November 23, 2014

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November 20, 2014

Proxy Advisory Firms – What About State Registration?

Yesterday’s post discussed why proxy advisory firms are likely to meet the definition of “investment adviser” under the Investment Advisers Act of 1940.  I noted that some proxy advisory firms, such as ISS and Marco Consulting Group, Inc., have, in fact, registered with the Securities and Exchange Commission as investment advisers.  Other proxy firms are not registered with the SEC or, as in the case of Glass, Lewis & Co., LLC, elected to terminate their SEC registration.  I don’t know why Glass, Lewis decided to call it quits with the SEC.  Apparently, it was also unwilling to explain its reasons to the Government Accountability Office.  See Corporate Shareholder Meetings – Issues Relating to Firms That Advise Institutional Investors on Proxy Voting,” at p. 9 (June 2007).

One answer might be that the law prohibits some proxy advisory firms from registering with the SEC because they have insufficient assets under management.  Section 203A of the Advisers Act generally prohibits an investment adviser from registering with the SEC unless it has assets under management of at least $100 million (this is an incomplete aperçu of a complicated statutory scheme and does not apply to investment advisers with their principal office and place of business in New York or Wyoming).  See Concept Release on the U.S. Proxy System, SEC Release Nos. 34-62495; IA-3052; and IC-29340 (July 14, 2010) at p. 112 (discussion predates Dodd-Frank Act provisions relating to mid-sized advisers).  Some proxy advisory firms may nevertheless register with the SEC because they qualify for an exemption to the prohibition under SEC Rule 203A-2(a).  For example, ISS discloses in its Form ADV that it is a pension consultant that qualifies for the exemption.

If a proxy advisor firm doesn’t have sufficient assets under Section 203A and isn’t eligible for an exemption under Rule 203A-2, it may not register with the SEC.  What puzzles me is why  these firms have not registered with the states in which they have offices.

The definition of “investment adviser” under the Corporate Securities Law of 1968 has its source in the Investment Advisers Act and the Commissioner has observed that it will look to SEC Release IA-1092 to aid in the interpretation the term. Cal. Corp. Code § 25009.Commissioner’s Release 80-C (May 25, 1993) and Commissioner’s Release 110-C (April 9, 1998).  There are, of course, several exemptions from the registration requirement of the CSL.  For example, Section 25203 exempts a person whose only clients are insurance companies and Commissioner’s Rule 260.204.7 exempts individuals from the licensing requirement who pursuant to Education Code Section 22205.2 [repealed, now Section 22352] contract to perform investment management or advisory services only for the California State Teachers’ Retirement System provided that all transactions are effected through a California licensed broker-dealer (or dealer exempt from licensing).

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About this 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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