The Securities and Exchange Commission (SEC) recently adopted rule and form amendments (Amendments) under the Investment Company Act of 1940 to enhance the information that mutual funds, exchange-traded funds, and other registered funds (funds) annually report on Form N-PX regarding proxy votes. The Amendments also include changes under the Securities Exchange Act of 1934 (Exchange Act) that require institutional investment managers subject to Section 13(f) of the Exchange Act to report how they voted proxies relating to executive compensation (or “say-on-pay”) matters on Form N-PX.1
Key aspects of the Amendments are described below.
Amendments to Form N-PX to Enhance Disclosure of Proxy Voting Records
Since 2003, funds have filed Form N-PX annually to report how they voted proxies for portfolio securities for each issuer. The Amendments modify Form N-PX to require more detailed disclosures about how funds vote proxies including, among other things: disclosing the number of shares that were actually voted and the number of shares that were on loan and not recalled for voting; tying the description of voting matters to the issuer’s form of proxy; categorizing voting matters into enumerated categories; and reporting information in a custom XML-structured data language. The Amendments also require funds to make voting records accessible via fund websites. These and other changes are described below.
Transparency of Securities Lending. When a fund’s securities are out on loan as of the record date of a corporate action, the fund – as owner – would need to recall the securities to vote the shares. Funds generally participate in securities lending programs because it generates income, which offsets expenses and enhances returns. Lending arrangements can be a “hard loan” or a “soft loan,” in which securities can be recalled on short notice. Currently, Form N-PX does not require that funds disclose the number of shares that were not voted because they were on loan and not recalled. In addition to disclosing the number of shares voted (or instructed to be voted), the Amendments will require funds to disclose information about the number of shares loaned and not recalled for voting. The SEC believes this disclosure will allow investors to better understand how securities lending activities affect the voting practices of funds. The Amendments will also permit funds to provide a narrative explanation of decisions on whether to recall a security on loan, which can be placed on the Form N-PX cover page or on a vote-by-vote basis.
Ease of Use. In order to make it easier for investors to compare how funds voted on a particular proposal, the Amendments will require funds to:
(1) use the same language as used by the issuer to identify voting matters, and report votes in the same order as in the issuer’s form of proxy (applies to proxy votes when a proxy card is available for the matter);
(2) use enumerated categories to identify the subject matter of each reported proxy voting item, such as “investment company matters,” “director elections,” “environment or climate,” or “diversity, equity, and inclusion;”
(3) file Form N-PX in an XML-based structured data language created specifically for reports on Form N-PX, which will make the submitted information easier to analyze and potentially more useful (reports are currently required to be filed in HTML or ASCII format); and
(4) provide Form N-PX disclosure separately by series if the fund offers multiple series of shares.
Disclosure of Accessibility. While most funds already make proxy voting records available to shareholders on request, many do not inform investors of that fact on their website. The Amendments include changes to Forms N-1A, N-2, and N-3 that will require funds to disclose that fund proxy voting records are publicly available, free of charge, on or through their websites (if a fund has a website) and upon request. A fund may comply with the website disclosure requirement by providing a direct link on its website to the HTML-rendered Form N-PX report on EDGAR. The Amendments also include changes to Forms N-1A and N-3 to require that funds provide an email address (if one exists) that investors may use to request proxy voting records.
Rule and Form Changes to Require Institutional Investment Managers to Report Proxy Voting Related to Shareholder Advisory Votes on Executive Compensation
Generally, Section 14A of the Exchange Act requires public companies to hold non-binding shareholder advisory votes to approve executive compensation, to determine the frequency of voting on executive compensation, and to approve “golden parachute” compensation relating to significant corporate actions (collectively, say-on-pay votes). The Amendments include form changes and new Rule 14Ad-1 under the Exchange Act to implement Section 14A(d) of the Exchange Act, which requires an institutional investment manager subject to Section 13(f) reporting requirements (institutional investment manager) to report say-on-pay votes. Institutional investment managers will now report say-on-pay votes annually using Form N-PX.
New Rule 14Ad-1 will require institutional investment managers to report say-on-pay votes only for securities over which they “exercised voting power.” Under Rule 14Ad-1, voting power exists if an institutional investment manager has the ability to vote the security or direct the voting of the security, including the ability to determine whether to vote the security at all, or to recall a loaned security before a vote. In turn, exercise of voting power means “using voting power to influence a voting decision with respect to a security.” Reporting will not be required, for example, for votes with respect to a security when the institutional investment manager’s voting decision is determined entirely by its client or another party. In addition, the Amendments permit institutional investment managers that have a disclosed policy of not voting proxies, and that have not in fact voted proxies during the reporting period, to indicate as much in a “notice” report without having to report information on a security-by-security basis.
Institutional investment managers will generally be subject to the same Form N-PX reporting requirements as funds (including the new obligations described above) with respect to their say-on-pay votes. In order to prevent duplicative reporting, the Amendments permit joint reporting of say-on-pay votes by groups of institutional investment managers, or by institutional investment managers and funds. Joint reporting will only be permitted under certain circumstances and will require additional disclosure to permit identification of a given fund or institutional investment manager’s voting record.
The Amendments also add a summary page to Form N-PX intended to help investors readily identify which fund and/or institutional investment manager’s voting record is being reported.
The Amendments will be effective for votes occurring on or after July 1, 2023. The first filings subject to the Amendments will be due in 2024. The SEC will run an EDGAR pilot program before July 1, 2024, through which filers will be able to test file amended Form N-PX.
S&K Observations and Insights
The SEC believes that the Amendments will make the information reported by funds on Form N-PX easier to access and analyze, noting difficulties investors have faced using Form N-PX. Certain provisions of the final rule have received sharp criticism from various quarters. In particular, critics of the changes regarding securities lending and proxy voting disclosure highlight concerns that a manager’s decision to keep shares on loan during a vote could be viewed negatively without the proper context and might encourage managers to recall securities on loan, despite a lack of benefit to investors and potential costs to the fund.
In addition, the requirement for private fund managers to file Form N-PX represents a new filing obligation (registered investment companies are already required to file Form N-PX).