SEC Expands Proxy Voting Disclosure Reporting Requirements
Commentary by Steven Lofchie
The SEC adopted a final rule amending the reporting requirements for (i) management investment companies (including exchange traded funds, or "ETFs") as to their reporting of proxy votes and (ii) "institutional investment managers" (as defined under Exchange Act Section 13(f)) as to proxy voting relating to executive compensation.
The final rule amends Form N-PX, which investment companies use to provide information on their proxy votes, to require (i) the use of a standardized XML format for reports to improve readability and clarity for investors and (ii) disclosure of the number of shares voted and the impact of funds' and mangers' securities lending activity on their votes.
Additionally, the SEC adopted a new rule, Exchange Act Rule 14Ad-1 ("Report of proxy voting record: Reporting of proxy votes on executive compensation and other matters"), which requires institutional investment managers to report annually how they voted with respect to executive compensation matters (or "say on pay" votes).
The SEC said that the rule and form amendments will apply to votes occurring on or after July 1, 2023, and the first filings subject to the amendments will be due by August 31, 2024.
Commissioner Statements
SEC Chair Gary Gensler said that the amendments will render Form N-PX more useful and usable to investors. SEC Commissioner Jaime Lizárraga said the amendments were much needed, as the old form was "outdated, overly lengthy, difficult to navigate, and of very limited use for comparisons across funds." SEC Commissioner Caroline A. Crenshaw said that the amendments will provide "better insight into fund governance of portfolio companies, which can improve shareholder value." SEC Commissioner Hester M. Peirce criticized the rule for generating additional costs and benefitting third parties interested in pressuring funds to vote a particular way. SEC Commissioner Mark T. Uyeda expressed concern that the rule does not benefit funds or advisers and is an attempt to alter their behavior.
Commentary
While the proxy disclosure requirements have attracted less attention than other SEC rule proposals, they may prove to be the most pernicious. The underlying danger is that the SEC will monitor the manner in which advisers vote and will cast a harsh eye on advisers that vote against governmentally-favored proposals. There is a reason that ballots for governmental offices are kept secret. The same potential for abuse exists with respect to proxy votes by advisers.
While there are reasons why such votes should not be secret, the transparency also carries dangers. It is not hard to be skeptical that retail investors in investment funds are comparing the votes of fund managers or that their doing so will somehow boost investment returns. It is easy to be worried about the way the SEC may use its visibility into adviser votes; e.g., to suggest that an adviser for a "green" fund is voting in a manner that is insufficiently "green" and therefore subject to an allegation of greenwashing.
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The SEC's proposal to amend reporting requirements for management investment companies and institutional investment managers was published in the Federal Register.
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The SEC proposed amendments to reporting requirements for (i) "management investment companies" (including exchange traded funds) as to their reporting of proxy votes, and (ii) "institutional investment managers" as to proxy voting relating to executive compensation.