Monday, December 24, 2018

Voting Recommendations, Fiduciary Duties, and the Proxy Process

A few weeks ago, I posted on the SEC Roundtable on the Proxy Process (here).  I noted in a postscript to that post that friend-of-the-BLPB Bernie Sharfman had an additional comment letter (his fourth) relating to this regulatory project up his sleeve (so to speak).  That comment letter, dated December 17, 2018, was recently filed (see here) and focuses on voting recommendations.  The nub?

Investment advisers should not be in fear of breaching their fiduciary duties if they use board voting recommendations. . . . The SEC needs to go further than just approving the use of board voting recommendations as long as the investment adviser has an agreement with the client to use them. . . . [T]he SEC needs to explicitly state in some way that an investment adviser will not be in breach of its fiduciary duties under the Advisers Act if it uses board voting recommendations when voting its proxies.

To implement such a policy, this comment letter requests the SEC to provide investment advisers with a liability safe harbor under the Advisers Act when using board voting recommendations in voting their proxies as long as their clients do not prohibit their use and no significant business relationship exists between the investment adviser and the company whose shares are being voted. This will help ensure that the value inherent in board voting recommendations is reflected in the voting of proxies by investment advisers.

The entire letter is well worth a good read--and only 11 pages, at that.

But that's not all.

Bernie has taken thoughts from two of his four comment letters and combined and enhanced them in a recently posted article, Enhancing the Value of Shareholder Voting Recommendations.  The abstract of the article is set forth below.

This writing addresses a fundamental issue in corporate governance. If institutional investors such as investment advisers to mutual funds have a fiduciary duty to vote the shares of stock that they owned on behalf of their investors, then how do we practically achieve informing them on how to vote their proxies without requiring each institutional investor to read massive amounts of information on the hundreds or thousands of companies they have invested in for the thousands, tens of thousands, or even hundreds of thousands of votes they are confronted with each year?

A critical step in resolving this issue is maximizing the ability of institutional investors to avail themselves of voting recommendations that are made on an informed basis and with the expectation that they will lead to shareholder wealth maximization. One way to achieve this maximization is to make sure that the voting recommendations provided by proxy advisors are truly informed ones. This leads to the recommendation that the proxy advisor should be held to the standard of an information trader. Another way is for the SEC to recognize the value of board recommendations and explicitly state that their use will allow investment advisers to meet their fiduciary duties when voting their proxies.

As Bernie noted on LinkedIn when he posted a link to the article a few days ago, it is a present "[f]or those of you who are looking forward to reading articles on corporate governance during the Christmas break."  I, for one, am still focused on grading (we ended late this semester, and my exam was given on the last possible day--with one student taking it late because of illness) and on my daughter's birthday (today) and Christmas (tomorrow).  But I did take a peek at the article anyway.  It makes many nice points on relevant embedded legal issues and does draw together well Bernie's ideas on the interaction of the duties of proxy advisors and investment advisers.

Bernie is inviting comments.  I am sure he would appreciate yours.

https://lawprofessors.typepad.com/business_law/2018/12/voting-recommendations-fiduciary-duties-and-the-proxy-process.html

Corporate Governance, Joan Heminway, Securities Regulation | Permalink

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