In a first-of-its kind enforcement action, the Securities and Exchange Commission fined an investment adviser and one of its former executives for a proxy voting rule violation.

Without admitting or denying the SEC’s findings, West Palm Beach, Fla.-based Intech Investment Management and its former chief operating officer David E. Hurley agreed to pay penalties of $300,000 and $50,000, respectively, to settle charges of violating an investment adviser proxy voting rule by not sufficiently describing the company’s proxy voting policies and procedures and failing to address a material potential conflict of interest.

The proxy voting rule, or Investment Advisers Act Rule 206(4)-6, which took effect in 2003, requires registered investment advisers to adopt proxy voting policies and describe them to clients, including procedures to address material conflicts of interest that may arise between the adviser and its clients.

“While the materiality of the conflict at issue seems arguable, this case suggests that registered advisers should carefully review their proxy voting policies and procedures for actual or potential conflicts,” says Jeremy D. Frey, a partner in the law firm Pepper Hamilton. “The message the Commission is sending generally is that the SEC is going to look hard at advisers with any potential or actual conflicts of interest that are undisclosed.”

The SEC order says Intech exercised voting authority over client securities without having written policies and procedures that “were reasonably designed to ensure it voted its clients’ securities in the best interests of its clients” because those policies and procedures didn’t include how the adviser would address material potential conflicts of interests that may arise between its interests and those of its clients. The SEC order also says Intech didn’t sufficiently describe its proxy voting policies and procedures to clients.

According to the Commission’s order, Intech chose third-party proxy voting service guidelines that followed AFL-CIO proxy voting recommendations while it was participating in an AFL-CIO survey that ranked investment advisers based on their adherence to the union’s recommendations on certain votes. Intech believed that following the guidelines would improve its ranking in the survey and that the improved score would likely be helpful in maintaining and attracting union-affiliated clients, the SEC order says.

The SEC order says Intech’s policies and procedures didn't address material potential conflicts that may have arisen between the firm’s interests and its clients who weren’t pro-AFL-CIO. A cover letter signed by Hurley and sent to clients along with those policies said Intech didn’t expect any conflicts to arise in the proxy voting process because it relied on a third-party voting service.

The Commission’s order says using the guidelines created a material potential conflict of interest because Intech didn’t address and describe the potential effect on its ability to retain and obtain business from existing and prospective union-affiliated clients.

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