Senate Proposes Proxy Vote Changes for Index Funds

Senator Dan Sullivan (R-AK), along with co-sponsors Pat Toomey (R-PA), Mike Crapo (R-ID) and Chuck Grassley (R-IA), have introduced S. 4241 the “Investor Democracy is Expected Act” or INDEX Act. The bill 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. The adviser would be responsible for passing through the proxies, collecting the instructions, and voting according to the investors’ wishes. With the exception of routine matters, the investment advisor cannot vote on the proportion of shares for which voting instructions were not received. The proposal provides for a safe harbor whereby investment advisors would not be in violation of duties by choosing not to solicit voting instructions or voting the particular proxy.

A passively managed fund is a qualified fund that is—

• Designed to track, or is derived from an index of securities or a portion of an index
• Allocates not less than 40 percent of the total assets of the fund that is designed to track or is derived from an index of securities or a portion thereof
• Discloses that the qualified fund is a passive or index fund following an investment strategy that is passive or based on an index of securities

The term qualified fund includes 401(a), 457(b) and 403(b) plans.