SEC Issues First Enforcement Action Against a RIA for Violation of Proxy Voting Rule
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.
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.
Labels: Proxy Voting
posted by bhill at 10:21 PM
SEC Publishes July 2008 ComplianceAlert
Today, the U.S. Securities and Exchange Commission (SEC) released its July 2008 ComplianceAlert letter which identifies and describes common deficiencies and weaknesses that SEC examiners have found during compliance examinations of SEC registered investment advisers/mutual funds, broker-dealers, and transfer agents. The release, which is considered official comment from the SEC’s Office of Compliance Inspections and Examinations and other select SEC department staff, provides valuable guidance for registered investment advisors trying to navigate the regulatory maze. In the release, the SEC provides guidance on four major areas: (1) personal trading by advisory staff; (2) proxy voting and funds’ use of proxy voting services; (3) valuation and liquidity issues in high yield municipal bond funds; and (4) soft dollar practices of investment advisors.
The release was prepared based on information gathered from certain risk-targeted examination reviews. It was written as a tool for Chief Compliance Officers and provides valuable tips and techniques for developing customized compliance programs. While some of the guidance provided by the SEC may have little practical application depending on the specific arrangements of your registered investment advisor, the release is still an excellent resource and should be read by every Chief Compliance Officer. You can read the entire release by clicking here.
Since passage of Rule 206(4)-7, which requires all SEC registered investment advisors to: (1) develop written compliance programs; (2) assess those programs on at least an annual basis; and (3) designate a Chief Compliance Officer, the SEC has made a more concerted effort to interact and be proactive with Chief Compliance Officers through tools such as ComplianceAlerts and the CCOutreach program. However, complying with SEC rules and regulations is a daunting challenge. RIA Compliance Consultants, Inc. can help your registered investment advisor navigate the regulatory maze. Visit our website or contact us to learn more about our suite of compliance consulting services.
The release was prepared based on information gathered from certain risk-targeted examination reviews. It was written as a tool for Chief Compliance Officers and provides valuable tips and techniques for developing customized compliance programs. While some of the guidance provided by the SEC may have little practical application depending on the specific arrangements of your registered investment advisor, the release is still an excellent resource and should be read by every Chief Compliance Officer. You can read the entire release by clicking here.
Since passage of Rule 206(4)-7, which requires all SEC registered investment advisors to: (1) develop written compliance programs; (2) assess those programs on at least an annual basis; and (3) designate a Chief Compliance Officer, the SEC has made a more concerted effort to interact and be proactive with Chief Compliance Officers through tools such as ComplianceAlerts and the CCOutreach program. However, complying with SEC rules and regulations is a daunting challenge. RIA Compliance Consultants, Inc. can help your registered investment advisor navigate the regulatory maze. Visit our website or contact us to learn more about our suite of compliance consulting services.
Labels: Compliance Program, Proxy Voting, Regulatory Inspections, SEC, Soft Dollars
posted by bhill at 2:38 PM
Is your Firm Meeting the SEC's Proxy Voting Rule?
Does your firm vote proxies on the behalf of its clients? If so, you need to have a full understanding of the SEC’s rule, Proxy Voting by Investment Advisers, issued in 2003. The days of being able to simply fill out the proxy voting paper work and drop it in the mail are long over. According to the SEC, it is fraudulent under Investment Advisers Act to exercise proxy voting authority without (1) adopting and implementing written policies and procedures that are reasonably designed to ensure that all proxy votes are done in the best interest of the client, (2) describing your firm’s proxy voting policy to clients and providing copies of the policy upon client request, and (3) disclosing to clients how they may obtain information on how the adviser voted their proxies.
What does an advisor firm need to do to ensure compliance with this rule? The first step is to consider the cost/benefit of voting client proxies. It is a significant undertaking for an investment advisor to engage in proxy voting and can be very expensive and time consuming regardless of the size of the firm. Consequently, it’s a responsibility that should be undertaken only if an advisor firm is committed to spending the time and money to do it correctly.
If your firm has determined that it is necessary to vote proxies, the next step is to develop a client- focused approach to voting proxies and then develop written policies and procedures reflecting your firm’s proxy voting practices. A committee should be established to discuss and review each proxy issue and decide as to how the respective proxies should be voted. In order to meet the SEC requirements, many advisor firms have elected to subscribe to a third-party vendor that provides research, analysis and recommendations regarding each vote. A few of the more popular services appear to be Institutional Shareholder Services and PROXY Governance, Inc. You can visit their websites at www.issproxy.com and www.proxygovernance.com. These companies offer research services and ancillary programs for tracking votes, record keeping, and reporting to clients.
An advisor firm must also provide a summary of its proxy voting policy in its Form ADV along with disclosure on how a client can review a copy of the entire policy. It’s recommended that the summary of the policy be included in the firm’s client advisory agreement. The firm needs to document all proxy votes along with the reasoning for those votes. This is important for not only when a client requests to view how their proxies were voted, but also to meet the SEC’s books and records and examination requirements.
After fully understanding the requirements of the proxy voting rule, many investment advisor firms have elected to avoid proxy voting and leave it to their clients. Even in these cases, a firm should have a written policy stating it does not vote client proxies. The policy must be in the firm’s compliance manual, but should also be in the disclosure brochure and client agreement. This is especially true if the firm maintains discretionary authority over client accounts. In fact, the SEC has stated that a firm that maintains discretionary authority with a disclosure brochure that's silent on the proxy voting issue is assumed to vote client proxies.
If you need assistance preparing your firm’s proxy voting policy, RIA Compliance Consultants is available to assist you.
What does an advisor firm need to do to ensure compliance with this rule? The first step is to consider the cost/benefit of voting client proxies. It is a significant undertaking for an investment advisor to engage in proxy voting and can be very expensive and time consuming regardless of the size of the firm. Consequently, it’s a responsibility that should be undertaken only if an advisor firm is committed to spending the time and money to do it correctly.
If your firm has determined that it is necessary to vote proxies, the next step is to develop a client- focused approach to voting proxies and then develop written policies and procedures reflecting your firm’s proxy voting practices. A committee should be established to discuss and review each proxy issue and decide as to how the respective proxies should be voted. In order to meet the SEC requirements, many advisor firms have elected to subscribe to a third-party vendor that provides research, analysis and recommendations regarding each vote. A few of the more popular services appear to be Institutional Shareholder Services and PROXY Governance, Inc. You can visit their websites at www.issproxy.com and www.proxygovernance.com. These companies offer research services and ancillary programs for tracking votes, record keeping, and reporting to clients.
An advisor firm must also provide a summary of its proxy voting policy in its Form ADV along with disclosure on how a client can review a copy of the entire policy. It’s recommended that the summary of the policy be included in the firm’s client advisory agreement. The firm needs to document all proxy votes along with the reasoning for those votes. This is important for not only when a client requests to view how their proxies were voted, but also to meet the SEC’s books and records and examination requirements.
After fully understanding the requirements of the proxy voting rule, many investment advisor firms have elected to avoid proxy voting and leave it to their clients. Even in these cases, a firm should have a written policy stating it does not vote client proxies. The policy must be in the firm’s compliance manual, but should also be in the disclosure brochure and client agreement. This is especially true if the firm maintains discretionary authority over client accounts. In fact, the SEC has stated that a firm that maintains discretionary authority with a disclosure brochure that's silent on the proxy voting issue is assumed to vote client proxies.
If you need assistance preparing your firm’s proxy voting policy, RIA Compliance Consultants is available to assist you.
Labels: Proxy Voting
posted by bhill at 1:39 PM
