Judge Rules SEC’s Suspension of 2020 Proxy Advisory Rules Unlawful

In what could be a major blow to the SEC’s reversing of company-friendly provisions in its 2020 proxy advisory firm oversight regulations, a federal judge has vacated the agency’s “unlawful” suspension of the rules.

This is not a ruling that the SEC must revert to the originally finalized rule. However, it is the first step in requiring the SEC to reinstate the rules in full, including Center-supported provisions that would allow companies to receive their proxy advisor report at least at the same time as investors and be allowed to respond to concerns raised in the report (for example, via a hyperlinked section in the report). 

The development centers on two separate lawsuits against the SEC: one for suspending the 2020 rules (declining to enforce them for a period) and the other for revising them to remove employer-friendly provisions – without following proper process in either case. The next step will be a summary judgment hearing scheduled for December 9, in which a judge will consider the National Association of Manufacturers’ argument that not only was the suspension of the rules unlawful, but the 2022 revision of the rules was as well. If the judge rules similarly in this revision case, the SEC would either have to revert to the original rules or conduct a full notice-and-comment rulemaking with proposed changes.

The win in the suspension case is also important because it will prevent the SEC or other agencies from simply suspending rules they don’t agree with in the future without going through a formal rulemaking process. The tendency of the current SEC to seek to suspend, revise or overturn rules established by a previous Commission is concerning because of the instability it suggests for companies and investors. The SEC has not yet commented on the judgement, but the Center will monitor closely for future developments.