Waters Statement in Opposition to Bill that Undermines Pension Funds’ Efforts to Hold Corporations Accountable

Mr. Speaker, H.R. 4015, the so-called Corporate Governance Reform and Transparency Act, would create an untested, inappropriate, and burdensome regulatory framework for proxy advisory firms, making it much more difficult for shareholders to obtain unbiased research used to make well-informed voting decisions about the companies they own.

Institutional investors, like pension funds and mutual funds, typically invest money on behalf of hardworking Americans in a large number of public companies. In exchange for their investment, companies provide investors with shares of ownership and a say on important proposed changes to how the companies are run. These proposals may relate to who sits on the board of directors, how much executives are paid, environmental practices, employee minimum wage, and non-discrimination policies. Shareholders often hire independent researchers called “proxy advisory firms” to help inform their voting decisions on the many proposals they consider each year.

H.R. 4015 contains numerous provisions that would undermine proxy advisory firms and the shareholders that rely on them for unbiased advice. First, H.R. 4015 would essentially fulfill the wishes of corporate management by regulating proxy advisory firms out of existence. The bill requires proxy advisory firms to register with the Securities and Exchange Commission (SEC) and authorizes the SEC to deny applications on a whim. Additionally, H.R. 4015 would force proxy advisors to publicly disclose their internal, proprietary research methodologies and voting policies, which firms invest time and money into developing. The bill would also require proxy advisors to hire a sort of complaint department dedicated entirely to the grievances of corporate management, rather than the advisor’s own shareholder-clients. These burdensome requirements would deter new proxy advisors from entering the market and squeeze out smaller, cost-sensitive firms. As a result, shareholders would be faced with ever-increasing fees to obtain research from a shrinking universe of advisors. 

Second, H.R. 4015 would grant corporate management the right to review and weigh in on a proxy advisor’s draft recommendations before the shareholder-clients, who pay for the recommendations, get to see a final report. If management raises a complaint that the advisor disagrees with, the bill allows management to get the last word by publishing its dissenting opinion in the advisor’s final report. In other words, the bill is the equivalent of requiring that a teacher clear a report card with a student before sending it to his or her parents.

Finally, H.R. 4015 is unnecessary in light of existing federal securities laws. For example, some proxy advisors, such as the largest firm, Institutional Shareholder Services, are already registered and regulated as investment advisers under the Investment Advisers Act of 1940. As such, they already owe heightened obligations to their customers, must make regular, comprehensive disclosures to regulators and the public, and are subject to periodic compliance examinations among other legal responsibilities. Additionally, the SEC has already provided guidance on due diligence and oversight relating to proxy advisors. H.R. 4015 would replace this well-understood guidance with a harmful and inappropriate regulatory regime that undermines investors’ ability to simply exercise their shareholder rights.

Tellingly, nothing in H.R. 4015 advances the bill’s purported goals of “fostering accountability, transparency, responsiveness, and competition in the proxy advisory firm industry.” Shareholders hold corporations and their management accountable by casting well-informed votes on important issues of corporate governance, including issues of diversity. For example, a recent study by Ernst & Young found that corporate board diversity and gender pay equity were key themes in the 2017 proxy season. Specifically, Ernst & Young found that over half of the investors it interviewed included diversity as a board priority in 2017 and “proposals asking boards to report on and increase their board diversity are among the top shareholder proposals submitted this year.” H.R. 4015 would render these important accountability efforts ineffective, as the institutional shareholders driving governance changes would be less able to obtain the research needed to inform voting decisions.

Now, I can imagine that Americans listening to this debate may be confused that Republicans, who have been singularly focused on repealing important safeguards and protections for America’s consumers and investors, are now claiming that they are seeking to protect investors with these new rules. But, Mr. Speaker, if this bill truly helped investors, why have so many from all over America written letters to Congress opposing H.R. 4015? To name a few, the bill’s opponents include public pension funds and government officials from California, Colorado, Connecticut, Florida, Illinois, New York, Ohio, Oregon, and Washington. These investors joined a letter from the Council of Institutional Investors, stating that H.R. 4015, “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.” 

Proponents of effective corporate governance, including Americans for Financial Reform, Consumer Federation of America, Public Citizen, and Principles for Responsible Investment, have similarly written to oppose this bill. For example, the Consumer Federation of America wrote that H.R. 4015, “would empower companies to bully proxy advisory firms into dropping their objections to management proposals or watering down their recommendations.” Private institutional investors also agree that H.R. 4015 would leave shareholders reliant on biased information tilted toward the interests of company management. 

Sound corporate governance requires shareholders to have access to impartial information when voting on key corporate issues. If our nation’s investors, who provide the capital for businesses to grow jobs and our economy, are unable to hold corporations accountable, they will be increasingly reluctant to invest. H.R. 4015 would thereby hurt the very businesses it purports to assist.

For these reasons, I urge my colleagues to join me in opposing H.R. 4015.

I reserve the balance of my time.

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