SEC Seeks Transparency in How Asset Managers Wield Voting Power

The Securities and Exchange Commission proposed a rule that would require money managers to disclose more information on how they use their voting power.

When investors buy a mutual fund and exchange-traded fund from an asset manager, the money manager votes on shareholder proposals on behalf of the investors. Shareholder votes extend to issues from executive compensation to a company’s efforts to address climate change.

The SEC proposal on Wednesday targets funds that manage trillions of dollars for investors. It follows a yearslong 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.

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

The popularity of index funds fueled the rise of a small group of money managers in the last decade. This has given firms such as BlackRock Inc., BLK -0.46% Vanguard Group and State Street Global Advisors enormous sway over corporate affairs that appear on proxies, including pay for top executives, board appointments and acquisitions. A 2019 study found that the three firms collectively cast an average of about 25% of the votes at 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 funds’ voting patterns. Categories and subcategories proposed by the SEC range from greenhouse gas emissions and diversity, equity and inclusion to corporate matters such as share buybacks or asset sales.

The rules would also require more disclosure around the effect of securities lending by funds. Money managers sometimes choose to lend out shares of companies their funds own. This can produce cash and boost fund returns. But when the shares are lent out, managers can forgo their funds’ ability to cast votes on those companies.

There is currently no way for investors to understand how often their fund managers make this trade-off.

In one example, fund managers left substantial GameStop shares out on loan 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 out shares. In the process, several firms also gave up the right to vote on big chunks of shares during a pivotal time for the videogame retailer.

This aspect of the proposed rules will likely prompt asset managers to push back, said people close to the asset management firms.

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

More disclosures on proxy voting would help accomplish a priority of SEC Chair Gary Gensler : arming investors with more information to decide if funds are living up to their promises to press companies on environmental, social and governance, or ESG, goals.

In the past year, investors have surged into funds that promote things such as clean energy, diversity and “low-carbon” practices.

BlackRock and other asset managers have been more willing to vote against company management to push them to do more on greenhouse-gas emissions and other ESG goals over the past year. In one sign that the world’s largest asset manager has been more willing 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% the year before.

BlackRock, Vanguard and State Street’s votes helped activist investment firm Engine No. 1 win board seats at Exxon Mobil Corp. this year. At the time, the three firms controlled more than a fifth of Exxon’s shares outstanding for investors, according to data compiled by S&P Global Market Intelligence.

With no clear industry definition on ESG, many managers remained locked in internal debates around what is the best way to cast votes to nudge companies on such priorities, and whether their voting records match up to how they are advertising themselves.

The SEC earlier this year said it would be more attentive to whether asset managers’ voting practices square with their marketing.

Republican SEC Commissioner Hester Peirce, who cast the lone vote against issuing the proposal, expressed concern that it would help activists pressure companies to elevate ESG objectives over profitability.

Fellow Republican Commissioner Elad Roisman said that a proposal requiring funds to disclose how many shares fund managers chose not to vote would be “ill-designed to communicate to investors the balancing that funds go through when considering how to maximize value for fund investors.”

Mr. Roisman joined the SEC’s three Democratic commissioners in voting to issue the proposal, but said it would need to undergo changes to gain his support as a final rule.

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

Write to Dawn Lim at and Paul Kiernan at

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