ISS has told the Securities and Exchange Commission that its clients hand over their voting decisions expecting confidentiality, "just as American voters cast their ballots in the privacy of voting booths." The SEC's answer was that ISS also runs a service that files those votes publicly.
The commission sued Institutional Shareholder Services on Friday in Philadelphia. Not for fraud — the agency says it has reached no conclusion that any law was broken. It is a subpoena enforcement action, and it is about a spreadsheet. The subpoena asked for three things. ISS agreed to two. The third is an electronic export of four years of its ProxyExchange data: which recommendation went to which client, and how that client's shares were voted.
ISS has been registered with the SEC as an investment adviser since 1997, which means it owes its clients a fiduciary duty. The commission's position is simple. It cannot judge whether ISS served a particular client's interest without knowing what ISS recommended to that client and how it voted for them.
ISS's public defense of its influence is that it does not decide: about 90 percent of the voted shares it processes worldwide, it says, run on policies the investor customized. But the vote authorization agreements it signs offer clients a setting called Implied Consent, under which ISS executes votes according to its own recommendations with no further action by the client, who keeps the right to override. Whether the client chose or ISS chose is therefore a per-client, per-ballot fact, and the record of it sits in the file ISS will not export.
All of that is the SEC's account, from the SEC's brief; ISS's letters are not public. And its constitutional objection is not a novelty — last year it and Glass Lewis persuaded a federal judge to block a Texas proxy adviser law on First Amendment grounds. ISS also argues it is being retaliated against for protected speech, citing the December executive order that named it and Glass Lewis and said proxy advisers use their power to advance radical, politically motivated agendas. The examination began three months later. The SEC's reply is that a regulator investigating whether an adviser put its politics ahead of its clients is a regulator doing its job.
The SEC also notes it examined ISS in 2006, 2012, 2015 and 2022, and found Advisers Act compliance deficiencies every time.
A ballot is secret because the voter owns the vote. These shares belong to millions of people in mutual funds and exchange-traded funds, and for many clients ISS is paid to publish how they were voted. What the commission is asking for is the column that shows who decided.
A ballot is secret because the voter owns the vote.
