The House of Representatives has passed a bill that, if approved in the Senate, could mean big changes for proxy advisory firms, notably industry leaders like ISS and Glass Lewis.

The Corporate Governance Reform and Transparency Act of 2017, reintroduced by Rep. Sean Duffy (R-WI) passed the House on Dec. 20, 2017, by a 238-182 vote.

“Proxy advisory firms play an important role in advising their clients but they are susceptible to conflicts of interest,” Duffy said. “Investors… across America expect and deserve certainty that their rights as shareholders won’t be compromised by advisors issuing conflicting recommendations and executing votes. “ He said the bill “will foster greater accountability, transparency, responsiveness, and competition in the proxy advisory firm industry.”

Financial Services Committee Chairman Jeb Hensarling (R-Texas) was a champion of the bill. “The Committee is aware of numerous instances whereby the two largest proxy advisory firms have issued vote recommendations to shareholders that include errors, misstatements of fact, and incomplete analysis. Some proxy advisory firms' recommendations have been made without any contact to the public company at all, and these same proxy advisory firms encourage companies to join their service in order to have the privilege to ‘influence’ an advisory firm's recommendations.”

Given the importance of proxy advisory firms to institutional investors and the dominance of two firms in the proxy system, greater transparency is necessary to protect shareholders, he added. The two largest proxy advisory firms make up approximately 97 percent of the proxy advisory industry and can control a significant percentage of shareholder votes in corporate elections.

The bill requires proxy advisory firms to register with the Securities and Exchange Commission, disclose potential conflicts of interest and codes of ethics, and make publically available their methodologies for formulating proxy recommendations and analyses.

Global professional services firms Aon and Radford Consulting also broke down the most significant parts of the bill on their website.

Registration: Proxy advisory firms will be required to file an application for registration with the SEC, certifying that the firm has adequate financial and managerial resources to consistently provide proxy advice based on accurate information, identifying any actual or potential conflicts of interest (including written policies and procedures in place to manage such actual or potential conflicts), and identifying the procedures and methodologies used in developing proxy voting recommendations, including whether and how the firm evaluates the size of a company when making recommendations.

Censure, Denial, or Suspension of Registration: The SEC may censure, suspend, place limitations on, or revoke the registration of a proxy advisory firm if such action is “necessary for the protection of investors and in the public interest.” Specific grounds for these disciplinary actions are listed in the bill (click here to see the full text of the bill).

Management of Conflicts of Interest: Each proxy advisory firm will be required to establish, maintain and enforce written policies and procedures reasonably designed to “address and manage any conflicts of interest that can arise from such business.” The SEC is granted broad authority to prohibit, or otherwise regulate specific conflicts of interest, including the offering of consulting services to an issuer.

Draft Reports: Proxy advisory firms will be required to develop procedures that allow companies’ access to draft ballot recommendations, with an opportunity for companies provide comment to the firms, including the opportunity to present details to the person responsible for developing the recommendation.

Ombudsman: Each proxy advisory firm will be required to employ an ombudsman to receive complaints about the accuracy of voting information used in making recommendations from the subjects of the proxy firm’s voting recommendations. The ombudsman is required to resolve complaints in a timely fashion and “in any event prior to the voting on the matter to which the recommendation relates.”