Enacted earlier this year and scheduled to take effect September 1, SB 2337 would impose new disclosure obligations on proxy advisory firms issuing recommendations regarding Texas-based public companies, including a requirement that any recommendation based in whole or in part on environmental, social, or governance (ESG) or other “nonfinancial” considerations be accompanied by a disclaimer that such advice subordinates shareholder financial interests to other objectives. But, on August 29, 2025, Judge Alan Albright of the U.S. District Court for the Western District of Texas entered preliminary injunctions in two related cases enjoining the State from enforcing Senate Bill 2337 against Institutional Shareholder Services (ISS) and Glass Lewis, the two firms that together account for the vast majority of proxy advisory services in the U.S. While the injunctions technically apply only to the named plaintiffs, their market dominance—an estimated 97 percent of proxy advisory services—renders the orders functionally dispositive of the law’s near-term enforceability.
SB 2337 Requirements
Senate Bill 2337 establishes a new regulatory scheme for proxy advisory firms issuing recommendations regarding companies incorporated or headquartered in Texas, as well as foreign entities seeking to re-domesticate in the state. The statute identifies specific circumstances in which a proxy advisory service is deemed not to be provided “solely in the financial interest of shareholders,” triggering detailed disclosure obligations.
A proxy advisory service is deemed not to be provided solely in the financial interests of shareholders if it:
- Is based in whole or in part on “nonfinancial factors,” defined to include ESG goals or principles; diversity, equity, or inclusion (DEI) initiatives; social credit or sustainability scores; or membership in an organization that evaluates companies on such nonfinancial bases;
- Supports a shareholder proposal inconsistent with the company’s board of directors’ recommendation and is not accompanied by a written economic analysis addressing short- and long-term costs and benefits, alignment with client investment objectives, quantifiable impacts on returns, and the methodology used; or
- Subordinates financial interests to other objectives or if it advises against management’s slate of directors without affirmatively stating that the recommendation was based solely on shareholder financial interests.
Where such advice is given, the law requires proxy advisors to disclose to each client that the service is not being provided solely in shareholders’ financial interests, explain with particularity the basis of the recommendation and that it subordinates shareholder interests to nonfinancial objectives, immediately provide a copy of the disclosure to the subject company, and post a conspicuous notice on the advisor’s public website that its services include recommendations not based solely on shareholder financial interests.
Violations of these provisions are deemed “deceptive trade practices” and may be pursued by the State’s Attorney General, with civil penalties of up to $10,000 per violation. The statute also authorizes “affected parties”—including shareholders, issuers and clients—to bring declaratory or injunctive actions, with notice to the Attorney General, who may intervene.
The Challenges
On July 24, 2025, ISS and Glass Lewis each filed suit in the Western District of Texas to block enforcement of SB 2337. Both complaints contend that the statute violates the First Amendment by compelling speech and penalizing recommendations that diverge from management or reflect so-called “nonfinancial” considerations. The firms also argue that the statute is unconstitutionally vague under the Due Process Clause, pointing to undefined terms such as “nonfinancial factors” and “materially different” advice, and that it is preempted by the federal Investment Advisers Act, which comprehensively regulates SEC-registered advisers. ISS, in addition, raised a Contracts Clause claim, asserting that the law would force it to breach confidentiality agreements with clients by requiring disclosure of customized recommendations.
Texas moved to dismiss, characterizing the lawsuits as premature because the law had not yet taken effect, and arguing that the plaintiffs lacked standing and that sovereign immunity barred the claims. On the merits, the State defended SB 2337 as a disclosure regime governing commercial speech, entitled to deferential review, and likened its provisions to other securities disclosure requirements.
ISS and Glass Lewis each sought preliminary injunctions to prevent the statute from taking effect on September 1. At a hearing on August 29, Judge Alan Albright concluded that the plaintiffs had shown a likelihood of success on the merits of their constitutional claims and that enforcement of the law would cause irreparable harm. The court enjoined Texas Attorney General Ken Paxton and his office from enforcing SB 2337 against ISS and Glass Lewis, including through intervention in private actions authorized by the statute, while the litigation proceeds.
The cases have also drawn outside participants. The Texas Stock Exchange and the Texas Association of Business moved to intervene in defense of the law, emphasizing their members’ interest in limiting what they described as misleading proxy advice, while the Alliance for Corporate Excellence, a nonprofit that supported SB 2337’s passage, submitted an amicus brief urging the court to uphold the statute as needed oversight of a concentrated industry.
Implications and Next Phase
The injunctions prevent Texas from enforcing SB 2337 against ISS and Glass Lewis while the litigation proceeds. Given the firms’ combined share of the proxy advisory market, the orders significantly limit the statute’s effect in the near term, though other proxy advisors not before the court remain subject to its provisions. The cases now move toward merits rulings on the constitutional and statutory claims, including challenges under the First Amendment, the Due Process Clause, the Contracts Clause, and the Investment Advisers Act. Those decisions may have influence well beyond Texas, testing the extent to which states may regulate proxy advisory practices or whether such regulation is preempted by federal law.