October 27, 2020

Volume X, Number 301

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October 27, 2020

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October 26, 2020

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Supplemental Guidance Regarding the Proxy Voting Responsibilities of Investment Advisers

The Securities and Exchange Commission’s (“SEC”) Supplement to Commission Guidance regarding Proxy Voting Responsibilities of Investment Advisers (“Guidance”) became effective on September 3, 2020. Additionally, the SEC final rules governing Proxy Advisors (“Amendments”), intended to improve the accuracy and transparency of information provided by proxy advisory firms, will go into effect on November 2, 2020 with a required compliance date of December 1, 2021, for certain provisions and full compliance by the 2022 proxy season. The Guidance and the Amendments are part of the SEC’s continued efforts to promote transparency, accountability and disclosure to investors during the proxy voting process.

In previous guidance, the SEC discussed how an investment adviser’s (“adviser”) fiduciary duty and Rule 206(4)-6 under the Advisers Act are related to an adviser’s exercise of its voting authority on behalf of its clients and provided examples to help the adviser comply with its obligations related to proxy voting. The previous guidance is now supplemented based upon the SEC’s ongoing review of the proxy voting process and the Amendments. The SEC expects that the Amendments will provide issuers, among other things, with access to the proxy advisory firms’ recommendations in a timely manner and will allow issuers to share any additional information with shareholders that may be material to their voting decisions. Proxy advisory firms, as a condition of their reliance on Rules 240 14a-2(b)(1) and (b)(3), must also develop policies and procedures that are reasonably designed to provide advisers and other clients with a mechanism by which they can be reasonably learn of the additional information before making proxy voting decisions.

The Guidance is intended to:

  1. Assist advisers in determining how to consider any additional information that will become more readily available as a result of the Amendments; and

  2. Address the disclosure obligations and considerations that may arise when advisers use proxy advisory firms, electronic vote management systems or other voting execution services for voting proxies.

Pre-Population of Voting Proxies

Since pre-population and automated voting occur before the submission deadline for proxies to be voted at a shareholder meeting, advisers that pre-populate clients’ votes now have an obligation to determine whether an issuer plans to file or has already filed additional soliciting materials reflecting its views regarding the voting recommendations. This should be done as part of an adviser’s reasonable due diligence into matters on which it votes. Some steps that an adviser could take to demonstrate that it is making voting determinations in a client’s best interest include, but is not limited to:

  • Review the policies and procedures to determine whether they are reasonably designed to address circumstances where the adviser becomes aware that an issuer intends to file or has filling additional soliciting materials with the SEC after the adviser has received the proxy advisory firm’s voting recommendations but before the submission deadline;

  • Determine whether the proxy advisory firm may obtain non-public information about how an adviser will vote clients’ proxies and then review all agreements with the proxy advisory firm to determine whether the agreements will permit the proxy advisory firm to use that non-public information in a manner that would not be in the best interest of the adviser’s clients; and

  • Determine whether policies and procedures are reasonably designed to address the adviser’s disclosure obligations.

Disclosure Obligations

Advisers are required, as part of its duty of loyalty to clients, to make full and fair disclosure of all material facts relating to the advisory relationship including, material facts related to the exercise of its proxy voting authority. Advisers that use automated voting should disclose:

  • The extent of the adviser’s use of automated voting and under what circumstances it will use automated voting;

  • How the adviser’s policies and procedures address the use of automated voting when the adviser becomes aware that an issuer intends to file or already filed additional soliciting materials with the SEC regarding a matter to be voted on prior to the submission deadline for proxies to be voted at the shareholder meeting; and

  • Sufficient and specific information which will provide a client with enough information to understand the role of the automated voting in the adviser’s exercise of its voting authority and to provide informed consent to the use and scope of automated voting.

The Amendments and the Guidance, in part, are focused on ensuring advisers act “in a manner consistent with their fiduciary obligations” and that they provide investors with enough information to make informed decisions when voting proxies. The new requirements could impact an adviser’s continued use of electronic proxy voting and the use of proxy advisor voting firms due to the Amendments and the corresponding anticipated increased cost of compliance. 

COPYRIGHT © 2020, STARK & STARKNational Law Review, Volume X, Number 261
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About this Author

Trina Glass Finance Lawyer Stark and Stark
Associate

Trina L. Glass is a Shareholder and member of Stark & Stark’s Investment Management & Securities Group. Ms. Glass’ legal practice is devoted to supporting the regulatory and compliance requirements of financial institutions, specializing in securities filings, regulatory analysis, investigations, books and records requirements, regulatory inquiries and exams, risk mitigation, privacy, industry advocacy, advising on written supervisory and compliance policies, and other procedural matters related to...

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