SEC Open Meeting
Securities and Exchange Commission
Open Meeting
Wednesday, November 2, 2022
Topline
- The Commission voted 3-2 to adopt from amendments to enhance the information registered management investment companies report about their proxy votes and to propose a new rule and form amendments to require institutional investment managers subject to section 13(f) to report proxy votes relating to certain executive compensation matters.
- The Commission voted 3-2 to propose amendments to rules and forms for open-end management investment companies related to liquidity risk management programs, swing pricing, and other pricing requirements.
- Transparency and accountability were the impetus of the proxy proposals, and speakers cited market volatility in March 2020 as the driving force behind the open-end fund proposals.
ITEM 1: Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers
The Commission voted 3-2 to propose form amendments to enhance the information registered management investment companies report about their proxy votes. The Commission also voted to propose a new rule and form amendments to require institutional investment managers subject to section 13(f) of the Securities Exchange Act of 1934 to report proxy votes relating to certain executive compensation matters, as required by section 14A of the Exchange Act.
Staff Discussion
William A. Birdthistle
Birdthistle explained the large capitalization of registered funds and said that disclosure of proxy records could eliminate conflicts of interest. He added that providing investors with information on proxy voting conflicts of interest is important and that current disclosures do not provide meaningful comparisons.
David Driscoll
In his opening statement, Driscoll explained several components to the amendments. First, the amendment would require funds and managers to format the report and format the Act consistently so that investors could compare voting records and identify both of interest in an easier manner. Second, the amendment would require reporting persons to disclose the number of shares voted or instructed to detach and the number of shared loans that did not recall. He said this information would improve transparency and provide context for investors to understand how securities lending activities could affect the reporting persons’ voting practices. Third, the amendment would require reporting persons to file using a structured data language, making the information easier to analyze. Fourth, the amendment would extend reporting requirements to institutional investment managers for any executive compensation vote, over which the managers exercise voting power.
Jessica Wachter
Wachter explained the many uses of mutual funds and the limits of existing transparency measures due to existing disclosure shortcomings. She said that the recommended amendments would require categorizing voting matters by type and other information and that she expects the amendments to provide additional information that will be easier to collect and analyze across funds. She also explained practice of lending shares but asserted that more information is needed to understand a fund’s voting behavior.
Commissioner Discussion
Commissioner Hester M. Peirce
Peirce said she could not support the proposal, which she said would harm funds and funds investors. Peirce said the final rule would require funds to identify the subject matter of each reported voting item from a selection of standardized, but non-exclusive, categories, would contain fewer categories, and would rework subcategories into examples within the different categories. She said such categorizing methods would fail in their purpose because of the unavoidable level of subjectivity involved in classifying each voting topic. Peirce then said requiring funds to disclose how many shares they have decided to leave out on loan, instead of voting them, would not help average investors. She added that the mandated disclosure would be granular and costly to compile with precision and would not provide worthwhile insight into the analysis that fund managers would undertake in deciding whether to recall shares. Peirce said smaller managers would be placed at a distinct disadvantage as a result of the proposal’s creating confusion and increasing costs and fees.
Commissioner Caroline A. Crenshaw
Crenshaw said proxy voting information will be easier to digest and access and be more readable by the end user as a result of the amendments. She added that the amendments will act as a deterrent to fund advisors acting in their own interests and that transparency and accountability are the impetus of the rule. She also said that more information for investors will allow them to allocate their hard-earned capital in line with their goals and preferences.
Commissioner Mark T. Uyeda
Uyeda said the amendment lacks a detailed comment summary and would not provide appropriate context. He also said the proposal would complicate the decision of funds and would make managers consider whether to recall. He added that the proposal would eventually make every disclosure a cost and make firms perceive curtailing their securities lending programs in response. Finally, Uyeda said the amendment would add more compliance costs to smaller funds.
Commissioner Jaime Lizárraga
Lizárraga explained the reliance of normal Americans on registered funds and said investors have a right to know how funds cast proxy votes but that the current form is outdated, overly lengthy, difficult to navigate, and of very limited use for comparisons across funds. He said the amendments will make the information provided on Form N-PX easier to understand and will also facilitate comparisons across funds. He also said the reforms will strengthen accountability by corporate executives and enhance the decision-useful information available to investors.
Chairman Gary Gensler
Gensler said the amendments would allow investors to better understand and analyze how their funds and managers are voting on shares held on their behalf. He also said the proposal would provide investors with more detailed information about proxy votes, create more consistency around how funds describe their proxy votes, and allow investors to analyze Form N-PX information electronically. He added that the proposal would provide investors with additional information into how a filer’s securities lending activities may affect its proxy voting.
ITEM 2: Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT
The Commission voted 3-2 to propose amendments to rules and forms for open-end management investment companies related to liquidity risk management programs, swing pricing, and other pricing requirements. The amendments also included reporting and disclosure requirements for certain registered investment companies, including open-end funds (other than money market funds), registered closed-end funds, and unit investment trusts.
Staff Discussion
William A. Birdthistle
Birdthistle said the amendments were designed to improve funds’ preparedness for stressed market conditions and address dilution by shareholder purchases or redemptions. He said the market disruptions of March 2020 show that liquidity can deteriorate rapidly and significantly and added that staff have identified weaknesses in funds’ risk management programs. He closed by saying the proposal will prepare funds for future stress conditions.
Rachel Kuo
In her opening statement, Kuo said the purpose of the recommended amendments includes improving the resilience of open-end funds, particularly in periods of stress. She then discussed changes in the proposal, including requiring funds to incorporate stress into their liquidity classifications and include new minimum standards for classifications, amending the liquidity classification categories, requiring daily liquidity classifications, and amending certain reporting and disclosure forms.
Jessica Wachter
Wachter explained the many uses of open-end funds, dilution risk, and first mover advantage. She said the proposal contains elements to enhance the resilience of open-end funds and would replace the concept of reasonably anticipated trade size with a new framework. She added that the proposal would also make swing pricing mandatory for all mutual funds and directly mitigate dilution risk and first mover advantage.
Commissioner Discussion
Commissioner Hester M. Peirce
Peirce referenced Europe’s experience with swing pricing to criticize the amendment and suggested the Commission should not imitate Europe’s actions as Europe and America have different intermediary structures between different market participants. She said dilution would become more likely in volatile times, but this new rulemaking might cost fund investors more than the dilution would. She further suggested other options to deal with dilution, including invest in exchange-traded funds (“ETFs”) and empowering each fund to analyze the need for anti-dilution tools.
Commissioner Caroline A. Crenshaw
Crenshaw said where there are flaws in the market, the Commission must consider solutions to alleviate those flaws. She explained the importance of open-end funds having robust liquidity risk management programs in place and said the proposal incorporates lessons from March 2020 stress events when open end funds experienced significant redemptions. She said the proposal uses swing pricing and the hard close but that the Commission should consider whether there are unintended consequences for the mutual fund market.
Commissioner Mark T. Uyeda
Uyeda said the proposal would dramatically alter how investors would buy and sell fund shares and that the proposal could reduce investor choice, undercut investor protection, and come with significant compliance and operational costs, which would ultimately be paid by fund investors. He then provided alternatives to further enhance liquidity and resiliency, including liquidity fees, dual pricing, and alternatives to a 4pm hard close.
Commissioner Jaime Lizárraga
Lizárraga cited March 2020 market volatility as a reason to analyze reforms to enhance stability and said the proposal would strengthen fund resiliency and improve liquidity risk management. He said more robust liquidity risk management that ensures funds can satisfy redemption requests in the timeframe required by law is an essential component of the Commission’s proposal. He added that the proposal would strengthen fund resiliency and improve liquidity risk management.
Chairman Gary Gensler
Gensler said the proposal would promote investor protection and greater resiliency for open-end funds and emphasized that the most significant feature of open-end funds is the ability for shareholders to redeem their shares daily, in both normal times and times of stress. He then explained the four ways by which the proposal would address investor protection and resiliency challenges: updating and enhancing the liquidity rule for open-end funds; requiring mutual funds to use a liquidity management tool called swing pricing; requiring mutual funds to make fund order processing timelier; and enhancing the disclosure requirements for open-end funds.
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