SEC Adopts New Rule Requiring Form 13F Filers to Report Annually Their Proxy Voting Record

Authors: Jonathan S. Adler, Josh La Grange, and Nathan M. Erickson

Introduction

On November 2, 2022, the Securities and Exchange Commission (“SEC”) adopted amendments to Form N-PX under the Investment Company Act of 1940 to “enhance” and make “easier to analyze” proxy voting information currently required to be reported annually by certain investment funds.[1] For existing Form N-PX filers, these amendments are largely technical in nature. But for Form 13F filers who have not previously been required to file Form N-PX, the SEC’s rulemaking imposes a new annual reporting requirement, beginning in 2024, concerning such filers’ proxy voting on certain executive compensation matters.

Background

Form N-PX, which requires mutual funds, exchange-traded funds, and certain other registered funds to report annually data regarding their proxy voting, was passed by the SEC in 2003.[2] Seven years later, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was passed, Section 951 of which mandated that “[e]very institutional investment manager subject to [Section 13(f) of the Securities Exchange Act of 1934 (the “Exchange Act”)] shall report at least annually how it voted on any shareholder vote [concerning executive compensation and “golden parachute” provisions in merger proxies (“say-on-pay”)], unless such vote is otherwise required to be reported publicly by rule or regulation of the Commission.”[3] While this language has existed in the statute since 2010, and despite the SEC having first issued a rulemaking proposal to implement the statute on October 18, 2010[4] (several months after the passage of Dodd-Frank), that proposal languished without passage for more than a decade, until 2021, when the SEC issued a new rulemaking proposal to amend Form N-PX.[5] As with the SEC’s prior rulemaking proposal, the SEC’s 2021 rulemaking release proposed requiring Form 13F filers to report publicly how they voted proxies related to shareholder advisory votes on say-on-pay matters whenever such filers exercise voting power over a security. The SEC has now adopted that new proposal, largely as proposed, implementing Dodd-Frank Section 951.[6]

Exchange Act Section 13(f) and Form 13F

Under current Exchange Act Section 13(f)(1), institutional investment managers that use the United States mail (or other means or instrumentality of interstate commerce) in the course of their business and that exercise investment discretion over $100 million or more in Section 13(f) securities are required to file quarterly reports listing such securities positions on SEC Form 13F.[7] Section 13(f) securities are defined as equity securities of a class described in Section 13(d)(1) of the Exchange Act; the SEC publishes quarterly a public list of securities meeting the definition that is known as the “Official List of Section 13(f) Securities.”[8]

For purposes of Section 13(f), the term “institutional investment manager” is defined as “any person, other than a natural person, investing in or buying and selling securities for its own account, and any person exercising investment discretion with respect to the account of any other person.”[9] Institutional investment managers are deemed to exercise investment discretion if “(i) the manager has the power to determine which securities are bought or sold for the account(s) under management; or (ii) the manager makes decisions about which securities are bought or sold for the account(s), even though someone else is responsible for the investment decisions.”[10]

Once an institutional investment manager meets the $100 million threshold at the end of any calendar month in any given year (even if such manager subsequently drops below the filing threshold), that manager triggers an obligation to file four quarterly Form 13F reports, each reporting the Section 13(f) securities over which it has investment discretion at the end of each respective reporting period.[11]

Form N-PX Filing Obligations of Institutional Investment Managers

The rules adopted by the SEC on November 2, 2022 included the adoption of new Exchange Act Rule 14Ad-1, which requires “each person that (1) is an “institutional investment manager” as defined in the Exchange Act; and (2) is required to file reports under 13(f) of the Exchange Act, to report its say-on-pay votes on Form N-PX.”[12] Form N-PX must be filed annually not later than August 31 of each year, and covers “the most recent 12-month period ended June 30, containing the institutional investment manager’s proxy voting record for each shareholder vote pursuant to Sections 14A(a) and (b)” of the Exchange Act with respect to each security over which the manager “exercised voting power” during such period.[13]

Whether a manager has “exercised voting power” under the new rule is defined by a two-part test. Under this test, a manager is deemed to have exercised voting power “only if the manager: (1) has the power to vote, or direct the voting of, a security; and (2) ‘exercises’ this power to influence a voting decision for the security.”[14] This two-part test, as the SEC describes it, derives from new Exchange Act Rules 14Ad-1(1), which defines “voting power” as “the ability, through any contract, arrangement, understanding, or relationship, to vote a security or direct the voting of a security, including the ability to determine whether to vote a security or to recall a loaned security” and 14Ad-1(2), which defines the “exercise of voting power” as “using voting power to influence a voting decision with respect to a security.”[15]

While managers under the rule will “have no reporting obligation with respect to a voting decision that is entirely determined by its client or another party,”[16] the circumstances under which a manager might be deemed to have “influenced” a vote are potentially expansive. For example, in the adopting release, the SEC stated that the exercise of voting power encompasses situations in which a manager exercises its “independent judgment or expertise to determine how a client’s voting policies should apply to a say-on-pay vote,” or when it determines “not to vote on a say-on-pay matter or whether to recall loaned securities in advance of a vote in order to vote the shares.”[17] The SEC also rejected commenters’ suggestions that the reporting obligation be limited to the party who “primarily” influences a voting decision, acknowledging that its adopted framework “could result in some subjectivity in some cases,” and noting that managers may exercise voting power in this manner even when they are “not the sole decision-maker.”[18]

Scope of the Reporting Obligation for Institutional Investment Managers

The reporting obligation in new Exchange Act Rule 14Ad-1 applies to say-on-pay votes with respect to “any security” over which the manager exercised voting power. Thus, while Form 13F filers are only required to report on Form 13F securities that qualify as “13(f) securities” and are listed on the SEC’s quarterly reported Form 13F List, such filers must report on Form N-PX their say-on-pay votes with respect to any security that is registered under Section 12, such as certain non-exchange traded securities, even when such securities are not “13(f) securities.”[19]

Similarly, while there is a de minimis exemption built into the Form 13F reporting regime, this limitation is not applicable to the scope of Form N-PX’s reach. And, while institutional investment managers’ Form 13F reporting obligations are limited to securities that the manager had investment discretion over at quarter end, a Form 13F filer must report annually its say-on-pay votes on Form N-PX regardless of whether it held such securities at any given point in time during the year, and (where the manager influences voting) even if the manager did not have investment discretion over such securities.[20] The scope of the Form N-PX reporting obligation is thus broader in some respects than dictated by the Form 13F reporting regime. The SEC’s decision not to cabin institutional investment managers’ Form N-PX reporting to only those securities that managers are otherwise required to report on Form 13F was driven by the reported belief that “doing so would exclude say-on-pay voting information that would be beneficial to investors,” and consequently “reduce the utility of the say-on-pay reporting disclosure by depriving investors of a manager’s full voting record.”[21]

While the SEC elected to adopt a broad vote reporting regime for institutional investment managers who are also Form 13F filers, the SEC did adopt “a designation to Form N-PX that would permit managers who have a disclosed policy of not voting proxies, and who did not in fact vote during the reporting period, to indicate such in a notice report.”[22] This more limited “notice report” will consist of only the Form N-PX cover page and a required signature.

Timeline for Effectiveness of the New Rules

Filers with existing Form N-PX reporting obligations under the pre-amendment rules will continue to have an existing reporting obligation under the pre-amendment rules. However, in order to give filers time to prepare for the amended reporting obligations, the SEC has agreed to delay the effectiveness of the amendments until July 1, 2024. Form N-PX filers, including institutional investment managers who are brought within the reporting regime by the amendments, must file their initial reports on amended Form N-PX (covering July 1, 2023 to June 30, 2024) by August 31, 2024.