The SEC is proposing to bring “greater transparency” to the information investment funds report about their proxy votes and to require disclosure of “say-on-pay” votes for institutional investment managers.
The SEC on Sept. 29 proposed amending Form N-PX under the Investment Company Act to require mutual funds, exchange-traded funds (ETFs) and certain other funds that currently report annually about their proxy votes to tie the description of each voting matter to the issuer’s form of proxy.
The proposal also would require funds to categorize each matter by type—including new environmental, human rights, and diversity, equity and inclusion subcategories—to help investors identify votes of interest and compare voting records. Additionally, the proposal prescribes how funds organize their reports and require them to use a structured data language to make the filings easier to analyze.
In addition, funds would be required to disclose how their securities lending activity affected their voting. The proposal explains that funds commonly engage in securities lending activities to generate additional revenue for the fund, but when a fund lends its portfolio securities, it transfers incidents of ownership relating to the loaned securities, including proxy voting rights, for the duration of the loan.
Thus, the Commission is proposing to require disclosure of the number of shares that were voted (or, if not known, the number of shares that were instructed to be cast) and the number of shares that were loaned and not recalled.
Say on Pay
As part of the same rulemaking package, the proposal would require institutional investment managers subject to section 13(f) of the Securities Exchange Act to report annually on Form N-PX how they voted proxies relating to executive compensation matters, or so-called say-on-pay matters, as required by section 14A of the Exchange Act. Asset managers generally would be subject to the same Form N-PX reporting requirements as funds with respect to their say-on-pay votes.
The Commission first proposed rule and form changes in October 2010 to implement the Dodd-Frank Act’s manager reporting requirements, but that proposal was never finalized. The SEC notes that the current proposal takes into account the comments it received in response to that proposal.
If adopted, the reporting requirements for institutional investment managers would fulfill one of the remaining rulemaking mandates under the Dodd-Frank Act.
Some Dissent
The Commissioners voted 4-1 to advance the proposal, but the vote wasn’t as unanimous as it might appear. Commissioner Hester Peirce was the lone “no” vote, suggesting that the Commission should instead consider eliminating the voting disclosure requirements altogether. “The discretionary amendments to Form N-PX are being justified in the name of enhanced transparency. Our disclosure rules are in place to help investors, but these proposed disclosures could harm investors, as existing Form N-PX disclosure may already be doing,” Peirce stated. “Although a fund’s voting strategy can be an important part of the overall fund management strategy, how or why a fund votes, or even whether a fund votes on a particular issue at a particular portfolio company is unlikely materially to influence an investor’s choice to invest in a particular fund.”
And while Commissioner Elad Roisman voted in favor to advance the proposal, he noted that he has strong reservations with certain aspects of the proposal that he hopes will be addressed during the public comment period. “To the extent the Proposed N-PX Amendments aim to update the form in these ways, I am supportive,” Roisman explained. “However, the Proposed N-PX Amendments go beyond mere ‘modernization’ and appear designed to alter the way funds fundamentally think about voting—in ways I do not believe will necessarily serve investors.”
SEC Chair Gary Gensler said he believes the proposal will make the information on Form N-PX more useful for investors. “If finalized, today’s rules would bring standardization and usability to this important form, updating it for today’s technologies. Investors will be able to see information tagged by categories, and they’ll be able to access this information in a format that is easy to analyze electronically,” he stated.
Gensler explained that since 2003, funds have been required to file Form N-PX reports disclosing how they voted on proxy proposals relating to investments they hold, but in recent years, investors have expressed concerns that they’re not getting readily usable information they desire. He observed, for example, that funds may report their votes in an inconsistent manner or in a format that is not machine readable, making it more difficult for investors to analyze the reported data.
“Together, both actions—finishing up the provision on say on pay and enhancing Form N-PX—will make it easier and more efficient for investors to get crucial information about proxy votes,” Gensler said.
A public comment period will remain open for 60 days after the proposed amendment is published in the Federal Register.
