The U.S. Securities and Exchange Commission (SEC) has adopted new guidance intended to clarify advisers’ proxy voting responsibilities.
The complex set of guidance addresses a host of issues related to proxy voting and the providers and users of proxy voting advice. Early reactions to the SEC guidance by investment adviser advocacy organizations are somewhat unfavorable and voice dissatisfaction about the fact that the guidance was crafted without the opportunity for public comment and without an accompanying economic analysis.
Investment Adviser Association (IAA) General Counsel Gail Bernstein suggests the new guidance, at least as summarized by the SEC, will likely increase costs for advisers and add to the already significant barriers to entry for proxy advisory firms—i.e, those firms SEC-registered advisers and their clients rely on for making proxy voting decisions.
“While the Commission stated at the open meeting that its actions do not create new obligations, we believe that as a practical matter they will for investment advisers,” Berstein says. “We are disappointed that the guidance was issued without the opportunity for public comment and without the benefit of an economic analysis.”
At the open meeting during which the new guidance was approved, SEC Chairman Jay Clayton thanked Commissioner Elad Roisman for “his leadership on our efforts to consider improvements to the proxy process, and for helping to develop this important guidance that, among other things, will provide clarity to investment advisers regarding proxy voting responsibilities, and ultimately benefit their clients.”
According to the SEC Fact Sheet summary, the guidance discusses, among other matters, the “ability of investment advisers to establish a variety of different voting arrangements with their clients and matters they should consider when they use the services of a proxy advisory firm.”
Importantly, the Commission issued an interpretation that proxy voting advice provided by proxy advisory firms generally constitutes a “solicitation” under the federal proxy rules. While it will take time for the actual language of the guidance to be interpreted by qualified counsel, this development seems to suggest, in essence, that proxy advisory firms are, by providing their advice, not simply delivering objective information to a third party but are, in fact, appealing to the client to vote in a certain way. This in turn means the proxy voting firm must meet a set of specific responsibilities in terms of the accuracy and intentions of its recommendations. To this end, the SEC also provided related guidance about the application of proxy antifraud rules to the provision of proxy voting advice.
The SEC’s move is significant for investment advisers, but the guidance at first blush seems to be even more meaningful for providers of proxy voter services. One company providing such services is Institutional Shareholder Services (ISS)—which became the parent company of PLANADVISER at the start of 2019.
In a written statement, Gary Retelny, ISS president and CEO, offers his take on the SEC guidance: “ISS appreciates the time and effort spent by the SEC Commissioners and staff to gauge perspectives of varied corporate governance constituencies, including through hosting of the November 2018 Proxy Advisors round table. We will carefully review the guidance, approved today along a party line vote, to understand the potential impacts for our clients as well as to consider further actions that could improve the ability of our clients to meet their fiduciary obligations in a cost effective manner. However, we are deeply concerned that aspects of the guidance may significantly undermine our ability to deliver independent, timely and accurate data, research, insights and perspectives to aid in the discharge of our clients’ fiduciary duties. We will have more to say once we have the opportunity to closely study the guidance.”
Clearly anticipating responses to the guidance like that of the IAA and ISS, Commissioner Roisman said this regulatory activity “has benefited from the substantial engagement from the public over the past decade, including last November’s staff roundtable on the proxy process and the extensive public comments the Commission has received. The releases reiterate the Commission’s views on the importance of investment advisers’ voting responsibly on behalf of their clients and the applicability of our proxy rules to proxy voting advice.”
According to Commissioner Roisman, these actions help ensure advisers who vote proxies will do so in a manner consistent with their fiduciary obligations and, to the extent they rely on voting advice from proxy advisory firms, that they will take reasonable steps to ensure the use of that advice is consistent with their fiduciary duties.
“In addition, proxy advisory firms, to the extent they engage in solicitations, must comply with applicable law,” Roisman said.
Technically speaking, the Commission has issued guidance to assist investment advisers in fulfilling their proxy voting responsibilities, particularly where they use the services of a proxy advisory firm, and provides guidance on proxy voting disclosures under Form N-1A, Form N-2, Form N-3, and Form N-CSR under the Investment Company Act of 1940. The Commission has also issued an interpretation of Exchange Act Rule 14a-1(l) that proxy voting advice generally constitutes a solicitation under the federal proxy rules and related guidance regarding the application of the antifraud provisions in Exchange Act Rule 14a-9 to proxy voting advice.
Given that there is no public comment period on the guidance or interpretation, they become effective upon publication in the Federal Register. As such, the SEC encourages investment advisers to review their policies and procedures in light of the guidance in advance of next year’s proxy season. To the extent that firms identify operational or other questions in the course of that review, SEC encourages them to contact the staff of the Division of Investment Management.