Bill Would Require Passively-Managed Funds To Vote Proxies As Instructed By Investors

Last week, U.S Senator Dan Sullivan introduced a bill to require passively managed funds to vote proxies as instructed by their investors.  I have not seen a copy of the bill yet, but according to the Senator's press release, the bill provides for the following:

  • Covered Funds: Includes passively-managed funds that are private funds, employer-sponsored retirement funds, defined benefit and contribution pension plans, and TSP funds.
  • 1% Voting Power Limitation: To limit costs and not inundate fund investors with votes of every portfolio company (for example, the Vanguard Total Stock Market Index Fund holds 4,000+ companies), voting choice is only required if the investment adviser holds more than 1% of a company’s voting securities.
  • Routine Matters Exception: Investment advisers cannot vote without instructions from fund investors, except for routine matters, like ratification of auditors, which will avoid concerns about shareholder meeting quorums. Most notable matters, such as changes of control, director elections, and shareholder proposals are not routine.
  • Mirror Voting Exception: For shareholder votes requiring a majority or more of the outstanding stock (e.g., merger approval), advisers may “mirror vote,” where their votes are proportionately cast to not affect the outcome.
  • Disclosure and Broker Obligations: Investment advisers must provide proxy statements and other materials to fund investors. Investment advisers that provide vote recommendations must permit third-party recommendations on a non-discriminatory basis that allows for a broad diversity of views.
  • Cost Burden: Expenses for implementing pass-through voting are required to be borne by the funds or their investment advisers, and not by the portfolio companies.
  • Safe Harbor: An investment adviser can simply refrain from voting altogether and avoid the costs of obtaining fund investor instructions. A safe harbor protects the decision to not vote from breaching any duty under federal or state law.
The intent of the bill is quite clearly to diminish the power of investment fund managers.  If "mirror voting" is permitted, an unintended consequence may be that a motivated minority may be able to determine the outcome of proposals requiring approval of a majority of the outstanding shares entitled to vote.