Regulatory and Legal Reform

The NAM achieved a significant victory in court Wednesday in a case that sought to bring needed oversight to proxy advisory firms—and, more broadly, to ensure regulatory certainty for manufacturers.

The background: Proxy firms make recommendations regarding the way shareholders should vote on proxy ballot proposals that come before public companies.

• These firms operate with minimal oversight despite their outsized influence and even though their decisions can have significant and sometimes harmful impacts.

The fight: In 2020, the Securities and Exchange Commission finalized an NAM-backed rule that included a range of modest but critical reforms to proxy firms’ business models.

• In particular, the 2020 rule ensured that companies had more information about the firms’ voting recommendations and provided investors with companies’ responses to those recommendations.
• But in 2022, the SEC rescinded critical portions of that rule.
• The NAM sued the SEC, asking the U.S. Court of Appeals for the Fifth Circuit to strike down this arbitrary and capricious agency action.

The victory: This week—in news covered by Reuters, POLITICO Pro (subscription), Law360 (subscription), Pensions & Investments (subscription) and Bloomberg (subscription)—the Fifth Circuit ruled in the NAM’s favor, deciding that the SEC acted unlawfully in rescinding the 2020 rule. In particular, the court made two critical points:

• The court held that the SEC’s stated justification for its decisions to rescind NAM-supported proxy firm reforms didn’t pass muster and called the agency’s reasoning “facially irrational” and not “reasonable [or] reasonably explained.”
• The court also ruled that a government agency reversing course despite no change in its underlying factual findings must “explain its about-face” by “giv[ing] a more detailed explanation” than the SEC provided.
• This ruling builds on existing case law that prevents agencies from arbitrarily reversing policies after administrations change, thus encouraging regulatory certainty for manufacturers.

Our take: “This decision confirms that federal agencies are bound by the rule of law, even as administrations change,” said NAM Chief Legal Officer Linda Kelly.

• “Manufacturers depend on the SEC to be a steady regulatory hand at the wheel of America’s world-leading capital markets—an obligation the agency abandoned in rescinding the commonsense, compromise 2020 proxy advisory firm rule. … We will continue to fight in court to uphold the 2020 rule—and to work with the SEC and with Congress to ensure appropriate oversight of these powerful actors.”