On September 29, 2021, the United States Securities and Exchange Commission (SEC) proposed changes to Form N-PX to provide greater transparency to the information that registered investment management companies (Funds) report on their votes. vicarious. He also proposed a new 14Ad-1 rule 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 compensation matters. leaders (say-on-pay). The SEC has asked for comments 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 question disclosed on Form N-PX to match what was used in the issuer’s proxy form and each proxy voting question should be categorized by type specified.
- Disclosure of how a Fund’s securities lending activity, if any, has affected its proxy voting.
- Filing reports on an N-PX form using a structured data language, such as an XML file.
- A Fund to post its proxy on its website.
- An “institutional investment manager” who has used his voting power to influence a proxy voting decision to annually declare his voting record on compensation voting questions on Form N-PX.
In 2003, the SEC adopted Form N-PX under the Investment Companies Act of 1940, as amended, on which the Funds publicly report their proxy voting records on an annual basis. The SEC noted that the presentation of information between Funds varied widely and could sometimes be “extremely long” due to the number of voting questions and Fund series that reports often cover. In addition, the proposed press release noted the large number of index funds and their use of proxy voting to increase the value of their investments, as well as increased investor interest in how funds vote on environmental, social issues. and governance (ESG).
The SEC proposed a new rule 14Ad-1 (a) that would complete the implementation of Section 951 of the Dodd-Frank Act on Wall Street Reform and Consumer Protection (the Dodd-Frank Act). In 2010, the SEC first proposed rule and form changes to implement Section 951, which were never enacted. The current proposal takes into account the comments received by staff in response to the 2010 proposal.
Proposed changes to Form N-PX
Descriptions and Categories of Proxy Voting Matters
The proposed changes to Form N-PX would require that the same proxy order and description be used on Form N-PX as those used in the issuer’s proxy form, in order to allow investors to identify and more easily compare proxy voting issues between Funds. In addition, the proposed changes would require the Funds to categorize each question by specific standardized topic types to help investors identify votes of interest and compare voting records between Funds. For example, the proposal includes categories such as rights and defenses of shareholders; corporate governance; environment or climate; Board of directors; extraordinary operations; diversity, equity and inclusion; and political activities (including sub-categories such as board diversity, the pay gap, lobbying and political contributions).
The SEC asked for comment on whether the proposed categories and subcategories were sufficiently clear and whether they adequately reflected the types of proxy voting issues that might arise.
Quantitative disclosure and impact of securities lending
Many Funds engage in securities lending to generate additional income. When a Fund lends its portfolio securities, it transfers its proxy votes in respect of the security to the borrower for the term of the loan. If a Fund determines that it wants to vote the proxies of the loaned securities, it must recall the securities and receive them before the voting record date. The SEC has proposed, for the purposes of Form N-PX, that a Fund would be entitled to vote on any matter if its portfolio securities are loaned on the date of registration of the meeting because the Fund could recall them and vote them. The proposed changes to Form N-PX would require the Funds to disclose the number of shares that have been voted on (or, if not known, the number of shares that have received the vote). order to be issued). In addition, the Funds would be required to disclose the number of shares of a loaned and non-recalled portfolio security.
The SEC has requested comment on various aspects of this proposed disclosure, including whether Form N-PX should be amended to provide that a Fund would be entitled to vote on an issue if its portfolio securities are loaned on the date of. registration. The SEC also asked why it shouldn’t change the form accordingly.
Structured data language and standardized report format
The SEC proposed that reports on Form N-PX be filed using a web form provided by the SEC or as an Extensible Markup Language (XML) file as opposed to the current plain text filing format ( ASCII) or HTML. Multi-Series Funds would be required to provide the vote record for each series separately and provide the required information on Form N-PX in a specified order.
In addition, the SEC has proposed the following changes to Form N-PX:
- Disclosure of a single security identifier – the security’s CUSIP or its ISIN.
- New sections on the cover page to use when filing is an amendment and for additional information.
- Disclosure as to whether the questions proposed by securityholders are proposals or counter-proposals.
- 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 are other ways to make disclosure on Form N-PX easier to review and compare between reporting people.
Proposed new rule 14Ad-1 (a) under the Exchange Act
Disclosure of compensation votes for institutional investment managers
The 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 on how they voted. on proxies relating to direct voting. compensation issues. 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 of the SEC. The proposed rule would require a manager to report compensation votes only when it both has voting power and has exercised that power in respect of a security. If a manager did not vote any securities that held compensation votes during the reporting period, it would still be required to file an N-PX form affirmatively indicating this fact. The SEC proposal allows for joint reporting where more than one manager exercises voting rights or if a manager exercises voting rights on behalf of a Fund. The proposed changes to the Form N-PX for funds would also apply for the most part to managers declaring compensation votes on the Form N-PX.
Specifically, as proposed, a manager would be required to declare the votes required by Section 14A (a) of the Exchange Act on the approval of executive compensation and on the frequency of such approval votes. executive compensation, as well as the 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 of the assets of the issuer. The SEC asked for comment on the scope of managers required to report on Form N-PX and what information to report. In particular, the SEC asked for comment on whether certain votes should be excluded from the statement. 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 asked for comment on whether a manager should be allowed to voluntarily disclose voting information.
Comment period and Commissioner’s comments
The SEC has solicited comments on the rule and form proposals regarding nearly 100 aspects of the proposed changes to Form N-PX and the proposed rule. The comment period will remain open until December 14, 2021.
SEC commissioners voted 4 to 1 in favor of the proposed regulation at the public meeting with Commissioner Hester Peirce opposing it. Commissioner Peirce asked whether the SEC should instead consider eliminating the vote disclosure requirements on Form N-PX altogether. She said the existing Form N-PX may already be harmful to investors and that the proposed changes could also be harmful, and that proxy voting is not the most important activity in which a Fund engages in any way. view of an investor.
Commissioner Elad Roisman voted in favor of moving the proposals forward, but expressed concerns about certain aspects, including the specified proxy voting categories, which were based on a specific proxy voting season and could change. year to year.
Practice points and reflections
The proposed regulations – at the first public meeting chaired by SEC Chairman Gary Gensler – are among many key policy issues that will be addressed under Chairman Gensler’s tenure. Unsurprisingly, topics such as greater transparency regarding how funds vote on ESG issues are among its priorities.
The proposed changes will change the information and reporting format on the N-PX form. Institutional investment managers will be reported for the first time on Form N-PX, if the proposed new rule is adopted. We recommend that Funds and Institutional Investment Managers review their current proxy reporting processes and securities lending practices and consider whether they wish to comment on the proposed regulations.