SEC headquarters (Photo: Shutterstock) SEC headquarters (Photo: Shutterstock)

Advisors received further direction from the Securities and Exchange Commission on Wednesday when the agency set down supplemental guidance regarding advisor proxy voting responsibility, in addition to the rules that, according to the SEC, makes proxy voting “more transparent.”

The commission’s guidance for advisors, to become effective upon publication in the Federal Register, adds to fiduciary rule 206(4)-6 under the Investment Advisers Act of 1940 that relates to advisors’ authority to vote on proposals on behalf of their clients. The SEC stated that this guidance “will assist investment advisors in fulfilling their proxy voting responsibilities in light of these amendments to the solicitation rules under the Exchange Act.”

According to the SEC, the supplemental guidance should aid advisors in “assessing how to consider issuer responses to recommendations by proxy advisory firms that may become more readily available to investment advisors as a result of the amendments to the solicitation rules under the Exchange Act. This includes circumstances in which the investment advisor utilizes a proxy advisory firm’s electronic vote management system that ‘pre-populates’ the advisor’s ballots with suggested voting recommendations or for voting execution services.”

But as Cipperman Compliance Services saw it, “When you cut through all the regulatory-speak, the SEC wants investment advisors to stop allowing proxy advisory firms to pre-populate ballots. Instead, advisors should evaluate the substance of the proxy proposals and the registrant/issuer’s response without slavishly hitting ‘send’ on the pre-populated automated ballot.”

The Investment Adviser Association wasn’t happy with the outcome, according to Karen Barr, president and CEO, “While the final proxy voting rules and new guidance adopted by the SEC [Wednesday] have been modified from the initial proposal in response to widespread criticism — including from the IAA — we continue to believe that the SEC’s actions represent bad policy. They represent a major step backwards for corporate governance and will make it more difficult for investment advisors to use the services of proxy advisory firms to fulfill their proxy voting responsibilities on behalf of their clients.”

Although the SEC has been trying to be more transparent the last few years, says Trina Glass, an attorney with the law firm Stark & Stark, the guidance might have made things more difficult: “Advisors will be on a constant hunt for information that would impact how they vote proxies,” she told ThinkAdvisor. “For example, if an issuer files additional information, prior to the submission deadline, the advisor is reasonably expected to consider that information prior to exercising its voting authority. Failure to do so may also be the advisor’s failure to vote in its client’s best interest.

“However, just because the issuer files additional information doesn’t mean that information is useful, presented fairly or complete. The advisor would also need time to reasonably consider and analyze the new information and determine whether it impacts their vote. Without assurances that the advisor would have reasonable time to evaluate all the information in my mind may also jeopardize the advisor’s ability to vote in the client’s best interest. That is problematic.”

New Rules  

The regulator’s overarching action that day was adopting proxy process rules — outlining and changing rules for proxy advisory firms. The SEC stated that the amendments were to ensure that proxy advisory business clients “receive more transparent, accurate and complete information on which to make voting decisions, without imposing undue costs or delays that could adversely affect the timely provision of proxy voting advice.”

Specifically, the amendments revise Rules 14a-2(b)(1) and (b)(3), which provide exemptions from the information and filing requirements of proxy rules.

Starting Dec. 1, 2021, proxy voting advice businesses — to rely on these exemptions — must satisfy these procedures: 1) specify any conflicts of interest, 2) adopt and have publicly written policies and procedures to ensure that registrants that are the subject of the vote have information early enough to disseminate it prior to the vote, and 3) provide clients with a mechanism by which they can reasonably be expected to see any written statements regarding its proxy voting advice by registrants who are the subject of such advice, in a timely manner before the security holder meeting.

“The proxy voting advice amendments … are more principles-based and less prescriptive than its proposed rules,” Laura Richman, partner of Mayer Brown, said. “The amendments add conditions to certain of the exemptions from the information and filing requirements of the proxy rules that proxy advisory firms often rely on.  …

“Conditioning exemptions from the information and filing exemptions that proxy advisory firms rely on will likely cause changes to some of the practices that they use in their business model,” she said. ”Also, the express statement that failure to disclose material information regarding proxy voting advice could be misleading may prompt proxy advisory firms to reevaluate the types of conflict of interest disclosures they make.”

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