The SEC this week weighed into the proxy advisor debate with Staff Legal Bulletin 20, which provides information on the proxy voting responsibilities of investment advisers (i.e. professional investors) as well as clarification on the exemptions from federal regulation which apply to proxy advisory firms.
We welcome the focus placed by the SEC on the role and responsibilities of investors in a bulletin which fittingly comes in the same week as the announcement of the Chair and Executive Director for the UK Investor Forum. It has been our consistent message that proxy research firms like Manifest are but the servants of our clients, the investors: we meet their needs and requirements, and we carry out the instructions accordingly. It is therefore helpful to have greater clarity and emphasis on the expectations the SEC places upon investors in how they approach the retention of research and voting services.
We also welcome the fact that the Bulletin is consistent with “The Best Practice Principles for Shareholder Voting Research 2014“, which remain the reference point for clarity and detail on the role and responsibilities of providers of shareholder voting research around the world.
The Bulletin underlines that the cornerstone of investor responsibility is naturally to their clients, and therefore voting should be carried out in those clients’ best interests. This demands regular policy and procedure review on the part of the investor. Investors are not required to vote everything, and should approach the definition of any obligation to vote with flexibility based on the “best client interests” notion.
Investors should satisfy themselves of their provider’s “capacity” and “competency” to do the job in hand, taking into account personnel, policies and procedures as regards information accuracy and management of any conflicts of interest. Furthermore, the SEC is clear that in the “best client interests”notion also demands that investors have a duty to oversee a proxy advisory firm.
Whilst investors may not be held responsible for the material accuracy of the facts used by proxy advisors in forming their research and recommendations, it is incumbent upon them to hold their provider(s) to account in the event that an inaccuracy occurs, in order to satisfy themselves that the provider is taking reasonable steps to ensure such an error does not re-occur.
Turning to proxy advisers, the Bulletin clarifies that federal proxy rules do apply where an advisor engages in a “solicitation” which is, in effect, a situation where the advisor seeks to procure voting rights from investors, or provides them with advice as to how to vote. However, the Bulletin clarifies that exemptions from these rules do apply if the proxy adviser:
- Is not given unrestrained discretion as to how to vote all shares (even where it may be according to a pre-determined custom policy), “even if the authority was revocable by the client”.
- Only distributes reports containing recommendations (i.e. without authority to vote shares)
- Gives financial advice in the normal course of its business (i.e. if it’s already registered as an investment adviser), discloses information about any significant relationship with the target company of the research, is only paid for the research by research user clients and is not commissioned for the research by someone soliciting proxies
- Considers, determines and, where relevant, discloses whether a possible conflict of interest exists. Disclosures should be specific and voluntary, rather than boilerplate or available only upon request.
Pockets of the issuer community who may be keen to see wings clipped among proxy advisers may be disappointed to see the SEC limit their comments to the role of investors and proxy adviser disclosure. But if investors are key to engagement with issuers, as the UK’s Investment Management Association release reminds us this week , then it is clearly consistent of the SEC to maintain that it should be up to investors to determine the fitness for purpose (or otherwise) of the tools and processes they use to underpin their engagement with portfolio companies.