The SEC’s Division of Investment Management and Division of Corporation Finance jointly issued a Staff Legal Bulletin regarding the duties of investment advisers in voting proxies on behalf of clients and duties relating to the use of proxy advisory firms (the Proxy Guidance). The Proxy Guidance, which is written in question and answer format, first discusses steps that an investment adviser could take to demonstrate that proxy votes are cast in accordance with clients’ best interests and the investment adviser’s proxy voting procedures. According to the Proxy Guidance, the investment adviser could demonstrate this by periodically sampling votes to review whether the votes were cast in compliance with the investment adviser’s proxy voting policies and procedures, by reviewing a sample of proxy votes that relate to certain proposals that may require more analysis and by reviewing, no less frequently than annually, the adequacy of the investment adviser’s policies and procedures. The Proxy Guidance also provides that an investment adviser is not required to vote every proxy and that an investment adviser and its client have flexibility in determining the scope of the investment adviser’s obligation to exercise proxy voting authority.
With regard to retaining a proxy advisory firm, the Proxy Guidance notes that an investment adviser should ascertain whether the proxy advisory firm has “the capacity and competency to adequately analyze proxy issues.” The SEC staff additionally specifies that an investment adviser that has retained a proxy advisory firm should adopt and implement policies and procedures reasonably designed to provide sufficient ongoing oversight of the firm to ensure that proxies are being voted in clients’ best interests. In this regard, relevant factors to consider could include: the adequacy and quality of the proxy advisory firm’s staffing and personnel; the adequacy of the proxy advisory firm’s policies and procedures designed to ensure that proxy voting recommendations are based on current and accurate information and that the proxy advisory firm is able to identify and address any conflicts of interest; and any other considerations that the investment adviser believes would be appropriate.
The Proxy Guidance emphasizes that an investment adviser has an ongoing duty to oversee a proxy advisory firm it utilizes, especially in light of any changes to the proxy advisory firm’s business or policies. The Proxy Guidance also addresses the duty of an investment adviser with regard to overseeing that the proxy advisory firm’s decisions are based on materially accurate information. If an investment adviser determines that a proxy advisory firm’s recommendation was based on a material factual error, the SEC staff believes that the investment adviser should take reasonable steps to investigate the error and should seek to determine whether the proxy advisory firm is taking reasonable steps to seek to reduce similar errors in the future.
The Proxy Guidance also addresses the application of the proxy rules under the Securities Exchange Act of 1934, as amended (the Exchange Act), to proxy advisory firms, including the exemptions available in Rule 14a-2 under the Exchange Act. These include certain exemptions for the furnishing of proxy voting advice by any person to another person with whom a business relationship exists (subject to certain conditions), as well as solicitations by persons who do not seek the power to act as a proxy for a security holder and do not furnish or otherwise request a form of revocation, abstention, consent or authorization.
The Proxy Guidance states that the SEC staff expects investment advisers and proxy advisory firms to make any necessary changes to their current systems and processes in light of this guidance “promptly, but in any event in advance of next year’s proxy season.”