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SEPTEMBER 13, 2023


VOLUME XIII, NUMBER 256


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GOP ESG BILLS AWAIT US HOUSE FLOOR CONSIDERATION

Wednesday, September 6, 2023

ESG 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.

Title II - H.R. 4628, to amend the Securities Exchange Act of 1934 to require
the SEC to disclose and report on non-material disclosure mandates, and for
other purposes.

 * 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.

Title IV - H.R. 4653, to require the Comptroller General of the United States to
conduct a study on the detrimental impact of the Directive on Corporate
Sustainability Due Diligence and the Corporate Sustainability Reporting
Directive on United States companies, and for other purposes.

 * 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

Title I - H.R. 4641, a bill authorize the exclusion of shareholder proposals
from proxy or consent solicitation material if such proposals are substantially
similar to previously included proposals.

 * 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. 

Title II - H.R. 4644, to authorize the exclusion of shareholder proposals from
proxy or consent solicitation material if such proposals substantially
implement, substantially duplicate, or are substantially similar to previously
included proposals.

 * 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). 

Title III - H.R. 4640, to authorize the exclusion of shareholder proposals from
proxy or consent solicitation material if the subject matter of the shareholder
proposal is environmental, social, or political.

 * 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). 

Title IV - H.R. 4657, to clarify that an issuer may exclude a shareholder
proposal pursuant to section 240.14a-8(i) of title 17, Code of Federal
Regulations, without regard to whether such proposal relates to a significant
social policy issue.

 * 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. 

Title V - H.R. 4662, to require the S EC to conduct a study of certain issues
with respect to shareholder proposals, proxy advisory firms, the proxy process,
and for other purposes.

 * 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.

Title VI - H.R. 4589, to amend the Securities Exchange Act of 1934 to provide
for the registration of proxy advisory firms, and for other purposes.

 * This bill requires proxy advisory firms to register with the SEC, disclose
   certain information, and meet certain requirements to manage conflicts of
   interest.

Title VII - H.R. 4590, to amend the Securities Exchange Act of 1934 to provide
for liability for certain failures to disclose material information in
connection with proxy voting advice, and for other purposes. 

 * 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. 

Title VIII - H.R. 4648, to amend the Securities Exchange Act of 1934 to provide
for duties of certain investment advisors, asset managers, and pension funds
with respect to voting on shareholder proposals, and for other purposes.

 * 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.

Title IX - H.R. 4656, to amend the Securities Exchange Act of 1934 to prohibit
robovoting with respect to votes related to proxy or consent solicitation
materials, and for other purposes.

 * 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. 

Title X - H.R. 4600, to amend the Investment Advisers Act of 1940 to specify
requirements concerning the consideration of pecuniary and non-pecuniary
factors, to require the S EC to conduct a study on climate change and other
environmental disclosures in the municipal bond market, and to require the SEC
to conduct a study on the solicitation of municipal securities business.

 * 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. 

Copyright 2023 K & L GatesNational Law Review, Volume XIII, Number 249

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