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Remarks at Asset Management Advisory Committee Meeting

March 19, 2021

Good morning. As always, thank you to the Committee for your time, dedication, and thoughtfulness on important asset management issues that affect investors and market integrity. Thank you also to the staff of the Division of Investment Management.

I commend you for continuing your work on issues related to Environmental, Sustainability, Governance (ESG); private securities; and diversity and inclusion. And I look forward to today’s discussions on these important issues.

There has been a lot of discussion about ESG as of late, so today’s agenda, which includes a discussion about the ESG Subcommittee’s recommendations, is timely.[1] I’ve said this before and I’ll say it again: investors are using ESG-related information to make investment decisions and to allocate capital more than ever before. They are increasingly looking for sustainable investments, albeit investors have different thoughts about what “sustainability” means and how ESG factors inform their investment decisions.[2]

The Commission’s role is to facilitate material disclosure to investors.[3] But to be useful to investors, disclosures need to be meaningful. That’s particularly true for ESG-related disclosures, as they are too often inconsistent and incomparable. What we should be working toward is a clear disclosure regime that yields consistent, comparable, reliable, and understandable ESG disclosures to investors. By improving these disclosures, issuers will be able to stay competitive and attract investors. Moreover, investors will have greater transparency into whether and how an investment fund or asset manager approaches and takes into account the ESG factors important to them.

The ESG Subcommittee has recommended that the Commission require the adoption of standards for ESG disclosure. As you discuss the recommendation today, I’m interested in hearing from you specifically about what information should be disclosed about issuers and investment products, what information can and should be quantified and disclosed through metrics, what standards you think we should use and why.

I also encourage you to think about the questions outlined in Acting Chair Lee’s recent request for public comment on climate disclosures,[4] as well as your thoughts about any “S” and “G” related risks that should be subject to mandatory disclosure. And whether you think metric-based disclosure standards and requirements should vary by industry.

Beyond ESG, as you think about your 2021 agenda, I’d also appreciate hearing the Committee’s views on other important topics affecting asset management. I am interested in many topics, but I’ll just briefly mention three today.

First, securities lending. As the index fund market has grown, so too has the market for securities lending. Securities lending can generate additional income for funds and their investors, but it can also expose funds and their investors to certain risks, including the risk that borrowers may default.[5] I am interested to know whether funds operate with sufficient safeguards to mitigate those risks. Additionally, on what basis do fund sponsors determine the split of revenue generated by securities lending, and are these decisions made in the fund’s and investors’ best interests?

Second, I’m interested in the AMAC’s views on the so-called lending-proxy voting tradeoff. In 2019, the Commission issued guidance encouraging funds to take into account “opportunity costs” of share lending when making voting decisions.[6] Prior to that, funds would recall shares they loaned when material items were on the ballot to ensure that voting would occur. Following this 2019 guidance, research has shown that funds significantly increased their share lending at the expense of proxy voting.[7] If this dynamic continues, what are the implications for shareholder democracy, corporate governance, and corporate stewardship? What, if anything, should the Commission be thinking about in this space?

One final proxy voting-related issue that I would appreciate hearing the Committee’s insights on is the effectiveness of Form N-PX, and I welcome any recommendations for revising the Form to make it more effective. Form N-PX was adopted to provide fund investors more information and greater transparency into how funds vote on shareholders’ behalf.[8] But, unfortunately, the Form has resulted in funds providing lengthy, dense, non-standardized, and difficult-to-understand disclosures which seem to be of little use to investors.[9]

Some questions that come to mind include: how can Form N-PX be updated to make it more useful for investors? Should the Commission revisit the proposed rule that, pursuant to Dodd-Frank, would require certain institutional investors to report their votes on executive compensation on Form N-PX? Are there other issues, such as ESG-related proxy voting, that investors would appreciate having be included in the Form N-PX disclosures?

Again, thank you for your commitment and dedication to these important issues.

[2] See, e.g., Sara Bernow et al., McKinsey & Co.,More Than Values: The Value-Based Sustainability Reporting That Investors Want (Aug. 7, 2019).

[3] See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (material information is that which a “would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available”).

[4] See Acting Chair Allison Herren Lee, Public Input Welcomed on Climate Change Disclosures, Sec. & Exch. Comm’n (Mar. 15, 2021).

[5] See Adam McCullough, A Close Examination of the Risks and Rewards of Securities Lending, Morningstar (Dec. 12, 2018).

[7] SeeEdwin Hu, Joshua Mitts & Haley Sylvester, The Index Fund Dilemma: An Empirical Study of the Lending-Voting Tradeoff 1 (N.Y.U. L. & Econ. Research Paper No. 20-52, 2020)(“We show that, after the SEC clarified funds’ power to lend shares rather than vote them at shareholder meetings, institutions supplied 58% more shares for lending immediately prior to those meetings. The change is concentrated in stocks with high index fund ownership.”).

[8] SeeDisclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, Release No. IC-25922 (Jan. 31, 2003) (“[W]e continue to believe that requiring funds to disclose their complete proxy voting records will benefit investors by improving transparency and enabling fund shareholders to monitor their funds' involvement in the governance activities of portfolio companies. . . . [R]egardless of whether all, or a majority of, investors are interested in proxy vote disclosure, we believe that fund shareholders who are interested in this information have a fundamental right to know how the fund has exercised its proxy votes on their behalf.”).

[9] See Acting Chair Allison Herren Lee, Every Vote Counts: The Importance of Fund Voting and Disclosure (Mar. 17, 2021).

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