On 2 November 2022, by a vote of 3-2 (with Commissioners Hester Peirce and Mark Uyeda objecting), the Securities and Exchange Commission (SEC) adopted,1 substantially as proposed in September 2021,2 final form and rule amendments (Final Amendments) that: (1) expand the proxy voting information that mutual funds, closed-end funds, exchange-traded funds, and other registered investment companies (collectively, registered funds) report on Form N-PX under the Investment Company Act of 1940, as amended (Investment Company Act); and (2) require “institutional investment managers” that file reports on Form 13F (managers) to begin reporting annually on Form N-PX (a form historically used only by registered funds) how they voted proxies relating to shareholder advisory votes on executive compensation (or say-on-pay) matters including “golden parachute” compensation in connection with a merger or acquisition.3 In this alert, “reporting persons” refers to managers and registered funds collectively. This review of the Final Amendments expands upon an alert recently authored by our colleagues in the Policy and Regulatory practice.
Once effective, the Final Amendments will implement substantial changes to the current reporting obligations on Form N-PX by, among other changes, requiring reporting persons to:
- Identify proxy voting matters using the same language and order as on the issuer’s form of proxy, or “proxy card,” if a proxy card subject to the SEC’s proxy rules is available for a matter;
- Categorize each proxy voting matter by type;
- Disclose the number of shares voted (or instructed to be voted), as well as how those shares were voted (e.g., for or against a proposal, or abstain);
- Disclose the number of shares that were loaned and not recalled to vote; and
- Report information using a structured data language.
The Final Amendments will require a manager to report on Form N-PX say-on-pay votes for each security over which the manager (i) has the power to vote or direct the voting of the security and (ii) exercises this power to influence a voting decision for the security. The Final Amendments also will permit, but will not require, joint reporting by affiliated managers and by managers and registered funds on say-on-pay votes on Form N-PX, and will provide the opportunity for managers (but not registered funds) to request confidential treatment. Additionally, the Final Amendments will prescribe how reporting persons must organize their reports on Form N-PX; require that a registered fund offering multiple series of shares provide Form N-PX disclosure separately by series;4 and require registered funds (but not managers) to make their proxy voting records publicly available on their websites (but only if they have websites).
The SEC is delaying the effectiveness of the Final Amendments until 1 July 2024, to allow time for reporting persons to prepare. Accordingly, registered funds and managers will be required to file their first reports on amended Form N-PX by 31 August 2024, with these reports covering the period 1 July 2023 to 30 June 2024. As proposed, the Final Amendments do not change the current reporting timing for registered funds.5
In 2003, the SEC adopted Form N-PX under the Investment Company Act.6 Form N-PX currently requires registered funds to report their proxy voting records publicly on an annual basis. In the September 2021 Proposing Release, the SEC proposed amendments intended to enhance the proxy voting information that registered funds report on Form N-PX and make that information easier to analyze. At that time, the SEC also proposed to require managers to begin reporting annually on Form N-PX how they voted proxies relating to say-on-pay matters. The new say-on-pay reporting requirements for managers complete rulemaking in response to a congressional directive to the SEC in Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).7
The Final Amendments incorporate the form and rule amendments substantially as proposed (with certain modifications, as discussed below). In this alert, Form N-PX as amended is referred to as “Form N-PX.”
Identification of Proxy Voting Matters
As proposed, the Final Amendments will require reports on Form N-PX to identify proxy voting matters using the same language and order as on an issuer’s proxy card, and, for the election of directors, identify each director separately in the same order as on the proxy card. However, in a change from the Proposal, these requirements apply only if a proxy card subject to Rule 14a-4 under the Exchange Act (an SEC proxy card) is available for a matter. The SEC explained in the Adopting Release that an SEC proxy card will “identify [each] matter in a clear manner, listed in order where the [proxy card] covers multiple matters, and be in the English language” and, thus, reporting persons “would not need to review other documents or filings of the issuer … beyond the [SEC proxy card] to determine the description or order of presentation.”8 Where an SEC proxy card is not available for a matter, reporting persons will remain subject to the current Form N-PX requirement to provide a “brief identification of the matter voted on,” except that the current requirement will be modified to limit abbreviations used in descriptions of voting matters to commonly understood terms or terms that the issuer abbreviated in its description of a matter.
Categorization of Proxy Voting Matters
As proposed, the Final Amendments will require reporting persons to identify the subject matter of each reported proxy voting matter by selecting from a specified, standardized list of categories. Also as proposed, the list of categories is nonexclusive, and reporting persons are instructed to select all categories applicable to a matter.9 In a change from the Proposal, the SEC has streamlined the proposed list of categories (from 17 to 14), combining certain categories that “were particularly likely to overlap and thus could cause confusion on how to categorize;”10 eliminated the proposed requirement to select from a list of (approximately 90) sub-categories; and included illustrative examples of matters that would fall within each category. In the Adopting Release, the SEC reasoned that adopting “fewer, but broader,”11 categories “should reduce the need for subjective judgments on the part of reporting persons in determining the applicable categories.”12 The 14 categories, which are intended to cover matters (including environmental, social and governance (ESG) matters and other social justice matters) on which registered funds frequently vote, are:
- Capital structure
- Corporate governance
- Director elections
- Diversity, equity, and inclusion
- Environment or climate
- Extraordinary transactions
- Human rights or human capital/workforce
- Investment company matters
- Section 14A say-on-pay votes13
- Shareholder rights and defenses
- Other social issues
As proposed, the Final Amendments will require reporting persons to disclose the number of shares voted and how those shares were voted (e.g., for or against a proposal, or abstain). If the actual number of shares voted is not known at the time a report on Form N-PX is filed, then a reporting person may disclose the number of shares instructed to be voted on the day of the vote.14 If there are instances in which votes were voted in more than one manner (e.g., both for and abstain), then a reporting person will be required to disclose the number of shares voted (or instructed to be voted) in each manner. The SEC believes that these quantitative disclosure requirements “improve the transparency of fund and manager voting records and more effectively enable investors to monitor their funds’ and managers’ involvement in the governance activities of their investments”15 as well as “the magnitude of the reporting person’s voting power.”16
Proxy Voting and Securities Lending
Currently, registered funds are required to report on Form N-PX information for each matter relating to a portfolio security considered at any shareholder meeting held during the reporting period and with respect to which the registered fund was entitled to vote.17 As proposed, the Final Amendments provide that, for purposes of Form N-PX, a registered fund would be “entitled to vote” on a matter if its portfolio securities are on loan as of the record date for the meeting because the registered fund could recall and vote the loaned securities. As proposed, the Final Amendments will require reports to disclose the number of shares a reporting person loaned (directly or indirectly through a lending agent) and did not recall to vote, in addition to the number of shares the reporting person voted. The disclosure would not be required where a manager is not involved in lending shares in a client’s account, either directly or indirectly. The SEC believes that this quantitative disclosure requirement will provide transparency into how a reporting person’s securities lending activities affect (or impact the degree of) its proxy voting.18
Registered funds, other pooled investment vehicles, and certain institutional investors commonly engage in securities lending activities to generate additional revenue, and recalling loaned securities may decrease the revenue generated from securities lending activities. In the Adopting Release, the SEC recognized that “[a]n adviser must make a determination regarding whether to retain a security and vote the accompanying proxy or lend out the security that is in the client’s best interest.”19 Such a determination is subject to the adviser’s fiduciary duties owed to its clients. The SEC acknowledged that the required quantitative disclosure alone might not reflect the considerations underlying this determination and noted that reporting persons with this concern will have the option to provide (e.g., at the end of the cover page, or on a vote-by-vote basis) additional, narrative disclosure about their processes for determining whether to recall loaned shares ahead of a proxy vote, if they believe such disclosure is helpful.20
Use of Structured Data Language
As proposed, the Final Amendments will require Form N-PX reports to be filed in a custom eXtensible Markup Language (XML)-based structured data language created specifically for reports on Form N-PX (custom XML). In the Adopting Release, the SEC noted that the use of custom XML is consistent with other SEC forms, particularly Forms 13F, N-CEN, and N-PORT, and, as such, it should be familiar to reporting persons and investors. The SEC also noted that an EDGAR pilot will provide reporting persons the opportunity to test the custom XML filing process in advance of the effective date of the Final Amendments.
Exercise of Voting Power
New Rule 14Ad-1 under the Exchange Act will require managers to report on Form N-PX say-on-pay votes for a security over which the manager has exercised voting power. As proposed, Rule 14Ad-1 includes a two-part test for determining whether a manager has “exercised voting power” over a security and is required to report say-on-pay votes on Form N-PX. Reporting will be required if the manager:
- Has “voting power,” or the ability to vote or direct the voting of a security, including the ability to determine whether to vote a security or recall a loaned security before a vote;21 and
- “Exercises” voting power to influence a voting decision.22
In the Adopting Release, the SEC explained that voting power can exist or be exercised directly or indirectly and can exist contractually or through an arrangement, understanding or relationship. As such, multiple parties can have and exercise voting power over the same securities.23 A manager exercises voting power when it votes, directs another party to vote, or influences a vote in accordance with the manager’s own guidelines or judgment, including exercising independent judgment or expertise to determine how a client’s voting policies should apply to a say-on-pay vote, but not if the “voting decision  is entirely determined by its client or another party.”24 The exercise of voting power also includes a manager’s ability to influence the determination regarding whether to vote a security, such as by determining not to vote on a say-on-pay matter or whether to recall loaned securities in order to vote the shares.25
The Final Amendments adopt, as proposed, amendments that permit, but do not require, affiliated managers or managers and registered funds to report jointly on say-on-pay votes in three circumstances, in order to avoid duplicative filings:
- A single manager may report say-on-pay votes where multiple managers exercise voting power;
- A registered fund may report say-on-pay votes on behalf of a manager that exercises voting power over some or all of the registered fund’s securities; and
- Two or more affiliated managers may file a single report on Form N-PX notwithstanding that they do not exercise voting power over the same securities.
If a manager relies on another manager to report all of its say-on-pay votes, or a manager reports some votes, but relies on another manager or a registered fund to report other votes, the non-reporting manager’s “notice” or “combination” report on Form N-PX will be required to identify the other managers or registered funds reporting on its behalf.26 (The different types of reports are described below in the section titled “FORM N-PX COVER PAGE.”) Conversely, a manager reporting say-on-pay votes on behalf of another manager, and a registered fund reporting say-on-pay votes on behalf of a manager, also will be required to identify each manager on whose behalf the filing is made.27
A manager will be required to report the number of shares it is reporting on behalf of another manager separately from the number of shares it is reporting on its own behalf. A manager also must separately report shares when the groups of managers on whose behalf the shares are voted are different. Additionally, a registered fund must separately report shares reported on behalf of different managers or groups of managers.28
In the Adopting Release, the SEC explained that the joint reporting requirements are intended to enable managers’ clients and investors to search easily for all votes where the manager exercised voting power, regardless of whether those votes are reported on the manager’s own Form N-PX.29 Additionally, joint reporting should “reduce the reporting burden for reporting persons by permitting them to either divide reporting responsibility among themselves or to report individually, creating operational efficiencies for reporting persons without negatively impacting the quality or accessibility of the information they report on Form N-PX.”30
Notice Report Omitting Voting Information
As proposed, the Final Amendments amend Form N-PX to permit managers to file a notice report omitting voting information where all proxy votes for which the manager exercised voting power are reported by other reporting persons. In a change from the Proposal, the Final Amendments also will permit managers to file a notice report where (1) the manager did not exercise voting power for any reportable voting matter, or (2) the manager has a clearly disclosed policy of not voting, and did not vote, on any proxy voting matter during the reporting period. In each case, the notice report would require, at a minimum, that the manager check a box on the cover page and include a signature. Additional information is required if a manager’s say-on-pay votes are reported by other reporting persons. The different types of notice reports are described below in the section titled “FORM N-PX COVER PAGE.”
In the Adopting Release, the SEC explained that a notice report will be required for managers that did not exercise voting power over securities that held say-on-pay votes during the reporting period because not requiring the filing “would reduce the usefulness of Form N-PX filings.”31 The SEC reasoned that, in the absence of a filing, “investors will not necessarily understand whether a manager did not make a filing because it did not exercise voting power or because it simply neglected to file the form.”32 Similarly, the SEC did not exempt managers that have a clearly disclosed policy of not voting, and did not vote, because “this may limit the ability of investors to understand fully how a manager exercises its voting power” and the notice reports will aid the SEC’s oversight of managers’ compliance with Section 14A.33
As proposed, Rule 14Ad-1 will not require a manager to file a Form N-PX report for the 12-month period ending 30 June of the calendar year in which the manager’s initial filing on Form 13F is due. Rather, a manager will be required to file a Form N-PX report for the period ending 30 June of the calendar year following the manager’s initial filing on Form 13F.34
As proposed, Rule 14Ad-1 will not require a manager to file a Form N-PX report with respect to a proxy vote at a meeting that occurs after 30 September of the calendar year in which the manager’s final filing on Form 13F is due. Rather, a manager will be required to file a Form N-PX report for the period 1 July through 30 September of the calendar year in which the manager’s final filing on Form 13F is due. The short-period Form N-PX will be due no later than 1 March of the following calendar year. The transition period is intended to conform the ending date for reporting say-on-pay votes with the ending date for Form 13F reporting.35
The SEC adopted, substantially as proposed, Form N-PX instructions permitting managers, but not registered funds, to request confidential treatment of proxy voting information, consistent with Rule 24b-2 under the Exchange Act.36 The content, procedures for filing the request, and standard for approving such request are the same as a confidential treatment request under Section 13(f) of the Exchange Act. Form N-PX instructions instruct managers to follow the procedures set forth in Form 13F for filing confidential treatment requests. All confidential treatment requests must be filed with the SEC on the EDGAR system.37
In the Adopting Release, the SEC stated that confidential treatment requests for Form N-PX filings will be evaluated using the same standards as for Form 13F filings.38 The SEC reiterated that, as discussed in the Proposing Release, “confidential treatment would not be merited solely in order to prevent proxy voting information from being made public.”39 Accordingly, the SEC did not extend the standards for requesting and obtaining confidential treatment to apply to a manager that has a confidentiality agreement with a client regarding disclosure of portfolio information, because this circumstance would not meet the Form 13F standards for confidential treatment.
FORM N-PX COVER PAGE
The Final Amendments incorporate changes to the Form N-PX cover page, substantially as proposed, with certain modifications. As proposed, the cover page will be required to disclose whether the reporting person is a registered fund or a manager, the reporting person’s name, the address of its principal executive offices, the name and address of its agent for service, the reporting person’s telephone number, the reporting period, and the reporting person’s file number. The cover page also will include check boxes for reporting persons to indicate whether the Form N-PX report is being filed as an amendment (in which case the reporting person must include an amendment number and select whether it is a restatement of the report or only includes new proxy voting information), identify the report type, and specify whether confidential treatment is requested.
In a change from the Proposal, managers and registered funds will check a box to identify the report as one of the following types:
Fund Voting Report40
- This report will be used by a registered fund that holds one or more securities it is entitled to vote.
Fund Notice Report
- This report will be used by a registered fund that does not hold any securities it is entitled to vote. In the Proposal, a registered fund would have been required to file a report stating that it had no proxy votes to report. The Final Amendments instead require a registered fund to (1) indicate that it had no votes to report, by checking a box on the cover page; and (2) file only the cover page, the summary page (including information about the multiple series, if any, with respect to which the report is filed), and the required signature.
Institutional Manager Voting Report
- As proposed, this report will be used by a manager to report all of the manager’s say-on-pay votes in a single report.
Institutional Manager Notice Report
- This report will be used when the Form N-PX contains no say-on-pay votes by a manager. As proposed, a manager would use this report when all of its say-on-pay votes are reported by other managers or registered funds under the joint reporting provisions described above. In a change from the Proposal, a manager also may file a notice report when (1) the manager did not exercise voting power during the reporting period and has no proxy votes to report, or (2) the manager has a disclosed policy of not voting proxies and did not vote during the reporting period. In each case, the manager would indicate on the cover page the reason for filing the notice report.
Institutional Manager Combination Report
- This report will be used when the Form N-PX contains some of a manager’s say-on-pay votes, but additional votes are reported by other managers or registered funds under the joint notice provisions.
Any “notice” or “combination” report will be required to list on the cover page the names and any file numbers, Central Registration Depository (CRD) numbers, or Legal Entity Identifiers (LEIs) of other managers and registered funds whose Form N-PX reports include say-on-pay votes of the reporting manager.
FORM N-PX SUMMARY PAGE
The SEC adopted, substantially as proposed, amendments adding a new summary page to Form N-PX. The summary page is intended to facilitate the joint reporting framework and enable investors to identify easily each registered fund (or series of a multi-series registered fund) covered by a report as well as any manager(s) reporting say-on-pay votes included in a report. The summary page will be required in all registered fund Form N-PX reports as well as any manager Form N-PX report that is not a “notice” report.41
The summary page will disclose certain information (e.g., names and identifiers) regarding the manager(s) and/or registered fund(s) filing the Form N-PX report. The summary page of a Form N-PX report that includes the say-on-pay votes of multiple managers is required to identify all such managers, their respective Form 13F file numbers, and any CRD numbers, LEIs, and other SEC file numbers. If a Form N-PX report filed by a registered fund includes the proxy votes of multiple series, the name, the series identifier, and the LEI of each series must be included on the summary page. Similar to Form 13F, managers and registered funds must assign a number to each manager included in the report and present the list on the summary page in sequential order.
ADDITIONAL FORM AMENDMENTS
- As proposed, the Final Amendments will require the information otherwise required or permitted to be reported on Form N-PX to be reported in the order presented on the form.
Separate Disclosure by Series
- As proposed, the Final Amendments will require a registered fund offering multiple series of shares to provide Form N-PX disclosure separately by series.
- As proposed, the Final Amendments will require reporting persons to report only one security identifier (i.e., the security’s Committee on Uniform Securities Identification Procedures (or CUSIP) number, unless it is not readily available, in which case reporting persons will be required to report the International Securities Identification Number (or ISIN), unless it too is not readily available) and eliminate the current form requirement to report a security’s ticker symbol.
- As proposed, the Final Amendments will clarify that reporting persons are required to disclose whether a vote was “for or against management’s recommendation.” (The current form requirement is for registered funds to disclose whether a vote was “for or against management.”)42
- As proposed, the Final Amendments will require registered funds to disclose on Forms N-1A, N-2, and N-3 that their proxy voting records are publicly available upon request and on (or through) their websites, free of charge in both cases. (The current form requirement is for registered funds to disclose that their proxy voting records are publicly available either upon request or on (or through) their websites.) A registered fund may comply with the requirement to disclose its proxy voting record in a “human-readable” format by, for example, providing on its website a direct link to the HTML-rendered Form N-PX report on EDGAR. The final form amendments clarify that a registered fund must make its proxy voting record available on its website only if it has a website. Also as proposed, amendments to Forms N-1A and N-3 will require registered funds to provide the email address, if any, that an investor may use to request the registered funds’ proxy voting records. Form N-2 already includes a similar provision.
The SEC’s 3-2 vote on the Final Amendments reflects the Commissioners’ widely divergent views on the new disclosure requirements. According to SEC Chair Gary Gensler, the “enhancements to Form N-PX” would “bring greater detail, consistency, and usability to the proxy voting information reported on Form N-PX” making “it more useful, and more usable, to investors.”43 Chair Gensler and Commissioners Caroline Crenshaw and Jaime Lizárraga broadly supported the Final Amendments, with each referring generally to the SEC’s position in connection with the adoption of Form N-PX in 2003 that “[i]nvestors in mutual funds have a fundamental right to know how the fund casts proxy votes on shareholders’ behalf.”44 Commissioners Peirce and Uyeda, however, were critical of the Final Amendments, with Commissioner Peirce commenting that “the expansion [of the 2003 mandate to disclose registered fund proxy votes] will serve the needs of third parties eager to pressure funds to vote their way, but will harm funds and fund investors,”45 and Commissioner Uyeda commenting that “[m]any of the provisions [of the Final Amendments] are not ‘enhancements’ but substantial changes that appear to affect the behavior of funds and their investment advisers.”46
In the Adopting Release, the SEC stated that the quantitative disclosure requirement “is not intended to change the analysis reporting persons may undertake currently as to whether to recall a loaned security.”47 However, Commissioner Uyeda questioned whether registered funds would forgo extra returns by recalling their securities to “look ‘more responsible’ on their Form N-PX disclosures,” whether investors would bring litigation “against [a] fund for forgoing the extra returns,” and whether price discovery would be impacted “by creating [proxy] seasonal shortages in the markets for borrowed securities[.]”48 In the same vein, Commissioner Peirce stated that the “mandated disclosure … will not provide worthwhile insight into the analysis that fund managers undertake in deciding whether to recall shares,”49 and that the new requirement “may turn out to be less about reporting voting practices than it is about manipulating them.”50
Greater transparency with regard to how registered funds are actually casting their votes on ESG matters and the ability to compare registered funds’ voting records on these matters are clearly important goals of the Final Amendments. The Final Amendments appear to advance the SEC’s role in using its disclosure, examination, and enforcement authority to promote ESG initiatives, which are among Chair Gensler’s stated priorities. Earlier this year, the SEC proposed rule and form amendments intended to promote enhanced disclosures by certain registered funds and investment advisers about their ESG investment practices.51 Although a manager’s new proxy voting disclosure requirements under the Final Amendments are limited to say-on-pay proposals, registered funds’ proxy votes are determined by their investment advisers, most of which are also managers of other pooled investment vehicles and separate accounts. As a result, the new categorization requirements will reveal how investment advisers vote registered fund proxies on ESG matters and other social justice matters. Promoting enhanced disclosure around ESG matters is a trend that we believe may continue as the SEC pursues its rulemaking agenda.
While the additional costs and operational burdens of compliance with the Final Amendments, which may appear to be technical, are not yet known, it is nevertheless clear that registered funds and managers will need to review their current processes and procedures, including their securities lending practices, and consult with their service providers to determine how best to prepare for, and ultimately to comply with, the Final Amendments. As noted above, registered funds and managers will be required to file their first reports on amended Form N-PX by 31 August 2024, with these reports covering the period 1 July 2023 to 30 June 2024. Providing the information that registered funds and managers will be required to report will necessitate coordination among reporting persons, proxy voting services providers, custodians, and others. Accordingly, registered funds and managers may want to begin to consider now any operational or other changes that may need to be implemented (e.g., to track and report the required information) before the commencement of the reporting period.
Please look for additional updates from us on this important development and contact us with any questions you may have.