SEC proposes rule change to help investors scrutinise proxy voting by managers

The US Securities and Exchange Commission (SEC) has proposed new disclosure rules that seek to help investors scrutinise and compare how fund managers vote at company meetings on their behalf.

Amendments to the annual Form N-PX filing, which were outlined yesterday by the US regulator, would include stipulations on how investment funds organise their annual proxy voting disclosures, such as requiring them to use a “structured data language to make the filings easier to analyse”. 

If introduced, the new rules would also require funds to label and categorise disclosures to help investors “identify votes of interest and compare voting records”.

SEC Commissioner Allison Herren Lee recently, as Acting-Chair of the SEC, introduced a raft of ESG-focused workstreams. In a statement on the proposed changes, she said it was “critical for investors and the public – academics, policymakers, issuers, and a wide variety of market participants – to understand and evaluate the role of funds and managers in the capital markets”.

Tom Powdrill, Head of Stewardship at UK-based proxy advisor Pensions & Investment Research Consultants, told RI that the firm was “very supportive of the SEC proposals”, and added that regulators in other markets should look at standardising disclosure around voting. “Anything that makes it easier for asset owners and other interested parties to take an informed view of how shareholder rights are utilised in practice is a good thing.”

Sarah Wilson, CEO at fellow proxy advisor Minerva Analytics, also “very much” welcomed the SEC’s announcement, which could contribute to the standardisation that many in the financial markets have been calling for on ESG issues. 

“We believe that this will make asset manager reporting considerably cheaper and more efficient for everyone,” she said.

Wilson is vice-chair of the Taskforce on Pension Scheme Voting Implementation, which made similar recommendations to the UK’s Department of Work and Pensions and Financial Conduct Authority. 

The US’ current proxy voting reporting regime was introduced in 2003, requiring funds to disclose how they voted on proposals relating to investments they hold. But the SEC pointed to difficulties faced by investors trying to analyse and compare filings as they stand, due to a lack of consistency and the fact that many are not published in a format that is “machine readable”.

“Investors are still largely in the dark when it comes to how the funds they own are voting their money,” said SEC Commissioner, Caroline Crenshaw.

Four of the SEC’s five commissioners, including Chair Gary Gensler, supported the changes, which are now out for public consultation. The only dissent came from Republican nominated Commissioner Hester Pierce, who questioned whether investors are really asking for greater transparency around voting or whether it is driven by “activists”.

“So while fund shareholders may not be interested in this information, activists of every stripe can use the fact that funds have to publish their votes to increase their leverage through intimidation and negative publicity,” she said. 

The proposed rule changes would also require investment managers to disclose how they voted on executive compensation, so-called ‘say on pay’ votes. This aspect, the SEC said, would “fulfill one of the remaining rulemaking mandates under the Dodd-Frank Wall Street Reform and Consumer Protection Act” – legislation brought in following the 2008 financial crisis.

The proposed rule would also require investment funds to disclose how their securities lending activity impacted their voting.

Earlier this month, at a meeting of the Bank of England’s Securities and Lending Committee, asset owner concerns were raised around how votes on borrowed securities could be used in ways that “contradict their own ESG objectives” PIRC’s Powdrill described the SEC’s proposals relating to stock-lending as “useful”. He highlighted research PIRC had undertaken which revealed some examples where stock lending around company meetings affected voting turnout “significantly”.

The SEC’s proposals will be open for public consultation for 60 days.