The Securities and Exchange Commission (SEC) has proposed rulemaking that would enact a provision of the Dodd-Frank Act requiring mutual fund managers to disclose how they voted on proxy proposals, including on compensation agreements with company executives.
The so-called “say-on-pay” rule is one of 11 Dodd-Frank provisions that remain unfinished more than a decade after the bill was passed into law. Managers of mutual funds and exchange-traded funds representing institutional investors would have to reveal whether they voted in favor of a company’s salary and benefits packages for its executives, as well as bonuses, separation agreements, executive pay arrangements following mergers and acquisitions, and more.
The rule is meant to increase transparency for investors, the SEC said in a press release Wednesday.
Although several Dodd-Frank provisions on executive compensation still left unfinished are controversial on Wall Street and could face strong opposition, this particular rule might not generate much heat. It is the most straightforward to implement: It would not require input from other federal regulators in order to be enacted, unlike two rules covering incentive-based compensation agreements.
Beyond the say-on-pay rule, the SEC is also seeking to implement several new mandates regarding proxy votes cast by mutual fund managers. The proposal would order fund managers to disclose how their securities lending activity affected their voting, for example, if they were not able to vote because their fund lent securities to another party.
Fund managers would also be required to report their votes in a structured way so investors could easily find and understand a fund’s proxy votes and compare them to other proxy votes cast elsewhere.
“This proposal will make it easier and more efficient for investors to get crucial information about proxy votes from funds,” stated SEC Chair Gary Gensler. “I am pleased to support the staff’s recommendations and look forward to putting them out to public comment.”
Gensler was joined by Democratic Commissioners Allison Herren Lee and Caroline Crenshaw and Republican Elad Roisman in voting in favor of advancing the rulemaking on proxy voting. Roisman said in a statement his yes vote “in no way reflects how I would vote on a recommendation to adopt these rules.”
Republican Hester Peirce was the only member to vote no. She was clear to differentiate her stance on say-on-pay (Section 951) from the other new proxy rules proposed by the SEC for rulemaking.
“Regardless of whether I agree with Section 951 of Dodd-Frank, it is the law, and the Commission is right in wanting to implement it,” Peirce wrote in a dissenting statement.
“If I had had my preference, the say-on-pay proposal would be up for Commission consideration as a standalone rulemaking,” she said. “Instead, it has been joined with a wholly discretionary proposal” involving alterations to a form mutual fund managers must submit to the SEC, Form N-PX.
“Although a fund’s voting strategy can be an important part of the overall fund management strategy, how or why a fund votes, or even whether a fund votes on a particular issue at a particular portfolio company is unlikely materially to influence an investor’s choice to invest in a particular fund,” she wrote. “The proposing release, however, is replete with statements insisting that investor demand for more data on specific fund votes compels this rulemaking.”
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