On September 29, 2021, the U.S. Securities and Exchange Commission (SEC) proposed amendments to Form N-PX to provide greater transparency to the information registered management investment companies (Funds) report about their proxy votes. It also proposed new Rule 14Ad-1 under the Securities Exchange of 1934 (Exchange Act) to require institutional investment managers who are required to report on Form 13F to disclose how they voted on executive compensation matters (say-on-pay). The SEC requested comment on various aspects of the proposals. Comments are due by December 14, 2021.
The proposals, if adopted, would require:
- The description of the proxy voting matter disclosed on Form N-PX to match what was used in the issuer’s form of proxy and each proxy voting matter to be categorized by specified type.
- Disclosure regarding how a Fund’s securities lending activity, if any, affected its voting of proxies.
- Filing of reports on Form N-PX using a structured data language, such as an XML file.
- A Fund to post its proxy record on its website.
- An “institutional investment manager” who used voting power to influence a proxy voting decision to report annually its voting record on say-on-pay matters on Form N-PX.
In 2003, the SEC adopted Form N-PX under the Investment Company Act of 1940, as amended, on which Funds publicly report their proxy voting records on an annual basis. The SEC noted that the presentation of information among Funds varied significantly and could at times be “overwhelmingly long” due to the number of voting matters and Fund series that the reports often cover. In addition, the proposing release noted the large number of index funds and their use of proxy voting to increase the value of their investments, as well as the heightened interest by investors in how Funds vote on environmental, social and governance (ESG) matters.
The SEC proposed new Rule 14Ad-1(a) would complete the implementation of section 951 of the Dodd–Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). In 2010, the SEC first proposed rule and form changes to implement section 951, which were never adopted. The current proposal takes into account the comments the staff received in response to the 2010 proposal.
Proposed Amendments to Form N-PX
Proxy Voting Matter Descriptions and Categories
The proposed amendments to Form N-PX would require the same order and proxy description to be used on Form N-PX as used in the issuer’s form of proxy, in order to make it easier for investors to identify and compare particular proxy voting matters across Funds. In addition, the proposed amendments would require Funds to categorize each matter by specific standardized subject types to help investors identify votes of interest and compare voting records among Funds. For instance, the proposal includes categories such as shareholder rights and defenses; corporate governance; environment or climate; board of directors; extraordinary transactions; diversity, equity and inclusion; and political activities (including, sub-categories such as board diversity, pay gap, lobbying and political contributions).
The SEC requested comment on whether the proposed categories and sub-categories were sufficiently clear and whether they adequately captured the types of proxy voting matters that could occur.
Quantitative Disclosure and Impact from Securities Lending
Many Funds engage in securities lending to generate additional income. When a Fund lends its portfolio securities, it transfers its proxy voting rights with respect to the security to the borrower for the duration of the loan. If a Fund determines that it wants to vote the proxies of loaned securities, it must recall the securities and receive them prior to the record date for the vote. The SEC proposed, for purposes of Form N-PX, that a Fund would be entitled to vote on a matter if its portfolio securities are on loan as of the record date for the meeting because the Fund could recall them and vote them. Proposed amendments to Form N-PX would require Funds to disclose the number of shares that were voted (or if not known, the number of shares that were instructed to be cast). In addition, Funds would be required to disclose the number shares of a portfolio security loaned and not recalled.
The SEC asked for comments on various aspects of these proposed disclosures, including whether Form N-PX should be amended to provide that a Fund would be entitled to vote on a matter if its portfolio securities are on loan as of the record date. The SEC also asked why it should not amend the Form accordingly.
Structured Data Language and Standardized Reporting Format
The SEC proposed that reports on Form N-PX be filed using an SEC-supplied web based form or as an Extensible Markup Language (XML) file as opposed to the current plain-text (ASCII) or HTML filing format. Multi-series Funds would be required to provide the voting record of each series separately and to provide the required disclosures on Form N-PX in a specified order
Additionally, the SEC proposed the following modifications to Form N-PX:
- Disclosure of only one securities identifier – the security’s CUSIP or its ISIN.
- New sections on the cover page to be used where the filing is an amendment and for additional information.
- Disclosure of whether matters proposed by security holders are proposals or counterproposals.
- A technical amendment to require reporting persons to disclose whether each reported vote was “for or against management’s recommendation.”
Among other things, the SEC specifically asked for comment on whether there were other ways to make the disclosure on Form N-PX easier to review and compare among reporting persons.
Proposed New Rule 14Ad-1(a) under the Exchange Act
Say-On-Pay Vote Disclosure for Institutional Investment Managers
Proposed new Rule 14Ad-1(a) would require institutional investment managers subject to Section 13(f) of the Securities and Exchange Act of 1934 to report annually on Form N-PX as to how they voted on proxies relating to say-on-pay matters. Section 13(f) requires managers who exercise investment discretion with respect to accounts holding certain equity securities with an aggregate fair market value of at least $100 million to file Form 13F with the SEC. The proposed rule would require a manager to report say-on-pay votes only when it both had voting power and exercised that power with respect to a security. If a manager did not exercise voting power over any securities that held say-on-pay votes during the reporting period, they would still be required to file a Form N-PX affirmatively stating this fact. The SEC’s proposal allows for joint reporting when more than one manager exercises voting power or if a manager is exercising voting power on behalf of a Fund. The proposed amendments to Form N-PX for Funds for the most part would also apply to managers reporting say-on-pay votes on Form N-PX, as well.
Specifically, as proposed, a manager would be required to report votes required by Section 14A(a) of the Exchange Act on the approval of executive compensation and on the frequency of such executive compensation approval votes, as well as votes required by section 14A(b) of the Exchange Act on the approval of executive compensation that relates to an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all the issuer’s assets. The SEC requested comment on the scope of managers required to report on Form N-PX and the information required to be reported. In particular, the SEC requested comments as to whether certain votes should be excluded from reporting. For example, with respect to securities that are not Section 13F securities or securities not held at the end of the calendar quarter. The SEC also requested comment on whether a manager should be permitted to voluntarily disclose voting information.
Comment Period and Commissioner Comments
The SEC has requested comments on the rule and form proposals with respect to almost 100 aspects of the proposed amendments to Form N-PX and Proposed Rule. The comment period will remain open until December 14, 2021.
SEC commissioners voted 4 to 1 in favor of the proposed rulemaking at the open meeting with Commissioner Hester Peirce opposing. Commissioner Peirce asked whether the SEC should instead consider eliminating the voting disclosure requirements on Form N-PX altogether. She stated that the existing Form N-PX may already be harming investors and the proposed amendments could do so as well, and that proxy voting was not the most important activity in which a Fund engages in from an investor’s perspective.
Commissioner Elad Roisman voted in favor to advance the proposals, but he expressed concerns with certain aspects including the specified proxy voting categories, which were based on a specific proxy voting season and could change from year to year.
Practice Points and Thoughts
The proposed rulemaking — in the first open meeting presided by SEC Chair Gary Gensler — is among many of key policy issues that will be addressed under Chair Gensler’s tenure. Not surprisingly, topics such as greater transparency regarding how Funds are voting on ESG matters are among his priorities.
The proposed amendments will change the information and format of reporting on Form N-PX. Institutional investments managers will be subject to reporting on Form N-PX for the first time, if the proposed new rule is adopted. We recommend Funds and institutional investment managers review their current proxy reporting processes and their securities lending practices and consider whether to comment on the proposed rulemaking.