59–006 

114TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 114–798 

CORPORATE GOVERNANCE REFORM AND TRANSPARENCY 

ACT OF 2016 

SEPTEMBER 28, 2016.—Committed to the Committee of the Whole House on the 

State of the Union and ordered to be printed 

Mr. HENSARLING, from the Committee on Financial Services, 

submitted the following 

R E P O R T 

together with 

MINORITY VIEWS 

[To accompany H.R. 5311] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Financial Services, to whom was referred the 

bill (H.R. 5311) to improve the quality of proxy advisory firms for 

the protection of investors and the U.S. economy, and in the public 

interest, by fostering accountability, transparency, responsiveness, 

and competition in the proxy advisory firm industry, having considered the same, reports favorably thereon with an amendment and 

recommends that the bill as amended do pass. 

The amendment is as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE. 

This Act may be cited as the ‘‘Corporate Governance Reform and Transparency 

Act of 2016’’. 

SEC. 2. DEFINITIONS. 

(a) SECURITIES EXCHANGE ACT OF 1934.—Section 3(a) of the Securities Exchange 

Act of 1934 (15 U.S.C. 78c(a)) is amended by adding at the end the following new 

paragraphs: 

‘‘(81) PROXY ADVISORY FIRM.—The term ‘proxy advisory firm’ means any person registered under section 15H who is engaged in the business of providing 

proxy voting research, analysis, or recommendations to clients, which conduct 

constitutes a solicitation within the meaning of section 14 and the Commission’s 

rules and regulations thereunder, except to the extent that the person is exempted by such rules and regulations from requirements otherwise applicable 

to persons engaged in a solicitation. 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
2 

‘‘(82) PERSON ASSOCIATED WITH A PROXY ADVISORY FIRM.—The term ‘person associated with’ a proxy advisory firm means any partner, officer, or director of 

a proxy advisory firm (or any person occupying a similar status or performing 

similar functions), any person directly or indirectly controlling, controlled by, or 

under common control with a proxy advisory firm, or any employee of a proxy 

advisory firm, except that persons associated with a proxy advisory firm whose 

functions are clerical or ministerial shall not be included in the meaning of such 

term. The Commission may by rules and regulations classify, for purposes or 

any portion or portions of this Act, persons, including employees controlled by 

a proxy advisory firm.’’. 

(b) APPLICABLE DEFINITIONS.—As used in this Act— 

(1) the term ‘‘Commission’’ means the Securities and Exchange Commission; 

and 

(2) the term ‘‘proxy advisory firm’’ has the same meaning as in section 

3(a)(81) of the Securities Exchange Act of 1934, as added by this Act. 

SEC. 3. REGISTRATION OF PROXY ADVISORY FIRMS. 

(a) AMENDMENT.—The Securities Exchange Act of 1934 is amended by inserting 

after section 15G the following new section: 

‘‘SEC. 15H. REGISTRATION OF PROXY ADVISORY FIRMS. 

‘‘(a) CONDUCT PROHIBITED.—It shall be unlawful for a proxy advisory firm to make 

use of the mails or any means or instrumentality of interstate commerce to provide 

proxy voting research, analysis, or recommendations to any client, unless such proxy 

advisory firm is registered under this section. 

‘‘(b) REGISTRATION PROCEDURES.— 

‘‘(1) APPLICATION FOR REGISTRATION.— 

‘‘(A) IN GENERAL.—A proxy advisory firm must file with the Commission 

an application for registration, in such form as the Commission shall require, by rule or regulation, and containing the information described in 

subparagraph (B). 

‘‘(B) REQUIRED INFORMATION.—An application for registration under this 

section shall contain information regarding— 

‘‘(i) a certification that the applicant has adequate financial and managerial resources to consistently provide proxy advice based on accurate 

information; 

‘‘(ii) the procedures and methodologies that the applicant uses in developing proxy voting recommendations, including whether and how 

the applicant considers the size of a company when making proxy voting recommendations; 

‘‘(iii) the organizational structure of the applicant; 

‘‘(iv) whether or not the applicant has in effect a code of ethics, and 

if not, the reasons therefor; 

‘‘(v) any potential or actual conflict of interest relating to the ownership structure of the applicant or the provision of proxy advisory services by the applicant, including whether the proxy advisory firm engages in services ancillary to the provision of proxy advisory services 

such as consulting services for corporate issuers, and if so the revenues 

derived therefrom; 

‘‘(vi) the policies and procedures in place to manage conflicts of interest under subsection (f); and 

‘‘(vii) any other information and documents concerning the applicant 

and any person associated with such applicant as the Commission, by 

rule, may prescribe as necessary or appropriate in the public interest 

or for the protection of investors. 

‘‘(2) REVIEW OF APPLICATION.— 

‘‘(A) INITIAL DETERMINATION.—Not later than 90 days after the date on 

which the application for registration is filed with the Commission under 

paragraph (1) (or within such longer period as to which the applicant consents) the Commission shall— 

‘‘(i) by order, grant registration; or 

‘‘(ii) institute proceedings to determine whether registration should 

be denied. 

‘‘(B) CONDUCT OF PROCEEDINGS.— 

‘‘(i) CONTENT.—Proceedings referred to in subparagraph (A)(ii) 

shall— 

‘‘(I) include notice of the grounds for denial under consideration 

and an opportunity for hearing; and 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
3 

‘‘(II) be concluded not later than 120 days after the date on which 

the application for registration is filed with the Commission under 

paragraph (1). 

‘‘(ii) DETERMINATION.—At the conclusion of such proceedings, the 

Commission, by order, shall grant or deny such application for registration. 

‘‘(iii) EXTENSION AUTHORIZED.—The Commission may extend the time 

for conclusion of such proceedings for not longer than 90 days, if it 

finds good cause for such extension and publishes its reasons for so 

finding, or for such longer period as to which the applicant consents. 

‘‘(C) GROUNDS FOR DECISION.—The Commission shall grant registration 

under this subsection— 

‘‘(i) if the Commission finds that the requirements of this section are 

satisfied; and 

‘‘(ii) unless the Commission finds (in which case the Commission 

shall deny such registration) that— 

‘‘(I) the applicant has failed to certify to the Commission’s satisfaction that it has adequate financial and managerial resources to 

consistently provide proxy advice based on accurate information 

and to materially comply with the procedures and methodologies 

disclosed under paragraph (1)(B) and with subsections (f) and (g); 

or 

‘‘(II) if the applicant were so registered, its registration would be 

subject to suspension or revocation under subsection (e). 

‘‘(3) PUBLIC AVAILABILITY OF INFORMATION.—Subject to section 24, the Commission shall make the information and documents submitted to the Commission by a proxy advisory firm in its completed application for registration, or 

in any amendment submitted under paragraph (1) or (2) of subsection (c), publicly available on the Commission’s website, or through another comparable, 

readily accessible means. 

‘‘(c) UPDATE OF REGISTRATION.— 

‘‘(1) UPDATE.—Each registered proxy advisory firm shall promptly amend and 

update its application for registration under this section if any information or 

document provided therein becomes materially inaccurate, except that a registered proxy advisory firm is not required to amend the information required 

to be filed under subsection (b)(1)(B)(i) by filing information under this paragraph, but shall amend such information in the annual submission of the organization under paragraph (2) of this subsection. 

‘‘(2) CERTIFICATION.—Not later than 90 calendar days after the end of each 

calendar year, each registered proxy advisory firm shall file with the Commission an amendment to its registration, in such form as the Commission, by rule, 

may prescribe as necessary or appropriate in the public interest or for the protection of investors— 

‘‘(A) certifying that the information and documents in the application for 

registration of such registered proxy advisory firm continue to be accurate 

in all material respects; and 

‘‘(B) listing any material change that occurred to such information or documents during the previous calendar year. 

‘‘(d) CENSURE, DENIAL, OR SUSPENSION OF REGISTRATION; NOTICE AND HEARING.— 

The Commission, by order, shall censure, place limitations on the activities, functions, or operations of, suspend for a period not exceeding 12 months, or revoke the 

registration of any registered proxy advisory firm if the Commission finds, on the 

record after notice and opportunity for hearing, that such censure, placing of limitations, suspension, or revocation is necessary for the protection of investors and in 

the public interest and that such registered proxy advisory firm, or any person associated with such an organization, whether prior to or subsequent to becoming so associated— 

‘‘(1) has committed or omitted any act, or is subject to an order or finding, 

enumerated in subparagraph (A), (D), (E), (H), or (G) of section 15(b)(4), has 

been convicted of any offense specified in section 15(b)(4)(B), or is enjoined from 

any action, conduct, or practice specified in subparagraph (C) of section 15(b)(4), 

during the 10-year period preceding the date of commencement of the proceedings under this subsection, or at any time thereafter; 

‘‘(2) has been convicted during the 10-year period preceding the date on which 

an application for registration is filed with the Commission under this section, 

or at any time thereafter, of— 

‘‘(A) any crime that is punishable by imprisonment for one or more years, 

and that is not described in section 15(b)(4)(B); or 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
4 

‘‘(B) a substantially equivalent crime by a foreign court of competent jurisdiction; 

‘‘(3) is subject to any order of the Commission barring or suspending the right 

of the person to be associated with a registered proxy advisory firm; 

‘‘(4) fails to furnish the certifications required under subsections (b)(2)(C)(ii)(I) 

and (c)(2); 

‘‘(5) has engaged in one or more prohibited acts enumerated in paragraph (1); 

or 

‘‘(6) fails to maintain adequate financial and managerial resources to consistently offer advisory services with integrity, including by failing to comply with 

subsections (f) or (g). 

‘‘(e) TERMINATION OF REGISTRATION.— 

‘‘(1) VOLUNTARY WITHDRAWAL.—A registered proxy advisory firm may, upon 

such terms and conditions as the Commission may establish as necessary in the 

public interest or for the protection of investors, which terms and conditions 

shall include at a minimum that the registered proxy advisory firm will no 

longer conduct such activities as to bring it within the definition of proxy advisory firm in section 3(a)(81) of the Securities Exchange Act of 1934, withdraw 

from registration by filing a written notice of withdrawal to the Commission. 

‘‘(2) COMMISSION AUTHORITY.—In addition to any other authority of the Commission under this title, if the Commission finds that a registered proxy advisory firm is no longer in existence or has ceased to do business as a proxy advisory firm, the Commission, by order, shall cancel the registration under this 

section of such registered proxy advisory firm. 

‘‘(f) MANAGEMENT OF CONFLICTS OF INTEREST.— 

‘‘(1) ORGANIZATION POLICIES AND PROCEDURES.—Each registered proxy advisory firm shall establish, maintain, and enforce written policies and procedures 

reasonably designed, taking into consideration the nature of the business of 

such registered proxy advisory firm and associated persons, to address and 

manage any conflicts of interest that can arise from such business. 

‘‘(2) COMMISSION AUTHORITY.—The Commission shall issue final rules to prohibit, or require the management and disclosure of, any conflicts of interest relating to the offering of proxy advisory services by a registered proxy advisory 

firm, including, without limitation, conflicts of interest relating to— 

‘‘(A) the manner in which a registered proxy advisory firm is compensated 

by the client, or any affiliate of the client, for providing proxy advisory services; 

‘‘(B) the provision of consulting, advisory, or other services by a registered 

proxy advisory firm, or any person associated with such registered proxy 

advisory firm, to the client; 

‘‘(C) business relationships, ownership interests, or any other financial or 

personal interests between a registered proxy advisory firm, or any person 

associated with such registered proxy advisory firm, and any client, or any 

affiliate of such client; 

‘‘(D) transparency around the formulation of proxy voting policies; 

‘‘(E) the execution of proxy votes if such votes are based upon recommendations made by the proxy advisory firm in which someone other 

than the issuer is a proponent; 

‘‘(F) issuing recommendations where proxy advisory firms provide advisory services to a company; and 

‘‘(G) any other potential conflict of interest, as the Commission deems 

necessary or appropriate in the public interest or for the protection of investors. 

‘‘(g) RELIABILITY OF PROXY ADVISORY FIRM SERVICES.— 

‘‘(1) IN GENERAL.—Each registered proxy advisory firm shall have staff sufficient to produce proxy voting recommendations that are based on accurate and 

current information. Each registered proxy advisory firm shall detail procedures 

sufficient to permit companies receiving proxy advisory firm recommendations 

access in a reasonable time to the draft recommendations, with an opportunity 

to provide meaningful comment thereon, including the opportunity to present 

details to the person responsible for developing the recommendation in person 

or telephonically. Each registered proxy advisory firm shall employ an ombudsman to receive complaints about the accuracy of voting information used in 

making recommendations from the subjects of the proxy advisory firm’s voting 

recommendations, and shall resolve those complaints in a timely fashion and in 

any event prior to voting on the matter to which the recommendation relates. 

‘‘(2) DRAFT RECOMMENDATIONS DEFINED.—For purposes of this subsection, the 

term ‘draft recommendations’— 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
5 

‘‘(A) means the overall conclusions of proxy voting recommendations prepared for the clients of a proxy advisory firm, including any public data 

cited therein, any company information or substantive analysis impacting 

the recommendation, and the specific voting recommendations on individual 

proxy ballot issues; and 

‘‘(B) does not include the entirety of the proxy advisory firm’s final report 

to its clients. 

‘‘(h) DESIGNATION OF COMPLIANCE OFFICER.—Each registered proxy advisory firm 

shall designate an individual responsible for administering the policies and procedures that are required to be established pursuant to subsections (f) and (g), and 

for ensuring compliance with the securities laws and the rules and regulations 

thereunder, including those promulgated by the Commission pursuant to this section. 

‘‘(i) PROHIBITED CONDUCT.— ‘‘(1) PROHIBITED ACTS AND PRACTICES.—The Commission shall issue final rules 

to prohibit any act or practice relating to the offering of proxy advisory services 

by a registered proxy advisory firm that the Commission determines to be unfair, coercive, or abusive, including any act or practice relating to— 

‘‘(A) conditioning a voting recommendation or other proxy advisory firm 

recommendation on the purchase by an issuer or an affiliate thereof of 

other services or products, of the registered proxy advisory firm or any person associated with such registered proxy advisory firm; and 

‘‘(B) modifying a voting recommendation or otherwise departing from its 

adopted systematic procedures and methodologies in the provision of proxy 

advisory services, based on whether an issuer, or affiliate thereof, subscribes or will subscribe to other services or product of the registered proxy 

advisory firm or any person associated with such organization. 

‘‘(2) RULE OF CONSTRUCTION.—Nothing in paragraph (1), or in any rules or 

regulations adopted thereunder, may be construed to modify, impair, or supersede the operation of any of the antitrust laws (as defined in the first section 

of the Clayton Act, except that such term includes section 5 of the Federal 

Trade Commission Act, to the extent that such section 5 applies to unfair methods of competition). 

‘‘(j) STATEMENTS OF FINANCIAL CONDITION.—Each registered proxy advisory firm 

shall, on a confidential basis, file with the Commission, at intervals determined by 

the Commission, such financial statements, certified (if required by the rules or regulations of the Commission) by an independent public auditor, and information concerning its financial condition, as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors. 

‘‘(k) ANNUAL REPORT.—Each registered proxy advisory firm shall, at the beginning 

of each fiscal year of such firm, report to the Commission on the number of shareholder proposals its staff reviewed in the prior fiscal year, the number of recommendations made in the prior fiscal year, the number of staff who reviewed and 

made recommendations on such proposals in the prior fiscal year, and the number 

of recommendations made in the prior fiscal year where the proponent of such recommendation was a client of or received services from the proxy advisory firm. 

‘‘(l) TRANSPARENT POLICIES.—Each registered proxy advisory firm shall file with 

the Commission and make publicly available its methodology for the formulation of 

proxy voting policies and voting recommendations. 

‘‘(m) RULES OF CONSTRUCTION.— 

‘‘(1) NO WAIVER OF RIGHTS, PRIVILEGES, OR DEFENSES.—Registration under 

and compliance with this section does not constitute a waiver of, or otherwise 

diminish, any right, privilege, or defense that a registered proxy advisory firm 

may otherwise have under any provision of State or Federal law, including any 

rule, regulation, or order thereunder. 

‘‘(2) NO PRIVATE RIGHT OF ACTION.—Nothing in this section may be construed 

as creating any private right of action, and no report filed by a registered proxy 

advisory firm in accordance with this section or section 17 shall create a private 

right of action under section 18 or any other provision of law. 

‘‘(n) REGULATIONS.— 

‘‘(1) NEW PROVISIONS.—Such rules and regulations as are required by this section or are otherwise necessary to carry out this section, including the application form required under subsection (a)— 

‘‘(A) shall be issued by the Commission, not later than 180 days after the 

date of enactment of this section; and 

‘‘(B) shall become effective not later than 1 year after the date of enactment of this section. 

‘‘(2) REVIEW OF EXISTING REGULATIONS.—Not later than 270 days after the 

date of enactment of this section, the Commission shall— 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
6 

‘‘(A) review its existing rules and regulations which affect the operations 

of proxy advisory firms; 

‘‘(B) amend or revise such rules and regulations in accordance with the 

purposes of this section, and issue such guidance, as the Commission may 

prescribe as necessary or appropriate in the public interest or for the protection of investors; and 

‘‘(C) direct Commission staff to withdraw the Egan Jones Proxy Services 

(May 27, 2004) and Institutional Shareholder Services, Inc. (September 15, 

2004) no-action letters. 

‘‘(o) APPLICABILITY.—This section, other than subsection (n), which shall apply on 

the date of enactment of this section, shall apply on the earlier of— 

‘‘(1) the date on which regulations are issued in final form under subsection 

(n)(1); or 

‘‘(2) 270 days after the date of enactment of this section.’’. 

(b) CONFORMING AMENDMENT.—Section 17(a)(1) of the Securities Exchange Act of 

1934 (15 U.S.C. 78q(a)(1)) is amended by inserting ‘‘proxy advisory firm,’’ after ‘‘nationally recognized statistical rating organization,’’. 

SEC. 4. COMMISSION ANNUAL REPORT. 

The Commission shall make an annual report publicly available on the Commission’s Internet website. Such report shall, with respect to the year to which the report relates— 

(1) identify applicants for registration under section 15H of the Securities Exchange Act of 1934, as added by this Act; 

(2) specify the number of and actions taken on such applications; 

(3) specify the views of the Commission on the state of competition, transparency, policies and methodologies, and conflicts of interest among proxy advisory firms; 

(4) include the determination of the Commission with regards to— 

(A) the quality of proxy advisory services issued by proxy advisory firms; 

(B) the financial markets; 

(C) competition among proxy advisory firms; 

(D) the incidence of undisclosed conflicts of interest by proxy advisory 

firms; 

(E) the process for registering as a proxy advisory firm; and 

(F) such other matters relevant to the implementation of this Act and the 

amendments made by this Act, as the Commission determines necessary to 

bring to the attention of the Congress; 

(5) identify problems, if any, that have resulted from the implementation of 

this Act and the amendments made by this Act; and 

(6) recommend solutions, including any legislative or regulatory solutions, to 

any problems identified under paragraphs (4) and (5). 

PURPOSE AND SUMMARY

Introduced by Representatives Sean Duffy and John Carney on 

May 24, 2016, H.R. 5311, the ‘‘Corporate Governance Reform and 

Transparency Act of 2016,’’ establishes a regulatory regime for 

proxy advisory firms with the Securities and Exchange Commission 

(SEC). Specifically, H.R. 5311 requires that proxy advisory firms 

register with the SEC, disclose and address potential conflicts of interest, maintain and publish a code of ethics, and make publicly 

available the methodologies used to formulate proxy recommendations and analyses. 

BACKGROUND AND NEED FOR LEGISLATION

A proxy advisory firm researches and provides analysis on shareholder proposals. Every year, public companies hold annual meetings for shareholders to vote on a number of company related 

issues, including the company’s directors. The SEC requires public 

companies to provide their shareholders with a proxy statement before each shareholder meeting. A proxy statement includes all important facts about the matters to be voted on, including, for example, information on board of director candidates, director compensaVerDate Sep 11 2014 04:36 Oct 04, 2016 Jkt 059006 PO 00000 Frm 00006 Fmt 6659 Sfmt 6602 E:\HR\OC\HR798.XXX HR798

smartinez on DSK3GLQ082PROD with REPORTS-HSE
7 

tion, executive compensation, related party transactions, and securities ownership by certain beneficial owners and management. The 

information contained in the statement must be filed with the SEC 

before soliciting a shareholder vote on the election of directors and 

the approval of other corporate actions. Solicitations, whether by 

management or shareholders, must disclose all important facts 

about the issues on which shareholders are asked to vote. 

H.R. 5311 will foster greater accountability, transparency, responsiveness and competition in the proxy advisory firm industry, 

thereby improving corporate governance and protecting investors. 

Just two proxy advisory firms control over 90% percent of the market and their writings, analyses, reports, and voting recommendations affect fundamental corporate transactions like mergers or acquisitions, the approval of corporate directors, and shareholder proposals. Requiring proxy advisory firms to register with the SEC 

will not change the fact that the market has created a duopoly. 

However, it will ensure that these firms are subject to SEC oversight and supervision. H.R. 5311 does not capture and would not 

subject any entity, which as a fiduciary exercises discretionary authority only to vote shares owned by its clients to register with the 

SEC as a proxy advisory firm. 

Federal regulation of proxy solicitations 

In general, state corporate law governs shareholder voting rights, 

including the types of corporate actions that require shareholder 

approval. However, Section 14 of the Securities Exchange Act of 

1934 authorizes the SEC to promulgate rules governing the solicitation of proxies for most public companies. SEC Regulation 14A 

governs proxy solicitations, and sets forth the categories of information that must be disclosed in proxy solicitations. Regulation 14A 

also provides for shareholder access to certain information in connection with proxy solicitations, sets forth when a company must 

include a shareholder’s proposal in its proxy statement, and prohibits the making of materially false and misleading statements or 

omissions in connection with a proxy solicitation. 

Proxy advisory firms 

Institutional investors, including investment advisers to mutual 

funds and pension funds, typically hold shares in a large number 

of public companies. Each year, the investment advisers to these 

funds vote billions of shares on behalf of their clients on thousands 

of proxy ballot items. In 2003, the SEC adopted a rule under the 

Investment Advisers Act of 1940 requiring an investment adviser 

that exercises voting authority over its clients’ proxies to adopt 

policies and procedures designed to ensure that it votes those proxies in the best interests of its clients. The SEC’s release adopting 

the rule clarified that ‘‘an adviser could demonstrate that the vote 

was not a product of a conflict of interest if it voted client securities 

in accordance with a pre-determined policy, based upon the recommendations of an independent third party.’’ As a result, institutional investors increased their reliance on proxy advisory firms to 

help them decide how to vote their shares. In 2004, the SEC staff 

issued (without a Commission vote) two ‘‘no action’’ letters ‘‘effectively blessing the practice of investment advisers simply voting 

the recommendations provided by a proxy adviser.’’ 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
8 

Largely as a result of the SEC’s regulations, proxy advisory firms 

now wield outsized influence in the U.S. proxy system. Studies 

have found that the two largest proxy advisory firms—Institutional 

Shareholder Services (ISS) and Glass Lewis & Co. collectively 

make up over 90% of the proxy advisory industry, and can control 

a significant percentage of shareholder votes in corporate elections, 

sometimes as high as 40 percent. 

Potential conflicts of interest 

Regulators, market participants, and academic observers have 

highlighted potential conflicts of interest inherent in the business 

models and activities of proxy advisory firms. For example, as 

noted above, proxy advisory firms may feel pressured by their largest clients’ many of whom are activist investors—to issue voting 

recommendations that reflect those clients’ specific agendas. In addition, proxy advisory firms often provide voting recommendations 

to investment advisers on matters for which they also provide consulting services to public companies. According to a Mercatus Center study, ‘‘these consulting services are designed precisely to facilitate managers’ obtaining favorable recommendations.’’ Some proxy 

advisory firms also rate or score public companies on their governance structure, policies, and practices, which provides another avenue for proxy advisory firms to influence corporate governance 

practices. 

2014 SEC staff bulletin on proxy voting 

Given the major role proxy advisor firms now play in the U.S. 

proxy system, including their ability to influence corporate governance standards by supplying voting recommendations and other 

services, as well as the conflicts of interest described above, proxy 

advisory firms have become the subject of greater scrutiny. Regulators, market participants, and academics have argued that rather 

than using shareholder votes to maximize shareholder value, proxy 

advisory firms have instead aligned themselves with activist shareholders or unions to push social, political, and environmental goals 

unrelated and in many cases antithetical to increasing shareholder 

returns. Their critics contend that because proxy advisory firms 

generally have no financial interest in a public company’s performance and owe no duty to its shareholders, they are prone to making 

decisions that neither promote good corporate governance nor increase shareholder value. 

In response to these concerns, on June 30, 2014, the SEC’s Division of Corporate Finance and its Division of Investment Management jointly issued a staff legal bulletin on ‘‘Proxy Voting: Proxy 

Voting Responsibilities of Investment Advisers and Availability of 

Exemptions from the Proxy Rules for Proxy Advisory Firms’’ (the 

Bulletin). The Bulletin clarifies that an investment adviser and its 

clients ‘‘have flexibility in determining the scope of the investment 

adviser’s obligation to exercise proxy voting authority,’’ and that 

SEC rules do not require investment advisers to vote every proxy. 

The Bulletin also states that, in considering whether to obtain the 

assistance of a proxy advisory firm, an investment adviser should 

ascertain the proxy advisory firm’s ‘‘capacity and competency to 

adequately analyze proxy issues,’’ and ‘‘identify and address any 

conflicts of interest.’’ The Bulletin adds that, in order to comply 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
9 

with SEC rules, investment advisers should adopt policies and procedures ‘‘reasonably designed to provide sufficient ongoing oversight of . . . third party [proxy advisers]’’ in order to ensure that 

proxies are voted in the best interest of the investment adviser’s 

clients. Finally, the Bulletin describes the exemptions available to 

proxy advisory firms from the filing and disclosure requirements of 

the SEC’s proxy rules, and clarifies that, in order to rely on these 

exemptions, proxy advisers must make certain disclosures regarding significant relationships and material interests, including material conflicts that may arise from consulting services or client relationships. 

The Bulletin was a positive step forward towards improving the 

system of developing and dispensing proxy advice in the United 

States. However, nearly two years after the guidance was issued, 

many of the same issues in terms of conflict of interest and the 

adoption of ‘‘one size fits all’’ proxy recommendations still remain. 

Moreover, ISS and Glass-Lewis continue to maintain their dominance in this space without sufficient SEC oversight. The bipartisan H.R. 5311 will address many of the potential conflicts of interest that were not remedied by the Bulletin and ensure that 

proxy advisory firms engaged in these important services are subject to SEC registration and regulation. 

In his testimony during the Capital Markets and Government 

Sponsored Enterprises Subcommittee hearing on May 17, 2016, 

former SEC Commissioner Daniel Gallagher praised the bill for 

helping to address concerns with the proxy advisory system, noting 

that it would provide: 

A comprehensive regulatory regime to address many of the 

fundamental concerns that still remain regarding the activities 

of proxy advisers. . . . The registration regime in the [bill] 

would significantly improve transparency surrounding the 

structure and operation of proxy advisers beyond the limited 

disclosure required under existing rules and guidance. 

Conclusion 

The current proxy advisory firm regulatory regime is not sufficient as two proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis & Co., account for 97 percent of the 

market share of the proxy advisory business and wield enormous 

influence. A new and specifically tailored regulatory regime for the 

business of proxy advisory firms providing recommendations on 

proxy votes is necessary to ensure that they are subject to SEC 

oversight. The Business Roundtable, in a written statement submitted to the Subcommittee on Capital Markets for the May 17, 

2016 hearing, noted that H.R. 5311 ‘‘would improve the efficiency 

of U.S. capital markets and improve the quality of information 

available to shareholders and investors.’’ 

HEARING

The Committee on Financial Services’ Subcommittee on Capital 

Markets and Government Enterprises held a hearing examining 

matters relating to H.R. 5311 on May 17, 2016. 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
10 

COMMITTEE CONSIDERATION

The Committee on Financial Services met in open session on 

June 16, 2016, and ordered H.R. 5311 to be reported favorably to 

the House as amended by a recorded vote of 41 yeas to 18 nays (recorded vote no. FC–114), a quorum being present. An amendment 

offered by Rep. Foster was agreed to by voice vote. 

COMMITTEE VOTES

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion 

to report legislation and amendments thereto. The sole recorded 

vote in Committee was a motion by Chairman Hensarling to report 

the bill favorably to the House as amended. That motion was 

agreed to by a recorded vote of 41 yeas to 18 nays (Record vote no. 

FC–114), a quorum being present. 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
11 


smartinez on DSK3GLQ082PROD with REPORTS-HSEInsert offset folio 011 here HR798.001
12 

COMMITTEE OVERSIGHT FINDINGS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House 

of Representatives, the findings and recommendations of the committee based on oversight activities under clause 2(b)(1) of rule X 

of the Rules of the House of Representatives, are incorporated in 

the descriptive portions of this report. 

PERFORMANCE GOALS AND OBJECTIVES

Pursuant to clause 3(c)(4) of rule XIII of the Rules of the House 

of Representatives, the Committee states that H.R. 5311 will foster 

greater accountability, transparency, responsiveness and competition in the proxy advisory firm industry, thereby improving corporate governance and protecting investors. 

NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX

EXPENDITURES

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee adopts as its own the estimate of new budget authority, entitlement authority, or tax expenditures or revenues contained in the cost estimate prepared by 

the Director of the Congressional Budget Office pursuant to section 

402 of the Congressional Budget Act of 1974. 

COMMITTEE COST ESTIMATE

The Committee adopts as its own the cost estimate prepared by 

the Director of the Congressional Budget Office pursuant to section 

402 of the Congressional Budget Act of 1974. 

CONGRESSIONAL BUDGET OFFICE ESTIMATES

Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House 

of Representatives, the following is the cost estimate provided by 

the Congressional Budget Office pursuant to section 402 of the 

Congressional Budget Act of 1974: 

U.S. CONGRESS, CONGRESSIONAL BUDGET OFFICE, Washington, DC, August 30, 2016. 

Hon. JEB HENSARLING, Chairman, Committee on Financial Services, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 5311, the Corporate Governance Reform and Transparency Act of 2016. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Stephen Rabent. 

Sincerely, 

KEITH HALL. 

Enclosure. 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
13 

H.R. 5311—Corporate Governance Reform and Transparency Act of 

2016 

H.R. 5311 would require proxy advisory firms to register with 

the Securities and Exchange Commission (SEC) and would subject 

them to certain rules and reporting requirements. H.R. 5311 would 

define the term proxy advisory firm and direct the SEC to require 

firms that fall within this definition to register with the agency in 

order to operate. A proxy advisory firm is one that provides voting 

recommendations to investment advisors who have the authority to 

proxy vote for their clients. It also would require registered proxy 

advisory firms to disclose certain information to the SEC, such as 

their financial and managerial resources and any potential or actual conflicts of interest in providing proxy advisory services. Lastly, H.R. 5311 would direct the SEC to annually report on its regulation of these firms. 

On the basis of information provided by the SEC, CBO estimates 

that implementing H.R. 5311 would cost $5 million over the 2017– 

2021 period to hire about 4 additional staff to create and maintain 

the registry and to prepare annual reports. However, the SEC is 

authorized to collect fees sufficient to offset its annual appropriation; therefore, CBO estimates that the net effect on discretionary 

spending would be negligible, assuming appropriation actions consistent with that authority. Enacting H.R. 5311 would not affect direct spending or revenues; therefore, pay-as-you-go procedures do 

not apply. 

CBO estimates that enacting H.R. 5311 would not increase net 

direct spending or on-budget deficits in any of the four consecutive 

10-year period beginning in 2027. 

H.R. 5311 contains no intergovernmental mandates as defined in 

the Unfunded Mandates Reform Act (UMRA) and would not affect 

the budgets of state, local, or tribal governments. 

H.R. 5311 contains private-sector mandates as defined in UMRA. 

CBO estimates that the aggregate cost of those mandates would 

fall below the annual threshold for private-sector mandates established in UMRA ($154 million in 2016, adjusted annually for inflation). The bill would impose new registration, disclosure, and personnel requirements on proxy advisory firms. 

The cost of the mandates would be the incremental costs incurred by firms to comply with the bill’s requirements. Based on 

an analysis of information from the SEC, industry sources, and the 

academic literature about current business practices, CBO estimates the incremental cost to comply with the mandates would be 

small. 

In addition, CBO expects that the SEC would increase fees to offset the cost of implementing the bill. An increase in SEC fees 

would increase the cost of an existing mandate on private entities 

required to pay those fees. Based on information from the SEC, 

CBO estimates that the incremental cost of the mandate, if imposed, would total no more than $5 million over the 2017–2021 period. 

The CBO staff contact for this estimate is Stephen Rabent (for 

federal costs) and Logan Smith (for private-sector mandates). The 

estimate was approved by Theresa Gullo, Assistant Director for 

Budget Analysis. 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
14 

FEDERAL MANDATES STATEMENT

The Committee adopts as its own the estimate of Federal mandates prepared by the Director of the Congressional Budget Office 

pursuant to section 423 of the Unfunded Mandates Reform Act. 

ADVISORY COMMITTEE STATEMENT

No advisory committees within the meaning of section 5(b) of the 

Federal Advisory Committee Act were created by this legislation. 

APPLICABILITY TO LEGISLATIVE BRANCH

The Committee finds that the legislation does not relate to the 

terms and conditions of employment or access to public services or 

accommodations within the meaning of the section 102(b)(3) of the 

Congressional Accountability Act. 

EARMARK IDENTIFICATION

H.R. 5311 does not contain any congressional earmarks, limited 

tax benefits, or limited tariff benefits as defined in clause 9 of rule 

XXI. 

DUPLICATION OF FEDERAL PROGRAMS

Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015), the 

Committee states that no provision of H.R. 5311 establishes or reauthorizes a program of the Federal Government known to be duplicative of another Federal program, a program that was included 

in any report from the Government Accountability Office to Congress pursuant to section 21 of Public Law 111–139, or a program 

related to a program identified in the most recent Catalog of Federal Domestic Assistance. 

DISCLOSURE OF DIRECTED RULEMAKING

Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015), the 

Committee states that H.R. 5311 contains two directed 

rulemakings. 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1: Short title 

This section cites H.R. 5311 as the ‘‘Corporate Governance Reform and Transparency Act of 2016.’’ 

Section 2: Definitions 

This section amends Section 3(a) of the Securities Act of 1933 by 

defining the term ‘‘proxy advisory firm’’ to mean any person registered under section 15H who is engaged in the business of providing proxy voting research, analysis, or recommendations to clients, which constitutes a solicitation; by defining ‘‘person associated with’’ to mean any partner, officer, employee, director or controller or under control of a proxy advisory firm. 

Section 3: Registration of proxy advisory firms 

This section amends The Securities Exchange Act of 1934 by inserting Section 15H. This new section states that a proxy advisory 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
15 

firm must file an application for registration with the Commission 

and disclose any potential conflicts of interest and code of ethics. 

Specifically, when applying for registration the proxy advisory firm 

must include the following information: a certification that the firm 

has the financial and managerial resources to provide proxy advice; 

the procedures and methodologies that the firm uses in developing 

proxy voting recommendations; the organizational structure of the 

firm; whether or not the firm has a code of ethics; any potential 

or actual conflict of interest; policies and procedures to manage 

conflicts of interest; and any other information that the Commission deems necessary. This section also sets forth that the Commission shall issue final rules to prohibit any act that they believe is 

unfair, coercive, or abusive relating to the offering of proxy advisory services as well as make publicly available all information 

that was provided to them by the proxy advisory firms. 

Section 4: Commission annual report 

This section requires that the Commission publicly release an annual report that describes the methodologies that they used for formulating proxy recommendations and analyses. 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (new matter is printed in italics 

and existing law in which no change is proposed is shown in 

roman): 

SECURITIES EXCHANGE ACT OF 1934 

* * * * * * * 

TITLE I—REGULATION OF SECURITIES EXCHANGES 

* * * * * * * 

DEFINITIONS AND APPLICATION OF TITLE

SEC. 3. (a) When used in this title, unless the context otherwise 

requires— 

(1) The term ‘‘exchange’’ means any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market 

place or facilities for bringing together purchasers and sellers 

of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as 

that term is generally understood, and includes the market 

place and the market facilities maintained by such exchange. 

(2) The term ‘‘facility’’ when used with respect to an exchange includes its premises, tangible or intangible property 

whether on the premises or not, any right to the use of such 

premises or property or any service thereof for the purpose of 

effecting or reporting a transaction on an exchange (including, 

among other things, any system of communication to or from 

the exchange, by ticker or otherwise, maintained by or with 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
16 

the consent of the exchange), and any right of the exchange to 

the use of any property or service. 

(3)(A) The term ‘‘member’’ when used with respect to a national securities exchange means (i) any natural person permitted to effect transactions on the floor of the exchange without the services of another person acting as broker, (ii) any 

registered broker or dealer with which such a natural person 

is associated, (iii) any registered broker or dealer permitted to 

designate as a representative such a natural person, and (iv) 

any other registered broker or dealer which agrees to be regulated by such exchange and with respect to which the exchange 

undertakes to enforce compliance with the provisions of this 

title, the rules and regulations thereunder, and its own rules. 

For purposes of sections 6(b)(1), 6(b)(4), 6(b)(6), 6(b)(7), 6(d), 

17(d), 19(d), 19(e), 19(g), 19(h), and 21 of this title, the term 

‘‘member’’ when used with respect to a national securities exchange also means, to the extent of the rules of the exchange 

specified by the Commission, any person required by the Commission to comply with such rules pursuant to section 6(f) of 

this title. 

(B) The term ‘‘member’’ when used with respect to a registered securities association means any broker or dealer who 

agrees to be regulated by such association and with respect to 

whom the association undertakes to enforce compliance with 

the provisions of this title, the rules and regulations thereunder, and its own rules. 

(4) BROKER.— (A) IN GENERAL.— The term ‘‘broker’’ means any person 

engaged in the business of effecting transactions in securities for the account of others. 

(B) EXCEPTION FOR CERTAIN BANK ACTIVITIES.— A bank 

shall not be considered to be a broker because the bank engages in any one or more of the following activities under 

the conditions described: 

(i) THIRD PARTY BROKERAGE ARRANGEMENTS.— The 

bank enters into a contractual or other written arrangement with a broker or dealer registered under 

this title under which the broker or dealer offers brokerage services on or off the premises of the bank if— 

(I) such broker or dealer is clearly identified as 

the person performing the brokerage services; 

(II) the broker or dealer performs brokerage 

services in an area that is clearly marked and, to 

the extent practicable, physically separate from 

the routine deposit-taking activities of the bank; 

(III) any materials used by the bank to advertise or promote generally the availability of brokerage services under the arrangement clearly indicate that the brokerage services are being provided by the broker or dealer and not by the bank; 

(IV) any materials used by the bank to advertise 

or promote generally the availability of brokerage 

services under the arrangement are in compliance 

with the Federal securities laws before distribution; 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
17 

(V) bank employees (other than associated persons of a broker or dealer who are qualified pursuant to the rules of a self-regulatory organization) 

perform only clerical or ministerial functions in 

connection with brokerage transactions including 

scheduling appointments with the associated persons of a broker or dealer, except that bank employees may forward customer funds or securities 

and may describe in general terms the types of investment vehicles available from the bank and the 

broker or dealer under the arrangement; 

(VI) bank employees do not receive incentive 

compensation for any brokerage transaction unless such employees are associated persons of a 

broker or dealer and are qualified pursuant to the 

rules of a self-regulatory organization, except that 

the bank employees may receive compensation for 

the referral of any customer if the compensation is 

a nominal one-time cash fee of a fixed dollar 

amount and the payment of the fee is not contingent on whether the referral results in a transaction; 

(VII) such services are provided by the broker or 

dealer on a basis in which all customers that receive any services are fully disclosed to the broker 

or dealer; 

(VIII) the bank does not carry a securities account of the customer except as permitted under 

clause (ii) or (viii) of this subparagraph; and 

(IX) the bank, broker, or dealer informs each 

customer that the brokerage services are provided 

by the broker or dealer and not by the bank and 

that the securities are not deposits or other obligations of the bank, are not guaranteed by the 

bank, and are not insured by the Federal Deposit 

Insurance Corporation. 

(ii) TRUST ACTIVITIES.— The bank effects transactions in a trustee capacity, or effects transactions in 

a fiduciary capacity in its trust department or other 

department that is regularly examined by bank examiners for compliance with fiduciary principles and 

standards, and— 

(I) is chiefly compensated for such transactions, 

consistent with fiduciary principles and standards, 

on the basis of an administration or annual fee 

(payable on a monthly, quarterly, or other basis), 

a percentage of assets under management, or a 

flat or capped per order processing fee equal to 

not more than the cost incurred by the bank in 

connection with executing securities transactions 

for trustee and fiduciary customers, or any combination of such fees; and 

(II) does not publicly solicit brokerage business, 

other than by advertising that it effects transVerDate Sep 11 2014 04:36 Oct 04, 2016 Jkt 059006 PO 00000 Frm 00017 Fmt 6659 Sfmt 6602 E:\HR\OC\HR798.XXX HR798

smartinez on DSK3GLQ082PROD with REPORTS-HSE
18 

actions in securities in conjunction with advertising its other trust activities. 

(iii) PERMISSIBLE SECURITIES TRANSACTIONS.— The 

bank effects transactions in— 

(I) commercial paper, bankers acceptances, or 

commercial bills; 

(II) exempted securities; 

(III) qualified Canadian government obligations 

as defined in section 5136 of the Revised Statutes, 

in conformity with section 15C of this title and the 

rules and regulations thereunder, or obligations of 

the North American Development Bank; or 

(IV) any standardized, credit enhanced debt security issued by a foreign government pursuant to 

the March 1989 plan of then Secretary of the 

Treasury Brady, used by such foreign government 

to retire outstanding commercial bank loans. 

(iv) CERTAIN STOCK PURCHASE PLANS.— 

(I) EMPLOYEE BENEFIT PLANS.— The bank effects transactions, as part of its transfer agency 

activities, in the securities of an issuer as part of 

any pension, retirement, profit-sharing, bonus, 

thrift, savings, incentive, or other similar benefit 

plan for the employees of that issuer or its affiliates (as defined in section 2 of the Bank Holding 

Company Act of 1956), if the bank does not solicit 

transactions or provide investment advice with respect to the purchase or sale of securities in connection with the plan. 

(II) DIVIDEND REINVESTMENT PLANS.— The bank 

effects transactions, as part of its transfer agency 

activities, in the securities of an issuer as part of 

that issuer’s dividend reinvestment plan, if— 

(aa) the bank does not solicit transactions 

or provide investment advice with respect to 

the purchase or sale of securities in connection with the plan; and 

(bb) the bank does not net shareholders’ 

buy and sell orders, other than for programs 

for odd-lot holders or plans registered with 

the Commission. 

(III) ISSUER PLANS.— The bank effects transactions, as part of its transfer agency activities, in 

the securities of an issuer as part of a plan or program for the purchase or sale of that issuer’s 

shares, if— 

(aa) the bank does not solicit transactions 

or provide investment advice with respect to 

the purchase or sale of securities in connection with the plan or program; and 

(bb) the bank does not net shareholders’ 

buy and sell orders, other than for programs 

for odd-lot holders or plans registered with 

the Commission. 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
19 

(IV) PERMISSIBLE DELIVERY OF MATERIALS.— 

The exception to being considered a broker for a 

bank engaged in activities described in subclauses 

(I), (II), and (III) will not be affected by delivery 

of written or electronic plan materials by a bank 

to employees of the issuer, shareholders of the 

issuer, or members of affinity groups of the issuer, 

so long as such materials are— 

(aa) comparable in scope or nature to that 

permitted by the Commission as of the date of 

the enactment of the Gramm-Leach-Bliley 

Act; or 

(bb) otherwise permitted by the Commission. 

(v) SWEEP ACCOUNTS.— The bank effects transactions as part of a program for the investment or reinvestment of deposit funds into any no-load, open-end 

management investment company registered under 

the Investment Company Act of 1940 that holds itself 

out as a money market fund. 

(vi) AFFILIATE TRANSACTIONS.— The bank effects 

transactions for the account of any affiliate of the 

bank (as defined in section 2 of the Bank Holding 

Company Act of 1956) other than— 

(I) a registered broker or dealer; or 

(II) an affiliate that is engaged in merchant 

banking, as described in section 4(k)(4)(H) of the 

Bank Holding Company Act of 1956. 

(vii) PRIVATE SECURITIES OFFERINGS.— The bank— 

(I) effects sales as part of a primary offering of 

securities not involving a public offering, pursuant 

to section 3(b), 4(2), or 4(5) of the Securities Act 

of 1933 or the rules and regulations issued thereunder; 

(II) at any time after the date that is 1 year 

after the date of the enactment of the GrammLeach-Bliley Act, is not affiliated with a broker or 

dealer that has been registered for more than 1 

year in accordance with this Act, and engages in 

dealing, market making, or underwriting activities, other than with respect to exempted securities; and 

(III) if the bank is not affiliated with a broker 

or dealer, does not effect any primary offering described in subclause (I) the aggregate amount of 

which exceeds 25 percent of the capital of the 

bank, except that the limitation of this subclause 

shall not apply with respect to any sale of government securities or municipal securities. 

(viii) SAFEKEEPING AND CUSTODY ACTIVITIES.— 

(I) IN GENERAL.— The bank, as part of customary banking activities— 

(aa) provides safekeeping or custody services with respect to securities, including the 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
20 

exercise of warrants and other rights on behalf of customers; 

(bb) facilitates the transfer of funds or securities, as a custodian or a clearing agency, in 

connection with the clearance and settlement 

of its customers’ transactions in securities; 

(cc) effects securities lending or borrowing 

transactions with or on behalf of customers as 

part of services provided to customers pursuant to division (aa) or (bb) or invests cash collateral pledged in connection with such transactions; 

(dd) holds securities pledged by a customer 

to another person or securities subject to purchase or resale agreements involving a customer, or facilitates the pledging or transfer 

of such securities by book entry or as otherwise provided under applicable law, if the 

bank maintains records separately identifying 

the securities and the customer; or 

(ee) serves as a custodian or provider of 

other related administrative services to any 

individual retirement account, pension, retirement, profit sharing, bonus, thrift savings, incentive, or other similar benefit plan. 

(II) EXCEPTION FOR CARRYING BROKER ACTIVI- TIES.— The exception to being considered a broker 

for a bank engaged in activities described in subclause (I) shall not apply if the bank, in connection with such activities, acts in the United States 

as a carrying broker (as such term, and different 

formulations thereof, are used in section 15(c)(3) 

of this title and the rules and regulations thereunder) for any broker or dealer, unless such carrying broker activities are engaged in with respect 

to government securities (as defined in paragraph 

(42) of this subsection). 

(ix) IDENTIFIED BANKING PRODUCTS.— The bank effects transactions in identified banking products as defined in section 206 of the Gramm-Leach-Bliley Act. 

(x) MUNICIPAL SECURITIES.— The bank effects transactions in municipal securities. 

(xi) DE MINIMIS EXCEPTION.— The bank effects, 

other than in transactions referred to in clauses (i) 

through (x), not more than 500 transactions in securities in any calendar year, and such transactions are 

not effected by an employee of the bank who is also an 

employee of a broker or dealer. 

(C) EXECUTION BY BROKER OR DEALER.— The exception 

to being considered a broker for a bank engaged in activities described in clauses (ii), (iv), and (viii) of subparagraph (B) shall not apply if the activities described in such 

provisions result in the trade in the United States of any 

security that is a publicly traded security in the United 

States, unless— 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
21 

(i) the bank directs such trade to a registered broker 

or dealer for execution; 

(ii) the trade is a cross trade or other substantially 

similar trade of a security that— 

(I) is made by the bank or between the bank 

and an affiliated fiduciary; and 

(II) is not in contravention of fiduciary principles established under applicable Federal or 

State law; or 

(iii) the trade is conducted in some other manner 

permitted under rules, regulations, or orders as the 

Commission may prescribe or issue. 

(D) FIDUCIARY CAPACITY.— For purposes of subparagraph (B)(ii), the term ‘‘fiduciary capacity’’ means— 

(i) in the capacity as trustee, executor, administrator, registrar of stocks and bonds, transfer agent, 

guardian, assignee, receiver, or custodian under a uniform gift to minor act, or as an investment adviser if 

the bank receives a fee for its investment advice; 

(ii) in any capacity in which the bank possesses investment discretion on behalf of another; or 

(iii) in any other similar capacity. 

(E) EXCEPTION FOR ENTITIES SUBJECT TO SECTION 15(e).— 

The term ‘‘broker’’ does not include a bank that— 

(i) was, on the day before the date of enactment of 

the Gramm-Leach-Bliley Act, subject to section 15(e); 

and 

(ii) is subject to such restrictions and requirements 

as the Commission considers appropriate. 

(F) JOINT RULEMAKING REQUIRED.— The Commission 

and the Board of Governors of the Federal Reserve System 

shall jointly adopt a single set of rules or regulations to 

implement the exceptions in subparagraph (B). 

(5) DEALER.— 

(A) IN GENERAL.— The term ‘‘dealer’’ means any person 

engaged in the business of buying and selling securities 

(not including security-based swaps, other than securitybased swaps with or for persons that are not eligible contract participants) for such person’s own account through 

a broker or otherwise. 

(B) EXCEPTION FOR PERSON NOT ENGAGED IN THE BUSINESS OF DEALING.— The term ‘‘dealer’’ does not include a 

person that buys or sells securities (not including securitybased swaps, other than security-based swaps with or for 

persons that are not eligible contract participants) for such 

person’s own account, either individually or in a fiduciary 

capacity, but not as a part of a regular business. 

(C) EXCEPTION FOR CERTAIN BANK ACTIVITIES.— A bank 

shall not be considered to be a dealer because the bank engages in any of the following activities under the conditions described: 

(i) PERMISSIBLE SECURITIES TRANSACTIONS.— The 

bank buys or sells— 

(I) commercial paper, bankers acceptances, or 

commercial bills; 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
22 

(II) exempted securities; 

(III) qualified Canadian government obligations 

as defined in section 5136 of the Revised Statutes 

of the United States, in conformity with section 

15C of this title and the rules and regulations 

thereunder, or obligations of the North American 

Development Bank; or 

(IV) any standardized, credit enhanced debt security issued by a foreign government pursuant to 

the March 1989 plan of then Secretary of the 

Treasury Brady, used by such foreign government 

to retire outstanding commercial bank loans. 

(ii) INVESTMENT, TRUSTEE, AND FIDUCIARY TRANSACTIONS.— The bank buys or sells securities for investment purposes— 

(I) for the bank; or 

(II) for accounts for which the bank acts as a 

trustee or fiduciary. 

(iii) ASSET-BACKED TRANSACTIONS.— The bank engages in the issuance or sale to qualified investors, 

through a grantor trust or other separate entity, of securities backed by or representing an interest in notes, 

drafts, acceptances, loans, leases, receivables, other 

obligations (other than securities of which the bank is 

not the issuer), or pools of any such obligations predominantly originated by— 

(I) the bank; 

(II) an affiliate of any such bank other than a 

broker or dealer; or 

(III) a syndicate of banks of which the bank is 

a member, if the obligations or pool of obligations 

consists of mortgage obligations or consumer-related receivables. 

(iv) IDENTIFIED BANKING PRODUCTS.— The bank 

buys or sells identified banking products, as defined in 

section 206 of the Gramm-Leach-Bliley Act. 

(6) The term ‘‘bank’’ means (A) a banking institution organized under the laws of the United States or a Federal savings 

association, as defined in section 2(5) of the Home Owners’ 

Loan Act, (B) a member bank of the Federal Reserve System, 

(C) any other banking institution or savings association, as defined in section 2(4) of the Home Owners’ Loan Act, whether 

incorporated or not, doing business under the laws of any State 

or of the United States, a substantial portion of the business 

of which consists of receiving deposits or exercising fiduciary 

powers similar to those permitted to national banks under the 

authority of the Comptroller of the Currency pursuant to the 

first section of Public Law 87–722 (12 U.S.C. 92a), and which 

is supervised and examined by State or Federal authority having supervision over banks or savings associations, and which 

is not operated for the purpose of evading the provisions of this 

title, and (D) a receiver, conservator, or other liquidating agent 

of any institution or firm included in clauses (A), (B), or (C) of 

this paragraph. 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
23 

(7) The term ‘‘director’’ means any director of a corporation 

or any person performing similar functions with respect to any 

organization, whether incorporated or unincorporated. 

(8) The term ‘‘issuer’’ means any person who issues or proposes to issue any security; except that with respect to certificates of deposit for securities, voting-trust certificates, or collateral-trust certificates, or with respect to certificates of interest or shares in an unincorporated investment trust not having 

a board of directors or of the fixed, restricted management, or 

unit type, the term ‘‘issuer’’ means the person or persons performing the acts and assuming the duties of depositor or manager pursuant to the provisions of the trust or other agreement 

or instrument under which such securities are issued; and except that with respect to equipment-trust certificates or like securities, the term ‘‘issuer’’ means the person by whom the 

equipment or property is, or is to be, used. 

(9) The term ‘‘person’’ means a natural person, company, 

government, or political subdivision, agency, or instrumentality 

of a government. 

(10) The term ‘‘security’’ means any note, stock, treasury 

stock, security future, security-based swap,bond, debenture, 

certificate of interest or participation in any profit-sharing 

agreement or in any oil, gas, or other mineral royalty or lease, 

any collateral-trust certificate, preorganization certificate or 

subscription, transferable share, investment contract, votingtrust certificate, certificate of deposit for a security, any put, 

call, straddle, option, or privilege on any security, certificate of 

deposit, or group or index of securities (including any interest 

therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a ‘‘security’’; or any certificate of interest or participation in, temporary or interim certificate for, 

receipt for, or warrant or right to subscribe to or purchase, any 

of the foregoing; but shall not include currency or any note, 

draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity 

of which is likewise limited. 

(11) The term ‘‘equity security’’ means any stock or similar 

security; or any security future on any such security; or any security convertible, with or without consideration, into such a 

security, or carrying any warrant or right to subscribe to or 

purchase such a security; or any such warrant or right; or any 

other security which the Commission shall deem to be of similar nature and consider necessary or appropriate, by such rules 

and regulations as it may prescribe in the public interest or for 

the protection of investors, to treat as an equity security. 

(12)(A) The term ‘‘exempted security’’ or ‘‘exempted securities’’ includes— 

(i) government securities, as defined in paragraph (42) of 

this subsection; 

(ii) municipal securities, as defined in paragraph (29) of 

this subsection; 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
24 

(iii) any interest or participation in any common trust 

fund or similar fund that is excluded from the definition 

of the term ‘‘investment company’’ under section 3(c)(3) of 

the Investment Company Act of 1940; 

(iv) any interest or participation in a single trust fund, 

or a collective trust fund maintained by a bank, or any security arising out of a contract issued by an insurance 

company, which interest, participation, or security is 

issued in connection with a qualified plan as defined in 

subparagraph (C) of this paragraph; 

(v) any security issued by or any interest or participation 

in any pooled income fund, collective trust fund, collective 

investment fund, or similar fund that is excluded from the 

definition of an investment company under section 

3(c)(10)(B) of the Investment Company Act of 1940; 

(vi) solely for purposes of sections 12, 13, 14, and 16 of 

this title, any security issued by or any interest or participation in any church plan, company, or account that is excluded from the definition of an investment company 

under section 3(c)(14) of the Investment Company Act of 

1940; and 

(vii) such other securities (which may include, among 

others, unregistered securities, the market in which is predominantly intrastate) as the Commission may, by such 

rules and regulations as it deems consistent with the public interest and the protection of investors, either unconditionally or upon specified terms and conditions or for stated periods, exempt from the operation of any one or more 

provisions of this title which by their terms do not apply 

to an ‘‘exempted security’’ or to ‘‘exempted securities’’. 

(B)(i) Notwithstanding subparagraph (A)(i) of this paragraph, 

government securities shall not be deemed to be ‘‘exempted securities’’ for the purposes of section 17A of this title. 

(ii) Notwithstanding subparagraph (A)(ii) of this paragraph, 

municipal securities shall not be deemed to be ‘‘exempted securities’’ for the purposes of sections 15 and 17A of this title. 

(C) For purposes of subparagraph (A)(iv) of this paragraph, 

the term ‘‘qualified plan’’ means (i) a stock bonus, pension, or 

profit-sharing plan which meets the requirements for qualification under section 401 of the Internal Revenue Code of 1954, 

(ii) an annuity plan which meets the requirements for the deduction of the employer’s contribution under section 404(a)(2) 

of such Code, (iii) a governmental plan as defined in section 

414(d) of such Code which has been established by an employer 

for the exclusive benefit of its employees or their beneficiaries 

for the purpose of distributing to such employees or their beneficiaries the corpus and income of the funds accumulated under 

such plan, if under such plan it is impossible, prior to the satisfaction of all liabilities with respect to such employees and 

their beneficiaries, for any part of the corpus or income to be 

used for, or diverted to, purposes other than the exclusive benefit of such employees or their beneficiaries, or (iv) a church 

plan, company, or account that is excluded from the definition 

of an investment company under section 3(c)(14) of the Investment Company Act of 1940, other than any plan described in 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
25 

clause (i), (ii), or (iii) of this subparagraph which (I) covers employees some or all of whom are employees within the meaning 

of section 401(c) of such Code, or (II) is a plan funded by an 

annuity contract described in section 403(b) of such Code. 

(13) The terms ‘‘buy’’ and ‘‘purchase’’ each include any contract to buy, purchase, or otherwise acquire. For security futures products, such term includes any contract, agreement, or 

transaction for future delivery. For security-based swaps, such 

terms include the execution, termination (prior to its scheduled 

maturity date), assignment, exchange, or similar transfer or 

conveyance of, or extinguishing of rights or obligations under, 

a security-based swap, as the context may require. 

(14) The terms ‘‘sale’’ and ‘‘sell’’ each include any contract to 

sell or otherwise dispose of. For security futures products, such 

term includes any contract, agreement, or transaction for future delivery. For security-based swaps, such terms include the 

execution, termination (prior to its scheduled maturity date), 

assignment, exchange, or similar transfer or conveyance of, or 

extinguishing of rights or obligations under, a security-based 

swap, as the context may require. 

(15) The term ‘‘Commission’’ means the Securities and Exchange Commission established by section 4 of this title. 

(16) The term ‘‘State’’ means any State of the United States, 

the District of Columbia, Puerto Rico, the Virgin Islands, or 

any other possession of the United States. 

(17) The term ‘‘interstate commerce’’ means trade, commerce, 

transportation, or communication among the several States, or 

between any foreign country and any State, or between any 

State and any place or ship outside thereof. The term also includes intrastate use of (A) any facility of a national securities 

exchange or of a telephone or other interstate means of communication, or (B) any other interstate instrumentality. 

(18) The term ‘‘person associated with a broker or dealer’’ or 

‘‘associated person of a broker or dealer’’ means any partner, 

officer, director, or branch manager of such broker or dealer (or 

any person occupying a similar status or performing similar 

functions), any person directly or indirectly controlling, controlled by, or under common control with such broker or dealer, 

or any employee of such broker or dealer, except that any person associated with a broker or dealer whose functions are 

solely clerical or ministerial shall not be included in the meaning of such term for purposes of section 15(b) of this title (other 

than paragraph (6) thereof). 

(19) The terms ‘‘investment company,’’ ‘‘affiliated person,’’ 

‘‘insurance company,’’ ‘‘separate account,’’ and ‘‘company’’ have 

the same meanings as in the Investment Company Act of 1940. 

(20) The terms ‘‘investment adviser’’ and ‘‘underwriter’’ have 

the same meanings as in the Investment Advisers Act of 1940. 

(21) The term ‘‘persons associated with a member’’ or ‘‘associated person of a member’’ when used with respect to a member 

of a national securities exchange or registered securities association means any partner, officer, director, or branch manager 

of such member (or any person occupying a similar status or 

performing similar functions), any person directly or indirectly 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
26 

controlling, controlled by, or under common control with such 

member, or any employee of such member. 

(22)(A) The term ‘‘securities information processor’’ means 

any person engaged in the business of (i) collecting, processing, 

or preparing for distribution or publication, or assisting, participating in, or coordinating the distribution or publication of, 

information with respect to transactions in or quotations for 

any security (other than an exempted security) or (ii) distributing or publishing (whether by means of a ticker tape, a communications network, a terminal display device, or otherwise) 

on a current and continuing basis, information with respect to 

such transactions or quotations. The term ‘‘securities information processor’’ does not include any bona fide newspaper, news 

magazine, or business or financial publication of general and 

regular circulation, any self-regulatory organization, any bank, 

broker, dealer, building and loan, savings and loan, or homestead association, or cooperative bank, if such bank, broker, 

dealer, association, or cooperative bank would be deemed to be 

a securities information processor solely by reason of functions 

performed by such institutions as part of customary banking, 

brokerage, dealing, association, or cooperative bank activities, 

or any common carrier, as defined in section 3 of the Communications Act of 1934, subject to the jurisdiction of the Federal 

Communications Commission or a State commission, as defined in section 3 of that Act, unless the Commission determines that such carrier is engaged in the business of collecting, 

processing, or preparing for distribution or publication, information with respect to transactions in or quotations for any security. 

(B) The term ‘‘exclusive processor’’ means any securities information processor or self-regulatory organization which, directly or indirectly, engages on an exclusive basis on behalf of 

any national securities exchange or registered securities association, or any national securities exchange or registered securities association which engages on an exclusive basis on its 

own behalf, in collecting, processing, or preparing for distribution or publication any information with respect to (i) transactions or quotations on or effected or made by means of any 

facility of such exchange or (ii) quotations distributed or published by means of any electronic system operated or controlled 

by such association. 

(23)(A) The term ‘‘clearing agency’’ means any person who 

acts as an intermediary in making payments or deliveries or 

both in connection with transactions in securities or who provides facilities for comparison of data respecting the terms of 

settlement of securities transactions, to reduce the number of 

settlements of securities transactions, or for the allocation of 

securities settlement responsibilities. Such term also means 

any person, such as a securities depository, who (i) acts as a 

custodian of securities in connection with a system for the central handling of securities whereby all securities of a particular 

class or series of any issuer deposited within the system are 

treated as fungible and may be transferred, loaned, or pledged 

by bookkeeping entry without physical delivery of securities 

certificates, or (ii) otherwise permits or facilitates the settleVerDate Sep 11 2014 04:36 Oct 04, 2016 Jkt 059006 PO 00000 Frm 00026 Fmt 6659 Sfmt 6602 E:\HR\OC\HR798.XXX HR798

smartinez on DSK3GLQ082PROD with REPORTS-HSE
27 

ment of securities transactions or the hypothecation or lending 

of securities without physical delivery of securities certificates. 

(B) The term ‘‘clearing agency’’ does not include (i) any Federal Reserve bank, Federal home loan bank, or Federal land 

bank; (ii) any national securities exchange or registered securities association solely by reason of its providing facilities for 

comparison of data respecting the terms of settlement of securities transactions effected on such exchange or by means of 

any electronic system operated or controlled by such association; (iii) any bank, broker, dealer, building and loan, savings 

and loan, or homestead association, or cooperative bank if such 

bank, broker, dealer, association, or cooperative bank would be 

deemed to be a clearing agency solely by reason of functions 

performed by such institution as part of customary banking, 

brokerage, dealing, association, or cooperative banking activities, or solely by reason of acting on behalf of a clearing agency 

or a participant therein in connection with the furnishing by 

the clearing agency of services to its participants or the use of 

services of the clearing agency by its participants, unless the 

Commission, by rule, otherwise provides as necessary or appropriate to assure the prompt and accurate clearance and settlement of securities transactions or to prevent evasion of this 

title; (iv) any life insurance company, its registered separate 

accounts, or a subsidiary of such insurance company solely by 

reason of functions commonly performed by such entities in 

connection with variable annuity contracts or variable life policies issued by such insurance company or its separate accounts; (v) any registered open-end investment company or 

unit investment trust solely by reason of functions commonly 

performed by it in connection with shares in such registered 

open-end investment company or unit investment trust, or (vi) 

any person solely by reason of its performing functions described in paragraph 25(E) of this subsection. 

(24) The term ‘‘participant’’ when used with respect to a 

clearing agency means any person who uses a clearing agency 

to clear or settle securities transactions or to transfer, pledge, 

lend, or hypothecate securities. Such term does not include a 

person whose only use of a clearing agency is (A) through another person who is a participant or (B) as a pledgee of securities. 

(25) The term ‘‘transfer agent’’ means any person who engages on behalf of an issuer of securities or on behalf of itself 

as an issuer of securities in (A) countersigning such securities 

upon issuance; (B) monitoring the issuance of such securities 

with a view to preventing unauthorized issuance, a function 

commonly performed by a person called a registrar; (C) registering the transfer of such securities; (D) exchanging or converting such securities; or (E) transferring record ownership of 

securities by bookkeeping entry without physical issuance of 

securities certificates. The term ‘‘transfer agent’’ does not include any insurance company or separate account which performs such functions solely with respect to variable annuity 

contracts or variable life policies which it issues or any registered clearing agency which performs such functions solely 

with respect to options contracts which it issues. 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
28 

(26) The term ‘‘self-regulatory organization’’ means any national securities exchange, registered securities association, or 

registered clearing agency, or (solely for purposes of sections 

19(b), 19(c), and 23(b) of this title) the Municipal Securities 

Rulemaking Board established by section 15B of this title. 

(27) The term ‘‘rules of an exchange’’, ‘‘rules of an association’’, or ‘‘rules of a clearing agency’’ means the constitution, 

articles of incorporation, bylaws, and rules, or instruments corresponding to the foregoing, of an exchange, association of brokers and dealers, or clearing agency, respectively, and such of 

the stated policies, practices, and interpretations of such exchange, association, or clearing agency as the Commission, by 

rule, may determine to be necessary or appropriate in the public interest or for the protection of investors to be deemed to 

be rules of such exchange, association, or clearing agency. 

(28) The term ‘‘rules of a self-regulatory organization’’ means 

the rules of an exchange which is a national securities exchange, the rules of an association of brokers and dealers 

which is a registered securities association, the rules of a clearing agency which is a registered clearing agency, or the rules 

of the Municipal Securities Rulemaking Board. 

(29) The term ‘‘municipal securities’’ means securities which 

are direct obligations of, or obligations guaranteed as to principal or interest by, a State or any political subdivision thereof, 

or any agency or instrumentality of a State or any political 

subdivision thereof, or any municipal corporate instrumentality 

of one or more States, or any security which is an industrial 

development bond (as defined in section 103(c)(2) of the Internal Revenue Code of 1954) the interest on which is excludable 

from gross income under section 103(a)(1) of such Code if, by 

reason of the application of paragraph (4) or (6) of section 

103(c) of such Code (determined as if paragraphs (4)(A), (5), 

and (7) were not included in such section 103(c)), paragraph (1) 

of such section 103(c) does not apply to such security. 

(30) The term ‘‘municipal securities dealer’’ means any person (including a separately identifiable department or division 

of a bank) engaged in the business of buying and selling municipal securities for his own account, through a broker or otherwise, but does not include— 

(A) any person insofar as he buys or sells such securities 

for his own account, either individually or in some fiduciary capacity, but not as a part of a regular business; or 

(B) a bank, unless the bank is engaged in the business 

of buying and selling municipal securities for its own account other than in a fiduciary capacity, through a broker 

or otherwise; Provided, however, That if the bank is engaged in such business through a separately identifiable 

department or division (as defined by the Municipal Securities Rulemaking Board in accordance with section 

15B(b)(2)(H) of this title), the department or division and 

not the bank itself shall be deemed to be the municipal securities dealer. 

(31) The term ‘‘municipal securities broker’’ means a broker 

engaged in the business of effecting transactions in municipal 

securities for the account of others. 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
29 

(32) The term ‘‘person associated with a municipal securities 

dealer’’ when used with respect to a municipal securities dealer 

which is a bank or a division or department of a bank means 

any person directly engaged in the management, direction, supervision, or performance of any of the municipal securities 

dealer’s activities with respect to municipal securities, and any 

person directly or indirectly controlling such activities or controlled by the municipal securities dealer in connection with 

such activities. 

(33) The term ‘‘municipal securities investment portfolio’’ 

means all municipal securities held for investment and not for 

sale as part of a regular business by a municipal securities 

dealer or by a person, directly or indirectly, controlling, controlled by, or under common control with a municipal securities dealer. 

(34) The term ‘‘appropriate regulatory agency’’ means— 

(A) When used with respect to a municipal securities 

dealer: 

(i) the Comptroller of the Currency, in the case of a 

national bank, a subsidiary or a department or division of any such bank, a Federal savings association 

(as defined in section 3(b)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(2))), the deposits of 

which are insured by the Federal Deposit Insurance 

Corporation, or a subsidiary or department or division 

of any such Federal savings association; 

(ii) the Board of Governors of the Federal Reserve 

System, in the case of a State member bank of the 

Federal Reserve System, a subsidiary or a department 

or division thereof, a bank holding company, a subsidiary of a bank holding company which is a bank 

other than a bank specified in clause (i), (iii), or (iv) 

of this subparagraph, a subsidiary or a department or 

division of such subsidiary, or a savings and loan holding company; 

(iii) the Federal Deposit Insurance Corporation, in 

the case of a bank insured by the Federal Deposit Insurance Corporation (other than a member of the Federal Reserve System), a subsidiary or department or 

division of any such bank, a State savings association 

(as defined in section 3(b)(3) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(3))), the deposits of 

which are insured by the Federal Deposit Insurance 

Corporation, or a subsidiary or a department or division of any such State savings association; and 

(iv) the Commission in the case of all other municipal securities dealers. 

(B) When used with respect to a clearing agency or 

transfer agent: 

(i) the Comptroller of the Currency, in the case of a 

national bank, a subsidiary of any such bank, a Federal savings association (as defined in section 3(b)(2) of 

the Federal Deposit Insurance Act (12 U.S.C. 

1813(b)(2))), the deposits of which are insured by the 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
30 

Federal Deposit Insurance Corporation, or a subsidiary of any such Federal savings association; 

(ii) the Board of Governors of the Federal Reserve 

System, in the case of a State member bank of the 

Federal Reserve System, a subsidiary thereof, a bank 

holding company, a subsidiary of a bank holding company that is a bank other than a bank specified in 

clause (i) or (iii) of this subparagraph, or a savings 

and loan holding company; 

(iii) the Federal Deposit Insurance Corporation, in 

the case of a bank insured by the Federal Deposit Insurance Corporation (other than a member of the Federal Reserve System), a subsidiary of any such bank, 

a State savings association (as defined in section 

3(b)(3) of the Federal Deposit Insurance Act (12 U.S.C. 

1813(b)(3))), the deposits of which are insured by the 

Federal Deposit Insurance Corporation, or a subsidiary of any such State savings association; and 

(iv) the Commission in the case of all other clearing 

agencies and transfer agents. 

(C) When used with respect to a participant or applicant 

to become a participant in a clearing agency or a person 

requesting or having access to services offered by a clearing agency: 

(i) the Comptroller of the Currency, in the case of a 

national bank or a Federal savings association (as defined in section 3(b)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(2))), the deposits of which 

are insured by the Federal Deposit Insurance Corporation when the appropriate regulatory agency for such 

clearing agency is not the Commission; 

(ii) the Board of Governors of the Federal Reserve 

System in the case of a State member bank of the Federal Reserve System, a bank holding company, or a 

subsidiary of a bank holding company, a subsidiary of 

a bank holding company that is a bank other than a 

bank specified in clause (i) or (iii) of this subparagraph, or a savings and loan holding company when 

the appropriate regulatory agency for such clearing 

agency is not the Commission; 

(iii) the Federal Deposit Insurance Corporation, in 

the case of a bank insured by the Federal Deposit Insurance Corporation (other than a member of the Federal Reserve System) or a State savings association (as 

defined in section 3(b)(3) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(3))), the deposits of which 

are insured by the Federal Deposit Insurance Corporation; and when the appropriate regulatory agency for 

such clearing agency is not the Commission; 

(iv) the Commission in all other cases. 

(D) When used with respect to an institutional investment manager which is a bank the deposits of which are 

insured in accordance with the Federal Deposit Insurance 

Act: 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
31 

(i) the Comptroller of the Currency, in the case of a 

national bank or a Federal savings association (as defined in section 3(b)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(2))), the deposits of which 

are insured by the Federal Deposit Insurance Corporation; 

(ii) the Board of Governors of the Federal Reserve 

System, in the case of any other member bank of the 

Federal Reserve System; and 

(iii) the Federal Deposit Insurance Corporation, in 

the case of any other insured bank or a State savings 

association (as defined in section 3(b)(3) of the Federal 

Deposit Insurance Act (12 U.S.C. 1813(b)(3))), the deposits of which are insured by the Federal Deposit Insurance Corporation. 

(E) When used with respect to a national securities exchange or registered securities association, member thereof, person associated with a member thereof, applicant to 

become a member thereof or to become associated with a 

member thereof, or person requesting or having access to 

services offered by such exchange or association or member 

thereof, or the Municipal Securities Rulemaking Board, 

the Commission. 

(F) When used with respect to a person exercising investment discretion with respect to an account: 

(i) the Comptroller of the Currency, in the case of a 

national bank or a Federal savings association (as defined in section 3(b)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(2))), the deposits of which 

are insured by the Federal Deposit Insurance Corporation; 

(ii) the Board of Governors of the Federal Reserve 

System in the case of any other member bank of the 

Federal Reserve System; 

(iii) the Federal Deposit Insurance Corporation, in 

the case of any other bank the deposits of which are 

insured in accordance with the Federal Deposit Insurance Act or a State savings association (as defined in 

section 3(b)(3) of the Federal Deposit Insurance Act 

(12 U.S.C. 1813(b)(3))), the deposits of which are insured by the Federal Deposit Insurance Corporation; 

and 

(iv) the Commission in the case of all other such 

persons. 

(G) When used with respect to a government securities 

broker or government securities dealer, or person associated with a government securities broker or government 

securities dealer: 

(i) the Comptroller of the Currency, in the case of a 

national bank, a Federal savings association (as defined in section 3(b)(2) of the Federal Deposit Insurance Act), the deposits of which are insured by the 

Federal Deposit Insurance Corporation, or a Federal 

branch or Federal agency of a foreign bank (as such 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
32 

terms are used in the International Banking Act of 

1978); 

(ii) the Board of Governors of the Federal Reserve 

System, in the case of a State member bank of the 

Federal Reserve System, a foreign bank, an uninsured 

State branch or State agency of a foreign bank, a commercial lending company owned or controlled by a foreign bank (as such terms are used in the International 

Banking Act of 1978), or a corporation organized or 

having an agreement with the Board of Governors of 

the Federal Reserve System pursuant to section 25 or 

section 25A of the Federal Reserve Act; 

(iii) the Federal Deposit Insurance Corporation, in 

the case of a bank insured by the Federal Deposit Insurance Corporation (other than a member of the Federal Reserve System or a Federal savings bank), a 

State savings association (as defined in section 3(b)(3) 

of the Federal Deposit Insurance Act), the deposits of 

which are insured by the Federal Deposit Insurance 

Corporation, or an insured State branch of a foreign 

bank (as such terms are used in the International 

Banking Act of 1978); and 

(iv) the Commission, in the case of all other government securities brokers and government securities 

dealers. 

(H) When used with respect to an institution described 

in subparagraph (D), (F), or (G) of section 2(c)(2), or held 

under section 4(f), of the Bank Holding Company Act of 

1956— 

(i) the Comptroller of the Currency, in the case of a 

national bank; 

(ii) the Board of Governors of the Federal Reserve 

System, in the case of a State member bank of the 

Federal Reserve System or any corporation chartered 

under section 25A of the Federal Reserve Act; 

(iii) the Federal Deposit Insurance Corporation, in 

the case of any other bank the deposits of which are 

insured in accordance with the Federal Deposit Insurance Act; or 

(iv) the Commission in the case of all other such institutions. 

As used in this paragraph, the terms ‘‘bank holding company’’ 

and ‘‘subsidiary of a bank holding company’’ have the meanings given them in section 2 of the Bank Holding Company Act 

of 1956. As used in this paragraph, the term ‘‘savings and loan 

holding company’’ has the same meaning as in section 10(a) of 

the Home Owners’ Loan Act (12 U.S.C. 1467a(a)). 

(35) A person exercises ‘‘investment discretion’’ with respect 

to an account if, directly or indirectly, such person (A) is authorized to determine what securities or other property shall 

be purchased or sold by or for the account, (B) makes decisions 

as to what securities or other property shall be purchased or 

sold by or for the account even though some other person may 

have responsibility for such investment decisions, or (C) otherwise exercises such influence with respect to the purchase and 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
33 

sale of securities or other property by or for the account as the 

Commission, by rule, determines, in the public interest or for 

the protection of investors, should be subject to the operation 

of the provisions of this title and rules and regulations thereunder. 

(36) A class of persons or markets is subject to ‘‘equal regulation’’ if no member of the class has a competitive advantage 

over any other member thereof resulting from a disparity in 

their regulation under this title which the Commission determines is unfair and not necessary or appropriate in furtherance of the purposes of this title. 

(37) The term ‘‘records’’ means accounts, correspondence, 

memorandums, tapes, discs, papers, books, and other documents or transcribed information of any type, whether expressed in ordinary or machine language. 

(38) The term ‘‘market maker’’ means any specialist permitted to act as a dealer, any dealer acting in the capacity of 

block positioner, and any dealer who, with respect to a security, holds himself out (by entering quotations in an inter-dealer communications system or otherwise) as being willing to buy 

and sell such security for his own account on a regular or continuous basis. 

(39) A person is subject to a ‘‘statutory disqualification’’ with 

respect to membership or participation in, or association with 

a member of, a self-regulatory organization, if such person— 

(A) has been and is expelled or suspended from membership or participation in, or barred or suspended from being 

associated with a member of, any self-regulatory organization, foreign equivalent of a self-regulatory organization, 

foreign or international securities exchange, contract market designated pursuant to section 5 of the Commodity Exchange Act (7 U.S.C. 7), or any substantially equivalent 

foreign statute or regulation, or futures association registered under section 17 of such Act (7 U.S.C. 21), or any 

substantially equivalent foreign statute or regulation, or 

has been and is denied trading privileges on any such contract market or foreign equivalent; 

(B) is subject to— 

(i) an order of the Commission, other appropriate regulatory agency, or foreign financial regulatory authority— 

(I) denying, suspending for a period not exceeding 12 

months, or revoking his registration as a broker, dealer, municipal securities dealer, government securities 

broker, government securities dealer, security-based 

swap dealer, or major security-based swap participant 

or limiting his activities as a foreign person performing a function substantially equivalent to any of 

the above; or 

(II) barring or suspending for a period not exceeding 

12 months his being associated with a broker, dealer, 

municipal securities dealer, government securities 

broker, government securities dealer, security-based 

swap dealer, major security-based swap participant, or 

foreign person performing a function substantially 

equivalent to any of the above; 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
34 

(ii) an order of the Commodity Futures Trading Commission denying, suspending, or revoking his registration 

under the Commodity Exchange Act (7 U.S.C. 1 et seq.); 

or 

(iii) an order by a foreign financial regulatory authority 

denying, suspending, or revoking the person’s authority to 

engage in transactions in contracts of sale of a commodity 

for future delivery or other instruments traded on or subject to the rules of a contract market, board of trade, or 

foreign equivalent thereof; 

(C) by his conduct while associated with a broker, dealer, municipal securities dealer, government securities 

broker, government securities dealer, security-based swap 

dealer, or major security-based swap participant, or while 

associated with an entity or person required to be registered under the Commodity Exchange Act, has been 

found to be a cause of any effective suspension, expulsion, 

or order of the character described in subparagraph (A) or 

(B) of this paragraph, and in entering such a suspension, 

expulsion, or order, the Commission, an appropriate regulatory agency, or any such self-regulatory organization 

shall have jurisdiction to find whether or not any person 

was a cause thereof; 

(D) by his conduct while associated with any broker, 

dealer, municipal securities dealer, government securities 

broker, government securities dealer, security-based swap 

dealer, major security-based swap participant, or any other 

entity engaged in transactions in securities, or while associated with an entity engaged in transactions in contracts 

of sale of a commodity for future delivery or other instruments traded on or subject to the rules of a contract market, board of trade, or foreign equivalent thereof, has been 

found to be a cause of any effective suspension, expulsion, 

or order by a foreign or international securities exchange 

or foreign financial regulatory authority empowered by a 

foreign government to administer or enforce its laws relating to financial transactions as described in subparagraph 

(A) or (B) of this paragraph; 

(E) has associated with him any person who is known, 

or in the exercise of reasonable care should be known, to 

him to be a person described by subparagraph (A), (B), (C), 

or (D) of this paragraph; or 

(F) has committed or omitted any act, or is subject to an 

order or finding, enumerated in subparagraph (D), (E), (H), 

or (G) of paragraph (4) of section 15(b) of this title, has 

been convicted of any offense specified in subparagraph (B) 

of such paragraph (4) or any other felony within ten years 

of the date of the filing of an application for membership 

or participation in, or to become associated with a member 

of, such self-regulatory organization, is enjoined from any 

action, conduct, or practice specified in subparagraph (C) 

of such paragraph (4), has willfully made or caused to be 

made in any application for membership or participation 

in, or to become associated with a member of, a self-regulatory organization, report required to be filed with a selfVerDate Sep 11 2014 04:36 Oct 04, 2016 Jkt 059006 PO 00000 Frm 00034 Fmt 6659 Sfmt 6602 E:\HR\OC\HR798.XXX HR798

smartinez on DSK3GLQ082PROD with REPORTS-HSE
35 

regulatory organization, or proceeding before a self-regulatory organization, any statement which was at the time, 

and in the light of the circumstances under which it was 

made, false or misleading with respect to any material 

fact, or has omitted to state in any such application, report, or proceeding any material fact which is required to 

be stated therein. 

(40) The term ‘‘financial responsibility rules’’ means the rules 

and regulations of the Commission or the rules and regulations 

prescribed by any self-regulatory organization relating to financial responsibility and related practices which are designated by the Commission, by rule or regulation, to be financial responsibility rules. 

(41) The term ‘‘mortgage related security’’ means a security 

that meets standards of credit-worthiness as established by the 

Commission, and either: 

(A) represents ownership of one or more promissory 

notes or certificates of interest or participation in such 

notes (including any rights designed to assure servicing of, 

or the receipt or timeliness of receipt by the holders of 

such notes, certificates, or participations of amounts payable under, such notes, certificates, or participations), 

which notes: 

(i) are directly secured by a first lien on a single 

parcel of real estate, including stock allocated to a 

dwelling unit in a residential cooperative housing corporation, upon which is located a dwelling or mixed 

residential and commercial structure, on a residential 

manufactured home as defined in section 603(6) of the 

National Manufactured Housing Construction and 

Safety Standards Act of 1974, whether such manufactured home is considered real or personal property 

under the laws of the State in which it is to be located, 

or on one or more parcels of real estate upon which is 

located one or more commercial structures; and 

(ii) were originated by a savings and loan association, savings bank, commercial bank, credit union, insurance company, or similar institution which is supervised and examined by a Federal or State authority, or by a mortgage approved by the Secretary of 

Housing and Urban Development pursuant to sections 

203 and 211 of the National Housing Act, or, where 

such notes involve a lien on the manufactured home, 

by any such institution or by any financial institution 

approved for insurance by the Secretary of Housing 

and Urban Development pursuant to section 2 of the 

National Housing Act; or 

(B) is secured by one or more promissory notes or certificates of interest or participations in such notes (with or 

without recourse to the issuer thereof) and, by its terms, 

provides for payments of principal in relation to payments, 

or reasonable projections of payments, on notes meeting 

the requirements of subparagraphs (A) (i) and (ii) or certificates of interest or participations in promissory notes 

meeting such requirements. 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
36 

For the purpose of this paragraph, the term ‘‘promissory note’’, 

when used in connection with a manufactured home, shall also 

include a loan, advance, or credit sale as evidence by a retail 

installment sales contract or other instrument. 

(42) The term ‘‘government securities’’ means— 

(A) securities which are direct obligations of, or obligations guaranteed as to principal or interest by, the United 

States; 

(B) securities which are issued or guaranteed by the 

Tennessee Valley Authority or by corporations in which 

the United States has a direct or indirect interest and 

which are designated by the Secretary of the Treasury for 

exemption as necessary or appropriate in the public interest or for the protection of investors; 

(C) securities issued or guaranteed as to principal or interest by any corporation the securities of which are designated, by statute specifically naming such corporation, to 

constitute exempt securities within the meaning of the 

laws administered by the Commission; 

(D) for purposes of sections 15C and 17A, any put, call, 

straddle, option, or privilege on a security described in 

subparagraph (A), (B), or (C) other than a put, call, straddle, option, or privilege— 

(i) that is traded on one or more national securities 

exchanges; or 

(ii) for which quotations are disseminated through 

an automated quotation system operated by a registered securities association; or 

(E) for purposes of sections 15, 15C, and 17A as applied 

to a bank, a qualified Canadian government obligation as 

defined in section 5136 of the Revised Statutes of the 

United States. 

(43) The term ‘‘government securities broker’’ means any 

person regularly engaged in the business of effecting transactions in government securities for the account of others, but 

does not include— 

(A) any corporation the securities of which are government securities under subparagraph (B) or (C) of paragraph (42) of this subsection; or 

(B) any person registered with the Commodity Futures 

Trading Commission, any contract market designated by 

the Commodity Futures Trading Commission, such contract market’s affiliated clearing organization, or any floor 

trader on such contract market, solely because such person 

effects transactions in government securities that the Commission, after consultation with the Commodity Futures 

Trading Commission, has determined by rule or order to 

be incidental to such person’s futures-related business. 

(44) The term ‘‘government securities dealer’’ means any person engaged in the business of buying and selling government 

securities for his own account, through a broker or otherwise, 

but does not include— 

(A) any person insofar as he buys or sells such securities 

for his own account, either individually or in some fiduciary capacity, but not as a part of a regular business; 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
37 

(B) any corporation the securities of which are government securities under subparagraph (B) or (C) of paragraph (42) of this subsection; 

(C) any bank, unless the bank is engaged in the business 

of buying and selling government securities for its own account other than in a fiduciary capacity, through a broker 

or otherwise; or 

(D) any person registered with the Commodity Futures 

Trading Commission, any contract market designated by 

the Commodity Futures Trading Commission, such contract market’s affiliated clearing organization, or any floor 

trader on such contract market, solely because such person 

effects transactions in government securities that the Commission, after consultation with the Commodity Futures 

Trading Commission, has determined by rule or order to 

be incidental to such person’s futures-related business. 

(45) The term ‘‘person associated with a government securities broker or government securities dealer’’ means any partner, officer, director, or branch manager of such government 

securities broker or government securities dealer (or any person occupying a similar status or performing similar functions), 

and any other employee of such government securities broker 

or government securities dealer who is engaged in the management, direction, supervision, or performance of any activities 

relating to government securities, and any person directly or 

indirectly controlling, controlled by, or under common control 

with such government securities broker or government securities dealer. 

(46) The term ‘‘financial institution’’ means— 

(A) a bank (as defined in paragraph (6) of this subsection); 

(B) a foreign bank (as such term is used in the International Banking Act of 1978); and 

(C) a savings association (as defined in section 3(b) of 

the Federal Deposit Insurance Act) the deposits of which 

are insured by the Federal Deposit Insurance Corporation. 

(47) The term ‘‘securities laws’’ means the Securities Act of 

1933 (15 U.S.C. 78a et seq.), the Securities Exchange Act of 

1934 (15 U.S.C. 78a et seq.), the Sarbanes-Oxley Act of 2002, 

the Trust Indenture Act of 1939 (15 U.S.C. 77aaa et seq.), the 

Investment Company Act of 1940 (15 U.S.C. 80a–1 et seq.), the 

Investment Advisers Act of 1940 (15 U.S.C. 80b et seq.), and 

the Securities Investor Protection Act of 1970 (15 U.S.C. 78aaa 

et seq.). 

(48) The term ‘‘registered broker or dealer’’ means a broker 

or dealer registered or required to register pursuant to section 

15 or 15B of this title, except that in paragraph (3) of this subsection and sections 6 and 15A the term means such a broker 

or dealer and a government securities broker or government 

securities dealer registered or required to register pursuant to 

section 15C(a)(1)(A) of this title. 

(49) The terms ‘‘person associated with a transfer agent’’ and 

‘‘associated person of a transfer agent’’ mean any person (except an employee whose functions are solely clerical or ministerial) directly engaged in the management, direction, superVerDate Sep 11 2014 04:36 Oct 04, 2016 Jkt 059006 PO 00000 Frm 00037 Fmt 6659 Sfmt 6602 E:\HR\OC\HR798.XXX HR798

smartinez on DSK3GLQ082PROD with REPORTS-HSE
38 

vision, or performance of any of the transfer agent’s activities 

with respect to transfer agent functions, and any person directly or indirectly controlling such activities or controlled by 

the transfer agent in connection with such activities. 

(50) The term ‘‘foreign securities authority’’ means any foreign government, or any governmental body or regulatory organization empowered by a foreign government to administer or 

enforce its laws as they relate to securities matters. 

(51)(A) The term ‘‘penny stock’’ means any equity security 

other than a security that is— 

(i) registered or approved for registration and traded on 

a national securities exchange that meets such criteria as 

the Commission shall prescribe by rule or regulation for 

purposes of this paragraph; 

(ii) authorized for quotation on an automated quotation 

system sponsored by a registered securities association, if 

such system (I) was established and in operation before 

January 1, 1990, and (II) meets such criteria as the Commission shall prescribe by rule or regulation for purposes 

of this paragraph; 

(iii) issued by an investment company registered under 

the Investment Company Act of 1940; 

(iv) excluded, on the basis of exceeding a minimum price, 

net tangible assets of the issuer, or other relevant criteria, 

from the definition of such term by rule or regulation 

which the Commission shall prescribe for purposes of this 

paragraph; or 

(v) exempted, in whole or in part, conditionally or unconditionally, from the definition of such term by rule, regulation, or order prescribed by the Commission. 

(B) The Commission may, by rule, regulation, or order, designate any equity security or class of equity securities described in clause (i) or (ii) of subparagraph (A) as within the 

meaning of the term ‘‘penny stock’’ if such security or class of 

securities is traded other than on a national securities exchange or through an automated quotation system described in 

clause (ii) of subparagraph (A). 

(C) In exercising its authority under this paragraph to prescribe rules, regulations, and orders, the Commission shall determine that such rule, regulation, or order is consistent with 

the public interest and the protection of investors. 

(52) The term ‘‘foreign financial regulatory authority’’ means 

any (A) foreign securities authority, (B) other governmental 

body or foreign equivalent of a self-regulatory organization empowered by a foreign government to administer or enforce its 

laws relating to the regulation of fiduciaries, trusts, commercial lending, insurance, trading in contracts of sale of a commodity for future delivery, or other instruments traded on or 

subject to the rules of a contract market, board of trade, or foreign equivalent, or other financial activities, or (C) membership 

organization a function of which is to regulate participation of 

its members in activities listed above. 

(53)(A) The term ‘‘small business related security’’ means a 

security that meets standards of credit-worthiness as established by the Commission, and either— 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
39 

(i) represents an interest in 1 or more promissory notes 

or leases of personal property evidencing the obligation of 

a small business concern and originated by an insured depository institution, insured credit union, insurance company, or similar institution which is supervised and examined by a Federal or State authority, or a finance company 

or leasing company; or 

(ii) is secured by an interest in 1 or more promissory 

notes or leases of personal property (with or without recourse to the issuer or lessee) and provides for payments 

of principal in relation to payments, or reasonable projections of payments, on notes or leases described in clause 

(i). 

(B) For purposes of this paragraph— 

(i) an ‘‘interest in a promissory note or a lease of personal property’’ includes ownership rights, certificates of 

interest or participation in such notes or leases, and rights 

designed to assure servicing of such notes or leases, or the 

receipt or timely receipt of amounts payable under such 

notes or leases; 

(ii) the term ‘‘small business concern’’ means a business 

that meets the criteria for a small business concern established by the Small Business Administration under section 

3(a) of the Small Business Act; 

(iii) the term ‘‘insured depository institution’’ has the 

same meaning as in section 3 of the Federal Deposit Insurance Act; and 

(iv) the term ‘‘insured credit union’’ has the same meaning as in section 101 of the Federal Credit Union Act. 

(54) QUALIFIED INVESTOR.— 

(A) DEFINITION.— Except as provided in subparagraph 

(B), for purposes of this title, the term ‘‘qualified investor’’ 

means— 

(i) any investment company registered with the 

Commission under section 8 of the Investment Company Act of 1940; 

(ii) any issuer eligible for an exclusion from the definition of investment company pursuant to section 

3(c)(7) of the Investment Company Act of 1940; 

(iii) any bank (as defined in paragraph (6) of this 

subsection), savings association (as defined in section 

3(b) of the Federal Deposit Insurance Act), broker, 

dealer, insurance company (as defined in section 

2(a)(13) of the Securities Act of 1933), or business development company (as defined in section 2(a)(48) of 

the Investment Company Act of 1940); 

(iv) any small business investment company licensed 

by the United States Small Business Administration 

under section 301 (c) or (d) of the Small Business Investment Act of 1958; 

(v) any State sponsored employee benefit plan, or 

any other employee benefit plan, within the meaning 

of the Employee Retirement Income Security Act of 

1974, other than an individual retirement account, if 

the investment decisions are made by a plan fiduciary, 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
40 

as defined in section 3(21) of that Act, which is either 

a bank, savings and loan association, insurance company, or registered investment adviser; 

(vi) any trust whose purchases of securities are directed by a person described in clauses (i) through (v) 

of this subparagraph; 

(vii) any market intermediary exempt under section 

3(c)(2) of the Investment Company Act of 1940; 

(viii) any associated person of a broker or dealer 

other than a natural person; 

(ix) any foreign bank (as defined in section 1(b)(7) of 

the International Banking Act of 1978); 

(x) the government of any foreign country; 

(xi) any corporation, company, or partnership that 

owns and invests on a discretionary basis, not less 

than $25,000,000 in investments; 

(xii) any natural person who owns and invests on a 

discretionary basis, not less than $25,000,000 in investments; 

(xiii) any government or political subdivision, agency, or instrumentality of a government who owns and 

invests on a discretionary basis not less than 

$50,000,000 in investments; or 

(xiv) any multinational or supranational entity or 

any agency or instrumentality thereof. 

(B) ALTERED THRESHOLDS FOR ASSET-BACKED SECURITIES

AND LOAN PARTICIPATIONS.— For purposes of section 

3(a)(5)(C)(iii) of this title and section 206(a)(5) of the 

Gramm-Leach-Bliley Act, the term ‘‘qualified investor’’ has 

the meaning given such term by subparagraph (A) of this 

paragraph except that clauses (xi) and (xii) shall be applied by substituting ‘‘$10,000,000’’ for ‘‘$25,000,000’’. 

(C) ADDITIONAL AUTHORITY.— The Commission may, by 

rule or order, define a ‘‘qualified investor’’ as any other 

person, taking into consideration such factors as the financial sophistication of the person, net worth, and knowledge 

and experience in financial matters. 

(55)(A) The term ‘‘security future’’ means a contract of sale 

for future delivery of a single security or of a narrow-based security index, including any interest therein or based on the 

value thereof, except an exempted security under section 

3(a)(12) of this title as in effect on the date of the enactment 

of the Futures Trading Act of 1982 (other than any municipal 

security as defined in section 3(a)(29) as in effect on the date 

of the enactment of the Futures Trading Act of 1982). The term 

‘‘security future’’ does not include any agreement, contract, or 

transaction excluded from the Commodity Exchange Act under 

section 2(c), 2(d), 2(f), or 2(g) of the Commodity Exchange Act 

(as in effect on the date of the enactment of the Commodity 

Futures Modernization Act of 2000) or title IV of the Commodity Futures Modernization Act of 2000. 

(B) The term ‘‘narrow-based security index’’ means an 

index— 

(i) that has 9 or fewer component securities; 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
41 

(ii) in which a component security comprises more than 

30 percent of the index’s weighting; 

(iii) in which the five highest weighted component securities in the aggregate comprise more than 60 percent of 

the index’s weighting; or 

(iv) in which the lowest weighted component securities 

comprising, in the aggregate, 25 percent of the index’s 

weighting have an aggregate dollar value of average daily 

trading volume of less than $50,000,000 (or in the case of 

an index with 15 or more component securities, 

$30,000,000), except that if there are two or more securities with equal weighting that could be included in the calculation of the lowest weighted component securities comprising, in the aggregate, 25 percent of the index’s 

weighting, such securities shall be ranked from lowest to 

highest dollar value of average daily trading volume and 

shall be included in the calculation based on their ranking 

starting with the lowest ranked security. 

(C) Notwithstanding subparagraph (B), an index is not a 

narrow-based security index if— 

(i)(I) it has at least nine component securities; 

(II) no component security comprises more than 30 percent of the index’s weighting; and 

(III) each component security is— 

(aa) registered pursuant to section 12 of the Securities Exchange Act of 1934; 

(bb) one of 750 securities with the largest market 

capitalization; and 

(cc) one of 675 securities with the largest dollar 

value of average daily trading volume; 

(ii) a board of trade was designated as a contract market 

by the Commodity Futures Trading Commission with respect to a contract of sale for future delivery on the index, 

before the date of the enactment of the Commodity Futures Modernization Act of 2000; 

(iii)(I) a contract of sale for future delivery on the index 

traded on a designated contract market or registered derivatives transaction execution facility for at least 30 days 

as a contract of sale for future delivery on an index that 

was not a narrow-based security index; and 

(II) it has been a narrow-based security index for no 

more than 45 business days over 3 consecutive calendar 

months; 

(iv) a contract of sale for future delivery on the index is 

traded on or subject to the rules of a foreign board of trade 

and meets such requirements as are jointly established by 

rule or regulation by the Commission and the Commodity 

Futures Trading Commission; 

(v) no more than 18 months have passed since the date 

of the enactment of the Commodity Futures Modernization 

Act of 2000 and— 

(I) it is traded on or subject to the rules of a foreign 

board of trade; 

(II) the offer and sale in the United States of a contract of sale for future delivery on the index was auVerDate Sep 11 2014 04:36 Oct 04, 2016 Jkt 059006 PO 00000 Frm 00041 Fmt 6659 Sfmt 6602 E:\HR\OC\HR798.XXX HR798

smartinez on DSK3GLQ082PROD with REPORTS-HSE
42 

thorized before the date of the enactment of the Commodity Futures Modernization Act of 2000; and 

(III) the conditions of such authorization continue to 

be met; or 

(vi) a contract of sale for future delivery on the index is 

traded on or subject to the rules of a board of trade and 

meets such requirements as are jointly established by rule, 

regulation, or order by the Commission and the Commodity Futures Trading Commission. 

(D) Within 1 year after the enactment of the Commodity Futures Modernization Act of 2000, the Commission and the 

Commodity Futures Trading Commission jointly shall adopt 

rules or regulations that set forth the requirements under 

clause (iv) of subparagraph (C). 

(E) An index that is a narrow-based security index solely because it was a narrow-based security index for more than 45 

business days over 3 consecutive calendar months pursuant to 

clause (iii) of subparagraph (C) shall not be a narrow-based security index for the 3 following calendar months. 

(F) For purposes of subparagraphs (B) and (C) of this paragraph— 

(i) the dollar value of average daily trading volume and 

the market capitalization shall be calculated as of the preceding 6 full calendar months; and 

(ii) the Commission and the Commodity Futures Trading 

Commission shall, by rule or regulation, jointly specify the 

method to be used to determine market capitalization and 

dollar value of average daily trading volume. 

(56) The term ‘‘security futures product’’ means a security future or any put, call, straddle, option, or privilege on any security future. 

(57)(A) The term ‘‘margin’’, when used with respect to a security futures product, means the amount, type, and form of collateral required to secure any extension or maintenance of 

credit, or the amount, type, and form of collateral required as 

a performance bond related to the purchase, sale, or carrying 

of a security futures product. 

(B) The terms ‘‘margin level’’ and ‘‘level of margin’’, when 

used with respect to a security futures product, mean the 

amount of margin required to secure any extension or maintenance of credit, or the amount of margin required as a performance bond related to the purchase, sale, or carrying of a 

security futures product. 

(C) The terms ‘‘higher margin level’’ and ‘‘higher level of 

margin’’, when used with respect to a security futures product, 

mean a margin level established by a national securities exchange registered pursuant to section 6(g) that is higher than 

the minimum amount established and in effect pursuant to 

section 7(c)(2)(B). 

(58) AUDIT COMMITTEE.— The term ‘‘audit committee’’ 

means— 

(A) a committee (or equivalent body) established by and 

amongst the board of directors of an issuer for the purpose 

of overseeing the accounting and financial reporting procVerDate Sep 11 2014 04:36 Oct 04, 2016 Jkt 059006 PO 00000 Frm 00042 Fmt 6659 Sfmt 6602 E:\HR\OC\HR798.XXX HR798

smartinez on DSK3GLQ082PROD with REPORTS-HSE
43 

esses of the issuer and audits of the financial statements 

of the issuer; and 

(B) if no such committee exists with respect to an issuer, 

the entire board of directors of the issuer. 

(59) REGISTERED PUBLIC ACCOUNTING FIRM.— The term ‘‘registered public accounting firm’’ has the same meaning as in 

section 2 of the Sarbanes-Oxley Act of 2002. 

(60) CREDIT RATING.— The term ‘‘credit rating’’ means an assessment of the creditworthiness of an obligor as an entity or 

with respect to specific securities or money market instruments. 

(61) CREDIT RATING AGENCY.— The term ‘‘credit rating agency’’ means any person— 

(A) engaged in the business of issuing credit ratings on 

the Internet or through another readily accessible means, 

for free or for a reasonable fee, but does not include a commercial credit reporting company; 

(B) employing either a quantitative or qualitative model, 

or both, to determine credit ratings; and 

(C) receiving fees from either issuers, investors, or other 

market participants, or a combination thereof. 

(62) NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZA- TION.— The term ‘‘nationally recognized statistical rating organization’’ means a credit rating agency that— 

(A) issues credit ratings certified by qualified institutional buyers, in accordance with section 15E(a)(1)(B)(ix), 

with respect to— 

(i) financial institutions, brokers, or dealers; 

(ii) insurance companies; 

(iii) corporate issuers; 

(iv) issuers of asset-backed securities (as that term 

is defined in section 1101(c) of part 229 of title 17, 

Code of Federal Regulations, as in effect on the date 

of enactment of this paragraph); 

(v) issuers of government securities, municipal securities, or securities issued by a foreign government; or 

(vi) a combination of one or more categories of obligors described in any of clauses (i) through (v); and 

(B) is registered under section 15E. 

(63) PERSON ASSOCIATED WITH A NATIONALLY RECOGNIZED

STATISTICAL RATING ORGANIZATION.— The term ‘‘person associated with’’ a nationally recognized statistical rating organization means any partner, officer, director, or branch manager of 

a nationally recognized statistical rating organization (or any 

person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled 

by, or under common control with a nationally recognized statistical rating organization, or any employee of a nationally 

recognized statistical rating organization. 

(64) QUALIFIED INSTITUTIONAL BUYER.— The term ‘‘qualified 

institutional buyer’’ has the meaning given such term in section 230.144A(a) of title 17, Code of Federal Regulations, or 

any successor thereto. 

(79) ASSET-BACKED SECURITY.— The term ‘‘asset-backed security’’— 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
44 

(A) means a fixed-income or other security collateralized 

by any type of self-liquidating financial asset (including a 

loan, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of the security to receive payments that depend primarily on cash flow from the asset, 

including— 

(i) a collateralized mortgage obligation; 

(ii) a collateralized debt obligation; 

(iii) a collateralized bond obligation; 

(iv) a collateralized debt obligation of asset-backed 

securities; 

(v) a collateralized debt obligation of collateralized 

debt obligations; and 

(vi) a security that the Commission, by rule, determines to be an asset-backed security for purposes of 

this section; and 

(B) does not include a security issued by a finance subsidiary held by the parent company or a company controlled by the parent company, if none of the securities 

issued by the finance subsidiary are held by an entity that 

is not controlled by the parent company. 

(65) ELIGIBLE CONTRACT PARTICIPANT.— The term ‘‘eligible 

contract participant’’ has the same meaning as in section 1a of 

the Commodity Exchange Act (7 U.S.C. 1a). 

(66) MAJOR SWAP PARTICIPANT.— The term ‘‘major swap participant’’ has the same meaning as in section 1a of the Commodity Exchange Act (7 U.S.C. 1a). 

(67) MAJOR SECURITY-BASED SWAP PARTICIPANT.— (A) IN GENERAL.— The term ‘‘major security-based swap 

participant’’ means any person— 

(i) who is not a security-based swap dealer; and 

(ii)(I) who maintains a substantial position in security-based swaps for any of the major security-based 

swap categories, as such categories are determined by 

the Commission, excluding both positions held for 

hedging or mitigating commercial risk and positions 

maintained by any employee benefit plan (or any contract held by such a plan) as defined in paragraphs (3) 

and (32) of section 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002) for the primary purpose of hedging or mitigating any risk directly associated with the operation of the plan; 

(II) whose outstanding security-based swaps create 

substantial counterparty exposure that could have serious adverse effects on the financial stability of the 

United States banking system or financial markets; or 

(III) that is a financial entity that— 

(aa) is highly leveraged relative to the amount 

of capital such entity holds and that is not subject 

to capital requirements established by an appropriate Federal banking agency; and 

(bb) maintains a substantial position in outstanding security-based swaps in any major security-based swap category, as such categories are 

determined by the Commission. 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
45 

(B) DEFINITION OF SUBSTANTIAL POSITION.— For purposes of subparagraph (A), the Commission shall define, by 

rule or regulation, the term ‘‘substantial position’’ at the 

threshold that the Commission determines to be prudent 

for the effective monitoring, management, and oversight of 

entities that are systemically important or can significantly impact the financial system of the United States. In 

setting the definition under this subparagraph, the Commission shall consider the person’s relative position in 

uncleared as opposed to cleared security-based swaps and 

may take into consideration the value and quality of collateral held against counterparty exposures. 

(C) SCOPE OF DESIGNATION.— For purposes of subparagraph (A), a person may be designated as a major securitybased swap participant for 1 or more categories of securitybased swaps without being classified as a major securitybased swap participant for all classes of security-based 

swaps. 

(68) SECURITY-BASED SWAP.— 

(A) IN GENERAL.— Except as provided in subparagraph 

(B), the term ‘‘security-based swap’’ means any agreement, 

contract, or transaction that— 

(i) is a swap, as that term is defined under section 

1a of the Commodity Exchange Act (without regard to 

paragraph (47)(B)(x) of such section); and 

(ii) is based on— 

(I) an index that is a narrow-based security 

index, including any interest therein or on the 

value thereof; 

(II) a single security or loan, including any interest therein or on the value thereof; or 

(III) the occurrence, nonoccurrence, or extent of 

the occurrence of an event relating to a single 

issuer of a security or the issuers of securities in 

a narrow-based security index, provided that such 

event directly affects the financial statements, financial condition, or financial obligations of the 

issuer. 

(B) RULE OF CONSTRUCTION REGARDING MASTER AGREE- MENTS.— The term ‘‘security-based swap’’ shall be construed to include a master agreement that provides for an 

agreement, contract, or transaction that is a security-based 

swap pursuant to subparagraph (A), together with all supplements to any such master agreement, without regard to 

whether the master agreement contains an agreement, 

contract, or transaction that is not a security-based swap 

pursuant to subparagraph (A), except that the master 

agreement shall be considered to be a security-based swap 

only with respect to each agreement, contract, or transaction under the master agreement that is a securitybased swap pursuant to subparagraph (A). 

(C) EXCLUSIONS.— The term ‘‘security-based swap’’ does 

not include any agreement, contract, or transaction that 

meets the definition of a security-based swap only because 

such agreement, contract, or transaction references, is 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
46 

based upon, or settles through the transfer, delivery, or receipt of an exempted security under paragraph (12), as in 

effect on the date of enactment of the Futures Trading Act 

of 1982 (other than any municipal security as defined in 

paragraph (29) as in effect on the date of enactment of the 

Futures Trading Act of 1982), unless such agreement, contract, or transaction is of the character of, or is commonly 

known in the trade as, a put, call, or other option. 

(D) MIXED SWAP.— The term ‘‘security-based swap’’ includes any agreement, contract, or transaction that is as 

described in subparagraph (A) and also is based on the 

value of 1 or more interest or other rates, currencies, commodities, instruments of indebtedness, indices, quantitative measures, other financial or economic interest or 

property of any kind (other than a single security or a narrow-based security index), or the occurrence, non-occurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or 

commercial consequence (other than an event described in 

subparagraph (A)(ii)(III)). 

(E) RULE OF CONSTRUCTION REGARDING USE OF THE TERM

INDEX.— The term ‘‘index’’ means an index or group of securities, including any interest therein or based on the 

value thereof. 

(69) SWAP.— The term ‘‘swap’’ has the same meaning as in 

section 1a of the Commodity Exchange Act (7 U.S.C. 1a). 

(70) PERSON ASSOCIATED WITH A SECURITY-BASED SWAP DEAL- ER OR MAJOR SECURITY-BASED SWAP PARTICIPANT.— (A) IN GENERAL.— The term ‘‘person associated with a 

security-based swap dealer or major security-based swap 

participant’’ or ‘‘associated person of a security-based swap 

dealer or major security-based swap participant’’ means— 

(i) any partner, officer, director, or branch manager 

of such security-based swap dealer or major securitybased swap participant (or any person occupying a 

similar status or performing similar functions); 

(ii) any person directly or indirectly controlling, controlled by, or under common control with such security-based swap dealer or major security-based swap 

participant; or 

(iii) any employee of such security-based swap dealer or major security-based swap participant. 

(B) EXCLUSION.— Other than for purposes of section 

15F(l)(2), the term ‘‘person associated with a securitybased swap dealer or major security-based swap participant’’ or ‘‘associated person of a security-based swap dealer 

or major security-based swap participant’’ does not include 

any person associated with a security-based swap dealer or 

major security-based swap participant whose functions are 

solely clerical or ministerial. 

(71) SECURITY-BASED SWAP DEALER.— (A) IN GENERAL.— The term ‘‘security-based swap dealer’’ means any person who— 

(i) holds themself out as a dealer in security-based 

swaps; 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
47 

(ii) makes a market in security-based swaps; 

(iii) regularly enters into security-based swaps with 

counterparties as an ordinary course of business for its 

own account; or 

(iv) engages in any activity causing it to be commonly known in the trade as a dealer or market 

maker in security-based swaps. 

(B) DESIGNATION BY TYPE OR CLASS.— A person may be 

designated as a security-based swap dealer for a single 

type or single class or category of security-based swap or 

activities and considered not to be a security-based swap 

dealer for other types, classes, or categories of securitybased swaps or activities. 

(C) EXCEPTION.— The term ‘‘security-based swap dealer’’ 

does not include a person that enters into security-based 

swaps for such person’s own account, either individually or 

in a fiduciary capacity, but not as a part of regular business. 

(D) DE MINIMIS EXCEPTION.— The Commission shall exempt from designation as a security-based swap dealer an 

entity that engages in a de minimis quantity of securitybased swap dealing in connection with transactions with or 

on behalf of its customers. The Commission shall promulgate regulations to establish factors with respect to the 

making of any determination to exempt. 

(72) APPROPRIATE FEDERAL BANKING AGENCY.— The term 

‘‘appropriate Federal banking agency’’ has the same meaning 

as in section 3(q) of the Federal Deposit Insurance Act (12 

U.S.C. 1813(q)). 

(73) BOARD.— The term ‘‘Board’’ means the Board of Governors of the Federal Reserve System. 

(74) PRUDENTIAL REGULATOR.— The term ‘‘prudential regulator’’ has the same meaning as in section 1a of the Commodity 

Exchange Act (7 U.S.C. 1a). 

(75) SECURITY-BASED SWAP DATA REPOSITORY.— The term 

‘‘security-based swap data repository’’ means any person that 

collects and maintains information or records with respect to 

transactions or positions in, or the terms and conditions of, security-based swaps entered into by third parties for the purpose of providing a centralized recordkeeping facility for security-based swaps. 

(76) SWAP DEALER.— The term ‘‘swap dealer’’ has the same 

meaning as in section 1a of the Commodity Exchange Act (7 

U.S.C. 1a). 

(77) SECURITY-BASED SWAP EXECUTION FACILITY.— The term 

‘‘security-based swap execution facility’’ means a trading system or platform in which multiple participants have the ability 

to execute or trade security-based swaps by accepting bids and 

offers made by multiple participants in the facility or system, 

through any means of interstate commerce, including any trading facility, that— 

(A) facilitates the execution of security-based swaps between persons; and 

(B) is not a national securities exchange. 

(78) SECURITY-BASED SWAP AGREEMENT.— 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
48 

(A) IN GENERAL.— For purposes of sections 9, 10, 16, 20, 

and 21A of this Act, and section 17 of the Securities Act 

of 1933 (15 U.S.C. 77q), the term ‘‘security-based swap 

agreement’’ means a swap agreement as defined in section 

206A of the Gramm-Leach-Bliley Act (15 U.S.C. 78c note) 

of which a material term is based on the price, yield, 

value, or volatility of any security or any group or index 

of securities, or any interest therein. 

(B) EXCLUSIONS.— The term ‘‘security-based swap agreement’’ does not include any security-based swap. 

(80) EMERGING GROWTH COMPANY.— The term ‘‘emerging 

growth company’’ means an issuer that had total annual gross 

revenues of less than $1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect 

the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the 

threshold to the nearest 1,000,000) during its most recently 

completed fiscal year. An issuer that is an emerging growth 

company as of the first day of that fiscal year shall continue 

to be deemed an emerging growth company until the earliest 

of— 

(A) the last day of the fiscal year of the issuer during 

which it had total annual gross revenues of $1,000,000,000 

(as such amount is indexed for inflation every 5 years by 

the Commission to reflect the change in the Consumer 

Price Index for All Urban Consumers published by the Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000) or more; 

(B) the last day of the fiscal year of the issuer following 

the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective 

registration statement under the Securities Act of 1933; 

(C) the date on which such issuer has, during the previous 3-year period, issued more than $1,000,000,000 in 

non-convertible debt; or 

(D) the date on which such issuer is deemed to be a 

‘‘large accelerated filer’’, as defined in section 240.12b–2 of 

title 17, Code of Federal Regulations, or any successor 

thereto. 

(80) FUNDING PORTAL.— The term ‘‘funding portal’’ means 

any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to section 4(6) of the Securities Act of 1933 (15 

U.S.C. 77d(6)), that does not— 

(A) offer investment advice or recommendations; 

(B) solicit purchases, sales, or offers to buy the securities 

offered or displayed on its website or portal; 

(C) compensate employees, agents, or other persons for 

such solicitation or based on the sale of securities displayed or referenced on its website or portal; 

(D) hold, manage, possess, or otherwise handle investor 

funds or securities; or 

(E) engage in such other activities as the Commission, 

by rule, determines appropriate. 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
49 

(81) PROXY ADVISORY FIRM.— The term ‘‘proxy advisory firm’’ 

means any person registered under section 15H who is engaged 

in the business of providing proxy voting research, analysis, or 

recommendations to clients, which conduct constitutes a solicitation within the meaning of section 14 and the Commission’s 

rules and regulations thereunder, except to the extent that the 

person is exempted by such rules and regulations from requirements otherwise applicable to persons engaged in a solicitation. 

(82) PERSON ASSOCIATED WITH A PROXY ADVISORY FIRM.— 

The term ‘‘person associated with’’ a proxy advisory firm means 

any partner, officer, or director of a proxy advisory firm (or any 

person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled 

by, or under common control with a proxy advisory firm, or any 

employee of a proxy advisory firm, except that persons associated with a proxy advisory firm whose functions are clerical or 

ministerial shall not be included in the meaning of such term. 

The Commission may by rules and regulations classify, for purposes or any portion or portions of this Act, persons, including 

employees controlled by a proxy advisory firm. 

(b) The Commission and the Board of Governors of the Federal 

Reserve System, as to matters within their respective jurisdictions, 

shall have power by rules and regulations to define technical, 

trade, accounting, and other terms used in this title, consistently 

with the provisions and purposes of this title. 

(c) No provision of this title shall apply to, or be deemed to include, any executive department or independent establishment of 

the United States, or any lending agency which is wholly owned, 

directly or indirectly, by the United States, or any officer, agent, or 

employee of any such department, establishment, or agency, acting 

in the course of his official duty as such, unless such provision 

makes specific reference to such department, establishment, or 

agency. 

(d) No issuer of municipal securities or officer or employee thereof acting in the course of his official duties as such shall be deemed 

to be a ‘‘broker’’, ‘‘dealer’’, or ‘‘municipal securities dealer’’ solely by 

reason of buying, selling, or effecting transactions in the issuer’s 

securities. 

(e) CHARITABLE ORGANIZATIONS.— 

(1) EXEMPTION.— Notwithstanding any other provision of 

this title, but subject to paragraph (2) of this subsection, a 

charitable organization, as defined in section 3(c)(10)(D) of the 

Investment Company Act of 1940, or any trustee, director, officer, employee, or volunteer of such a charitable organization 

acting within the scope of such person’s employment or duties 

with such organization, shall not be deemed to be a ‘‘broker’’, 

‘‘dealer’’, ‘‘municipal securities broker’’, ‘‘municipal securities 

dealer’’, ‘‘government securities broker’’, or ‘‘government securities dealer’’ for purposes of this title solely because such organization or person buys, holds, sells, or trades in securities for 

its own account in its capacity as trustee or administrator of, 

or otherwise on behalf of or for the account of— 

(A) such a charitable organization; 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
50 

(B) a fund that is excluded from the definition of an investment company under section 3(c)(10)(B) of the Investment Company Act of 1940; or 

(C) a trust or other donative instrument described in 

section 3(c)(10)(B) of the Investment Company Act of 1940, 

or the settlors (or potential settlors) or beneficiaries of any 

such trust or other instrument. 

(2) LIMITATION ON COMPENSATION.— The exemption provided 

under paragraph (1) shall not be available to any charitable organization, or any trustee, director, officer, employee, or volunteer of such a charitable organization, unless each person who, 

on or after 90 days after the date of enactment of this subsection, solicits donations on behalf of such charitable organization from any donor to a fund that is excluded from the definition of an investment company under section 3(c)(10)(B) of 

the Investment Company Act of 1940, is either a volunteer or 

is engaged in the overall fund raising activities of a charitable 

organization and receives no commission or other special compensation based on the number or the value of donations collected for the fund. 

(f) CONSIDERATION OF PROMOTION OF EFFICIENCY, COMPETITION, 

AND CAPITAL FORMATION.—Whenever pursuant to this title the 

Commission is engaged in rulemaking, or in the review of a rule 

of a self-regulatory organization, and is required to consider or determine whether an action is necessary or appropriate in the public 

interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, 

competition, and capital formation. 

(g) CHURCH PLANS.—No church plan described in section 414(e) 

of the Internal Revenue Code of 1986, no person or entity eligible 

to establish and maintain such a plan under the Internal Revenue 

Code of 1986, no company or account that is excluded from the definition of an investment company under section 3(c)(14) of the Investment Company Act of 1940, and no trustee, director, officer or 

employee of or volunteer for such plan, company, account, person, 

or entity, acting within the scope of that person’s employment or 

activities with respect to such plan, shall be deemed to be a 

‘‘broker’’, ‘‘dealer’’, ‘‘municipal securities broker’’, ‘‘municipal securities dealer’’, ‘‘government securities broker’’, ‘‘government securities 

dealer’’, ‘‘clearing agency’’, or ‘‘transfer agent’’ for purposes of this 

title— 

(1) solely because such plan, company, person, or entity buys, 

holds, sells, trades in, or transfers securities or acts as an 

intermediary in making payments in connection with transactions in securities for its own account in its capacity as trustee or administrator of, or otherwise on behalf of, or for the account of, any church plan, company, or account that is excluded from the definition of an investment company under 

section 3(c)(14) of the Investment Company Act of 1940; and 

(2) if no such person or entity receives a commission or other 

transaction-related sales compensation in connection with any 

activities conducted in reliance on the exemption provided by 

this subsection. 

(h) LIMITED EXEMPTION FOR FUNDING PORTALS.— 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
51 

(1) IN GENERAL.— The Commission shall, by rule, exempt, 

conditionally or unconditionally, a registered funding portal 

from the requirement to register as a broker or dealer under 

section 15(a)(1), provided that such funding portal— 

(A) remains subject to the examination, enforcement, 

and other rulemaking authority of the Commission; 

(B) is a member of a national securities association registered under section 15A; and 

(C) is subject to such other requirements under this title 

as the Commission determines appropriate under such 

rule. 

(2) NATIONAL SECURITIES ASSOCIATION MEMBERSHIP.— For 

purposes of sections 15(b)(8) and 15A, the term ‘‘broker or dealer’’ includes a funding portal and the term ‘‘registered broker 

or dealer’’ includes a registered funding portal, except to the 

extent that the Commission, by rule, determines otherwise, 

provided that a national securities association shall only examine for and enforce against a registered funding portal rules of 

such national securities association written specifically for registered funding portals. 

* * * * * * * 

SEC. 15H. REGISTRATION OF PROXY ADVISORY FIRMS. 

(a) CONDUCT PROHIBITED.—It shall be unlawful for a proxy advisory firm to make use of the mails or any means or instrumentality 

of interstate commerce to provide proxy voting research, analysis, or 

recommendations to any client, unless such proxy advisory firm is 

registered under this section. 

(b) REGISTRATION PROCEDURES.— 

(1) APPLICATION FOR REGISTRATION.— 

(A) IN GENERAL.— A proxy advisory firm must file with 

the Commission an application for registration, in such 

form as the Commission shall require, by rule or regulation, and containing the information described in subparagraph (B). 

(B) REQUIRED INFORMATION.— An application for registration under this section shall contain information regarding— 

(i) a certification that the applicant has adequate financial and managerial resources to consistently provide proxy advice based on accurate information; 

(ii) the procedures and methodologies that the applicant uses in developing proxy voting recommendations, 

including whether and how the applicant considers the 

size of a company when making proxy voting recommendations; 

(iii) the organizational structure of the applicant; 

(iv) whether or not the applicant has in effect a code 

of ethics, and if not, the reasons therefor; 

(v) any potential or actual conflict of interest relating 

to the ownership structure of the applicant or the provision of proxy advisory services by the applicant, including whether the proxy advisory firm engages in services 

ancillary to the provision of proxy advisory services 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
52 

such as consulting services for corporate issuers, and if 

so the revenues derived therefrom; 

(vi) the policies and procedures in place to manage 

conflicts of interest under subsection (f); and 

(vii) any other information and documents concerning the applicant and any person associated with 

such applicant as the Commission, by rule, may prescribe as necessary or appropriate in the public interest 

or for the protection of investors. 

(2) REVIEW OF APPLICATION.— (A) INITIAL DETERMINATION.— Not later than 90 days 

after the date on which the application for registration is 

filed with the Commission under paragraph (1) (or within 

such longer period as to which the applicant consents) the 

Commission shall— 

(i) by order, grant registration; or 

(ii) institute proceedings to determine whether registration should be denied. 

(B) CONDUCT OF PROCEEDINGS.— 

(i) CONTENT.— Proceedings referred to in subparagraph (A)(ii) shall— 

(I) include notice of the grounds for denial under 

consideration and an opportunity for hearing; and 

(II) be concluded not later than 120 days after 

the date on which the application for registration 

is filed with the Commission under paragraph (1). 

(ii) DETERMINATION.— At the conclusion of such proceedings, the Commission, by order, shall grant or 

deny such application for registration. 

(iii) EXTENSION AUTHORIZED.— The Commission 

may extend the time for conclusion of such proceedings 

for not longer than 90 days, if it finds good cause for 

such extension and publishes its reasons for so finding, 

or for such longer period as to which the applicant consents. 

(C) GROUNDS FOR DECISION.— The Commission shall 

grant registration under this subsection— 

(i) if the Commission finds that the requirements of 

this section are satisfied; and 

(ii) unless the Commission finds (in which case the 

Commission shall deny such registration) that— 

(I) the applicant has failed to certify to the Commission’s satisfaction that it has adequate financial and managerial resources to consistently provide proxy advice based on accurate information 

and to materially comply with the procedures and 

methodologies disclosed under paragraph (1)(B) 

and with subsections (f) and (g); or 

(II) if the applicant were so registered, its registration would be subject to suspension or revocation under subsection (e). 

(3) PUBLIC AVAILABILITY OF INFORMATION.— Subject to section 24, the Commission shall make the information and documents submitted to the Commission by a proxy advisory firm in 

its completed application for registration, or in any amendment 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
53 

submitted under paragraph (1) or (2) of subsection (c), publicly 

available on the Commission’s website, or through another comparable, readily accessible means. 

(c) UPDATE OF REGISTRATION.— 

(1) UPDATE.— Each registered proxy advisory firm shall 

promptly amend and update its application for registration 

under this section if any information or document provided 

therein becomes materially inaccurate, except that a registered 

proxy advisory firm is not required to amend the information 

required to be filed under subsection (b)(1)(B)(i) by filing information under this paragraph, but shall amend such information in the annual submission of the organization under paragraph (2) of this subsection. 

(2) CERTIFICATION.— Not later than 90 calendar days after 

the end of each calendar year, each registered proxy advisory 

firm shall file with the Commission an amendment to its registration, in such form as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for 

the protection of investors— 

(A) certifying that the information and documents in the 

application for registration of such registered proxy advisory firm continue to be accurate in all material respects; 

and 

(B) listing any material change that occurred to such information or documents during the previous calendar year. 

(d) CENSURE, DENIAL, OR SUSPENSION OF REGISTRATION; NOTICE

AND HEARING.—The Commission, by order, shall censure, place limitations on the activities, functions, or operations of, suspend for a 

period not exceeding 12 months, or revoke the registration of any 

registered proxy advisory firm if the Commission finds, on the 

record after notice and opportunity for hearing, that such censure, 

placing of limitations, suspension, or revocation is necessary for the 

protection of investors and in the public interest and that such registered proxy advisory firm, or any person associated with such an 

organization, whether prior to or subsequent to becoming so associated— 

(1) has committed or omitted any act, or is subject to an order 

or finding, enumerated in subparagraph (A), (D), (E), (H), or 

(G) of section 15(b)(4), has been convicted of any offense specified in section 15(b)(4)(B), or is enjoined from any action, conduct, or practice specified in subparagraph (C) of section 

15(b)(4), during the 10-year period preceding the date of commencement of the proceedings under this subsection, or at any 

time thereafter; 

(2) has been convicted during the 10-year period preceding 

the date on which an application for registration is filed with 

the Commission under this section, or at any time thereafter, 

of— 

(A) any crime that is punishable by imprisonment for one 

or more years, and that is not described in section 

15(b)(4)(B); or 

(B) a substantially equivalent crime by a foreign court of 

competent jurisdiction; 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
54 

(3) is subject to any order of the Commission barring or suspending the right of the person to be associated with a registered proxy advisory firm; 

(4) fails to furnish the certifications required under subsections (b)(2)(C)(ii)(I) and (c)(2); 

(5) has engaged in one or more prohibited acts enumerated in 

paragraph (1); or 

(6) fails to maintain adequate financial and managerial resources to consistently offer advisory services with integrity, including by failing to comply with subsections (f) or (g). 

(e) TERMINATION OF REGISTRATION.— (1) VOLUNTARY WITHDRAWAL.— A registered proxy advisory 

firm may, upon such terms and conditions as the Commission 

may establish as necessary in the public interest or for the protection of investors, which terms and conditions shall include at 

a minimum that the registered proxy advisory firm will no 

longer conduct such activities as to bring it within the definition of proxy advisory firm in section 3(a)(81) of the Securities 

Exchange Act of 1934, withdraw from registration by filing a 

written notice of withdrawal to the Commission. 

(2) COMMISSION AUTHORITY.— In addition to any other authority of the Commission under this title, if the Commission 

finds that a registered proxy advisory firm is no longer in existence or has ceased to do business as a proxy advisory firm, the 

Commission, by order, shall cancel the registration under this 

section of such registered proxy advisory firm. 

(f) MANAGEMENT OF CONFLICTS OF INTEREST.— (1) ORGANIZATION POLICIES AND PROCEDURES.— Each registered proxy advisory firm shall establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of the business of such registered proxy advisory firm and associated persons, to address 

and manage any conflicts of interest that can arise from such 

business. 

(2) COMMISSION AUTHORITY.— The Commission shall issue 

final rules to prohibit, or require the management and disclosure of, any conflicts of interest relating to the offering of proxy 

advisory services by a registered proxy advisory firm, including, 

without limitation, conflicts of interest relating to— 

(A) the manner in which a registered proxy advisory firm 

is compensated by the client, or any affiliate of the client, 

for providing proxy advisory services; 

(B) the provision of consulting, advisory, or other services 

by a registered proxy advisory firm, or any person associated with such registered proxy advisory firm, to the client; 

(C) business relationships, ownership interests, or any 

other financial or personal interests between a registered 

proxy advisory firm, or any person associated with such 

registered proxy advisory firm, and any client, or any affiliate of such client; 

(D) transparency around the formulation of proxy voting 

policies; 

(E) the execution of proxy votes if such votes are based 

upon recommendations made by the proxy advisory firm in 

which someone other than the issuer is a proponent; 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
55 

(F) issuing recommendations where proxy advisory firms 

provide advisory services to a company; and 

(G) any other potential conflict of interest, as the Commission deems necessary or appropriate in the public interest or for the protection of investors. 

(g) RELIABILITY OF PROXY ADVISORY FIRM SERVICES.— (1) IN GENERAL.— Each registered proxy advisory firm shall 

have staff sufficient to produce proxy voting recommendations 

that are based on accurate and current information. Each registered proxy advisory firm shall detail procedures sufficient to 

permit companies receiving proxy advisory firm recommendations access in a reasonable time to the draft recommendations, 

with an opportunity to provide meaningful comment thereon, 

including the opportunity to present details to the person responsible for developing the recommendation in person or telephonically. Each registered proxy advisory firm shall employ an 

ombudsman to receive complaints about the accuracy of voting 

information used in making recommendations from the subjects 

of the proxy advisory firm’s voting recommendations, and shall 

resolve those complaints in a timely fashion and in any event 

prior to voting on the matter to which the recommendation relates. 

(2) DRAFT RECOMMENDATIONS DEFINED.— For purposes of 

this subsection, the term ‘‘draft recommendations’’— 

(A) means the overall conclusions of proxy voting recommendations prepared for the clients of a proxy advisory 

firm, including any public data cited therein, any company 

information or substantive analysis impacting the recommendation, and the specific voting recommendations on 

individual proxy ballot issues; and 

(B) does not include the entirety of the proxy advisory 

firm’s final report to its clients. 

(h) DESIGNATION OF COMPLIANCE OFFICER.—Each registered 

proxy advisory firm shall designate an individual responsible for 

administering the policies and procedures that are required to be established pursuant to subsections (f) and (g), and for ensuring compliance with the securities laws and the rules and regulations thereunder, including those promulgated by the Commission pursuant to 

this section. 

(i) PROHIBITED CONDUCT.— 

(1) PROHIBITED ACTS AND PRACTICES.— The Commission 

shall issue final rules to prohibit any act or practice relating to 

the offering of proxy advisory services by a registered proxy advisory firm that the Commission determines to be unfair, coercive, or abusive, including any act or practice relating to— 

(A) conditioning a voting recommendation or other proxy 

advisory firm recommendation on the purchase by an 

issuer or an affiliate thereof of other services or products, 

of the registered proxy advisory firm or any person associated with such registered proxy advisory firm; and 

(B) modifying a voting recommendation or otherwise departing from its adopted systematic procedures and methodologies in the provision of proxy advisory services, based 

on whether an issuer, or affiliate thereof, subscribes or will 

subscribe to other services or product of the registered proxy 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
56 

advisory firm or any person associated with such organization. 

(2) RULE OF CONSTRUCTION.— Nothing in paragraph (1), or 

in any rules or regulations adopted thereunder, may be construed to modify, impair, or supersede the operation of any of 

the antitrust laws (as defined in the first section of the Clayton 

Act, except that such term includes section 5 of the Federal 

Trade Commission Act, to the extent that such section 5 applies 

to unfair methods of competition). 

(j) STATEMENTS OF FINANCIAL CONDITION.—Each registered proxy 

advisory firm shall, on a confidential basis, file with the Commission, at intervals determined by the Commission, such financial 

statements, certified (if required by the rules or regulations of the 

Commission) by an independent public auditor, and information 

concerning its financial condition, as the Commission, by rule, may 

prescribe as necessary or appropriate in the public interest or for the 

protection of investors. 

(k) ANNUAL REPORT.—Each registered proxy advisory firm shall, 

at the beginning of each fiscal year of such firm, report to the Commission on the number of shareholder proposals its staff reviewed 

in the prior fiscal year, the number of recommendations made in the 

prior fiscal year, the number of staff who reviewed and made recommendations on such proposals in the prior fiscal year, and the 

number of recommendations made in the prior fiscal year where the 

proponent of such recommendation was a client of or received services from the proxy advisory firm. 

(l) TRANSPARENT POLICIES.—Each registered proxy advisory firm 

shall file with the Commission and make publicly available its 

methodology for the formulation of proxy voting policies and voting 

recommendations. 

(m) RULES OF CONSTRUCTION.— 

(1) NO WAIVER OF RIGHTS, PRIVILEGES, OR DEFENSES.— Registration under and compliance with this section does not constitute a waiver of, or otherwise diminish, any right, privilege, 

or defense that a registered proxy advisory firm may otherwise 

have under any provision of State or Federal law, including 

any rule, regulation, or order thereunder. 

(2) NO PRIVATE RIGHT OF ACTION.— Nothing in this section 

may be construed as creating any private right of action, and 

no report filed by a registered proxy advisory firm in accordance with this section or section 17 shall create a private right 

of action under section 18 or any other provision of law. 

(n) REGULATIONS.— 

(1) NEW PROVISIONS.— Such rules and regulations as are required by this section or are otherwise necessary to carry out 

this section, including the application form required under subsection (a)— 

(A) shall be issued by the Commission, not later than 180 

days after the date of enactment of this section; and 

(B) shall become effective not later than 1 year after the 

date of enactment of this section. 

(2) REVIEW OF EXISTING REGULATIONS.— Not later than 270 

days after the date of enactment of this section, the Commission 

shall— 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
57 

(A) review its existing rules and regulations which affect 

the operations of proxy advisory firms; 

(B) amend or revise such rules and regulations in accordance with the purposes of this section, and issue such guidance, as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors; and 

(C) direct Commission staff to withdraw the Egan Jones 

Proxy Services (May 27, 2004) and Institutional Shareholder Services, Inc. (September 15, 2004) no-action letters. 

(o) APPLICABILITY.—This section, other than subsection (n), which 

shall apply on the date of enactment of this section, shall apply on 

the earlier of— 

(1) the date on which regulations are issued in final form 

under subsection (n)(1); or 

(2) 270 days after the date of enactment of this section. 

* * * * * * * 

ACCOUNTS AND RECORDS, EXAMINATIONS OF EXCHANGES, MEMBERS, AND OTHERS

SEC. 17. (a)(1) Every national securities exchange, member thereof, broker or dealer who transacts a business in securities through 

the medium of any such member, registered securities association, 

registered broker or dealer, registered municipal securities dealer 

municipal advisor,, registered securities information processor, registered transfer agent, nationally recognized statistical rating organization, proxy advisory firm, and registered clearing agency and 

the Municipal Securities Rulemaking Board shall make and keep 

for prescribed periods such records, furnish such copies thereof, 

and make and disseminate such reports as the Commission, by 

rule, prescribes as necessary or appropriate in the public interest, 

for the protection of investors, or otherwise in furtherance of the 

purposes of this title. Any report that a nationally recognized statistical rating organization is required by Commission rules under 

this paragraph to make and disseminate to the Commission shall 

be deemed furnished to the Commission. 

(2) Every registered clearing agency shall also make and keep for 

prescribed periods such records, furnish such copies thereof, and 

make and disseminate such reports, as the appropriate regulatory 

agency for such clearing agency, by rule, prescribes as necessary or 

appropriate for the safeguarding of securities and funds in the custody or control of such clearing agency or for which it is responsible. 

(3) Every registered transfer agent shall also make and keep for 

prescribed periods such records, furnish such copies thereof, and 

make such reports as the appropriate regulatory agency for such 

transfer agent, by rule, prescribes as necessary or appropriate in 

furtherance of the purposes of section 17A of this title. 

(b) RECORDS SUBJECT TO EXAMINATION.— (1) PROCEDURES FOR COOPERATION WITH OTHER AGENCIES.— All records of persons described in subsection (a) of this section 

are subject at any time, or from time to time, to such reasonable periodic, special, or other examinations by representatives 

of the Commission and the appropriate regulatory agency for 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
58 

such persons as the Commission or the appropriate regulatory 

agency for such persons deems necessary or appropriate in the 

public interest, for the protection of investors, or otherwise in 

furtherance of the purposes of this title: Provided, however, 

That the Commission shall, prior to conducting any such examination of a— 

(A) registered clearing agency, registered transfer agent, 

or registered municipal securities dealer for which it is not 

the appropriate regulatory agency, give notice to the appropriate regulatory agency for such clearing agency, 

transfer agent, or municipal securities dealer of such proposed examination and consult with such appropriate regulatory agency concerning the feasibility and desirability 

of coordinating such examination with examinations conducted by such appropriate regulatory agency with a view 

to avoiding unnecessary regulatory duplication or undue 

regulatory burdens for such clearing agency, transfer 

agent, or municipal securities dealer; or 

(B) broker or dealer registered pursuant to section 

15(b)(11), exchange registered pursuant to section 6(g), or 

national securities association registered pursuant to section 15A(k), give notice to the Commodity Futures Trading 

Commission of such proposed examination and consults 

with the Commodity Futures Trading Commission concerning the feasibility and desirability of coordinating such 

examination with examinations conducted by the Commodity Futures Trading Commission in order to avoid unnecessary regulatory duplication or undue regulatory burdens for such broker or dealer or exchange. 

(2) FURNISHING DATA AND REPORTS TO CFTC.— The Commission shall notify the Commodity Futures Trading Commission 

of any examination conducted of any broker or dealer registered pursuant to section 15(b)(11), exchange registered pursuant to section 6(g), or national securities association registered pursuant to section 15A(k) and, upon request, furnish 

to the Commodity Futures Trading Commission any examination report and data supplied to, or prepared by, the Commission in connection with such examination. 

(3) USE OF CFTC REPORTS.— Prior to conducting an examination under paragraph (1), the Commission shall use the reports 

of examinations, if the information available therein is sufficient for the purposes of the examination, of— 

(A) any broker or dealer registered pursuant to section 

15(b)(11); 

(B) exchange registered pursuant to section 6(g); or 

(C) national securities association registered pursuant to 

section 15A(k); 

that is made by the Commodity Futures Trading Commission, 

a national securities association registered pursuant to section 

15A(k), or an exchange registered pursuant to section 6(g). 

(4) RULES OF CONSTRUCTION.— (A) Notwithstanding any other provision of this subsection, the records of a broker or dealer registered pursuant to section 15(b)(11), an exchange registered pursuant 

to section 6(g), or a national securities association regVerDate Sep 11 2014 04:36 Oct 04, 2016 Jkt 059006 PO 00000 Frm 00058 Fmt 6659 Sfmt 6602 E:\HR\OC\HR798.XXX HR798

smartinez on DSK3GLQ082PROD with REPORTS-HSE
59 

istered pursuant to section 15A(k) described in this subparagraph shall not be subject to routine periodic examinations by the Commission. 

(B) Any recordkeeping rules adopted under this subsection for a broker or dealer registered pursuant to section 15(b)(11), an exchange registered pursuant to section 

6(g), or a national securities association registered pursuant to section 15A(k) shall be limited to records with respect to persons, accounts, agreements, contracts, and 

transactions involving security futures products. 

(C) Nothing in the proviso in paragraph (1) shall be construed to impair or limit (other than by the requirement 

of prior consultation) the power of the Commission under 

this subsection to examine any clearing agency, transfer 

agent, or municipal securities dealer or to affect in any 

way the power of the Commission under any other provision of this title or otherwise to inspect, examine, or investigate any such clearing agency, transfer agent, or municipal securities dealer. 

(c)(1) Every clearing agency, transfer agent, and municipal securities dealer for which the Commission is not the appropriate regulatory agency shall (A) file with the appropriate regulatory agency 

for such clearing agency, transfer agent, or municipal securities 

dealer a copy of any application, notice, proposal, report, or document filed with the Commission by reason of its being a clearing 

agency, transfer agent, or municipal securities dealer and (B) file 

with the Commission a copy of any application, notice, proposal, report, or document filed with such appropriate regulatory agency by 

reason of its being a clearing agency, transfer agent, or municipal 

securities dealer. The Municipal Securities Rulemaking Board shall 

file with each agency enumerated in section 3(a)(34)(A) of this title 

copies of every proposed rule change filed with the Commission 

pursuant to section 19(b) of this title. 

(2) The appropriate regulatory agency for a clearing agency, 

transfer agent, or municipal securities dealer for which the Commission is not the appropriate regulatory agency shall file with the 

Commission notice of the commencement of any proceeding and a 

copy of any order entered by such appropriate regulatory agency 

against any clearing agency, transfer agent, municipal securities 

dealer, or person associated with a transfer agent or municipal securities dealer, and the Commission shall file with such appropriate regulatory agency, if any, notice of the commencement of any 

proceeding and a copy of any order entered by the Commission 

against the clearing agency, transfer agent, or municipal securities 

dealer, or against any person associated with a transfer agent or 

municipal securities dealer for which the agency is the appropriate 

regulatory agency. 

(3) The Commission and the appropriate regulatory agency for a 

clearing agency, transfer agent, or municipal securities dealer for 

which the Commission is not the appropriate regulatory agency 

shall each notify the other and make a report of any examination 

conducted by it of such clearing agency, transfer agent, or municipal securities dealer, and, upon request, furnish to the other a 

copy of such report and any data supplied to it in connection with 

such examination. 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
60 

(4) The Commission or the appropriate regulatory agency may 

specify that documents required to be filed pursuant to this subsection with the Commission or such agency, respectively, may be 

retained by the originating clearing agency, transfer agent, or municipal securities dealer, or filed with another appropriate regulatory agency. The Commission or the appropriate regulatory agency (as the case may be) making such a specification shall continue 

to have access to the document on request. 

(d)(1) The Commission, by rule or order, as it deems necessary 

or appropriate in the public interest and for the protection of investors, to foster cooperation and coordination among self-regulatory 

organizations, or to remove impediments to and foster the development of a national market system and national system for the 

clearance and settlement of securities transactions, may— 

(A) with respect to any person who is a member of or participant in more than one self-regulatory organization, relieve any 

such self-regulatory organization of any responsibility under 

this title (i) to receive regulatory reports from such person, (ii) 

to examine such person for compliance, or to enforce compliance by such person, with specified provisions of this title, the 

rules and regulations thereunder, and its own rules, or (iii) to 

carry out other specified regulatory functions with respect to 

such person, and 

(B) allocate among self-regulatory organizations the authority to adopt rules with respect to matters as to which, in the 

absence of such allocation, such self-regulatory organizations 

share authority under this title. 

In making any such rule or entering any such order, the Commission shall take into consideration the regulatory capabilities and 

procedures of the self-regulatory organizations, availability of staff, 

convenience of location, unnecessary regulatory duplication, and 

such other factors as the Commission may consider germane to the 

protection of investors, cooperation and coordination among selfregulatory organizations, and the development of a national market 

system and a national system for the clearance and settlement of 

securities transactions. The Commission, by rule or order, as it 

deems necessary or appropriate in the public interest and for the 

protection of investors, may require any self-regulatory organization relieved of any responsibility pursuant to this paragraph, and 

any person with respect to whom such responsibility relates, to 

take such steps as are specified in any such rule or order to notify 

customers of, and persons doing business with, such person of the 

limited nature of such self-regulatory organization’s responsibility 

for such person’s acts, practices, and course of business. 

(2) A self-regulatory organization shall furnish copies of any report of examination of any person who is a member of or a participant in such self-regulatory organization to any other self-regulatory organization of which such person is a member or in which 

such person is a participant upon the request of such person, such 

other self-regulatory organization, or the Commission. 

(e)(1)(A) Every registered broker or dealer shall annually file 

with the Commission a balance sheet and income statement certified by a independent public accounting firm, or by a registered 

public accounting firm if the firm is required to be registered under 

the Sarbanes-Oxley Act of 2002,, prepared on a calendar or fiscal 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
61 

year basis, and such other financial statements (which shall, as the 

Commission specifies, be certified) and information concerning its 

financial condition as the Commission, by rule may prescribe as 

necessary or appropriate in the public interest or for the protection 

of investors. 

(B) Every registered broker and dealer shall annually send to its 

customers its certified balance sheet and such other financial statements and information concerning its financial condition as the 

Commission, by rule, may prescribe pursuant to subsection (a) of 

this section. 

(C) The Commission, by rule or order, may conditionally or unconditionally exempt any registered broker or dealer, or class of 

such brokers or dealers, from any provision of this paragraph if the 

Commission determines that such exemption is consistent with the 

public interest and the protection of investors. 

(2) The Commission, by rule, as it deems necessary or appropriate in the public interest or for the protection of investors, may 

prescribe the form and content of financial statements filed pursuant to this title and the accounting principles and accounting 

standards used in their preparation. 

(f)(1) Every national securities exchange, member thereof, registered securities association, broker, dealer, municipal securities 

dealer, government securities broker, government securities dealer, 

registered transfer agent, registered clearing agency, participant 

therein, member of the Federal Reserve System, and bank whose 

deposits are insured by the Federal Deposit Insurance Corporation 

shall— 

(A) report to the Commission or other person designated by 

the Commission and, in the case of securities issued pursuant 

to chapter 31 of title 31, United States Code, to the Secretary 

of the Treasury such information about securities that are 

missing, lost, counterfeit, stolen, or cancelled, in such form and 

within such time as the Commission, by rule, determines is 

necessary or appropriate in the public interest or for the protection of investors; such information shall be available on request for a reasonable fee, to any such exchange, member, association, broker, dealer, municipal securities dealer, transfer 

agent, clearing agency, participant, member of the Federal Reserve System, or insured bank, and such other persons as the 

Commission, by rule, designates; and 

(B) make such inquiry with respect to information reported 

pursuant to this subsection as the Commission, by rule, prescribes as necessary or appropriate in the public interest or for 

the protection of investors, to determine whether securities in 

their custody or control, for which they are responsible, or in 

which they are effecting, clearing, or settling a transaction 

have been reported as missing, lost, counterfeit, stolen, cancelled, or reported in such other manner as the Commission, 

by rule, may prescribe. 

(2) Every member of a national securities exchange, broker, dealer, registered transfer agent, registered clearing agency, registered 

securities information processor, national securities exchange, and 

national securities association shall require that each of its partners, directors, officers, and employees be fingerprinted and shall 

submit such fingerprints, or cause the same to be submitted, to the 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
62 

Attorney General of the United States for identification and appropriate processing. The Commission, by rule, may exempt from the 

provisions of this paragraph upon specified terms, conditions, and 

periods, any class of partners, directors, officers, or employees of 

any such member, broker, dealer, transfer agent, clearing agency, 

securities information processor, national securities exchange, or 

national securities association, if the Commission finds that such 

action is not inconsistent with the public interest or the protection 

of investors. Notwithstanding any other provision of law, in providing identification and processing functions, the Attorney General shall provide the Commission and self-regulatory organizations 

designated by the Commission with access to all criminal history 

record information. 

(3)(A) In order to carry out the authority under paragraph (1) 

above, the Commission or its designee may enter into agreement 

with the Attorney General to use the facilities of the National 

Crime Information Center (‘‘NCIC’’) to receive, store, and disseminate information in regard to missing, lost, counterfeit, or stolen 

securities and to permit direct inquiry access to NCIC’s file on such 

securities for the financial community. 

(B) In order to carry out the authority under paragraph (1) of 

this subsection, the Commission or its designee and the Secretary 

of the Treasury shall enter into an agreement whereby the Commission or its designee will receive, store, and disseminate information in the possession, and which comes into the possession, of the 

Department of the Treasury in regard to missing, lost, counterfeit, 

or stolen securities. 

(4) In regard to paragraphs (1), (2), and (3), above insofar as such 

paragraphs apply to any bank or member of the Federal Reserve 

System, the Commission may delegate its authority to: 

(A) the Comptroller of the Currency as to national banks; 

(B) the Federal Reserve Board in regard to any member of 

the Federal Reserve System which is not a national bank; and 

(C) the Federal Deposit Insurance Corporation for any State 

bank which is insured by the Federal Deposit Insurance Corporation but which is not a member of the Federal Reserve 

System. 

(5) The Commission shall encourage the insurance industry to require their insured to report expeditiously instances of missing, 

lost, counterfeit, or stolen securities to the Commission or to such 

other person as the Commission may, by rule, designate to receive 

such information. 

(g) Any broker, dealer, or other person extending credit who is 

subject to the rules and regulations prescribed by the Board of Governors of the Federal Reserve System pursuant to this title shall 

make such reports to the Board as it may require as necessary or 

appropriate to enable it to perform the functions conferred upon it 

by this title. If any such broker, dealer, or other person shall fail 

to make any such report or fail to furnish full information therein, 

or, if in the judgment of the Board it is otherwise necessary, such 

broker, dealer, or other person shall permit such inspections to be 

made by the Board with respect to the business operations of such 

broker, dealer, or other person as the Board may deem necessary 

to enable it to obtain the required information. 

(h) RISK ASSESSMENT FOR HOLDING COMPANY SYSTEMS.— 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
63 

(1) OBLIGATIONS TO OBTAIN, MAINTAIN, AND REPORT INFORMA- TION.— Every person who is (A) a registered broker or dealer, 

or (B) a registered municipal securities dealer for which the 

Commission is the appropriate regulatory agency, shall obtain 

such information and make and keep such records as the Commission by rule prescribes concerning the registered person’s 

policies, procedures, or systems for monitoring and controlling 

financial and operational risks to it resulting from the activities of any of its associated persons, other than a natural person. Such records shall describe, in the aggregate, each of the 

financial and securities activities conducted by, and the customary sources of capital and funding of, those of its associated 

persons whose business activities are reasonably likely to have 

a material impact on the financial or operational condition of 

such registered person, including its net capital, its liquidity, 

or its ability to conduct or finance its operations. The Commission, by rule, may require summary reports of such information to be filed with the Commission no more frequently than 

quarterly. 

(2) AUTHORITY TO REQUIRE ADDITIONAL INFORMATION.— If, as 

a result of adverse market conditions or based on reports provided to the Commission pursuant to paragraph (1) of this subsection or other available information, the Commission reasonably concludes that it has concerns regarding the financial or 

operational condition of (A) any registered broker or dealer, or 

(B) any registered municipal securities dealer, government securities broker, or government securities dealer for which the 

Commission is the appropriate regulatory agency, the Commission may require the registered person to make reports concerning the financial and securities activities of any of such 

person’s associated persons, other than a natural person, 

whose business activities are reasonably likely to have a material impact on the financial or operational condition of such 

registered person. The Commission, in requiring reports pursuant to this paragraph, shall specify the information required, 

the period for which it is required, the time and date on which 

the information must be furnished, and whether the information is to be furnished directly to the Commission or to a selfregulatory organization with primary responsibility for examining the registered person’s financial and operational condition. 

(3) SPECIAL PROVISIONS WITH RESPECT TO ASSOCIATED PERSONS SUBJECT TO FEDERAL BANKING AGENCY REGULATION.— 

(A) COOPERATION IN IMPLEMENTATION.— In developing 

and implementing reporting requirements pursuant to 

paragraph (1) of this subsection with respect to associated 

persons subject to examination by or reporting requirements of a Federal banking agency, the Commission shall 

consult with and consider the views of each such Federal 

banking agency. If a Federal banking agency comments in 

writing on a proposed rule of the Commission under this 

subsection that has been published for comment, the Commission shall respond in writing to such written comment 

before adopting the proposed rule. The Commission shall, 

at the request of the Federal banking agency, publish such 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
64 

comment and response in the Federal Register at the time 

of publishing the adopted rule. 

(B) USE OF BANKING AGENCY REPORTS.— A registered 

broker, dealer, or municipal securities dealer shall be in 

compliance with any recordkeeping or reporting requirement adopted pursuant to paragraph (1) of this subsection 

concerning an associated person that is subject to examination by or reporting requirements of a Federal banking 

agency if such broker, dealer, or municipal securities dealer utilizes for such recordkeeping or reporting requirement 

copies of reports filed by the associated person with the 

Federal banking agency pursuant to section 5211 of the 

Revised Statutes, section 9 of the Federal Reserve Act, section 7(a) of the Federal Deposit Insurance Act, section 

10(b) of the Home Owners’ Loan Act, or section 8 of the 

Bank Holding Company Act of 1956. The Commission may, 

however, by rule adopted pursuant to paragraph (1), require any broker, dealer, or municipal securities dealer filing such reports with the Commission to obtain, maintain, 

or report supplemental information if the Commission 

makes an explicit finding that such supplemental information is necessary to inform the Commission regarding potential risks to such broker, dealer, or municipal securities 

dealer. Prior to requiring any such supplemental information, the Commission shall first request the Federal banking agency to expand its reporting requirements to include 

such information. 

(C) PROCEDURE FOR REQUIRING ADDITIONAL INFORMATION.— Prior to making a request pursuant to paragraph 

(2) of this subsection for information with respect to an associated person that is subject to examination by or reporting requirements of a Federal banking agency, the Commission shall— 

(i) notify such agency of the information required 

with respect to such associated person; and 

(ii) consult with such agency to determine whether 

the information required is available from such agency 

and for other purposes, unless the Commission determines that any delay resulting from such consultation 

would be inconsistent with ensuring the financial and 

operational condition of the broker, dealer, municipal 

securities dealer, government securities broker, or government securities dealer or the stability or integrity 

of the securities markets. 

(D) EXCLUSION FOR EXAMINATION REPORTS.— Nothing in 

this subsection shall be construed to permit the Commission to require any registered broker or dealer, or any registered municipal securities dealer, government securities 

broker, or government securities dealer for which the Commission is the appropriate regulatory agency, to obtain, 

maintain, or furnish any examination report of any Federal banking agency or any supervisory recommendations 

or analysis contained therein. 

(E) CONFIDENTIALITY OF INFORMATION PROVIDED.— No 

information provided to or obtained by the Commission 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
65 

from any Federal banking agency pursuant to a request by 

the Commission under subparagraph (C) of this paragraph 

regarding any associated person which is subject to examination by or reporting requirements of a Federal banking 

agency may be disclosed to any other person (other than 

a self-regulatory organization), without the prior written 

approval of the Federal banking agency. Nothing in this 

subsection shall authorize the Commission to withhold information from Congress, or prevent the Commission from 

complying with a request for information from any other 

Federal department or agency requesting the information 

for purposes within the scope of its jurisdiction, or complying with an order of a court of the United States in an 

action brought by the United States or the Commission. 

(F) NOTICE TO BANKING AGENCIES CONCERNING FINANCIAL AND OPERATIONAL CONDITION CONCERNS.— The Commission shall notify the Federal banking agency of any 

concerns of the Commission regarding significant financial 

or operational risks resulting from the activities of any 

registered broker or dealer, or any registered municipal securities dealer, government securities broker, or government securities dealer for which the Commission is the appropriate regulatory agency, to any associated person 

thereof which is subject to examination by or reporting requirements of the Federal banking agency. 

(G) DEFINITION.— For purposes of this paragraph, the 

term ‘‘Federal banking agency’’ shall have the same meaning as the term ‘‘appropriate Federal bank agency’’ in section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. 

1813(q)). 

(4) EXEMPTIONS.— The Commission by rule or order may exempt any person or class of persons, under such terms and 

conditions and for such periods as the Commission shall provide in such rule or order, from the provisions of this subsection, and the rules thereunder. In granting such exemptions, the Commission shall consider, among other factors— 

(A) whether information of the type required under this 

subsection is available from a supervisory agency (as defined in section 1101(6) of the Right to Financial Privacy 

Act of 1978 (12 U.S.C. 3401(6))), a State insurance commission or similar State agency, the Commodity Futures 

Trading Commission, or a similar foreign regulator; 

(B) the primary business of any associated person; 

(C) the nature and extent of domestic or foreign regulation of the associated person’s activities; 

(D) the nature and extent of the registered person’s securities activities; and 

(E) with respect to the registered person and its associated persons, on a consolidated basis, the amount and proportion of assets devoted to, and revenues derived from, 

activities in the United States securities markets. 

(5) AUTHORITY TO LIMIT DISCLOSURE OF INFORMATION.— Notwithstanding any other provision of law, the Commission shall 

not be compelled to disclose any information required to be reported under this subsection, or any information supplied to 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
66 

the Commission by any domestic or foreign regulatory agency 

that relates to the financial or operational condition of any associated person of a registered broker, dealer, government securities broker, government securities dealer, or municipal securities dealer. Nothing in this subsection shall authorize the 

Commission to withhold information from Congress, or prevent 

the Commission from complying with a request for information 

from any other Federal department or agency requesting the 

information for purposes within the scope of its jurisdiction, or 

complying with an order of a court of the United States in an 

action brought by the United States or the Commission. For 

purposes of section 552 of title 5, United States Code, this subsection shall be considered a statute described in subsection 

(b)(3)(B) of such section 552. In prescribing regulations to carry 

out the requirements of this subsection, the Commission shall 

designate information described in or obtained pursuant to 

subparagraph (B) or (C) of paragraph (3) of this subsection as 

confidential information for purposes of section 24(b)(2) of this 

title. 

(i) AUTHORITY TO LIMIT DISCLOSURE OF INFORMATION.—Notwithstanding any other provision of law, the Commission shall not be 

compelled to disclose any information required to be reported under 

subsection (h) or (i) or any information supplied to the Commission 

by any domestic or foreign regulatory agency that relates to the financial or operational condition of any associated person of a 

broker or dealer, investment bank holding company, or any affiliate 

of an investment bank holding company. Nothing in this subsection 

shall authorize the Commission to withhold information from Congress, or prevent the Commission from complying with a request 

for information from any other Federal department or agency or 

any self-regulatory organization requesting the information for purposes within the scope of its jurisdiction, or complying with an 

order of a court of the United States in an action brought by the 

United States or the Commission. For purposes of section 552 of 

title 5, United States Code, this subsection shall be considered a 

statute described in subsection (b)(3)(B) of such section 552. In prescribing regulations to carry out the requirements of this subsection, the Commission shall designate information described in or 

obtained pursuant to subparagraphs (A), (B), and (C) of subsection 

(i)(5) as confidential information for purposes of section 24(b)(2) of 

this title. 

(j) COORDINATION OF EXAMINING AUTHORITIES.— 

(1) ELIMINATION OF DUPLICATION.— The Commission and the 

examining authorities, through cooperation and coordination of 

examination and oversight activities, shall eliminate any unnecessary and burdensome duplication in the examination 

process. 

(2) COORDINATION OF EXAMINATIONS.— The Commission and 

the examining authorities shall share such information, including reports of examinations, customer complaint information, 

and other nonpublic regulatory information, as appropriate to 

foster a coordinated approach to regulatory oversight of brokers and dealers that are subject to examination by more than 

one examining authority. 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
67 

(3) EXAMINATIONS FOR CAUSE.— At any time, any examining 

authority may conduct an examination for cause of any broker 

or dealer subject to its jurisdiction. 

(4) CONFIDENTIALITY.— (A) IN GENERAL.— Section 24 shall apply to the sharing 

of information in accordance with this subsection. The 

Commission shall take appropriate action under section 

24(c) to ensure that such information is not inappropriately disclosed. 

(B) APPROPRIATE DISCLOSURE NOT PROHIBITED.— Nothing in this paragraph authorizes the Commission or any 

examining authority to withhold information from the 

Congress, or prevent the Commission or any examining 

authority from complying with a request for information 

from any other Federal department or agency requesting 

the information for purposes within the scope of its jurisdiction, or complying with an order of a court of the United 

States in an action brought by the United States or the 

Commission. 

(5) DEFINITION.— For purposes of this subsection, the term 

‘‘examining authority’’ means a self-regulatory organization 

registered with the Commission under this title (other than a 

registered clearing agency) with the authority to examine, inspect, and otherwise oversee the activities of a registered 

broker or dealer. 

* * * * * * * 


smartinez on DSK3GLQ082PROD with REPORTS-HSE
(68) 

MINORITY VIEWS 

H.R. 5311, the ‘‘Corporate Governance Reform and Transparency 

Act of 2016,’’ would create an untested, inappropriate and costly 

regulatory framework for proxy advisory firms—or firms that provide research and voting recommendations to shareholders—under 

the guise of limiting conflicts of interest and improving transparency. However, rather than improve public company corporate 

governance, the legislation would create numerous problems that 

would make it more difficult for shareholders to hold company 

management accountable. Indeed, H.R. 5311 would only serve to 

limit the impartial information available to shareholders when 

making proxy voting decisions, make it more difficult for institutional investors to fulfill their fiduciary duty to their clients, and 

create barriers to entry that would stifle competition in the proxy 

advisory firm industry. 

Many stakeholders wrote to the Committee to say as much when 

H.R. 5311 was being considered. This includes investors like TIAA, 

and their trade association representatives, including the Investment Company Institute and the Council of Institutional Investors; 

union pension funds representing carpenters, automobile workers 

and Teamsters; as well as public pension funds from the states of 

California, New York, Florida, Colorado, Washington, Ohio, 

Vermont and Oregon. Advocates representing the interests of investors likewise opposed H.R. 5311, including the Consumer Federation of America, Americans for Financial Reform, and Public 

Citizen. 

The correspondence and testimony received by the Committee on 

H.R. 5311 noted numerous problems with the legislation. 

First, H.R. 5311 would require that proxy advisory firms provide 

an opportunity for companies to comment on the editorial decisions 

reflected in the firms’ research before that research could be disseminated to paying clients. This mandatory pre-publication consultation with companies would essentially open up the independent research process to lobbying from special interests. This 

provision would be made more unworkable by the fact that the U.S. 

proxy season is compressed, occurring over just a few months in 

the spring. Further, the Minority notes that H.R. 5311 does not 

provide shareholders with proposals on the proxy the same opportunity for pre-review and lobbying as company management. 

Second, H.R. 5311 would make it more difficult for institutional 

investors to fulfill their fiduciary duty to their clients. Staff Legal 

Bulletin No. 20 (SLB–20) from the Securities and Exchange Commission (SEC) has already provided needed clarity to investment 

advisors, outlining the due diligence and oversight that advisors 

must undertake in order to ensure that research providers and 

third-party voting agents are serving their clients’ best interests. 

H.R. 5311 would replace this clear guidance with an untested reguVerDate Sep 11 2014 06:23 Oct 04, 2016 Jkt 059006 PO 00000 Frm 00068 Fmt 6604 Sfmt 6604 E:\HR\OC\HR798.XXX HR798

smartinez on DSK3GLQ082PROD with REPORTS-HSE
69 

latory framework, which may be inconsistent with the Department 

of Labor’s recently finalized conflict of interest rule, Financial Industry Regulatory Authority (FINRA) rules prohibiting pre-review 

of research reports, as well as best practice principles adopted by 

the European Securities and Markets Authority and the Canadian 

Securities Administrators. 

Finally, H.R. 5311 would create barriers to entry that would only 

serve to further concentrate the proxy advisory firm industry. Investors writing to the Committee have noted that the legislation 

would likely reduce the number of firms in the marketplace offering independent proxy advisory services, and, as a result, the remaining firm(s) in the industry may drive up the costs of their research. Alternatively, investors expressed concern that they may be 

left without independent research providers at all, and may instead 

have to spend significant amounts to develop extensive in-house research divisions. 

In summary, the Minority believes that corporate governance 

works best when shareholders are empowered with independent, 

impartial information when making voting decisions on key ballot 

issues—from director elections to corporate boards, to Dodd-Frank’s 

‘‘say on pay’’ votes, to countless other measures. H.R. 5311 represents a step in the wrong direction, which would leave shareholders reliant on biased information tilted towards the interests of 

company management. 

For these reasons, the Minority opposes H.R. 5311. 

MAXINE WATERS. KEITH ELLISON. GWEN MOORE. AL GREEN. 

RUBE ́ N HINOJOSA. 

DENNY HECK. EMANUEL CLEAVER. 

STEPHEN F. LYNCH. JOYCE BEATTY. 

WM. LACY CLAY. 

Æ 


smartinez on DSK3GLQ082PROD with REPORTS-HSE