SEC Sues ISS in Landmark Clash Over Proxy Adviser Data

The SEC Is No Longer Asking Nice

The Securities and Exchange Commission filed a subpoena-enforcement lawsuit against Institutional Shareholder Services on Friday in the U.S. District Court for the Eastern District of Pennsylvania. The message is blunt: ISS stopped pretending this was a negotiation and went to court to make it comply.

The case began in March, when the SEC’s Division of Examinations opened a routine-looking review of ISS and asked for data on the firm’s proxy recommendations and voting activity. ISS did not produce all the requested information. In July, the enforcement division escalated, issuing a formal subpoena. ISS pushed back again. After extended deadlines and repeated attempts to settle the dispute quietly, the SEC filed suit.

The regulator says the investigation remains in a fact-finding stage and has not concluded that ISS violated federal securities laws. But the posture has shifted dramatically. The SEC is not investigating anymore. It is litigating.

What makes this case notable is not just that the SEC is enforcing a subpoena — agencies do that all the time — but what the subpoena is seeking. The SEC wants granular data on how ISS constructs its recommendations: the raw metrics, the weighting algorithms, the client-level voting guidance, and the internal research that feeds public reports. In effect, the regulator is asking to see behind the curtain of an industry that has spent decades operating with minimal scrutiny.

Why ISS Matters Beyond Wall Street

ISS and Glass Lewis together control more than 90% of the proxy-advisory market, according to the White House. That is not a contest. That is a duopoly with outsized power over how institutions vote their shares — and therefore, over who runs public companies.

When ISS recommends “against” a board member or a say-on-pay proposal, pension funds, sovereign wealth funds, and asset managers across the world follow that signal. Their voting decisions are filtered through ISS research. The firm does not cast votes itself, but it tells the people who do what to do. That makes ISS one of the most influential gatekeepers in global corporate governance — even though it is a private company with no elected mandate.

The reach extends far beyond American borders. European pension schemes, Middle Eastern sovereign funds, and Asian institutional investors all rely on ISS ratings when making voting decisions at U.S. and global corporations. A single ISS recommendation can sway outcomes at companies where activist investors hold modest stakes but the advisory firm’s guidance tips the balance. The firm’s say-on-pay scores, board diversity assessments, and environmental and social governance ratings have become de facto standards — not because they are codified into law, but because the market treats them as authoritative.

For the Trump administration, that concentration is a problem. The executive order signed in December directed the SEC to review its rules and guidance on proxy advisers, enforce antifraud provisions, and consider additional disclosure requirements. The order specifically named ISS and Glass Lewis. The lawsuit is the administrative version of that order: an attempt to force transparency from firms that have operated with limited public accountability.

The First Amendment Defense

ISS’s counterargument is unusual for a financial-regulation case. The firm told the SEC the subpoena raises First Amendment concerns and could expose ISS and its clients to retaliation over their voting activity. It is not arguing attorney-client privilege or competitive harm. It is arguing that forced disclosure of its research and voting recommendations would chill speech — and then point to its clients, who might face backlash for following that advice.

That framing is designed to cast the SEC as an agency trying to coerce private actors into silence. If successful, it would set a precedent that proxy-adviser methodology and client-level voting data qualify for speech protections that other financial-data requests do not enjoy.

It is also a defense with real stakes. Proxy advisers already operate in a legal gray zone: they advise fiduciaries on how to vote, but they are not themselves fiduciaries. They publish recommendations that shape outcomes without being directly accountable to the shareholders whose votes are being shaped. A ruling that forced disclosure violates the First Amendment would cement that opacity. A ruling that upholds the subpoena would open the door to far more aggressive oversight.

Legal scholars have noted the novelty of invoking the First Amendment in this context. The core question is whether ISS’s recommendations constitute protected speech or constitute actionable financial advice subject to regulatory compulsion. Courts have historically drawn a sharp line between the two — but the proxy-advisory space sits squarely in the middle, which is precisely why this case matters.

Second-Order Effects and Market Reactions

Even before the lawsuit was filed, market participants were adjusting. Several large asset managers have quietly begun building in-house proxy-voting capabilities, reducing their dependence on ISS and Glass Lewis. BlackRock, Vanguard, and State Street have all expanded their governance teams in recent years, partly in response to growing criticism that proxy advisers wield too much influence with too little accountability.

The lawsuit is likely to accelerate that trend. If the SEC prevails, other firms may face similar subpoenas, creating compliance uncertainty that pushes clients toward vertical integration. If ISS prevails, the status quo hardens, and the duopoly becomes more entrenched — precisely the outcome the Trump administration sought to avoid.

There are also ripple effects for corporate boards. Companies that have long lobbied against ISS recommendations now have a regulatory ally in the SEC. Some have privately praised the administration’s move, arguing that proxy advisers have become unchecked power centers in corporate governance. Others worry that increased disclosure could weaponize their methodologies against them, exposing proprietary models to competitors or giving activists ammunition to challenge specific scoring decisions.

International regulators are watching closely. The UK’s Financial Conduct Authority and the European Securities and Markets Authority have both signaled interest in proxy-adviser oversight in recent years. A U.S. ruling that strengthens SEC enforcement authority could embolden foreign regulators to pursue similar actions, potentially reshaping global governance standards. Conversely, a ruling that favors ISS on First Amendment grounds could create a protective precedent that limits regulatory reach on both sides of the Atlantic.

Who Wins, Who Loses, What Happens Next

If the SEC prevails, the immediate effect is narrow: ISS must produce the records the subpoena covers. But the longer-term effect could be wide. The litigation gives the agency leverage to renegotiate the terms under which proxy advisers operate — including whether their methodologies, data sources, and client relationships should be more transparent.

If ISS prevails, the SEC’s enforcement toolkit shrinks. Future subpoenas to proxy advisers will face the same First Amendment argument, and the agency will have to find another path — likely through new rules rather than ad hoc enforcement. That path is slower, harder, and politically uncertain.

For shareholders, the lawsuit is a double-edged sword. More disclosure could mean better oversight of how recommendations are made and whether conflicts of interest are managed. Less disclosure means the current system continues: institutions vote based on research they cannot fully audit, shaped by two firms that answer to no one outside their own boardrooms.

The Trump administration’s stated goal is to rein in what it sees as an overmighty, unaccountable industry. Whether the lawsuit achieves that goal depends on a federal judge in Philadelphia — and on how broadly the court interprets the First Amendment in a context that has nothing to do with journalism and everything to do with financial advice.

The case will test whether the SEC can compel a subpoena that a private company can resist on constitutional grounds. It will also test whether the White House’s broader crackdown on proxy advisers has staying power beyond an executive order. Whatever the ruling, the outcome will reshape the relationship between capital markets, corporate governance, and the unelected firms that sit between them — a relationship that has gone unexamined for far too long.