RIA Compliance Blog
In July 2020, the Securities and Exchange Commission issued supplemental guidance relating to the duties of investment advisers with respect to proxy voting. This follows guidance issued in 2019, which we have discussed before. The prior guidance was issued in connection with amended rules finalized at the same time which dealt with proxy solicitations under the federal securities laws. Those amendments were designed to grant companies that issue stock to obtain advisory firms’ recommendations on proxy issues in advance of the proxy submission deadline. As a result, the issuer has time to submit additional materials as part of the proxy solicitation.
As a result of the new rules, proxy voting services will be forced to share their voting recommendations with the issuers of the securities at or prior to the providing the recommendations to their institutional clients, and if issuers submit additional information in response, must also disclose such information to the clients. The proxy advisers must also disclose any conflicts of interest that might exist that could reasonably be expected to influence their recommendations.
The effective date of the amended rule is 60 days after publication. Proxy advisory firms must comply with the amendments by December 1, 2021. The supplemental guidance became effective on September 3, 2020.
The Supplemental Guidance relates to how an RIA that uses the services of a third-party proxy voting firm may implement the firm’s recommendations. Most RIAs pre-populate their clients’ proxy votes or automatically submit a client’s vote. Under the supplemental guidance, an RIA must consider whether its policies and procedures sufficiently permit additional information submitted with the solicitation to be considered in advance of the proxy vote being submitted. If such supplemental information is filed, an RIA’s policies must dictate that the information must be considered if it is material to the issues being voted upon. This conclusion follows and is based upon the RIA’s fiduciary duty to its clients, which require that each proxy vote submitted be in the particular client’s best interest. RIAs that do not vote client proxies are not affected by the original or supplemental guidance.
RIAs that use automated voting must disclose material facts relating to the exercise of authority, including information that would permit a client to understand how the voting execution services work. This requires that the RIA disclose the extent to which an automated voting process is employed and how the filing of additional materials by the issuer is taken into consideration by the adviser prior to the deadline for casting the proxy vote. Only if such information is specifically provided will the adviser have the client’s informed consent to cast the vote.
In some cases, proxy advisory services may come into possession of non-public insider information in the form of pre-populated votes by large financial institutions such as advisory firms. The SEC guidance suggests that advisory firms facing that situation should assure that their agreements with the proxy adviser contain information prohibiting the use of such information in a manner not in the advisory firm’s clients.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.