The Securities and Exchange Commission issued a proposal to expand investment company disclosures of their proxy voting activities. If adopted, the rules would enhance the information mutual funds, exchange-traded funds, and other regulated investment companies are required to report on Form N-PX under the Investment Company Act.[1] These expanded disclosures are intended to make proxy voting decisions made by investment company advisers more complete, accessible, and understandable to investors.
Form N-PX and the usefulness of the information provided by registered investment companies under the current proxy reporting regime came under criticism in March 2021 remarks by then acting SEC Chair Allison Herren Lee:
"Ultimately, corporate accountability is only possible when the funds that manage American investors' savings diligently exercise their authority to vote, clearly disclose their votes to investors, and operate in a system that efficiently provides accurate information about vote execution."
"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."
At that time, Acting Chair Lee committed the SEC staff to reform Form N-PX to be more beneficial to investors. On September 29, 2021, the Commission approved a new proposal to expand disclosures on the form. As proposed, the updated Form N-PX would:
- Require that funds and managers tie the description of each voting matter to the issuer's form of proxy and 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 (like XBRL or XML rather than text or HTML) to make the data more usable and the filings easier to analyze; and
- Require funds and managers to disclose how their securities lending activity impacted their voting.
In addition, the SEC also proposed a new rule (Rule 14Ad-1) and form amendments under the Securities Exchange Act of 1934 (Exchange Act).[2] If adopted, new Rule 14Ad-1 would implement a statutorily mandated requirement under Section 14A of the Exchange Act by requiring institutional investment managers subject to Section 13(f) of the Exchange Act to report on an annual basis how they voted their proxies on executive compensation matters (i.e., "say-on-pay").[3]
If adopted, the Rule 14Ad-1 reporting requirements for institutional investment managers would fully implement the "say on pay" provisions of Section 951 of the Dodd-Frank Act.
Securities Lending
Among Acting Chair Lee's criticisms of investment company proxy disclosures was a lack of clarity about funds' decisions about whether to recall lent securities for proxy votes. Notably, the N-PX proposals include enhanced quantitative disclosures intended to "allow investors to understand better how securities lending activities affected the voting practices of the reporting person." These include:
- The number of shares that were voted (or, if not known, the number of shares of which votes were instructed to be cast)[4]; and
- The number of shares that the fund did not recall.
These statistics are intended to provide transparency about whether a reporting person chose to recall a security and vote the accompanying proxy or keep the security out on loan in favor of the loan income.
Comments on the proposal are due by mid-December 2021.
[1] The 2003 rules adopting Form N-PX require registered investment companies to report no later than August 31 of each year the proxy voting records of their portfolio companies for the period July 1 to June 30.
[2] Form N-PX was originally adopted under the Investment Company Act only. If adopted, the amendments to Form N-PX will apply under both the Exchange Act and the Investment Company Act.
[3] Section 13(f) of the Exchange Act requires a manager to file a report with the SEC if it exercises investment discretion for accounts holding certain equity securities with an aggregate fair market value on the last trading day of any month of any calendar year of at least $100 million.
[4] According to the SEC release, the proposal modifies the 2010 proposal with respect to the disclosure of the number of shares voted because reporting persons may not be able to determine with certainty how many of the votes they instructed to be cast were actually voted in a particular matter. This change would permit a reporting person to use the number of shares voted as reflected in its records at the time of filing a report on Form N-PX. If a reporting person has not received confirmation of the actual number of votes cast, Form N-PX instead may reflect the number of shares instructed to be cast on the date of the vote. See, Proposing Release, pp. 41-46.
"[I]n contrast to the 2010 proposal, we are also proposing to require disclosure of the number of shares the reporting person loaned and did not recall. We believe that the context given by disclosing the number of shares voted would allow investors to better understand how securities lending activities affect the voting practices of the reporting person. Without disclosing the amount voted, the amount of shares on loan for a given vote would not provide meaningful insight into how a fund or manager voted. . .
[W]e are proposing to modify the 2010 proposal with respect to the disclosure of the number of shares voted because reporting persons may not be able to determine with certainty how many of the votes they instructed to be cast were actually voted in a particular matter. This change would permit a reporting person to use the number of shares voted as reflected in its records at the time of filing a report on Form N-PX."