/>iESG ACTIVITY IN THE HOUSE FINANCIAL SERVICES COMMITTEE (HFSC)
Prior to departing for the August recess, Chairman Patrick McHenry (R-NC) wrapped up the month-long series of hearings considering digital assets and environmental, social, and governance (ESG) legislation. In tandem markups held on 26 July and 27 July, HFSC advanced several bills on these issues, both on a bipartisan basis (digital assets and stablecoin) and along party lines (anti-ESG bills). Prior to the ESG markup, HFSC Republicans had released 18 bills that would be under consideration. However, these bills were then bundled into a few larger packages, which was done in a way that largely precluded Democratic support, as they were then tied to provisions that only Republicans would support.
More information on the legislation advanced during the 27 July ESG-related markup, as well as the vote outcomes, is detailed below.
LOOKING AHEAD
Chairman McHenry will likely push for full House consideration of these bills now that Congress has returned from the August recess. The top Congressional priorities are consideration of the FY2024 appropriations bills, the FY2024 National Defense Authorization Act, the Federal Aviation Administration reauthorization, and the Farm Bill. However, given Chairman McHenry’s standing with the House leadership, we expect the Republican-led House may consider and pass the HFSC bills. In a narrowly divided House and an even narrower Senate, it is possible there will be room for bipartisan agreement on some of these issues going forward, though that may prove more difficult as we get closer to the 2024 presidential election.
Another factor involved in the Congressional focus on ESG is the Securities and Exchange Commission’s (SEC) long-awaited final rule on climate risk disclosures and proposed rule on human capital disclosures. Both rulemakings are listed on the SEC’s Unified Regulatory Agenda with potential actions in October 2023. However, the timing remains unclear and these rulemakings could slip into 2024 given the ongoing controversy and threat of litigation. When the respective proposed and final regulations are issued, it is likely to spur increased attention and oversight, particularly by House Republicans. Regardless, we should expect a continuing focus on ESG in Congress as a proxy battle for more fundamental political and policy differences on the role of government.
ESG LEGISLATION CONSIDERED DURING THE 27 JULY HFSC MARKUP
H.R. 4790, the “Guiding Uniform and Responsible Disclosure Requirements and Information Limits (Guardrail) Act of 2023” - Passed By Vote of 29-21 Along Party Lines
Title I - H.R. 4168, the “Mandatory Materiality Requirement Act of 2022.”
- Amends the Securities Exchange Act of 1934 to require that an issuer is only obligated to disclose information to the SEC that it finds to be material to an investment or voting decision regarding securities of that issuer.
- Requires the SEC to publish on its website: (1) any mandate under federal securities laws or regulations that require the disclosure of non-material information; and (2) why the mandate is required.
- Requires the SEC to send a report to Congress every five years justifying each disclosure required to be published under the bill.
- Limits private liability for failure to report non-material information pursuant to a federal securities law or regulation.
Title III - H.R. 4652, the “Public Company Advisory Committee Act of 2022.”
- Creates the Public Company Advisory Committee to provide advice to the SEC on its rules, regulations, and policies as they relate to issues related to public reporting and corporate governance of public companies, issues related to the proxy process for shareholder meetings, trading in securities of public companies, issues related to capital formation, and existing or emerging regulatory priorities of the SEC.
- This bill would require the US Comptroller General to conduct a study examining:
- The detrimental impact and potential detrimental impact of each of the directives (including the Corporate Sustainability Due Diligence Directive adopted by the EU in February 2022 and the Corporate Sustainability Reporting Directive of the European Commission effective 5 January 2023) on US companies, consumers, and investors, as well as the economy of the U.S.;
- The extent to which each of the directives aligns with international conventions and declarations on human rights and environmental obligations; and
- The legal basis for the extraterritorial reach of each of the directives.
- Further, it would require that the Comptroller General submits a report to the Senate Banking Committee and the House Financial Services Committee, the Secretary of State, the Secretary of Commerce, and the US Trade Representative with the findings of this study and recommendations for policymakers and stakeholders no later than one year after the enactment of the bill.
- Lastly, it provides that the Comptroller General may request information from private entities to retrieve relevant data and information necessary to conduct the study.
H.R. 4767, the Protecting Americans’ Retirement Savings From Politics Act - Passed By Vote of 29-21 Along Party Lines
- This bill would require the SEC to revise resubmission requirements in Section 240.14a-8(i)(12) of title 17, Code of Federal Regulations so as to allow a shareholder proposal to be excluded by an issuer from its proxy or consent solicitation material for a meeting of the shareholders if the proposal substantially addresses the same subject matter as a proposal(s) previously included in the proxy or consent solicitation material.
- The bill provides for the terms of eligibility.
- This bill would provide for a shareholder proposal submitted to an issuer having the option of being excluded by an issuer from its proxy or consent solicitation material for a shareholder meeting if the proposal:
- Has been substantially implemented by the issuer and addressed the proposal’s underlying concerns;
- Substantially duplicates by having the same principal thrust or principal focus as another proposal submitted that will be included in the material; and
- Substantially addresses the same subject matter as a previous proposal that shared the same concerns.
- Further, this bill would require that the SEC may not finalize, apply the positions contained within, or issue a substantially similar rule to the proposed rule entitled Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals under Exchange Act Rule 12 14a-8 (87 Fed. Reg. 45052).
- This bill would provide that shareholder proposals submitted to an issuer may be excluded by an issuer from its proxy or consent solicitation material for a shareholder meeting if the subject matter is environmental, social, or political (or a similar subject matter).
- This bill would provide that shareholder proposals submitted to an issuer may be excluded by an issuer from its proxy or consent solicitation material for a shareholder meeting regardless of whether the proposal relates to a significant social policy issue.
- Requires the SEC to conduct a study no later than 180 days after enactment of the bill and every five years thereafter on shareholder proposals, proxy advisor firms, and the proxy process. Each report is required to study:
- The incentives and obligations of all groups involved in the proxy process;
- Determine whether the proxy process no longer serves the economic interests of long-term retail investors because of skewed incentives;
- Whether regulations and financial incentives have created and protected the outsized influence of proxy advisors;
- Any costs borne by issuers because of political, environmental, or socially motivated shareholder proposals;
- A cost benefit analysis, of the adequacy of the current submission thresholds in Rule 14a-8;
- Studying whether shareholder proposals disincentivize companies from going public;
- Assess the economic analysis conducted by proxy advisory firms or institutional shareholders when recommending or voting in favor of shareholder proposals;
- Analyze the extent to which institutional investors rely on the recommendations of proxy advisory firms; and
- Assess whether proxy advisors are subject to sufficient or effective regulations to ensure that their policies and recommendations are free of conflicts, accurate, and benefit the economic best interests of the shareholders.
- This bill requires proxy advisory firms to register with the SEC, disclose certain information, and meet certain requirements to manage conflicts of interest.
- This bill would amend the Securities Exchange Act of 1934 to add that the failure to disclose material information (such as a proxy voting advice business’s methodology, sources of information, or conflicts of interest) or the making of a material misstatement regarding proxy voting advice shall be considered to be false or misleading with respect to a material fact.
- Requires that institutional investment managers who engage with a proxy advisory firm and have voting power for accounts holding equity securities or are deemed to be a beneficial owner of any securities are required to file a report with the SEC outlining how the investment manager voted on every shareholder proposal, in addition to outlining the percentage of votes cast on shareholder proposals that were consistent with proxy advisory firm recommendations.
- The bill also requires a certification that the manager’s voting decisions were based solely on the best economic interests of the shareholders on whose behalf the manager holds shares; and an explanation of, (1) how the manager took into consideration the recommendation of the proxy advisory firm; (2) how votes were reconciled with the fiduciary duty of the investment manager to vote in the best economic interests of shareholders; (3) how often votes were changed due to an error or new information from issuers; and (4) the degree to which investment professionals of the investment manager were involved in proxy voting decisions.
- The bill includes additional requirements for institutional investment managers found to have a fair market value of at least US$100 billion including, (1) providing an economic analysis for every shareholder proposal that the manager votes on showing that the vote is in the best economic interest of the shareholders and (2) requiring them to include a stipulation in materials provided to customers stating that shareholders are not required to vote on every proposal.
- For the purposes of the bill, best economic interest is defined as a decision that seeks to maximize investment returns over a time horizon consistent with the investment objectives and risk management profile of the fund.
- This bill would amend the Securities Exchange Act of 1934 to add a prohibition of, define, and provide terms for robovoting. It would also require that the SEC finalize rules with respect to prohibiting the use of robovoting on votes related to proxy or consent solicitation materials.
- Further, it would prohibit institutional investors from outsourcing voting decisions, and would prohibit any person from being required to cast votes related to proxy or consent solicitation materials.
- Lastly, the bill would require that a proxy advisor firm shall calculate vote results related to proxy or consent solicitation materials consistent with state law (in whichever state the issuer is incorporated). The bill defines what is considered to be a proxy advisory firm.
- Defines best interest of a customer to be based on pecuniary factors that may not be limited or subordinated to non-pecuniary factors unless written informed consent is received from a customer.
- In receiving informed consent from a customer to consider non-pecuniary factors, a broker, dealer, or investment adviser must inform the customer of the pecuniary effects of this choice over a selected period of time that cannot exceed three years, and disclose to a customer the effects of these non-pecuniary factors over a period of time (including listing fees, costs, and expenses incurred because of non-pecuniary factors).
- Pecuniary factors are defined as those that a prudent fiduciary would expect to have a material effect on the risk or return of an investment based on an appropriate investment horizon.
- Requires the SEC to conduct a study of analyzing the extent to which municipal bond market issuers make disclosures to investors regarding climate change and other environmental matters. Requires the study to be submitted to the HFSC and the Senate Banking Committee.
H.R. 4823, the American Financial Institution Regulator Sovereignty and Transparency Act - Passed By Vote of 29-21 Along Party Lines
Title I - H.R. 4737, the Stop Executive Capture of Banking Regulators Act
- Prevents several federal agencies from implementing non-binding recommendations of the Financial Stability Oversight Chair or contained in an executive order unless the agency first provides the HFSC and the Senate Committee on Banking, Housing, and Urban Affairs with:
- A notice that the agency intends to implement the recommendation;
- A report outlining the proposed implementation and justification for the implementation; and
- If requested, to be available to testify regarding the proposed implementation.
- The Act applies to several agencies including the Federal Reserve, OCC, FDIC, NCUA, and the FHFA.
Title II - H.R. 4649, the Ensuring US Authority Over US Banking Regulations Act
- This bill prevents various federal agencies from proposing or finalizing rules unless the board provides the HFSC and the Senate Committee on Banking, Housing, and Urban Affairs with notice, testimony, and a detailed economic analysis of the effects of the proposed rule. It only applies to rules that: (1) would have an aggregate effect on the US economy of US$10 billion or more over a 10-year period and (2) are intended to comply with a recommendation of a non-governmental international organization. This Act applies to rules promulgated by the Federal Reserve System, OCC, FDIC, NCUA, and FHFA.
- Prevents a federal banking regulator from meeting or engaging with a covered international organization regarding climate-related financial risk unless the regulator has issued a report to the HFSC and the Senate Committee on Banking, Housing, and Urban Affairs outlining:
- A description of activities in which the federal banking regulator participates in connection with the covered international organization; and
- A description of funding sources for the covered international organization.
Title III - H.R. 4601, the Banking Regulator International Reporting Act
- Requires the federal agencies to keep records of interactions with non-governmental international organizations and issue a report to the HFSC and the Senate Committee on Banking, Housing, and Urban Affairs regarding these interactions.
- The Act applies to several agencies including the Federal Reserve, OCC, FDIC, NCUA, and the FHFA.
Title IV - H.R. 4630, the Supervision Reform Act
- Removes language allowing for the designation of a Federal Reserve Board member as a Vice Chairman for Supervision
H.R. 4655, the Businesses Over Activists Act - Passed By Vote of 29-21 Along Party Lines
- This bill clarifies that the SEC does not have the authority to override state regulations on shareholder proposals or proxy materials. Also prevents the SEC from compelling the inclusion or discussion of shareholder proposals.
H.J.Res. 66, A Joint Resolution Disapproving the Rule Submitted by the Consumer Financial Protection Bureau Relating to “Small Business Lending Under the Equal Credit Opportunity Act (Regulation B)”- Passed By Vote of 29-21 Along Party Lines
- This resolution nullifies the CFPB’s final rule implementing Section 1071 of the Dodd-Frank Act.
H.R. 4766, the Clarity for Payment Stablecoins Act of 2023 - Passed (As Amended With an Amendment in the Nature of a Substitute, Offered by Chairman McHenry) By Vote of 34-16 on a Bipartisan Basis
H.R. 4841, the Keep Your Coins Act of 2023 - Passed By Vote of 29-21 Along Party Lines
- This bill prohibits federal agencies from taking action against or implementing any rule that would prohibit an individual’s right to use self-hosted wallets to conduct transactions.
Lauren E. Hamma also contributed to this article.
