House Passes Center-Supported Proxy Advisory Firm Reform Bill on Bipartisan Vote
December 22, 2017
This week, after passing comprehensive tax reform but before breaking for the holidays, the House of Representatives passed legislation that would create new SEC-led registration and monitoring of proxy advisory firms on a bipartisan vote of 238-182, with twelve Democrats voting in favor of the bill, and five Republicans opposing it.. Prior to the vote, the Center On Executive Compensation sent a letter in support of "The Corporate Governance Reform and Transparency Act "(H.R. 4015) to House Financial Services Committee Chair Jeb Hensarling (R-TX) and Subcommittee Chair and bill sponsor Rep. Sean Duffy (R-WI) and sent a copy of the letter to all House members urging their support for the bill. Our letter noted that proxy advisory firms are currently regulated under a law intended for investment advisors, and as a result conflicts of interest, concerns with procedural rigor and a lack of transparency over how the firms develop their voting methodologies have become prevalent. During the debate, Chair Duffy explained the multiple roles that ISS and Glass Lewis play: “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.” The Center’s letter states that the bill recognizes the important role proxy advisors play in the voting proxy process and “provides a comprehensive template for the effective oversight of the proxy advisory firm industry by the Securities and Exchange Commission which would address each of the above concerns.”
During the debate, Financial Service Committee Ranking Member Maxine Waters (D-CA), argued that bill 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.” However, even she acknowledged the need for reform, stating “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…. 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.” The bill next goes to the Senate, where a companion bill has not yet been introduced.