Under the leadership of its new Chair Gary Gensler, the SEC has announced an ambitious regulatory agenda. Corporate governance, and proxy voting in particular, occupies a prominent place in that agenda. Among other projects, the newly-constituted Commission plans to propose amendments to revise its Trump-era rules on proxy voting advice and shareholder proposals, as well as to adopt universal proxy. First up on the SEC’s corporate governance agenda, however, was proxy vote reporting.

On September 29, at Chair Gensler’s first open meeting at the SEC helm, the Commission proposed new rules requiring institutional investment managers to disclose their say-on-pay votes and enhancements to Form N-PX, the form that funds in the U.S. use today to report their proxy votes. The proposed new rules and form changes are significant and will be open for comment until December 14, 2021. We encourage all Glass Lewis clients that file Form N-PX today, as well as those 13F filers subject to the new say-on-pay vote disclosure rules, to study the SEC’s proposals and consider weighing in.

Investment Manager Say-on-Pay Vote Disclosure

The first part of the SEC’s proposal would implement a statutory mandate from the Dodd-Frank Act. In addition to introducing say-on-pay votes for U.S. public companies, Section 951 of that Act requires “institutional investment managers” subject to the reporting requirements of section 13(f) of the Exchange Act to disclose their say-on-pay votes annually. The SEC proposed rules to implement this directive in 2010, but never finalized them. The SEC’s new proposed rules would implement this long-standing mandate by requiring 13F filers to report such votes each year on Form N-PX, as enhanced through the companion proposed rules discussed below.

The terms of the SEC’s proposed rule generally mirror the statutory directive, although there are some significant technical details. In a departure from the 2010 proposal, the proposed rules would apply to all votes over which the investment manager directly or indirectly has and exercises voting power. The SEC release suggests this standard would be interpreted broadly; an investment manager would exercise voting power whenever it exercises some judgment in determining how a client votes. And, rebuffing the suggestion of some 2010 commenters, the proposed rules would not contain a de minimis exception or an exception for managers that, as a policy, do not vote proxies. The SEC did, however, propose a series of amendments permitting a single manager, fund, or manager affiliate to report on behalf of another manager in some circumstances, with related changes to Form N-PX intended to clearly identify such situations.

The SEC’s proposal, while expected given the statutory requirement, would usher in a new proxy vote reporting requirement for many institutional investors. The SEC estimated there are 7,550 managers with investment discretion over approximately $39.79 trillion in section 13(f) securities. Pension funds, foundations, insurance companies, family offices, hedge funds and others subject to 13(f) reporting requirements may want to begin to consider the systems and processes needed to make these filings, as well as making plans to review their proxy voting policies on say-on-pay before the rules’ compliance date.

Form N-PX Enhancements

The SEC also proposed a major revamp of Form N-PX. As championed by SEC Commissioner Lee in a series of speeches last Spring, the enhancements are intended to make those filings easier for investors to understand and analyze, thereby facilitating comparison of funds’ and managers’ voting records. While there are a number of changes to the Form, some that we expect will be most significant to our filer clients include –

  • Use of structured data language. Form N-PX would have to be filed using a custom XML structured data language.
  • Disclosure of shares voted, and shares loaned and not recalled. The proposed rules would require disclosure of the number of shares that were voted (or instructed to be voted), and the number of shares that a fund (or investment manager) loaned and did not recall before the record date for the vote. This new disclosure would shed light on the degree to which funds (and covered managers) recall securities to vote the accompanying proxy or leave them out on loan.
  • Standardized descriptions and order of voting matters. Form N-PX filers would have to describe each voting matter using the description in the issuer’s form of proxy and present them in the same order as the issuer’s proxy.
  • Categorization of votes. Voting matters would have to be categorized by type. To this end, the SEC proposed a list of 16 primary categories, each with multiple sub-categories — ranging from “director election” to “auditor rotation” to “responsible tax policies” — that N-PX filers would select and apply to all ballot items. Votes that defy categorization could be labelled “Other,” with an accompanying brief description.
  • Series-by-series reporting. Funds with a series structure would have to provide the complete voting record of each series separately (e.g., one series’ full proxy voting record followed by the next series’ full proxy voting record).
  • Website disclosure. Funds would have to disclose that their proxy voting records are publicly available, in a human readable form, on (or through) their websites or upon request.

Compliance Timing

Today, Form N-PX must be filed annually by August 31, reporting all proxy votes for the prior year ended June 30. The SEC proposes to retain this timing, for both funds and investment managers, and included a somewhat complicated set of compliance dates for funds to adopt the new format and for investment managers to start reporting. The basic concept underlying the compliance dates is to offer N-PX reporters a six-month grace period after the rules become effective, which is itself usually 30-60 days after the SEC adopts the rules and they appear in the Federal Register.

For Funds

Funds would continue to use the current N-PX format for votes through the end of this grace period (i.e., the rules’ effective date plus six months) and then the new format for votes after the grace period ends. In other words, if the rules are not effective six months before June 30, funds would have until the following year’s reporting cycle to report at all under the new format. When they do adopt the new format, funds would only have to use that format for votes more than six months after the effective date, resulting in one year where their N-PX reports use both the old and new formats. For example:

Hypothetical Effective Date 8/31/22 Reports 8/31/23 Reports
5/31/22 Current N-PX format – Current N-PX format for votes from 7/1/22 to 11/30/22

– New N-PX format for votes from 12/1/22 to 6/30/23

In practical terms, a 2022 effective date would require the new format to first be used for at least some votes in August 2023. Of course, those reports would use the enhanced reporting format for votes taking place as much as a year earlier. Funds would therefore be well served to have systems in place to, among other things, track votes in the new categories and sub-categories well before the grace period runs, which could be as early as 3Q 2022.

For Investment Managers

Investment managers would only need to report votes (always under the new format) for votes after the grace period runs. The timing of investment managers’ first reports, therefore, depends on whether the rules become effective more than six months before a June 30 reporting cut-off. For example:

Hypothetical Effective Date 8/31/22 Reports 8/31/23 Reports
5/31/22 No Report Due New N-PX format reporting only votes from 12/1/22 to 6/30/23

 

In practical terms, a 2022 effective date would make investment managers’ first reports due in August 2023. Of course, again, that report could cover votes from as early as the Summer of 2022, so investment managers may want to begin the process of reviewing their proxy voting policies and should plan to have systems and processes in place to track these votes and be prepared to report in the specified format well before the applicable reporting date.

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As the proxy vote reporting service provider for a number of our fund clients today, Glass Lewis will continue to follow the SEC’s process and expects to comment on some practical aspects of the proposed new requirements. Clients interested in learning more about Glass Lewis’ Form N-PX offerings should contact their client service representative. For others interested in Glass Lewis’ vote reporting and disclosure offerings, please visit the Glass Lewis Proxy Voting Disclosure Solutions page.