In re INTECH Investment Management LLC

Investment Advisers Act Release No. 2872 (2009)

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In re INTECH Investment Management LLC

Securities and Exchange Commission
Investment Advisers Act Release No. 2872 (2009)

Facts

INTECH Investment Management LLC (INTECH) (defendant) was a registered investment manager. INTECH’s clients—many of which delegated responsibility to INTECH to vote their shares in corporate elections—included unions and union-related entities and corporations. INTECH relied on Institutional Shareholder Services (ISS), a third-party, proxy-advisory service, in deciding how to vote its clients’ proxies. INTECH participated in the annual AFL-CIO Key Votes Survey (survey), which summarized and ranked investment advisers based on how advisers voted in proxy contests that the AFL-CIO (a federation of labor unions) identified as key votes. Investment advisers that voted all their clients’ proxies in accordance with the AFL-CIO’s recommendations scored higher in the survey than advisers who voted only union-related proxies that way. In 2002, INTECH followed ISS’s general guidelines, which usually meant voting proxies in favor of management recommendations. As a result, INTECH scored in the middle tier in the 2002 survey, and some INTECH union-related clients complained. In an effort to win and retain union-related clients, INTECH switched to ISS’s PVS voting guidelines (PVS guidelines)—which followed the AFL-CIO’s key-vote recommendations—in 2003 for all clients. As a result, INTECH achieved a 100 percent score in the 2003 survey. In March 2003, the Securities and Exchange Commission (SEC) (plaintiff) adopted a new proxy-voting rule (rule), which required investment advisers to vote client proxies in accordance with each client’s best interests and barred advisers from elevating their own interests ahead of their clients’ interests. The SEC permitted investment advisers to use a third-party, proxy-advisory service’s predetermined policy to vote client proxies if using the service’s policy was designed to further client interests rather than the advisers’ interests. To comply with the rule, in July 2003, INTECH sent its proxy-voting policies to its clients, which disclosed that INTECH planned to use the PVS guidelines but did not disclose that the PVS guidelines followed the AFL-CIO’s voting recommendations and did not address how INTECH would resolve potential conflicts of interest. In December 2005, after the SEC questioned INTECH’s proxy voting, INTECH let clients choose between the PVS guidelines and the general guidelines and explained that the PVS guidelines followed the AFL-CIO’s recommendations. Approximately 27 percent of INTECH’s clients chose the general guidelines. The SEC instituted a cease-and-desist proceeding against INTECH and Edward Hurley (defendant), INTECH’s chief operating officer, alleging that INTECH violated the Investment Advisers Act of 1940, and the SEC rules promulgated thereunder, by engaging in false, deceptive, or manipulative acts by failing to adopt and implement proxy-voting rules and procedures that were reasonably designed to avoid conflicts between INTECH’s interests and its clients’ interests. To resolve the proceeding, INTECH offered to pay a civil penalty of $300,000, Hurley offered to pay a civil penalty of $50,000, and INTECH and Hurley agreed to cease and desist violating the act and the related SEC rules.

Rule of Law

Issue

Holding and Reasoning ()

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