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The
cease-and-desist order reported in the press release
below includes the following findings:
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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
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Source:
U. S.
Securities and Exchange Commission, May 23, 2013 press release |
SEC Charges Institutional
Shareholder Services in Breach of Clients' Confidential Proxy Voting
Information
FOR IMMEDIATE RELEASE
2013-92
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.
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.
# # #
http://www.sec.gov/news/press/2013/2013-92.htm
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