SB1503 - 572R

Be it enacted by the Legislature of the State of Arizona:

Section 1. Title 38, Arizona Revised Statutes, is amended by adding chapter 6.1, to read:

CHAPTER 6.1

FIDUCIARY DUTIES AND PROXY VOTING

ARTICLE 1. GENERAL PROVISIONS

START_STATUTE38-971. Definitions

In this chapter, unless the context otherwise requires:

1. "Consumer" means a person who is a resident of this state and either:

(a) Has an interest in an investment company, including mutual funds and exchange traded funds, that is registered with the United States Securities and Exchange Commission and that directly or indirectly owns shares of an enterprise regulated by this state.

(b) Is a beneficiary of or participant in a pension benefit plan.

2. "Economic analysis":

(a) Means a written analysis demonstrating the factors considered in evaluating the economic impact of a shareholder-sponsored proposal.

(b) Includes:

(i) The subject matter of the shareholder-sponsored proposal.

(ii) An evaluation of the issuer's stated reasons for opposition to the shareholder-sponsored proposal.

(iii) An evaluation of whether the shareholder-sponsored proposal is consistent with the investment objectives and risk management profile of the pension benefit plan in which the participants and beneficiaries are invested.

(iv) An evaluation of the economic benefits and costs of implementing the shareholder-sponsored proposal over a time period that is consistent with the investment objectives and risk management profile of the plan.

(v) The quantifiable impact of the shareholder-sponsored proposal on the investment returns of the participants and beneficiaries of the plan.

(vi) An explanation of the modeling, procedures and processes used to complete the economic analysis.

3. "Fiduciary" means a person who, with respect to a pension benefit plan, does any of the following:

(a) Exercises discretionary authority or discretionary control with respect to management of the plan or exercises authority or control with respect to acquisition, management or disposition of the plan's assets.

(b) Renders investment advice for a fee or other direct or indirect compensation with respect to monies or other assets of the plan or has authority or responsibility to do so.

4. "Investment company" has the same meaning as defined in 15 United States Code section 80a-3.

5. "Pension benefit plan" or "plan" means a plan, fund or program that is established, maintained or offered by a public entity, including a public retirement system, if by its terms or as a result of surrounding circumstances the plan, fund or program does any of the following:

(a) Provides retirement income or other retirement benefits to employees or former employees.

(b) Results in a deferral of income by employees for a period extending to the termination of covered employment or beyond.

6. "Proxy advisory firm" means a person who is engaged in the business of providing proxy voting advice, research, analysis, ratings or recommendations to a fiduciary or providing proxy voting advice, research, analysis, ratings or recommendations relating to an issuer of securities.

7. "Public entity" means this state, a political subdivision of this state, a public school corporation and a public officer, board, commission, department, agency and authority empowered by law to enter into public contracts for the expenditure of public monies, including the Arizona board of regents and institutions under the control of the Arizona board of regents.

8. "Say on pay proposal" means a resolution subject to a shareholder vote to approve the compensation of executives as required by the Securities Exchange Act of 1934 (15 United States Code section 78n-1(a)(1).

9. "Sole economic interest" means the maximization of risk-adjusted investment returns of the participants and beneficiaries of a pension benefit plan over a time period consistent with the risk management profile of the plan.END_STATUTE

START_STATUTE38-972. Fiduciary voting responsibilities; annual report

A. A fiduciary shall vote all shares held directly or indirectly by, subject to or on behalf of a pension benefit plan for the benefit of the plan's participants and beneficiaries in the sole economic interest of the plan's participants and beneficiaries.

B. For the purposes of this section, with respect to a shareholder-sponsored proposal, there is a rebuttable presumption that a fiduciary votes its shares in the sole economic interest of the plan's participants and beneficiaries if the fiduciary's vote follows the recommendation of the board of directors of the issuer of the shares if the board includes a majority of independent directors.

C. With respect to a shareholder-sponsored proposal, a fiduciary’s vote in a manner inconsistent with the recommendation of the board of directors of the issuer of the shares is presumed to be in the sole economic interest of the plan's participants and beneficiaries if any of the following criteria are met:

1. The fiduciary conducts and documents an economic analysis demonstrating that the vote is in the sole economic interest of the plan's participants and beneficiaries.

2. On behalf of the fiduciary, a third party conducts and documents an economic analysis demonstrating that the vote is in the sole economic interest of the plan's participants and beneficiaries and the fiduciary determines that the economic analysis adequately demonstrates that the vote is in the sole economic interest of the plan's participants and beneficiaries.

D. A fiduciary may not vote in a manner that does any of the following:

1. Subordinates the economic interest of the plan's participants and beneficiaries to any environmental, social, policy, governance or ideological goal.

2. Promotes any environmental, social, policy, governance or ideological goal, unless, based on an economic analysis, it is determined that the vote is in the sole economic interest of the plan's participants and beneficiaries and to maximize risk-adjusted investment returns of the plan's participants and beneficiaries.

E. With respect to shareholder-sponsored proposals, a fiduciary shall annually disclose in a report to the state treasurer both:

1. Each vote that is inconsistent with the recommendation of an issuer's board of directors composed of a majority of independent directors.

2. The economic analysis conducted and documented with respect to each vote described in subsection C of this section to determine that the vote was in the sole economic interest of the plan's participants and beneficiaries.

F. The report required under subsection E of this section shall be certified by the chief executive officer and chief financial officer, or an individual acting on behalf of the chief executive officer or chief financial officer, of the fiduciary.

G. At least once every three years, a fiduciary shall back test its economic analysis to ensure that the models, procedures and processes the fiduciary uses to predict the sole economic interest of the plan's participants and beneficiaries are accurate and shall deliver a report detailing the back testing to the state treasurer. Based on the back testing, the chief executive officer and chief financial officer of the fiduciary, or an individual acting on behalf of the chief executive officer or chief financial officer, shall certify that the economic analysis performed by the fiduciary and included in the report was effective.END_STATUTE

START_STATUTE38-973. Proxy advisory firms

A. With respect to any enterprise that is regulated by this State, a proxy advisory firm may not:

1. Provide proxy voting advice with respect to shareholder-sponsored proposals submitted to the enterprise unless the proxy advisory firm bases its voting recommendations on the sole economic interest of the enterprise's shareholders.

2. With respect to a company-sponsored say on pay proposal, provide proxy voting advice that undermines the use of discretion by an independent compensation committee of the issuer's board of directors, is based on prior shareholder support levels beyond the level at which the proposal passed under the relevant state law or relies on assumptions or methodologies that are not consistent with generally accepted accounting principles.

B. With respect to a shareholder-sponsored proposal submitted to an enterprise regulated by this state:

1. There is a presumption that a proxy advisory firm's voting recommendation is based in the sole economic interest of the enterprise's shareholders if the recommendation is consistent with the recommendation of the board of directors of the issuer of the shares and the board is composed of a majority of independent directors.

2. A proxy advisory firm may recommend a vote that is inconsistent with the recommendation of the board of directors of the issuer of the shares if the proxy advisory firm conducts and documents an economic analysis demonstrating that the vote is in the sole economic interest of the enterprise's shareholders.

C. A proxy advisory firm must annually disclose in a report to the state treasurer all of the following:

1. Each vote recommendation that is inconsistent with the recommendation of an issuer's board of directors composed of a majority of independent directors.

2. The economic analysis conducted and documented with respect to each vote recommendation described in subsection B, paragraph 2 of this section to determine that the vote recommendation is in the sole economic interest of the regulated enterprise's shareholders.

D. With respect to a shareholder-sponsored proposal to be considered for voting by a plan:

1. A proxy advisory firm may not provide proxy voting advice to a plan unless the proxy advisory firm bases its voting recommendations on the sole economic interest of the plan's participants and beneficiaries.

2. There is a presumption that a proxy advisory firm's voting recommendation is in the sole economic interest of the plan's participants and beneficiaries if the recommendation is consistent with the recommendation of the board of directors of the issuer of the shares and the board is composed of a majority of independent directors.

3. A proxy advisory firm may recommend a vote that is inconsistent with the recommendation of the board of directors of the issuer of the shares if the proxy advisory firm conducts and documents an economic analysis demonstrating that the vote is in the sole economic interest of the plan's participants and beneficiaries.

4. A proxy advisory firm shall disclose in an annual report to the Board of Trustees or an oversight body to the plan both of the following:

(a) each vote recommendation that is inconsistent with the recommendation of an issuer's board of directors composed of a majority of independent directors.

(b) The economic analysis conducted and documented with respect to each vote recommendation described in paragraph 3 of this subsection to determine that the vote recommendation is in the sole economic interest of the plan's participants and beneficiaries.

E. With respect to a company-sponsored say on pay proposal, A proxy advisory firm may not provide to a plan proxy voting advice that:

1. Undermines the use of discretion by an independent compensation committee of the issuer's board of directors.

2. Is based on prior shareholder support levels beyond the level at which the proposal passes under state law.

3. Relies on assumptions or methodologies that do not comply with generally accepted accounting principles.END_STATUTE

START_STATUTE38-974. Consumer right to disclosure

A. If a consumer has a reason to believe that shares underlying the consumer's investment have been voted in a manner inconsistent with the consumer's best economic interest, a consumer may submit a request to obtain a copy of the documented economic analysis demonstrating that the vote is solely in the best economic interest of the consumer. In each case that the consumer is an investor, beneficiary or participant, The consumer may submit the request to the investment company that owns shares of an enterprise regulated by this State or the plan. There is a presumption that a vote is in the sole economic interest of the consumer if the vote is consistent with the recommendation of the board of directors of the issuer of the shares and the board is composed of a majority of independent directors.

B. The investment company or plan shall respond in writing to the consumer within ninety days after receipt of a request described in subsection A of this section by doing one of the following:

1. Providing the consumer with the requested economic analysis.

2. Informing the consumer that an economic analysis is not available if the investment company did not conduct and document an economic analysis.

3. Informing the consumer that the vote at issue was cast consistent with the recommendation of the board of directors of the issuer of the shares and the board is composed of a majority of independent directors.

C. Information described in subsection B of this section must be provided by the investment company or plan free of charge not more than twice annually per consumer. END_STATUTE

START_STATUTE38-975. Prohibitions against conflicts of interest, disenfranchising shareholders and undermining independent board of directors

A. A plan may not enter into an agreement with a proxy advisory firm with respect to the provision of proxy advisory services unless the proxy advisory firm acknowledges in writing and accepts under contract its obligations under this section.

B. A proxy advisory firm may not provide proxy voting advice to a plan if an actual or potential conflict of interest exists that could reasonably be expected to affect the objectivity or reliability of the proxy voting advice. For the purposes of this subsection, an actual or potential conflict of interest that could reasonably be expected to affect the objectivity or reliability of the proxy voting advice includes the following acts by a proxy advisory firm or any of its affiliates:

1. Receiving or seeking to receive fees for consulting services from either:

(a) The issuer of the shares or any of its affiliates that is the subject of any proxy voting advice, written report, research, analysis, rating or recommendation furnished by the proxy advisory firm.

(b) The sponsor of a shareholder-sponsored proposal or any of its affiliates that is the subject of the proxy voting advice.

2. being a member of any organization that actively supports a shareholder-sponsored proposal that is, or is substantially similar to, the subject of the proxy voting advice.

C. A proxy advisory firm may not provide proxy voting advice to a plan if its voting recommendation is not consistent with the recommendation of a board of directors or a committee of the board of directors when the recommendation is decided by a majority of independent directors and the recommendation is based, in whole or in part, on a decision by the board of directors or the committee to either:

1. Pursue the adjudication of a business dispute in United States federal court or state court.

2. Exercise its discretion in connection with executive compensation decisions.

D. A proxy advisory firm may not provide proxy voting advice to a plan if its negative voting recommendation is based, in whole or in part, on the level of shareholder support received with respect to a previous proposal submitted to a vote at the company if the company's previous proposal was approved by shareholders pursuant to the laws of the state of incorporation of the company.END_STATUTE

START_STATUTE38-976. Enforcement; attorney general; violation; civil penalty

A. The attorney general may enforce this chapter.

B. If the attorney general has reasonable cause to believe that a person has engaged in, is engaging in, or is about to engage in a violation of this chapter, the attorney general may do any of the following:

1. Require the person to file on forms prescribed by the attorney general a statement or report in writing, under oath, as to all the circumstances surrounding the actual, alleged or potential violation and other information that the attorney general deems necessary.

2. Examine under oath any person in connection with the actual, alleged or potential violation.

3. Examine any record, book, document or paper as the attorney general deems necessary.

4. Issue civil investigatory demands consistent with an investigation into a potential enforcement action.

5. Under a district court order, impound any record, book, document, paper or sample or material relating to the actual, alleged or potential violation and retain the impounded item in the attorney general's possession until the completion of all proceedings undertaken under this chapter or in court.

C. The attorney general may initiate an action in the name of this state and may seek an injunction to restrain a violation of this chapter. A violation of this chapter constitutes irreparable harm. Each share voted by a fiduciary that is not voted in the sole economic interest of the shareholder constitutes a separate violation. For each violation of this chapter, The attorney general may seek civil penalties that may not exceed $1,000 per violation. Civil penalties collected under this chapter shall be deposited in the state general fund. END_STATUTE