An investment adviser settled SEC charges for casting proxy votes on behalf of the registered investment companies it managed without taking steps to verify that its voting tendencies were in the best interest of the clients it represented. The adviser contracted a third-party service provider to cast proxy votes for its clients.
In the Order, the SEC found that the adviser established standing instructions with the third-party proxy vote provider to always vote all of its securities interests in favor of proposals put forth by the issuers' management and vote against any shareholder proposals without exception. The firm maintained these standing orders without determining if the votes were cast in its clients' best interests, nor did it review the proxy materials associated with a particular vote prior to casting the ballot, which was also inconsistent with its Form ADV filings. Despite maintaining the ability to instruct the third party to cast votes however the adviser saw fit, it did not deviate from its standing order in over 200 proxy votes. Additionally, the adviser failed to establish supervisory controls designed to ensure that the adviser cast proxy votes that were in the best interests of its clients.
As a result, the SEC determined that the adviser violated Advisers Act Section 206(2) and (4) ("Prohibited transactions by investment advisers") and Advisers Act Rule 206-4(6) ("Proxy voting"). To settle the charges, the adviser agreed to (i) cease and desist, (ii) accept a censure and (iii) pay a civil monetary penalty of $150,000.
SEC Commissioners Hester M. Peirce and Mark T. Uyeda dissented, stating that there was no evidence that the votes were to the detriment of the investors or resulted from conflicts of interest. They expressed concern that the decision "may be misconstrued regarding an adviser's fiduciary duties with respect to voting proxies on behalf of its clients, as well as the specific requirements imposed by the proxy voting rule."