• Proposals For New SEC Proxy Voting Rules For Investment Advisers and Investment Companies
  • July 29, 2003
  • Law Firm: Kilpatrick Stockton LLP - Atlanta Office
  • The Securities and Exchange Commission ("SEC") recently proposed two new rules relating to proxy voting that would affect all investment advisers and investment companies by requiring the adoption of policies and procedures for proxy voting and disclosure of proxy votes. Investment advisers who have proxy voting authority have a fiduciary obligation to vote proxies in a manner that is consistent with the interests of their clients, but the SEC has not previously focused on this duty or required written procedures or specific disclosures related to proxy voting. Many investment advisers and investment companies do not have written proxy voting policies, and only a few disclose actual voting records. Accordingly, the SEC's rule proposals would have a significant impact on investment advisers and investment companies if adopted.

    Disclosure of Proxy Voting by Registered Investment Advisers

    The first proposal, issued as Securities Act Release No. IA-2059 on September 20, 2002, would apply to registered investment advisers and would amend two existing rules under the Investment Advisers Act of 1940 (the "Advisers Act") that address an investment adviser's fiduciary obligation to clients who have given the adviser the authority to vote their proxies. Under the proposed rules, registered investment advisers would be required to adopt written policies and procedures that:

    • Describe how the adviser addresses material conflicts of interest between its interests and those of its clients with respect to proxy voting;
    • Address how the investment adviser resolves conflicts in the best interests of its clients;
    • Identify personnel responsible for monitoring corporate actions;
    • Describe the basis on which decisions are made to vote client proxies; and
    • Describe the extent to which the adviser relies on the advice of third parties to vote proxies.

    In addition, the proposed rules would require that investment advisers disclose to clients (i) their proxy voting policies and procedures; and (ii) how clients can obtain information about how their proxies were voted. Finally, the proposed rules would also specifically require investment advisers to retain, among other things, written copies of their proxy voting policies, records of proxy statements received, records of votes cast, and records of all communications received with regard to proxies for five years.

    Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Investment Companies

    The second proposal, issued as Securities Act Release No. 33-8131 on September 20, 2002, would apply to registered investment companies (each, a "Fund"). The proposal would amend Forms N-1A, N-3 and proposed form N-CSR to require that Funds:

    • Disclose in their registration statement (and in the case of a closed-end fund, on proposed Form N-CSR), the policies and procedures that the Fund uses to determine how to vote proxies relating to its portfolio securities; and
    • File with the SEC (semi-annually on proposed Form N-CSR) and make available to shareholders, upon request and free of charge, the Fund's proxy voting record.

    The proposed rules would also require that a Fund disclose in its annual and semi-annual reports to shareholders and in its registration statement how they may obtain information about the Fund's proxy voting. Finally, the proposed rules would require that a Fund disclose in its annual and semi-annual reports to shareholders any proxy votes (or failures to vote) that are inconsistent with its proxy voting policies and procedures, and why the Fund voted, or failed to vote, in a manner consistent with its policies and procedures.

    The SEC has solicited comments on both proposals by December 6, 2002.

    Reaction by Investment Managers, Mutual Fund Companies and the Public At Large

    Even before the release of the proposed rules, a number of shareholder activist groups and "socially-responsible" investment management firms called on the SEC to provide guidance and require disclosure regarding investment advisers' proxy voting practices. Understandably, the SEC's proxy voting disclosure proposals have generated considerable interest among individual investors, activist organizations and investment firms.

    In general, socially-responsible investment firms and activist organizations have expressed support for the proposed rules as an effort to help investors understand how mutual funds and advisers vote on a variety of proxy issues, such as corporate governance, environmental issues and labor-related concerns. At the same time, some institutional money managers have expressed concerns that the SEC's proposed rules would subject the adviser or their funds to the political or social preferences of their largest clients and investors, but will not help investors make better investment decisions. Investment advisers have also raised concerns that the new rules will require considerable resources (e.g., time and personnel) be focused on proxy voting, first to determine how to vote and second, to manage investor or public reaction to those votes.

    Practical Effects of the SEC's Proposed Rules

    Regardless of an investment adviser's position regarding the proposed rules, it is important to recognize and prepare for their potential business impact. Whether the proposed rules are adopted or not, the SEC's focus on proxy voting highlights the importance of ensuring that clients understand an investment adviser's role in voting proxies. As a matter of best practices for investment advisers, investment advisers should review their proxy voting obligations to clients, and carefully consider whether to accept proxy voting as part of their contractual duties. In addition, investment advisers that vote proxies for clients should regularly (e.g., annually) review proxy voting practices and procedures. Investment advisers also should ensure that proxies are voted in the best interests of clients, and that appropriate records of proxy votes are maintained.

    Of course, as a practical matter, if the SEC adopts the proposed rules, investment advisers will be required to adopt written procedures for proxy voting in accordance with the rules. Even investment advisers who currently have proxy voting procedures would be required to review those procedures for compliance with the new rules.