In January 2015, the ICI and IDC issued a paper, “Report on Funds’ Use of Proxy Advisory Firms,” to assist boards and advisers in understanding and fulfilling their responsibilities with respect to proxy voting and the use of proxy advisory firms. The paper provides an overview of proxy advisory firm services, board oversight of proxy advisory firms, adviser due diligence and oversight of proxy advisory firms, and other miscellaneous considerations related to the use of proxy advisory firms. The paper recognizes that funds and advisers receive different types and levels of services from proxy advisory firms, that there is no single set of best practices for oversight of proxy advisory firms, practices continue to evolve, and that oversight of proxy advisory firms should be developed in a manner that complements the structure and practices of the board and adviser where relevant.

Proxy Advisory Firm Services

According to the paper, there are a wide range of services provided by proxy advisory firms that advisers may find useful in carrying out their proxy voting responsibilities. These services include: (1) assisting with the administrative tasks associated with proxy voting, such as keeping track of meeting dates and voting instructions, executing proxies in accordance with clients’ instructions, generating voting reports, providing coverage and translation services with respect to foreign issuers, and compiling information for funds’ annual proxy voting filings with the SEC on Form N-PX; (2) analyzing, providing research, and making voting recommendations, which advisers may take into account when deciding how to vote; (3) providing research and commentary on trends in prior and upcoming proxy seasons; (4) assisting with the formulation of and amendments to proxy voting guidelines; and (5) helping advisers mitigate conflicts of interest in voting proxies.

Board Oversight of Proxy Advisory Firms

As stated in the paper, a board typically delegates to the adviser the day-to-day oversight of the proxy advisory firm and the board may rely on the adviser to report to the board on the proxy advisory firm’s performance. The paper notes that the topics addressed in board reports as well as their frequency vary and generally depend on the level and types of services provided. According to the paper, topics for inclusion in board reports might include: (1) a list or types of services offered by the proxy advisory firm and those services being used by the adviser; (2) the adviser’s processes for overseeing the proxy advisory firm, including the type of information the adviser receives; (3) the adviser’s assessment of the proxy advisory firm’s capacity and competency to assist the adviser with proxy voting functions on behalf of the fund; (4) any material changes or events regarding the proxy advisory firm; and (5) updates of other pertinent information, such as the proxy advisory firm’s guidelines and how the adviser uses the firm. The paper also notes that, in some situations, proxy advisory firms may make presentations at board meetings to educate the board about their services.

Adviser Due Diligence and Adviser Oversight of Proxy Advisory Firms

As the paper discusses, an adviser’s oversight of proxy advisory firms is broadly similar to its oversight of any other service provider it may hire to assist it in carrying out a function that it has undertaken to perform. The paper notes that the adviser’s oversight program and the adviser’s due diligence efforts thereunder should be documented, will depend on the particular services provided and as an overarching principle, when selecting a proxy advisory firm, the adviser should consider the firm’s capacity and competency to assist as well as the anticipated costs and benefits. The paper stresses that the adviser may wish to consider or evaluate additional factors as part of an initial due diligence review based on the services to be provided. The paper notes that, after an adviser has completed its initial due diligence and hired the proxy advisory firm, the adviser should continue to exercise ongoing oversight, which should occur no less frequently than the annual review of the adviser’s own proxy voting policies and procedures. The paper recognizes that the adviser may choose any number of methods to keep apprised of significant developments affecting its business relationship with the proxy advisory firm, such as using recurring reviews, information requests or communications with the firm.

The paper also stresses that the adviser, subject to board approval, may want to formulate and maintain proxy voting guidelines in order to help ensure consistency and protect against potential conflicts of interest, and noted that, in many cases, the adviser adopts the proxy voting firm’s standard guidelines. The paper notes that, irrespective of a proxy advisory firm’s involvement, the proxy voting guidelines should reflect the adviser’s and board’s views about how to act in the best interest of the fund and that the adviser and board should review the guidelines at least annually. The paper recognizes that proxy voting guidelines alone, no matter how detailed, will not always yield obvious voting decisions and that with these case-by-case evaluations, many fund advisers use proxy advisory firms’ research and recommendations as one resource. The paper notes that an adviser may wish to assess a proxy advisory firm’s research capabilities and voting recommendations and may also want to evaluate potential conflicts of interest to which a proxy advisory firm may be subject, with these evaluations being undertaken at least annually. The paper stresses that an adviser should always consider whether the proxy advisory firm can make recommendations that are in the best interest of the fund.

The ICI/IDC paper is available at www.ici.org/pdf/pub_15_proxy_advisory_firms.pdf.