Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, 47420-47427 [2019-18342]
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Federal Register / Vol. 84, No. 175 / Tuesday, September 10, 2019 / Rules and Regulations
Subject
Release No.
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Commission Interpretation and Guidance Regarding the Applicability
of the Proxy Rules to Proxy Voting Advice.
By the Commission.
Dated: August 21, 2019.
Vanessa A. Countryman,
Secretary.
Fed. Reg. vol. and page
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August 21, 2019
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[Insert FR Volume Number] FR [Insert FR Page Number].
Form N–3,4 and Form N–CSR 5 under
the Investment Company Act [15 U.S.C.
80a].6
Table of Contents
[FR Doc. 2019–18355 Filed 9–9–19; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
I. Introduction
II. Guidance Regarding Investment Advisers’
Proxy Voting Responsibilities and
Disclosures on Form N–1A, Form N–2,
Form N–3, and Form N–CSR
III. Other Matters
17 CFR Parts 271 and 276
I. Introduction
BILLING CODE 8011–01–P
[Release Nos. IA–5325; IC–33605]
Commission Guidance Regarding
Proxy Voting Responsibilities of
Investment Advisers
Securities and Exchange
Commission.
ACTION: Guidance.
AGENCY:
The Securities and Exchange
Commission (the ‘‘SEC’’ or the
‘‘Commission’’) is publishing guidance
regarding the proxy voting
responsibilities of investment advisers
under its regulations issued under the
Investment Advisers Act of 1940 (the
‘‘Advisers Act’’), and Form N–1A, Form
N–2, Form N–3, and Form N–CSR under
the Investment Company Act of 1940
(the ‘‘Investment Company Act’’).
DATES: Effective: September 10, 2019.
FOR FURTHER INFORMATION CONTACT:
Thankam A. Varghese, Senior Counsel;
or Holly Hunter-Ceci, Assistant Chief
Counsel, at (202) 551–6825 or IMOCC@
sec.gov, Chief Counsel’s Office, Division
of Investment Management, Securities
and Exchange Commission, 100 F Street
NE, Washington, DC 20549–8549.
SUPPLEMENTARY INFORMATION: The
Commission is publishing guidance
regarding the proxy voting
responsibilities of investment advisers
under 17 CFR 275.206(4)–6 [Rule
206(4)–6 under the Advisers Act [15
U.S.C. 80b]],1 Form N–1A,2 Form N–2,3
SUMMARY:
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34–86721
Date
1 Unless otherwise noted, when we refer to the
Advisers Act, or any paragraph of the Advisers Act,
we are referring to 15 U.S.C. 80b of the United
States Code, at which the Advisers Act is codified,
and when we refer to rules under the Advisers Act,
or any paragraph of these rules, we are referring to
title 17, part 275 of the Code of Federal Regulations
[17 CFR part 275], in which these rules are
published.
2 Referenced in 17 CFR 274.11A.
3 Referenced in 17 CFR 274.11a–1.
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Investment advisers regularly are
faced with an array of decisions
regarding voting of equity securities on
behalf of their clients, whether those
clients are individual investors, funds or
other institutional investors.7 In various
contexts, and in respect of a wide range
of matters submitted to shareholders for
a vote, investment advisers that have
agreed to take on proxy voting authority
are called upon to make voting
determinations.
4 Referenced
in 17 CFR 274.11b.
in 17 CFR 274.128.
6 Unless otherwise noted, when we refer to the
Investment Company Act, or any paragraph of the
Investment Company Act, we are referring to 15
U.S.C. 80a of the United States Code, at which the
Investment Company Act is codified, and when we
refer to rules under the Investment Company Act,
or any paragraph of these rules, we are referring to
title 17, part 270 of the Code of Federal Regulations
[17 CFR part 270], in which these rules are
published.
7 Investment advisers owe each of their clients a
fiduciary duty under the Advisers Act, which
‘‘must be viewed in the context of the agreed-upon
scope of the relationship between the adviser and
the client.’’ Commission Interpretation Regarding
Standard of Conduct for Investment Advisers,
Release No. IA–5248 (June 5, 2019), 84 FR 33669,
at 33671 (July 12, 2019) (‘‘Fiduciary
Interpretation’’). In the case of a registered
investment company (‘‘fund’’), the scope of this
relationship is defined by the advisory agreement
between the investment adviser and its client (i.e.,
the fund), and the fund board has the authority to
set the scope of voting authority in accordance with
its fiduciary duty. With respect to funds, the
Investment Company Institute noted that a fund
board typically delegates its proxy voting duties to
the fund’s investment adviser. During the 2017
proxy season, 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 (figures exclude
companies domiciled outside the United States.).
See Letter dated Mar. 15, 2019 from Paul Schott
Stevens, President and CEO, Investment Company
Institute (‘‘ICI Letter II’’) at p. 3. Unless otherwise
noted, letters cited herein were submitted in
response to the Statement Announcing SEC Staff
Roundtable on the Proxy Process, July 30, 2018
available at https://www.sec.gov/comments/4-725/
4-725.htm.
5 Referenced
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In general, matters are put forth for a
shareholder vote either by the issuer 8 or
by a shareholder or group of
shareholders. The submission of matters
for a vote by shareholders typically
occurs in connection with a meeting of
shareholders, including annual
shareholder meetings and special
shareholder meetings.9 Some matters
appear regularly and consistently at
each annual meeting of shareholders,
such as the shareholder vote on whether
to ratify the issuer’s selection of an
outside auditor.10 Other matters, such as
shareholder votes on proposed mergers,
acquisitions, or other corporate actions
and matters proposed by a shareholder
or group of shareholders, are generally
more idiosyncratic in substance and
timing.
Investment advisers are fiduciaries
that owe each of their clients duties of
care and loyalty with respect to services
undertaken on the client’s behalf,
including voting.11 In the context of
voting, the specific obligations that flow
from the investment adviser’s fiduciary
duty depend upon the scope of voting
authority assumed by the adviser.12 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 the investment adviser’s own
interests ahead of the interests of the
client.
Specifically, an investment adviser’s
duty of care includes, among other
things, the duty to provide advice that
8 As used in this Release, the terms ‘‘company’’
and ‘‘issuer’’ refer to the issuer of the securities for
which proxies are solicited.
9 Concept Release on the U.S. Proxy System,
Release No. 34–62495 (July 14, 2010), 75 FR 42982
(July 22, 2010) (‘‘Concept Release’’).
10 Many of these matters are required to be
submitted to shareholders as a result of federal law,
state law, exchange requirements or the company’s
governance documents. See, e.g., Section 14A(a) of
the Securities Exchange Act of 1934 (‘‘say-on-pay’’
votes); 8 Del. C. 1953, sec. 211 (annual meeting to
elect directors); NYSE Listed Company Manual
Section 312.03(b) (shareholder approval for certain
related party transactions involving issuances of
common stock); and NASDAQ Rule 5635(a)
(shareholder approval is required in certain
instances prior to the issuance of securities in
connection with the acquisition of the stock or
assets of another company).
11 See Fiduciary Interpretation, 84 FR 33669, at n.
32.
12 See Fiduciary Interpretation, 84 FR 33669, at
33671–72.
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is in the best interest of the client.13
Where an investment adviser has
assumed the authority to vote on behalf
of its client, the investment adviser,
among other things, must have a
reasonable understanding of the client’s
objectives and must make voting
determinations that are in the best
interest of the client.14 As discussed
below, for an investment adviser to form
a reasonable belief that its voting
determinations are in the best interest of
the client, it should conduct an
investigation reasonably designed to
ensure that the voting determination is
not based on materially inaccurate or
incomplete information.15 Further, Rule
206(4)–6 under the Advisers Act
provides that it is a fraudulent,
deceptive, or manipulative act, practice,
or course of business for an investment
adviser registered or required to be
registered with the Commission to
exercise voting authority with respect to
client securities unless the adviser,
among other things, adopts and
implements written policies and
procedures that are reasonably designed
to ensure that the investment adviser
votes proxies in the best interest of its
clients.16 We discuss further below how
the fiduciary duty and Rule 206(4)–6
relate to an investment adviser’s
exercise of voting authority on behalf of
clients.
When making voting determinations
on behalf of clients, many investment
advisers retain proxy advisory firms to
perform a variety of functions and
services. Some of these are
administrative, such as providing the
investment adviser with an electronic
platform that enables the adviser to
manage voting mechanics more
13 See Fiduciary Interpretation, 84 FR 33669, at
33672.
14 See Fiduciary Interpretation, 84 FR 33669, at
33673 (discussing an adviser’s obligation to make
a reasonable inquiry into its client’s financial
situation, level of financial sophistication,
investment experience and financial goals and have
a reasonable belief that the advice it provides is in
the best interest of the client based on the client’s
objectives).
15 See Fiduciary Interpretation, 84 FR 33669, at
33674. See also Proxy Voting by Investment
Advisers, Release No. IA–2106 (Jan. 31, 2003), 68
FR 6585 (Feb. 7, 2003) (‘‘Proxy Voting Release’’), at
6586 (explaining that an adviser’s duty of care with
respect to proxy voting requires, among other
things, an adviser with proxy voting authority to
monitor corporate events.)
16 See Rule 206(4)–6 under the Advisers Act.
With respect to conflicts of interests, the
Commission brought a settled enforcement action
against an investment adviser that had voting
authority, where the adviser’s policies and
procedures did not include how the adviser would
address potential conflicts that may arise between
its interests and those of its clients. See In the
Matter of Intech Investment Management, LLC and
David E. Hurley, Release No. IA–2872 (May 7,
2009).
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efficiently. Other services provided by
proxy advisory firms relate to the
substance of voting, such as: Providing
research and analysis regarding the
matters subject to a vote; promulgating
general voting guidelines that
investment advisers can adopt; and
making voting recommendations to
investment advisers on specific matters
subject to a vote.17 We understand that
these voting recommendations may be
based on a proxy advisory firm’s own
voting guidelines or on custom voting
guidelines that the investment adviser
has created.18 We understand further
that custom guidelines, where they are
used, may be more or less detailed,
depending on the level of instruction an
investment adviser has provided to a
proxy advisory firm.19 Contracting with
proxy advisory firms to provide these
types of functions and services can
reduce burdens for investment advisers
(and potentially reduce costs for their
clients) as compared to conducting them
in-house.
We understand further that an
investment adviser that has assumed the
authority to vote proxies on behalf of its
clients may look to the voting
recommendations of a proxy advisory
firm when the investment adviser has a
conflict of interest, such as if, for
example, the investment adviser’s
interests in an issuer or voting matter
differ from those of some or all of its
clients. While this third-party input into
such an investment adviser’s voting
decision may mitigate the investment
adviser’s potential conflict of interest, it
does not relieve that investment adviser
of (1) its obligation to make voting
determinations in the client’s best
interest, or (2) its obligation to provide
full and fair disclosure of the conflicts
of interest and obtain informed consent
from its clients.20
17 See, e.g., Letter dated Dec. 31, 2018 from Gail
C. Bernstein, General Counsel, Investment Adviser
Association (‘‘IAA Letter’’), at p. 2; ICI Letter II, at
pp. 8–9; Letter dated Jan. 16, 2019 from Dieter
Waizenegger, Executive Director, CtW Investment
Group at p. 2 (explaining that the value-added
analysis provided by proxy advisory firms is
especially important during the U.S. proxy season);
see generally Roundtable on the Proxy Process,
Transcript (Nov. 15, 2018) available at https://
www.sec.gov/files/proxy-round-table-transcript111518.pdf.
18 See, e.g., IAA Letter, at 2; Letter dated Nov. 14,
2018 from Paul Schott Stevens, President and CEO,
Investment Company Institute (‘‘ICI Letter I’’), at p.
34.
19 See, e.g., Letter dated Nov. 14, 2018 from
Katherine Rabin, Chief Executive Officer, Glass
Lewis, at p. 2 (noting that institutional investors
who engage a proxy advisory firm are opting for
such firms to execute increasingly detailed
policies).
20 See Fiduciary Interpretation, 84 FR 33669, at
33675–76 (‘‘To meet its duty of loyalty, an adviser
must make full and fair disclosure to its clients of
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We have solicited feedback on, and
our staff has previously provided
guidance regarding, various means
investment advisers can use to fulfill
their proxy voting responsibilities,
including the retention and use of proxy
advisory firms. In addition, we and our
staff have engaged with the public
through various forums and statements
on a variety of issues related to the
proxy voting process, including those
discussed below.
For example, in 2010, the
Commission issued a concept release
that sought public comment about,
among other things, the role and legal
status of proxy advisory firms within
the U.S. proxy system.21 In 2013, the
staff held a roundtable on the use of
proxy advisory firm services by
institutional investors and investment
advisers.22 In 2014, the staff of the
Divisions of Investment Management
and Corporation Finance issued a Staff
Legal Bulletin (‘‘SLB 20’’) to provide (1)
the staff’s views regarding an
investment adviser’s responsibilities in
voting client proxies and retaining
proxy advisory firms, as well as (2)
guidance about the availability and
requirements of two exemptions to the
federal proxy rules that are often relied
upon by proxy advisory firms.23 The
SEC’s Office of Compliance Inspections
and Examinations has also examined
investment advisers’ compliance with
their fiduciary duty when voting proxies
on behalf of investors, including review
of risk areas related to conflicts of
interest, proxy voting policies and
procedures, and oversight of proxy
all material facts relating to the advisory
relationship. . . . In addition, an adviser must
eliminate or at least expose through full and fair
disclosure all conflicts of interest which might
incline an investment adviser—consciously or
unconsciously—to render advice which was not
disinterested.’’) (internal citations omitted).
21 See Concept Release, 75 FR 42982. The
comment letters received in response to the
Concept Release are available at https://
www.sec.gov/comments/s7-14-10/s71410.shtml.
22 See SEC Announces Agenda, Panelists for
Roundtable on Proxy Advisory Services (Nov. 27,
2013), available at https://www.sec.gov/news/pressrelease/2013-253. The letters received in response
to the announcement are available at https://
www.sec.gov/comments/4-670/4-670.shtml.
23 See SEC Staff Legal Bulletin No. 20, Proxy
Voting: Proxy Voting Responsibilities of Investment
Advisers and Availability of Exemptions from the
Proxy Rules for Proxy Advisory Firms (June 30,
2014), available at https://www.sec.gov/interps/
legal/cfslb20.htm. SLB 20 represents the views of
the staff of the Divisions of Investment Management
and Corporation Finance. It is not a rule, regulation,
or statement of the Commission. Furthermore, the
Commission has neither approved nor disapproved
its content. SLB 20, like all staff guidance, has no
legal force or effect: It does not alter or amend
applicable law, and it creates no new or additional
obligations for any person.
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advisory firms, among other issues.24
Most recently, the staff hosted a
roundtable on the proxy process in
November 2018 (the ‘‘2018
Roundtable’’) that included a panel on
the role of proxy advisory firms and
their use by investment advisers.25 In
connection with the 2018 Roundtable,
the public was invited to provide input
on questions that arise regarding the use
of proxy advisory firms and their
activities.26 We have carefully
considered the feedback received on
these topics, and with the benefit of this
extensive body of information, historical
experience, and engagement, the
Commission is today issuing guidance
to investment advisers about their
voting responsibilities.27
In Section II below, we discuss how
the fiduciary duty and Rule 206(4)–6
relate to an investment adviser’s
exercise of voting authority on behalf of
clients. In that Section, we are focused
in particular on providing guidance to
investment advisers that retain a proxy
advisory firm to assist them in some
aspect of their proxy voting
responsibilities.28 More specifically, we
have followed the question and answer
format used by the staff in SLB 20 as we
understand that many investment
advisers have found that format useful.
In this guidance, we provide
examples to help facilitate investment
advisers’ compliance with their proxy
voting responsibilities; however, these
examples are not the only way by which
investment advisers could comply with
their principles-based fiduciary duty
imposed on them by the Advisers Act.
We encourage investment advisers
and proxy advisory firms to review their
policies and practices in light of the
guidance below in advance of next
year’s proxy season. To the extent that
firms identify operational or other
questions in the course of that review,
we encourage them to contact the staff
24 See, e.g., SEC, Office of Compliance Inspections
and Examinations, 2015 Examination Priorities for
2015, available at https://www.sec.gov/about/
offices/ocie/national-examination-programpriorities-2015.pdf.
25 See Chairman Jay Clayton, Statement
Announcing SEC Staff Roundtable on the Proxy
Process, available at https://www.sec.gov/news/
public-statement/statement-announcing-sec-staffroundtable-proxy-process.
26 See Comments on Statement Announcing SEC
Staff Roundtable on the Proxy Process; File No. 4–
725, available at https://www.sec.gov/comments/4725/4-725.htm.
27 The Commission today is also issuing
interpretation and guidance regarding certain rules
promulgated under Section 14 of the Securities
Exchange Act of 1934 regarding proxy voting
advice. Release No. 34–86721 (August 21, 2019),
published elsewhere in this issue of the Federal
Register.
28 The staff previously provided its views on
certain of these questions in SLB 20.
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of the Division of Investment
Management.
The Commission will consider any
questions or other feedback on its
guidance regarding the proxy voting
responsibilities of investment advisers
under their fiduciary duty and Rule
206(4)–6 under the Advisers Act, and
Form N–1A, Form N–2, Form N–3, and
Form N–CSR under the Investment
Company Act to evaluate whether
additional guidance might be
appropriate in the future. Based on any
feedback received, the Commission
could supplement this guidance.
II. Guidance Regarding Investment
Advisers’ Proxy Voting Responsibilities
and Disclosures on Form N–1A, Form
N–2, Form N–3, and Form N–CSR
Question 1: How may an investment
adviser and its client, in establishing
their relationship, agree upon the scope
of the investment adviser’s authority
and responsibilities to vote proxies on
behalf of that client?
Response: As we recently stated,
‘‘[t]he fiduciary duty follows the
contours of the relationship between the
adviser and its client, and the adviser
and its client may shape that
relationship by agreement, provided
that there is full and fair disclosure and
informed consent.’’ 29 Accordingly, an
investment adviser is not required to
accept the authority to vote client
securities, regardless of whether the
client undertakes to vote the proxies
itself.30 If an investment adviser does
accept voting authority, it may agree
with its client, subject to full and fair
disclosure and informed consent, on the
scope of voting arrangements, including
the types of matters for which it will
exercise proxy voting authority. While
the application of the investment
adviser’s fiduciary duty in the context of
proxy voting will vary with the scope of
the voting authority assumed by the
investment adviser, the relationship in
all cases remains that of a fiduciary to
the client.31
29 See
Fiduciary Interpretation, 84 FR at 33677,
footnotes 67–70 and accompanying text for a
detailed discussion of informed consent and how it
is generally considered on an objective basis and
may be inferred. See also Form ADV, Part 2A, Item
17, and Proxy Voting Release, 68 FR 6585, at n. 19.
30 We believe, however, that to the extent an
investment adviser has discretionary authority to
manage the client’s portfolio and has not agreed
with the client to a narrower scope of voting
authority through full and fair disclosure and
informed consent, the adviser’s responsibility for
making voting determinations is implied. See Proxy
Voting Release, 68 FR 6585 at n. 10.
31 As we recently stated, ‘‘an adviser’s federal
fiduciary duty may not be waived, though it will
apply in a manner that reflects the agreed-upon
scope of the relationship.’’ See Fiduciary
Interpretation, 84 FR 33669, at 33672.
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Differences in agreements between
investment advisers and their clients as
to the scope of the advisory relationship
may result in a variety of arrangements
for voting client securities. While a
client and its investment adviser may
agree that the client will delegate all of
its proxy voting authority to its
investment adviser, the client and the
investment adviser may instead agree
(in the manner described above) to other
proxy voting arrangements in which the
investment adviser would not assume
all of the proxy voting authority, or in
which the investment adviser would
only assume the authority to vote on
behalf of the client in limited
circumstances or not at all.32 Following
are several non-exhaustive examples of
possible voting arrangements to which a
client and its investment adviser may
agree, subject to full and fair disclosure
and informed consent: 33
• A client and its investment adviser
may agree that the investment adviser
should exercise voting authority
pursuant to specific parameters
designed to serve the client’s best
interest. For example, the client and the
investment adviser may agree that,
absent receipt of a contrary instruction
from the client or a determination by the
investment adviser that voting a
particular proposal in a different way
would be in the client’s best interest
(e.g., if voting differently would further
the investment strategy being pursued
by the investment adviser on behalf of
the client):
Æ The investment adviser will vote in
accordance with the voting
recommendations of management of the
issuer. Such an arrangement could be
subject to conditions, for example
additional analysis by the investment
adviser where the voting
recommendation concerns a matter that
may present heightened management
conflicts of interest or involve a type of
matter of particular interest to the
investment adviser’s client; or
32 Some letters asked the Commission to clarify
the various types of voting arrangements that might
be adopted. See, e.g., Letter dated Dec. 21, 2018
from Benjamin Zycher, Ph.D., American Enterprise
Institute at p. 5 (seeking clarification about when it
is appropriate to vote proxies).
33 As we stated in the Fiduciary Interpretation,
‘‘[w]hether the disclosure is full and fair will
depend upon, among other things, the nature of the
client, the scope of the services, and the material
fact or conflict. Full and fair disclosure for an
institutional client (including the specificity, level
of detail, and explanation of terminology) can
differ, in some cases significantly, from full and fair
disclosure for a retail client because institutional
clients generally have a greater capacity and more
resources than retail clients to analyze and
understand complex conflicts and their
ramifications.’’ (internal citations omitted). See
Fiduciary Interpretation, 84 FR 33669, at 33677.
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Æ The investment adviser will vote in
favor of all proposals made by particular
shareholder proponents. Such an
arrangement could be subject to
conditions, for example requiring that
the shareholder proponent has
particular expertise or an investment
strategy that will further the interests of
the investment adviser’s client.
• A client and its investment adviser
may agree that the investment adviser
would not exercise voting authority in
circumstances under which voting
would impose costs on the client, such
as opportunity costs for the client
resulting from restricting the use of
securities for lending in order to
preserve the right to vote.34
• A client and its investment adviser
may agree that the investment adviser
will focus voting resources only on
particular types of proposals based on
the client’s preferences, such as
proposals relating to corporate events
(mergers and acquisition transactions,
dissolutions, conversions, or
consolidations) or contested elections
for directors.
• A client and its investment adviser
may agree that the investment adviser
would not exercise voting authority on
certain types of matters where the cost
of voting would be high, or the benefit
to the client would be low.35 This could
include, for example:
Æ Circumstances where the cost of
voting the proxy exceeds the expected
benefit to the client, including, for
example, casting a vote on a foreign
security that could involve the
additional costs of hiring a translator or
traveling to a foreign country to vote the
security in person; or
Æ Circumstances under which casting
a vote would not reasonably be expected
to have a material effect on the value of
the client’s investment.
While, as noted above, an investment
adviser and its client may shape the
voting authority through full and fair
disclosure and informed consent, we
reiterate that an investment adviser that
assumes proxy voting authority must
make voting determinations consistent
with its fiduciary duty and in
compliance with Rule 206(4)–6.36
34 We note, however, that the investment adviser
would still have to fulfill its duty of loyalty while
exercising its voting authority on behalf of its client.
For example, an investment adviser must make any
determination regarding whether to retain a security
and vote the accompanying proxy or lend out the
security in the client’s best interest.
35 See Proxy Voting Release, 68 FR 6585 at n. 18
and accompanying text.
36 Rule 206(4)–6 under the Advisers Act requires
an investment adviser that assumes proxy voting
authority to adopt and implement policies and
procedures that are reasonably designed to ensure
it votes client securities in the best interest of
clients.
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Question 2: What steps could an
investment adviser that has assumed the
authority to vote proxies on behalf of a
client take to demonstrate that it is
making voting determinations in a
client’s best interest and in accordance
with the investment adviser’s proxy
voting policies and procedures?
Response: As we discuss in Section I
above, an investment adviser is a
fiduciary and owes each of its clients a
fiduciary duty with respect to services
undertaken on the client’s behalf,
including voting. In that discussion, we
explain some of the requirements that
follow from an investment adviser’s
fiduciary duty in the context of voting
on behalf of clients, including the need
for an investment adviser to conduct a
reasonable investigation into matters on
which the adviser votes and to vote in
the best interest of the client.37
An investment adviser should
consider how its fiduciary duty and its
obligations under Rule 206(4)–6 apply
when it has multiple clients. Many
investment advisers have multiple
clients, including funds, other pooled
investment vehicles, and individual
investors, with differing investment
objectives and strategies.38 In
considering whether an investment
adviser’s proxy voting policies and
procedures are reasonably designed to
ensure compliance with Rule 206(4)–6
and to fulfill its fiduciary duty to its
clients, an investment adviser should
consider whether voting all of its
clients’ shares in accordance with a
uniform voting policy would be in the
best interest of each of its clients.39 In
particular, where an investment adviser
undertakes proxy voting responsibilities
on behalf of multiple funds, pooled
investment vehicles, or other clients, it
should consider whether it should have
37 The Commission has noted that an investment
adviser uses various means of ensuring that proxy
votes are voted in its client’s best interest and not
affected by the adviser’s conflicts of interest, in
addition to looking to the voting recommendations
of a proxy advisory firm. For example, the
Commission has stated that ‘‘[c]learly, an adviser’s
policy of disclosing the conflict to clients and
obtaining their consents before voting satisfies the
requirements of the rule and, when implemented,
fulfills the adviser’s fiduciary obligations under the
Advisers Act. . . . Other policies and procedures
are also available; their effectiveness (and the
effectiveness of any policies and procedures) will
turn on how well they insulate the decision on how
to vote client proxies from the conflict.’’ See Proxy
Voting Release, 68 FR 6585, at 6587–88.
38 Such other pooled investment vehicles may
include, for example, private funds that are
excluded from the definition of investment
company by either Section 3(c)(1) or Section 3(c)(7)
of the Investment Company Act.
39 Some letters have noted that proxy voting
guidelines allow funds to handle efficiently the
large majority of votes that are recurring and noncontroversial. See, e.g., ICI Letter I at pp. 9–10; ICI
Letter II at p. 4.
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different voting policies for some or all
of these different funds, vehicles, or
other clients, depending on the
investment strategy and objectives of
each.40 For example, a growth fund that
targets companies with high growth
prospects may have a different
perspective on certain matters
submitted to shareholders than an
income or dividend fund that seeks to
generate an income stream for
shareholders in the form of dividends or
interest payments.
Funds that invest in voting securities
are also required to disclose in their
statements of additional information
(‘‘SAI’’) 41 or on Form N–CSR,42 as
applicable, the policies and procedures
that they use to determine how to vote
proxies relating to securities held in
their portfolios.43 As discussed above, if
the funds have different voting policies
and procedures, these should be
reflected in the SAI or on Form N–CSR,
as applicable.
An investment adviser should also
consider whether certain types of
matters may necessitate that the adviser
conduct a more detailed analysis than
what may be entailed by application of
its general voting guidelines, to consider
factors particular to the issuer or the
voting matter under consideration. Such
matters might include, but are not
limited to, corporate events (mergers
and acquisition transactions,
dissolutions, conversions, or
consolidations) or contested elections
for directors. When determining
whether to conduct such an issuerspecific analysis, or an analysis specific
40 As we have noted in the Proxy Voting Release,
nothing in Rule 206(4)–6 under the Advisers Act
prevents an investment adviser from having
different policies and procedures for different
clients or different categories of clients. Thus, the
board of directors of a fund could adopt and require
an investment adviser to use policies and
procedures that differ from those the adviser uses
with respect to its other clients. Proxy Voting
Release, FR 6587 at n. 13.
41 The SAI is part of a fund’s registration
statement and contains information about a fund in
addition to that contained in the prospectus. The
SAI is required to be delivered to investors upon
request and is available on the Commission’s
Electronic Data Gathering, Analysis, and Retrieval
System (‘‘EDGAR’’).
42 Form N–CSR is used by open-end funds and
closed-end funds to file certified shareholder
reports with the Commission on EDGAR.
43 Open-end funds must disclose their proxy
voting policies and procedures in their SAIs.
Because closed-end funds do not offer their shares
continuously, and are therefore generally not
required to maintain an updated SAI to meet their
obligations under the Securities Act of 1933, they
are required to disclose their proxy voting policies
and procedures in their annual reports on Form N–
CSR. See Disclosure of Proxy Voting Policies and
Proxy Voting Records by Registered Management
Investment Companies, Release No. IC–25922 (Jan.
31, 2003), 68 FR 6564 (Feb. 7, 2003), Form N–1A,
Form N–2, Form N–3, and Form N–CSR.
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to the matter to be voted on, an
investment adviser should consider the
potential effect of the vote on the value
of a client’s investments. An investment
adviser should consider identifying in
its voting policy or policies the factors
that it will consider in determining
which matters require company-specific
evaluation, and how it will evaluate
voting decisions on such matters.
In addition, an investment adviser
should consider reasonable measures to
determine that it is casting votes on
behalf of its clients consistently with its
voting policies and procedures. For
example, one way in which an
investment adviser could evaluate its
compliance with Rule 206(4)–6 would
be to sample the proxy votes it casts on
behalf of its clients as part of its annual
review of its compliance policies and
procedures.44 Such a review could
specifically include sampling of proxy
votes that relate to proposals that may
require more issuer-specific analysis
(e.g., mergers and acquisition
transactions, dissolutions, conversions,
or consolidations), to assist in
evaluating whether the investment
adviser’s voting determinations are
consistent with its voting policies and
procedures and in its client’s best
interest.45
An investment adviser that retains a
proxy advisory firm to provide voting
recommendations or voting execution
services also should consider additional
steps to evaluate whether the
investment adviser’s voting
determinations are consistent with its
voting policies and procedures and in
the client’s best interest before the votes
are cast. For example, some steps that
an investment adviser could use to
evaluate its compliance are:
• Sampling pre-populated votes:
Where the investment adviser utilizes
the proxy advisory firm for either voting
recommendations or voting execution
(or both), it could assess ‘‘prepopulated’’ votes shown on the proxy
advisory firm’s electronic voting
platform before such votes are cast, such
as through periodic sampling of the
proxy advisory firm’s pre-populated
votes.
• Consideration of additional
information: Where the investment
adviser utilizes the proxy advisory firm
for voting recommendations, it could
consider policies and procedures that
provide for consideration of additional
information that may become available
regarding a particular proposal. This
additional information may include an
44 See 17 CFR 275.206(4)–7(b) [Rule 206(4)–7(b)
under the Advisers Act].
45 Id.
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issuer’s or a shareholder proponent’s
subsequently filed additional definitive
proxy materials or other information
conveyed by an issuer or shareholder
proponent to the investment adviser
that would reasonably be expected to
affect the investment adviser’s voting
determination.
• Higher degree of analysis: Where
the investment adviser utilizes the
proxy advisory firm for either voting
recommendations or voting execution
(or both), with respect to matters where
the investment adviser’s voting policies
and procedures do not address how it
should vote on a particular matter, or
where the matter is highly contested or
controversial,46 it could consider
whether a higher degree of analysis may
be necessary or appropriate to assess
whether any votes it casts on behalf of
its client are cast in the client’s best
interest.
Finally, as part of an investment
adviser’s ongoing compliance program,
the adviser must review and document,
no less frequently than annually, the
adequacy of its voting policies and
procedures to ensure that they have
been formulated reasonably and
implemented effectively, including
whether the applicable policies and
procedures continue to be reasonably
designed to ensure that the adviser casts
votes on behalf of its clients in the best
interest of such clients.47
Question 3: What are some of the
considerations that an investment
adviser should take into account if it
retains a proxy advisory firm to assist it
in discharging its proxy voting duties?
46 This may include, for example, major
acquisitions involving takeovers or contested
director elections where a shareholder has proposed
its own slate of directors.
47 See Proxy Voting Release; see also 17 CFR 204–
2(a)(17)(ii) [Rule 204–2(a)(17)(ii) under the Advisers
Act] (requiring an investment adviser to maintain
copies of its records documenting the investment
adviser’s annual review of policies and procedures
conducted pursuant to Rule 206(4)–7(b)); Rule
206(4)–7 under the Advisers Act (e.g., requiring
investment advisers to adopt and implement
written policies and procedures reasonably
designed to prevent violation, by the adviser and its
supervised person, of the Advisers Act. The rule
also requires, among other things, that investment
advisers review, no less frequently than annually,
the adequacy of their policies and procedures and
the effectiveness of their implementation). See also
Rule 38a–1 under the Investment Company Act
(e.g., requiring each fund to adopt and implement
written policies and procedures reasonably
designed to prevent violation of the federal
securities laws by the fund, including policies and
procedures that provide for the oversight of
compliance by the fund’s investment adviser,
among others. The rule also requires, among other
things, that the fund review, no less frequently than
annually, the adequacy of the policies and
procedures of the fund and of each investment
adviser, principal underwriter, administrator, and
transfer agent, and the effectiveness of their
implementation).
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Response: When an investment
adviser is considering whether to retain
or continue retaining a proxy advisory
firm to provide research or voting
recommendations as an input to the
adviser’s voting decisions, we believe
that an investment adviser should
consider, among other things, whether
the proxy advisory firm has the capacity
and competency to adequately analyze
the matters for which the investment
adviser is responsible for voting.48 In
this regard, investment advisers could
consider, among other things, the
adequacy and quality of the proxy
advisory firm’s staffing, personnel, and/
or technology.
Such an investment adviser should
also consider whether the proxy
advisory firm has an effective process
for seeking timely input from issuers
and proxy advisory firm clients with
respect to, for example, its proxy voting
policies, methodologies, and peer group
constructions, including for ‘‘say-onpay’’ votes.49 For example, if peer group
comparisons are a component of the
substantive evaluation, the investment
adviser should consider how the proxy
advisory firm incorporates appropriate
input in formulating its methodologies
and construction of issuer peer groups.
Where relevant, an investment adviser
should also consider how the proxy
advisory firm, in constructing peer
groups, takes into account the unique
characteristics regarding the issuer, to
the extent available, such as the issuer’s
size; its governance structure; its
industry and any particular practices
unique to that industry; its history; and
its financial performance.
Such an investment adviser should
also consider whether a proxy advisory
firm has adequately disclosed to the
investment adviser its methodologies in
formulating voting recommendations,
such that the investment adviser can
understand the factors underlying the
proxy advisory firm’s voting
recommendations.50 In addition, the
48 In Question No. 4, we provide guidance
regarding an investment adviser’s duties with
respect to evaluating the care and competency of
the proxy advisory firm with respect to potential
factual errors, potential incompleteness, or
potential methodological weaknesses that may
materially affect the proxy advisory firm’s voting
recommendations.
49 17 CFR 240.14a–21 [Rule 14a–21 under the
Securities Exchange Act of 1934] requires, among
other things, companies soliciting proxies for an
annual or other meeting of shareholders at which
directors will be elected to include a separate
resolution subject to a shareholder advisory vote to
approve the compensation of named executive
officers.
50 If an investment adviser utilizes the proxy
advisory firm for research and not voting
recommendations, it could still evaluate to what
extent, if any, the proxy advisory firm’s peer group
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investment adviser should consider the
nature of any third-party information
sources that the proxy advisory firm
uses as a basis for its voting
recommendations. The investment
adviser also should consider what steps
it should take to develop a reasonable
understanding of when and how the
proxy advisory firm would expect to
engage with issuers and third parties.
More generally, an investment
adviser’s decision regarding whether to
retain a proxy advisory firm should also
include a reasonable review of the proxy
advisory firm’s policies and procedures
regarding how it identifies and
addresses conflicts of interest.51 Some
ways in which an investment adviser
could conduct this review include, for
example, assessing:
• Whether the proxy advisory firm
has adequate policies and procedures to
identify, disclose, and address actual
and potential conflicts of interest,
including (1) conflicts relating to the
provision of proxy voting
recommendations and proxy voting
services generally, (2) conflicts relating
to activities other than providing proxy
voting recommendations and proxy
voting services, and (3) conflicts
presented by certain affiliations. In the
first instance, actual or potential
conflicts may include conflicts arising
from the provision of recommendations
and services to issuers as well as
proponents of shareholder proposals
regarding matters that may be the
subject of a vote. In the third instance,
actual or potential conflicts presented
by certain affiliations may include
whether a third party with significant
influence over the proxy advisory firm
(e.g., as a shareholder, lender, or
significant source of business) has taken
a position on a particular voting issue or
voting issues more generally; 52
construction methodology may influence how the
firm would determine ‘‘say-on-pay’’ votes.
Some letters have called for greater transparency
to issuers and clients about the formulation of
proxy advisory recommendations and guidelines.
See, e.g., Letter dated Oct. 10, 2018 from Timothy
M. Doyle, Vice President of Policy and General
Counsel, American Council for Capital Formation at
p. 2; Letter dated July 26, 2019 from Neil A.
Hansen, Vice President, Investor Relations and
Corporate Secretary, ExxonMobil at 2 (stating that
proxy advisory firms’ methodology in evaluating
executive compensation can undermine the
company’s ability to offer incentives for
management to pursue long-term shareholder value
creation).
51 Some letters have noted concerns about proxy
advisory firm conflicts of interest. See, e.g., Letter
dated Nov. 9, 2018, Business Roundtable; Letter
dated Nov. 29, 2018 from Suanne Estatico; Letter
dated Jan. 11, 2019 from Darryl M. Burman, Office
of the General Counsel, Group 1 Automotive, Inc.
52 See, e.g., U.S. Government Accountability
Office, Report to Congressional Requesters,
Corporate Shareholder Meetings—Issues Relating to
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• Whether the proxy advisory firm’s
policies and procedures provide for
adequate disclosure (i.e., contextspecific, non-boilerplate disclosure) of
the proxy advisory firm’s actual and
potential conflicts with respect to the
services the proxy advisory firm
provides to the investment adviser. This
disclosure could include details on, for
example, whether the issuer has
received consulting services from the
proxy advisory firm, and if so, the
amount of compensation paid to the
firm, if any; whether a proponent of a
shareholder proposal or an affiliate of
the proponent is or has been a client of
the proxy advisory firm; and
• Whether the proxy advisory firm’s
policies and procedures utilize
technology in delivering conflicts
disclosures that are readily accessible
(for example, usage of online portals or
other tools to make conflicts disclosure
transparent and accessible).
The steps an investment adviser
should take when considering whether
to retain or continue retaining a proxy
advisory firm could depend on, among
other things (1) the scope of the
investment adviser’s voting authority,
and (2) the type of functions and
services that the investment adviser has
retained the proxy advisory firm to
perform. Accordingly, the extent to
which an investment adviser takes some
or all of the steps described above could
vary based on these factors. For
example, some of these considerations
may be less relevant for an investment
adviser that engages a proxy advisory
firm solely to execute votes according to
detailed voting instructions from the
investment adviser, which leaves
minimal discretion to the proxy
advisory firm. Nevertheless, an
investment adviser that retains a proxy
advisory firm for this limited purpose
should consider what steps to take to
understand the proxy advisory firm’s
own policies and procedures, including
its methodologies if applicable, with
respect to implementing the investment
adviser’s voting instructions.
Question 4: When retaining a proxy
advisory firm for research or voting
recommendations as an input to its
voting determinations, what steps
should an investment adviser consider
taking when it becomes aware of
potential factual errors, potential
incompleteness, or potential
methodological weaknesses in the proxy
advisory firm’s analysis that may
materially affect one or more of the
investment adviser’s voting
determinations?
Firms That Advise Institutional Investors on Proxy
Voting (June 2007).
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As discussed in Section I above, for
an investment adviser to form a
reasonable belief that its voting
determinations are in the best interest of
the client, it should conduct a
reasonable investigation into the matter.
In the case of potential factual errors,
potential incompleteness, or potential
methodological weaknesses in the proxy
advisory firm’s analysis, the investment
adviser’s policies and procedures
should be reasonably designed to ensure
that its voting determinations are not
based on materially inaccurate or
incomplete information. For example,
an investment adviser that has retained
a proxy advisory firm for research or
voting recommendations as an input to
its voting determinations should
consider including in its policies and
procedures a periodic review of the
investment adviser’s ongoing use of the
proxy advisory firm’s research or voting
recommendations. Such a review could
include an assessment of the extent to
which potential factual errors, potential
incompleteness, or potential
methodological weaknesses in the proxy
advisory firm’s analysis (that the
investment adviser becomes aware of
and deems credible and relevant to its
voting determinations) materially
affected the proxy advisory firm’s
research or recommendations that the
investment adviser utilized.
In reviewing its use of a proxy
advisory firm, an investment adviser
should also consider the effectiveness of
the proxy advisory firm’s policies and
procedures for obtaining current and
accurate information relevant to matters
included in its research and on which
it makes voting recommendations. As
part of this assessment, investment
advisers should consider, and in certain
cases may wish to communicate with
proxy advisory firms, regarding the
following:
• 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 in a timely and
efficient manner;
• 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
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voting recommendations or executing
voting instructions; 53 and
• The proxy advisory firm’s
consideration of factors unique to a
specific issuer or proposal when
evaluating a matter subject to a
shareholder vote.
Question 5: How can an investment
adviser evaluate the services of a proxy
advisory firm that it retains, including
evaluating any material changes in
services or operations by the proxy
advisory firm?
Response: In order to act consistently
with Rule 206(4)–6, an investment
adviser that has retained a third party
(such as a proxy advisory firm) to assist
substantively with its proxy voting
responsibilities and carrying out its
fiduciary duty should adopt and
implement policies and procedures that
are reasonably designed to sufficiently
evaluate the third party in order to
ensure that the investment adviser casts
votes in the best interest of its clients.54
For example, a proxy advisory firm’s
business and/or its policies and
procedures regarding conflicts of
interest could change after an
investment adviser’s initial assessment
of the proxy advisory firm, and these
changes could, for example, materially
alter the effectiveness of the proxy
advisory firm’s policies and procedures
and may require the investment adviser
to make a subsequent assessment. In
this regard, we believe that investment
advisers that retain a proxy advisory
firm to provide research or voting
recommendations (or both) should
consider policies and procedures to
identify and evaluate a proxy advisory
firm’s conflicts of interest that can arise
on an ongoing basis, in addition to
updates regarding the proxy advisory
firm’s capacity and competency to
provide voting recommendations or to
execute votes in accordance with an
investment adviser’s voting
instructions.55 Accordingly, the
investment adviser should consider
requiring the proxy advisory firm to
update the investment adviser regarding
business changes the investment adviser
considers relevant (i.e., with respect to
the proxy advisory firm’s capacity and
competency to provide independent
proxy voting advice or carry out voting
instructions). An investment adviser
should also consider whether the proxy
advisory firm appropriately updates its
methodologies, guidelines, and voting
recommendations on an ongoing basis,
including in response to feedback from
issuers and their shareholders.
Question 6: If an investment adviser
has assumed voting authority on behalf
of a client, is it required to exercise
every opportunity to vote a proxy for
that client?
Response: No, if either of two
situations applies. First, if an
investment adviser and its client have
agreed in advance to limit the
conditions under which the investment
adviser would exercise voting authority,
as discussed above, the investment
adviser need not cast a vote on behalf
of the client where contemplated by
their agreement.
Second, as the Commission has stated
previously, there may be times when an
investment adviser that has voting
authority may refrain from voting a
proxy on behalf of a client if it has
determined that refraining is in the best
interest of that client.56 This may be the
case where the adviser determines that
the cost to the client of voting the proxy
exceeds the expected benefit to the
client.57 In making such a
determination, the investment adviser
Subject
Release No.
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*
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Commission Guidance Regarding the Proxy Voting
Responsibilities of Investment Advisers.
53 See
54 See
Question No. 3 above.
supra at n. 47.
55 Id.
56 See Proxy Voting Release, 68 FR 6585, at 6587.
We also have stated that ‘‘[w]hether the advice is
in a client’s best interest must be evaluated in the
context of the portfolio that the adviser manages for
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Pursuant to the Congressional Review
Act,59 the Office of Information and
Regulatory Affairs has designated this
guidance as not a ‘‘major rule,’’ as
defined by 5 U.S.C. 804(2).
*
*
*
*
*
List of Subjects in 17 CFR Parts 271 and
276
Securities.
Amendments to the Code of Federal
Regulations
For the reasons set out above, the
Commission is amending title 17,
chapter II of the Code of Federal
Regulations as set forth below:
PART 271—INTERPRETATIVE
RELEASES RELATING TO THE
INVESTMENT COMPANY ACT OF 1940
AND GENERAL RULES AND
REGULATIONS THEREUNDER
1. An authority citation is added for
part 271 to read as follows:
■
Authority: 15 U.S.C. 80a et seq.
2. The table is amended by adding an
entry for Release No. IC–33605 at the
end to read as follows:
■
FR vol. and
page
*
IC–33605
Frm 00022
III. Other Matters
Date
August 21,
2019
*
*
*
[Insert FR Volume Number] FR [Insert FR Page Number].
the client and the client’s objectives.’’ See Fiduciary
Interpretation, 84 FR 33669, at 33673.
57 See Proxy Voting Release, 68 FR 6585, at 6587.
The Commission stated in that release that ‘‘we do
not suggest that an adviser that fails to vote every
proxy would necessarily violate its fiduciary
obligations. There may even be times when
refraining from voting a proxy is in the client’s best
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may not ignore or be negligent in
fulfilling the obligation it has assumed
to vote client proxies and cannot fulfill
its fiduciary responsibilities to its
clients by merely refraining from voting
the proxies.58 Accordingly, before
refraining from voting under the
circumstances described in this second
situation, an investment adviser should
consider whether it is fulfilling its duty
of care to its client in light of the scope
of services to which it and the client
have agreed.
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interest, such as when the adviser determines that
the cost of voting the proxy exceeds the expected
benefit to the client.’’ Id. In this second situation,
the costs to be considered would necessarily have
to be additional costs to the client.
58 See 68 FR 6585, at 6587–88.
59 5 U.S.C. 801 et seq.
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PART 276—INTERPRETATIVE
RELEASES RELATING TO THE
INVESTMENT ADVISERS ACT OF 1940
AND GENERAL RULES AND
REGULATIONS THEREUNDER
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Authority: 15 U.S.C. 80b et seq.
4. The table is amended by adding an
entry for Release No. IA–5325 at the end
to read as follows:
■
3. An authority citation is added for
part 276 to read as follows:
■
Subject
Release No.
*
*
*
Commission Guidance Regarding the Proxy Voting
Responsibilities of Investment Advisers.
By the Commission.
Dated: August 21, 2019.
Vanessa A. Countryman,
Secretary.
DEPARTMENT OF HOMELAND
SECURITY
CFR Code of Federal Regulations
COTP Captain of the Port Sector Upper
Mississippi River
DHS Department of Homeland Security
FR Federal Register
NPRM Notice of proposed rulemaking
§ Section
U.S.C. United States Code
33 CFR Part 165
[Docket Number USCG–2019–0760]
RIN 1625–AA00
Safety Zone; Missouri River, Mile
Marker 117 to 116.5, Chamois, MO
Coast Guard, DHS.
Temporary final rule.
AGENCY:
The Coast Guard is
establishing a temporary safety zone for
all navigable waters of the Missouri
River in a work zone located from Mile
Marker (MM) 116.5 through MM 117.
The safety zone is needed to protect
persons, vessels, and the marine
environment from potential hazards
created by the installation of electrical
lines across the river. Entry of persons
or vessels into this zone is prohibited
unless specifically authorized by the
Captain of the Port Sector Upper
Mississippi River (COTP) or a
designated representative.
DATES: This rule is effective from
October 7, 2019, through October 9,
2019.
SUMMARY:
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*
*
*
[Insert FR Volume Number] FR [Insert FR Page Number].
I. Table of Abbreviations
Coast Guard
To view documents
mentioned in this preamble as being
available in the docket, go to https://
www.regulations.gov, type USCG–2019–
0760 in the ‘‘SEARCH’’ box and click
‘‘SEARCH.’’ Click on Open Docket
Folder on the line associated with this
rule.
ADDRESSES:
15:50 Sep 09, 2019
August 21,
2019
If
you have questions on this rule, call or
email Lieutenant Commander Christian
Barger, Waterways Management
Division, Sector Upper Mississippi
River, U.S. Coast Guard; telephone 314–
269–2560, email Christian.J.Barger@
uscg.mil.
SUPPLEMENTARY INFORMATION:
BILLING CODE 8011–01–P
VerDate Sep<11>2014
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IA–5325
FOR FURTHER INFORMATION CONTACT:
[FR Doc. 2019–18342 Filed 9–9–19; 8:45 am]
ACTION:
FR vol. and
page
Date
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II. Background Information and
Regulatory History
The Coast Guard is issuing this
temporary rule without prior notice and
opportunity to comment pursuant to
authority under section 4(a) of the
Administrative Procedure Act (APA) (5
U.S.C. 553(b)). This provision
authorizes an agency to issue a rule
without prior notice and opportunity to
comment when the agency for good
cause finds that those procedures are
‘‘impracticable, unnecessary, or contrary
to the public interest.’’ Under 5 U.S.C.
553(b) (B), the Coast Guard finds that
good cause exists for not publishing a
notice of proposed rulemaking (NPRM)
with respect to this rule because it is
impracticable. We must establish this
safety zone by October 7, 2019, and we
lack sufficient time to provide a
reasonable comment period and then
consider those comments before issuing
the rule. The NPRM process would
delay establishment of the safety zone
until after the date of the electrical line
work and compromise public safety.
Under 5 U.S.C. 553(d)(3), the Coast
Guard finds that good cause exists for
making this rule effective less than 30
days after publication in the Federal
Register. Delaying the effective date of
PO 00000
Frm 00023
Fmt 4700
Sfmt 4700
this rule would be contrary to public
interest because immediate action is
necessary to respond to the potential
safety hazards associated with electrical
line installation over the Missouri River.
III. Legal Authority and Need for Rule
The Coast Guard is issuing this rule
under authority in 46 U.S.C. 70034
(previously 33 U.S.C. 1231). The
Captain of the Port Sector Upper
Mississippi River (COTP) has
determined that potential hazards
associated with electrical line
installation over the Missouri River will
be a safety concern for anyone in the
work zone from Mile Marker (MM)
116.5 through MM 117. This rule is
needed to protect persons, vessels, and
the marine environment on the
navigable waters within the safety zone
while electrical lines are pulled across
the river.
IV. Discussion of the Rule
This rule establishes a temporary
safety zone for a three day period from
October 7, 2019 through October 9, 2019
or until the electrical line work is
completed, whichever occurs first. The
safety zone will be enforced at the work
zone on the Missouri River between MM
116.5 and MM 117.
Transit into and through this safety
zone is prohibited during periods of
enforcement unless given permission by
the Captain of the Port or a designated
representative. This zone will be
enforced for up to ten hours each day
from 7 a.m. through 5 p.m. The COTP
or a designated representative will
inform the public through Broadcast
Notices to Mariners (BNMs) at least 12
hours in advance of each enforcement
period, and a safety vessel will
coordinate all vessel traffic during the
enforcement periods. In addition, the
COTP or a designated representative
will release regular BNMs while the
zone is in effect and will also announce
E:\FR\FM\10SER1.SGM
10SER1
]]>Agencies
[Federal Register Volume 84, Number 175 (Tuesday, September 10, 2019)]
[Rules and Regulations]
[Pages 47420-47427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18342]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 271 and 276
[Release Nos. IA-5325; IC-33605]
Commission Guidance Regarding Proxy Voting Responsibilities of
Investment Advisers
AGENCY: Securities and Exchange Commission.
ACTION: Guidance.
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SUMMARY: The Securities and Exchange Commission (the ``SEC'' or the
``Commission'') is publishing guidance regarding the proxy voting
responsibilities of investment advisers under its regulations issued
under the Investment Advisers Act of 1940 (the ``Advisers Act''), and
Form N-1A, Form N-2, Form N-3, and Form N-CSR under the Investment
Company Act of 1940 (the ``Investment Company Act'').
DATES: Effective: September 10, 2019.
FOR FURTHER INFORMATION CONTACT: Thankam A. Varghese, Senior Counsel;
or Holly Hunter-Ceci, Assistant Chief Counsel, at (202) 551-6825 or
[email protected], Chief Counsel's Office, Division of Investment
Management, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is publishing guidance
regarding the proxy voting responsibilities of investment advisers
under 17 CFR 275.206(4)-6 [Rule 206(4)-6 under the Advisers Act [15
U.S.C. 80b]],\1\ Form N-1A,\2\ Form N-2,\3\ Form N-3,\4\ and Form N-CSR
\5\ under the Investment Company Act [15 U.S.C. 80a].\6\
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\1\ Unless otherwise noted, when we refer to the Advisers Act,
or any paragraph of the Advisers Act, we are referring to 15 U.S.C.
80b of the United States Code, at which the Advisers Act is
codified, and when we refer to rules under the Advisers Act, or any
paragraph of these rules, we are referring to title 17, part 275 of
the Code of Federal Regulations [17 CFR part 275], in which these
rules are published.
\2\ Referenced in 17 CFR 274.11A.
\3\ Referenced in 17 CFR 274.11a-1.
\4\ Referenced in 17 CFR 274.11b.
\5\ Referenced in 17 CFR 274.128.
\6\ Unless otherwise noted, when we refer to the Investment
Company Act, or any paragraph of the Investment Company Act, we are
referring to 15 U.S.C. 80a of the United States Code, at which the
Investment Company Act is codified, and when we refer to rules under
the Investment Company Act, or any paragraph of these rules, we are
referring to title 17, part 270 of the Code of Federal Regulations
[17 CFR part 270], in which these rules are published.
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Table of Contents
I. Introduction
II. Guidance Regarding Investment Advisers' Proxy Voting
Responsibilities and Disclosures on Form N-1A, Form N-2, Form N-3,
and Form N-CSR
III. Other Matters
I. Introduction
Investment advisers regularly are faced with an array of decisions
regarding voting of equity securities on behalf of their clients,
whether those clients are individual investors, funds or other
institutional investors.\7\ In various contexts, and in respect of a
wide range of matters submitted to shareholders for a vote, investment
advisers that have agreed to take on proxy voting authority are called
upon to make voting determinations.
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\7\ Investment advisers owe each of their clients a fiduciary
duty under the Advisers Act, which ``must be viewed in the context
of the agreed-upon scope of the relationship between the adviser and
the client.'' Commission Interpretation Regarding Standard of
Conduct for Investment Advisers, Release No. IA-5248 (June 5, 2019),
84 FR 33669, at 33671 (July 12, 2019) (``Fiduciary
Interpretation''). In the case of a registered investment company
(``fund''), the scope of this relationship is defined by the
advisory agreement between the investment adviser and its client
(i.e., the fund), and the fund board has the authority to set the
scope of voting authority in accordance with its fiduciary duty.
With respect to funds, the Investment Company Institute noted that a
fund board typically delegates its proxy voting duties to the fund's
investment adviser. During the 2017 proxy season, 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 (figures exclude companies domiciled outside the United
States.). See Letter dated Mar. 15, 2019 from Paul Schott Stevens,
President and CEO, Investment Company Institute (``ICI Letter II'')
at p. 3. Unless otherwise noted, letters cited herein were submitted
in response to the Statement Announcing SEC Staff Roundtable on the
Proxy Process, July 30, 2018 available at https://www.sec.gov/comments/4-725/4-725.htm.
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In general, matters are put forth for a shareholder vote either by
the issuer \8\ or by a shareholder or group of shareholders. The
submission of matters for a vote by shareholders typically occurs in
connection with a meeting of shareholders, including annual shareholder
meetings and special shareholder meetings.\9\ Some matters appear
regularly and consistently at each annual meeting of shareholders, such
as the shareholder vote on whether to ratify the issuer's selection of
an outside auditor.\10\ Other matters, such as shareholder votes on
proposed mergers, acquisitions, or other corporate actions and matters
proposed by a shareholder or group of shareholders, are generally more
idiosyncratic in substance and timing.
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\8\ As used in this Release, the terms ``company'' and
``issuer'' refer to the issuer of the securities for which proxies
are solicited.
\9\ Concept Release on the U.S. Proxy System, Release No. 34-
62495 (July 14, 2010), 75 FR 42982 (July 22, 2010) (``Concept
Release'').
\10\ Many of these matters are required to be submitted to
shareholders as a result of federal law, state law, exchange
requirements or the company's governance documents. See, e.g.,
Section 14A(a) of the Securities Exchange Act of 1934 (``say-on-
pay'' votes); 8 Del. C. 1953, sec. 211 (annual meeting to elect
directors); NYSE Listed Company Manual Section 312.03(b)
(shareholder approval for certain related party transactions
involving issuances of common stock); and NASDAQ Rule 5635(a)
(shareholder approval is required in certain instances prior to the
issuance of securities in connection with the acquisition of the
stock or assets of another company).
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Investment advisers are fiduciaries that owe each of their clients
duties of care and loyalty with respect to services undertaken on the
client's behalf, including voting.\11\ In the context of voting, the
specific obligations that flow from the investment adviser's fiduciary
duty depend upon the scope of voting authority assumed by the
adviser.\12\ 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 the investment
adviser's own interests ahead of the interests of the client.
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\11\ See Fiduciary Interpretation, 84 FR 33669, at n. 32.
\12\ See Fiduciary Interpretation, 84 FR 33669, at 33671-72.
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Specifically, an investment adviser's duty of care includes, among
other things, the duty to provide advice that
[[Page 47421]]
is in the best interest of the client.\13\ Where an investment adviser
has assumed the authority to vote on behalf of its client, the
investment adviser, among other things, must have a reasonable
understanding of the client's objectives and must make voting
determinations that are in the best interest of the client.\14\ As
discussed below, for an investment adviser to form a reasonable belief
that its voting determinations are in the best interest of the client,
it should conduct an investigation reasonably designed to ensure that
the voting determination is not based on materially inaccurate or
incomplete information.\15\ Further, Rule 206(4)-6 under the Advisers
Act provides that it is a fraudulent, deceptive, or manipulative act,
practice, or course of business for an investment adviser registered or
required to be registered with the Commission to exercise voting
authority with respect to client securities unless the adviser, among
other things, adopts and implements written policies and procedures
that are reasonably designed to ensure that the investment adviser
votes proxies in the best interest of its clients.\16\ We discuss
further below how the fiduciary duty and Rule 206(4)-6 relate to an
investment adviser's exercise of voting authority on behalf of clients.
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\13\ See Fiduciary Interpretation, 84 FR 33669, at 33672.
\14\ See Fiduciary Interpretation, 84 FR 33669, at 33673
(discussing an adviser's obligation to make a reasonable inquiry
into its client's financial situation, level of financial
sophistication, investment experience and financial goals and have a
reasonable belief that the advice it provides is in the best
interest of the client based on the client's objectives).
\15\ See Fiduciary Interpretation, 84 FR 33669, at 33674. See
also Proxy Voting by Investment Advisers, Release No. IA-2106 (Jan.
31, 2003), 68 FR 6585 (Feb. 7, 2003) (``Proxy Voting Release''), at
6586 (explaining that an adviser's duty of care with respect to
proxy voting requires, among other things, an adviser with proxy
voting authority to monitor corporate events.)
\16\ See Rule 206(4)-6 under the Advisers Act. With respect to
conflicts of interests, the Commission brought a settled enforcement
action against an investment adviser that had voting authority,
where the adviser's policies and procedures did not include how the
adviser would address potential conflicts that may arise between its
interests and those of its clients. See In the Matter of Intech
Investment Management, LLC and David E. Hurley, Release No. IA-2872
(May 7, 2009).
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When making voting determinations on behalf of clients, many
investment advisers retain proxy advisory firms to perform a variety of
functions and services. Some of these are administrative, such as
providing the investment adviser with an electronic platform that
enables the adviser to manage voting mechanics more efficiently. Other
services provided by proxy advisory firms relate to the substance of
voting, such as: Providing research and analysis regarding the matters
subject to a vote; promulgating general voting guidelines that
investment advisers can adopt; and making voting recommendations to
investment advisers on specific matters subject to a vote.\17\ We
understand that these voting recommendations may be based on a proxy
advisory firm's own voting guidelines or on custom voting guidelines
that the investment adviser has created.\18\ We understand further that
custom guidelines, where they are used, may be more or less detailed,
depending on the level of instruction an investment adviser has
provided to a proxy advisory firm.\19\ Contracting with proxy advisory
firms to provide these types of functions and services can reduce
burdens for investment advisers (and potentially reduce costs for their
clients) as compared to conducting them in-house.
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\17\ See, e.g., Letter dated Dec. 31, 2018 from Gail C.
Bernstein, General Counsel, Investment Adviser Association (``IAA
Letter''), at p. 2; ICI Letter II, at pp. 8-9; Letter dated Jan. 16,
2019 from Dieter Waizenegger, Executive Director, CtW Investment
Group at p. 2 (explaining that the value-added analysis provided by
proxy advisory firms is especially important during the U.S. proxy
season); see generally Roundtable on the Proxy Process, Transcript
(Nov. 15, 2018) available at https://www.sec.gov/files/proxy-round-table-transcript-111518.pdf.
\18\ See, e.g., IAA Letter, at 2; Letter dated Nov. 14, 2018
from Paul Schott Stevens, President and CEO, Investment Company
Institute (``ICI Letter I''), at p. 34.
\19\ See, e.g., Letter dated Nov. 14, 2018 from Katherine Rabin,
Chief Executive Officer, Glass Lewis, at p. 2 (noting that
institutional investors who engage a proxy advisory firm are opting
for such firms to execute increasingly detailed policies).
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We understand further that an investment adviser that has assumed
the authority to vote proxies on behalf of its clients may look to the
voting recommendations of a proxy advisory firm when the investment
adviser has a conflict of interest, such as if, for example, the
investment adviser's interests in an issuer or voting matter differ
from those of some or all of its clients. While this third-party input
into such an investment adviser's voting decision may mitigate the
investment adviser's potential conflict of interest, it does not
relieve that investment adviser of (1) its obligation to make voting
determinations in the client's best interest, or (2) its obligation to
provide full and fair disclosure of the conflicts of interest and
obtain informed consent from its clients.\20\
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\20\ See Fiduciary Interpretation, 84 FR 33669, at 33675-76
(``To meet its duty of loyalty, an adviser must make full and fair
disclosure to its clients of all material facts relating to the
advisory relationship. . . . In addition, an adviser must eliminate
or at least expose through full and fair disclosure all conflicts of
interest which might incline an investment adviser--consciously or
unconsciously--to render advice which was not disinterested.'')
(internal citations omitted).
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We have solicited feedback on, and our staff has previously
provided guidance regarding, various means investment advisers can use
to fulfill their proxy voting responsibilities, including the retention
and use of proxy advisory firms. In addition, we and our staff have
engaged with the public through various forums and statements on a
variety of issues related to the proxy voting process, including those
discussed below.
For example, in 2010, the Commission issued a concept release that
sought public comment about, among other things, the role and legal
status of proxy advisory firms within the U.S. proxy system.\21\ In
2013, the staff held a roundtable on the use of proxy advisory firm
services by institutional investors and investment advisers.\22\ In
2014, the staff of the Divisions of Investment Management and
Corporation Finance issued a Staff Legal Bulletin (``SLB 20'') to
provide (1) the staff's views regarding an investment adviser's
responsibilities in voting client proxies and retaining proxy advisory
firms, as well as (2) guidance about the availability and requirements
of two exemptions to the federal proxy rules that are often relied upon
by proxy advisory firms.\23\ The SEC's Office of Compliance Inspections
and Examinations has also examined investment advisers' compliance with
their fiduciary duty when voting proxies on behalf of investors,
including review of risk areas related to conflicts of interest, proxy
voting policies and procedures, and oversight of proxy
[[Page 47422]]
advisory firms, among other issues.\24\ Most recently, the staff hosted
a roundtable on the proxy process in November 2018 (the ``2018
Roundtable'') that included a panel on the role of proxy advisory firms
and their use by investment advisers.\25\ In connection with the 2018
Roundtable, the public was invited to provide input on questions that
arise regarding the use of proxy advisory firms and their
activities.\26\ We have carefully considered the feedback received on
these topics, and with the benefit of this extensive body of
information, historical experience, and engagement, the Commission is
today issuing guidance to investment advisers about their voting
responsibilities.\27\
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\21\ See Concept Release, 75 FR 42982. The comment letters
received in response to the Concept Release are available at https://www.sec.gov/comments/s7-14-10/s71410.shtml.
\22\ See SEC Announces Agenda, Panelists for Roundtable on Proxy
Advisory Services (Nov. 27, 2013), available at https://www.sec.gov/news/press-release/2013-253. The letters received in response to the
announcement are available at https://www.sec.gov/comments/4-670/4-670.shtml.
\23\ See SEC Staff Legal Bulletin No. 20, Proxy Voting: Proxy
Voting Responsibilities of Investment Advisers and Availability of
Exemptions from the Proxy Rules for Proxy Advisory Firms (June 30,
2014), available at https://www.sec.gov/interps/legal/cfslb20.htm.
SLB 20 represents the views of the staff of the Divisions of
Investment Management and Corporation Finance. It is not a rule,
regulation, or statement of the Commission. Furthermore, the
Commission has neither approved nor disapproved its content. SLB 20,
like all staff guidance, has no legal force or effect: It does not
alter or amend applicable law, and it creates no new or additional
obligations for any person.
\24\ See, e.g., SEC, Office of Compliance Inspections and
Examinations, 2015 Examination Priorities for 2015, available at
https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2015.pdf.
\25\ See Chairman Jay Clayton, Statement Announcing SEC Staff
Roundtable on the Proxy Process, available at https://www.sec.gov/news/public-statement/statement-announcing-sec-staff-roundtable-proxy-process.
\26\ See Comments on Statement Announcing SEC Staff Roundtable
on the Proxy Process; File No. 4-725, available at https://www.sec.gov/comments/4-725/4-725.htm.
\27\ The Commission today is also issuing interpretation and
guidance regarding certain rules promulgated under Section 14 of the
Securities Exchange Act of 1934 regarding proxy voting advice.
Release No. 34-86721 (August 21, 2019), published elsewhere in this
issue of the Federal Register.
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In Section II below, we discuss how the fiduciary duty and Rule
206(4)-6 relate to an investment adviser's exercise of voting authority
on behalf of clients. In that Section, we are focused in particular on
providing guidance to investment advisers that retain a proxy advisory
firm to assist them in some aspect of their proxy voting
responsibilities.\28\ More specifically, we have followed the question
and answer format used by the staff in SLB 20 as we understand that
many investment advisers have found that format useful.
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\28\ The staff previously provided its views on certain of these
questions in SLB 20.
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In this guidance, we provide examples to help facilitate investment
advisers' compliance with their proxy voting responsibilities; however,
these examples are not the only way by which investment advisers could
comply with their principles-based fiduciary duty imposed on them by
the Advisers Act.
We encourage investment advisers and proxy advisory firms to review
their policies and practices in light of the guidance below in advance
of next year's proxy season. To the extent that firms identify
operational or other questions in the course of that review, we
encourage them to contact the staff of the Division of Investment
Management.
The Commission will consider any questions or other feedback on its
guidance regarding the proxy voting responsibilities of investment
advisers under their fiduciary duty and Rule 206(4)-6 under the
Advisers Act, and Form N-1A, Form N-2, Form N-3, and Form N-CSR under
the Investment Company Act to evaluate whether additional guidance
might be appropriate in the future. Based on any feedback received, the
Commission could supplement this guidance.
II. Guidance Regarding Investment Advisers' Proxy Voting
Responsibilities and Disclosures on Form N-1A, Form N-2, Form N-3, and
Form N-CSR
Question 1: How may an investment adviser and its client, in
establishing their relationship, agree upon the scope of the investment
adviser's authority and responsibilities to vote proxies on behalf of
that client?
Response: As we recently stated, ``[t]he fiduciary duty follows the
contours of the relationship between the adviser and its client, and
the adviser and its client may shape that relationship by agreement,
provided that there is full and fair disclosure and informed consent.''
\29\ Accordingly, an investment adviser is not required to accept the
authority to vote client securities, regardless of whether the client
undertakes to vote the proxies itself.\30\ If an investment adviser
does accept voting authority, it may agree with its client, subject to
full and fair disclosure and informed consent, on the scope of voting
arrangements, including the types of matters for which it will exercise
proxy voting authority. While the application of the investment
adviser's fiduciary duty in the context of proxy voting will vary with
the scope of the voting authority assumed by the investment adviser,
the relationship in all cases remains that of a fiduciary to the
client.\31\
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\29\ See Fiduciary Interpretation, 84 FR at 33677, footnotes 67-
70 and accompanying text for a detailed discussion of informed
consent and how it is generally considered on an objective basis and
may be inferred. See also Form ADV, Part 2A, Item 17, and Proxy
Voting Release, 68 FR 6585, at n. 19.
\30\ We believe, however, that to the extent an investment
adviser has discretionary authority to manage the client's portfolio
and has not agreed with the client to a narrower scope of voting
authority through full and fair disclosure and informed consent, the
adviser's responsibility for making voting determinations is
implied. See Proxy Voting Release, 68 FR 6585 at n. 10.
\31\ As we recently stated, ``an adviser's federal fiduciary
duty may not be waived, though it will apply in a manner that
reflects the agreed-upon scope of the relationship.'' See Fiduciary
Interpretation, 84 FR 33669, at 33672.
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Differences in agreements between investment advisers and their
clients as to the scope of the advisory relationship may result in a
variety of arrangements for voting client securities. While a client
and its investment adviser may agree that the client will delegate all
of its proxy voting authority to its investment adviser, the client and
the investment adviser may instead agree (in the manner described
above) to other proxy voting arrangements in which the investment
adviser would not assume all of the proxy voting authority, or in which
the investment adviser would only assume the authority to vote on
behalf of the client in limited circumstances or not at all.\32\
Following are several non-exhaustive examples of possible voting
arrangements to which a client and its investment adviser may agree,
subject to full and fair disclosure and informed consent: \33\
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\32\ Some letters asked the Commission to clarify the various
types of voting arrangements that might be adopted. See, e.g.,
Letter dated Dec. 21, 2018 from Benjamin Zycher, Ph.D., American
Enterprise Institute at p. 5 (seeking clarification about when it is
appropriate to vote proxies).
\33\ As we stated in the Fiduciary Interpretation, ``[w]hether
the disclosure is full and fair will depend upon, among other
things, the nature of the client, the scope of the services, and the
material fact or conflict. Full and fair disclosure for an
institutional client (including the specificity, level of detail,
and explanation of terminology) can differ, in some cases
significantly, from full and fair disclosure for a retail client
because institutional clients generally have a greater capacity and
more resources than retail clients to analyze and understand complex
conflicts and their ramifications.'' (internal citations omitted).
See Fiduciary Interpretation, 84 FR 33669, at 33677.
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A client and its investment adviser may agree that the
investment adviser should exercise voting authority pursuant to
specific parameters designed to serve the client's best interest. For
example, the client and the investment adviser may agree that, absent
receipt of a contrary instruction from the client or a determination by
the investment adviser that voting a particular proposal in a different
way would be in the client's best interest (e.g., if voting differently
would further the investment strategy being pursued by the investment
adviser on behalf of the client):
[cir] The investment adviser will vote in accordance with the
voting recommendations of management of the issuer. Such an arrangement
could be subject to conditions, for example additional analysis by the
investment adviser where the voting recommendation concerns a matter
that may present heightened management conflicts of interest or involve
a type of matter of particular interest to the investment adviser's
client; or
[[Page 47423]]
[cir] The investment adviser will vote in favor of all proposals
made by particular shareholder proponents. Such an arrangement could be
subject to conditions, for example requiring that the shareholder
proponent has particular expertise or an investment strategy that will
further the interests of the investment adviser's client.
A client and its investment adviser may agree that the
investment adviser would not exercise voting authority in circumstances
under which voting would impose costs on the client, such as
opportunity costs for the client resulting from restricting the use of
securities for lending in order to preserve the right to vote.\34\
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\34\ We note, however, that the investment adviser would still
have to fulfill its duty of loyalty while exercising its voting
authority on behalf of its client. For example, an investment
adviser must make any determination regarding whether to retain a
security and vote the accompanying proxy or lend out the security in
the client's best interest.
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A client and its investment adviser may agree that the
investment adviser will focus voting resources only on particular types
of proposals based on the client's preferences, such as proposals
relating to corporate events (mergers and acquisition transactions,
dissolutions, conversions, or consolidations) or contested elections
for directors.
A client and its investment adviser may agree that the
investment adviser would not exercise voting authority on certain types
of matters where the cost of voting would be high, or the benefit to
the client would be low.\35\ This could include, for example:
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\35\ See Proxy Voting Release, 68 FR 6585 at n. 18 and
accompanying text.
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[cir] Circumstances where the cost of voting the proxy exceeds the
expected benefit to the client, including, for example, casting a vote
on a foreign security that could involve the additional costs of hiring
a translator or traveling to a foreign country to vote the security in
person; or
[cir] Circumstances under which casting a vote would not reasonably
be expected to have a material effect on the value of the client's
investment.
While, as noted above, an investment adviser and its client may shape
the voting authority through full and fair disclosure and informed
consent, we reiterate that an investment adviser that assumes proxy
voting authority must make voting determinations consistent with its
fiduciary duty and in compliance with Rule 206(4)-6.\36\
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\36\ Rule 206(4)-6 under the Advisers Act requires an investment
adviser that assumes proxy voting authority to adopt and implement
policies and procedures that are reasonably designed to ensure it
votes client securities in the best interest of clients.
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Question 2: What steps could an investment adviser that has assumed
the authority to vote proxies on behalf of a client take to demonstrate
that it is making voting determinations in a client's best interest and
in accordance with the investment adviser's proxy voting policies and
procedures?
Response: As we discuss in Section I above, an investment adviser
is a fiduciary and owes each of its clients a fiduciary duty with
respect to services undertaken on the client's behalf, including
voting. In that discussion, we explain some of the requirements that
follow from an investment adviser's fiduciary duty in the context of
voting on behalf of clients, including the need for an investment
adviser to conduct a reasonable investigation into matters on which the
adviser votes and to vote in the best interest of the client.\37\
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\37\ The Commission has noted that an investment adviser uses
various means of ensuring that proxy votes are voted in its client's
best interest and not affected by the adviser's conflicts of
interest, in addition to looking to the voting recommendations of a
proxy advisory firm. For example, the Commission has stated that
``[c]learly, an adviser's policy of disclosing the conflict to
clients and obtaining their consents before voting satisfies the
requirements of the rule and, when implemented, fulfills the
adviser's fiduciary obligations under the Advisers Act. . . . Other
policies and procedures are also available; their effectiveness (and
the effectiveness of any policies and procedures) will turn on how
well they insulate the decision on how to vote client proxies from
the conflict.'' See Proxy Voting Release, 68 FR 6585, at 6587-88.
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An investment adviser should consider how its fiduciary duty and
its obligations under Rule 206(4)-6 apply when it has multiple clients.
Many investment advisers have multiple clients, including funds, other
pooled investment vehicles, and individual investors, with differing
investment objectives and strategies.\38\ In considering whether an
investment adviser's proxy voting policies and procedures are
reasonably designed to ensure compliance with Rule 206(4)-6 and to
fulfill its fiduciary duty to its clients, an investment adviser should
consider whether voting all of its clients' shares in accordance with a
uniform voting policy would be in the best interest of each of its
clients.\39\ In particular, where an investment adviser undertakes
proxy voting responsibilities on behalf of multiple funds, pooled
investment vehicles, or other clients, it should consider whether it
should have different voting policies for some or all of these
different funds, vehicles, or other clients, depending on the
investment strategy and objectives of each.\40\ For example, a growth
fund that targets companies with high growth prospects may have a
different perspective on certain matters submitted to shareholders than
an income or dividend fund that seeks to generate an income stream for
shareholders in the form of dividends or interest payments.
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\38\ Such other pooled investment vehicles may include, for
example, private funds that are excluded from the definition of
investment company by either Section 3(c)(1) or Section 3(c)(7) of
the Investment Company Act.
\39\ Some letters have noted that proxy voting guidelines allow
funds to handle efficiently the large majority of votes that are
recurring and non-controversial. See, e.g., ICI Letter I at pp. 9-
10; ICI Letter II at p. 4.
\40\ As we have noted in the Proxy Voting Release, nothing in
Rule 206(4)-6 under the Advisers Act prevents an investment adviser
from having different policies and procedures for different clients
or different categories of clients. Thus, the board of directors of
a fund could adopt and require an investment adviser to use policies
and procedures that differ from those the adviser uses with respect
to its other clients. Proxy Voting Release, FR 6587 at n. 13.
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Funds that invest in voting securities are also required to
disclose in their statements of additional information (``SAI'') \41\
or on Form N-CSR,\42\ as applicable, the policies and procedures that
they use to determine how to vote proxies relating to securities held
in their portfolios.\43\ As discussed above, if the funds have
different voting policies and procedures, these should be reflected in
the SAI or on Form N-CSR, as applicable.
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\41\ The SAI is part of a fund's registration statement and
contains information about a fund in addition to that contained in
the prospectus. The SAI is required to be delivered to investors
upon request and is available on the Commission's Electronic Data
Gathering, Analysis, and Retrieval System (``EDGAR'').
\42\ Form N-CSR is used by open-end funds and closed-end funds
to file certified shareholder reports with the Commission on EDGAR.
\43\ Open-end funds must disclose their proxy voting policies
and procedures in their SAIs. Because closed-end funds do not offer
their shares continuously, and are therefore generally not required
to maintain an updated SAI to meet their obligations under the
Securities Act of 1933, they are required to disclose their proxy
voting policies and procedures in their annual reports on Form N-
CSR. See Disclosure of Proxy Voting Policies and Proxy Voting
Records by Registered Management Investment Companies, Release No.
IC-25922 (Jan. 31, 2003), 68 FR 6564 (Feb. 7, 2003), Form N-1A, Form
N-2, Form N-3, and Form N-CSR.
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An investment adviser should also consider whether certain types of
matters may necessitate that the adviser conduct a more detailed
analysis than what may be entailed by application of its general voting
guidelines, to consider factors particular to the issuer or the voting
matter under consideration. Such matters might include, but are not
limited to, corporate events (mergers and acquisition transactions,
dissolutions, conversions, or consolidations) or contested elections
for directors. When determining whether to conduct such an issuer-
specific analysis, or an analysis specific
[[Page 47424]]
to the matter to be voted on, an investment adviser should consider the
potential effect of the vote on the value of a client's investments. An
investment adviser should consider identifying in its voting policy or
policies the factors that it will consider in determining which matters
require company-specific evaluation, and how it will evaluate voting
decisions on such matters.
In addition, an investment adviser should consider reasonable
measures to determine that it is casting votes on behalf of its clients
consistently with its voting policies and procedures. For example, one
way in which an investment adviser could evaluate its compliance with
Rule 206(4)-6 would be to sample the proxy votes it casts on behalf of
its clients as part of its annual review of its compliance policies and
procedures.\44\ Such a review could specifically include sampling of
proxy votes that relate to proposals that may require more issuer-
specific analysis (e.g., mergers and acquisition transactions,
dissolutions, conversions, or consolidations), to assist in evaluating
whether the investment adviser's voting determinations are consistent
with its voting policies and procedures and in its client's best
interest.\45\
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\44\ See 17 CFR 275.206(4)-7(b) [Rule 206(4)-7(b) under the
Advisers Act].
\45\ Id.
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An investment adviser that retains a proxy advisory firm to provide
voting recommendations or voting execution services also should
consider additional steps to evaluate whether the investment adviser's
voting determinations are consistent with its voting policies and
procedures and in the client's best interest before the votes are cast.
For example, some steps that an investment adviser could use to
evaluate its compliance are:
Sampling pre-populated votes: Where the investment adviser
utilizes the proxy advisory firm for either voting recommendations or
voting execution (or both), it could assess ``pre-populated'' votes
shown on the proxy advisory firm's electronic voting platform before
such votes are cast, such as through periodic sampling of the proxy
advisory firm's pre-populated votes.
Consideration of additional information: Where the
investment adviser utilizes the proxy advisory firm for voting
recommendations, it could consider policies and procedures that provide
for consideration of additional information that may become available
regarding a particular proposal. This additional information may
include an issuer's or a shareholder proponent's subsequently filed
additional definitive proxy materials or other information conveyed by
an issuer or shareholder proponent to the investment adviser that would
reasonably be expected to affect the investment adviser's voting
determination.
Higher degree of analysis: Where the investment adviser
utilizes the proxy advisory firm for either voting recommendations or
voting execution (or both), with respect to matters where the
investment adviser's voting policies and procedures do not address how
it should vote on a particular matter, or where the matter is highly
contested or controversial,\46\ it could consider whether a higher
degree of analysis may be necessary or appropriate to assess whether
any votes it casts on behalf of its client are cast in the client's
best interest.
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\46\ This may include, for example, major acquisitions involving
takeovers or contested director elections where a shareholder has
proposed its own slate of directors.
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Finally, as part of an investment adviser's ongoing compliance
program, the adviser must review and document, no less frequently than
annually, the adequacy of its voting policies and procedures to ensure
that they have been formulated reasonably and implemented effectively,
including whether the applicable policies and procedures continue to be
reasonably designed to ensure that the adviser casts votes on behalf of
its clients in the best interest of such clients.\47\
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\47\ See Proxy Voting Release; see also 17 CFR 204-2(a)(17)(ii)
[Rule 204-2(a)(17)(ii) under the Advisers Act] (requiring an
investment adviser to maintain copies of its records documenting the
investment adviser's annual review of policies and procedures
conducted pursuant to Rule 206(4)-7(b)); Rule 206(4)-7 under the
Advisers Act (e.g., requiring investment advisers to adopt and
implement written policies and procedures reasonably designed to
prevent violation, by the adviser and its supervised person, of the
Advisers Act. The rule also requires, among other things, that
investment advisers review, no less frequently than annually, the
adequacy of their policies and procedures and the effectiveness of
their implementation). See also Rule 38a-1 under the Investment
Company Act (e.g., requiring each fund to adopt and implement
written policies and procedures reasonably designed to prevent
violation of the federal securities laws by the fund, including
policies and procedures that provide for the oversight of compliance
by the fund's investment adviser, among others. The rule also
requires, among other things, that the fund review, no less
frequently than annually, the adequacy of the policies and
procedures of the fund and of each investment adviser, principal
underwriter, administrator, and transfer agent, and the
effectiveness of their implementation).
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Question 3: What are some of the considerations that an investment
adviser should take into account if it retains a proxy advisory firm to
assist it in discharging its proxy voting duties?
Response: When an investment adviser is considering whether to
retain or continue retaining a proxy advisory firm to provide research
or voting recommendations as an input to the adviser's voting
decisions, we believe that an investment adviser should consider, among
other things, whether the proxy advisory firm has the capacity and
competency to adequately analyze the matters for which the investment
adviser is responsible for voting.\48\ In this regard, investment
advisers could consider, among other things, the adequacy and quality
of the proxy advisory firm's staffing, personnel, and/or technology.
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\48\ In Question No. 4, we provide guidance regarding an
investment adviser's duties with respect to evaluating the care and
competency of the proxy advisory firm with respect to potential
factual errors, potential incompleteness, or potential
methodological weaknesses that may materially affect the proxy
advisory firm's voting recommendations.
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Such an investment adviser should also consider whether the proxy
advisory firm has an effective process for seeking timely input from
issuers and proxy advisory firm clients with respect to, for example,
its proxy voting policies, methodologies, and peer group constructions,
including for ``say-on-pay'' votes.\49\ For example, if peer group
comparisons are a component of the substantive evaluation, the
investment adviser should consider how the proxy advisory firm
incorporates appropriate input in formulating its methodologies and
construction of issuer peer groups. Where relevant, an investment
adviser should also consider how the proxy advisory firm, in
constructing peer groups, takes into account the unique characteristics
regarding the issuer, to the extent available, such as the issuer's
size; its governance structure; its industry and any particular
practices unique to that industry; its history; and its financial
performance.
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\49\ 17 CFR 240.14a-21 [Rule 14a-21 under the Securities
Exchange Act of 1934] requires, among other things, companies
soliciting proxies for an annual or other meeting of shareholders at
which directors will be elected to include a separate resolution
subject to a shareholder advisory vote to approve the compensation
of named executive officers.
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Such an investment adviser should also consider whether a proxy
advisory firm has adequately disclosed to the investment adviser its
methodologies in formulating voting recommendations, such that the
investment adviser can understand the factors underlying the proxy
advisory firm's voting recommendations.\50\ In addition, the
[[Page 47425]]
investment adviser should consider the nature of any third-party
information sources that the proxy advisory firm uses as a basis for
its voting recommendations. The investment adviser also should consider
what steps it should take to develop a reasonable understanding of when
and how the proxy advisory firm would expect to engage with issuers and
third parties.
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\50\ If an investment adviser utilizes the proxy advisory firm
for research and not voting recommendations, it could still evaluate
to what extent, if any, the proxy advisory firm's peer group
construction methodology may influence how the firm would determine
``say-on-pay'' votes.
Some letters have called for greater transparency to issuers and
clients about the formulation of proxy advisory recommendations and
guidelines. See, e.g., Letter dated Oct. 10, 2018 from Timothy M.
Doyle, Vice President of Policy and General Counsel, American
Council for Capital Formation at p. 2; Letter dated July 26, 2019
from Neil A. Hansen, Vice President, Investor Relations and
Corporate Secretary, ExxonMobil at 2 (stating that proxy advisory
firms' methodology in evaluating executive compensation can
undermine the company's ability to offer incentives for management
to pursue long-term shareholder value creation).
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More generally, an investment adviser's decision regarding whether
to retain a proxy advisory firm should also include a reasonable review
of the proxy advisory firm's policies and procedures regarding how it
identifies and addresses conflicts of interest.\51\ Some ways in which
an investment adviser could conduct this review include, for example,
assessing:
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\51\ Some letters have noted concerns about proxy advisory firm
conflicts of interest. See, e.g., Letter dated Nov. 9, 2018,
Business Roundtable; Letter dated Nov. 29, 2018 from Suanne
Estatico; Letter dated Jan. 11, 2019 from Darryl M. Burman, Office
of the General Counsel, Group 1 Automotive, Inc.
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Whether the proxy advisory firm has adequate policies and
procedures to identify, disclose, and address actual and potential
conflicts of interest, including (1) conflicts relating to the
provision of proxy voting recommendations and proxy voting services
generally, (2) conflicts relating to activities other than providing
proxy voting recommendations and proxy voting services, and (3)
conflicts presented by certain affiliations. In the first instance,
actual or potential conflicts may include conflicts arising from the
provision of recommendations and services to issuers as well as
proponents of shareholder proposals regarding matters that may be the
subject of a vote. In the third instance, actual or potential conflicts
presented by certain affiliations may include whether a third party
with significant influence over the proxy advisory firm (e.g., as a
shareholder, lender, or significant source of business) has taken a
position on a particular voting issue or voting issues more generally;
\52\
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\52\ See, e.g., U.S. Government Accountability Office, Report to
Congressional Requesters, Corporate Shareholder Meetings--Issues
Relating to Firms That Advise Institutional Investors on Proxy
Voting (June 2007).
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Whether the proxy advisory firm's policies and procedures
provide for adequate disclosure (i.e., context-specific, non-
boilerplate disclosure) of the proxy advisory firm's actual and
potential conflicts with respect to the services the proxy advisory
firm provides to the investment adviser. This disclosure could include
details on, for example, whether the issuer has received consulting
services from the proxy advisory firm, and if so, the amount of
compensation paid to the firm, if any; whether a proponent of a
shareholder proposal or an affiliate of the proponent is or has been a
client of the proxy advisory firm; and
Whether the proxy advisory firm's policies and procedures
utilize technology in delivering conflicts disclosures that are readily
accessible (for example, usage of online portals or other tools to make
conflicts disclosure transparent and accessible).
The steps an investment adviser should take when considering
whether to retain or continue retaining a proxy advisory firm could
depend on, among other things (1) the scope of the investment adviser's
voting authority, and (2) the type of functions and services that the
investment adviser has retained the proxy advisory firm to perform.
Accordingly, the extent to which an investment adviser takes some or
all of the steps described above could vary based on these factors. For
example, some of these considerations may be less relevant for an
investment adviser that engages a proxy advisory firm solely to execute
votes according to detailed voting instructions from the investment
adviser, which leaves minimal discretion to the proxy advisory firm.
Nevertheless, an investment adviser that retains a proxy advisory firm
for this limited purpose should consider what steps to take to
understand the proxy advisory firm's own policies and procedures,
including its methodologies if applicable, with respect to implementing
the investment adviser's voting instructions.
Question 4: When retaining a proxy advisory firm for research or
voting recommendations as an input to its voting determinations, what
steps should an investment adviser consider taking when it becomes
aware of potential factual errors, potential incompleteness, or
potential methodological weaknesses in the proxy advisory firm's
analysis that may materially affect one or more of the investment
adviser's voting determinations?
As discussed in Section I above, for an investment adviser to form
a reasonable belief that its voting determinations are in the best
interest of the client, it should conduct a reasonable investigation
into the matter. In the case of potential factual errors, potential
incompleteness, or potential methodological weaknesses in the proxy
advisory firm's analysis, the investment adviser's policies and
procedures should be reasonably designed to ensure that its voting
determinations are not based on materially inaccurate or incomplete
information. For example, an investment adviser that has retained a
proxy advisory firm for research or voting recommendations as an input
to its voting determinations should consider including in its policies
and procedures a periodic review of the investment adviser's ongoing
use of the proxy advisory firm's research or voting recommendations.
Such a review could include an assessment of the extent to which
potential factual errors, potential incompleteness, or potential
methodological weaknesses in the proxy advisory firm's analysis (that
the investment adviser becomes aware of and deems credible and relevant
to its voting determinations) materially affected the proxy advisory
firm's research or recommendations that the investment adviser
utilized.
In reviewing its use of a proxy advisory firm, an investment
adviser should also consider the effectiveness of the proxy advisory
firm's policies and procedures for obtaining current and accurate
information relevant to matters included in its research and on which
it makes voting recommendations. As part of this assessment, investment
advisers should consider, and in certain cases may wish to communicate
with proxy advisory firms, regarding the following:
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 in a timely and
efficient manner;
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
[[Page 47426]]
voting recommendations or executing voting instructions; \53\ and
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\53\ See Question No. 3 above.
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The proxy advisory firm's consideration of factors unique
to a specific issuer or proposal when evaluating a matter subject to a
shareholder vote.
Question 5: How can an investment adviser evaluate the services of
a proxy advisory firm that it retains, including evaluating any
material changes in services or operations by the proxy advisory firm?
Response: In order to act consistently with Rule 206(4)-6, an
investment adviser that has retained a third party (such as a proxy
advisory firm) to assist substantively with its proxy voting
responsibilities and carrying out its fiduciary duty should adopt and
implement policies and procedures that are reasonably designed to
sufficiently evaluate the third party in order to ensure that the
investment adviser casts votes in the best interest of its clients.\54\
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\54\ See supra at n. 47.
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For example, a proxy advisory firm's business and/or its policies
and procedures regarding conflicts of interest could change after an
investment adviser's initial assessment of the proxy advisory firm, and
these changes could, for example, materially alter the effectiveness of
the proxy advisory firm's policies and procedures and may require the
investment adviser to make a subsequent assessment. In this regard, we
believe that investment advisers that retain a proxy advisory firm to
provide research or voting recommendations (or both) should consider
policies and procedures to identify and evaluate a proxy advisory
firm's conflicts of interest that can arise on an ongoing basis, in
addition to updates regarding the proxy advisory firm's capacity and
competency to provide voting recommendations or to execute votes in
accordance with an investment adviser's voting instructions.\55\
Accordingly, the investment adviser should consider requiring the proxy
advisory firm to update the investment adviser regarding business
changes the investment adviser considers relevant (i.e., with respect
to the proxy advisory firm's capacity and competency to provide
independent proxy voting advice or carry out voting instructions). An
investment adviser should also consider whether the proxy advisory firm
appropriately updates its methodologies, guidelines, and voting
recommendations on an ongoing basis, including in response to feedback
from issuers and their shareholders.
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\55\ Id.
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Question 6: If an investment adviser has assumed voting authority
on behalf of a client, is it required to exercise every opportunity to
vote a proxy for that client?
Response: No, if either of two situations applies. First, if an
investment adviser and its client have agreed in advance to limit the
conditions under which the investment adviser would exercise voting
authority, as discussed above, the investment adviser need not cast a
vote on behalf of the client where contemplated by their agreement.
Second, as the Commission has stated previously, there may be times
when an investment adviser that has voting authority may refrain from
voting a proxy on behalf of a client if it has determined that
refraining is in the best interest of that client.\56\ This may be the
case where the adviser determines that the cost to the client of voting
the proxy exceeds the expected benefit to the client.\57\ In making
such a determination, the investment adviser may not ignore or be
negligent in fulfilling the obligation it has assumed to vote client
proxies and cannot fulfill its fiduciary responsibilities to its
clients by merely refraining from voting the proxies.\58\ Accordingly,
before refraining from voting under the circumstances described in this
second situation, an investment adviser should consider whether it is
fulfilling its duty of care to its client in light of the scope of
services to which it and the client have agreed.
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\56\ See Proxy Voting Release, 68 FR 6585, at 6587. We also have
stated that ``[w]hether the advice is in a client's best interest
must be evaluated in the context of the portfolio that the adviser
manages for the client and the client's objectives.'' See Fiduciary
Interpretation, 84 FR 33669, at 33673.
\57\ See Proxy Voting Release, 68 FR 6585, at 6587. The
Commission stated in that release that ``we do not suggest that an
adviser that fails to vote every proxy would necessarily violate its
fiduciary obligations. There may even be times when refraining from
voting a proxy is in the client's best interest, such as when the
adviser determines that the cost of voting the proxy exceeds the
expected benefit to the client.'' Id. In this second situation, the
costs to be considered would necessarily have to be additional costs
to the client.
\58\ See 68 FR 6585, at 6587-88.
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III. Other Matters
Pursuant to the Congressional Review Act,\59\ the Office of
Information and Regulatory Affairs has designated this guidance as not
a ``major rule,'' as defined by 5 U.S.C. 804(2).
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\59\ 5 U.S.C. 801 et seq.
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* * * * *
List of Subjects in 17 CFR Parts 271 and 276
Securities.
Amendments to the Code of Federal Regulations
For the reasons set out above, the Commission is amending title 17,
chapter II of the Code of Federal Regulations as set forth below:
PART 271--INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT
COMPANY ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER
0
1. An authority citation is added for part 271 to read as follows:
Authority: 15 U.S.C. 80a et seq.
0
2. The table is amended by adding an entry for Release No. IC-33605 at
the end to read as follows:
----------------------------------------------------------------------------------------------------------------
Subject Release No. Date FR vol. and page
----------------------------------------------------------------------------------------------------------------
* * * * * * *
Commission Guidance Regarding the Proxy IC-33605 August 21, [Insert FR Volume Number]
Voting Responsibilities of Investment 2019 FR [Insert FR Page
Advisers. Number].
----------------------------------------------------------------------------------------------------------------
[[Page 47427]]
PART 276--INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT
ADVISERS ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER
0
3. An authority citation is added for part 276 to read as follows:
Authority: 15 U.S.C. 80b et seq.
0
4. The table is amended by adding an entry for Release No. IA-5325 at
the end to read as follows:
----------------------------------------------------------------------------------------------------------------
Subject Release No. Date FR vol. and page
----------------------------------------------------------------------------------------------------------------
* * * * * * *
Commission Guidance Regarding the Proxy IA-5325 August 21, [Insert FR Volume Number]
Voting Responsibilities of Investment 2019 FR [Insert FR Page
Advisers. Number].
----------------------------------------------------------------------------------------------------------------
By the Commission.
Dated: August 21, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-18342 Filed 9-9-19; 8:45 am]
BILLING CODE 8011-01-P
