Shining a Light on Corporate Democracy: Statement on Updates to Form N-PX

[1] The use of “funds” herein refers to registered management investment companies—such as mutual funds, closed-end funds, and exchange-traded funds—all of which are required by Rule 30b1-4 under the Investment Company Act of 1940 (“Investment Company Act”) to file an annual report containing their proxy voting record on Form N-PX. See 17 C.F.R. 270.30b1-4.

[2] Section 13 of the Securities Exchange Act of 1934 (“Exchange Act”) defines an institutional investment manager as “any person, other than a natural person, investing in or buying and selling securities for its own account, and any person exercising investment discretion with respect to the account of any other person.” 15 U.S.C. 78m(f)(6). As used herein, the term “manager” means any institutional investment manager subject to the reporting requirements of Section 13(f) of the Exchange Act and Rule 13f-1 thereunder. See 15 U.S.C. 78(m) and 17 C.F.R. 240.13f-1. Those provisions generally require any institutional investment manager exercising investment discretion over accounts with an aggregate value of at least $100 million to disclose the holdings of such accounts on Form 13F on a quarterly basis. Id.

[3] See Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers, Proposed Rule, Investment Company Act Rel. No. [Forthcoming] (Sept. 29, 2021) (“Proposal”). See also Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, Final Rule, Investment Company Act Rel. No. 25922 (Sept. 23, 2003) (adopting, among other things, new rule 30b1-4 requiring management investment companies to publicly report their proxy voting record on new Form N-PX).

[4] See Exchange Act Section 14A(d), 15 U.S.C. 78n-1(d) (requiring that “[e]very institutional investment manager subject to [Exchange Act Section 13(f)] shall report at least annually how it voted” on say-on-pay matters). See also Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, Section 951 (July 21, 2010) (amending the Exchange Act by adding new section 14A (15 U.S.C. 78n-1) relating to shareholder approval of executive compensation). As used herein, “say-on-pay votes” refers to non-binding shareholder advisory votes on executive compensation matters pursuant to Section 14A of the Exchange Act. See 15 U.S.C. 78n-1(a) and (b). Such votes generally include three categories of votes required by Section 14A: 1) whether to approve the compensation of certain named executives; 2) the frequency of say-on-pay votes (every one, two, or three years); and 3) whether to approve “golden parachute” compensation in connection with a merger or acquisition.

[5] From the Division of Investment Management, I’d like to thank: Acting Director Sarah ten Siethoff, Tim Dulaney, Brian Johnson, Angela Mokodean, Nathan Schuur, Gregg Jaffray, and Terri Jordan. From the Division of Economic and Risk Analysis: Director Jessica Wachter, Hanna Lee, Marina Martynova, Alex Schiller, PJ Hamidi, and Andrew Glickman.

[6] Section 8 of the Investment Company Act empowers the Commission to require disclosure of such information and documents that the Commission finds is “necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. 80a-8(a). Similarly, Section 45(a) states that the information contained in filings made with the Commission shall be made public unless the Commission “finds that public disclosure is neither necessary nor appropriate in the public interest or for the protection of investors.” 15 U.S.C. 80a-44(a).

As it relates to managers, the legislative history of Exchange Act Section 13(f) reflects Congress’ intent that the disclosure requirement benefit the publicly broadly. The Senate Report associated with the relevant legislation flags numerous categories of potential beneficiaries, including: investors, individuals, data aggregators (referred to as “firms with computer processing capabilities”), regulatory agencies, other institutional investment managers, and issuers. See Securities Acts Amendments of 1975: Hearings on S. 249 before a Subcomm. of the Senate Comm. on Banking, Housing and Urban Affairs, 94th Cong., 1st Sess. (S. Report No. 94-75) (1975). Moreover, the Senate Report states that the disclosure requirement will “substantially improve the body of factual data about large investment managers which is available to individuals” and that Congress’ intent is to permit “careful consideration by interested persons of the public policy implications” and “reasoned discussion and decisions about the influence and impact of the large institutional investment managers on the securities markets.” The focus on how disclosure by institutional investment managers could be used to inform public policy discussions is a clear signal that such disclosure was intended to benefit the public at large in considering the influence of institutional investors. In enacting Exchange Act Section 14A, Congress specifically applied the new reporting requirement to those managers subject to Section 13(f) reporting, and by doing so expanded the information available to the public to serve the purposes underlying Section 13(f).

[7] See Matt Phillips, Exxon’s Board Defeat Signals the Rise of Social-Good Activists, N.Y. Times (June 9, 2021), www.nytimes.com/2021/06/09/business/exxon-mobil-engine-no1-activist.html (discussing how an activist campaign to install three new directors on Exxon’s board against the recommendation of management was successful only because of the support of three of the nation’s largest fund complexes).

[8] See Lucian Bebchuk & Scott Hirst, The Specter of the Giant Three, 99 B.U. L. Rev. 721, 724 (2019) (stating that “[f]ollowing two decades of growth, the Big Three now collectively hold an average stake of more than 20% of S&P 500 companies and that “shares held by the Big Three represent an average of about 25% of the shares voted in director elections at S&P 500 companies in 2018”). See also John C. Coates IV, The Future of Corporate Governance Part I: The Problem of Twelve (Harvard John M. Olin Ctr. for Law, Econ., & Bus., Discussion Paper No. 1001, 2019), http://www.law.harvard.edu/programs/olin_center/papers/pdf/Coates_1001.pdf (discussing the increasing concentration of control over public companies by a small number of index fund managers); Matt Levine, Bloomberg Opinion (June 25, 2020), https://www.bloomberg.com/opinion/articles/2020-06-25/the-government-wants-esg-out-of-pensions (“There is another government, in the world, consisting of a handful of gigantic institutional asset managers . . . who own (on behalf of their customers) most of the stocks of most of the public companies, and can, in some loose sense, tell those companies how to behave. They are not chosen democratically, exactly, but they are representative; millions of people give their money to those institutions and trust them to make decisions for them.”) (emphasis in original).

[9] In addition to the requirement for funds and managers to disclose how they vote on each ballot item, the proposal includes a requirement to disclose the number of shares on loan as of the record date and not recalled. See Proposed Item 1(i) of Form N-PX. See also Proposed Rule 14Ad-1(d)(1) (defining “voting power” to include, among other things, “the ability to determine whether to vote the security or to recall a loaned security”). The release correctly notes that a decision not to recall shares on loan is, in effect, a voting decision because the fund or manager is unable to use the voting power associated with those shares. See, e.g., Proposal, supra note 3, at 51 (“Absent this disclosure [of the number of shares on loan], investors would not have information about a manager’s decision not to recall a loaned security, which is similar to the decision not to vote on a matter.”).

[10] See Proposal, supra note 3, at 75-81 (discussing the proposed requirement for filings to be submitted in a custom eXtensible Markup Language (“XML”) -based structured data language created specifically for reports on Form N-PX).

[11] See Proposal, supra note 3, at 77 (“Commenters that expressed support suggested that structured data would: improve investor analysis or allow for more informed decision-making, improve third-party analyses of voting information or reduce the costs associated with preparing them, and generally benefit investors or improve the usefulness and accessibility of reported data.”), 79 (“We believe that reporting in custom XML language will allow investors to aggregate and analyze the reported data in a much less labor-intensive manner”), 107 (“We also expect these amendments could facilitate comparisons of voting patterns across a wide range of funds or within an individual fund over time.”).

[12] See id. at 81-85 (discussing the timing requirements and requesting comment on whether the Commission should adopt a requirement for funds and managers to disclose their voting record more frequently).

[13] At present, funds and managers are required to disclose their holdings on a quarterly basis using Form N-PORT and Form 13F, respectively. If the Commission were to require disclosure of proxy voting information more frequently than quarterly, such disclosure could, in effect, act as holdings disclosure if it predates the filing of a Form N-PORT or Form 13F covering the relevant position(s). As the Commission acknowledges in today’s release, a requirement for timelier disclosure could, depending on how it is implemented, contribute to concerns by some about the potential for third-parties to use this information in order to either front-run or reverse engineer a fund’s or manager’s strategy. See Proposal, supra note 3, at 125. The Commission could consider, however, whether the existing level of transparency for certain types of funds—such as index funds and the majority of exchange-traded funds—reduces the potential for timelier disclosure to contribute to these concerns. See id. at 85, Question 79.

[14] See, e.g., Risk Alert: The Division of Examinations’ Review of ESG Investing, Division of Examinations, U.S. Securities and Exchange Commission (Apr. 9, 2021), https://www.sec.gov/files/esg-risk-alert.pdf (“The staff observed inconsistencies between public ESG-related proxy voting claims and internal proxy voting policies and practices. For example, the staff observed public statements that ESG-related proxy proposals would be independently evaluated internally on a case-by-case basis to maximize value, while internal guidelines generally did not provide for such case-by-case analysis.”); Gita Rao, Opinion: A Surprise about some ESG Funds—They Actually Vote Against Environmental and Socially Conscious Resolutions, MarketWatch (Dec. 18, 2020), https://www.marketwatch.com/story/a-surprise-about-some-esg-funds-they-actually-vote-against-environmental-and-socially-conscious-resolutions-11608306020 (discussing the voting patterns of certain ESG funds that, despite having an explicit ESG mandate, have voting records that often contradict their stated objectives); Leo E. Strine, Jr., Fiduciary Blind Spot: The Failure of Institutional Investors to Prevent the Illegitimate Use of Working Americans' Savings for Corporate Political Spending, 97 Wash. U.L. Rev. 1007 (2020) (discussing why institutional investors’ inaction on proxy issues relating to corporate political spending is contrary to the interests of the majority of investors).

[15] It is possible that such an approach—which would require more frequent reporting only on fund/manager websites and retain only an annual filing of Form N-PX—would minimize the burden associated with such a requirement. In light of the fact that funds and managers will already be required to make and keep records of the relevant information, and to report such information in a structured format on Form N-PX, more frequent disclosure online might entail a relatively small burden compared to frequent filings with the Commission of Form N-PX.

[16] Such an approach should mitigate any potential concerns around front-running or reverse engineering as the required disclosure would occur contemporaneously with disclosure of holdings.