Document ID: SEC-2020-1411-0001
Agency: sec
Document Type: Rule
Title: Supplement to Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers
Posted Date: 2020-09-03T04:00Z

[Federal Register Volume 85, Number 172 (Thursday, September 3, 2020)]
[Rules and Regulations]
[Pages 55155-55158]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16338]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 276

[Release No. IA-5547]

Supplement to Commission Guidance Regarding Proxy Voting 
Responsibilities of Investment Advisers

AGENCY: Securities and Exchange Commission.

ACTION: Guidance.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
publishing supplementary guidance regarding the proxy voting 
responsibilities of investment advisers under its regulations issued 
under the Investment Advisers Act of 1940 (the ``Advisers Act'') in 
light of the Commission's amendments to the rules governing proxy 
solicitations under the Securities Exchange Act of 1934 (the ``Exchange 
Act'').

DATES: Effective: September 3, 2020.

FOR FURTHER INFORMATION CONTACT: Thankam A. Varghese, Senior Counsel; 
or Holly Hunter-Ceci, Assistant Chief Counsel, at (202) 551-6825 or 
IMOCC@sec.gov, Chief Counsel's Office, Division of Investment 
Management, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is publishing supplementary 
guidance regarding the proxy voting responsibilities of investment 
advisers under 17 CFR 275.206(4)-6 [Rule 206(4)-6 under the Advisers 
Act [15 U.S.C. 80b]].\1\
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    \1\ Unless otherwise noted, when we refer to the Advisers Act, 
or any paragraph of the Advisers Act, we are referring to 15 U.S.C. 
80b of the United States Code, at which the Advisers Act is 
codified, and when we refer to rules under the Advisers Act, or any 
paragraph of these rules, we are referring to title 17, part 275 of 
the Code of Federal Regulations [17 CFR part 275], in which these 
rules are published.
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I. Introduction

    The Commission previously issued guidance discussing how the 
fiduciary duty and rule 206(4)-6 under the Advisers Act relate to an 
investment adviser's exercise of voting authority on behalf of clients 
and also provided examples to help facilitate investment advisers' 
compliance with their obligations in connection with proxy voting.\2\ 
We are supplementing this guidance in light of information gained in 
connection with our ongoing review of the proxy voting process and our 
related regulations, including the amendments to the proxy solicitation 
rules under the Exchange Act that we are issuing at this time.\3\
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    \2\ Commission Guidance Regarding Proxy Voting Responsibilities 
of Investment Advisers, Release No. IA-5325 (Aug. 21, 2019), 84 FR 
47420 (Sept. 10, 2019) (``Commission Guidance on Proxy Voting 
Responsibilities'').
    \3\ See Exemptions from the Proxy Rules for Proxy Voting Advice, 
Release No. 34-89372 (July 22, 2020) (``Amendments to Proxy 
Solicitation Rules''); see also 17 CFR 240.14a-2(b)(9)(iv); see also 
Commission Guidance on Proxy Voting Responsibilities, supra at n. 2. 
Proxy advisory firms will not be required to comply with certain of 
the amendments we are making to the proxy solicitation rules until 
December 1, 2021. This guidance addresses the application of the 
fiduciary duty, Form ADV, and rule 206(4)-6 under the Advisers Act 
to an investment adviser's proxy voting responsibilities in 
connection with current practices, as well as any policies or 
procedures that may be implemented by proxy advisory firms under the 
final amendments.
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    We expect that the Exchange Act amendments adopted in Release No. 
34-89372 will result in improvements in the mix of information that is 
available to investors and material to a voting decision. In 
particular, we expect issuers will have access to proxy advisory firm 
recommendations in a timeframe that will permit those issuers to make 
available to shareholders additional information that may be material 
to a voting decision in a more systematic and timely manner than they 
could previously.\4\ We also expect that the amendments will result in 
the availability of that additional information being made known to 
proxy advisory firms and their clients in a timely manner, including 
because proxy advisory firms, as a condition to the availability of the 
exemptions in 17 CFR 240.14a-2(b)(1) and (b)(3), must adopt policies 
and procedures that are reasonably designed to provide investment 
advisers and other clients with a mechanism by which they can 
reasonably be expected to become aware of that additional information 
prior to making voting decisions. Accordingly, we are providing 
supplementary guidance to assist investment advisers in assessing how 
to consider the additional information that may become more readily 
available to them as a result of these amendments, including in 
circumstances where the investment adviser utilizes a proxy advisory 
firm's electronic vote management system that ``pre-populates'' the 
adviser's proxies with suggested voting recommendations and/or for 
voting execution services. The supplementary guidance also addresses 
disclosure obligations and considerations that may arise when 
investment advisers use such services for voting.
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    \4\ See infra at n. 6. While 17 CFR 240.14a-2(b) uses the term 
``proxy voting advice business,'' we use the term ``proxy advisory 
firm'' in this release. This is consistent with the Commission 
Guidance on Proxy Voting Responsibilities, which this release 
supplements.
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II. Supplemental Guidance Regarding Investment Advisers' Proxy Voting 
Responsibilities

    Question 2.1: In some cases, proxy advisory firms assist clients, 
including investment advisers, with voting execution, including through 
an electronic vote management system that allows the proxy advisory 
firm to: (1) Populate each client's votes shown on the proxy advisory 
firm's electronic voting platform with the proxy advisory firm's 
recommendations based on that client's voting instructions to the firm 
(``pre-population''); and/or (2) automatically submit the client's 
votes to be counted (``automated voting''). Pre-population and 
automated voting generally occur prior to the submission deadline for 
proxies to be voted at the shareholder meeting. In various 
circumstances, an investment adviser, in the course of conducting a 
reasonable investigation into matters on which it votes,\5\ may become 
aware that an issuer that is the subject of a voting recommendation 
intends to file or has filed additional soliciting materials with the 
Commission setting forth the issuer's views regarding the voting 
recommendation. These materials may or may not reasonably be expected 
to affect the investment adviser's voting

[[Page 55156]]

determination.\6\ In addition, these materials may become available 
after or around the same time that the investment adviser's votes have 
been pre-populated but before the submission deadline for proxies to be 
voted at the shareholder meeting.\7\ In these circumstances, what steps 
should an investment adviser take to demonstrate that it is making 
voting determinations in a client's best interest?
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    \5\ See Commission Guidance on Proxy Voting Responsibilities, 
text at notes 15 and 37 and in response to Question 4.
    \6\ For example, we expect that 17 CFR 240.14a-2(b)(9)(ii)(A) 
will result in issuers being made aware of recommendations by proxy 
voting advice businesses (the term used in the rule for what we 
refer to here as proxy advisory firms) in a timeframe that will 
permit those issuers to make any views regarding those 
recommendations available in a more systematic and timely manner 
than was previously the case. 17 CFR 240.14a-2(b)(9)(ii)(B) also 
requires that proxy voting advice businesses adopt policies and 
procedures reasonably designed to provide their clients, including 
investment advisers, with a mechanism by which they can reasonably 
be expected to become aware of those views. See Amendments to Proxy 
Solicitation Rules, supra at n. 3; see also 17 CFR 240.14a-
2(b)(9)(iv) (providing a non-exclusive safe harbor pursuant to which 
proxy voting advice businesses will be deemed to satisfy the 
principle-based requirement of Rule 14a-2(b)(9)(ii)(B)).
    \7\ Unless otherwise indicated, our reference to the term 
``meeting'' throughout Question 2.1 is intended to include an 
issuer's solicitation of written consents or authorizations in lieu 
of a shareholder meeting. For example, if the issuer is seeking the 
necessary shareholder approval for a matter through a solicitation 
of written consents or authorizations in lieu of a vote at a 
shareholder meeting, our guidance addresses the additional 
information that may become available after the proxy advisory 
firm's recommendations have been pre-populated but before the 
written consents or authorizations have been submitted.
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    Response: The Commission in its prior guidance discussed a number 
of steps that an investment adviser could take to demonstrate that it 
is making voting determinations in a client's best interest.\8\ These 
include additional steps when an investment adviser utilizes a proxy 
advisory firm, such as assessing pre-populated votes shown on the proxy 
advisory firm's electronic voting platform and considering additional 
information that may become available before the relevant votes are 
cast. Together with those steps, an investment adviser should consider 
whether its policies and procedures, including any policies and 
procedures with respect to automated voting of proxies, are reasonably 
designed to ensure that it exercises voting authority in its client's 
best interest. An investment adviser should consider, for example, 
whether its policies and procedures address circumstances where the 
investment adviser has become aware that an issuer intends to file or 
has filed additional soliciting materials with the Commission after the 
investment adviser has received the proxy advisory firm's voting 
recommendation but before the submission deadline. In such cases, if an 
issuer files such additional information sufficiently in advance of the 
submission deadline and such information would reasonably be expected 
to affect the investment adviser's voting determination, the investment 
adviser would likely need to consider such information prior to 
exercising voting authority in order to demonstrate that it is voting 
in its client's best interest.\9\ In addition, because the timing of 
pre-population and automated voting may result in proxy advisory firms 
possessing non-public information regarding how an investment adviser 
intends to vote a client's securities, the investment adviser should 
also consider reviewing its agreements with any proxy advisory firms to 
determine whether the agreements would permit the proxy advisory firms 
to utilize this information in a manner that would not be in the best 
interest of the investment adviser's client.\10\
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    \8\ See Commission Guidance on Proxy Voting Responsibilities, 84 
FR 47420, at 47423 (Question No. 2).
    \9\ Whether such information would reasonably be expected to 
affect an investment adviser's voting determination for a client may 
depend, in part, on the agreed upon scope of the investment 
adviser's authority and responsibilities to vote proxies on behalf 
of that client, as discussed in response to Question 1 of the 
Commission Guidance on Proxy Voting Responsibilities. See Commission 
Guidance on Proxy Voting Responsibilities, 84 FR 47420, at 47422 
(Question No. 1).
    \10\ For example, the investment adviser may want to consider 
the extent to which the proxy advisory firm would be permitted to 
share this information (including information on aggregated voting 
intentions of the firm's clients) with third parties.
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    In its prior guidance, the Commission also discussed how an 
investment adviser and its client may agree on the scope of the 
investment adviser's authority and responsibilities to vote proxies on 
behalf of that client.\11\ The Commission explained that an investment 
adviser may agree with its client to the scope of voting arrangements 
but that scoping the relationship requires the investment adviser to 
make full and fair disclosure and the client to provide informed 
consent. Differences in agreements between investment advisers and 
their clients as to the scope of the advisory relationship may result 
in a variety of arrangements for voting client securities, which may 
address, for example, parameters around the method of voting execution.
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    \11\ See Commission Guidance on Proxy Voting Responsibilities, 
84 FR 47420, at 47422 (Question No. 1).
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    An investment adviser also has an obligation, as a result of its 
duty of loyalty to clients, to make full and fair disclosure to its 
clients of all material facts relating to the advisory 
relationship.\12\ These include material facts related to the exercise 
of voting authority with respect to client securities. The Commission 
recently explained that, ``[i]n order for disclosure to be full and 
fair, it should be sufficiently specific so that a client is able to 
understand the material fact or conflict of interest and make an 
informed decision whether to provide consent.'' \13\ Further, rule 
206(4)-6 and Form ADV require an investment adviser to describe to 
clients its voting policies and procedures.\14\
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    \12\ See Commission Interpretation Regarding Standard of Conduct 
for Investment Advisers, Release No. IA-5248 (June 5, 2019), 84 FR 
33669, at 33675 (July 12, 2019) (``[t]o meet its duty of loyalty, an 
adviser must make full and fair disclosure to its clients of all 
material facts relating to the advisory relationship.'') (internal 
citations omitted).
    \13\ See id., text at note 59.
    \14\ Rule 206(4)-6(c) requires investment advisers to describe 
their voting policies and procedures to clients. See also Form ADV, 
Part 2A, Item 17 (requiring an adviser to briefly describe voting 
policies and procedures where it has, or will accept, authority to 
vote client securities).
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    In light of the above, we believe that an investment adviser that 
uses automated voting should consider disclosing: (1) The extent of 
that use and under what circumstances it uses automated voting; and (2) 
how its policies and procedures address the use of automated voting in 
cases where it becomes aware before the submission deadline for proxies 
to be voted at the shareholder meeting that an issuer intends to file 
or has filed additional soliciting materials with the Commission 
regarding a matter to be voted upon. In addition, an investment adviser 
should also consider whether its policies and procedures are reasonably 
designed to address these disclosures. Depending on the facts and 
circumstances, these disclosures may be necessary for the investment 
adviser to provide sufficiently specific information so that a client 
is able to understand the role of automated voting in the investment 
adviser's exercise of voting authority. In those cases, the client may 
not, without this disclosure, have sufficiently specific information to 
provide informed consent with respect to the use of automated voting as 
a means of exercising voting authority either (a) for purposes of 
agreeing to the scope of the relationship or (b) as it relates to the 
investment adviser's obligation, under its duty of loyalty, to provide 
full and fair disclosure relating to the advisory relationship. In this 
regard, an investment adviser should also consider its obligations 
under rule

[[Page 55157]]

206(4)-6 and Form ADV as they relate to the investment adviser's voting 
policies and procedures. Accordingly, an investment adviser should 
carefully review its disclosures with respect to these matters in order 
to ascertain whether it has provided its clients with the disclosure 
necessary for the clients to provide informed consent with respect to 
the use of automated voting as a means of exercising voting authority 
and for the adviser to satisfy its obligations under rule 206(4)-6 and 
Form ADV.

III. Other Matters

    Pursuant to the Congressional Review Act,\15\ the Office of 
Information and Regulatory Affairs has designated this guidance as not 
a ``major rule,'' as defined by 5 U.S.C. 804(2).
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    \15\ 5 U.S.C. 801 et seq.
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List of Subjects in 17 CFR Part 276

    Securities.

Amendments to the Code of Federal Regulations

    For the reasons set out above, the Commission is amending title 17, 
chapter II, of the Code of Federal Regulations as set forth below:

PART 276--INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT 
ADVISERS ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
1. The authority citation for part 276 continues to read as follows:

    Authority: 15 U.S.C. 80b et seq.

0
2. Amend the table by adding an entry for Release No. IA-5547 at the 
end of the table to read as follows:

[[Page 55158]]

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                                                                                         Federal Register volume
               Subject                       Release No.                  Date                   and page
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                                                  * * * * * * *
Supplement to Commission Guidance      IA-5547................  September 3, 2020......  [Insert FR citation of
 Regarding the Proxy Voting                                                               publication]
 Responsibilities of Investment
 Advisers.
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    By the Commission.
    Dated: July 22, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-16338 Filed 9-2-20; 8:45 am]
BILLING CODE 8011-01-P