Introduction
Under new rules adopted by the Securities and Exchange Commission, investment advisers will be required to adopt policies and procedures reasonably designed to ensure that proxies are voted in the best interests of clients. These investment advisers will also be required to disclose to their clients information about their proxy voting policies and procedures and how proxies were actually voted, and to maintain certain records related to proxy voting. Advisers must comply with the new rules by August 1, 2003. The new rules apply to investment advisers registered under the Investment Advisers Act of 1940 (the "Advisers Act") who exercise voting authority (either implicit or explicit) with respect to their clients' securities.
Proxy Voting Policies and Procedures
New Rule 206(4)-6 under the Advisers Act requires investment advisers subject to the rule to adopt and implement proxy voting policies and procedures. The proxy voting policies and procedures must be in writing and reasonably designed to ensure that the adviser votes in the best interests of clients, and must include procedures for addressing material conflicts between the interests of the adviser and those of its clients with respect to proxy voting. The SEC believes that an investment adviser with voting authority has a duty to monitor corporate actions and vote client proxies and that the adviser should have procedures in place to fulfill those duties.
The SEC has not mandated any specific proxy voting policies and procedures, recognizing that a "one size fits all" approach is unworkable and giving advisers the flexibility to develop procedures that are suitable to their businesses. Some advisers are unlikely to face any material conflicts of interest, in which case their procedures could be fairly simple. Advisers may have different policies and procedures for use with different clients. Nonetheless, the SEC believes that proxy voting policies and procedures should address how the adviser will vote proxies (or what factors it will take into consideration) when voting on particular types of matters, such as changes in corporate governance structures, adoption or amendments to compensation plans (including stock options), and matters involving social issues or corporate responsibility.
Conflict of Interest. An investment adviser's proxy voting policies and procedures must address how the adviser resolves material conflict of interest with its clients. A logical policy would be to disclose the conflict to clients and obtain their consent for voting. In the absence of consent, an adviser must have procedures to ensure that a decision to vote the proxy was based on the client's best interests and was not the product of the conflict. An adviser could establish a predetermined voting policy which would make voting a matter of simply applying the policy. An adviser could also suggest that the clients engage another party to determine how the proxies should be voted in the event of a material conflict.
Description of Proxy Voting Policies and Procedures. The new rule also requires investment advisers to describe their proxy voting policies and procedures and, upon request, to provide clients with those policies and procedures. It is likely that investment advisers will put such descriptions in their written brochures.
Disclosure as to How to Obtain Voting Information
Advisers will be required to disclose how clients can obtain information on how the advisers actually voted client securities. Public disclosure of such information is not required, except for advisers who vote proxies for a mutual fund. It is expected that most advisers will make this disclosure in their written brochures.
Recordkeeping
New recordkeeping rules will require an investment adviser who exercises voting authority with respect to client securities to make and retain (1) a copy of its proxy voting policies and procedures; (2) a copy of each proxy statement that the adviser receives regarding client securities (this requirement may be satisfied by relying on the ability to obtain a copy of a proxy statement from the SEC's EDGAR database); (3) a record of each vote cast by the adviser on behalf of a client; (4) a copy of any document created by the adviser that was material to making a decision on how to vote proxies on behalf of a client or that memorializes the basis for that decision; and (5) a copy of each written request from a client for information on how the advisers voted proxies on behalf of the client, and a copy of any written responses by the adviser to any client request for information on how the adviser voted proxies.
All of these books and records must be maintained and preserved in an easily accessible place for place five years, the first two years in the adviser's office.
Compliance Dates
Investment advisers subject to the new rules will need to adopt and provide their clients with a description of proxy voting policies and procedures, and disclose how clients may obtain information on the votes cast by the adviser with respect to client securities, not later than August 1, 2003.
Please contact Charles Weber (414/277-5107 or cmweber@quarles.com), Conrad Goodkind (414/277-5305 or cgg@quarles.com) or Fred Lautz (414/277-5309 or flautz@quarles.com) if you have any questions about the matters discussed in this Update or if you would like us to assist you in developing your proxy voting policies and procedures.