SEC cease-and-desist order reported in the article below includes the following findings:
16. ISS lacked
policies or procedures concerning the relationship between its account
managers and proxy solicitors even though the potential misuse of
material nonpublic information should have been clear to ISS’ managers
and compliance personnel. The supervisors of the ISS account managers
who accepted meals or tickets from proxy solicitors were aware of the
meals and events, and, in some cases, were invited to the meals and
events. Also, several supervisors at ISS attended meals paid for by
proxy solicitors earlier in their careers when they were more junior
employees. Similarly, account managers could recall communications
among the employees, including managers, in the account management
group when a proxy solicitor was being particularly aggressive in
soliciting vote information. The proxy solicitor worked to cultivate
relationships with employees in ISS’ account management group, but ISS
did not provide training for its account managers concerning how to
interact appropriately with a proxy solicitor even though: (a) one of
the most important roles of a proxy solicitor is to inform their
clients how shareholders are voting their proxies, (b) during the
relevant time period, there was virtually no legitimate business
reason for ISS’ account managers to have relationships with proxy
solicitors, and (c) all of ISS’ account managers had access to voting
information that would be very helpful to proxy solicitors.
17. MSCI, ISS’
parent company, had a written policy that prohibited ISS employees
from receiving gifts unless of a nominal value, or business
entertainment unless reasonable and appropriate, but many ISS account
managers were unclear on how to interpret the policy and when it
applied. ISS failed to provide adequate training for its employees
regarding application of the gift policy, and despite being generally
aware of certain meals and events, ISS managers never took steps to
determine whether the meals were reasonable and appropriate under the
policy. The gifts policy invited employees to contact a legal or
compliance person if they had questions about the policy, but the
policy did not require employees to report gifts.
18. In addition
to the proxy solicitor firm that exchanged meals and tickets with the
ISS Employee for vote information, several ISS account managers were
treated to meals and/or sporting event tickets by other proxy
solicitor firms. One proxy solicitor developed a friendship with an
ISS account manager and treated him to meals on at least two
occasions. After receiving the meals, the ISS account manager told the
proxy solicitor in approximately 2009 how specific ISS clients were
voting in a proxy contest.
For a copy of the SEC's press release and full order, see
Institutional Shareholder Services, the biggest
independent adviser to shareholders on corporate elections, agreed to
pay a fine on Thursday to settle civil charges that it failed to stop an
employee from improperly selling confidential vote data.
The firm will pay $300,000 to settle and to retain
an independent compliance consultant to monitor its practices, according
Securities and Exchange Commission, which ran the investigation.
The settlement ends an
unusual inquiry into I.S.S., the biggest company in the proxy advisory
industry and an influential voice in deciding how investors should vote
on matters like mergers or director elections. Many of the firm’s
clients are mutual funds, pension funds and other large investors.
The power of I.S.S. has come into question in recent
months, however, as shareholders have bucked the firm’s recommendations in
several recent elections. Among them was a proposal at
JPMorgan to split the chairman and chief executive roles, which was
handily voted down despite I.S.S.’s backing.
The S.E.C.’s case revolved around a smaller arm of
the firm, which allows shareholders to vote electronically on corporate
matters. The regulator disclosed in an order that an unnamed employee of
I.S.S. sold confidential information on how more than 100 clients voted from
2007 to early last year.
The S.E.C. said that the employee logged into the
operation’s Web site from home and passed along the information, using his
personal e-mail account, to an unidentified proxy solicitor. Such people are
hired by companies and investors to estimate how a vote is proceeding and to
try to sway shareholders into supporting a proposal.
Having specific knowledge of vote counts would be
enormously helpful to proxy solicitors, who could focus on wooing undecided
In exchange for providing the information, the S.E.C.
said that the employee received $20,000 worth of meals, $11,500 worth of
tickets to concerts and sports games and an airline ticket. The employee was
fired last March, according to a spokeswoman for I.S.S.
The S.E.C. noted that the proxy solicitor also
bought sports tickets for at least two other I.S.S. account managers, one of
whom disclosed how two big shareholders had acted in a major proxy contest.
The scheme first came to light last year when MSCI,
the parent company of I.S.S., disclosed an internal investigation into the
matter after a report by The New York Post. By that point, the S.E.C. had
received a whistle-blower complaint that accused an employee of furnishing
the confidential vote data to proxy solicitor firms.
In its order on Thursday, the agency criticized
I.S.S. for not having strict checks on employees, including providing
training and routinely screening staff e-mails for potential abuses.
“Proxy advisers must tailor their controls based on
the risks of their particular business in order to protect the integrity of
the proxy voting process,” Julie M. Riewe, a senior S.E.C. enforcement
official, said in a statement. “The internal controls at I.S.S. did not
adequately address the potential misuse of confidential proxy voting
information by firm employees.”
Though it did not admit or deny the S.E.C.’s
findings, I.S.S. agreed not commit future securities violations.
An I.S.S. spokeswoman wrote in an e-mailed statement
on Thursday that the firm “took swift action of its own and also fully
cooperated with the S.E.C. to investigate and promptly resolve this matter.
The confidentiality of our clients’ information is essential and is of the
highest priority to us at I.S.S. We now consider this matter closed.”
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