Regulating Proxy Advisors: Court Rules Advice Is Not a ‘Solicitation’ and Texas Enacts Its Own Law

On July 1, 2025, the U.S. Court of Appeals for the District of Columbia Circuit ended more than five years of uncertainty and confusion by ruling that proxy voting advice issued by proxy advisors is not a “solicitation” under the Securities and Exchange Act of 1934, as amended (the Exchange Act). Absent an appeal to the Supreme Court, the court’s decision effectively ends the SEC’s long-running regulatory effort to hold proxy advisors accountable based on the theory that their recommendations constitute a “solicitation” under the proxy solicitation provisions of the Exchange Act.

The SEC may look for other ways to regulate proxy advisors, but in the meantime, Texas has led the way by enacting legislation aimed at proxy voting advice related to companies with a Texas nexus. Other states and even the federal government may follow suit. Each of these efforts is likely to result in legal attacks, potentially including challenges based on First Amendment grounds.

ISS v. SEC: Court Rules Proxy Advice Is Not a ‘Solicitation’

Background: The decision from the D.C. Circuit Court of Appeals ends a multiyear saga stemming from the SEC’s efforts to regulate proxy advisors under the Exchange Act. In 2019, the U.S. Securities and Exchange Commission (SEC) issued Interpretive Guidance confirming its view that proxy voting advice provided by proxy advisors may constitute a “solicitation” under Section 14(a) of the Exchange Act and, as a result, proxy advisor recommendations would be subject to the SEC’s proxy rules promulgated under that provision, including filing requirements and the antifraud provisions under Rule 14a-9. Shortly after the issuance of this guidance, prominent proxy advisory firm Institutional Shareholder Services Inc. (ISS) filed a complaint in the U.S. District Court for the District of Columbia (the District Court), arguing that its proxy voting advice and related services do not constitute a “solicitation” within the meaning of the Exchange Act and seeking to set aside the SEC’s interpretive guidance. The case was later stayed while the SEC considered whether it would adopt new rules related to the guidance.

In 2020, the SEC adopted amendments to the proxy rules codifying its prior interpretation and guidance (the 2020 Rules). Under the 2020 Rules, absent an available exemption, proxy voting advice would be required to be filed, like any other solicitation, under the proxy rules. The SEC adopted two filing exemptions, available if the proxy advisor: (1) discloses conflicts of interest in its voting advice and (2) adopts policies to timely (i) disseminate proxy voting advice to each subject public company and (ii) notify the proxy advisor’s clients of any response from the subject company. In addition, proxy advisors would be liable for material misstatements or omissions, including a failure to disclose “methodology, sources of information, or conflicts of interest.” Following the issuance of the 2020 Rules, ISS revived its original suit and sought summary judgement against the SEC.

In June 2021, after Gary Gensler was appointed as the chairman of the SEC, he directed the SEC staff to consider whether the 2020 Rules should be revisited. The case was once again suspended while the SEC reexamined the rules. Finally, in July 2022, the SEC adopted amendments to the 2020 Rules rescinding the second filing exemption requirement — that proxy advisors adopt policies to timely disseminate recommendations and notify clients of responses — thereby making it easier for proxy advisors to comply with the new rules. However, the amendments did not change the overall concept that proxy voting advice is a “solicitation” under the proxy rules or the requirement that proxy advisors disclose their conflicts of interest. As a result, the case brought by ISS was again revived. For an in depth discussion of the 2020 Rules and the 2022 amendments, see our client alert.

The District Court granted summary judgement to ISS, holding that “the term ‘solicit’ could not reasonably be stretched to include disinterested voting advice.” The SEC appealed the grant of summary judgement to the D.C. Circuit Court of Appeals. For more information on the decision of the District Court, see our public company update.

Decision: On July 1, 2025, the D.C. Circuit Court of Appeals affirmed the judgement of the District Court, relying on the plain meaning of the word “solicit” to conclude that proxy voting services are not “solicitations,” noting that unlike a company director who asks shareholders to vote for a particular outcome, a proxy advisor merely provides recommendations at the request of its clients. The court distinguished between advice that may influence a shareholder’s decision on how to vote and a solicitation, finding that a simple voting recommendation rendered by a proxy advisor without a request for proxy authority, while no doubt influential, falls outside of the statutory definition of “solicitation” because nothing in the proxy rules suggests that the rules were “intended to reach those entities that merely advise others how to vote, without themselves seeking votes or acting on behalf of those who do.” As a result, the court concluded that the SEC’s adoption of the 2020 Rules expanding the definition of “solicitation” to encompass proxy voting advice was improper. With its decision, the court effectively ended the SEC’s long-running efforts to apply the proxy rules to the activities of proxy advisors.

New Texas Law Regulating Proxy Advisors

On June 20, 2025, the Texas governor signed into law Senate Bill 2337, which regulates proxy advisors providing voting recommendations or other proxy advisory services to public companies headquartered or incorporated in, or redomesticating to, Texas. The new law imposes mandatory disclosure and other obligations on proxy advisory services “not provided solely in the financial interest of the shareholders,” including advice based on ESG or DEI factors, and recommendations that are inconsistent with a board’s recommendation.

Under the Texas law, proxy advisors are required to comply with the following disclosure and other obligations for the proxy services listed:

Any proxy advice based on nonfinancial factors, such as ESG, DEI or sustainability scores	Provide a statement that the service is not being provided solely in shareholders’ financial interests and give notice to the company. Explain, with particularity, the basis of the advice and that the advice subordinates shareholders’ financial interests to other objectives. Disclose on the proxy advisor’s website home page that its services include recommendations that are not based solely on the financial interests of shareholders.
Recommendations on shareholder proposals that are inconsistent with a board’s recommendation	Comply with all requirements for nonfinancial proxy advice. Provide a written economic analysis that includes (1) the proposal’s short/long-term economic costs and benefits, (2) an analysis of whether the proposal is consistent with the client’s investment objectives and its impact on returns and (3) an explanation of the methods used to prepare the economic analysis.
Recommendations in opposition to the board made to clients who have not expressly requested nonfinancial proxy advice (i.e., materially different advice)	Comply with all requirements for nonfinancial proxy advice. Notify the company, each client receiving advice and the Texas attorney general of the conflicting advice. Disclose if the conflicting advice is based solely on financial factors and supported by any specific financial analysis.

 

These new regulations are expected to impose substantial financial and compliance burdens on proxy advisors. As a result, proxy advisors may choose not to render services for Texas companies or may make fewer recommendations against them. While bills to regulate the activities of proxy advisors are being considered in other states — including Florida, Oklahoma and West Virginia — they are generally more limited in scope than the Texas law and are still at a nascent stage. Despite the likelihood that the Texas regulations will be challenged in court, as efforts progress in these states, and potentially in additional states, Texas may provide a framework for legislatures seeking to constrain proxy advisors in their jurisdictions.

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For over a decade, there have been growing concerns raised by business associations, public companies and politicians over the substantial influence proxy advisors wield over shareholder voting decisions, attracting the attention of successive Republican and Democrat administrations. More recently, proxy advisors have been attacked for basing their voting advice on ESG or DEI considerations, rather than on the financial interests of shareholders. To date, efforts to regulate proxy advisors have primarily come in the form of SEC rulemaking and guidance. However, the D.C. Circuit Court’s decision has rendered moot all prior regulatory efforts by the SEC based on the theory that proxy voting advice constitutes a “solicitation.” Having exhausted that path, the SEC will need to find another basis in the securities laws to regulate proxy advisors.

In the absence of SEC regulation and amid mounting pressure to manage their influence, efforts to regulate proxy advisors at the state and federal level are increasing. The regulations enacted in Texas provide a roadmap for other states looking to impose constraints on proxy advisory activities in their states. In addition, federal legislators are also considering legislation that would impose antifraud liability on proxy advisors, prohibit them from issuing voting advice if they have a conflict of interest and require them to register with the SEC, among other proposals. It is likely that any legislation, including the Texas legislation, will be challenged in court, and it is not certain whether state or federal legislation will be upheld, either in whole or in part. As a result, the situation is likely to continue to develop.