Author: Chris Payne

Yesterday, the SEC adopted new rules surrounding proxy advisory firms and provided supplemental guidance for investment advisers to follow. As a result of these new rules, investment advisers who have agreed to take on proxy voting authority on behalf of their clients will be faced with additional regulatory scrutiny and expectations, particularly if they utilize proxy advisory firms.


Investment advisers frequently agree to take on proxy voting authority for their clients. The scope of this authority is determined in the agreed-upon relationship between adviser and client, often through the advisory agreement, which will either give the investment adviser discretionary authority to vote proxies on behalf of the client or leave that responsibility to the client. Advisers to mutual funds are typically granted discretionary authority to vote proxies for shareholders, although this authority typically belongs to the fund board, and is then delegated to the fund’s investment adviser.

Proxy Voting & the Fiduciary Duty

Investment advisers are fiduciaries that owe each client a duty of care and loyalty with respect to services undertaken on the client’s behalf, including voting. To satisfy its 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 its own interests ahead of the interests of the client. For an investment adviser to form a reasonable belief that its voting determinations are in the best interest of the client, the firm should conduct an investigation reasonably designed to ensure that the voting determination is not based on materially inaccurate or incomplete information.

Proxy Advisory Firms

According to the Investment Company Institute, funds cast more than 7.6 million votes for proxy proposals, and the average fund voted on 1,504 separate proxy proposals for U.S. listed portfolio companies in 2017 alone. Investment advisers working with equity funds are therefore pretty busy and logically want to seek solutions that allow them to more efficiently serve their client, reduce costs, and yes, increase profit margins. Many investment advisers therefore turn to proxy advisory firms to perform a hodge-podge of various functions and services, including administrative services (e.g. electronic voting platforms that makes voting mechanics easier), or services relating to the substance of voting, like providing research and analysis, giving voting guidelines, or providing voting recommendations.

The new guidance expands on the guidance provided last August and focuses on the use of proxy advisory firms’ services and give specific examples of considerations investment advisers should make in particular circumstances.

For example, registered investment advisers using automated voting services will be required to disclose the practice to their clients with very specific and detailed disclosure. The SEC’s guidance is very clear that it expects investment advisers to provide sufficiently specific information so that a client is able to understand the role of automated voting in the investment adviser’s exercise of voting authority. Without this disclosure, the SEC’s guidance states that the client may not be able to provide the informed consent necessary for the investment adviser to satisfy its fiduciary duty.

The supplemental guidance also provides that the investment adviser may want to consider the extent to which the proxy advisory firm would be permitted to share this information (including information on aggregated voting intentions of the firm’s clients) with third parties.

It is extremely likely that the SEC will focus on these areas in upcoming examinations of investment advisers. We recommend that all firms that vote proxies on behalf of their clients, with specific emphasis on those firms utilizing proxy advisory services, review their existing disclosures and proxy voting procedures to ensure compliance with both the 2019 and 2020 guidance. If it has been a while since your firm reviewed its proxy voting disclosures and procedures, Key Bridge Compliance stands ready to help.