27 November 2019
Main Contributor: Katie Mogan, IACCP® Vice President, Senior Compliance Consultant
After years of research, OCIE exam findings, and roundtable discussions, the SEC has issued guidance on proxy voting in the form of a Question and Response (“Q&R”). You can find the Q&R guidance here.
The responsibilities of proxy voting can be an administrative burden for investment advisors, which is why many have chosen a third-party vendor to assist with proxy voting. The Q&R from the SEC is a good reminder that even if you outsource proxy voting to a third-party vendor, you as the investment advisor still have a fiduciary responsibility to your clients.
So now the question begs… What do I need to do?
We have outlined below a checklist of actions items to ensure your firm’s full compliance. Please note, that if you keep proxy voting responsibility in-house, we still recommend you review this article to ensure you are also incorporating the proper practices.
Let’s dive in!
Step 1: Review Your Investment Advisory Agreements
If you choose to NOT vote proxies on behalf of your clients, you MUST inform your clients and obtain their consent. This can be done through the written advisory agreement.
If you choose to be silent on this fact, then it is presumed you have proxy voting authority.
We suggest reviewing your master agreements to ensure the proper language is included with regard to proxy voting. If it’s a general policy to not vote proxies, include this statement clearly in the client’s agreement. If you would like to provide options, allow this option to be selected in your client agreement.
We also suggest, if applicable, selecting a sample of clients for whom you do NOT have proxy voting authority and confirm that this is documented in writing, whether in the client agreement or in another form of documentation (which is allowed). Document this review as part of your firm’s annual review.
Step 2: Review Your ADV Part 2A
In Item 17 of your ADV Part 2A you must disclose whether or not you vote proxies.
If you DO NOT vote on behalf of the client’s account, you must disclose this fact and explain who the client will receive proxies from (custodian or transfer agent of record) and if the client may contact you with questions and/or advice on their proxy solicitations.
If you DO vote proxies on behalf of clients, you must generally describe your policies and procedures, how you address conflicts of interest, how clients can obtain information on how you voted their securities, and that they may obtain your policies and procedures upon request.
We suggest reviewing this section of your ADV Part 2A (which is a great year-end review), to ensure the disclosure requirements, as outlined above, are being met.
Step 3: Review Your Proxy Voting Policies
If your firm votes proxies, you must adopt and implement policies and procedures reasonably designed to ensure you are voting proxies in the best interest of your clients.
Here are some things to consider when creating and reviewing your proxy voting policies:
- Make sure the polices are tailored to your firm’s actual practices.
- Consider if the policies are fair and benefit all clients in all strategies and investment products (it may make sense to have different policies for different strategies).
- Document how you will vote (i.e. vote in favor of management, shareholder proposals, in accordance with third party recommendations).
- Note what conditions require additional consideration and/or company-specific reviews (i.e. social considerations).
- Consider sampling pre-populated proxy votes for accuracy. This is helpful whether or not you outsource but may not be possible for all advisors, so factor in the risk. If you review the proxy provider’s policies annually, test post-votes, and have found no issues or discrepancies, then this step is probably unnecessary for you.
- Have a plan in case your policies do not address how your firm should vote (i.e. mergers and acquisitions, dissolutions, conversions or consolidations). You may not be able to plan for all scenarios, but you can escalate complicated or controversial votes to the appropriate person and/or committee when the policy does not address a particular issue.
- Discuss how you will mitigate potential conflicts.
Step 4: Conduct Testing of Proxy Procedures
Whether you vote proxies internally or employ a third-party proxy voting service, you have an obligation to review your policies and procedures at least annually for adequacy and effectiveness.
We suggest the following testing be conducted as part of your firm’s annual review:
- Sample votes cast during the year and confirm adherence to the Firm’s or third-party provider’s policies. Ensure any deviations from policies have documented explanations.
- If you are utilizing a third-party proxy provider, review their proxy voting recommendations (policies) to ensure they are set up to be in the best interest of your clients. Determine if certain recommendations will require additional review/consideration by your firm and what information would be available to you to make assessments.
- For post-voting tests, compare the number of shares the client owned to the actual shares voted. If there are discrepancies, investigate and document the reasons for the inconsistency.
- If utilizing a third-party proxy provider, complete due diligence of the vendor to assess the adequacy and quality of the vendor’s:
- Policies and procedures around conflicts of interest
- Confirm they are not “boiler plate” and they do address specific conflicts
- How errors are resolved
- Technology and communication
Investment advisers should take the proxy voting responsibility seriously and understand that outsourcing the voting does not outsource the fiduciary duty. Create a process to review your proxy voting policies and procedures annually and adopt sustainable testing around your policies. Oversight of internal staff or a third-party vendor is crucial to ensuring your clients’ best interests are met. The process does not have to be overly burdensome, but given the SEC’s suggestion to “review [your] policies and procedures in light of the guidance…in advance of next year’s proxy season” we think this blog post will be a great starting point to ensure compliance with the guidance.