INVESTMENT ADVISERS—Use of standing order for proxy votes absent relevant policies and procedures violated SEC rules - 22 September 2022

The two dissenting Commissioners emphasized how the majority’s order could be misunderstood to deny clients’ agreements to use standing orders or it could deprive advisers, especially small ones, of the ability to mull cost in casting proxy votes.

The SEC announced that Toews Corporation has agreed to pay $150,000 to settle charges that it repeatedly failed to determine whether proxies voted on behalf its clients were in those clients’ best interests. A key part of the SEC’s administrative action was the use by Toews Corporation of a standing agreement with a third-party service provider to always vote in favor of management proposals and against shareholder proposals. Toews Corporation agreed to the settlement without admitting or denying the SEC’s findings. A pair of dissenting commissioners expressed concern about the breadth of the order, stating that the order may conflict with existing guidance and could disproportionately impact smaller advisers (In the Matter of Toews Corporation, Release No. IA-6139, September 20, 2022).

Standing order. According to information disclosed in Toews Corporation’s Form ADV, it has been registered with the SEC as an adviser since 1994, has $1.26 billion in assets under management (AUM), and advises eight registered investment companies. The SEC’s order, approved by a majority of the Commission, alleged that Toews Corporation failed to determine whether proxy votes it cast on behalf of its clients during the five-year period January 2017 to January 2022 were in those clients’ best interests.

The SEC’s order explained that under Investment Advisers Act Sections 206(2) and 206(4), and Advisers Act Rule 206(4)-6, it is a fraudulent practice for an adviser to exercise voting authority over client securities unless, among other things, the adviser has adopted and implemented written policies and procedures that are reasonably designed to ensure that the adviser votes client securities in the best interest of its clients. Toews Corporation, the SEC alleged, lacked policies and procedures to make the required determinations and instead operated under a standing instruction to a third-party proxy service provider to vote client’s shares in favor of management proposals and against shareholder proposals.

According to the SEC’s order, Toews Corporation’s Form ADV brochures touted its role in voting shares in their clients’ best interests and the adviser’s policies and procedure noted the goal of maximizing the value of fund investments and ensuring timely proxy votes. Nevertheless, the SEC said Toews Corporation failed to make determinations about whether votes were in their clients’ best interests and failed to have policies and procedures reasonably designed to ensure that proxies were voted in its clients’ best interests.

Moreover, Toews Corporation adhered to the standing order with the third-party service provider without deviation for 200 shareholder meetings during the five-year period targeted by the SEC. The SEC’s order said Toews Corporation continued to use the standing order despite retaining the ability to review proxy materials and to issue different instructions to the service provider.

Dissent. Commissioners Hester M. Peirce and Mark T. Uyeda jointly dissented from the Commission’s order imposing penalties on Toews Corporation. According to Peirce and Uyeda, not only did the order against Toews Corporation not make any findings about whether the firm’s clients would have benefitted from the proxies being voted differently, the order also made no findings about whether the proxy votes had been tainted by conflicts of interest.

The dissent added that the order’s recitation that Toews Corporation had revised its policies and procedures in light of the SEC’s enforcement action could imply (in the dissenters’ view erroneously) that the firm’s pre-revision practices were per se unlawful. Moreover, the dissenters see the potential for the Commission’s order to confuse advisers because it may suggest an intrusion into the ability of clients to agree to let firms exercise voting authority and it may limit the ability of advisers to mull costs in meeting their fiduciary duties. The dissenters view the order as especially likely to impact smaller advisers, such as Toews Corporation, which the dissenters noted had just over $1 billion in AUM and only 17 advisory personnel. According to the dissenters, small advisers make up a majority of the investment advisory marketplace.

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