House Bill 4015 and the Proposed Regulation of Proxy Advisors

Dimitri Zagoroff is a Senior Proxy Research Analyst at Glass, Lewis & Co. This post is based on a Glass Lewis publication by Mr. Zagoroff.

Regulation of proxy advisors is back on the U.S. legislative agenda. If enacted, the proposed rules could create delays to the delivery and threats to the independence of proxy research, with investors footing the bill.

Introduced October 11, House Bill 4015 is mostly a resubmission of last year’s HR 5311—mostly. The proposed compliance regime is unchanged. Proxy advisors would be required to register with the SEC, meet extensive disclosure requirements relating to methodologies and conflicts of interest, and hire an ombudsperson to handle complaints. However, HR 4015 includes additional detail on how the bill’s thorniest provision would work in practice: allowing companies to vet proxy advisor’s recommendations, including access to analysts, before they are released to investors. The new bill would give companies three days to review draft analysis and submit a response to the proxy advisor’s ombudsperson; if they are “unable to resolve such complaints prior to voting” (whether to the ombudsperson’s satisfaction or the company’s remains unclear), the company would be given space to set out their case within the proxy report distributed to investors.

Besides representing a compliance and operational headache for proxy advisors, the proposed rules pose a threat to investors who rely on proxy research. In letter to the Senate regarding HR 5311, CII argues that the legislation would result in higher costs to investors with no clear benefit, and that the proposed company review process “would create an incentive for companies subject to criticism to delay publication of reports as long as possible” leaving investors “less time to analyze the reports and recommendations in the context of their own customized proxy voting guidelines to arrive at informed voting decisions.” More broadly, CII argues that “the proposed legislation would weaken corporate governance in the United States; undercut proxy advisory firms’ ability to uphold their fiduciary obligation to their investor clients; and reorient any surviving firms to serve companies rather than investors.”

The rationale for the legislation is questionable, resting primarily on a misunderstanding of how investors use proxy analysis and voting recommendations. Moreover, Glass Lewis already provides U.S. companies with an opportunity to vet the data used in its analysis through its Issuer Data Reports. The IDR program provides a meaningful review process to ensure accuracy without undermining timely delivery to investors or the independence of the research.

This is a third life for the bill. HR 5311 was introduced in May 2016 and got the support of the House Financial Services Committee, but didn’t make it to the Senate. Its provisions were then folded into the Financial CHOICE Act; now, with FCA unlikely to survive bipartisan review in the Senate, the standalone bill is back.

It is early days, the specific provisions are likely to change, and the bill is unlikely to go far in the Senate (when and if it gets there); but investors, advisors, and anyone else involved in proxy voting should have HR 4015, and its potential impact on corporate governance, on their radar.

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