RIA Hands Untied

RIA Hands Untied by SEC No-Action Denial

RIA hands untied by Newground Social Investments team and the SEC’s refusal to grant a no-action letter to Baker Hughes (BHI, $BHI) on February 22, 2016. Congratulations to Bruce Herbert and staff at Newground, as well as to their advisors.

We have discussed the importance of not counting abstentions before at Simple Majority Vote Counting Initiative for Proxies. Bruce has worked tirelessly in chipping away at vote counting deception for years… making some progress. However, what we are celebrating here are two precedents established that will ease the burden faced by Registered Investment Advisors (RIAs, Investment Advisor or Investment Adviser?) and their clients:

  1. Companies can no longer demand proof of representation when a Registered Investment Advisor files a shareholder proposal on behalf of a client.
  2. An Advisor can issue a Statement of Intent (and other communications) on behalf of a client.

For years companies have made unsubstantiated claims and asserted the existence of specious requirements regarding proof of authorization. They have also challenged RIA on grounds that a statement of intent could only be authored by the shareholder him/herself.

Companies have won numerous challenges and blocked proposals using these spurious tactics, but as a result of the Baker Hughes ruling that is no longer the case.

RIA Hands Untied: Credit Overview

Attorney Sanford Lewis did splendid work on the outline, bones, and muscle of the response – effectively countering every one of the company’s citations, and even showing some to favor Newground’s position.

Attorney Paul Neuhauser added valuable additional citations in support of our arguments (one of them Newground’s own win against Chevron two years ago).

Bruce Herbert finessed the writing and added the introduction; the summary; and two newly-framed legal concepts that helped carry the day.

RIA Hands Untied: Four Key Points

  1. A Registered Investment Advisor, like an attorney, operates within a regulatory and legal construct – such that both would risk censure were they to falsely claim to represent a client.  Now, Advisors can simply assert that they represent a shareholder client, and this assertion must be accepted at face value.As we know, lawyers routinely write to announce that they represent a company, without being required to offer any proof of authorization.  The same courtesy is now extended to Advisors.
  2. An Advisor is: “…entitled under State Law [of Agency] – and not denied the right under Rule 14a-8 – to assert that it represents a client for all purposes related to the filing of a shareholder proposal.” The SEC affirmed this to include both filing the proposal, and issuing a statement of intent.
  3. There is a “Unity of Documentation” (a new legal concept) comprised of the Proposal, Letter of Verification, and Statement of Intent. Neither of these elements by itself is sufficient for a proposal to advance, and all three together are necessary before a resolution can appear in the proxy.
  4. There exists a “Lineage of Authority” (another new legal concept), that is fully demonstrated by the existence of a Letter of Verification.  A custodian would not produce and deliver a verification letter without authorization from the client, and the client would not do that if they did not wish the Advisor to file the resolution on the client’s behalf.

At this point Bruce Herbert turned metaphorical:

In this manner, as scientists can with certainty infer the existence of a planet from the presence of a shadow during an eclipse, so the Staff and a company can conclusively infer the existence of appropriate authorization for Newground (in this instance) from the presence of a Letter of Verification.

RIA Hands Untied: Impact

Though this was submitted and won as a test case, companies are likely to push back or continue to challenge on these grounds – which makes remembering to properly use this precedent an imperative.

Bruce Herber wish celebrate his main collaborator in this effort, Sanford Lewis; and also Paul Neuhauser, Tim Smith of Walden, Steven Heim of Boston Common, as well as Holly Testa of First Affirmative. All Participated and offered sage counsel along the way.

RIA’s now have a trusted documentation template for filing resolutions. Since they don’t have to reinvent the wheel every time, my hope is that with RIA hands untied, we will see even more work on behalf of clients in filing shareholder proposals.

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