DC Circuit Court shields proxy advisor duopoly

In an unfortunate move, the DC Circuit Court of Appeals recently struck down the Securities and Exchange Commission’s (SEC) 2020 Proxy Advisor Rule. The case, Institutional Shareholder Services, Inc. v. SEC, concerns whether proxy advisor recommendations constitute a form of “solicitation” under the Securities Exchange Act of 1934.

The SEC’s 2020 rule amendments properly treated client-requested advice and the subsequent proxy advisor recommendations as solicitations. With the DC Circuit’s ruling, unaccountable proxy advisors will continue to manipulate important voting decisions affecting thousands of companies without recourse. Neither the SEC nor the companies they influence can say otherwise.

During the summer of 2020, the SEC sought to address mounting concerns over proxy advisors operating in obscurity. The SEC’s existing 2003 rule imposed minimal regulatory oversight of proxy advisors, enabling the rise of the duopoly, Glass Lewis and Institutional Shareholder Services (ISS), which now dominates the market.

The 2020 amendments were intended to provide public companies with necessary transparency rather than the backdoor engagement of proxy advisors managing voting decisions on their behalf. Rather than engage companies directly, proxy advisors issue non-public recommendations to institutional investors (mostly asset managers) who invest on behalf of companies. These recommendations are often made without explanation from advisory firms aside from their general proxy voting guidelines.

Many institutional investors “robo-vote” in lockstep with their proxy advisor’s recommendations, effectively ignoring the concerns of their clients.

The SEC fought this unfair dynamic by requiring proxy advisors to disclose their vote recommendations to companies before or during the time they reach the institutional investor. This requirement also provided the opportunity for businesses to issue feedback on the advisor’s advice before it reached the institutional investor.

Another important requirement of the 2020 rule is that proxy advisory firms would have been forced to disclose any conflicts of interest to both their clients and the underlying companies. This allowed companies to vet the trustworthiness of proxy firms before accepting their advice. Such disclosure proved to be so valuable that, even after the SEC’s drastic change in leadership with Gary Gensler, the agency’s 2022 amendments preserved this requirement.

Glass Lewis and ISS have been shown to harbor several conflicts of interest. During a recent congressional hearing, Charles Crain, the Vice President of Policy for the National Association of Manufacturers (NAM), described how the duopoly both advises clients on ESG proxy matters and sells ESG-based products. This includes selling guidance on ESG reporting, sustainability consulting, and valuable data reserved for clients.

In 2019, the year prior to the investment peak of ESG, ISS was exposed for harboring a conflict of interest in the domain of corporate governance. Specifically, scholars associated with the Milken Institute wrote that “ISS provides governance advice to the same public companies it provides shareholder voting recommendations and receives fees from them.” At the time, Glass Lewis avoided this conflict but has since engaged in selling ESG data to companies in lockstep with its pro-ESG proxy voting advice.

With the DC Circuit’s recent decision in ISS v. SEC (2025), the SEC’s 2020 rule and 2022 amendments have effectively been terminated. This presents a worrying predicament that will allow the proxy duopoly to solicit advice to clients absent any proper oversight.

Proxy advice should be classified as a form of solicitation. Based on interpretation of Section 14(a) of the Securities Exchange Act of 1934 and its 2020 amendments, the SEC required proxy advisor advice to conform to statutory transparency requirements. This meant that proxy firms, like other third-party firms, were prevented from issuing “deceptive or inadequate disclosure” to their clients. This was an understandable amendment given the broad statutory definition of “solicitation” whose 1935 adoption and 1956 revision created no exclusions for third-party consultants.

Proxy advisors meet this definition by issuing recommended actions and, in some cases, managing proxy votes for their clients (robo-voting). Solicitation is the act of asking for something or requesting that certain steps be taken. Under the SEC’s existing definition, solicitation entails “any request to execute or not to execute, or to revoke, a proxy” and more specifically:

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.

Aside from the above definitions and the SEC’s own 2019 interpretation of proxy advice, both the district court and DC Circuit should have applied Section 14(a) in recognizing the SEC’s rulemaking authority over proxy advisors. While both courts were right to contemplate the ordinary meaning of solicitation in the Exchange Act of 1934, they arrived at the wrong conclusion.

The Circuit Court overlooked the earlier conflict of interest created by the proxy duopoly profiting from a financial stake in how ESG proxy votes are cast. To claim they have no interest in the outcome ignores reality, as Glass Lewis and ISS have clearly profited from their ESG bias. The court also ignored both the broader definition of solicit and the statutory definition cited above, both pointing to the act of providing advice to solicit voting decisions in exchange for a fee.

NAM and SEC attorneys should consider appealing the DC Circuit’s ruling to the Supreme Court. Given last year’s circuit court split over a separate SEC-proxy advisory dispute, this is a ripe legal issue. By invalidating the SEC’s 2020 amendments, the courts have unjustly insulated the proxy duopoly from any form of oversight, regulatory or otherwise. Companies deserve to know what these proxy advisors are doing and how they justify their recommendations to institutional investors. Removing this cloak of secrecy through transparent disclosure and proper oversight remains the best course of action.