SEC Proxy Reform Initiative Polarizes Industry

August 20, 2010
Chris Kentouris

Should U.S. corporations be allowed to send proxy materials directly to beneficial shareholders or should they still rely on financial intermediaries or their agent – Broadridge Financial – to do so?

That question posed by the Securities and Exchange Commission continues to polarize the securities industry, based on an analysis of preliminary responses to its request for comment issued last month. Corporations and their transfer agents say that issuers have the right to communicate directly with all of their investors while banks and brokerage firms say the current process works just fine.

On July 14, the SEC issued its long awaited concept release on proxy reform for public comment by October.

Among the questions asked were whether it should eliminate or reduce the ability of investors to hide their identities from corporations by categorizing themselves as “objecting beneficial shareholders” (OBOs); whether the New York Stock Exchange’s fee structure for proxy distribution be eliminated in favor of allowing the marketplace to determine the appropriate fees; whether retail investors can or should provide their broker-dealers with standing instructions on how they want to vote their shares; whether shareholders can under any circumstances gain rights to vote a public company’s shares, even if they do not own the shares; and other matters affecting how voting conducted or tabulated.

The proxy system refers to how investors vote their shares at corporate meetings.

Under the current process, which has been criticized as antiquated by some issuers and transfer agents, corporations can communicate and send proxy materials directly to their registered shareholders but not to their beneficial shareholders, who hold their shares in the name of a financial intermediary.

The intermediary – typically a brokerage firm – will reflect the beneficial shareholders’ votes when executing its proxy for shares held in customer accounts. The votes from the registered shareholders and beneficial shareholders are ultimately delivered to a vote tabulator to determine the outcome of the vote. Issuers must pay broker-dealers for sending out proxy materials to beneficial shareholders.

Those fees, set by the New York Stock Exchange, are collected by Broadridge Financial, the world’s largest proxy distribution firm, on behalf of broker-dealers and banks.

At issue is whether the SEC should eliminate or reduce the ability of investors to hide their identities from corporations by categorizing themselves as objecting beneficial shareholders (OBOs). Some institutional investors – an estimated 30 percent of beneficial shareholders—prefer to remain anonymous to protect their trading strategies from being discovered.

In its August 10 letter to the SEC, Redwood Capital Bancorp said that it favored eliminating barriers between public companies by allowing investors wanting to remain anonymous to register their shares in a nominee or custodial account.

The bank also said that it wanted to foster competition among proxy advisory services. “As an issuer, we should be able to select the distributors of our communications and should not be forced to pay for a system in which proxy fees and intermediary services are determined by third parties,” wrote Fred Moore, chief financial officer.

Such a stance was also taken by the Shareholder Communications Coalition, whose members include the Business Roundtable, the National Association of Corporate Directors and Securities Transfer Association.

In August 2009, the Washington D.C. lobbying group also asked the regulator to reduce the ability of investors to remain as OBOs by hiding behind a type of nominee name with the hope that companies can communicate and send proxy materials to their beneficial shareholders directly.

The SCC also wants the SEC to allow the NYSE to revise its fee structure for proxy distribution or eliminate it in favor of allowing the marketplace to determine the appropriate fees.

Giving corporations direct access to their beneficial shareholders would allow them to have a say in who will mail of electronically distribute their proxy materials and counts up their votes. And if issuers had a say, the argument goes, Broadridge wouldn’t have its stronghold in the proxy mailing and electronic distribution business.

By contrast, in its June 10, 2010 letter to the SEC, the Securities Industry and Financial Markets Association reiterated its longstanding opinion that the SEC to preserve the broker and Broadridge’s role in the proxy voting system. It also wants the SEC to continue to permit investors to designate themselves as either non-objecting or objecting beneficial shareholders.

“Alternative proposals that in varying degrees would remove brokers and their agents from the proxy communications and voting process could lead to a deterioration in clients’ overall experience, undermine their legitimate expectations and possibly cause further reductions in retail participation in proxy voting,” said a report attached to the SIFMA letter which was written by SIFMA’s Proxy Working Group with the law firm of Katten Muchin Rosenman in Washington, D.C. “A requirement that investors go through additional procedures such as opening nominee or other supplemental accounts to protect their privacy rights – or pay a fee for maintaining OBO status – would impact retail investors disproportionately.”

Two of the respondents advocated that the SEC allow broker dealers and banks to adopt a policy called client-directed voting for retail investors. Already a practice for institutional investors, client-directed voting would allow the brokerage firm or bank to cast the individual investor’s vote based on a pre-determined set of instructions created on its database. The investor could still change his or her vote before the company’s annual meeting.

“I would love to be able to permanently direct my broker to just vote in favor of all management proposals, subject to my ability to revoke that instruction,” wrote Frederick Lipman, a partner at the law firm of Blank Rome in Philadelphia in a July 16 email to the SEC. (Lipman said the email reflected his personal views and not those of any organization).

In advocating the adoption of client-directed voting, James McRitchie, president of Corporate Governance in Elk Grove, Calif. said that issuers rather than investors should pay for client-directed voting platforms. To do so, the “NYSE should consider forcing Broadridge to direct some of its paper suppression fees to firms like Moxyvote.com [an electronic proxy voting system] since shifting to electronic from paper voting saves money.”

In two separate memoranda posted on the SEC’s website, the Office of SEC Commissioner Luis Aguilar said that Commissioner Aguilar and his counsel Zachary May met with officials from Broadridge and Katten Muchin Rosenman representing the Society of Corporate Secretaries and Governance Professionals to discuss client directed voting. Aguilar and May also met with officials from the proxy advisory firm of Proxy Governance.

As reported by Securities Technology Monitor on August 10, Michael Ryan, president of the proxy advisory firm based in McLean, Virginia said that his firm is seeking industry funding to create a non-profit organization that would develop client-directed voting for retail investors, among other services.

The following day, Broadridge emailed a statement to Securities Technology Monitor concerning its view of client directed voting, saying “With its proven technology capabilities, Broadridge is capable of assisting in the design and implementation of effective technology infrastructures and systems for an array of shareholder-directed voting approaches to support retail voting.”