Proxy Reform Study: Gradual Not Radical Change is Needed
February 24, 2010
The Securities and Exchange Commission doesn’t need to radically overhaul the current proxy distribution and voting system to promote greater participation by investors in corporate agendas.
That’s the conclusion of a new white paper written by the law firm of Cleary Gottlieb Steen & Hamilton on behalf of the Council for Institutional Investors (CII), a Washington, D.C. trade group representing the U.S’ largest pension funds. Its largest member is the California Public Employees Retirement System (Calpers), well-known for its shareholder activism.
The publication of Cleary Gottlieb’s study comes amidst the Securities and Exchange Commission’s attempt to change what it calls “proxy plumbing” so that corporations can communicate directly with investors rather than through financial intermediaries which hold their accounts. SEC Chairman Mary Schapiro said that the regulator will come out with a concept release on the matter shortly.
The recent report for CII, prepared by Cleary Gottlieb’s partners Alan Beller and Janet Fisher, says that the SEC should continue to allow beneficial shareholders to conceal their identities from corporations if they wish but only if they pay their financial intermediary a fee to list them as “nominee accounts” on their records. The study also says that issuers are likely to continue using third party distributors such as Broadridge Financial, to mail proxy materials to beneficial shareholders to gain cost and operational efficiencies.
“We do not believe that proposals that eliminate the possibility of anonymity altogether are workable, at least in the near term, since they do not accommodate the strong privacy interest of many retail and institutional investors,” writes Cleary Gottlieb in the report called: “The OBO/NOBO Distinction in Beneficial Ownership: Implications for Shareowner Communications and Voting.”
The report, which can be found on Cleary Gottlieb’s website www.cgsh.com, goes on to say that even in a world where direct communications are fully permissible, “we believe that companies will continue to use agents [such as Broadridge] for the purposes of compiling shareowner lists and particularly document distribution given the advantages of large scale fulfillment in terms of cost and reliability.”
While issuers or their transfer agents know the identities of registered shareholders they don’t for beneficial shareholders who hold their accounts in the name of the financial intermediary through which they bought their shares.
Beneficial shareholders which allow their broker dealers or banks to disclose their identities to corporations are known as non-objecting beneficial owners (NOBOs), while those who refuse are called objecting beneficial owners. About thirty percent of beneficial shareholders are OBOs. Banks and brokerage firms typically request that investors designate whether they wish to be NOBOs or OBOs at the time they open their accounts. And many brokerage firms often categorize shareholders as OBOs instead of NOBOs if they don’t make a choice.
Although corporations can ask financial intermediaries to disclose the names of NOBOs they still cannot mail them proxy materials directly. Some issuers and proxy solicitation firms have advocated that the SEC either abolish the designation of objecting beneficial shareholders entirely or severely restrict its usage.
