117 HR 9527 IH: Putting Investors First Act of 2022
U.S. House of Representatives
2022-12-14
text/xml
EN
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I
117th CONGRESS
2d Session
H. R. 9527
IN THE HOUSE OF REPRESENTATIVES
December 14, 2022
Mr. Steil (for himself, Mr. Barr, Mr. Ferguson, Ms. Stefanik, Mr. Rose, Mr. Davidson, Mr. Amodei, Mr. Balderson, Mr. Armstrong, Mr. Williams of Texas, Mr. Hill, Mr. Flood, Mr. LaMalfa, Mr. C. Scott Franklin of Florida, Mr. Gooden of Texas, Mr. Rodney Davis of Illinois, Mr. Fitzgerald, and Mr. Gimenez) introduced the following bill; which was referred to the Committee on Financial Services
A BILL
To amend the Securities Exchange Act of 1934 to require the registration of proxy advisory firms, and for other purposes.
1.

Short title
This Act may be cited as the “Putting Investors First Act of 2022”.
2.

Definitions
(a)

In general
In this Act:
(1)

Commission
The term Commission means the Securities and Exchange Commission.
(2)

Proxy advisory firm
The term proxy advisory firm has the meaning given the term in paragraph (81) of section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)), as added by this Act.
(3)

State
The term State has the meaning given the term in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)).
(b)

Securities Exchange Act of 1934 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:
“(81)

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.
(82)

Person associated with a proxy advisory firm
The term person associated with a proxy advisory firm—
(A)
means—
(i)
any partner, officer, or director of a proxy advisory firm (or any person occupying a similar status or performing similar functions);
(ii)
any person directly or indirectly controlling, controlled by, or under common control with a proxy advisory firm;
(iii)
any employee of a proxy advisory firm; or
(iv)
any person the Commission determines by rule is controlled by a proxy advisory firm; and
(B)
does not include any person that performs clerical or ministerial functions with respect to a proxy advisory firm.” .
3.

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:
“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 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;
(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 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;
(vi)
the policies and procedures in place to publicly disclose and manage conflicts of interest under subsection (f);
(vii)
information related to the professional and academic qualifications of staff tasked with providing proxy advisory services; and
(viii)
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 with integrity, including by failing to comply with subsection (f) or (g); or
(7)
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
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.
(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;
(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 subjects 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;
(D)
if such ombudsman is unable to resolve such complaints prior to the publication of proxy voting recommendations to clients, include in the final report of the firm to clients a statement detailing its complaints, if requested in writing by the company; and
(E)
provide to clients receiving proxy advisory firm recommendations—
(i)
information demonstrating that draft recommendations (other than recommendations relating to an issuer-sponsored proposal or recommendations consistent with that of the majority of the board of directors of the issuer) are in the best economic interest of shareholders; and
(ii)
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 draft recommendations (other than recommendations relating to an issuer-sponsored proposal or recommendations consistent with that of the majority of the board of directors of the issuer)—
(I)
are based on internal controls and procedures that are designed to ensure accurate information;
(II)
do not violate applicable State or Federal law; and
(III)
prioritize economic returns to 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, unless otherwise defined through a final rule issued by the Commission; 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
Each registered proxy advisory firm shall, at the beginning of each fiscal year of such firm, report to the Commission on the number of—
(1)
shareholder proposals its staff reviewed in the prior fiscal year;
(2)
recommendations made in the prior fiscal year;
(3)
staff who reviewed and made recommendations on such proposals in the prior fiscal year (and the qualifications of such staff); and
(4)
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.
(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.
(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.”.
(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,”.
4.

Duties of investment advisors, asset managers, and pension funds
(a)

Reporting requirements
Not later than 1 year after the date of the enactment of this Act and annually thereafter, any covered entity that retains the services of a proxy advisory firm with respect to the preceding year shall provide to the beneficiaries and customers of the covered entity, as applicable, a report that includes—
(1)
the percentage of votes cast on shareholder proposals that follow proxy advisor firm recommendations for each proxy advisory firm retained by the covered entity;
(2)
the percentage of votes cast on environmental-, social-, or governance-related shareholder proposals that follow proxy advisory firm recommendations for each proxy advisory firm retained by the covered entity; and
(3)
an explanation of—
(A)
how proxy advisory firm recommendations are used by the covered entity in making voting decisions;
(B)
how such recommendations are reconciled with the fiduciary duty of the covered entity to vote in the best economic interests of shareholders;
(C)
how frequently votes are changed when an error occurs or due to new information from issuers; and
(D)
the degree to which investment professionals of the covered entity are involved in such voting decisions.
(b)

Requirements
With respect to shareholder proposals of an issuer, a covered entity with more than $100,000,000,000 in assets under management shall—
(1)
provide customers with a mechanism to indicate how the covered entity should vote on their behalf;
(2)
in any materials provided to customers and related to customers voting their shares, clarify that shareholders are not required to vote on every proposal; and
(3)
with respect to each shareholder proposal for which the covered entity voted (other than an issuer-sponsored proposal or a vote consistent with the recommendation of the majority of the board of directors of the issuer), make publicly available the economic analysis the covered entity conducted to determine that the vote is in the best economic interest of the customers.
(c)

Covered entity defined
In this section, the term covered entity means an investment advisor, asset manager, or pension fund with more than $100,000,000 in assets under management.
5.

Transparency regarding ESG funds
Section 10 of the Securities Act of 1933 (15 U.S.C. 77j) is amended by adding at the end the following:
“(g)

Transparency regarding ESG funds
An investment company that holds itself out as offering an index fund under which investments are made pursuant to a set of environmental, social, or governance standards shall disclose in tabular form on the first page of each prospectus required pursuant to this section the 1-, 3-, and 5-year annual returns and fees charged to investors with respect to such fund compared with the annual returns and fees charged to investors for the most readily comparable broad-based index fund offered by such investment company under which investments are not made pursuant to such standards, or if such investment company does not offer a comparable index fund, a reasonably similar comparison to a readily comparable broad-based index fund.”.
6.

Resubmission thresholds for shareholder proposals
Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n) is amended by adding at the end the following:
“(k)

Exclusion of certain shareholder proposal resubmissions
A shareholder proposal may be excluded from any proxy or consent solicitation material for an annual meeting of the shareholders of an issuer if the proposal—
(1)
is not germane (without regard to whether the proposal involves a significant social policy issue); or
(2)
addresses substantially the same subject matter (without regard to whether the proposal involves a significant social policy issue) as a proposal previously included in the proxy or consent solicitation material for an annual meeting of the shareholders of an issuer—
(A)
for a meeting of the shareholders conducted in the preceding 5 years; and
(B)
if the most recent vote—
(i)
occurred in the preceding 3 years; and
(ii)
(I)
if voted on once during such period, received less than 5 percent of the votes;
(II)
if voted on twice during such period, received less than 15 percent of the votes; or
(III)
if voted on three or more times during such period, received less 25 percent of the votes.” .
7.

Prohibition on robovoting
Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n) is further amended by adding at the end the following:
“(l)

Prohibition on robovoting
(1)

In general
The Commission shall issue final rules prohibiting the use of robovoting with respect to votes related to proxy or consent solicitation materials.
(2)

Robovoting defined
The term robovoting means the practice of automatically voting in a manner consistent with the recommendations of a proxy advisory firm.”.
8.

Liability for certain failures to disclose material information
Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n) is further amended by adding at the end the following:
“(m)

False or misleading statements
For purposes of section 18, failure to disclose material information regarding proxy voting advice that makes a recommendation to a security holder as to its vote, consent, or authorization on a specific matter for which security holder approval is solicited, and that is furnished by a person that markets its expertise as a provider of such proxy voting advice, separately from other forms of investment advice, and sells such proxy voting advice for a fee, shall be considered to be false or misleading with respect to a material fact.”.
9.

Study of certain issues with respect to shareholder proposals and proxy advisory firms
Not later than 180 days after the date of the enactment of this Act, and every 5 years thereafter, the Securities and Exchange Commission, including the Office of the Advocate for Small Business Capital Formation, shall carry out a study and submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives on shareholder proposals and proxy advisory firms that includes, with respect to, in the case of the first report, the preceding 10 years, and in the case of each subsequent report, the preceding 5 years, the following:
(1)
The costs that issuers incurred in responding to—
(A)
politically, environmentally, or socially motivated shareholder proposals; and
(B)
shareholder proposals that failed to be agreed to more than once.
(2)
The amount of fees that public companies paid to proxy advisory firms and persons associated with proxy advisory firms.
(3)
The source of funds with respect to payment of such fees.
(4)
The academic or professional qualifications of the staff members that provide proxy advisory services at proxy advisory firms.
(5)
The number of shareholder proposals that, if adopted, would require an issuer to violate a State or Federal law.
(6)
An estimate of the costs that issuers would incur if such proposals were adopted.