US appeals court voids SEC rollback of proxy voting advice rules

By Jonathan Stempel

(Reuters) -A federal appeals court on Wednesday struck down part of the U.S. Securities and Exchange Commission's 2022 rollback of rules that critics said impeded the independence of proxy advice firms that help investors vote in corporate elections.

By a 3-0 vote, the 5th U.S. Circuit Court of Appeals said the SEC's explanation for rescinding rules adopted just two years earlier during the Trump administration was "arbitrary and capricious and therefore unlawful."

The rollback covered requirements that proxy firms such as Institutional Shareholder Services and Glass Lewis notify companies about their advice no later than when they notify clients, and provide clients a means to obtain companies' written responses to that advice.

In announcing the changes, SEC Chair Gary Gensler said it would promote "the timeliness and independence of proxy voting advice, which would help to protect investors and facilitate shareholder democracy."

An SEC spokeswoman said the regulator is reviewing the decision and will determine its appropriate next steps.

The rollback was challenged by Natural Gas Services Group, which supplies compression equipment to the energy industry, and the National Association of Manufacturers.

"Today's decision confirms that federal agencies are bound by the rule of law, even as administrations change," Linda Kelly, the trade group's chief legal officer, said in a statement.

The dispute is part of a long-running battle over how to regulate firms that advise investors how to vote on corporate matters such as shareholder proposals, the election of directors, and whether to approve mergers.

Writing for the appeals court, Circuit Judge Edith Jones said the SEC failed to adequately explain what was wrong with its earlier finding that the 2020 rules posed little or no risk to the timeliness and independence of proxy voting.

She also said the SEC failed to reasonably explain why the risks were so significant that rescission became necessary.

"This was the agency equivalent of saying, 'That was then--this is now,'" Jones wrote.

The New Orleans-based 5th Circuit is perhaps the most conservative of the 13 federal appeals courts. The three judges in Wednesday's panel decision were appointed by Republican presidents.

The case is National Association of Manufacturers et al v SEC et al, 5th U.S. Circuit Court of Appeals, No. 22-51069.

(Reporting by Jonathan Stempel in New York, editing by Deepa Babington and Diane Craft)