Key Takeaways:

• The SEC is proposing to require funds to use standardized disclosures when reporting their proxy votes on Form N-PX and to tie the description of each matter voted to the issuer’s form of proxy to help investors more easily identify votes of interest and compare voting records.
• The proposal would subject institutional investment managers to reporting regarding their say-on-pay votes.
• Reporting persons would be required to identify their votes by categories specified in the proposal so that investors can focus on topics they find important.
• Additional disclosures and transparency would be required regarding the number of shares a fund or manager voted (or was instructed to vote), as well as the number of shares a fund loaned out but did not recall.

On Sept. 29, 2021, the Securities and Exchange Commission (SEC) proposed amendments to Form N-PX that would enhance and expand the information mutual funds, exchange traded funds and certain other funds must report about their proxy votes. The SEC has also proposed a new rule 14Ad-1 under the Securities Exchange Act of 1934 (Exchange Act), which would require institutional investment managers to report annually how they voted on executive compensation, or say-on-pay, matters.[1] The proposed reporting requirements for managers would complete implementation of Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Summary of Proposals

Registered investment funds are required to report on Form N-PX how they vote on proxy proposals relating to investments they hold. But different funds use varying language to describe proxy proposals on which they are voting, and there is no requirement for funds to use consistent categories for their votes. This can make it challenging for investors to compare how different funds voted on similar categories of proposals.

Identification of proxy matters and categories. The proposal would require reporting persons to use the same language the issuer uses in the issuer’s form of proxy to identify the matters the reporting persons are voting on. In addition, each voting matter would be required to be reported in the same order as presented on the issuer’s form of proxy. In the proposing release, the SEC staff noted that it believes these proposed requirements would facilitate identification of identical matters included on different Form N-PX filings by different reporting persons even though there is no interactive data tagging in issuer proxy materials. It would also permit investors to focus more easily on topics that interest them.

Structured data language and standardized format. Fund reports are currently submitted in plain-text or HTML format. The proposal would require information reported on Form N-PX to be submitted in a standardized, structured data language via an XML file or SEC-provided web-based form. Funds would also be required to upload their proxy voting records on the fund’s website. These requirements are intended to make it easier for investors to locate votes that are of interest to them.

Quantitative disclosures and securities lending. Under current reporting requirements, investors do not have information regarding funds that do not cast votes because their securities are out on loan. The proposed amendments would require funds to disclose the number of shares that were voted, how those shares were voted, and the number of shares that were loaned out and not recalled for vote. If the exact number of voted shares is not known, funds would be required to disclose the number of shares instructed to be cast.

Say-on-pay reporting for institutional investment managers. Under proposed rule 14Ad-1, every person that is (a) an “institutional investment manager” under the Exchange Act, and (b) required to file reports under Section 13(f) of the Exchange Act, will be subject to new Form N-PX reporting requirements annually with respect to votes on say-on-pay proposals. The proposals permit joint reporting of say-on-pay votes by managers, or by managers and funds, under specified circumstances to avoid duplicative reporting while also requiring additional disclosure to allow identification of a manager’s full say-on-pay voting record. The proposed rule establishes a two-part test for assessing whether a vote must be reported: 1) There must be power to vote a security (or to cause another party to vote such security), and 2) such power must actually be used to influence the specific voting decision. In instances where managers did not exercise voting power over any securities that held say-on-pay votes during a given reporting period, said managers would file Form N-PX reports affirmatively stating such facts.

Miscellaneous Amendments

Additional amendments included in the SEC proposal are aimed at transparency and accessibility. For example, the SEC proposal seeks to clarify existing Form N-PX requirements while improving the usability of the form reports and seeking to establish a standardized order to the Form N-PX disclosure requirements. Funds that offer multiple series of shares are also required to provide separate Form N-PX disclosures by series. There are also proposed changes to the Form N-PX cover page which would include information that would help investors identify more readily whether the reporting person is a fund or a manager. Amended Form N-PX would also include a new summary page for investors to readily identify any additional managers other than the reporting person with say-on-pay votes included on the Form N-PX.

Timing of Reporting

Compliance dates vary based on when the proposed amendments become effective relative to the Form N-PX reporting deadline. The SEC proposal would apply the current reporting timing for funds to managers’ reporting of say-on-pay votes. As a result, both investment funds and institutional investment managers would be required to report their proxy voting records and say-on-pay votes no later than Aug. 31 of each year, for the most recent 12-month period ending June 30.

Conclusion

The SEC’s proposals are designed to promote transparency and enhanced information for investors about the proxy voting of institutional investment managers and investment funds. It remains to be seen whether the proposals will also result in more interest among the general public about shareholder proposals and how funds and managers are actually voting with respect to proposals, particularly climate change and other ESG proposals, that they speak about publicly. It will also be interesting to see how the enhanced information about how funds and managers vote impacts issuers’ strategies in dealing with shareholder proposals.