The House took up the question of whether to regulate proxy advisers and decided that these firms should be required to register with the SEC. Meanwhile, the House passed a Dodd-Frank Act revision that would make it harder for regulators to designate bank holding companies (BHCs) as systemically important financial institutions (SIFIs) and the House re-passed the tax reform bill to cure a procedural defect. The proxy adviser bill passed by a vote of 238-182, while the SIFI bill passed by a vote of 288-130.
Proxy advisers—bill mechanics. Representative Sean Duffy (R-Wis) re-introduced legislation earlier this year that would regulate proxy advisory firms. Similar language also was included in the Financial CHOICE Act (H.R. 10; See Subtitle Q, Section 481, et seq.). The bill also is similar to one Rep. Duffy sponsored in the 114th Congress (H.R. 5311) and which was reported by the House Financial Services Committee 41-18 (by comparison, the current House FSC reported the bill by a vote of 40-20). Moreover, the Treasury Department's report on capital markets cited a GAO study and the SEC’s proxy concept release on the growing concerns about proxy advisers’ influence, but the report did not take a position on proxy advisory firm regulation and instead recommended further study.
The Corporate Governance Reform and Transparency Act of 2017 (H.R. 4015) would require proxy advisory firms to register with the Commission. Currently, most proxy advisers are not SEC-registered, but those that are do so under an exemption from the prohibition on registration as an investment adviser under Investment Advisers Act Rule 203A-2. Specifically, a proxy adviser may register as a pension consultant if it meets certain criteria, including that it advises plans with assets of at least $200 million.
The Duffy bill also would require a proxy advisory firm to base its voting recommendations on accurate and current information. A firm would have to develop procedures to afford a company access to draft recommendations within a reasonable time and to allow the company to offer meaningful comments. A proxy advisory firm would have to employ an ombudsman to handle complaints from companies and send a final report to clients that includes a statement by a company of its complaints about the accuracy of voting information; a firm would also have to appoint a compliance officer. Moreover, a proxy advisory firm would have to establish written policies and procedures that are reasonably designed to manage conflicts of interest.
The Commission would have to issue rules on prohibited conduct, such as unfair, coercive, or abusive acts, including the making of proxy vote recommendations subject to the purchase of other services. The bill would deny a right to a private cause of action generally, and would deprive those who might challenge a proxy advisory firm’s filings with the Commission the right to sue under Exchange Act Section 18.
The bill also would impose various reporting requirements. A proxy advisory firm would have to confidentially file with the Commission data on its financial condition, report annually to the Commission on shareholder proposals reviewed and recommendations made, and file with the Commission (and publish) its methodology for issuing policies and for making recommendations. The Commission also would have to publish an annual report on proxy advisory firms on its website.
House Financial Services Chairman Jeb Hensarling (R-Texas) said the bill is a disclosure bill aimed at bringing transparency to the recommendations made by proxy advisers, including the two dominant proxy advisers who together service 97 percent of the market. The bill’s sponsor, Rep. Duffy, noted the possible political influence of some advisers, including Glass Lewis, which he said is owned by a Canadian labor union (Glass Lewis is owned by the Ontario Teachers’ Pension Plan Board and Alberta Investment Management Corp.). According to Duffy, the Congressional Budget Office (CBO) noted only "minimal" impact on the SEC and proxy advisers from the bill.
By contrast, Ranking member Maxine Waters (D-Calif) characterized the bill as creating an "untested, inappropriate, and burdensome regulatory framework" that is unnecessary given existing SEC guidance. The Duffy bill would require the Commission to withdraw two no-action letters that are part of the SEC’s guidance for proxy advisers.
Proxy advisers—political spending. Representative John Sarbanes (D-Md) made a motion to recommit the bill with instructions (an amendment) that he said would restore the ability of proxy advisers to issue recommendations on companies’ political spending habits. The amendment would have functioned as an exemption from the bill’s requirement that a proxy advisory firm provide a company that receives a recommendation access within a reasonable time to draft recommendations. The definition of "draft recommendations" would have been revised to clarify that the term did not include recommendations on shareholder proposals related to companies’ political donations.
According to Rep. Sarbanes, the amendment would not have jeopardized passage of the bill. He also explained his concern that court decisions such as Citizens United had enabled greater corporate influence over politics. He would cite as examples the tax reform bill and the House-passed SIFI bill after making the case for his amendment.
"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," said Rep. Sarbanes. "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."
But Chairman Hensarling countered that the amendment raised constitutional concerns. "I didn’t hear anything about labor union political campaign contributions, known political allies of the Democratic Party," said Chairman Hensarling. He then added: "This is yet one more assault on the First Amendment’s freedom of speech by my friends on the other side of the aisle." The Sarbanes motion (and amendment) was then rejected by voice vote and that rejection was later re-affirmed by a recorded vote of 189-231.
In the coming days, Congress will again mull a stop-gap spending measure to keep the government open. The current continuing resolution (CR) expires December 22 and a new CR introduced in the House would extend current funding until mid-January 2018. Previous CRs have barred the Commission from finalizing any rules on companies’ disclosure of political contributions. The SEC has received millions of comment letters on petitions calling for rules that would make companies’ political spending more transparent, although the agency has not yet proposed or adopted such rules.
SIFI designation. The House also passed the Systemic Risk Designation Improvement Act of 2017 (H.R. 3312), sponsored by Rep. Blaine Luetkemeyer (R-Mo), to amend the SIFI designation process. The bill would remove the automatic designation of certain financial institutions as SIFIs primarily because of their size. The threshold is currently set at total consolidated assets of $50 billion. The bill would become effective 18 months after enactment.
The size threshold would be replaced by five factors regulators would have to consider before designating a BHC as a SIFI. The factors are: (1) size; (2) interconnectedness; (3) the availability of substitutes for the BHC’s services; (4) the BHC’s global cross-jurisdictional activities; and (5) the BHC’s complexity.
Chairman Hensarling called the current Dodd-Frank Act provision "flawed" and cited comments made by former House FSC Chairman Barney Frank reportedly calling the selection of the $50 billion threshold "arbitrary." Representative Al Green (D-Texas) countered with a letter he said was obtained from Frank saying H.R. 3312 would increase the need for subjective judgment by regulators rather than giving regulators clear rules for banks to follow; Rep. Green also insisted that Frank had not endorsed H.R. 3312. Ranking Member Waters argued that the bill would accelerate the pace of big banks’ acquisitions of smaller banks.
The Congressional Budget Office estimated that H.R. 3312 would result in a net increase to the deficit of $43 million over a nearly 10-year period. The CBO said the increase would arise from higher administrative costs for the Fed to evaluate and defend SIFI designations and from the possibility that the FDIC may have to expend additional sums to handle bank failures. Representative Luetkemeyer told members he disagreed with the CBO estimate.
Tax reform changes. The House, which had already passed the Tax Cuts and Jobs Act by a vote of 227-203, was forced to re-pass the legislation after the Senate parliamentarian, citing the Byrd rule for handling reconciliation bills, objected to three provisions: a section dealing with 529 accounts, a provision dealing with the endowment excise tax for certain educational institutions, and the short title of the conference report. The Senate made the required changes and passed the bill by a vote of 51-48.
Before addressing the proxy adviser bill, the House re-debated the tax reform legislation and once again passed the conference report. House Ways and Means Committee Chairman Kevin Brady (R-Texas) reiterated his support for what he called "a simpler, fairer tax code." House Rules Committee Ranking Member Louise Slaughter (D-NY) accused Republicans of failing to do their due diligence on the rushed conference report and quipped that the re-vote was reminiscent of "Ground Hog Day." The amended conference report eventually passed by a by a vote of 224-201. The tax measure now goes to the White House for the president’s signature.
The tax legislation covers a wide range of topics, including securities-related topics such as the corporate tax rate, carried interest, and executive compensation. For a summary of provisions impacting securities topics, please click here.
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