SEC Charges Institutional Shareholder Services in Breach of Clients' Confidential Proxy Voting Information
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.