September 16, 2025

Texas Proxy Advisory Firms Face Legal Challenges

News Summary

A recent court ruling in Texas has introduced a significant legal challenge for proxy advisory firms with the implementation of Senate Bill 2337. This bill mandates these firms to disclose potential influences of non-financial interests on their recommendations. The ruling affects major players like Institutional Shareholder Services Inc. and Glass Lewis & Co., which argue the law is unconstitutional. Meanwhile, proponents believe it enhances transparency. As the situation unfolds, the implications for businesses and shareholders in Texas could reshape the proxy advisory landscape.

AUSTIN, Texas – A U.S. District Court has temporarily halted the implementation of Texas Senate Bill 2337, which aimed to impose strict disclosure requirements on proxy advisory firms concerning their recommendations influenced by non-financial interests. On August 29, 2025, Judge Albright granted preliminary injunctions in two lawsuits, effectively preventing Texas Attorney General Ken Paxton from enforcing the law against Institutional Shareholder Services (ISS) and Glass Lewis, two of the largest proxy advisory firms in the market.

The injunctions come as ISS and Glass Lewis prepare for a trial scheduled for February 2, 2026. While the ruling applies specifically to these two firms, which hold a combined market share of approximately 97% in the proxy advisory market, it significantly limits the law’s practical enforceability against other firms in the short term. The Texas Senate Bill 2337 was set to take effect on September 1, 2025, introducing detailed public and directed disclosure obligations for proxy advisory firms if their counsel is influenced by factors beyond financial interests, such as environmental, social, and governance (ESG) factors.

Under SB 2337, advisory firms would be required to disclose if their recommendations might not align solely with the financial interests of shareholders, mandating transparency regarding how non-financial considerations may impact their advice. Violating this law is classified as a deceptive trade practice in Texas, allowing shareholders and the attorney general to take legal action.

ISS and Glass Lewis contend that the law is unconstitutional due to its requirements for compelled speech and its vague definitions of critical terms such as “non-financial factors.” ISS also argues that SB 2337 is preempted by the Investment Advisers Act of 1940, while Glass Lewis cites the Employee Retirement Income Security Act of 1974 as the basis for their claim of preemption.

The Texas Stock Exchange and Texas Association of Business have intervened as defendants in the lawsuits, expressing their interest in enforcing SB 2337 to limit what they perceive as misleading proxy advice. Conversely, the Alliance for Corporate Excellence has filed amicus briefs in support of the legislation, claiming it is necessary for increasing transparency within the proxy advisory industry.

During the court proceedings, Judge Albright acknowledged potential harm to ISS and Glass Lewis should the law be enforced and recognized a likelihood of success on the merits for the plaintiffs, warranting the issuance of the injunctions. The attorney general has the option to appeal this decision to the Fifth Circuit, which could lead to an emergency stay while the litigation continues. If implemented, the law would compel proxy advisory firms to disclose any conflicts of interest within 24 hours and maintain clarity concerning voting recommendations based on non-financial factors.

Critics of SB 2337 argue that the legislation could disrupt the operations of proxy advisory firms, hinder shareholder engagement, and decrease transparency in voting outcomes. Judge Albright expressed skepticism about the law’s intended purpose and its enforcement implications during the hearings.

The broader context of this legal challenge highlights a significant conflict between state regulations on proxy advising practices and existing federal laws governing financial advising. As the situation unfolds, the ultimate consequences for proxy advisory firms in Texas, as well as implications for shareholder advisory practices nationwide, remain to be seen.

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Author: STAFF HERE GEORGETOWN

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