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The Friday List: The 10 Most Significant Investment Adviser Proxy Voting Requirements

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

On Wednesday, the SEC issued guidance to investment advisers about the contours of their fiduciary responsibility when voting proxies on behalf of their clients.  SEC Commissioner Elad Roisman summarized the SEC’s view: “Advisers who vote proxies must do so in a manner consistent with their fiduciary obligations and, to the extent they rely on voting advice from proxy advisory firms they must take reasonable steps to ensure the use of that advice is consistent with their fiduciary duties.”  Today, we offer the 10 most significant investment adviser proxy voting requirements.

The 10 Most Significant Investment Adviser Proxy Voting Requirements

  1. Fiduciary Responsibility. Proxy voting is part of an investment adviser’s fiduciary responsibility, which requires the adviser to vote proxies in the best interest of every client based on a reasonable understanding of the client’s objectives.
  2. Implied Duty. If the agreement with a client does not otherwise limit an adviser’s proxy voting obligations, the adviser has the implied duty to vote proxies on behalf of the client.
  3. Consider Cost of Voting. An adviser may refrain from voting if it would be in the best interest of the client (e.g. voting would impose unnecessary costs on the client.)
  4. Policies and Procedures. Advisers must adopt, implement, and test policies and procedures to ensure that the firm votes proxies in the best interest of its clients.
  5. Can’t Outsource Liability. Hiring a third party proxy firm does not relieve an adviser of its fiduciary obligations to ensure every vote is cast in the best interest of clients.
  6. Reasonable Investigation. Advisers must conduct a reasonable investigation into matters on which the adviser votes, whether or not delegated to a proxy voting firm.
  7. Client-Specific Policies. Advisers should scrutinize whether applying the same voting policy to all clients, regardless of size or type, would satisfy the fiduciary responsibility and consider client-specific policies.
  8. Corporate Actions. Significant events (e.g. corporate events, contested director elections) require a more detailed analysis than more routine events.
  9. Service Provider Oversight. Advisers must conduct a detailed initial and ongoing due diligence of third party proxy advisory firms that includes an investigation into staffing, policies and procedures, technology, and methodologies.
  10. Obligation to Update. The adviser should require the proxy advisory firm to update the adviser regarding any relevant business changes.

SEC Withdraws Letters that Allowed Advisers to Rely on Proxy Voting Firms

 The SEC has withdrawn two no-action letters that allowed an investment adviser to rely on third-party proxy voting services so long as the adviser had policies in place to ensure independence.  The SEC withdrew the letters because it wants to open debate about the regulation of proxy voting services at its upcoming Roundtable on the Proxy Process in November.  The SEC wants to consider whether investment advisers 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 advisers and their clients, including funds and fund shareholders.”  The SEC withdrew the Egan-Jones Proxy Services (5/27/04) and Institutional Shareholder Services (9/15/04) no-action letters.

OUR TAKE:  The Egan-Jones and ISS letters provided a de facto safe harbor for advisers to rely on third party voting services.  Their withdrawal and upcoming roundtable open the door to additional requirements on advisers to supervise proxy voting.