On July 22, 2020, the Securities and Exchange Commission (the “SEC”) issued supplemental guidance (the “Supplemental Guidance”) regarding the proxy voting responsibilities of an SEC-registered investment adviser (“adviser”) under the Investment Advisers Act of 1940 (the “Advisers Act”).1 The Supplemental Guidance provides additional guidance on policies and procedures and disclosure requirements for an adviser that uses a third-party proxy advisory firm’s (“proxy advisory firm”) electronic vote management system.2
Policies and Procedures Requirements
Proxy advisory firms may help advisers with voting execution through an electronic vote management system by (i) pre-populating the adviser’s votes on the proxy advisory firm’s electronic voting platform with the proxy advisory firm’s recommendations based on the adviser’s voting instructions to the firm (“pre-population”); and/or (ii) automatically submitting the adviser’s votes to be counted (“automated voting”). Pre-population and automated voting generally occur prior to the proxy submission deadline. In conducting a reasonable investigation into matters on which it votes, an adviser may become aware that an issuer that is the subject of a proxy advisory firm’s voting recommendation intends to file or has filed additional solicitating materials (“Additional Information”) that may or may not reasonably be expected to affect an adviser’s voting determination.
The Supplemental Guidance provides that an adviser should consider whether its policies and procedures with respect to automated voting are reasonably designed to ensure that an adviser exercises voting authority in its client’s best interest. In particular, an adviser should consider whether its policies and procedures address circumstances where an adviser has become aware that an issuer intends to file or has filed Additional Information with the SEC after the adviser has received the proxy advisory firm’s voting recommendation but before the proxy submission deadline. In such instances, if an issuer files Additional Information sufficiently in advance of the submission deadline and the Additional Information would reasonably be expected to affect the adviser’s voting determination, the adviser would likely need to consider the Additional Information prior to exercising voting authority to demonstrate it is voting in its client’s best interest.
The Supplemental Guidance further provides that, due to the timing of pre-population and automated voting, proxy advisory firms may possess non-public information regarding how an adviser intends to vote a client’s securities. The adviser should consider reviewing its agreements with proxy advisory firms to determine whether the proxy advisory firms would be permitted to utilize this information in a manner that would not be in the best interest of the adviser’s client, such as whether the proxy advisory firm would be permitted to share this information (including information on aggregated voting intentions of the firm’s clients) with third parties.
Disclosure Requirements
According to the Supplemental Guidance, an adviser has an obligation, as a result of its duty of loyalty to clients, to make full and fair disclosure of all material facts relating to the advisory relationship, including material facts relating to the exercise of voting authority with respect to client securities. The Supplemental Guidance provides that advisers using automated voting should consider disclosing (i) the extent of and circumstances under which the adviser uses automated voting; and (ii) how the adviser’s policies and procedures address the use of automated voting in cases where the adviser becomes aware of Additional Information prior to the proxy submission deadline.
The Supplemental Guidance states that an adviser should carefully review whether it has provided its clients with the disclosure necessary for the clients to provide informed consent to the use of automated voting and for the adviser to satisfy its obligations under rule 206(4)-6 under the Advisers Act and Form ADV.
S&K Observations
The Supplemental Guidance expands on the proxy voting guidance for advisers provided by the SEC in 2019 and continues the theme of that prior guidance in explaining that an adviser’s fiduciary duty requires it to continue to be involved in the proxy voting process to the extent it is responsible for voting proxies for a client. Essentially, an adviser cannot hand the voting baton to a proxy voting service and walk away; it must continue to stay apprised of matters relating to each proxy vote. By requiring disclosures relating to this process, the SEC is reinforcing this obligation.
Seward & Kissel LLP, and our compliance consulting service SKRC (Seward & Kissel Regulatory Compliance), are available to assist advisers with the issues discussed in the Supplemental Guidance.
