Summary
Investment advisers with authority to vote proxies could be in a position to affect the outcome of shareholder votes and influence corporate governance. As a result, the SEC expects advisers to adopt policies and procedures relative to proxy voting and provide disclosures to clients regarding these procedures. The goal of these procedures and disclosures is to help ensure advisers are acting in the best interest of clients, while providing for an adequate amount of transparency.

Applicable Rules
There are two rules¹ that directly apply to proxy voting. They are summarized below:
1) Rule 206(4)-6 requires an adviser to do the following prior to voting client proxies:

a)   Adopt written policies and procedures: Such documentation should be designed to ensure that the adviser votes in the best interest of clients and should address how material conflicts will be addressed.

b)   Disclose to clients how they may obtain information regarding voted proxies.

c)   Describe proxy voting procedures to clients and provide copies on request. This should be more of a clear statement instead of the actual policies and procedures; however, the advisers’ procedures should be provided upon request.

2) Rule 204-2 addresses record keeping. The following records must be retained for five years:

a)   Proxy voting policies and procedures
b)   Proxy statements received
c)   Records of votes made by the adviser
d)   Records of client requests relative to proxy voting materials
e)   Any documentation supporting a voting decision

Potential Conflicts and Solutions
When designing your firm’s proxy voting policies, keep in mind the potential conflicts of interest that could arise. There are several potential conflicts that could place the adviser in a situation where the best option for the adviser conflicts with what is best for the client. These conflicts may vary from firm to firm and could differ based on the firm’s clients and types of relationships maintained. Some examples include the following:

• The adviser has a personal relationship with senior management at a company, which could make it difficult to vote against management.
• The adviser, or an affiliate of the adviser, does business with the company issuing the proxy (for example, manages a pension plan), which could make it difficult to vote against management.
• The adviser has a family member employed by the company.
• The adviser has a relationship with a shareholder group that introduces a proposal.

Although several different types of conflicts may arise, there are various solutions that advisers use to avoid conflicts of interest.  The following potential solutions could assist the adviser when a potential conflict appears:  

• Abstain from voting in those situations
• Forward the proxy to clients when a conflict appears
• Utilize an independent third party to vote proxies on behalf of the adviser

In addition to the above, if the firm’s policies and procedures are specific enough to address how a proxy should be voted, and there is little or no discretion on how votes are cast, this may eliminate issues around proxy conflicts. A strong “pre-determined voting policy” could prove to be adequate should a regulatory inquiry arise.

Conclusion
Firms that vote proxies must ensure they maintain strong policies and procedures and avoid conflicts of interest. In addition, proper recordkeeping will reduce the firm’s regulatory exposure. Firms should include this as part of their annual 206(4)-7 testing and consider hiring an independent consultant to ensure proxy voting policies are adequate and books and records are properly maintained. 

Regulatory Compliance is dedicated to partnering with our clients and providing the most up-to-date information on the current regulatory environment. For questions about your firm’s obligations under the SEC’s proxy voting rules, please contact your Regulatory Compliance account manager at 603-434-3594.

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