On July 22, 2020, the US Securities and Exchange Commission (SEC) published supplementary guidance in the form of a policy statement (Policy Statement) regarding the proxy voting responsibilities of investment advisers under Rule 206(4)-6 under the Investment Advisers Act of 1940 (Advisers Act). The SEC previously issued guidance discussing how the fiduciary duty and Rule 206(4)-6 under the Advisers Act relate to an investment adviser’s exercise of voting authority on behalf of clients.1 The Policy Statement supplements the prior guidance in light of information that the SEC gained in connection with its ongoing review of the proxy voting process and related regulations, including the amendments to the proxy solicitation rules under the Securities Exchange Act of 1934 (Exchange Act), which were issued on the same day (Proxy Rule Amendments).2
The SEC expects the Proxy Rule Amendments to result in improvements in the proxy voting information available to investors. Specifically, the SEC expects that issuers will have access to proxy advisory firm recommendations such that those issuers will be able to make available to shareholders on a more timely basis additional proxy voting information.
The SEC also expects that the Proxy Rule Amendments will result in the availability of certain additional information being made known to proxy advisory firms and their clients in a timely manner. Proxy advisory firms, as a condition to the availability of the exemptions in Exchange Act Rule 14a-2(b)(1) and (b)(3), must adopt policies and procedures that are reasonably designed to provide investment advisers and other clients with a mechanism by which they can reasonably be expected to become aware of that additional information prior to making voting decisions.
Based on these expectations, the SEC decided to provide additional guidance to assist investment advisers in assessing the additional information (including where the investment adviser utilizes a proxy advisory firm’s electronic voting management system that “pre-populates” the adviser’s proxies with suggested voting recommendations). The supplementary guidance also addresses disclosure matters that may arise when investment advisers use these types of services.
Consistent with the 2019 Guidance, the Policy Statement provides guidance in a “Q&A” format, and posed a single question, Question 2.1, summarized below.
Supplemental Question 2.1
In Question 2.1, the SEC states that in some cases, proxy advisory firms assist clients, including investment advisers, with voting execution, including through an electronic vote management system that allows the proxy advisory firm to:
- populate each client’s votes shown on the proxy advisory firm’s electronic voting platform with the proxy advisory firm’s recommendations based on that client’s voting instructions to the firm (“pre-population”); and/or
- automatically submit the client’s votes to be counted (“automated voting”).
Pre-population and automated voting generally occur prior to the submission deadline for proxies to be voted at the shareholder meeting.
An investment adviser, in the course of conducting a reasonable investigation into matters on which it votes, may become aware that the issuer intends to file or has filed additional soliciting materials with the SEC setting forth the issuer’s views regarding the proxy advisory firm’s voting recommendation. These materials might affect the investment adviser’s voting determination and might become available after or around the same time that the investment adviser’s votes have been pre-populated but before the submission deadline. In these circumstances, what steps should an investment adviser take to demonstrate that it is making voting determinations in a client’s best interest?
Summary of SEC Response
Demonstrating “Best Interest” — In the 2019 Guidance, the SEC discussed steps that an investment adviser could take to demonstrate that it is making voting determinations in a client’s best interest, including additional steps when an investment adviser utilizes a proxy advisory firm, such as assessing pre-populated votes shown on the proxy advisory firm’s electronic voting platform and considering additional information that may become available before the relevant votes are cast.
In the Policy Statement, the SEC states that the adviser should consider whether its policies and procedures, including any with respect to automated voting of proxies, are reasonably designed to ensure that it exercises voting authority in its client’s best interest. As an example, the SEC states that the adviser should consider whether its policies and procedures address circumstances where the adviser has become aware that an issuer intends to file or has filed additional soliciting materials after the adviser has received the proxy advisory firm’s voting recommendation but before the submission deadline. If those materials would reasonably be expected to affect the adviser’s voting determination, the adviser would likely need to consider them before voting in order to demonstrate “best interests” voting. In addition, the adviser should also consider reviewing its agreements with its proxy advisory firms to determine whether the agreements would permit the proxy advisory firms to utilize non-public information about how the adviser intends to vote in a manner that would not be in the best interest of the investment adviser’s client.
Scope of Voting Authority — In the 2019 Guidance, the SEC discussed how an investment adviser and its client may agree on the scope of the adviser’s proxy voting responsibilities (with full and fair disclosure and informed client consent). Drawing from its 2019 fiduciary interpretation,3 in the Policy Statement, the SEC states that an adviser also has an obligation (arising from its duty of loyalty) to make full and fair disclosure to its clients of all material facts relating to the advisory relationship, including facts related to proxy voting. The SEC emphasizes that such disclosure needs to be “sufficiently specific so that a client is able to understand the material fact or conflict of interest and make an informed decision whether to provide consent.”4 The SEC also notes that Rule 206(4)-6 and Form ADV require an investment adviser to describe to clients its voting policies and procedures.
Given the above, the SEC states its belief that an investment adviser that uses automated voting should consider disclosing:
- the extent of that use and under what circumstances it uses automated voting; and
- how its policies and procedures address the use of automated voting in cases where it becomes aware before the submission deadline that an issuer intends to file or has filed additional soliciting materials.
In addition, the SEC believes that an adviser should also consider whether its policies and procedures are reasonably designed to address these disclosures, which may be necessary for the investment adviser to provide sufficiently specific information so that a client is able to understand the role of automated voting in the investment adviser’s exercise of voting authority. Without this disclosure, the SEC believes that the client may not have sufficiently specific information to provide informed consent with respect to the use of automated voting (whether for scope or disclosure purposes)
The SEC also encourages advisers to consider their obligations under Rule 206(4)-6 and Form ADV and carefully review their proxy voting disclosures for purposes of evaluating informed consent to the use of automated voting.
1 SEC Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-5325 (Aug. 21, 2019) [2019 Guidance]. Please see our Legal Update on the 2019 Guidance at https://www.mayerbrown.com/en/perspectives-events/publications/2019/09/sec-publishes-guidance-on-the-proxy-voting-responsibilities-of-investment-advisers