INDEX Act
Bill: S.4241 | Sponsor: Sen. Sullivan, Dan (R-AK)
Policy area: Finance and Financial Sector

Summary:
INvestor Democracy is EXpected Act or the INDEX Act
This bill establishes guidelines for passively managed funds (e.g., index funds) that vote shares on behalf of fund investors in proxy shareholder votes. Under the bill, these funds generally must vote shares on a proportional basis according to instructions from fund investors.
The bill establishes an exemption for routine matters and matters requiring approval of a majority of outstanding securities. Additionally, the bill establishes a safe harbor from these requirements for investment advisers.

To amend the Investment Advisers Act of 1940 to require investment 
advisers for passively managed funds to arrange for pass-through voting 
       of proxies for certain securities, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``INvestor Democracy is EXpected Act'' 
or the ``INDEX Act''.

SEC. 2. PROXY VOTING OF PASSIVELY MANAGED FUNDS.

    (a) In General.--The Investment Advisers Act of 1940 (15 U.S.C. 
80b-1 et seq.) is amended by inserting after section 208 (15 U.S.C. 
80b-8) the following:

``SEC. 208A. REQUIREMENT WITH RESPECT TO PROXY VOTING OF PASSIVELY 
              MANAGED FUNDS.

    ``(a) Definitions.--In this section--
            ``(1) the term `covered security'--
                    ``(A) means a voting security, as that term is 
                defined in section 2(a) of the Investment Company Act 
                of 1940 (15 U.S.C. 80a-2(a)), in which a qualified fund 
                is invested; and
                    ``(B) does not include any voting security (as 
                defined in subparagraph (A)) of an issuer registered 
                with the Commission as an investment company under 
                section 8 of the Investment Company Act of 1940 (15 
                U.S.C. 80a-8);
            ``(2) the term `passively managed fund' means a qualified 
        fund that--
                    ``(A) is designed to track, or is derived from, an 
                index of securities or a portion of such an index;
                    ``(B) discloses that the qualified fund is a 
                passive fund or an index fund;
                    ``(C) allocates not less than 40 percent of the 
                total assets of the qualified fund to an investment 
                strategy that is designed to track, or is derived from, 
                an index of securities or a portion of such an index; 
                or
                    ``(D) discloses that an allocation described in 
                subparagraph (C) follows an investment strategy that is 
                passive or based on an index of securities;
            ``(3) the term `qualified fund' means--
                    ``(A) an investment company, as that term is 
                defined in section 3 of the Investment Company Act of 
                1940 (15 U.S.C. 80a-3);
                    ``(B) a private fund;
                    ``(C) an eligible deferred compensation plan, as 
                that term is defined in section 457(b) of the Internal 
                Revenue Code of 1986;
                    ``(D) an entity described in section 3(c)(11) of 
                the Investment Company Act of 1940 (15 U.S.C. 80a-
                3(c)(11));
                    ``(E) a plan maintained by an employer described in 
                clause (i), (ii), or (iii) of section 403(b)(1)(A) of 
                the Internal Revenue Code of 1986 to provide annuity 
                contracts described in section 403(b) of such Code;
                    ``(F) a common trust fund, or similar fund, 
                maintained by a bank;
                    ``(G) any fund established under section 8438(b)(1) 
                of title 5, United States Code; or
                    ``(H) any separate managed account of a client of 
                an investment adviser;
            ``(4) the term `registrant' means an issuer of covered 
        securities;
            ``(5) the term `routine matter' does not include--
                    ``(A) a proposal that is not submitted to a holder 
                of covered securities by means of a proxy statement 
                comparable to that described in section 240.14a-101 of 
                title 17, Code of Federal Regulations, or any successor 
                regulation;
                    ``(B) a proposal that is--
                            ``(i) the subject of a counter-
                        solicitation; or
                            ``(ii) part of a proposal made by a person 
                        other than the applicable registrant;
                    ``(C) a proposal that relates to a merger or 
                consolidation, except when, with respect to a 
                registrant--
                            ``(i) the proposal is to merge with a 
                        wholly owned subsidiary of the registrant; and
                            ``(ii) holders of covered securities issued 
                        by the registrant that dissent to the proposal 
                        do not have rights of appraisal;
                    ``(D) a proposal that relates to the sale, lease, 
                or exchange of all, or substantially all, of the 
                property and assets of a registrant;
                    ``(E) an election for directors (or comparable 
                positions); or
                    ``(F) any other matter determined by the Commission 
                or an exchange registered under section 6 of the 
                Securities Exchange Act of 1934 (15 U.S.C. 78f) to be 
                not routine; and
            ``(6) the term `voting person' means a person that provides 
        voting instructions under subsection (b) or (c).
    ``(b) Requirement.--
            ``(1) In general.--Subject to subsection (g), if an 
        investment adviser holds authority to vote a proxy solicited 
        pursuant to section 14 of the Securities Exchange Act of 1934 
        (15 U.S.C. 78n) in connection with any vote of covered 
        securities held by a passively managed fund, and the voting 
        authority held by that investment adviser with respect to those 
        covered securities (when combined with the voting authority of 
        other persons controlled by, or under common control with, that 
        investment adviser) is more than 1 percent of the voting 
        authority of the outstanding securities of the registrant 
        subject to the vote, the investment adviser shall vote 
        proportionate amounts of those covered securities in accordance 
        with the voting instructions of--
                    ``(A) in the case of a passively managed fund that 
                issues securities, persons holding securities in the 
                passively managed fund, such that, solely for the 
                purposes of that vote, the percentage of securities 
                held by such a person shall be deemed to be the 
                percentage of the covered securities beneficially owned 
                by that person; and
                    ``(B) in all cases other than a case described in 
                subparagraph (A), persons holding economic interests in 
                the passively managed fund, such that, solely for 
                purposes of that vote, the percentage of economic 
                interests held by such a person shall be deemed to be 
                the percentage of the covered securities beneficially 
                owned by that person.
            ``(2) Prohibition.--If paragraph (1) applies with respect 
        to any vote of covered securities and the investment adviser to 
        which that paragraph applies does not receiving voting 
        instructions from all persons described in subparagraphs (A) 
        and (B) of that paragraph, the investment adviser may not vote 
        the proportion of the shares of the covered securities for 
        which the investment adviser does not receive voting 
        instructions.
    ``(c) Passively Managed Fund as Security Holder of Another 
Passively Managed Fund.--If a passively managed fund (referred to in 
this subsection as the `holding fund') holds securities of another 
passively managed fund (referred to in this subsection as the `held 
fund'), and there is a vote with respect to covered securities held by 
the held fund, the investment adviser of the holding fund shall obtain 
voting instructions from persons holding securities in the holding 
fund, or to persons holding economic interests in the holding fund, as 
applicable, with respect to that vote in the manner described in 
subsection (b).
    ``(d) Prohibitions.--
            ``(1) Reimbursement.--No person may seek reimbursement from 
        a registrant, or require any expenses incurred to be paid by a 
        registrant, with respect to the obligations imposed under this 
        section.
            ``(2) Partial compliance.--An investment adviser may not 
        solicit voting instructions from some, but not all, voting 
        persons under subsection (b)(1) or (c), as applicable.
    ``(e) Exceptions.--
            ``(1) Voting on routine matters.--Notwithstanding 
        subsections (b)(1), (b)(2), and (d)(2), if an investment 
        adviser chooses not to solicit voting instructions with respect 
        to a vote described in subsection (b)(1) or (c), or, as of the 
        date that is 10 days before such a vote, the investment adviser 
        has not received voting instructions from a person described in 
        subparagraph (A) or (B) of subsection (b)(1) or subsection (c), 
        as applicable, the investment adviser may vote the covered 
        securities for which the investment adviser has not received 
        voting instructions with respect to a routine matter.
            ``(2) Mirror voting exception for matters requiring 
        approval of a majority of outstanding securities.--
        Notwithstanding subsections (b)(1), (b)(2), and (d)(2), if a 
        matter to be considered at a meeting of a registrant requires 
        the approval of a majority of the outstanding securities of the 
        registrant entitled to vote on the matter, an investment 
        adviser to which any such provision applies may, with respect 
        to any covered securities for which voting instructions have 
        not been received, as of the date that is 10 days before that 
        vote, vote the uninstructed covered securities in a manner that 
        is proportionate to the votes submitted on the matter by all 
        other security holders of the registrant.
    ``(f) Dissemination of Information.--
            ``(1) In general.--Any investment adviser subject to the 
        requirements of subsection (b) or (c) shall, with respect to 
        the dissemination of information and other materials to a 
        voting person, comply with the following requirements, unless 
        the voting person affirmatively declines to receive that 
        information and other materials:
                    ``(A) Provide to the voting person--
                            ``(i) a proxy statement, other proxy 
                        soliciting material, or an information 
                        statement;
                            ``(ii) an annual report from the applicable 
                        registrant;
                            ``(iii) a form of voting instruction to 
                        return to the investment adviser; and
                            ``(iv) any control or identification number 
                        that the voting person needs to return to the 
                        investment adviser the voting instruction 
                        provided under subparagraph (B).
                    ``(B) Provide the voting person with not less than 
                5 business days after the date on which the voting 
                person receives the materials provided under paragraph 
                (1) to return those materials to the investment 
                adviser.
            ``(2) Electronic delivery.--All, or any portion, of the 
        materials that an investment adviser is required to provide 
        under paragraph (1)(A) may be provided electronically, 
        including an internet web site address provided by the 
        applicable registrant or a third party.
            ``(3) Option for investment advisers.--An investment 
        adviser may provide recommendations to voting persons with the 
        material provided under paragraph (1)(A), or after providing 
        the material under that paragraph, if the investment adviser 
        permits voting recommendations to be provided to voting persons 
        by third parties on a nondiscriminatory basis and on a wide 
        range of views.
            ``(4) Satisfaction of requirements by passively managed 
        fund.--With respect to any requirement applicable to an 
        investment adviser under this subsection, the requirement may 
        be satisfied by the applicable passively managed fund, which 
        may cover any expenses, direct or indirect, incurred in 
        carrying out that requirement.
    ``(g) Safe Harbor and Rule of Construction Regarding Duties.--An 
investment adviser--
            ``(1) with respect to a matter that is not a routine 
        matter, may choose not to solicit voting instructions from any 
        person under subsection (b)(1) or (c), subject to subsections 
        (d)(2) and (e); and
            ``(2) if the investment adviser chooses not to solicit 
        voting instructions under subparagraph (A), shall not be 
        considered to be in violation of any duty under any Federal or 
        State law for failing to vote the applicable securities.''.
    (b) Effective Date.--Section 208A of the Investment Advisers Act of 
1940, as added by subsection (a), shall take effect on the first August 
1 that occurs after the date that is 2 years after the date of 
enactment of this Act.

SEC. 3. VOTING INSTRUCTIONS FROM CUSTOMERS.

    Section 14(b)(1) of the Securities Exchange Act of 1934 (15 U.S.C. 
78n(b)(1)) is amended by inserting ``voting instruction,'' after 
``consent,''.
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