Corporate Governance

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

By J. Robert Brown

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

According to the release, Intech had responsibility for voting shares of an assortment of clients, some connected to public companies (pension plans and the like) and others connected to unions. In deciding how to vote the shares, Intech relied on the recommendations of the Institutional Investors Service (IIS), a practice specifically approved by the SEC in its adopting release.  See Investment Company Act Release No. 2106 (Jan. 31, 2003)("Similarly, an adviser could demonstrate that the vote was not a product of a conflict of interest if it voted client securities, in accordance with a pre-determined policy, based upon the recommendations of an independent third party.")

IIS had in place a variety of approaches, at least one of which was pro-management.  Another, developed with the apparent assistance of the AFL-CIO, was more pro-shareholder in the approach to voting.

Intech originally opted for the pro-management approach with respect to all votes.  According to the release, however, Intech switched from a pro-management to pro-shareholder approach to 'please its union-affiliated clients' and potentially attract additional union business.  Apparently at the time of the change, Intech did not inform clients that the new policy tracked the voting recommendations of the AFL-CIO.

Intech did, however, send to clients on a quarterly basis a report showing how it voted a client's shares, apparently causing some expressions of concern.  Ultimately, clients were given an option to choose between a pro-management (called "management friendly" in the SEC release) or pro-shareholder style of voting. Approximately 27% of the clients chose pro-management. Eventually, Intech disclosed to clients that the default system for voting shares was developed by ISS in conjunction with the AFL-CIO and that this could result in the Adviser retaining and obtaining union clients.

The Commission sanctioned Infotech for willfully violating Section 206 and Rule 206(4)-6, apparently for failing to have in place policies designed to vote shares in the best interest of their clients.  According to the release:

• This case involves a registered investment adviser, INTECH, which, from at least 2003 through 2006 (the 'relevant time period'), exercised voting authority over client securities without having written policies and procedures that were reasonably designed to ensure it voted its clients' securities in the best interests of its clients because those policies and procedures did not include how the adviser would address material potential conflicts of interests that may arise between its interests and those of its clients.

The Commission sanctioned the Adviser $300,000 and the responsible official inside the adviser $50,000 (for aiding and abetting). We will give some thoughts on this case in the next post.

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