On December 3, 2024, the National Association of Manufacturers (NAM) filed a brief with the U.S. Court of Appeals for the D.C. Circuit, urging the court to overturn a lower court decision that challenges the Securities and Exchange Commission’s (SEC) authority to regulate proxy advisory firms. This development marks the latest chapter in NAM’s long-standing campaign to ensure proper oversight of these powerful entities.

The Legal Dispute

The case centers on a February 2024 ruling by the D.C. District Court, which found that the SEC lacks authority under the Securities Exchange Act of 1934 to regulate proxy advisory firms like Institutional Shareholder Services (ISS) and Glass Lewis. These firms dominate the proxy advice market, influencing nearly 40% of shareholder votes in public companies. The NAM’s November 15 brief contends that this decision undermines decades of SEC oversight and jeopardizes the integrity of shareholder voting.

Historical Context

Since the passage of the Exchange Act in the wake of the Great Depression, the SEC has been tasked with regulating proxy solicitation to ensure that shareholders make informed voting decisions based on transparent and reliable information. According to NAM, the emergence of the proxy advisory industry over the past four decades has brought these firms squarely within the scope of the SEC’s regulatory mandate.

“Proxy firms ‘solicit’ proxies under any reasonable definition of the term,” NAM’s brief argues, making them subject to SEC oversight. NAM also emphasized that firms like ISS have historically resisted regulation, despite operating with substantial influence and potential conflicts of interest.

Why Proxy Regulation Matters

Proxy advisory firms wield outsized power over corporate governance decisions, with significant implications for manufacturers, investors, and the broader market. According to NAM:

• ISS and Glass Lewis control 97% of the proxy advice market.

• These firms often operate with undisclosed conflicts of interest, issue error-prone reports, and provide “robo-voting” services that automate proxy voting without investor review.

Such practices can distort shareholder decision-making and erode confidence in corporate governance. NAM’s advocacy underscores the need for robust regulatory frameworks to mitigate these risks.

NAM’s Advocacy Efforts

NAM has long been at the forefront of the push for proxy advisory reform. In July 2020, following years of NAM advocacy, the SEC finalized a rule to introduce critical reforms for proxy firms. ISS immediately challenged the rule, and NAM intervened to defend it. Subsequent lawsuits during the Biden administration, including NAM’s successful challenge to the SEC’s rescission of portions of the 2020 rule, illustrate the high stakes of this regulatory battle.

The Role of Former SEC Officials

NAM’s position has garnered support from former SEC commissioners and staff, who filed an amicus brief emphasizing the importance of SEC oversight. The brief highlights a 50-year precedent affirming the SEC’s regulatory authority over proxy advisory firms and warns that removing this oversight would harm market fairness and transparency.

What’s Next?

As a lawyer who defends companies navigating complex regulatory landscapes, I view NAM's position as a necessary safeguard for fair corporate governance. Proxy advisory firms wield substantial influence, and without adequate oversight, their unchecked power can create significant challenges for businesses striving to maintain transparency and investor confidence. Regulatory frameworks like those advanced by the SEC ensure a level playing field, preventing conflicts of interest and inaccuracies from undermining shareholder trust.

The D.C. Circuit’s decision could have far-reaching consequences for the proxy advisory industry and corporate governance. Oral arguments are expected in early 2025. A ruling in NAM’s favor would reinforce the SEC’s authority and restore the 2020 rule’s critical reforms, addressing longstanding concerns about proxy firm practices.

For continued updates on this case and other regulatory developments, follow our blog at Anderson Insights.

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