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The 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

 

Source: New York Times DealBook, May 23, 2013 article


Legal/Regulatory

I.S.S. Settles Investigation Into Leaks of Shareholder Vote Data

By MICHAEL J. DE LA MERCED

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 to the 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.

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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 shareholders.

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.”

 


Copyright 2013 The New York Times Company

 

 

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