Over-voting or Over-reporting: 'Tempest in a Teapot'?
Over-voting or Over-reporting: 'Tempest in a Teapot'?
May 17, 2010
Broker-dealers call it over-reporting; transfer agents call it over-voting. Broker-dealers say it's a nonissue. But a group representing some transfer agents and issuers says it's a flawed part of voting by shareholders, which needs to be fixed.
What it is? The potential for a corporation to receive more votes from beneficial shareholders during its annual meeting than actually can be cast.
The over-voting could occur when a broker-dealer or a bank makes a recordkeeping mistake on the number of shares that can be voted at an annual meeting. This can take place for a variety of reasons, but the most typical miscue is failing to keep track of shares when they are out on loan. That is because the lender of the securities has lost its right to vote to the holder of the securities on record date. That right goes to another borrower or another investor, further down the line.
Such recordkeeping errors can and will be caught by financial intermediaries prior to an annual meeting. But the Shareholder Communications Coalition (SCC) is asking the Securities and Exchange Commission to mandate even more operational improvements on the part of broker dealers. The SCC, an umbrella organization for the transfer agent trade group Securities Transfer Association and several issuer organizations, wants the regulator to require brokerage firms holding shares for beneficial shareholders to always adjust their records in advance of each annual meeting. That will allow them to ensure they know who is eligible to vote-and how many shares they are entitled to vote-before they mail out proxy materials and ballots to investors.
"Broker-dealers should reconcile account holders' long positions with share-lending positions prior to distributing voting instruction forms and mailing out proxy materials," said Niels Holch, a partner at Holch & Erickson, the Washington, D.C. lobbying firm representing the SCC.
Such a process of prereconciliation is often done by institutional brokerages. Retail brokerages often use a process called postreconciliation.
The SCC's request comes in the midst of a far-reaching analysis by the SEC on how to improve the current proxy voting system. The SCC also wants the SEC to allow corporations to send proxy materials directly to their beneficial shareholders rather than through banks and brokerages, entities which hold shares on their behalf.
"Over-voting is sort of a misnomer because the issuer doesn't get the extra votes, but there is still an operational glitch involved," conceded Rob Folinus, product manager for proxy services at BNY Mellon Shareowner Services, the Jersey City, N.J. stock transfer arm of Bank of New York Mellon. The unit tabulates votes for about 1,000 annual meetings.
Regardless of how one identifies the hiccup, here is how the voting process works:
* Broker-dealers now send contact information on a company's beneficial shareholders and their holdings to Broadridge Financial Solutions, the world's largest distributor of proxy materials.
* Broadridge then distributes voting instruction forms to the beneficial shareholders, so they can vote.
* Broadridge tabulates the votes from the beneficial shareholders and provides the vote totals to a company's transfer agent.
* That agent acts as the vote tabulator for an annual meeting, adding in the votes from registered shareholders who vote in their own names.
