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Regulation and Compliance > Federal Regulation > SEC

SEC's New Proxy Voting Guidance Gets Mixed Reviews

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The Securities and Exchange Commission’s newly issued guidance on investment advisors’ proxy voting duties is receiving mixed reviews — with the Investment Adviser Association stating Wednesday that the new plan will increase costs for advisors and “barriers to entry for proxy advisory firms.”

During a Wednesday meeting at SEC headquarters in Washington, the agency voted 3-2 to issue guidance that clarifies how an investment advisor’s fiduciary duty and Rule 206(4)-6 under the Advisers Act relate to an advisor’s proxy voting on behalf of clients, particularly if the investment advisor retains a proxy advisory firm.

Rule 206(4)-6 under the Advisers Act requires an advisor who exercises voting authority with respect to client securities to adopt and implement written policies and procedures that are reasonably designed to ensure that the investment advisor votes proxies in the best interest of its clients.

Given that the SEC’s guidance hasn’t been published, “based on statements at the open meeting, we’re concerned that the new guidance adopted today will increase costs for advisers and also increase barriers to entry for proxy advisory firms,” Gail Bernstein, IAA’s general counsel, told ThinkAdvisor in a Wednesday email message.

Bernstein added that while the commission stated “that its actions do not create new obligations, we believe that as a practical matter they will for investment advisors.”

IAA, Bernstein said, was “disappointed that the guidance was issued without the opportunity for public comment and without the benefit of an economic analysis.”

The SEC’s guidance will become effective once published in the Federal Register.

The agency explains that the guidance applies to advisors particularly where they use the services of a proxy advisory firm, and provides guidance on proxy voting disclosures under Form N-1A, Form N-2, Form N-3 and Form N-CSR under the Investment Company Act of 1940.

The commission has also issued an interpretation of Exchange Act Rule 14a-1(l) that proxy voting advice generally constitutes a solicitation under the federal proxy rules and related guidance regarding the application of the antifraud provisions in Exchange Act Rule 14a-9 to proxy voting advice.

The guidance, in question and answer format, provides examples to help facilitate compliance, and discusses, among other things:

  • How an advisor and client, in establishing their relationship, may agree upon the scope of the advisor’s authority and responsibilities to vote proxies on behalf of that client;
  • Steps an advisor, who has assumed voting authority on behalf of clients, could take to demonstrate it is making voting determinations in a client’s best interest and in accordance with the advisor’s proxy voting policies and procedures; and
  • Considerations that an advisor should take into account if it retains a proxy advisory firm to assist it in discharging its proxy voting duties.

The SEC stated that advisors should review their policies and procedures in light of the guidance in advance of next year’s proxy season, and direct questions to staff of the Division of Investment Management.

Tom Quaadman, executive vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, applauded the SEC’s move in a Wednesday statement, stating that “proxy advisory firms have been riddled with conflicts of interest, failed to link advice with economic return or company specific information, and lack process and transparency.”

The Chamber, he continued, “commends the SEC for taking a critical first step in bringing much-needed oversight to proxy advisory firms, and we hope the SEC and other regulators take further action to ensure that proxy advisory firms provide ‘decision useful’ information to investors.”

Ridgway Barker, a partner in the corporate team of international law firm Withers, however, added in an emailed statement to ThinkAdvisor that “there are two kinds of regulation — market-based and law-based. The fundamental failure of the SEC’s action in this area — which today’s guidance only scratches the surface — is that it relies on neither approach. There is no effective reporting of the consequences of proxy advisors recommendations to ultimate investors, and so no market-based way for investors to make different decisions on who and how much to rely on the advisors.”

Similarly, Barker argued, “there is no effective direct regulation on advisors, or remedy for ultimate investors upon breach. Thus, uncorrected errors, inadequate review time, bias against smaller issuers, unwillingness or limited willingness to accept input, biased decision-making and so on plague the process to the detriment of our markets.”


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