SEC Issues New Guidance Regarding Investment Advisers’ Proxy Voting Responsibilities and Proxy Advisory Firms

Investment Management Update

Date: September 05, 2019

Key Notes:

  • An adviser that assumes proxy voting authority must implement policies and procedures that are reasonably designed to ensure it makes voting decisions in the best interest of clients.
  • Before retaining a proxy advisory firm, advisers should consider the proxy advisory firm’s resources, recommendation methodologies and conflict of interest policies.

The Securities and Exchange Commission (SEC) recently issued guidance (“Guidance”) to assist advisers with fulfilling their proxy voting responsibilities, including their responsibilities when using proxy advisory firms. The Guidance culminated a decade’s worth of public engagement by the SEC including the Staff Roundtable held in November 2018.

Investment Advisers’ Proxy Voting Responsibilities

Rule 206(4)-(6) of the Investment Advisers Act of 1940, as amended, requires an adviser who exercises voting authority on behalf of clients to adopt and implement written policies and procedures that are reasonably designed to ensure that the adviser votes proxies in the best interest of its clients. In this regard, it is important to note that an adviser is not required to accept the authority to vote a client’s securities. If an adviser does accept voting authority, it may agree with its client on the scope of voting arrangements, including the types of matters for which it will exercise proxy voting authority. The Guidance outlines examples of possible voting arrangements to which an adviser and client may agree, including:

  • The adviser should exercise voting authority pursuant to specific parameters designed to serve the client’s best interests. For example, the adviser and client may agree that the adviser will vote with the voting recommendations of management of the issuer, or that the adviser will vote to further the investment strategy being pursued by the adviser.
  • The adviser should not exercise voting authority in circumstances under which voting would impose costs on the client.
  • The adviser should focus voting resources only on particular types of proposals such as mergers and acquisition transactions, dissolutions, consolidations or contested elections for directors.
  • The adviser should not vote on matters where the cost of voting would be high, or the benefit to the client would be low.
Steps to Demonstrate Voting Determinations Are in the Client’s Best Interest

In the Guidance, the SEC indicates that an adviser that has authority to vote proxies on behalf of its clients must conduct a reasonable investigation into matters in which the adviser votes and must vote in the best interest of the client. Below are specific actions and considerations outlined by the SEC that demonstrate that an adviser is acting in accordance with its fiduciary duties:

  • Considering whether adopting a uniform voting policy is in the best interest of each of its clients.
  • Considering the investment strategy and objectives for each of its clients and whether clients would be best served by individual policies.
  • Evaluating whether certain types of matters require more detailed analysis (such as mergers and acquisitions, dissolutions, conversions or contested elections).
  • Assessing whether the adviser is voting on behalf of its clients in a manner consistent with its policies and procedures. Specifically, such a review could include sampling proxy votes it has cast on behalf of clients as part of its annual review of its compliance policies and procedures
  • Evaluating whether a proxy advisory firm’s recommendations are consistent with its policies and procedures by:
    • Assessing pre-populated votes on the proxy advisory firm’s platform before such votes are cast.
    • Considering policies and procedures that provide for consideration of additional information that may become available regarding a particular proposal.
    • Performing a higher degree of analysis on matters where the adviser’s policies and procedures do not address how it should vote on a particular matter, or where the matter is highly contested or controversial.
Adviser Considerations When Retaining a Proxy Advisory Firm

The Guidance also notes that an adviser should take special considerations into account before retaining a proxy advisory firm, such as whether the proxy advisory firm has:

  • The capacity and competency to adequately analyze the matter for which the adviser is responsible for voting, including the proxy advisory firm’s staffing, personnel and technology.
  • An effective process for seeking timely input from issuers and its clients.
  • Adequately disclosed its methodologies in formulating voting recommendations, such that the adviser can understand the factors underlying voting recommendations.
  • Policies and procedures regarding how it identifies and addresses conflicts of interest. An adviser can review potential conflicts of interest by assessing:
    • Whether the proxy advisory firm has adequate policies and procedures to identify, disclose and address actual and potential conflicts of interest relating to proxy voting recommendations and voting services, relating to activities other than providing proxy voting recommendations, and conflicts presented by certain affiliations.
    • Whether the proxy advisory firm’s policies and procedures provide context-specific, non-boilerplate disclosure of actual and potential conflicts of interest.
    • Whether the proxy advisory firm’s policies and procedures utilize technology to quickly deliver conflict disclosures.
Responding to Factual Errors, Incompleteness or Methodological Weakness in a Proxy Advisory Firm’s Analysis

An adviser may become aware of potential errors, incompleteness or weakness in the methodologies of a proxy firm’s analysis that may materially affect one or more of the adviser’s determinations. To that end, the Guidance states the adviser should:

  • Adopt internal policies and procedures reasonably designed to ensure that its voting determinations are not based on materially inaccurate or incomplete information.
  • Conduct a periodic review of its ongoing use of the proxy voting firm’s research or voting recommendations.
  • Evaluate the effectiveness of the proxy voting firm’s policies and procedures for obtaining current and accurate information, including its engagement with issuers to obtain their views on the recommendations.
  • Evaluate any material changes in the services or operations of the proxy voting firm.
  • Adopt and implement policies and procedures that allow the adviser to identify and evaluate on an ongoing basis a proxy voting firm’s conflicts of interest, in addition to the proxy firm’s capacity and competency to provide voting recommendations.
To Vote or Not to Vote

The Guidance provides that an adviser does not have to exercise every opportunity to vote a proxy for a client if (1) the adviser and client have agreed to limit the conditions on which the adviser would exercise voting authority or (2) voting the proxy would not be in the best interest of the client.


The Guidance will become effective upon publication in the Federal Register. Advisers should reexamine their existing proxy voting policies and procedures with the above considerations in mind and as they prepare for the 2020 proxy season.


For more information, please contact:

Andrew J. Davalla

Donald S. Mendelsohn

Brian Doyle-Wenger

Latashia Love*

*Latashia Love is a law clerk and is not admitted to practice in Ohio; her work is supervised by principals of the firm.

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