Is A Popularity Contest The Best Way To Pick An Advisor?


Koheleth wrote that “there is nothing new under the sun”, but there are a many ideas that are new to me.  Such is the case with the shareholder proposal recently submitted by James McRitchie ( to Cisco Systems, Inc.  In general, he proposes that Cisco’s board establish a competition for proxy advisory firms.  These firms would pay a fee (he suggests $2,000) and the shareholders would be asked “Which of the following proxy advisors do you think deserve cash awards for the usefulness of information they have provided to Cisco shareowners?”  The company would then award cash prizes based on the number of votes received.

Cisco opposed the proposal on two grounds.  First, it argued that the proposal was an illegal lottery under California law (Cal. Penal Code §§ 619 et seq.) and therefore excludable under Rule 14a-8(i)(2).  Although Cisco submitted a legal opinion to that effect, the SEC staff declined to concur.  Cisco is a California corporation and that would seem to make California law relevant.  However, it seems entirely possible that participating proxy advisory firms will be located in other jurisdictions.  Institutional Shareholder Services (ISS), for example, is located in Maryland.  By offering the competition to advisers in other states, won’t the laws of those jurisdictions be implicated?  Second, Cisco argued that the proposal was excludable under Rule 14a-8(i)(8) because, if implemented, it would impermissibly relate to director elections.  The SEC staff declined to concur with either position.  Because the staff doesn’t provide reasons, one can only guess as to why.

Koheleth was right, the idea of a proxy advisor competition is not new.  In fact,, Inc. omitted a similar proposal from Mr. McRitchie earlier this year under Rule 14a-8(i)(7), as relating to’s ordinary business operations.  See March 20, 2013 No-Action Letter.  In 2006, Microsoft’s shareholders voted nearly 50 to 1 against a similar idea.

It seems to me that the proposal could create significant compliance questions for investment advisers.  For example, would the shareholders be clients?  If so, how could an advisory firm comply with the Investment Advisers Act of 1940?  To whom would it be required to deliver brochures?  How would the adviser handle conflicts and potential conflicts?


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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