As this year’s U.S. proxy season gets underway, attention turns, as always, to the proxy contests and shareholder proposals that will draw business press headlines over the coming months. Behind the headlines, however, this season will be notable for a different reason. For institutional investors, the 2024 season will usher in a new level of transparency for their proxy voting. The reason – SEC changes to Form N-PX, the little-known form that U.S. funds have used to report their proxy votes since 2003.

In late 2022, in one of the first completed rule initiatives of Chair Gensler’s tenure, a divided SEC passed the most significant changes to Form N-PX in 20 years. By the end of this summer, the new requirements will have gone into effect and the first round of filings on the enhanced form will have been made, providing a new window into how both funds and a range of other institutional investors voted during the 2024 season.

What is new?

The SEC’s changes affect two groups of institutional investors. First, as required by the Dodd-Frank Act of 2010, all Form 13F filers will, for the first time, have to disclose their say-on-pay votes. Specifically, “institutional investment managers” subject to the reporting requirements of section 13(f) of the Exchange Act will disclose votes for which they “exercised voting power” on the new Form N-PX. Notably, the rules apply to all such managers that file Form 13F, whether based in the U.S. or not. The rules apply to all Dodd-Frank “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. There is no de minimis exception for smaller holdings, nor is there an exception for managers that, as a matter of policy, do not vote proxies, although managers that do not vote or that have their votes reported on another manager or fund’s report may file a one-page “notice” report.

Second, funds will continue to report all their votes, but will do so on the new Form N-PX, which requires new disclosures and changes the format for reporting votes. Among these changes  –

  • Categorization of votes. Funds will now have to assign all their proxy votes to one or more of 14 categories, ranging from “Director elections” and “Corporate governance” to “Environment or climate” and “Diversity, equity, and inclusion.”
  • Disclosure of shares loaned and not recalled. The new form requires 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.
  • Use of structured data language. Form N-PX will now be filed and tagged using a custom XML structured data language.

The first reports for managers, and the first for funds on the new form, are due this August 31, covering votes cast from July 1, 2023 – June 30, 2024.

What does this mean for affected institutional investors?

This is first and foremost a compliance imperative for those required to file the new reports. In adopting the rules, the SEC estimated that the new reporting requirement would apply to over 8000 managers, including 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 in U.S.-traded securities to be subject to Form 13F reporting requirements. For many such institutional investment managers that have had no prior proxy vote disclosure requirements, this means implementing new internal compliance processes both to track the relevant votes and to file the report.

All such institutional investment managers should at this point know how they are capturing the voting and share lending data that will need to be reported, and have a plan in place to file the new report this summer. Affected asset owners and managers may need to work through whether and when they “exercise voting power,” triggering the need to report the votes, as well as whether those accounts have any shares on loan. Working with Glass Lewis, many of our manager clients have also coordinated with their custodians to ensure that relevant information about shares on loan is being provided through the proxy distribution channels between custodians and ballot distributors. Firms with multiple Legal Entity Identifiers (“LEIs”) and/or reporting entities have needed to map accounts to the reporting entity or entities and worked through whether and how to use the rule’s joint reporting provisions.

Funds will also need to adapt to the new filing format and ensure the required information is being collected and recorded as votes are cast this season. By this point, funds should have already ascertained that they or their N-PX service provider are receiving the necessary share lending information. Funds may also need to coordinate with sub-advisers and affiliated entities for which they will be reporting say-on-pay votes. Fund complexes with affiliates that are 13F filers will also need to determine how they will satisfy the separate, new manager reporting mandate.

What does this mean for proxy voting in general?

Apart from the substantial compliance challenges, the new Form N-PX reports that will become available by Labor Day will alter the proxy voting information landscape. As SEC Commissioner Lee noted in encouraging this initiative, N-PX reports have been “unwieldy, difficult to understand, and difficult to compare across fund complexes.” The updates and enhancements to the form are intended to make N-PX reports easier for investors to understand and analyze, thereby facilitating comparison of funds’ and managers’ voting records.

What are the potential effects of this new information becoming available? Here are some questions we should be able to start to answer this autumn once the initial round of new reports are filed.

Will the new N-PX affect say-on-pay approval rates?

U.S. companies have been holding say-on-pay votes since 2011, yet 2024 will mark the first year that such votes will be accompanied by transparency about managers’ say-on-pay votes, as intended by the Dodd-Frank Act. Average shareholder support for say-on-pay approval votes across all U.S. companies has been relatively consistent the last three proxy seasons. In 2023, support ticked up only slightly to 89%, with just 63 U.S. companies failing say-on-pay and 239 companies receiving low support (defined as 50-75% of the vote).

With far more market participants now set to publicly report their votes, say-on-pay approval rates this season may reveal whether this anticipated transparency affected institutional investment managers’ voting decisions. Or perhaps any change is more likely after the markets react to the first round of such reporting. With institutional investors still having different views on whether say-on-pay, as implemented in the U.S., has achieved its purposes, any change in say-on-pay approval rates – as well as the increased visibility into how a range of institutional managers are voting – seems likely to reinvigorate analysis and debate on say-on-pay’s efficacy.

Will markets use the new say-on-pay vote disclosures?

In adopting the rules, the SEC noted that, “[t]o the extent the information contained in say-on-pay votes is understood and valued by investors, investors can benefit from using this additional information in selecting managers that vote say-on-pay matters according to investor preferences.” To be sure, intermediaries have learned to use funds’ Form N-PX disclosures, however unwieldy, to compare their voting. Will we see a similar use of managers’ say-on-pay votes? For example, some have suggested that increased labor strikes over pay, like the auto workers and screenwriters’ strikes in the U.S. last year, could bring more attention to executive pay generally and institutional shareholders’ say-on-pay voting records, in particular. Whether and how markets use the more limited voting information for all or some 13F filers remains to be seen.

Will this affect companies’ executive compensation practices?

The SEC also suggested the new transparency could benefit public companies: “Knowing how managers have voted on executive compensation matters in the past, and knowing how they voted on say-on-pay matters at similar firms or other firms in the same industry, can be useful for the companies as they consider their own executive compensation practices and policies.” Supporters of say-on-pay often point to the enhanced engagement it has led to between institutional investors and companies on executive compensation issues. The added transparency from manager say-on-pay vote reporting could expand this engagement, further influencing companies to align their compensation practices with shareholder interests.

Will the new categories be used to compare funds’ votes?

With some half of U.S. households investing in mutual funds, there is already considerable public interest in how funds vote. As noted above, investment research firms, NGOs, and others analyze and publicize funds’ voting records based on their N-PX filings. This should only increase and expand under the new Form N-PX. By requiring that votes be categorized, as well as standardizing the identification of proxy voting matters and requiring that reports use a structured data language, the new Form N-PX promises to make this sort of comparison easier for these parties, as well as retail investors themselves, to perform. By this autumn, a retail investor seeking to compare two clean energy funds should be able to compare those funds’ proxy votes in the “environment or climate” category as readily as they can compare their three-year performance and expense ratio today. As SEC Commissioner Lee explained it, “an updated and clearer Form N-PX can serve as a tool for funds to more readily distinguish their voting records from that of their competitors.”

Many funds, especially those that use stewardship as part of an ESG focus, have already tailored their voting to their investment approach or the specific impact they seek to achieve. A majority of our clients today vote under a custom policy and asset managers increasingly apply different voting policies for different products and accounts, or even, when pass-through voting is offered, within a fund itself. We expect this trend to continue, as the new form will facilitate comparisons of how funds vote on particular types of issues both across fund companies and between ESG-focused funds and other funds within the same fund family.

Will we see changes in funds’ or managers’ share lending practices and vote recall decisions?

When the SEC proposed its changes, a number of commenters expressed concern that disclosure of shares on loan would present an incomplete and overly negative picture of funds’ and managers’ share lending practices. In fact, some commentators went so far as to suggest that requiring these disclosures could “convince institutions to scale back share-lending programs given the potential for a PR crisis over investor concerns that they aren’t voting shares on critical ESG topics,” with potentially “far-reaching consequences [for] short seller activists who borrow shares . . . .” Likewise, a number of commenters, including Glass Lewis, noted that the inferences that may be drawn from a reporting person’s not recalling shares to vote may be unjustified, given that SEC rules today do not require a meeting agenda or proxy statement to be delivered before the record date.

The SEC nonetheless chose to go forward with shares on loan disclosure. In doing so, however, the SEC emphasized that it was not meant to change share lending practices. As the SEC pointedly explained, “There are legitimate reasons why an adviser or other reporting person may decide not to recall any loaned securities. . . . If a reporting person believes that leaving securities on loan is in the client’s best interest, the reporting person should leave those securities on loan.” In part for this reason, the SEC allowed Form N-PX filers to supplement this disclosure with narrative explanation of their share lending practices and/or recall decisions. Time will tell whether the new reporting – and markets’ reactions to it – will have any effect on share lending and vote recall decisions.

What else could happen?

As is increasingly the norm, the SEC’s rule changes have been challenged in court. In February 2023, four states – Texas, Utah, Louisiana and West Virginia – filed a petition to review the rule changes in the federal Court of Appeals for the Fifth Circuit. In briefing, the four states have clarified that their challenge is focused on the SEC’s adoption of the fourteen categories. The case has been briefed, but not yet argued and there is no specific timetable for a decision.

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In originally adopting Form N-PX, the SEC declared that fund investors have “a fundamental right to know how the fund casts proxy votes on shareholders’ behalf.” By autumn of this year, investors and the markets in general should be receiving more information on how funds vote and getting that information in a new, more usable and comparable format. Likewise, the markets will for the first time see how thousands of other institutional managers voted on say-on-pay in the United States. While the exact effects of this new sunlight remain to be seen, the changes to Form N-PX reflect the importance of proxy voting in today’s markets and may make that voting even more important going forward.