The SEC’s Divisions of Investment Management and Corporation Finance recently provided guidance (the “Guidance”) to investment advisers regarding their obligations in voting client proxies and retaining proxy advisory firms. The Guidance also covered proxy advisory firms directly regarding their reliance on popular exemptions from the federal proxy rules. In doing so, the regulators addressed the interplay between advisers’ fiduciary obligations and the Proxy Voting Rule. They also clarified that proxy advisory firms, when creating voting guidelines for advisers and institutional investors and acting to apply those guidelines in voting proxies, might jeopardize their ability to rely on exemptions from federal proxy rules.
The Guidance describes how advisers’ fiduciary obligations to clients in voting proxies and in agreeing with clients to vote on their behalf confer proactive obligations. It also reminds advisers of their obligation to maintain and, at least annually, to review proxy voting policies and procedures “reasonably designed to ensure that the investment adviser votes proxies in the best interest of its clients” (the “Proxy Voting Rule”).
The Guidance confirms that even though clients may have delegated to the adviser some or all of the authority for voting proxies, it is consistent with the Proxy Voting Rule for advisers and their clients to contractually agree that, in addition to the adviser having complete authority to vote proxies on behalf of the client:
- The adviser may delegate voting duties to proxy voting firms,
- The adviser’s obligation to vote may be limited to only certain proposals, as other considerations in fulfilling that authority might not be in the client’s best interests; and
- The adviser’s obligation to vote may be lockstep with management or certain shareholders’ proposals, unless the client directs otherwise or other considerations in such a vote might not be in the client’s best interests.
Importantly, the Guidance confirms that it is consistent with the Proxy Voting Rule for an adviser and its client to agree that the adviser has no proxy voting authority at all. If the voting authority is exclusively the client’s, there is no further obligation for the adviser, even if the client does not ever vote.
For those advisers who retain a proxy advisory firm (or similar third party), the SEC staff expects that the adviser will “adopt and implement policies and procedures that are reasonably designed to provide sufficient ongoing oversight” of the proxy advisory firm. The Guidance addresses some of the policies and procedures an adviser should consider when it has delegated its proxy voting obligations to a third party, specifically including:
- the adequacy and quality of the proxy advisory firm’s staffing and personnel; and whether the proxy advisory firm has robust policies and procedures (1) so that its proxy voting recommendations are based on current and accurate information, and (2) that identify and address conflicts of interest relating to its voting recommendations.
- such ongoing oversight must closely consider risks of the third party’s ability to fulfill its mandate and likelihood of changes in the third party’s business and conflicts policies arising over time, periodically sampling proxy votes to review whether they comply with the adviser’s proxy voting policy and procedures; and
- reviewing a sample of proxy votes that relate to certain proposals that may require more analysis.
