SEC’s New Guidance on Proxy Voting Responsibilities

David A. Bell and Robert A. Freedman are partners at Fenwick & West LLP. This post is based on their Fenwick memorandum.

Possibly signaling the future direction of regulation of proxy advisers, the U.S. Securities and Exchange Commission (SEC) on Aug. 21 issued two sets of interpretive guidance, one regarding proxy advisory firms under the proxy solicitation rules, and one regarding investment advisers and their proxy voting responsibilities. Among other things, the SEC issued an interpretation that proxy voting advice provided by proxy advisory firms generally constitutes a “solicitation” under the federal proxy rules. The SEC did not seek public comment or propose or adopt any new rules—though it pointed to processes that are already underway pursuant to which comment may be provided and noted consideration of specific potential future rulemaking under which public comment would be a part of the normal part of the rulemaking process. The moves may be an indication of what the SEC staff and the commission are considering with regard to requirements on proxy advisers to improve transparency and to give an opportunity to issuers to respond.

Guidance to Proxy Advisory Firms

In the Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice (Release No. 34‑86721), the SEC:

  • ​Noted their recent engagements with public input on the role of proxy advisory firms and their use by investment advisers, including the November 2018 proxy process roundtable, as well as a concept release (Release No. 34‑62495) in 2010, a prior roundtable in 2013 and a Staff Legal Bulletin (SLB 20) in 2014;
  • Promulgated an interpretation that proxy voting advice constitutes a “solicitation” under the federal proxy rules (i.e., within the definition of a “solicitation” under Rule 14a‑1), as their recommendations are “communication[s] to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy;”
  • Noted that Rule 14a‑9, which prohibits false or misleading statements or omissions in connection with solicitations, applies to voting advice from proxy advisory firms, as Rule 14a-2(b) does not provide an exemption from that rule. To this end, the SEC noted that proxy advisory firms should consider whether to include with their voting advice:
    • “[A]n explanation of the methodology used to formulate its voting advice on a particular matter (including any material deviations from the provider’s publicly-announced guidelines, policies, or standard methodologies for analyzing such matters);”
    • “[D]isclosure about [third-party information sources] and the extent to which the information from these sources differs from the public disclosures provided by the registrant;” and
    • “[D]isclosure about material conflicts of interest that arise in connection with providing the proxy voting advice in reasonably sufficient detail so that the client can assess the relevance of those conflicts;”
  • Noted that the SEC staff is also considering recommending that the commission propose rule amendments to address proxy advisory firms’ reliance on the proxy solicitation exemptions in Rule 14a-2(b), which generally allows proxy advisory firms to be exempt from having to file a proxy statement as they are not soliciting the actual power to vote (they merely provide a recommendation).

Guidance to Investment Advisers

In the Guidance Regarding Proxy Voting Responsibilities of Investment Advisers(Release Nos. IA‑5325; IC‑33605), the SEC noted:

  • That investment advisers that control, for example, investment funds, “are fiduciaries that owe each of their clients duties of care and loyalty with respect to services undertaken on the client’s behalf, including voting” and that to “satisfy [their] fiduciary duty in making any voting determination, the investment adviser must make the determination in the best interest of the client and must not place the investment adviser’s own interests ahead of the interests of the client;”
  • That where “an investment adviser has assumed the authority to vote on behalf of its client, the investment adviser, among other things, must have a reasonable understanding of the client’s objectives and must make voting determinations that are in the best interest of the client” and “for an investment adviser to form a reasonable belief that its voting determinations are in the best interest of the client, it should conduct an investigation reasonably designed to ensure that the voting determination is not based on materially inaccurate or incomplete information;”
  • That where an investment adviser has assumed voting authority, it is not required to vote on every matter presented to stockholders, for example when refraining is in the best interest of the investment fund such as when the cost to the client of voting the proxy exceeds the expected benefit to the investment fund (though the investment adviser should carefully consider its duty of care when making such a determination).
  • That when using proxy advisory firms, while “this third-party input into such an investment adviser’s voting decision may mitigate the investment adviser’s potential conflict of interest, it does not relieve that investment adviser of (1) its obligation to make voting determinations in the client’s best interest, or (2) its obligation to provide full and fair disclosure of the conflicts of interest and obtain informed consent from its clients;”
  • A variety of arrangements that investment advisers and their clients (investments funds) may have with respect to voting;
  • That when investment advisers have voting authority for a variety of funds, they need to consider whether the interests of the various funds differ and whether or not they should be applying uniform voting policies across those funds (“For example, a growth fund that targets companies with high growth prospects may have a different perspective on certain matters submitted to shareholders than an income or dividend fund that seeks to generate an income stream for shareholders in the form of dividends or interest payments”);
  • That investment advisers that retain proxy advisory firms a different perspective on certain matters submitted to shareholders than an income or dividend fund that seeks to generate an income stream for shareholders in the form of dividends or interest payments, for example:
    • assessing “pre-populated” votes shown on the proxy advisory firm’s electronic voting platform before such votes are cast (such as through periodic sampling of the proxy advisory firm’s pre-populated votes);
    • consider policies and procedures that provide for consideration of additional information (other than the recommendation of a proxy advisory firm) that may become available regarding a particular proposal, such as an issuer’s or a shareholder proponent’s subsequently filed additional definitive proxy materials; and
    • with respect to matters where the investment adviser’s voting policies and procedures do not address how it should vote on a particular matter, or where the matter is highly contested or controversial, the investment adviser could consider whether a higher degree of analysis may be necessary or appropriate to assess whether any votes it casts on behalf of its investment fund client are cast in the client’s best interest;
  • That investment advisers must review and document the adequacy of their procedures with respect to voting in the best interests of their investment fund clients;
  • That when determining to work with a proxy advisory firm, the investment adviser should consider:
    • Whether the proxy advisory firm has the capacity and competency to adequately analyze the matters for which the investment adviser is responsible for voting, including the adequacy and quality of the proxy advisory firm’s staffing, personnel, and/or technology;
    • Whether the proxy advisory firm has an effective process for seeking timely input from issuers and proxy advisory firm clients with respect to, for example, its proxy voting policies, methodologies, and peer group constructions, including for “say-on-pay” votes (e.g., if peer group comparisons are a component of the substantive evaluation, the investment adviser should consider how the proxy advisory firm (1) incorporates appropriate input in formulating its methodologies and construction of issuer peer groups, and (2) takes into account the unique characteristics regarding the issuer, to the extent available, such as the issuer’s size, its governance structure; its industry and any particular practices unique to that industry, its history, and its financial performance);
    • Whether a proxy advisory firm has adequately disclosed to the investment adviser its methodologies in formulating voting recommendations, such that the investment adviser can understand the factors underlying the proxy advisory firm’s voting recommendations;
    • The nature of any third-party information sources that the proxy advisory firm uses as a basis for its voting recommendations, and what steps the investment adviser should take to develop a reasonable understanding of when and how the proxy advisory firm would expect to engage with issuers and third parties; and
    • Whether the proxy advisory firm’s policies and procedures regarding how it identifies and addresses conflicts of interest are appropriate, such as:
      • Whether they address actual and potential conflicts of interest, including (1) conflicts relating to the provision of proxy voting recommendations and proxy voting services generally (such as the provision of recommendations and services to issuers as well as proponents of shareholder proposals regarding matters that may be the subject of a vote), (2) conflicts relating to activities other than providing proxy voting recommendations and proxy voting services, and (3) conflicts presented by certain affiliations, such as whether a third party with significant influence over the proxy advisory firm [e.g., as a shareholder, lender, or significant source of business] has taken a position on a particular voting issue or voting issues more generally;
      • Whether they disclose details on for example, whether the issuer has received consulting services from the proxy advisory firm, and if so, the amount of compensation paid to the firm (if any), and whether a proponent of a shareholder proposal or an affiliate of the proponent is or has been a client of the proxy advisory firm; and
      • Whether they utilize technology in delivering conflicts disclosures that are readily accessible (for example, usage of online Portals or other tools to make conflicts disclosure transparent and accessible); and
  • That an investment adviser should assess the extent to which a proxy advisory firm’s advice is subject to potential factual errors, potential incompleteness, or potential methodological weaknesses, including whether they engage with issuers to ensure complete and accurate information, correct any identified material deficiencies in their analysis, disclose the sources of information used in formulating recommendations and consider factors unique to the issuer or proposal when making recommendations.

The guidance and interpretation will be effective upon publication in the Federal Register.


Although the SEC did not directly address its intentions for future rulemaking in its press release or its guidance, the flavor of things to come may be hinted at in the various examples of matters that proxy advisory firms should consider disclosing and the matters that investment advisers should be considering when working with proxy advisory firms. It is possible that this may also be a signal to legislators in Congress who have proposed bills regarding regulation of proxy advisory firms that the SEC is itself addressing the concern.​​​​​​​​

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