5.7.2009 The SEC charged INTECH Investment Management LLC, a Florida investment adviser, and its former CEO David E. Hurley for violating the SEC’s proxy voting rule for investment advisers. The SEC stated that the firm had not sufficiently described its proxy voting policies and procedures to clients and had failed to address a material potential conflict of interest.
INTECH managed institutional portfolios for pension plans, foundations, unions (including those referred to as “Taft-Hartley” clients), public funds, and public corporations (hereinafter collectively referred to as “clients”). Most of the assets invested by the public funds and corporations were related to employee pension plans. As part of its investment advisory services, INTECH exercised voting authority with respect to many of its clients’ securities. In deciding how to vote client securities, INTECH chose to rely upon the recommendations of a third-party proxy voting service called Institutional Shareholder Services (ISS), which offered various sets or platforms of recommendations.
The SEC found that INTECH exercised voting authority over client securities without having written policies and procedures that were reasonably designed to ensure it voted its clients’ securities in the best interests of its clients. It stated that the firm’s policies and procedures did not include how the adviser would address material potential conflicts of interests that may arise between its interests and those of its clients. According to the SEC, INTECH also did not sufficiently describe its proxy voting policies and procedures to clients. In determining how to vote securities (or proxies) for those clients who had delegated such voting authority to INTECH, it selected a third-party proxy voting service’s guidelines that followed AFL-CIO proxy voting recommendations.
INTECH used guidelines provided by ISS. INTECH chose to follow ISS Proxy Voter Services (ISS-PVS) at a time when it was participating in the annual AFL-CIO Key Votes Survey that ranked investment advisers based on their adherence to the AFL-CIO recommendations on certain votes. INTECH believed that following the ISS-PVS guidelines would improve its ranking in the AFL-CIO Key Votes Survey and that the improved score would likely be helpful in maintaining existing and attracting new union-affiliated clients.
Rule 206(4)-6 under the Investment Advisers Act of 1940 governs proxy voting by investment advisers and requires advisers to have written proxy voting policies and procedures and provide them to its clients. Contrary to the rule, the SEC found that INTECH’s written policies and procedures did not address material potential conflicts that may have arisen between INTECH’s interests and those of its clients who were not pro-AFL-CIO. Moreover, INTECH did not sufficiently describe to clients its proxy voting policies and procedures. Using ISS-PVS created a material potential conflict of interest for INTECH because INTECH chose an AFL-CIO-based voting platform for all clients without addressing and describing its potential effect on INTECH’s ability to retain and obtain business from existing and prospective union-affiliated clients.
The SEC found that INTECH’s final written policies and procedures did not address the potential conflict caused by INTECH choosing the ISS-PVS guidelines for all of its clients while having an interest in retaining and obtaining union-affiliated clients. Moreover, INTECH told its clients in the cover letter signed by Hurley and stated in its proxy voting policy that, because it relied on a third-party proxy voting service, it did not “expect that any conflicts w[ould] arise in the proxy voting process.”
In addition, INTECH, according to the SEC, did not sufficiently describe its proxy voting policies and procedures to its clients. INTECH disclosed that it intended to rely on ISS-PVS to vote clients’ securities. INTECH, however, did not disclose that ISS-PVS followed AFL-CIO proxy voting recommendations. In fact, INTECH, through Hurley, described its policies and procedures without including references to the fact that the ISS-PVS guidelines it had chosen followed AFL-CIO recommendations. Although INTECH did not sufficiently describe its proxy voting policies and procedures to its clients, it did, on a quarterly basis, send to all of its clients a report showing all proxy votes cast on behalf of clients. The report, however, did not reference the guidelines that were followed that resulted in those votes.
INTECH was ordered to pay a civil money penalty in the amount of $300,000. Hurley was ordered to pay a civil money penalty in the amount of $50,000.
Click http://www.sec.gov/litigation/admin/2009/ia-2872.pdf to access the administrative action.