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SEC Reopens Advisor Proxy Voting Debate

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The Securities and Exchange Commission recently withdrew two no-action letters that allowed investment advisors to rely on third-party proxy voting services as long as the advisor had policies in place to ensure independence.

The agency’s Investment Management Division stated in its Sept. 14 Information Update that the securities regulator wants to revisit the regulation of proxy voting services at its upcoming Roundtable on the Proxy Process in November.

IM staff recently re-examined the letters that the staff issued in 2004 to Egan-Jones Proxy Services (May 27) and Institutional Shareholder Services, Inc. (Sept. 15).

“Taking into account developments since 2004, the staff has determined to withdraw these letters,” IM said. The notice of withdrawal of the letters is designed to facilitate the discussion at the roundtable and the agency is eager to receive “information and feedback from stakeholders with multiple perspectives at the roundtable.”

The SEC “wants to consider whether investment advisors are ‘relying on proxy advisory firms for information aggregation and voting recommendations to a greater extent than they should, and whether the extent of reliance on these firms is in the best interests of investment advisors and their clients, including funds and fund shareholders,’” stated Cipperman Compliance Services, in a note about the withdrawal.

The Egan-Jones and ISS letters “provided a de facto safe harbor for advisors to rely on third-party voting services. Their withdrawal and upcoming roundtable open the door to additional requirements on advisors to supervise proxy voting,” Cipperman said.

SEC Commissioner Robert Jackson said in a Sept. 14 statement on that matter that SEC Chairman Jay Clayton’s office along with IM “suddenly raised questions about long-resolved issues regarding shareholder voting. Because the [SEC] Investor Advisory Committee’s critical work in this area is ongoing, it’s important to clarify the path ahead for those interested in giving shareholders real access to the levers of corporate democracy.”

The law governing investor use of proxy advisors, Jackson said, “is no different today than it was yesterday. The Commission has long recognized that proxy advisors—the companies that develop recommendations regarding how investors should vote on corporate questions—serve an important role in the shareholder-voting process, and today’s statements do nothing to change that.”

Karen Barr, president and CEO of the Investment Adviser Association, told ThinkAdvisor in a Tuesday email message that proxy advisory firms “provide critically important services to investment advisors to help them meet their proxy voting obligations, ranging from voting mechanics to research and recommendations.”

IAA, Barr continued, “strongly opposes measures that would restrict the ability of our members to use those services,” stating that the withdrawal of the no-action letters should not have “any legal or practical effect on advisors’ existing legal obligations.”

IAA’s members, Barr said, “understand that they must vote proxies in their clients’ best interest and must also conduct appropriate due diligence on proxy advisory firms. We look forward to the SEC staff’s upcoming roundtable on this issue.”

Christopher Lacovella, CEO of the American Securities Association, stated that he applauds SEC Chairman Jay Clayton and the SEC for “acting to put the interests of America’s retail investors before the often politically motivated interests of the proxy advisory mega-firms.”

Withdrawals of the no-action letters “will help investors better grow and protect their wealth as funds and institutions can no longer quickly turn to proxy advisors without conducting the necessary due diligence their fiduciary duty requires,” he added.