Yesterday the SEC issued a massive release which, effective next July 1, substantially tightened reporting on how mutual funds and ETFs must disclose how they vote on proxy issues.  Normally one might think this development is of interest only to lawyers who write fund disclosures for the SEC, but people who are investors ought to pay attention to these new rules as they affect understanding of how corporate votes occur at companies in which their money is ultimately invested.

New disclosure formatting rules will make it easier to understand exactly what votes were taken, but of most interest to investors is likely to be the focus on “say-on-pay” (a vote endorsing or not endorsing compensation for the top five executives). In the fund’s/EFT’s annual report, there now must be disclosure on how the proxies were voted, which can give a sense of the degree to which a given fund has tight focus on the relationship between company performance and company pay.

A second requirement appears technical but is important: since funds often “lend” shares to third parties, they cannot vote those shares unless they are “recalled.”  If very many shares of a given company are not recalled, the fund has in effect surrendered its vote (and you the investors’ vote) on whether the executive cadre is being over-compensated.

Increased SEC regulation over many fronts, not just here, is driven by the activist Commission majority named by the President.  As with very many SEC actions of late, the vote in favor of tighter regulation has been on a 3-2 basis, with the Democratic majority outvoting the Republican minority and heightening regulation.  While it is dangerous for this blog to wander into  politics, we must wonder if there are not ANY regulatory issues wherein the merits of a proposed action can be resolved not on lines that reflect political parties.  Surely there should be some regulatory promulgations that end up with a 4-1 or 5-0 vote, yes?