The U.S. Securities and Exchange Commission has taken legal action against Institutional Shareholder Services, arguing that the proxy adviser failed to fully comply with a demand for documents. ISS has long wielded enormous influence over how institutional investors cast their votes at corporate shareholder meetings.
The SEC filed suit on the 4th in the U.S. District Court for the Eastern District of Pennsylvania, seeking to compel ISS to turn over records under a subpoena, CNBC reported on the 6th.
The agency said it had asked ISS for materials on its proxy voting recommendations and ballot-processing operations, but that the company did not produce them in full. The SEC's examinations division opened a review of ISS in March and issued a formal subpoena on July 21 after concluding the documents it had received were insufficient. "This investigation does not mean we have already determined that ISS violated securities laws," the SEC said, adding that it is at a stage of gathering facts and understanding business practices.
ISS has pushed back forcefully. The company argues that the SEC's document demand could infringe on free speech protections under the First Amendment. It contends that disclosing internal records on its voting recommendations and ballot activities could expose ISS and its clients to political or economic retaliation.
CNBC said an executive order that President Donald Trump signed in December last year also lies behind the lawsuit, noting that the order calls for stronger oversight of proxy advisers. The White House at the time singled out ISS and Glass Lewis as foreign-owned and politically biased proxy advisers, criticizing the two firms for controlling more than 90% of the U.S. proxy advisory market.
ISS's ownership structure is a central point of contention for the U.S. government. Founded in 1985, ISS was acquired in 2020 by Deutsche Boerse, the operator of the Frankfurt Stock Exchange, for 1.5 billion euros (about 2.4 trillion won), and the German exchange group remains its largest shareholder. Glass Lewis counts a Canadian private equity firm among its main shareholders.
This is not the first clash between ISS and the SEC. In 2013, ISS paid the regulator $300,000 to settle allegations that it had failed to safeguard client information related to proxy voting.
