The SEC recently issued a concept release to solicit comment on various aspects of the U.S. proxy system. The release highlighted the following principal areas of interest: enhancement of the accuracy, transparency and efficiency of the voting process; improvement of shareholder communications and participation; and the alignment of voting power with economic interest.
Accuracy, Transparency and Efficiency of the Voting Process
The SEC noted that, in connection with securities lending transactions and “fails to deliver,” it is possible for the number of securities held by a broker-dealer at the Depository Trust Company (DTC) not to match the number credited to the broker-dealer’s customer accounts, raising a concern about the varying means by which intermediaries reconcile these differences and the impact they may have on the accuracy of the votes’ allocation among beneficial owners. The release seeks comment on whether investors would find disclosure on these allocation methods helpful or whether another regulatory response may be appropriate. The release also expressed concern that the inability for shareholders to confirm the timely receipt and accurate tabulation of their votes may impair confidence in the proxy system, and it suggests as a solution the creation of a unique identifying code which could be used to create an audit trail. A concern was raised that some investors that engage in securities lending may learn of material votes too late to recall loaned securities prior to a vote’s record date. The release suggested requiring the filing of a report on Form 8-K to disclose the meeting’s agenda prior to the record date or asking the NYSE and other Self-Regulatory Organizations (SROs) to adopt rules requiring public dissemination of a notice in advance of the record date. It also suggested amending Form N-PX to require disclosure of the number of portfolio securities for which a fund does not vote proxies because the securities were on loan. The release also articulated concerns about the fees charged for distribution of proxy materials, including that they may not “reflect reasonable rates of reimbursement” in light of the notice and access model of distribution and that financial intermediaries may lack incentives to reduce distribution costs for issuers. The SEC considered creating a central data aggregator that would permit an issuer to designate an agent for the distribution of its materials or asking SROs to review their fee schedules.
Shareholder Communication, Participation and Information
The SEC noted that commentators have raised issues regarding the costs and efficiency of communication between issuers and shareholders, particularly when shares are held in street name. The release suggested eliminating beneficial owners’ option to object to the disclosure of their identities to issuers or encouraging beneficial owners not to object to this disclosure, in order to permit issuers to more easily communicate directly with shareholders. The SEC raised a concern regarding the level of participation in proxy voting by retail investors and sought comment on possible regulatory responses, including improved investor education, enhancements to brokers’ websites, adoption of advance voting instructions, facilitation of discussion among voters and refinements to the notice and access model for distribution of proxy materials. The release also requested comment on whether the SEC should reconsider permitting or requiring interactive data tagging for proxy statements and voting information.
Alignment of Voting Power and Economic Interest
Finally, the release highlighted concerns related to proxy voting advisory firms, such as conflicts of interest that may arise when a firm recommends votes to shareholders of an issuer while also providing consulting services to the same issuer and those that may result from the potential for such firms to make recommendations based on materially inaccurate or incomplete information. The release suggested requiring additional disclosure related to conflicts of interest and the firm’s controls and procedures for ensuring accuracy of issuer data, and it also considered prohibiting certain types of conflicts. It noted that some states, including Delaware, now permit use of dual record dates, with a voting record date as late as the date of the meeting itself, and sought comment on whether regulatory action should be taken to accommodate issuers that wish to use separate record dates where permitted by state law. The release also articulated a concern with circumstances where a share’s voting rights have been “decoupled” from an economic stake in the issuer, such as when an investment is hedged, and requested comment on a range of regulatory responses from adopting new disclosure requirements to prohibiting voting in circumstances of negative economic interest.
In addition to the specific questions highlighted in the release, the SEC invited other comments on the proxy system that commentators may have, including comments on any costs or benefits of possible regulatory action. Comments are due by October 20, 2010.
A full copy of the concept release can be found at: http://www.sec.gov/rules/concept/2010/34-62495.pdf.