SEC IM Staff Issues Guidance on Proxy Voting Responsibilities of Investment Advisers

by Dechert LLP

The U.S. Securities and Exchange Commission’s (SEC) Divisions of Investment Management (IM) and Corporate Finance (CF) released a staff legal bulletin (Bulletin) on June 30, 2014, covering various issues involved with proxy voting. In the Bulletin, the staff of the IM Division (IM Staff) provided guidance as to the responsibilities of investment advisers in voting client proxies and retaining proxy advisory firms, and the staff of the CF Division (CF Staff) expressed its views as to the requirements for two exemptions from the federal proxy rules that are often relied upon by proxy advisory firms.

Many U.S. asset managers that manage investment funds currently retain proxy advisory firms, and this DechertOnPoint focuses on the IM Staff’s guidance to investment advisers.1

Overview of the Bulletin

The IM Staff first provided examples of steps that investment advisers may wish to take to demonstrate that proxy votes are being cast in accordance with their clients’ best interests and in a manner that is consistent with the investment adviser’s own proxy voting policies and procedures. The IM Staff also noted that, although there are many different types of proxy arrangements that may be agreed to between investment advisers and clients, a registered investment adviser must always exercise proxy authority in compliance with the SEC’s proxy voting rule (Proxy Voting Rule).2 The IM Staff addressed factors that it believes an investment adviser should consider when determining whether to retain a proxy advisory firm to assist the investment adviser in discharging its obligations to clients with respect to proxy voting matters. Further, the IM Staff discussed how an investment adviser who retains a proxy advisory firm should exercise reasonable ongoing oversight of that proxy voting firm – focusing, particularly, on the potential conflicts of interest to which proxy advisory firms may be subject, as well as an investment adviser’s duties with respect to the material accuracy of the facts relied upon by proxy voting firms in formulating a recommendation.

Investment Adviser Recommendations

In light of the fiduciary duties owed by an investment adviser to its clients and the particular requirements imposed on registered investment advisers by the Proxy Voting Rule, the IM Staff suggested the following steps that investment advisers can take to demonstrate that proxy votes are cast in accordance with clients’ best interests and the investment adviser’s proxy voting policies and procedures:

  • periodically sampling proxy votes to review whether they complied with the investment adviser’s proxy voting policy and procedures; and
  • review[ing] a sample of proxy votes that relate to certain proposals that may require more analysis.3

Additionally, consistent with the SEC’s compliance program rule under the Advisers Act (Compliance Program Rule), the IM Staff suggested that an investment adviser should review (at least annually) the “adequacy of its proxy voting policies and procedures to make sure they have been implemented effectively, including whether these policies and procedures continue to be reasonably designed to ensure that proxies are voted in the best interests of its clients."4

Types of Proxy Arrangements

The IM Staff noted that the Proxy Voting Rule does not require that investment advisers be responsible for voting proxies on behalf of clients. Rather, investment advisers and clients may agree as to the authority, if any, that an investment adviser will exercise, including for example: (i) client grants to the investment adviser complete authority to vote proxies; (ii) client agrees that the investment adviser will not vote certain types of proxy proposals; (iii) client instructs the investment adviser to vote proxies as recommended by the management of the company, unless the investment adviser receives different instructions from the client; (iv) client and investment adviser agree that the adviser will abstain from voting all proxies, regardless of whether the client votes proxies itself; and (v) client instructs the investment adviser to focus resources only on particular types of proposals based on the client’s preferences.5 The IM Staff emphasized that, whenever a registered investment adviser assumes any degree of voting authority, it must exercise that authority in a manner that is consistent with the Proxy Voting Rule.

Proxy Advisory Firm Factors

The IM Staff discussed certain factors that it believes an investment adviser should consider when retaining a proxy advisory firm. In particular, the IM Staff emphasized that an investment adviser should consider “whether the proxy advisory firm has the capacity and competency to adequately analyze proxy issues.” Factors that the IM Staff suggested advisers might consider include:

  • the adequacy and quality of the proxy advisory firm’s staffing and personnel;
  • the robustness of [the proxy advisory firm’s] policies and procedures regarding its ability to (i) ensure that its proxy voting recommendations are based on current and accurate information and (ii) identify and address conflicts of interest; and
  • any other considerations that the investment adviser believes would be appropriate in considering the nature and quality of the services provided by the proxy advisory firm.6

Investment Adviser Oversight

The IM Staff cited prior guidance indicating its view that investment advisers have an ongoing duty to oversee any proxy advisory firm retained.7 Under the Proxy Voting Rule, investment advisers who have proxy voting authority must adopt written policies and procedures reasonably designed to ensure that the adviser is voting proxies in its clients’ best interests. In the IM Staff’s view, this would include oversight procedures when a proxy advisory firm is retained and, since a proxy advisory firm’s business and/or policies and procedures regarding conflicts of interest can change over time, the investment adviser should also “establish and implement measures reasonably designed to identify and address the proxy advisory firm’s conflicts that can arise on an ongoing basis.” The IM Staff suggested that an investment adviser might satisfy this “by requiring the proxy advisory firm to update the investment adviser of business changes the investment adviser considers relevant ... or [changes in the proxy advisory firm’s] conflict policies and procedures.”

The IM Staff also addressed its expectation that “an investment adviser that receives voting recommendations from a proxy advisory firm should ascertain that the proxy voting firm has the ... ability to make voting recommendations based on materially accurate information.” If an investment adviser discovers that a proxy voting recommendation was based on materially inaccurate information, the adviser might reasonably question the proxy advisory firm’s processes and, in the IM Staff’s view, such an adviser “should take reasonable steps to investigate the error.” In doing so, the IM Staff suggested that the investment adviser consider the nature of the error, its effect on the related recommendation, and the measures the proxy advisory firm is undertaking to reduce similar types of errors in the future.


The Bulletin provides helpful insight as to the IM Staff’s view of an investment adviser’s obligations when retaining a proxy advisory firm to assist it in complying with its fiduciary duties with respect to proxy voting and the Proxy Voting Rule. The Bulletin also sets forth relevant factors that investment advisers may wish to consider when retaining a proxy advisory firm and means by which advisers can oversee any proxy advisory firms that they have retained. Implementing policies and procedures for evaluating and overseeing proxy advisory firms can help demonstrate that the investment adviser has complied with its fiduciary duties, the Proxy Voting Rule, and the Compliance Program Rule, and should reduce the chances that proxy advisory firm conflicts of interest or errors could negatively impact the investment adviser or its clients. The IM Staff has indicated that it expects that investment advisers who do not already include these types of provisions in their policies and procedures or processes in place will implement them “promptly, but in any event in advance of next year’s proxy season.”



Portions of the CF Staff’s guidance that may be of particular relevance to investment advisers included discussions of the services that a proxy advisory firm may provide to an investment adviser and the disclosures that must be made by proxy advisory firms to investment advisers regarding the proxy advisory firm’s potential conflicts of interest.


Rule 206(4)-6 under the Investment Advisers Act of 1940 (Advisers Act). By its terms, the Proxy Voting Rule applies only to advisers that “are registered or required to be registered” under the Advisers Act. However, any investment adviser, regardless of its registration status, is subject to certain fiduciary duties and the Advisers Act’s general anti-fraud provisions. Unregistered advisers having proxy voting authority should, therefore, also consider the guidance as instructive.


Bulletin, Q&A 1.


The Compliance Program Rule, among other things, requires an adviser to perform an annual review of the adequacy and effectiveness of implementation of the policies and procedures adopted by the investment adviser under the Advisers Act. Rule 206(4)-7(b).


As a general matter, where an adviser otherwise has discretionary authority but the adviser and client agree that the adviser will not have authority to vote, the contract (or another document) should include a provision evidencing that the adviser will not have such authority.


Bulletin, Q&A 3.


See Egan-Jones Proxy Services, SEC Staff Letter (May 27, 2004) and Institutional Shareholder Services, Inc., SEC Staff Letter (Sept. 15, 2004).


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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