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The NYSE has always been committed to serving as a strong voice for public companies on key policy and regulatory matters. Through regular dialogue and interaction with listed companies, we saw a growing need for increased government oversight of proxy advisory firms to account for their outsized influence in shareholder related matters.

We are happy to report that our advocacy efforts are paying off with the introduction of The Corporate Governance Fairness Act by a bipartisan group of Senators. This bill advances the regulation of proxy advisory firms under the Investment Advisers Act of 1940. Working together with Senate leaders, the legislation strikes an important balance between the interests of our issuers and the value that proxy advisory firms offer to institutional investors.

The Corporate Governance Fairness Act will:
  1. Require entities that meet the definition of a "proxy advisory firm" to register with the SEC under the Investment Advisers Act of 1940.
  2. Direct the U.S. Securities and Exchange Commission (SEC) to complete a targeted examination of proxy advisory firms for: (i) false or misleading information, or omissions of fact, in communications from proxy advisory firms to their clients; and (ii) policies and practices related to conflicts of interest at proxy advisory firms.
  3. Give the SEC explicit discretionary authority to conduct additional, special and other examinations.
  4. Require the SEC to consult with all relevant stakeholders and produce a report to Congress (Senate Banking Committee and House Financial Services Committee) that reviews the same issues mandated by the 360 day targeted examination, and outlines whether the SEC should consider additional protections related to proxy advisory firms.

Impact of Proxy Advisory Firms on Public Companies

Proxy advisory firms can provide a valuable service to institutional investors who vote thousands of proxies each year. But the long-standing concerns of our listed companies about the practices of these firms needs to be addressed.

Over time, two firms, have captured the vast majority of market share for proxy advisory services. These firms design opaque, and in the view of many, subjective standards to benchmark corporate issuers across a variety of corporate governance and other measures. Based on these non-public benchmarks, proxy advisory firms issue recommendations to their institutional clients electronically, with the default setting designed to steer the client to vote in-line with their recommendation.

In general, proxy advisory firms also make little, if any, effort to consult with issuers that are the subject of their recommendations to confirm the accuracy of the information provided to their institutional clients. This lack of rigor around the factual accuracy of recommendations, coupled with the use of default vote settings, eliminates any realistic chance for issuers to correct the record before votes are cast.

Left without a meaningful remedy for votes cast based on inaccurate or incomplete information, corporate issuers are often persuaded to purchase "consulting services." The cost of these services are steep, often in the tens of thousands of dollars, to give issuers a view into how a single firm reviews their company’s policies and practices so that they may "improve" their score in a future review.

Reform is needed now to concentrate the oversight of proxy advisory firms at the SEC. The proposed legislation will implement changes that will improve the quality of information that proxy advisory firms provide to their institutional clients, and will compel these firms to manage their conflicts of interest.

Bipartisanship Creates a Path Forward

The NYSE strongly supports this bipartisan bill and its ability to drive greater reform for proxy advisory firms. A press release from the co-sponsors of the bill, Senators Jack Reed (D-RI), David Perdue (R-GA), Heidi Heitcamp (D-ND), Thom Tillis (R-NC), Doug Jones (D-AL) and John Kennedy (R-LA), can be found here and the full bill can be found here.

We continue to advocate for a healthy regulatory environment that promotes economic growth and benefits investors, and we look forward to working with our issuer community, top decision makers and leaders in government to ensure the competitiveness of the U.S. in global capital markets moving forward.