SEC staff withdraws two no-action letters related to proxy advisory firms

SEC Chair Jay Clayton in July announced that the SEC will be holding a Roundtable to discuss the proxy process, currently expected to be held in November 2018.

Role of proxy Advisory Firms

Among the potential topics identified was the role of proxy advisory firms and the question of whether investment advisers and others rely excessively on proxy advisory firms for information aggregation and voting recommendations.

The SEC Division of Investment Management has now issued a statement announcing that, in light of subsequent developments, the staff has withdrawn two frequently disparaged no-action letters  which provided staff guidance about investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms.

Duty of care

By way of background, as fiduciaries, investment advisers owe their clients duties of care and loyalty with respect to services provided, including proxy voting. Accordingly, in voting client securities, an investment adviser must adopt and implement policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interest of its clients. The two now-withdrawn no-action letters indicated that one way advisers could demonstrate that proxies were voted in their clients’ best interest was to vote client securities based on the recommendations of an independent third party—including a proxy advisory firm—which served to “cleanse” the vote of any conflict on the part of the investment adviser. Historically, investment advisers have frequently looked to proxy advisory firms to fill this role. As a result, the staff’s guidance was often criticized for having “institutionalized” the role of—and, arguably, the over-reliance of investment advisers on—proxy advisory firms, in effect transforming them into faux regulators.

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