The Securities and Exchange Commission (SEC) held a roundtable on November 15 to discuss whether the SEC’s current proxy voting rules and procedures should be updated. (Chairman Jay Clayton, SEC Announcement). According to the announcement, the evidence and testimony presented at the roundtable will aid SEC staffers in making their recommendations about what changes should be made. (Andrew Ramonas, Bloomberg Law). The roundtable is scheduled to discuss several topics, including the voting process, retail shareholder participation, shareholder proposals, proxy advisory firms, technology and innovation, and other actions. (Chairman Jay Clayton, SEC Announcement).

One area of contention to be discussed at the roundtable is the regulation of firms that advise investment managers, who subsequently vote on corporate matters for their clients through the proxy voting system. (Andrew Ramonas, Bloomberg Law). A proxy vote is an authorization by which a person or firm can cast a ballot on behalf of a shareholder of a corporation, subject to the shareholder’s consent. (Investopedia). Proxy voting is used to decide an array of important issues including a merger or acquisition, the election of the board of directors, or changes to the corporate governance documents, among others. (Investopedia).

Pursuant to 17 CFR 275.206(4)-6, it is fraudulent for an investment adviser to vote in respect to client securities if they fail to: adopt and implement written policies and procedures that are reasonably designed to ensure that the investment adviser votes in the best interest of their clients; disclose to the clients how the clients may know how the investment adviser voted with respect to their securities; and describe to their clients the investment adviser’s proxy voting policies and procedures. (17 CFR 275.206, Proxy voting).

For the past fourteen years, investment firms relied on two staff letters regarding the use of proxy voting advice by investment managers. (Andrew Ramonas, Bloomberg Law; SEC Letter to Egan-Jones and to Institutional Shareholder Services, Inc.). These letters essentially allowed investment managers to use advisory firms when voting through the proxy voting system, as long as the advice didn’t pose a conflict of interest. (Andrea Vittorio, Bloomberg Law; SEC Information Update).The continuous use of the letters throughout the corporate world made their content seem like binding guidance from the SEC. (Id.).

Pursuant to one of the letters, “[a]n investment adviser that retains a third party to make recommendations regarding how to vote its clients' proxies should take reasonable steps to verify that the third party is, in fact, independent of the adviser based on all of the relevant facts and circumstances. A third party generally would be independent of an investment adviser if that person is free from influence or any incentive to recommend that the proxies should be voted in anyone's interest other than the adviser's clients.” (SEC Letter to Institutional Shareholder Services, Inc.). Although the letters expressly state that impartiality is crucial in proxy voting, the reality may prove otherwise. As such, the SEC withdrew these letters upon its announcement of the roundtable, in hopes of creating consistent, binding regulations that would control how advising firms are used in the proxy voting system. Andrea Vittorio, Bloomberg Law; SEC Information Update).

The withdrawing of these letters implies that the use of third party advising firms has not been as impartial as the SEC had hoped, even after the publication of additional guidance in 2014. Nonetheless, some people deem the withdrawal of these letters as a “win” for corporate lobbyists who are looking to limit the role of investment advisers. (Andra Vittorio, Bloomberg Law). Overall, the decisions made after the roundtable will undoubtedly impact the way advisors handle their client’s proxy voting.

In the end, the roundtable will update a system that has not seen much change since the 1970’s and will hopefully provide some impartiality in the proxy voting process.