The SEC proposed amendments to the reporting requirements for (i) management investment companies (including exchange traded funds, or "ETFs") as to their reporting of proxy votes and (ii) "institutional investment managers" (as defined under SEA Section 13(f)) as to proxy voting relating to executive compensation.
In a fact sheet, the SEC explained that the proposal would amend Form N-PX, on which investment companies provide reports on their proxy voting, in order to, among other things:
- require that reporting of votes be standardized and in a machine-readable format to aid investors in analyzing the relevant information; and
- mandate disclosures from funds and managers as to the effect of their securities lending activity on their votes.
For purposes of disclosure, the SEC stated that proxies are divided into separate categories, some of which are procedural. Other categories include proxies relating to (i) environment or climate, (ii) human rights or human capital, (iii) diversity, equity and inclusion, and (iv) other social issues, including "responsible tax policies."
The SEC also voted to propose new SEA Rule 14Ad-1 ("Report of proxy voting record: Reporting of Proxy Votes on Executive Compensation and Other Matters") which requires institutional investment managers to report annually how they voted with respect to executive compensation matters (or "say on pay" votes). If adopted, the proposal would implement Section 951(d) of Dodd-Frank.
Comments must be submitted within 60 days of the proposal's publication in the Federal Register.
Commissioner Statements
SEC Chair Gary Gensler praised the proposed amendments for their potential to facilitate investors' receipt of key information on proxy votes. Mr. Gensler stated that currently Forms N-PX are not reported in a machine-readable format, making it difficult for investors to obtain and analyze the information.
Commissioners Allison Herren Lee and Caroline A. Crenshaw emphasized the value of structured data. Ms. Lee stated that she is looking forward to feedback regarding the frequency of the voting reporting. Ms. Crenshaw expressed concern regarding the complexity of the current format of Form N-PX, stating that "investors are still largely in the dark when it comes to how the funds they own are voting their money."
Commissioner Hester M. Peirce dissented from the SEC's decision to propose the amendment. Ms. Peirce said she would have supported a standalone rulemaking on mandatory say-on-pay reporting as it is required by Dodd-Frank, but she objected to the increased disclosure as to proxy voting by mutual funds, saying she doubted that the way a fund chooses to vote on an issue would materially impact an investor's decision to invest in the fund. Ms. Peirce stated that investors' decisions are more likely driven by "a desire to see a positive return." Ms. Peirce questioned whether the SEC should in fact eliminate required voting disclosures altogether to (i) reduce reporting expenses, (ii) enable the "presumptive confidentiality of votes" and (iii) make clear that the SEC abstains from a position as to whether funds must vote securities they own. She expressed concern that the increased disclosure would enable "activists of every stripe [to] use the fact that funds have to publish their votes to increase their leverage through intimidation and negative publicity."
While Commissioner Elad L. Roisman expressed reservations as to the proposed increased on disclosures by investment companies. Mr. Roisman stated that the proposed amendments are poorly designed for their purpose, emphasizing that they do not consider all of the components of a fund manager's decision to recall shares that have been loaned out to vote. He also criticized the analysis underpinning the proposed categorization framework, emphasizing that its reliance on a review of the 2020 proxy season renders the analysis incomplete. He also expressed concern regarding the weight placed on voting as to environmental, social and governance ("ESG") matters.
Commentary
Commissioner Peirce raises basic questions: Do investors select mutual funds based on their returns or on how they vote? If investors select funds based on their returns, this information is irrelevant, and counterproductive in that it simply raises the cost of doing business.
If the SEC believes that disclosure of proxy voting is important to at least some investors, but likely not all, the SEC could propose a voting format and allow those funds that wished to do so to follow the disclosure format. That would allow those investors who cared about voting as much as they cared about returns to invest in the funds that made the required disclosures. Alternatively, the SEC could make the disclosures required for funds that tout themselves as ESG funds. Conversely, if a fund marketed itself on the basis of its returns, then disclosure of the fund's voting record would not be relevant. Investors who are indifferent to a fund's voting record could then elect to invest in those funds that obtain the best returns and that save themselves the costs of the proxy disclosures.
One irony is that if the SEC commissioners genuinely believed that a corporation's increased ESG focus would result in increased returns, there would be no need to mandate investment funds to disclose their ESG votes; they would do so in order to increase their returns. Rather, the SEC appears to assume that there is some trade-off between ESG and returns, and that there is a group of investors that is willing to sacrifice returns to obtain an ESG end.
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