Is your Firm Meeting the SEC’s Proxy Voting Rule?

March 14, 2006

Reading time : 3 minutes

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 and 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.

Posted by Bryan Hill
Labels: Proxy Voting