House Committee Passes HR Policy-Supported Bill Ramping Up Regulation of Proxy Advisory Services

June 17, 2016

This week, on a bipartisan vote with eight Democrats voting in support, the House Financial Services Committee approved legislation that would impose a more rigorous SEC registration and oversight process for proxy advisory firms.  The Corporate Governance Reform and Transparency Act (H.R. 5311), on which our Center on Executive Compensation CEO Tim Bartl recently testified in support, would require proxy advisory firms to:

  • File a detailed registration application with the SEC, confirming that they have sufficient resources to fulfill their fiduciary duties in analyzing proxies;

  • Disclose "potential or actual conflicts of interest" relating to the ownership structure of the proxy advisory firm, including whether the proxy advisor provides ancillary services, such as consulting, to corporate issuers, and if so the revenue derived from those services as well as how those conflicts will be addressed; and

  • Have sufficient resources to ensure proxy voting recommendations are based on accurate and current information.
The bill would also repeal the two staff "No Action" letters that currently set the regulatory framework for proxy advisory firms and effectively encourage institutional investors to use such firms to discharge their fiduciary duty to vote proxies.  During the markup, the Committee approved by voice vote an amendment sponsored by Rep. Bill Foster (D-IL) to define the draft recommendations proxy advisory firms are required to provide and to remove the private right of action.  In addition to original cosponsor Rep. John Carney (D-DE), the Democrats voting in support of the bill were Representatives Michael Capuano (D-MA), David Scott (D-GA), Jim Himes (D-CT), Bill Foster (D-IL), Kirsten Sinema (D-AZ), and Juan Vargas (D-CA).  In a statement posted earlier on its website, proxy advisory firm Institutional Shareholder Services opposed the bill, stating that the bill:
  • Would hamper "institutional investors' efforts to meet their fiduciary responsibilities with respect to monitoring the companies in their portfolios and voting their shares in an informed fashion;"

  • Is based on "factual inaccuracies about the proxy advisory industry conjured up by corporate lobbyists," and "complaints from a small cadre of self-serving corporate executives who would prefer immunity from investor scrutiny;" and

  • Fails to "comprehend the robustness of the existing regulatory oversight structure that already applies to ISS, as well as the success of ongoing efforts by U.S. and global regulators and the industry itself to foster best practices in the industry."