by James Hyatt

The Securities and Exchange Commission officially launched its long-anticipated rule-making inquiry into the U.S. proxy system.

Proxy_Crop_iS_Feature 2SEC staff members at a July 14 meeting outlined a concept release seeking public comment on proposals to “promote greater efficiency and transparency in the U.S. proxy system and enhance the accuracy and integrity of the shareholder vote.”  And SEC Commissioners, with no debate, unanimously approved issuing the concept release for a 90-day public comment period.

However, the mid-July concept release isn’t intended to address a number of corporate governance issues included in the Dodd-Frank financial reform bill still pending in Congress.

Proxy voting issues under examination involve so-called “proxy plumbing” issues of particular interest to institutional shareholders and major corporations.

“OBO/NOBO” rules on disclosure of names of beneficial owners

Currently, shareholders can keep their names secret through use of brokers or banks —  Objecting Beneficial Owners or OBOs.   Such an arrangement prevents companies from contacting such investors directly, in turn, companies argue, raising costs and reducing shareholder voting.  Shareholders who prefer to hear from companies directly are called Non-objecting Beneficial owners, or NOBOs.

Brokers and banks, however, want to maintain confidentiality of customers as well as collect fees for forwarding proxy materials and help make lending of shares easier.

Some investors, meanwhile, prefer secrecy as part of an investment strategy.  The SEC study seeks comment “on whether to preserve, eliminate, limit, or discourage the use of objecting beneficial owner status.”

The role of proxy advisory firms

Advisory firms have become increasingly influential, helping investors keep track of thousands of shareholder meetings, analyzing tens of thousands of corporate and shareholder proposals, providing services to expedite actual proxy voting, while weighing in at the same time on corporate governance and ethical behavior issues.

(The largest advisory firm, RiskMetrics Group, was acquired earlier this year for about $1.55 billion in cash and stock by MSCI Inc.)

The SEC wants to address, among other issues, whether advisers serving both corporations and investors are disclosing possible conflicts of interest.  Three of the seven major proxy advisors are registered with the SEC as investment advisers.

The SEC’s fact sheet says the proposal also seeks comments on enhancing regulatory oversight over the formation of voting recommendations, and requiring eventual public disclosure by proxy advisory firms of their voting recommendations in Commission filings.

Accuracy of proxy voting

As far back as 1997, the SEC was exploring low retail-investor participation in proxy voting, as well as technical problems with over- and under-voting.

The concept proposal asks wither over-voting or under-voting is a problem, and, if so, whether broker-dealers should disclose how votes are allocated.  It also seeks comment on whether vote tabulators, securities intermediaries and proxy service providers should provide each other with access to vote data to confirm votes have been received and tallied correctly.

Proxy voting by institutional shareholders

Some  major investors often lend securities, but such loaned shares can’t be voted until the shares are recalled. The SEC wants to explore whether agenda items at shareholder meetings should be announced earlier so that holder can decide whether to get involved in voting the shares.

Addressing “empty voting”

The SEC wants to explore whether, due to setting a  “record date” determining whether a shareholder can vote, the practice means “holders without an economic stake in the matter can influence the outcome of a vote.”  That is, a holder may have sold the shares after the record date, but still can vote on issues of corporate concern.

Removing barriers to retail investor participation

The proposal  seeks to examine several ideas to improve retail investor voting participation including:

  • Improving investor education
  • Enhancing brokers’ Internet platforms
  • Permitting advance voting instructions for retail investors
  • Enhancing investor-to-investor communications
  • Improving the use of the Internet for distribution of proxy materials

A fell text of the SEC’s fact sheet on the rule-making into the proxy system is available here.