August 29, 2019Client Alert

SEC Issues Guidance to both Investment Advisers and Proxy Advisory Firms

During an open meeting on August 21, 2019, SEC commissioners voted 3-2 along party lines to publish guidance regarding the applicability of proxy voting responsibilities to investment advisers and interrelated interpretations and guidance regarding the applicability of proxy rules to proxy advisory firms.

Investment advisers are called upon to make voting determinations on behalf of their clients. They owe fiduciary duties to these clients and must ensure that these votes are in the best interests of their clients, not placing the adviser’s interests ahead of the clients’. The SEC’s guidance assists investment advisers in complying with these fiduciary duties, particularly in the context of advice from third parties including proxy advisory firms.

Proxy advisory firms provide guidance to investment advisers, mutual funds and other stockholders on how to vote on proposals at annual and special meetings of stockholders. Companies have long awaited SEC input on the applicability of SEC rules and regulations to proxy advisory firms, who have significant influence over stockholder votes on company policies, governance and compensation. The SEC’s guidance to proxy advisory firms helps them to ensure compliance with SEC rules and regulations, particularly in the context of anti-fraud provisions.

The SEC characterized this guidance in its press release as reinforcing and elaborating its views on non-exclusive methods investment advisers and proxy advisory firms can use to comply with existing securities laws and regulations.

Investment Advisers

Investment advisers are often called upon by their clients to make voting determinations on their behalf. Investment advisers owe each of their clients duties of care and loyalty with respect to services undertaken on the clients’ behalf, including proxy voting. The guidance discusses how an investment adviser can establish voting procedures with its clients and the duties it has to its clients when it assumes responsibility over voting decisions.

To the extent the adviser uses a proxy advisory firm to assist with fulfilling its fiduciary duties, the guidance provides considerations for how it may properly discharge its fiduciary duties. The guidance also provides methods an investment adviser may use to evaluate a proxy advisory firm and what it could do if it determines that the recommendations of a proxy advisory firm are based on factual errors, incompleteness or methodological weaknesses, including:

  • The proxy advisory firm’s engagement with issuers, including the firm’s process for ensuring that it has complete and accurate information about the issuer and each particular matter, and the firm’s process, if any, for investment advisers to access the issuer’s views about the firm’s voting recommendations.
  • The proxy advisory firm’s efforts to correct any identified material deficiencies in the proxy advisory firm’s analysis.
  • The proxy advisory firm’s disclosure to the investment adviser regarding the sources of information and methodologies used in formulating voting recommendations or executing voting instructions.
  • The proxy advisory firm’s consideration of factors unique to a specific issuer or proposal when evaluating a matter subject to a shareholder vote.

Proxy Advisory Firms

The SEC’s guidance to proxy advisory firms was that advice provided by such firms generally constitutes a “solicitation” under the federal proxy rules, thus subjecting the advice to securities laws liability. The SEC stated in its release, “Under Exchange Act Rule 14a-1(l), a solicitation includes, among other things, a “communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy,” and includes communications by a person seeking to influence the voting of proxies by shareholders, regardless of whether the person itself is seeking authorization to act as a proxy.” By engaging in solicitations, proxy advisory firms are subject to the anti-fraud provisions of the Exchange Act Rule 14a-9. Advice in those solicitations may not contain any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact.

A solicitation can only be made if disclosure of the underlying facts, assumptions, limitations, and other information is provided to mitigate Rule 14a-9 concerns. The SEC provided the following as possible types of information that could be provided, if failure to provide such information would render statements false or misleading:

  • An explanation of the methodology used to formulate its voting advice.
  • To the extent that the voting advice is based on information other than a registrant’s public disclosures, the source of this information and the extent to which these sources differ from public disclosures.
  • Disclosure of any material conflicts of interest that arise in connection with providing advice in sufficient detail so that clients can assess the relevance of those conflicts.

The SEC stated in its press release that its interpretation that proxy voting advice constitutes a solicitation subject to federal proxy rules, “does not affect the ability of proxy advisory firms to continue to rely on the exemptions from the federal proxy rules’ filing requirements.  These exemptions, found in Rule 14a-2(b), among other things, provide relief from the obligation to file a proxy statement, as long as the advisory firm complies with the exemption’s conditions.”


These moves are expected to be the first in a series of proxy voting reforms targeted by the SEC following Commissioner Jay Clayton’s announcement in 2018 that Commissioner Elad L. Roisman would lead the SEC’s efforts to improve the proxy voting process and infrastructure.

Michael Best’s Securities & Capital Markets team has experts who advise investment advisers and public companies on compliance with the SEC regulations. Please do not hesitate to contact Michael Best for additional information on this guidance.

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