Over the past month, the SEC has signaled the primacy of ESG in its mission for 2021 and beyond. Seemingly daily, there have been updates regarding ESG initiatives, whether from the Division of Enforcement or the Division of Corporation Finance. This week, it was the Division of Investment Management’s turn. On Wednesday, Acting SEC Chair Allison Herren Lee signaled to and solicited comment from mutual funds and investment managers that the SEC was considering rulemaking regarding the manner in which those entities exercise voting authority on behalf of their clients in a manner consistent with their fiduciary duties. Her speech at the ICI Mutual Funds and Investment Management Conference can be found here.
While the chair approached the issue through the lens of ESG, the SEC has long had the unaddressed problem of representing a retail investor base that increasingly holds equity securities indirectly through a fund or an ETF, or for the more well-heeled investor, in an account managed by an investment adviser. As a result, those fund and ETF investors have little to no voice on corporate governance issues at the companies whose equity securities are held by the fund or ETF. Similarly, investment advisers must make a choice whether to hold such securities so that they can be voted on, or lend them to maximize account value. When lent out with voting rights attached, the interests of the long-term holder are not represented at shareholder votes.
Adopted in 2003, Form N-PX, was intended to provide transparency into fund voting. While Lee indicated that new rulemaking could address updating Form N-PX, it was also clear that she was considering more far-reaching reforms and was looking into ways the Staff might be able to provide transparency around fund voting by using data analytics to sort data already produced to the SEC to provide more meaningful information to investors.
The SEC foments change by rulemaking. It also foments change by talking about rulemaking. Given the volume of signals the SEC is giving across all of its divisions regarding ESG, change regarding ESG is coming.