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Legislation

Senate Banking Committee hears pros and cons of proxy-advisory firm regulation

The Senate Banking Committee heard testimony Thursday on proposed legislation that would require greater transparency from proxy-advisory firms.

H.R. 4015, the Corporate Governance Reform and Transparency Act of 2017, passed the House of Representatives late last year. Under the bill, proxy firms would have to register with the Securities and Exchange Commission, disclose potential conflicts of interest and codes of ethics, and make public their methodologies for formulating proxy recommendations and analyses.

The U.S. Chamber of Commerce is in favor of the legislation. In testimony Thursday, Thomas Quaadman, executive vice president of the chamber's Center of Capital Markets Competitiveness, said requiring proxy firms to produce their methodologies would "allow for fair due process in the system."

Mr. Quaadman noted that two firms — Institutional Shareholder Services and Glass Lewis — dominate the proxy-advisory sphere.

Gary Retelny, president and CEO of ISS, said in a statement the bill "will breach the long-standing fiduciary bond and existing regulatory regime that govern proxy advisers like ISS — itself an SEC-regulated registered investment adviser — in favor of new, unnecessary and cumbersome regulations that prioritize corporate interests over those of shareholders, the true owners of the companies."

Damon A. Silvers, policy director and special counsel for the AFL-CIO and an opponent of the bill, said in testimony Thursday that the bill "effectively gives corporations, CEOs and boards the ability to control the people who are supposed to be holding them accountable."

While the AFL-CIO is in favor of requiring proxy firms to register with the SEC, this bill seeks to "punish them for doing their jobs and to impose upon them a regulatory scheme designed to make them disloyal to their clients, among which are our clients' pension funds," Mr. Silvers said

Darla Stuckey, president and CEO of the Society of Corporate Governance, which represents about 1,000 public companies, said in testimony that the bill would provide "badly needed improvements to the accuracy and transparency" of proxy firms. "Our members report that as much as 20% to 30% of their total shareholder votes are swayed by ISS and Glass Lewis," Ms. Stuckey said.

Sen. Sherrod Brown, D-Ohio, ranking member on the committee, said the bill would make it harder for public retirement systems to use research and analysis from proxy advisers. "Why would we want to do that if we really care about those investors and those communities and those retirement systems?" Mr Brown asked.

Mr. Quaadman asked the committee to advance a Senate companion bill "as swiftly as possible."