Proxy Voting

Under its advisory agreements, Ravenscar Investment Counsel holds authority to vote proxies for client-held securities. Under Rule 206(4)-6, the firm must do all of the following EXCEPT:

1. A.Adopt written proxy voting policies reasonably designed to vote in clients' best interest and address material conflictsThis is the central affirmative requirement of the rule.
2. B.Describe its proxy voting policies to clients and furnish a copy on requestThe rule expressly requires this description and availability on request.
3. C.Disclose how a client may obtain information about how the adviser voted that client's securitiesThis disclosure is required by the rule.
4. D.Cast a vote on every proxy for every client-held security, without exceptionCorrect. No such duty exists; abstention can be in the client's interest where voting costs exceed the benefit.

Why: Rule 206(4)-6 requires an adviser with proxy voting authority to adopt written policies and procedures reasonably designed to ensure it votes client securities in the clients' best interest and addresses material conflicts, to describe those policies to clients and furnish a copy on request, and to disclose how a client may obtain information about how the adviser voted that client's securities. The rule does not require the adviser to vote every proxy; abstaining can be appropriate where voting would cost the client more than the vote is worth.

Cranleigh Asset Management votes proxies for securities held in its discretionary client accounts. A client writes asking how her shares were voted during the last proxy season and who decides when the firm has a business relationship with the company being voted on. Under the Advisers Act, the firm brochure must:

1. A.Explain that clients must vote their own proxies, because an adviser may never exercise voting authority over client securities.Incorrect. Advisers commonly hold proxy voting authority; the rules govern how it is exercised and disclosed.
2. B.State only that the firm votes proxies, since the voting record is proprietary and need not be made available to clients.Incorrect. Clients must be told how to obtain information on how their own securities were voted.
3. C.Summarize its proxy voting policies, explain how a client may obtain information on how her securities were voted and how to direct the firm vote on a particular solicitation, and address how voting conflicts are handled.Correct. Policies, access to the client own voting information, client direction and conflict handling are all required brochure content.
4. D.Disclose the complete voting record of every client account to any client who asks.Incorrect. Access runs to the requesting client own securities, not to other clients holdings.

Why: When an adviser has proxy voting authority, the brochure has to tell clients three things: a summary of the firm proxy voting policies and procedures, how a client can obtain information about how the firm voted that client securities, and how a client can direct the firm vote on a particular solicitation. Because voting the shares of a company that is also a business partner is an obvious conflict, the policies must also address how such conflicts are identified and resolved. If the adviser does NOT vote proxies, the brochure must say so and explain how clients receive their proxy materials.

Larkspur Vane Advisory holds discretionary authority over 240 client accounts and, under its advisory contracts, also has authority to vote proxies on the securities in those accounts. Its founder regards proxy voting as an administrative nuisance and has instructed staff to discard proxy materials unread, on the view that a single adviser's votes cannot affect the outcome and that clients hired the firm to pick securities rather than to vote them. What is wrong with this approach?

1. A.Nothing, provided the advisory contract does not expressly promise that proxies will be voted in every case.The contract grants the authority, and accepting it brings the fiduciary obligation to exercise it.
2. B.The firm must adopt written proxy voting policies, address conflicts, and tell clients how to obtain its policies and its voting record.Correct. Accepting voting authority carries a fiduciary duty implemented through written policies and disclosure to clients.
3. C.The firm must return proxy voting authority to every client, since advisers may not vote client securities.Advisers may hold and exercise proxy voting authority. The failure here is in abandoning it, not in having it.
4. D.The firm must vote every proxy in favour of the recommendations of the issuer's board, which is the presumptive best interest.There is no such presumption. The adviser must vote in the client's best interest under its own reasoned policies.

Why: An adviser that has accepted authority to vote client proxies has assumed a fiduciary responsibility and must exercise it in the clients' best interests. Concretely, the firm must adopt and implement written policies and procedures reasonably designed to ensure that proxies are voted in clients' best interests, must address how it will handle conflicts of interest when they arise, must DISCLOSE to clients how they can obtain information about how their proxies were voted, and must describe its proxy voting policies and provide a copy on request. Discarding materials unread abandons an authority the firm accepted and was engaged to exercise. The founder's view that individual votes rarely change outcomes is not a defence, because the obligation arises from having taken on the authority, not from the expected influence of any particular vote.

An SEC-registered adviser with voting authority over client securities must, under Rule 206(4)-6:

1. A.Vote every proxy exactly as management recommendsWrong. Reflexive management support may violate the best-interest duty.
2. B.Obtain client consent before each individual voteWrong. Vote-by-vote consent would defeat delegated authority.
3. C.Adopt written voting policies addressing conflicts and tell clients how to obtain its voting recordCorrect. Policies, description, and record access are the rule's pillars.
4. D.Abstain from all proxy votes to avoid conflictsWrong-but-tempting. Abstention can itself breach the duty when voting adds value.

Why: Advisers with proxy authority must adopt and describe voting policies, manage conflicts, and inform clients how to learn how their securities were voted. Citation: Advisers Act Rule 206(4)-6. Takeaway: written policies, conflict handling, and voting-record access.