The Securities and Exchange Commission (SEC) recently issued regulatory guidance (see related Q&A) regarding proxy voting responsibilities, including the role of proxy advisory firms and use of advisory firm advice. Implicit in the staff’s guidance is the expectation that firms and advisers incorporate updates to their voting policies and processes prior to the 2015 proxy season.
As part of its ongoing focus on proxy voting matters generally, recent SEC Division of Corporate Finance and Division of Investment management guidance (see Q&A) clarifies the responsibilities of funds and other investment advisers with respect to proxy voting. Historically, many investment funds and institutional investors followed the voting recommendations of proxy advisory firms (e.g., ISS and Glass Lewis) as a “safe harbor” for required fiduciary obligations with respect to matters subject to proxy voting. The recent staff guidance makes it clear, however, that any investment adviser that wishes to rely on the advice of an advisory firm, in discharge of its fiduciary duties, may do so only with increased oversight and more active monitoring. Investment adviser responsibilities include:
- Prior to retention, conducting diligence on the advisory firm’s capacity and competency to adequately assess proxy issues;
- Establishing measures designed to identify any advisory firm conflicts on an ongoing basis, as well as requiring advisory firms to proactively disclose interests in companies about which the firm is providing advice;
- Regular review of voting guidelines to ensure consistency in implementation of client best interests;
- Timely feedback to advisory firms regarding the quality of service, including feedback about inadequate or incorrect analysis;
- Periodic assessment of advisory firm performance (staffing, analytic process, conflict disclosure process, error rates, regulatory compliance, etc.).
Notably, the SEC guidance also permits institutional investors to abstain from voting on proxy matters or automatically vote for company management positions. Increased flexibility to create their own voting policies will permit managers and advisers to more appropriately tailor voting for their own clients and less routinely vote only in conformance to advisory firm recommendations.
Although the full impact of the new guidelines will need to be monitored as we move towards the next proxy season, many companies hope that more diverse voting practices by institutional investors will be advantageous in the face of strategic events and contested director and governance campaigns. Given the new dynamics at play for fund and other advisers, when faced with a key proxy event, companies should consult early and often with legal and other advisers in order to maximize positive shareholder response.