Ensuring Compliance in Proxy Voting: A Guide for Registered Investment Advisory Firms

Proxy voting is a critical aspect of fiduciary duty for registered investment advisory (RIA) firms, requiring them to act in the best interests of their clients. With increased regulatory scrutiny from the Securities and Exchange Commission (SEC), RIAs must ensure that their proxy voting policies align with compliance requirements while maintaining transparency and accountability.

Understanding the Regulatory Framework

The SEC’s Proxy Voting Rule (Rule 206(4)-6 of the Investment Advisers Act of 1940) mandates that RIAs adopting proxy voting authority must:

• Act in the best interests of their clients.

• Establish and implement written proxy voting policies and procedures.

• Disclose proxy voting policies to clients and provide details upon request.

• Maintain records of proxy voting decisions.

Furthermore, the SEC’s updated guidance highlights the importance of ensuring that proxy voting aligns with clients’ investment objectives and best interests.

Key Compliance Considerations for RIAs

1. Establishing a Robust Proxy Voting Policy

RIAs should develop comprehensive proxy voting policies that include:

• Criteria for assessing proposals and voting decisions.

• Procedures for addressing conflicts of interest.

• Methods for documenting the rationale behind voting decisions.

These policies should be periodically reviewed to remain compliant with evolving regulations.

2. Managing Conflicts of Interest

Conflicts of interest in proxy voting can arise when RIAs have business relationships with issuers or their affiliates. To mitigate risks:

• RIAs should implement clear procedures for identifying conflicts.

• Voting decisions should be based on pre-established guidelines rather than subjective influence.

• Firms may opt to engage an independent third party to assist in voting.

3. Transparency and Client Disclosure

RIAs must provide clients with clear disclosures regarding their proxy voting policies. Compliance best practices include:

• Informing clients about how proxy voting aligns with their interests.

• Offering access to proxy voting records upon request.

• Ensuring that disclosures in Form ADV Part 2A accurately reflect the firm’s proxy voting policies.

4. Recordkeeping and Documentation

Accurate recordkeeping is essential for SEC compliance. RIAs must maintain:

• A history of proxy voting decisions and supporting rationale.

• Client requests related to proxy voting.

• Copies of proxy statements received and any research used in decision-making.

5. Regular Compliance Audits and Training

To remain in compliance, RIAs should conduct periodic internal audits of their proxy voting procedures. Additionally, training programs for employees involved in proxy voting can ensure adherence to policies and regulatory expectations.

Consequences of Non-Compliance

Failure to comply with proxy voting regulations can result in enforcement actions, reputational damage, and financial penalties. RIAs that do not properly disclose or manage conflicts of interest may face SEC scrutiny, highlighting the need for diligent compliance efforts.

Conclusion

Proxy voting is a key fiduciary duty for RIAs, requiring meticulous attention to compliance, transparency, and client interests. By implementing a well-structured proxy voting policy, managing conflicts of interest, maintaining thorough records, and ensuring regular compliance reviews, RIAs can fulfill their regulatory obligations while safeguarding client trust. As regulatory expectations evolve, staying proactive in compliance measures will help RIAs mitigate risks and reinforce their commitment to fiduciary responsibility.