As expected, the Securities and Exchange Commission’s five commissioners voted unanimously to publish its long-awaited Concept Release on the U.S. Proxy System.
The so-called “proxy plumbing” concept release, which is expected to include a 90-day comment period when published, is part of the first comprehensive SEC review of the infrastructure of the U.S. proxy voting system in nearly 30 years. [Update: the 151-page Concept Release has been posted to the SEC Web site].
The SEC is seeking input on whether changes to the current system might be needed in light of developments during that time in shareholder demographics, the structure of share holdings, technology, and the potential economic significance of each proxy vote.
“With all of these changes, it is time to once again ask the fundamental policy questions that led to the development of the current infrastructure, as well as to examine issues that, three decades ago, either did not exist or were not considered significant,” SEC chairman Mary Schapiro said in remarks during the July 14 open meeting.
Schapiro noted that more than 600 billion shares are voted annually at more than 13,000 shareholder meetings each year.
The concept release focuses on three major issues: the accuracy and transparency of the voting process, the manner in which shareholders and corporations communicate, and the relationship between voting power and economic interest.
“While we believe the system overall is working, it is certainly reasonable that it can work better,” Meredith Cross, director of the SEC’s Division of Corporation Finance, noted. Cross added that the issuance of the concept release “is not the end of our review of the U.S. proxy system.”
“After we receive public input, we expect to bring to recommendations to the commission for changes to the rules if it appears the changes would help investors and improve the proxy system,” she said.
SEC staff members detailed nine major issues to be addressed in the release:
Over-voting and under-voting, which can occur when there’s a mismatch between the number of shares held by a broker-dealer and the number of shares credited to the broker-dealer’s customers’ accounts. SEC staffer Ray Be noted that one of the methods used by some broker-dealers to reconcile their records and allocate votes in order to avoid over voting may result in under voting. He said the release will seek comment on whether the method used by broker-dealers to allocate votes should be disclosed, and whether the SEC should require a particular method be used.
Vote confirmation that votes cast were received and recorded properly—which Schapiro noted “currently only exists in limited circumstances.”
Proxy voting in the context of securities lending. Rather than passing judgment on the merits of securities lending, Schapiro said the release will examine whether investors who lend securities need information sooner about the content of shareholder meetings so they can decide whether to recall their shares and regain their right to vote them. The release will also ask 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 they vote.
Proxy distribution fees. The release will ask for input on the fees charged to issuers to reimburse broker-dealers for the costs of forwarding proxy materials. Maximum fees, which are set by stock exchange rules, haven’t been revised since 2002. Be said potential actions could include having the stock exchanges revise the fee schedule or eliminating it and allowing market forces to determine the appropriate fees.
Issuers’ ability to communicate with beneficial owners. The release will seek input on whether the 25 year-old “OBO/NOBO” system, which allows shareholders to keep their identities confidential from issuers, is still the “most appropriate regulatory response to the competing interests of privacy versus effective shareholder-corporation communications.” Be said the release will seek comment on whether to eliminate limit, or discourage use of “OBO” status.
Removing barriers/disincentives to retail investor voting participation. The release will seek comment on ideas for improving investor education; enhancing brokers’ Internet platforms; permitting advance voting instructions for retail investors (known as client-directed voting), and enhancing investor-to-investor communications.
Data-tagging proxy-related materials. In response to a February recommendation by the SEC 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 shareholders’ ability to analyze issuer disclosures and to make informed voting decisions, and what it might cost.
“Empty voting”—where the right to vote is disconnected from the economic interest in the outcome of the vote—as a result of certain hedging strategies; the sale of shares after the record date but before the annual meeting; voting unallocated shares in an ESOP, and certain stock lending. The release will seek input on the scope and significance of “empty voting”; the costs versus benefits; whether certain issuers are more vulnerable to “empty voting” than others; and whether regulatory responses are warranted, such as requiring the disclosure of decoupling activities.
The role of proxy advisory firms. The SEC will seek input about concerns that proxy advisory firms may be subject to undisclosed conflicts of interest, may fail to conduct adequate research, or may base recommendations on erroneous or incomplete facts. The release will ask whether firms should be subject to increased SEC oversight.
Compliance Week will providers subscribers with complete details in an upcoming edition.