It’s that time of year again – proxy season! As public companies are in the midst of mailing out notices, ballots, proxies, and annual reports, we wanted to take this opportunity to remind investment advisers of their proxy voting obligations.
When investment advisers have the authority to vote proxies on behalf of their clients, there is a fiduciary duty imposed on the advisers to vote such proxies in the best interests of their clients. Under Section 206(4)-6 and Rule 204-2 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), investment advisers are additionally required to:
- adopt and maintain written policies and procedures regarding voting proxies, which policies must be reasonably designed to ensure that the adviser votes proxies in the best interests of the clients and that also address how conflicts of interest in voting proxies are handled;
- disclose their proxy voting policies and procedures (including by providing a copy of the policies and procedures if requested by a client);
- inform clients and investors how proxies were voted; and
- retain certain records regarding the voting of proxies. Further, like all policies and procedures adopted by an investment adviser, the adviser’s proxy voting policies and procedures must be reviewed and tested periodically (the SEC has stated that an investment adviser should review the adequacy of its policies and procedures annually).
An adviser’s policy regarding proxy voting may – like many other investors – include retaining or looking to a proxy advisory firm to provide voting recommendations. In 2014, the Securities and Exchange Commission (SEC) provided guidance to investment advisers regarding the retention of proxy advisory firms. Under this guidance, investment advisers may retain third parties (such as proxy advisory firms) to provide voting recommendations. The investment adviser, however, is obligated to (a) undertake due diligence regarding the proxy advisory firm (in particular, whether the proxy advisory firm has sufficient capacity and competency to analyze proxy issues and make voting recommendations on current and accurate information and whether there exist any relevant conflicts of interest) and (b) oversee the proxy advisory firm on an ongoing basis. The SEC noted that part of such oversight process by the investment adviser should include establishing measures that would identify conflicts of the proxy advisory firm that may arise after the initial engagement and due diligence, and address such conflicts of interest.
In sum, while investment advisers may, as part of their proxy voting procedures, retain a third-party proxy advisory firm to provide voting recommendations and assistance, this cannot constitute an abdication of the adviser’s fiduciary and Advisers Act responsibilities. An adviser must adequately conduct a diligence review of the proxy advisory firm and oversee the proxy advisory firm on an ongoing basis to ensure that it is voting proxies in the best interests of its clients and that conflicts of interest do not exist (or are appropriately addressed).