Focus Perspective: Proxy Voting Responsibilities of Investment Advisers

On August 21, 2019 the SEC released, “Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers.” This is the first time, in my memory, that the SEC has provided this much clarification on this issue. “The guidance discusses, among other matters, the ability of investment advisers to establish a variety of different voting arrangements with their clients and matters they should consider when they use the services of a proxy advisory firm.”

See Press Release


“Why should I care about proxy voting? That’s not a big part of what I do. I use a proxy voting service, so I don’t have to worry about this stuff.”

The release reminds us that, “Investment advisers are fiduciaries that owe each of their clients duties of care and loyalty with respect to services undertaken on the client’s behalf, including voting. In the context of voting, the specific obligations that flow from the investment adviser’s fiduciary duty depend upon the scope of voting authority assumed by the adviser. To satisfy its fiduciary duty in making any voting determination, the investment adviser must make the determination in the best interest of the client and must not place the investment adviser’s own interests ahead of the interests of the client.” (emphasis added)

The SEC’s guidance is presented in the responses to six questions. Highlights from the responses include:

Question 1: How may an investment adviser and its client, in establishing their relationship, agree upon the scope of the investment adviser’s authority and responsibilities to vote proxies on behalf of that client?

Response: There is no requirement for the adviser to vote client proxies and it may choose not to vote them, but if it agrees to vote proxies for a client, it is as a fiduciary for that client. If the client and adviser agree on the arrangement, subject to full and fair disclosure and informed consent, the voting arrangement is decided by them, and may or not involve other parties such as a proxy voting service. An investment adviser that assumes proxy voting authority must make voting determinations consistent with its fiduciary duty and in compliance with Rule 206(4)-6. A proxy vote that would benefit one client will not necessarily benefit all clients, nor even all clients with the same holdings.

Question 2: What steps could an investment adviser that has assumed the authority to vote proxies on behalf of a client take to demonstrate that it is making voting determinations in a client’s best interest and in accordance with the investment adviser’s proxy voting policies and procedures?

Response: One step would be to sample the proxy votes the adviser cast on behalf of clients as part of the annual review of compliance policies and procedures as well as testing the adequacy of the voting policies and procedures. If the adviser uses a proxy voting service, testing on a more frequent basis would be indicated, to include a review of the policies and procedures of the proxy voting service. 

Question 3: What are some of the considerations that an investment adviser should take into account if it retains a proxy advisory firm to assist it in discharging its proxy voting duties?

Response: Depending on the duties provided by the proxy voting service, from performing research and making recommendations, through actual voting of the proxies, the investment adviser should consider whether the proxy voting service appears to have adequate and qualified personnel, expertise, and/or technology. Part of the oversight would include regular testing of the research and review process, as well as how it identifies and addresses conflicts of interest in its policies and procedures.

Question 4: When retaining a proxy advisory firm for research or voting recommendations as an input to its voting determinations, what steps should an investment adviser consider taking when it becomes aware of potential factual errors, potential incompleteness, or potential methodological weaknesses in the proxy advisory firm’s analysis that may materially affect one or more of the investment adviser’s voting determinations?

Response: Awareness or suspicion of problems in the proxy advisory firm’s analysis should trigger an investigation to determine the cause of the problems and whether they are systemic (indicating some bias in the process) or one-off, and the significance of the impact on proxy voting in the past, and going forward if not corrected.

Question 5: How can an investment adviser evaluate the services of a proxy advisory firm that it retains, including evaluating any material changes in services or operations by the proxy advisory firm?

Response: The adviser should adopt and implement policies and procedures reasonably designed to ensure that the adviser casts votes in the best interest of its clients and follow through with testing as described above. When adequate testing is performed on a consistent basis, anomalies should stand out.

Question 6: If an investment adviser has assumed voting authority on behalf of a client, is it required to exercise every opportunity to vote a proxy for that client?

Response: No, the guidance identifies two situations that may apply.

“First, if an investment adviser and its client have agreed in advance to limit the conditions under which the investment adviser would exercise voting authority, as discussed above, the investment adviser need not cast a vote on behalf of the client where contemplated by their agreement.

Second, as the Commission has stated previously, there may be times when an investment adviser that has voting authority may refrain from voting a proxy on behalf of a client if it has determined that refraining is in the best interest of that client. This may be the case where the adviser determines that the cost to the client of voting the proxy exceeds the expected benefit to the client. In making such a determination, the investment adviser may not ignore or be negligent in fulfilling the obligation it has assumed to vote client proxies and cannot fulfill its fiduciary responsibilities to its clients by merely refraining from voting the proxies. Accordingly, before refraining from voting under the circumstances described in this second situation, an investment adviser should consider whether it is fulfilling its duty of care to its client in light of the scope of services to which it and the client have agreed.”

See Guidance

 Our Perspective

We would not be surprised, nor should you, that proxy voting will be an area of interest for the remainder of FY2019 and identified as an examination priority for FY2020. Now is probably the best time (before next year’s proxy season) to put some effort into reviewing your policies and procedures around proxy voting and how you document that you have acted in the best interest of each client.

Remember, this is just guidance at this point, not a rule, but the SEC is talking about fiduciary obligation here, and we have seen that definition grow, or perhaps be “clarified” in the past few years.

As with many actions taken by the SEC, there was mixed reaction to the release.

See Article in ThinkAdviser

See Article in PlanAdviser

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