The SEC recently settled its first enforcement action to be brought under Rule 206(4)-6 of the Investment Advisers Act of 1940—the so-called proxy voting rule. Among other things, the rule requires registered investment advisers that exercise proxy voting authority over client securities to adopt written proxy voting policies and describe them to clients, including procedures to address material conflicts of interest that may arise between the adviser and its clients. In an administrative proceeding, the SEC alleged that a Florida-based investment adviser willfully violated the rule, and that its former chief operating officer willfully aided and abetted and caused those violations.
The SEC found that, in determining how to vote client securities, the adviser selected a third-party proxy voting service’s guidelines that followed AFL-CIO proxy voting recommendations, and that the adviser chose to follow those guidelines at a time when it was participating in an annual AFL-CIO-sponsored survey that ranked advisers based on their adherence to the AFL-CIO recommendations on certain votes. The adviser, according to the SEC, believed that following the guidelines would improve its ranking in the survey and that the improved score would be helpful in maintaining existing and attracting new clients. The SEC determined that, contrary to the proxy voting rule, the adviser’s written policies and procedures did not address material potential conflicts that may have arisen between the adviser’s interests and those of its clients who were not pro-AFL-CIO, and further that the adviser did not sufficiently describe to clients its proxy voting policies and procedures.
As to the COO, the SEC determined that he had participated in drafting the proxy voting polices and procedures while aware of this potential conflict of interest. The SEC found that, despite the COO’s knowledge, the adviser told its clients in a cover letter signed by the COO that it did not expect any conflicts to arise in the proxy voting process.
Without admitting or denying the SEC’s findings, the adviser and its former COO agreed to pay fines of $300,000 and $50,000, respectively, and to cease and desist from committing or causing any violations and any future violations of the proxy voting rule.