Statement on Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers
Sept. 29, 2021
I want to offer my thanks to the staff of the Divisions of Investment Management and Economic and Risk Analysis and the Office of the General Counsel. I enjoyed our discussion about the proposal before us today and your thoughtful consideration of my comments. I know how much work goes into a proposal like this one, which makes it all the more difficult that I cannot support it.
One aspect of the proposal being considered today involves a statutorily mandated disclosure on “say-on-pay” votes. In a nutshell, Section 14A(d) of the Exchange Act, which the Dodd-Frank Act amended, requires every manager to report at least annually how it voted on say-on-pay matters. Regardless of whether I agree with section 951 of Dodd-Frank, it is the law, and the Commission is right in wanting to implement it.
If I had had my preference, the say-on-pay proposal would be up for Commission consideration as a standalone rulemaking. Instead, it has been joined with a wholly discretionary proposal involving a number of alterations to Form N-PX.
The discretionary amendments to Form N-PX are being justified in the name of enhanced transparency. Our disclosure rules are in place to help investors, but these proposed disclosures could harm investors, as existing Form N-PX disclosure may already be doing.
At the risk of apostasy, I posit that proxy voting is not the most important activity in which a fund engages. Although a fund’s voting strategy can be an important part of the overall fund management strategy, how or why a fund votes, or even whether a fund votes on a particular issue at a particular portfolio company is unlikely materially to influence an investor’s choice to invest in a particular fund. The proposing release, however, is replete with statements insisting that investor demand for more data on specific fund votes compels this rulemaking.
How many fund shareholders will be poring over the amended Form N-PX looking to see whether loaned securities were recalled and voted? Or how many fund shareholders will make use of the mandated structured data presentation? And how many fund shareholders will find useful the new categorization of votes by categories and subcategories, such as “environmental justice,” “pay gap,” and “other social matters”? Incidentally, the proposed categorization is unlikely to deliver the goods given the inevitable lack of uniformity in reporting across funds.
The real interest in this kind of detailed voting information seems to come from activists and the ever-expanding population of “stakeholders,” for whom proxy voting seems to be the fund’s highest purpose. In 2003, when the SEC was considering the original Form N-PX fund voting disclosure mandate, the heads of the two then-largest asset managers jointly penned a remarkably prescient Wall Street Journal opinion piece. In it, they warned that:
[R]equiring mutual-fund managers to disclose their votes on corporate proxies would politicize proxy voting. In case after case, it would open mutual-fund voting decisions to thinly veiled intimidation from activist groups whose agendas may have nothing to do with maximizing our clients’ returns.
Those words resonate now that so many proxy votes involve highly contentious social and political issues. So while fund shareholders may not be interested in this information, activists of every stripe can use the fact that funds have to publish their votes to increase their leverage through intimidation and negative publicity. Thus these stakeholders shape how proxy votes are cast.
A fund shareholder looking to earn a return so she can retire may not see much value in having the fund manager devote a lot of resources to voting and painstakingly categorizing the votes for publication. The fund manager, knowing that each vote will be made public, may feel pressured to expend more time considering the vote and figuring out how to catalog it than she would if the vote were not required to be made public and she were just focused on doing what was best for the fund. Moreover, because of the way the proposal suggests leaving securities out on loan is an abdication of voting responsibilities, a fund manager might conclude she has to recall lent securities to vote them, when the extra securities lending revenue might have been worth more to the fund than exercising the vote. An investor is motivated by a desire to see a positive return on her fund investment, and as the nation’s capital markets regulator, her interests should be our concern, not the interests of those seeking to use her fund to further their own interests.
The call for greater transparency in corporate disclosure is often justified by references to the need to bolster investor protection. In the case of Form N-PX, we are faced with investors needing protection from the consequences of mandated transparency.
For these reasons, I am skeptical of the value of the aspect of this proposal that seeks to double down on the fund vote publication requirement. Our experience with that mandate since its adoption in 2003 suggests that we should consider eliminating it altogether. This fundamental concern led me to ask for the inclusion of a question about whether we should eliminate mandatory public disclosure of fund votes. Had that question made it into today’s release, my vote would have been different. Alas, it was not to be. Although it is not in the release, I will include the question in the written draft of my statement, which will be available shortly on the Commission’s public website. I look forward to hearing responses to that question and the many questions in the release. Thank you in advance to commenters for your insights and wisdom, which will inform my determination about how to vote on any adopting release.
Again, my thanks go to the agency’s staff who worked so hard on this proposal: Nathan R. Schuur, Angela Mokodean, Brian M. Johnson, Terri G. Jordan, Sarah ten Siethoff, Marie-Louise Huth, Natalie Shioji, Robert Bagnall, Amy Scully, Alexander Schiller, Marina Martynova, Hanna Lee, Andrew Glickman, Parhaum Hamidi, Mavis Kelly, Song Pak Brandon, Dabney O’Riordan, Adam Turk, Ted Yu, Nicholas Panos, Jill Felker, and Vanessa Meeks.
Question: Instead of these proposed amendments to Form N-PX, should the Commission be proposing a complete withdrawal of all non-statutorily mandated voting disclosures to eliminate the expense of reporting, allow for presumptive confidentiality of votes, and emphasize that the Commission does not take a position on whether or not funds should vote?
 See, e.g., Fidelity Letter (with regard to our 2010 proposal which included more limited categorization, citing difficulty of achieving uniform reporting “given the wide variety of votes placed before shareholders” and stating that “as a general matter, the variable nature of proxy-related disclosures do not lend themselves to uniform standardization”); Letter of Fidelity Investments (Oct. 20, 2010) (File No. S7-14-10) (questioning feasibility of providing for a uniform identification of each matter voted in reports on Form N-PX); Letter of Investment Company Institute (Oct. 20, 2010) (File No. S7-14-10) (also in the context of the 2010 rulemaking, citing a “significant practical issue” of “how to provide for uniform identification of each matter voted across different funds”). See Exchange Act Release No. 63123 (Oct. 18, 2010) [75 FR 66622 (Oct. 28, 2010)]. Even as described in the release filers are unlikely to categorize particular voting matters uniformly, which seems a rather significant defect in a proposal seeking to impose standardization.
 John J. Brennan and Edward C. Johnson 3d, No Disclosure: The Feeling Is Mutual, Wall St. J., Jan. 14, 2003.