Dive Brief:
- The United States Fifth Circuit Court of Appeals dismissed a challenge to a 2022 Securities and Exchange Commission rule that updated proxy voting reporting requirements to include disclosing the votes on ESG matters.
- The three-judge panel dismissed the petition from the states of Texas, Louisiana, Utah and West Virginia for lack of jurisdiction on Friday, ruling the states failed to establish standing in the case.
- In the unpublished opinion, the judges said, despite having a plausible theory of increased compliance costs being passed on to states and other investors, the plaintiffs were unable to provide any evidence of such an injury, and conceded “there is no guarantee that regulated parties will always pass costs on to their consumers.”
Dive Insight:
The four Republican-led states initiated the petition in February 2023, three months after the SEC finalized the rule. The “Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers” was finalized in December 2022 and goes into effect on July 1.
The increased proxy voting reporting measures require proxy cards filed with the SEC to mirror the language and structure of the issuing party, as well as categorize voting matters. The categorizations include multiple ESG-related matters, including environment, climate, say-on-pay, shareholder rights and other topics.
The judges said the states were unable to establish evidence that any increased costs of compliance will be passed along from businesses to individuals. The case was decided by Fifth Circuit Judges James L. Dennis, Leslie Southwick and James C. Ho.
“In theory, cost pass-throughs can support a claim of standing,” the judges’ opinion said. “But there’s a difference between theory and practice. … Without evidence of a cost pass-through, we cannot say that the States have established a “substantial risk” that investors will suffer economic injury.”
The judges said the states additionally asserted a theory of parens patriae — the idea that states can take up suits either on behalf of citizens who can’t represent themselves or in their own “quasi-sovereign interest” to support the general economic well-being of their citizens. Typically, states are not allowed to bring parens patriae suits against the federal government, according to the ruling.
However, the judges decided there was no need to rule on the extent such lawsuits can be raised against the government “because this suit cannot proceed regardless.”
“There is insufficient record evidence that the Rule infringes [on the economic well-being of the plaintiff states’ citizens],” the opinion said. “The States argue that Texas residents who invest in funds subject to the categorization requirement will bear the regulatory costs passed on by funds. This argument runs into the same problem [as the cost pass-through argument] — the States have not offered sufficient evidence that the funds will indeed pass costs on to investors.”
The case was dismissed without prejudice, and Ho wrote in a concurring opinion that the states have the ability to refile in the future if they are able to provide evidence of injury.
“These are interesting — and potentially viable — theories of injury. But they are not supported by record evidence,” Ho wrote in the concurrence. “The lack of such record evidence prevents us from crediting these theories of injury at this time. … But the lack of record evidence does not prevent the States from refiling in the future with stronger evidence of injury.”
