SEC Issues First Enforcement Action Against a RIA for Violation of Proxy Voting Rule

May 16, 2009

On May 8, 2009, the U.S. Securities and Exchange Commission (“SEC”) announced that it has initiated an administrative proceeding to charge a federally registered investment adviser and its former chief operating officer for violating the SEC’s proxy voting rule. Under SEC Rule 206(4)-6 of the Investment Advisers Act of 1940, it is considered a fraudulent act for a registered investment adviser to vote its clients proxies unless the investment adviser establishes sufficient written policies and procedures, provides a summary of those policies and procedures to all clients along with an offer to provide a complete copy of the policies and procedures, votes all proxies in the best interests of the clients, and maintains adequate books and records for all proxy votes.

According the SEC, the registered investment adviser and COO that are charged in this proceeding failed to properly disclose a material conflict of interest between the investment adviser and its clients. Further, the registered investment adviser’s policies and procedures did not include how it would address material potential conflicts of interest between the investment adviser’s interests and those of its clients. In fact, disclosures made by the registered investment adviser to its clients included a statement that because the investment adviser used a third-party proxy voting service, it did not expect that any conflicts would arise in the proxy voting process. Subsequently, the named registered investment adviser is accused of not sufficiently describing its proxy voting policies and procedures to clients.

The SEC’s announcement serves as a wake up call to all registered investment advisers that vote proxies and have not developed sufficient policies and procedures. Registered investment advisers that vote proxies need to make sure that all votes are cast in the best interests of the firm’s clients, diligent books and records are retained and a process must be developed to allow clients the ability to view how votes are made. Most importantly, conflicts of interest between the registered investment adviser and client with respect to how the investment adviser votes need to be disclosed to all clients. Registered investment advisers need to fully understand the requirements of the SEC’s proxy voting rule including record keeping requirements. A chief compliance officer of a registered investment adviser needs to carefully analyze its procedures and identify any potential conflicts of interest. Proxy voting disclosures to clients need to be accurate and consistent with a registered investment adviser’s actual procedures so as not to be deemed misleading.

If your registered investment adviser votes clients proxies and has questions about whether its policies and procedures comply with SEC Rule 206(4)-6, please call RIA Compliance Consultants, Inc. to learn more about our proxy-voting compliance consulting services.

Posted by Bryan Hill
Labels: Proxy Voting