The SEC charged Rockville, Maryland-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.
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. Without admitting or denying the SEC’s findings, ISS agreed to cease and desist from committing or causing any future violations of Section 204A.
Lofchie Comment: This is an interesting disciplinary action for a few reasons.
First, it is another firm or person who has had compliance problems lately as a result of a failure or mishandling of technology. The technology failure in this case involved allowing unrestricted access to a broad range of client information to too many employees without good reason, and a failure to monitor that access. The information in this case happened to be in regard to shareholder voting, but the concern which this case raises extends far beyond information and firms of this type. That is, every firm must worry that what information it holds or is held by others is vulnerable to improper use by its employees or by the employees of another organization.
Secondly, the case involved a “miss” of a fairly substantial red flag involving a conflict of interest; i.e., that the employee of a proxy solicitor was giving gifts to the employee of a proxy advisory service, even though there was no obvious legitimate business reason for the gift.
Third, it is the second time in a week that proxy advisory services are in the regulatory news. Although the stories are wholly unrelated, these are not the kinds of coincidences that any business likes. Here is the prior story: SEC Commissioner Gallagher Delivers Remarks on Proxy Advisory Services.