CRS Reviews Debates over Regulating Proxy Advisors

The Congressional Research Service ("CRS") summarized the current regulatory, legislative, and litigation landscape for proxy advisory firms.

In the report the CRS outlined the primary criticisms leveled against the industry, including their concentrated market power, potential conflicts of interest from their consulting services, alleged analytical errors, and the controversial influence of Environmental, Social, and Governance (ESG) factors in voting recommendations.

The CRS highlighted the following:

• Concerns Regarding the Proxy Advisor Industry: The CRS cited critics who argue the dominant proxy advisors — Institutional Shareholder Services ("ISS") and Glass Lewis — exercise outsized influence over corporate governance, operate with conflicts of interest, and issue politically driven recommendations. Defenders counter these claims, stating that institutional investors primarily use proxy advisors as a research resource while retaining independent judgment.
• SEC Regulation: The CRS recounted that in 2020 (under the Trump Administration) the SEC adopted rules classifying proxy advice as proxy "solicitation" under the Exchange Act, imposing new disclosure and procedural requirements, but the SEC (under the Biden Administration) rescinded several of these measures in 2022. The CRS highlighted that in ISS v. SEC, the D.C. Circuit held that proxy advice does not constitute solicitation under Exchange Act Section 14 ("Proxies"), a ruling that may limit the SEC’s authority to regulate proxy advisors under existing law. 
• State Law Developments: Texas enacted Senate Bill 2337, becoming the first state law to attempt to regulate proxy advisors, requiring disclosures when recommendations incorporate nonfinancial factors such as ESG considerations. The CRS reported that ISS and Glass Lewis have sued to block the statute, and a federal court has preliminarily enjoined its enforcement. State attorneys general in Florida and Missouri have opened investigations into proxy advisors’ ESG- and DEI-related practices.
• Federal Legislation: The CRS reported that congressional legislation would regulate proxy advisors directly or govern how institutional investors use their services. The CRS explained that legislative options range from banning conflicts of interest and mandating SEC registration to imposing disclosure requirements and curbing robovoting.

The CRS concluded that while judicial rulings may limit SEC authority, scrutiny from both states and Congress signals continued debate over proxy advisor regulation.