More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
The Securities and Exchange Commission released late Monday guidance on the responsibilities of investment advisors voting proxies on behalf of their clients, particularly in retaining proxy advisory firms.
The guidance, issued by the Division of Investment Management in frequently asked question format, is “intended to respond to criticism by issuers and others that proxy advisory firms face conflicts of interests and that investment advisors rely too heavily on such firms for voting recommendations,” according to the Investment Adviser Association.
Karen Barr, IAA's general counsel, told ThinkAdvisor in an email message that IAA doesn’t believe the guidance presents “any dramatically new concepts for investment advisors,” and that the “core concept is that advisors have a fiduciary duty to vote proxies in the best interests of their clients.”
The guidance “appropriately confirms” that advisors may retain proxy advisory firms to assist in them in carrying out these proxy voting duties, Barr says, and “underscores the fact that the SEC is focusing on these issues, so advisors should review their procedures for conducting due diligence and exercising ongoing oversight with respect to proxy advisory firms they retain.”
Barr says IAA is also “pleased” that the guidance may result in proxy advisory firms proactively providing information about conflicts to advisors.
The SEC held a roundtable last December to discuss the use of proxy advisory firm services by institutional investors and investment advisors.
The guidance sets out examples of steps an advisor could take to demonstrate that it casts proxy votes in accordance with clients’ best interests and the advisor’s proxy voting procedures.
For instance, Question 2 asks whether an investment advisor is required to vote every proxy.
"The Proxy Voting Rule does not require that investment advisors and clients agree that the investment advisor will undertake all of the proxy voting responsibilities," the SEC says. "We understand that in most cases, clients delegate to their investment advisors the authority to vote proxies relating to equity securities."
The guidance says that advisors and proxy advisory firms “may want or need to make changes” to their current systems and processes in light of this guidance. The SEC staff said that it expects any “necessary changes will be made promptly, but in any event in advance of next year’s proxy season.”
The SEC staff also states that an advisor should review the efficacy of its proxy policies at least annually.
The SEC also provided guidance to proxy advisory firms on exemptions to federal proxy rules. The staff emphasized that reliance on one of the exemptions requires proxy advisory firms to disclose material interests or significant relationships to the recipient of proxy voting recommendations.
Check out White House Getting Involved With DOL Fiduciary Redraft on ThinkAdvisor.