SEC IM Director Shares Views on Proxy Voting

SEC Division of Investment Management Director Brian Daly recently delivered remarks on investment advisers voting client proxies. Key takeaways from Director Daly’s speech:

• Investment advisers must act consistently with their fiduciary duties when voting proxies.
• Advisers are not required to vote all client proxies and may scope their fiduciary relationship accordingly.
• When deciding whether to vote proxies, consideration may be given to investment strategy.
• The SEC is signaling heightened scrutiny of the use of proxy advisors.
• Pass-through voting programs and AI-assisted proxy analysis present opportunities for advisers, subject to fiduciary duties.

The director of the SEC’s Division of Investment Management (“IM”), Brian Daly recently delivered remarks to the New York City Bar Association on investment advisers voting client proxies.¹ Director Daly’s remarks follow an earlier Executive Order addressing the role of proxy advisors,² as well as public statements by Chairman Paul Atkins indicating that the SEC will take a holistic look at proxy voting practices “within the next year.”³

Below is an expanded discussion of the key takeaways from Director Daly’s remarks:         

• Investment advisers are fiduciaries and must act consistently with their fiduciary duties when voting proxies on behalf of clients. Director Daly noted that, as is the case with other investment-related decisions, and as the Commission has long stated, proxy voting generally requires advisers to manage conflicts of interest and act in each client’s best interest.
• Registered investment advisers are not required to vote all client proxies. Director Daly reiterated the Commission’s statement in the 2003 adopting release for the Advisers Act proxy voting rule that “there may even be times when refraining from voting a proxy is in the client’s best interest,” as well as the Commission’s guidance from the 2019 Fiduciary Interpretation, which states that advisers and clients may scope their fiduciary relationship with regard to proxy voting such that the adviser would vote “only in limited circumstances or not at all.”⁴  He noted that prior Commission and staff statements have been read by some to suggest that advisers’ duty of care requires them to vote all client proxies. Many will find the Director’s reminder helpful, particularly because he followed his comment with a non-exhaustive list of examples for consideration.
• Consideration may be given to investment strategy.  For example, voting proxies may not make sense for advisers using quantitative or systematic trading strategies: “[i]nvestment advisers that determine proxy voting is not required by, or may even be inconsistent with, their investment program should not be afraid to take that position.” Director Daly noted that many index funds vote proxies “notwithstanding their passive investment mandate” and suggested that advisers managing passive strategies should “consider whether taking positions on fundamental corporate matters, or on precatory proposals, is consistent with their investment mandate” to replicate index performance. Passive advisers who do vote should confirm they are “comfortable with” their voting authority “both as a general matter and, in particular, when a vote reflects an investment adviser’s or a proxy advisor’s personal view or opinion on a social or political matter.” These examples could lead some managers to carefully consider their views and current approaches in these contexts.
• The SEC is signaling heightened scrutiny of the use of proxy advisors. Director Daly questioned whether advisers are acting in their clients’ best interest when the adviser’s voting record on non-routine matters is “nearly identical to a proxy advisor’s standard voting policies.” Advisers may want to consider the 2019 Fiduciary Interpretation’s reasonable inquiry standard and whether routinely following proxy advisors’ standard recommendations meets those standards. Director Daly also highlighted the recent presidential executive order that directs the Commission to examine the use of proxy advisors. The Director, however, did state that using proxy advisers and their services is not necessarily inappropriate, and he recognized their value when following specific instructions within a tailored mandate and subject to periodic review.
• Advisers are encouraged to explore pass-through voting and AI-assisted analysis. Director Daly praised fund managers, including index fund managers, who are “spearheading programs that enable their investors to express their voting preferences and direct their proportionate share of voting power.” He also said that AI presents a “compelling opportunity” to review proxy statements and generate principled voting recommendations efficiently, while noting here also that advisers must act consistently with their fiduciary duties when deploying such tools.

Advisers that are considering changing their proxy practices in light of Director Daly’s speech should assess their existing disclosures concerning proxy voting, as well as the proxy voting provisions in any client agreements. To the extent an adviser with proxy voting authority does not vote client proxies, it may wish to consider documenting its assessment that not exercising that authority is in its clients’ best interests and providing relevant disclosures to clients. Relatedly, ESG-focused advisers currently filing on Schedule 13G should discuss with counsel assessing whether their ESG-related proxy voting activities might necessitate a transition to Schedule 13D.