SEC Proxy Reform Initiative Polarizes Industry
August 20, 2010
Should U.S. corporations be allowed to send proxy materials directly to beneficial shareholders or should they still rely on financial intermediaries or their agent – Broadridge Financial – to do so?
That question posed by the Securities and Exchange Commission continues to polarize the securities industry, based on an analysis of preliminary responses to its request for comment issued last month. Corporations and their transfer agents say that issuers have the right to communicate directly with all of their investors while banks and brokerage firms say the current process works just fine.
On July 14, the SEC issued its long awaited concept release on proxy reform for public comment by October.
Among the questions asked were whether it should eliminate or reduce the ability of investors to hide their identities from corporations by categorizing themselves as “objecting beneficial shareholders” (OBOs); whether the New York Stock Exchange’s fee structure for proxy distribution be eliminated in favor of allowing the marketplace to determine the appropriate fees; whether retail investors can or should provide their broker-dealers with standing instructions on how they want to vote their shares; whether shareholders can under any circumstances gain rights to vote a public company’s shares, even if they do not own the shares; and other matters affecting how voting conducted or tabulated.
The proxy system refers to how investors vote their shares at corporate meetings.
Under the current process, which has been criticized as antiquated by some issuers and transfer agents, corporations can communicate and send proxy materials directly to their registered shareholders but not to their beneficial shareholders, who hold their shares in the name of a financial intermediary.
The intermediary – typically a brokerage firm – will reflect the beneficial shareholders’ votes when executing its proxy for shares held in customer accounts. The votes from the registered shareholders and beneficial shareholders are ultimately delivered to a vote tabulator to determine the outcome of the vote. Issuers must pay broker-dealers for sending out proxy materials to beneficial shareholders.
Those fees, set by the New York Stock Exchange, are collected by Broadridge Financial, the world’s largest proxy distribution firm, on behalf of broker-dealers and banks.
At issue is whether the SEC should eliminate or reduce the ability of investors to hide their identities from corporations by categorizing themselves as objecting beneficial shareholders (OBOs). Some institutional investors – an estimated 30 percent of beneficial shareholders—prefer to remain anonymous to protect their trading strategies from being discovered.
In its August 10 letter to the SEC, Redwood Capital Bancorp said that it favored eliminating barriers between public companies by allowing investors wanting to remain anonymous to register their shares in a nominee or custodial account.
The bank also said that it wanted to foster competition among proxy advisory services. “As an issuer, we should be able to select the distributors of our communications and should not be forced to pay for a system in which proxy fees and intermediary services are determined by third parties,” wrote Fred Moore, chief financial officer.
Such a stance was also taken by the Shareholder Communications Coalition, whose members include the Business Roundtable, the National Association of Corporate Directors and Securities Transfer Association.
