Compliance Solutions for Investment Advisers

FAQs — Proxy Voting

 

What are the requirements for investment advisers that vote proxies on behalf of their clients?

Advisers that vote client proxies must (i) adopt and implement written policies and procedures that are reasonably designed to ensure that the adviser votes proxies in the best interest of its clients; (ii) describe its proxy voting procedures to its clients and provide copies on request; and (iii) disclose to clients how they may obtain information on how the adviser voted their proxies.

If an investment adviser provides advice to clients on voting proxies, but does not have discretionary authority to vote those proxies, is the adviser required to adopt and implement proxy voting procedures, etc.?

No.  The requirement to adopt and implement proxy voting procedures only applies to investment advisers that exercise proxy voting authority over client securities. However, advisers that have implicit as well as explicit voting authority also must comply with the proxy voting rule. Therefore, the rule applies when the advisory contract is silent, but the adviser’s voting authority is implied by an overall delegation of discretionary authority.

What are the requirements for proxy voting policies and procedures?

The policies and procedures must be in writing. They must be reasonably designed to ensure that the adviser votes in the best interest of clients. And they must describe how the adviser addresses material conflicts between its interests and those of its clients with respect to proxy voting.

Has the SEC given any guidance as to what should be included in an investment adviser’s proxy voting policies and procedures?

Advisers’ proxy voting policies and procedures should address (although the rule does not require) how the adviser will vote proxies (or what factors it will take into consideration) when voting on particular types of matters, such as changes in corporate governance structures, adoption or amendments to compensation plans (including stock options) and matters involving social issues or corporate responsibility.

What is the scope of an investment adviser’s responsibilities to a client when voting proxies?

The scope of an adviser’s responsibilities with respect to voting proxies would ordinarily be determined by the adviser’s contracts with its clients, the disclosures it has made to its clients, and the investment policies and objectives of its clients. An adviser’s fiduciary duties to a client do not necessarily require the adviser to become a “shareholder activist” by, for example, actively engaging in soliciting proxies or supporting or opposing matters before shareholders.

Does an investment adviser with authority to vote proxies have to vote each and every proxy?

No.  While, an adviser’s duty of care requires an adviser with voting authority to monitor corporate actions and vote client proxies, that does not mean that an adviser that fails to vote every proxy would necessarily violate its fiduciary obligations. There may even be times when refraining from voting a proxy is in the client’s best interest, such as when the adviser determines that the cost of voting the proxy exceeds the expected benefit to the client. An adviser may not, however, ignore or be negligent in fulfilling the obligation it has assumed to vote client proxies.

How can an investment adviser resolve material conflicts of interest with its clients?

Disclosing the conflict to clients and obtaining their consent before voting satisfies the requirements of the rule and, when implemented, fulfills the adviser’s fiduciary obligations under the Advisers Act. In the absence of client disclosure and consent, an adviser that has a material conflict of interest with its clients must take other steps designed to ensure, and must be able to demonstrate that those steps resulted in, a decision to vote the proxies that was based on the clients’ best interest and was not the product of the conflict.

What method can an investment adviser use to seek client consent to a material conflict of interest?

An adviser seeking a client’s consent must provide the client with sufficient information regarding the matter before shareholders and the nature of the adviser’s conflict to enable the client to make an informed decision to consent to the adviser’s vote. Boilerplate disclosure in a client brochure regarding generalized conflicts would be inadequate.

What are some methods of ensuring that proxy votes are voted in the client’s best interest and not affected by the adviser’s conflicts of interest?

Advisers use various means of ensuring that proxy votes are voted in their client’s best interest and not affected by the adviser’s conflicts of interest. An adviser that votes securities based on a pre-determined voting policy could demonstrate that its vote was not a product of a conflict of interest if the application of the policy to the matter presented to shareholders involved little discretion on the part of the adviser. Similarly, an adviser could demonstrate that the vote was not a product of a conflict of interest if it voted client securities, in accordance with a pre-determined policy, based upon the recommendations of an independent third party. An adviser could also suggest that the client engage another party to determine how the proxies should be voted, which would relieve the adviser of the responsibility to vote the proxies. Other policies and procedures are also available.  Their effectiveness (and the effectiveness of any policies and procedures) will turn on how well they insulate the decision on how to vote client proxies from the conflict.

Is an investment adviser required to publicly disclose how it voted a proxy?

No. Advisers are not required to disclose their votes publicly. However, advisers are required to disclose to their clients how they can obtain information from the adviser on how their securities were voted.

What are the disclosure requirements for proxy voting?

An investment adviser must disclose the following information in Item 17 of Form ADV Part 2A:

  • Whether (and, if so, how) its clients can direct the adviser’s vote in a particular solicitation;
  • How it addresses conflicts of interest with its clients with respect to voting their securities; and
  • How clients may obtain information about how the investment adviser voted their securities and explain to clients that they may obtain a copy of the adviser’s proxy voting policies and procedures upon request.

If an adviser does not have authority to vote client securities, it must disclose this fact and explain whether clients will receive their proxies or other solicitations directly from their custodian or a transfer agent or from the advisory firm. An adviser must also discuss whether (and, if so, how) clients can contact the firm with questions about a particular solicitation.

What records is an investment adviser required to keep with regard to proxy voting?

Advisers Act Rule 204-2 requires investment advisers to keep copies of the following material pertaining to the proxy voting:

  • Copies of all proxy voting policies and procedures.
  • A copy of each proxy statement that the investment adviser receives regarding client securities. An investment adviser may satisfy this requirement by relying on a third party to make and retain, on the investment adviser’s behalf, a copy of a proxy statement (provided that the adviser has obtained an undertaking from the third party to provide a copy of the proxy statement promptly upon request) or may rely on obtaining a copy of a proxy statement from the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
  • A record of each vote cast by the investment adviser on behalf of a client. An investment adviser may satisfy this requirement by relying on a third party to make and retain, on the investment adviser’s behalf, a record of the vote cast (provided that the adviser has obtained an undertaking from the third party to provide a copy of the record promptly upon request).
  • A copy of any document created by the adviser that was material to making a decision how to vote proxies on behalf of a client or that memorializes the basis for that decision.
  • A copy of each written client request for information on how the adviser voted proxies on behalf of the client, and a copy of any written response by the investment adviser to any (written or oral) client request for information on how the adviser voted proxies on behalf of the requesting client.

What proxy voting records does the SEC usually request prior to a regulatory examination?

The Staff of the SEC may request some of all of the following documents and information pertaining to proxy voting:

  • A list of the person or persons by name and title who are responsible for voting proxies.
  • Copies of the current organizational charts of the departments responsible for voting proxies.
  • Copies of emails related to issues on proxy voting matters. At a minimum, include emails for the proxy manager, proxy voting committee members, any third party screeners or service providers, corporate action personnel, compliance, investment professionals and marketing personnel.
  • Copies of written proxy policies and procedures.
  • Copies your firm’s description of its proxy voting policies and procedures.
  • Copies of your firm’s proxy voting records for all clients.
  • Copies of proxies received where votes were not cast and an explanation for not submitting a vote.
  • Copies of proxy statements where there were conflicts of interests present and any documentation memorializing the basis for deeming the conflict as material or not.
  • Copies of the contracts or agreements and any amendments used in connection with providing proxy voting services.
  • Copies of all correspondence to or from any proxy voting service provider, including copies of invoices and payments.
  • Copies of each written client request for information on how proxies were voted and a copy of any written response, including any log kept for both oral and written record requests.
  • A copy of the policy addressing who is the party responsible for voting the proxy of securities on loan.

 

Important Information

The information contained in this Frequently Asked Questions is only a summary and is not intended to be a comprehensive analysis of the rules and regulations applicable to registered investment advisers. It is not intended to constitute legal or compliance consulting advice or apply to any one investment adviser’s particular situation. For more information, please see our Terms of Use.

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