Reform Initiative Polarizes Industry
August 20, 2010
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
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
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
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
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.”
Securities Technology Monitor and SourceMedia, Inc.