## Facts

- INTECH Investment Management LLC (INTECH) was a registered investment adviser that managed institutional portfolios for clients including unions, union-related entities, and corporations.
- Many clients delegated to INTECH the authority to vote proxies for securities held in their accounts.
- INTECH used Institutional Shareholder Services (ISS), a third-party proxy advisory firm, to help determine how to vote client proxies.
- INTECH participated in the AFL-CIO Key Votes Survey, which ranked investment advisers based on how their proxy votes aligned with AFL-CIO positions on selected “key votes.”
- In 2002, INTECH generally voted proxies using ISS’s standard guidelines, which often resulted in votes consistent with management recommendations; INTECH scored in the middle tier of the AFL-CIO survey, and some union-related clients complained.
- Seeking to win and retain union-related business, INTECH switched in 2003 to ISS Proxy Voter Services (ISS-PVS) guidelines for all clients; those guidelines tracked AFL-CIO voting recommendations on key votes, and INTECH received a 100% score in the 2003 survey.
- In March 2003, the SEC adopted a proxy-voting rule requiring advisers with proxy-voting authority to vote in clients’ best interests and to adopt policies and procedures reasonably designed to ensure that outcome, including procedures to address material conflicts of interest.
- The SEC’s framework allowed advisers to use a proxy advisory firm’s predetermined voting policy when the selection and use of that policy was designed to serve client interests rather than the adviser’s interests.
- In July 2003, INTECH sent clients its proxy-voting policies stating it planned to use the ISS-PVS guidelines, but it did not disclose that the ISS-PVS guidelines followed AFL-CIO recommendations and did not set out how INTECH would identify and handle material conflicts of interest.
- After SEC staff questioned INTECH’s proxy voting practices, INTECH in December 2005 gave clients a choice between the ISS-PVS guidelines and the standard ISS guidelines and explained that ISS-PVS followed AFL-CIO recommendations; about 27% of clients chose the standard guidelines.
- The SEC instituted public administrative and cease-and-desist proceedings against INTECH and David E. Hurley (Hurley), INTECH’s chief operating officer, based on failures to implement proxy-voting policies and disclosures addressing conflicts between INTECH’s interests and its clients’ interests.
- To settle the matter, INTECH and Hurley submitted Offers of Settlement, consented to entry of the SEC’s order without admitting or denying the findings, agreed to cease and desist from future violations, and agreed to pay civil money penalties ($300,000 by INTECH and $50,000 by Hurley).

## Issues

1. Whether INTECH violated Advisers Act § 206(4) and Rule 206(4)-6 by exercising proxy-voting authority without written policies and procedures reasonably designed to ensure proxies were voted in clients’ best interests, where the policies did not address how material conflicts of interest would be handled and were not sufficiently described to clients.
2. Whether Hurley caused INTECH’s violations through his conduct and role at the firm.

## Decision

- The SEC instituted and simultaneously settled administrative cease-and-desist proceedings against INTECH and Hurley based on accepted Offers of Settlement.
- The SEC found that INTECH violated Advisers Act § 206(4) and Rule 206(4)-6 by failing to maintain proxy-voting policies and procedures reasonably designed to ensure voting in clients’ best interests, including procedures for material conflicts of interest, and by failing sufficiently to describe its proxy-voting policies and procedures to clients.
- The SEC found that Hurley caused INTECH’s violations.
- The SEC ordered INTECH and Hurley to cease and desist from committing or causing the relevant violations.
- The SEC imposed civil money penalties of $300,000 on INTECH and $50,000 on Hurley.

## Legal Principles

- An investment adviser’s proxy-voting authority is part of its fiduciary obligations; proxy votes must be cast to serve clients’ best interests, not the adviser’s business interests.
- Advisers Act Rule 206(4)-6 requires written proxy-voting policies and procedures reasonably designed to ensure proxy votes are cast in clients’ best interests, including a method for identifying and addressing material conflicts of interest.
- The rule also requires advisers to describe proxy-voting policies and procedures to clients; incomplete descriptions can violate the rule when they omit key elements such as how conflicts will be handled.
- A material potential conflict exists when an adviser’s voting approach may affect the adviser’s ability to attract or keep business from a subset of clients; policies and disclosures must address that risk.
- An adviser may use a proxy advisory firm and a predetermined voting policy, but the selection and use of that policy must be designed to benefit clients rather than to serve the adviser’s marketing or client-retention goals.

## Conclusion

In In re INTECH Investment Management LLC, the SEC concluded in a settled administrative order that INTECH’s proxy-voting program from at least 2003 through 2006 violated Advisers Act § 206(4) and Rule 206(4)-6 because INTECH voted client proxies under policies that did not explain how it would address material conflicts of interest arising from its business incentives—particularly its decision to use AFL-CIO-aligned ISS-PVS guidelines while seeking union-related business—and because it did not sufficiently describe its proxy-voting policies to clients; the SEC also found that INTECH’s chief operating officer, David E. Hurley, caused the violations, ordered both respondents to cease and desist from future violations, and imposed $350,000 in total civil money penalties.


In re INTECH Investment Management LLC, Investment Advisers Act Release No. 2872 (2009)