The Securities and Exchange Commission has proposed a rule that would require money managers to disclose more information on how they use their voting power.
When investors buy a mutual fund and exchange-traded fund from an asset manager, the money manager votes on shareholder proposals on behalf of the investors.
Shareholder votes extend from issues from executive compensation to a company’s efforts to address climate change.
The 29 September proposal targets funds that manage trillions of dollars of money for investors. It follows a yearslong concern among some SEC officials that current disclosures make it difficult for individual investors to see how asset managers cast shareholder votes on their behalf.
“Shareholder voting is at the heart of corporate democracy, and when those votes are cast by intermediaries, transparency is at the heart of our trust in that system,” said SEC commissioner Allison Herren Lee, a Democrat.
The popularity of index funds fueled the rise of a small group of money managers in the last decade. This has given firms such as BlackRock, Vanguard, and State Street enormous sway over corporate affairs that appear on proxies, including pay for top executives, board appointments and acquisitions.
A 2019 study found that the three firms collectively cast an average of about 25% of the votes at S&P 500 companies.
The agency’s new draft rules require asset managers to categorise votes more clearly in SEC filings to help investors more easily identify and compare funds’ voting patterns.
Under the proposed rule, the reports would need to be filed in a format that is easier to analyse.
It would also require more disclosure around the effect of securities lending by funds. Money managers sometimes choose to lend out shares of companies their funds own. This can produce cash and boost fund returns. But when the shares are lent out, managers can forgo their funds’ ability to cast votes on those companies.
There is currently no way for investors to understand how often their fund managers make this trade-off.
In one prominent example, major fund managers left substantial GameStop shares out on loan during a board contest in 2020, as reported by The Wall Street Journal last year. With significant interest by hedge funds in shorting GameStop shares, some fund managers opted for fees from lending out shares. In the process, several firms also gave up the right to vote on big chunks of shares during a pivotal time for GameStop.
The proposed rules will likely prompt asset managers to push back.
More disclosures on proxy voting would help accomplish a key priority of SEC chair Gary Gensler: arming investors with more information to decide if funds are living up to their promises to press companies on environmental, social and governance, or ESG, goals.
In the past year, investors have surged into funds that promote things like clean energy, diversity and “low-carbon” practices.
The SEC earlier this year said it would be more attentive to whether asset managers’ voting practices square with their marketing.
Republican SEC commissioner Hester Peirce, who cast the lone vote against issuing the proposal, expressed concern that it would help activists pressure companies to elevate ESG objectives over profitability.
Fellow Republican commissioner Elad Roisman said that a proposal requiring funds to disclose how many shares fund managers chose not to vote would be “ill-designed to communicate to investors the balancing that funds go through when considering how to maximise value for fund investors.”
Roisman joined the SEC’s three Democratic commissioners in voting to issue the proposal, but said it would need to undergo changes to gain his support as a final rule.
The SEC is also proposing new reporting requirements on so-called “say-on-pay” votes involving executive compensation to meet a requirement of the 2010 Dodd-Frank financial reform that the agency had left unfinished.
This article was published by Dow Jones Newswires