SEC Finalizes Proxy Vote Reporting Changes: New Form N-PX

Nichol Garzon-Mitchell is Chief Legal Officer and Senior Vice President of Corporate Development at Glass, Lewis & Co. This post is based on her Glass Lewis memorandum.

The Securities and Exchange Commission recently made the most significant changes to U.S. proxy vote reporting in the past 20 years. On November 2, 2022, a divided SEC adopted rules requiring Form 13F filers to disclose their say-on-pay votes, as well as significantly revising and expanding the disclosures required on Form N-PX, the form that funds use today and that both funds and the “institutional investment managers” subject to the new say-on-pay vote reporting will use going forward.

While the new Form N-PX will not have to be filed until 2024, that filing will cover votes cast after June 30, 2023. As such, institutional investment managers and funds will want to familiarize themselves with the new disclosure requirements and, in the near term, consider whether any changes to their proxy voting policies and procedures, as well as their share lending and recall practices, are warranted before votes become subject to the new disclosure regime.

Investment Manager Say-on-Pay Vote Disclosure

The first part of the SEC’s final rules implements a mandate from the Dodd-Frank Act. In addition to introducing say-on-pay votes for U.S. public companies, Section 951 of that Act requires “institutional investment managers” subject to the reporting requirements of section 13(f) of the Exchange Act to disclose their say-on-pay votes annually. The SEC’s final rules implement this statutory directive by requiring Form 13F filers to report such votes each year on Form N-PX, as enhanced through the rule and form changes discussed below.

The SEC’s final rules generally track its proposal from last Fall. Key elements include:

  • Votes to be disclosed. The rules apply to all “say-on-pay” votes, that is: 1) periodic votes on the approval of executive compensation, 2) votes on the frequency of such say-on-pay votes, and 3) votes to approve “golden parachute” compensation in connection with mergers and acquisitions.
  • Managers covered. The rules apply to any institutional investment manager that “exercised voting power” over a security. A manager exercises voting power, as defined in the rules, when it has the ability to vote the security or direct the voting of the security and uses that voting power to influence a voting decision.
  • No exceptions. The rules do not contain a de minimis exception for smaller holdings or an exception for managers that, as a policy, do not vote proxies. The final rules do, however, allow for notice filings and permit a single manager (or fund or manager affiliate) to report on behalf of another manager in some circumstances, with related changes to Form N-PX intended to clearly identify such situations.

Form N-PX Enhancements

The SEC also made substantial changes to Form N-PX. The enhancements are intended to make those filings easier for investors to understand and analyze, thereby facilitating comparison of funds’ and managers’ voting records. While the final rules make a number of technical changes, the most substantive include —

  • Categorization of votes. Form N-PX filers will have to assign all their proxy votes to one or more of 14 categories. Categories range from “Director elections” and “Corporate governance” to “Environment or climate” and “Diversity, equity, and inclusion.” While the SEC had also proposed some 90 sub-categories, those were dropped from the final rules, as Glass Lewis and a number of other commenters had suggested.
  • Standardized descriptions and order of voting matters. Form N-PX filers will have to describe each voting matter using the description in the issuer’s form of proxy and present them in the same order as the issuer’s proxy. Based on comments from Glass Lewis and others, however, the SEC limited this requirement to companies using a SEC proxy card (generally, U.S. companies).
  • Disclosure of shares loaned and not recalled. Despite significant opposition from commenters, the final rules require disclosure of the number of shares that were voted and the number of shares that a fund or investment manager loaned and did not recall before the record date for the vote. The SEC acknowledged the practical hurdles to such reporting, but expressed confidence that funds, custodians and other participants in the proxy voting chain could work together to resolve those issues. The SEC also emphasized that this disclosure was not meant to change share lending practices and that Form N-PX filers can supplement this disclosure with narrative explanation of their share lending practices and/or recall decisions.
  • Use of structured data language. Form N-PX will be filed using a custom XML structured data language. The SEC will pilot-test this new format before it is required.
  • Website disclosure. Funds (but not institutional investment managers) will have to disclose that their proxy voting records are publicly available, in a human readable form, on their websites or upon request.

When Do the New Rules Apply?

The new rules are effective July 1, 2024, making the first reports from 13F filers — and the first reports from funds on the new form — due August 31, 2024. Like under the current rules, these August 2024 reports will cover all proxy votes for the prior year ended June 30.

The delayed effective date will be particularly helpful for those institutional investment managers that are new to Form N-PX and for whom these rules may be their first proxy vote disclosure requirement. All such institutional investment managers — banks, insurance companies and broker-dealers that trade for their own account, corporations and pension funds that manage their own investment portfolio, as well as foundations, family offices, hedge funds, investment advisers and others that have sufficient assets under management to be subject to Form 13F reporting requirements — should take the time to familiarize themselves with the new rules and begin to consider what it will take to comply.

Next Steps

While the effective date does give managers, funds, and their service providers some time to develop the processes and systems needed to file the new form, it is important to remember that the August 2024 filings will cover votes cast as early as this coming July.

This means that, starting July 1, 2023, all Form 13F filers will need to start tracking their shares on loan at the time of casting any “say-on-pay” votes. Those new to filing NP-X forms will also need to familiarize themselves with the process and ensure they are ready to submit an NP-X filing in line with the SEC reporting requirements come August 2024.

Moreover, in light of the enhanced transparency and improved comparability of voting records resulting from these changes, funds and investment managers may also want to consider reviewing their proxy voting policies vis-à-vis the 14 required categories. In addition, while the SEC made clear that these changes were not intended to impact share lending practices, funds and managers may want to review their share lending and recall practices, given the increased visibility of shares on loan.

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