The Dodd-Frank Act established the Investor Advisory Committee (IAC) to advise the Securities and Exchange Commission on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace. The IAC met for the first time on June 12, 2012 and the next full committee meeting is scheduled for September 28, 2012. Additional information on the committee.
At its inaugural meeting, the IAC agreed to create the following Subcommittees to carry out its responsibilities.
- Market Structure
- Financial Literacy
- Retail Investor Issues
- Investor as Owner
I’ll be primarily focusing on the Investor as Owner subcommittee. That subcommittee is charged with deliberating, considering and making recommendations on issues that directly impact investors as owners of the companies in which they invest. These topics range from corporate governance and “proxy plumbing” issues to matters of greater transparency and disclosure.
All committees seek public input and suggestions on these and other topics as the subcommittees begin to put their work plans and agendas together. IAC recommendations to the SEC, both short and longer term will be based on the priorities established by the subcommittees. Comments to date.
The subcommittees would appreciate receiving constructive comments. Those submitted by September 21, 2012 may be used to help set the agenda for the September 28, 2012 meeting. Send your comments to [email protected]. If this iteration of the IAC is anything like the last one, it will provide investors with a real opportunity to make a difference… if we can provide them with carefully conceived recommendations. Below are some of my initial thoughts, which I hope to tighten up and expand upon by the end of the week.
Members of the new Investor Advisory Committee
- Chairman Joseph Dear, Chief Investment Officer, California Public Employees’ Retirement System
- Vice Chairman, Craig Goettsch, Director of Investor Education and Consumer Outreach, Iowa Insurance Division
- Secretary, J. Robert Brown, Jr., Law Professor, University of Denver
- Darcy Bradbury, Managing Director and Director of External Affairs, D.E. Shaw & Co., L.P.
- Eugene Duffy, Partner and Principal, Paradigm Asset Management Co. LLC
- Roger Ganser, Chairman of the Board of Directors of BetterInvesting
- James Glassman, Executive Director, George W. Bush Institute
- Joseph Grundfest, William A. Franke Professor of Law and Business, Stanford Law School
- Mellody Hobson, President and Director of Ariel Investments, LLC
- Stephen Holmes, General Partner and Chief Operating Officer, InterWest Partners
- Adam Kanzer, Managing Director and General Counsel of Domini Social Investments and Chief Legal Officer of the Domini Funds
- Roy Katzovicz, Partner, Investment Team Member and Chief Legal Officer, Pershing Square Capital Management, L.P.
- Barbara Roper, Director of Investor Protection, Consumer Federation of America
- Kurt Schacht, Managing Director, CFA Institute
- Alan Schnitzer, Vice Chairman and Chief Legal Officer, The Travelers Companies, Inc.
- Jean Setzfand, Director of Financial Security for the AARP
- Anne Sheehan, Director of Corporate Governance, California State Teachers’ Retirement System
- Damon Silvers, Associate General Counsel for the AFL-CIO
- Mark Tresnowski, Managing Director and General Counsel, Madison Dearborn Partners, LLC
- Steven Wallman, Founder and Chief Executive Officer, Foliofn, Inc.
- Ann Yerger, Executive Director, Council of Institutional Investors
Concentrate Efforts on Retail Investors
The IAC would do well to recommend leveling the playing field between retail and institutional investors and between investors of all types and corporate management. Retail investors are more likely to return to the market if the scales aren’t so often tipped against them. It appears there may be agreement by Committee members to first concentrate their efforts on retail investors. Commissioner Luis A. Aguilar in his remarks to Committee members, noted:
According to a recent survey, only 15% of Americans trust the stock market. Investors continued to withdraw cash from U.S. equity funds in 2011, continuing a trend that has seen a total outflow of a half a trillion dollars from domestic equity funds since 2006. Some of this shift may be a natural result of the aging population of baby boomers. But research suggests there may also be a decline in the willingness of even younger investors to invest in the stock market.
SEC Chairman Mary L. Schapiro’s remarks noted the work of the Committee will be supplemented by the addition of the SEC’s new Office of the Investor Advocate, also established by the Dodd-Frank Act and indicated they are in the process of receiving applications for the new Investor Advocate, “who will lead that office and by statute work with you as a member of this Committee.” She reminded members the Dodd-Frank Act stated the purpose of the Committee is to advise and consult with the Commission on
- Regulatory priorities;
- Issues relating to the regulation of securities products, trading strategies, fee structures and the effectiveness of disclosure;
- Initiatives to protect investor interest; and
- Initiatives to promote
According to New SEC Investor Advisory Committee to Put Retail Investors First (AdvisorOne.com, 6/12/2012) Committee member James Glassman, executive director of the George W. Bush Institute, told newly appointed Committee Chairman Joe Dear that he wanted to be “assured” that the committee’s agenda would focus on retail investors. “Yes,” Dear replied. Barbara Roper, director of investor protection for the Consumer Federation of America, told AdvisorOne that most committee members expressed a desire to focus on the needs of retail investors-
there is no issue of higher importance for retail investors than how we regulate the intermediaries [such as the advisors and broker-dealers] they rely on.
One example of the dismissive atmosphere is the treatment of retail investors submitting proxy proposals. As you can see from the table below from John Laide at SharkRepellent.net, individuals submit a substantial proportion of such proposals. Yet, when the SEC convenes its post-season roundtable to review how the process can be improved, it typically does not invite retail investors
|Top Sponsors of Shareholder Proxy Proposals|
The process to obtain proof of ownership from retail investors should be less onerous. What real problem did Staff Legal Bulletin No. 14F (CF) address? Many retail shareowner proposal proponents viewed this SLB as a complicated labor intensive answer seeking a problem. Had introducing brokers provided false evidence of ownership letters for retail investors holding shares in street name?
I have never heard of any brokerage providing a letter saying one of their clients owned shares when he or she did not. If such cases exist, why aren’t these incidents brought to the attention of prosecutors for criminal violation? Wouldn’t that be a much simpler process unless such practices are rampant? If such practices are rampant, where is the evidence?
SLB 14F(CF) sets up a process whereby proponents may be required to obtain a letter from a clearing bank verifying their broker or bank held specified shares, even though the proponent may have no relationship with such a bank and the bank has no legal obligation to provide a letter.
The IAC should ask staff for examples of fraudulent broker letters. If there were no fraudulent letters, the IAC should recommend that a letter from the proponent’s broker or bank is sufficient and their is no need to get a letter from the clearing bank.
SEC rules require that proponents affirm their intention to continue holding at least the minimum amount of shares necessary to submit a proposal through the date of the annual meeting. Companies typically do not seek reconfirmation of share ownership once the proposal has gone through no-action review. In some sense, they are trusting that shareowners haven’t sold their shares during the several months between submission and the annual meeting. However, when it comes to a day or two around the submission, companies typically play “gotcha.” See page 6 of Council of Institutional Investors guide, Everything you wanted to know about Filing a Shareholder Proposal but were afraid to ask.
To prove ownership, a proponent needs to get a letter from a bank or broker confirming that he or she owned the requisite number of shares on the date the proposal was sent to the company. Ideally, the broker letter should be submitted along with the shareowner proposal.
This can get tricky. As a practical matter, however, the broker may prepare the broker letter a day or two in advance of the date the proponent submits it. Thus, when it is sent in, it will have a different date than the date of the letter. The company may argue that the submission is insufficient because the broker letter is dated November 15, whereas the submission is dated November 17 and it is conceivable that all of the proponent’s (shares) were sold on November 16.
The IAC should recommend to the Commission that two or three days between the submission date of a proposal and the date of a letter evidencing ownership is imaterial. Let’s stop playing games.
Voter Information Forms
Retail investors should be entitled to the same protections as shareowners holding actual proxies. Retail investors typically hold their shares in “street name” and receive voter instruction forms (VIFs) from Broadridge, rather than actual proxies. Broadridge claims (in correspondence and conversations) the rules that apply to proxies don’t apply to VIFs.
If VIFs go out to about 1/3 of the total number of shareowners and the rules don’t apply to them, then the SEC appears to sanction the treatment of retail shareowners as second class citizens, in comparison to those who receive actual proxies. (I don’t know the actual proportion going out as VIFs, but 1/3 seems like a reasonable guess.) SEC Rule 14a-4(a)(3) states the proxy
shall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters, and whether proposed by the registrant or by security holders.
Broadridge claims the rules for proxies don’t apply to voter information forms (VIFs), since they are not legal proxies. It may be helpful here to provide an example. John Chevedden submitted a proposal to Altera, asking them to end supermajority voting requirements. His resolved language read as follows:
Shareholders request that our board take the steps necessary so that each shareholder voting requirement in our charter and bylaws, that calls for a greater than simple majority vote, be changed to a majority of the votes cast for and against the proposal in compliance with applicable laws. This includes each 80% supermajority provision in our charter and bylaws.
Broadridge identified the item to be voted on the VIF, which most retail shareowners got, as follows:
TO CONSIDER A STOCKHOLDER PROPOSAL REQUESTING THAT BOARD TAKE THE STEPS NECESSARY SO THAT EACH STOCKHOLDER VOTING REQUIREMENT IN ALTERA S CERTIFICATE OF INCORPORATION.
In an April 1, 2010, letter to the SEC and Altera, Chevedden complained that voting would not be accurate with such a description of his resolution. On April 2nd, I posted an article entitled Abusive Practices Continue as VIFs Tilt Voting in Favor of Management and urged readers to bring this abusive practice to the attention of the former SEC Investor Advisory Committee through use of their online comment form. On April 9, 2010 Broadridge had acknowledged the error and “corrected” ballot language so that it read as follows:
A STOCKHOLDER PROPOSAL REQUESTS A CHANGE TO ALTERA’S VOTING REQUIREMENTS, SEE PROXY STATEMENT FOR FURTHER DETAILS.
I was told by a Broadridge representative that they “try” to summarize the issues but if that can’t be done easily, they put a general statement on the VIF, referring the shareowner to the proxy materials, such as that used at Altera. It is difficult for me to understand why Broadridge claimed to not be able to summarize this proposal as “end supermajority voting requirements,” or something similar. It certainly was not a unique or hard to understand proposal. Many, many such proposals had gone before.
This “corrected” ballot language certainly does not meet the requirements of SEC Rule 14a-4(a)(3). I asked the SEC for clarification on whether or not proxy rules apply to VIFs but received no response. If the SEC is trying to set up a system of rules that will persuade retail investors to come back into the market, why does it allow VIFs to obfuscate the issues?
For a more complete review of the problems related to VIFs, see my comment letter to the SEC dated October 20, 2010. See also, Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration and Ross Kerber’s piece for Reuters on zombie voting (Top U.S. proxy vote site favors boards, critics say, 5/29/2012) that might be addressed if VIFs have to meet the same standards as proxies.
The IAC should ask staff for a legal opinion discussing what legal requirements apply to VIFs and how, if at all, do they differ from those that apply to proxies. The IAC should recommended changes necessary so the same protections are afforded to retail investors as are afforded to shareowners with direct registration.
If the SEC ever gets around to determining their rules do apply to VIFs, that may take care of the issue of the including a “clear and impartial” description, required by Rule 14a-4(a)(3) and as discussed above. Additionally, such a finding might also somewhat address another issue — votes left blank that turn, almost magically, into votes for management. At least more voters would be alerted to the fact that blank votes will be counted as votes in favor of the position taken by the company’s soliciting committee because warnings would then have to be in bold-type, instead of in micro-type footnotes, as Broadridge now uses.
However, I would argue that Rule 14a-4(b)(1) still needs to be changed. See my post on the HLS Forum at Don’t Let Companies Change Shareholders’ Blank Votes and my petition to the SEC 4-583. Just as the SEC finally agreed to abolish the practice of “broker voting” in most instances because a non-vote isn’t necessarily intended to be a vote for management, the SEC should also amend 14a-4(b)(1) so that blank votes are counted as blank votes, not as votes in favor of the position taken by the company’s soliciting committee.
The IAC should try to level the playing field by recommending the Commission take action on my rulemaking petition to eliminate blank votes from automatically going to management.
Voting Uninstructed Shares
It makes little sense to prohibit brokers from voting uninstructed shares, but, at the same time, continue to allow companies the ability to vote on matters where the shareowner has failed to indicate his or her choice. Congress’ objective in enacting Section 957 of Dodd-Frank should logically be seen as extending to blank votes and other issues. The intent appears clear; if beneficial owners fail to provide instructions on how their proxies should be marked with respect to “significant” matters, no one should be empowered to vote on their behalf.
It would appear from the bill’s language that the prohibition already overrides provisions of SEC Rule 14a-4(b)(1) that “a proxy may confer discretionary authority with respect to matters as to which a choice is not specified by the beneficial owner or security holder.” At least it appears to clearly override granting such discretionary authority for votes on directors and executive compensation to brokers.
The SEC should use its rulemaking powers, not only to conform the provisions of Rule 14a-4(b)(1) to the mandate and the implied intent of Dodd-Frank but should also make a determination that all proxy matters are “significant.” All votes for all matters should only be cast in a manner as instructed by beneficial owners. Non-votes should not be counted as “for” or “against,” since they are obvious abstentions.
Who can say even selection of auditors is routine after Andersen’s involvement in Enron? Andersen struggled to balance the need to maintain its faithfulness to accounting standards with its clients’ desire to maximize profits, as reflected in quarterly earnings reports. Although the Supreme Court of the United States unanimously reversed Andersen’s conviction because of vague jury instructions, Andersen was also alleged to have been involved in the fraudulent accounting and auditing of Sunbeam Products, Waste Management, Inc., Asia Pulp & Paper, and the Baptist Foundation of Arizona, WorldCom, as well as others. Four years ago, a Department of Treasury advisory committee suggested that more companies have their shareholders vote on auditors, as a way to keep audit committees more accountable to their oversight duties.
More companies hold such votes. However, how do such votes keep audit committees more accountable if broker votes and blank votes tip the scales and override actual votes by shareowners? Additionally, broker votes allowed on any issue deny shareowners the ability to withhold their proxy, a possibly important strategy where shareowners believe the process being followed is illegitimate, as when companies hold a virtual-only annual meeting.
The IAC should recommend the Commission amend Rule 14a-4 to remove the provision that confers discretionary authority on matters where choice has not been specified by the security holder or beneficial owner, should explicitly extend such prohibition of discretionary authority to companies where beneficial owners fail to provide instructions, and should make similar amendments to other rules that may provide such authority.
Client Directed Voting
Historically, most retail shareowners toss their proxies. During the first year under the “notice and access” method for Internet delivery of proxy materials, I understand that less than 6% voted. This contrasts with almost all institutional investors voting, since they have a fiduciary duty to do so.
“Client directed voting” (CDV), a term coined by Stephen Norman, is seen by many as a solution for getting more retail shareowners to vote, ensuring companies get a quorum, and helping management recapture a good portion of the broker-votes cast in their favor that evaporated with recent reforms. I viewed Norman’s initial proposal as an extension of the “Vote with the Board’s Recommendations” button seen on VIFs. An open form of CDV could create much more thoughtful and robust corporate elections.
The key issue in any open CDV system is to let shareowners control where their electronic ballots are delivered. Just as there is no question shareowners can control where hardcopy ballots are delivered, there should be no question they can direct where their electronic ballots are delivered. This simple requirement would insure third-party content providers, like the late effort at MoxyVote.com, an opportunity to compete and improve the quality of voting advice.
Additional elements for a more effective CDV system include:
- A wide range of voting opinion sources that will eventually cover all issues;
- Open access for any new opinion sources to publish their opinions;
- Open access for shareowners to choose any opinion source for our standing instructions on voting;
- Sufficient funding for professional voting opinion sources that compete for funding allocated by retail shareowner vote (or by beneficial owners of funds that may choose to “pass through” their votes).
Under an open system for of CDV, feeds would offer the ability for retail shareowners to essentially build a “voting policy,” just as institutional voters are now able to do. That model will increase participation and voting quality. We shouldn’t ask shareowners to affirm every single pre-filled ballot. That could be a deal breaker for people with stock in many different companies who would rather spend their time on other activities.
Third-party CDV systems, like the former Moxy Vote, could allow investors to create hierarchies of voting instructions. (Vote like X. If X hasn’t voted the item, vote per Y. If Y hasn’t voted, vote per Z, etc. Eventually, these systems could become very complex. Vote like X on issue A; vote like Y on issue B, also specifying defaults if either X or Y don’t have votes recorded.) See Client Directed Voting Q&A on the VoterMedia.org site.
If brokers are required to deliver proxies as directed by their clients, another whole model could emerge around “proxy assignments.” Proxies assigned to organizations or individuals, for example, could give annual meetings a new meaning. See Investor Suffrage Movement by Glyn A. Holton. For a more complete discussion CDV and my recommendations, see my discussion at An Open Proposal for Client Directed Voting, Harvard Law School Forum on Corporate Governance and Financial Reform, July 14, 2010.
The IAC should ask staff what rulemaking changes would be needed to create an open and robust form of client directed voting and should then recommend such changes to the Commission.