The SEC on September 29, 2021, voted 4 to 1 to issue a proposal that would increase the reporting of proxy votes by management investment companies such as mutual funds and exchange-traded funds (ETFs). The proposal would also require institutional investment managers to report executive compensation votes or “say-on-pay” votes.
“This proposal will make it easier and more efficient for investors to get crucial information about proxy votes from funds,” said SEC Chair Gary Gensler said in a statement.
Commissioner Hester Peirce dissented, saying that the proposed rule, if finalized, will not necessarily protect investors but empower activists on issues that may have nothing to do with maximizing investment returns.
While Commissioner Elad Roisman voted to issue the proposal, he emphasized that he did so only because it is not an adopting release.
The proposal is in Release No. 34-91603, Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers.
Comments are due 60 days after publication in the Federal Register.
Section 951 of Dodd-Frank added Section 14A to the Securities Exchange Act of 1934, requiring public operating companies to provide shareholders with a vote on executive compensation. The provision also requires institutional investment managers to report how they voted on say-on-pay. Sec. 951 of PL111-203
In January 2011, the SEC issued Release No. 33-9178, Shareholder Approval of Executive Compensation and Golden Parachute Compensation, which requires say-on-pay votes.
In October 2010, the commission issued a proposal that would require proxy vote reporting on say-on-pay by money managers in Release No. 34-63123, Reporting of Proxy Votes on Executive Compensation and Other Matters, as required by the Dodd-Frank. This rule was not adopted. And the proposal in Release No. 34-91603, if adopted, would complete the implementation of Section 951. Sec. 951 of PL111-203
Increased Reporting of Proxy Votes
The other part of the proposal in Release No. 34-91603 is about enhancing the information contained in Form N-PX, which funds use to report about how they voted on proxy proposals related to investments they hold. The SEC is concerned that, as it stands today, it may be difficult for investors to analyze the forms.
Form N-PX filings can sometimes run more than a thousand pages.
“For example, funds may report their votes in an inconsistent manner or in a format that is not machine readable. This can make it more difficult for investors to analyze the reported data,” the SEC said. “The proposal would make funds’ proxy voting records more usable and easier to analyze, improving investors’ ability to monitor how their funds vote and compare different funds’ voting records.”
Form N-PX was adopted in January 2003 in Release No. 33-8188, Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies.
“This disclosure was designed to satisfy investors’ interest in understanding how funds they hold are voting proxies,” Gensler said. Before 2003, funds did not have to disclose their proxy votes. “A lot has changed since that time, but that basic concept has stayed the same,” Gensler said. “Time and again, we’ve seen the desire from investors for more information on these matters.”
In particular, today’s proposal would require funds to tie the description of each voting item to the public company’s proxy form and to categorize each matter by type. This is intended to help investors to identify votes more easily and compare voting records.
It would also spell out how funds can organize the information and require them to use XML structured data language.
In addition, funds would be required to disclose how their securities lending activity affected their votes.
Among other concerns, Commissioner Roisman pointed to the proposed categorization framework, which funds would have to follow when listing the voting matters.
He said he understands why investors might want funds to present their votes in comparable categories. But the process that the SEC used to establish the framework lacks rigorous analysis, he said, because it grounds a review of proxy voting matters only on the most recent proxy season—2020. This myopic focus has substantive policy implications.
For example, Roisman said he is worried about the proposed environmental, social, and governance (ESG) categories and subcategories.
While ESG investment strategies proliferated last year, he said he is not sure whether those have staying power in their current form.
“Several of the subcategories in the multiple ‘environmental’ and ‘social’ categories are at once incredibly specific and also potentially overlapping,” he said.
For example, many will likely ask what it exactly means by terms like “environmental justice” and “water issues,” he said.
“Yet, this ambiguity is typical of ESG issues more broadly—the terms mean different things to different people, who have different objectives and interests in obtaining the information,” he said. “I believe the difficulty we apparently had even delineating what each ESG category and subcategory covers in our proposal reflects how hard it is to come up with a structure for reporting of ESG information that is comparable across companies—let alone material to investors.”
Roisman is likely to use the same argument when the SEC proposes a disclosure rulemaking on climate change later this year or early next year.
In the meantime, Bartlett Naylor, financial policy advocate for Public Citizen, welcomed the SEC’s proposal.
“Executive compensation levels long ago broke the sanity barrier, with some CEOs raking in more in an hour what the average worker earns in a year. That’s only possible if shareholders approve these plans,” Naylor said in a statement. “The SEC’s proposal can help customers of mutual funds better understand if the stewards of their investment are enablers or reformers of runaway pay packages.”
This article originally appeared in the September 30, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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