Investment company adviser Toews Corporation voted proxies for its funds’ portfolio companies pursuant to a standing order to vote in accordance with management recommendations and against all shareholder proposals. The SEC, in a settled enforcement proceeding against Toews, asserted that the adviser had deviated from its disclosed voting practices, failed to determine whether it voted proxies in its clients’ best interests and lacked appropriate policies and procedures for proxy voting. Commissioners Hester M. Peirce and Mark T. Uyeda, in a dissenting statement, argued that the settlement order could have an adverse effect on how advisers develop their proxy voting policies and procedures.
Asset management partner George Raine told Hedge Fund Law Report that, “we believe that this case is really about disclosures, and ensuring that, as it relates to proxy practices, advisers are up front with their investors about how they handle responding to proxies, disclose their approach and what they have agreed to with their investors and then put in place a policy to ensure compliance with their agreed/disclosed approach.” There was “a dramatic disconnect between the adviser’s disclosures and its practices,” he said.
Litigation & enforcement partner Dan O’Connor told the publication that, “the dissent makes it clear that it would be improper for the SEC staff to deem a standing order to vote in accordance with management recommendations to be per se improper. The key will be documenting that the clients received full and fair disclosure of the practice and were able to provide their informed consent.” Moreover, “given that the uniform practice of voting proxies with management relieves the adviser of certain costs and duties associated with management, one can imagine that the SEC would see the failure to delve further as presenting at least a potential conflict of interest,” he observed.
Dan also recommended two important steps advisors should take to avoid running afoul of the Proxy Rule: Ensure that the adviser’s proxy voting practices and agreements with third-party proxy firms are consistent with the adviser’s marketing materials, Form ADV, private placement memorandum, partnership agreement and other disclosures, and establish a process or policy for testing compliance with the disclosed proxy voting approach on a periodic basis.
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