SEC Beefs Up Proxy Voting Disclosure

On November 2, 2022, the Securities and Exchange Commission (SEC) finalized the first of its market data rule proposals. The amendments to form N-PX bring greater detail, consistency, and usability to the proxy voting information reported by mutual funds. These changes came in response to investors, who have said for nearly twenty years that they would benefit from more readily usable information and greater details.

As we have described previously, over the past two decades, the SEC has endeavored to shed light on the proxy voting behavior of regulated funds. But, previous efforts, the Commission admits, never lived up to their potential.[1] According to then-acting SEC Chair Allison Herren Lee:

"Retail investors need more meaningful insight into how their money is voted, and that insight is more important than ever with the growth of interest in ESG shareholder proposals,". . . "It's hard to see how retail investors can get an accurate and reliable picture of how a fund votes on ESG issues when they have to try to parse through these lengthy forms that use a kind of short-hand description of the proposals that were voted."

Acknowledging that the proxy reporting regime was failing to meet the needs of investors, in 2021, the SEC proposed to amend the form to expand the disclosures well beyond what was considered in a never-finalized 2010 proposal. 

What's Changed

The final changes to form N-PX adopted by the SEC on November 2 seek to address the shortcomings of the previous reporting format in four ways by:

1. Amending Form N-PX to provide investors with more understandable information about proxy votes (by making it consistent with proxy cards when identifying the matters on which a registered fund voted);
2. Establishing 14 standardized categories in Form N-PX, aimed at creating more consistency around how funds describe their proxy votes; 
3. Requiring registered funds to disclose the number of shares that were voted or instructed to be cast, as well as the number of shares loaned but not recalled and, consequently, not voted by the fund [2]; and
4. Structuring Form N-PX in a machine-readable format (i.e., Extensible Markup Language [XML])so investors can analyze this information electronically.

The new final rules also require that institutional investment managers disclose how they voted on "say-on-pay" matters, which fulfills the mandate under section 951 of the Dodd-Frank Act of 2010. [3]

Securities Lending in the Spotlight

Form N-PX's newly required disclosures about mutual fund recall activity may reveal a great deal of information about registered funds' and their investment advisers' securities lending practices, particularly how their securities lending strategies articulate with their proxy voting practices and policies. The complex calculus about whether to forego lending income in favor of exercising the right to vote a proxy relies on myriad factors. Weighing the benefits of participating in a securities lending arrangement against the benefits of being able to vote on a proxy matter will now be a considerably more public matter. 

Effective Dates

The new N-PX reporting rules are effective on July 1, 2024, with managers and funds required to file their first reports covering the period from July 1, 2023 to June 30, 2024 on amended Form N-PX by August 31, 2024. 

[1] The stated goals of Form N-PX were to:

1. "enable fund shareholders to monitor their funds' involvement in the governance activities of portfolio companies." 
2. "illuminate potential conflicts of interest." 
3. enable shareholders to "evaluate how closely fund managers follow their state proxy voting policies."
    

[2]  Registered funds must report on Form N-PX information for each matter relating to a portfolio security considered at any shareholder meeting during the reporting period and concerning which the fund was entitled to vote. The rule amendments further clarify that, for purposes of Form N-PX, a fund is “entitled to vote” on matters relating to securities that are on loan as of the record date of the meeting because the fund has the option to recall its loaned securities and vote their proxies.
 

[3] On June 24, 2011, under a mandate under Section 951 of the Dodd-Frank Act, the SEC adopted rules concerning shareholder approval of executive compensation and "golden parachute" compensation arrangements. The new rules specify that say-on-pay votes required under the Dodd-Frank Act must occur at least once every three years and that companies are required to hold a "frequency" vote at least once every six years to allow shareholders to decide how often they would like to be presented with the say-on-pay vote.