The U.S. proxy system governs the way in which investors vote their
shares in a public company regardless of whether they attend shareholder
“The proxy is often the principal means for shareholders and public
companies to communicate with one another, and for shareholders to weigh in
on issues of importance to the corporation,” said SEC Chairman Mary L.
Schapiro. “To result in effective governance, the transmission of this
communication between investors and public companies must be timely,
accurate, unbiased, and fair.”
It has been nearly 30 years since the Commission last conducted a
comprehensive review of the proxy voting infrastructure. With significant
changes since then in shareholder demographics, technology, and other areas,
the Commission’s review of the U.S. proxy system will examine emerging
issues that either did not exist or were not considered significant three
The SEC’s concept release focuses on the accuracy and transparency of the
voting process, the manner in which shareholders and corporations
communicate, and the relationship between voting power and economic
There will be a 90-day public comment period for the concept release
after it is published in the Federal Register.
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Last year, Chairman Schapiro directed the SEC staff to undertake a
comprehensive review of the U.S. proxy system. More than 600 billion shares
are voted at more than 13,000 shareholder meetings every year.
In the three decades since the Commission last conducted a comprehensive
review, there have been dramatic changes affecting the operation of that
system. Those include technological innovations, changes in the nature of
stock ownership, consolidation of proxy distribution service providers,
growth in other types of proxy service providers, and new financial
As part of its review, the Commission issued the concept release seeking
public comment on concerns raised by investors and industry participants
relating to the accuracy, reliability, transparency, accountability, and
integrity of the U.S. proxy system.
What is the U.S. proxy system?
The U.S. proxy system governs how investors vote their shares on matters
presented to shareholders at shareholder meetings. Most investors vote their
shares by proxy — that is, they give authority to someone else to vote their
shares according to their instructions. This means that investors can vote
their shares without having to attend shareholder meetings.
Many investors are “record owners” — that is, their names are listed in
the company’s shareholder records — and they can vote their shares directly
by granting a proxy. The vast majority of investors in U.S. companies,
however, hold their shares in “street name” — that is, in customer accounts
with a securities intermediary, which is usually a broker or bank. To vote
their shares, these investors, who are also known as “beneficial owners,”
typically give voting instructions to their securities intermediary or to a
third party (known as a “proxy service provider”) retained by the securities
intermediary to receive voting instructions on its behalf.
In turn, the securities intermediary will reflect the beneficial owners’
voting instructions when executing its proxy for shares held in its customer
accounts. Ultimately, proxies from record owners and proxies from securities
intermediaries (reflecting voting instructions from beneficial owners) are
delivered to a vote tabulator to determine the outcome of the vote.
What issues does the concept release address?
The concept release, which requests comment on matters relating to the
U.S. proxy system, is organized under three general areas:
- Accuracy, transparency, and efficiency of the voting process.
- Communications and shareholder participation.
- Relationship between voting power and economic interest.
The specific matters covered in those areas are:
Over-voting and under-voting of shares: At times, a broker-dealer
— or other securities intermediary — may cast more votes, or fewer votes,
than the number of shares that the intermediary actually holds. This
imbalance results from the way securities transactions are cleared and
settled in the U.S. markets.
Some securities intermediaries, primarily broker-dealers, have developed
methods to reconcile their records and allocate votes to their customers in
order to avoid “over-voting.” One of those methods, however, may result in
“under-voting,” which occurs when investors who are allocated the ability to
vote fail to do so, and other investors who do vote may be allocated a
number of votes fewer than the number of shares they hold.
The concept release seeks comment on whether over-voting or under-voting
is a problem, and if so, whether the method used by the broker-dealer to
allocate votes should be disclosed, and whether the Commission should
require the use of a particular method.
Vote confirmation: The concept release explores the possibility of
requiring vote tabulators, securities intermediaries, and proxy service
providers to provide each other with access to vote data so investors and
issuers can confirm that votes have been received and tallied according to
investors’ voting instructions.
Proxy voting by institutional securities lenders: Institutional
shareholders often lend their securities, and shares on loan generally
cannot be voted by the lender unless the shares are recalled. Without
sufficient advance notice of the matters to be voted on, lenders may not be
able to recall shares in time to vote on matters of interest. The concept
release examines whether shareholders would be helped by requiring the
agenda items at shareholder meetings to be identified earlier, so that
lenders can make a decision to re-call their shares and vote on issues
important to them. In addition, the concept release explores whether mutual
funds and closed-end funds should be required to disclose the number of
shares that a fund votes at a particular meeting, in addition to how that
Proxy distribution fees: Stock exchange rules, last revised in
2002, establish the maximum fees that a member broker-dealer may charge an
issuer as “reasonable reimbursement” for forwarding proxy materials. In
response to concerns about whether this fee structure continues to
constitute reasonable reimbursement, the concept release discusses several
potential actions, including having the stock exchanges revise the fee
schedule or eliminate it in favor of allowing market forces to determine
Issuers’ ability to communicate with beneficial owners of securities:
Some issuers have expressed concerns that they are limited in their ability
to communicate directly with their shareholders. These issuers cite the
“street name” system of ownership, as well as rules allowing beneficial
owners to object to having their identities disclosed to issuers, as reasons
for this concern. Among other things, the concept release seeks comments on
whether to preserve, eliminate, limit, or discourage the use of objecting
beneficial owner status.
Potential means to facilitate retail investor voting participation:
The concept release presents several ideas that could potentially improve
retail investor voting participation, including:
- Improving investor education
- Enhancing brokers’ Internet platforms
- Permitting advance voting instructions for retail investors
- Enhancing investor-to-investor communications
- Improving the use of the Internet for distribution of proxy materials
Data-tagging proxy-related materials: At the suggestion of the
SEC’s Investor Advisory Committee, the concept release seeks comment on
whether data-tagging proxy-related data, such as information relating to
executive compensation and director qualifications, might enhance a
shareholder’s ability to analyze issuer disclosures to make informed voting
Role of proxy advisory firms: Some companies and investors have
raised concerns that proxy advisory firms may be subject to conflicts of
interest or may fail to conduct adequate research and base recommendations
on erroneous or incomplete facts. As a result, the concept release seeks
comment on improving disclosure of potential conflicts of interest,
enhancing regulatory oversight over the formation of voting recommendations,
and requiring eventual public disclosure by proxy advisory firms of their
voting recommendations in Commission filings.
Dual record dates: Companies set a date — known as the “record
date” — on which persons who are shareholders on that date are entitled to
receive notice of a meeting and to vote at the meeting. If a shareholder
sells after the record date, that person (who no longer holds the shares)
still has the right to vote. This can mean that holders without an economic
stake in the matter can influence the outcome of a vote.
Recent changes to state law, however, now allow for “dual record dates” —
one for determining who is entitled to receive notice of the meeting and a
later one for determining who can vote at the meeting. The concept release
requests comment on whether the Commission’s rules should be revised to
accommodate dual record dates.
“Empty voting”: The concept release requests comment on whether
“empty voting” and related activities are being used to inappropriately
influence corporate voting results. “Empty voting” occurs when a
shareholder’s voting rights substantially exceed its economic interest in
the company — that is, its voting rights are “decoupled” from its economic
interest. For example, if a holder of shares buys a put option to sell those
shares, the holder retains voting rights on all of those shares, even though
it has hedged away at least some of its economic interest. Empty voting can
also occur if a shareholder sells its shares after the record date of a
shareholder meeting, but before the meeting. In that instance, the
shareholder retains the right to vote those shares, even though it no longer
has an economic interest in those shares. The release requests comment on,
for instance, whether the Commission should consider requiring disclosure of
decoupling activities as a possible regulatory response.
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With respect to each of these topics, the concept release describes the
concerns that have been expressed by market participants, presents several
possible regulatory responses to such concerns, and presents specific
questions for public comment.
What are the next steps?
There is a 90-day public comment period for this concept release.