SEC Censures ISS

News Brief

By Cydney Posner

The SEC today charged proxy adviser ISS with "failing to safeguard the confidential proxy voting information of clients participating in a number of significant proxy contests." http://www.sec.gov/news/press/2013/2013-92.htm Here is a link to the SEC's order. http://www.sec.gov/litigation/admin/2013/ia-3611.pdf

According to the press release, the SEC 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 breaches took place between 2007 and 2012. According to the press release, "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." In sum, it did not have adequate internal controls. (In light of this material weakness, is ISS now going to recommend against its own audit and risk committees? Are we permitted a moment of schadenfreude?)

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."

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