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SEC Issues New Guidance Regarding Investment Advisers' Proxy Voting Responsibilities and the Application of Proxy Rules to Voting Advice
Practical Law Legal Update w-021-7946 (Approx. 4 pages)
SEC Issues New Guidance Regarding Investment Advisers' Proxy Voting Responsibilities and the Application of Proxy Rules to Voting Advice
by Practical Law Corporate & Securities
| Published on 22 Aug 2019 • USA (National/Federal) |
The SEC's Division of Investment Management and Division of Corporation Finance provided guidance to assist investment advisers in fulfilling their proxy voting responsibilities, an interpretation that proxy voting advice provided by proxy advisory firms generally constitutes a "solicitation" under the federal proxy rules, and related guidance about the application of the proxy antifraud provisions to proxy voting advice.
On August 21, 2019, the SEC's Division of Investment Management and Division of Corporation Finance issued a press release outlining their:
- Guidance and interpretation that proxy voting advice provided by proxy advisory firms generally constitutes a "solicitation" under the federal proxy rules and the application of the proxy antifraud rule to proxy voting advice.
Investment Advisers' Proxy Voting Responsibilities
Investment advisers are subject to the fiduciary duties of care and loyalty with respect to services undertaken on the clients' behalf, including proxy voting. Rule 206(4)-6 under the Investment Advisers Act of 1940 requires investment advisers that exercise voting authority with respect to client securities to adopt and implement written policies and procedures that are reasonably designed to ensure that they vote proxies in the best interest of their clients. The guidance further clarifies how investment advisers' fiduciary duty and Rule 206(4)-6 relate to an adviser's proxy voting on behalf of clients, particularly if the adviser retains a proxy advisory firm. The guidance is provided in a question and answer format and discusses topics, including:
- How an adviser and its client, in establishing their relationship, may agree on the scope of the adviser's proxy voting authority and responsibilities on behalf of the client.
- What steps an adviser that has assumed voting authority on behalf of clients could take to demonstrate it is making voting determinations in a client's best interest and in accordance with the adviser's proxy voting policies and procedures.
- Considerations that an adviser should take into account if it retains a proxy advisory firm to assist in discharging its proxy voting duties.
- Steps for an adviser to consider if it becomes aware of potential factual errors, potential incompleteness, or potential methodological weaknesses in the proxy advisory firm's faulty analysis that may materially affect one or more of the adviser's voting determinations.
- How an adviser could evaluate the services of a proxy advisory firm that it retains, including evaluating any material changes in services or operations of the proxy advisory firm.
- Whether an adviser that has assumed voting authority on behalf of a client is required to exercise every opportunity to vote a proxy for that client.
Applicability of the Federal Proxy Rules to Proxy Voting Advice
The federal proxy rules apply to any solicitation for a proxy with respect to any security registered under Section 12 of the Securities Exchange Act (Exchange Act). Under Rule 14a-1(l) under the Exchange Act, a solicitation includes a "communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy" and includes communications by a person seeking to influence the voting of proxies by shareholders, regardless of whether the person itself is seeking authorization to act as a proxy.
Under the SEC's interpretation, proxy voting advice provided by a proxy advisory firm generally constitutes a solicitation subject to the federal proxy rules. However, this interpretation does not affect the ability of proxy advisory firms to continue to rely on the exemptions from the federal proxy rules' filing requirements in Rule 14a-2(b) under the Exchange Act.
Solicitations exempt from the federal proxy rules' filing requirements remain subject to Rule 14a-9 under the Exchange Act, which prohibits any solicitation from containing any statement which, at the time and in the light of the circumstances under which it was made, is false or misleading with respect to any material fact. The SEC guidance explains what a proxy voting firm should consider when considering the information it may need to disclose to avoid a potential violation of Rule 14a-9 under the Exchange Act where the failure to disclose such information would render the advice materially false or misleading.
For more information on proxy advisory firms and proxy statements, see: