The Securities and Exchange Commission (SEC) and its staff (the Staff) recently issued guidance on a pair of proxy voting issues: investment advisers’ proxy voting responsibilities, as well as how federal proxy rules apply to solicitations to those issuing proxy voting advice.

Whether these guidelines, released August 21, 2019, are ultimately better for shareholders depends on which side of the vote you come down on. The SEC’s commissioners were split, voting 3-2 to issue the guidance.

The commissioners in favor tout the new rules as adding transparency to proxy voting advice, such as disclosing conflicts of interest, or disclosing providers of any third-party research used in a recommendation. Proxy voting advisers also will now be subject to an existing SEC rule governing the issuance of “false or misleading” statements.

For some time, the SEC has been considering various changes and guidance regarding proxy voting. In 2010, the Staff published a concept release and public comment regarding proxy advisory firms and their role. Additionally, the SEC hosted a round table to discuss the proxy process with industry leaders to gain their insight. Finally, earlier this year, Chairman Clayton stated that “the current system is in need of a major overhaul.” It appears this overhaul has arrived.

Fiduciary Obligation in Proxy Voting

Rule 206(4)-6 of the Advisers Act of 1940, as amended (the Advisers Act) requires registered investment advisers to adopt policies and procedures reasonably designed to vote clients securities in their best interest. As a result, one of the key points of this new guidance elaborates on exactly how advisers are making the determination to vote a proxy.

Often times, advisers will seek information regarding proxies from a third party, such as ISS or Glass Lewis – the two most prominent in the U.S. proxy advisory market. The new guidance emphasizes that this information is considered a “solicitation” under Rule 14a-1 of the Securities Exchange Act of 1934 and, according to the SEC, constitutes information “designed to influence client’s voting decisions.” When using this information, it is the adviser responsibility and obligation to verify that what they received is not false or misleading in any way that may cause them to vote a proxy. Accordingly, advisers cannot blindly rely on the guidance provided by third-party proxy advisory firms and must develop proper oversight measures to satisfy their regulatory obligations.

Third-Party Proxy Services for Proxy Voting

As a general matter, it has become more and more common for an adviser to engage a proxy voting service to either manage the proxies received or vote proxies themselves. The guidance provides that by designating this authority to a third party, the adviser does not alleviate itself from its fiduciary duty or potential conflicts. Additional due diligence and ongoing review should be instituted to: (i) verify that the firm is reputable and appropriate; and (ii) ensure that information provided by the firms is accurate; and (iii) any votes that are made by the proxy voting firm are in line with the adviser’s policies and procedures.

Items to Consider With the New Guidance

As a general matter, proxy voting policies should be reviewed to see how the policy as written conforms to practice (or vice versa). If the policy is very broad, it may be best to establish client-by-client proxy voting instructions, and ensure that the policy comports with the applicable offering documents, Form ADV and/or investment management agreement. These policies and procedures should be reviewed at least annually.

If engaging a third-party proxy firm, extra due diligence should be conducted to ensure that the firm is reputable. Additionally, when seeking recommendations on proxies from these services, adviser should undergo some sort of verification or independent analysis of the proxy, specifically with matters regarding corporate actions. If there has been an issue with a proxy voting firm, there should be some sort of review to first uncover the discrepancy and second remedial action taken and how to prevent from a similar discrepancy. Finally, disclosure should be provided to clients regarding the engagement of a proxy firm and the authority given to them. This can generally be addressed in the Form ADV Part 2A (Item 17) and a fund’s offering documents.

For more information regarding the SEC’s release and guidance, please click here.