The Securities and Exchange Commission (SEC) recently adopted, in a 3-2 vote, rule and form amendments impacting proxy disclosures reporting on Form N-PX (the “amendments”).
The amendments that are applicable to mutual funds, ETFs, and other management investment companies registered under the Investment Company Act of 1940 (collectively, “funds”) will require enhanced disclosures on Form N-PX. Other amendments will require institutional investment managers who file reports under section 13(f) of the Securities Exchange Act of 1934 (“managers”) to use Form N-PX to report how they voted on proxies relating to executive compensation (“say-on-pay”) matters.
Also, new notice filings will be mandated for funds and managers (collectively, “reporting persons”) that either have disclosed policies of not voting proxies and did not vote, or did not hold any securities entitled to be voted during the reporting period.
Premise and Purpose
As a justification for adopting the amendments, the SEC underscored that funds own around 32% of the market capitalization of all US-issued public equities, and as such have substantial institutional voting power that can influence the outcome of matters submitted to shareholder votes through proxies. In the SEC’s view, investors in funds have an interest in how their funds vote. Managers similarly have substantial voting power.
Form N-PX, which was adopted in 2003, requires funds to publicly report their proxy voting records on an annual basis. It is the SEC’s opinion that the current form makes it difficult for investors to analyze and understand how their funds are voting in a particular year, over time, and as compared to other funds in which the investor invests. In particular, under the current form, funds are not required to disclose proxy votes in a standardized manner.
The purpose of the amendments is to compel funds to provide information to investors in a standardized and easily accessible manner. Such accessibility improvements include requiring both a more intuitive layout of proxy voting matters so that investors are able to sort through topics of interest to them and, with respect to securities lending, adding quantitative information.
The amendments also require reporting persons to file Form N-PX in a structured data language to ease in both preparation and investor use. This will allow investors to sort, search, and group the information contained in the form to better analyze its contents. As before, such proxy voting records are to be publicly available via funds’ websites or by request free of charge.
Other changes to Form N-PX require reporting persons to disclose quantitative information about the number of shares voted, or instructed to be voted, including the number of shares that the reporting person had out on loan and did not recall as reflected in their records at the time of filing a report. The SEC opined that such quantitative information will provide investors insight into how securities lending impact proxy voting practices. Additionally, registrants with multiple funds will be required to provide Form N-PX disclosure separately by fund, making it easier for investors of each fund to review only the disclosure relevant to them.
Proxy Categories
Under the amendments, reporting persons are required to categorize matters by type per a set of standardized categories, allowing investors to better track how funds vote on the same subjects over time. How reporting persons choose to sort various proxy subjects into one or more of 14 categories (streamlined from the 17 categories and 90 sub-categories originally proposed) will involve some subjectivity. The goal of imposing standardized categories is to allow investors to compare proxy voting matters across funds in which they invest. Together with the structured data language parameters, investors will now be able to search proxy voting topics of interest to them with greater ease and efficiency.
Say-on-Pay
Outside the fund context, the amendments require managers to report say-on-pay votes on Form N-PX. The reporting includes votes on “approval of executive compensation and on the frequency of such executive compensation approval votes, as well as votes to approve ‘golden parachute’ compensation in connection with a merger or acquisition,” per the final rule. Managers are only required to report in situations where the manager:
(1) has the power to vote, or direct voting of, a security; and
(2) “exercises” this power to influence a voting decision for the security
The SEC emphasizes that managers will only exercise voting power when they vote, influence or direct a vote, based on the manager’s own judgment. The final rule specifies that a manager will have no reporting obligations with respect to voting decisions “entirely determined by its client or a third party.” Managers who did not vote during the reporting period, and who have a disclosed policy of not voting on proxies, are allowed to indicate that fact in a notice report. Joint reporting for reporting persons will be available only in selected scenarios, such as where multiple managers exercise voting power.
Effective Date
The amendments will be effective for votes occurring on or after July 1, 2023, and the first filings subject to the amendments will begin on August 31, 2024, with the reports covering the period of July 1, 2023 – June 30, 2024.
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