670 F.Supp.3d 537
M.D. Tenn.2023Background
- Proxy voting advice businesses (PVABs) like ISS and Glass Lewis provide research and voting recommendations to large institutional investors; critics alleged errors, conflicts, and market concentration.
- SEC in 2020 treated PVAB advice as a "solicitation," added two conditions for exemption from proxy-filing rules: a conflicts-disclosure condition and a notice-and-awareness condition, and added Note (e) to Rule 14a-9 addressing potential misleading omissions.
- The 2022 SEC rulemaking rescinded the notice-and-awareness condition, deleted Note (e), and relaxed aspects of the 2020 regime, citing concerns about costs, timeliness, independence, and voluntary industry practices.
- Plaintiffs (U.S. Chamber, Business Roundtable, Tennessee Chamber) sued under the APA, asserting improper notice-and-comment (too short a comment period) and that the 2022 rescission was arbitrary, failed required economic consideration (15 U.S.C. § 78c(f)), ignored reliance interests, failed to consider alternatives, and treated similarly situated parties differently.
- The court reviewed the administrative record on cross-motions for summary judgment and applied the APA's deferential arbitrary-and-capricious standard.
- Court held for the SEC: Plaintiffs' motion denied and defendants' cross-motion granted; the 2022 amendments were lawful and procedurally adequate.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Adequacy of notice-and-comment period (Count I) | 30-day comment period (over holidays) was inadequate; SEC usually used 60 days and commenters requested extension | 30 days permissible here given extensive prior proceedings and parties' preparedness | Court: 30 days sufficient; summary judgment for SEC |
| Failure to consider effects on efficiency, competition, capital formation (15 U.S.C. § 78c(f), Count II) | SEC's economic analysis for 2022 was cursory and ignored costs to companies and shareholders | 2022 reconsideration was a targeted rebalancing relying on prior record; qualitative analysis was sufficient | Court: SEC complied with § 78c(f); summary judgment for SEC |
| Arbitrary and capricious / inadequate explanation for reversing 2020 rule (Counts III–IV) | SEC's 2022 rationale was too brief, failed to address why earlier findings were wrong, and improperly relied on changed "political winds" | Agencies may change policy so long as they provide a reasoned explanation; SEC addressed key counterarguments and reliance concerns | Court: SEC provided adequate, reasoned explanation; reversal permissible; summary judgment for SEC |
| Failure to consider viable alternatives (Count V) | SEC failed to consider less drastic alternative (e.g., delay & retrospective review) | SEC did consider delay/retrospective review and explained reasons for immediate rescission (limited reliance, harms of notice-and-awareness, stakeholder views) | Court: SEC adequately considered and rejected alternatives; summary judgment for SEC |
| Unequal treatment of similarly situated parties (Count VI) | Rescission preferentially benefits PVABs and departs from SEC's usual transparency emphasis | SEC had rational bases for distinguishing PVABs and noted notice-and-awareness previously privileged management over other stakeholders | Court: No arbitrary disparate treatment shown; summary judgment for SEC |
Key Cases Cited
- J.I. Case Co. v. Borak, 377 U.S. 426 (recognizing proxy solicitations as regulated communications)
- Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (arbitrary-and-capricious review standard for agency rulemaking)
- FCC v. Fox Television Stations, Inc., 556 U.S. 502 (permissible agency change of policy requires reasoned explanation, not heightened standard)
- Encino Motorcars, LLC v. Navarro, 579 U.S. 211 (agency must examine relevant data and articulate satisfactory explanation)
- Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment standard)
- Bowman Transp., Inc. v. Ark.-Best Freight Sys., Inc., 419 U.S. 281 (courts must defer to agency expertise absent clear error)