SEC Proposes Rules Requiring Reporting of Proxy Votes on Executive CompensationOctober 29, 2010
On October 18, 2010, the SEC proposed rules to implement Section 14A(d) of the Exchange Act, which generally requires certain institutional investment managers to report at least annually on how they voted on Section 14A Votes. In a companion release (discussed above), the SEC sought public comment on proposed rules to implement the voting requirements of Sections 14A(a) and (b) of the Exchange Act.
WHICH ENTITIES MUST FILE REPORTS
Section 13(f) of the Exchange Act requires institutional investment managers to file reports with the SEC if they exercise investment discretion over accounts holding Section 13(f) securities1 having an aggregate fair market value on the last trading day in any of the preceding twelve months of at least $100,000. Proposed Rule 14Ad-1 would require every institutional investment manager that must file Section 13(f) reports to file its record of Section 14A Votes on Form N-PX. An “institutional investment manager” includes any entity investing in or buying and selling securities for its own account and any person exercising “investment discretion” over another person’s account. A person exercises investment discretion when authorized to determine which securities or other property will be purchased or sold by or for the account, even though some other person may have responsibility for such investment decisions.
TYPES OF VOTES THAT MUST BE REPORTED
Under the proposed rules, institutional investment managers meeting the above criteria would be required to report Say-on-Pay Votes and Say-When-on-Pay Votes required by Section 14A(a), as well as Say-onGolden-Parachute Votes. These reporting requirements would apply only if the manager had or shared the power to vote, or to direct the voting of, the security. One potential issue is that this may create a discrepancy between how a given institutional investment manager reports under Section 13(f), which uses the “investment discretion” test, and how that same manager reports under Section 14A(d), which uses the “voting power” test.
SECURITIES WITH RESPECT TO WHICH VOTES MUST BE REPORTED
Institutional investment managers would be required, under the proposed rules, to report Section 14A Votes with respect to any security over which it meets the voting power test, regardless of whether the manager had previously reported or been required to report the security under Section 13(f).
TIME OF REPORTING
To coincide with the schedule on which registered management investment companies (“funds”) report their complete proxy voting records, the proposed rules require institutional investment managers to report their Section 14A Votes annually not later than August 31 of each year for the most recent 12-month period ended June 30. This schedule is meant to provide the same advantages for institutional investment manager reporting that it has for fund reporting: proxy voting records will be available within a relatively short time after the proxy voting season and all institutional investment managers will provide their voting records over a uniform July 1-June 30 period. To allow institutional investment managers to transition into its voting reporting obligations, the proposed rules do not require institutional investment managers to report Section 14A Votes for the twelve-month period ending June 30 of the calendar year in which the manager’s initial filing under Section 13(f) is due. This is meant to provide institutional investment managers with sufficient time to implement the systems needed to record and report proxy votes. Additionally, an institutional investment manager would not be required to report its Section 14A Votes with respect to any shareholder vote at a meeting that occurs after September 30 of the calendar year in which the manager’s final Section 13(f) filing is due. FORM N-PX REPORTS The proposed rules would amend Form N-PX to accommodate the reporting of Section 14A Votes by institutional investment managers and funds. The amended form would consist of three parts: Cover Page, Summary Page, and required proxy voting information.
Cover Page. The Form N-PX Cover Page, in its current form and as amended, requires the reporting person to disclose certain personal data. A provision of the proposed Cover Page would allow the reporting person to designate the filing as an amendment to a previously filed Form N-PX, thereby linking information in multiple Form N-PX filings for a single reporting person all relating to the same filing period. The new Cover Page would require the reporting person to identify itself as either an institutional investment manager or a fund.
Summary Page. Under the proposed rules, the Summary Page would enable users to readily identify any institutional investment managers (in addition to the person filing the report) whose Section 14A Votes are included on the Form N-PX report by requiring the reporting person to state the total number of institutional investment managers whose Section 14A votes are included in the report and to list them by name. This provision is intended to prevent duplicative reporting.
A fund filing a Form N-PX must file the Summary Page. An institutional investment manager filing a Form N-PX must file the Summary Page unless filing a “notice” report, which indicates that the manager’s Section 14A Votes are reported by other institutional investment managers or funds, as these could not contain any Section 14A Votes at all, and, therefore, would not contain any Section 14A Votes of other institutional investment managers.
Proxy Voting Information. A reporting person would be required to disclose certain information for each Section 14A Vote relating to any security considered at any shareholder meeting held during the reporting period, and with respect to which the reporting person has voting power.
These Form N-PX proxy voting disclosures are intended to identify the security voted, the manner with respect to which the vote occurred, and how the reporting person voted. The proposed disclosures would be substantially the same as the existing Form N-PX requirements with the exception of the following changes to form and content:
- The information would be required to appear in a standardized order to facilitate comparisons of voting records among voting persons;
- Funds, but not institutional investment managers, would be required to disclose whether a matter was proposed by the issuer or by the security holder. Institutional investment managers would be excluded because Section 14A Votes relate exclusively to matters proposed by issuers and not by security holders. Institutional investment managers and funds would be required to disclose: (1) the number of shares the reporting person was “entitled to vote (for funds) or the number of shares over which the reporting person had or shared voting power (for institutional investment managers); (2) the number of shares that were voted; and (3) how the reporting person voted those shares and, if the votes were cast in multiple manners, the number of shares voted in each manner. These disclosures are intended to contribute to the transparency of proxy voting records.
- To prevent duplicative reporting, if two or more institutional investment managers share the power to vote the same securities on a Section 14A Vote, only one of the managers must report these votes, but each manager involved must indicate this arrangement on separate Forms N-PX The manager who reports the Section 14A Votes must identify any other institutional investment managers on whose behalf the filing is made, while the non-reporting manager must file a Form N-PX report that identifies each institutional investment manager and fund reporting on its behalf.
- New Form N-PX would require standardized descriptions for Section 14A Votes to provide a brief identification of the matter voted, which would allow users to compare proxy voting records among reporting persons.
Except in limited situations, information filed on Form N-PX would be available to the public.
If adopted, the rules will require institutional investment managers to file their first reports on new Form NPX for Section 14A Votes made at meetings occurring on or after January 21, 2011 and ending June 30, 2011. These reports must be filed no later than August 31, 2011.
Similarly, funds would be required to comply with the new rules for Form N-PX reports filed for the period July 1, 2010 through June 30, 2011. These reports must be filed no later than August 31, 2011, except that funds may provide the information of the type and in the manner required by the existing Form N-PX for votes at meetings that occur before January 21, 2011.
Public comments on the proposed rules may be submitted to the SEC on or before November 18, 2010. The full text of the proposed rules, including instructions for submitting comments, is available at http://www.sec.gov/rules/proposed/2010/ 34-63123.pdf.