PLANADVISER - September/October 2019 - 54

compliance consult
SEC Issues Proxy Guidance
Noted are proxy voting duties and rules for advisers
ON August 21, the Securities and Exchange Commission
(SEC) issued an interpretive release titled " Commission
Guidance Regarding Proxy Voting Responsibilities of Investment
Advisers, " directed at all advisers registered under the
Investment Advisers Act of 1940. The SEC focused on three
broad categories of Adviser Act compliance as to proxy voting
activity: 1) when and to what extent the act applies; 2) the
standard of conduct that applies to advisers who engage in
proxy voting activities; and 3) the responsibilities
of advisers who utilize the services
of third-party proxy voting services.
During the advisory relationship, a
number of opportunities will arise with
regard to voting securities held by an
adviser's clients. The fiduciary requirements
under the Adviser Act apply to the
extent that the adviser agrees with the
client to assume responsibilities for proxy
voting. In other words, the adviser need
not assume any responsibility for voting
proxies, may assume only limited responsibility,
or may assume complete responsibility
for voting proxies. However, the
SEC requires the adviser to obtain from
his client " full and fair disclosure and informed consent " in
connection with how the advisory relationship is shaped.
In its release, the SEC provides a number of examples
include, for example, mergers and acquisitions (M&As), dissolutions,
conversions, consolidations and contested board of
directors elections, rather than more routine matters, such
as a change to an issuer's auditors, that require a vote.
The policies should identify such complex situations
... hiring a third
party does
not absolve
the adviser of
compliance
with his fiduciary
duties and
obligations ...
showing different degrees to which the adviser vs. the client
can handle the voting responsibilities and says the two
parties have a great deal of discretion in defining what each
one's role will be.
The release also makes clear that an adviser acts as a
fiduciary to the extent that he assumes voting responsibilities.
Therefore, he should consider how he will meet his fiduciary
duties and obligations under Rule 206(4)-6. This means
he must act in the best interest of the client and, to that end,
establish appropriate proxy voting policies and procedures.
Notably, the release states, an adviser should consider
whether to apply a uniform proxy voting policy to every
client, or to tailor the policy to the client or groups of clients.
The answer to this question will largely depend on the
extent to which he has agreed with each client to provide
proxy voting services and whether his clients all have the
same investment strategies or objectives.
The SEC also noted that an adviser should consider
whether his proxy voting policies and procedures should
require that he conduct a more detailed analysis when more
complicated or significant events are at issue. Such events
and detail how those versus the routine matters, will be
addressed. The release also says all of the adviser's proxy
voting policies and procedures should be disclosed in his
statements of additional information or
on Form N-CSR and that he should test
whether he complies with the procedures
he has established.
Finally, the SEC explains in considerable
detail how an adviser should comply
with the act when he engages third-party
proxy voting firms to help conduct voting
activities. Importantly, the release stresses
that hiring a third party does not absolve
the adviser of compliance with his fiduciary
duties and obligations under Rule 206(4)-6.
When an adviser engages a third-party
proxy voting service, that service must take
steps to assure that the adviser's voting
determinations are consistent with his policies
and procedures and with his fiduciary duties. But there
may be situations where the adviser should not simply accept
the recommendations of the third party such as when he has
pertinent additional information that the third party lacks.
According to the SEC, the Adviser Act also requires the
adviser to enter into a rigorous due diligence process when
hiring a third-party proxy firm. The firm must be adequately
qualified to perform the services for which it is engaged. The
adviser should review the firm's policies and procedures,
including those intended to address potential conflicts of
interest on the part of the firm and to address potential
factual errors, potential incompleteness, or potential methodological
weakness in the firm's analysis.
By making even modest changes to policies and procedures,
advisers may be able to find, and remedy, shortcomings
before the SEC spots them during an examination.
David Kaleda is a principal in the fiduciary responsibility practice
group at Groom Law Group, Chartered, in Washington, D.C. He has
an extensive background in the financial services sector. His range of
experience includes handling fiduciary matters affecting investment
managers, advisers,
broker/dealers,
insurers, banks and service
providers. He served on the DOL's ERISA Advisory Council from 2012
through 2014.
54 | planadviser.com September-October 2019
Art by Tim Bower
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