Touted as a way to bring greater transparency, the Securities and Exchange Commission has finalized new rules concerning information that investment funds report about their proxy votes and disclosure of “say-on-pay” votes for institutional investment managers.
The Commission adopted the new rule and amendments Nov. 2 in a divided 3-2 vote, with Republican Commissioners Hester Peirce and Mark Uyeda voting against the changes.
The new rule amends Form N-PX under the Investment Company Act to require mutual funds, exchange-traded funds (ETFs) and certain other registered funds that currently report annually about their proxy votes to now categorize each matter by type and, where a form of proxy or “proxy card” subject to the Commission’s proxy rules is available, tie the description and order of voting matters to the issuer’s form of proxy.
The changes also prescribe how funds and managers must organize their reports and require them to use a structured data language to make the filings easier to analyze.
Funds and managers will also be required to disclose the number of shares that were voted or instructed to be voted, as well as the number of shares loaned and not recalled, and thus, not voted. The SEC notes that this latter requirement is designed to provide shareholders with context to understand how securities lending activities could affect a fund’s or manager’s proxy voting practices.
According to the SEC, the amendments will make these funds’ proxy voting records more usable and easier to analyze, improving investors’ ability to monitor how their funds vote and compare different funds’ voting records.
Say on Pay
The rulemaking will also newly require institutional investment managers to disclose how they voted on executive compensation—or so-called “say-on-pay” matters—which the SEC notes fulfills one of the remaining rulemaking mandates under the Dodd-Frank Act.
According to a fact sheet, new rule 14Ad-1 will require managers to report annually on Form N-PX each say-on-pay vote over which the manager exercised voting power. The rule requires a manager to report say-on-pay votes when it uses voting power to influence a voting decision with respect to a security.
In addition, the rule permits joint reporting of say-on-pay votes by managers, or by managers and funds, under identified circumstances to avoid duplicative reporting, the SEC explains. It also requires additional disclosure to allow identification of a given manager’s full say-on-pay voting record. Managers will also be required to comply with the other requirements of Form N-PX for their say-on-pay votes.
“The amendments will provide investors with more detailed information about proxy votes, create more consistency around how funds describe their proxy votes, and structure Form N-PX in a machine-readable format,” SEC Chair Gary Gensler said in a statement. “This rulemaking also will require institutional investment managers to disclose how they voted on ‘say-on-pay’ matters, which fulfills the mandate under Section 951 of the Dodd-Frank Act of 2010. Together, these enhancements to Form N-PX would make it more useful, and more usable, to investors.”
The new rules and form amendments will be effective for votes occurring on or after July 1, 2023, with the first filings subject to the amendments due in 2024.
SEC Proposes Changes to Open-End Fund Liquidity Framework
Meanwhile, the SEC also voted Nov. 2 to propose amendments to “better prepare open-end funds for stressed conditions and to mitigate dilution of shareholders’ interests.” According to the SEC, the rule and form amendments would enhance how funds manage their liquidity risks, require mutual funds to implement liquidity management tools, and provide for more timely and detailed reporting of fund information.
An SEC fact sheet explains that the rule and form amendments would:
- enhance how open-end funds other than money market funds (MMFs) and certain ETFs classify the liquidity of their investments and requiring a minimum amount of highly liquid assets of at least 10% of net assets;
- require any open-end fund, other than a MMF or ETF, to use swing pricing and implementing a “hard close” to operationalize this pricing and to improve order processing more generally; and
- provide for more frequent and more detailed public reporting of fund information, including information about funds’ liquidity and use of swing pricing.
A comment period will remain open for 60 days after publication in the Federal Register.
