Who Will Pay for CDV/AVI?

Interesting article, Who Will Pay for Client-Directed Voting?, at the Securities Industry Blog on August 10, 2010, asks:

Will the SEC approve it? Even if it did, who would build the technology to implement it and who will pay for it? Or, maybe the answer is would the SEC approve it without knowing that someone would be prepared to build it?

Take a look at MoxyVote.com, it is already there. Apparently, Proxy Governance says they can upgrade their voting platform for institutional investors at an “incremental cost” to accommodate retail investors. We can see from the comments posted on proxy plumbing at the SEC’s site, Proxy Governance has been in talking with commissioners. It reportedly needs $5 million just to get started and an additional $7 million to $20 million to operate each year.

One thing I wish people who report on this topic would get right is the originator of the idea. Yes, as reported in the Securities Industry Blog,  Steven Norman generally gets credit for coining the term, “client directed voting,” which the SEC reframes as Advance Voting Instructions. Once it looked like broker-votes would be eliminated, he came up with an idea to give shareowners a very limited number of options that would allow their broker to continue to vote on their behalf, having been directed to do so by the client.

Many years before, Mark Latham, a member or the SEC’s Investor Advisory Committee, proposed a much more comprehensive system at least as far back as the year 2000. “The Internet Will Drive Corporate Monitoring” and other papers on the VoterMedia.org Publications page, which proposed a market-driven framework to help investors vote more intelligently. Coming from the standpoint of educating voters or recapturing their votes for management led to substantially different models.

Yes paying for a system is a key issue but MoxyVote.com is already doing it. ProxyDemocracy.org could do easily with a minimum of financial help. The key is opening the process to competition by allowing proxies to be delivered to whomever is designated by the shareowner.

NYSE rules currently require payment by issuers for the cost of voting electronically but issuers may not always be making such payments to CDV platforms like Moxy Vote. See NYSE Rules 450-460 pertaining to proxy distribution. The Rules are actually written for “member organizations” (i.e., brokers) and specify what brokers or their agents (e.g., Broadridge) can charge for distribution and collection of proxy-related items. The rules are clear that Issuers are supposed to pay for all of the distribution (and collection) costs and that brokers can expect to collect from them. These rules should be amended to apply to Issuers when shareowners choose to take delivery of proxies or to vote through sites like Moxy Vote, RiskMetrics, Glass Lewis and ProxyGovernance.

The fees that Broadridge is charging to electronic voting platforms (RiskMetrics, Glass Lewis, ProxyGovernance, Moxy Vote, etc.) should be paid by the issuers as part of the overall collection costs (like postage). The electronic platforms, in this function, are merely an extension of the proxy distribution agent. However, I understand that Broadridge charges on the order of 10X for electronic vote collection from these platforms than it is permitted to charge the issuers.

If Broadridge is offering a “value-added” service to these electronic platforms, where is the “baseline” service that costs less? Perhaps the value-added services revolve around the ability to turn blank vote into votes for management without following the rules that apply to proxies. (See my blog post, Jim Crow “Protections” for Retail Shareowners)

My understanding is that fees are charged to electronic platforms on a “per ballot” basis (generally one fee per position per year) and that electronic platforms are generally passing along these costs to voters. That becomes much more difficult, perhaps impossible, when trying to service retail shareowners with small position sizes and many more per ballot transactions, relative to shares voted.

This is, in effect, becomes a system where the voter is paying to vote, like the old Jim Crow poll tax. It also inhibits progress (i.e., the development of electronic platforms for retail shareowners) because voting through the mail and through the phone is free. Why should retail shareowners have to pay when voting online, which is inherently the least expensive method of voting? Why should services like Moxy Vote have to front such expenses? Without a change, it is hard to see how they can ever turn a profit and it seems even less likely that nonprofits, such as Proxy Democracy, would ever be able to offer users the option of voting on a Proxy Democracy platform. Such costs need to be eliminated or minimized if a robust open CDV system is to mature.

The NYSE should consider forcing Broadridge to direct some of its “paper suppression fees” to firms like MoxyVote.com that should be sharing in this incentive, since shifting to electronic from paper voting saves money. That would be a simple way of beginning to address the cost issue. The most fundamental point regarding costs is that issuers should bear the actual cost of voting, not shareowners or CDV systems.

For more, see my comments to the SEC on proxy plumbing dated Jul. 16, 2010 and my post, An Open Proposal for Client Directed Voting on the Harvard Law School Forum.