SEC Guidance on Proxy Voting Concerns Smaller Mutual Funds

Last week, the SEC issued guidance with respect to the proxy voting responsibilities of investment advisers (the “Proxy Guidance”).[1]  The Proxy Guidance follows on the heels of the SEC’s interpretation of the fiduciary duties investment advisers owe their clients[2] and public statements by Commissioner Elad Roisman,[3] among others, on the topic of proxy voting practices of investment advisers.

The Proxy Guidance states that satisfying an investment adviser’s fiduciary duty in voting proxies requires that the adviser “make the determination in the best interest of the client and . . . not place the investment adviser’s own interest ahead of the interests of the client.”[4]  Doing so requires that the investment adviser “form a reasonable belief that its voting determinations are in the best interest of the client” based on “an investigation reasonably designed to ensure that the determinations were not based on materially inaccurate or incomplete information.”[5]

The Proxy Guidance also states that investment advisers and their clients may contractually agree to limit (or eliminate) the adviser’s fiduciary responsibility with respect to voting proxies.  This is a fairly common practice among investment advisers that serve individual clients, but where the investment adviser manages the assets of a registered investment company (e.g., a mutual fund, exchange-traded fund (ETF) or closed-end fund), the fund’s board expects the investment adviser to direct proxy voting for the fund.  In light of these expectations, and recognizing the importance of appropriately serving fund shareholders, many investment advisers to smaller investment companies turn to proxy advisory firms for assistance.

For investment advisers enlisting the help of, or delegating voting responsibility to, a proxy advisory firm, the Proxy Guidance provides lengthy recommendations regarding the selection and monitoring of the firm.[6]  Among other things, the Proxy Guidance states that investment advisers should:

  • Take steps to evaluate whether voting determinations are consistent with the investment adviser’s voting policies and procedures and the client’s best interest by, for example, sampling the pre-populated votes shown on the proxy advisory firm’s electronic voting platform;[7]
  • Consider the proxy advisory firm’s capacity and competency to adequately analyze the matters to be voted on by looking at, among other things, the adequacy and quality of the proxy advisory firm’s staffing, personnel, and/or technology;[8]
  • Review the proxy advisory firm’s policies and procedures regarding how it identifies and addresses its conflicts of interests with the investment adviser (e.g., check that the proxy advisory firm’s disclosures are context-specific and non-boilerplate), and develop policies and procedures that will identify and assess the proxy advisory firm’s conflicts of interest on an ongoing basis;
  • Periodically review the proxy advisory firm’s research and/or voting recommendations by, for example, assessing the extent to which errors, incompleteness, or methodological weaknesses may have materially affected such research or recommendations;
  • Assess the proxy advisory firm’s policies and procedures for obtaining current and accurate information by considering or communicating with the proxy advisory firm about, among other things, the proxy advisory firm’s engagement with issuers and efforts to correct material deficiencies in its analysis; and
  • Adopt and implement policies and procedures for evaluating the proxy advisory firm after the initial assessment of the firm by, for example, requiring the proxy advisory firm to provide the investment adviser with updates regarding the firm’s business and its ability to provide independent voting recommendations and execute voting instructions.

Commissioner Jackson, in a statement on the Proxy Guidance, worried that the steps proscribed are so lengthy that following them may prove too costly for small investment companies to follow.[9]  As a consequence, he worried that small investment companies may decide to completely forego voting proxies and cede greater corporate oversight power to a narrowing pool of institutional investors.

We encourage investment advisers and the boards of the investment companies they serve to review their proxy voting policies and practices in light of the guidance issued by the SEC and consider what amendments are necessary to satisfy the adviser’s fiduciary duties and serve the best interests of the investment companies.  While the guidance is lengthy, we believe that substantial enhancements to processes can be achieved without incurring high costs.  As with other aspects of fiduciary responsibilities, investment companies rely on thoughtfully drafted procedures at the compliance level, careful implementation at the business level, and appropriate oversight and documentation at the board level.  Taking these steps will enable advisers with investment companies of any size to be well-represented without ceding their voice on important portfolio company matters.

If you have any questions regarding the Proxy Guidance, including cost-effective methods for implementing enhancements consistent with the guidance, or the regulation of investment advisers or investment companies generally, please feel free to contact us.

By the Investment Management and Broker-Dealer Team at Kilpatrick Townsend & Stockton



[1] SEC, Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, available at https://www.sec.gov/rules/interp/2019/ia-5325.pdf (“Proxy Voting Guidance”).

[2] For more information regarding the SEC’s recent interpretation of investment adviser fiduciary duties, please see our recent blog post, SEC Issues Interpretation of the Standard of Conduct for Investment Advisers, available at https://www.kilpatricktownsend.com/en/Blog/Investment-Management-and-Broker-Dealer/2019/7/SEC-Issues-Interpretation-of-the-Standard-of-Conduct-for-Investment-Advisers.

[3] SEC, Keynote Remarks: ICI Mutual Funds and Investment Management Conference, available at https://www.sec.gov/news/speech/speech-roisman-031819.

[4] Proxy Voting Guidance at 3.

[5] Id. at 4.

[6] Id. at 15-23.

[7] Id. at 15.

[8] Id. at 17.

[9] SEC, Statement on Proxy-Advisor Guidance by Commissioner Robert J. Jackson, Jr, available at https://www.sec.gov/news/public-statement/statement-jackson-082119.

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