SEC Identifies Policies, Procedures And Disclosures Related To Registered Investment Advisers' Proxy Voting Responsibilities And Proxy Voting Advice

On August 21, 2019, the Securities and Exchange Commission issued two interpretive releases involving proxy voting and proxy voting advice. In the first release, the SEC provided guidance regarding the responsibilities of registered investment advisers in fulfilling their fiduciary duties when they employ proxy advisory firms.1 In the second release, the SEC interpreted the activities of proxy advisory firms as involving "solicitations" subject to the anti-fraud provisions of the SEC's proxy rules.2 Together, the two releases provide detailed guidance on the types of policies, procedures and disclosures that investment advisers and proxy advisory firms should consider in connection with the use and provision of voting advice.

These releases appear to advance the goals of critics of proxy advisory firms by suggesting deeper regulation of the manner in which proxy advisory firms formulate voting recommendations and lay the foundation for greater Commission involvement in the relationship between proxy advisory firms and investment advisers. While the guidance is consistent with certain principles addressed through previous SEC Staff and Commission statements, including Staff Legal Bulletin 20,3 each release identifies certain specific policies, procedures and disclosures not previously articulated by either the Staff or the Commission. Two SEC Commissioners expressed strong dissenting views on the substance of the new guidance and the lack of a formal public comment process to study its potential impact.4 Nevertheless, this appears to be just a first step in the Commission's focus on proxy process, with the Chairman signaling that new rulemaking is likely in the near future.5

Context of the Commission's Action

The degree to which investment advisers rely on the recommendations of proxy advisory firms varies widely. Some rely on the administrative services provided by the proxy advisory firms and use recommendations from proxy advisory firms as one input into the investment advisers' proxy voting decisions. The voting decisions of many large investment advisers are typically made by committees and are often informed by internal policies designed to maximize the value of their clients' returns on which their own profits depend.

In 2003, the Commission adopted Rule 206(4)-6 under the Investment Advisers Act of 1940,6 which was designed to require investment advisers to address conflicts they may have in voting client proxies. Investment advisers, for example, may manage the pension assets of a company whose proxy they are asked to vote or have an executive who serves on the board of directors of such a company.7

Corporate managers and their trade associations have denounced the proxy voting firms as an unregulated duopoly that has an outsized influence on proxy voting by investment advisers who excessively defer to the firms' recommendations.8 These corporate managers and trade associations criticize the lack of transparency of proxy advisory firm decision-making, their conflicts of interest and the adequacy of their research and analysis. Some assert that the proxy advisory firms make errors in formulating recommendations, and some companies whose voting resolutions are passed upon by proxy advisory firms argue that they should be able to review the proxy advisory firms' recommendations before they are finalized to prevent errors or misinterpretations.9 Others have criticized the extent to which institutional investors, influenced by the proxy voting advisers, vote in favor of environmental and social governance proposals.10

Institutional investors assert that the research and recommendations provided by proxy advisory firms11 provide a critical service in helping to inform their own independent decisions on voting proxies.12 They dispute the influence of proxy advisory firms, noting that institutional investors vote overwhelmingly for management proposals and may vote in significantly different percentages on the same proposal.13 Moreover, they contend that agreement with a recommendation of a proxy voting adviser does not equate to irresponsible deference. With respect to asserted errors in formulating recommendations and the call for issuer pre-review of voting advice, proxy advisory firms argue that supposed errors are often simply differences of opinion, and some clients for whom the reports are prepared do not want the reports pre-screened by the subject companies because they believe pre-review may compromise the independence of the advice.14

Additionally, a number of institutional investors have expressed the view that they are satisfied with the services they receive from proxy advisory firms and oppose efforts to regulate them.15 During his remarks at the SEC's open meeting to adopt the recent guidance, Commissioner Roisman countered this perspective stating that, in this context, he does not consider investment advisers to be the investors that the SEC is charged with protecting, but rather, the Commission's guidance on proxy voting is designed to protect the "ultimate retail investors."16

In context, the releases appear to be a modest effort to address some of the concerns raised by companies by encouraging greater transparency and emphasizing accountability of both the proxy advisory firms and the investment advisers that engage them. To the extent proxy advisory firms respond to the...