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In recent years, the concept of “say-on-pay” has become an integral part of corporate governance, particularly for companies under the oversight of the SEC. Say-on-pay rules empower shareholders to vote on executive compensation, promoting transparency and accountability within firms. For SEC-registered advisers, changes to securities laws require firms to disclose how they voted on these issues. And with these changes coming into effect later this year, it’s worth getting familiar with the requirements to stay on the front foot.
The foundation of say-on-pay
Say-on-pay rules were introduced under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, requiring companies to provide their shareholders with a non-binding vote on executive compensation at least once every three years. This legislation is designed to give investors a voice in the pay practices of the companies they own, essentially serving as a feedback mechanism on the appropriateness of executive pay based on performance and other key metrics.
Form N-PX and the upcoming requirements
All Form 13F filers must now also annually disclose their say-on-pay votes through Form N-PX. The form is due annually by August 31st, with the reporting period from the previous July 1st to the most recent June 30th. Institutional investment managers only have to file proxy votes on say-on-pay issues.
Form N-PX categorizes all types of proxy votes into 14 categories (A-N), including a category for say-on-pay. If you’re an investment manager, make sure to only fill out an N-PX for category B, which is say-on-pay votes. Other sections may also address compensation, such as Section H which covers board compensation, non-say-on-pay executive compensation, 10b5-1 plans, board and executive anti-hedging and anti-pledging, or compensations claw backs, that you don’t need to report.
To stay compliant, SEC-registered advisers should adopt the following strategies:
Vote tracking and documentation:
Institutional managers should meticulously track and document all votes cast in say-on-pay and other relevant proposals throughout the year to ensure accurate reporting.
Engagement with share lending:
The new rules require disclosure of shares loaned and not recalled for voting, necessitating a review of current share lending practices and possibly amending them to retain voting rights, when needed.
Proactive stakeholder communication:
Given the public nature of these disclosures, it’s crucial to proactively communicate your voting rationale to stakeholders, especially if votes could be viewed as contentious or misaligned with broader investor interests. BAs a reminder, Investment Managers have a fiduciary duty to their clients, so be sure to monitor votes closely to ensure that they are in the best interest of the client.
The integration of say-on-pay reporting into Form N-PX filings represents a significant shift in how proxy voting is approached in the U.S. financial markets. It’s therefore important to use this time to carefully update your compliance and reporting mechanisms to stay on track.
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