Written by Camilla Cater
On November 2, 2022, the Securities and Exchange Commission (“SEC”) adopted new Rule Rule 14Ad-1, which requires “institutional investment managers” subject to section 13(f) reporting requirements to disclose annually on Form N-PX their proxy votes on executive compensation matters, otherwise called “say-on-pay” votes. Previously, only investment companies or funds registered under the Investment Company Act of 1940, as amended (the “1940 Act”) were required to file Form N-PX. The new rules will become effective for votes occurring on or after July 1, 2023, with the first filings due in 2024.
Many registered investment advisers will be familiar with the definition of institutional investment manager as a manager that exercises investment discretion over $100 million or more in 13(f) securities. These institutional investment managers will now need to file their “say-on-pay” votes with the SEC annually on Form N-PX by August 31 of each year if they “exercised voting power” over a security.
The SEC has adopted a two-part test for determining if a manager exercised voting power over a security. The manager must (1) have the power to vote, or direct the voting of, a security and (2) “exercise” this power to influence a voting decision for the security. This test “focuses on the exercise, rather than the mere possession, of voting power.” However, the SEC would consider a manager deciding not to vote or whether to recall loaned securities in advance of a record date for a vote in order to vote the shares is exercising voting power.
Along with the new rule, the Form N-PX will be amended to make the information easier to analyze. Votes will be standardized into categories, such as director elections, say-on-pay and audit matters and will require managers to report proxy voting matters using the same language and order as disclosed in the issuer’s proxy. Managers will have to disclose the number of shares that were voted or instructed to be voted, as well as the number of shares loaned and not recalled. Managers will also be able to indicate that they have a disclosed policy of not voting proxies and did not vote during the reporting period.
It is unclear how these transparency requirements will impact institutional investment managers, but it is anticipated that institutional investors will scrutinize the data especially for funds targeting ESG priorities.