A new proxy voting and compliance package is a winner.

    Every now and then, a reader points me in the direction of a truly interesting story; this is one of those times. A few months ago, Dan Roe, a principal at Budros, Ruhlin & Roe, sent me the following e-mail:
    Have you covered the issue of good solutions (using technology of course) for voting client proxies? We took that on as a service to clients years ago and often regret it, due to the amount of time it takes internally and the seeming lack of cost-efficient solutions to help us. ADP has the main program that some smaller firms seem to be feeding off of. I am wondering where that service is going and if there aren't others on the horizon.
    I didn't have a good answer immediately, but Dan's e-mail prodded me to find one, and I think I have. It's called PROXY Governance Inc. Before I introduce you to PROXY Governance Inc., let's examine the issues surrounding proxy voting.

Proxy Voting Requirements For Advisors
    In 2003, the SEC adapted a new rule under the Investment Advisor Act of 1940. This new rule, Section 275.206(4)-6, imposes a number of responsibilities on the advisors who vote proxies for their clients. Advisors are required to vote in the best interest of clients, and to implement a policy for dealing with material conflicts of interest. This policy must be in writing. In addition, advisors must disclose how clients can obtain their proxy voting records, and advisors must provide proxy-voting policies to clients upon request.
    Concurrently, the SEC adapted a new record-keeping rule for proxies, Section 204-2(c). It requires advisors to retain a copy of policies and procedures, a copy of each proxy statement, a record of each vote cast, copies of any information the advisors used to arrive at a vote and proxy-related correspondence with clients.
    According to Barry P. Schwartz, a partner at Adviser Compliance Associates LLC and a former SEC compliance examiner, "Sections 275.206(4)-6 and 204-2(c) further clarify and codify something that the Investment Advisor Act of 1940 already required: advisors' fiduciary duty to act in the best interest of their clients." While this may be true, by spelling out in more detail what is required of advisors voting proxies on their client's behalf, the SEC has, in the perception of some advisors, raised the compliance bar; and in doing so it may have actually done a disservice to the clients of advisors.
    How could this be? Consider the alternative. If an advisor declines proxy voting responsibility, the only alternative is to let the clients vote their own proxies; and some firms are doing just that. According to Brett A. Coffman, M.B.A., CFP and EA of Matrix Wealth Advisors Inc. in Charlotte, N.C.: "We very recently (in the last six months) changed our proxy voting stance as a result of several strong nudges from a compliance consultant. We are a six-employee boutique, comprehensive fee-only financial planning firm. We invest almost exclusively with mutual funds, with Schwab as our custodian, and manage just north of $100 million. Although it is rare, we do hold stock for a few clients.
    "We consider ourselves fiduciaries and, as part of that, had a feeling that there was this sense of duty to vote all proxies. However, the time taken was enormous and in the end, the feeling was that it costs us valuable time that needs to be spent on research of managers, investment styles, asset classes and alternative investments. In order to give those items proper service, we did not feel that the due diligence needed to vote proxies properly was realistic."
    "We don't vote proxies," says Norman M. Boone, M.B.A., CFP, of Mosaic Financial Partners Inc. "We have language in our contract and in our IPS that absolves us of that responsibility. Voting on behalf of our clients is a fiduciary responsibility. It requires that we do it with thoughtfulness and thoroughness, each and every time. It would take almost a full-time person on our staff to understand each of the issues well enough to make those judgments, which doesn't make sense, since we couldn't get paid anything extra to do that extra work."
    Boone acknowledges, however, that his firm's position is less than ideal.  "The disadvantage (of an advisor not voting proxies) is that clients almost certainly don't have the knowledge or understanding to do it well either, so in all probability, no vote is cast. Usually not a problem, but on occasion, there is an important opportunity lost."
    What might those lost opportunities be? In theory, there could be many, but they vary by firm. For those advisors who invest primarily in mutual funds, issues like changes in portfolio managers or management companies and proposed hikes in management fees would qualify. Advisors who invest in smaller boutique mutual funds may find that the ability to vote proxies increases an advisor's access to management.
    For those who invest in closed-end funds, the end game is often open-ending or liquidation; in such a case, the inability to vote proxies could be seriously detrimental to the client's financial health. When client portfolios include individual stocks, executive compensation can be an issue. One can always vote with one's feet, and sell a holding rather than try to influence policy, but in taxable accounts a large tax cost could be tied to such a decision.
    While conscientious advisors like Boone recognize the limitations of their policy position, advisors on the other side of the fence are experiencing discomfort as well.  "We vote proxies, somewhat reluctantly," says Michael J. Garry, CFP, JD/MBA and vice-president of Global Investment Management Inc. in Princeton, N.J. "We have been advised not to because of the current regulatory requirements, but we have done it for a long time and our clients expect it of us."
    Says Dan Moisand, principal at Spraker, Fitzgerald, Tamayo & Moisand LLC in Melbourne, Fla., "Our clients invest primarily in managed products like mutual funds, but some clients own individual 'pet' stocks. Voting proxies on those pet positions can be a pain in the rear end, but it is part of our value proposition so we feel obliged to do it."
    Harold Evensky of Evensky & Katz in Coral Gables, Fla., argues persuasively for advisors taking on the proxy voting responsibility: "We do, with our client's permission, vote proxies. I believe that it is an appropriate responsibility for us to assume as our client's advisor. Obviously, we have determined the selection of investments, so it seems appropriate that we should assume the responsibility of managing those investments (including voting proxies). The disadvantage is that we assume the responsibility and obligation to make a professional decision. Naturally, we can avoid this responsibility by passing off the obligation to our clients; however, that begs the question, 'What are they paying us for?' If we really want to be paid and avoid responsibility, perhaps we should lobby for our own 'Merrill Rule.' The new version would be, 'Pay me but don't blame me.'"
    The consensus appears to be that there is an incremental benefit that accrues to the client if their advisor votes proxies. What advisors do not agree upon is whether the potential benefit to the client is worth the cost (in time and in acquiring the requisite knowledge) and the liability risk.  I suspect that a great many advisors would be willing to vote proxies for their clients if they could do so easily and inexpensively, while ensuring compliance. Coincidentally, that is exactly what PROXY Governance Inc. does.

The PROXY Governance System
    PROXY Governance Inc., a wholly owned subsidiary of FOLIOfn Inc., recently launched an automated proxy voting platform. This Web-based solution integrates all voting functions, including proprietary research and vote recommendation review, establishment of policy guidelines and execution of voting decisions to proxy distributors, ballot processing, record keeping and reporting. In addition, it allows advisors to fully automate the proxy voting process if they wish to do so.
    When you enter the site, a page called Research & Vote is displayed. Here, all pending meeting notices are listed. The custodian or the custodian's agent, which is usually ADP, automatically feeds this information into the platform. The list includes security symbol, security name, meeting type (annual, special, etc.), meeting date and voting deadline. When research reports and/or proxies are available for voting, little links are displayed. Clicking on the appropriate link takes you to the research or to the voting page.
    The meeting list can be sorted and filtered by various criteria. For example, you can sort by company, voting deadline or meeting date. Listings can be filtered, so only those offering the completed research report or only those with proxies available to vote are displayed. You can also filter by icon status, date range or meeting type.
    In addition, status icons follow each listing. There are status icons labeled Research, Viewed, Holdings, Ballots, Determined, Saved, Cast, Submitted and Executed. Each icon turns from red to green when an action is taken, so an advisor can tell at a glance the status of every proxy to be voted. For example, if you open and view the research related to a meeting, the research icon goes from red to green. An advisor who wanted to vote each proxy manually would follow the progression of the icons.
    First, he would read the independent research. This research approaches the process much as a portfolio manager would, looking at company-specific factors, peer performance and company performance. If a compensation issue is on the ballot, the research would not look at the pay structure in a vacuum: It would look at how the company performed vs. its competitors and how the executives were being paid vs. competitors, in order to make sure both metrics were in alignment. The goal is to make sure that advisors have the information necessary to act in the best interests of their clients, and to provide a rationale for each recommendation.
    Next, the advisor would view the proxy statement. After that, holdings and ballots would be viewed. For many firms, particularly smaller ones, it is difficult to reconcile the number of shares owned by clients with the actual number of ballots presented. The Proxy Governance platform addresses this problem by allowing the advisor to upload a holding file from the custodian or directly from the advisor. Proxy Governance monitors an advisor's holdings as of the record date. This information can be compared with the number of ballots under the ballots tab to make sure proxies for all shares have been received.
    The site allows for separate voting policies for each voting group within a firm; hence the need for the "determined" icon. Perhaps you vote the majority of client proxies according to one policy, but you have a few socially conscious clients who require a different policy. Proxy Governance allows you to do this. When the appropriate voting action for all groups has been determined, the icon turns green. These votes could then be saved for later action or the ballots could be cast. Once the votes are cast, the platform submits them. Upon confirmation of execution, the executed icon turns green.
    The voting process can be automated if the advisor wishes. Currently, the platform can be programmed to cast all votes, or all votes for a group of client accounts, according to one of a number of standard policies. These include voting according to PROXY Governance recommendations, voting management's recommendations, a "standard" Taft- Hartley policy or a "standard" socially responsible policy. By the time you read this, advisors will be able to create totally customizable voting policies either buy modifying the standard policies or creating their own. This involves simply checking or clearing boxes on a form residing within the platform.
    While the decision-making and voting process is important, so is record keeping. The PROXY Governance platform is equally strong in this area. With a few mouse clicks, advisors can generate a wide variety of customized voting reports. For example, there are three types of "issue" reports: a short summary report, a more detailed report and a report that only includes votes against management. Users can choose to insert within the reports the rationale for each vote, votes against management or votes against policy, if desired. Reports can be compiled by date range, voting group or other criteria.

An Elegant Solution
    Broadly speaking, advisors should have two major concerns with regard to proxy compliance: record keeping and mitigation of conflicts. After trying out the PROXY Governance platform using a test account populated with sample data, I feel comfortable recommending it as a technological solution for advisors' proxy-voting woes.
    It appears to me that PROXY Governance addresses the record-keeping requirement very well, but I wanted a second opinion on the conflict mitigation. According to Barry Schwartz of Adviser Compliance Associates, "Smaller advisors, those with under $100 million in assets under management, do not run into many conflicts of interest voting proxies, but it can happen. For example, if a registered rep's client owns a mutual fund, and there is a vote on raising the 12(b)-1 fee, voting a proxy in that instance could be construed as a conflict. When an advisor does encounter a conflict, one way to mitigate the conflict is to rely upon the opinion of a reliable third party."
    Schwartz has not researched the PROXY Governance platform, so has not yet formed an opinion on the quality of their research. But based upon what I have seen, I feel very comfortable recommending it.
    The only remaining issue is cost. Those advisors who do believe it is their duty to vote proxies on behalf of clients are paying a high price for the privilege. The time required to read the proxy materials, come to an informed decision, reconcile ballots against holdings, etc., is substantial. At most firms, a principal is responsible for proxy voting, so the hours expended on proxy related tasks are expensive ones. The PROXY Governance solution starts at $2,500 and could go as high as $10,000, depending on the size of the firm and the holdings. For firms that invest primarily in mutual funds and/or individual domestic securities, the price should fall near the low end of the range.
    If you believe your firm has a duty to vote your clients proxies, and you want to do so in a compliant and cost-effective manner, PROXY Governance is clearly the way to go.

Joel P. Bruckenstein, publisher of Virtual Office News  and an expert in applied technology for advisors, can be contacted at [email protected].