The conflict between the U.S. Securities and Exchange Commission (SEC) and proxy advisory firm Institutional Shareholder Services Inc. (ISS) is escalating, with the regulator seeking a court order to compel the firm to hand over data about its proxy votes and recommendations.
In a federal court in the eastern district of Pennsylvania, the SEC filed a memo seeking an order to compel ISS to comply with a subpoena issued by the regulator, which demands data about the firm’s voting recommendations to its clients, and the clients’ votes.
According to the filing, in July, the SEC issued an order indicating that it’s investigating whether the proxy advisory firm has violated securities law — and, as part of the investigation, it issued a subpoena demanding data from the firm, which the regulator said is necessary for it to determine whether ISS has breached the law.
“ISS owes a fiduciary duty to provide advice that is in the best interest of its clients. The commission is investigating, among other things, whether ISS is operating consistent with that duty,” the regulator said.
And, it argued that data on the firm’s clients and their votes, “is necessary to determine whether ISS voted in accordance with client instructions and profiles. Reviewing client data is also necessary for assessing whether ISS is adhering to its recordkeeping obligations under the federal securities laws.”
The filing indicated that ISS has pushed back on the demand for certain data, particularly data that identifies clients and their votes on particular proxy issues.
Among other things, the filing noted that the firm argued that this data is “confidential and proprietary” — and also argued that the SEC’s inquiry is barred by the first amendment to the U.S. constitution, which protects basic freedoms, including freedom of speech.
The constitutional argument is raised in the context of a recent U.S. executive order, which has called for the SEC to investigate whether proxy advisors are pursuing “radical, politically-motivated agendas” in their voting advice to shareholders.
In its court filing, the SEC argues that it’s legitimate for it to investigate the U.S. administration’s purported concerns.
“It is wholly appropriate for the SEC to look into whether ISS’s investment advice to clients on proxy voting is driven by a particular political or policy aim to the detriment of its clients’ interests,” it said.
Now, the SEC is asking the court to compel ISS to comply with its subpoena.
The request also comes amid an escalating legal fight between the firm and certain states that have sought to adopt anti-ESG laws — an issue that has also raised free speech arguments.
And, last month, the SEC signalled that the proxy advisory industry may face anti-trust scrutiny — as the regulator retracted a 1987 letter that indicated the U.S. government wouldn’t pursue anti-trust enforcement against firms in the proxy advisory business.