By Mark S. Nelson, J.D.
A district judge for the U.S. District Court for the Western District of Texas has issued an order vacating SEC guidance on proxy advisers that the National Association of Manufacturers had said purported to suspend the compliance date for an interpretation and guidance and a related formal rulemaking that brought proxy advisers more directly within SEC proxy regulations. The case arose from actions the SEC took to inform practitioners that it would not enforce a 2020 proxy rulemaking and related guidance pending an agency review of potential new amendments to the prior rulemaking. The district court vacated the SEC’s purported suspension of the proxy rulemaking’s compliance date and ordered the SEC not to refuse to recognize that compliance date, although the court further noted that “its holding is limited to the narrow factual circumstances presented here.” The SEC has since adopted further amendments to some of the proxy rules at issue in the case (National Association of Manufacturers v. SEC, September 28, 2022, Counts, D.).
Trump-era SEC proxy interpretation and rule. The immediately previous Administration’s SEC sought to bring the proxy adviser industry more squarely under SEC proxy regulations by issuing guidance in 2019 and engaging in a rulemaking in 2020 that, among other things, clarified that proxy advice can be a solicitation and by subjecting such advice to the Commission’s antifraud authorities. For years, companies and industry groups had argued that proxy advisers, of which two dominate the marketplace, had undue influence over the voting of proxies and, thus, sought to have the SEC impose increased duties on proxy advisers, including by requiring proxy advisers to disclose conflicts of interest and to timely respond to company complaints about those advisers’ recommendations.
Proxy advisers had challenged the Trump-era proxy adviser rules in court on grounds that they violated the Exchange Act, the Administrative Procedure Act, and the First Amendment. The instant case was follow-on litigation commenced after the SEC on June 1, 2021, indicated through its chair that further proxy rulemaking may be forthcoming, indicated that the SEC would not enforce guidance and rules adopted in 2019 and 2020, and sought to halt the proxy adviser industry’s litigation against the 2019 and 2020 guidance and rules while the current SEC considered further amendments to those rules.
The 2020 rulemaking had an effective date of November 2, 2020, but the amendments made to Exchange Act Rule 14a-2(b)(9) were given a compliance date of December 1, 2021, in order to allow proxy advisory firms to implement compliant systems and processes and to more generally minimize any disruptions to the forthcoming proxy season. The remaining 2020 proxy rule amendments were not subject to a transition period because the Commission said they amounted to a codification of existing guidance.
SEC action is reviewable. A threshold issue for the district court was whether the SEC’s June 1, 2021, actions were reviewable. The court explained that Fifth Circuit precedent requires finality on the part of an agency before a court can review that agency’s action. That means that the agency action must represent the consummation of the agency’s decision-making process and, further, determine rights or obligations from which legal consequences flow.
According to the district court, the SEC’s suspension of the proxy adviser rule’s compliance date was the consummation of the agency’s decision-making process, notwithstanding that the SEC could further alter the compliance date. The district court also concluded that the suspension of the compliance date determined rights or obligations and that legal consequences would flow from those determinations. As a result, the district court concluded that the SEC had taken final, judicially reviewable action.
Did SEC sidestep rulemaking procedures? NAM had argued that the SEC was required to engage in notice and comment rulemaking to alter the compliance date. The SEC had argued in opposition that it did not alter the compliance date and had only stated that it would forebear enforcement for a limited time, an internal staff position that is not legally binding and which does not require notice and comment rulemaking.
The district court emphasized that the SEC took a trio of actions on a single day that together amount to a suspension of the compliance date of the proxy adviser rulemaking; those actions were: (1) SEC Chair Gary Gensler asked agency staff to mull amendments to the proxy adviser rulemaking; (2) the SEC’s Division of Corporation Finance stated that it would not enforce the compliance date for the proxy adviser rulemaking; and (3) the SEC sought to have prior litigation brought by Institutional Shareholder Services, Inc. held in abeyance pending agency reconsideration of the 2019 and 2020 proxy adviser interpretation, guidance, and rulemaking.
According to the district court, the three actions cannot be viewed in “isolation” but must instead be “analyzed in their totality.” In concluding remarks, the court would explain that the SEC’s actions were more than “coincidence.” Said the district court: “Coincidence is just a messenger sent by truth. Yet Defendant expects this Court to accept this case’s coincidences and turn a blind eye to the rest. The Court will not do so. Defendants’ June 1 conduct achieved its end—a subtle wink to an industry with only two major players that the SEC would not enforce the Proxy Advice Rule’s compliance deadline. But the means to that end were unlawful.”
The district court also briefly considered whether the SEC’s actions were within its discretion. Citing to authorities within the Fifth Circuit, the district court concluded that “modification of effective dates is itself a rulemaking” for which the SEC lacked discretionary authority to alter without notice and comment rulemaking.
With respect to the remedy, the district court concluded that the proper path forward was to vacate the SEC’s suspension of the proxy rule’s compliance date and to further enjoin the SEC from refusing to recognize the proxy rule’s compliance date. As a result, the district court granted NAMs’ motion for summary judgment and denied the SEC’s cross motion for summary judgment.
Industry reaction; new SEC rules. NAM’s Chief Legal Officer, Linda Kelly, said via press release that the district court’s decision held the SEC accountable and that the organization would pursue still more litigation regarding the SEC’s proxy rules: “Today’s decision is a victory for the rule of law, and the NAM Legal Center was proud to lead this effort for the industry. Federal agencies are bound by the Administrative Procedure Act—standards the SEC failed to meet by indefinitely delaying the compliance date for the 2020 proxy firm rule without notice and-comment rulemaking.”
While the NAM litigation was pending, the adopted rules that rescind certain proxy guidance, further amend Exchange Act Rule 14a-2(b)(9), and remove language from Exchange Act Rule 14a-9 that had suggested proxy advice as an example of the kinds of statements that can be misleading in the context of the SEC’s ban on false or misleading statements or omissions in proxy solicitations. The latest proxy amendments became effective September 19, 2022.
The case is No. 21-cv-00183.