New SEC Guidance on Proxy Voting Process: What You Should Know

WHAT HAPPENED?

On Aug. 21, 2019, the US Securities and Exchange Commission released guidance on the proxy voting process. The guidance primarily outlines considerations advisers should make when choosing to begin or continue working with a proxy advisory firm. The Commission compiled six questions and answers selected as key takeaways from panels, roundtables, and calls for comment over recent years.

The guidance focuses on Rule 206(4)-6 of the Advisers Act, which emphasizes the need for investment advisers to act in the best interest of clients and to adopt, implement, and review proper proxy voting policies and procedures. The document includes examples of a variety of proxy-voting situations an investment adviser may encounter when working with a proxy advisory firm.

KEY TAKEAWAYS

  1. In establishing a relationship with each individual client, investment advisers must consider what breadth of proxy voting authority is appropriate. As every client relationship is different, variable proxy voting arrangements should be made. In some cases, it is appropriate for the adviser to have full voting authority; in others, the client and adviser may come up with unique voting procedures. No matter the arrangement, it is most important that the adviser provide full and fair disclosure and maintain their fiduciary duty to the client.
  2. Investment advisers should take steps to demonstrate votes are being made in clients’ best interest and in-line with firm policies and procedures. Advisers can, for example, sample proxy votes as part of their annual compliance review, evaluate a sample of pre-populated votes, or consider a “higher degree of analysis” when reviewing votes on particularly sensitive or controversial issues. It is essential that proxy voting policies and procedures be reviewed by the firm at least annually.
  3. Investment advisers should make certain considerations when employing the services of a proxy advisory firm. Advisers should primarily conduct appropriate due diligence to determine whether the firm has the “capacity and competency” to meet their specific needs, carefully review third-party information sources used by the proxy advisory firm, and assess the firm’s policies and procedures related to conflicts of interest.
  4. If an investment adviser becomes aware of potential errors or weaknesses in their chosen proxy advisory firm’s services, steps should be taken to mitigate the situation. A reasonable investigation should be conducted by the adviser to confirm and address issues with the firm.
  5. Investment advisers should adopt policies and procedures designed to evaluate whether the proxy advisory firm is acting in the best interest of clients. These provisions should be designed to review the firm’s practices on a periodic, ongoing basis to account for evolving business practices which may affect conflicts of interest for the adviser.
  6. In some cases, it is required for investment advisers to vote on behalf of clients at every opportunity. There are two situations where this does not apply. First, an adviser and their client may have agreed on certain proxy voting limitations. Second, there are some situations where refraining from a vote would be considered in the best interest of the client.

WHAT DOES THIS MEAN FOR ME?

Pending public feedback, the Commission may issue additional guidance on the proxy voting process. The practices of a proxy advisory firm serve as an extension of an investment adviser’s fiduciary duty to clients. All third-party engagements that may affect client conflicts of interest should be carefully reviewed and be addressed in compliance policies and procedures.

More information on the proxy voting process can be found in the full guidance. Questions about the specific provisions of the guidance can be directed to the SEC’s Division of Investment Management. Fairview is available to address inquiries about the proxy voting process, proxy advisory firms, and compliance policies and procedures.

About the Author:

Fairview®
Founded in 2005 with the goal of developing streamlined solutions for investment advisers, Fairview® is now servicing investment advisers, foundations, and funds with over $196 billion in collective assets.