New Rule 14Ad-1 takes effect on July 1, 2024, with filing of Form N-PX due on August 31, 2024, for votes during the July 1, 2023 to June 30, 2024 reporting period. The Rule requires all institutional investment managers that are 13F filers to report say-on-pay votes on the new version of Form N-PX when voting on the approval of executive compensation, including, but not limited to, “golden parachute” compensation. It is important to note that the rules do not contain a de minimis exception for smaller holdings and is not limited to those securities that are listed on Form 13F. It applies to any security over which the institutional investment manager exercised voting power on a say-on-pay matter presented under Section 14A. Even if you are a 13F filer that does not vote proxies or does not vote on any say-on-pay matters, Form N-PX must still be filed, indicating that there was no such voting. Managers that have a disclosed policy of not voting proxies and have not voted proxies during the reporting period will be able to file a notice report under the Form N-PX cover page.

Section 13(f)(6)(A) of the Exchange Act defines “institutional investment manager” as “any person, other than a natural person, investing in or buying and selling securities for its own account, and any person exercising investment discretion with respect to the account of any other person.” Registered Investment Advisers are considered to be institutional investment managers.

According to the SEC, a Say-on-Pay vote asks investors to vote on the compensation of the top executives of the company – the CEO, the Chief Financial Officer, and at least three other most highly compensated executives. (These are called the “named executive officers.”) Examples of compensation include remuneration packages of executives, grants of equity to executives, performance measures related to compensation, short-term and long-term incentives.

The Final Rule provides a two-part test for determining whether an institutional investment manager “exercised voting power” over a security and must therefore report a say-on-pay vote on Form N-PX:

1. The institutional investment manager has the power to vote, or direct the voting of, a security.
2. The institutional manager “exercises” this power to influence a voting decision for the security.

The Final Rule states that “voting power could exist or be exercised either directly or indirectly by way of a contract, arrangement, understanding, or relationship.” It is important to note that a manager can be deemed to have exercised voting power even if it abstains from voting.

With this deadline quickly approaching, managers subject to Rule 14Ad-1 must account for their say-on-pay voting activity beginning on July 1, 2023 and record the information corresponding to the Form N-PX disclosure requirements. Going forward, managers must also be aware that Form N-PX disclosure now highlights a firm’s voting conduct.

As this deadline rapidly approaches, the attorneys at Stark & Stark remain available to assist with new Rule 14Ad-1 compliance.

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On April 3, 2024, the U.S. Department of Labor (DOL) published a final amendment to Prohibited Transaction Class Exemption 84-14. The amendment will become effective June 17, 2024.

Registered investment advisers that manage accounts that are considered “plan assets” under the Employee Retirement Income Security Act of 1974 (ERISA) and that are subject to the ERISA prohibited transaction rules often rely on this Exemption. Without an exemption, the prohibited transaction rules prohibit any transaction between an adviser using “plan assets” and certain related parties. The Exemption allows advisers meeting particular requirements to qualify as a “qualified professional asset manager” (“QPAM”) to engage in certain investment transactions that would otherwise violate the prohibited transaction rules.

The Amendment increases the current QPAM registered investment adviser AUM and Equity thresholds in 2024, 2027, and 2030, from the current $85 million AUM and $1 million shareholders’ equity. For the fiscal year ending December 31, 2024, the thresholds are $101,956,000 AUM and $1,346,000 equity. For the fiscal year ending December 31, 2027, the thresholds are $118,912,000 AUM and $1,694,000 equity. For the fiscal year ending December 31, 2030, the thresholds are $135,868,000 AUM and $2,040,000 equity. Annual adjustments for inflation will be made following December 31, 2030.

The Amendment also clarifies the requirement that the QPAM must not “act as a mere independent approver of transactions.” Rather, the QPAM must have and exercise sole discretion over the investments of plan assets. Specifically, a manager may not be appointed to “uncritically approve transactions, commitments, or investments negotiated, proposed, or approved by the plan sponsor, or other party in interest.”

The Amendment requires advisers qualifying as a QPAM to submit a one-time email notice to the DOL at QPAM@dol.gov, within 90 days of the QPAM’s reliance on the Exemption, providing the legal and operating name(s) of the firm. For a firm that is relying on the Exemption as of the June 17, 2024 effective date, the email must be sent no later than September 15, 2024. If a firm fails to report, there is an additional 90-day period to cure. A firm that qualifies as a QPAM must report to the DOL if there is a change to a legal or operating name for the firm or the QPAM is no longer relying on the exemption. A current list of entities relying on the QPAM Exemption will be listed on the DOL website.

The attorneys at Stark & Stark remain available to assist.

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On April 12, 2024, the Securities and Exchange Commission announced settled charges against five registered investment advisers for violations of the Marketing Rule. The firms have agreed to settle and pay a combined $200,000 in penalties, as well as cease and desist from violating the charged provisions, and to implement corrective actions to their compliance policies and procedures.

According to the order, the five firms advertised hypothetical performance to the general public on their websites without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of each advertisement’s intended audience, as required by the Marketing Rule. One of the charged firms also violated the Marketing Rule by making false and misleading statements in advertisements, advertising misleading model performance, being unable to substantiate performance shown in advertisements, and failing to enter into written agreements with people it compensated for endorsements. The order further finds that one of the charged advisers committed recordkeeping and compliance violations and made misleading statements about its performance to a registered investment company client and that the misleading statements were included in the client’s prospectus filed with the Commission.

As a reminder, the Marketing Rule covers the definition of what constitutes an “advertisement,” requirements for testimonials or endorsements (including promoters), use of third-party ratings, presentation and disclosure requirements for performance information, and books and records requirements related to advertisements.

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