[00:00:00] Speaker 03: Case number 24-5105, Institutional Shareholder Services Inc. [00:00:06] Speaker 03: versus Securities and Exchange Commission, and Gary Gensler in his official capacity as Chair of the Securities and Exchange Commission, National Association of Manufacturers, Appellant. [00:00:18] Speaker 03: Mr. Hughes for the Appellant, Mr. Harris for the Appellate. [00:00:24] Speaker 04: All right, Mr. Hughes, good morning. [00:00:26] Speaker 00: Good morning. [00:00:28] Speaker 00: May it please the court, Paul Hughes for Appellant National Association of Manufacturers. [00:00:33] Speaker 00: Proxy advisory firms play a huge role in the public markets. [00:00:38] Speaker 00: Within 48 hours of a single firm disclosing its voting recommendations, as many as 45% of a company's shareholders will vote in lockstep. [00:00:48] Speaker 00: But these firms often have conflicts of interest. [00:00:51] Speaker 00: Their reports are sometimes plagued with errors. [00:00:54] Speaker 00: and the firms often require companies to adhere to distinctive visions of good corporate governance. [00:01:02] Speaker 00: When it promulgated modest protections in 2020 for public companies and their investors, the SEC acted within the scope of its statutory authority. [00:01:11] Speaker 00: The district court's contrary conclusion rested on its view that to solicit an entity must have some self-interest in the result it urges, and it found that proxy firms lacked such a self-interest. [00:01:24] Speaker 00: That conclusion is wrong for three principal reasons. [00:01:27] Speaker 00: First, the District Court failed to appreciate the Exchange Act's expressed delegation of definitional authority. [00:01:33] Speaker 00: The Commission was well within the bounds of Section 14A's scope to conclude it may regulate those who urge or advocate a particular result, regardless of any self-interest. [00:01:43] Speaker 00: Second, the district court's results is completely atextual. [00:01:48] Speaker 00: The district court and ISS prefer definitions of solicit like excite to action or entreat to do something. [00:01:54] Speaker 00: But those definitions don't contain a self-interest requirement. [00:01:59] Speaker 00: The district court engrafted a self-interest requirement through looking to a case citation in Black's Law Dictionary, which I'll discuss is just not a proper way of using that dictionary. [00:02:10] Speaker 00: Third, even if solicitation [00:02:12] Speaker 00: Contrary to my first two arguments, requires some self-interest on behalf of the proxy firm, the FCC found record evidence that such self-interest is present here. [00:02:23] Speaker 00: Proxy firms make their money because their customers follow their recommendations. [00:02:28] Speaker 00: Proxy firms make recommendations explicitly to obtain changes in corporate practices. [00:02:35] Speaker 00: And as the SEC found, proxy firms, because of conflicts of interest, can have immediate self-interest in the advice that they provide. [00:02:44] Speaker 05: Can I ask you a threshold question about standing? [00:02:48] Speaker 05: What is the injury to NAM members here? [00:02:54] Speaker 00: Thank you, Your Honor. [00:02:55] Speaker 05: It seems a bit unclear. [00:02:59] Speaker 00: Thank you. [00:03:03] Speaker 00: In the district court, there was a declaration of Chris Netram, who showed that many members are directly affected by the advice that the ISS provides. [00:03:14] Speaker 00: And the ways that they are affected, for example, as his declaration describes, is when there's inaccurate advice, it can be very difficult and time consuming for those members to be able to try to make corrections that ISS or Glass Lewis's members receive in a timely fashion. [00:03:31] Speaker 00: So they have to go to great expense in order to try to show their stockholders the errors that are in the ISS report. [00:03:41] Speaker 05: Is that kind of an informational harm? [00:03:42] Speaker 00: Well, it's a pocketbook harm, Your Honor. [00:03:46] Speaker 00: There is a direct pocketbook harm because what companies have to do in order to be able to overcome the information [00:03:52] Speaker 00: is for their own expense, distribute countervailing information. [00:03:58] Speaker 00: What the underlying 2020 rule does that is ultimately at issue here is it requires proxy advisory firms to be able to provide to their clients a link such that if a registrant puts up on Edgar [00:04:13] Speaker 00: a response to the ISS proxy analysis. [00:04:17] Speaker 00: A link to that response is provided to ISS customers through the ISS system. [00:04:22] Speaker 00: If that doesn't happen, the registrants have a significant out of pocketbook expense of getting that same information to their stock or to their shareholders. [00:04:31] Speaker 00: And it's also not usually done in nearly as timely a fashion. [00:04:35] Speaker 00: Additionally, to obtain even the report, the actual proxy analysis report, can be highly time-consuming and expensive if the companies can get it at all. [00:04:46] Speaker 05: Very indirect harms. [00:04:48] Speaker 00: I don't think I think they're kind of direct and immediate harms your honor I'll say that the National Association manufacturers when this rule was rescinded filed suit and had that that rule struck directly because they had standing there was never a challenge to the standing in the in the litigation that came through the Fifth Circuit often not a challenge to standing. [00:05:09] Speaker 00: Well, I appreciate that, Your Honor. [00:05:10] Speaker 00: But I think that's because it's clear that the members of the associational standing case, the members have this immediate direct pocketbook injury of how do they get this information timely to their shareholders? [00:05:24] Speaker 00: Second, how do they even get access to the reports? [00:05:26] Speaker 00: Because these reports are often proprietary information. [00:05:29] Speaker 00: But again, step back for a second. [00:05:32] Speaker 00: You have a report that makes critical [00:05:36] Speaker 00: statements about company management and suggest voting against the company management. [00:05:40] Speaker 00: Well, oftentimes those reports may be deemed confidential. [00:05:44] Speaker 00: So the registrant, the company who those reports are about, may not have ready access or timely access to be able to even receive those reports. [00:05:52] Speaker 00: That's a direct injury on the company, on the registrant, not to have immediate access to that information. [00:05:58] Speaker 00: And again, as I just said, 45% of stockholders may vote within 48 hours. [00:06:03] Speaker 00: There's evidence that 30% can vote within 24 hours. [00:06:05] Speaker 00: time is absolutely of the essence in one of these proxy fights. [00:06:09] Speaker 05: One of the requirements of the 2020... Don't the companies only get the information if the proxy advisor works within the exemption? [00:06:21] Speaker 00: Well, in order to be entitled to the exemption, the proxy advisor has to provide the information to the... The proxy advisor may choose not to [00:06:32] Speaker 05: provide that information because may choose not to fall within the exemption. [00:06:36] Speaker 05: You know, I think as a practice that makes the harm to the companies even less direct. [00:06:39] Speaker 00: Well, I think your honor, as a practical matter, the company or the proxy advisory firms deeply want exemptions from all of the other requirements. [00:06:48] Speaker 00: So they do and they would. [00:06:49] Speaker 05: So as a practical matter, they make this information available. [00:06:53] Speaker 00: So they but and that's the design, the 2020 rule, I think, is shot through with the notion that this is in order to enable registrants to get timely access to this information. [00:07:02] Speaker 00: And again, it has to be provided to the registrant at the same time that it's provided to stockholders, as I said. [00:07:09] Speaker 00: If 30% are voting within 24 hours and 45% are voting within 48 hours, a difference of getting it immediately the same time the stockholder gets it versus getting it two days later can be 45% of the stockholders of a corporate election having voted. [00:07:23] Speaker 00: And so the immediacy of the information that the registrants get by proxy firms that adhere to the two [00:07:30] Speaker 00: to be nine exemption provisions gives a very immediate impact in addition to, as I said, the cost of distributing information. [00:07:41] Speaker 05: I don't want to take away your time to get to the merits. [00:07:43] Speaker 05: So thank you. [00:07:45] Speaker 00: Thank you. [00:07:47] Speaker 02: I see a question about the merits. [00:07:48] Speaker 02: Yes, yes, you're sort of maybe jump to at least what your how your textual interpretation works. [00:07:54] Speaker 02: Of course, is it effectively that anything that impacts affects influences a proxy vote can be recorded as a solicitation? [00:08:05] Speaker 00: Yeah, I think to start with what what our view of what solicitation is is that the SEC is construction of it from 1956 on into this is just from the. [00:08:17] Speaker 02: My issue is I'm having trouble understanding what exactly they thought it meant and when you say words like move to action or urge, but it seems to come down to. [00:08:28] Speaker 02: anything that impacts effects influences a proxy vote. [00:08:33] Speaker 02: Yeah. [00:08:33] Speaker 02: And I want if that's oversimplifying, I want to hear why. [00:08:36] Speaker 00: Well, you know, I think that the distillation of this is the regulatory text, which is the reasonably calculated to result in the procurement of the proxy vote, but the reasonably calculated to results. [00:08:47] Speaker 00: And I think that is somebody who is making a statement [00:08:50] Speaker 00: with the intent to influence that vote. [00:08:53] Speaker 00: So I'm not sure that's materially different or distinct from what Your Honor just said. [00:08:57] Speaker 00: So I think we may have a point of agreement there. [00:09:00] Speaker 00: I just think what the SEC has said from 1956 current as to how they've interpreted by regulation is correct. [00:09:07] Speaker 00: Now, there are different textual definitions that have been provided. [00:09:13] Speaker 00: To urge is one that was discussed below. [00:09:15] Speaker 00: My friends have a series of other [00:09:20] Speaker 00: terms that they prefer, but I think ultimately they all get to the same point, which is you're suggesting somebody to do something. [00:09:30] Speaker 00: You're urging them to do a particular thing. [00:09:33] Speaker 00: You're entreating to action. [00:09:34] Speaker 00: You are inciting to action. [00:09:37] Speaker 00: These are the different sorts of terms that are all thrown around as definitions for solicit. [00:09:43] Speaker 05: a very strange understanding of the word solicit, I think both from 1934 and today. [00:09:49] Speaker 05: I mean, because here institutional investors hire, you know, ISS and I guess the one other company, you know, for this advice. [00:09:59] Speaker 05: Like they are seeking, they want this advice. [00:10:02] Speaker 05: And so it just doesn't sort of fit within the ordinary understanding of solicit. [00:10:08] Speaker 00: Well, I don't think that's entirely the marketing. [00:10:11] Speaker 05: I mean, do we really have to rely on the marketing? [00:10:13] Speaker 05: The fact that they market their services, that's a solicitation. [00:10:17] Speaker 00: I think the marketing does get us there. [00:10:19] Speaker 00: I don't want to shy away from that argument, but I don't think that is our principal argument, or the court has to rest on that argument, because what they are doing in the actual analysis, and I think it might be helpful just to show an example. [00:10:31] Speaker 00: In the appendix at page 457, there is an example of what one of these ISS reports directly looks like, and it's called an ISS proxy analysis benchmark [00:10:44] Speaker 00: policy voting recommendations. [00:10:46] Speaker 00: This is one that's in the record for Braemar Hotels. [00:10:49] Speaker 00: And it has the seven issues that are up for the corporate election. [00:10:53] Speaker 00: And it says what the board's recommendation is. [00:10:55] Speaker 00: And then it provides the ISS recommendation. [00:10:58] Speaker 00: And for five of them, it's different than the management, the board recommendations. [00:11:03] Speaker 05: Stan, I mean, NAM makes a lot of arguments about why ISS's advice is bad or ideological or [00:11:10] Speaker 05: You know, whatever it is. [00:11:11] Speaker 05: And, you know, there are a number of reasons why corporations don't like this. [00:11:17] Speaker 05: But I'm not sure how if institutional investors enter into a normal commercial relationship, they pay money to ISS for this advice. [00:11:26] Speaker 05: How does the advice become a solicitation of the proxy vote? [00:11:30] Speaker 05: Just in ordinary English. [00:11:31] Speaker 05: I just don't see that. [00:11:33] Speaker 05: It's hard for me to see that. [00:11:34] Speaker 00: I mean, their preferred definition includes, for example, entreat to do something. [00:11:39] Speaker 00: What ISS is doing at page J457 is entreating [00:11:43] Speaker 00: the folks who are purchasing its analysis to do a particular thing in treating someone has paid them for their advice. [00:11:50] Speaker 05: They can take it. [00:11:50] Speaker 05: They could leave it, but they've asked for the advice that they paid for the advice. [00:11:55] Speaker 05: So how is the advice then in treaty? [00:11:58] Speaker 05: Well, it is a commercial transaction. [00:12:02] Speaker 00: Your Honor, I think, like, let me provide a different example. [00:12:04] Speaker 00: If I go see my doctor, who I pay for, my doctor will likely solicit me to lose weight. [00:12:11] Speaker 00: That is a term that is used. [00:12:13] Speaker 05: He gives you advice to lose weight. [00:12:15] Speaker 00: Of course, yes. [00:12:16] Speaker 00: And I don't think there is a distinction there, because what they're doing is urging. [00:12:19] Speaker 00: They are saying, awake to action, entreat to do this particular thing. [00:12:24] Speaker 00: That is well within the meaning of what solicit encompasses. [00:12:28] Speaker 00: And again, this. [00:12:30] Speaker 00: We're comfortable with their definitions of it. [00:12:33] Speaker 00: It is urging somebody to do a particular thing, to awake to action. [00:12:37] Speaker 00: It is saying, here's the action you should take. [00:12:40] Speaker 00: Awake to action comes from Black Slot Dictionary, one of the dictionaries that ISS and the district court rely upon. [00:12:46] Speaker 05: But if you ask someone for something or advice or recommendation, it just, how is that advice and recommendation a solicitation? [00:12:56] Speaker 00: Because what they're doing in this particular instance and every time they send one of these reports is they're trying to awake you to action of saying here's the proxy vote don't be silent here the actions you should take you should take these particular actions you should vote for or against these proposals you should because. [00:13:14] Speaker 05: because you've asked for our advice, you've paid for our advice, and we are giving you this advice. [00:13:20] Speaker 00: And you are being awoken to action to do this thing that ISS thinks is in your interest, and ISS thinks is in the world's interest, in the global interest, and that ISS thinks is its own interest because it's selling advice. [00:13:33] Speaker 00: It needs people to follow its advice in order to have a market for people to continue buying its advice. [00:13:38] Speaker 00: It only exists if the consumers of this advice actually follow it and find value to it. [00:13:43] Speaker 00: What the advice is designed to do is to have because of the solicitation. [00:13:47] Speaker 05: That's because of a market relationship that no one's going to pay for advice that they find not useful. [00:13:53] Speaker 05: People pay for the advice because for whatever reason they find it useful, maybe. [00:13:57] Speaker 05: maybe they they shouldn't for whatever reason and things follow this advice but but I don't know how the advice becomes. [00:14:04] Speaker 00: So you know again I think comes back to the underlying definition that that we can agree to his insight to action is this inciting the recipient of this advice to take some action it is it is inciting saying. [00:14:15] Speaker 00: You need to do a particular thing. [00:14:17] Speaker 00: What is the thing you need to do? [00:14:18] Speaker 00: You need to vote for this vote against that. [00:14:21] Speaker 00: That is inciting to action is saying here's the action you take beyond even inciting to action. [00:14:27] Speaker 00: I assess in the robo voting platform. [00:14:29] Speaker 00: Well, for many of their customers automatically a vote unless it gets overridden by the customer. [00:14:35] Speaker 00: In other circumstances, it creates and there are examples of this at J 601. [00:14:40] Speaker 00: a matrix where a investor can just click through and vote their ISS recommendations, all of them at the touch of a single button using an ISS platform. [00:14:52] Speaker 05: And they choose to do so. [00:14:54] Speaker 00: Yes, but the materials that are being sent are saying, here is the action you should take. [00:14:59] Speaker 00: We're recommending you're doing it. [00:15:00] Speaker 00: That is soliciting them taking that action. [00:15:03] Speaker 05: We recommend this to you because you've paid for a recommendation. [00:15:06] Speaker 00: Well, yeah, you've paid for the recommendation. [00:15:08] Speaker 00: That's, of course, [00:15:09] Speaker 00: The reason they're paying for it, you said earlier, it's been marketed to them. [00:15:13] Speaker 00: But beyond being marketed to them, ISS needs to have people to take this advice for them to have a business. [00:15:18] Speaker 00: They are in the business of selling this advice and people wanting it and finding it actionable. [00:15:22] Speaker 00: And what's more, the SEC at J819, footnote 141, [00:15:29] Speaker 00: says that they're providing this advice in part because the firms quote unquote such influence is good and ultimately they want to have a positive influence on their clients because they view that as part of their responsibility to promote good governance. [00:15:42] Speaker 00: So there is additionally a motivation that is embedded within this advice is promoting a sense of what the proxy firm views as good governance. [00:15:51] Speaker 00: That is also part of the solicitation that the SEC found demonstrating why this was within scope. [00:15:57] Speaker 00: Step back again for a moment. [00:16:00] Speaker 00: From a statutory perspective, the question here is not who has the very best understanding of solicit. [00:16:06] Speaker 00: The question is, is what the SEC did within the scope of what solicit the broad meanings can be? [00:16:13] Speaker 00: And for example, the district court looked to the Oxford English Dictionary at page 20 of the district court's decision. [00:16:20] Speaker 00: and found that to urge is one of the included definitions. [00:16:24] Speaker 00: Then later at page 23, the district court found that the Oxford English Dictionary is one of the better definitions. [00:16:30] Speaker 00: The SEC pointed to, again, page 819, urge as one of the definitions on which it was resting as a permissible construction of this term. [00:16:42] Speaker 04: And given... Let me interrupt you, because I have the same concern Judge Brow does. [00:16:47] Speaker 04: If I come to you for legal advice, [00:16:50] Speaker 04: Have you solicited it? [00:16:52] Speaker 00: Well, Your Honor, I think if I am telling you, you need to do a particular thing at a particular time. [00:16:58] Speaker 00: And it's in the backdrop of, I have a business where I am saying, I am providing advice about this particular topic. [00:17:05] Speaker 00: I'm providing advice about environmental issues. [00:17:10] Speaker 00: And I am the best at providing advice about environmental issues. [00:17:13] Speaker 00: I provide this for 5,000 clients. [00:17:16] Speaker 00: They all rest on me providing this kind of advice. [00:17:19] Speaker 04: Kevin, I solicited your advice. [00:17:22] Speaker 00: Solicitation can go both ways. [00:17:24] Speaker 00: You've solicited my advice, but when I'm telling you that you need to do a particular thing at a particular time, I am inciting you to take action. [00:17:31] Speaker 00: I'm urging you to do a particular thing in a particular way. [00:17:34] Speaker 00: That is well within the definition of what solicitation can mean. [00:17:40] Speaker 00: And again, the SEC has authority to be able to define this term that's been directly delegated to it by Congress. [00:17:50] Speaker 04: give you a couple minutes of reply. [00:17:52] Speaker 04: Mr. Harris? [00:17:55] Speaker 01: Good morning. [00:18:03] Speaker 01: May I please the court? [00:18:04] Speaker 01: No one would call a communication a solicitation when the recipient has invited and paid for it. [00:18:11] Speaker 01: ISS does not go around telling strangers how to vote. [00:18:14] Speaker 01: It gives its advice only to those who have retained and paid it for this purpose. [00:18:19] Speaker 01: Investors do not pay ISS to solicit them. [00:18:22] Speaker 01: I'd refer the court to the Council of Institutional Investors' amicus brief, which helpfully talks about how investors engage ISS and makes the exact same point the court made, which is that the investors ask ISS to provide them these services, pay ISS, and then ISS provides the advice. [00:18:38] Speaker 01: And ISS critically only analyzes securities or votes that the clients ask it to. [00:18:44] Speaker 01: Moreover, ISS is a fiduciary, which means that's the antithesis of a solicitor. [00:18:50] Speaker 01: A fiduciary is required by law to work solely in its client's best interest, not its own. [00:18:56] Speaker 01: And so again, I just don't think anyone familiar with English would say ISS solicits its client's votes when it says, here's how we recommend you vote based on the criteria you told us. [00:19:08] Speaker 01: Now, I'd like to go to Judge Garcia's point. [00:19:11] Speaker 01: My friends, I think, [00:19:12] Speaker 01: In terms of the statute, if the court agrees with this definition, we've essentially turned the statute into the SEC may regulate votes in the public interest. [00:19:20] Speaker 01: And let me give you a comparison. [00:19:22] Speaker 01: 10B, the most famous provision of the securities laws, same statute. [00:19:26] Speaker 01: It says the SEC may regulate manipulative or deceptive practices in connection with the purchase or sale of securities. [00:19:33] Speaker 01: They could have done the exact same thing. [00:19:34] Speaker 01: They could have said, [00:19:36] Speaker 01: the SEC may regulate manipulative, deceptive, unfair practices in connection with shareholder votes. [00:19:42] Speaker 01: They didn't. [00:19:43] Speaker 01: They said the word solicit. [00:19:44] Speaker 01: And I do think if we allow SEC via NAMM to define solicitation based on one rare definition, again, I think that essentially writes solicit out of the statute. [00:19:58] Speaker 01: It has to do some work. [00:19:59] Speaker 01: Now, even Lope or Bright, at all times, [00:20:04] Speaker 01: The agency's interpretation always has to be reasonable. [00:20:07] Speaker 01: And it's difficult to describe how much NAMM's position warps the purpose of the solicitation rule. [00:20:14] Speaker 01: So the purpose of the solicitation statute was to protect ISS's clients from NAMM's members. [00:20:21] Speaker 01: It was the corporations, the partisans, the corporations, management and opponents running around soliciting based on [00:20:27] Speaker 01: false premises. [00:20:29] Speaker 01: But to use that for NAMM to regulate ISS, it completely inverts the statute to say, we're going to use this to regulate the investors' advisors. [00:20:42] Speaker 01: Because of course, at the end of the day, when there is this partisan fight over a takeover or a board election, ISS helps its clients sort those issues out and figure out how to vote. [00:20:53] Speaker 01: So again, it's just to interpose [00:20:56] Speaker 01: I section 14 in there makes no sense and I think it's important to note to on a practical level we put several of them in the appendix. [00:21:04] Speaker 01: I SS is clients are some of the richest and most sophisticated entities in the financial system they didn't want this rule so that the people who are actually paying I SS for advice they complete they said. [00:21:16] Speaker 01: We manage conflicts like ISS as an investment advisor has to maintain a comprehensive program to manage its conflicts. [00:21:23] Speaker 01: The investors weren't raising these issues or this notion of errors and inaccuracies. [00:21:27] Speaker 01: That's not coming from our clients who seem pretty happy with our work. [00:21:30] Speaker 01: It's coming from the publicly traded companies and they have a difference of opinion with ISS on some things like director qualifications, executive comp, sustainability, but even on those things. [00:21:40] Speaker 01: I mean, ISS has clients that vote for sustainability measures and those that vote against it. [00:21:46] Speaker 02: You mentioned Loper-Brite, and NAM obviously has placed a lot of weight on this provision saying the SEC has power to define technical and other terms. [00:21:57] Speaker 02: Can you sort of directly explain whether and how you think that should affect our, how we approach the statutory analysis? [00:22:04] Speaker 01: Sure, I mean, I agree it's there. [00:22:06] Speaker 01: I mean, Judge Metta acknowledged that. [00:22:07] Speaker 01: I mean, after, because of course, to figure out, there's no question, I think, even for my friends, that the court has a role in policing the bounds of what that means. [00:22:17] Speaker 01: The word solicit has to mean something. [00:22:18] Speaker 01: Judge Metta acknowledged this. [00:22:20] Speaker 01: He acknowledged the commission's rulemaking and definitional authority. [00:22:24] Speaker 01: And so I just, I think it strains both Loper and the statute beyond the breaking point if, again, a party standing in the shoes of the SEC [00:22:33] Speaker 01: win based on a rare definition. [00:22:35] Speaker 01: I think a great case on this. [00:22:37] Speaker 01: I think two great cases on this are MCI and then Regions Bank. [00:22:40] Speaker 01: So in Regions Bank, the 11th Circuit, it's a really interesting case about does the word applicant for credit, does that include a guarantor, or is it just the applicant, the person applying? [00:22:54] Speaker 01: And the majority by Judge Bill Pryor surveyed lots of dictionaries and said, well, it would really, really push the bounds of usage to say the guarantor is the applicant. [00:23:04] Speaker 01: The dissent disagreed and said, no, we think you can't limit it to this use of applicant just because it's more common. [00:23:14] Speaker 01: Same thing. [00:23:14] Speaker 01: And MCI was the exact same thing of the meaning of the word modify. [00:23:19] Speaker 01: And based on an extensive interpretation of that term, [00:23:22] Speaker 01: Even though the agency there was getting Chevron deference, just like in Regions Bank, the court via Justice Scalia said, you just can't take modify to mean essentially upend. [00:23:34] Speaker 02: So I think you would say this has some effect. [00:23:37] Speaker 02: Whatever effect it has, it would give the SEC some leeway to stretch the bounds of. [00:23:43] Speaker 02: what solicit means, but whatever the bounds of that discretion, they've gone beyond it here. [00:23:48] Speaker 02: That's how you want us to do it. [00:23:49] Speaker 01: Yes. [00:23:49] Speaker 01: And I think, and again, even the SEC, I don't think has ever disputed that its preferred definitions were rare. [00:23:56] Speaker 01: And as I think the conversation with my friend and ourselves, I just don't think anyone would use language this way. [00:24:02] Speaker 01: I mean, and this is Commissioner Lee's dissent, JA804205. [00:24:06] Speaker 01: Merely providing a service in response to a request from a client is not solicitation. [00:24:12] Speaker 01: how people talk. [00:24:14] Speaker 01: And I think there is something different. [00:24:16] Speaker 01: The commission recognized this once. [00:24:19] Speaker 01: In some of its early opinions, they recognized this difference for financial advisors and others between, are you sending it to people who didn't ask for it? [00:24:28] Speaker 01: Or are you just advising your client? [00:24:29] Speaker 01: And then mysteriously, that disappeared when the commission tried to pull in proxy advisors into this regime. [00:24:35] Speaker 01: And they stopped talking about whether [00:24:40] Speaker 01: whether it was unsolicited. [00:24:41] Speaker 05: Mr. Harris, what about the marketing, right? [00:24:44] Speaker 05: The marketing of expert services? [00:24:45] Speaker 05: I mean, that seems the closest thing perhaps to solicitation. [00:24:53] Speaker 01: I think there's two issues with that. [00:24:54] Speaker 05: The first is... Especially if ISS has its own ideological perspective on what corporations should do, and then they market themselves as experts in proxy advice. [00:25:04] Speaker 01: Right, and I think there are two problems with that. [00:25:06] Speaker 01: The first is even in that context, the advice, the quote unquote influence, the urging, all that doesn't start until after you're retained. [00:25:16] Speaker 01: So sure, ISS like any professional says, we do a good job, we'd like you to hire us, but they're not sending the advice until then. [00:25:23] Speaker 01: The second problem with that theory [00:25:25] Speaker 01: That's not what the Commission regulated here. [00:25:27] Speaker 01: The Commission wasn't saying, ISS, when you market your services, you need to do X, Y, and Z. They're regulating the advice. [00:25:34] Speaker 01: So even if that theory works, and we don't think it does, there's still this mismatch between that and what the Commission ultimately regulated. [00:25:45] Speaker 02: So I know you dispute this premise. [00:25:47] Speaker 02: And I'm not saying I accept it. [00:25:49] Speaker 02: But imagine the SEC actually had found, affirmatively, that proxy advice firms have an interest in the outcome of shareholder votes. [00:25:58] Speaker 02: And they give their advice to further their own self-interest. [00:26:02] Speaker 02: Would you agree, if that were the case, that ISS would be soliciting, even under your understanding? [00:26:08] Speaker 02: Or would there still be some distinction? [00:26:10] Speaker 01: I think there'd be a big problem with that, because as a fiduciary, ISS is obligated to put its client's interests above its own. [00:26:16] Speaker 01: So that finding would essentially mean ISS was breaching its fiduciary duties. [00:26:21] Speaker 01: And if ISS does that, it's a registered investment advisor. [00:26:24] Speaker 01: The commission has many, many tools to fix that. [00:26:28] Speaker 01: I mean, ISS gets audited by the SEC. [00:26:29] Speaker 01: It has to do compliance reports to say nothing of its clients, who, again, are some of the biggest entities in the financial system. [00:26:36] Speaker 02: So my understanding is that at least some of the advisory firms believe they fall within an exemption to the Advisor Act. [00:26:45] Speaker 02: And so I think, is the answer yes? [00:26:50] Speaker 02: I understand if... [00:26:51] Speaker 02: You think that would be a bunch of problems with that factual finding. [00:26:55] Speaker 02: I'm just trying to figure out what the bounds of what it means to solicit are. [00:26:58] Speaker 02: If they were self-interested and giving advice motivated to reach a particular outcome, it seems like that would qualify as solicitation, right? [00:27:09] Speaker 01: Right. [00:27:09] Speaker 01: And I obviously dispute the premise. [00:27:11] Speaker 01: But yes, the nature of solicitation. [00:27:13] Speaker 01: Let me take the example of the broker dealers. [00:27:16] Speaker 01: In the 60s, [00:27:17] Speaker 01: broker dealers who are very well positioned in these markets, many of them were on the payroll of the partisans, of the boards or the insurgents. [00:27:25] Speaker 01: And so the commission says in 64, if the broker dealer is working on behalf of someone actually soliciting, sure, you're covered. [00:27:32] Speaker 01: So I think in that scenario, and let me talk about what you said about some advisors not being regulated. [00:27:38] Speaker 01: So first of all, ISS is the only party here, and there's no dispute. [00:27:42] Speaker 01: We are regulated. [00:27:44] Speaker 01: It would be really odd to say, and first of all, if you're acting as an investment advisor, you're subject to the duties and the conflict requirements regardless. [00:27:53] Speaker 01: But it'd be really odd to say some proxy advisors aren't investment advisors. [00:27:59] Speaker 01: Therefore, we're going to pull all of them into this regime that doesn't fit. [00:28:03] Speaker 01: And to go back to Judge Rao's question about the exemption, [00:28:06] Speaker 01: It is difficult to describe how absurd it would be for ISS not to be exempt. [00:28:12] Speaker 01: So ISS has hundreds of thousands of clients across thousands of votes, many with custom policies. [00:28:21] Speaker 01: And the crux of the non-exempt solicitors is you have to file. [00:28:26] Speaker 01: You have to basically file with the commission what you've been soliciting. [00:28:29] Speaker 01: I think ISS would have to make hundreds of thousands of filings. [00:28:34] Speaker 01: No one ever thought they were going to do that. [00:28:36] Speaker 01: So we had to create all these exemptions. [00:28:38] Speaker 01: And so instead of just recognizing, ISS doesn't solicit or regulate it under the Advisors Act, you have to pull them into this regime that doesn't fit textually and then make up exemptions to pull us out of it. [00:28:50] Speaker 01: It seems easier to just say, we're an investment advisor. [00:28:52] Speaker 01: If we have problems with that, there are plenty of tools to address it. [00:28:57] Speaker 05: Could they impose those disclosure requirements through [00:28:59] Speaker 05: Its other regular the SEC impose those disclosure requirements through its other regulatory authorities. [00:29:05] Speaker 05: The rather than through this exemption. [00:29:08] Speaker 01: The advisors act. [00:29:09] Speaker 01: So one of the pieces of this solicitation rule is about conflict disclosures. [00:29:13] Speaker 01: One of the core aspects of being a registered investment advisor is conflict disclosures. [00:29:18] Speaker 01: I mean, is has to to the Commission satisfaction develop procedures to [00:29:22] Speaker 01: Disclose manage and mitigate any conflicts and so again, it's not only It's duplicate but again, I think the point of this is the Commission is trying to get ISS under the thumb of issuers But that just doesn't make sense. [00:29:38] Speaker 01: It doesn't comport with the statute and again the Commission had to do a lot of gymnastics both to pull us in as a solicitor and [00:29:45] Speaker 01: And then once a solicitor to then say, well, but you don't actually have to follow the stuff solicitors do, because that makes no sense. [00:29:52] Speaker 01: So again, unless there are further questions, again, I would just conclude by saying. [00:29:56] Speaker 05: I have one question just about if you could just say, I think a number of NAMM's arguments focus on the fact that ISS is a duopoly. [00:30:06] Speaker 05: And I'm just wondering if you can explain to me why this market is a duopoly. [00:30:12] Speaker 05: Or if you have any thoughts about why this market is a duopoly. [00:30:15] Speaker 05: I know it's not. [00:30:15] Speaker 05: I'm just interested in understanding how this market works. [00:30:18] Speaker 01: Well, I think I would dispute duopoly. [00:30:19] Speaker 01: I mean, there are certainly others. [00:30:20] Speaker 01: And I believe Vivek Ramaswamy has established a proxy advisor that is intended to have a different viewpoint than some of the others. [00:30:28] Speaker 01: So I would dispute it's a duopoly. [00:30:30] Speaker 01: But I think [00:30:31] Speaker 01: Companies hire ISS because it provides valuable services and does a good job. [00:30:36] Speaker 01: And it's important to note, too, nobody has to hire ISS. [00:30:39] Speaker 01: If an institutional investor wants to do it so they can hire more staff, they can do this in-house. [00:30:43] Speaker 01: And so the fact that they hire ISS, notwithstanding these allegations of conflicts and inaccuracies, I think shows that [00:30:53] Speaker 01: our clients at least think ISS is doing a good job. [00:30:56] Speaker 01: And again, the last thing I would say is it's just a truly odd rulemaking when our clients, the people we contract with, overwhelmingly didn't want these rules. [00:31:04] Speaker 01: And I think Commissioner Lee wrote very eloquent dissents in both things we challenged on this point. [00:31:11] Speaker 02: You mentioned that, Brian, am I right that the way ISS would behave if this [00:31:19] Speaker 02: role were in effect would be to do what it needs to do to be under the exemption rather than the alternative. [00:31:26] Speaker 01: We'd have no choice. [00:31:26] Speaker 01: I mean, I think it would be almost unthinkable the amount of filings they would have to make if every custom policy that we make for a client for every vote is deemed a solicitation. [00:31:37] Speaker 01: I think it would be unthinkable to not be exempt. [00:31:40] Speaker 02: And do you, this isn't, you know, biting on us, but do you have a view on NAMM's standing? [00:31:45] Speaker 02: Because if that's the case and [00:31:47] Speaker 02: It seems like you would be providing these disclosures and providing your currently confidential advice that would reduce some burdens on them, make them more effective at countering responding to the advice. [00:31:59] Speaker 01: You can read, so we opposed intervention below on grounds of standing. [00:32:04] Speaker 01: I believe they were given permissive intervention. [00:32:07] Speaker 01: We didn't appeal that, but I think our brief opposing their intervention below sets forth our view of that. [00:32:12] Speaker 01: Again, we didn't challenge it here, but we do have a whole brief on why we didn't think they had [00:32:17] Speaker 05: It does seem though that your view of how the exemption works suggests they have a quite direct interest. [00:32:24] Speaker 01: We didn't challenge their standing in this court. [00:32:28] Speaker 04: Let me ask you, do you have any view on why the SEC is not before? [00:32:36] Speaker 01: I mean, they didn't take the resources to appeal. [00:32:38] Speaker 01: And remember, there's been this extraordinarily convoluted history of the rule. [00:32:44] Speaker 01: that after we initially sued to challenge the exemption conditions, the commission rescinded the exemption conditions, but not the definition. [00:32:52] Speaker 01: Then the SEC lost on the definition, but since then, the Fifth Circuit has reinstated some of the exemption conditions. [00:32:59] Speaker 01: So I think it's possible they just took a view of its [00:33:02] Speaker 01: They just want the courts at this point to resolve this once and for all. [00:33:06] Speaker 01: But honestly, I think the fact that they're not here I think should have the court take with a grain of salt any arguments from my friends about damage to the regulatory regime or problems with enforcement. [00:33:22] Speaker 04: Thank you. [00:33:23] Speaker 04: Thank you. [00:33:26] Speaker 04: Mr. Hughes, why don't you take two minutes? [00:33:32] Speaker 00: Thank you, Your Honor. [00:33:33] Speaker 00: I'll try to make four brief points. [00:33:35] Speaker 00: The first, again, the delegation point is an important one in Lindean versus SEC. [00:33:40] Speaker 00: This court explained that those provisions have real effects and will take you outside the ordinary meeting and give flexibility to the agency. [00:33:48] Speaker 00: Their preferred definition, awake to action, fits precisely what is happening here. [00:33:54] Speaker 00: And let me give six things that happen. [00:33:56] Speaker 00: They market their services, telling investors why they need to purchase them. [00:34:00] Speaker 00: They make money by having investors follow that advice. [00:34:03] Speaker 00: They issue comprehensive reports that they call benchmark policy voting recommendations. [00:34:07] Speaker 00: those reports are transmitted immediately around the vote when they're going to have their maximum impact. [00:34:13] Speaker 00: Five, they offer a platform for the voting, give click through voting, if not robo voting. [00:34:19] Speaker 00: In six, it has an enormous pragmatic effect. [00:34:22] Speaker 00: Even the district court, and I think when you look at ISS's brief, they don't say they don't awake somebody to action. [00:34:28] Speaker 00: Their argument is actually far more nuanced. [00:34:30] Speaker 00: They say the reason [00:34:31] Speaker 00: it is for solicitation that we're not soliciting is it's not in our own self-interest. [00:34:35] Speaker 00: So they're taking actually a more narrow understanding of solicitation because this fits comfortably, but that self-interest provision is a textual, doesn't have a basis. [00:34:45] Speaker 00: To Judge Garcia's question about if there were conflicts of interest, would that show a basis? [00:34:50] Speaker 00: The SEC at the Joint Appendix 819, footnote 141, this was sort of a tertiary reason defending its permissibility, but it did tie in its conflict of interest analysis, and then it cross-sided to the other provisions of the rule where it found the conflicts of interest and the importance there, and that's part of the basis on which the SEC said there is solicitation here because of the conflicts. [00:35:14] Speaker 00: That's squarely within the reasoning the SEC gave. [00:35:18] Speaker 00: Last point to Judge Henderson's question, [00:35:20] Speaker 00: about why the SEC is not here. [00:35:22] Speaker 00: This was the product of decades long, over a decade long rulemaking across administrations. [00:35:28] Speaker 00: This was a bipartisan effort up until Commissioner Gensler decided that he was going to try to pull the plug on it at all costs. [00:35:35] Speaker 00: First, the commission in 2021 suspended the operation of the regulation [00:35:41] Speaker 00: wholesale until a court said that you can't simply say a regulation is no longer in force. [00:35:45] Speaker 00: Then there was a kind of very quick of the night rescission that was struck down by the court. [00:35:51] Speaker 00: The last action then was dismissing the appeal the SEC took to take the SEC jurisdictionally out of the game in this case. [00:35:59] Speaker 00: And that's why I think the SEC is not here. [00:36:03] Speaker ?: Thank you.