Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration

According to Investors Against Genocide, proxies issued directly by American Funds met the SEC standard (Rule 14a-4(a)(3) of the Securities Exchange Act of 1934) by clearly indicating the vote was about not investing in companies that substantially contribute to genocide. However, according to American Funds, 50 – 60% of its shareholders hold their shares in "street name" and receive proxy materials through Broadridge Financial Solutions. Voting instructions issued by Broadridge to those American Funds shareholders simply referenced “a shareholder proposal described in the proxy statement.” Each of the other seven questions were clearly described in Broadridge’s voting instructions. Broadridge’s online voting instructions were similarly vague.

Given that the voting process encourages shareholders to vote with management across the board, and genocide was not clearly flagged to voters as an issue, many shareholders did not know that they had an opportunity to vote on a matter of important social significance. The specifics are more fully described in a letter from Eric Cohen, Chairperson of Investors Against Genocide, to the SEC. More coverage of the issue at Mutual fund activists claim more voting problems, Reuters, 11/23/09. An American Funds spokesman says the most support at any of the funds where ballots were counted Tuesday was about 12 percent. (‘Genocide-free’ measure rejected at American Funds, AP, 11/24/09)

I suspect Broadridge claims they don’t have to follow the rules required for proxies because they use a voter information form (VIF), not a proxy. This is the same logic they gave for turning blank votes into votes for management (See petition to the SEC. Send comments to [email protected] with File 4-583 in the subject line.)

By that logic, based on technicalities, none of us are shareowners either. Almost all shares are owned by Cede & Co., a subsidiary of the Depository Trust & Clearing Corporation (DTCC). For many companies, Cede & Co. is the only shareowner of record. Cede gives participants an "omnibus proxy," that they in turn issue to their customers. Or their customers use the VIF to request voter instructions. We don’t actually buy and sell shares, we buy and sell claims against the accounts of "immobilized" shares held by DTCC and Cede. This method of clearing settlements was imposed by the 1975 Securities Acts Amendments.

It was supposed to be a temporary measure. Brokers were in a panic because they didn’t have the backroom staff necessary to clear the exchange of registered certificates. In response, the markets shortened the trading day and closed on Wednesdays. Still, over a hundred brokerage firms went bankrupt or sold out. The 1975 Act ended the physical movement of securities certificates and the panic. Stocks were "immobilized" at Cede and we began trading something more akin to poker chips, as Glyn Holton characterizes it. The "immobilized" system was supposed to be temporary, until a direct registration system could be developed around "uncertified" or "dematerialized" shares. Legal changes were needed in many states and computer systems needed to gear up and integrate.

That has all happened but too many business earn money off the current system. It has become entrenched because everyone now depends on intermediaries like brokers, banks and Broadridge. Of course, brokers and banks don’t want a direct registration system because they are the only ones who know who owns what at ground level. They have all the names and names are worth money. What we have been stuck with is a system that can’t accurately count ballots because it can’t audit back to the beneficial owner, only to the bank or broker, whom we are supposed to trust to reconcile the voting… and they can do it either before or after the fact.

As a result, there is lots of "empty voting." I imagine it also facilitates tax evasion, although I haven’t seen much written about that. Since voting happens through many layers, the system is overly complex. Rules, like the one cited by Investors Against Genocide with regard to proxy requirements and the issue I petitioned the SEC on (blank votes going to management, instead of being counted as abstentions), are easily circumvented.

A growing number of us think a direct registration system, where all shareowners hold their stock directly, will solve many of these issues. The company will know who their shareowners are. Shareowners would all potentially know each other and be able to communicate directly with each other. Transparency; it is good for the market and is good for knowing who supports or opposes policies, such as those that support or fight genocide.

I’m participating with a group coordinated by Glyn Holton, of the U.S. Proxy Exchange and the Investor Suffrage Movement. We are putting together comments to the SEC advocating direct, rather than "street name," registration, which we hope they will consider as they take up "proxy plumbing/mechanics" issues." We would love to have you join us in this effort. If interested, send me an e-mail.

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