The head of the U.S. Securities and Exchange Commission's Division of Investment Management has endorsed the use of artificial intelligence in proxy voting by investment advisers.
In a lecture entitled (Re)empowerment of trustees in the exercise of voting rights “I want to plug in artificial intelligence,” Brian Daley told the New York City Bar Association.
He said AI tools such as large-scale language models and agent AI “offer attractive opportunities” as advisors grapple with the scale and complexity of proxy voting, particularly across large portfolios.
“Imagine an AI agent that can review dozens or even hundreds of proxy statements, evaluate them against their expressed values, and efficiently generate a large number of principled voting recommendations, all for almost free. This is not science fiction, but near-future reality.”
Daly joined the regulator in July from Akin, Gump, Strauss, Hauer & Feld, where he worked as a partner in the investment management practice. Prior to that, he spent nearly 10 years as a partner in Schulte Roth & Zabel's investment management group.
His comments came as it was revealed this week that JPMorgan Asset & Wealth Management will no longer use third-party proxy advisory firms to vote proxies for U.S.-listed companies.
The US giant will instead use Proxy IQ, a proprietary AI-powered tool that aggregates and analyzes proprietary data from 3,000 shareholder meetings, according to an internal memo.
“Proxy IQ extends the high bar of independent analysis that our portfolio managers, research analysts, and stewardship teams have always applied to every vote. We leverage that same expertise to cover every aspect of the voting process, down to the smallest detail, including data and research selection,” the company said in a note.
But Daly suggested in his speech that guardrails are needed. In particular, he said, there is a need to train AI agents and review their output.
He said advisors should also consider principles of transparency, auditability, and consistency with fiduciary duties when using AI for proxy voting.
“Used properly, AI can be a valuable tool that augments, rather than replaces, human judgment, allowing advisors to better serve their clients.”
Proxy advisory firms have come under increased scrutiny in the United States, and Mr. Daley doubled down on his criticism, branding the industry a “small oligopoly” of companies “with the de facto power to impose their views on social and political issues on large swaths of the U.S. capital markets.”
However, he also said, “There is essentially nothing wrong with investment advisers using proxy voting advisers.''
“When operating within a coordinated mandate, with specific instructions, and subject to periodic review, proxy advisors can provide valuable research, analytical, and logistical support to investment advisors.”
pass-through voting
In his remarks, Daley also appeared to support executives who propose split voting or pass-through voting.
When it comes to voting, he said, regulators should give investment advisers and their clients “the first say” in deciding how to vote in the latter's best interest.
“Because when we do that, when we get out of the way of market participants, innovation flourishes. Take for example fund managers, including index fund managers, who are currently spearheading programs that allow investors to express voting preferences and direct the pro rata distribution of voting rights,” he said.
He said such efforts are an example of “exactly the type of innovation we don't want to inadvertently slow down,” but noted that there needs to be a sufficient number of options and clear disclosure of how shares will be voted based on those options.
A growing number of asset management giants, including BlackRock, Vanguard, State Street, Northern Trust, DWS, and Legal & General's wealth management division, are offering choice to clients in a variety of jurisdictions.
The service is primarily offered to passive funds, as active managers argue that transferring voting rights risks losing a key tool in the investment process.
Some services allow clients to implement their own internal voting policies or direct specific votes, while others allow clients to choose only from a list of third-party policies, such as policies from proxy voting advisors.
Another topic in Daly's speech was whether investment advisers must vote on all client proxies.
“We often hear from investment advisers who feel forced to vote on matters they don't think are important to their investment programs and would welcome more clarity that they don't have to vote on every proxy,” he said.
Daly noted that while voting is important to the “overwhelming number” of advisors, it is “important that advisors and clients have considerable latitude to decide what works in their individual cases.”
Daly cited index funds as an example of an “interesting situation.” “Many mutual funds and ETFs purport to track a reference index, and the investment advisor's primary mission is to replicate the performance of the reference index within the fund, no more, no less. However, many index funds, such as some systematic funds, engage in proxy voting despite their passive investing mission.”
Daly suggested that some — “perhaps many” — advisers are voting by proxy because they are “under pressure or feel like they have to.”
“However, it may be appropriate for these categories of investment advisers, and the boards that oversee this function, to consider whether taking positions on a company's fundamental issues or forward-looking proposals is consistent with their investment obligations.”
