[Congressional Bills 118th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4589 Introduced in House (IH)]
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118th CONGRESS
1st Session
H. R. 4589
To amend the Securities Exchange Act of 1934 to provide for the
registration of proxy advisory firms, and for other purposes.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
July 12, 2023
Mr. Steil introduced the following bill; which was referred to the
Committee on Financial Services
_______________________________________________________________________
A BILL
To amend the Securities Exchange Act of 1934 to provide for the
registration of proxy advisory firms, and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. REGISTRATION OF PROXY ADVISORY FIRMS.
(a) Amendment.--The Securities Exchange Act of 1934 (15 U.S.C. 78a
et seq.) 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 advice, research,
analysis, ratings 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 shall file
with the Commission an application for registration, in
such form as the Commission shall require, by rule, and
containing the information described in subparagraph
(B).
``(B) Required information.--An application for
registration under this section shall contain--
``(i) a certification that the applicant is
able to consistently provide proxy advice based
on accurate information;
``(ii) with respect to clients of the
applicant that vote shares held on behalf of
shareholders, a certification that the
applicant--
``(I) will provide proxy voting
advice only in the best economic
interest of those shareholders; and
``(II) has the requisite expertise
to ensure that voting recommendations
are in the best economic interest of
those shareholders;
``(iii) information on the procedures and
methodologies that the applicant uses to ensure
that proxy voting recommendations are in the
best economic interest of the ultimate
shareholders;
``(iv) information on the organizational
structure of the applicant;
``(v) an explanation of whether or not the
applicant has in effect a code of ethics, and
if not, the reasons therefor;
``(vi) a description of any potential or
actual conflict of interest relating to the
provision of proxy advisory services, including
those arising out of or resulting from the
ownership structure of the applicant or the
provision of other services by the applicant or
any person associated with the applicant;
``(vii) the policies and procedures in
place to publicly disclose and manage conflicts
of interest under subsection (f);
``(viii) information related to the
professional and academic qualifications of
staff tasked with providing proxy advisory
services; and
``(ix) 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 the Commission 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 (d).
``(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);
``(6) fails to maintain adequate financial and managerial
resources to consistently offer advisory services to clients
that vote shares held on behalf of shareholders consistent with
the best economic interest of those shareholders, including by
failing to comply with subsection (f) or (g);
``(7) fails to maintain adequate expertise to ensure that
proxy advisory services for clients that vote shares held on
behalf of shareholders are tied to the best economic interest
of those shareholders; or
``(8) engages in a prohibited act enumerated in subsection
(j).
``(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),
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
publicly disclose and manage any conflicts of interest that
arise or would reasonably be expected to arise from such
business.
``(2) Commission authority.--The Commission shall, within
one year of enactment, issue final rules to prohibit, or
require the management and public 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, any
affiliate of the client, or any other person for
providing proxy advisory services;
``(B) 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;
``(C) the formulation of proxy voting policies;
``(D) the execution, or assistance with the
execution, of proxy votes if such votes are based upon
recommendations made by the proxy advisory firm in
which a person other than the issuer is a proponent;
and
``(E) any other potential conflict of interest, as
the Commission deems necessary or appropriate in the
public interest or for the protection of investors.
``(3) Disclosure on factors influencing recommendations.--
Each registered proxy advisory firm shall annually disclose to
the Commission and make publicly available the economic and
other factors that a reasonable investor would expect to
influence the recommendations of such proxy advisory firm,
including the ownership composition of such proxy advisory firm
and any meetings with, or feedback received from, outside
entities.
``(g) Reliability of Proxy Advisory Firm Services.--
``(1) In general.--Each registered proxy advisory firm
shall--
``(A) have staff and other resources sufficient to
produce proxy voting recommendations that are based on
accurate and current information and designed for
clients that vote shares held on behalf of shareholders
to advance the best economic interest of those
shareholders;
``(B) implement procedures that permit issuers that
are the subject of proxy voting recommendations--
``(i) access in a reasonable time to data
and information used to make recommendations;
and
``(ii) a reasonable opportunity to provide
meaningful comment and corrections to such data
and information, including the opportunity to
present (in person or telephonically) details
to the person responsible for developing such
data and information prior to the publication
of proxy voting recommendations to clients;
``(C) employ an ombudsman to receive complaints
about the accuracy of information used in making
recommendations from the companies that are the subject
of the proxy advisory firm's voting recommendations and
seek to resolve those complaints in a timely fashion
and prior to the publication of proxy voting
recommendations to clients; and
``(D) if the ombudsman is unable to resolve a
complaint to a company's satisfaction prior to the
publication of proxy voting recommendations to clients,
include in the final report of the firm to clients--
``(i) a statement detailing the company's
complaints, if requested in writing by the
company; and
``(ii) a statement explaining why the proxy
voting recommendation is in the best economic
interest of shareholders.
``(2) Definitions.--In this subsection:
``(A) Data and information used to make
recommendations.--The term `data and information used
to make voting recommendations'--
``(i) means the financial, operational, or
descriptive data and information on an issuer
used by proxy advisory firms and any contextual
or substantive analysis impacting the
recommendation; and
``(ii) does not include the entirety of the
proxy advisory firm's final report to its
clients.
``(B) Reasonable time.--The term `reasonable
time'--
``(i) means not less than 1 week before the
publication of proxy voting recommendations for
clients; and
``(ii) 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.
``(h) Private Right of Action With Respect to Illegal
Recommendations.--Any proxy advisory firm that endorses a proposal that
is not supported by the issuer but is approved and subsequently found
by a court of competent jurisdiction to violate State or Federal law
shall be liable to the applicable issuer for the costs associated with
the approval of such proposal, including implementation costs and any
penalties incurred by the issuer.
``(i) Designation of Compliance Officer.--Each registered proxy
advisory firm shall designate an individual who reports directly to
senior management as 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.
``(j) Prohibited Conduct.--
``(1) Prohibited acts and practices.--Not later than one
year after the date of enactment of this section, 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) advisory or consulting services (offered
directly or indirectly, including through an affiliate)
related to corporate governance issues; or
``(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).
``(k) 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.
``(l) Annual Report.--
``(1) In general.--Each registered proxy advisory firm
shall, not later than 90 calendar days after the end of each
fiscal year, file with the Commission and make publicly
available an annual report in such form as the Commission, by
rule, may prescribe as necessary or appropriate in the public
interest or for the protection of investors.
``(2) Contents.--Each annual report required under
paragraph (1) shall include, at a minimum, disclosure by the
registered proxy advisory firm of the following:
``(A) A list of shareholder proposals the staff of
the registered proxy advisory firm reviewed in the
prior fiscal year.
``(B) A list of the recommendations made in the
prior fiscal year.
``(C) The economic analysis conducted to determine
that final recommendations provided in the prior fiscal
year (other than recommendations relating to an issuer-
sponsored proposal or recommendations consistent with
that of a board of directors composed of a majority of
independent directors) delivered to clients that vote
shares held on behalf of shareholders were in the best
economic interest of those shareholders.
``(D) The staff who reviewed and made
recommendations on such proposals in the prior fiscal
year.
``(E) The qualifications of such staff to ensure
that each of the recommendations for clients that vote
shares held on behalf of shareholders were tied to the
best economic interest of those shareholders.
``(F) The 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.
``(G) A certification by the chief executive
officer, chief financial officer, and the primary
executive responsible for overseeing the compilation
and dissemination of proxy voting advice that the final
recommendations (other than recommendations relating to
an issuer-sponsored proposal or recommendations
consistent with that of a board of directors composed
of a majority of independent directors) delivered to
clients that vote shares held on behalf of shareholders
in the last fiscal year--
``(i) were based on internal controls and
procedures that are designed to ensure accurate
information and that such internal controls and
procedures are effective;
``(ii) do not violate applicable State or
Federal law; and
``(iii) were based on the best economic
interest of those shareholders.
``(H) The economic and other factors that a
reasonable investor would expect to influence the
recommendations of such proxy advisory firm, including
the ownership composition of such proxy advisory firm.
``(m) 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 to clients that vote shares held on behalf of
shareholders and how that methodology ensures that the firm's voting
recommendations are in the best economic interest of those
shareholders.
``(n) Rules of Construction.--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.
``(o) 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.
``(p) 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 (o)(1); or
``(2) 270 days after the date of enactment of this section.
``(q) Best Economic Interest Defined.--In this section, the term
`best economic interest' means decisions that seek to maximize
investment returns over a time horizon consistent with the investment
objectives and risk management profile of the fund in which the
shareholders are invested.''.
(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,''.
(c) Proxy Advisory Firm Definitions.--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:
``(82) Proxy advisory firm.--The term `proxy advisory
firm'--
``(A) means any person who is primarily engaged in
the business of providing proxy voting advice,
research, analysis, ratings, or recommendations to
clients, which conduct constitutes a solicitation
within the meaning of section 14; and
``(B) does not include any person that is exempt
under law or regulation from the requirements otherwise
applicable to persons engaged in such a solicitation.
``(83) Person associated with a proxy advisory firm.--With
respect to a proxy advisory firm--
``(A) a person is `associated' with the proxy
advisory firm if the person is--
``(i) a partner, officer, or director of
the proxy advisory firm (or any person
occupying a similar status or performing
similar functions);
``(ii) a person directly or indirectly
controlling, controlled by, or under common
control with the proxy advisory firm;
``(iii) an employee of the proxy advisory
firm; or
``(iv) a person the Commission determines
by rule is controlled by the proxy advisory
firm; and
``(B) a person is not `associated' with the proxy
advisory firm if the person only performs clerical or
ministerial functions with respect to a proxy advisory
firm.''.
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