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The cease-and-desist order reported in the press release 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 full order, see


Source: U. S. Securities and Exchange Commission, May 23, 2013 press release

U.S. Securities & Exchange Commission
SEC Seal
U.S. Securities and Exchange Commission


SEC Charges Institutional Shareholder Services in Breach of Clients' Confidential Proxy Voting Information


Washington, D.C., May 23, 2013 — The Securities and Exchange Commission today charged charged Rockville, Md.-based proxy adviser Institutional Shareholder Services (ISS) for failing to safeguard the confidential proxy voting information of clients participating in a number of significant proxy contests.

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SEC Order

An SEC investigation found that an employee at ISS provided a proxy solicitor with material, nonpublic information revealing how more than 100 ISS institutional shareholder advisory clients were voting their proxy ballots. In exchange for voting information, the proxy solicitor provided the ISS employee with meals, expensive tickets to concerts and sporting events, and an airline ticket. The breach was made possible in part because ISS lacked sufficient controls over employee access to confidential client vote information, as this employee gathered the data by logging into the ISS voting website from home or work and using his personal e-mail account to communicate details to the proxy solicitor. The employee no longer works at ISS.

ISS, which is registered with the SEC as an investment adviser, agreed to settle the charges by paying $300,000 and retaining an independent compliance consultant.

"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," said Julie M. Riewe, Deputy Chief of the SEC Enforcement Division's Asset Management Unit. "The internal controls at ISS did not adequately address the potential misuse of confidential proxy voting information by firm employees."

According to the SEC's order instituting settled administrative proceedings, the breach occurred from approximately 2007 to 2012. ISS failed to establish or enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by ISS employees. Specifically, ISS lacked sufficient controls over employee access to databases of confidential client vote information.

The SEC's order finds that ISS willfully violated Section 204A of the Investment Advisers Act of 1940. The order censures the firm and requires ISS to pay a $300,000 penalty and engage an independent compliance consultant to review its supervisory and compliance policies and procedures. The consultant will evaluate whether ISS's procedures are reasonably designed to ensure that its proxy voting services business complies with the Advisers Act in its treatment of confidential information, communications with proxy solicitors, and gifts and entertainment. Without admitting or denying the SEC's findings, ISS agreed to cease and desist from committing or causing any future violations of Section 204A.

The SEC's investigation was conducted in the Boston Regional Office by Robert Baker and Kevin Kelcourse of the Asset Management Unit along with Britt Collins and Rachel Hershfang. They were assisted by members of the Boston Regional Office's examination staff, including Daniel Wong, Paul Prata, and Dan Mazzaferro.


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Modified: 05/23/2013


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