Texas v. Securities & Exchange Commission

The Fifth Circuit Court of Appeals ruled that Texas, Louisiana, Utah, and West Virginia did not establish standing to challenge a U.S. Securities and Exchange Commission (SEC) rule requiring registered management investment companies to disclose their votes on environmental, social, and governance (ESG) matters. The states argued that the rule “provides benefits only to a narrow sliver of fund investors motivated by the ESG agenda,” and that the SEC acted arbitrarily and capriciously, including because the SEC did not consider whether the rule would “increase activist leverage and pressure on fund managers and cause disinvestment in securities of companies and industries targeted by ESG activists.” The Fifth Circuit found that the record did not establish that the states would incur economic injuries as investors. The court also found that there was insufficient evidence of infringement of a state’s “quasi-sovereign interest in the economic well-being of its interests” to support the states’ invocation of the doctrine of parens patriae as a basis for standing. Judge Ho concurred in the judgment; he agreed that the states did not establish standing but stated that they could refile if they believed they could “assemble stronger evidence of injury.”

Texas, Louisiana, Utah, and West Virginia filed a petition for review in the Fifth Circuit Court of Appeals challenging the Securities and Exchange Commission’s final rule on proxy vote reporting requirements for registered management investment companies. In a <a href="https://texasattorneygeneral.gov/news/releases/paxton-sues-biden-administration-terminate-illegal-sec-rule-will-hurt-financial-companies-and-their">press release</a> regarding the petition for review, the Texas Attorney General said the new rule amended the form for reporting details of proxy votes “by expanding the number of voting categories that address left-wing priorities.” The Attorney General characterized the “real reason behind the new rule” as to “force … companies to either increase the number of votes taken that would further the radical political agenda of the Biden Administration or face enhanced public scrutiny.” The Attorney General also said the new rule would “pressure … funds to potentially violate their fiduciary duties by taking actions that may not be in the best financial interests of their investors.”