The Securities and Exchange Commission on Wednesday voted to propose several new rules regarding how institutional mutual funds vote on proxy proposals, including whether they support corporate compensation packages for their top executives.
The Dodd-Frank Financial Reform Act passed in the wake of the financial crisis in 2008 obliged listed companies to hold non-binding proxy voting for shareholders on the remuneration of their best-paid executives. It also required companies to disclose so-called "golden parachute" agreements or executive compensation agreements in the event of a merger, acquisition or other transaction.
If adopted, the rule would correspond to a mandate under the Dodd-Frank Act to require mutual funds, exchange-traded funds, and other investment vehicles to disclose their votes on board compensation.
The proposal would also require funds to disclose when they are unable to vote because they have lent securities to another party, such as investors borrowing stocks for a short sale. In addition, the proposed rule would require fund managers to organize their reconciliation reports in a structured data language that facilitates analysis.
The SEC voted 4-1 to propose the rule, with Republican Commissioner Hester Peirce recommending it against. The public now has 60 days to provide feedback on the proposal, which allows the Commission to vote to finalize the rule.
Peirce said she would have voted for the proposal if it had included a question to the public asking if she thought funds should disclose their proxies at all, as they have done since 2003.
"How or why a fund votes … is unlikely to materially affect an investor's decision to invest in a particular fund," Peirce explained her voice. "The real interest in this appears to come from activists," who want to use the information to put public pressure on funds to vote on issues that may not be in the best interests of the funds' performance, she added.
The three Democrats on the commission – Chairman Gary Gensler and Commissioners Allison Messrs. Lee and Caroline Crenshaw – all voted in favor of the proposal. Elad Roisman, a Republican, voted in favor but said that vote does not indicate that he will support the implementation of the rule in its current form. Roisman said he shared Peirce's concern that the rule "could change the way funds think about votes in ways that I don't think are in the best interests of investors."
The voting behavior of large investment vehicles such as index funds and exchange-traded funds has moved more into focus in recent years, as passive investments are becoming increasingly popular. Researchers Lucian Bebchuk and Scott Hirst recently estimated that by the end of 2019, the three largest index fund managers – BlackRock Inc.
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and the Vanguard Group owned an average of 21.4% of the stocks in the S&P 500 index companies.
"The decisions made by index fund managers – how to monitor, coordinate and interact with their portfolio companies – are likely to have profound implications for the governance and performance of public companies and the economy," they wrote in a February working paper.
Dorothy Donohue, Deputy General Counsel at the Investment Company Institute, a trading group in the fund industry, said in a statement that the proposal would "modernize" proxy disclosure and "make it easier for proxies to access and analyze funds."
"Regulated funds take their proxy voting responsibilities very seriously," she added. “We will review the proposal and carefully consider how it could affect the voting practices of the regulated funds. We intend to comment and look forward to working with the SEC. "