SEC Proposal Seeks Transparency in How Money Managers Wield Vast Voting Power

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Rule on how asset manager proxy votes handle securities lending will require more disclosure

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The SEC’s proposal on Wednesday targets funds that manage trillions of dollars for investors. It follows a year-long 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.

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“Shareholder voting is at the heart of corporate democracy, and when those votes are cast by intermediaries, transparency is at the heart of our belief in that system,” said SEC Commissioner Alison Herren Lee, a Democrat. “Funds and managers, acting on behalf of their shareholders and customers, have the potential to exert substantial influence on issuers of all sizes.”

The popularity of index funds fueled the rise of a small group of money managers over the past decade. It has given firms like BlackRock Inc.,

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Vanguard Group and State Street Global Advisors have a heavy sway over corporate matters visible on proxy, including salaries for top executives, board appointments and acquisitions. a 2019 Study It was found that the three firms collectively cast an average of about 25% of the votes in the S&P 500 companies.

The agency’s new draft rules require asset managers to select from standardized categories to help investors identify issues in proxy votes and compare the fund’s voting patterns. Categories and subcategories proposed by the SEC range from greenhouse gas emissions and diversification, equities and corporate matters such as share buybacks or asset sales.

The regulations would require further disclosure about the effect of the funds lending to securities. Money managers sometimes choose to lend out shares of companies to fund their own. This can generate cash and increase fund returns. But when shares are lent, managers can give up the ability of their funds to cast votes on those companies.

At present there is no way for investors to understand how often their fund managers close the deal.

In one example, fund managers left substantial shares of GameStop on debt 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 the shares. In the process, several firms also renounced the right to vote on a large majority of shares during a critical time for the videogame retailer.

People close to asset management firms said this aspect of the proposed rules would prompt asset managers to backtrack.

“Regulated funds take their proxy voting responsibilities very seriously. We will review the proposal and carefully assess how it may affect the proxy voting practices of regulated funds,” said deputy general of the Investment Company Institute, an asset management lobby group. Council Dorothy Donohue said.

More disclosure on proxy voting would help fulfill SEC Chairman Gary Gensler’s priority: for investors to decide whether the fund lives up to its promise to press companies on environmental, social and governance, or ESG, goals. are.

Over the past year, investors have increased funds that promote things like clean energy, diversity and “low-carbon” practices.

BlackRock and other asset managers have been more inclined to vote against company management to prompt them to do more on greenhouse-gas emissions and other ESG targets over the past year. In a sign that the world’s largest asset manager is ready to take a more aggressive stance on companies’ environmental priorities, BlackRock backed 64% of shareholder-led environmental proposals in the year ended June, up from just 11 a year earlier. % Was.

Votes from BlackRock, Vanguard and State Street helped Engine No. 1, an investment firm active in Exxon Mobil, win board seats. Corporation

this year. At the time, the three firms controlled a fifth of Exxon’s shares outstanding to investors, according to data compiled by S&P Global Market Intelligence.

With no clear industry definition on ESG, many managers remained locked in internal debate over what is the best way to vote companies on such preferences, and whether their voting records match how they advertise themselves. are.

Earlier this year the SEC Said it would be more attentive Whether asset managers’ voting practices are in line with their marketing.

Republican SEC Commissioner Hester Peirce, who cast a single vote against issuing the proposal, expressed concern that it would help companies pressuring activists to elevate ESG objectives above profitability.

Fellow Republican Commissioner Elad Roisman said that a proposal that requires the funds to disclose how many shares the fund managers voted not to “would be unfairly designed to tell investors that the fund is not available to investors.” What balance do funds go through when considering how to maximize value?

Mr Roisman joined three of the SEC’s Democratic commissioners in voting to issue the resolution, but he said it would have to undergo change to gain their support as a final rule.

The SEC is also proposing new reporting requirements on so-called “say-on-pay” votes that include executive compensation to meet a 2010 Dodd-Frank financial-reform law requirement that the agency left unfulfilled.

Don Lim at Don [email protected] and Paul Kiernan at [email protected]

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