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17.4 Proxy Voting & Other Obligations

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Series 65 Uniform Investment Adviser Law

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1 Introduction

About the Series 65 How to Use This Guide

2 Chapter 1: Economic Factors & Business Cycles

1.1 Business Cycles 1.2 Monetary Policy 1.3 Fiscal Policy 1.4 Inflation & Deflation 1.5 Interest Rates & Yield Curves 1.6 Global Economic Factors

3 Chapter 2: Financial Reporting & Analytical Methods

2.1 Financial Statements Overview 2.2 Accounting Fundamentals 2.3 SEC Filings & Annual Reports 2.4 Financial Ratios 2.5 Time Value of Money 2.6 IRR and NPV 2.7 Descriptive Statistics

4 Chapter 3: Types of Risk

3.1 Systematic (Market) Risk 3.2 Unsystematic (Company-Specific) Risk 3.3 Interest Rate & Reinvestment Risk 3.4 Inflation & Currency Risk 3.5 Liquidity Risk & Opportunity Cost 3.6 Risk Measurement & Portfolio Theory

5 Chapter 4: Cash Equivalents & Fixed Income Securities

4.1 Cash & Cash Equivalents 4.2 Treasury Securities 4.3 Agency Securities 4.4 Corporate Bonds 4.5 Municipal Bonds 4.6 Bond Pricing & Yields

6 Chapter 5: Equity Securities

5.1 Common Stock 5.2 Preferred Stock 5.3 Shareholder Rights & Corporate Actions 5.4 Equity Valuation Methods 5.5 ADRs, REITs & Other Equity Securities

7 Chapter 6: Pooled Investments

6.1 Mutual Funds 6.2 Mutual Fund Costs & Fees 6.3 Exchange-Traded Funds (ETFs) 6.4 Closed-End Funds & UITs 6.5 Hedge Funds & Private Equity

8 Chapter 7: Derivatives, Alternative Investments & Insurance Products

7.1 Options Basics 7.2 Options Strategies 7.3 Alternative Investments 7.4 Annuities 7.5 Life Insurance Products

9 Chapter 8: Client Types & Profiles

8.1 Individual Clients 8.2 Business Entity Clients 8.3 Trusts & Estates 8.4 Accredited & Qualified Investors 8.5 Suitability & Know Your Customer

10 Chapter 9: Portfolio Theory & Capital Markets

9.1 Modern Portfolio Theory 9.2 Capital Asset Pricing Model (CAPM) 9.3 Efficient Market Hypothesis 9.4 Risk & Performance Measures 9.5 Asset Allocation

11 Chapter 10: Portfolio Management Strategies

10.1 Investment Styles 10.2 Portfolio Management Techniques 10.3 Fixed Income Strategies 10.4 Return Calculations

12 Chapter 11: Tax Considerations & Retirement Planning

11.1 Capital Gains & Investment Taxes 11.2 Retirement Plans Overview 11.3 Individual Retirement Accounts (IRAs) 11.4 Education Savings Plans 11.5 Distributions & RMDs

13 Chapter 12: ERISA, Special Accounts & Performance Measures

12.1 ERISA Requirements 12.2 Special Account Types 12.3 Performance Measures & Reporting 12.4 QDROs & Special Situations

14 Chapter 13: Regulation of Investment Advisers

13.1 Investment Advisers Act of 1940 13.2 Registration Requirements 13.3 Recordkeeping Requirements 13.4 Custody Requirements 13.5 Exempt Reporting Advisers

15 Chapter 14: Regulation of Investment Adviser Representatives

14.1 IAR Definition & Requirements 14.2 Registration & Post-Registration 14.3 IARs of Federal Covered Advisers

16 Chapter 15: Regulation of Broker-Dealers & Agents

15.1 Broker-Dealer Definition 15.2 Agent Registration 15.3 Regulation Best Interest

17 Chapter 16: Securities Registration & Exemptions

16.1 Uniform Securities Act 16.2 Securities Registration Methods 16.3 Exempt Securities 16.4 Exempt Transactions

18 Chapter 17: Communications & Client Relationships

17.1 Advertising Rules 17.2 Social Media & Electronic Communications 17.3 Client Agreements & Disclosure 17.4 Proxy Voting & Other Obligations

19 Chapter 18: Ethics & Fiduciary Obligations

18.1 Fiduciary Duties 18.2 Prohibited Practices 18.3 Senior & Vulnerable Adult Protection 18.4 AML & Compliance Programs

17.4 Proxy Voting & Other Obligations

Key Takeaways Explain This Topic AI

Proxy voting authority requires written policies and best-interest voting.

Best execution considers multiple factors, not just lowest cost.

Section 28(e) offers safe harbor for eligible soft dollar arrangements.

Trade allocation must be fair with no favoritism.

These obligations stem from the adviser's fiduciary duty.

Last updated: December 2025

Proxy Voting & Other Client Obligations

Investment advisers have important obligations related to proxy voting, best execution, and trade allocation. These duties flow from the adviser's fiduciary relationship with clients.

  • Proxy Voting (Rule 206(4)-6)
  • When the Rule Applies

Rule 206(4)-6 applies when an investment adviser:

  • Has voting authority over client securities (explicit or implicit)
  • Exercises discretion that includes proxy voting authority
  • Has not specifically excluded proxy voting from the advisory agreement
  • Requirements for Advisers with Voting Authority
  • Requirement Description
  • Written Policies Must adopt and implement written proxy voting policies
  • Vote in Best Interest Must vote proxies in clients' best interests
  • Conflict Disclosure Must address how conflicts of interest are handled
  • Client Disclosure Must describe policies in Form ADV Part 2A
  • Provide Upon Request Must provide copy of policies and voting records
  • Recordkeeping Must maintain records for 5 years
  • Conflicts of Interest

Advisers must address how they handle conflicts, such as:

  • Voting on securities of clients who are issuers
  • Voting when adviser has business relationship with issuer
  • Voting when adviser or personnel have personal interests
  • Use of Proxy Advisory Firms

If using a proxy advisory firm (like ISS or Glass Lewis):

  • Must conduct due diligence on the firm's capabilities
  • Must assess accuracy and conflicts of the firm
  • Cannot blindly follow recommendations
  • Ultimate responsibility remains with the adviser
  • Record Retention Requirements

Must maintain for 5 years:

  • Proxy voting policies and procedures
  • Proxy statements received (or where available)
  • Records of actual votes cast
  • Client requests for voting information
  • Documents prepared for voting decisions
  • Best Execution
  • The Duty of Best Execution

Investment advisers have a duty to seek the most favorable terms reasonably available under the circumstances for client transactions.

Factors to Consider

  • Factor Consideration
  • Price Most important but not the only factor
  • Commission/Spread Cost of execution
  • Speed How quickly the order is executed

Likelihood of Execution Can the order be filled?

  • Size of Order Impact on market
  • Settlement Settlement capabilities
  • Broker Reputation Financial responsibility and integrity
  • Research Value of research services (soft dollars)
  • Soft Dollar Arrangements

Definition : Using client commission dollars to pay for research and brokerage services.

Section 28(e) Safe Harbor : Protects advisers from breach of fiduciary duty claims if:

  • Requirement Description
  • Eligible Services Only brokerage and research services qualify
  • Lawful Assistance Services must assist in investment decision-making
  • Good Faith Determination Adviser believes commissions are reasonable for services
  • Eligible vs. Ineligible Services
  • Eligible (Safe Harbor) Ineligible (Not Protected)
  • Research reports and analysis Office rent and equipment
  • Trading systems for execution General administrative expenses
  • Market data services Marketing costs
  • Financial publications Employee salaries
  • Seminars on investment topics Travel expenses (most)
  • Mixed-Use Items

For items that are partly eligible and partly ineligible:

  • Must make reasonable allocation
  • Only eligible portion can be paid with soft dollars
  • Ineligible portion must be paid with adviser's own funds
  • Documentation of allocation required
  • Disclosure Requirements

Soft dollar arrangements must be disclosed in:

  • Form ADV Part 2A (Item 12—Brokerage Practices)
  • Description of products/services received
  • Description of how they benefit clients
  • Directed Brokerage
  • Client-Directed Brokerage

When a client directs the use of a particular broker:

  • Client may not receive best execution
  • Adviser must disclose this risk
  • Client must consent to the arrangement
  • Trades may cost more or execute at inferior prices
  • Adviser-Directed Brokerage

When an adviser directs brokerage for non-best execution reasons:

  • May create conflicts of interest
  • Must be disclosed
  • Must still consider client interests
  • Trade Allocation
  • Fair Allocation Requirements

When an adviser manages multiple accounts with similar investment objectives:

  • Must allocate trades fairly among clients
  • Cannot favor certain clients over others
  • Cannot allocate based on fee structure
  • Must have written allocation policies
  • Aggregation (Bunching) of Orders
  • Element Requirement
  • Purpose Reduce costs and improve execution
  • Average Price All participating accounts receive same average price
  • Pro-Rata Allocation Generally allocated proportionally
  • Partial Fills Must be allocated fairly
  • Documentation Written policies and procedures required
  • Prohibited Practices
  • Favoring accounts that pay higher fees
  • "Cherry-picking" profitable trades for certain accounts
  • Allocating IPO shares unfairly
  • Giving preferential treatment to proprietary accounts

On the Exam : Know the three-step test for Section 28(e) safe harbor for soft dollars: (1) eligible service, (2) lawful assistance in investment decisions, (3) good faith belief that commissions are reasonable. Also know that proxy voting authority creates specific compliance obligations.

  • Key Takeaways
  • Proxy voting authority requires written policies and best-interest voting
  • Best execution considers multiple factors, not just lowest cost
  • Section 28(e) provides safe harbor for eligible soft dollar arrangements
  • Trade allocation must be fair—no favoritism allowed
  • All these obligations flow from the adviser's fiduciary duty