Proxy Mosaic

Proxy Advisory Guidelines Issued by SEC

ProxyMosaicOn June 30th, the Securities and Exchange Commission released some long-awaited guidance on the procedures that advisers should follow in retaining proxy advisory firms and clarifies the responsibilities for both investment advisers and proxy advisory firms. Here is our initial response for a more detailed response please read our white paper.

The most important aspect of the SEC’s guidance is that an adviser does not have an absolute duty to vote all items on a proxy statement, neither do advisers bear all of the responsibility for proxy voting. Rather, voting should be guided by a cost-benefit analysis of the economic impact of certain votes on a client’s portfolio, and advisers may prioritize certain kinds of proposals in accordance with client preferences or even abstain from voting in certain situations. Advisers may delegate all or part of their voting to third-party proxy advisory firms, vote on some proposals but not others, or simply vote all proxies in accordance with pre-determined guidelines. These agreements are largely left to the discretion of advisers and their clients.

This echoes the SEC guidance previously codified in the Final Rule on Proxy Voting by Investment Advisers, where it stated that an adviser that fails to vote every proxy would not necessarily violate its fiduciary obligations. It also confirms guidance from the Department of Labor in 2008, which held that ERISA fiduciary standards do not necessarily require an investment adviser to vote all shares in all matters. The Department asserted that costs may be taken into account when deciding whether or not to vote, and that the decision whether to vote should be guided by, among other things, an analysis of the net effect of a particular issue on the economic value of the plan’s investment.

The second important element is renewed emphasis on the duty of advisers to verify that their proxy voting procedures or the proxy advisory firms that they retain are serving their clients’ best interests. Policies and procedures will depend on the priorities of the client, but advisers should take some affirmative steps to demonstrate compliance. Advisers should also ensure that factual errors by proxy advisors are corrected and prevented, and should determine whether the proxy advisor has the “capacity and competency” to adequately analyze proxy issues by considering the following factors:

  • The quality of the firm’s staff and personnel;
  • Whether its recommendations are based on current and accurate information; and
  • Whether it has any conflicts of interest that could negatively influence its recommendations.

The SEC states that advisers should proactively evaluate their proxy advisor on an ongoing basis. Proxy advisory firms are also now obligated to affirmatively disclose their conflicts of interest to their clients. Boilerplate language that conflicts “may” exist would not be sufficient; advisers should be able to make an informed decision as to whether the nature of these conflicts would impair their duty to act in the best interests of their clients.

We at Proxy Mosaic applaud this new guidance from the SEC because it reaffirms that our approach to proxy voting is consistent with both the spirit and the letter of the SEC’s rules: rather than spending client resources investigating every single ballot item, Proxy Mosaic focuses on a deep and rigorous analysis of the votes that directly affect economic value, such as executive compensation, contested director elections, and mergers and acquisitions. A broad-based “checklist” approach that covers all ballot items using a formulaic process with a minimal level of due diligence is not only unnecessary, but may be at odds with the obligation of a fiduciary to vote based on a cost-benefit analysis of economic value.

Guest Post by  is a Research Analyst with Proxy Mosaic, a leading-edge corporate governance research, shareholder communications, and proxy voting advisory firm. This article originally appeared as Our Quick Take on New SEC Guidelines for Proxy Advisors. “Our ultimate mission is to safeguard investor returns and promote enfranchisement by bringing greater transparency, empirical research, direct communication, and the voices of diverse stakeholders to the governance process,” says John D. Shea, CEO of Proxy Mosaic.

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