SEC Proposes New Disclosures on Asset Managers' Proxy Votes

The Securities and Exchange Commission is proposing changes to the way that asset managers disclose how they vote on shareholder proxies and on corporate executive compensation, known as "say on pay."

The enhanced disclosure requirements involve changes to Form N-PX, which asset managers file annually with the commission to disclose proxy votes, but which "can be difficult for investors to use and can provide an incomplete picture of a fund's voting practices," according to the SEC proposal.

The proposed rulemaking would require fund companies to categorize each voting matter by type so investors could identify those votes that interest them and compare voting records of asset managers.

It would also prescribe how asset managers organize their voting reports and require them to use a structured data language to make filings easier to analyze and require funds to disclose how their securities lending activity affected their proxy votes since they would have to recall those loans, even temporarily, to vote on shares.

The requirement on funds' "say-on-pay" matters, would fulfill one of the remaining rule-making mandates under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which Congress passed in 2010.

"This proposal will make it easier and more efficient for investors to get crucial information about proxy votes from funds," SEC Chairman Gary Gensler said in a statement. "I am pleased to support the staff's recommendations and look forward to putting them out to public comment."

The agency will be collect public comments on the proposal for 60 days after its publication in the Federal Register.

The new proposal would apply to over 7,550 asset management firms that have discretion of almost $40 trillion in assets. That's almost twice the gross national product of the U.S. and nearly half the world's GDP.

How the Commissioners Voted

Four of the five commissioners of the SEC, including Gensler, voted in support of the proposal. Commissioner Hester Peirce voted against it.

In her statement, Peirce said the proposed disclosure requirements would distract fund managers from "doing what was best for the fund," including potentially recalling securities out on loan when the extra revenue might be worth more to the fund than exercising a proxy vote.

She assailed the proposal as reflecting "the real interest" of activists and "the ever-expanding population of 'stakeholders,' for whom proxy voting seems to be the fund's highest purpose" and noted a preference" for the say-on-pay proposal as a stand-alone rule-making.

In contrast, Commissioner Allison Herren Lee said the proposed enhanced disclosure requirements would help investors understand and evaluate the role of funds and managers in the capital markets given their influence.

She cited one recent study showing that BlackRock, Vanguard and State Street Global Advisors cast an average of about 25% of the votes at S&P 500 companies, "often with the ability to tip the scales on important matters of corporate governance."

All three fund giants manage trillions of dollars in equity index funds, which receive special mention in the SEC proposal. "Because index funds' investment policies typically do not permit them to sell investments in the relevant index, these funds cannot sell a stock if they are dissatisfied with management," the proposal reads.

"Instead, index funds may use their voting power to become active in corporate governance in order to increase the value of their investments," it adds, noting that the net assets of index funds make up nearly half of the assets in equity funds.

Commissioner Caroline Crenshaw said the proposal addresses "many of the gaps under the existing reporting regime, including fund votes on executive compensation, and provides the information that shareholders can use to hold funds "to account, which in turn, could enhance corporate decision making."

Commissioner Elad Roisman expressed "strong reservations" about the proposal that he voted for and said his vote "in no way reflects how I would vote on a recommendation to adopt" them.

He disagreed with the categorization of votes, especially those regarding environmental, social and governance issues. "In the year 2020, ESG investment strategies proliferated for myriad reasons. Whether they have staying power in their current form is yet to be seen, but by permanently memorializing their interests into our reporting of votes, we seem to be underscoring the importance of these issues to all investors for years to come."

The new SEC proxy proposal is the latest example of the Gensler-led SEC moving away from the policies adopted by the agency under former Chairman Jay Clayton. In June, the SEC announced it would not enforce a Trump-era rule that restricts the practices of proxy advisory firms.