After reflecting further on SEC Staff Legal Bulletin No. 20 that was issued yesterday, a word comes to mind: indirection.  Consider Q&A 3 and 4 below.  It seem as though the SEC staff is trying to affect the behavior of proxy advisers indirectly by hammering on the investment advisers (i.e., the proxy adviser's clients).  Notwithstanding the headline, maybe indirect regulation is the right approach.

Question 3.  What are some of the considerations that an investment adviser may wish to take into account if it retains a proxy advisory firm to assist it in its proxy voting duties?

Answer.  When considering whether to retain or continue retaining any particular proxy advisory firm to provide proxy voting recommendations, the staff believes that an investment adviser should ascertain, among other things, whether the proxy advisory firm has the capacity and competency to adequately analyze proxy issues.⁶  In this regard, investment advisers could consider, among other things: the adequacy and quality of the proxy advisory firm’s staffing and personnel; the robustness of its policies and procedures regarding its ability to (i) ensure that its proxy voting recommendations are based on current and accurate information and (ii) identify and address any conflicts of interest and any other considerations that the investment adviser believes would be appropriate in considering the nature and quality of the services provided by the proxy advisory firm.

Question 4.  Does an investment adviser have an ongoing duty to oversee a proxy advisory firm that it retains?

Answer.  The staff believes that an investment adviser that has retained a third party (such as a proxy advisory firm) to assist with its proxy voting responsibilities should, in order to comply with the Proxy Voting Rule, adopt and implement policies and procedures that are reasonably designed to provide sufficient ongoing oversight of the third party in order to ensure that the investment adviser, acting through the third party, continues to vote proxies in the best interests of its clients. ⁷  In addition, the staff notes that a proxy advisory firm’s business and/or policies and procedures regarding conflicts of interest could change after an investment adviser’s initial assessment, and some changes could alter the effectiveness of the policies and procedures and require the investment adviser to make a subsequent assessment.  Consequently, the staff has stated that investment advisers should establish and implement measures reasonably designed to identify and address the proxy advisory firm’s conflicts that can arise on an ongoing basis,⁸ such as by requiring the proxy advisory firm to update the investment adviser of business changes the investment adviser considers relevant  (i.e., with respect to the proxy advisory firm’s capacity and competency to provide proxy voting advice) or conflict policies and procedures.

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