The Fiduciary Duties of Proxy Advisors
Bottom Line: Recent SEC guidance identifies a “principles-based fiduciary duty” that requires investment advisers with delegated voting authority to closely monitor the voting recommendations and research provided them by their proxy advisors. This comment letter recommends that the SEC provide additional guidance that recognizes a corresponding “principles-based fiduciary duty” owed by proxy advisors to their clients. This fiduciary duty would arise from the SEC recognizing proxy advisors as investment advisers. The burden of monitoring this new fiduciary duty would fall on the SEC, not the investment advisers.
The burden of fiduciary duty falls on the investment adviser, with the SEC requiring its policies and procedures be reasonably designed to ensure that voting determinations are not based on materially inaccurate or incomplete information.
This “enforcer” approach is certainly a necessary first step in helping to make sure that proxy advisors provide investment advisers with informed, unbiased, and precise voting recommendations and research. However, this approach leaves unresolved two issues.
First, given that the proxy advisor industry is dominated by two entities, being dissatisfied with one or both proxy advisors does not give an investment adviser much choice or leverage when trying to improve the quality of deficient voting recommendations and research.
Second, who is going to monitor the investment advisers to make sure they are meeting their fiduciary duties? Institutional Shareholder Services has approximately 2,000 institutional clients and Glass Lewis has over 1,300 such clients. So, who is going to make sure that the 1,000 plus investment advisers that utilize proxy advisors are actually in complaince? It is doubtful that the SEC has the resources or interest to do so.
To address these issues, the SEC should consider additional guidance that recognizes a proxy advisor’s fiduciary duty to “implement policies and procedures” that result in voting recommendations and research that are consistent with what is required of investment advisers. These fiduciary duties will substitute for a marketplace that does not allow for significant choice. In addition, the SEC is in the best position to monitor how well proxy advisors are complying with their fiduciary duties and what needs to be done to correct deficiencies.
As an investment adviser, the proxy advisor has fiduciary duties that it owes its clients. This understanding creates the foundation for the SEC to provide additional guidance that recognizes a corresponding “principles-based fiduciary duty” owed by proxy advisors to their clients. This duty would require proxy advisors to “implement policies and procedures” that result in voting recommendations that are in the best interest of their clients, supporting what is required of investment advisers.
The next step is for the SEC to provide guidance that allows proxy advisors to “implement policies and procedures” that support what is required of their clients. These policies and procedures, as enforced by the SEC, will help correct for a marketplace where there is very few voting recommendation providers, resulting in few options for an investment adviser that wants to improve the quality of deficient voting recommendations and research, and support the ability of investment advisers to meet their fiduciary duties.
Read the full comment letter here.