On paper, the Securities and Exchange Commission filed a straightforward civil action. The agency seeks judicial enforcement of an administrative subpoena against Institutional Shareholder Services—the world's largest proxy voting advisory firm, covering more than 40,000 shareholder meetings annually. No criminal charges. No immediate penalties. Just a request for documents.
But code does not lie, and neither do legal filings when read at sufficient depth.
This case is not about subpoena compliance. It is about whether the SEC can finally crack open the black box of proxy advisory power before Congress potentially strips that authority away. The subpoena is a fishing expedition only in the most cynical interpretation. More accurately, it is the opening move in a regulatory chess game that has been building since 2020, when the SEC first tried to impose disclosure rules on this industry—and retreated in 2022 under First Amendment pressure.
Based on my audit experience reviewing institutional compliance frameworks and regulatory exposure assessments, I can identify what the SEC is actually hunting for: evidence that ISS's dual revenue model—charging investors for voting recommendations while simultaneously selling consulting services to the companies those investors vote on—creates systematic conflicts of interest that current disclosure regimes fail to address.
The Legal Architecture of This Fight
To understand what is at stake, one must first disambiguate the procedural posture from the substantive dispute.
The SEC's lawsuit, filed in federal district court, invokes Section 21(b) and (c) of the Securities Exchange Act of 1934. These provisions grant the SEC subpoena authority during investigations and permit the agency to seek judicial enforcement when targets refuse to comply. This is a standard enforcement mechanism—but its deployment against ISS signals something beyond routine regulatory housekeeping.
The critical distinction: this is a civil enforcement action targeting ISS's failure to comply, not an enforcement action alleging substantive securities violations. The underlying investigation remains sealed. What the SEC actually suspects ISS of doing wrong remains outside the public record.
This matters because the path from subpoena enforcement to actual penalties typically runs through three stages: document production, investigative findings, and either a settled administrative proceeding or a full enforcement action. The current lawsuit represents stage one. The SEC is building an information advantage before committing to a broader case.
What could that broader case involve? The most probable targets include potential violations of Rule 14a-9, which prohibits false or misleading statements in proxy materials; failure to disclose material conflicts of interest under the solicitation framework; or potentially fraudulent inducement if ISS recommendations were systematically biased in ways that financially benefited its consulting clients.
The 2020 proxy voting rules provide the regulatory hook. Under Release No. 34-89372, the SEC classified proxy voting advice as "solicitation" under federal securities law, triggering disclosure requirements and feedback mechanisms. The rationale was straightforward: if ISS tells institutional investors how to vote on executive compensation, board elections, or shareholder proposals, that advice influences the democratic functioning of public companies—and should therefore carry transparency obligations.
Then came the 2022 retreat. Under Release No. 34-95260, the SEC acknowledged that proxy voting advice deserves First Amendment protection and partially rolled back the 2020 framework. The agency effectively conceded that mandatory disclosure regimes for voting recommendations faced constitutional and practical challenges.
The SEC's Strategic Pivot
Here is where the contrarian reading becomes necessary: this lawsuit represents a deliberate pivot from rulemaking to enforcement.
When Congress or the courts constrain regulatory authority, experienced agencies do not surrender. They adapt. The SEC cannot currently promulgate a new rule requiring ISS to disclose its methodology or client relationships in voting recommendations. The 2022 guidance forecloses that path. But the agency retains full investigative authority under Section 21.
By issuing a subpoena—and then suing to enforce it when challenged—the SEC achieves several objectives simultaneously. First, it compels document production that would be impossible to obtain through notice-and-comment rulemaking. Second, it signals to the entire proxy advisory industry that enforcement is the new regulatory instrument. Third, it builds a factual record that could support either renewed rulemaking or targeted legislative proposals.
This strategy carries risk. ISS will argue that the subpoena is overbroad, that the requested documents implicate attorney-client privilege and work product protections, and that the SEC lacks authority to use investigative subpoenas as de facto rulemaking tools. If the federal court agrees and limits the subpoena's scope, the SEC's investigative capacity across the entire proxy advisory sector could face collateral damage.
But if the court enforces the subpoena with minimal restrictions, the SEC gains unprecedented access to ISS's internal deliberations, client communications, and conflict-of-interest documentation. That information asymmetry will define the next phase of this dispute.
The Dual Revenue Problem
Nowhere is the technical analysis more revealing than in ISS's business model.
ISS operates on what I call a "两边收费" structure—a dual revenue stream that has long attracted scrutiny. Institutional investors—pension funds, mutual funds, hedge funds—pay subscription fees for ISS's voting recommendations and governance research. Simultaneously, the companies being voted on pay ISS for consulting services, including corporate governance scorecards, board effectiveness assessments, and strategic governance advice.
The conflict of interest is structural, not incidental. When ISS advises a pension fund to vote against a particular executive compensation plan, ISS simultaneously advises the company's compensation committee on how to structure that plan to avoid negative recommendations. The same firm profits from both sides of the governance relationship.
The 2020 SEC rules attempted to address this through disclosure requirements: if ISS received compensation from a company it was recommending investors vote against, that relationship would need disclosure. But the 2022 guidance retreated from mandatory disclosure, treating most proxy voting advice as protected speech rather than regulated solicitation.
The SEC's current investigation likely focuses on whether ISS's voluntary disclosure practices under the Best Practice Principles for Shareholder Voting Research—a self-regulatory framework—adequately capture these conflicts. The agency is testing whether industry self-governance can substitute for regulatory mandates.
My assessment, based on years of reviewing conflict-of-interest frameworks in financial services: it cannot. Voluntary disclosure regimes systematically underperform when the disclosing party has strong incentives to minimize the disclosed information. ISS's public conflict-of-interest disclosures read like compliance theater—acknowledging the existence of potential conflicts without quantifying their frequency or materiality.
The Jarkesy Shadow
One overlooked dimension: the Supreme Court's 2024 decision in Jarkesy v. SEC established that SEC administrative enforcement proceedings must provide Article III court jury trials for certain civil penalties. While Jarkesy addressed the constitutionality of SEC in-house tribunals for fraud cases, its reasoning has broader implications.
ISS could argue that if the SEC attempts to bring an enforcement action based on subpoena-obtained evidence, any administrative proceeding would face Jarkesy-based constitutional challenges. This adds a procedural layer to what is already a multi-front legal dispute.
If ISS successfully extends Jarkesy protections to SEC proxy advisory investigations, the agency would need to pursue all subsequent enforcement actions in federal court—dramatically increasing litigation costs and timelines. This is not a peripheral concern. It is a potential structural constraint on the SEC's entire enforcement strategy for this sector.
International Complications
ISS operates across North America, Europe, and Asia-Pacific. The subpoena likely targets documents stored or generated in multiple jurisdictions. When those documents reside on European servers or involve EU-resident employees or clients, GDPR Chapter V restrictions on cross-border data transfers create a genuine legal conflict.
ISS can invoke the "real conflict" doctrine under international comity principles—arguing that complying with the SEC's subpoena would violate EU data protection law. Courts have recognized this defense, though success requires demonstrating that the company exhausted GDPR-compliant pathways (such as authorized transfers under Standard Contractual Clauses) before refusing compliance.
More importantly, ISS's EU operations already subject it to the Shareholder Rights Directive II, which requires annual public disclosure of conflict-of-interest management practices. If the SEC obtains documents showing ISS's EU disclosures mischaracterized its conflict management—perhaps by omitting consulting relationships that influenced voting recommendations—the agency could leverage inconsistent reporting across jurisdictions as evidence of systemic disclosure failures.
Competitive Dynamics and Industry Consequences
ISS and Glass Lewis control approximately 97% of the US proxy advisory market. A sustained SEC investigation of ISS creates a rare window for competitive disruption.
If institutional investors lose confidence in ISS's independence—or if the SEC imposes operational restrictions on ISS's business model—Glass Lewis benefits immediately. But the more significant opportunity lies with emerging data-driven competitors leveraging artificial intelligence and alternative data sources. A prolonged compliance crisis at ISS signals that the incumbent's "trust us" model is under regulatory attack, opening client relationships to vendors offering verifiable, auditable governance analytics.
The regulatory technology sector also benefits. Subpoena disputes center on document preservation and retrieval capabilities. If ISS lacked sophisticated e-discovery infrastructure—evidenced by its inability to respond precisely to SEC requests—it may face adverse inferences from the court. This failure, if documented, becomes a case study driving industry-wide investment in compliance technology.
Forward Assessment
The next six to twelve months will determine whether this case reshapes proxy advisory regulation or becomes a footnote in SEC enforcement history.
If federal courts enforce the subpoena with minimal restrictions, expect the SEC to rapidly escalate from information gathering to formal enforcement proceedings. The agency will likely pursue cease-and-desist actions, civil monetary penalties, and mandatory compliance monitorships. Institutional investors currently relying on ISS recommendations will face pressure to independently verify governance advice—or face fiduciary duty scrutiny for mechanically following potentially biased recommendations.
If courts limit the subpoena's scope or impose narrow protective orders, the SEC's investigative capacity contracts significantly. The agency may need to rely on voluntary cooperation from ISS, which seems unlikely given current litigation posture. In that scenario, the regulatory vacuum persists, and Congress becomes the relevant arena—potentially through legislation like the Voting Choice Act, which could explicitly constrain SEC authority over proxy advisors.
One outcome appears certain regardless of litigation trajectory: ISS will face substantial compliance restructuring. The dual revenue model, as currently structured, cannot survive sustained regulatory scrutiny. Whether that restructuring comes through mandatory divestiture of consulting services, enhanced Chinese wall requirements, or comprehensive conflict-of-interest disclosure mandates, the business model that made ISS a $4 billion enterprise will look materially different in three years.
The SEC chose enforcement precisely because rulemaking failed. Whether that bet pays off depends on what the subpoena eventually reveals—and whether courts give the agency the investigative latitude it needs to build a case that sticks.
Trust no one. Verify everything. In this instance, the SEC is taking its own advice.
