Proxy Voting By Investment Advisers

Article by the Vedder Price Investment Services Group

The SEC’s new rules regarding proxy voting by investment advisers require full compliance by August 6, 2003. SECregistered advisers must have written proxy voting policies and procedures in place and deliver related disclosures to clients by that date. This bulletin highlights practical tips for complying with the new rules.

The new proxy voting rules apply to investment advisers, registered with the SEC, that exercise voting authority for client securities. Investment advisers subject to the new rules must:

1. Adopt and implement written policies and procedures that:

• are reasonably designed to ensure that the adviser votes proxies in the best interests of clients; and
• describe how the adviser addresses material conflicts of interest that may arise between itself and clients with respect to proxy voting.

2. Provide disclosure to clients that:

• tells clients how they can obtain information on how their securities were voted; and
• summarizes the adviser’s proxy voting policies and procedures and indicates that such policies and procedures are available upon request.

3. Maintain proxy voting records.

You are not subject to the new rules if you:

• are a state-registered adviser;
• are an adviser exempt from SEC registration;
• are an adviser whose clients invest exclusively in nonvoting securities;
• provide clients with advice as to how clients should vote securities (but are not responsible for voting those securities); or
• your discretionary client advisory contracts expressly state that the client has retained voting authority.

Otherwise, if you are an investment adviser, registered with the SEC, that exercises voting authority for client securities, you are subject to the new rules. In addition, if it is unclear in your discretionary client advisory contracts whether the client has retained voting authority, you are deemed to have voting authority and the new rules apply to you.

Although many advisers have proxy voting policies and procedures, they may not be documented in writing. You must document your policies and procedures, and you should assess whether they effectively address the new rules. If you do not have proxy voting policies and procedures, you will need to develop such policies and procedures. Although the SEC did not specify policies or procedures that advisers must adopt, the SEC indicated that proxy voting policies and procedures should:

• address how the adviser will vote proxies or what factors will be taken into consideration when voting on particular matters (such as corporate governance, compensation/stock option plans and social matters and, for advisers that invest in mutual funds, approval of advisory contracts, 12b-1 plans or mergers); and
• address conflicts of interest (such as cases where the adviser manages the pension plan of, or provides other services to, a company whose management is soliciting proxies) by:

In developing your policies and procedures, you should also consider whether:

• it is appropriate to identify the personnel responsible for monitoring corporate actions, making voting decisions and ensuring that proxies are submitted on time;
• it may be appropriate to have different policies and procedures for different clients; and
• there are circumstances when not voting is in the best interests of clients.

The SEC also stated that proxy voting policies and procedures may not:

• merely state that all proxies will be voted in the best interests of clients; or
• provide that the adviser will not vote proxies.

You must provide your clients with the new proxy voting disclosure by August 6, 2003. You may deliver the disclosures in writing or, if the client has consented, electronically. The SEC stated that it expects that most advisers will include the new disclosure in their brochures or Part II of their Form ADV. Alternatively, you may send the disclosure with an account statement or as a separate mailing.

If you choose to include the disclosure in your brochure or Part II of Form ADV, you:

• must deliver
(not merely offer) the revised brochure to clients by the compliance date;
• should also send a cover letter identifying the new disclosure; and
• should not bury the disclosure in your brochure.

Advisers subject to the new rules must also maintain proxy voting records, including:

• their proxy voting policies and procedures;
• proxy statements received regarding client securities (if the company filed its proxy statement on the SEC’s EDGAR system, you can rely on the EDGAR filing rather than keeping paper copies; or, if a third-party proxy voting service or other third party maintains your records, you can rely on them as long as they have given you an undertaking to provide the documents on request);
• records of votes cast (you can rely on a third party subject to the undertaking requirement);
• records of written client requests for proxy voting information and the adviser’s written response to written and oral client requests;
• and documents prepared by the adviser that were material to making a voting decision or that memorialized the basis for the decision.

As with most of the SEC’s books and records requirements, these proxy voting records must be maintained in an easily accessible place for five years, the first two years in an appropriate office of the adviser.

The Investment Services Bulletin is published by the law firm of Vedder, Price, Kaufman & Kammholz. It is intended to keep our clients and interested parties generally informed on developments in the investment services industry. It is not a substitute for professional advice.

© 2003 Vedder, Price, Kaufman & Kammholz.