House Subcommittees on Capital Markets and Government Sponsored Enterprises conducted a joint hearing to examine three legislative proposals intended to enhance capital formation, transparency and regulatory accountability.  The legislative proposals were 1) the " SEC Regulatory Accountability Act," 2) the " Investment Advisers Modernization Act of 2016," and 3) the " Proxy Advisory Firm Reform Act".

Former SEC Commissioner Daniel Gallagher asserted that the Proxy Advisory Firm Reform Act proposal will resolve numerous issues by providing a comprehensive registration and examination regime for proxy advisory firms. He emphasized that the SEC Regulatory Accountability Act will be a significant improvement by (i) ensuring that analysis conducted by economists is fully entrenched in rulemaking, and (ii) holding the SEC more accountable to the public, particularly with regard to mandated rulemakings. Lastly, Mr. Gallagher argued that although the Investment Advisers Modernization Act of 2016 would preserve the current registration regime, it would remove unnecessary requirements and modernize overly burdensome Investment Advisers Act requirements. He urged the SEC to focus on increasing efficiency and competition in capital formation.

In contrast, Vermont Law School Professor Jennifer Taub argued against the three proposals, highlighting that:

  • the Investment Advisers Modernization Act of 2016 would provide a loophole for recordkeeping requirements and exempt many advisers and hedge funds from Form PF;
  • the SEC Regulatory Accountability Act would limit the ability of the SEC to protect the investing public and create opportunities for litigation; and
  • the Proxy Advisory Firm Reform Act is unwarranted – the SEC already maintains the authority to examine proxy firms and to address conflict of interest concerns.

According to a hearing summary prepared by Delta Strategy Group, three witnesses at the hearing stated that the Proxy Advisory Firm Reform Act would address the existing conflict of interest in proxy advisory firms and noted that currently two firms cover 97% of market share. Moreover, Mr. Gallagher encouraged federal involvement:

As Commissioner, I heard many failures of proxy advisory firms. It is time for Congress to look at how the Federal government can step in.

Other witnesses at the hearing included:

  • Timothy J. Bartl, CEO & President, Center on Executive Compensation;
  • Joshua Cherry-Seto, Chief Financial Officer, Blue Wolf Capital Partners, LLC, and
  • Thomas Quaadman, Senior Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce.

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