Only a Few Hours Left to Comment to SEC on Proxy Plumbing (updated)

On July 14, 2010 the Securities and Exchange Commission voted unanimously to issue a concept release seeking public comment on the U.S. proxy system and asking whether rule revisions should be considered to promote greater efficiency and transparency. Today is the last day to comment within the formal timeline. Looking through the comments posted thus far, here were some of the more interesting for me:

  • Niels Holch, Executive Director, Shareholder Communications Coalition – More than any other group, probably helped establish the framework of the SEC’s release.
  • James McRitchie, Sure, I’ll plug my work:
  • Mark Latham, Innovative market-based solutions. Open client directed voting, competitive funding for proxy advice, the need for the proxy communications system to be kept outside corporate management’s control — taking the opposite position from many on this last issue but with sound reasoning.
  • John C. Wilcox, ICGN. Need for dematerialization of shares, establish guidelines for identifying the beneficial owner or “ultimate investor” entitled to exercise voting rights, supports further development of open client directed voting
  • Glenn H. Davis, CII. Favors a robust system of client-directed voting, data-tagging for proxy–related materials
  • Wachtell, Lipton, Rosen & Katz. Calls for proxy advisory services to be regulated and increase disclosures, a very closed form of client directed voting that essentially brings back broker votes
  • Keith Bozarth, SWIB. Does not favor changing private OBO status

Broc Romanek, highlights some other comments at this morning.  Time is running out.

USPX just provided comments, which attempts a more comprehensive question by question response. A few creative highlights:

In an honest election, votes that aren’t cast should remain not cast. You don’t offer those votes up to whomever would like a little extra suffrage: “Unused votes! Who wants ’em?” That, essentially, is what the post-reconciliation and hybrid methods do, at least as described in the Concept Release.

We define a reconciliation method as “accurate” if it reproduces the result that would be obtained if, instead of the current system of street name registration, a direct registration system prevailed, with individual shares tracked through clearance and settlement to individual beneficial owners. With an accurate reconciliation method, as so defined, there will never be over-voting of any sort. Votes won’t be recycled, as defined in our response to question 1. No investor will be denied a vote because someone else’s trade failed to settle. Investors’ interest in fair, undistorted corporate elections will be protected.

The Commission should enforce this right (to withhold proxies) by allowing shareowners to prevent anyone from voting a proxy on their behalf. One solution would be to do away with Rule 452 entirely. Another would be to provide a check box on all proxies or VIFs allowing shareowners to withhold their proxy.

Most of the problems with today’s proxy system arise because of the current system whereby shares are immobilized by DTC and shareowners trade security entitlements. This system was intended as a temporary stop-gap in the 1970s, when it was implemented. At the time, technology to support an automated direct registration system didn’t exist. Today, that technology could easily be implemented. Rather than keep patching the broken-down system of DTC and immobilized stock certificates, perhaps resources should be invested in a comprehensive direct registration system. That would solve many problems with the current proxy system, including that of confirming votes.

The OBO/NOBO distinction should be scrapped. Shareowners should not be allowed to refuse direct corporate communications.

We have serious reservations about allowing anonymous investment in public corporations. We understand this is a foundational issue, but we believe the time is long overdue for public debate on the question.

We believe it is in the public interest that individuals not be allowed to finance corporate activities—with their potential to produce enormous good or enormous evil—anonymously. We understand some believe anonymity is important for the conduct of certain speculative trading activities. We are unimpressed and remind the Commission that its mandate says nothing about facilitating speculative trading.

Disclosure of all beneficial owners would not harm investors. It should occur more frequently than annually and include information on the length of time shares were held, which would facilitate proving ownership for purposes of Rule 14a-8 and proposed Rule 14a-11. We are not concerned about disclosures impairing speculative trading strategies.

It would also be helpful for the Commission to establish guidelines for identifying the beneficial owner or “ultimate investor” entitled to exercise voting rights. For example, full voting rights should be passed to 401(k) plan participants for holdings in the employer’s company.

Banks and brokers should not be offering their retail clients options such as “always vote with management”, “always vote against management” or “vote according to this third party’s recommendations”. Rather, they should be offering their clients the single option of transferring their proxy to a voting platform that would then make all the same options—and many more—available to them.

Because the voting platforms would receive proxies—and not VIFs—they could pass client votes directly to vote tabulators, bypassing the expense and inevitable errors associated with passing votes back to the client’s securities intermediary and then on to Broadridge.

We have serious concerns about rudimentary forms of client-directed voting that would have shareowners making elections such as “always vote with management”, “always vote against management” or “always abstain”. We call such rudimentary forms of client-directed voting “zombie voting”. If offered on proxy voting platforms along side of more robust options, we believe these rudimentary options would be little-used, posing little problem. If offered at the bank or broker level, as part of only a limited suite of options for client-directed voting, we believe these rudimentry options would be quite widely used, causing systemic problems.

Another form of client-directed voting mentioned in the Concept Release would allow shareowners to elect that their shares be voted according to recommendations— or pre-announced votes—of some third party. Again, we believe such options would be appropriate if offered through a proxy voting platfform. If offered at the bank or broker level, they will pose unique systemic issues. In particular, they will likely lead to violations of Rule 13(d).

Rule 14a-2(b)(6) should be revised to provide for discussion of issues related an issuers proxy up to the date voting closes.

We believe all VIFs should be replaced with discretionary proxies.

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