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Comments on SEC’s Form N-PX/Say-on-Pay Proposal
December 14, 2021
Via Electronic Filing
Vanessa A. Countryman, Secretary
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Re: Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers
Dear Ms. Countryman:
The Investment Adviser Association (IAA)[1] appreciates the opportunity to comment on the Commission’s re-proposal of a rule and form amendments under the Securities Exchange Act of 1934 (Exchange Act) to facilitate the disclosure of certain votes by institutional investment managers that are subject to Section 13(f) of the Exchange Act (13(f) Institutional Managers), as required by Section 951 of the Dodd-Frank Act.[2] The Proposal would also significantly amend Form N-PX reporting for registered management investment companies (funds).
The IAA has long supported robust proxy voting and managers’ engagement with respect to the governance of issuers in which they invest, and we have strongly opposed efforts to make proxy voting more difficult for investment advisers.[3] We thus commend the Commission for proposing to finalize this statutory requirement. We write specifically to recommend a modification to the proposed requirement to report shares loaned but not recalled by a reporting person. We also request an extension of the proposed compliance period to allow 13(f) Institutional Managers sufficient time to implement the necessary changes to identify and collect data and operationalize these complex new filing requirements.
Background
Section 951 added Section 14A to the Exchange Act, which requires public companies to hold non-binding shareholder votes on so-called “say-on-pay” matters (say-on-pay votes).[4] Section 14A(d) requires 13(f) Institutional Managers to report at least annually on Form N-PX – the form currently used by funds to report their proxy votes – “how [they] voted on any shareholder vote” on these matters.[5] The SEC originally proposed rule and form amendments to implement Section 951 in 2010,[6] but it never finalized that proposal. The new Proposal replaces and supersedes the 2010 proposal and would require that 13(f) Institutional Managers report their say-on-pay votes in connection with each security over which the manager “exercised voting power.”[7]
The Commission also proposes significant amendments to funds’ reporting on Form N-PX to require classification of each proxy voting matter from a specified list of new categories and subcategories. The IAA supports the comments of the Investment Company Institute (ICI) that relate to these proposed classifications, as well as its comments on other aspects of the Proposal.
The IAA commented on the 2010 proposal, asking for clarification and confirmation with respect to proposed joint reporting.[8] We are pleased that the Proposal would provide optional joint reporting and commend the Commission for providing that flexibility. We also strongly support limiting when a manager is required to report say-on-pay votes to securities over which the manager “exercised voting power,” i.e., when it “ha[d] voting power and use[d] that power to influence a voting decision.”[9]
Disclosure of Loaned Shares Not Recalled for Proxy Voting
One of the proposed amendments that was not included in the 2010 proposal is a requirement for a 13(f) Institutional Manager to disclose on Form N-PX “for each shareholder vote . . . over which the manager exercised voting power”[10] “the number of shares that the reporting person loaned and did not recall.”[11] This requirement would apply to all 13(f) Institutional Managers’ say-on-pay votes. It would also apply to all fund votes “with respect to which the reporting person was entitled to vote, including securities on loan,”[12] and not just say-on-pay votes. The disclosure is “designed to provide transparency into how a reporting person’s securities lending affects its proxy voting.”[13] We believe that narrative disclosure of a manager’s recall policies would better satisfy the Commission’s goal of providing transparency in this area. We are also concerned about the Commission’s negative characterization of securities lending in the Proposal.
We agree with the Commission that “[a]n investment adviser that assumes proxy voting authority must adopt and implement policies and procedures reasonably designed to ensure it votes client securities in the best interest of clients.”[14] The Commission has recognized that there may be times when refraining from voting a proxy is in the client’s best interest, such as when the adviser determines that the cost of voting the proxy exceeds the expected benefit to the client.[15] We do not believe that the Proposal gives sufficient consideration to the benefits to investors of securities lending. As a threshold matter, therefore, we encourage the Commission to present a more balanced discussion of the costs and benefits to fund investors and other clients of securities lending. Although the Commission recognizes in the Proposal that an adviser should, as part of its fiduciary duty, “consider the tradeoffs between continuing to keep securities on loan, or recalling loaned securities in order to vote,”[16] the discussion in the Proposal creates a negative inference against a determination to leave securities on loan. Moreover, while there is some discussion of the costs to clients of recalling loaned securities to vote,[17] the Proposal minimizes those costs and their potential impact, appearing to create a presumption that a say-on-pay proxy vote is virtually always more in a client’s best interest than leaving the securities on loan.[18] We suggest that the Commission remove language from the release that implies that securities lending is harmful or less valuable to clients when in fact it may be in their best interest for their securities to remain on loan, notwithstanding a say-on-pay vote on the ballot.
We are also concerned that the stand-alone number called for by this proposed disclosure item may be misinterpreted without further context, i.e., that the manager has made a determination that is based on what is in the best interest of the client according to the client’s strategy and its agreement with the manager.[19] We do not agree with the Commission’s statement that “the context given by disclosing the number of [these] shares . . . would allow investors to better understand how securities lending activities affect the voting practices of the reporting person.”[20]
We suggest that if the Commission determines that some information on loaned securities would be valuable for investors, it consider an alternative to the proposed quantitative disclosure of shares loaned but not recalled for voting, such as a narrative disclosure. A narrative disclosure that describes a manager’s policies for recalling securities on loan would be more informative for investors than simply a raw numerical number of shares loaned but not recalled because it would provide meaningful context and would better achieve the Commission’s goal of increased transparency around securities lending practices. In addition, the burden of producing the quantitative disclosure, especially on smaller advisers, would not be outweighed by the benefits. Instead, one option would be to include this disclosure in proposed Item 1(m) of Form N-PX, which would ask for any other information. This approach would also align with other jurisdictions’ requirements on disclosure of securities lending.[21]
CUSIP
The Commission proposes to require the reporting of CUSIPs. If the CUSIP number is not available through reasonably practicable means (e.g., in the case of certain foreign issuers), however, the Form would require the security’s ISIN, unless it also is not available through reasonably practicable means.[22] As we have commented to the Commission in the past, we have significant concerns about the Commission’s requirement to use CUSIPs in regulatory reports or in rules absent a holistic study by the Commission of practices relating to CUSIP licensing fees.[23] In the meantime, while we recognize that it could add some complexity to reporting, we suggest that the Commission consider permitting alternative identifiers to CUSIPs.
Compliance Date
The Commission proposes that a 13(f) Institutional Manager’s requirement to report say-on-pay votes on Form N-PX would begin six months after the rule’s effective date, stating its belief that this is enough time for managers to work with third-party service providers to develop the necessary systems to record and report information on Form N-PX for the first time. We urge the Commission to extend this time. As we noted in our 2010 letter, it continues to be the case that, for some 13(f) Institutional Managers, proxy votes are processed manually and are not managed by outside proxy service providers. New systems would thus need to be developed internally to capture and record say-on-pay votes electronically.
It will be especially difficult for smaller 13(f) Institutional Managers – even those that use the services of third parties – that have not previously filed Form N-PX or that do not currently capture all relevant information electronically, to implement systems to capture the data and file Form N-PX. More than 60 percent of SEC-registered advisers have under $500 million in RAUM and eight in ten advisers have 50 or fewer employees.[24] These advisers are small businesses by any reasonable measure and we urge the Commission to take into account the burdens these advisers will face.
All new filers will need to identify and collect data on their say-on-pay votes, determine who will report for sub-advisory and corporate group relationships,[25] and work with service providers and other third parties to report on Form N-PX for the first time. Further, as discussed in the ICI’s comments, funds will need significantly more than six months to collect all the new data required to be reported in the format proposed. Given the potentially significant systems changes that must be implemented to capture these new votes (especially for 13(f) Institutional Managers that have not previously filed Form N-PX), we request that the Commission extend the compliance date to allow for at least one full reporting period for reporting persons to file in order to allow these managers sufficient time to implement the necessary changes.
* * * *
We appreciate the opportunity to provide our views on these issues and would be pleased to provide any additional information. Please contact the undersigned or Monique Botkin, IAA Associate General Counsel, at (202) 293-4222 with any questions regarding these matters.
Respectfully Submitted
Gail C. Bernstein
General Counsel
cc:
The Honorable Gary Gensler, Chair
The Honorable Hester M. Peirce, Commissioner
The Honorable Elad L. Roisman, Commissioner
The Honorable Allison Herren Lee, Commissioner
The Honorable Caroline A. Crenshaw, Commissioner
Sarah ten Siethoff, Acting Director, Division of Investment Management
[1] The IAA is the leading organization dedicated to advancing the interests of investment advisers. For more than 80 years, the IAA has been advocating for advisers before Congress and U.S. and global regulators, promoting best practices and providing education and resources to empower advisers to effectively serve their clients, the capital markets, and the U.S. economy. The IAA’s member firms manage more than $35 trillion in assets for a wide variety of individual and institutional clients, including pension plans, trusts, mutual funds, private funds, endowments, foundations, and corporations. For more information, please visit www.investmentadviser.org.
[2] Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers, 86 Fed. Reg. 57478 (Oct. 15, 2021) (Proposal), available at https://www.govinfo.gov/content/pkg/FR-2021-10-15/pdf/2021-21549.pdf.
[3] Letter from Karen L. Barr, IAA President & CEO, Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice (Feb. 3, 2020), available at https://www.investmentadviser.org/wp-content/uploads/2021/10/February_3__2020_-_IAA_Proxy_Advice_Comment_Letter.pdf; see also IAA Letter to Chair Gensler (May 17, 2021) (IAA Letter to Chair Gensler), available at https://www.investmentadviser.org/resources/regulation-of-investment-advisers/.
[4] Say-on-pay votes include those of public companies to approve the compensation of their named executive officers, determine the frequency of these votes, and approve “golden parachute” compensation in connection with a merger or acquisition.
[5] This reporting is required unless the vote is otherwise required to be reported publicly. Proposal at 57481.
[6] Reporting of Proxy Votes on Executive Compensation and Other Matters, 75 Fed. Reg. 66622 (Oct. 28, 2010) (2010 proposal), available at https://www.sec.gov/rules/proposed/2010/34-63123fr.pdf.
[8] See Letter from Jennifer S. Choi, IAA Associate General Counsel, Reporting of Proxy Votes on Executive Compensation and Other Matters (Nov. 16, 2010), available at https://www.sec.gov/comments/s7-30-10/s73010-8.pdf.
[15] See Proxy Voting by Investment Advisers, 68 Fed. Reg. 6585 (Feb. 7, 2003) (Proxy Voting Rule Release), available at https://www.govinfo.gov/content/pkg/FR-2003-02-07/pdf/03-2952.pdf.
[17] See, e.g., Proposal at 57505.
[18] As the Commission notes in the Proposal, in some cases, proxy statements also may not be delivered until after the “record date,” i.e., the date as of which the record holders of securities entitled to vote are determined. Proposal at 57490. Matters on the ballot thus may not always be known before the record date, creating challenges for reporting persons to determine whether they should recall loaned securities. Managers reasonably could decide that it is not practical, or not a good way to maximize client revenue, to recall a security on loan to vote every proxy, especially where matters on the ballot are not yet known on the record date.
[19] We note that whether securities lending is part of the advisory relationship or product is disclosed to, and often negotiated with, the client in advance, and is conducted pursuant to written policies and procedures. The scope of an adviser’s responsibilities with respect to voting proxies would ordinarily be determined by the adviser’s contracts with its clients, the disclosures it has made to its clients, and the investment policies and objectives of its clients. If applicable, advisers determine whether to vote proxies based on costs and expected benefits to clients. Proxy Voting Rule Release at 6587, n.19.
[21] For example, the UK Stewardship Code requires that, for listed securities, signatories “state what approach they have taken to stock lending, recalling lent stock for voting and how they seek to mitigate ‘empty voting’”; see also Article 3i of the EU Shareholder Rights Directive.
[23] See, e.g., IAA Letter to Chair Gensler; Presentation to the SEC’s Asset Management Advisory Committee, Karen Barr, President & CEO and Gail Bernstein, General Counsel, Investment Adviser Association (Sept. 27, 2021) (IAA AMAC Presentation), available at https://www.sec.gov/files/iaa-presentation-karen-barr-gail-bernstein-092721.pdf.
[24] See IAA Letter on Reporting Threshold for Institutional Investment Managers (Sept. 29, 2020), available at https://www.investmentadviser.org/wp-content/uploads/2021/10/September_29__2020_-_Form_13F_Comment_Letter_FINAL.pdf. See also, IAA AMAC Presentation (providing key data points on smaller advisers); and Investment Adviser Industry Snapshot 2021 (July 2021), available at https://www.investmentadviser.org/wp-content/uploads/2021/08/Investment_Adviser_Industry_Snapshot_2021.pdf (annual report on SEC-registered investment adviser industry).
[25] We agree with the Commission that it should not specify who should report in sub-advisory or corporate group relationships, because the joint reporting provisions are designed to provide flexibility to reporting persons to divide that responsibility among themselves or to each report independently. Proposal at 57492. That said, determining who should report, at least initially, will likely need more time.
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Proxy Voting