On September 29, 2021, the Securities and Exchange Commission ("SEC") proposed new proxy voting disclosure requirements (the "Proposal") for registered investment companies ("funds")1 and for institutional investment managers ("managers") subject to reporting under section 13(f) of the Securities Exchange Act of 1934 (the "Exchange Act").2 Under the Proposal, funds would, among other things, be required to categorize their voting records by standardized proposal types on Form N-PX, disclose the number of shares that were voted (or, if not known, the number of shares that were instructed to be voted) as well as the number of shares held by the funds that were loaned out on the record date and not recalled for voting, and post voting-related information on their websites. Similarly, managers would be required to disclose on Form N-PX their voting records regarding executive compensation and "golden parachute" arrangements. The new requirements for managers would implement the provisions of section 14A of the Exchange Act adopted by Congress in 2010 under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act").
The Proposal is the first proposed rule-making issued by the SEC under Chairman Gary Gensler and highlights the Chairman's focus on the shareholder proxy process as well as on completing outstanding implementation requirements under the Dodd-Frank Act.3 The Commissioners voted 4-1 in favor of the Proposal, with Commissioner Hester Peirce dissenting.4
Comments on the Proposal are due December 14, 2021, which is 60 days after publication of the rule proposal in the Federal Register (available here).
I. Background
The SEC adopted Form N-PX in 2003 to improve transparency and enable fund shareholders to monitor their funds' involvement in the governance activities of portfolio companies. Funds are currently required to file their proxy voting records on the Form annually. These reports are available to the public through the SEC's EDGAR system.5 The SEC stated that while the reporting has increased transparency, investors find it difficult to use the reports in their current form. The SEC also noted that current reports may give an incomplete picture of a fund's voting practices because the reports do not highlight which of the fund's securities were not voted because securities were out on loan on the applicable record date. The Proposal would address perceived shortcomings in the current fund reporting regime on Form N-PX.
The Proposal also would address rule-making requirements under Exchange Act section 14A. Section 14A requires public companies to hold non-binding shareholder votes regarding approval of executive compensation and "golden parachute" compensation arrangements, known as "say-on-pay votes." Companies must seek shareholder votes relating to: (1) approval of the compensation of its named executive officers; (2) the frequency of such votes, with the option of every one, two, or three years; and (3) approval of "golden parachute" compensation in connection with a merger or acquisition. Section 14A(d) provides disclosure requirements for managers on "say-on-pay votes" that the SEC is directed to adopt rules to implement.6 Although the SEC adopted rules in 2011 implementing the non-binding shareholder vote provisions of section 14A,7 to date it has not adopted rules to implement the voting disclosure requirements set forth in Section 14A(d). The SEC proposed rules in 2010 to implement section 14A(d), but the proposed rules were never finalized. The current Proposal builds on the 2010 proposal and addresses comments received in response to that proposal.
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Footnotes
1 The proposed requirements would apply to mutual funds and exchange-traded funds organized as open-end management investment companies, closed-end management investment companies as well as insurance company separate accounts organized as management investment companies that offer variable annuity contracts (which register on Form N-3). The Proposal would not apply to unit investment trusts, face amount certificate companies or small business investment companies registered on Form N-2.
2 Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers, 1940 Act Release No. 34389 (Sep. 29, 2021), 86 FR 57478 (Oct. 15, 2021) (the "Proposing Release").
3 The SEC under Chairman Gensler also has re-opened the comment periods on the rules proposed in 2016 for the use of universal proxy cards in all non-exempt solicitations for contested director elections, and its 2015 proposal directing the national securities exchanges and national securities associations to establish listing standards that would require issuers to develop and implement a policy providing for the recovery of incentive-based compensation under certain circumstances and to disclose their policies, to implement another Dodd-Frank Act requirement. See SEC Reopens Comment Period for Listing Standards for Recovery of Erroneously Awarded Compensation, Securities Act Release No. 10998 (Oct. 14, 2021), available here; and Reopening of Comment Period for Universal Proxy, Securities Act Release No. 91603 (Apr. 16, 2021), 86 FR 24364 (May 6, 2021), available here.
4 Notably, Commissioner Peirce issued a statement regarding the Proposal, stating that she supported the SEC's proposing rules to implement statutorily required "say-on-pay" voting disclosures, but that she is concerned that the current and proposed Form N-PX disclosure requirements benefit activists rather than investors. As a result, she asked for comment as to whether the SEC should propose the complete withdrawal of all non-statutorily mandated voting disclosures, allow for presumptive confidentiality of votes, and emphasize that the SEC takes no position as to whether or not funds should vote. See Commissioner Hester M. Peirce, "Statement on Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers," Sept. 29. 2021, available here.
5 Proposing Release at 57478.
6 Section 14A(d) provides: Every institutional investment manager subject to section 78m(f) of this title shall report at least annually how it voted on any shareholder vote pursuant to subsections (a) and (b), unless such vote is otherwise required to be reported publicly by rule or regulation of the [SEC].
7 Shareholder Approval of Executive Compensation and Golden Parachute Compensation, SEC Rel. Nos. 33-9178; 34-63768 (Jan. 25, 2011), 76 FR 6010 (Feb. 2, 2011), available here.
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