(Article from Registered Funds Regulatory Update, January 2023)
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On November 2, 2022, the SEC adopted amendments to Form N-PX to expand proxy voting disclosures for registered funds. The SEC also adopted a new rule requiring institutional investment managers to annually report their proxy votes regarding executive compensation matters on Form N-PX (“say-on-pay” votes). Funds will be required to file their first reports on amended Form N-PX by August 31, 2024, with these reports covering the period of July 1, 2023 to June 30, 2024.
Amendments to Form N-PX
Identification of Proxy Voting Matters. Funds currently use different descriptions for a specific proxy proposal and are not required to categorize their votes by type, which, according to the SEC, can make it difficult for investors to compare votes by funds on a proposal. To address this, amended Form N-PX will require a “brief identification of the matter voted on,” which must (i) use the same language that is on the form of proxy to identify the matter; (ii) identify all matters in the same order as on the form of proxy; and (iii) identify each director separately, in a director election, in the same order as on the form of proxy, even if presented as a single matter on the form of proxy. In a change from the proposal, the new requirements to mirror the form of proxy apply only to proxies for which a proxy card is required under Rule 14a-4 of the Exchange Act. For proxies not subject to Rule 14a-4, reports must provide a brief identification of the matter voted on, consistent with the current Form N-PX requirement.
Categorization of Proxy Voting Matters. To assist investors in focusing on important topics, amended Form N-PX requires funds to categorize each matter from a specified list of fourteen categories. As a result of input from the industry, the SEC streamlined and consolidated the proposed list of categories in an attempt to reduce overlap and make the categories easier to use. The fourteen categories in the final rule are: “Director elections,” “Section 14A say-on-pay votes,” “Audit-related,” “Investment company matters,” “Shareholder rights and defenses,” “Extraordinary transactions,” “Capital structure,” “Compensation” (other than Section 14A say-on-pay), “Corporate governance,” “Environment or climate,” “Human rights or human capital/workforce,” “Diversity, equity, and inclusion,” “Other social issues,” and “Other,” a residual category requiring a brief description. The categories are non-exclusive and all categories applicable to the matter must be selected.
Quantitative Disclosure and Securities Lending. Current Form N-PX requires disclosures regarding how the shares were voted (for, against, or abstain) and whether votes cast were for or against management. However, investors currently do not have visibility on when their shares are not voted because their securities are on loan. Amended Form N-PX introduces quantitative disclosures on: (i) the number of shares that were voted; (ii) a breakdown of how those shares were voted, if cast in multiple manners; and (iii) the number of shares that were loaned out and not recalled. Optional Item 1(o) of Form N-PX allows the reporter to provide any additional information regarding the matter or how it voted. These amendments are intended to provide greater transparency on the impact of securities lending on voting practices and split voting.
Structured Data. The amendments also provide that funds must file Form N-PX in a custom XML-based structured data, which is designed to standardize proxy voting disclosures and make the filings easier to analyze. Amended Form N-PX also allows managers who did not vote on any proxy voting matter and have a clearly disclosed policy of not voting on such matters to indicate this on the form and provide no further disclosure about the matter.
Exchange Act Rule 14Ad-1 for Institutional Investment Managers
New Rule 14Ad-1 under the Exchange Act requires institutional investment managers that are subject to the reporting requirements of section 13(f) of the Exchange Act to disclose say-on-pay votes on Form N-PX. This includes proxy matters regarding executive compensation and golden parachute compensation in connection with a merger or acquisition. Consistent with the proposal, a manager is required to report a say-on-pay vote for a security only if the manager: (i) has the power to vote, or direct the voting of, a security; and (ii) “exercises” this power to influence a voting decision. While the SEC acknowledged that it could be somewhat subjective to determine whether a manager exercises the power to vote a security, it declined to make any changes to the proposed standard.
Enhanced Reporting of Proxy Votes by Registered Management Investment Companies;
Reporting of Executive Compensation Votes by Institutional Investment Managers,
SEC Release No. IC-24745 (Nov. 2, 2022), available at: https://www.sec.gov/rules/final/2022/33-11131.pdf.