During a speech yesterday at the New York City Bar Association, Brian Daly, Director of the SEC’s Division of Investment Management, shared his thoughts on the proxy voting landscape (subject to the standard disclaimer). He starts by saying, “I often hear investment advisers say that they feel compelled to vote on matters they do not deem important to their investment programs and that they would welcome more clarity that they need not vote all proxies.”

Citing the 2003 adopting release for the SEC’s proxy voting rule and 2003 guidance on proxy voting considerations, he gives some examples of situations where he thinks not voting may make sense.

Look, for example, at quantitative and systematic managers, who often operate models that merely seek exposures to identified sources of alpha. Many investment advisers managing quantitative and systematic strategies will even say that voting on board members, management policies, or on precatory social and political matters is irrelevant to their strategy and imposes costs without conferring any measurable benefit to investors.

Many mutual funds and ETFs purport to track a reference index, and the core mandate for the investment adviser is to replicate the performance of the reference index in the fund. [I]t may be appropriate for these categories of investment advisers (and the Boards that exercise oversight over this function) to consider whether taking positions on fundamental corporate matters, or on precatory proposals, is consistent with their investment mandates.

Ultimately, he says, “it is important that advisers and clients have a fair amount of latitude to decide what works in their individual cases […] Investment advisers that determine proxy voting is not required by, or may even be inconsistent with, their investment program should not be afraid to take that position.” He does acknowledge the alarm going off in all our heads (what about quorums?!), noting “investment advisers to passive or systematic strategies may deem some kind of neutral (or neutral-ish) voting policy to be essential for quorum and similar reasons.”

In discussing how to vote, he concludes that determining the right amount of the process to delegate to proxy advisors is situationally dependent and should be determined between advisers and clients. But he cautions:

If an investment adviser routinely follows a proxy advisor’s stock recommendations without a tailored engagement or independent analysis, is this “reasonable inquiry?” Maybe, but it is certainly worth thinking about. And, to go back to the first question, if the voting process is so burdensome that it requires extensive external resources, why is the adviser voting at all?

– Meredith Ervine