On June 30, 2014, the SEC's Division of Investment Management and Division of Corporation Finance jointly issued new 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." The Staff Legal Bulletin consists of 13 Q&As:

Among other topics, the new guidance includes discussions of:

In Q&A 4, the Staff states its belief that, to comply with Rule 206(4)-6 under the Investment Advisers Act of 1940 (the proxy voting rule), an investment adviser that has retained a proxy advisory firm to assist with its voting duties should implement procedures reasonably designed to ensure that the investment adviser, acting through the proxy advisory firm, continues to vote proxies in the best interests of its clients.

Specifically, the Staff notes that investment advisers should implement measures reasonably designed to identify and address a proxy advisory firm's conflicts that can arise on an ongoing basis. An investment adviser could, for example, require a proxy advisory firm to update the investment adviser on:

In Q&As 10 through 13, the Staff examines the availability of the Exchange Act Rule 14a-2(b)(3) exemption from the federal proxy rules in cases where a proxy advisory firm has a conflict of interest. Rule 14a-2(b)(3) exempts the furnishing of proxy voting advice by any person to another person with whom a business relationship exists, subject to certain conditions.

In Question 10, the Staff examines whether a proxy advisory firm may be precluded from relying on the Rule 14a-2(b)(3) exemption if that firm either:

The Staff states that to rely on Rule 14a-2(b)(3), a proxy advisory firm must first assess whether either:

The proxy advisory firm then must disclose to the recipient of the voting recommendation any significant relationship or material interest that it identified. Whether a relationship is "significant" or an interest is "material" is to be determined based on the specific facts and circumstances in each case. In determining whether a relationship is significant, a proxy advisory firm should consider:

A similar inquiry would be made in determining whether an interest is material. A relationship generally would be considered "significant" or a "material interest" would exist if knowledge of the relationship or interest would reasonably be expected to affect the recipient's assessment of the reliability and objectivity of the adviser and the advice.

Q&A 11 clarifies that if a proxy advisory firm determines that it has a significant relationship or material interest requiring disclosure under Rule 14a-2(b)(3), it must provide notice of the relationship or material interest to the recipient of its advice. Boilerplate language that a significant relationship or material interest may or may not exist does not provide sufficient notice. Instead, the disclosure should:

In Q&A 12, the Staff stresses that Rule 14a-2(b)(3):

Q&A 13 states that Rule 14a-2(b)(3) does not specify where or how the disclosure of a significant relationship or material interest should be provided. A proxy advisory firm should provide the disclosure in a way that allows the client to assess both:

The disclosure may be made publicly or between only the proxy advisory firm and the client.