Putting Investors First Act of 2023
This bill requires a proxy advisory firm to register with the Securities and Exchange Commission and prohibits an unregistered proxy advisory firm from using interstate commerce to provide proxy-voting advice, research, analysis, or recommendations to any client.
With respect to these firms, the bill (1) establishes procedures for both registration and termination of registration; (2) requires each firm to employ an ombudsman, designate a compliance officer, and publicly disclose conflicts of interest; (3) allows issuers to assess and comment on proxy voting recommendations; and (4) prohibits unfair, coercive, or abusive practices.
The bill establishes a private right of action against a proxy advisory firm that endorses an approved proposal that is not supported by the issuer and is found to be illegal.
[Congressional Bills 118th Congress]
[From the U.S. Government Publishing Office]
[S. 1799 Introduced in Senate (IS)]
<DOC>
118th CONGRESS
1st Session
S. 1799
To amend the Securities Exchange Act of 1934 to require the
registration of proxy advisory firms, and for other purposes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
June 1, 2023
Mr. Hagerty introduced the following bill; which was read twice and
referred to the Committee on Banking, Housing, and Urban Affairs
_______________________________________________________________________
A BILL
To amend the Securities Exchange Act of 1934 to require the
registration of proxy advisory firms, and for other purposes.
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 ``Putting Investors First Act of
2023''.
SEC. 2. DEFINITIONS.
(a) In General.--In this Act:
(1) Commission.--The term ``Commission'' means the
Securities and Exchange Commission.
(2) Proxy advisory firm.--The term ``proxy advisory firm''
has the meaning given the term in paragraph (81) of section
3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)),
as added by this Act.
(3) State.--The term ``State'' has the meaning given the
term in section 3(a) of the Securities Exchange Act of 1934 (15
U.S.C. 78c(a)).
(b) Securities Exchange Act of 1934 Definitions.--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:
``(81) Proxy advisory firm.--The term `proxy advisory
firm'--
``(A) means any person who is primarily engaged in
the business of providing proxy voting advice,
research, analysis, ratings, or recommendations to
clients, which conduct constitutes a solicitation
within the meaning of section 14; and
``(B) does not include any person that is exempt
under law or regulation from the requirements otherwise
applicable to persons engaged in such a solicitation.
``(82) Person associated with a proxy advisory firm.--The
term `person associated' with a proxy advisory firm--
``(A) means--
``(i) any partner, officer, or director of
a proxy advisory firm (or any person occupying
a similar status or performing similar
functions);
``(ii) any person directly or indirectly
controlling, controlled by, or under common
control with a proxy advisory firm;
``(iii) any employee of a proxy advisory
firm; or
``(iv) any person the Commission determines
by rule is controlled by a proxy advisory firm;
and
``(B) does not include any person that performs
clerical or ministerial functions with respect to a
proxy advisory firm.''.
SEC. 3. REGISTRATION OF PROXY ADVISORY FIRMS.
(a) Amendment.--The Securities Exchange Act of 1934 (15 U.S.C. 78a
et seq.) 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 advice, research,
analysis, ratings 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 shall 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--
``(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;
``(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 provision of proxy
advisory services, including those arising out
of or resulting from the ownership structure of
the applicant or the provision of other
services by the applicant or any person
associated with the applicant;
``(vi) the policies and procedures in place
to publicly disclose and manage conflicts of
interest under subsection (f);
``(vii) information related to the
professional and academic qualifications of
staff tasked with providing proxy advisory
services; and
``(viii) 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 the Commission 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 (d).
``(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 1 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);
``(6) fails to maintain adequate financial and managerial
resources to consistently offer advisory services with
integrity, including by failing to comply with subsection (f)
or (g); or
``(7) engages in a prohibited act enumerated in subsection
(j).
``(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),
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
publicly disclose and manage any conflicts of interest that
arise or would reasonably be expected to arise from such
business.
``(2) Commission authority.--The Commission shall, within
one year of enactment, issue final rules to prohibit, or
require the management and public 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, any
affiliate of the client, or any other person for
providing proxy advisory services;
``(B) 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;
``(C) the formulation of proxy voting policies;
``(D) the execution, or assistance with the
execution, of proxy votes if such votes are based upon
recommendations made by the proxy advisory firm in
which a person other than the issuer is a proponent;
and
``(E) any other potential conflict of interest, as
the Commission deems necessary or appropriate in the
public interest or for the protection of investors.
``(3) Disclosure.--Each registered proxy advisory firm
shall annually disclose to the Commission and make publicly
available the economic and other factors that a reasonable
investor would expect to influence the recommendations of such
proxy advisory firm, including the ownership composition of
such proxy advisory firm.
``(g) Reliability of Proxy Advisory Firm Services.--
``(1) In general.--Each registered proxy advisory firm
shall--
``(A) have staff and other resources sufficient to
produce proxy voting recommendations that are based on
accurate and current information;
``(B) implement procedures that permit issuers that
are the subject of proxy voting recommendations--
``(i) access in a reasonable time to data
and information used to make recommendations;
and
``(ii) a reasonable opportunity to provide
meaningful comment and corrections to such data
and information, including the opportunity to
present (in person or telephonically) details
to the person responsible for developing such
data and information prior to the publication
of proxy voting recommendations to clients; and
``(C) employ an ombudsman to receive complaints
about the accuracy of information used in making
recommendations from the subjects of the proxy advisory
firm's voting recommendations and seek to resolve those
complaints in a timely fashion and prior to the
publication of proxy voting recommendations to clients;
``(D) if such ombudsman is unable to resolve such
complaints prior to the publication of proxy voting
recommendations to clients, include in the final report
of the firm to clients a statement detailing its
complaints, if requested in writing by the company; and
``(E) provide to clients receiving proxy advisory
firm recommendations--
``(i) information demonstrating that draft
recommendations (other than recommendations
relating to an issuer-sponsored proposal or
recommendations consistent with that of the
majority of the board of directors of the
issuer) are in the best economic interest of
shareholders; and
``(ii) a certification by the chief
executive officer, chief financial officer, and
the primary executive responsible for
overseeing the compilation and dissemination of
proxy voting advice that the draft
recommendations (other than recommendations
relating to an issuer-sponsored proposal or
recommendations consistent with that of the
majority of the board of directors of the
issuer)--
``(I) are based on internal
controls and procedures that are
designed to ensure accurate
information;
``(II) do not violate applicable
State or Federal law; and
``(III) prioritize economic returns
to shareholders.
``(2) Definitions.--In this subsection:
``(A) Data and information used to make
recommendations.--The term `data and information used
to make voting recommendations'--
``(i) means the financial, operational, or
descriptive data and information on an issuer
used by proxy advisory firms and any contextual
or substantive analysis impacting the
recommendation; and
``(ii) does not include the entirety of the
proxy advisory firm's final report to its
clients.
``(B) Reasonable time.--The term `reasonable
time'--
``(i) means not less than 1 week before the
publication of proxy voting recommendations for
clients, unless otherwise defined through a
final rule issued by the Commission; and
``(ii) 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.
``(h) Private Right of Action With Respect to Illegal
Recommendations.--Any proxy advisory firm that endorses a proposal that
is not supported by the issuer but is approved and subsequently found
by a court of competent jurisdiction to violate State or Federal law
shall be liable to the applicable issuer for the costs associated with
the approval of such proposal, including implementation costs and any
penalties incurred by the issuer.
``(i) Designation of Compliance Officer.--Each registered proxy
advisory firm shall designate an individual who reports directly to
senior management as 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.
``(j) Prohibited Conduct.--
``(1) Prohibited acts and practices.--Not later than one
year after the date of enactment of this section, 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) advisory or consulting services (offered
directly or indirectly, including through an affiliate)
related to corporate governance issues; or
``(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).
``(k) 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.
``(l) 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--
``(1) shareholder proposals its staff reviewed in the prior
fiscal year;
``(2) recommendations made in the prior fiscal year;
``(3) staff who reviewed and made recommendations on such
proposals in the prior fiscal year (and the qualifications of
such staff); and
``(4) 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.
``(m) 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.
``(n) Rules of Construction.--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.
``(o) 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;
and
``(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.
``(p) 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 (o)(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. DUTIES OF INVESTMENT ADVISORS, ASSET MANAGERS, AND PENSION
FUNDS.
(a) Reporting Requirements.--Not later than 1 year after the date
of the enactment of this Act and annually thereafter, any covered
entity that retains the services of a proxy advisory firm with respect
to the preceding year shall provide to the beneficiaries and customers
of the covered entity, as applicable, a report that includes--
(1) the percentage of votes cast on shareholder proposals
that follow proxy advisor firm recommendations for each proxy
advisory firm retained by the covered entity;
(2) the percentage of votes cast on environmental-, social-
, or governance-related shareholder proposals that follow proxy
advisory firm recommendations for each proxy advisory firm
retained by the covered entity; and
(3) an explanation of--
(A) how proxy advisory firm recommendations are
used by the covered entity in making voting decisions;
(B) how such recommendations are reconciled with
the fiduciary duty of the covered entity to vote in the
best economic interests of shareholders;
(C) how frequently votes are changed when an error
occurs or due to new information from issuers; and
(D) the degree to which investment professionals of
the covered entity are involved in such voting
decisions.
(b) Requirements.--With respect to shareholder proposals of an
issuer, a covered entity with more than $100,000,000,000 in assets
under management shall--
(1) provide customers with a mechanism to indicate how the
covered entity should vote on their behalf;
(2) in any materials provided to customers and related to
customers voting their shares, clarify that shareholders are
not required to vote on every proposal; and
(3) with respect to each shareholder proposal for which the
covered entity voted (other than an issuer-sponsored proposal
or a vote consistent with the recommendation of the majority of
the board of directors of the issuer), make publicly available
the economic analysis the covered entity conducted to determine
that the vote is in the best economic interest of the
customers.
(c) Covered Entity Defined.--In this section, the term ``covered
entity'' means an investment advisor, asset manager, or pension fund
with more than $100,000,000 in assets under management.
SEC. 5. TRANSPARENCY REGARDING ESG FUNDS.
Section 10 of the Securities Act of 1933 (15 U.S.C. 77j) is amended
by adding at the end the following:
``(g) Transparency Regarding ESG Funds.--An investment company that
holds itself out as offering an index fund under which investments are
made pursuant to a set of environmental, social, or governance
standards shall disclose in tabular form on the first page of each
prospectus required pursuant to this section the 1-, 3-, and 5-year
annual returns and fees charged to investors with respect to such fund
compared with the annual returns and fees charged to investors for the
most readily comparable broad-based index fund offered by such
investment company under which investments are not made pursuant to
such standards, or if such investment company does not offer a
comparable index fund, a reasonably similar comparison to a readily
comparable broad-based index fund.''.
SEC. 6. RESUBMISSION THRESHOLDS FOR SHAREHOLDER PROPOSALS.
Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n)
is amended by adding at the end the following:
``(k) Exclusion of Certain Shareholder Proposal Resubmissions.--A
shareholder proposal may be excluded from any proxy or consent
solicitation material for an annual meeting of the shareholders of an
issuer if the proposal--
``(1) is not germane (without regard to whether the
proposal involves a significant social policy issue); or
``(2) addresses substantially the same subject matter
(without regard to whether the proposal involves a significant
social policy issue) as a proposal previously included in the
proxy or consent solicitation material for an annual meeting of
the shareholders of an issuer--
``(A) for a meeting of the shareholders conducted
in the preceding 5 years; and
``(B) if the most recent vote--
``(i) occurred in the preceding 3 years;
and
``(ii)(I) if voted on once during such
period, received less than 5 percent of the
votes;
``(II) if voted on twice during such
period, received less than 15 percent of the
votes; or
``(III) if voted on three or more times
during such period, received less 25 percent of
the votes.''.
SEC. 7. PROHIBITION ON ROBOVOTING.
Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n)
is further amended by adding at the end the following:
``(l) Prohibition on Robovoting.--
``(1) In general.--The Commission shall issue final rules
prohibiting the use of robovoting with respect to votes related
to proxy or consent solicitation materials.
``(2) Robovoting defined.--The term `robovoting' means the
practice of automatically voting in a manner consistent with
the recommendations of a proxy advisory firm.''.
SEC. 8. LIABILITY FOR CERTAIN FAILURES TO DISCLOSE MATERIAL
INFORMATION.
Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n)
is further amended by adding at the end the following:
``(m) False or Misleading Statements.--For purposes of section 18,
failure to disclose material information regarding proxy voting advice
that makes a recommendation to a security holder as to its vote,
consent, or authorization on a specific matter for which security
holder approval is solicited, and that is furnished by a person that
markets its expertise as a provider of such proxy voting advice,
separately from other forms of investment advice, and sells such proxy
voting advice for a fee, shall be considered to be false or misleading
with respect to a material fact.''.
SEC. 9. STUDY OF CERTAIN ISSUES WITH RESPECT TO SHAREHOLDER PROPOSALS
AND PROXY ADVISORY FIRMS.
Not later than 180 days after the date of the enactment of this
Act, and every 5 years thereafter, the Securities and Exchange
Commission, including the Office of the Advocate for Small Business
Capital Formation, shall carry out a study and submit a report to the
Committee on Banking, Housing, and Urban Affairs of the Senate and the
Committee on Financial Services of the House of Representatives on
shareholder proposals and proxy advisory firms that includes, with
respect to, in the case of the first report, the preceding 10 years,
and in the case of each subsequent report, the preceding 5 years, the
following:
(1) The costs that issuers incurred in responding to--
(A) politically, environmentally, or socially
motivated shareholder proposals; and
(B) shareholder proposals that failed to be agreed
to more than once.
(2) The amount of fees that public companies paid to proxy
advisory firms and persons associated with proxy advisory
firms.
(3) The source of funds with respect to payment of such
fees.
(4) The academic or professional qualifications of the
staff members that provide proxy advisory services at proxy
advisory firms.
(5) The number of shareholder proposals that, if adopted,
would require an issuer to violate a State or Federal law.
(6) An estimate of the costs that issuers would incur if
such proposals were adopted.
<all>
Introduced in Senate
Read twice and referred to the Committee on Banking, Housing, and Urban Affairs.
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