SEC proposes new rule mandating funds disclose votes on executive pay

The Securities and Exchange Commission voted Wednesday to propose several new rules related to institutional investment funds’ votes on proxy proposals, including whether they support companies’ compensation packages for their top executives.

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The Dodd-Frank financial reform law, passed in the wake of the 2008 financial crisis, required public companies to hold non-binding shareholder proxy votes on the compensation of their most highly paid executives. It also required companies to disclose so-called “golden parachute” agreements, or compensation arrangements for executives in the event of a merger, acquisition or other transaction.

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If the rule is adopted, it would fulfill a mandate in the Dodd-Frank law to require mutual funds, exchange-traded funds and other investment vehicles to disclose their votes on executive compensation.

The proposal also would require funds to disclose when they are not able to participate in a proxy vote because they have lent securities to another party, like investors who borrow shares for a short sale. In addition, the proposed rule would require that fund managers organize their voting reports in structured data language that makes them easier to analyze.

The SEC voted 4-1 to propose the rule, with Republican party Commissioner Hester Peirce recommending against it. The public will now have 60 days to submit feedback on the proposal, after which the commission can vote to finalize the rule.

Peirce said she would have voted for the proposal if it had included a question for the public asking whether it believes funds should have to disclose their proxy votes at all, as they have been since 2003.

“How or why a fund votes…is unlikely to materially influence an investors choice to invest in a particular fund,” Peirce said, explaining her vote. “The real interest in this seems to come from activists” who wish to use the information to apply public pressure to funds to vote on issues in a particular way that may not be in the best interest of the funds’ performance, she added.

The three Democrats on the commission — Chairman Gary Gensler and Commissioners Allison Herren Lee and Caroline Crenshaw — all voted for the proposal. Elad Roisman, a Republican, voted for it, but said that this vote does not indicate that he will support implementing the rule in its current form. Roisman said he shared Peirce’s concern that the rule could “alter the way funds think about voting in ways I do not believe are in the best interest of investors.”

Voting behavior of large investment vehicles like index funds and exchange-traded funds has come into greater focus in recent years as passive investing has grown in popularity. Researchers Lucian Bebchuk and Scott Hirst recently estimated that by the end of 2019, the largest three index fund managers — BlackRock Inc. State Street Global Advisors and the Vanguard Group owned on average 21.4% of the shares of S&P 500 index corporations.

“The stewardship decisions of index fund managers — how they monitor, vote and engage with their portfolio companies — are likely to have a profound impact on governance and the performance of public companies and the economy,” they wrote in a February working paper.

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