SEC Staff Requires Proxy Voting Testing and Oversight

The staff of the Division of Investment Management, in a new Staff Legal Bulletin, has provided guidance about an investment advisor’s obligations when retaining a proxy voting firm. The staff instructs advisers to implement compliance policies and procedures including “periodically sampling proxy votes” to ensure a proxy voting firm casts votes in accordance with client instructions. The staff said that testing could include generalized sample testing or a review of voting with respect to certain proposals. Proxy advisory firm oversight measures should also include a review of conflicts of interest policies, capacity and competency, and consideration of material information. The staff says that oversight should not decrease simply because the RIA and the proxy advisory firm established up-front rules about proxy voting (e.g. always abstain, vote with management). The Staff Legal Bulletin also discusses rules affecting proxy voting firms themselves.

OUR TAKE: This is a good reminder that retaining a third party proxy voting firm and setting “one-and-done” voting rules does not absolve you from reviewing and testing whether the firm actually followed those rules. The staff requires firms to manage all third party vendors with ongoing diligence.

http://www.sec.gov/interps/legal/cfslb20.htm