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, 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.