US SEC Moves to Boost Transparency on Proxy Votes

Proposed rule changes will make it easier for asset owners to see how asset managers are voting at AGMs.

US fund managers will have to provide more information on their proxy votes at AGMs under proposed new rules from the US Securities and Exchange Commission (SEC).

The amendments to Form N-PX would also require institutional investment managers to disclose how they voted on executive pay or so called ‘say-on-pay’ matters.

Funds and investment managers would, under the proposals, be required to tie the description of each voting matter to the issuer’s form of proxy and to categorise each matter by type to help investors identify votes of interest and compare voting records.

The proposal would include categories for votes related to the board of directors, extraordinary transactions, say-on-pay, shareholder rights and defences, and environment or climate.

Greater transparency on votes

Funds would be required to disclose that they will post proxy voting records on their websites and make the records available to investors upon request, free of charge.

The proposals would also prescribe how funds and managers organise their reports and require them to use a structured data language to make the filings easier to analyse.

“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. “I am pleased to support the staff’s recommendations and look forward to putting them out to public comment.”

Since 2003, funds have been required to file Form N-PX reports disclosing how they voted on proxy proposals relating to investments they hold, but the SEC said investors may have faced difficulties analysing these reports.

“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 analyse the reported data,” the SEC said. “The proposal would make funds’ proxy voting records more usable and easier to analyse, improving investors’ ability to monitor how their funds vote and compare different funds’ voting records.”

Four of the five SEC commissioners including Gensler and Allison Herren Lee voted in favour. Lee said the proposals were the most meaningful improvements to the disclosure of fund voting information since the requirement to disclose was first adopted nearly 20 years ago.

“Each of these proposed new features will bring greater transparency to how intermediaries cast votes on behalf of investors,” she said.

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 Hester Peirce, one of two Republicans, voted against the proposals. Peirce said they would distract fund managers from “doing what was best for the fund,” and could harm investors.

“These changes are unlikely material to influence an investor’s choice to invest in a particular fund,” Peirce said.

Increased focus on shareholder engagement

Dorothy Donohue, deputy general counsel at the Investment Company Institute, said that the proposal would make it easier to access and analyse fund proxy votes.

“Regulated funds take their proxy voting responsibilities very seriously,” she said. “We will review the proposal and carefully assess how it could affect regulated funds’ proxy voting practices. We intend to comment and look forward to engaging with the SEC.”

A 60-day comment period will begin after the proposal is published in the Federal Register. Although the proposed rule is seen as largely positive for investors, the SEC drew criticism last week for introducing a new rule seen as limiting shareholder power. Amendments to Rule14a-8 were described as a “setback for corporate transparency and shareholder democracy” by the Interfaith Center on Corporate Responsibility, for raising limits on the filing of resolutions.

The changes come as climate-related shareholder resolutions soared in the US proxy voting season. According to an Institutional Shareholder Services report in September there was a marked escalation of shareholder engagement on climate-related issues.

This included the high-profile vote at oil giant Exxon Mobil initiated by Engine No.1, resulting in the removal of three directors, following considerable criticism for the firm’s reluctance to take measures to adapt to or mitigate climate change.

A total of 19 climate-related vote-no campaigns were pursued at companies in the US electricity generation, oil and gas, and banking sectors in the 2021 season.

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