Corporate Governance

The Cox Commisson and the Legacy of Anti-Shareholder Bias: In re Intech Investment Management (The Law)

By J. Robert Brown

We are discussing In re Intech Investment Management, a recent administrative proceeding brought by the Commission against an advser with pro-shareholder voting practices.

The case involved the first apparent enforcement action under Rule 206(4)-6 (adopted back in 2003).  The rule was a response to problems of voting by pension plans and mutual funds (at the same time the Commission imposed disclosure obligations on voting behavior of mutual funds; see Investment Company Act Release No. 25922 (Jan. 31, 2003). 

Pension plans own a large portion of equity shares in the United States.  According to the GAO:  "In 2001, pension plans, as a whole, owned about 20 percent of the total corporate equity issued by U.S. companies, with private pension funds owning about 59 percent of that amount."  This reflects, therefore, a substantial percentage of voting shares and can easily sway votes by shareholders in one director or another.

In voting shares, advisors may have a conflict of interest.  Most noticeably, corporate run pension plans might expect advisors to take a pro-management stance when voting shares.  As a GAO Study noted:

• Business associations between a proxy voter and any entity that may influence their vote presents a conflict of interest. Some experts we interviewed explained that these associations may form whether proxies are internally or externally managed because company management has direct access to the proxy voter who is either an employee, in the case of internally voted proxies, or is a service provider, in the case of externally voted proxies.

The Commission intervened in the area when it adopted Rule 206(4)-6.  The rule required that advisors:

1. Adopt and implement written policies and procedures that are reasonably designed to ensure that you vote client securities in the best interest of clients, which procedures must include how you address material conflicts that may arise between your interests and those of your clients;
2. Disclose to clients how they may obtain information from you about how you voted with respect to their securities; and
3. Describe to clients your proxy voting policies and procedures and, upon request, furnish a copy of the policies and procedures to the requesting client

In short, the approach was limited to disclosure.  There needed to be policies designed to ensure that policies are voted "in the best interests of clients" and provide information to clients on how they voted.  It contained no substantive obligations.  Nonetheless, exposure of the voting process was likely to lead to substantive changes in behavior (see Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure).

In adopting the rule, the Commission recognized the concern over conflicts of interest.  In noting the conflict, the Commission specifically mentioned the problems associated with the management of private pension plans operated by companies.  In other words, the concern was over management's ability to influence the adviser.  As the adopting release noted:

• An adviser may have a number of conflicts that can affect how it votes proxies. For example, an adviser (or its affiliate) may manage a pension plan, administer employee benefit plans, or provide brokerage, underwriting, insurance, or banking services to a company whose management is soliciting proxies. Failure to vote in favor of management may harm the adviser's relationship with the company. The adviser may also have business or personal relationships with participants in proxy contests, corporate directors or candidates for directorships. For example, an executive of the adviser may have a spouse or other close relative who serves as a director or executive of a company.

Given these views and obvious concerns, one would expect the early enforcement efforts to center around attempts to address conflicts between advisers and management.  In fact, this was not the case, as In re Intech Investment Management demonstrated.

Full post as published by The Race to the Bottom on June 04, 2009 (boomark / email).