[Congressional Bills 114th Congress]
[From the U.S. Government Publishing Office]
[H.R. 5311 Reported in House (RH)]

<DOC>





                                                 Union Calendar No. 621
114th CONGRESS
  2d Session
                                H. R. 5311

                          [Report No. 114-798]

 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

                              May 24, 2016

 Mr. Duffy (for himself and Mr. Carney) introduced the following bill; 
       which was referred to the Committee on Financial Services

                           September 28, 2016

  Reported with an amendment, committed to the Committee of the Whole 
       House on the State of the Union, and ordered to be printed
 [Strike out all after the enacting clause and insert the part printed 
                               in italic]
[For text of introduced bill, see copy of bill as introduced on May 24, 
                                 2016]


_______________________________________________________________________

                                 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 2016''.

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 registered under section 15H who is engaged in 
        the business of providing proxy voting research, analysis, 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 
                        has adequate financial and managerial resources 
                        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 has adequate 
                                financial and managerial resources 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 one 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 subsections (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 resolve those 
        complaints in a timely fashion and in any event prior to voting 
        on the matter to which the recommendation relates.
            ``(2) 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;
                    ``(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; and
                    ``(C) direct Commission staff to withdraw the Egan 
                Jones Proxy Services (May 27, 2004) and Institutional 
                Shareholder Services, Inc. (September 15, 2004) no-
                action letters.
    ``(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).
                                                 Union Calendar No. 621

114th CONGRESS

  2d Session

                               H. R. 5311

                          [Report No. 114-798]

_______________________________________________________________________

                                 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.

_______________________________________________________________________

                           September 28, 2016

  Reported with an amendment, committed to the Committee of the Whole 
       House on the State of the Union, and ordered to be printed