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Univ. of Toledo College of Law

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Tuesday, May 12, 2009

SEC Brings First Enforcement Action for Proxy Voting Rule Violations

The SEC charged West Palm Beach, Fla.-based INTECH Investment Management LLC and its former chief operating officer David E. Hurley with violating the SEC's proxy voting rule for investment advisers by not sufficiently describing its proxy voting policies and procedures and failing to address a material potential conflict of interest.  The proxy voting rule requires registered investment advisers to adopt proxy voting policies and describe them to clients, including procedures to address material conflicts of interest that may arise between the adviser and its clients. The rule is designed to ensure that advisers vote proxies in their clients' best interests, and provide clients with information about how their proxies are voted. This is the first enforcement action taken by the SEC for a proxy voting rule violation.

In a settled administrative proceeding against INTECH and Hurley, the Commission's order finds that INTECH exercised voting authority over client securities without including in its policies and procedures how it would address material potential conflicts of interests. Specifically, INTECH chose a particular set of voting recommendations for all clients without addressing and describing in the policies and procedures its potential effect on INTECH's ability to retain and obtain business from a particular subset of its clients.  INTECH and Hurley consented to the issuance of a Commission order without admitting or denying any of the findings. INTECH agreed to pay a penalty of $300,000 and Hurley agreed to pay a $50,000 penalty.

According to the Commission's order, INTECH managed institutional portfolios for pension plans, foundations, unions, public funds and public corporations. As part of its investment advisory services, INTECH exercised voting authority over many of its clients' securities or proxies. In connection with the proxy voting rule, which became effective March 10, 2003, INTECH adopted and implemented written proxy voting policies and procedures and provided them to its clients. Hurley reviewed and edited counsel's drafts of those policies and procedures.

The SEC's order finds that after receiving complaints from some of its union-affiliated clients about pro-management proxy votes, INTECH selected a third-party proxy voting service provider's guidelines to vote in accordance with AFL-CIO-based proxy voting recommendations for all clients' securities. INTECH selected the guidelines that followed the AFL-CIO proxy voting recommendations at a time when it was participating in the annual AFL-CIO Key Votes Survey that ranked investment advisers based on their adherence to the AFL-CIO recommendations on certain votes.

When INTECH advised its clients about its proxy voting policies and procedures, it told clients that because it relied on a third-party proxy voting service, it did not expect that any conflicts would arise in the proxy voting process.

Accordingly, the Commission order finds that INTECH's policies and procedures did not include how INTECH would address material potential conflicts of interests that may have arisen between its interests and those of its clients. INTECH also did not sufficiently describe its proxy voting policies and procedures to clients.

The Commission's order finds INTECH willfully violated, and Hurley willfully aided and abetted and caused violations of, Section 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-6(a) and (c) thereunder. In addition to the financial penalties, the order censures INTECH and Hurley and requires them to cease and desist from committing or causing any violations and any future violations of those provisions.

http://lawprofessors.typepad.com/securities/2009/05/sec-brings-first-enforcement-action-for-proxy-voting-rule-violations.html

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