Two of the nation's largest proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, are suing the State of Texas over a new law that could directly affect how public pension funds and trustees receive shareholder voting guidance.

Filed in U.S. District Court for the Western District of Texas on July 24, 2025, the lawsuits challenge Senate Bill 2337, which takes effect Sept. 1, 2025. The law mandates that proxy advisers disclose when their recommendations consider environmental, social, or governance (ESG) or DEI factors and support such advice with financial analysis. Texas lawmakers say it brings much-needed transparency, but ISS and Glass Lewis argue it violates their First Amendment rights and conflicts with federal regulations. The case unfolding in Austin could reshape the governance tools trustees and pension fund systems rely upon.

Overview: What Just Happened

1. SB 2337, signed into law June 20, 2025, requires proxy advisory firms to disclose if their recommendations are based fully or partially on nonfinancial factors (like ESG or DEI), provide a financial analysis for any recommendation that differs from management's, and include a notice that advice is "not provided solely in the financial interest of shareholders."
2. On July 24, 2025, ISS and Glass Lewis each filed suit in the U.S. District Court for the Western District of Texas, arguing the law compels speech, is unconstitutionally vague, preempted by ERISA and securities law, and burdens interstate commerce.
3. Texas Attorney General Ken Paxton's office is defending the statute, arguing that SB 2337 promotes transparency and protects investors from politically motivated proxy voting advice.
4. A hearing on a preliminary injunction is scheduled for Aug. 28, 2025, which could decide whether the law takes effect as planned on Sept. 1.

Why This Matters to Trustees and Public Pension Funds

1. Proxy Advisors’ Outsized Role
   ISS and Glass Lewis dominate the proxy advisory market nationally, but most Texas public pension funds do not use these firms directly. That does not mean they are unaffected.
2. Congressional Scrutiny
   Concerns about proxy advisory influence and “robo-voting” were raised in an April 2025 hearing before the House Financial Services Committee’s Subcommittee on Capital Markets, underscoring the need for stronger fiduciary oversight.
3. Trustees’ Fiduciary Duty
   The Reason Foundation notes that fiduciary accountability applies regardless of whether a Fund hires ISS, Glass Lewis, or relies on outside investment managers. For Texas Funds, updating or creating a Proxy Voting Policy is imperative. Trustees must ensure that external money managers are following the Fund’s policy—not their own default or a proxy firm’s template.
4. Industry and Legal Perspective
   Legal analysts such as Morgan Lewis warn that SB 2337 could complicate compliance for advisors and managers serving multiple clients, making clear policies even more important at the Fund level. 

What Pension Trustees Should Watch

1. Court Outcome: The Aug. 28 injunction hearing could halt or delay SB 2337. If the law is upheld, trustees will need to adjust how they review and rely on proxy reports.
2. Voting Practices: Reassess reliance on proxy "auto-voting." Strengthen internal review processes to ensure decisions meet fiduciary responsibilities.
3. Transparency Push: Consider advocating for clearer disclosure standards so proxy advice is explicitly tied to financial performance rather than nonfinancial objectives.
4. Benchmarking: Monitor how other states and institutional peers are addressing reliance on proxy advisors to guide best practices.
5. State-Federal Interplay: Watch whether other states adopt similar measures or whether federal courts preempt state-level proxy regulation.

Additional Resources

1. Texas SB 2337 – Full Enrolled Bill Text
2. Institutional Shareholder Services (ISS)
3. Glass Lewis response to SB 2337
4. Texas Attorney General Ken Paxton's statement
5. House Financial Services Committee – Proxy Advisory Firms Hearing
6. Reason Foundation – Proxy Firms Lawsuit Highlights Risks
7. Morgan Lewis – Texas Law Puts Proxy Advice Under the Microscope

Bottom Line for TEXPERS

The lawsuits over SB 2337 are more than a courtroom fight—they spotlight how public pension trustees interact with proxy advisors and the risks of over-reliance on outside recommendations. Whether the law is upheld or struck down, trustees should strengthen fiduciary oversight, update or create a proxy voting policy, and ensure proxy voting decisions are aligned with their duty to maximize financial returns for members and beneficiaries.

About the Author: Allen Jones is the director of communications and event marketing for TEXPERS. He joined the Association in 2017. Before TEXPERS, he worked in the news media industry, producing content for newspapers, magazines, and online publications and leading newsrooms as an editor and publications manager. [email protected]   

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