rules codified the SEC’s interpretation that proxy voting advice constitutes a “solicitation” under the proxy rules, and added new conditions to the exemptions from those solicitation rules. Under the new Final Amendments, proxy voting advice will remain a solicitation subject to the proxy rules.1  However, the Final Amendments rescind other provisions impacting proxy advisory firms: 

Shareholder Engagement Provision

The Final Amendments reverse several conditions imposed by the 2020 Rules that required proxy advisory firms to provide additional information to their clients and to companies that are the subject of their advice. Under the 2020 Rules, proxy advisory firms were required to make their proxy voting advice available to subject companies at or before the time that they provide that advice to their clients.2 The 2020 Amendments also mandated that proxy advisory firms provide their clients with a mechanism to access any written responses to the proxy voting advice received by the subject companies. The Final Amendments eliminate this rule. The SEC explained that this decision was made due to the “limited reliance interests at stake,” combined with the existence of other mechanisms in the proxy system that promote “informed shareholder voting.” 3

False or Misleading Statements

The Final Amendments also eliminate a provision describing the potential applicability of Rule 14a-9 to proxy advisory firms. The 2020 Rules modified Rule 14a-9 by adding examples in Note (e) which attempted to clarify when proxy voting advice could be considered misleading in violation of the rule. The 2020 Rules provided, in part, that failing to disclose “material information regarding proxy voting advice” could be misleading within the meaning of the rule. The Final Amendments eliminate Note (e), although the SEC has stressed that deleting this particular Note does not impact the potential application of Rule 14a-9 to proxy voting advice in general. This decision addresses the concerns raised by investors and proxy advisory firms that the 2020 Rules had created a misperception that Note (e) broadened the applicability and scope of Rule 14a-9. 

Supplemental Proxy Voting Guidance

Finally, the Final Amendments rescind supplemental guidance issued by the SEC that was designed, in part, to help investment advisers assess how to consider registrant responses to proxy voting advice. The SEC rescinded this guidance in its July vote, explaining that the Commission’s 2019 Proxy Voting Guidance already provides the information needed to assist investment advisers in carrying out their obligations under Rule 206(4)-6 under the Investment Advisers Act of 1940, without the need for separate guidance. 


[1] Release No. 34-95266 (July 13, 2022).

[2} 17 CFR 240.14a-2(b)(9)(ii) (hereinafter Rule 14a-2(b)(9)(ii)).

[3] Release No. 34-95266.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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