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Data a Problem With Proxy Plumbing Comments
Article published on December 6, 2010
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
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
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
“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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