Tuesday, January 08, 2019

Investment adviser group opposes more regulation of proxy advisory firms

By Amanda Maine, J.D.

In a follow-up comment letter to the SEC’s November proxy roundtable, the Investment Adviser Association (IAA) implored the Commission to tackle issues relating to the proxy infrastructure weaknesses that were highlighted at the roundtable. Nevertheless, IAA recognized that the issue of proxy advisory firms is “politically heated” and reiterated its opposition to further regulation of proxy advisory firms, citing the importance of such firms in providing administrative and research services and the increased costs that would result from increased regulation of the firms.

Proxy advisory firm services. IAA’s letter emphasized the services that proxy advisory firms provide are valuable to investment advisers, including voting mechanics, data tracking and aggregation, and workflow management.

IAA also addressed criticism that investment advisors engage in “robo-voting” in lockstep with proxy advisory firm recommendations. Certain investment advisers provide their own proxy voting guidelines to proxy advisory firms, which customize the recommendations and execute the proxy votes accordingly. Still others receive information based on benchmark policies or other policies such as socially responsible investing, IAA explained. Investment advisers use this information to make their own recommendations on voting proxies and do not necessarily use the recommendations of the proxy advisory firm, according to IAA.

Current rules adequate to protect shareholders. IAA cited current SEC regulations and guidance in favor of its position that additional regulation of proxy advisory firms is unnecessary. Advisers Act Rule 206(4)-6 (the Proxy Voting Rule) requires investment advisers to implement policies and procedures addressing material conflicts of interest that may arise between an adviser and its clients, an issue that was brought up at the SEC’s proxy roundtable. In addition, under the Compliance Program Rule (Advisers Act Rule 206(4)-7), advisers must disclose to clients how they obtain information about how the advisers voted client proxies.

IAA also cited Staff Legal Bulletin No. 20, which outlines issues for investment advisers to consider when evaluating whether to retain a proxy advisory firms and addresses due diligence and oversight questions relating to the proxy advisory firm’s staffing and personnel, the robustness of its policies, and how it addresses conflicts of interest. In addition to the statutory fiduciary requirement of investment advisors, IAA stated, the Proxy Voting Rule, the Compliance Program Rule, and SLB No. 20 provide a “robust regulatory framework” that does not warrant further regulation of the proxy advisory voting process.

Costs. IAA also raised concerns about the potential costs of any new regulation of proxy advisory firms. It rejected the notion that conflicts of interest are grounds for more proxy advisory firm regulation. IAA emphasized again that firms currently disclose these conflicts of interest in a manner sufficient for investment advisers to review and evaluate them, which should negate the need for new regulations in this area.

IAA also opposes a requirement that proxy advisory firms distribute their reports to issuers for review and comment prior to distributing the reports to those that use and pay for the reports. Not only could such a requirement interfere with the independence and analyses of the reports, it is also unworkable due to the timeline which would be required to distribute reports to issuers, receive their feedback, and then distribute the reports to investment advisers and other clients.

Pass-through vote. IAA expressed its opposition to the suggestion that funds obtain feedback directly from shareholders regarding proxies for fund portfolio securities, or “pass-through” votes. IAA points out that a primary reason that investors purchase fund shares is to benefit from professional management of the fund and expert analysis, which includes the manager making the voting decision.

In addition, IAA noted that a shareholder has access to information which allows him or her to determine in which funds to invest consistent with the shareholder’s philosophy. IAA also advised that a fund’s portfolio securities are legally owned by the fund, and possess legal shareholder rights, including voting rights.

Finally, IAA noted the practical issues related to pass-through voting. A fund may hold hundreds of thousands of securities, and distributing information to each and every shareholder for proxy purposes would be not only logistically difficult, but also extremely costly. Such a requirement would overwhelm shareholders with paperwork. Shareholders who have made an affirmative decision to invest in a fund managed by professionals expect their investments to be handled by fund management, IAA explained.