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Compliance July 21, 2023
Congressional Proxy Voting Reforms Include Changes to Adviser Discretion
Among 11 total bills, one would require advisers to either abstain or vote the way their client or the issuer instructs them to.
Reported by Paul Mulholland
Republicans on the House Committee on Financial Services introduced 11 bills on July 12 that would reform proxy voting advice.
The bills’ introduction accompanied two subcommittee hearings on July 13 in which Republicans alleged that proxy voting firms such as Institutional Shareholder Services Inc. and Glass, Lewis & Co. were prioritizing progressive politics rather than the economic interests of their clients. ISS owns PLANADVISER.
Some of the proposed legislation mirrors recommendations made by the committee’s ESG Working Group’s interim report from June, such as a bill that would require proxy advisory firms to register with the SEC.
This registration process would require proxy firms to disclose “information on the procedures and methodologies that the applicant uses to ensure that proxy voting recommendations are in the best economic interest of the ultimate shareholders.” The bill then requires the SEC to publish these disclosures on their website.
At a hearing on July 14, Steven Friedman, general counsel at ISS, indicated he would support mandatory SEC registration for proxy advisory firms. ISS is currently registered with the SEC as an investment adviser.
Apart from regulating proxy firms, most of the bills take aim at the process by which shareholders make proposals in the first place. Some bills would empower the issuer to remove certain shareholder proposals from the proxy statement. One such bill proposed by Representative Byron Donalds, R-Florida, would permit an issuer to exclude a proposal “if the subject matter of the shareholder proposal is environmental, social, or political.”
When considering environmental, social and governance issues, a focus on the “E” and “S” and the omission of “G” is a theme common in the committee’s approach.
Another bill proposed by Representative Erin Houchin, R-Indiana, would permit issuers to exclude proposals that have already been substantially addressed by the issuer, if it is duplicative of another proposal or if it is similar to one that has been voted down in the previous five years.
Instead of empowering issuers to exclude proposals, a second approach proposed in some of the bills has been to disempower the SEC from requiring issuers to include a proposal. A bill proposed by Representative Ralph Norman, R-South Carolina, states that “the Commission may not compel an issuer to include in a proxy statement of the issuer … any shareholder proposal.”
Norman’s bill speaks to concerns expressed by some Republican members in the subcommittee hearings that the SEC was requiring too many proposals to be considered through Staff Bulletin 14L. Currently, issuers may exclude proposals which address their day-to-day business operations, known as the “ordinary business exemption,” as well as those economically irrelevant to the issuer.
14L modifies these exemptions and explains that when deciding whether to permit the exclusion of a proposal, SEC staff will consider whether it “raises issues with a broad societal impact, such that they transcend the ordinary business of the company.”
The last approach to regulating proxy voting comes in a bill proposed by Representative Bill Huizenga, R-Michigan. His bill would require advisers with the authority to vote shares on behalf of clients to vote in one of three ways: the way their client instructs them to; the way the issuer instructs them to; or to abstain. Advisers would no longer have the ability to vote with their discretion, though the bill explicitly states that they would not be penalized for failing to solicit the opinion of their client.
All 11 bills have been sent to the House Committee on Financial Services. The committee has not yet scheduled a markup hearing for these bills.
