[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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