SEC Issues Guidance to Investment Advisers on Proxy Voting

At its August 21, 2019 Open Meeting, the Securities and Exchange Commission (“SEC”) voted 3-2 to issue guidance to assist registered investment advisers (“RIAs”) in carrying out their proxy voting responsibilities. While the guidance didn’t break a lot of new ground, it clarified the SEC’s expectations for investment advisers in voting client proxies and engaging proxy advisory firms.

As part of its fiduciary duty to its clients, an RIA who accepts the responsibility to vote proxies on behalf of its clients must make the determination that a vote is in the best interest of the client and doesn’t place the RIA’s own interest ahead of the client. Further, under Rule 206(4)-6 under the Investment Advisers Act of 1940, an RIA exercising such voting authority must, among other things, adopt and implement written policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interest of its clients.

Many advisers retain proxy advisory firms to assist in the process.  Proxy advisory firms provide an electronic voting platform and offer research and analysis of matters subject to a vote and make a voting recommendation on specific matters. While a proxy advisory firm may make a recommendation, the responsibility for voting in each client’s best interest still rests with the RIA.

Overview of SEC Guidance

Define Proxy Voting Responsibility in Advisory Agreement
  • Specify specific parameters to determine voting activity
  • Subject to full and fair disclosure
Demonstrate the Votes are in Client’s Best Interest
  • Consider if different policies are needed for different clients to meet each client’s best interest obligation
  • Retain records showing reasonable review of a voting matter
  • Policies to identify factors to consider when more detailed analysis necessary
  • Evidence that votes cast are consistent with policies and procedures
  • Review adequacy of policies and procedures in annual compliance review
  • Test a sample of votes cast for compliance with policy
  • Sample pre-populated votes in proxy adviser’s system
  • Sometimes not voting is in client’s best interest (cost to vote > benefits)
Conduct Due Diligence of Proxy Advisory Firm
  • Capacity and competency of firm
  • Proess for seeking input from issuers and clients on policies and methodologies
  • Disclosure of methodologies to RIA
  • Review firm’s policies for managing conflicts
  • Determine extent in which proxy firm errors or weaknesses affect research
  • Effectiveness of firm policies and procedures to obtain accurate information
  • RIA policies and procedures to ensure votes not based on errors or incomplete information
  • Proxy advisory firm’s procedures to advise RIA of relevant business changes or issues

Separately, the SEC issued guidance regarding the applicability of proxy rules to proxy voting advice, affirming that proxy voting recommendations constitute a proxy solicitation subject to the proxy rules and that recommendations must not be false or misleading or omit to state a material fact.

Two commissioners, Robert Jackson and Allison Herren Lee, voted against the guidance citing concerns that it creates additional costs for RIAs and proxy advisory firms, the effect of which could be to disincentivize smaller advisers from voting and reduce competition in the already highly concentrated proxy advice industry.


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