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What’s happening, why it matters, and what’s next.
Pass-through voting initiatives continue to gain momentum as investors, asset managers, and industry advocates find common ground.
Pass-through voting refers to the practice of giving investors more of a voice in how asset managers vote the proxies on the underlying equities that make up a given fund.1
Because the asset manager is the legal owner of the securities in each fund, fund investors do not have the right to vote the proxies. However, new innovations are making it possible to give fund investors a greater voice in the proxy process.
The rise of index funds. The past decade has seen an explosive rise in passively managed index funds, both ETFs and mutual funds. Today, passively managed funds account for more than $15 trillion in global AUM.
Given this sharp rise, there’s a growing spotlight on how passive funds vote the proxies for the corporations they invest in.
For example, recently proposed legislation in the U.S. Senate, the INDEX Act, aims to offset the concentration of voting power held by passive funds. According to the bill’s author, the INDEX Act “would require investment advisors of passively-managed funds to vote proxies in accordance with the instructions of fund investors—not at the discretion of the adviser.”
Pass-through voting is seen as a tool to potentially assist funds in letting individual fund investors influence how they vote.
Fund investor expectations. Fund investors sometimes ask fund companies to incorporate specific voting policies for the funds they’re invested in.
In the past, acting on these requests required fund companies to create a separately managed account. Or, in other cases, fund companies created dedicated funds committed to voting in alignment with specific principles.
Pass-through voting, however, enables fund investors to convey their vote preferences without the need to create a separate account or a new fund.
Shareholder democracy. Now that an increasing number of retail shareholders have entered the market, advocates for shareholder democracy say that pass-through voting could be a great way to bring these investors into the process. The SEC under multiple administrations has sought to make proxy voting easier and more transparent.
Pass-through voting can be seen as part of this larger trend toward expanding individual investor participation.
When it comes to mutual funds and ETFs (passively or actively managed), the asset manager has the right to vote as the legal beneficial shareholder of the underlying equities. Given this arrangement, fund investors do not have the legal right to vote. This presents unique challenges for pass-through voting.
To solve these challenges, Broadridge recently developed two solutions that enable asset managers to facilitate pass-through voting.
Institutional investors, such as banks, pension funds or mutual fund investment management companies, purchase large numbers of individual equities and funds.
Retail investors are individuals who buy and sell smaller numbers of equities and funds through brokerage or retirement accounts.
Broadridge’s institutional solution helps asset managers split the vote in portfolio companies and pass directly to institutional investors on a proportional basis (i.e., according to the investor’s holdings relative to the other investors).
Broadridge helps these investors vote the proxies for the underlying portfolio companies by using the same voting platform that institutional investors already use for their other investments. By using the same workflows and processes, investors can take advantage of pass-through voting.
For retail fund investors, we provide a slightly different approach with two alternative solutions. The first solution will give retail fund investors the ability to give voting instructions or potentially cast a vote on any of the individual equities held by the fund for pre-determined meetings. Retail investors can establish standing voting preferences that automatically provide voting instructions, as well as alert filters to help them manage the potentially high volume of meetings.
Alternatively, the second retail solution lets funds poll their retail fund investors to capture vote preferences. This approach helps simplify the experience and keeps retail investors engaged. While these vote preferences are not binding, they give funds valuable feedback, which can help inform voting policies and practices.
There are a few things to keep in mind if you are an asset manager thinking about extending pass-through voting to your clients.
Since an asset manager has a fiduciary responsibility to vote in the best interests of the relevant fund, asset managers and their advisors should thoughtfully structure their pass-through voting approach to comply with those responsibilities. For example, an asset manager could structure the voting options for investors to make sure that they can only select from options that the asset manager believes are consistent with their own policies. In addition, an asset manager could review retail votes before they are submitted.
Some considerations for asset managers include reviewing the fund’s organizing documents, delegation of voting authority (generally in advisory agreements), voting policies and procedures.
Asset managers will need to disclose how they will incorporate investor voting preferences into their voting decisions. Asset managers may need to update their regulatory filings if there are changes to voting policies.
If you’re looking for ways to extend pass-through voting options, please reach out to Broadridge. Our team can help you take advantage of available technologies and assist in your investors having a positive experience.
1 Of course, fund shareholders have the right to vote the proxies for fund meetings.
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