The Security and Exchange Commission’s Divisions of Investment Management and Corporation Finance issued Staff Legal Bulletin No. 20 (IM/CF) on June 30 (SLB 20). SLB 20 provides guidance regarding proxy voting responsibilities of investment advisers and proxy advisory firms’ exemptions from proxy rules. Rule 206(4)-6 under the Advisers Act requires advisers to have written proxy voting policies and procedures. SLB 20 states that advisers can ensure that proxies are being voted in their clients’ best interests if, for example, they periodically sample proxy votes to review compliance with the advisers’ policies and procedures or sample the voting on certain proposals. In any event, an adviser needs to be analyzing, at least annually, whether its proxy voting policies and procedures continue to be reasonably designed to ensure that proxies are voted in clients’ best interests. 

SLB 20 also clarifies that Rule 206(4)-6 does not require advisers to undertake all proxy voting responsibilities. The staff noted that most clients delegate the authority to vote proxies in relation to equity securities to investment advisers completely, without retaining any authority to vote such proxies. Nevertheless, advisers and clients may agree to limit the scope of advisers’ proxy voting responsibilities. Such agreements may contain arrangements that:

  • the time and costs associated with the mechanics of voting proxies with respect to certain types of proposals or issuers may not be in the clients’ best interests;
  • all proposals are voted in accordance with company management recommendations or with a particular shareholder proponent, absent a contrary instruction from the client or a determination by the adviser that a particular proposal should be voted in a different way because, for example, it furthers the adviser’s strategy;
  • the adviser will abstain from voting any proxies at all, regardless of whether the client undertakes to vote the proxies itself; and
  • the adviser will focus on only particular types of proposals based on client preferences. 

SLB 20 supports the proposition that advisers are not required to engage proxy advisory firms when they assume a delegation of proxy voting authority from their clients to avoid conflicts of interest issues. Instead, advisers may limit by contract the scope of their proxy voting authority. 

If an adviser retains or considers the continued retention of a third-party proxy advisory firm, SLB 20 emphasizes that the adviser should ascertain, among other things, whether the proxy advisory firm has the capacity and competency to analyze proxy issues adequately. Moreover, SLB 20 admonishes the adviser to have adequate policies and procedures for “sufficient ongoing oversight” of the proxy advisory firm to ensure that proxies are voted in the best interests of its clients. This oversight also requires (i) ensuring that voting recommendations are based on current and accurate information and (ii) identifying and addressing on an ongoing basis the proxy advisory firm’s conflicts that can arise.  

Click here to read all issues covered in the guidance on proxy voting.