Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The SEC and Institutional Shareholder Services, Inc. (ISS) have settled public administrative and cease-and-desist proceedings initiated against ISS by the SEC alleging that ISS violated Section 204A of the Advisers Act by failing to establish, maintain, and enforce written policies and procedures designed to prevent the use of material nonpublic information by ISS in violation of the Advisers Act.   ISS has agreed to pay a $300,000 fine and to engage a consultant (with the oversight of the SEC) and to implement the recommendations of the consultant.

The basis for the proceedings against ISS (you can read the full order here) is the sale by ISS employees of confidential shareholder voting information to proxy solicitors in exchange for meals and entertainment.  Dealbook has some good commentary on why this information would be so valuable to proxy solictors and what this means for ISS’ reputation.  Although several employees and even managers at ISS were involved, much of the misconduct can be traced back to a single ISS employee and a single proxy solicitor.

ISS had a computer system that allowed its employees to access the instructions of all of its institutional clients regarding voting.  The proxy solicitor would e-mail the ISS employee with the names of ISS clients, the name of an issuer, and a particular ballot proposition, and ask “how many & how voted.”  From a remote location late at night or early in the morning, the ISS employee would access the information and forward it to his personal e-mail account for sharing with the proxy solicitor.  This practice went on from 2007 to 2012 and involved more than 100 ISS clients on hundreds of occasions, including “a number of significant proxy contests.”

It is clear from the e-mail correspondence between the ISS employee and the proxy solicitor that the vote information was provided in exchange for meals and gifts – the ISS employee even tells the proxy solicitor that certain information will “cost” him “another game.”  The proxy solicitor provided approximately $11,500 in sporting and concert tickets to the ISS employee, as well as approximately $20,000 in meals.

The SEC does not characterize this as a case of one bad apple, though, as it found evidence of systemic problems at ISS, such as:

  • The ISS Code of Ethics failed to establish policies designed to prevent ISS account managers from sharing confidential client information in exchange for gifts.
  • ISS did not exert sufficient control and monitoring over the access to client voting information.
  • The computer system used by ISS had built in audit capabilities that could have easily identified an employee who was accessing voting records more frequently than appropriate and from locations and at times that raise suspicion, but ISS failed to utilize the audit capabilities.
  • ISS managers were aware that proxy solicitors sought to establish relationships with ISS employees, even though there was no legitimate business reason for such relationships.
  • ISS managers were aware that proxy solicitors were providing entertainment and meals to ISS employees, and sometimes even partook in the entertainment and meals themselves.
  • In the words of the SEC, “ISS lacked policies or procedures concerning the relationship between its account managers and proxy solicitors even though the potential misuse of material nonpublic information s hould have been clear to ISS’ managers and compliance personnel.
  • Although the parent company of ISS had a written policy prohibiting ISS employees from receiving gifts of more than nominal value, ISS account managers were unclear on how the policy should be applied and interpreted.

It is unclear how far the fallout from this debacle will spread, or how much of a deletrious effect it will have on the already faltering reputation of ISS.  Check back frequently at for news and analysis of this and other securities law topics.