Proxy advisory firm Institutional Shareholder Services (ISS) is suing Oklahoma’s state attorney general in an effort to overturn a new law that it says will interfere with the ability of proxy advisors to provide investors with independent voting advice.
In its complaint, which was filed in U.S. district court in the western district of Oklahoma, the firm aims to strike down a recently-enacted statute that, among other things, imposes certain standards and disclosure requirements on proxy advisors — and defines breaches of the requirements as deceptive trade practices, which the state attorney general is empowered to investigate. The new law is slated to take effect on Nov. 1.
In the meantime, ISS is challenging the new legislation in court — arguing, among other things, that it will infringe on its free speech rights.
If it’s allowed to take effect, the new law “will subject ISS to a stunningly broad regime of state-mandated warnings whenever ISS gives advice to its clients that goes against what company managers want their shareholders to do,” the firm said in its complaint.
The lawsuit alleged that the new law imposes burdens on the firm based on the content of its advice. When it aligns with management, no added disclosure is required, but when it recommends voting against management, it’s required to produce written financial analysis to justify its views.
ISS argues that the requirement infringes on its free speech rights, but also ignores the fact that many shareholder votes don’t involve a financial prediction component — such as voting on a particular director based on their meeting attendance record — and ignores the fact that different clients have their own views about the best way to boost shareholder value.
Additionally, breaching the law’s requirements could subject the firm to felony prosecution and civil fines of US$10,000 per violation.
The proposed law’s “attempt to compel compliance with management violates the U.S. Constitution multiple times over,” it said.
ISS noted that other federal district courts have already granted injunctions against similar state laws in Kansas, Indiana and Texas.
“As it has in other states, ISS is challenging the constitutionality of a new Oklahoma statute aimed at undermining its business by burdening its ability to speak freely on matters of corporate governance,” ISS said in a statement accompanying the legal filing.
“ISS refuses to back down from overreaching, unconstitutional attempts by state governments to violate free speech and distort the free flow of information to institutional investors. We offer fact-based proxy vote recommendations based on independent analysis to help our clients meet their investment objectives based on their market strategies,” it said.