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SEC Staff Withdraws Proxy Advisory Guidance

In 2003, to address the potential conflicts of interest that arise when investment advisers vote client proxies, the SEC adopted Rule 206(4)-6 under the Investment Advisers Act of 1940.  This rule requires advisers to adopt and implement written proxy voting policies designed to ensure proxies are voted in clients’ best interests, to describe these policies to clients and to provide clients information on how proxies are actually voted.  In 2004, the SEC staff issued two no-action letters, to Egan-Jones Proxy Services and Institutional Shareholder Services, Inc., indicating that advisers may satisfy Rule 206(4)-6 by voting client proxies in accordance with recommendations provided by thirdparty proxy advisory firms, provided the advisers adopt and implement policies and procedures to ensure that the proxy advisory firms are not themselves subject to conflicts of interest.  Under the guidance set forth in the no-action letters, before relying on a proxy advisory firm’s recommendations, an adviser must first determine, among other things, that the advisory firm has the capacity and competency to adequately analyze proxy issues and can make such recommendations impartially and in the best interests of the adviser’s clients.  In 2014, the SEC staff issued additional guidance in Q&A format regarding advisers’ responsibilities with respect to voting client proxies and using proxy advisory firms, including the responsibility to identify and address any conflicts of interest facing the proxy advisory firm.

In July 2018, SEC Chairman Jay Clayton announced that the SEC staff would host a roundtable later in the year to gather input from investors, issuers and other market participants on the proxy process, which may lead to changes in rules and staff guidance relating to proxy solicitations and proxy voting.  On September 13, 2018, the SEC staff issued a public statement announcing that it was withdrawing the two 2004 no-action letters referenced above to facilitate discussion at the roundtable, which is now expected to take place in November 2018.  The staff indicated that it would expect to use input from the roundtable to prepare any future guidance relating to the use of proxy advisory firms, including any changes to the guidance previously provided by the staff.

The statement is available at: https://www.sec.gov/news/public-statement/statement-regarding-staff-prox...

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Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...

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