Take Action: SEC-IAC Report on Impartiality Stops Short

The Investor as Owner Subcommittee of the SEC’s Investor Advisory Committee (SEC-IAC) established pursuant to Section 911 of the Dodd-Frank Act issued a report on Impartiality in the Disclosure of Preliminary Voting Results. The recommendations will be discussed at a meeting on October 9, 2014.

The members of the subcommittee are listed here. After I discuss the SEC-IAC’s two recommendations briefly below, which I support, I then urge readers to write to the SEC-IAC requesting they address additional issues of impartiality.

Impartiality Regarding Disclosure of Preliminary Voting Data

That the staff of the Commission take the steps necessary to ensure that the exemption in Rule 14a-2(a)(1) is conditioned upon the broker (and any intermediary designated by the broker) acting in an impartial and ministerial fashion throughout the proxy process, including the disclosure of preliminary voting information.

Rule 14a-2(a)(1) exempts the brokers’ role in the voting process from proxy rules, in part, conditioned on the broker acting in an impartial manner.  The SEC-IAC rightly sees Broadridge’s selective disclosure of preliminary voting information to issuers as inconsistent with the brokers’ requirement to remain impartial, since Broadridge is acting as intermediary for the brokers.

For brokers to remain exempt from the proxy rules, the SEC cannot allow brokers (or their intermediary, such as Broadridge) to provide voting information to only to one side in a contested or exempt solicitation. Impartiality could be met through the denial of such information to all parties in a contested or exempt solicitation, or as the SEC-IAC prefers, by disclosure on identical terms to all parties who distribute proxy materials.

Impartiality Must Be Verified to Guard Against Conflicts of Interest

That the staff of the Commission take the position that any broker relying on the exemption from the proxy rules in Rule 14a-2(a)(1) that uses an intermediary to fulfill the requirements of impartiality under Rule 14a-2(a)(1) take reasonable steps to verify, based upon all the relevant facts and circumstances, that the intermediary will act in an impartial fashion and is not subject to impermissible conflicts of interest that impair the ability of the intermediary to act in an impartial manner.

The second recommendation addresses possible conflicts of interest by Broadridge, which distributes Voter Information Forms (VIFs) and other materials for brokers, but also provides tabulation and inspector of election services for issuers.  That puts Broadridge in the position of determining the validity of proxies it submitted on behalf of brokers and banks — in effect, auditing its own work.

The SEC-IAC says brokers should be required to take reasonable steps to verify, based upon all the relevant facts and circumstances, that Broadridge will act in an impartial fashion and is not subject to impermissible conflicts of interest that impair the ability of the intermediary to act in an impartial manner. They would need to audit their intermediary.

Take Action: Extend to Impartiality to Handling Voter Information Forms (VIFs)

The report included additional concerns regarding impartiality in a footnote but chose not to address these issues. I think this would be a good time to remind the SEC-IAC these issues, which treat retail shareholders as second-class shareowners, are also important. I’m beginning to feel like the victim in the Cyanide and Happiness cartoon to the right. Footnote 38 reads as follows:

Concerns have also been raised about Broadridge’s policy of voting the blank portions of partially executed proxies in a manner consistent with management’s recommendations. Corp. Governance, to Elizabeth M. Murphy, Sec’y, SEC 2 (May 15, 2009), available at http://www.sec.gov/rules/petitions/2009/petn4-583.pdf (requesting rulemaking to amend Rule 14a–4(b)(1) under Securities Exchange Act of 1934 to prohibit conferring discretionary authority to issuers with respect to nonvotes on the voter information form or proxy). See also Christie Nicks, Voting of Partially Instructed Shares by Brokers, DU Online Law Rev. (April 2014), available at http://www.denverlawreview.org/online-articles/2014/4/19/voting-of-partially-instructed-shares-by-brokers.html Our recommendation does not address this issue.

Correspondence to the SEC-IAC gets posted here. You can submit comments here. It would be nice to get a few more comments, such as the following:

Now that the SEC-IAC has addressed Impartiality in the ‘Disclosure of Preliminary Voting Results’ in their paper of the same title, I hope the Committee will take up the issue of impartiality in writing the Voter Information Form (VIF) and counting the votes cast on behalf of shareholders.  As acknowledged in footnote 38 of the above named paper, these issues were discussed in detail in the May 15, 2009 rulemaking petition and the April 2014 DU Online Law Review article.

Brokers distributing VIFs have an obligation to act in an ‘impartial’ manner. Yet, the SEC continues to allow brokers to vote for unvoted VIFs on ‘routine’ matters and to fill in votes left blank for partially voted VIFs. I submit there that after the behavior of auditor Arthur Andersen in the Enron case, there are no ‘routine’ matters and that items left blank should be counted as abstentions or the rules applicable to proxies regarding bold type etc. should apply to VIFs.

Additionally, VIFs should be “prohibited from describing proxy ballot items using wording, headings or fonts that differ from those used on the related proxy card,” as the Council of Institutional Investors (CII) pointed out in their letter of April 4, 2013 to the SEC at http://www.cii.org/files/issues_and_advocacy/correspondence/2013/04_05_13_cii_letter_to_nyse_on_proxy_distribution_fees.pdf.

Impartiality should apply equally to disclosure of votes and to the behavior of intermediaries with regard to drafting VIFs and voting itself. The current process tips the scales in favor of entrenched boards by misleading retail shareholders. Please advise the Commission on how to remedy this unfair situation.