The Securities and Exchange Commission (SEC) recently proposed amendments to Form N-PX under the Investment Company Act of 1940, as well as rule and form amendments under the Securities Exchange Act of 1934 (Exchange Act), to (1) enhance the information that mutual funds, exchange-traded funds, and certain other funds (funds) must annually report regarding proxy voting, and (2) 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 (Proposed Amendments).1
Key aspects of the Proposed Amendments are summarized below.
Amendments to Form N-PX to Enhance Disclosure of Proxy Voting Records
Form N-PX requires funds to annually disclose their proxy votes. The Proposed Amendments would require funds to, among other things, tie the description of voting matters to the issuer’s form of proxy, categorize voting matters by type, report information in a custom XML-structured data language, disclose the number of shares that were voted and the number that were on loan and not recalled for voting, and make voting records accessible via fund websites. These and other notable proposed changes are described below.
Ease of Use. In order to make it easier for investors to compare how funds voted on a particular proposal, the Proposed Amendments would require funds to: (1) use the same language as that used on the issuer’s form of proxy to identify voting matters on Form N-PX; (2) use standardized categories and sub-categories to identify the subject matter of each reported proxy voting item, such as “change to investment management agreement,” “director election,” or “renewable energy or energy efficiency;” (3) file Form N-PX in an XML-structured data language created specifically for Form N-PX reports, which may be easier for reporting persons to prepare and may make the submitted information more useful (such reports are currently required to be filed in HTML or ASCII); (4) present required disclosures in a standardized order; and (5) provide Form N-PX disclosure separately by series if the fund offers multiple series of shares.
Disclosure of Accessibility. While most funds currently make proxy voting records available to shareholders on request, many do not inform investors of that fact on their website. The Proposed Amendments include changes to Forms N-1A, N-2, and N-3 that would require funds to disclose that their proxy voting records are publicly available on their websites as well as available to investors on request, free of charge in both cases.
Transparency of Securities Lending. Currently, funds are not required to disclose the number of shares that were not voted because they were on loan and not recalled. The Proposed Amendments would require funds to disclose information not only about the number of shares voted, but also about the number of shares loaned and not recalled for voting. The SEC believes this disclosure would allow investors to better understand how securities lending activities affect the voting practices of funds.
Rule and Form Changes to Require Institutional Investment Managers to Report Proxy Votes Relating to Shareholder Advisory Votes on Executive Compensation
Section 14A of the Exchange Act requires public companies to hold non-binding shareholder advisory votes on executive compensation (say-on-pay). The Proposed Amendments seek 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 how it voted on say-on-pay measures at least annually, by requiring institutional investment managers to report such voting annually on Form N-PX (not later than August 31 of each year for the most recent 12-month period ended June 30).
Say-on-pay votes that institutional investment managers would be required to report include votes to approve executive compensation, to determine the frequency of voting on executive compensation, and to approve “golden parachute” compensation relating to a merger, acquisition, consolidation, or other disposition of all or substantially all of the issuer’s assets.
An institutional investment manager would be required to report say-on-pay votes only for securities over which the institutional investment manager both has voting power and exercises that power. Under the Proposed Amendments, exercise of voting power means the actual use of voting power to influence a voting decision. Reporting would not be required, for example, where an institutional investment manager’s voting decision is entirely dictated by a client or third party. In addition, institutional investment managers who have but do not exercise voting power over any securities that hold say-on-pay votes during the relevant reporting period would be required to file a Form N-PX stating as much.
Institutional investment managers generally would be subject to the same Form N-PX reporting requirements as funds with respect to their say-on-pay votes. In order to prevent duplicative reporting, the Proposed Amendments would allow joint reporting of say-on-pay votes by groups of institutional investment managers, or by institutional investment managers and funds. Joint reporting would only be permitted under certain identified circumstances and would require additional disclosure to permit identification of a given institutional investment manager’s say-on-pay voting record.
Comments on the Proposed Amendments are due on or before December 14, 2021.
S&K Observations and Insights
The Proposed Amendments seek to address concerns that information in Form N-PX reports has been difficult to use and analyze. The SEC’s initiative to make Form N-PX more useful and easier to analyze, along with the proposed changes to make the Form more informative in certain areas such as securities lending, may signal a belief by the SEC that how funds vote is increasingly being considered important to shareholders, perhaps apparent, among other things, in the increasing focus on environmental, social, and governance matters by investors and attention to corporate behavior and actions.
The Proposed Amendments would require institutional investment managers required to report on Form 13F to annually report their voting on executive compensation matters on Form N-PX. Currently, only registered investment companies are required to file Form N-PX. Therefore, if adopted, the Proposed Amendments would implement new filing requirements for many private fund managers. Adoption of the Proposed Amendments would also likely increase scrutiny by the public of say-on-pay votes.
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If you have any questions regarding the matters covered in this memorandum, please contact any member of our Registered Funds Group.