Investment Adviser Proxy Voting Responsibilities & Use of Proxy Advisory Firms

Investment Management Update

Date: July 24, 2014


On June 30, 2014, the SEC’s Division of Investment Management and Division of Corporation Finance issued a Staff Legal Bulletin providing guidance about investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms. The bulletin also addresses exemptions to the federal proxy rules relied upon by proxy advisory firms.


Investment advisers are required under Rule 206(4)-6 of the Investment Advisers Act of 1940, as amended, to adopt policies and procedures reasonably designed to vote proxies in their clients’ best interests. Many investment advisers utilize the services of proxy advisory firms to fulfill their proxy voting responsibilities. In such arrangements, the investment adviser retains fiduciary responsibility for voting its clients’ proxies.

Investment advisers’ use of proxy advisory firms has come under increased scrutiny over the past several years. Specifically, institutions such as the Business Roundtable and the U.S. Chamber of Commerce have called for additional oversight of proxy advisory firms, citing concerns over conflicts of interest, accountability and transparency. SEC Commissioner Daniel Gallagher also has expressed his concern regarding the research, transparency and accountability of proxy advisory firms. In December 2013, the SEC conducted a roundtable discussion concerning these issues that included participants from the SEC staff, institutional investors, trade associations, lawyers and academics.

Staff Guidance
Investment Advisers

The Staff Legal Bulletin provides the following guidance to investment advisers that have the authority to vote client proxies.

In meeting its fiduciary obligations, an investment adviser should review its proxy voting policies and procedures annually to ensure their adequacy and determine whether they have been properly implemented and followed. Investment advisers should sample voting records throughout the year to determine if proxies were voted in compliance with their proxy voting policy guidelines.

While Rule 206(4)-6 requires an investment adviser to adopt proxy voting policies and procedures, the staff clarified that the rule is not intended to require an investment adviser to vote every proxy. An investment adviser and its client could agree that voting in some circumstances might not be in the client’s best interests (e.g., not voting in countries with share blocking or meetings in which voting would entail additional costs). An investment adviser and client could also agree the adviser will abstain from voting certain proxies or will concentrate only on certain types of proposals or issues.

The staff stated that an investment adviser should conduct ongoing oversight over any third party it retains to assist in the proxy voting process. The adviser should consider whether the proxy advisory firm has the capacity, competency and resources to adequately analyze proxy voting issues. The adviser also should review the proxy advisory firm’s voting guidelines and conflicts of interest policy. Since most proxy advisory firms issue updated proxy voting guidelines on an annual basis, an investment adviser should review those to make sure any changes are in its clients’ best interests. Potential conflicts of interest the proxy advisory firm may have with its clients should be identified and addressed.

In its oversight of a proxy advisory firm, an investment adviser might determine that a voting recommendation issued by the proxy advisory firm was based on a material factual error. In such an instance, the adviser should investigate the error and determine whether the proxy advisory firm is taking reasonable steps to reduce the potential for similar errors in the future. Material factual errors should also cause an investment adviser to consider whether or not the proxy advisory firm has the capacity and competency to adequately analyze proxy voting issues.

Proxy Advisory Firms

The Staff Legal Bulletin addresses the applicability of rules under the Securities Exchange Act of 1934 (1934 Act) to proxy advisory firms, as well as the obligations of proxy advisory firms to disclose conflicts of interest.

Proxy advisory firms often rely on the exemptions from the federal proxy rules provided by Rule 14a-2(b) under the 1934 Act. Rule 14a-2(b)(1) provides an exemption from most requirements of the federal proxy rules for “any solicitation by or on behalf of any person who does not, at any time during such solicitation, seek directly or indirectly either on its own or another’s behalf, the power as a proxy for a security holder and does not furnish or otherwise request, or act on behalf of a person who furnishes or requests, a form of revocation, abstention, consent or authorization.” The staff clarified that the exemption provided by Rule 14a-2(b)(1) would not be available for a proxy advisory firm that allows clients to establish general proxy voting guidelines or policies, in advance of receiving materials for a particular shareholder meeting, that the proxy advisory firm will apply on behalf of the client. However, the staff indicated that proxy advisory firms could continue to rely upon this exemption if they distribute only proxy voting recommendations and do not solicit the power to act as proxy for the clients receiving the recommendations.

Rule 14a-2(b)(3) exempts from the federal proxy rules the provision of proxy voting advice by any person to another person with whom a business relationship exists. The exemption is available to proxy advisory firms if they:

  • Give financial advice in the ordinary course of business
  • Disclose to their clients any significant relationship with the company or any of its affiliates or a security holder proponent of a matter on which advice is given or any material interests the proxy advisory firm may have in such matter
  • Receive no special commission or remuneration for providing the advice from any person other than the recipient(s) of their advice
  • Do not provide advice on behalf of any person soliciting proxies or on behalf of a participant in a contested election

The staff indicated that a proxy advisory firm that also provides consulting services to companies may have a “significant relationship” with a company and so could be required to disclose the nature and scope of that relationship as well as any steps taken to mitigate the conflict of interest. The disclosure provided should allow the recipient of the proxy advisory firm’s advice to assess the reliability and objectivity of the advice.


Investment advisers should review their proxy voting policies and procedures at least annually to ensure that they are appropriate in light of the adviser’s fiduciary obligation to vote proxies in its clients’ best interests. Advisers also should periodically sample their proxy voting records to demonstrate compliance with their proxy voting policy guidelines. Investment advisers that use proxy advisory firms should conduct ongoing oversight of these service providers to evaluate their ability to appropriately analyze proxy voting issues, taking into consideration factors such as the proxy advisory firm’s staffing, resources, voting guidelines and policies, including its conflict of interest policy. The investment adviser should consider and address a proxy advisory firm’s potential conflict of interest in issuing a voting recommendation.

Proxy advisory firms should review this guidance in light of the Rule 14a-2(b) exemption(s) upon which they may rely. They should review their policies and procedures to ensure that they have processes in place to identify and properly disclose to their clients potential conflicts of interest with public companies and shareholder proponents.


For more information, please contact:

Andrew J. Davalla

Michael V. Wible


This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

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