Corporate Governance Reform and Transparency Act of 2019

I 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 account- ability, transparency, responsiveness, and competition in the proxy advi- sory firm industry. IN THE HOUSE OF REPRESENTATIVES NOVEMBER 15, 2019 Mr. STEIL (for himself, Mrs. WAGNER, Mr. RIGGLEMAN, and Mr. BARR) in- troduced the following bill; which was referred to the Committee on Fi- nancial Services A BILL To improve the quality of proxy advisory firms for the protec- tion of investors and the U.S. economy, and in the public interest, by fostering accountability, transparency, re- sponsiveness, and competition in the proxy advisory firm industry. Be it enacted by the Senate and House of Representa- 1 tives of the United States of America in Congress assembled, 2 SECTION 1. SHORT TITLE. 3 This Act may be cited as the ‘‘Corporate Governance 4 Reform and Transparency Act of 2019’’. 5 VerDate Sep 11 2014 22:40 Nov 25, 2019 Jkt 099200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\H5116.IH H5116 kjohnson on DSK79L0C42 with BILLS 2 •HR 5116 IH SEC. 2. DEFINITIONS. 1 (a) SECURITIES EXCHANGE ACT OF 1934.—Section 2 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 3 78c(a)) is amended by adding at the end the following new 4 paragraphs: 5 ‘‘(81) PROXY ADVISORY FIRM.—The term 6 ‘proxy advisory firm’ means any person who is pri- 7 marily engaged in the business of providing proxy 8 voting research, analysis, ratings, or recommenda- 9 tions to clients, which conduct constitutes a solicita- 10 tion within the meaning of section 14 and the Com- 11 mission’s rules and regulations thereunder, except to 12 the extent that the person is exempted by such rules 13 and regulations from requirements otherwise appli- 14 cable to persons engaged in a solicitation. 15 ‘‘(82) PERSON ASSOCIATED WITH A PROXY AD- 16 VISORY FIRM.—The term ‘person associated with’ a 17 proxy advisory firm means any partner, officer, or 18 director of a proxy advisory firm (or any person oc- 19 cupying a similar status or performing similar func- 20 tions), any person directly or indirectly controlling, 21 controlled by, or under common control with a proxy 22 advisory firm, or any employee of a proxy advisory 23 firm, except that persons associated with a proxy ad- 24 visory firm whose functions are clerical or ministe- 25 rial shall not be included in the meaning of such 26 VerDate Sep 11 2014 22:40 Nov 25, 2019 Jkt 099200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\H5116.IH H5116 kjohnson on DSK79L0C42 with BILLS 3 •HR 5116 IH term. The Commission may by rules and regulations 1 classify, for purposes or any portion or portions of 2 this Act, persons, including employees controlled by 3 a proxy advisory firm.’’. 4 (b) APPLICABLE DEFINITIONS.—As used in this 5 Act— 6 (1) the term ‘‘Commission’’ means the Securi- 7 ties and Exchange Commission; and 8 (2) the term ‘‘proxy advisory firm’’ has the 9 same meaning as in section 3(a)(81) of the Securi- 10 ties Exchange Act of 1934, as added by this Act. 11 SEC. 3. REGISTRATION OF PROXY ADVISORY FIRMS. 12 (a) AMENDMENT.—The Securities Exchange Act of 13 1934 is amended by inserting after section 15G the fol- 14 lowing new section: 15 ‘‘SEC. 15H. REGISTRATION OF PROXY ADVISORY FIRMS. 16 ‘‘(a) CONDUCT PROHIBITED.—It shall be unlawful 17 for a proxy advisory firm to make use of the mails or any 18 means or instrumentality of interstate commerce to pro- 19 vide proxy voting research, analysis, or recommendations 20 to any client, unless such proxy advisory firm is registered 21 under this section. 22 ‘‘(b) REGISTRATION PROCEDURES.— 23 ‘‘(1) APPLICATION FOR REGISTRATION.— 24 VerDate Sep 11 2014 22:40 Nov 25, 2019 Jkt 099200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\H5116.IH H5116 kjohnson on DSK79L0C42 with BILLS 4 •HR 5116 IH ‘‘(A) IN GENERAL.—A proxy advisory firm 1 must file with the Commission an application 2 for registration, in such form as the Commis- 3 sion shall require, by rule or regulation, and 4 containing the information described in sub- 5 paragraph (B). 6 ‘‘(B) REQUIRED INFORMATION.—An appli- 7 cation for registration under this section shall 8 contain information regarding— 9 ‘‘(i) a certification that the applicant 10 is able to consistently provide proxy advice 11 based on accurate information; 12 ‘‘(ii) the procedures and methodolo- 13 gies that the applicant uses in developing 14 proxy voting recommendations, including 15 whether and how the applicant considers 16 the size of a company when making proxy 17 voting recommendations; 18 ‘‘(iii) the organizational structure of 19 the applicant; 20 ‘‘(iv) whether or not the applicant has 21 in effect a code of ethics, and if not, the 22 reasons therefor; 23 ‘‘(v) any potential or actual conflict of 24 interest relating to the ownership structure 25 VerDate Sep 11 2014 22:40 Nov 25, 2019 Jkt 099200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\H5116.IH H5116 kjohnson on DSK79L0C42 with BILLS 5 •HR 5116 IH of the applicant or the provision of proxy 1 advisory services by the applicant, includ- 2 ing whether the proxy advisory firm en- 3 gages in services ancillary to the provision 4 of proxy advisory services such as con- 5 sulting services for corporate issuers, and 6 if so the revenues derived therefrom; 7 ‘‘(vi) the policies and procedures in 8 place to manage conflicts of interest under 9 subsection (f); and 10 ‘‘(vii) any other information and docu- 11 ments concerning the applicant and any 12 person associated with such applicant as 13 the Commission, by rule, may prescribe as 14 necessary or appropriate in the public in- 15 terest or for the protection of investors. 16 ‘‘(2) REVIEW OF APPLICATION.— 17 ‘‘(A) INITIAL DETERMINATION.—Not later 18 than 90 days after the date on which the appli- 19 cation for registration is filed with the Commis- 20 sion under paragraph (1) (or within such longer 21 period as to which the applicant consents) the 22 Commission shall— 23 ‘‘(i) by order, grant registration; or 24 VerDate Sep 11 2014 22:40 Nov 25, 2019 Jkt 099200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\H5116.IH H5116 kjohnson on DSK79L0C42 with BILLS 6 •HR 5116 IH ‘‘(ii) institute proceedings to deter- 1 mine whether registration should be de- 2 nied. 3 ‘‘(B) CONDUCT OF PROCEEDINGS.— 4 ‘‘(i) CONTENT.—Proceedings referred 5 to in subparagraph (A)(ii) shall— 6 ‘‘(I) include notice of the grounds 7 for denial under consideration and an 8 opportunity for hearing; and 9 ‘‘(II) be concluded not later than 10 120 days after the date on which the 11 application for registration is filed 12 with the Commission under paragraph 13 (1). 14 ‘‘(ii) DETERMINATION.—At the con- 15 clusion of such proceedings, the Commis- 16 sion, by order, shall grant or deny such ap- 17 plication for registration. 18 ‘‘(iii) EXTENSION AUTHORIZED.—The 19 Commission may extend the time for con- 20 clusion of such proceedings for not longer 21 than 90 days, if it finds good cause for 22 such extension and publishes its reasons 23 for so finding, or for such longer period as 24 to which the applicant consents. 25 VerDate Sep 11 2014 22:40 Nov 25, 2019 Jkt 099200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\H5116.IH H5116 kjohnson on DSK79L0C42 with BILLS 7 •HR 5116 IH ‘‘(C) GROUNDS FOR DECISION.—The Com- 1 mission shall grant registration under this sub- 2 section— 3 ‘‘(i) if the Commission finds that the 4 requirements of this section are satisfied; 5 and 6 ‘‘(ii) unless the Commission finds (in 7 which case the Commission shall deny such 8 registration) that— 9 ‘‘(I) the applicant has failed to 10 certify to the Commission’s satisfac- 11 tion that it is able to consistently pro- 12 vide proxy advice based on accurate 13 information and to materially comply 14 with the procedures and methodolo- 15 gies disclosed under paragraph (1)(B) 16 and with subsections (f) and (g); or 17 ‘‘(II) if the applicant were so reg- 18 istered, its registration would be sub- 19 ject to suspension or revocation under 20 subsection (e). 21 ‘‘(3) PUBLIC AVAILABILITY OF INFORMATION.— 22 Subject to section 24, the Commission shall make 23 the information and documents submitted to the 24 Commission by a proxy advisory firm in its com- 25 VerDate Sep 11 2014 22:40 Nov 25, 2019 Jkt 099200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\H5116.IH H5116 kjohnson on DSK79L0C42 with BILLS 8 •HR 5116 IH pleted application for registration, or in any amend- 1 ment submitted under paragraph (1) or (2) of sub- 2 section (c), publicly available on the Commission’s 3 website, or through another comparable, readily ac- 4 cessible means. 5 ‘‘(c) UPDATE OF REGISTRATION.— 6 ‘‘(1) UPDATE.—Each registered proxy advisory 7 firm shall promptly amend and update its applica- 8 tion for registration under this section if any infor- 9 mation or document provided therein becomes mate- 10 rially inaccurate, except that a registered proxy advi- 11 sory firm is not required to amend the information 12 required to be filed under subsection (b)(1)(B)(i) by 13 filing information under this paragraph, but shall 14 amend such information in the annual submission of 15 the organization under paragraph (2) of this sub- 16 section. 17 ‘‘(2) CERTIFICATION.—Not later than 90 cal- 18 endar days after the end of each calendar year, each 19 registered proxy advisory firm shall file with the 20 Commission an amendment to its registration, in 21 such form as the Commission, by rule, may prescribe 22 as necessary or appropriate in the public interest or 23 for the protection of investors— 24 VerDate Sep 11 2014 22:40 Nov 25, 2019 Jkt 099200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\H5116.IH H5116 kjohnson on DSK79L0C42 with BILLS 9 •HR 5116 IH ‘‘(A) certifying that the information and 1 documents in the application for registration of 2 such registered proxy advisory firm continue to 3 be accurate in all material respects; and 4 ‘‘(B) listing any material change that oc- 5 curred to such information or documents during 6 the previous calendar year. 7 ‘‘(d) CENSURE, DENIAL, OR SUSPENSION OF REG- 8 ISTRATION; NOTICE AND HEARING.—The Commission, by 9 order, shall censure, place limitations on the activities, 10 functions, or operations of, suspend for a period not ex- 11 ceeding 12 months, or revoke the registration of any reg- 12 istered proxy advisory firm if the Commission finds, on 13 the record after notice and opportunity for hearing, that 14 such censure, placing of limitations, suspension, or revoca- 15 tion is necessary for the protection of investors and in the 16 public interest and that such registered proxy advisory 17 firm, or any person associated with such an organization, 18 whether prior to or subsequent to becoming so associ- 19 ated— 20 ‘‘(1) has committed or omitted any act, or is 21 subject to an order or finding, enumerated in sub- 22 paragraph (A), (D), (E), (H), or (G) of section 23 15(b)(4), has been convicted of any offense specified 24 in section 15(b)(4)(B), or is enjoined from any ac- 25 VerDate Sep 11 2014 22:40 Nov 25, 2019 Jkt 099200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\H5116.IH H5116 kjohnson on DSK79L0C42 with BILLS 10 •HR 5116 IH tion, conduct, or practice specified in subparagraph 1 (C) of section 15(b)(4), during the 10-year period 2 preceding the date of commencement of the pro- 3 ceedings under this subsection, or at any time there- 4 after; 5 ‘‘(2) has been convicted during the 10-year pe- 6 riod preceding the date on which an application for 7 registration is filed with the Commission under this 8 section, or at any time thereafter, of— 9 ‘‘(A) any crime that is punishable by im- 10 prisonment for 1 or more years, and that is not 11 described in section 15(b)(4)(B); or 12 ‘‘(B) a substantially equivalent crime by a 13 foreign court of competent jurisdiction; 14 ‘‘(3) is subject to any order of the Commission 15 barring or suspending the right of the person to be 16 associated with a registered proxy advisory firm; 17 ‘‘(4) fails to furnish the certifications required 18 under subsections (b)(2)(C)(ii)(I) and (c)(2); 19 ‘‘(5) has engaged in one or more prohibited acts 20 enumerated in paragraph (1); or 21 ‘‘(6) fails to maintain adequate financial and 22 managerial resources to consistently offer advisory 23 services with integrity, including by failing to comply 24 with subsection (f) or (g). 25 VerDate Sep 11 2014 23:23 Nov 25, 2019 Jkt 099200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\H5116.IH H5116 kjohnson on DSK79L0C42 with BILLS 11 •HR 5116 IH ‘‘(e) TERMINATION OF REGISTRATION.— 1 ‘‘(1) VOLUNTARY WITHDRAWAL.—A registered 2 proxy advisory firm may, upon such terms and con- 3 ditions as the Commission may establish as nec- 4 essary in the public interest or for the protection of 5 investors, which terms and conditions shall include 6 at a minimum that the registered proxy advisory 7 firm will no longer conduct such activities as to 8 bring it within the definition of proxy advisory firm 9 in section 3(a)(81) of the Securities Exchange Act 10 of 1934, withdraw from registration by filing a writ- 11 ten notice of withdrawal to the Commission. 12 ‘‘(2) COMMISSION AUTHORITY.—In addition to 13 any other authority of the Commission under this 14 title, if the Commission finds that a registered proxy 15 advisory firm is no longer in existence or has ceased 16 to do business as a proxy advisory firm, the Com- 17 mission, by order, shall cancel the registration under 18 this section of such registered proxy advisory firm. 19 ‘‘(f) MANAGEMENT OF CONFLICTS OF INTEREST.— 20 ‘‘(1) ORGANIZATION POLICIES AND PROCE- 21 DURES.—Each registered proxy advisory firm shall 22 establish, maintain, and enforce written policies and 23 procedures reasonably designed, taking into consid- 24 eration the nature of the business of such registered 25 VerDate Sep 11 2014 22:40 Nov 25, 2019 Jkt 099200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\H5116.IH H5116 kjohnson on DSK79L0C42 with BILLS 12 •HR 5116 IH proxy advisory firm and associated persons, to ad- 1 dress and manage any conflicts of interest that can 2 arise from such business. 3 ‘‘(2) COMMISSION AUTHORITY.—The Commis- 4 sion shall issue final rules to prohibit, or require the 5 management and disclosure of, any conflicts of inter- 6 est relating to the offering of proxy advisory services 7 by a registered proxy advisory firm, including, with- 8 out limitation, conflicts of interest relating to— 9 ‘‘(A) the manner in which a registered 10 proxy advisory firm is compensated by the cli- 11 ent, or any affiliate of the client, for providing 12 proxy advisory services; 13 ‘‘(B) the provision of consulting, advisory, 14 or other services by [Text truncated for display. 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