The staff of the Division of Investment Management and Corporation Finance recently issued guidance with respect to proxy advisory firms. The guidance, in the form of a Staff Legal Bulletin, is here. The advice provides some helpful guidance but left gaps. In one instance, the guidance has the potential to raise uncertainty outside the proxy advisory firm area.
One section addresses the fiduciary obligations of advisers with respect to voting client shares. The guidance purports to provide advice on whether advisers must vote "every proxy." Advice in this area would be most useful in specifying when advisers with voting authority may nonetheless refrain from voting. After all, this is the most common situation. See Staff Legal Bulletin No. 20 (June 30, 2014) ("We understand that in most cases, clients delegate to their investment advisers the authority to vote proxies relating to equity securities").
Yet the advice was quite different and had little to do with the actual fiduciary obligations of advisers. The advice was really about possible arrangements that clients could impose on advisers. Thus, clients could deny advisers voting authority in its entirety. They could prohibit advisers from voting on certain types of proposals or only provide voting authority over certain types of proposals. Clients can also require that advisers vote in a certain fashion (as in for all management proposals).
So the take away is that it doesn't violate an adviser's fiduciary obligations to follow voting instructions received from received by clients. One has to wonder whether there was ever much doubt about that. See Proxy Voting by Investment Advisers, Investment Advisers Act Release No. 2106 (Jan. 31, 2003) (noting that advisers "with proxy voting authority" was obligated to act with a duty of care).
The advice does, however, seem to encourage clients to adopt more restrictive voting arrangements with advisers. Of course, IM does not have jurisdiction over institutional investors so cannot actually state that such arrangements are consistent with any fiduciary obligations of clients. Clients will have to make their own determination on that matter.
The one place where the guidance did seem to comment on an adviser's fiduciary obligations with respect to voting may well sow the seeds of confusion. The staff specified that advisers may follow instructions from clients to always follow a particular party's recommendations (for management or for a particular shareholder proponent). The guidance, however, suggested that the advice could be ignored upon a "determination by the investment adviser that a particular proposal should be voted in a different way if, for example, it would further the investment strategy being pursued by the investment adviser on behalf of the client."
To the extent that this is the staff's position (the staff could have been suggesting that advisers and clients can agree to this exception), presumably the obligation to override client instructions applies in other circumstances where necessary to further the adviser's investment strategy. This potentially adds a great deal of uncertainty and leaves advisers open to allegations of breach whenever they vote in a manner consistent with client instructions but inconsistend with their investment strategy.