Focus On: Operations
A DAY IN THE BACK OFFICE:
Eliminating Operational Risk at a Transfer Agency
May 4, 2011
Computershare had to change its proxy cards as well as its online and automated phone service. And it had only three months to do so, the time between the issuance of the final requirements from the SEC and when corporations needed to start mailing proxy cards with the new “say-when-on-pay” question.
The costs of adapting to cost-basis reporting and executive say when on pay?
Computershare executives wouldn’t specify a figure but its annual report provides some inkling. For fiscal 2010, Computershare spent $161 million on technology, globally. That compared to $154 million in 2009.
Computershare will have to spend a lot more on technology if the SEC approves a proposal put forth last year by transfer agents to allow U.S. corporations to send proxy materials to beneficial shareholders directly instead of having to go through banks and broker dealers.
Under the current rules, only financial intermediaries can do so and obtain voting instructions from their beneficial account holders. They have decided to outsource the labor and technology intensive process to Broadridge Financial. That firm, in turn, collects the fees the financial intermediaries are allowed to charge corporations based on rates largely set by the New York Stock Exchange.
The Risk of Going Direct
There is plenty of operational risk involved in so called “direct communications.” Computershare, like other transfer agents, would have to ensure that it could send the proxy materials to beneficial shareholders on time and calculate the votes correctly. That also means tapping into the records of banks and brokerage firms to find out who those shareholders are or getting the names from some yet-to-be-determined data aggregator.
Although the Securities Transfer Association, a group of transfer agents including Computershare, believes that direct communications is a de facto right of U.S. corporations and investors, the goal is far from altruistic. Computershare, like other transfer agents would generate additional fees from proxy mailings and tabulations and other shareholder services such as answering phone calls.
Transfer agents, which can only send out proxy mailing and tabulate votes for registered shareholders, claim they can do the same job as Broadridge for beneficial shareholders. For, they believe, a lot less money.
Here is how their argument goes; if issuers could send proxy mailings to beneficial shareholders directly and select whoever they want as their distribution agent, the market-driven competition would spur lower fees and greater innovation.
“We have done some modeling to determine just what is required and are confident we can do it,” says Rossi, without elaborating.
Just how much it will cost transfer agents, such as Computershare, to expand hardware and software capacity to handle additional mailings and votes from beneficial shareholders is unclear. And it is unclear just how quickly they can do so.
In advocating the status quo with the SEC, Broadridge has estimated it spent over $1 billion in systems, technologies and processing for its shareholder communications and proxy voting businesses over the past decade alone. Broadridge has also said that a study it commissioned, which was completed by Compass Lexecon, showed that the fee charged to deliver a proxy package to a registered shareholder is higher, on average, than the fee to deliver the same proxy package to a beneficial shareholder.
Broadridge is already becoming a formidable competitor. Last year, it did the proxy mailings for registered shareholders for about 1,500 annual meetings. That means that corporations thought that Computershare could do a better job than their transfer agents.
While Computershare awaits the SEC’s decision on proxy reform, the agent isn’t idle. Well-known for its acquisitive nature, Computershare remains on the lookout for a good takeover candidate. “We would certainly entertain a complementary business line,” says Jay McHale, president of Computershare’s equity services unit.