Growing concerns regarding the increasingly prominent role of proxy advisory firms, including Institutional Shareholder Services and Glass Lewis, were largely not addressed when, on June 30, 2014, the Securities and Exchange Commission’s (the “SEC”) Division of Investment Management and Division of Corporation Finance issued joint guidance — Staff Legal Bulletin No. 20, “Proxy Voting: Proxy Voting Responsibilities of Investment Advisers and Availability of Exemptions from the Proxy Rules for Proxy Advisory Firms” (“SLB No. 20”). Investment advisers routinely rely on proxy advisory firms’ voting recommendations for proposals presented for shareholder vote and on general recommendations regarding corporate voting matters, such as director elections and executive compensation. Many public companies take proxy advisory firms’ recommendations very seriously because such recommendations are able to have a meaningful impact on corporate voting results. While SLB No. 20 addressed some of these concerns, including with respect to potential conflicts of interest, proxy advisory firms are likely to retain a significant influence on the outcomes of corporate voting matters as investment advisers are expected to continue to rely on voting recommendations in making decisions on behalf of shareholders of their portfolio companies.
Composed of 13 Q&As, SLB No. 20 outlines the Division of Investment Management clarifications about investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms (Q&As 1–5) and the Division of Corporation Finance clarifications regarding the availability and requirements of two exemptions to the federal proxy rules that are often relied upon by proxy advisory firms (Q&As 6–13). As a practical matter, SLB No. 20 focuses on conflicts of interest and excessive reliance on voting recommendations of proxy advisory firms. Following SLB No. 20, proxy advisory firms are required to disclose to their clients any conflicts of interest if, for instance, a proxy advisory firm provides consulting services to a company on a matter central to a voting recommendation. Investment advisers are now required to adopt, implement and periodically evaluate proxy voting policies and procedures to ensure that, in following any voting recommendations, they are acting in their clients’ best interests.
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