Well, lately we have seen that there are actually a number of different players that can influence a shareholder meeting. Last week the media focused some attention on Broadridge’s role (more on this in another blog post), and today, the SEC charged Institutional Shareholder Services Inc., the proxy advisory firm, for failing to safeguard the confidential proxy voting information of its clients participating in a number of significant proxy contests. Among other things, the order requires ISS to pay a $300,000 penalty and engage an independent compliance consultant to review its supervisory and compliance policies and procedures.
So what did ISS do? According to the order, from approximately 2007 through early 2012, an ISS employee provided information to a proxy solicitor concerning how more than 100 of ISS’ institutional shareholder advisory clients (i.e., institutional investment managers) were voting. In exchange for this information, the proxy solicitor gave the ISS employee meals, expensive tickets to concerts and sporting events, and an airline ticket. The employee gathered the information by logging into ISS’ voting website from home or work and used his personal email account to communicate voting information to the proxy solicitor.
The order states that the ISS employee’s breach was made possible in part by ISS’ failure to establish or enforce written policies and procedures reasonably designed, taking into consideration the nature of ISS’ business, to prevent the misuse of material, non-public information by ISS and its associated persons.
For those interested in more details, below is a summary of the scheme:
- ISS provides an application through a confidential website to its institutional shareholder advisory clients to assist them in voting their proxy ballots. The current version of this application is called “ProxyExchange.” ISS’ shareholder advisory clients use this application to indicate their vote instructions, which in turn are delivered by ISS to a third-party ballot provider and then to the issuer.
- The client-specific vote information, including the number of shares voted and whether the vote was for or against a proposal, was confidential prior to the shareholder meeting. Prior to a shareholder meeting, proxy solicitors did not know for certain how a shareholder voted unless the shareholder had disclosed the information. Some shareholder advisory firms do not share how they vote with anyone prior to the shareholder meeting because, given the size of their positions, their vote could move the market price of the issuer’s stock.
- The ISS employee had access to the confidential voting instructions and provided it to the proxy solicitor. In a typical example, the proxy solicitor would email the ISS employee a list of ISS’ clients with the name of an issuer and particular ballot propositions, and ask “how many & how voted.” The ISS employee would reply with that information.
- The ISS employee provided the information to the proxy solicitor as a quid pro quo for the tickets and meals he received. While, ISS had a code of ethics that prohibited unauthorized disclosures of confidential client information and barred employees from taking advantage of confidential client information for their personal benefit, the order found that ISS did not establish, maintain or enforce sufficient policies or practices reasonably designed to prevent certain ISS account managers from sharing ISS’ clients’ confidential information.