United States: SEC Staff Releases Guidance On Investment Advisers And Proxy Advisory Firms

On June 30, 2014, the SEC Divisions of Investment Management and Corporation Finance released guidance to investment advisers and proxy advisory firms in the form of 13 Questions and Answers. The guidance, which is published in Staff Legal Bulletin No. 20 ("SLB 20") and available at http://www.sec.gov/interps/legal/cfslb20.htm, addresses (1) investment advisers' responsibility when voting client proxies and retaining proxy advisory firms and (2) the availability and requirements of two exemptions to federal proxy rules often relied upon by proxy advisory firms. Although many commentators have been requesting more regulation over proxy advisory firms, this guidance does not overhaul the existing legal framework.


Proxy advisory firms have emerged in recent years as a powerful force in influencing proxy voting by institutional investors. Although there are several niche players in the industry, the market is dominated by Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. LLC (Glass-Lewis). Proxy advisory firms are often criticized on various grounds, including (1) issuing recommendations based on incorrect assumptions, calculations or methodologies, (2) failing to provide advance copies of their recommendations except to the largest US public companies, (3) applying a one-size-fits-all approach to corporate governance matters, and (4) creating conflicts of interest by issuing recommendations to investors on how to vote on shareholder proposals while also offering consulting services to the same public companies submitting such proposals. Proxy advisory firms also face a challenging business environment. ISS, for example, issues recommendations on approximately 39,000 companies in 115 countries each year. In addition, most of the proposals in the United States are considered during a three-month period each year. At the same time, ISS is under pressure from its clients to minimize costs.

The guidance issued in SLB 20, as summarized below, will likely disappoint observers who were hoping the Commission would seek to regulate the operations of proxy advisory firms in a more comprehensive and robust fashion. Nearly four years have elapsed since the Commission most recently considered enhanced regulation of proxy advisory firms.1 As a result, it seems unlikely that the Commission will pursue additional regulations soon, even though many commentators continue to call for greater transparency into the methodologies by which proxy advisory firms make voting recommendations and more vigorous disclosure of conflicts of interest.

Proxy Voting by Investment Advisers

Investment advisers owe a duty of care and loyalty when undertaking services on behalf of their clients, including proxy voting. Current SEC rules require investment advisers to adopt and implement written policies and procedures reasonably designed to ensure investment advisers vote proxies in the best interests of their clients (the "Proxy Voting Rule").2 At least annually, investment advisers should review the adequacy of their proxy voting policies to verify they are being effectively implemented and are still reasonably designed to serve their clients' best interests. Investment advisers can demonstrate their compliance with this rule by periodically sampling proxy votes to verify compliance with their policies and procedures.

Although in most cases clients delegate to their investment adviser all their proxy voting authority, the Proxy Voting Rule grants flexibility in determining the scope of the investment adviser's voting authority. SLB 20 includes a nonexclusive list of examples of alternative arrangements clients and investment advisers can establish, including ones in which they determine:

  • the time and costs associated with certain types of proposals or issuers may not be in the client's best interest;
  • to vote as recommended by management or in favor of all proposals made by a particular shareholder proponent absent contrary instructions;
  • to abstain from voting any proxies; or
  • to focus resources on only particular types of proposals.

Investment advisers that retain proxy firms to assist with their proxy voting responsibilities must perform sufficient due diligence to "ascertain that the proxy advisory firm has the capacity and competency to adequately analyze proxy issues." In making that determination, investment advisers may consider the adequacy of the proxy advisory firm's staffing and personnel and the robustness of its policies concerning identifying and addressing conflicts of interest and ensuring the accuracy of the information used to make its proxy voting recommendations.

Exemption of Proxy Advisory Firms from SEC's Proxy Solicitation Rules

Proxy advisory firms engage in "solicitation" when they furnish recommendations "to security holders ... reasonably calculated to result in the procurement, withholding or revocation of a proxy," but Exchange Act Rule 14a-2(b) exempts them from the information and filing requirements of federal proxy rules so long as they provide only voting recommendations ("Voting Recommendation Exemption"). The Voting Recommendation Exemption is not available when a proxy firm allows its client to establish, in advance of receiving proxy materials for a particular shareholder meeting, general guidelines that the proxy advisory firm (not the client) uses to vote the proxies. Such a "power to act as a proxy" is not allowed under the Voting Recommendation Exemption.

SLB 20 goes on to explain, even when the Voting Recommendation Exemption is not available, Rule 14a-2(b)(3) exempts the furnishing of proxy voting advice from federal proxy rules so long as a business relationship is present, subject to certain conditions ("Business Relationship Exemption"). The Business Relationship Exemption is available if the proxy advisory firm (1) gives financial advice in the ordinary course of business, (2) receives no special commission for furnishing the advice other than from the recipient, (3) does not furnish advice for a person or company soliciting proxies or on behalf of a participant in a contested election, and, most notably, (4) discloses to the recipient of the advice any significant relationship the advisory firm has with the company or the proponent subject to the advice recommended.

The Business Relationship Exemption recognizes the potential conflict of interest when a proxy advisory firm provides voting recommendations concerning a company while also providing consulting services to that same company. Therefore, the Business Relationship Exemption is available only if:

  • the proxy advisory firm has assessed whether its relationship to the company is "significant," meaning the relationship would reasonably "affect the recipient's assessment of the reliability and objectivity of the advisor and the advice"; and
  • after determining there is a "significant" relationship, the proxy advisory firm affirmatively discloses to the potential recipient of the advice the nature and scope of the relationship, including any steps taken to mitigate the conflict of interest.

Notably, the proxy advisory firm needs to disclose only the "significant" relationship to its client. The proxy advisory firm is not required to make this disclosure public or share it with the company or proponent subject to this potentially biased recommendation.


The guidance provided in SLB 20 merely clarifies current rules applicable to investment advisers and reiterates the availability of two often-used exemptions to federal proxy rules for proxy advisory firms. It does not modify the staff no-action letters that some commentators have criticized as fueling the current controversy. Although the guidance notes that investment advisers and proxy advisory firms may want or need to make changes to their current systems and processes in light of the guidance provided, issuers will likely not notice the effects of any such changes. Nevertheless, the guidance clarifies that furnishing proxy voting advice will generally constitute a "solicitation" under the federal proxy rules, which also subjects proxy advisory firms to potential antifraud liability under Rule 14a-9. Moreover, public companies that purchase consulting services from proxy advisory firms are entitled to more robust conflict of interest disclosure from the advisory firm.


1 See Concept Release on the US Proxy System, Release Nos. 34-62495; IA-3052; IC-29340; File No. S7-14-10 (July 14, 210).

2 Rule 206(4)-6 under the Investment Advisers Act of 1940.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions