Proxy Voting Responsibilities of Investment Advisers

Ethan CoreyLegal Insights


SEC Issues Guidance for Proxy Voting Responsibilities of Investment Advisers

On August 21, 2019, the Securities and Exchange Commission (SEC) issued guidance regarding the proxy voting responsibilities of investment advisers (Proxy Guidance) pursuant to Rule 206(4)-6 under the Investment Advisers Act of 1940 (Advisers Act), and their disclosure obligations under Form N-1A, Form N-2, Form N-3, and Form N-CSR under the Investment Company Act of 1940 (1940 Act). 1

The guidance supplements past SEC guidance concerning advisers’ obligations when voting client proxies and supersedes past SEC staff guidance concerning advisers’ use of proxy advisory firms. The guidance set forth with respect to advisers’ use of proxy advisory firms appears to be intended to address uncertainty that was triggered by the SEC staff’s recent rescission of two no-action letters that advisers relied upon to utilize proxy advisory firms to assist them in voting client proxies.

Scope of Obligation – General

The Proxy Guidance states that an adviser’s fiduciary duty to its client extends to its voting of proxies on behalf of its clients.  The Proxy Guidance notes that advisers do not have to agree to vote proxies on behalf of clients in the first instance, and the nature of an adviser’s duty to a client will “depend upon the scope of voting authority assumed by the adviser.”2   The Proxy Guidance provides examples of instances where advisers and clients agree in advance:  (a) how to vote proxies; or (b) not to vote proxies.  The Proxy Guidance also reminds advisers that a vote that may be in the best interest for one client may not be in the best interest for another client; consequently, advisers may need to tailor their proxy voting guidelines to take into account the differing interests of their clients.  

The Proxy Guidance notes that funds that invest in voting securities must disclose in their statements of additional information (“SAI”) or on Form N-CSR, as applicable, the policies and procedures that they use to determine how to vote proxies relating to securities held in their portfolios.  The Proxy Guidance also notes that if funds with the same investment adviser have different voting policies and procedures, each SAI or Form N-CSR, as applicable, should reflect those voting policies and procedures that apply to it.

The Proxy Guidance notes that an adviser must make its proxy voting determination in its client’s best interest, and not put its own interest ahead of its client’s interest in order to satisfy its fiduciary duty to its client.  The Proxy Guidance reminds advisers to review and document, at least annually, the adequacy of their voting policies and procedures to ensure that they have been formulated reasonably and implemented effectively.  The review must address whether the 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. 

Use of Proxy Advisory Firms

The SEC staff previously addressed an adviser’s use of proxy advisory firms on three separate occasions.  The SEC staff issued two letters in 2004 addressing advisers’ due diligence responsibilities when selecting proxy advisory firms to assist them in voting client proxies – in particular, to assure themselves of a firm’s independence in instances in which a firm has provided advice to an issuer on corporate governance issues.3 On June 30, 2014, the SEC staff issued a legal bulletin addressing, among other things, proxy voting responsibilities of investment advisers.4 

SLB 20, citing the two 2004 letters, stated that “[w]hen considering whether to retain or continue retaining any particular proxy advisory firm to provide proxy voting recommendations, the staff believes that an investment adviser should ascertain, among other things, whether the proxy advisory firm has the capacity and competency to adequately analyze proxy issues.”  SLB 20 went on to suggest that advisers could consider the quality of a proxy advisory firm’s policies and procedures to identify and address conflicts of interest – a matter addressed in the 2004 letters.

In September 2018, the SEC staff withdrew the two 2004 letters, “[t]aking into account developments since 2004”.5 However, the SEC staff did not withdraw SLB 20, which, as noted above, specifically cited to the two 2004 letters.  Not surprisingly, the actions created confusion within the industry.

The Proxy Guidance articulates standards and expectations of investment advisers when electing to use proxy advisory firms, whether to provide research or voting recommendations as an input to the adviser’s voting decisions or simply to execute votes according to detailed voting instructions from the investment adviser. 

The Proxy Guidance states that an adviser considering a proxy advisory firm to assist it in formulating voting decisions “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.”  The Proxy Guidance sets forth a non-exhaustive list of factors that advisers “should” or “could” consider in assessing the proxy advisory firm:

Factors an Investment Adviser “Should” Consider

  • Does the proxy advisor have an effective process for seeking timely input from issuers and proxy advisor clients with respect to proxy voting policies, methodologies, and peer group constructions?
  • Has the proxy advisor adequately disclosed its methodologies in formulating voting recommendations, such that the investment adviser can understand the factors underlying the proxy advisor’s voting recommendations?
  • The nature of any third-party information sources that the proxy advisor uses as a basis for its voting recommendations.
  • How to develop a reasonable understanding of when and how the proxy advisor would expect to engage with issuers and third parties.
  • A reasonable review of the proxy advisor’s policies and procedures regarding how it identifies and addresses conflicts of interest.
  • Performing periodic reviews of the proxy advisor and requiring the proxy advisor to update the investment adviser regarding business changes the investment adviser considers relevant (i.e., with respect to the proxy advisor’s capacity and competency to provide independent proxy voting advice or carry out voting instructions).
  • Does the proxy advisor appropriately update its methodologies, guidelines, and voting recommendations on an ongoing basis, including in response to feedback from issuers and their shareholders?6

Factors an Investment Adviser “Could” Consider

  • Adequacy and quality of the proxy advisor’s staffing, personnel, and/or technology.
  • The extent to which potential factual errors, potential incompleteness, or potential methodological weaknesses in the proxy advisor’s analysis materially affected the proxy advisor’s research or recommendations that the investment adviser utilized.7

It should be noted that the scope of review that the SEC is recommending with respect to proxy advisory firms is much more extensive than the scope of review that it requires under the 1940 Act Compliance Rule (Rule 38a-1) for third-party service providers encompassed by that Rule.  When the SEC adopted Rule 38a-1, it recognized that many funds employ third-party service providers that provide services to a large number of funds. The SEC stated that “we will consider a fund’s policies and procedures to have satisfied the requirements of this rule if the fund uses a third-party report on the service provider’s procedures instead of the procedures themselves when the board is evaluating whether to approve the service provider’s compliance program.”8


The Proxy Guidance articulates the SEC’s views of how an adviser’s fiduciary duty applies to its obligation to vote proxies under a variety of proxy voting arrangements to which an adviser and its client have agreed.  It also helps to remove uncertainty created by the staff’s revocation of the two 2004 no-action letters with respect to the use of proxy advisory firms. However, advisers should be aware that the standards and expectations articulated in the Proxy Guidance will require more of advisers than did the two 2004 no-action letters and SLB 20.

1Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Investment Advisers Act Rel. No. 5325 (Aug. 21, 2019), 84 Fed. Reg. 47420 (Sept. 10, 2019).  
2Id., 84 Fed. Reg. at 47420 and n. 12, citing Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Investment Advisers Act Rel. No. 5248 (June 5, 2019), 84 Fed. Reg. 33669, 33671-72 (July 12, 2019).
3Egan-Jones Proxy Services, SEC Staff No-action Letter (pub. avail. May 27, 2004) and Institutional Shareholder Services, Inc., SEC Staff No-action Letter (Sept. 15, 2004).
4SEC 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) (SLB 20).
5IM Information Update 2018-02 (Sept. 2018) ( (visited Sept. 3, 2019).
6Proxy Guidance, supra note 1, 84 Fed. Reg. at 47424-26.
7Id., 84 Fed. Reg. at 47424-25.  
8Compliance Programs of Investment Companies and Investment Advisers, Investment Company Act Rel. No. 26299 (Dec. 17, 2003), 68 FR 74713, 74717 (Dec. 24, 2003).