Should Proxy Advisory Firms Have to Register With the SEC & Disclose Conflicts of Interest to Clients? (H.R. 4015)

What is H.R. 4015?

(Updated November 16, 2018)

This bill would require proxy advisory firms to register with the Securities and Exchange Commission (SEC) and subject them to certain rules and reporting requirements. Publicly traded companies are required to issue proxy statements to shareholders before voting on corporate actions — like electing company directors and approving compensation packages. Proxy advisory firms advise a variety of clients like pension plans, mutual funds, and other institutional investors which can influence their advice, so this bill would require such firms to disclose potential or actual conflicts of interest when providing services.

Proxy advisory firms would be required to disclose information about their financial and managerial resources to the SEC in addition to disclosing conflicts of interest to current or prospective clients.

The SEC would be required to report annually to Congress on its regulation of proxy advisory firms.

Argument in favor

This bill would improve corporate governance by giving shareholders information about the conflicts of interest of the proxy advisory firm that’s providing them advice on corporate voting matters.

Argument opposed

This bill would interfere with shareholders’ ability to access impartial information and subject proxy advisory firms to a costly and untested regulatory regime that undermines their independence.

Impact

Shareholders; proxy advisory firms; corporations; and the SEC.

Cost of H.R. 4015

The CBO estimates that enacting this bill would cost $5 million over the 2018-2022 period, but that would be offset through the collection of fees by the SEC.

Additional Info

In-Depth: Sponsoring Rep. Sean Duffy (R-WI) introduced this bill to protect investors and improve corporate governance of publicly-held companies by requiring proxy advisory firms to register with the SEC and disclose conflicts of interest:

“Proxy advisory firms play an important role in advising their clients, including pension plans, mutual funds, and other institutional investors but they are susceptible to activist influence and potential conflicts of interest. Wisconsin investors expect that their rights as shareholders won’t be compromised by professional institutional investors who rely on conflicted advisors to issue recommendations and execute votes. My bill will foster greater accountability, transparency, responsiveness, and competition in the proxy advisory firm industry.”

House Democrats expressed opposition to this bill in its committee report:

“IH.R. 4015, the “Corporate Governance Reform and Transparency Act of 2017,” would create a costly and untested regulatory regime for proxy advisory firms… The bill purports to foster “accountability, transparency, responsiveness, and competition in the proxy advisory firm industry.” In truth, the bill interferes with shareholders’ access to impartial analysis used to inform proxy voting decisions, and thus undermines shareholders’ ability to hold corporate management accountable.”

This legislation passed the House Financial Services Committee on a 40-20 vote and has the support of one Democrat and one Republican cosponsor in the House.

Media:

• Sponsoring Rep. Sean Duffy (R-WI) Press Release (Previous Version)
  
• CBO Cost Estimate
  
• HR Policy Association (In Favor)