The states of Texas, Louisiana, Utah, and West Virginia filed a Petition with the US Court of Appeals for the Fifth Circuit challenging a rule issued by the Securities and Exchange Commission (SEC) requiring mutual and exchange-traded funds to disclose their votes on environment, social, and governance (ESG) matters. The 5th Circuit did not rule on the substance; rather, it dismissed the challenge for lack of jurisdiction, ruling that the States had failed to establish standing.

Requirement to Identify Categories for Proxy Votes
SEC’s rule, effective July 1, 2024, requires funds to categorize their proxy votes by subject matter. The rule includes fourteen categories, four of which relate to ESG.

Failure to Establish Standing
For a federal court to be able to consider a challenge to an agency rule, challengers must establish “standing;” that is, challengers must show “an injury in fact that is fairly traceable to the challenged action.”

The 5th Circuit ruled the States had no evidence that SEC’s rule would increase costs to the funds to such an extent that these costs would be passed on to the funds’ shareholders, which include the States and their citizens.

Alternatively, the States argued SEC’s rule would harm their energy industries. In rejecting that argument, the 5th Circuit said the theory relies on a “highly attenuated chain of possibilities” not supported by the record.

Concurrence: States Can Refile with Stronger Evidence of Injury
One judge filed a concurring opinion. Noting the decision was not substantive, the States could refile their challenge when they have “stronger evidence of injury.” As an example, if funds spend significant costs in determining the proper category of certain votes, evidence of these costs being passed on to the States could establish an injury traceable to SEC’s rule.

To see the opinion https://www.ca5.uscourts.gov/opinions/unpub/23/23-60079.0.pdf