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SEC Brings Its First Action for Proxy Voting Violation

On Friday, May 8, the SEC brought its first enforcement case for a proxy voting rule violation. The case, involving the registered investment adviser INTECH Investment Management LLC, charged that the adviser did not sufficiently describe its proxy voting policies and procedures and failed to address a material conflict of interest that might arise between the adviser and some of its clients.

The Commission found that the adviser exercised voting authority over client securities without including in its policies and procedures how it would address certain material potential conflicts of interests. Specifically, the Commission alleged that the adviser’s proxy voting policy was selected in part to attract clients. The Commission’s press release states:

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.


Comments in the press release from SEC staff are particularly interesting: “Investment advisers have enormous voting power, which can significantly affect the future value of corporate securities held by the adviser's clients," said Daniel M. Hawke, Director of the SEC's Philadelphia Regional Office. "With this power comes the duty to cast proxy votes in a manner consistent with the best interests of the adviser's clients and not to subrogate clients' interests to its own."

The full text of the SEC’s press release can be found at http://www.sec.gov/news/press/2009/2009-105.htm and the settlement papers at http://www.sec.gov/litigation/admin/2009/ia-2872.pdf