Congressional Record, Volume 163 Issue 208 (Wednesday, December 20, 2017)

[Congressional Record Volume 163, Number 208 (Wednesday, December 20, 2017)]
[House]
[Pages H10313-H10329]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

CORPORATE GOVERNANCE REFORM AND TRANSPARENCY ACT OF 2017

Mr. HENSARLING. Mr. Speaker, pursuant to House Resolution 657, I call
up the bill (H.R. 4015) 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, and ask for its
immediate consideration in the House.
The Clerk read the title of the bill.
The SPEAKER pro tempore (Mr. Bost). Pursuant to House Resolution 657,
an amendment in the nature of a substitute consisting of the text of
Rules Committee Print 115-46 is adopted, and the bill, as amended, is
considered read.
The text of the bill, as amended, is as follows:

H.R. 4015

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 2017''.

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 who is primarily engaged in the business of
providing proxy voting research, analysis, ratings, 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--

[[Page H10314]]

``(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, 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 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 (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 seek to
resolve those complaints in a timely fashion and in any event
prior to voting on the matter to which the recommendation
relates. If the ombudsman is unable to resolve such
complaints prior to voting on the matter, the proxy advisory
firm shall include in its final report to its clients a
statement from the company detailing its complaints, if
requested in writing by the company.
``(2) Reasonable time defined.--For purposes of this
subsection, the term `reasonable time'--
``(A) means not less than 3 business days unless otherwise
defined through a final rule issued by the Commission; and

[[Page H10315]]

``(B) 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.
``(3) 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).

The SPEAKER pro tempore. The bill, as amended, shall be debatable for
1 hour equally divided and controlled by the chair and ranking minority
member of the Committee on Financial Services.
The gentleman from Texas (Mr. Hensarling) and the gentlewoman from
California (Ms. Maxine Waters) each will control 30 minutes.
The Chair recognizes the gentleman from Texas.

General Leave

Mr. HENSARLING. Mr. Speaker, I ask unanimous consent that all Members
have 5 legislative days to revise and extend their remarks and submit
extraneous material on the bill under consideration.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Texas?
There was no objection.
Mr. HENSARLING. Mr. Speaker, I yield myself such time as I may
consume.
Mr. Speaker, I rise in strong support of H.R. 4015, the Corporate
Governance Reform and Transparency Act of 2017, and I thank the sponsor
of this legislation, the gentleman from Wisconsin (Mr. Duffy), the
chairman of the Housing and Insurance Subcommittee of our committee,
for offering this bill.
Each year, Mr. Speaker, public companies hold shareholder meetings
wherein shareholders vote for the companies' directors and on other
significant corporate actions that require shareholder approval.
Mr. Speaker, the Securities and Exchange Commission requires that,
before these annual shareholder meetings take place, public companies
must provide shareholders with proxy statements that include all
important facts about matters to be voted on at a shareholder meeting.
Many shareholders and investment advisers rely on information provided
by proxy advisory firms to guide their votes on these matters.
H.R. 4015 would enhance transparency in the shareholder proxy system
by requiring proxy advisory firms to register with the SEC, disclose
potential conflicts of interest and codes of ethics, and make their
methodologies public.
Mr. Speaker, this is a pure disclosure bill, nothing more, nothing
less. Proxy firms play an outsized role in the U.S. economy in shaping
corporate governance. They counsel pension plans, mutual funds, and
other institutional investors about how to vote the shares of
corporations that they own.
With respect to institutional investors, Mr. Speaker, the share of
institutional investor ownership was roughly 46 percent as recently as
1987, but today, that figure is more than 75 percent; in other words,
the volume of proxy votes for which investors are responsible has grown
into the billions.
In 2003, the SEC adopted a rule under the Investment Advisers Act
that requires an investment adviser to vote in

[[Page H10316]]

the best interest of their clients' own proxies. A series of SEC no-
action letters give the investment adviser a fundamental safe harbor
from liability if they use a proxy adviser.
As a result, institutional investors have increasingly relied on
proxy advisory firms to help them decide how to vote their shares.
However, regulators, market participants, and academic observers have
highlighted potential conflicts of interest that are inherent in the
business models and activities of proxy advisory firms.
The committee, for example, is aware of numerous instances whereby
the two largest proxy advisory firms have issued vote recommendations
to shareholders that include errors, misstatements of facts, and
incomplete analysis.
For example, in one instance, a company reported that, even though
the total shareholder return the company actually had generated for its
shareholders was 64 percent, a proxy advisory firm, Glass Lewis,
erroneously reported this calculation to be 26 percent.
Another company reported that ISS erroneously reported that the
company's long-term cash awards will vest and pay out their maximum
opportunity in the event of a change in control. Well, this was
reported even though the company's plan had been amended and approved
by the shareholders years earlier in a manner that would pay out at
target upon change in control, and there are many other examples.
Some proxy advisory firms' recommendations have been made without any
contact to the public company at all, and then these same proxy
advisory firms encourage companies to join their service in order to
have the privilege to ``influence'' an advisory firm's recommendations.
I suspect, for many people, this simply does not pass the smell test.
An industrial company told its shareholders, Mr. Speaker: ``ISS'
negative recommendation was based on flawed analysis of our
compensation programs that did not appropriately take into account the
significant declines in our CEO's pay in 2015 or the performance-based
nature of our annual and long-term incentive compensation programs.''
A pharmaceutical company responded to a proxy advisory firm's
recommendations with this statement: ``For the second year in a row,
Glass Lewis did not include its full pay for performance analysis in
this report. For shareholders who rely only on Glass Lewis materials to
make voting decisions, there is no discussion of the company's
industry-leading performance over this time period.''
Again, Mr. Speaker, there are many, many more examples like these.
So another concern that many people have, Mr. Speaker, is that the
two largest proxy advisory firms collectively--collectively--make up 97
percent of the proxy advisory industry--97 percent. This monopolization
and the lack of transparency regarding proxy advisory firms means that
the writings, analysis, reports, and voting recommendations of these
two firms have a disproportionate effect on fundamental corporate
transactions like mergers or acquisitions, the approval of corporate
directors, and shareholder proposals. In other words, these two firms
have a huge impact on our economy.
The bill of the gentleman from Wisconsin (Mr. Duffy) helps address
these concerns by setting up a new regulatory regime for proxy advisory
firms that looks out for the interest of investors, shareholders, by
ensuring they receive complete information through the proxy process
and can better vote in a manner consistent with shareholder interest as
opposed to the potential conflicted interest of a proxy firm.
Mr. Duffy's bill also helps ensure that shareholders and their
proxies have access to accurate information regarding companies by
allowing companies to provide input on proxy recommendations. This is
especially important for emerging growth companies that rely heavily on
investors.
A bad proxy recommendation in which emerging growth companies cannot
refute the recommendation can be devastating to those emerging growth
companies and, thus, have a harmful impact on our economy.
In a letter to our committee, the Biotechnology Innovation
Organization wrote: ``Small business innovators operate in a unique
industry that values a strong relationship with investors. Yet they are
often held to standards that are not applicable to their company and
forced to engage in proxy fights over issues that do not add value to
shareholders.''
H.R. 4015 would provide for SEC oversight of proxy advisory firms,
ensuring that they operate within appropriate boundaries and can be
held accountable to regulators and the public.
To be clear, Mr. Speaker, nothing in this bill permits companies to
rewrite a proxy firm's report or forces a proxy firm to change its
recommendation based on feedback received from the company.
In summary, H.R. 4015 will improve transparency in the proxy system
and enhance shareholder access to information by ensuring that proxy
advisory firms are registered with the SEC, disclose potential
conflicts of interest and codes of ethics, and make publicly available
their methodologies for forming proxy recommendations and analysis. For
every Member who believes in investor protection and supports a
healthier economy, they should support H.R. 4015.
Mr. Speaker, I reserve the balance of my time.

{time} 1315

Ms. MAXINE WATERS of California. Mr. Speaker, I yield myself such
time as I may consume.
Mr. Speaker, H.R. 4015, the so-called Corporate Governance Reform and
Transparency Act, would create an untested, inappropriate, and
burdensome regulatory framework for proxy advisory firms, making it
much more difficult for shareholders to obtain unbiased research used
to make well-informed voting decisions about the companies they own.
Institutional investors, like pension funds and mutual funds,
typically invest money on behalf of hardworking Americans in a large
number of public companies. In exchange for their investment, companies
provide investors with shares of ownership and a say on important
proposed changes to how the companies are run.
These proposals may relate to who sits on the board of directors, how
much executives are paid, environmental practices, employee minimum
wage, and nondiscrimination policies.
Shareholders often hire independent researchers called proxy advisory
firms to help inform their voting decisions on the many proposals they
consider each year.
H.R. 4015 contains numerous provisions that would undermine proxy
advisory firms and the shareholders that rely on them for unbiased
advice.
First, H.R. 4015 would essentially fulfill the wishes of corporate
management by regulating proxy advisory firms out of existence. The
bill requires proxy advisory firms to register with the Securities and
Exchange Commission and authorizes the SEC to deny applications on a
whim.
Additionally, H.R. 4015 would force proxy advisers to publicly
disclose their internal proprietary research methodologies and voting
policies, which firms invest time and money into developing.
The bill would also require proxy advisers to hire a sort of
compliance department dedicated entirely to the grievances of corporate
management rather than the adviser's own shareholder clients.
These burdensome requirements would deter new proxy advisers from
entering the market and squeeze out smaller, cost-sensitive firms. As a
result, shareholders would be faced with ever-increasing fees to obtain
research from a shrinking universe of advisers.
Second, H.R. 4015 would grant corporate management the right to
review and weigh in on a proxy adviser's draft recommendations before
the shareholder-clients, who pay for the recommendations, get to see a
final report. If management raises a complaint that the adviser
disagrees with, the bill allows management to get the last word by
publishing its dissenting opinion in the adviser's final report. In
other words, the bill is the equivalent of requiring that a teacher
clear a report card with a student before sending it to his or her
parents.
Finally, H.R. 4015 is unnecessary in light of existing Federal
securities

[[Page H10317]]

laws. For example, some proxy advisers, such as the largest firm,
Institutional Shareholder Services, are already registered and
regulated as investment advisers under the Investment Advisers Act of
1940. As such, they already owe heightened obligations to their
customers; must make regular, comprehensive disclosures to regulators
and the public; and are subject to periodic compliance examinations,
among other legal responsibilities. Additionally, the SEC has already
provided guidance on due diligence and oversight related to proxy
advisers.
H.R. 4015 would replace this well-understood guidance with a harmful
and inappropriate regulatory regime that undermines investors' ability
to simply exercise their shareholder rights.
Tellingly, nothing in H.R. 4015 advances the bill's purported goals
of ``fostering accountability, transparency, responsiveness, and
competition in the proxy advisory firm industry.''
Shareholders hold corporations and their management accountable by
casting well-informed votes on important issues of corporate
governance, including issues of diversity. For example, a recent study
by Ernst & Young found that corporate board diversity and gender pay
equity were key themes in the 2017 proxy season. Specifically, Ernst &
Young found that over half of the investors it interviewed included
diversity as a board priority in 2017, and ``proposals asking boards to
report on and increase their board diversity are among the top
shareholder proposals submitted this year.''
H.R. 4015 would render these important accountability efforts
ineffective, as the institutional shareholders driving governance
changes would be less able to obtain the research needed to inform
voting decisions.
Now, I can imagine that Americans listening to this debate may get
confused that Republicans, who have been singularly focused on
repealing important safeguards and protections for America's consumers
and investors, are now claiming that they are seeking to protect
investors with these new rules, but, Mr. Speaker, if this bill truly
helped investors, why have so many from all over America written
letters to Congress opposing H.R. 4015?
To name a few, the bill's opponents include public pension funds and
government officials from California, Colorado, Connecticut, Florida,
Illinois, New York, Ohio, Oregon, and Washington. These investors
joined a letter from Council of Institutional Investors stating that
H.R. 4015 ``would weaken corporate governance in the United States;
undercut proxy advisory firms' ability to uphold their fiduciary
obligation to their investor clients; and reorient any surviving firms
to serve companies rather than investors.''
Proponents of effective corporate governance, including Americans for
Financial Reform, Consumer Federation of America, Public Citizen, and
Principles for Responsible Investment, have similarly written to oppose
this bill. For example, the Consumer Federation of America wrote that
H.R. 4015 ``would empower companies to bully proxy advisory firms into
dropping their objections to management proposals or watering down
their recommendations.''
Private institutional investors also agree that H.R. 4015 would leave
shareholders reliant on biased information tilted toward the interests
of company management. Sound corporate governance requires shareholders
to have access to impartial information when voting on key corporate
issues.

If our Nation's investors, who provide the capital for businesses to
grow jobs and our economy, are unable to hold corporations accountable,
they will be increasingly reluctant to invest. H.R. 4015 would,
thereby, hurt the very businesses it purports to assist.
Mr. Speaker, for these reasons, I urge my colleagues to join me in
opposing H.R. 4015.
Mr. Speaker, I reserve the balance of my time.
Mr. HENSARLING. Mr. Speaker, I yield myself 10 seconds.
Mr. Speaker, it is a historic day in America. Republicans deliver
historic tax relief for working Americans and small businesses.
The ranking member has articulated concern over burdensome
requirements. I look forward to working with her now on reducing the
burdensome requirements of the Dodd-Frank Act.
Mr. Speaker, I yield 4 minutes to the gentleman from Michigan (Mr.
Huizenga), the chairman of the Committee on Financial Services'
Subcommittee on Capital Markets, Securities, and Investments.
Mr. HUIZENGA. Mr. Speaker, as has been pointed out each year, public
companies convene these shareholder meetings at which the companies'
shareholders vote for the companies' directors and on other significant
corporate actions that require shareholder approval.
As part of this annual process, the Securities and Exchange
Commission requires public companies to provide their shareholders with
a proxy statement before those meetings.
A proxy statement includes all important facts about the matters to
be voted on at the meeting, including, for example, information on
board of directors candidates, director compensation, executive
compensation, related party transactions, securities ownership by
management, and eligible shareholder proposals.
The information contained in the statement must be filed with the SEC
before soliciting a shareholder vote on the election of directors and
the approval of these other corporate actions. Solicitations, whether
by management or shareholders, must disclose all important facts about
the issues on which the shareholders are being asked to vote.
Institutional investors, including investment advisers to mutual
funds and pension funds, typically hold shares in a large number of
public companies. Each year, the investment advisers to these funds
vote billions of shares on behalf of their clients on thousands of
proxy ballot items.
What you have heard about, really, was the theoretical way this is
supposed to run. Unfortunately, that is not reality, and that is not
what you are hearing from the other side, because in 2003, the SEC
adopted a rule under the Investment Advisers Act of 1940, requiring an
investment adviser that exercises voting authority over its clients'
proxies to adopt policies and procedures designed to ensure that the
investment adviser votes those proxies in the best interests of their
clients. Perfect. That is exactly what they should be doing.
The SEC's release adopting the rule clarified that ``an adviser could
demonstrate that the vote was not a product of a conflict of interest
if it voted client securities, in accordance with a predetermined
policy, based upon the recommendations of an independent third party.''
Okay so far, but here is where we see the problem. As a result,
institutional investors increase their reliance on these proxy adviser
firms to help them decide how to vote their shares.
In 2004, the SEC staff, without a Commission vote, just the staff,
issued two ``no action'' letters ``effectively blessing the practice of
investment advisers simply voting the recommendations provided by a
proxy adviser,'' according to SEC Commissioner Dan Gallagher.
Largely, as a result of the SEC's regulation, proxy adviser firms now
wield tremendous outside influence on the U.S. proxy system. Studies
have shown that the two largest proxy adviser firms are comprised of
approximately 97 percent of all the proxy advisory industry and can
control a significant percentage of share votes in corporate elections,
which is sometimes as high as 40 percent. There have been numerous
instances where these two firms have issued vote recommendations on
publicly traded companies that include errors, misstatements of fact,
and incomplete analysis.
Additionally, some proxy advisory firms' recommendations have been
made without any sort of communication or contact with the public
company that they are actually reviewing. In fact, these same proxy
advisory firms even encourage companies to join their service on the
other side of the ledger in order to have the privilege to
``influence'' an advisory firm's recommendations.
Members heard from the ranking member about a teacher having to check
with a student about what their grades are going to be as a student.
Well, what this is, Mr. Speaker, this is the teacher shaking down the
student for their lunch money and milk

[[Page H10318]]

money to make sure that they are behaving.
So let's talk about reality here.
Regulators, market participants, and academic observers have
highlighted potential conflicts of interest inherent to this business
model and activities of these proxy firms. For example, proxy advisory
firms may feel pressured by their largest clients, who may be activist
investors, to issue voting recommendations that reflect those clients'
specific agendas, not the boards' or the corporations'.
The SPEAKER pro tempore. The time of the gentleman has expired.
Mr. HENSARLING. Mr. Speaker, I yield an additional 1 minute to the
gentleman from Michigan (Mr. Huizenga).
Mr. HUIZENGA. Mr. Speaker, additionally, proxy advisory firms often
provide voting recommendations to investment advisers on matters for
which they also provide consulting services to public companies. Talk
about, again, a conflict of interest.
Some proxy advisory firms also rate or score these public companies
on their governance structures, policies, practices, and they are
trying to actually influence the corporate governance practices of
these companies.
Essentially, these proxy advisory firms have hijacked the proxy
system by aligning themselves with activist shareholders, who also
might be their clients, to push social and political initiatives rather
than using shareholder votes to maximize shareholder value and
increasing shareholder returns.

{time} 1330

Well, H.R. 4015 is to the rescue on this. It would foster greater
accountability, competition, responsiveness, and, most importantly of
all, transparency.
This legislation would ensure that voting recommendations at proxy
advisory firms are, in fact, in the interest of long-term shareholders.
So let's not misunderstand. The role of these proxy advisory firms
serves a very important place in our economy. However, these firms
aren't immune to conflicts of interest.
The good work of my friend, Mr. Duffy, on H.R. 4015 will improve that
transparency.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield myself such
time as I may consume.
It is not enough that my friends on the opposite side of the aisle
just voted to give the biggest tax breaks to America's richest
corporations. They are back here now supporting the control and the
dominance of corporations over our investors who need protections. The
difference between us and them, they are for deregulation of Dodd-Frank
and protection for consumers to support, however they can give it, the
biggest corporations in America.
Mr. Speaker, I yield 3 minutes to the gentlewoman from New York (Mrs.
Carolyn B. Maloney), the distinguished ranking member of the
Subcommittee on Capital Markets, Securities, and Investments.
Mrs. CAROLYN B. MALONEY of New York. Mr. Speaker, I rise in support
of investor protection and in opposition to H.R. 4015.
Proxy advisers provide recommendations to institutional investors on
how to vote on board of director elections and shareholder resolutions.
Big institutional investors are shareholders at thousands of public
companies, and they simply don't have time to carefully review every
single hundred-page proxy statement in detail, especially because most
public companies hold their shareholders meetings at about the same 3-
month period.
So institutional investors rely on proxy advisers for vote
recommendations, which are often tailored to the investor's particular
corporate governance preferences. They also rely on proxy firms for
their data management on shareholder votes and corporate governance.
This is healthy. Proxy advisers do actually have the time to
carefully read all of the statements and proposals because they are
professionals that are hired to do just that.
I agree that the current regulatory system for proxy advisers is not
perfect. Two proxy advisory firms account for 97 percent of the
market--ISS and Glass Lewis--but, for some reason, they are regulated
differently. ISS is a registered investment adviser, while Glass Lewis
is not. Surely, this is not an ideal setup, so I am open to the idea of
a better and more consistent regulatory regime for proxy advisers.
But there are several things in this bill that concern me deeply. I
don't see why companies should have a statutory right to receive and
comment on a proxy adviser's draft recommendations before they are sent
to investors. Proxy advisers aren't Federal agencies with a notice-and-
comment for private companies. They are working for private companies
that are providing a valuable service. This is not appropriate at all.
Asset managers that use proxy advisers also tell me that they would
find proxy advisers a lot less useful if the proxy firm had to give the
company an opportunity to comment on their vote recommendations before
sending them to the asset manager.
And a new addition to the bill is very troubling. This would raise
the possibility of proxy advisers being forced to send the clients the
companies' own complaints about the proxy adviser's recommendations,
even if the complaint is completely untrue.
This is totally inappropriate and, I would say, plain wrong. So while
I am sympathetic to the idea that a better and more consistent
regulatory regime could be developed, I cannot support this bill, and I
have good company here.
Mr. Speaker, I include in the Record a letter from the Comptroller of
the State of New York, Comptroller DiNapoli; a statement from the AFL-
CIO of the United States of America; a statement from the Council of
Institutional Investors; a statement from the Consumer Federation of
America, and a statement by Glass Lewis.
This is a troubling bill. I urge my colleagues to vote ``no'' on it.
It is bad for safety and soundness and for good governance in this
country.

State of New York,

Office of the State Comptroller,

Albany, NY, December 14, 2017.
Re Opposition to H.R. 4015, Corporate Governance Reform and
Transparency Act of 2017.

Dear Members of the NYS Congressional Delegation: I write
to express my strong opposition to H.R. 4015, the Corporate
Governance Reform and Transparency Act of 2017, which I
understand will soon be voted on by the United States House
of Representatives. I believe that H.R. 4015, if passed and
enacted, would require unnecessary and expensive regulation.
Further, this legislation was not promoted by those it
purports to protect: shareholders. It would weaken corporate
accountability and shareholder oversight, undercut proxy
advisory firms' invaluable independence, increase costs to
consumers of research and redirect proxy advisors to answer
to companies rather than the clients it serves.
As Comptroller of the State of New York, I am the Trustee
of the New York State Common Retirement Fund (Fund) and the
administrative head of the New York State and Local
Retirement System (the System). As a fiduciary responsible
for the benefits of over one million state and local
government employees, retirees, and beneficiaries, I am
especially troubled by H.R. 4015's provisions that would
weaken corporate accountability and shareholder oversight.
The system of corporate governance that has evolved in the
United States relies on the accountability of boards of
directors to shareholders, and proxy voting is a critical
means by which shareholders hold boards to account.
Currently, proxy advisors provide shareholders of
corporations with independent advice. The proposed bill
threatens that very independence, which is integral to the
responsible exercise of a shareholder's voting rights.
In public comments defending H.R. 4015, members of the
Financial Services Committee have voiced the erroneous
assertions that proxy advisory firms dictate proxy voting
results and that institutional investors utilizing proxy
advisors do not make their own voting decisions. I personally
review and approve the Fund's customized Proxy Voting and
Corporate Governance Guidelines (Guidelines). In 2017, the
Fund voted on nearly 30,000 agenda items on its portfolio
companies' proxy statements, and every single one of those
items was voted pursuant to the guidelines which state:
``proxy voting decisions are based on internal reviews of
available information relating to items on the ballot at each
company's annual meeting. . . . The Fund analyzes a variety
of materials from publicly available sources, which include
but are not limited to, U.S. Securities and Exchange
Commission (SEC) filings, analyst reports, relevant studies
and materials from proponents and opponents of shareholder
proposals, third-party independent perspectives and studies,
and analyses from several corporate governance advisory
firms.'' All of our proxy voting decisions are made
independently and in the best interest of our System's
participants.
Proxy advisory firms provide cost-efficient, informed, and
independent research,

[[Page H10319]]

analysis, and advice for institutional shareholders, which
often hold thousands of companies in their investment
portfolios. The independence of that advice is absolutely
essential, and if proxy advisors are required to obtain
corporate review and rebuttals before releasing their
research to investors, that independence would be
compromised, depriving public pension funds and other
institutional investors of a vital resource. Such a
requirement would also delay investors' access to research in
the already constricted time frame available to consider
ballot issues and develop independent voting decisions in an
informed fashion.
As you consider your vote on this bill, please take into
account the concerns I have expressed on behalf of the more
than one million members, retirees and beneficiaries of the
System for whom the Fund invests.
Thank you for your consideration of this very important
matter. Please feel free to contact me if you would like to
discuss these issues further.
Sincerely,
Thomas P. DiNapoli,
State Comptroller.
____

AFL-CIO,

Washington, DC, December 14, 2017.
Dear Representative: On behalf of the AFL-CIO, I am writing
to express our strong opposition to the ``Corporate
Governance Reform and Transparency Act of 2017'' (H.R. 4015).
H.R. 4015 will create a costly and untested regulatory regime
for proxy advisory firms that provide research and voting
recommendations to shareholders. The bill claims to foster
``accountability, transparency, responsiveness, and
competition in the proxy advisory firm industry,'' while in
reality it will interfere with shareholders' access to
impartial analysis and undermine shareholders' ability to
hold corporate management accountable.
For example, H.R. 4015 will undermine investors' ability to
hold corporate management responsible on issues such as
executive pay. H.R. 4015 would give corporate executives an
effective veto over proxy advisor recommendations by enabling
companies to delay vote recommendations. Corporate executives
will be able to object to any proxy voting recommendation
that is contrary to their own preferences, including votes on
their own executive compensation packages.
The bill is based on the false idea that shareholders
blindly follow the recommendations of proxy advisors. In
reality, proxy advisors provide independent and unbiased
research on proxy votes to help investors formulate their own
proxy voting decisions. This flawed bill will create
unnecessary regulations that undermine this free flow of
information to investors.
For these reasons, we strongly urge you to vote against
``Corporate Governance Reform and Transparency Act of 2017''
(H.R. 4015).
Sincerely,
William Samuel,
Director, Government Affairs Department.
____

Council of Institutional Investors,

Washington, DC, December 12, 2017.
Hon. Paul Ryan,
Speaker of the House of Representatives,
Washington, DC.
Hon. Nancy Pelosi,
Minority Leader, U.S. House of Representatives,
Washington, DC.
Re H.R. 4015.

Dear Mr. Speaker and Minority Leader Pelosi: On behalf of
the Council of Institutional Investors (CII or Council), we
are writing to express our opposition to H.R. 4015, which we
understand will soon be voted on by the United States House
of Representatives.
CII is a nonpartisan, nonprofit association of public,
corporate and union employee benefit funds, other employee
benefit plans, state and local entities charged with
investing public assets, and foundations and endowments with
combined assets under management exceeding $3 trillion. CII's
member funds include major long-term shareowners with a duty
to protect the retirement savings of millions of workers and
their families. The Council's associate members include a
range of asset managers with more than $20 trillion in assets
under management.
Many of our members and other institutional investors
voluntary contract with proxy advisory firms to obtain
research reports to assist the funds in voting their proxies
according to the funds' own proxy voting guidelines. This
contractual relationship provides investors a cost-efficient
means of obtaining supplemental research on proxy voting
issues, which is particularly beneficial since many funds
hold thousands of companies in their investment portfolios.
H.R. 4015 would establish a new federal regulatory scheme
for proxy advisory firms that would (1) grant ``companies,''
apparently meaning corporate management, the right to review
the proxy advisory firms research reports before the paying
customers--investors--receive the reports; (2) mandate that
the proxy advisory firms hire an ombudsman to receive and
resolve corporation's complaints; and (3) if the ombudsman to
unable to resolve the complaints, and if the company
management submits a written request, proxy advisory firms
would be required to publish company management's dissenting
statement. These provisions would result in the federal
government interposing corporate management between investors
and those proxy advisory firms that investors hire to provide
them with research on issues, such as executive compensation,
in which corporate management can have its own interests,
sometimes in conflict with investors and with the corporate
entity.
Setting aside whether the provisions of H.R. 4015 are
consistent with First Amendment rights of freedom of speech,
the provisions are not practical. The provisions would
require proxy advisory firms to provide the management teams
of more than 4,000 corporations the opportunity to present
detailed comments on the firm's reports in a matter of weeks
before the reports are provided to investors. Thus, investors
would have limited time to analyze the reports in the context
of their own proxy voting guidelines to arrive at informed
voting decisions. Time is already tight, particularly in the
spring ``proxy season,'' due to the limited period between a
corporations' publication of the annual meeting proxy
materials and the date in which investors are permitted to
vote on proxy issues.
In addition, the provisions of H.R. 4015 would likely
result in fewer market participants in the proxy advisory
firm industry. The provisions would add significant costs
increasing barriers to new entrants and potentially leading
some existing firms to exit the industry altogether.
We also note that the United States Department of Treasury
recently performed extensive outreach to identify views of
company management teams and other market participants on
proxy advisory firms in connection with its recently issued
report to President Trump on ``A Financial System that
Creates Economic Opportunities, Capital Markets.'' In its
report the Treasury found that ``institutional investors, who
pay for proxy advice and are responsible for voting
decisions, find the [proxy advisory firm] services valuable,
especially in sorting through the lengthy and significant
disclosures contained in proxy statements.'' More
significantly, the Treasury did not call for legislation of
the proxy advisory firm industry.
Finally, we have attached for your information and review a
November 9, 2017 letter signed by 45 investors and investor
organizations describing in more detail the basis for their
strong opposition to H.R. 4015.
Thank you for considering our views. We would welcome the
opportunity to discuss our perspective on this important
issue with you or your staff in more detail.
Sincerely,
Jeffrey P. Mahoney,
General Counsel.
____

Consumer Federation of America,

December 18, 2017.
Re Vote No on H.R. 4015, the ``Corporate Governance
Transparency Act''.

Dear Representative: We understand the House is scheduled
to vote this week on legislation (H.R. 4015, the Corporate
Governance Reform and Transparency Act) that would undermine
the ability of shareholders to get reliable, independent
analysis of proxy issues on which they are asked to vote. We
urge you to vote no.
Although H.R. 4015 is presented as a bill to regulate proxy
advisory firms in order to better protect investors and the
economy, its effect would be to undermine their independence,
simultaneously increasing their costs and undermining their
value to the investors who use their services. Indeed,
several of the bill's provisions are specifically designed to
give the companies whose proxy proposals the firms are
supposed to independently analyze greater input into and
influence over their recommendations.
It would, for example, require proxy advisory firms to give
companies a first look at their draft recommendations and an
opportunity to comment on them before any recommendation to
investors is finalized.
Proxy advisory firms would also be required to employ an
ombudsman to take complaints about the accuracy of the voting
materials from the companies that are subjects of the
recommendations, and provide those companies with an
opportunity to include a comment in materials sent to
investors if their complaints are not resolved to their
satisfaction.
Together, these provisions would empower companies to bully
proxy advisory firms into dropping their objections to
management proposals or watering down their recommendations.
We certainly agree that proxy advisory firms should be
subject to appropriate regulation. Rather than create a
bureaucratic new regulatory regime for a handful of firms,
however, we believe that is better achieved by regulating
these firms as investment advisers, with a fiduciary duty to
act in the best interests of the investors who rely on their
services and an obligation to minimize and appropriately
manage conflicts of interest.
For these reasons, we urge you to vote no on this misguided
and misdirected legislation. Please feel free to contact me
directly if you have questions about our position on this
bill.
Respectfully submitted,
Barbara Roper,
Director of Investor Protection.

[[Page H10320]]

____
Glass Lewis,

December 18, 2017.
Re HR 4015--Corporate Governance Reform and Transparency Act
of 2017.

Hon. Paul Ryan,
Speaker, House of Representatives,
Washington, DC.
Hon. Nancy Pelosi,
Minority Leader, House of Representatives,
Washington, DC.
Dear Speaker Ryan and Leader Pelosi: I am writing to
express opposition to HR 4015, the Corporate Governance and
Reform and Transparency Act of 2017, which seeks to exert
additional regulatory control over proxy advisory firms at
the expense of investors. I urge a no vote when this
legislation is considered by the full House of
Representatives.
Shareholder voting, a regulatory obligation for U.S.
registered investment advisors, is a primary means by which a
public company's owners can influence company operations,
corporate governance and activities of corporate social
responsibility. As such, it is important for institutional
investors (pension funds, mutual funds and other asset
managers) to have access to the resources--including unbiased
proxy research--that enable them to execute their votes in
accordance with their views.
Glass Lewis is dedicated to helping institutional
shareholders of public companies better understand and
connect directly with the companies in which they invest. Our
duty, as a proxy advisory firm, is to support--not usurp--the
role of our clients as investors/owners, a distinction we
take very seriously. It is reflected in how we develop and
update our proxy voting policies, create our research, and
engage with public companies, shareholders and other
stakeholders.
H.R. 4015, as drafted, would damage investors in public
companies by attempting to silence research firms that
provide investors data, analysis and independent voting
recommendations to support their fiduciary activities related
to proxy voting. It would require the SEC to develop a new
registration scheme that would compel proxy advisory firms to
share their proprietary research reports with the subject
public companies prior to distributing those reports to their
investor clients--thereby granting the subject companies an
unprecedented right of prior review. The proposed legislation
also would establish a system whereby issuers could dispute
recommendations of proxy advisory firms before the investor
clients of proxy advisory firms were granted access to the
research.
No other investment research analysts are subject to these
prior review rules; in fact, FINRA prohibits investment
research analysts from doing this to avoid conflicts of
interest.
In SEC Staff Legal Bulletin No. 20 (June 30, 2014), the SEC
restated that investor consumers of proxy advisory firm
services are responsible for holding their advisors
accountable. These investor consumers are satisfied with the
current system. Indeed, it is telling that the call for
regulating proxy advisory firms is coming not from investors
but from the companies that are the subjects of the advisors'
reports.
In October, the United States Department of Treasury issued
its report to President Trump on ``A Financial System that
Creates Economic Opportunities, Capital Markets.'' As part of
that report, extensive outreach was undertaken to identify
views of company management teams and other market
participants on the role and activities of proxy advisors.
Treasury found that ``institutional investors, who pay for
proxy advice and are responsible for voting decisions, find
the [proxy advisory firm] services valuable, especially in
sorting through the lengthy and significant disclosures
contained in proxy statements.'' More significantly, the
Treasury did not call for legislation of the proxy advisory
industry.
Further, in 2012, the European Securities and Markets
Authority (ESMA), which comprises all the securities
regulators in Europe, and the Canadian Securities
Administrators (CSA) conducted comprehensive reviews of the
proxy advisory industry and its activities. Both regulatory
agencies concluded that neither binding nor quasi-binding
regulation of proxy advisory firm activity was warranted.
ESMA and the CSA each recommended the development of an
industry code of conduct. In accordance with the specific
direction of these regulators, the Best Practice Principles
for Shareholder Voting Research (``Principles'') were
launched in 2014.
Glass Lewis and ISS, the largest U.S.-based proxy advisory
firms, apply the Principles globally. The Principles
encourage transparency, conflict management and disclosure,
and engagement with companies when appropriate. Glass Lewis
meets the' Principles' standards by making its full
guidelines; research approach and methodologies; conflict
avoidance and disclosure policies; and public-company
engagement procedures available publicly on its website.
Most recently, in an effort to ensure that the Principles
remain fully aligned with applicable regulation, a global
consultation was launched in order to seek views from
investors and companies on whether the Principles have been
effective in ensuring the integrity and efficiency of the
services provided by shareholder voting analysts and
advisors. The review is being carried out by a Steering Group
comprised of five representatives of the current Principles'
signatories, chaired by Chris Hodge, former Director of
Corporate Governance at the Financial Reporting Council in
the UK, and supported by an Advisory Panel whose members have
broad experience and knowledge of investors, companies and
different national markets, including the United States. By
way of example, one of the key items on the agenda is the
consideration of what actions will be needed in order to
ensure the Principles are fully compatible with the revised
EU Shareholder Rights Directive, which includes mandatory
requirements for proxy advisors operating in the EU,
scheduled to take effect in 2019.
The Corporate Governance Reform and Transparency Act is an
attack on investors to the detriment of their beneficiaries--
notably the millions of U.S. teachers, municipal employees,
law enforcement officers, firefighters, retirees and mutual
funds investors. If enacted, it will result in less informed,
more time-constrained investors who will be less able to
properly hold companies accountable for poor returns,
overpaying executives at underperforming companies and
ignoring shareholders and shareholder interests.
Glass Lewis joins with the many pension funds,
institutional investors, and consumer advocates urging you to
vote no on HR 4015 to protect shareholder rights.
Sincerely,
Katherine H. Rabin,
Chief Executive Officer.

Mr. HENSARLING. Mr. Speaker, I yield 3 minutes to the gentleman from
Arkansas (Mr. Hill), our Republican Conference whip.
Mr. HILL. Mr. Speaker, I rise in support today of the Corporate
Governance Reform and Transparency Act of 2017, and I appreciate my
good friend, Sean Duffy's work on it.
Over the past 3 decades, I have advocated for responsible shareholder
activism and urged for corporate boards of directors to perform their
responsibility of careful stewardship, particularly in their essential
functions in evaluating corporate strategy, hiring able hardworking
executive management, and, critically, capital allocation.
For example, as Berkshire Hathaway's CEO, Warren Buffett, recommends,
corporate compensation committees must be composed of ``saber-toothed
tigers,'' not ``house cats,'' in their work.
Likewise, investors must take their responsibility to hold boards
accountable for their irreplaceable role in maximizing returns for
shareholders, while executing a corporate strategy that balances
shareholder returns with employees and customers.
So the question is: How can investors effectively lower agency costs
and actively meet this accountability mission?
For 20 years, this has been a much-discussed area by thoughtful
experts like Warren Buffett, ISS founder Robert Monks, Marty Lipton,
and Lawrence Cunningham. Grad schools at UCLA, Stanford, Harvard, Yale
all researched this challenge. Organizations of institutional investors
and corporate directors all proffer best practices.
And how do we best align these interests for this mission, but make
conflicts of interest readily apparent?
The role of proxy advisory firms in the U.S. economy has grown over
the last 2 decades and is a major shaper of corporate governance, and
it is of national importance. These firms counsel our pension plans,
our mutual funds, other institutional investors, which are more and
more in the market; 75 percent of the market, compared to when Robert
Monks started thinking about the idea in the late 1980s.
Under the current system, two proxy advisory firms now have 97
percent of the market, Mr. Speaker, and this monopolization and the
lack of transparency regarding their work means that the writings,
analyses, reports, and vote recommendations of just these two firms
have a disproportionate effect on the fundamental corporate
transactions, like mergers and acquisitions, the approval of corporate
directors, and other shareholder proposals.
Also, this has created more of a checklist mentality in the
boardroom. Directors today need information, yes, but, more
importantly, they need wisdom. And the proxy advisory firms are driving
people in boardrooms, in my view, to more of a checklist mentality,
regulatory mentality, and less using their business judgment and wisdom
to guide our public companies.
Proxy advisory firms aren't immune to conflicts of interest.
The SPEAKER pro tempore. The time of the gentleman has expired.
Mr. HENSARLING. Mr. Speaker, I yield an additional 30 seconds to the
gentleman from Arkansas.

[[Page H10321]]

Mr. HILL. Mr. Speaker, these conflicts are provided by providing
additional recommendations to the very firms that they are rating.
So, Mr. Speaker, we need balance in this arena, and I think Mr.
Duffy's bill provides a step toward that balance, an improvement in
transparency in the proxy system, thereby enhancing shareholder access
to important investment information. I appreciate his work on it. I
thank him for his work in our committee.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield 3 minutes to
the gentleman from Georgia (Mr. David Scott), a hardworking member of
the Financial Services Committee.
Mr. DAVID SCOTT of Georgia. Mr. Speaker, this is indeed a very, very
important issue. I come at this from one who has worked with my good
friend, Mr. Duffy, on this issue. More than that, I voted with Mr.
Duffy for this bill in committee.
However, there are some troubling things about this bill that could
do one very damaging thing. It could put many of these proxy firms out
of business.
I want to take a moment to explain what the danger is in the bill
that made me change my mind. I chatted with Mr. Duffy about it. He
understands it. This is not to shed any negative light on his
objective, but it is what he is doing to get to that objective that
disturbs me and, I think, should disturb the people of this Congress
and this country, and that is this:
It could be summed up in, basically, 2 words: unilateral authority.
That is what this bill provides to the Securities and Exchange
Commission: unilateral authority to set the requirements, first of all,
for what it means to be a proxy firm.
When you put unilateral authority into the hands of a regulatory
agency, we know the damage that can be done. And I agree that there may
be some things that need to be done, but these words, ``unilateral
authority,'' would mean that the Securities and Exchange Commission
could establish any number of hurdles for these proxy advisory firms to
jump over in order to just stay in business.
Unilateral authority to do such things as setting financial
requirements, one would say that nothing may be wrong with that; but
other hurdles that the Securities and Exchange Commission could put up
likely will be arbitrary, illogical, such as them setting requirements
for how many employees a proxy firm should have.
Mr. Speaker, this is a step too far, especially during a time in our
country when Federal regulators have used their powers to attack the
American people at any and every level.
The SPEAKER pro tempore. The time of the gentleman has expired.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield an additional
30 seconds to the gentleman from Georgia.
Mr. DAVID SCOTT of Georgia. Mr. Speaker, second, let me give you an
example of how you can put too much regulatory authority into an
agency.
When HHS, this year, used their powers to attack women's health, that
happened; or when the Department of Justice used their powers to
reverse community policing reform at the Department of Justice.
All I am saying in this particular argument, Mr. Speaker, is that Mr.
Duffy is well-intended, but this goes too far, and I urge my colleagues
to reject and vote ``no'' on this bill.
Mr. HENSARLING. Mr. Speaker, I yield 4 minutes to the gentleman from
North Carolina (Mr. Budd).
Mr. BUDD. Mr. Speaker, I rise today in support of H.R. 4015. I thank
Chairman Duffy for his leadership on this bipartisan piece of
legislation, which will improve our country's shareholder proxy system.
Since the early 2000s, we have seen market share and the shareholder
proxy system consolidate, essentially, into a duopoly, as two firms
control 97 percent of the market, so, under the current system,
potential conflicts of interest abound.
For example, proxy advisory firms that provide voting recommendations
to advisers often provide consulting services to those same public
companies. So wouldn't it make sense that they at least notify their
shareholders of this potential conflict of interest?
Well, right now, while the SEC has offered guidance on this problem,
the proxy firm wouldn't be required to do so. We need to get this bill
on the books just to address this problem.

{time} 1345

This bill is also timely because we have seen proxy firms align
themselves with political causes, unions, and interest groups that do
not always represent their shareholders' best interests. Shareholders
oftentimes aren't even aware of these conflicts. Again, reform is
needed.
So it should go without saying, Mr. Speaker, that the two problems
outlined above pose problems for the shareholder and for the average
investor. We cannot continue to allow the security laws and processes
to be wrapped in a service of political agenda.
Mr. Speaker, we have dealt with this issue in the Financial Services
Committee on a number of fronts with regard to disclosure of
information that is being weaponized against public companies, from
mining to conflict minerals. It is time to deal with the proxy issue
today.
The number of public companies has fallen in recent years. It was
never easy to be public, to be subject to the financial markets and the
pressures that come from being accountable to your shareholders. This
issue, the proxy issue, is part of a larger tapestry of challenges that
public companies face. They are increasingly choosing not to play the
game. They are getting capital from dark pools; they are getting
capital from hedge funds; and they are just staying private. That puts
investment opportunities in the hands of the 1 percent, and that leaves
retail investors out in the cold.
Mr. Speaker, my constituents and North Carolina shareholders are from
the part-time trader to the full-time trader. They deserve better than
this. Luckily, this body can do something to address these problems,
and that is where Chairman Duffy's bipartisanship legislation comes
into play. His bill will bring about much-needed accountability,
competition, and, most importantly, transparency in the proxy advisory
firm industry.
This bill also protects clients and their financial future from being
influenced by activists and outside interest groups. His legislation
accomplishes this by mandating that proxy advisory firms register with
the SEC, disclose potential conflicts of interest to the shareholders,
and make their methods for coming up with proxy recommendations
available to the public.
Two proxy advisory firms should not have this much control of the
marketplace and the power to disproportionately affect fundamental
corporate transactions. This bill is a win for the consumer, a win for
the free market, and should be a bipartisan priority for this body.
A number of outside commentators have been clear that the proxy
industry has gained a worrisome degree of authority over companies. In
fact, Columbia Law Professor Jeffrey Gordon said that the burden of
annual voting would lead investors, particularly institutional
investors, to farm out evaluation of most pay plans to a handful of
proxy advisory firms who, themselves, will seek to economize on those
very proxy review costs. There are a host of others who are saying
these same things about the way things are today in proxy voting.
Ultimately, the shareholder is the one who suffers. We should put a
stop to it.
Mr. Speaker, once again, I want to thank Chairman Duffy for leading
the fight on this issue, and I urge adoption of his legislation.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield 3 minutes to
the gentleman from Massachusetts (Mr. Capuano), an invaluable member of
the Financial Services Committee.
Mr. CAPUANO. Mr. Speaker, I thank the gentlewoman for yielding time
to me.
Mr. Speaker, this is one of those mundane issues that 95 percent of
America doesn't understand. I didn't understand much about it a while
back because I don't have any proxy advisers. I do have money in
retirement funds. I do get those 100-page documents in the mail,
saying, ``We are having a proxy fight and you should read it,'' in the
smallest print possible, and I do what 95 percent of America

[[Page H10322]]

does when I get those: I throw them right in the trash.
Now, that doesn't make me smart. It just means I can't read through
that stuff. I can't understand what they are doing with my pension
funds. I kind of have to go on faith that they are not sticking it to
me. That is what most of us do, and most anybody listening to this,
that is the only thing they have to do with this issue.
So I went out and found out what is a proxy adviser. Here is what it
is.
The pension funds--not always, but mostly pension funds--that invest
my pension money do it all across the board. Many of them are small.
Some of them are big. And when it comes time to reading those 100-page
documents and the thousands of companies they invest in, they go and
hire somebody to help them do it, a proxy adviser. They go through
those documents with accountants and actuaries and give them advice.
Not a demand--advice.
Now, I don't know about you. I get advice from my lawyer on occasion.
I get advice from my accountant on occasion. I get advice from my
priest on occasion. And it is none of your damn business what advice
they give me, because two of them I am paying and one of them loves me.
When a person or an entity hires someone else to give them advice, it
is no one else's business what that is. This bill says it is. It now
would be the business of the company about whom they are giving the
advice.
I paid them. Why should I share that information with you? That is
what a proxy adviser is. It is not some big swami sitting in the back
sticking it to big corporations. It is a paid adviser.
Now, we have heard, oh, terrible things that these advisers do.
Who do they work for? Well, they work for pension funds--mostly
pension funds, by the way, that are public pension funds, not all. They
have the pension money of teachers, firefighters, police officers,
trash collectors, water workers all across this country.
And then there are private pension funds that work for union members:
the AFL-CIO, the Bricklayers, the SEIU. That is who is doing most of
this investing on behalf of little people like me who don't have the
knowledge or the time to be able to go through 100 pages of really fine
print, really detailed stuff, to determine which person I should vote
for on a board of a company I don't know much about. That is it.

The SPEAKER pro tempore. The time of the gentleman has expired.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield an additional
30 seconds to the gentleman from Massachusetts.
Mr. CAPUANO. Mr. Speaker, let's figure out who are the worst of the
worst of the people who hire these people.
Well, it turns out the Dominican Sisters hire a proxy adviser. Oh,
they are put together for the very purpose of ripping the heart out of
corporate America. Those Dominican Sisters, they are evil investors.
Let's not forget the Daughters of Charity. Oh, terrible, terrible
people. They are so busy caring for the poorest people in the world
that they take time out of that in order to find a way to stick it to
the biggest corporate people in the country.
The SPEAKER pro tempore. The time of the gentleman has again expired.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield an additional
30 seconds to the gentleman from Massachusetts.
Mr. CAPUANO. Mr. Speaker, they use proxy advisers.
Let me see. Who wants this bill? Every corporation in America. Why?
They don't want you knowing what they are doing.
Let's see. Whose side am I on? I think if I have a choice between
being on the side of the biggest corporations in this country or being
with the Dominican Sisters, I am choosing the Dominican Sisters. They
are doing God's work. They use and need proxy advisers. Leave them
alone.
Mr. HENSARLING. Mr. Speaker, I yield myself 10 seconds just to say
that, if the gentleman is so busy he can't read a 100-page proxy
statement, perhaps he could read a 20-page bill and he would realize
that his comments have almost absolutely nothing to do with the bill
whatsoever.
Mr. Speaker, I yield 5 minutes to the gentleman from Wisconsin (Mr.
Duffy), the sponsor of the legislation and the chairman of the
Financial Services Subcommittee on Housing and Insurance.
Mr. DUFFY. Mr. Speaker, I appreciate the gentleman for yielding time
to me, the chairman of Financial Services, Mr. Hensarling. I appreciate
his leadership and stewardship on our committee.
Mr. Speaker, I want to get into the bill in a second, but I can't let
the Dominican Sisters reference go.
It is not the Dominican Sisters who are using proxy advisers. It is
the largest financial investors in the world that are using these
advisers, which we are going to get into in a little bit.
And if you want to talk about sisters, I will talk about the Little
Sisters of the Poor, who have been ravaged by ObamaCare because they
can't practice their faith, if you want to talk about sisters. We are
not going to go there today.
Mr. Speaker, we are in a situation where, my friends, if you listen
to the debate, you might say, ``Well, Republicans are asking for a
little more regulation in the proxy advisory space,'' and Democrats,
miraculously, are saying, ``We don't want any regulation.''
Well, our concern is that you have consolidated power in two
companies that control 97 percent of the industry, and some have made
the claim and the allegation that there might be political motivations
behind both--or at least one--of these massive proxy advisory firms,
because Glass Lewis is owned by the Ontario Teachers' Pension fund, and
they might have a political agenda that might affect the
recommendations that have a massive impact on American corporate
governance. Maybe that could be the distinction between the two parties
in today's debate.
Mr. Speaker, we have covered this quite a bit, but I want to go into
it again. The role of proxy advisory firms in the U.S. economy is
incredibly important. It is important stuff.
These firms counsel pension plans and mutual funds and institutional
investors on how to vote their shares. No one is trying to get rid of
proxy advisory firms. We think they are a good thing, but we think they
should have a little bit of regulation and a little bit of oversight.
I think it is troubling, when you look at the share of institutional
ownership, in 1987, it was 46 percent. Today, that has grown to 75
percent, meaning that institutional investors control billions of
shares.
There was a recent study that was done by Stanford that says that
asset managers with $100 billion or more under their control only make
10 percent of the decisions on these proxy issues, meaning they
outsource 90 percent of the decisions to one of two firms,
consolidating great power in these proxy advisory firms.
This was pointed out before as well, but, again, two firms, 97
percent of the market share, writing analysis reports, voting
recommendations that affect the fundamentals of corporate governance,
mergers, acquisitions, approval of corporate directors, and shareholder
proposals.
What is of greatest concern is that these firms are not free of
conflicts of interest. For example, in addition to providing
recommendations to institutional investors about how to vote, proxy
advisory firms may advise companies about corporate governance issues,
rate companies on corporate governance, help companies improve those
ratings, and advise proponents about how to frame a proposal to get the
most votes. They are playing every side of the issue. They are getting
every dollar from anybody who cares about the corporate governance
space. They play everybody. And if you want access, you pay.
I am going to give you an example in just a little bit of one of the
hundreds of letters that I have received on this issue. But before I do
that, I think it is important to say: What are we asking for? What is
the radical idea that we brought to the floor today, which, by the way,
had six Democrats' support?

Mr. Scott commented about his support as well, and I know he had an
issue about the cost that this would have on proxy advisory firms; but
the CBO, which I rarely quote, did a study on this and said the cost to
proxy advisory firms of this bill is minimal, if

[[Page H10323]]

anything. I think his concern might be misplaced.
But what are we asking to do here? We are asking for accountability.
We are asking for transparency, responsiveness, and competition in the
proxy advisory space. By doing that, we will improve corporate
governance, and, in the end, we are going to protect investors.
Specifically, again, this bipartisan bill will ensure that proxy
advisory firms are registered with the SEC. They will disclose
potential conflicts of interest. They will maintain a code of ethics
and make publicly available their methodologies for formulating their
proxy recommendations.
The SPEAKER pro tempore (Mr. Holding). The time of the gentleman has
expired.
Mr. HENSARLING. Mr. Speaker, I yield an additional 1 minute to the
gentleman from Wisconsin.
Mr. DUFFY. Mr. Speaker, I don't know what my friends across the aisle
have about maintaining a code of ethics or disclosing potential
conflicts of interest or instituting an ombudsman to resolve issues
that might come up. This is commonsense stuff. This is good governance,
and I would encourage all of my friends across the aisle to join us.
Mr. Speaker, I want to read one part of a letter that I received that
I think embodies what is going on in corporate America.

{time} 1400

I am not going to give the name of the company, but it says:

Upon contacting ISS and seeking explanation on one of the
recommendations, we were told there was a firewall between
the ISS recommendation group and the ISS group that deals
with corporate matters. Ultimately, we were advised that if
we were willing to join ISS, which includes payment of a
relatively substantial amount of money, we could have input
in the recommendations before they were made.

So, Mr. Speaker, pay for the input.
The SPEAKER pro tempore. The time of the gentleman has expired.
Mr. HENSARLING. Mr. Speaker, I yield an additional 1 minute to the
gentleman from Wisconsin.
Mr. DUFFY. Mr. Speaker, it goes on to say:

Meanwhile, during our latest discussions we were again
advised that we could avoid some issues by subscribing to ISS
corporate services and thereby have some input before such
recommendations are published.

Mr. Speaker, of course, such a subscription would entail big payouts.
It goes on to say:

On the one hand, ISS makes wholly unsupportable,
unreasonable, and irrational recommendations regarding
corporate elections without investigation, regulatory
support, or even contact with the victim company. While, on
the other hand, seeking fees from the victim company for the
privilege of influencing ISS's recommendations.

Mr. Speaker, so what you have here is you have the mafia on the
streets. So, lo and behold, your little shop on the street corner gets
burglarized at 10 o'clock one night and at 8 o'clock in the morning,
and lo and behold, the thugs come in and say: Do you want to buy some
insurance? Do you want to buy some protection? Pay up. We will keep you
safe. ISS, Glass Lewis, you pay up, and we can help you with your
recommendation. We can help you with your ratings.
Mr. Speaker, this is thuggery.
Let's have a little commonsense oversight in this space. It is a good
bill.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield myself such
time as I may consume.
Mr. Speaker, the gentleman talked about what is happening in
corporate America. They are dancing in the streets after that big tax
cut that was just given by my friends on the opposite side of the
aisle.
As to just a couple of companies--or too few companies--that are
doing the advising for these investors, it was just a week or so ago
that my friends on the opposite side of the aisle came here
representing one company, Berkshire Hathaway, where they were asking
this Congress to allow them to charge higher interest rates on the most
vulnerable people in our population, with high interest rates and the
terrible foreclosure practices all over this manufactured housing that
Berkshire Hathaway is selling to these most vulnerable people in our
society.
Mr. Speaker, I yield 3 minutes to the distinguished gentleman from
Texas (Mr. Al Green), who is the ranking member of the Subcommittee on
Oversight and Investigations.
Mr. AL GREEN of Texas. Mr. Speaker, I thank the ranking member for
yielding.
Mr. Speaker, I would also like to note that the ranking member, the
Honorable Maxine Waters, is often the sentinel on watch. She is the
person who is there to protect investors. She is there to protect
persons who might, but for her absence, be taken advantage of. So I am
honored to speak with her and to stand with her.
Mr. Speaker, I oppose this bill today because this bill epitomizes
what I believe is a business model that allows corporate America to
take advantage of investors. This business model is one that has been
perpetrated and perpetuated by my colleagues on the other side. This
business model is one that surfaced in 2008, when the credit rating
agencies became captives of the businesses that were providing the
instruments that were to be rated. They were catering to the businesses
to the detriment of the investors.
I believe this business model is one that allows the fiduciary rule
to be compromised. The fiduciary rule simply said that, if you are
working on behalf of an investor, you can't put your interest ahead of
the investor's interest. That rule was compromised by my colleagues on
the other side.
So today they again come with another business model that will allow
investors to be taken advantage of. Caveat emptor is going to apply in
a way that it has never been seen before as it will relate to these
investors.
It is time for us to prevent the business model of allowing investors
to be taken advantage of and to present a business model that allows
the investor to have the benefit of advice from the proxy. That is what
we have currently. Let's not change the business model. Let's make sure
that the investor is properly protected.
Mr. HENSARLING. Mr. Speaker, I reserve the balance of my time.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield 3 minutes to
the gentlewoman from Texas (Ms. Jackson Lee.)
Ms. JACKSON LEE. Mr. Speaker, I thank the gentlewoman from California
for yielding.
It is certainly my pleasure to be on the side of the gentlewoman from
California. Every time we have got in these fights to attack Dodd-
Frank, she has been on the right side of the issue.
So let me clearly, though my voice is a little raspy, speak on behalf
of those, as my colleagues have spoken about, of us who certainly have
a degree of education and receive those long statements where there are
big fights and the print is so small.
I will tell you that the proxy advisers are representing not us, but
those vulnerable pensioners who put everything they have ever had in
that pot, and those advisers give those public pension funds the
counsel and advice that is necessary.
First of all, this bill is entirely impractical. Pension plans and
other institutional investors often hold shares in thousands of public
companies. The bill will require proxy advisory firms, who provide
voting recommendations to these shareholders, to provide the management
with more than 4,000 public companies with the opportunity to present
detailed comments on the firm's draft recommendations before paying
shareholders receive a final report.

It also wants to burden them with all kinds of extra trinkets that
they have to give information about, an unprecedented right to weigh in
by the corporations on voting recommendations, executive compensation,
nondiscrimination policies. Again, the proxy advisers work with the
public pension funds.
Who are they?
They are the coal miners and the bus drivers. They are, in fact,
those teachers, firemen, and policemen. They are Americans who depend
upon their pensions.
Mr. Speaker, the reason that I wanted to stand on this floor today
is, just a few minutes ago, we again voted for this catastrophic tax
bill. I wanted to tie this to, as I heard my good friend from Texas,
jumping up and celebrating. I assume they will run to the White House
when this bill is passed in one way or the other.

[[Page H10324]]

Let me describe to you what I believe is the scenario on the tax
bill. We all like cliffhanger movies. Cliffhanger movies always get the
family together to be able to tell the story or to sit in the movie and
look at the cliffhanger because it is always the heroes that win on a
cliffhanger. You are waiting for the hero to launch down and save
everyone.
Here is the Republican cliffhanger: it is this tax bill, and the
cliffhanger is you are going up a mountain. As you go up the mountain,
here are the Republicans and this tax bill that is going to take away
millions of dollars from Medicaid.
The SPEAKER pro tempore. The time of the gentlewoman has expired.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield an additional
30 seconds to the gentlewoman from Texas.
Ms. JACKSON LEE. They are throwing over the cliff the Medicaid
recipients, people with dementia. My good friend who has ALS, who is in
a wheelchair, thrown over the cliff. They are throwing over teachers.
They are throwing over individuals who are believing them that they are
going to get jobs, but they are getting no jobs. They are throwing over
families, working class families, 86 million of them--throwing them
over the cliff.
It is not a good ending. It is a tragic ending, and they are standing
one by one by one and throwing them over this cliff with this phony tax
bill. They are not going to be able to do what is right for those who
are truly in need. The benefits for those who are working Americans is
temporary, and those of corporations is forever.
Mr. HENSARLING. Mr. Speaker, I reserve the balance of my time.
Ms. MAXINE WATERS of California. Mr. Speaker, I yield myself such
time as I may consume.
Mr. Speaker, I include in the Record letters from the California
Public Employees' Retirement System, the California State Teachers'
Retirement System, the Ohio Public Employees Retirement System, and the
National Conference on Public Employee Retirement Systems.

California Public Employees' Retirement System Executive
Office,
Sacramento, CA, December 18, 2017.
Subject H.R. 4015, The ``Corporate Governance Reform and
Transparency Act of 2017''.

Hon. Kevin McCarthy,
Majority Leader, House of Representatives,
Washington, DC.
Hon. Nancy Pelosi,
Minority Leader, House of Representatives,
Washington, DC.
Dear Leaders McCarthy and Pelosi: On behalf of the
California Public Employees' Retirement System (CalPERS), I
write to express our opposition to H.R. 4015, the ``Corporate
Governance Reform and Transparency Act of 2017,'' which is
scheduled to be considered by the full House this week.
CalPERS is the largest public, defined benefit pension plan
in the United States, with approximately $346.13 billion in
global assets, as of market close December 13, 2017. CalPERS
manages investment assets on behalf of more than 1.8 million
public employees, retirees, and beneficiaries. As a global,
institutional investor that invests in more than 11,000
public companies worldwide, we rely on the integrity and
efficiency of our financial markets to furnish the long-term
sustainable, risk-adjusted returns that allow us to meet our
liabilities.
Although we support the House Financial Services
Committee's focus on bipartisan ways to foster a system that
promotes capital formation and maximizes shareowner value, we
have several substantive concerns about H.R. 4015. Given the
large number of public companies in which CalPERS holds
voting shares, we use proxy advisory firms and other data
providers to assist us with analysis of management and
shareowner proposals and director elections. In providing
these services to CalPERS, these firms are guided by our
Governance and Sustainability Principles and proxy voting
policies to efficiently provide independent research and
analysis that helps to inform our voting decisions. While we
are certainly in favor of ensuring that proxy advisory firms
are well-regulated and transparent, we oppose efforts to
create an unduly burdensome regulatory regime in this area.
H.R. 4015 would create such a regulatory regime by
establishing conflict of interest management requirements
that are duplicative of existing Securities and Exchange
Commission (SEC) authority. Currently, shareowners pay proxy
advisory firms through contractual arrangements, and this
provision of H.R. 4015 appears designed to fix a problem that
does not exist among contracting parties.
In addition, the bill would establish a process by which
corporations have preliminary access to the proxy information
that investors pay for under contracts with proxy advisory
firms. At the same time, corporations that do not provide
early access to their consultants' positions on items subject
to shareowner votes would not be required to register with
the SEC. The bill would also significantly increase proxy
voting costs for investors and create additional barriers to
entry for new proxy advisory firms. Finally, the bill's
definition of ``proxy advisory firm'' makes it unclear
whether the intent is to regulate the thousands of entities
that provide advice to institutional investors or only the
three or so that would be considered proxy advisory firms
under this definition.
Considering the SEC's limited resources and ever-increasing
responsibilities for addressing a broad range of emerging
challenges in our securities markets, it would be imprudent
to impose unnecessary requirements on the agency. As an
institutional investor that uses proxy advisory services, we
oppose H.R. 4015.
Thank you for your consideration of these views. Please do
not hesitate to contact me if we can be of any assistance.
Sincerely,
Marcie Frost,
Chief Executive Officer.
____

California State Teachers'

Retirement System,

West Sacramento, CA, December 14, 2017.
Hon. Maxine Waters,
Washington, DC.
Re H.R. 4015.

To The Honorable Maxine Waters: CalSTRS was established
more than 100 years ago to provide retirement benefits for
California's public school teachers and is the largest
educator-only pension fund in the world. The CalSTRS
portfolio is currently valued at approximately $215 billion,
which we carefully invest, as patient capital with a long-
term investment horizon, to meet the retirement needs of more
than 900,000 plan participants and their families.
We are writing to express our opposition to H.R. 4015,
which would impose new regulatory burdens and restrictions on
proxy advisors. As a large institutional investor, we use
proxy advisors to help inform our proxy voting at portfolio
companies. Investors such as CalSTRS are the main clients of
the services of proxy advisory firms. Proxy advisory firms
provide useful research regarding the governance and finances
at these companies to supplement our own due diligence and
research, and they play an important and helpful role in
enabling cost-effective proxy voting with respect to the more
than 7,000 companies in our investment portfolio. We do not
outsource our proxy voting to these proxy advisors. Rather,
our Investment staff, in consultation with our governing
Teachers' Retirement Board, develops carefully thought-out
proxy voting guidelines, and then we vote our own proxies
based on those well-established guidelines.
H.R. 4015 would establish a new federal regulatory scheme
for proxy advisory firms that would (1) grant companies the
right to review the proxy advisory firms' research reports
before the paying customer--investors--receive the reports;
(2) mandate that proxy advisory firms hire an ombudsman to
receive and resolve company complaints; and (3) if the
ombudsman is unable to resolve the complaints, and if the
company submits a written request, require proxy advisory
firms to publish the company management's dissenting
statement. While the stated goal of the proposed legislation
is the ``protection of investors'', we believe H.R. 4015 is
unnecessary, overly burdensome and counterproductive.
Furthermore, we believe the proposed requirements on the
industry could weaken the governance of public companies in
the U.S. and do not reflect the needs of proxy advisory firm
customers who are primarily institutional investors, such as
CalSTRS.
While we understand some funds may utilize proxy advisory
firms to assist them in executing their proxy voting
responsibilities, the SEC has taken steps to make sure
investors are properly carrying out their due diligence
obligations. In fact as recently as 2014, the SEC
acknowledged the important role proxy advisors play in the
oversight of proxy voting of fund fiduciaries and, in 2014,
issued updated regulatory guidance on the responsibilities of
Investment Advisers who utilize proxy advisory firms in their
proxy voting. In addition, the SEC has authority under
current law to address any conflicts at these proxy advisory
firms and has taken steps to require additional disclosure of
these conflicts by proxy advisors. Accordingly, we believe
that the existing SEC regulatory regime already protects our
interests with respect to proxy advisory firms and that H.R.
4015 is both unnecessary and counter-productive.
The proposed legislation would result in higher costs for
pension plans, like CalSTRS, and other institutional
investors. H.R. 4015 would give companies the right to review
reports and lobby the advisory firms prior to the reports
being distributed to their customers and require firms to
establish an ombudsman to address issues raised by the
companies. Given the already short time period between when
companies issue their proxy materials and the shareholder
meeting date, the review and lobby process would severely
limit CalSTRS ability to review and vote proxies in a timely
manner. This multi-layered review would substantially raise
costs in order to meet deadlines and maintain the current
level of scrutiny and due diligence

[[Page H10325]]

over proxy voting. Moreover, the proposed legislation is
likely to limit competition by reducing the current number of
proxy advisors and imposing additional barriers to entry for
potential new firms--again raising costs for investors.
Thank you for considering our views on this very important
matter. We would be happy to discuss our perspectives with
you or your staff at your convenience. Should you have any
immediate questions or wish to discuss our concerns, please
contact Aeisha Mastagni, Portfolio Manager.
Sincerely,
Anne Sheehan,
Director of Corporate Governance.
____

Ohio Public Employees

Retirement System,

Columbus, Ohio, December 15, 2017.
Dear Representative: We are writing on behalf of the Ohio
Public Employees Retirement System (OPERS) to oppose HR 4015,
the Corporate Governance Reform and Transparency Act of 2017
(Act), a bill that could significantly and negatively impact
OPERS' ability to effectively and efficiently vote its
proxies and fulfill its fiduciary obligations.
OPERS is the 12th largest public retirement system in the
country, with more than one million active, inactive, and
retired members, which means that almost one out of every 12
Ohioans has some connection to our System. In order to
provide secure retirement benefits for our members, OPERS has
invested more than $78 billion in capital markets around the
world, including holdings in more than 10,000 public
companies. As a fiduciary, OPERS is required to act in the
best interests of its members, and this responsibility
extends to the prudent management of the investments we make
with our members' retirement contributions. We believe it is
our duty to engage with, participate in, and exercise our
voting rights for each of public companies in which we are
invested in an effort to ensure that those companies continue
to generate value for their shareholders.
However, with limited time and resources, it is difficult
for an investor, even one as sophisticated as OPERS, to fully
research every proxy and follow every issue. That is why we
have engaged the services of proxy advisory firms--they
perform the research and analyses that we cannot, and provide
us with impartial voting recommendations that we consider
against our own proxy voting guidelines. Without timely
access to the reports provided by our proxy advisory firms,
it would be significantly more difficult to meet our
obligations to our members.
We are aware of the criticisms that have been leveled at
proxy advisory firms, namely that they wield undue influence
over the proxy voting decisions of their clients, but OPERS
has taken steps to ensure that this is not the case. Our
Board of Trustees has adopted proxy voting guidelines to
govern our voting decisions as shareholders. To the extent
that a proxy advisory firm report or recommendation conflicts
with our proxy voting guidelines, OPERS Corporate Governance
staff will closely scrutinize the discrepancies and the
firm's recommendations can be disregarded.
Given the sheer necessity of proxy advisory firms and the
services they provide, it is troubling that the House of
Representatives is considering changes that would erode
investor confidence in the impartiality and independence of
proxy advisory firm reports. If enacted, the Act would make
it harder--perhaps impossible--for OPERS to effectively vote
each of the thousands of proxies it receives during any given
proxy season. In our view, this constitutes a violation of
our duty to our members and the people of Ohio, and is
therefore unacceptable
We urge you to oppose the Corporate Governance and
Transparency Act of 2017.
Thank you for your continued support of Ohio's public
retirement systems. If you have questions regarding OPERS'
comments or proxy voting guidelines, please do not hesitate
to contact OPERS' Corporate Governance Officer, Patti
Brammer.
Sincerely,
Karen Carraher,
Executive Director.
Patti Brammer,
Corporate Governmance Officer.
____

National Conference on Public Employee Retirement
Systems,
Washington, DC, December 11, 2017.
Hon. Paul Ryan,
Speaker of the House of Representatives,
House of Representatives, Washington, DC.
Hon. Nancy Pelosi,
Minority Leader,
House of Representatives, Washington, DC.
Dear Speaker Ryan and Leader Pelosi: On behalf of the
National Conference on Public Employee Retirement Systems
(NCPERS), I am writing to relay our serious concerns with,
and opposition to, H.R. 4015, the ``Corporate Governance
Reform and Transparency Act of 2017,'' which was reported out
of the House Financial Services Committee on November 15.
The legislation is riddled with worrisome provisions,
premised on false assumptions, that undercut the ability of
pension plans to receive independent, unbiased corporate
governance research, introducing new costs and burdens to
pension plans and undermining their ability to effectively
exercise their fiduciary responsibilities. We are alarmed by
the precedent this legislation would set.
NCPERS is the largest national, nonprofit public pension
advocate, representing more than 500 funds that manage more
than $3 trillion in pension assets. We strive to protect the
autonomy and independence of state and local government
retirement systems. H.R. 4015 would undermine this very
principle.
Many pension plan administrators employ proxy advisory
firms to provide them with unbiased and independent data and
analytical research to help them formulate their corporate
governance and proxy voting policies. In addition, in some
instances our members ask the proxy advisory firms to
implement their proxy voting instructions on their behalf
following a plan's guidelines. The use of proxy research
reports prepared by proxy advisory firms is one important way
that our members exercise their due diligence to make
independent, well-informed decisions. H.R.4015 would (1)
grant corporations the ``right to review'' these reports
before the pension plan receives the report; (2) mandate that
proxy advisory firms hire an ombudsman--a cost that pension
funds would ultimately pay--to receive and resolve
corporations' complaints; and (3) if the ombudsman is unable
to resolve the complaints, and if the corporation submits a
written request, proxy advisory firms would be required to
publish the corporation's dissenting statement. This would
effectively allow corporations the privilege to make the
``final cut'' on a report that is requested and paid for by
the pension plan. Such corporate interference in the affairs
of its shareholders is unprecedented and would dilute the
independence of the proxy firms' reports and ultimately the
independence of pension plans.
Additionally, the regulatory regime proposed under H.R.4015
is part-inappropriate and part-unnecessary, and would
needlessly drive up costs for public pension plans while
reducing market choice. While NCPERS welcomes the opportunity
to protect public pensions, we are puzzled by the need to
impose a new federal regulatory regime that is largely
duplicative of existing SEC requirements that are designed to
protect investors, including those for registered investment
advisers under the Investment Advisers Act of 1940. Other
provisions of H.R. 4015 propose to bypass free-market
principles by authorizing the SEC to pre-qualify industry
entrants based on a set of vague and highly subjective
standards. We believe that contrary to the sponsors' stated
intent, namely to increase competition and protect investors,
the heavy-handed regime would result in fewer market
participants, would enhance barriers to new entrants and
could potentially lead smaller proxy advisory firms to exit
the industry altogether, reducing market choice for our
members. In the end, H.R.4015 would increase costs, perhaps
significantly increase costs, to pension plans administrators
and beneficiaries while providing no additional benefits.
Public pensions play an important role in the local, state
and national economies. We ask that you consider the
detrimental impact that H.R. 4015 would have on the
independence and financial wellbeing of public pension plans,
and urge you to oppose this and any similar legislation.
NCPERS greatly appreciates your time and consideration. If
there is any additional information I can provide that would
assist you, please do not hesitate to contact me.
Sincerely,
Hank Kim, Esq.,
Executive Director & Counsel.

Ms. MAXINE WATERS of California. Mr. Speaker, they are frightened,
absolutely frightened, that we could possibly be on the floor today
negotiating with the opposite side of the aisle about investment
advisers.
They can't understand why it is that we have Members of Congress who
do not understand how important it is to have someone protecting the
interest of middle class workers all over America.
You have heard the reference to the teachers, firefighters, garbage
collectors, and on and on and on. These people work every day. They
invest in their retirement and they expect their retirement to be taken
care of, honored, and not to be basically undermined by corporate
interests. So these investment advisers are extremely important to the
investors of these retirement systems.
Having said that, Mr. Speaker, H.R. 4015 is simply the latest effort
by Republicans to check off every item on the corporate wish list
before the holidays. The bill would empower corporate management at the
expense of institutional shareholders, like our Nation's public pension
plans, by allowing corporations to unfairly influence proxy voting
recommendations.
Because of the size of their portfolios, public pension plans who may
hold shares in thousands of companies must rely on proxy advisers to
provide independent research and voting recommendations on the merits
of proposals. Without the work of proxy advisers, institutional
investors would, in practical terms, be left voiceless on corporate
matters that are important to them, including governance, board

[[Page H10326]]

compensation, executive pay, and environmental sustainability.
H.R. 4015 would give corporate management the unprecedented right to
interfere in the relationship between institutional investors and the
proxy advisers they hire.
At its core, the bill is based on the false premise that shareholders
blindly follow the recommendations of proxy advisers who themselves are
beholden to activist interests. This belief is directly contradicted by
reality.
For example, in 2017, the largest proxy advisory firm recommended
``no'' votes on less than 12 percent of say-on-pay proposals, which are
nonbinding votes on executive compensation practices required under the
Dodd-Frank Act. That means they sided with company management 88
percent of the time.
When it comes to director elections, the largest proxy firm voted
``yes''--``yes'' votes for 90 out of 100 directors. Proxy advisers
understand that the vast majority of companies' proposals are good for
shareholders, but not for all.
Mr. Speaker, I ask for a ``no'' vote on this misdirected bill, and I
yield back the balance of my time.
Mr. HENSARLING. Mr. Speaker, may I inquire how much time I have
remaining?
The SPEAKER pro tempore. The gentleman from Texas has 2 minutes
remaining.
Mr. HENSARLING. Mr. Speaker, I yield myself the balance of my time.
Mr. Speaker, while I was fascinated to hear so many of my friends on
the other side of the aisle exclaim how much they care about working
Americans, it just makes we wonder why now twice--twice--in the last 24
hours they have voted against giving the average working American a
$2,059 tax cut. Twice now they have voted to deny working Americans tax
relief in order to bolster their paychecks. I wonder about that.
I also wonder, as I listened to this litany of groups whose letters
were entered into the Record, how often I heard labor union; government
pension; Washington, D.C.; and special interest group.
What I didn't hear about is average working Americans who have their
investment in trying to save to buy a home, trying to perhaps fund a
small business, or send a kid to college. It is their interest that we
are trying to stand up for.
So what we know is that the SEC--the Securities and Exchange
Commission--have, for all intents and purposes, required investment
advisers to use one of two proxy advisory firms, one of which, as my
colleague, the author of the bill pointed out, is owned by a foreign
labor union. Yet the SEC requires us to use them.
So here is the radical nature of the bill: the bill, H.R. 4015,
simply says that we ought to have transparency--something apparently my
friends across the other side of the aisle are against.
We say they have to register with the SEC--something my friends on
the other side of the aisle are against.
They have to disclose potential conflicts of interest. Apparently my
friends on the other side are against that.
They have to disclose codes of ethics. Apparently my friends on the
other side of the aisle are against that, as well as making their
methodologies public.
This is a disclosure bill to help investors, pure and simple. We
ought to vote in favor of H.R. 4015.
Mr. Speaker, I yield back the balance of my time.
Ms. MAXINE WATERS of California. Mr. Speaker, I include in the Record
the following letters:

Americans for Financial Reform,

Washington, DC, December 18, 2017.
Dear Representative: On behalf of Americans for Financial
Reform (AFR), we are writing to urge you to vote against H.R.
4015, the ``Corporate Governance Reform and Transparency Act
of 2017'', which will be considered on the House floor this
week. By placing an excessive and unnecessary regulatory
burden on proxy advisory firms, this bill would unfairly
disadvantage shareholders as compared to firm management, and
raise serious First Amendment concerns as well. AFR joins
major representatives of shareholders such as the Council of
Institutional Investors (CII) and the California Public
Employee Retirement System (CALPERS) in opposing this bill.
H.R. 4015 would establish a new Federal regulatory scheme
for proxy advisory firms. These firms provide institutional
investors, including pension funds, with the research and
information they need in order to exercise their voting
rights as shareholders. The regulations proposed in H.R. 4015
would require proxy advisory firms to provide the management
of public companies with detailed voting recommendations
relevant to their firms before these recommendations were
shown to shareholders who paid for proxy advisory services.
Advisory firms would also be required to resolve any
complaints from firm management, and employ an ombudsman to
ensure that such complaints were addressed. If complaints
were not resolved to the satisfaction of firm management,
then the full text of complaints from companies would be
included next to voting recommendations in proxy advisory
reports. Regulations would also mandate extensive disclosure
requirements for the details of proxy advisory methodologies,
reducing incentives to invest in developing such
methodologies. The costs of this regulatory regime would be
passed on to investors and pension funds that use proxy
advisory services.
The regulatory scheme is a transparent attempt to weaken if
not eliminate the independence of proxy advisory firms from
firm management by placing sharp restrictions on their
expression of opinions which differ from those of firm
management. Besides raising First Amendment issues, this
improperly restricts the ability of shareholders to obtain
independent views on how they should exercise their voting
rights.
This legislation cannot be justified, as some have
attempted to do, by any analogy to the regulation of credit
rating agencies. Proxy advisory services do not face a
fundamental conflict of interest in their business model
because they are not paid by securities issuers while
providing certification of securities quality to securities
investors. They also have not been implicated in massive
fraudulent behavior that contributed directly to a global
financial crisis. Further, proxy advisory services are
clearly recognized as providing opinions regarding voting
decisions, in a context where many other such opinions are
available, rather than being entities that certify the
quality of securities.
Any concerns about the independence of proxy advisory
services can be addressed by simply requiring such services
to register as investment advisors under the Investment
Advisors Act. The radical regulatory scheme laid out in H.R.
4015 goes far beyond anything even mentioned in the recent
Treasury Department report on capital markets, which examined
the issue of proxy advisory firms and recommended only that
regulators engage in ``further study and evaluation of proxy
advisory firms, including regulatory responses to promote
free market principles if appropriate.'' The regulatory
scheme in H.R. 4015, besides being misguided in other ways,
certainly does not promote free market principles.
The effort in H.R. 4015 to eliminate the independent voice
of proxy advisory services should be rejected. We urge you to
vote against it.
For more information please contact AFR's Policy Director,
Marcus Stanley.
Sincerely,
Americans for Financial Reform.
____

Council of Institutional

Investors,

Washington, DC, November 9, 2017.
Re Proposed Legislation Relating to Proxy Advisory Firms.

Hon. Jeb Hensarling,
Chairman, Committee on Financial Services, House of
Representatives, Washington, DC.
Hon. Maxine Waters,
Ranking Member, Committee on Financial Services, House of
Representatives, Washington, DC.
Dear Mr. Chairman and Ranking Member Waters: On behalf of
the Council of Institutional Investors (CII or the Council)
and the undersigned 45 investors and investor organizations,
we are writing to express our opposition to legislation that
has recently been introduced and is pending in the Committee
on Financial Services related to proxy advisory firms.
CII is a nonpartisan, nonprofit association of public,
corporate and union employee benefit funds, other employee
benefit plans, state and local entities charged with
investing public assets, and foundations and endowments with
combined assets under management exceeding $3 trillion. CII's
member funds include major long-term shareowners with a duty
to protect the retirement savings of millions of workers and
their families.
H.R. 4015, the ``Corporate Governance Reform and
Transparency Act of 2017,'' and similar language which was
incorporated in Subtitle Q of Title IV of H.R. 10, ``the
Financial CHOICE Act,'' would require, as a matter of federal
law, that proxy advisory firms share their research reports
and proxy voting recommendations with the companies about
whom they are writing before they are shared with the
institutional investors who are their clients. In essence,
while the stated goal of the proposed legislation is the
``protection of investors,'' as the primary customer of proxy
advisory firm research, institutional investors believe that
adding the new proposed requirements to the industry is
unnecessary, overly burdensome and counter-productive.
The proposed legislation appears to be based on several
false premises, including

[[Page H10327]]

the erroneous conclusion that proxy advisory firms dictate
proxy voting results and that institutional investors do not
drive or form their own voting decisions. Indeed, many
pension funds and other institutional investors contract with
proxy advisory firms to review their research, but most large
holders have adopted their own policies and employ the proxy
advisory firms to help administer the voting of proxies
during challenging proxy seasons.
In short, most large institutional investors vote their
proxies according to their own guidelines. While large
institutional investors rely on proxy advisors to manage the
analysis of issues presented in the proxy statements
accompanying over 38,000 meetings annually, and to help
administer proxy voting, this does not mean that they
abdicate their responsibility for their own voting decisions.
The independence that shareowners exercise when voting
their proxies is evident in the statistics related to ``say
on pay'' proposals and director elections. Although
Institutional Shareholder Services Inc. (ISS), the largest
proxy advisory firm, recommended against say on pay proposals
at 11.92 percent of Russell 3000 companies in 2017, only 1.28
percent of those proposals received less than majority
support from shareowners. Similarly, although ISS recommended
votes in opposition to the election of 10.43 percent of
director-nominees during the most recent proxy season, just
0.185 percent failed to obtain majority support.
We believe the pending legislation (both Subtitle Q of
Title IV of H.R. 10 and H.R. 4015, which was introduced last
month) would weaken corporate governance in the United
States; undercut proxy advisory firms' ability to uphold
their fiduciary obligation to their investor clients; and
reorient any surviving firms to serve companies rather than
investors. The system of corporate governance that has
evolved in the United States relies on the accountability of
boards of directors to shareowners, and proxy voting is a
critical means by which shareowners hold boards to account.
Currently, proxy advisors provide equity holders of U.S.
corporations with independent advice. The proposed bills
threaten to abrogate that very independence, which is a
hallmark of ownership and accountability.
Proxy advisory firms, while imperfect, play an important
and useful role in enabling effective and cost-efficient
independent research, analysis and informed proxy voting
advice for large institutional shareholders, particularly
since many funds hold thousands of companies in their
investment portfolio. In our view, the proposed legislation
would undermine proxy advisory firms' ability to provide a
valuable service to pension funds and other institutional
investors.
We are particularly concerned that, if enacted, H.R. 10 and
H.R. 4015 would:
Require that proxy advisory firms: 1) provide companies
early review of their recommendations and most elements of
the research informing their reports; 2) give companies an
opportunity to review and lobby the firms to change their
independent recommendations; 3) mandate a heavy-handed
``ombudsman'' construct to address issues that companies
raise.
Under H.R 10, the company could essentially veto the proxy
advisor's report and prevent its publication, while H.R. 4015
would require proxy advisors to publish a company's statement
``detailing its complaints'' in the proxy advisory firms'
final reports to their clients, if the ombudsman is unable to
resolve these complaints and if the companies make the
request in writing.
Giving corporate issuers the ``right to review'' the proxy
advisors' work product BEFORE the reports go to the paying
customers would not only give corporate management
substantial undue influence over proxy advisory firms'
reports, but could compromise the very fiduciary duties that
large institutional investors have to their own clients,
beneficiaries and shareowners. We believe the objective of
the bills is to bias proxy advisory firm recommendations in
favor of corporate management, creating a dynamic that would
encourage the firms to view management as their clients,
rather than the investors who contract for this research.
This approach would award a privileged position to high-
powered CEOs and other executives to talk proxy advisory
firms out of criticizing management on subjects such as
CEO pay, without providing the same pre-publication right
to others. Another concern is that such forced pre-
publication review may not be consistent with First
Amendment rights to freedom of speech. Regardless, the
attempt by government fiat to interpose corporate
management between investors and those investors hire to
provide them with independent research is highly
questionable as a matter of public policy.
Further, the additional regulatory hurdles imposed would
surely: increase the complexity of the challenges faced by
the proxy advisory firms; impose even more severe time
constraints on the production of reports; and, without doubt,
add significant resource burdens that would increase the cost
of their services. In short, H.R. 4015 would add no value but
would add an unnecessary drag to institutional investors'
portfolios. This is not constructive regulatory ``reform,''
and is not supported by institutional investors.
Under both bills, pension funds and other institutional
investors would have less time to analyze the advisor's
reports and recommendations in the context of their own
adopted proxy voting guidelines to arrive at informed voting
decisions. Time is already tight, particularly in the highly
concentrated spring ``proxy season,'' due to the limited
period between a company's publication of the annual meeting
proxy materials and annual meeting dates.
Moreover, the proposed legislation does not appear to
contemplate a parallel requirement that dissidents in a proxy
fight or proponents of shareowner proposals also receive the
recommendations and research in advance. This would violate
an underlying tenet of U.S. corporate governance that where
matters are contested in corporate elections, management and
shareowner advocates should operate on a level playing field.
Require the Securities and Exchange Commission (SEC) to
assess the ability of proxy advisory firms to perform their
duties and to assess the adequacy of proxy advisory firms'
``financial and managerial resources.''
The entities that are in the best position to make
assessments about the ability of proxy advisory firms to
perform their contractual duties are the pension funds and
other institutional investors that choose to purchase and use
the proxy advisory firms' reports and recommendations. These
are sophisticated consumers who make choices based on free-
market principles.
In 2014, the SEC staff issued guidance reaffirming that
investment advisors have a duty to maintain sufficient
oversight of proxy advisory firms and other third-party
voting agents: We publicly supported that guidance. We are
unaware of any compelling empirical evidence indicating that
the guidance is not being followed or that the burdensome
federal regulatory scheme contemplated by the proposed
legislation is needed.
Increase costs for institutional investors with no clear
benefits.
If enacted, the proposed legislation is likely to result in
higher costs for pension plans and other institutional
investors--potentially much higher costs if investors seek to
maintain current levels of scrutiny and due diligence around
proxy voting amid the exit of some or all proxy advisory
firms from the business. The proposed legislation is highly
likely to limit competition, by reducing the current number
of proxy advisory firms in the U.S. market and imposing
serious barriers to entry for potential new firms.
We believe that the cost estimate provided by the
Congressional Budget Office to the House Financial Services
Committee in September 2016 on substantially similar
legislation in the 114th Congress (that is, that private
sector costs would be less than $154 million) underestimates
the costs that this bill would impose through private-sector
mandates. The CBO should analyze the probable effects of the
proposal on competition, and the costs to investors if (a)
competition is reduced and the pricing power of a surviving
proxy advisory firm is enhanced, and (b) if all present firms
exit the market and the services they provided are no longer
available, forcing individual investors to use internal
resources not subject to the new regulatory mandate.
Finally, we note that in recent months the United States
Department of Treasury (Treasury) performed outreach to
identify views on proxy advisory firms in connection with its
recently issued report to the President on ``A Financial
System that Creates Economic Opportunities, Capital
Markets.'' In that report, the Treasury found that
``institutional investors, who pay for proxy advice and are
responsible for voting decisions, find the services valuable,
especially in sorting through the lengthy and significant
disclosures contained in proxy statements.'' More
importantly, the Treasury did not recommend any legislative
changes governing the proxy advisory firm industry.
Thank you for considering these views. CH would be very
happy to discuss its perspective in more detail.
Sincerely,
Jeff Mahoney, General Counsel, Council of Institutional
Investors; Marcie Frost, Chief Executive Officer, CalPERS;
Anne Sheehan, Director of Corporate Governance, California
State Teachers' Retirement System; Gregory W. Smith,
Executive Director/CEO, Colorado Public Employees' Retirement
Association; Denise I. Nappier, Connecticut State Treasurer,
Trustee, Connecticut Retirement Plans and Trust Funds;
Michael McCauley, Senior Officer, Investment Programs &
Governance, Florida State Board of Administration; Michael
Frerichs, Illinois State Treasurer; Jonathan Grabel, Chief
Investment Officer, Los Angeles County Employees Retirement
Association; Scott Stringer, New York City Comptroller; Karen
Carraher, Executive Director, Ohio Public Employees
Retirement System; Richard Stensrud, Executive Director,
School Employees Retirement System of Ohio; Jeffrey S. Davis,
Executive Director, Seattle City Employees' Retirement System
Tobias Read, Treasurer, State of Oregon; Michael J. Nehf,
Executive Director, STRS Ohio; Theresa Whitmarsh, Executive
Director, Washington State Investment Board; Heather Slavin
Corzo, Director, Office of Investment, AFL-CIO; Dieter
Waizenegger, Executive Director, CtW Investment Group;
Timothy J. Driscoll, Secretary-Treasurer, International Union
of Bricklayers & Allied Craftworkers; Janice J. Fueser,
Research Coordinator, Corporate Governance, UNITE HERE; Euan
Stirling, Global Head of Stewardship & ESG Investing,
Aberdeen Standard Investments; Blaine Townsend, Senior Vice

[[Page H10328]]

President, Director, Sustainable, Responsible and Impact
Investing Group Bailard, Inc.; Jennifer Coulson, Senior
Manager, ESG Integration, British Columbia Investment
Management Corporation (bcIMC); Julie Cays, Chair, Canadian
Coalition for Good Governance; Mike Lubrano, Managing
Director, Corporate Governance and Sustainability, Cartica
Management, LLC.
Carole Nugent, CCRIM Coordinator, Conference for Corporate
Responsibility, Indiana and Michigan; Karen Watson, CFA,
Chief Investment Officer, Congregation of St. Joseph; Sister
Teresa Teresa George, D.C., Provincial Treasurer, Daughters
of Charity, Province of St. Louise; Mary Ellen Leciejewski,
OP, Vice President, Corporate Responsibility, Dignity Health;
Jeffery W. Perkins, Executive Director, Friends Fiduciary
Corporation; Matthew S. Aquiline, CEO, International Council
of Employers of Bricklayers & Allied Craftworkers; Andrew
shapiro, Managing Member & President, Lawndale Capital
Management, LLC; Clare Payn, Head of Corporate Governance
North America, Legal & General Investment Management; Susan
S. Makos, Vice President of Social Responsibility, Mercy
Investment Services, Inc.; Luan Jenifer, Chief Operating
Officer, Miller/Howard Investments, Inc.; Michelle de
Cordova, Director, Corporate Engagement Public Policy, NEI
Investments; Judy Byron, OP, Director, Northwest Coalition
for Responsible Investment.
Amy O'Brien, Global Head of Responsibile Investing, Nuveen,
the investment manager of TIAA; Julie Fox Gorte, Ph.D, Senior
Vice President for sustainable Investing, Pax World
Management, LLC; Kathleen Woods, Corporate Responsibility
Chair, Portfolio Advisory Board, Adrian Dominican Sisters;
Judy Cotte, VP & Head, Corporate Governance & Responsible
Investment, RBC Global Asset Management; Maria Egan,
Portfolio Manager and Shareholder Engagaement Manager,
Reynders, McVeigh Capital Management, LLC; Maureen O'Brien,
Vice President and Corporate Governance Director, Segan Marco
Advisers; Kevin Thomas, Director of Shareholder Engagement,
Shareholder Association for Research & Education; Jonas D.
Kron, Senior Vice President, Director of Shareholder
Advocacy, Trillium Asset Management, LLC; Tim Smith, Director
of ESG, Shareowner Engagement, Walden Asset Management; Sonia
Kowal, President, Zevin Asset Management, LLC.
____

Council of Institutional Investors,

Washington, DC, December 12, 2017.
Re H.R. 4015.

Hon. Paul Ryan,
Speaker of the House of Representatives,
House of Representatives, Washington, DC.
Hon. Nancy Pelosi,
Minority Leader, House of Representatives,
Washington, DC.
Dear Mr. Speaker and Minority Leader Pelosi: On behalf of
the Council of Institutional Investors (CII or Council), we
are writing to express our opposition to H.R. 4015, which we
understand will soon be voted on by the United States House
of Representatives.
CII is a nonpartisan, nonprofit association of public,
corporate and union employee benefit funds, other employee
benefit plans, state and local entities charged with
investing public assets, and foundations and endowments with
combined assets under management exceeding $3 trillion. CII's
member funds include major long-term shareowners with a duty
to protect the retirement savings of millions of workers and
their families. The Council's associate members include a
range of asset managers with more than $20 trillion in assets
under management.
Many of our members and other institutional investors
voluntary contract with proxy advisory firms to obtain
research reports to assist the funds in voting their proxies
according to the funds' own proxy voting guidelines. This
contractual relationship provides investors a cost-efficient
means of obtaining supplemental research on proxy voting
issues, which is particularly beneficial since many funds
hold thousands of companies in their investment portfolios.
H.R. 4015 would establish a new federal regulatory scheme
for proxy advisory firms that would (I) grant ``companies,''
apparently meaning corporate management, the right to review
the proxy advisory firms research reports before the paying
customers--investors--receive the reports; (2) mandate that
the proxy advisory firms hire an ombudsman to receive and
resolve corporation's complaints; and (3) if the ombudsman to
unable to resolve the complaints, and if the company
management submits a written request, proxy advisory firms
would be required to publish company management's dissenting
statement. These provisions would result in the federal
government interposing corporate management between investors
and those proxy advisory firms that investors hire to provide
them with research on issues, such as executive compensation,
in which corporate management can have its own interests,
sometimes in conflict with investors and with the corporate
entity.
Setting aside whether the provisions of H.R. 4015 are
consistent with First Amendment rights of freedom of speech,
the provisions are not practical. The provisions would
require proxy advisory firms to provide the management teams
of more than 4,000 corporations the opportunity to present
detailed comments on the firm's reports in a matter of weeks
before the reports are provided to investors. Thus, investors
would have limited time to analyze the reports in the context
of their own proxy voting guidelines to arrive at informed
voting decisions. Time is already tight, particularly in the
spring ``proxy season,'' due to the limited period between a
corporations' publication of the annual meeting proxy
materials and the date in which investors are permitted to
vote on proxy issues.
In addition, the provisions of H.R. 4015 would likely
result in fewer market participants in the proxy advisory
firm industry. The provisions would add significant costs
increasing barriers to new entrants and potentially leading
some existing firms to exit the industry altogether.
We also note that the United States Department of Treasury
recently performed extensive outreach to identify views of
company management teams and other market participants on
proxy advisory firms in connection with its recently issued
report to President Trump on ``A Financial System that
Creates Economic Opportunities, Capital Markets.'' In its
report the Treasury found that ``institutional investors, who
pay for proxy advice and are responsible for voting
decisions, fmd the [proxy advisory firm] services valuable,
especially in sorting through the lengthy and significant
disclosures contained in proxy statements.'' More
significantly, the Treasury did not call for legislation of
the proxy advisory firm industry.
Finally, we have attached for your information and review a
November 9, 2017 letter signed by 45 investors and investor
organizations describing in more detail the basis for their
strong opposition to H.R. 4015.
Thank you for considering our views. We would welcome the
opportunity to discuss our perspective on this important
issue with you or your staff in more detail.
Sincerely,
Jeffrey P. Mahoney,
General Counsel.

{time} 1415

The SPEAKER pro tempore. All time for debate has expired.
Pursuant to House Resolution 657, the previous question is ordered on
the bill, as amended.
The question is on the engrossment and third reading of the bill.
The bill was ordered to be engrossed and read a third time, and was
read the third time.

Motion to Recommit

Mr. SARBANES. Mr. Speaker, I have a motion to recommit at the desk.
The SPEAKER pro tempore. Is the gentleman opposed to the bill?
Mr. SARBANES. I am opposed.
The SPEAKER pro tempore. The Clerk will report the motion to
recommit.
The Clerk read as follows:

Mr. Sarbanes moves to recommit the bill, H.R. 4015, with
instructions to report the same back to the House forthwith,
with the following amendments:
Page 14, strike line 23.
Page 14, line 25, strike the period and insert ``; and''
and after such line insert the following:
``(C) does not include proxy voting recommendations on
shareholder proposals related to political campaign
contributions of a company.''.

The SPEAKER pro tempore. Pursuant to the rule, the gentleman from
Maryland is recognized for 5 minutes in support of his motion.
Mr. SARBANES. Mr. Speaker, this is the final amendment to the bill,
which will not kill the bill or send it back to committee. If adopted,
the bill will immediately proceed to final passage, as amended.
Mr. Speaker, this amendment is about promoting greater transparency
and shareholder review of political campaign activity of public
corporations.
As we have heard, the underlying bill would create new restrictions
on proxy advisory firms that would erode their capacity to provide
reliable, independent advice to public company investors: institutional
investors such as pension funds that serve firefighters, teachers, and
police officers. My amendment would restore the ability of advisory
firms to provide research and vote recommendations regarding a public
company's spending on political campaign contributions.
Over the past half a century, public companies have increasingly
entered the political arena, spending huge sums on political
contributions and campaign activity. Court rulings like Citizens United
and SpeechNOW.org have opened new avenues of influence for corporate
America and have worked to amplify the role of public companies in our
politics. Mr. Speaker, the public is becoming increasingly anxious
about this.

[[Page H10329]]

Fortunately, in recent years, some shareholders and public interest
organizations have successfully put pressure on public corporations to
adopt shareholder review of corporate political activity, stemming the
tide of unchecked political spending from public corporations. Yet the
underlying bill would unwind that progress, giving corporations direct
influence over proxy advisory firm recommendations to shareholders
regarding political activity, knocking down yet another pillar of
political accountability in our politics.
Mr. Speaker, we need more, not less political accountability from our
Nation's corporations. As this week has shown, corporate America has an
outsized influence in our Nation's public policy. Look no further than
today's vote on the GOP tax scam or yesterday's further deregulation of
some of our Nation's largest financial institutions.
There is no mystery as to why this has happened. A sophisticated
corporate influence economy involving campaign contributions,
aggressive lobbying, a web of trade associations, corporate-backed
think tanks, and outside political organizations has sprung up in
Washington to shape who runs for office, who wins office, and the
policies we in Congress adopt.
Mr. Speaker, Americans hate this system. They hate the arrogance with
which monied interests exert their influence on our politics and our
government. They feel that their voice, the voice of the people, is
ignored while Big Money insiders have their way on Capitol Hill. They
want us to change the corrosive status quo.
Mr. Speaker, we can take a small step forward with this amendment to
restore the American people's faith in our ability to stand up to
corporate power. We should adopt this modest, but important change to
an otherwise flawed piece of legislation.
At a minimum, we should protect the opportunity for institutional
investors to receive independent research and advice when it comes to
the political activity of public companies. It is about transparency.
It is about accountability. It is about the public interest.
Mr. Speaker, to that end, I urge my colleagues to support the motion
to recommit, and I yield back the balance of my time.
Mr. HENSARLING. Mr. Speaker, I claim the time in opposition.
The SPEAKER pro tempore. The gentleman from Texas is recognized for 5
minutes.
Mr. HENSARLING. Mr. Speaker, I listened carefully. I didn't hear
anything about labor union political campaign contributions, known
political allies of the Democratic Party.
This is yet one more assault on the First Amendment's freedom of
speech by my friends on the other side of the aisle. Mr. Speaker, it
ought to be rejected, and I yield back the balance of my time.
The SPEAKER pro tempore. Without objection, the previous question is
ordered on the motion to recommit.
There was no objection.
The SPEAKER pro tempore. The question is on the motion to recommit.
The question was taken; and the Speaker pro tempore announced that
the noes appeared to have it.
Mr. SARBANES. Mr. Speaker, on that I demand the yeas and nays.
The yeas and nays were ordered.
The SPEAKER pro tempore. Pursuant to clause 8 of rule XX, further
proceedings on this question will be postponed.

____________________