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SEC Issues Proxy Voting Guidance

On August 21, 2019, the SEC issued two releases that set forth new guidance on various matters relating to proxy voting. Specifically, the SEC issued a policy release concerning the proxy voting responsibilities of investment advisers and an interpretive release and related guidance regarding the applicability of the proxy rules under the Securities Exchange Act of 1934 to voting recommendations provided by proxy advisory firms. The releases are part of a long-term review of the proxy process and a re-examination of relevant guidance being conducted by the SEC, and the SEC noted that it may propose amendments to the proxy rules or issue additional guidance in the future.

Proxy Voting Responsibilities of Investment Advisers

The policy release provides a non-exhaustive list of questions and answers discussing how an investment adviser’s fiduciary duties of care and loyalty to its clients, as well as its obligations under Rule 206(4)-6 under the Investment Advisers Act of 1940, can be met when the adviser votes proxies on behalf of clients, particularly when proxy advisory firms are used. The policy release recommends the following:

  • The scope of an adviser’s authority to vote proxies on behalf of a client should be agreed upon pursuant to full and fair disclosure and informed consent.

  • An adviser can demonstrate that voting determinations are made in its clients’ best interest and in accordance with its proxy voting policies and procedures by analyzing matters on which the adviser votes, considering whether uniform or separate voting policies would be in the best interest of its clients (e.g., because of different investment objectives), identifying factors for determining whether certain types of matters to be voted on require more detailed analysis, and sampling proxy votes cast to evaluate compliance.

  • In evaluating proxy advisory firms, advisers should consider a firm’s capacity and competency to adequately analyze the matters on which the adviser is voting, whether the proxy advisory firm has adequately disclosed the reasons for making a voting recommendation, and the firm’s policies and procedures for identifying and addressing various conflicts of interest.

  • An adviser’s proxy voting policies and procedures should be reasonably designed to evaluate third parties (e.g., proxy advisory firms) on an ongoing basis for changes in their business, conflicts of interest and methodologies, and to ensure that the adviser’s voting determinations are not based on materially inaccurate or incomplete information. In this regard, an adviser should consider the proxy advisory firm’s policies and procedures to assure that recommendations are made based on current and accurate information and that the firm has a process in place to cure deficiencies in its analysis.

  • If an adviser has assumed voting authority on behalf of a client, the adviser is not required to exercise voting authority (1) subject to conditions set forth in the client agreement and (2) in cases in which the adviser determines it is in the client’s best interest to refrain from voting.

Applicability of Proxy Rules to Voting Recommendations Provided by Proxy Advisory Firms

 The interpretive release set forth the SEC’s view that a proxy voting recommendation provided by a proxy advisory firm generally constitutes a “solicitation” that is subject to the federal proxy rules. In this regard, the SEC noted that Rule 14a-1 under the Exchange Act broadly defines the term "solicitation," and that this term has been construed by courts to include any communication to security holders “reasonably calculated to result in the procurement, withholding or revocation of a proxy,” whether or not the person making the solicitation is soliciting on its own behalf, is seeking authorization to act as a proxy or is interested in the outcome of the vote. The SEC found that because proxy advisory firms market their expertise in, and receive fees for, researching and analyzing matters submitted to a shareholder vote and providing voting recommendations, those recommendations are reasonably calculated to influence votes and should be considered a solicitation regardless of whether the recommendations are followed. The SEC also found that voting recommendations based on tailored, client-mandated voting guidelines are solicitations, provided that the proxy advisory firm is not merely performing administrative or ministerial services. The SEC stated that this interpretation is not intended to restrict or limit reliance on applicable exemptions from the information and filing requirements under the proxy rules.

The SEC also provided its view that proxy voting recommendations deemed solicitations are subject to the anti-fraud provisions of Rule 14a-9 under the Exchange Act, which provides that a solicitation may not contain a material misstatement or omission. In this regard, the SEC stated that a proxy advisory firm may need to explain the methodology used to reach a voting recommendation (including material deviations from its standard methodologies) and disclose any third-party information used in its analysis, as well as any material conflicts of interest that could be relevant to a voting recommendation, in order to avoid a potential anti-fraud violation.

The SEC’s Guidance regarding Proxy Voting Responsibilities of Investment Advisers is available here.

The SEC’s Interpretation and Guidance regarding Applicability of Proxy Rules to Voting Recommendations is available here.

© 2020 Vedder PriceNational Law Review, Volume IX, Number 276


About this Author

Jacob Tiedt, Vedder Price, investment services attorney

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....

Legal, Business, John Marten, Investment Attorney, Vedder Price Law FIrm

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds employing alternative investment strategies. Mr. Marten provides practical legal and business advice to investment company directors to assist them in fulfilling their fiduciary duties as directors, including extensive experience counseling directors with respect to Section 15(c) contract renewal matters.

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Nathaniel Segal, Investment Attorney, Vedder Price Law Firm

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Prior to joining Vedder Price, Mr. Quade served as a 1940 Act attorney and assistant vice president at a mutual fund service provider in Milwaukee, Wisconsin. There, he provided legal support to a registered open-end multiple series trust and its board of trustees, and he also supported proprietary mutual funds. Among other matters, Mr. Quade facilitated investment advisory agreement approval and renewal processes, prepared and reviewed board meeting materials...

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