The Securities and Exchange Commission (SEC) has filed charges against the 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, the SEC said.
To settle the charges, ISS, which is registered with the SEC as an investment adviser, will pay $300,000 and retain an independent compliance consultant.
ISS was represented by Jim Windels of Davis Polk in New York.
“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.”
The SEC alleged that ISS failed to establish or enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by ISS employees.
The SEC said that ISS lacked sufficient controls over employee access to databases of confidential client vote information.
The SEC’s 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 Investment 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.