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Investment Advisers Should Review Proxy Voting Disclosures in Light of Recent SEC Enforcement

Corporate and Securities Law Alert

Authors: Jeremy D. Frey and Gregory J. Nowak


In what is apparently its first enforcement action for a proxy voting policy rule violation (Rule 206(4)-6 of the Investment Advisers Act of 1940), the SEC charged Florida-based INTECH Investment Management LLC and its former COO with failing to disclose adequately to clients a material potential conflict of interest arising from its choice of a pro-union third-party proxy voting service for use with all of the accounts it managed. INTECH agreed to pay a $300,000 fine and was censured. The former COO also agreed to pay a penalty of $50,000, and was censured.

In INTECH, the company selected a proxy voting service that followed AFL-CIO proxy voting recommendations. According to the SEC, INTECH selected this approach partly because the company believed that using the AFL-CIO recommendations would help INTECH to a higher position in the AFL-CIO’s ranking of investment advisers. The company apparently thought that a higher score from the AFL-CIO would assist INTECH in obtaining and retaining union-affiliated clients.

INTECH had written proxy voting policies and procedures and provided them to clients. These disclosures, however, did not describe the potential conflict of interest arising from INTECH’s selection of the third-party proxy voting platform that potentially promoted the company's business. Instead, the company's disclosures merely stated that because the company employed a third party to help it make proxy voting decisions, it expected that no “conflicts [would] arise in the proxy voting process.”

Pepper Point: The SEC did not assert that an actual conflict of interest existed, that the proxy voting platform in fact helped the company obtain any business, or that the company's pro-union third-party voting policy presented any impermissible conflict among its diverse clients' interests. Rather, the gist of the complaint appeared to be that the company was using a valuable right – the right to vote proxies – in a way that promoted the adviser’s business (i.e., getting new investment mandates from union organizations) without disclosing that to its clients.

Pepper Point: It appears that this matter was brought to the attention of INTECH as the result of client inquiries as to why there seemed to be such a high number of votes against management on shareholder proposals.

Though the materiality of the potential conflict in this case seems arguable, after INTECH advisers should carefully review their compliance with the SEC's proxy voting rule requirements. Advisers need to make sure that any actual or potential benefits they could enjoy from the implementation of the adviser’s proxy voting policies and procedures are fully disclosed to clients.

Pepper Point: While this case involves an SEC enforcement action, if INTECH breached a fiduciary duty and ERISA accounts were involved, both the U.S. Department of Labor and the Internal Revenue Service might also have an interest in this matter.

Pepper Hamilton's Financial Services Practice Group represents registered and unregistered investment advisers, and can assist any company interested in ensuring they are fully compliant with applicable federal securities laws.

Jeremy D. Frey and Gregory J. Nowak

The material in this publication is based on laws, court decisions, administrative rulings and congressional materials, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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