SEC Settles Charges Against Investment Adviser for Failing to Implement Adequate Proxy Voting Policies and Procedures

Who may be interested: Compliance and investment personnel with responsibility for proxy voting matters.

Quick Take: Advisers should not systematically decline to conduct any review of proxy voting matters delegated to a third-party service provider under a standing instruction. Advisers must take steps to determine whether proxy votes are cast in a client’s best interests in accordance with proxy voting procedures that ensure that such votes are cast in the best interests of its clients, as required by the Investment Advisers Act of 1940.

The SEC recently settled charges against a registered investment adviser (Adviser) for failing to take any steps to verify that proxy votes cast on behalf of registered investment company clients were in the clients’ best interests and for failing to implement policies and procedures reasonably designed to ensure that such votes were cast in the best interests of its clients.

According to the SEC’s order (Order), the Adviser entrusted voting of its clients’ proxies to a third-party service provider with a standard instruction to vote all shares in favor of management proposals and in opposition to all shareholder proposals. The Order indicates that the Adviser did not engage in any review of specific proxy materials or take any other steps to determine whether proxies were voted in the best interests of each of its clients, despite professing the importance of and dedication to voting proxies in clients’ best interests.

The Order also notes that the Adviser retained the right to direct the third-party service provider to vote client proxies differently from the standing instruction but never exercised that right. The Order lays out how the Adviser failed to review any proxy materials for more than 200 shareholder meetings over a five-year period from January 2017 to January 2022, relying only on its standard instruction to vote with management proposals and against shareholder proposals.

Two SEC commissioners issued a statement dissenting from the Order, expressing concern that the Order may be misconstrued to suggest that choosing a “standing instruction” approach to proxy voting instead of individual review and analysis of each matter submitted for shareholder voting cannot be in the best interest of the client. These commissioners expressed particular concern over the Order’s potential for raising costs for smaller advisers if such advisers could no longer give standard voting instructions. Given that the majority of investment advisers fall within this category, incorrect implications drawn from the Order could have wide-ranging consequences.

The Order requires the Adviser to cease and desist from any future violations of the Investment Advisers Act of 1940, censures the Adviser, and enforces a civil penalty of $150,000.

The Order can be found here.

The SEC press release can be found here.

The dissenting statement can be found here.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.