On December 11, the White House issued an Executive Order that targets proxy advisory firms, including ISS and Glass Lewis, for regulatory and enforcement actions (the “Executive Order”). This is the latest executive branch action that could upend the traditional process for shareholders and proxy advisory firms to influence public companies in the 2026 proxy season.
The Executive Order (which has an accompanying fact-sheet) takes on a full scale review of proxy advisory firms, mobilizing the Chairmen of the SEC and FTC and the Secretary of Labor to review and revise regulations as they pertain to proxy advisory firms. The Executive Order’s “Purpose” section criticizes the proxy voting advisory firms for using “their substantial power to advance and prioritize radical politically-motivated agendas – like “diversity, equity, and inclusion” and “environmental, social, and governance” – even though investor returns should be the only priority.”
In particular, SEC Chairman Paul S. Atkins is instructed to review all SEC rules and guidance relating to proxy advisors, with a focus on those that implicate “diversity, equity, and inclusion” and “environmental, social, and governance policies.”
Under the Executive Order, the SEC Chairman is instructed to consider revising or rescinding all rules, regulations, guidance, bulletins, and memoranda relating to proxy advisors in order “to increase oversight of and take action to restore public confidence in the proxy advisor industry, including by promoting accountability, transparency, and competition.” The focus, but not the exclusive focus of the President’s regulatory directive is “diversity, equity, and inclusion” and “environmental, social, and governance policies.”
The Executive Order specifically directs the Chairman to focus on Rule 14a-8, which governs shareholder proposals. It also instructs Chairman Atkins:
- to enforce the antifraud provisions of the federal securities laws in cases of material misstatements or omissions in proxy advisor’s voting recommendations; and
- to assess whether the proxy advisory firms should register as Registered Investment Advisers under the Investment Advisers Act of 1940 (the “Advisers Act”).
The Executive Order directs the SEC not only to consider regulating proxy advisory firms, but also to consider regulating those who use their recommendations. Under the Executive Order, the SEC Chairman must:
- analyze whether proxy advisory firm voting recommendations lead “investment advisers”[1] to “coordinate and augment” their voting decisions such that they form a “group” for purposes of the beneficial ownership reporting rules under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (the “Exchange Act”); and
- direct SEC Staff to examine whether the practice of Registered Investment Advisers engaging proxy advisory firms to advise on “non-pecuniary factors in investing,” including “diversity, equity, and inclusion” and “environmental, social, and governance” factors, is “inconsistent with their fiduciary duties.”
The Executive Order also:
- directs the Chairman of the Federal Trade Commission to investigate the proxy advisory firms for antitrust violations and unfair and deceptive acts and practices; and
- orders the Secretary of Labor to consider revising ERISA rules to
- specify whether a proxy advisory firm is an “investment advice fiduciary” under ERISA; and
- “strengthen the fiduciary standards for pension and retirement plans covered under ERISA” and assess “whether proxy advisors act solely in the financial interests of plan participants and the extent to which any of their practices undermine the pecuniary value of the assets of ERISA plans.”
How far-reaching the Executive Order’s implications will be remains to be seen, particularly given a July court ruling from the D.C. Circuit that significantly narrows the Commission’s authority to regulate proxy advisory firms using the federal proxy rules (see in a prior Freshfields post).
But the order, and any subsequent SEC, FTC and Department of Labor (“DOL”) actions to which it leads, may nonetheless deter advice and outreach by proxy advisory firms and institutional investors in the upcoming proxy season. This will likely further limit the amount of shareholder engagement public companies receive this proxy season and in the coming year.
1) What Does the Executive Order Do (and Not Do)? And What Does the Advisers Act Have to Do With It?
The Executive Order does not itself amend the Exchange Act, the Investment Advisers Act, ERISA, or any agency proxy rules. Instead, it directs agencies to consider rulemaking, guidance changes, and enforcement steps. The SEC may respond with a range of actions, including notice-and-comment rulemaking, changes in SEC (and staff) guidance, and enforcement actions.
The SEC faces some limitations on what rule sets it can use to regulate proxy advisory firms in the wake of the D.C. Circuit opinion in Institutional Shareholder Servs., Inc. v. SEC, which upheld a lower court decision that invalidated the SEC’s earlier regulation of the proxy advisory firms under the federal proxy rules. Under the D.C. Circuit ruling, which was not appealed, the SEC had not shown that the proxy voting advisory firms had “solicited” proxies. Without a solicitation, the federal proxy rules, including the antifraud provisions of Rule 14a-9, do not apply to ISS and Glass Lewis.
These limitations likely drove the Executive Order to focus on alternative mechanisms to regulated the proxy advisory firms, including using the Advisers Act. The Executive Order contemplates requiring proxy advisors to register as Registered Investment Advisers under the Advisers Act, which would impose fiduciary duties on firms and trigger a suite of compliance requirements. ISS is already registered under the Advisers Act; Glass Lewis is not but has considered it.
We expect that ISS and Glass Lewis will respond to any new SEC rules with litigation and may reprise some of the arguments deployed in the earlier court challenges, including First Amendment claims and arguments that any new regulation would exceed the SEC’s statutory authorities under the Advisers Act. The former presents potentially profound challenges to the SEC’s authority. Under the latter arguments, the proxy advisory firms may seek to leverage the Supreme Court decision in Loper Bright, which accords agencies less deference in their interpretations of statutory terms. The end of Chevron deference provides ammunition to parties challenging new regulations by any Administration.
What to watch for: intense legal wrangling and the SEC navigating how it regulates proxy advisory firms, but we expect notice and comment rulemaking to take time considering prospective legal challenges.
2. Rule 14a-8: What’s the Next Shoe to Drop?
Rule 14a-8 has already been the subject of a flurry of SEC actions this year. Weeks after President Trump took office a second time, the staff of the SEC Division of Corporation Finance repealed Staff Legal Bulletin 14L and replaced it with Staff Legal Bulletin 14M. This gave public companies seeking to exclude shareholder proposals more latitude under the (i)(7) ordinary business grounds for exclusion (by narrowing the “significant social policy” exception to the grounds for exclusion ) and the (i)(5) grounds for exclusion (dealing with whether proposals relate to the company’s business). Then, in October, the SEC Chairman gave a speech outlining how, under Delaware law, precatory proposals are not proper matters for a shareholder vote and thus are excludable by public companies under (i)(1) of Rule 14a-8. (See our earlier blogs on this speech and the subsequent decision by the Division of Corporation Finance to limit no-action relief this proxy season to this ground for exclusion).
Rule 14a-8 is already on the SEC’s RegFlex Agenda, and the Chairman alluded to coming changes to the rule in a speech about promoting capital formation and IPOs earlier this month when he spoke of “depoliticizing” shareholder meetings.
What to watch for: the levers that the SEC may use in a 14a-8 rule proposals include:
- Changing the minimum ownership thresholds required for making a shareholder proposal;
- Tightening the thresholds for votes necessary in one shareholder meeting for a proposal to be resubmitted the following year; and
- Eliminating the “significant social policy” doctrine or otherwise limiting the subject matter of shareholder proposals.
3. Drawing Lines: Brought to You by the Letter “G” and the Symbol “$”
The Executive Order targets “DEI” and “ESG.” It does not distinguish, however, among “environmental” and “social” investment concerns versus “governance” concerns. The Executive Order takes aim at “non-pecuniary” investment aims, but leaves to the SEC and other agencies the task of defining the line between “ESG” motivations that are pecuniary versus motivations that are non-pecuniary.
What to watch for:
- Will the SEC (and the FTC and DOL) attempt to focus regulatory and enforcement efforts on environmental and social investment initiatives and carveout more “traditional” governance concerns? Or will regulatory initiatives take a more maximalist approach?
- How will agencies, proxy voting advisory firms, shareholders, and public companies jockey to define the dividing line between pecuniary and non-pecuniary investment objectives (which is subject matter that the DOL has been wrangling with for decades)?
4. Thinking “Groups”
In directing the SEC Chairman to analyze how proxy voting advice may lead to the formation of a group under Exchange Act Sections 13(d) and 13(g), the Executive Order returns the governance conversation to a complex area of securities. The SEC most recently considered the group definition in its recent overhaul of the beneficial ownership reporting rules. Earlier this year, the Division of Corporation Finance issued revised Compliance and Disclosure Interpretations related to Schedules 13D and 13G under Acting Chairman Uyeda’s watch. These C&DIs caused many shareholders to reevaluate whether conversations they considered to be traditional crossed the line into seeking control, potentially triggering a 13D filing. In the wake of this guidance, the shareholder engagement landscape changed so much that even ISS changed its proxy voting guidelines, expanding flexibility for companies that receive less than 70% support for say-on-pay if they are unable to get specific feedback from shareholders in the wake of the C&DIs.
What to watch for:
- How will the SEC draw the lines here around group formation, anticipating potential concerns (and litigation arguments)?
- Will any changes try to carve out “G” from the “ES” investment motivations?
- Will a subset of investors threaten litigation, including using similar arguments to what the proxy voting advisory firms have used in the past?
5. The Recommendations and Votes You Won’t See
Although the Executive Order’s greatest impacts won’t be seen until any rules are proposed, it will likely affect this proxy season behind-the-scenes. ISS and Glass Lewis have already signaled greater discretion on whether to support environmental and social shareholder proposals put forward to companies, with ISS taking a case-by-case approach, down from its presumptive supportive approach, and Glass Lewis announcing that it would abandon its single set of “benchmark” voting recommendations beginning in 2027. The Executive Order will likely further deter their willingness to recommend support for “E” and “S” proposals, as well as potentially for “G” proposals. This may also have knock on effects, with institutional investors becoming more circumspect about supporting “E” and “S” (and possibly “G”) proposals.
[1] It will remain to be seen whether the SEC will only analyze whether proxy advisory firm recommendations lead only registered investment advisers to form a group or whether the analysis will extend more broadly.
