On June 26, the U.S. Court of Appeals for the Fifth Circuit ruled against the SEC in a legal challenge over the Commission's abrupt rescission of its 2020 proxy advisor rule, finding that the agency had not adequately explained its departure from factual findings in that earlier rule.
The National Association of Manufacturers (NAM) and National Gas Services Group sued the SEC over its 2022 rulemaking, which repealed the 2020 rule's "notice and awareness" provisions that required proxy firms to distribute final research reports to companies at the same time (or before) as distribution to proxy advice clients and to notify clients if a company had a rebuttal. The 2020 rulemaking, which was approved by the SEC's three Republican commissioners when Jay Clayton was chair, represented a compromise from a 2019 proposed rule, which would have required the pre-publication distribution of draft reports to issuers. However, the 2020 final rule never took effect as enforcement was suspended by new SEC Chair Gary Gensler in June 2021 shortly after he took office.
In that 2022 rulemaking, which supported by Gensler and the SEC's two Democratic commissioners, the agency cited concern over the potential impact on proxy advisor independence and the timeliness of reports, notwithstanding the revisions to the rule in 2020 to address similar concerns raised by allies of the proxy advice firms.
Writing for a unanimous three-judge panel, U.S. Circuit Judge Edith Jones wrote: "[T]he SEC acted arbitrarily and capriciously in two ways. First, the agency failed adequately to explain its decision to disregard its prior factual finding that the notice-and-awareness conditions posed little or no risk to the timeliness and independence of proxy voting advice. Second, the agency failed to provide a reasonable explanation why these risks were so significant under the 2020 Rule as to justify its rescission."
The Fifth Circuit vacated the SEC's repeal of the notice-and-awareness provisions in the 2020 rule. The Commission has not yet officially responded to the court's decision.
A different group of business organizations, including the Business Roundtable and the U.S. Chamber of Commerce, filed a similar lawsuit against the SEC in federal court in Tennessee that is now is pending in the U.S. Court of Appeals for the Sixth Circuit. That appeals court held oral argument in that case in October 2023 but has not yet published a decision. If the Sixth Circuit reaches a similar decision, then the SEC presumably will have to reinstate the notice-and-awareness provisions, which will be helpful to issuers as they engage with proxy firms.
The Society, which supported the proposed 2019 rule and filed a comment letter that opposed the 2022 Rescission rulemaking, submitted an amicus brief in support of the Business Roundtable and Chamber's lawsuit. That amicus brief cited survey data from Society members about errors and omissions in proxy advisor reports.
For more on the Fifth Circuit's decision, please see this statement from NAM and these memos from Gibson Dunn and Sullivan & Cromwell.