AN ACT relating to the regulation of proxy advisory services.

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AN ACT relating to the regulation of proxy advisory services. 1
Be it enacted by the General Assembly of the Commonwealth of Kentucky: 2
SECTION 1. A NEW SECTION OF KRS CHAPTER 367 IS CREATED TO 3
READ AS FOLLOWS: 4
As used in Sections 1 to 3 of this Act: 5
(1) "Company" means a publicly traded for -profit corporation, limited liability 6
company, partnership, or other business entity that is doing business in this state 7
as defined in KRS 141.010(13); 8
(2) "Company proposal" means a proposal made by a company that is included in 9
the company's proxy statement, including a proposal regarding director 10
nominations or elections, executive compensation, corporate transactions and 11
structure, auditor selection, or similar measures; 12
(3) "Default recommendation or policy" means a system, set of rules, principles, or 13
guidelines designed to assist with voting decisions on any company proposal or 14
proxy proposal; 15
(4) "Economic analysis" means a written analysis of the economic impact of a 16
shareholder-sponsored proposal, which shall include, at a minimum: 17
(a) The subject matter of the shareholder-sponsored proposal; 18
(b) Whether the board of directors of the issuer of se curities opposes the 19
shareholder-sponsored proposal and the stated reasons for the opposition; 20
(c) Whether the shareholder -sponsored proposal is consistent with the 21
investment policy of the shareholder receiving the advice; 22
(d) The economic benefits and c osts of implementing the shareholder -23
sponsored proposal, as written, in the long and short term; 24
(e) The quantifiable impact of the shareholder -sponsored proposal, as written, 25
on the investment returns of the shareholder receiving the advice; and 26
(f) An explanation of the modeling, procedures, and processes used to complete 27
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the economic analysis; 1
(5) A "material connection" is established if there is a substantial likelihood that a 2
reasonable investor would consider it important in determining the financial risk 3
or the financial return of an investment; 4
(6) "Materially different advice," with respect to advice or a recommendation on how 5
to vote on a company proposal or shareholder -sponsored proposal, means 6
simultaneously advising or recommending that one (1) or more clients vote for: 7
(a) The proposal and one (1) or more clients vote against the proposal; 8
(b) A nominee for a company's governing authority and one (1) or more clients 9
vote against or abstain from voting for the same nominee; or 10
(c) Or against th e proposal in opposition to the recommendation of the 11
company's management; 12
(7) "Nonpecuniary interest" includes but is not limited to an environmental, social, 13
political, or ideological interest which does not have a direct and material 14
connection to the financial risk or financial return of an investment; 15
(8) "Pecuniary factor" means a consideration having a direct and material 16
connection to the financial risk or financial return of an investment; 17
(9) "Proxy advisor": 18
(a) Means any person who is engaged i n the business of providing advice, 19
research, analysis, ratings, or recommendations specifically with respect to 20
proxy voting for compensation; and 21
(b) Does not include an "investment advisor" under the federal Investment 22
Advisers Act of 1940, 15 U.S.C. se c. 80b -2, except when engaged in the 23
business of providing proxy advisory service to a third party for 24
compensation; 25
(10) "Proxy advisory service" means any of the following services that are provided in 26
connection with or in relation to a company: 27
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(a) Advice or recommendations on how to vote on a shareholder -sponsored 1
proposal or company proposal; 2
(b) Proxy statement research and analysis regarding a shareholder -sponsored 3
proposal or company proposal; 4
(c) A rating or research regarding corporate governance; or 5
(d) Development of proxy voting recommendations or policies, including 6
establishing default recommendations or policies; 7
(11) "Shareholder" includes a shareholder, unitholder, limited partner, or other 8
equity owner of a company; 9
(12) "Shareholder-sponsored proposal" means a proposal by a shareholder included 10
in the proxy statement of an issuer of securities pursuant to 17 C.F.R. sec. 11
240.14a-8; and 12
(13) "Solely in the interest of shareholders" shall be determined using only pecuniary 13
factors and shall not include any purpose to further a nonpecuniary interest. 14
SECTION 2. A NEW SECTION OF KRS CHAPTER 367 IS CREATED TO 15
READ AS FOLLOWS: 16
(1) A proxy advisory service is not solely in the interest of shareholders of a compa ny 17
if the service: 18
(a) Is wholly or partly based on, or otherwise takes into account, one (1) or 19
more nonpecuniary interests or subordinates the financial interests of 20
shareholders to other objectives, including sacrificing investment returns or 21
undertaking additional investment risk to promote or further nonpecuniary 22
interests; 23
(b) Involves providing a voting recommendation with respect to a shareholder -24
sponsored proposal that: 25
1. Is inconsistent with the voting recommendation of the company's 26
board of directors or a board committee composed of a majority of the 27
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company's independent directors; and 1
2. Does not include a written economic analysis of the financial impact 2
on shareholders of the proposal; or 3
(c) Advises against a company proposal to elect a governing person unless the 4
proxy advisor affirmatively states that the proxy advisor y service rendered 5
such advice solely in the interest of the shareholders of the company. 6
(2) If a proxy advisor provides a proxy advisory service that is not solely in the 7
interest of shareholders as provided in subsection (1) of this section, the proxy 8
advisor shall: 9
(a) Include, in writing or by electronic means, a disclosure to each shareholder 10
or entity or other person acting on behalf of a shareholder receiving the 11
proxy advisory service that: 12
1. Conspicuously states that pursuant to subsection (1) o f this section the 13
proxy advisory service is not being provided solely in the interest of 14
shareholders and that the advice subordinates the financial interests 15
of shareholders to other objectives, including sacrificing investment 16
returns or undertaking add itional investment risk to promote one (1) 17
or more nonpecuniary interests; and 18
2. Explains, with particularity, the basis of the proxy advisor's advice 19
concerning each recommendation, including but not limited to the 20
company or companies for which the advi ce applies to and the 21
nonpecuniary interests used in the basis of the advice; and 22
(b) Immediately provide a copy of the disclosure required under paragraph (a) 23
of this subsection to the company that is subject to the proxy advisory 24
service. 25
(3) If the prox y advisor provides materially different advice to different clients who 26
have not expressly requested proxy advisory services for a nonpecuniary interest, 27
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the advisor shall: 1
(a) If applicable, comply with the disclosure requirements in subsections (1) 2
and (2) of this section; and 3
(b) Notify, in writing or by electronic means, each shareholder or entity or 4
other person acting on behalf of a shareholder receiving the proxy advisory 5
service, the company that is subject to the materially different advice 6
provided by the proxy advisory service, and the Attorney General, of the 7
materially different advice and disclose the advice or recommendation that 8
is: 9
1. Provided solely in the interest of shareholders; and 10
2. Supported by an economic analysis performed and reli ed upon by the 11
proxy advisor. 12
SECTION 3. A NEW SECTION OF KRS CHAPTER 367 IS CREATED TO 13
READ AS FOLLOWS: 14
(1) Failure to comply with the notification and disclosure requirements established 15
for proxy advisors in Sections 1 and 2 of this Act shall be deemed to be an unfair, 16
false, misleading, or deceptive act or practice in the conduct of trade or commerce 17
in violation of KRS 367.170. 18
(2) The recipient of proxy advisory services provided by a proxy advisor, the company 19
that is the subject of the proxy advisory services, or any shareholder of the 20
company that is the subject of the proxy advisory services may bring a cause of 21
action seeking declaratory or injunctive relief in the Circuit Court of the county 22
where the plaintiff resides or where the violation occurred. 23
(3) (a) In any proceeding under subsection (2) of this section, the plaintiff shall 24
serve the Attorney General with a copy of the petition within seven (7) days 25
of filing. The Attorney General may intervene in the action. 26
(b) All of the remedies, powers, and duties provided to the Attorney General 27
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under KRS 367.110 to 367.300, and the penalties provided in KRS 367.990, 1
pertaining to acts and practices declared unlawful by KRS 367.170, shall 2
apply with equal force and effect to a violation of Section 1 or 2 of this Act. 3
(c) Sections 1 to 3 of this Act shall not be construed to limit or restrict the 4
powers, duties, remedies, or penalties available to the Attorney General 5
under any other statutory or common law. 6
(4) (a) Notwithstanding any other provision of Sections 1 to 3 of this Act to the 7
contrary, a cause of action under Sections 1 to 3 of this Act shall not be 8
brought against a nonprofit organization exempt from taxation under 26 9
U.S.C. sec. 501(c) by any person or entity other than the Attorney General 10
of the Commonwealth of Kentucky: 11
1. Provided that the nonprofit organization has gross annual revenue 12
attributable to proxy advisory services of less than five hundred 13
thousand dollars ($500,000); and 14
2. Provided fur ther that in the event the nonprofit organization is a 15
member of an affiliated group, the combined gross annual revenue of 16
all members of the affiliated group attributable to proxy advisory 17
services is less than five hundred thousand dollars ($500,000). 18
(b) This subsection shall not limit the authority of the Attorney General to 19
investigate or enforce Sections 1 to 3 of this Act against any person or 20
entity. 21
Section 4. Sections 1 to 3 of this Act apply to proxy advisory services provided 22
on or after the effective date of this Act. 23