August 31, 2015

CCO Series (2015) - Voting Client Proxies

The right to cast votes on certain corporate matters is an important power given to shareholders of publicly traded companies and mutual funds. Your RIA firm is expected to address its role with respect to voting proxies on behalf of clients. You may agree to take on the responsibility to vote proxies on securities they own, or you may elect to not vote their proxies. In each instance, regulators expect you to have clearly defined and communicated policies and procedures related to this vital aspect of corporate governance so clients understand if and how their votes are cast.

Advisor Proxy Voting In a Nutshell

Shareholders of publicly traded companies and mutual funds have the right to express their opinion on certain business matters that impact the value of the securities they own. Board of director elections, mergers and acquisitions and changes in fee schedules (in the case of mutual funds) are examples of decisions that are delegated to shareholders.

Since most shareholders do not attend annual meetings in person, their opinions on these matters are communicated by casting a ballot either electronically or via mail.

Custodians and broker-dealers normally receive and transmit notices of upcoming proxy votes, meeting and record dates and other information on upcoming corporate actions by companies in which their client’s are shareholders.

Accepting this responsibility for your clients is a significant undertaking, so it is important to consider the pros/cons of doing so. On one hand, clients may appreciate that you serve as their voice in significant matters that affect the value of their investments. But agreeing to vote client proxies requires a significant amount of process monitoring and record keeping.

For this reason, most RIA firms elect to not vote proxies.

Your firm’s policies on voting proxies should be disclosed and clearly described in:

  • Form ADV Part 2A, Item 17 - Voting Client Securities
  • Advisory Agreements, either in the section that describes your investment discretion authority or in a standalone section

Note: If you have discretionary investment authority over client accounts and your ADV and agreements remain silent on this topic, it is assumed that you do vote proxies.

If your firm does not vote proxies

If your firm does not intend to vote proxies, and you do not intend to advise clients on how to vote proxies, you must disclose this in Form ADV and communicate to clients that they retain the authority and responsibility for voting their own proxies.

If a client reaches out with questions regarding a particular proxy vote, you may assist them in understanding the background and intent of the proxy, but your guidance must not influence their voting decision. In doing so, your firm should remind them that they assume the responsibility for ultimately making the voting decision of making the contractual decision of their voting shares, and that you are prohibited from providing the service of that advice.

In this instance, your clients will receive proxy statements directly from the Custodian. They should not be sent to you.

If your firm does vote proxies

If you do intend to vote proxies, you are required to do so in the best interest of your clients. When setting up new client accounts at your custodian, you should request that they forward proxy statements to you directly instead of your client.

In addition, you must:

  • Develop and implement policies and procedures that are reasonably designed to ensure that your firm votes proxies in the best interest of its clients,
  • Describe your firm’s proxy voting policy to clients (via Form ADV 2A and advisory agreements) and provide copies to clients upon request, and
  • Disclose how clients can obtain information on how your firm voted their proxies.

In fact, regulators consider it fraudulent for advisors to exercise proxy voting authority without fulfilling these three requirements.

Through the Regulator's Eyes

When it comes to proxy voting, regulators simply expect that you clearly communicate your policy on voting proxies for your clients. When you do accept this responsibility, you are expected to exercise this duty in the client's best interest, avoid and disclose any conflicts of interest that may come up in these corporate matters and maintain proper books and records that demonstrate that you are fulfilling this duty in accordance with the Advisers Act.

A copy of the SEC’s final rule on advisors voting proxies can be found here.

CCO Best Practices

  • Consider whether or not your clients would gain a material benefit by your advising their proxy voting responsibilities, and if that benefit would be worth the related compliance burden.
  • If your firm does not vote client proxies:
    • Review client activities to ensure that your firm has not voted proxies for any clients.
    • Review any exceptions made to the proxy voting policy and all supporting documentation and ensure that all were properly documented and approved by the CCO.
    • If you ever choose to begin voting proxies, revise your proxy voting policy to comply with the Adviser's Act.
  • If your firm does vote client proxies:
    • Confirm that existing proxy voting policies and procedures are adequately designed to ensure that votes are consistent with client interests.
    • Conduct a forensic test by reviewing a sample of proxies voted during a particular period and confirm that each proxy was voted in accordance with your policy and that each were voted in the best interest of the client.
    • Review any exceptions made to the proxy voting policy and all supporting documentation.
    • Ensure that all exceptions were properly documented and approved by your firm’s CCO.
    • Review your firm’s books and records to confirm that for the previous five years you can produce a copy of each proxy you received, records for all proxies voted (with any related back up), a log of any proxy voting information requests by clients and your firm’s responses to those requests.

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program.  Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

Michael Conlon


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