Just before the July 4th holiday, the SEC’s Division of Investment Management and Division of Corporate Finance issued guidance on proxy voting. The guidance, which is a staff bulletin in the form of a Q&A, is the next chapter in an ongoing discussion about how investment advisers satisfy their obligations to vote client securities.
The proxy voting rule, which was adopted in 2003, requires investment advisers to implement policies and procedures that are reasonably designed to ensure that the adviser votes client securities in the best interests of clients. The procedures must include how the adviser addresses material conflicts that may arise between the adviser’s and clients’ interests.
The adopting release for the proxy voting rule and a series of SEC no-action letters have led to reliance on recommendations of third party proxy advisory firms that are independent of the investment adviser to cleanse any adviser conflict. SEC commissioners and members of Congress have called on the SEC to clarify that investment advisers may not simply rely on proxy advisory firms to fulfill their proxy voting responsibilities. Proxy advisory firms also have been criticized for conflicts of interest including for providing fee-based corporate governance services to companies to which they also provide proxy voting advice.
Against this backdrop, the staff bulletin1 makes the following key points:
- An investment adviser that has retained a proxy advisory firm to assist with proxy voting responsibilities should implement policies and procedures that are reasonably designed to provide sufficient ongoing oversight of the proxy advisory firm to ensure that the adviser continues to vote proxies in the best interests of clients. The adviser also should implement measures reasonably designed to identify and address the proxy advisory firm’s conflicts that can arise on an ongoing basis.
- A proxy advisory firm may well have to make detailed disclosures to its investment adviser clients about the proxy advisory firm’s consulting services for or other significant relationship with a company or security holder proponent, or of material interests in a matter that is the subject of a voting recommendation, in order to rely on certain commonly relied upon exemptions from the federal proxy rules. “[B]oilerplate language that such a relationship or interest may or may not exist” will not be sufficient. The disclosure should enable the recipient to understand the relationship or interest and the steps taken to mitigate the conflict, and to make an assessment of the reliability or objectivity of the recommendation.
The bulletin concludes by noting that investment advisers and proxy advisory firms may “want or need” to make changes to their current systems and processes in light of the guidance in the bulletin, and that the staff “expects any necessary changes will be made promptly, but in any event in advance of next year’s proxy season.” In addition, the bulletin states that investment advisors should review their proxy voting policies and procedures at least annually. Investment advisers will clearly want to be sure that their policies and procedures meet the staff’s expectations, and that they have mechanisms in place to evaluate and act on disclosures of conflicts that they receive from proxy advisory firms.