“Say-on-Pay” Proxy Voting Requirements for Hedge Fund Managers
The U.S. Securities and Exchange Commission (the “SEC”) adopted amendments to Form N-PX which now requires an institutional investment manager (i.e., a manager who files a Form 13F) to also file a Form N-PX. The first filing is due on August 31, 2024, and will cover the 12-month period from July 1, 2023 to June 30, 2024.
The SEC’s purpose behind this amendment is to provide public disclosure of proxy voting results regarding executive compensation, commonly known as “say-on-pay” matters.
The amendment requires reporting of say-on-pay votes whenever a manager uses its voting power to influence a voting decision with respect to a security. This includes votes on (i) the approval of executive compensation and (ii) the frequency of such executive compensation approval votes; this also includes votes to approve “golden parachute” compensation in connection with a merger or acquisition transaction.
To avoid duplicative reporting, under certain circumstances the amendment permits joint reporting of say-on-pay votes by certain managers and funds.
Manager’s Exercise of Voting Power
The SEC has adopted a two-prong test for determining whether a manager “exercises voting power” over a security. A manager is required to report a say-on-pay vote for a security only if the manager: (1) has the power to vote, or direct the voting of, a security; and (2) “exercises” such power to influence a voting decision for the security.
In the first prong of the test, the ability to vote, or direct the voting of, a security includes the ability to determine whether to vote the security at all, or to recall a loaned security before a vote. To be clear, a voting power could exist or could be exercised, either directly or indirectly, by way of a contract, arrangement, understanding, or other relationship.
For the second prong of the test, the SEC has defined the “exercise of voting power” to mean the actual use of voting power to influence a voting decision. In general, the SEC focuses on the exercise, rather than mere possession, of voting power.
Identification of Proxy Voting Matters
The SEC requires managers to use the same language that is on the form of proxy to identify the matter on Form N-PX, and to report proxy voting matters in the same order in which they are presented on the issuer's form of proxy.
Quantitative Disclosure
In addition to the foregoing, Form N-PX will also require managers to disclose the following:
the number of shares voted (or instructed to be voted) and how those shares were voted ( e.g., for or against proposal, or whether the voter abstained); and
the number of shares the manager loaned and did not recall, in addition to the number of shares the manager voted.
Next Steps
If these changes apply to you, then you should start tracking activities related to “say-on-pay” proxy voting beginning July 1, 2023.
If you have any questions about this Alert, or any other regulatory matters, do not hesitate to reach out to: Daniel Viola (Partner – Head of the Regulatory Group) at 212.573.8038 or via email at dviola@sadis.com; or Mark Strefling (Partner) at 212.573.8159 or via email at Mstrefling@sadis.com; or Vartika Naithani at 212.573.8148 or via email at vnaithani@sadis.com.
