RIA Compliance and Practice Management Blog

Investment Adviser Proxy Voting RIA Compliance Obligations

Posted by RIA in a Box

May 16, 2014 8:07:00 PM

Many registered investment adviser (RIA) firms do not fully understand the extensive regulatory obligations when it comes to assisting clients with proxy voting. It is quite common to hear that an RIA firm's client is becoming overwhelmed by the magnitude of proxy materials and corporate communications they are receiving from custodians. As such, many investment advisory firms may think to simply offer to vote proxies on behalf of the client going forward. However, as RIA compliance consultants, we strongly urge the Chief Compliance Officer (CCO) of each investment advisory firm to exercise the proper caution before allowing proxy voting on behalf of a client to take place.

Under SEC Proxy Voting Rule 206(4)-6 it is a fraudulent, deceptive, or manipulative act, practice or course of business within the meaning of section 206(4) of the Act for an investment adviser to exercise voting authority with respect to client securities, unless (i) the adviser has adopted and implemented written policies and procedures that are reasonably designed to ensure that the adviser votes proxies in the best interest of its clients, (ii) the adviser describes its proxy voting procedures to its clients and provides copies on request, and (iii) the adviser discloses to clients how they may obtain information on how the adviser voted their proxies.

The SEC established the proxy voting rule in March of 2003 and in May of 2009 charged an investment advisory firm for proxy voting rules violations which resulted in $350,000 of total penalties.Unfortunately, in this instance, the SEC believed that the investment advisory firm failed to address material conflicts of interest which are often inherent in the proxy voting process. As a fiduciary, investment advisers must always vote proxies in their clients' best interests.

Thus, before an RIA firm decides to vote proxies on behalf of clients, it is critical that the proper RIA compliance policies and procedures are established and other firm documents updated to ensure that the proper system is employed to allow this practice to occur. The situation that the CCO must be sure to avoid is one in which the firm has begun assisting with proxy voting but it has yet to update its policies and procedures, has not thought through the potential conflicts of interest, and is not keeping the proper proxy voting records.

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SEC Investment Adviser Books and Records Rule 204-2 has specific requirements in relation to proxy voting:

  • Every investment adviser subject to paragraph (a) of this section that exercises voting authority with respect to client securities shall, with respect to those clients, make and retain the following:
    • Copies of all policies and procedures required by SEC Proxy Voting Rule 206(4)-6
    • A copy of each proxy statement that the investment adviser receives regarding client securities. An investment adviser may satisfy this requirement by relying on a third party to make and retain, on the investment adviser's behalf, a copy of a proxy statement (provided that the adviser has obtained an undertaking from the third party to provide a copy of the proxy statement promptly upon request) or may rely on obtaining a copy of a proxy statement from the Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
    • A record of each vote cast by the investment adviser on behalf of a client. An investment adviser may satisfy this requirement by relying on a third party to make and retain, on the investment adviser's behalf, a record of the vote cast (provided that the adviser has obtained an undertaking from the third party to provide a copy of the record promptly upon request).
    • A copy of any document created by the adviser that was material to making a decision how to vote proxies on behalf of a client or that memorializes the basis for that decision.
    • A copy of each written client request for information on how the adviser voted proxies on behalf of the client, and a copy of any written response by the investment adviser to any (written or oral) client request for information on how the adviser voted proxies on behalf of the requesting client.

Thus, RIA firms need to fully understand what is required before they take on proxy voting responsibilities on behalf of clients. Failure to fully grasp the associated RIA compliance obligations can unfortunately result in severe RIA regulatory exam violations.

Topics: RIA Operations, RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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