United States: SEC Withdraws Two No-Action Letters Regarding Use Of Proxy Advisory Firms – Chairman Clayton Issues Statement Regarding Staff Views

On September 13, 2018, the Division of Investment Management (the "Division") issued an Information Update (the "Update") in which it announced the withdrawal of two no-action letters concerning the circumstances under which a third-party proxy advisory firm may be considered independent under Rule 206(4)-6 under the Advisers Act. That Rule was adopted by the SEC in 2003 to ensure that investment advisers vote proxies in the best interest of their clients and provide clients with information about how their proxies are voted.1

In the Rule 206(4)-6 adopting release, the SEC stated that an investment adviser could demonstrate that its vote of its clients' proxies was not a product of a conflict of interest if the adviser voted the proxies in accordance with a pre-determined policy based on the recommendations of an "independent" proxy advisory firm. The two withdrawn no-action letters concerned whether a proxy advisory firm would be considered independent if the proxy advisory firm receives compensation from an issuer for providing advice on corporate governance issues (or otherwise had a potential conflict of interest that could make the proxy advisory firm incapable of making impartial recommendations).

In 2014, the Division affirmed the substance of the two letters in a Staff Legal Bulletin for the purpose of "providing guidance about investment advisers' responsibilities in voting client proxies and retaining proxy advisory firms." Last week's Update referred to, but did not withdraw, the Staff Legal Bulletin. Therefore, notwithstanding the Division's withdrawal of the two no-action letters, the Update should not have any practical effect at this time on investment advisers that rely on proxy advisory firms.


In a July 30, 2018 statement, SEC Chairman Jay Clayton announced that the SEC staff will be hosting a "Roundtable on the Proxy Process" in the fall of 2018. The Update noted that the roundtable is expected to be held in November 2018 and that, in developing the agenda for the roundtable, the SEC staff has been considering "whether prior staff guidance about investment advisers' responsibilities in voting client proxies and retaining proxy advisory firms should be modified, rescinded or supplemented." This simply repeats the last item from the portion of Chairman Clayton's July 30, 2018, statement in which he also listed the following items among the potential topics to be discussed at the roundtable:

Proxy Advisory Firms

Proxy advisory firms provide a number of services related to proxy voting, which include aggregating and standardizing information, providing platforms for managing votes, and providing voting recommendations. Areas that may warrant particular attention include:

  • Whether various factors, including legal requirements, have resulted in investment advisers to funds and other clients relying on proxy advisory firms for information aggregation and voting recommendations to a greater extent than they should . . .
  • Whether there is sufficient transparency about a proxy advisory firm's voting policies and procedures so that companies, investors, and other market participants can understand how the advisory firm reached its voting recommendations on a particular matter . . .
  • Whether there are conflicts of interest, including with respect to related consulting services provided by proxy advisory firms, and, if so, whether those conflicts are adequately disclosed and mitigated . . .
  • [W]hether prior staff guidance about investment advisers' responsibilities in voting client proxies and retaining proxy advisory firms should be modified, rescinded, or supplemented.


The Update did not explain the Division's rationale for withdrawing the two no-action letters, Egan-Jones Proxy Services (May 27, 2004) ("Egan-Jones") and Institutional Shareholder Services, Inc. (Sept. 15, 2004) ("ISS"). The Update merely noted the upcoming roundtable and stated, "[t]aking into account developments since 2004, the staff has determined to withdraw these letters, effective today . . . in order to facilitate the discussion at the Roundtable."

  • In Egan-Jones, the SEC staff confirmed that a third-party proxy advisory firm could be considered to be an independent third party if the proxy advisory firm receives compensation from an issuer for providing advice on corporate governance issues. The SEC staff listed additional requirements to be satisfied by the investment adviser seeking to rely on such a proxy advisory firm's recommendations, including obtaining information on an ongoing basis from any third-party proxy advisory firm to permit the investment adviser to determine that the proxy advisory firm is, in fact, independent, and that it can make recommendations for voting proxies in an impartial manner and in the best interests of the adviser's clients.
  • In ISS, the SEC staff agreed that a case-by-case evaluation of a proxy advisory firm's potential conflicts of interest was not the sole manner by which an investment adviser may fulfill its Rule 206(4)-6 obligations and fiduciary duty of care to clients regarding voting client proxies according to the proxy advisory firm's recommendations. More specifically, the SEC staff confirmed that an investment adviser may instead determine that a proxy advisory firm is capable of making impartial recommendations in the best interests of the adviser's clients based on the proxy advisory firm's conflict procedures, provided that the investment adviser has (among other things) conducted a thorough review of the proxy advisory firm's conflict procedures and the effectiveness of their implementation, as well as other means reasonably designed to ensure the integrity of the proxy voting process.

The Update also stated that the Division looks forward to receiving information from stakeholders at the roundtable, "including on the staff guidance in Staff Legal Bulletin No. 20 (June 30, 2014)" (available here).2 Critically, Staff Legal Bulletin No. 20, citing Egan-Jones and ISS, stated that:

  • In retaining proxy advisory firms, investment advisers could consider, among other things, "the robustness of its policies and procedures regarding its ability to . . . 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."
  • 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, such as by requiring the proxy advisory firm to update the investment adviser of business changes the investment adviser considers relevant . . . or conflict policies and procedures."

In short, Staff Legal Bulletin No. 20 largely memorialized the no-action assurances provided in Egan-Jones and ISS, and it was not withdrawn by the Update. Therefore, the Division's withdrawal of Egan-Jones and ISS should not have any practical effect at this time on investment advisers that, relying on Staff Legal Bulletin No. 20, retain proxy advisory firms. As a substantive matter, the intended goal or benefit of withdrawing the two no-action letters remains unclear to us.

Nonetheless, while the Update does not immediately affect investment advisers that rely on independent proxy advisory firms, it is clear that the SEC intends to reexamine the regulatory regime for proxy advisory firms, including earlier SEC staff guidance regarding investment advisers' responsibilities in retaining proxy advisory firms. The November Roundtable is the first step of that reexamination. We will keep you apprised of material developments.

Chairman Clayton's Statement on SEC Staff Views

On the same day that the Division issued the Update, Chairman Clayton issued a public statement in which he reiterated the SEC's "longstanding position . . . that all staff statements are nonbinding and create no enforceable legal rights or obligations of the Commission or other parties." He also stated that:

Several weeks ago, I instructed the directors of the Division of Enforcement and the Office of Compliance Inspections and Examinations to further emphasize this distinction to their staff. More generally, our divisions and offices, including but not limited to the Division of Corporation Finance, the Division of Investment Management and the Division of Trading and Markets, have been and will continue to review whether prior staff statements and staff documents should be modified, rescinded or supplemented in light of market or other developments.

Chairman Clayton's instructions may help to explain the Division's withdrawal of Egan-Jones and ISS in the Update. However, it is not clear whether Chairman Clayton had an additional motive that led him to issue his public statement weeks after his instruction to the SEC's divisions and offices. Interestingly, two days earlier, on September 11, 2018, in an Interagency Statement, the Federal Reserve Board, the Bureau of Consumer Financial Protection, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency confirmed that "supervisory guidance does not have the force and effect of law" but, instead, "supervisory guidance outlines the agencies' supervisory expectations or priorities and articulates the agencies' general views regarding appropriate practices for a given subject area."


1 On the same day that Rule 206(4)-6 was adopted, the SEC also (i) adopted Rule 30b1-4 under the 1940 Act, requiring registered funds to file with the SEC their proxy voting records on new Form N-PX and (ii) amended Forms N-1A and N-2, requiring open-end and closed-end funds to disclose their proxy voting policies and procedures.

2 The official title of Staff Legal Bulletin No. 20 is "Proxy Voting: Proxy Voting Responsibilities of Investment Advisers and Availability of Exemptions from the Proxy Rules for Proxy Advisory Firms."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions