On November 2, 2022, the Securities and Exchange Commission, by a three-to-two vote, adopted amendments to Form N-PX under the Investment Company Act of 1940, to improve the utility to investors of proxy voting information reported by mutual funds, exchange-traded funds and certain other funds (collectively, funds) (Final Rules).1 The Final Rules also include rule and form amendments under the Securities Exchange Act of 1934 that require institutional investment managers subject to the reporting requirements under Section 13(f) of the Exchange Act (managers) to annually report their proxy voting record on Form N-PX with respect to certain shareholder advisory votes on executive compensation matters. These amendments were proposed by the SEC in September 2021, and the Final Rules were adopted substantially as proposed.2
Once effective, the Final Rules will:
- Expand the scope of funds’ Form N-PX reporting obligations;
- Subject managers to Form N-PX reporting obligations;
- Enhance Form N-PX disclosures;
- Permit joint reporting by funds, managers and affiliated managers on Form N-PX; and
- Require website availability of fund proxy voting records.
This Dechert Newsflash provides a brief overview of the SEC’s Final Rules. A more detailed discussion of the Final Rules will be covered in an upcoming Dechert OnPoint.
Expansion of Scope of Funds’ Form N-PX Reporting Obligations
Currently, funds are required to report on Form N-PX information for each matter relating to a portfolio security considered at any shareholder meeting during the reporting period and with respect to which the fund was entitled to vote. To address funds’ securities lending activities and the impact of such activities on proxy voting, the Final Rule expands this standard by specifying that, for purposes of Form N-PX, a fund is “entitled to vote” on matters relating to securities that are on loan as of the record date of the meeting, because the fund has the option to recall its loaned securities and vote them.
Managers Subject to Form N-PX Reporting Obligations
As proposed, the SEC adopted new Rule 14Ad-1 under the Exchange Act as part of the Final Rules, which will require “institutional investment managers” (as defined in the Exchange Act) that are required to file reports under Section 13(f) of the Exchange Act to report their proxy voting record with respect to certain shareholder advisory votes on executive compensation (or say-on-pay votes).
- Types of Votes to Be Reported: Under new Rule 14Ad-1, managers will be required to report on Form N-PX the same types of say-on-pay votes required by Section 14A of the Exchange Act, including those votes related to: the approval of executive compensation; the frequency of such votes; and “golden parachute” compensation in connection with a merger or acquisition.
- Exercise of Voting Power: Rule 14Ad-1 will require managers to report say-on-pay votes for securities only if the manager “exercised voting power” over the security. Under Rule 14Ad-1, a manager is deemed to have “exercised voting power” if the manager: has the power to vote or cause another party to vote the security; and has used that power to influence the voting decision. Similar to the proposal, under the Final Rules, voting power would exist when a manager has the ability to vote the security or direct the voting of the security (including the ability to determine whether to vote the security at all or to recall a loaned security before a vote). The “exercise” prong of this test will not be satisfied in instances where a third party makes all decisions regarding whether to vote the security. The Final Rules explain that more than one party can exercise voting power over a security as one party could influence the way another party votes, but that a manager will not be considered to have influenced a voting decision in situations where a third party voted contrary to the manager’s recommendation.
- Non-Votes: In instances where a manager has a disclosed policy of not voting proxies and did not exercise voting power over any securities that held say-on-pay votes during a reporting period, the Final Rules will require that the manager affirmatively report on Form N-PX that no votes were cast.
Enhanced Form N-PX Disclosures
The Final Rules include several enhancements to enable investors and other stakeholders to better comprehend and analyze proxy voting information reported on Form N-PX.
- Identification of Proxy Voting Matters and Categories: The Final Rules will require funds and managers to identify proxy voting matters in the same language and order as the issuer’s form of proxy (only in the case where the form of proxy is subject to Rule 14a-4) and categorize their votes according to 14 specified categories. The categories are both fewer and broader than proposed and include (among others) votes related to: director elections; extraordinary transactions; say-on-pay; shareholder rights and defenses; and the environment or climate. In a change from the proposal, the Final Rules do not require sub-categories to be identified on Form N-PX.
- Reporting Persons to Disclose the Number of Shares Voted and Loaned but not Recalled: The Final Rule will require disclosure of: the number of shares that were voted or instructed to be cast; how the shares were voted; and the number of shares the reporting person loaned but did not recall.
- Structured Data Language and Standardized Reporting Format: Form N-PX reports will now be required to be filed using XML structured data language instead of in HTML or ASCII formats. The Final Rules also will require that each separate series of a registrant present its voting record separately.
Joint Reporting on Form N-PX
The Final Rules permit, under certain circumstances, managers, funds and affiliated managers to jointly report their required disclosures, in order to avoid duplicative filings.
- Single Manager Reporting. The Final Rules will allow a single manager to report say-on-pay votes where multiple managers exercise voting power.
- Fund Say-On-Pay Reporting. The Final Rules will allow a fund to report say-on-pay votes on behalf of a manager exercising voting power over some or all of the fund’s securities.
- Affiliate Reporting. The Final Rules will allow two or more affiliates to file a single report on Form N-PX. Affiliates will be permitted to file joint reports even in instances where they do not exercise voting power over the same securities.
Website Availability of Proxy Voting Records
The Final Rules include amendments to Forms N-1A, N-2 and N-3, which will require funds to make their proxy voting records available on (or through) their respective websites (only if the fund has a website). Form N-1A and Form N-3 will require that a fund provide the email address, if any, that an investor may use to request the proxy voting record.
The Final Rules will be effective on July 1, 2024, with managers and funds being required to file their first reports covering the period from July 1, 2023 to June 30, 2024 on amended Form N-PX by August 31, 2024, meaning that funds and managers will need to begin maintaining the necessary records relating to their proxy votes on July 1, 2023.
* The authors would like to thank Magdalene Lam for her contributions to this Newsflash.
1) Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers, SEC Rel. Nos. 33-11131; 34-96206 (Nov. 2022) (Adopting Release). At times, this Dechert Newsflash tracks the Adopting Release without the use of quotation marks. Terms not defined in this Dechert Newsflash have the meaning assigned to them in the Adopting Release.
2) Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers, SEC Rel. Nos. 34-93169; IC-34389 (Sep. 2021) (Proposing Release). For additional information regarding the Proposing Release, please refer to Dechert OnPoint, SEC Proposes to Increase Reporting of Proxy Votes by Registered Management Investment Companies and Reporting of Executive Compensation Votes by Institutional Investment Managers.