H.R. 4015, the Corporate Governance Reform and Transparency Act, passed the House of Representatives on December 20, 2017, by a vote of 238 – 182. (Many of the provisions included in this bill were originally in the Financial CHOICE Act but excluded in the final version signed into law.)

This bill places regulations on proxy advisory firms that provide research, advice and voting recommendations based on corporate disclosures. The bill would create substantial additional registration and reporting requirements for proxy advisory firms. Notably, it would allow corporations to lobby the proxy firms prior to shareholder recommendations. This raises questions about the ability of shareholders to receive impartial analysis.

Major provisions of H.R. 4015

Corporate lobbying on draft proxy recommendations:

  • requires proxy advisory firms to share draft recommendations to the corporation it is analyzing. The legislation requires that the corporation has at least three days to subsequently lobby the proxy firm on the recommendations before the shareholder vote; and
  • requires proxy advisory firms to employ an ombudsman to receive complaints about proxy recommendations.

Registration of proxy advisory firms

  • requires firms to register with the SEC and disclose information such as:
    • the procedures and methodologies used to develop voting recommendations and whether the size of a company is considered;
    • the applicant fs code of ethics; and
    • any potential or actual conflicts of interest relating to the ownership structure and whether the proxy advisory firm provides additional services for corporate issuers, and the revenues generated by ancillary services.

Conflicts of interest

  • each proxy advisory firm must establish and enforce written policies and procedures to address and manage any conflicts of interest that can arise from its business. The bill gives the SEC discretion to provide further regulations on conflict of interest issues.

Prohibited acts

  • prohibits the conditioning of a proxy recommendation on the purchase by a corporation of other proxy advisory firm services or products.

Statements of financial condition

  • each proxy advisory firm must file confidential financial statements to the SEC.

Censure, denial, or suspension of registration

  • the SEC can censure, limit, suspend or revoke the registration of any registered proxy advisory firm if the Commission finds it is necessary for the protection of investors and in the public interest.

The shareholder voting process, ESG integration and proxy advice in the US