Thursday, September 30, 2021

SEC proposes new proxy voting disclosure rules by investment funds

By Amanda Maine, J.D.

In a 4-to-1 vote, the SEC proposed amendments to Form N-PX intended to enhance the information mutual funds, exchange-traded funds, and certain other funds report about their proxy votes. In his opening statement in support of the proposed amendments, SEC Chair Gary Gensler proclaimed that the amendments are long overdue from the mandates under the Dodd-Frank Act, including “say on pay” regarding executive compensation. Commissioners Allison Herren Lee and Caroline Crenshaw also voiced their support for the proposed amendments. Commissioner Elad Roisman voted to put out the proposal for public comment, doing so reluctantly. Commissioner Hester Peirce was the lone vote against the proposed amendments, stating that the say-on-pay proposal should be considered as a standalone rulemaking, rather than as part of the N-PX suite of proposed amendments. Peirce was also skeptical about what she considers the influence of “activists” on fund voting (Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers, Release No. 34-93169, September 29, 2021).

Proposal. The Commission proposed new Rule 14Ad-1 under the Exchange Act. The proposed rule would do the following:
  • Require funds and managers to tie the description of each voting matter to the issuer’s form of proxy and to categorize each matter by type to help investors identify votes of interest and compare voting records;
  • Prescribe how funds and managers organize their reports and require them to use a structured data language to make the filings easier to analyze; and
  • Require funds and managers to disclose how their securities lending activity impacted their voting.
In addition to new Rule 14Ad-1, the proposal would amend Form N-PX to require an institutional investment manager to report annually on Form N-PX how it voted proxies relating to executive compensation matters (commonly referred to as “say-on-pay” votes), as required by Section 14A of the Exchange Act. The proposed reporting requirements for managers, if adopted, would complete implementation of Section 951 of the Dodd-Frank Act.

Commissioner statements. According to Gensler, the proposed amendments will bring standardization and usability to Form N-PX, updating it for today’s technologies. He added that investors will be able to see information tagged by categories and to access this information in a format that is easy to analyze electronically.

Calling the proposed amendments “the most meaningful improvements to the disclosure of fund voting information since the requirement to disclose was first adopted nearly 20 years ago,” Lee said the proposal was long overdue under the Dodd-Frank Act’s say-on-pay mandate. In addition, she stated that she was pleased that the proposal will require voting information to be disclosed in a structured, machine-readable format.

Commissioner Crenshaw echoed many of Lee’s sentiments, stating that when shareholders have readily available information about how funds vote their interests, they can hold them to account, which will help enhance corporate decision making. The proposed amendments should help inform investors, who are still largely in the dark when it comes to how the funds they own are voting their money, according to Crenshaw.

Roisman was less enthusiastic about the proposal, but voted for it nevertheless to let the public weigh in. While he is in favor of the proposed changes implementing Dodd-Frank Act Section 951, Roisman voiced his reluctance about the Form N-PX amendments. He noted that the proposed amendments are not required by any statute, but do rest within the Commission’s discretion. And while he supports the amendments as far as they improve the modernization of Form N-PX, he also stated that some elements go beyond mere “modernization” and appear designed to alter the way funds fundamentally think about voting—in ways he does not believe will necessarily serve investors. “I support this proposal as far as it is just that: a proposal,” Roisman explained.

Peirce’s dissent cited many of the same concerns outlined by Roisman. According to Peirce, the Commission’s disclosure rules are in place to help investors, but the proposed disclosures could harm investors, as existing Form N-PX disclosure may already be doing. “At the risk of apostasy, I posit that proxy voting is not the most important activity in which a fund engages,” Peirce said. In particular, Peirce took issue with parts of the proposing release’s new categorization of votes by categories and subcategories, such as “environmental justice,” “pay gap,” and “other social matters.” “The real interest in this kind of detailed voting information seems to come from activists,” Peirce lamented.

The release is No. 34-93169.