Securities Regulation Daily dvisory subcommittee’s reforms to ‘proxy plumbing’ would include universal proxy
Thursday, July 25, 2019

dvisory subcommittee’s reforms to ‘proxy plumbing’ would include universal proxy

By Anne Sherry, J.D.

The SEC Investor Advisory Committee discussed, then postponed a vote on, a subcommittee’s recommendations to improve the U.S. proxy system.

The Investor-as-Owner Subcommittee of the SEC Investor Advisory Committee presented a set of four recommendations designed to improve the "plumbing" of the U.S. proxy system. In the subcommittee’s view, the SEC should formalize rules requiring the industry to do what is in its best interest. While there was support for the ideas among the committee, it agreed to postpone a vote to give members more time to analyze the 17-page, densely endnoted recommendation.

The recommendations. The subcommittee recommended that the SEC:

  1. require end-to-end vote confirmations to end-users of the proxy system;
  2. require all involved in the system to cooperate in reconciling vote-related information;
  3. conduct studies on share lending and investor views on anonymity; and
  4. adopt its proposed universal proxy rule, with "modest changes."

In introducing the recommendations at the Investor Advisory Committee meeting, subcommittee chairman John Coates said that while the industry has been working on end-to-end confirmation for 15 years and has reached consensus that it is a good idea, it is not a first-order priority at most companies. The recommendation does not tell the SEC exactly how to go about making it happen, but rather urges the Commission to ensure that voters are able to find out whether their votes were counted as they thought they would be.

Coates explained that the second recommendation takes the rules that already apply to transfer agents and expand them to other actors who are functioning in the same way. Broadridge, custodial banks, proxy agents, proxy advisors, collectively should all have a duty to work together to reconcile voting information when they realize there’s a problem, he said.

The third recommendation relates to surveys and studies. There were suggestions at the proxy roundtable that investors are unclear on how they can remain anonymous to the companies whose shares they own. The subcommittee recommends that the SEC survey investors and explore whether the nominal default rule—broker customers are non-objecting beneficial owners (NOBOs) unless they specifically object—has actually been flipped without actual customer knowledge in brokerage contracts. Second, SEC staff should study the extent to which share lending contributes to errors and whether the effect of share lending on voting is being sufficiently disclosed to investors.

Finally, the fourth recommendation is that the SEC adopt a universal proxy. Coates said that opposition to the agency’s proposal has died down and is now confined to specific elements that can be addressed in a revised rule. He also believes that concerns about a director’s unwillingness to serve if a member of the dissident slate were elected could be ameliorated with proper disclosures about what the issuer knows about its directors’ intentions.

Discussion. J.W. Verret said that he is in favor of a self-selected or opt-in procedure for the universal proxy, rather than making it mandatory. He also said that because the proposal works with individual parts of the proxy system but leaves out proxy advisors, he would vote no on that issue. Coates responded that the subcommittee captures proxy advisors in the second recommendation (duty to cooperate), but did not take on broader issues about proxy advisors like conflicts of interest and registration. He said he doubted there would be consensus even at the subcommittee level, much less in the broader committee.

William Lee came out strongly in favor of the recommendations, adding that they have systemic importance as well as they relate to share lending. Allison Bennington had prepared some additions to the universal proxy recommendation, which Coates said he would pass around as a friendly amendment. Bennington noted that the current system creates confusion for Main Street investors who receive different ballots, in different colors, at different times over a period of weeks. A universal proxy would significantly help with that and would reduce costs not just for dissidents but significantly for companies—which are ultimately paid by shareholders.

Lydia Mashburn, however, raised some concerns about the recommendation and particularly that the committee had not been afforded enough time to thoroughly consider it. Several members agreed, and the committee declined to vote at this time.

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