Proxy Advisors Glass Lewis and ISS Continue Fight Against State Attorney General Challenges to “Nonfinancial” advice in Challenge of Texas Law

Over the past several months, Missouri and Florida have gone on the offensive against the nation’s largest proxy advisors related to what they deemed “radical” agendas in providing proxy advice. In Texas, two of the largest proxy advisors, Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co., LLC (“Glass Lewis”), punched first, filing separate complaints in federal court against Texas Attorney General Ken Paxton in his official capacity, challenging the facial and as applied constitutionality of Senate Bill 2337 (“S.B. 2337” or “the Act”). The Act would require all proxy advisory services to disclose advice or recommendations that are “not provided solely in the financial interest of the shareholders of a company.” Advice and/or a recommendation is defined as being “for nonfinancial reasons” when it “is wholly or partly based on, or otherwise takes into account, one or more nonfinancial factors” including “an environmental, social, or governance (ESG) goal,” “diversity, equity, or inclusion (DEI)”, or “a social credit or sustainability factor or score.” Both Glass Lewis and ISS seek declaratory and injunctive relief enjoining the enforcement of S.B. 2337 as unconstitutional under the First and Fourteenth Amendments. Specifically, they allege the Act violates the First Amendment’s prohibition against viewpoint discrimination, infringes upon their freedom of association, and is unconstitutionally vague. Glass Lewis also argues that the Act violates the Dormant Commerce Clause, and that it is preempted by the Employment Retirement Income Security Act of 1974 (“ERISA”).

S.B. 2337

The Act, which is slated to take effect on September 1, 2025, is intended to “prevent fraudulent or deceptive practices associated with proxy advisors making recommendations for nonfinancial reasons.”

Under the Act, proxy advisors would be required to provide notice to the company requesting advice that “conspicuously” discloses when a service is based off or related to one of these “nonfinancial” factors, explaining that “the advice subordinates the financial interests of shareholders to other objectives.” The proxy advisors would also be required to “publicly and conspicuously” state on their website home page that “services include advice and recommendations that are not based solely on the financial interest of shareholders.”

Any violation of these disclosure provisions would constitute a deceptive trade practice under Section 17.47 of Texas’s Business & Commerce Code, which could result in a $10,000 penalty per violation—or up to $250,000 if a consumer 65 years of age or older was affected. In addition, the Act creates a private right of action for any “affected party” to seek declaratory judgment or injunctive relief. “Affected party” is defined to include recipients of proxy advisory services, companies that are the subject of proxy advisory services, or any shareholder of a company that is the subject of proxy advisory services.

The Complaints

Glass Lewis and ISS argue in their complaints that the Act constitutes unlawful content and viewpoint discrimination under the First Amendment and fails strict scrutiny review because it targets particular speakers (proxy advisors), restricts specific types of speech such as advice which opposes corporate management, and compels particular messages that alter the content of the companies’ speech. They also argue that the law is vague for voidness and is preempted by federal law regulating investment advisors registered with the U.S. Securities and Exchange Commission (“SEC”). As an entity already “subject to a comprehensive regulatory regime under the Advisers Act,” ISS maintains that S.B. 2337 impermissibly imposes state regulations despite well-established federal precedent, and that it unreasonably interferes with private contractual relationships for no legitimate public purpose. As noted by ISS and Glass Lewis in their complaints, a similar law in Missouri was recently struck down by a district court as violating the First Amendment, void for vagueness, and preempted by federal law. See Sec. Indus. & Fin. Mkts. Ass’n v. Ashcroft, 745 F. Supp. 3d 783, 801 (W.D. Mo. 2024).  

Glass Lewis further argues that S.B. 2337 violates the Dormant Commerce Clause because it “burdens interstate commerce by requiring out-of-state proxy advisors to give out-of-state shareholders time-consuming, expensive, and distracting disclosures about companies that need not even be incorporated in Texas.” The complaint also suggests that the Act could result in “gamesmanship” by prompting companies with no ties to Texas to move there “solely to trigger regulation under the Act.” Glass Lewis also contends that the Act directly contradicts the express requirements of ERISA and is thus invalid under ERISA’s broad preemption clause, and that the vagueness and additional obligations and risks imposed by the Act could result in gamesmanship by out-of-state entities.

Additionally, ISS argues that the Act violates the Contracts Clause of the Constitution by substantially impairing its contractual relationships with customers without any legitimate public purpose by (1) expanding and attaching new obligations to existing contractual duties; (2) imposing new consequences for fulfilling contractual obligations; and (3) forcing ISS to breach its contractual confidentiality obligations. The complaint argues that even if the Act were genuinely concerned with preventing fraud, such a purpose is not actually advanced by the regulation because it requires proxy advisors like ISS to provide warnings regarding factors that “clients asked ISS to consider.”

ESG, DEI, and an Uptick in State Attorney General Actions

The Act and the ISS/Glass Lewis lawsuits mark the latest development in a recent trend of shareholder suits related to DEI and ESG initiatives. In addition to the recently enjoined Missouri law cited to in both complaints, Missouri Attorney General Andrew Bailey launched investigations into and filed lawsuits against Glass Lewis and ISS “related to their promotion of radical environmental, social, and governance (ESG) and diversity, equity, and inclusion (DEI) agendas.” Likewise, Florida Attorney General James Uthmeier announced investigations into the two proxy advisors also in relation to their DEI and ESG investing policies, including antitrust accusations of collusion regarding the adoption of those policies. Antitrust accusations related to ESG and DEI are also on the rise, including lawsuits brought by state attorneys general and supported by the U.S. Department of Justice and the Federal Trade Commission.

Crowell’s State Attorneys General Practice (State Attorneys General | Crowell & Moring LLP) is comprised of veteran state prosecutors. Our team is here to assist you in your matters before the State Attorneys General, or discuss either this action or similar challenges to recent legislative activity at the state level.