INDEX Act
The INDEX Act would require investment advisers who vote proxies for securities held by passively managed funds to pass through voting instructions from the fund’s beneficial holders (the “voting persons”) and to vote those shares proportionately according to those instructions, when the adviser controls more than 1% of the voting power of the issuer’s outstanding securities. The act creates detailed definitions (what counts as a covered security, what is a passively managed fund, what is a qualified fund) and sets out when and how advisers must obtain and use voting instructions, with several important exceptions and safeguards. It also adds transparency requirements, such as providing voting materials to voting persons and allowing electronic delivery, and it amends the Securities Exchange Act to recognize “voting instruction” as a formal concept. The effective date is a two-year lead time after enactment, with the requirement then taking effect on the first August 1 following that period. In short, the bill shifts proxy voting power for passive funds away from fund managers in cases where the adviser has substantial voting influence, toward pass-through voting that reflects the preferences of individual fund holders, subject to defined routines, exemptions, and operational costs set by the bill.
Key Points
- 1Proportional pass-through voting: If an investment adviser with >1% voting authority votes proxies for covered securities held by a passively managed fund, they must vote in line with the voting instructions of the voting persons (and use a deemed ownership percentage for those holders). If not all voting persons provide instructions, the adviser cannot vote those shares for which no instructions were received.
- 2Broad but precise definitions: The bill defines covered securities, passively managed funds, and qualified funds (including various fund types such as investment companies, private funds, certain retirement plans, and separate managed accounts). It excludes voting securities of issuers that are themselves registered investment companies.
- 3Voting instructions for nested funds: If a passively managed fund holds securities of another passively managed fund, the adviser must obtain and follow voting instructions from the holders of the holding fund.
- 4Exceptions and safe harbors: Routine matters have special treatment—advisers may vote on routine matters without receiving instructions, and there is a “mirror voting” provision for majority-required matters that allows uninstructed shares to be voted in proportion to others’ votes. There is also a safe harbor stating that not soliciting voting instructions on non-routine matters does not violate applicable duties.
- 5Reporting and materials to voting persons: Advisers must provide voting-related materials to voting persons (proxy statements, annual reports, voting instruction forms, and necessary identifiers) and give at least five business days to respond. Electronic delivery is permitted, and advisers may provide voting recommendations or rely on third-party voting views, provided nondiscriminatory access.
- 6Financial and governance implications: The bill restricts reimbursement of voting costs to registrants and bars partial solicitation. Passively managed funds may satisfy the requirement and cover related expenses. The requirement could increase compliance costs for advisers and may influence how passive funds interact with issuers during proxy campaigns.
- 7Effective date and rulemaking: The new proxy voting requirement (208A) becomes effective on the first August 1 after two years from enactment. The bill also adds “voting instruction” language to the Securities Exchange Act to formalize the concept of providing and receiving voting instructions.