A recent Bloomberg article by Matt Levine discusses last month’s SEC settlement against Toews Asset Management, an investment advisor, corresponding to Toews’ history of directing a third-party service provider to “always vote in favor of proposals put forth by the issuers’ management and against any shareholder proposals.” The SEC deemed such a directive as not ensuring votes are cast in the best interests of Towes’ clients and thereby contrary to the requirements of the Investment Advisers Act.
Unlike retail investors, for whom there is little incentive to study proxy statements and vote their shares, the article notes that “gigantic” institutional investors, like BlackRock, do have an incentive to vote shares based on an assessment of the importance of a proxy proposal to the long-term value of their investment in the company’s shares. Additionally, the largest institutional investors have dedicated staff that research proxy proposals and provide an informed perspective on the issue in question. Retail investors do not generally have a significant stake in the company and are therefore unwilling to devote the time and effort to reading and analyzing the proxy information and do not vote their shares. This lack of individual shareholder voting increases the impact of the votes cast by institutional investors, and the corresponding influence of proxy advisory firms.
While the largest institutional investors, such as BlackRock, Vanguard, and State Street, may hold significant positions in a company’s shares, there are many smaller institutional investors below the largest firms that may hold, in total, a significant amount of a company’s shares and these firms often do not have the staff or resources to analyze the proxy proposals of the numerous companies in which they hold positions. Many of these institutional investors rely on third-party service providers, including ISS, to vote their shares pursuant to investors’ voting guidelines and directives.
The SEC decision in the Toews case, which was a split decision with the two Republican commissioners dissenting, points out that delegating responsibility for voting proxies to a third-party provider, without sufficient oversight and review, is not in keeping with ensuring that proxies are voted in the best interests of an investor’s clients as required under the Investment Advisers Act. A potential impact of the enforcement action against Towes may be to prompt institutional investors that outsource proxy voting to revisit their voting policies and oversight of third-party proxy service providers.