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April 25, 2014

Proxy Advisory Firms And Investment Adviser Registration

Recently, I wrote about a shareholder proposal seeking to hold a proxy advisor popularity contest.  I commented that this could raise some interesting compliance challenges for proxy advisory firms that are registered as investment advisers.  I waited, it turns out in vain, for someone to point out that not all proxy advisors are registered as investment advisers.

Are proxy advisors subject to registration as investment advisers under the Investment Advisers Act of 1940?  Here’s the Securities and Exchange Commission’s answer:

Second, when proxy advisory firms provide certain services, they meet the definition of investment adviser under the Advisers Act and thus are subject to regulation under that Act.  A person is an “investment adviser” if the person, for compensation, engages in the business of providing advice to others as to the value of securities, whether to invest in, purchase, or sell securities, or issues reports or analyses concerning securities.  As described above, proxy advisory firms receive compensation for providing voting recommendations and analysis on matters submitted for a vote at shareholder meetings.  These matters may include shareholder proposals, elections for boards of directors, or corporate actions such as mergers.  We understand that typically proxy advisory firms represent that they provide their clients with advice designed to enable institutional clients to maximize the value of their investments. In other words, proxy advisory firms provide analyses of shareholder proposals, director candidacies or corporate actions and provide advice concerning particular votes in a manner that is intended to assist their institutional clients in achieving their investment goals with respect to the voting securities they hold.  In that way, proxy advisory firms meet the definition of investment adviser because they, for compensation, engage in the business of issuing reports or analyses concerning securities and providing advice to others as to the value of securities.

Concept Release on the U.S. Proxy System, pages 109-110 (July 14, 2010) (fo0tnote omitted).  Thus, it should be no surprise that some proxy adivsors have registered.  These include Institutional Shareholder Services Inc. (ISS) and Marco Consulting Group, Inc.  Other well-known proxy advisory firms, including Glass, Lewis & Co., LLC are not (itterminated its registration with the SEC on April 1, 2005).  Tomorrow, I’ll discuss why some some firms are not registered with the SEC and a potential state law concern.

© 2010-2014 Allen Matkins Leck Gamble Mallory & Natsis LLP

About the Author

Keith Paul Bishop, Business Attorney, Allen Matkins Law Firm
Partner

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients on compliance,...

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