Investment advisers are often stuck with voting of equity securities on behalf of their clients. This falls under the investment advisers’ duties of care and loyalty with respect to services undertaken on the client’s behalf, depending on the authority granted to the adviser. The Securities and Exchange Commission issued two sets of interpretive guidance last month on proxy voting: one targeted at proxy advisory firms under the proxy solicitation rules, and the other targeting investment advisers and their proxy voting responsibilities.
In the first, proxy voting advice provided by proxy advisory firms will generally constitute a “solicitation” under the federal proxy rules.
The second is guidance to Rule 206(4)-6.
[I]t is a fraudulent, deceptive, or manipulative act, practice or course of business within the meaning of section 206(4) of the Act (15 U.S.C. 80b-6(4)), for you to exercise voting authority with respect to client securities, unless you: (a) Adopt and implement written policies and procedures that are reasonably designed to ensure that you vote client securities in the best interest of clients …
According to the guidance, the Rule requires when an an investment adviser has assumed the authority to vote on behalf of its client, the investment adviser must have a reasonable understanding of the client’s objectives and must make voting determinations that are in the best interest of the client. Therefore, an investment adviser has to form a reasonable belief that its voting determinations are in the best interest of the client, by conducting an investigation reasonably designed to ensure that the voting determination is not based on materially inaccurate or incomplete information.
An investment adviser is not required to vote on every matter presented to stockholders.
Using proxy advisory firms, may mitigate an investment adviser’s potential conflict of interest, it does not relieve that investment adviser of (1) its obligation to make voting determinations in the client’s best interest, or (2) its obligation to provide full and fair disclosure of the conflicts of interest and obtain informed consent from its clients.
It’s worth noting that this is formal guidance from the Commission and not guidance from the Investment Management Division or other staff guidance. It’s also not a new rule. It’ formal guidance further explaining the Rule.
Sources:
- Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers Release Nos. IA-5325; IC-33605
- SEC’s New Guidance on Proxy Voting Responsibilities by David A. Bell and Robert A. Freedman, Fenwick & West LLP
- SEC Publishes New Guidance on Investment Advisers’ Proxy Voting Responsibilities and Reliance on Proxy Advisors
- Rule 206(4)-6
