Bill Summary
The Corporate Governance Reform and Transparency Act of 2019 aims to improve the quality of proxy advisory firms in order to protect investors and the economy. It promotes accountability, transparency, responsiveness, and competition within the industry and includes provisions for registration, updating, and managing conflicts of interest. Section 4 of the bill requires the Securities and Exchange Commission to issue an annual report publicly available on its website, identifying applicants for registration and providing the Commission's views on competition, transparency, policies, methodologies, and conflicts of interest. It also requires the Commission to identify and recommend solutions for any problems that arise from the implementation of the Act.
Possible Impacts
1. Shareholders and investors will benefit from the legislation as it aims to improve the quality of proxy advisory firms, ensuring that they receive accurate and unbiased information to guide their investment decisions.
2. The legislation will promote accountability and transparency in the proxy advisory firm industry, protecting the economy from potential conflicts of interest and unethical practices.
3. The Securities and Exchange Commission will have the authority to issue rules and regulations to address conflicts of interest in proxy voting policies, ultimately increasing the fairness and competitiveness of the industry.
[Congressional Bills 116th Congress]
[From the U.S. Government Publishing Office]
[H.R. 5116 Introduced in House (IH)]
<DOC>
116th CONGRESS
1st Session
H. R. 5116
To improve the quality of proxy advisory firms for the protection of
investors and the U.S. economy, and in the public interest, by
fostering accountability, transparency, responsiveness, and competition
in the proxy advisory firm industry.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
November 15, 2019
Mr. Steil (for himself, Mrs. Wagner, Mr. Riggleman, and Mr. Barr)
introduced the following bill; which was referred to the Committee on
Financial Services
_______________________________________________________________________
A BILL
To improve the quality of proxy advisory firms for the protection of
investors and the U.S. economy, and in the public interest, by
fostering accountability, transparency, responsiveness, and competition
in the proxy advisory firm industry.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Corporate Governance Reform and
Transparency Act of 2019''.
SEC. 2. DEFINITIONS.
(a) Securities Exchange Act of 1934.--Section 3(a) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is amended by adding
at the end the following new paragraphs:
``(81) Proxy advisory firm.--The term `proxy advisory firm'
means any person who is primarily engaged in the business of
providing proxy voting research, analysis, ratings, or
recommendations to clients, which conduct constitutes a
solicitation within the meaning of section 14 and the
Commission's rules and regulations thereunder, except to the
extent that the person is exempted by such rules and
regulations from requirements otherwise applicable to persons
engaged in a solicitation.
``(82) Person associated with a proxy advisory firm.--The
term `person associated with' a proxy advisory firm means any
partner, officer, or director of a proxy advisory firm (or any
person occupying a similar status or performing similar
functions), any person directly or indirectly controlling,
controlled by, or under common control with a proxy advisory
firm, or any employee of a proxy advisory firm, except that
persons associated with a proxy advisory firm whose functions
are clerical or ministerial shall not be included in the
meaning of such term. The Commission may by rules and
regulations classify, for purposes or any portion or portions
of this Act, persons, including employees controlled by a proxy
advisory firm.''.
(b) Applicable Definitions.--As used in this Act--
(1) the term ``Commission'' means the Securities and
Exchange Commission; and
(2) the term ``proxy advisory firm'' has the same meaning
as in section 3(a)(81) of the Securities Exchange Act of 1934,
as added by this Act.
SEC. 3. REGISTRATION OF PROXY ADVISORY FIRMS.
(a) Amendment.--The Securities Exchange Act of 1934 is amended by
inserting after section 15G the following new section:
``SEC. 15H. REGISTRATION OF PROXY ADVISORY FIRMS.
``(a) Conduct Prohibited.--It shall be unlawful for a proxy
advisory firm to make use of the mails or any means or instrumentality
of interstate commerce to provide proxy voting research, analysis, or
recommendations to any client, unless such proxy advisory firm is
registered under this section.
``(b) Registration Procedures.--
``(1) Application for registration.--
``(A) In general.--A proxy advisory firm must file
with the Commission an application for registration, in
such form as the Commission shall require, by rule or
regulation, and containing the information described in
subparagraph (B).
``(B) Required information.--An application for
registration under this section shall contain
information regarding--
``(i) a certification that the applicant is
able to consistently provide proxy advice based
on accurate information;
``(ii) the procedures and methodologies
that the applicant uses in developing proxy
voting recommendations, including whether and
how the applicant considers the size of a
company when making proxy voting
recommendations;
``(iii) the organizational structure of the
applicant;
``(iv) whether or not the applicant has in
effect a code of ethics, and if not, the
reasons therefor;
``(v) any potential or actual conflict of
interest relating to the ownership structure of
the applicant or the provision of proxy
advisory services by the applicant, including
whether the proxy advisory firm engages in
services ancillary to the provision of proxy
advisory services such as consulting services
for corporate issuers, and if so the revenues
derived therefrom;
``(vi) the policies and procedures in place
to manage conflicts of interest under
subsection (f); and
``(vii) any other information and documents
concerning the applicant and any person
associated with such applicant as the
Commission, by rule, may prescribe as necessary
or appropriate in the public interest or for
the protection of investors.
``(2) Review of application.--
``(A) Initial determination.--Not later than 90
days after the date on which the application for
registration is filed with the Commission under
paragraph (1) (or within such longer period as to which
the applicant consents) the Commission shall--
``(i) by order, grant registration; or
``(ii) institute proceedings to determine
whether registration should be denied.
``(B) Conduct of proceedings.--
``(i) Content.--Proceedings referred to in
subparagraph (A)(ii) shall--
``(I) include notice of the grounds
for denial under consideration and an
opportunity for hearing; and
``(II) be concluded not later than
120 days after the date on which the
application for registration is filed
with the Commission under paragraph
(1).
``(ii) Determination.--At the conclusion of
such proceedings, the Commission, by order,
shall grant or deny such application for
registration.
``(iii) Extension authorized.--The
Commission may extend the time for conclusion
of such proceedings for not longer than 90
days, if it finds good cause for such extension
and publishes its reasons for so finding, or
for such longer period as to which the
applicant consents.
``(C) Grounds for decision.--The Commission shall
grant registration under this subsection--
``(i) if the Commission finds that the
requirements of this section are satisfied; and
``(ii) unless the Commission finds (in
which case the Commission shall deny such
registration) that--
``(I) the applicant has failed to
certify to the Commission's
satisfaction that it is able to
consistently provide proxy advice based
on accurate information and to
materially comply with the procedures
and methodologies disclosed under
paragraph (1)(B) and with subsections
(f) and (g); or
``(II) if the applicant were so
registered, its registration would be
subject to suspension or revocation
under subsection (e).
``(3) Public availability of information.--Subject to
section 24, the Commission shall make the information and
documents submitted to the Commission by a proxy advisory firm
in its completed application for registration, or in any
amendment submitted under paragraph (1) or (2) of subsection
(c), publicly available on the Commission's website, or through
another comparable, readily accessible means.
``(c) Update of Registration.--
``(1) Update.--Each registered proxy advisory firm shall
promptly amend and update its application for registration
under this section if any information or document provided
therein becomes materially inaccurate, except that a registered
proxy advisory firm is not required to amend the information
required to be filed under subsection (b)(1)(B)(i) by filing
information under this paragraph, but shall amend such
information in the annual submission of the organization under
paragraph (2) of this subsection.
``(2) Certification.--Not later than 90 calendar days after
the end of each calendar year, each registered proxy advisory
firm shall file with the Commission an amendment to its
registration, in such form as the Commission, by rule, may
prescribe as necessary or appropriate in the public interest or
for the protection of investors--
``(A) certifying that the information and documents
in the application for registration of such registered
proxy advisory firm continue to be accurate in all
material respects; and
``(B) listing any material change that occurred to
such information or documents during the previous
calendar year.
``(d) Censure, Denial, or Suspension of Registration; Notice and
Hearing.--The Commission, by order, shall censure, place limitations on
the activities, functions, or operations of, suspend for a period not
exceeding 12 months, or revoke the registration of any registered proxy
advisory firm if the Commission finds, on the record after notice and
opportunity for hearing, that such censure, placing of limitations,
suspension, or revocation is necessary for the protection of investors
and in the public interest and that such registered proxy advisory
firm, or any person associated with such an organization, whether prior
to or subsequent to becoming so associated--
``(1) has committed or omitted any act, or is subject to an
order or finding, enumerated in subparagraph (A), (D), (E),
(H), or (G) of section 15(b)(4), has been convicted of any
offense specified in section 15(b)(4)(B), or is enjoined from
any action, conduct, or practice specified in subparagraph (C)
of section 15(b)(4), during the 10-year period preceding the
date of commencement of the proceedings under this subsection,
or at any time thereafter;
``(2) has been convicted during the 10-year period
preceding the date on which an application for registration is
filed with the Commission under this section, or at any time
thereafter, of--
``(A) any crime that is punishable by imprisonment
for 1 or more years, and that is not described in
section 15(b)(4)(B); or
``(B) a substantially equivalent crime by a foreign
court of competent jurisdiction;
``(3) is subject to any order of the Commission barring or
suspending the right of the person to be associated with a
registered proxy advisory firm;
``(4) fails to furnish the certifications required under
subsections (b)(2)(C)(ii)(I) and (c)(2);
``(5) has engaged in one or more prohibited acts enumerated
in paragraph (1); or
``(6) fails to maintain adequate financial and managerial
resources to consistently offer advisory services with
integrity, including by failing to comply with subsection (f)
or (g).
``(e) Termination of Registration.--
``(1) Voluntary withdrawal.--A registered proxy advisory
firm may, upon such terms and conditions as the Commission may
establish as necessary in the public interest or for the
protection of investors, which terms and conditions shall
include at a minimum that the registered proxy advisory firm
will no longer conduct such activities as to bring it within
the definition of proxy advisory firm in section 3(a)(81) of
the Securities Exchange Act of 1934, withdraw from registration
by filing a written notice of withdrawal to the Commission.
``(2) Commission authority.--In addition to any other
authority of the Commission under this title, if the Commission
finds that a registered proxy advisory firm is no longer in
existence or has ceased to do business as a proxy advisory
firm, the Commission, by order, shall cancel the registration
under this section of such registered proxy advisory firm.
``(f) Management of Conflicts of Interest.--
``(1) Organization policies and procedures.--Each
registered proxy advisory firm shall establish, maintain, and
enforce written policies and procedures reasonably designed,
taking into consideration the nature of the business of such
registered proxy advisory firm and associated persons, to
address and manage any conflicts of interest that can arise
from such business.
``(2) Commission authority.--The Commission shall issue
final rules to prohibit, or require the management and
disclosure of, any conflicts of interest relating to the
offering of proxy advisory services by a registered proxy
advisory firm, including, without limitation, conflicts of
interest relating to--
``(A) the manner in which a registered proxy
advisory firm is compensated by the client, or any
affiliate of the client, for providing proxy advisory
services;
``(B) the provision of consulting, advisory, or
other services by a registered proxy advisory firm, or
any person associated with such registered proxy
advisory firm, to the client;
``(C) business relationships, ownership interests,
or any other financial or personal interests between a
registered proxy advisory firm, or any person
associated with such registered proxy advisory firm,
and any client, or any affiliate of such client;
``(D) transparency around the formulation of proxy
voting policies;
``(E) the execution of proxy votes if such votes
are based upon recommendations made by the proxy
advisory firm in which someone other than the issuer is
a proponent;
``(F) issuing recommendations where proxy advisory
firms provide advisory services to a company; and
``(G) any other potential conflict of interest, as
the Commission deems necessary or appropriate in the
public interest or for the protection of investors.
``(g) Reliability of Proxy Advisory Firm Services.--
``(1) In general.--Each registered proxy advisory firm
shall have staff sufficient to produce proxy voting
recommendations that are based on accurate and current
information. Each registered proxy advisory firm shall detail
procedures sufficient to permit companies receiving proxy
advisory firm recommendations access in a reasonable time to
the draft recommendations, with an opportunity to provide
meaningful comment thereon, including the opportunity to
present details to the person responsible for developing the
recommendation in person or telephonically. Each registered
proxy advisory firm shall employ an ombudsman to receive
complaints about the accuracy of voting information used in
making recommendations from the subjects of the proxy advisory
firm's voting recommendations, and shall seek to resolve those
complaints in a timely fashion and in any event prior to voting
on the matter to which the recommendation relates. If the
ombudsman is unable to resolve such complaints prior to voting
on the matter, the proxy advisory firm shall include in its
final report to its clients a statement from the company
detailing its complaints, if requested in writing by the
company.
``(2) Reasonable time defined.--For purposes of this
subsection, the term `reasonable time'--
``(A) means not less than 3 business days unless
otherwise defined through a final rule issued by the
Commission; and
``(B) shall not otherwise interfere with a proxy
advisory firm's ability to provide its clients with
timely access to accurate proxy voting research,
analysis, or recommendations.
``(3) Draft recommendations defined.--For purposes of this
subsection, the term `draft recommendations'--
``(A) means the overall conclusions of proxy voting
recommendations prepared for the clients of a proxy
advisory firm, including any public data cited therein,
any company information or substantive analysis
impacting the recommendation, and the specific voting
recommendations on individual proxy ballot issues; and
``(B) does not include the entirety of the proxy
advisory firm's final report to its clients.
``(h) Designation of Compliance Officer.--Each registered proxy
advisory firm shall designate an individual responsible for
administering the policies and procedures that are required to be
established pursuant to subsections (f) and (g), and for ensuring
compliance with the securities laws and the rules and regulations
thereunder, including those promulgated by the Commission pursuant to
this section.
``(i) Prohibited Conduct.--
``(1) Prohibited acts and practices.--The Commission shall
issue final rules to prohibit any act or practice relating to
the offering of proxy advisory services by a registered proxy
advisory firm that the Commission determines to be unfair,
coercive, or abusive, including any act or practice relating
to--
``(A) conditioning a voting recommendation or other
proxy advisory firm recommendation on the purchase by
an issuer or an affiliate thereof of other services or
products, of the registered proxy advisory firm or any
person associated with such registered proxy advisory
firm; and
``(B) modifying a voting recommendation or
otherwise departing from its adopted systematic
procedures and methodologies in the provision of proxy
advisory services, based on whether an issuer, or
affiliate thereof, subscribes or will subscribe to
other services or product of the registered proxy
advisory firm or any person associated with such
organization.
``(2) Rule of construction.--Nothing in paragraph (1), or
in any rules or regulations adopted thereunder, may be
construed to modify, impair, or supersede the operation of any
of the antitrust laws (as defined in the first section of the
Clayton Act, except that such term includes section 5 of the
Federal Trade Commission Act, to the extent that such section 5
applies to unfair methods of competition).
``(j) Statements of Financial Condition.--Each registered proxy
advisory firm shall, on a confidential basis, file with the Commission,
at intervals determined by the Commission, such financial statements,
certified (if required by the rules or regulations of the Commission)
by an independent public auditor, and information concerning its
financial condition, as the Commission, by rule, may prescribe as
necessary or appropriate in the public interest or for the protection
of investors.
``(k) Annual Report.--Each registered proxy advisory firm shall, at
the beginning of each fiscal year of such firm, report to the
Commission on the number of shareholder proposals its staff reviewed in
the prior fiscal year, the number of recommendations made in the prior
fiscal year, the number of staff who reviewed and made recommendations
on such proposals in the prior fiscal year, and the number of
recommendations made in the prior fiscal year where the proponent of
such recommendation was a client of or received services from the proxy
advisory firm.
``(l) Transparent Policies.--Each registered proxy advisory firm
shall file with the Commission and make publicly available its
methodology for the formulation of proxy voting policies and voting
recommendations.
``(m) Rules of Construction.--
``(1) No waiver of rights, privileges, or defenses.--
Registration under and compliance with this section does not
constitute a waiver of, or otherwise diminish, any right,
privilege, or defense that a registered proxy advisory firm may
otherwise have under any provision of State or Federal law,
including any rule, regulation, or order thereunder.
``(2) No private right of action.--Nothing in this section
may be construed as creating any private right of action, and
no report filed by a registered proxy advisory firm in
accordance with this section or section 17 shall create a
private right of action under section 18 or any other provision
of law.
``(n) Regulations.--
``(1) New provisions.--Such rules and regulations as are
required by this section or are otherwise necessary to carry
out this section, including the application form required under
subsection (a)--
``(A) shall be issued by the Commission, not later
than 180 days after the date of enactment of this
section; and
``(B) shall become effective not later than 1 year
after the date of enactment of this section.
``(2) Review of existing regulations.--Not later than 270
days after the date of enactment of this section, the
Commission shall--
``(A) review its existing rules and regulations
which affect the operations of proxy advisory firms;
and
``(B) amend or revise such rules and regulations in
accordance with the purposes of this section, and issue
such guidance, as the Commission may prescribe as
necessary or appropriate in the public interest or for
the protection of investors.
``(o) Applicability.--This section, other than subsection (n),
which shall apply on the date of enactment of this section, shall apply
on the earlier of--
``(1) the date on which regulations are issued in final
form under subsection (n)(1); or
``(2) 270 days after the date of enactment of this
section.''.
(b) Conforming Amendment.--Section 17(a)(1) of the Securities
Exchange Act of 1934 (15 U.S.C. 78q(a)(1)) is amended by inserting
``proxy advisory firm,'' after ``nationally recognized statistical
rating organization,''.
SEC. 4. COMMISSION ANNUAL REPORT.
The Commission shall make an annual report publicly available on
the Commission's internet website. Such report shall, with respect to
the year to which the report relates--
(1) identify applicants for registration under section 15H
of the Securities Exchange Act of 1934, as added by this Act;
(2) specify the number of and actions taken on such
applications;
(3) specify the views of the Commission on the state of
competition, transparency, policies and methodologies, and
conflicts of interest among proxy advisory firms;
(4) include the determination of the Commission with
regards to--
(A) the quality of proxy advisory services issued
by proxy advisory firms;
(B) the financial markets;
(C) competition among proxy advisory firms;
(D) the incidence of undisclosed conflicts of
interest by proxy advisory firms;
(E) the process for registering as a proxy advisory
firm; and
(F) such other matters relevant to the
implementation of this Act and the amendments made by
this Act, as the Commission determines necessary to
bring to the attention of the Congress;
(5) identify problems, if any, that have resulted from the
implementation of this Act and the amendments made by this Act;
and
(6) recommend solutions, including any legislative or
regulatory solutions, to any problems identified under
paragraphs (4) and (5).
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