New Corporate Bill Puts Proxy Advisory Firms Under SEC Scrutiny, Mandates Conflict of Interest Reports Every 5 Years

This new piece of legislation, dubbed the Corporate Governance Fairness Act, is all about bringing a specific group of financial players—known as proxy advisory firms—under the direct supervision of the Securities and Exchange Commission (SEC). Essentially, it amends the Investment Advisers Act of 1940 to explicitly define these firms as investment advisers, meaning they now have to register and comply with the same rules as the pros who manage your retirement account. A "proxy advisory firm" is defined here as any entity that provides research, analysis, or recommendations to investors on how to vote on corporate matters, especially if those recommendations are tailored to a specific client’s needs.

The $5 Million Small Business Exemption

Not every firm gets swept up in this new regulation. The bill carves out an important exemption: if a firm and its affiliates pull in less than $5 million in gross receipts from clients annually, they are generally not considered a proxy advisory firm under this Act. This revenue threshold is designed to protect truly small operations from being crushed by federal registration costs, and it will adjust annually based on the U.S. GDP. However, this is where things get tricky: if you’re a firm hovering just above that $5 million mark, you’re suddenly facing major new compliance costs, which could be a huge administrative burden compared to the big players who can absorb it easily. For the financial analyst or small consultant who just started getting traction, this could be a significant hurdle.

The SEC Is Now Watching

The biggest change is the new oversight. The SEC must now start conducting periodic inspections of these firms’ records within one year of the bill becoming law. During these check-ups, the SEC will be looking for two main things: first, whether the firm knowingly made any false statements or left out material facts in their reports; and second, how they are managing their internal conflicts of interest. The bill also gives the SEC the power to conduct "special examinations" whenever they deem it necessary for investor protection, which is pretty broad authority. This is a crucial point for everyday investors: the idea is that this increased scrutiny should lead to more accurate, less biased advice for the pension funds and institutional investors managing your 401(k).

What About Conflicts of Interest?

One of the core concerns addressed by this bill is the potential for conflicts of interest within these advisory firms. To tackle this, the SEC is required to submit a detailed report to Congress within two years and then every five years after that, evaluating how well the existing rules are protecting investors from these conflicts. This mandatory reporting cycle is designed to keep the pressure on the SEC and Congress to ensure that the advice influencing corporate governance—like executive pay or merger decisions—is sound. If these firms are doing their job right, your investments are better protected. But if the new compliance requirements slow down the release of their specialized reports, it could hamper the ability of large funds to make timely voting decisions, which could ultimately affect the speed and efficiency of the market.