CLIENT ALERT: SEC Issues Guidance on Proxy Voting Responsibilities of Investment Advisers and Interpretation Regarding Applicability of Proxy Voting Rules to Proxy Advisory Firm Voting Recommendations

Client Alert
Steve Wolosky, Andrew Freedman, Kenneth Silverman and Ron Berenblat

On August 21, 2019, the Securities and Exchange Commission (the “SEC”) (i) approved new guidance (the “Guidance”) regarding the proxy voting responsibilities of investment advisers under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and (ii) issued an interpretation and related guidance (the “Interpretation”) regarding the applicability of the federal proxy rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to proxy voting advice provided by proxy advisory firms. The Guidance discusses, among other things, the ability of investment advisers to establish a variety of different voting arrangements with their clients and matters they should consider when they utilize the services of a proxy advisory firm. Specifically, the Guidance clarifies how an investment adviser’s fiduciary duties to its clients and Rule 206(4)-6 of the Advisers Act relate to an investment adviser’s voting authority on behalf of clients, particularly where the investment adviser retains a proxy advisory firm. The Interpretation confirms the SEC’s historical position that proxy voting advice generally constitutes a “solicitation” under Rule 14a-1(l) of the Exchange Act and, as such, falls under the purview of the antifraud provisions of Rule 14a-9 of the Exchange Act. The Guidance and Interpretation will become effective upon publication in the Federal Register. The Guidance and Interpretation were issued after years of advocacy by members of Congress, corporations and others claiming that proxy advisory firms such as Institutional Shareholder Services and Glass Lewis & Co. wield too much power and a regulatory framework should be put in place to address issues related to the services provided by these firms such as conflicts of interest, accuracy of reports, transparency and oversight.

Proxy Voting Responsibilities of Investment Advisers

As fiduciaries, investment advisers owe each of their clients a duty of care and loyalty when performing services on their behalf, including proxy voting. An investment adviser’s specific fiduciary duties as they relate to proxy voting depend on the scope of the voting authority delegated by the client to the investment adviser. In making any voting determination that has been delegated to an investment adviser, the investment adviser must put the best interest of the client ahead of its own interest. Under Rule 206(4)-6 of the Advisers Act, investment advisers who exercise voting authority over securities on behalf of clients must adopt and implement written policies and procedures that are reasonably designed to ensure that their voting determinations are being made in the best interest of their clients. The Guidance clarifies how an investment adviser’s fiduciary duties and Rule 206(4)-6 relate to an investment adviser exercising such voting authority, particularly when the investment adviser has retained a proxy advisory firm.

The Guidance discusses the following in a question and answer format:

  • How an investment adviser and its clients may agree upon the scope of the investment adviser’s authority and responsibilities to vote proxies on behalf of such clients, including examples of possible voting arrangements that may be agreed upon, subject to full and fair disclosure and informed consent;

  • What steps an investment adviser that has assumed voting authority on its client’s behalf may take to demonstrate that the investment adviser is making voting decisions in the client’s best interest and in accordance with the investment adviser’s proxy voting policies and procedures, including considering (i) whether voting all shares for clients in accordance with a uniform voting policy would be in the best interest of each client, (ii) whether certain types of matters (e.g., merger transactions and contested elections) require the investment adviser to “conduct a more detailed analysis” than what may be necessary for applying general voting guidelines, and (iii) measures to determine that the investment adviser is casting votes for its clients in a manner consistent with its voting policies;

  • More specifically, if the investment adviser retains a proxy advisory firm to provide voting recommendations and/or voting execution services, additional steps the investment adviser may take to determine that its voting decisions are consistent with its voting policies and procedures and in the client’s best interest, including (i) assessing “pre-populated” votes shown on a proxy advisory firm’s electronic voting platform before casting a vote, (ii) considering additional information (e.g., in a contested solicitation, additional proxy materials filed by the company or the dissident) that may subsequently become available and could reasonably be expected to impact the investment adviser’s voting determinations, and (iii) considering whether a “higher degree of analysis” may be necessary when the investment adviser’s policies do not provide for how it should vote on a particular voting matter or where the matter is “highly contested or controversial;”

  • Certain considerations an investment adviser should weigh if it retains a proxy advisory firm to assist the investment adviser in fulfilling its proxy voting duties, including whether the proxy advisory firm has (i) the “capacity and competency” to analyze the item being voted on by the investment adviser, (ii) an “effective process” for seeking input from companies and the proxy advisory firm’s clients relating to, among other things, its proxy voting policies, methodologies and peer group constructions, (iii) adequately disclosed its methodologies for formulating voting recommendations, and (iv) policies and procedures with regard to identifying and addressing conflicts of interest;

  • Actions an investment adviser might consider taking when it becomes aware of potential factual errors, incompleteness or methodological weaknesses in the proxy advisory firm’s analysis that may have a material effect on the investment adviser’s voting determinations, including communicating with the proxy advisory firm regarding its (i) process for ensuring accurate information about the company and each voting matter, (ii) process for the investment adviser to have access to the company’s views about the proxy advisory firm’s voting recommendations, (iii) efforts to correct deficiencies in the proxy advisory firm’s analysis, (iv) disclosure to the investment adviser regarding the sources of information and methodologies used for voting recommendations, and (v) consideration of “factors unique” to a specific company or voting matter;

  • Certain criteria by which an investment adviser might evaluate the services of a proxy advisory firm it has retained, including any material changes in services rendered or operations performed by the proxy advisory firm such as changes to its conflict of interest policies; and

  • Whether an investment adviser who has assumed voting authority for a client must exercise such authority at every opportunity to do so.

Applicability of the Federal Proxy Rules to Proxy Voting Advice

The Interpretation provides that proxy voting advice issued by proxy advisory firms generally constitutes a “solicitation” under Rule 14a-1(l) of the Exchange Act and, therefore, must comply with the federal proxy rules. Further, the Interpretation confirms that because proxy voting advice constitutes a solicitation, the advice must comply with the antifraud provisions of Rule 14a-9 of the Exchange Act.

In reaching the conclusion that proxy voting advice generally constitutes a “solicitation,” the Interpretation first discusses the applicability of Rule 14a-1(l) and the SEC’s historically broad interpretation of what constitutes a “solicitation.” Rule 14a-1(l) defines a solicitation as, among other things, a “communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.” In interpreting this rule, the SEC has stated that a “solicitation” 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” and regardless of whether the person is “indifferent to the outcome of [the] vote.” The SEC has also taken the position that this definition may include “communications which may indirectly accomplish such a result or constitute a step in a chain of communications designed ultimately to accomplish such a result.” Consistent with this broad definition of “solicitation,” the Interpretation reaffirms the SEC’s previously stated view that a proxy advisory firm’s voting recommendations may be subject to the proxy rules even though it does not seek authorization to act as a proxy or have an interest in the outcome of the vote.

The SEC has also previously stated that the determination as to whether a communication is a “solicitation” often depends on “‘the purpose for which the communication was published – i.e., whether the purpose was to influence the shareholders’ decisions,’ as evidenced by the substance of the communication and the circumstances under which it was transmitted.” In the Interpretation, the SEC discusses whether the issuance of voting recommendations by proxy advisory firms is intended to influence proxy voting decisions based on the foregoing “substance” and “circumstances” analysis. The SEC observes that proxy advisory firms “market their expertise in researching and analyzing” voting matters and present voting recommendations to their clients with the expectation that these recommendations will be used by their clients to assist in fulfilling their fiduciary duty when making voting decisions. Accordingly, the SEC states that the substance of proxy advisory firms’ services and the circumstances under which they assist clients with making their voting determinations and “not merely performing administrative or ministerial services” further support its determination that such proxy voting advice constitutes a solicitation. The Interpretation further provides that the same generally holds true even when a proxy advisory firm provides tailored voting advice based on a client’s internal voting guidelines and even in cases where the client may not follow the proxy advisory firm’s advice.

However, the Interpretation does not preclude proxy advisory firms from continuing to avail themselves of the Rule 14a-2(b) exemptions to the filing requirements imposed by the proxy rules. Rule 14a-2(b)(3) specifically exempts the “furnishing of proxy voting advice by any person (the “advisor”) to any other person with whom the advisor has a business relationship” as long as: (i) the advisor renders financial advice in the ordinary course of its business, (ii) the advisor discloses any significant relationship with the issuer or other proponent of the matter as well as any material interest the advisor has in the matter, (iii) the advisor does not receive any compensation for furnishing the advice from any person other than the recipient of the advice, and (iv) the advice is not furnished on behalf of any person soliciting proxies or any participant in an election.

The Interpretation does, however, also specify that even though the furnishing of proxy voting advice may be exempt from the filing requirements of the federal proxy rules, such advice still remains subject to Rule 14a-9 of 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 is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading.” Consequently, the SEC notes that a proxy advisory firm should consider disclosing the following types of information, among other things, in order to avoid violating Rule 14a-9: (i) an explanation of the methodologies used to formulate its voting advice, and any material deviations from any publicly announced methodologies, where the omission of such information would render the advice materially false or misleading, (ii) any third-party sources of information on which the voting advice is based and the extent to which this information differs from information publicly disclosed by the company where failure to disclose these differences would render the advice false or misleading, and (iii) a description, in “reasonably sufficient detail” of any material conflicts of interests that may arise in connection with providing the proxy voting advice.


In response to the Guidance regarding proxy voting responsibilities of investment advisers, we generally expect to see investment advisers re-examine, on a client-by-client basis, their contractual obligations to make voting decisions on behalf of each client, their policies for making voting determinations and procedures for managing voting mechanics for each client and whether these policies and procedures ensure that their voting decisions are being made in the best interest of their clients and in a manner that fulfills their fiduciary duties. To the extent investment advisers rely on or take into consideration recommendations of proxy advisory firms, we expect to see these investment advisers re-examine, on a client-by-client basis, their contractual obligations and policies for taking into consideration the recommendations of proxy advisory firms in formulating their voting decisions, policies and procedures for utilizing electronic platforms provided by proxy advisory firms to cast votes on behalf of clients, policies and procedures to ensure proper due diligence is conducted with regard to services provided by proxy advisory firms, and policies and procedures for addressing potential conflicts of interest and factual errors, incompleteness and methodological weaknesses in a firm’s analysis. In response to the Interpretation regarding the applicability of the proxy rules to proxy voting advice, we expect to see proxy advisory firms re-examine the methodologies used to formulate their voting recommendations and the disclosure in their websites and voting reports regarding these methodologies as well as the identification of third-party sources of information they rely upon in making their recommendations and the extent to which such third-party information differs from publicly available information disclosed by the company.

Please contact the Olshan attorney with whom you regularly work or one of the attorneys below if you would like to discuss further or have questions.

This publication is issued by Olshan Frome Wolosky LLP for informational purposes only and does not constitute legal advice or establish an attorney-client relationship. In some jurisdictions, this publication may be considered attorney advertising.
Copyright © 2019 Olshan Frome Wolosky LLP. All Rights Reserved.

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