The Securities and Exchange Commission has charged proxy adviser Institutional Shareholder Services for failing to safeguard the confidential proxy voting information of clients. 

In response, ISS, registered with the SEC as an investment adviser, has agreed to settle the charges by paying $300,000 and retaining an independent compliance consultant that will evaluate its policies and procedures regarding confidential information.

An SEC investigation found that an employee at ISS (no longer with the company) 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 employee was rewarded with approximately $11,500 in tickets to concerts and sporting events, meals, and an airline ticket. According to the SEC, in one instance, when the proxy solicitor asked for voting information, the employee allegedly responded that it would “cost you another game.” The employee no longer works at ISS.

According to the SEC's announcement of the settlement on Thursday, the breaches, which took place between 2007 to 2012, were made possible, in part, because “ISS lacked sufficient controls over employee access to confidential client vote information” and “failed to establish or enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information.”

The SEC order points out that ISS' clients understood that, at least prior to a shareholder meeting, that it would keep their vote information on the ProxyExchange service confidential and some had detailed confidentiality provisions included in their contracts. It was also important to several of ISS' clients that vote information remain confidential before the shareholder meeting because, given the size of their positions, their vote could move the market price of the issuer's stock.

In an 8-K filing with the SEC in October, MSCI Inc., the parent company of ISS, disclosed that a whistleblower complaint led to a Wells Notice being issued by the SEC over the matter. The disclosure added that firm has implemented a new policy specifically addressing communications and contacts with proxy solicitors. It also enhanced internal systems to further restrict internal access to client voting information and has conducted further training regarding its gifts and entertainment policy.

“The confidentiality of client information is essential to ISS's business, and we will continue to reinforce in our policies and procedures and in our training of our employees the paramount importance of safeguarding this information,” the company wrote.