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The article below was published in Agenda, a Financial Times private subscription service for corporate directors, and is presented with permission.


Agenda, December 6, 2010 article


The week's news from other boardrooms




Article published on December 6, 2010

By Kristin Gribben

Officials at the SEC have said they are committed to bringing forward proposed rules based on its July “proxy plumbing” concept release, but many issuers say there’s insufficient information available for them to address the issues raised in the release. At least one SEC commissioner, however, was hoping interested parties would provide more data themselves.

The commission isn’t getting “as good of input as we would like,” said Commissioner Elisse Walter during the Practising Law Institute’s annual securities regulation conference in New York last month. “We need more data… I’m very worried that recommendations are based on inaccurate facts.”

The problem may be with the lack of existing data available to support the questions the SEC asks in its concept release, which addresses a breadth of issues around the proxy voting system, such as whether there should be more regulation of proxy advisory firms and if shareholders should be allowed to remain anonymous to issuers when signing up for a brokerage account.

One assumption in the concept release, on which the SEC asks for input, is the positive impact that early disclosure of annual meeting agendas could provide shareholders in their voting duties, such as the ability to call back loaned shares ahead of the meeting. However, Pfizer questions this in its Nov. 23 comment letter. “[T]he release does not provide any empirical data indicating that this is a significant problem or that earlier disclosure would remedy any such problem,” writes Matthew Lepore, Pfizer’s vice president and chief counsel of corporate governance. Earlier disclosure of meeting agendas would put pressure on boards to finalize agenda items before they are ready and disrupt the request for no-action process for shareholder proposals, Lepore argues.

Another subject in the concept release asks whether the SEC should try to prevent problems of over- or under-voting of securities in proxy matters. But Abe Friedman, managing director at BlackRock, says there is a lack of data to suggest this is even a problem. “[W]e recommend that the cause and extent to which this may be occurring be identified before any solutions are devised,” Friedman writes in a comment letter. In addition, over half of the 89 corporate secretaries surveyed by the Society of Corporate Secretaries and Governance Professionals said they don’t know if over-voting is having a significant impact on their election results.

Nonetheless, the SEC’s director of the Division of Corporate Finance, which is leading the proxy plumbing effort, says the agency is on track to put some of the issues raised in the concept release into proposed rules. “We’re determined to keep this one on track,” said Meredith Cross at the PLI conference. “I can’t pretend this isn’t challenging… but we’re looking at getting some of these up as proposals,” she added.

At the very least, Brian Breheny, the former deputy director of the Corporation Finance Division, says the proposed rules would most likely address proxy advisory firms such as ISS; whether shareholders can remain anonymous (objecting beneficial owner versus non-objecting beneficial owner, or OBO/NOBO); and the processing fees Broadridge Financial Solutions charges issuers. Breheny left the SEC three months ago for private practice after spending 18 months working on the concept release.

“There are some things that can probably be done, but I’m not sure the world can change overnight as some people might like,” he says.

“On the [Broadridge] fee issue I could see committees and studies and maybe compelling the New York Stock Exchange to take a more involved and nuanced approach to how [the exchange] set[s] fees,” he says. This is a matter of great concern to corporate secretaries, since proxy processing fees fall under their budgets.

Proxy advisory firms such as ISS are also ripe for reform. The SEC asked for public comments on whether more regulation of this industry is needed to address conflicts of interest, disclosure of how the firms develop their voting policies and whether investors over-rely on the firms’ voting advice. Proxy advisory firms have received an SEC exemption from being considered a soliciting agent since the 1970s, but Breheny says the agency could toughen the standards for exemption as a way of bringing more regulation to the industry. That could include providing more public disclosure or possibly, in the case of ISS, eliminating its corporate advisory business, which critics contend is a conflict of interest.

Pfizer’s Lepore argues that the soliciting agent exemption should be removed altogether, but Breheny says he doesn’t think the SEC will take such drastic action. That would open proxy advisory services up to much more disclosure obligations and certain liabilities.

In terms of the OBO/NOBO classification, Breheny says he doesn’t think the SEC will revoke the privilege shareholders currently have to remain anonymous to companies, but that it could make it more difficult by, for example, requiring retail investors to renew the option to remain anonymous on a more frequent basis. Shareholders generally opposed changes to the OBO/NOBO structure in their comment letters, while more than 98% of issuers support either reforming or eliminating the classifications, according to an analysis of comment letters by the Securities Transfer Association.


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