[Federal Register Volume 84, Number 175 (Tuesday, September 10, 2019)]
[Rules and Regulations]
[Pages 47420-47427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18342]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 271 and 276

[Release Nos. IA-5325; IC-33605]


Commission Guidance Regarding Proxy Voting Responsibilities of 
Investment Advisers

AGENCY: Securities and Exchange Commission.

ACTION: Guidance.

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SUMMARY: The Securities and Exchange Commission (the ``SEC'' or the 
``Commission'') is publishing guidance regarding the proxy voting 
responsibilities of investment advisers under its regulations issued 
under the Investment Advisers Act of 1940 (the ``Advisers Act''), and 
Form N-1A, Form N-2, Form N-3, and Form N-CSR under the Investment 
Company Act of 1940 (the ``Investment Company Act'').

DATES: Effective: September 10, 2019.

FOR FURTHER INFORMATION CONTACT: Thankam A. Varghese, Senior Counsel; 
or Holly Hunter-Ceci, Assistant Chief Counsel, at (202) 551-6825 or 
IMOCC@sec.gov, Chief Counsel's Office, Division of Investment 
Management, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is publishing guidance 
regarding the proxy voting responsibilities of investment advisers 
under 17 CFR 275.206(4)-6 [Rule 206(4)-6 under the Advisers Act [15 
U.S.C. 80b]],\1\ Form N-1A,\2\ Form N-2,\3\ Form N-3,\4\ and Form N-CSR 
\5\ under the Investment Company Act [15 U.S.C. 80a].\6\
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    \1\ Unless otherwise noted, when we refer to the Advisers Act, 
or any paragraph of the Advisers Act, we are referring to 15 U.S.C. 
80b of the United States Code, at which the Advisers Act is 
codified, and when we refer to rules under the Advisers Act, or any 
paragraph of these rules, we are referring to title 17, part 275 of 
the Code of Federal Regulations [17 CFR part 275], in which these 
rules are published.
    \2\ Referenced in 17 CFR 274.11A.
    \3\ Referenced in 17 CFR 274.11a-1.
    \4\ Referenced in 17 CFR 274.11b.
    \5\ Referenced in 17 CFR 274.128.
    \6\ Unless otherwise noted, when we refer to the Investment 
Company Act, or any paragraph of the Investment Company Act, we are 
referring to 15 U.S.C. 80a of the United States Code, at which the 
Investment Company Act is codified, and when we refer to rules under 
the Investment Company Act, or any paragraph of these rules, we are 
referring to title 17, part 270 of the Code of Federal Regulations 
[17 CFR part 270], in which these rules are published.
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Table of Contents

I. Introduction
II. Guidance Regarding Investment Advisers' Proxy Voting 
Responsibilities and Disclosures on Form N-1A, Form N-2, Form N-3, 
and Form N-CSR
III. Other Matters

I. Introduction

    Investment advisers regularly are faced with an array of decisions 
regarding voting of equity securities on behalf of their clients, 
whether those clients are individual investors, funds or other 
institutional investors.\7\ In various contexts, and in respect of a 
wide range of matters submitted to shareholders for a vote, investment 
advisers that have agreed to take on proxy voting authority are called 
upon to make voting determinations.
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    \7\ Investment advisers owe each of their clients a fiduciary 
duty under the Advisers Act, which ``must be viewed in the context 
of the agreed-upon scope of the relationship between the adviser and 
the client.'' Commission Interpretation Regarding Standard of 
Conduct for Investment Advisers, Release No. IA-5248 (June 5, 2019), 
84 FR 33669, at 33671 (July 12, 2019) (``Fiduciary 
Interpretation''). In the case of a registered investment company 
(``fund''), the scope of this relationship is defined by the 
advisory agreement between the investment adviser and its client 
(i.e., the fund), and the fund board has the authority to set the 
scope of voting authority in accordance with its fiduciary duty. 
With respect to funds, the Investment Company Institute noted that a 
fund board typically delegates its proxy voting duties to the fund's 
investment adviser. During the 2017 proxy season, funds cast more 
than 7.6 million votes for proxy proposals, and the average fund 
voted on 1,504 separate proxy proposals for U.S. listed portfolio 
companies (figures exclude companies domiciled outside the United 
States.). See Letter dated Mar. 15, 2019 from Paul Schott Stevens, 
President and CEO, Investment Company Institute (``ICI Letter II'') 
at p. 3. Unless otherwise noted, letters cited herein were submitted 
in response to the Statement Announcing SEC Staff Roundtable on the 
Proxy Process, July 30, 2018 available at https://www.sec.gov/comments/4-725/4-725.htm.
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    In general, matters are put forth for a shareholder vote either by 
the issuer \8\ or by a shareholder or group of shareholders. The 
submission of matters for a vote by shareholders typically occurs in 
connection with a meeting of shareholders, including annual shareholder 
meetings and special shareholder meetings.\9\ Some matters appear 
regularly and consistently at each annual meeting of shareholders, such 
as the shareholder vote on whether to ratify the issuer's selection of 
an outside auditor.\10\ Other matters, such as shareholder votes on 
proposed mergers, acquisitions, or other corporate actions and matters 
proposed by a shareholder or group of shareholders, are generally more 
idiosyncratic in substance and timing.
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    \8\ As used in this Release, the terms ``company'' and 
``issuer'' refer to the issuer of the securities for which proxies 
are solicited.
    \9\ Concept Release on the U.S. Proxy System, Release No. 34-
62495 (July 14, 2010), 75 FR 42982 (July 22, 2010) (``Concept 
Release'').
    \10\ Many of these matters are required to be submitted to 
shareholders as a result of federal law, state law, exchange 
requirements or the company's governance documents. See, e.g., 
Section 14A(a) of the Securities Exchange Act of 1934 (``say-on-
pay'' votes); 8 Del. C. 1953, sec. 211 (annual meeting to elect 
directors); NYSE Listed Company Manual Section 312.03(b) 
(shareholder approval for certain related party transactions 
involving issuances of common stock); and NASDAQ Rule 5635(a) 
(shareholder approval is required in certain instances prior to the 
issuance of securities in connection with the acquisition of the 
stock or assets of another company).
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    Investment advisers are fiduciaries that owe each of their clients 
duties of care and loyalty with respect to services undertaken on the 
client's behalf, including voting.\11\ In the context of voting, the 
specific obligations that flow from the investment adviser's fiduciary 
duty depend upon the scope of voting authority assumed by the 
adviser.\12\ To satisfy its fiduciary duty in making any voting 
determination, the investment adviser must make the determination in 
the best interest of the client and must not place the investment 
adviser's own interests ahead of the interests of the client.
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    \11\ See Fiduciary Interpretation, 84 FR 33669, at n. 32.
    \12\ See Fiduciary Interpretation, 84 FR 33669, at 33671-72.
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    Specifically, an investment adviser's duty of care includes, among 
other things, the duty to provide advice that

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is in the best interest of the client.\13\ Where an investment adviser 
has assumed the authority to vote on behalf of its client, the 
investment adviser, among other things, must have a reasonable 
understanding of the client's objectives and must make voting 
determinations that are in the best interest of the client.\14\ As 
discussed below, for an investment adviser to form a reasonable belief 
that its voting determinations are in the best interest of the client, 
it should conduct an investigation reasonably designed to ensure that 
the voting determination is not based on materially inaccurate or 
incomplete information.\15\ Further, Rule 206(4)-6 under the Advisers 
Act provides that it is a fraudulent, deceptive, or manipulative act, 
practice, or course of business for an investment adviser registered or 
required to be registered with the Commission to exercise voting 
authority with respect to client securities unless the adviser, among 
other things, adopts and implements written policies and procedures 
that are reasonably designed to ensure that the investment adviser 
votes proxies in the best interest of its clients.\16\ We discuss 
further below how the fiduciary duty and Rule 206(4)-6 relate to an 
investment adviser's exercise of voting authority on behalf of clients.
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    \13\ See Fiduciary Interpretation, 84 FR 33669, at 33672.
    \14\ See Fiduciary Interpretation, 84 FR 33669, at 33673 
(discussing an adviser's obligation to make a reasonable inquiry 
into its client's financial situation, level of financial 
sophistication, investment experience and financial goals and have a 
reasonable belief that the advice it provides is in the best 
interest of the client based on the client's objectives).
    \15\ See Fiduciary Interpretation, 84 FR 33669, at 33674. See 
also Proxy Voting by Investment Advisers, Release No. IA-2106 (Jan. 
31, 2003), 68 FR 6585 (Feb. 7, 2003) (``Proxy Voting Release''), at 
6586 (explaining that an adviser's duty of care with respect to 
proxy voting requires, among other things, an adviser with proxy 
voting authority to monitor corporate events.)
    \16\ See Rule 206(4)-6 under the Advisers Act. With respect to 
conflicts of interests, the Commission brought a settled enforcement 
action against an investment adviser that had voting authority, 
where the adviser's policies and procedures did not include how the 
adviser would address potential conflicts that may arise between its 
interests and those of its clients. See In the Matter of Intech 
Investment Management, LLC and David E. Hurley, Release No. IA-2872 
(May 7, 2009).
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    When making voting determinations on behalf of clients, many 
investment advisers retain proxy advisory firms to perform a variety of 
functions and services. Some of these are administrative, such as 
providing the investment adviser with an electronic platform that 
enables the adviser to manage voting mechanics more efficiently. Other 
services provided by proxy advisory firms relate to the substance of 
voting, such as: Providing research and analysis regarding the matters 
subject to a vote; promulgating general voting guidelines that 
investment advisers can adopt; and making voting recommendations to 
investment advisers on specific matters subject to a vote.\17\ We 
understand that these voting recommendations may be based on a proxy 
advisory firm's own voting guidelines or on custom voting guidelines 
that the investment adviser has created.\18\ We understand further that 
custom guidelines, where they are used, may be more or less detailed, 
depending on the level of instruction an investment adviser has 
provided to a proxy advisory firm.\19\ Contracting with proxy advisory 
firms to provide these types of functions and services can reduce 
burdens for investment advisers (and potentially reduce costs for their 
clients) as compared to conducting them in-house.
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    \17\ See, e.g., Letter dated Dec. 31, 2018 from Gail C. 
Bernstein, General Counsel, Investment Adviser Association (``IAA 
Letter''), at p. 2; ICI Letter II, at pp. 8-9; Letter dated Jan. 16, 
2019 from Dieter Waizenegger, Executive Director, CtW Investment 
Group at p. 2 (explaining that the value-added analysis provided by 
proxy advisory firms is especially important during the U.S. proxy 
season); see generally Roundtable on the Proxy Process, Transcript 
(Nov. 15, 2018) available at https://www.sec.gov/files/proxy-round-table-transcript-111518.pdf.
    \18\ See, e.g., IAA Letter, at 2; Letter dated Nov. 14, 2018 
from Paul Schott Stevens, President and CEO, Investment Company 
Institute (``ICI Letter I''), at p. 34.
    \19\ See, e.g., Letter dated Nov. 14, 2018 from Katherine Rabin, 
Chief Executive Officer, Glass Lewis, at p. 2 (noting that 
institutional investors who engage a proxy advisory firm are opting 
for such firms to execute increasingly detailed policies).
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    We understand further that an investment adviser that has assumed 
the authority to vote proxies on behalf of its clients may look to the 
voting recommendations of a proxy advisory firm when the investment 
adviser has a conflict of interest, such as if, for example, the 
investment adviser's interests in an issuer or voting matter differ 
from those of some or all of its clients. While this third-party input 
into such an investment adviser's voting decision may mitigate the 
investment adviser's potential conflict of interest, it does not 
relieve that investment adviser of (1) its obligation to make voting 
determinations in the client's best interest, or (2) its obligation to 
provide full and fair disclosure of the conflicts of interest and 
obtain informed consent from its clients.\20\
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    \20\ See Fiduciary Interpretation, 84 FR 33669, at 33675-76 
(``To meet its duty of loyalty, an adviser must make full and fair 
disclosure to its clients of all material facts relating to the 
advisory relationship. . . . In addition, an adviser must eliminate 
or at least expose through full and fair disclosure all conflicts of 
interest which might incline an investment adviser--consciously or 
unconsciously--to render advice which was not disinterested.'') 
(internal citations omitted).
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    We have solicited feedback on, and our staff has previously 
provided guidance regarding, various means investment advisers can use 
to fulfill their proxy voting responsibilities, including the retention 
and use of proxy advisory firms. In addition, we and our staff have 
engaged with the public through various forums and statements on a 
variety of issues related to the proxy voting process, including those 
discussed below.
    For example, in 2010, the Commission issued a concept release that 
sought public comment about, among other things, the role and legal 
status of proxy advisory firms within the U.S. proxy system.\21\ In 
2013, the staff held a roundtable on the use of proxy advisory firm 
services by institutional investors and investment advisers.\22\ In 
2014, the staff of the Divisions of Investment Management and 
Corporation Finance issued a Staff Legal Bulletin (``SLB 20'') to 
provide (1) the staff's views regarding an investment adviser's 
responsibilities in voting client proxies and retaining proxy advisory 
firms, as well as (2) guidance about the availability and requirements 
of two exemptions to the federal proxy rules that are often relied upon 
by proxy advisory firms.\23\ The SEC's Office of Compliance Inspections 
and Examinations has also examined investment advisers' compliance with 
their fiduciary duty when voting proxies on behalf of investors, 
including review of risk areas related to conflicts of interest, proxy 
voting policies and procedures, and oversight of proxy

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advisory firms, among other issues.\24\ Most recently, the staff hosted 
a roundtable on the proxy process in November 2018 (the ``2018 
Roundtable'') that included a panel on the role of proxy advisory firms 
and their use by investment advisers.\25\ In connection with the 2018 
Roundtable, the public was invited to provide input on questions that 
arise regarding the use of proxy advisory firms and their 
activities.\26\ We have carefully considered the feedback received on 
these topics, and with the benefit of this extensive body of 
information, historical experience, and engagement, the Commission is 
today issuing guidance to investment advisers about their voting 
responsibilities.\27\
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    \21\ See Concept Release, 75 FR 42982. The comment letters 
received in response to the Concept Release are available at https://www.sec.gov/comments/s7-14-10/s71410.shtml.
    \22\ See SEC Announces Agenda, Panelists for Roundtable on Proxy 
Advisory Services (Nov. 27, 2013), available at https://www.sec.gov/news/press-release/2013-253. The letters received in response to the 
announcement are available at https://www.sec.gov/comments/4-670/4-670.shtml.
    \23\ See SEC Staff Legal Bulletin No. 20, Proxy Voting: Proxy 
Voting Responsibilities of Investment Advisers and Availability of 
Exemptions from the Proxy Rules for Proxy Advisory Firms (June 30, 
2014), available at https://www.sec.gov/interps/legal/cfslb20.htm. 
SLB 20 represents the views of the staff of the Divisions of 
Investment Management and Corporation Finance. It is not a rule, 
regulation, or statement of the Commission. Furthermore, the 
Commission has neither approved nor disapproved its content. SLB 20, 
like all staff guidance, has no legal force or effect: It does not 
alter or amend applicable law, and it creates no new or additional 
obligations for any person.
    \24\ See, e.g., SEC, Office of Compliance Inspections and 
Examinations, 2015 Examination Priorities for 2015, available at 
https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2015.pdf.
    \25\ See Chairman Jay Clayton, Statement Announcing SEC Staff 
Roundtable on the Proxy Process, available at https://www.sec.gov/news/public-statement/statement-announcing-sec-staff-roundtable-proxy-process.
    \26\ See Comments on Statement Announcing SEC Staff Roundtable 
on the Proxy Process; File No. 4-725, available at https://www.sec.gov/comments/4-725/4-725.htm.
    \27\ The Commission today is also issuing interpretation and 
guidance regarding certain rules promulgated under Section 14 of the 
Securities Exchange Act of 1934 regarding proxy voting advice. 
Release No. 34-86721 (August 21, 2019), published elsewhere in this 
issue of the Federal Register.
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    In Section II below, we discuss how the fiduciary duty and Rule 
206(4)-6 relate to an investment adviser's exercise of voting authority 
on behalf of clients. In that Section, we are focused in particular on 
providing guidance to investment advisers that retain a proxy advisory 
firm to assist them in some aspect of their proxy voting 
responsibilities.\28\ More specifically, we have followed the question 
and answer format used by the staff in SLB 20 as we understand that 
many investment advisers have found that format useful.
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    \28\ The staff previously provided its views on certain of these 
questions in SLB 20.
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    In this guidance, we provide examples to help facilitate investment 
advisers' compliance with their proxy voting responsibilities; however, 
these examples are not the only way by which investment advisers could 
comply with their principles-based fiduciary duty imposed on them by 
the Advisers Act.
    We encourage investment advisers and proxy advisory firms to review 
their policies and practices in light of the guidance below in advance 
of next year's proxy season. To the extent that firms identify 
operational or other questions in the course of that review, we 
encourage them to contact the staff of the Division of Investment 
Management.
    The Commission will consider any questions or other feedback on its 
guidance regarding the proxy voting responsibilities of investment 
advisers under their fiduciary duty and Rule 206(4)-6 under the 
Advisers Act, and Form N-1A, Form N-2, Form N-3, and Form N-CSR under 
the Investment Company Act to evaluate whether additional guidance 
might be appropriate in the future. Based on any feedback received, the 
Commission could supplement this guidance.

II. Guidance Regarding Investment Advisers' Proxy Voting 
Responsibilities and Disclosures on Form N-1A, Form N-2, Form N-3, and 
Form N-CSR

    Question 1: How may an investment adviser and its client, in 
establishing their relationship, agree upon the scope of the investment 
adviser's authority and responsibilities to vote proxies on behalf of 
that client?
    Response: As we recently stated, ``[t]he fiduciary duty follows the 
contours of the relationship between the adviser and its client, and 
the adviser and its client may shape that relationship by agreement, 
provided that there is full and fair disclosure and informed consent.'' 
\29\ Accordingly, an investment adviser is not required to accept the 
authority to vote client securities, regardless of whether the client 
undertakes to vote the proxies itself.\30\ If an investment adviser 
does accept voting authority, it may agree with its client, subject to 
full and fair disclosure and informed consent, on the scope of voting 
arrangements, including the types of matters for which it will exercise 
proxy voting authority. While the application of the investment 
adviser's fiduciary duty in the context of proxy voting will vary with 
the scope of the voting authority assumed by the investment adviser, 
the relationship in all cases remains that of a fiduciary to the 
client.\31\
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    \29\ See Fiduciary Interpretation, 84 FR at 33677, footnotes 67-
70 and accompanying text for a detailed discussion of informed 
consent and how it is generally considered on an objective basis and 
may be inferred. See also Form ADV, Part 2A, Item 17, and Proxy 
Voting Release, 68 FR 6585, at n. 19.
    \30\ We believe, however, that to the extent an investment 
adviser has discretionary authority to manage the client's portfolio 
and has not agreed with the client to a narrower scope of voting 
authority through full and fair disclosure and informed consent, the 
adviser's responsibility for making voting determinations is 
implied. See Proxy Voting Release, 68 FR 6585 at n. 10.
    \31\ As we recently stated, ``an adviser's federal fiduciary 
duty may not be waived, though it will apply in a manner that 
reflects the agreed-upon scope of the relationship.'' See Fiduciary 
Interpretation, 84 FR 33669, at 33672.
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    Differences in agreements between investment advisers and their 
clients as to the scope of the advisory relationship may result in a 
variety of arrangements for voting client securities. While a client 
and its investment adviser may agree that the client will delegate all 
of its proxy voting authority to its investment adviser, the client and 
the investment adviser may instead agree (in the manner described 
above) to other proxy voting arrangements in which the investment 
adviser would not assume all of the proxy voting authority, or in which 
the investment adviser would only assume the authority to vote on 
behalf of the client in limited circumstances or not at all.\32\ 
Following are several non-exhaustive examples of possible voting 
arrangements to which a client and its investment adviser may agree, 
subject to full and fair disclosure and informed consent: \33\
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    \32\ Some letters asked the Commission to clarify the various 
types of voting arrangements that might be adopted. See, e.g., 
Letter dated Dec. 21, 2018 from Benjamin Zycher, Ph.D., American 
Enterprise Institute at p. 5 (seeking clarification about when it is 
appropriate to vote proxies).
    \33\ As we stated in the Fiduciary Interpretation, ``[w]hether 
the disclosure is full and fair will depend upon, among other 
things, the nature of the client, the scope of the services, and the 
material fact or conflict. Full and fair disclosure for an 
institutional client (including the specificity, level of detail, 
and explanation of terminology) can differ, in some cases 
significantly, from full and fair disclosure for a retail client 
because institutional clients generally have a greater capacity and 
more resources than retail clients to analyze and understand complex 
conflicts and their ramifications.'' (internal citations omitted). 
See Fiduciary Interpretation, 84 FR 33669, at 33677.
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     A client and its investment adviser may agree that the 
investment adviser should exercise voting authority pursuant to 
specific parameters designed to serve the client's best interest. For 
example, the client and the investment adviser may agree that, absent 
receipt of a contrary instruction from the client or a determination by 
the investment adviser that voting a particular proposal in a different 
way would be in the client's best interest (e.g., if voting differently 
would further the investment strategy being pursued by the investment 
adviser on behalf of the client):
    [cir] The investment adviser will vote in accordance with the 
voting recommendations of management of the issuer. Such an arrangement 
could be subject to conditions, for example additional analysis by the 
investment adviser where the voting recommendation concerns a matter 
that may present heightened management conflicts of interest or involve 
a type of matter of particular interest to the investment adviser's 
client; or

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    [cir] The investment adviser will vote in favor of all proposals 
made by particular shareholder proponents. Such an arrangement could be 
subject to conditions, for example requiring that the shareholder 
proponent has particular expertise or an investment strategy that will 
further the interests of the investment adviser's client.
     A client and its investment adviser may agree that the 
investment adviser would not exercise voting authority in circumstances 
under which voting would impose costs on the client, such as 
opportunity costs for the client resulting from restricting the use of 
securities for lending in order to preserve the right to vote.\34\
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    \34\ We note, however, that the investment adviser would still 
have to fulfill its duty of loyalty while exercising its voting 
authority on behalf of its client. For example, an investment 
adviser must make any determination regarding whether to retain a 
security and vote the accompanying proxy or lend out the security in 
the client's best interest.
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     A client and its investment adviser may agree that the 
investment adviser will focus voting resources only on particular types 
of proposals based on the client's preferences, such as proposals 
relating to corporate events (mergers and acquisition transactions, 
dissolutions, conversions, or consolidations) or contested elections 
for directors.
     A client and its investment adviser may agree that the 
investment adviser would not exercise voting authority on certain types 
of matters where the cost of voting would be high, or the benefit to 
the client would be low.\35\ This could include, for example:
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    \35\ See Proxy Voting Release, 68 FR 6585 at n. 18 and 
accompanying text.
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    [cir] Circumstances where the cost of voting the proxy exceeds the 
expected benefit to the client, including, for example, casting a vote 
on a foreign security that could involve the additional costs of hiring 
a translator or traveling to a foreign country to vote the security in 
person; or
    [cir] Circumstances under which casting a vote would not reasonably 
be expected to have a material effect on the value of the client's 
investment.

While, as noted above, an investment adviser and its client may shape 
the voting authority through full and fair disclosure and informed 
consent, we reiterate that an investment adviser that assumes proxy 
voting authority must make voting determinations consistent with its 
fiduciary duty and in compliance with Rule 206(4)-6.\36\
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    \36\ Rule 206(4)-6 under the Advisers Act requires an investment 
adviser that assumes proxy voting authority to adopt and implement 
policies and procedures that are reasonably designed to ensure it 
votes client securities in the best interest of clients.
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    Question 2: What steps could an investment adviser that has assumed 
the authority to vote proxies on behalf of a client take to demonstrate 
that it is making voting determinations in a client's best interest and 
in accordance with the investment adviser's proxy voting policies and 
procedures?
    Response: As we discuss in Section I above, an investment adviser 
is a fiduciary and owes each of its clients a fiduciary duty with 
respect to services undertaken on the client's behalf, including 
voting. In that discussion, we explain some of the requirements that 
follow from an investment adviser's fiduciary duty in the context of 
voting on behalf of clients, including the need for an investment 
adviser to conduct a reasonable investigation into matters on which the 
adviser votes and to vote in the best interest of the client.\37\
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    \37\ The Commission has noted that an investment adviser uses 
various means of ensuring that proxy votes are voted in its client's 
best interest and not affected by the adviser's conflicts of 
interest, in addition to looking to the voting recommendations of a 
proxy advisory firm. For example, the Commission has stated that 
``[c]learly, an adviser's policy of disclosing the conflict to 
clients and obtaining their consents before voting satisfies the 
requirements of the rule and, when implemented, fulfills the 
adviser's fiduciary obligations under the Advisers Act. . . . Other 
policies and procedures are also available; their effectiveness (and 
the effectiveness of any policies and procedures) will turn on how 
well they insulate the decision on how to vote client proxies from 
the conflict.'' See Proxy Voting Release, 68 FR 6585, at 6587-88.
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    An investment adviser should consider how its fiduciary duty and 
its obligations under Rule 206(4)-6 apply when it has multiple clients. 
Many investment advisers have multiple clients, including funds, other 
pooled investment vehicles, and individual investors, with differing 
investment objectives and strategies.\38\ In considering whether an 
investment adviser's proxy voting policies and procedures are 
reasonably designed to ensure compliance with Rule 206(4)-6 and to 
fulfill its fiduciary duty to its clients, an investment adviser should 
consider whether voting all of its clients' shares in accordance with a 
uniform voting policy would be in the best interest of each of its 
clients.\39\ In particular, where an investment adviser undertakes 
proxy voting responsibilities on behalf of multiple funds, pooled 
investment vehicles, or other clients, it should consider whether it 
should have different voting policies for some or all of these 
different funds, vehicles, or other clients, depending on the 
investment strategy and objectives of each.\40\ For example, a growth 
fund that targets companies with high growth prospects may have a 
different perspective on certain matters submitted to shareholders than 
an income or dividend fund that seeks to generate an income stream for 
shareholders in the form of dividends or interest payments.
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    \38\ Such other pooled investment vehicles may include, for 
example, private funds that are excluded from the definition of 
investment company by either Section 3(c)(1) or Section 3(c)(7) of 
the Investment Company Act.
    \39\ Some letters have noted that proxy voting guidelines allow 
funds to handle efficiently the large majority of votes that are 
recurring and non-controversial. See, e.g., ICI Letter I at pp. 9-
10; ICI Letter II at p. 4.
    \40\ As we have noted in the Proxy Voting Release, nothing in 
Rule 206(4)-6 under the Advisers Act prevents an investment adviser 
from having different policies and procedures for different clients 
or different categories of clients. Thus, the board of directors of 
a fund could adopt and require an investment adviser to use policies 
and procedures that differ from those the adviser uses with respect 
to its other clients. Proxy Voting Release, FR 6587 at n. 13.
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    Funds that invest in voting securities are also required to 
disclose in their statements of additional information (``SAI'') \41\ 
or on Form N-CSR,\42\ as applicable, the policies and procedures that 
they use to determine how to vote proxies relating to securities held 
in their portfolios.\43\ As discussed above, if the funds have 
different voting policies and procedures, these should be reflected in 
the SAI or on Form N-CSR, as applicable.
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    \41\ The SAI is part of a fund's registration statement and 
contains information about a fund in addition to that contained in 
the prospectus. The SAI is required to be delivered to investors 
upon request and is available on the Commission's Electronic Data 
Gathering, Analysis, and Retrieval System (``EDGAR'').
    \42\ Form N-CSR is used by open-end funds and closed-end funds 
to file certified shareholder reports with the Commission on EDGAR.
    \43\ Open-end funds must disclose their proxy voting policies 
and procedures in their SAIs. Because closed-end funds do not offer 
their shares continuously, and are therefore generally not required 
to maintain an updated SAI to meet their obligations under the 
Securities Act of 1933, they are required to disclose their proxy 
voting policies and procedures in their annual reports on Form N-
CSR. See Disclosure of Proxy Voting Policies and Proxy Voting 
Records by Registered Management Investment Companies, Release No. 
IC-25922 (Jan. 31, 2003), 68 FR 6564 (Feb. 7, 2003), Form N-1A, Form 
N-2, Form N-3, and Form N-CSR.
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    An investment adviser should also consider whether certain types of 
matters may necessitate that the adviser conduct a more detailed 
analysis than what may be entailed by application of its general voting 
guidelines, to consider factors particular to the issuer or the voting 
matter under consideration. Such matters might include, but are not 
limited to, corporate events (mergers and acquisition transactions, 
dissolutions, conversions, or consolidations) or contested elections 
for directors. When determining whether to conduct such an issuer-
specific analysis, or an analysis specific

[[Page 47424]]

to the matter to be voted on, an investment adviser should consider the 
potential effect of the vote on the value of a client's investments. An 
investment adviser should consider identifying in its voting policy or 
policies the factors that it will consider in determining which matters 
require company-specific evaluation, and how it will evaluate voting 
decisions on such matters.
    In addition, an investment adviser should consider reasonable 
measures to determine that it is casting votes on behalf of its clients 
consistently with its voting policies and procedures. For example, one 
way in which an investment adviser could evaluate its compliance with 
Rule 206(4)-6 would be to sample the proxy votes it casts on behalf of 
its clients as part of its annual review of its compliance policies and 
procedures.\44\ Such a review could specifically include sampling of 
proxy votes that relate to proposals that may require more issuer-
specific analysis (e.g., mergers and acquisition transactions, 
dissolutions, conversions, or consolidations), to assist in evaluating 
whether the investment adviser's voting determinations are consistent 
with its voting policies and procedures and in its client's best 
interest.\45\
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    \44\ See 17 CFR 275.206(4)-7(b) [Rule 206(4)-7(b) under the 
Advisers Act].
    \45\ Id.
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    An investment adviser that retains a proxy advisory firm to provide 
voting recommendations or voting execution services also should 
consider additional steps to evaluate whether the investment adviser's 
voting determinations are consistent with its voting policies and 
procedures and in the client's best interest before the votes are cast. 
For example, some steps that an investment adviser could use to 
evaluate its compliance are:
     Sampling pre-populated votes: Where the investment adviser 
utilizes the proxy advisory firm for either voting recommendations or 
voting execution (or both), it could assess ``pre-populated'' votes 
shown on the proxy advisory firm's electronic voting platform before 
such votes are cast, such as through periodic sampling of the proxy 
advisory firm's pre-populated votes.
     Consideration of additional information: Where the 
investment adviser utilizes the proxy advisory firm for voting 
recommendations, it could consider policies and procedures that provide 
for consideration of additional information that may become available 
regarding a particular proposal. This additional information may 
include an issuer's or a shareholder proponent's subsequently filed 
additional definitive proxy materials or other information conveyed by 
an issuer or shareholder proponent to the investment adviser that would 
reasonably be expected to affect the investment adviser's voting 
determination.
     Higher degree of analysis: Where the investment adviser 
utilizes the proxy advisory firm for either voting recommendations or 
voting execution (or both), with respect to matters where the 
investment adviser's voting policies and procedures do not address how 
it should vote on a particular matter, or where the matter is highly 
contested or controversial,\46\ it could consider whether a higher 
degree of analysis may be necessary or appropriate to assess whether 
any votes it casts on behalf of its client are cast in the client's 
best interest.
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    \46\ This may include, for example, major acquisitions involving 
takeovers or contested director elections where a shareholder has 
proposed its own slate of directors.
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    Finally, as part of an investment adviser's ongoing compliance 
program, the adviser must review and document, no less frequently than 
annually, the adequacy of its voting policies and procedures to ensure 
that they have been formulated reasonably and implemented effectively, 
including whether the applicable policies and procedures continue to be 
reasonably designed to ensure that the adviser casts votes on behalf of 
its clients in the best interest of such clients.\47\
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    \47\ See Proxy Voting Release; see also 17 CFR 204-2(a)(17)(ii) 
[Rule 204-2(a)(17)(ii) under the Advisers Act] (requiring an 
investment adviser to maintain copies of its records documenting the 
investment adviser's annual review of policies and procedures 
conducted pursuant to Rule 206(4)-7(b)); Rule 206(4)-7 under the 
Advisers Act (e.g., requiring investment advisers to adopt and 
implement written policies and procedures reasonably designed to 
prevent violation, by the adviser and its supervised person, of the 
Advisers Act. The rule also requires, among other things, that 
investment advisers review, no less frequently than annually, the 
adequacy of their policies and procedures and the effectiveness of 
their implementation). See also Rule 38a-1 under the Investment 
Company Act (e.g., requiring each fund to adopt and implement 
written policies and procedures reasonably designed to prevent 
violation of the federal securities laws by the fund, including 
policies and procedures that provide for the oversight of compliance 
by the fund's investment adviser, among others. The rule also 
requires, among other things, that the fund review, no less 
frequently than annually, the adequacy of the policies and 
procedures of the fund and of each investment adviser, principal 
underwriter, administrator, and transfer agent, and the 
effectiveness of their implementation).
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    Question 3: What are some of the considerations that an investment 
adviser should take into account if it retains a proxy advisory firm to 
assist it in discharging its proxy voting duties?
    Response: When an investment adviser is considering whether to 
retain or continue retaining a proxy advisory firm to provide research 
or voting recommendations as an input to the adviser's voting 
decisions, we believe that an investment adviser should consider, among 
other things, whether the proxy advisory firm has the capacity and 
competency to adequately analyze the matters for which the investment 
adviser is responsible for voting.\48\ In this regard, investment 
advisers could consider, among other things, the adequacy and quality 
of the proxy advisory firm's staffing, personnel, and/or technology.
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    \48\ In Question No. 4, we provide guidance regarding an 
investment adviser's duties with respect to evaluating the care and 
competency of the proxy advisory firm with respect to potential 
factual errors, potential incompleteness, or potential 
methodological weaknesses that may materially affect the proxy 
advisory firm's voting recommendations.
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    Such an investment adviser should also consider whether the proxy 
advisory firm has an effective process for seeking timely input from 
issuers and proxy advisory firm clients with respect to, for example, 
its proxy voting policies, methodologies, and peer group constructions, 
including for ``say-on-pay'' votes.\49\ For example, if peer group 
comparisons are a component of the substantive evaluation, the 
investment adviser should consider how the proxy advisory firm 
incorporates appropriate input in formulating its methodologies and 
construction of issuer peer groups. Where relevant, an investment 
adviser should also consider how the proxy advisory firm, in 
constructing peer groups, takes into account the unique characteristics 
regarding the issuer, to the extent available, such as the issuer's 
size; its governance structure; its industry and any particular 
practices unique to that industry; its history; and its financial 
performance.
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    \49\ 17 CFR 240.14a-21 [Rule 14a-21 under the Securities 
Exchange Act of 1934] requires, among other things, companies 
soliciting proxies for an annual or other meeting of shareholders at 
which directors will be elected to include a separate resolution 
subject to a shareholder advisory vote to approve the compensation 
of named executive officers.
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    Such an investment adviser should also consider whether a proxy 
advisory firm has adequately disclosed to the investment adviser its 
methodologies in formulating voting recommendations, such that the 
investment adviser can understand the factors underlying the proxy 
advisory firm's voting recommendations.\50\ In addition, the

[[Page 47425]]

investment adviser should consider the nature of any third-party 
information sources that the proxy advisory firm uses as a basis for 
its voting recommendations. The investment adviser also should consider 
what steps it should take to develop a reasonable understanding of when 
and how the proxy advisory firm would expect to engage with issuers and 
third parties.
---------------------------------------------------------------------------

    \50\ If an investment adviser utilizes the proxy advisory firm 
for research and not voting recommendations, it could still evaluate 
to what extent, if any, the proxy advisory firm's peer group 
construction methodology may influence how the firm would determine 
``say-on-pay'' votes.
    Some letters have called for greater transparency to issuers and 
clients about the formulation of proxy advisory recommendations and 
guidelines. See, e.g., Letter dated Oct. 10, 2018 from Timothy M. 
Doyle, Vice President of Policy and General Counsel, American 
Council for Capital Formation at p. 2; Letter dated July 26, 2019 
from Neil A. Hansen, Vice President, Investor Relations and 
Corporate Secretary, ExxonMobil at 2 (stating that proxy advisory 
firms' methodology in evaluating executive compensation can 
undermine the company's ability to offer incentives for management 
to pursue long-term shareholder value creation).
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    More generally, an investment adviser's decision regarding whether 
to retain a proxy advisory firm should also include a reasonable review 
of the proxy advisory firm's policies and procedures regarding how it 
identifies and addresses conflicts of interest.\51\ Some ways in which 
an investment adviser could conduct this review include, for example, 
assessing:
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    \51\ Some letters have noted concerns about proxy advisory firm 
conflicts of interest. See, e.g., Letter dated Nov. 9, 2018, 
Business Roundtable; Letter dated Nov. 29, 2018 from Suanne 
Estatico; Letter dated Jan. 11, 2019 from Darryl M. Burman, Office 
of the General Counsel, Group 1 Automotive, Inc.
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     Whether the proxy advisory firm has adequate policies and 
procedures to identify, disclose, and address actual and potential 
conflicts of interest, including (1) conflicts relating to the 
provision of proxy voting recommendations and proxy voting services 
generally, (2) conflicts relating to activities other than providing 
proxy voting recommendations and proxy voting services, and (3) 
conflicts presented by certain affiliations. In the first instance, 
actual or potential conflicts may include conflicts arising from the 
provision of recommendations and services to issuers as well as 
proponents of shareholder proposals regarding matters that may be the 
subject of a vote. In the third instance, actual or potential conflicts 
presented by certain affiliations may include whether a third party 
with significant influence over the proxy advisory firm (e.g., as a 
shareholder, lender, or significant source of business) has taken a 
position on a particular voting issue or voting issues more generally; 
\52\
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    \52\ See, e.g., U.S. Government Accountability Office, Report to 
Congressional Requesters, Corporate Shareholder Meetings--Issues 
Relating to Firms That Advise Institutional Investors on Proxy 
Voting (June 2007).
---------------------------------------------------------------------------

     Whether the proxy advisory firm's policies and procedures 
provide for adequate disclosure (i.e., context-specific, non-
boilerplate disclosure) of the proxy advisory firm's actual and 
potential conflicts with respect to the services the proxy advisory 
firm provides to the investment adviser. This disclosure could include 
details on, for example, whether the issuer has received consulting 
services from the proxy advisory firm, and if so, the amount of 
compensation paid to the firm, if any; whether a proponent of a 
shareholder proposal or an affiliate of the proponent is or has been a 
client of the proxy advisory firm; and
     Whether the proxy advisory firm's policies and procedures 
utilize technology in delivering conflicts disclosures that are readily 
accessible (for example, usage of online portals or other tools to make 
conflicts disclosure transparent and accessible).
    The steps an investment adviser should take when considering 
whether to retain or continue retaining a proxy advisory firm could 
depend on, among other things (1) the scope of the investment adviser's 
voting authority, and (2) the type of functions and services that the 
investment adviser has retained the proxy advisory firm to perform. 
Accordingly, the extent to which an investment adviser takes some or 
all of the steps described above could vary based on these factors. For 
example, some of these considerations may be less relevant for an 
investment adviser that engages a proxy advisory firm solely to execute 
votes according to detailed voting instructions from the investment 
adviser, which leaves minimal discretion to the proxy advisory firm. 
Nevertheless, an investment adviser that retains a proxy advisory firm 
for this limited purpose should consider what steps to take to 
understand the proxy advisory firm's own policies and procedures, 
including its methodologies if applicable, with respect to implementing 
the investment adviser's voting instructions.
    Question 4: When retaining a proxy advisory firm for research or 
voting recommendations as an input to its voting determinations, what 
steps should an investment adviser consider taking when it becomes 
aware of potential factual errors, potential incompleteness, or 
potential methodological weaknesses in the proxy advisory firm's 
analysis that may materially affect one or more of the investment 
adviser's voting determinations?
     As discussed in Section I above, for an investment adviser to form 
a reasonable belief that its voting determinations are in the best 
interest of the client, it should conduct a reasonable investigation 
into the matter. In the case of potential factual errors, potential 
incompleteness, or potential methodological weaknesses in the proxy 
advisory firm's analysis, the investment adviser's policies and 
procedures should be reasonably designed to ensure that its voting 
determinations are not based on materially inaccurate or incomplete 
information. For example, an investment adviser that has retained a 
proxy advisory firm for research or voting recommendations as an input 
to its voting determinations should consider including in its policies 
and procedures a periodic review of the investment adviser's ongoing 
use of the proxy advisory firm's research or voting recommendations. 
Such a review could include an assessment of the extent to which 
potential factual errors, potential incompleteness, or potential 
methodological weaknesses in the proxy advisory firm's analysis (that 
the investment adviser becomes aware of and deems credible and relevant 
to its voting determinations) materially affected the proxy advisory 
firm's research or recommendations that the investment adviser 
utilized.
    In reviewing its use of a proxy advisory firm, an investment 
adviser should also consider the effectiveness of the proxy advisory 
firm's policies and procedures for obtaining current and accurate 
information relevant to matters included in its research and on which 
it makes voting recommendations. As part of this assessment, investment 
advisers should consider, and in certain cases may wish to communicate 
with proxy advisory firms, regarding the following:
     The proxy advisory firm's engagement with issuers, 
including the firm's process for ensuring that it has complete and 
accurate information about the issuer and each particular matter, and 
the firm's process, if any, for investment advisers to access the 
issuer's views about the firm's voting recommendations in a timely and 
efficient manner;
     The proxy advisory firm's efforts to correct any 
identified material deficiencies in the proxy advisory firm's analysis;
     The proxy advisory firm's disclosure to the investment 
adviser regarding the sources of information and methodologies used in 
formulating

[[Page 47426]]

voting recommendations or executing voting instructions; \53\ and
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    \53\ See Question No. 3 above.
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     The proxy advisory firm's consideration of factors unique 
to a specific issuer or proposal when evaluating a matter subject to a 
shareholder vote.
    Question 5: How can an investment adviser evaluate the services of 
a proxy advisory firm that it retains, including evaluating any 
material changes in services or operations by the proxy advisory firm?
    Response: In order to act consistently with Rule 206(4)-6, an 
investment adviser that has retained a third party (such as a proxy 
advisory firm) to assist substantively with its proxy voting 
responsibilities and carrying out its fiduciary duty should adopt and 
implement policies and procedures that are reasonably designed to 
sufficiently evaluate the third party in order to ensure that the 
investment adviser casts votes in the best interest of its clients.\54\
---------------------------------------------------------------------------

    \54\ See supra at n. 47.
---------------------------------------------------------------------------

    For example, a proxy advisory firm's business and/or its policies 
and procedures regarding conflicts of interest could change after an 
investment adviser's initial assessment of the proxy advisory firm, and 
these changes could, for example, materially alter the effectiveness of 
the proxy advisory firm's policies and procedures and may require the 
investment adviser to make a subsequent assessment. In this regard, we 
believe that investment advisers that retain a proxy advisory firm to 
provide research or voting recommendations (or both) should consider 
policies and procedures to identify and evaluate a proxy advisory 
firm's conflicts of interest that can arise on an ongoing basis, in 
addition to updates regarding the proxy advisory firm's capacity and 
competency to provide voting recommendations or to execute votes in 
accordance with an investment adviser's voting instructions.\55\ 
Accordingly, the investment adviser should consider requiring the proxy 
advisory firm to update the investment adviser regarding business 
changes the investment adviser considers relevant (i.e., with respect 
to the proxy advisory firm's capacity and competency to provide 
independent proxy voting advice or carry out voting instructions). An 
investment adviser should also consider whether the proxy advisory firm 
appropriately updates its methodologies, guidelines, and voting 
recommendations on an ongoing basis, including in response to feedback 
from issuers and their shareholders.
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    \55\ Id.
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    Question 6: If an investment adviser has assumed voting authority 
on behalf of a client, is it required to exercise every opportunity to 
vote a proxy for that client?
    Response: No, if either of two situations applies. First, if an 
investment adviser and its client have agreed in advance to limit the 
conditions under which the investment adviser would exercise voting 
authority, as discussed above, the investment adviser need not cast a 
vote on behalf of the client where contemplated by their agreement.
    Second, as the Commission has stated previously, there may be times 
when an investment adviser that has voting authority may refrain from 
voting a proxy on behalf of a client if it has determined that 
refraining is in the best interest of that client.\56\ This may be the 
case where the adviser determines that the cost to the client of voting 
the proxy exceeds the expected benefit to the client.\57\ In making 
such a determination, the investment adviser may not ignore or be 
negligent in fulfilling the obligation it has assumed to vote client 
proxies and cannot fulfill its fiduciary responsibilities to its 
clients by merely refraining from voting the proxies.\58\ Accordingly, 
before refraining from voting under the circumstances described in this 
second situation, an investment adviser should consider whether it is 
fulfilling its duty of care to its client in light of the scope of 
services to which it and the client have agreed.
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    \56\ See Proxy Voting Release, 68 FR 6585, at 6587. We also have 
stated that ``[w]hether the advice is in a client's best interest 
must be evaluated in the context of the portfolio that the adviser 
manages for the client and the client's objectives.'' See Fiduciary 
Interpretation, 84 FR 33669, at 33673.
    \57\ See Proxy Voting Release, 68 FR 6585, at 6587. The 
Commission stated in that release that ``we do not suggest that an 
adviser that fails to vote every proxy would necessarily violate its 
fiduciary obligations. There may even be times when refraining from 
voting a proxy is in the client's best interest, such as when the 
adviser determines that the cost of voting the proxy exceeds the 
expected benefit to the client.'' Id. In this second situation, the 
costs to be considered would necessarily have to be additional costs 
to the client.
    \58\ See 68 FR 6585, at 6587-88.
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III. Other Matters

    Pursuant to the Congressional Review Act,\59\ the Office of 
Information and Regulatory Affairs has designated this guidance as not 
a ``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \59\ 5 U.S.C. 801 et seq.
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* * * * *

List of Subjects in 17 CFR Parts 271 and 276

    Securities.

Amendments to the Code of Federal Regulations

    For the reasons set out above, the Commission is amending title 17, 
chapter II of the Code of Federal Regulations as set forth below:

PART 271--INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT 
COMPANY ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
1. An authority citation is added for part 271 to read as follows:

    Authority: 15 U.S.C. 80a et seq.


0
2. The table is amended by adding an entry for Release No. IC-33605 at 
the end to read as follows:

----------------------------------------------------------------------------------------------------------------
                Subject                           Release No.               Date           FR vol. and  page
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
Commission Guidance Regarding the Proxy  IC-33605                          August 21,  [Insert FR Volume Number]
 Voting Responsibilities of Investment                                           2019   FR [Insert FR Page
 Advisers.                                                                              Number].
----------------------------------------------------------------------------------------------------------------


[[Page 47427]]

PART 276--INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT 
ADVISERS ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
3. An authority citation is added for part 276 to read as follows:

    Authority: 15 U.S.C. 80b et seq.


0
4. The table is amended by adding an entry for Release No. IA-5325 at 
the end to read as follows:

----------------------------------------------------------------------------------------------------------------
                Subject                           Release No.               Date           FR vol. and  page
----------------------------------------------------------------------------------------------------------------
 
                                                  * * * * * * *
Commission Guidance Regarding the Proxy  IA-5325                           August 21,  [Insert FR Volume Number]
 Voting Responsibilities of Investment                                           2019   FR [Insert FR Page
 Advisers.                                                                              Number].
----------------------------------------------------------------------------------------------------------------


    By the Commission.

    Dated: August 21, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-18342 Filed 9-9-19; 8:45 am]
 BILLING CODE 8011-01-P


