# 75 FR 42982: Concept Release on the U.S. Proxy System

> Federal · Regulations · In force

URL: https://www.frixlaw.com/law-library/statutes/FR_PRORULE_2010-17615

## Section

- **Citation:** 75 FR 42982
- **Heading:** Concept Release on the U.S. Proxy System
- **Jurisdiction:** Federal
- **Kind:** Regulations
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** Federal Register / Vol. 75 / 75 FR 42982

## Text

SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240, 270, 274, and 275 [Release Nos. 34-62495; IA-3052; IC-29340; File No. S7-14-10] RIN 3235-AK43 Concept Release on the U.S. Proxy System AGENCY:
Securities and Exchange Commission.

ACTION:
Concept release; request for comments.

SUMMARY:
The Commission is publishing this concept release to solicit comment on various aspects of the U.S. proxy system. It has been many years since we conducted a broad review of the system, and we are aware of industry and investor interest in the Commission's consideration of an update to its rules to promote greater efficiency and transparency in the system and enhance the accuracy and integrity of the shareholder vote. Therefore, we seek comment on the proxy system in general, including the various issues raised in this release involving the U.S. proxy system and certain related matters.

DATES:
Comments should be received on or before October 20, 2010.

ADDRESSES:
Comments may be submitted by any of the following methods:
Electronic Comments
• Use the Commission's Internet comment form ( http://www.sec.gov/rules/concept.shtml );
• Send an e-mail to rule-comments@sec.gov. Please include File Number S7-14-10 on the subject line; or
• Use the Federal eRulemaking Portal ( http://www.regulations.gov ). Follow the instructions for submitting comments.
Paper Comments
• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number S7-14-10. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( http://www.sec.gov/rules/concept.shtml )
ge Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number S7-14-10. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( http://www.sec.gov/rules/concept.shtml ). Comments are also available for Web site viewing and copying in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. FOR FURTHER INFORMATION CONTACT:
Raymond A. Be or Lawrence A. Hamermesh, Division of Corporation Finance, at (202) 551-3500, Susan M. Petersen or Andrew Madar, Division of Trading & Markets, at (202) 551-5777, Holly L. Hunter-Ceci or Brian P. Murphy, Division of Investment Management, at (202) 551-6825, or Joshua White, Division of Risk, Strategy, and Financial Innovation, at (202) 551-6655, 100 F Street, NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction II. The Current Proxy Distribution and Voting Process A. Types of Share Ownership and Voting Rights 1. Registered Owners 2. Beneficial Owners B. The Process of Soliciting Proxies 1. Distributing Proxy Materials to Registered Owners 2. Distributing Proxy Materials to Beneficial Owners a. The Depository Trust Company b. Securities Intermediaries: Broker-Dealers and Banks C. Proxy Voting Process D. The Roles of Third Parties in the Proxy Process 1. Transfer Agents 2. Proxy Service Providers 3. Proxy Solicitors 4. Vote Tabulators 5. Proxy Advisory Firms III. Accuracy, Transparency, and Efficiency of the Voting Process A. Over-Voting and Under-Voting 1. Imbalances in Broker Votes a. Securities Lending b. Fails To Deliver 2
ies Intermediaries: Broker-Dealers and Banks C. Proxy Voting Process D. The Roles of Third Parties in the Proxy Process 1. Transfer Agents 2. Proxy Service Providers 3. Proxy Solicitors 4. Vote Tabulators 5. Proxy Advisory Firms III. Accuracy, Transparency, and Efficiency of the Voting Process A. Over-Voting and Under-Voting 1. Imbalances in Broker Votes a. Securities Lending b. Fails To Deliver 2. Current Reconciliation and Allocation Methodologies Used by Broker-Dealers To Address Imbalances a. Pre-Reconciliation Method b. Post-Reconciliation Method c. Hybrid Reconciliation Methods 3. Potential Regulatory Responses 4. Request for Comment B. Vote Confirmation 1. Background 2. Potential Regulatory Responses 3. Request for Comment C. Proxy Voting by Institutional Securities Lenders 1. Background 2. Lack of Advance Notice of Meeting Agenda a. Background b. Potential Regulatory Responses c. Request for Comment 3. Disclosure of Voting by Funds a. Background b. Potential Regulatory Responses c. Request for Comment D. Proxy Distribution Fees 1. Background a. Current Fee Schedules b. Notice and Access Model c. Current Practice Regarding Fees Charged 2. Potential Regulatory Responses 3. Request for Comment IV. Communications and Shareholder Participation A. Issuer Communications With Shareholders 1. Background 2. Potential Regulatory Responses 3. Request for Comment B. Means To Facilitate Retail Investor Participation 1. Background 2. Potential Regulatory Responses a. Investor Education b. Enhanced Brokers' Internet Platforms c. Advance Voting Instructions d. Investor-to-Investor Communications e. Improving the Use of the Internet for Distribution of Proxy Materials 3. Request for Comment C. Data-Tagging Proxy-Related Materials 1. Background 2. Potential Regulatory Responses 3. Request for Comment V. Relationship Between Voting Power and Economic Interest A. Proxy Advisory Firms 1. The Role and Legal Status of Proxy Advisory Firms 2. Concerns About the Role of Proxy Advisory Firms a. Conflicts of Interest b
of the Internet for Distribution of Proxy Materials 3. Request for Comment C. Data-Tagging Proxy-Related Materials 1. Background 2. Potential Regulatory Responses 3. Request for Comment V. Relationship Between Voting Power and Economic Interest A. Proxy Advisory Firms 1. The Role and Legal Status of Proxy Advisory Firms 2. Concerns About the Role of Proxy Advisory Firms a. Conflicts of Interest b. Lack of Accuracy and Transparency in Formulating Voting Recommendations 3. Potential Regulatory Responses a. Potential Solutions Addressing Conflicts of Interest b. Potential Solutions Addressing Accuracy and Transparency in Formulating Voting Recommendations 4. Request for Comment B. Dual Record Dates 1. Background 2. Difficulties in Setting a Voting Record Date Close to a Meeting Date 3. Potential Regulatory Responses 4. Request for Comment C. “Empty Voting” and Related “Decoupling” Issues 1. Background and Reasons for Concern 2. Empty Voting Techniques and Potential Downsides a. Empty Voting Using Hedging-Based Strategies b. Empty Voting Using Non-Hedging-Based Strategies 3. Potential Regulatory Responses 4. Request for Comment VI. Conclusion I. Introduction
Regulation of the proxy solicitation process is one of the original responsibilities that Congress assigned to the Commission in 1934. The Commission has actively monitored the proxy process since receiving this 1 In recent years, a number of our proxy-related rulemakings have been spurred by the Internet and other technological advances that enable more efficient communications. For example, we have adopted the “notice and access” model for the delivery of proxy materials, 2 as well as rules to facilitate the use of electronic shareholder forums. 3 Perceived deficiencies in the proxy distribution process have prompted other proxy-related rulemakings, such as rules to reinforce the obligation of issuers to distribute proxy materials to banks and brokers on a timely basis 4 and to permit the “householding” of proxy materials
model for the delivery of proxy materials, 2 as well as rules to facilitate the use of electronic shareholder forums. 3 Perceived deficiencies in the proxy distribution process have prompted other proxy-related rulemakings, such as rules to reinforce the obligation of issuers to distribute proxy materials to banks and brokers on a timely basis 4 and to permit the “householding” of proxy materials. 5 We have also periodically revised our rules requiring certain types of disclosures in the proxy statement, such as information on executive compensation and corporate governance matters. 6 We also have pending a proposal to adopt rules that would require, under certain circumstances, a company to include in its proxy materials a shareholder's, or group of shareholders', nominees for director. 7
1 For a history of the Commission's efforts to regulate the proxy process since 1934, see Jill E. Fisch, From Legitimacy to Logic: Reconstructing Proxy Regulation, 46 Vand. L. Rev. 1129 (Oct. 1993).
2 17 CFR 240.14a-16; Shareholder Choice Regarding Proxy Materials, Release No. 34-56135 (July 26, 2007) [72 FR 42222] (“Notice and Access Release”); Amendments to Rules Requiring Internet Availability of Proxy Materials, Release No. 33-9108 (Feb. 22, 2010) [75 FR 9074].
3 17 CFR 240.14a-17; Electronic Shareholder Forums, Release No. 34-57172 (Jan. 18, 2008) [73 FR 4450]. These amendments clarified that participation in an electronic shareholder forum that could potentially constitute a solicitation subject to the proxy rules is exempt from most of the proxy rules if all of the conditions to the exemption are satisfied. In addition, the amendments state that a shareholder, issuer, or third party acting on behalf of a shareholder or issuer that establishes, maintains or operates an electronic shareholder forum will not be liable under the federal securities laws for any statement or information provided by another person participating in the forum
roxy rules if all of the conditions to the exemption are satisfied. In addition, the amendments state that a shareholder, issuer, or third party acting on behalf of a shareholder or issuer that establishes, maintains or operates an electronic shareholder forum will not be liable under the federal securities laws for any statement or information provided by another person participating in the forum. The amendments did not provide an exemption from Rule 14a-9 [17 CFR 240.14a-9], which prohibits fraud in connection with the solicitation of proxies.
4 See 17 CFR 14b-1 and 14b-2; Timely Distribution of Proxy and Other Soliciting Material, Release No. 34-33768 (Mar. 16, 1994) [59 FR 13517].
5 Delivery of Proxy Statements and Information Statements to Households, Release No. 33-7912 (Oct. 27, 2000) [65 FR 65736]. “Householding” permits a securities intermediary to send only one copy of proxy materials to multiple accounts within the same household under specified conditions. Id.
6 See, e.g., Proxy Disclosure Enhancements, Release No. 33-9089 (Dec. 16, 2009) [74 FR 68334] and Executive Compensation and Related Person Disclosure, Release No. 33-8732A (Aug. 9, 2006) [71 FR 53158].
7 See Facilitating Shareholder Director Nominations, Release Nos. 33-9046, 34-60089, IC-287665 (June 10, 2009) [74 FR 29024].
During many of these previous proxy-related rulemakings, commentators raised concerns about the proxy system as a whole. 8 In addition, the Commission's staff often receives complaints from individual investors about the administration of the proxy system. 9 We believe that these concerns and complaints merit attention because they address a subject of considerable importance—the corporate proxy—which, given the wide dispersion of shareholders, is the principal means by which shareholders can exercise their voting rights.
8 See, e.g., Request for Rulemaking Concerning Shareholder Communications, April 12, 2004-Business Roundtable Petition 4-493 (“BRT Petition”); comment letter to Release No
nts merit attention because they address a subject of considerable importance—the corporate proxy—which, given the wide dispersion of shareholders, is the principal means by which shareholders can exercise their voting rights.
8 See, e.g., Request for Rulemaking Concerning Shareholder Communications, April 12, 2004-Business Roundtable Petition 4-493 (“BRT Petition”); comment letter to Release No. 33-9046, note 7, above, from Altman Group; comment letters to Security Holder Director Nominations, Release No. 34-48626 (Oct. 14, 2003) [68 FR 60784] from Intel and Georgeson Shareholder Communications.
9 Most commonly submitted to the Commission's Office of Investor Education and Advocacy, these complaints raise issues such as, for example, technical problems with electronic voting platforms offered by proxy service providers and failures by issuers to respond to shareholder complaints about proxy-related matters.
Accordingly, in this release, we are reviewing and seeking public comment as to whether the U.S. proxy system as a whole operates with the accuracy, reliability, transparency, accountability, and integrity that shareholders and issuers should rightfully expect. With over 600 billion shares voted every year at more than 13,000 shareholder meetings, 10 shareholders should be served by a well-functioning proxy system that promotes efficient and accurate voting. Moreover, recent developments, such as the revisions to Rule 452 of the New York Stock Exchange (“NYSE”) limiting the ability of brokers to vote uninstructed shares in uncontested director elections 11 and other corporate governance trends such as increased adoption of a majority voting standard for the election of directors 12 have highlighted the importance of accuracy and accountability in the voting process.
10 See Broadridge 2009 Key Statistics and Performance Ratings, available at http://www.broadridge.com/investor-communications/us/2009ProxyStats.pdf.
11 Order Approving Proposed Rule Change, as modified by Amendment No
ds such as increased adoption of a majority voting standard for the election of directors 12 have highlighted the importance of accuracy and accountability in the voting process.
10 See Broadridge 2009 Key Statistics and Performance Ratings, available at http://www.broadridge.com/investor-communications/us/2009ProxyStats.pdf.
11 Order Approving Proposed Rule Change, as modified by Amendment No. 4, to Amend NYSE Rule 452 and Corresponding Listed Company Manual Section 402.08 to Eliminate Broker Discretionary Voting for the Election of Directors, Except for Companies Registered under the Investment Company Act of 1940, and to Codify Two Previously Published Interpretations that Do Not Permit Broker Discretionary Voting for Material Amendments to Investment Advisory Contracts with an Investment Company, Release No. 34-60215 (July 1, 2009) [74 FR 33293] (Commission approval of amendments to NYSE Rule 452).
12 Historically, many corporate directors were elected under a plurality standard, which required only that a candidate receive more votes than other candidates, but not a majority of the votes. Since there ordinarily are not more candidates than seats, the election threshold has historically been low and shareholder participation was less important to electing directors. See American Bar Association Section of Business Law, Report of the Committee on Corporate Laws on Voting by Shareholders for the Election of Directors (Mar. 13, 2006), available at http://www.abanet.org/buslaw/committees/CL270000pub/directorvoting/20060313000001.pdf. From 2005 to 2007, however, a majority of companies in the S&P 500 index adopted a voting policy, through bylaw amendments or changes in corporate governance principles, that requires directors who do not receive a majority of votes cast at the meeting in favor of their election to tender their resignation to the board, which resignation the board may or may not accept. See Claudia H. Allen, Study of Majority Voting in Director Elections (Nov
anies in the S&P 500 index adopted a voting policy, through bylaw amendments or changes in corporate governance principles, that requires directors who do not receive a majority of votes cast at the meeting in favor of their election to tender their resignation to the board, which resignation the board may or may not accept. See Claudia H. Allen, Study of Majority Voting in Director Elections (Nov. 12, 2007), available at http://www.ngelaw.com/files/upload/majoritystudy111207.pdf.
The manner in which proxy materials are distributed and votes are processed and recorded involves a level of complexity not generally understood by those not involved in the process. This complexity stems, in large part, from the nature of share ownership in the United States, in which the vast majority of shares are held through securities intermediaries such as broker-dealers or banks; this structure supports prompt and accurate clearance and settlement of securities transactions, yet adds significant complexity to the proxy voting process. 13 As a result, the proxy system involves a wide array of third-party participants in addition to companies and their shareholders, including brokers, banks, custodians, securities depositories, transfer agents, proxy solicitors, proxy service providers, proxy advisory firms, and vote tabulators. 14 The use of some of these third parties improves efficiencies in processing and distributing proxy materials to shareholders, while at the same time the increased reliance on these third parties—some of which are not directly regulated by federal or state securities regulators—adds complexity to the proxy system and makes it less 15
13 See Final Report of the Securities and Exchange Commission on the Practice of Recording the Ownership of Securities in the Records of the Issuer in Other than the Name of the Beneficial Owner of such Securities Pursuant to Section 12(m) of the Securities Exchange Act of 1934, Dec. 3, 1976 (the “Street Name Study”).
14 The focus of this release is the U.S
he proxy system and makes it less 15
13 See Final Report of the Securities and Exchange Commission on the Practice of Recording the Ownership of Securities in the Records of the Issuer in Other than the Name of the Beneficial Owner of such Securities Pursuant to Section 12(m) of the Securities Exchange Act of 1934, Dec. 3, 1976 (the “Street Name Study”).
14 The focus of this release is the U.S. proxy system. We recognize, however, that many U.S. persons hold shares in non-U.S. issuers. While this release does not address the processes and procedures followed by participants when non-U.S. issuers distribute proxy-related materials to U.S. persons, we are interested in information about those processes and procedures. We also seek comment about whether we should consider regulatory responses to issues that may arise in that area.
15 A report from the United Kingdom has characterized its voting process as one in which the chain of accountability is complex, where there is a lack of transparency and where there are a large number of different participants, each of whom may give a different priority to voting. See Review of the impediments to voting UK shares: Report by Paul Myners to the Shareholder Voting Working Group (Jan. 2004) (“Myners Report”). The European Union also has considered issues related to proxy voting and has enacted rules and legislation in response. As a result, the European Union passed a directive on the exercise of certain rights of shareholders in listed companies in July 2007, which covers many of the matters discussed in this release. See Directive 2007/36/EC of the European Parliament and of the Council (July 11, 2007) (“Shareholder Rights Directive”). The Shareholder Rights Directive addresses the issues of record dates, transparency, electronic communications, conflicts of interest, financial intermediaries and other parties involved in the proxy voting process.
We begin this concept release with an overview of the U.S. proxy system
ive 2007/36/EC of the European Parliament and of the Council (July 11, 2007) (“Shareholder Rights Directive”). The Shareholder Rights Directive addresses the issues of record dates, transparency, electronic communications, conflicts of interest, financial intermediaries and other parties involved in the proxy voting process.
We begin this concept release with an overview of the U.S. proxy system. We then outline some of the concerns that have been raised regarding the accuracy, reliability, transparency, accountability, and integrity of this system, as well as possible regulatory responses to these concerns. These concerns generally relate to three principal questions:
• Whether we should take steps to enhance the accuracy, transparency, and efficiency of the voting process;
• Whether our rules should be revised to improve shareholder communications and encourage greater shareholder participation; and
• Whether voting power is aligned with economic interest and whether our disclosure requirements provide investors with sufficient information about this issue.
In reviewing the performance of the proxy system, the Commission's staff has recently had numerous discussions with a variety of participants in the proxy voting process, and we appreciate the insights these participants have provided. 16 While we set forth a number of general and specific questions, we welcome comments on any other concerns related to the proxy process that commentators may have, and we specifically invite comment on any costs, burdens or benefits that may result from possible regulatory responses identified in this release. We recognize that the various aspects of the proxy system that we address in this release are interconnected, and that changes to one aspect may affect other aspects, as well as complement or frustrate other potential changes. 17 We encourage the public to consider these relationships when formulating comments
benefits that may result from possible regulatory responses identified in this release. We recognize that the various aspects of the proxy system that we address in this release are interconnected, and that changes to one aspect may affect other aspects, as well as complement or frustrate other potential changes. 17 We encourage the public to consider these relationships when formulating comments. Interested persons are also invited to comment on whether alternative approaches, or a combination of approaches, would better address the concerns raised by the current process.
16 Beginning in September of 2009, the Commission's staff has met with representatives of the following groups and individuals to discuss issues about the U.S. proxy system: The Altman Group; Broadridge Financial Solutions, Inc.; Broadridge Steering Committee; Council of Institutional Investors (“CII”); Edwards, Angell, Palmer & Dodge; Glass, Lewis & Co.; the Hong Kong Securities & Futures Commission; International Corporate Governance Network (“ICGN”); InvestShare; McKenzie Partners; Mediant Communications; Moxy Vote; National Investor Relations Institute (“NIRI”); Proxy Governance, Inc.; RiskMetrics Group; Professor Edward Rock; Shareholder Communications Coalition; Securities Industry and Financial Markets Association (“SIFMA”); Society of Corporate Secretaries and Governance Professionals; Sodali; Target Corp.; TIAA-CREF; the U.K. Financial Reporting Council; and Weil, Gotshal & Manges, LLP. The staff has also been in communication with other regulators, including the Federal Reserve, FDIC, Office of the Comptroller of Currency, and Office of Thrift Supervision. Several of the above-listed parties provided written materials to the staff, which we are including in the public comment file for this release. The SEC Investor Advisory Committee has also recommended an inquiry into data-tagging proxy information, as described in Section IV.C below
tors, including the Federal Reserve, FDIC, Office of the Comptroller of Currency, and Office of Thrift Supervision. Several of the above-listed parties provided written materials to the staff, which we are including in the public comment file for this release. The SEC Investor Advisory Committee has also recommended an inquiry into data-tagging proxy information, as described in Section IV.C below.
17 For example, the feasibility of establishing a means of vote confirmation may depend on whether and to what extent we continue to allow beneficial owners to object to the disclosure of their identities to issuers. See Sections III.B and IV.A, below.
We are mindful that, while we have recently amended—and are considering amending—a number of our rules that relate to the proxy process, further amendments to those rules or additional guidance about our views on their application may be appropriate to address concerns raised by the application of those rules. Although the discussion in this release generally focuses on the broader proxy system, we remain interested in ways to improve our proxy disclosure, solicitation, and distribution rules. We seek public comment on the concerns about those rules.
II. The Current Proxy Distribution and Voting Process
A fundamental tenet of state corporation law is that shareholders have the right to vote their shares to elect directors and to approve or reject major corporate transactions at shareholder meetings. 18 Under state law, shareholders can appoint a proxy to vote their shares on their behalf at shareholder meetings, 19 and the major national securities exchanges generally require their listed companies to solicit proxies for all meetings of shareholders
hareholders have the right to vote their shares to elect directors and to approve or reject major corporate transactions at shareholder meetings. 18 Under state law, shareholders can appoint a proxy to vote their shares on their behalf at shareholder meetings, 19 and the major national securities exchanges generally require their listed companies to solicit proxies for all meetings of shareholders. 20 Because most shareholders do not attend public company shareholder meetings in person, voting occurs almost entirely by the use of proxies that are solicited before the shareholder meeting, 21 thereby resulting in the corporate proxy becoming “the forum for shareholder suffrage.” 22 Issuers with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (“Exchange Act”) and issuers that are registered under the Investment Company Act of 1940 (“Investment Company Act”) are required to comply with the federal proxy rules in Regulation 14A when soliciting proxies from shareholders. 23
18 See, e.g., Del. Code Ann. tit. 8, §§ 211 and 212; Model Bus. Corp. Act §§ 7.01 and 7.21. While voting in the election of directors is largely the exclusive right of stockholders, state law may permit the corporation to grant voting rights to holders of other securities, such as debt. See, e.g., Del. Code Ann. tit. 8, § 221. For a brief review of the rationale for voting by shareholders, see Frank H. Easterbrook and Daniel R. Fischel, The Economic Structure of Corporate Law (1991). We refer to Delaware law frequently because of the large percentage of public companies incorporated under that law. The Delaware Division of Corporations reports that over 50% of U.S. public companies are incorporated in Delaware. We refer to the Model Business Corporation Act as well because the corporate statutes of many states adopt or closely track its provisions.
19 See, e.g., Del Code Ann. tit. 8, § 212(b); Model Bus. Corp. Act § 7.22(b)
large percentage of public companies incorporated under that law. The Delaware Division of Corporations reports that over 50% of U.S. public companies are incorporated in Delaware. We refer to the Model Business Corporation Act as well because the corporate statutes of many states adopt or closely track its provisions.
19 See, e.g., Del Code Ann. tit. 8, § 212(b); Model Bus. Corp. Act § 7.22(b).
20 See, e.g., NYSE Listed Company Manual § 402.04(a); Nasdaq Listing Rule 5620(b).
21 Although voting rights in public companies are exercised only at the meeting of shareholders, the votes cast at the meeting are almost entirely by proxy and the voting decisions have been made during the proxy solicitation process.
22 Roosevelt v. E.I duPont de Nemours & Co., 958 F.2d 416, 422 (D.C. Cir. 1992).
23 17 CFR 240.14a-1 et seq.; 17 CFR 270.20a-1. However, securities of foreign private issuers are exempt from the proxy rules. See 17 CFR 240.3a12-3.
A. Types of Share Ownership and Voting Rights
The proxy solicitation process starts with the determination of who has the right to receive proxy materials and vote on matters presented to shareholders for a vote at shareholder meetings. The method for making this determination depends on the way the shares are owned. There are two types of security holders in the U.S.—registered owners and beneficial owners.
1. Registered Owners
Registered owners (also known as “record holders”) have a direct relationship with the issuer because their ownership of shares is listed on records maintained by the issuer or its transfer agent. 24 State corporation law 25 Because registered owners have the right to vote, they also have the authority to appoint a proxy to act on their behalf at shareholder meetings
ners.
1. Registered Owners
Registered owners (also known as “record holders”) have a direct relationship with the issuer because their ownership of shares is listed on records maintained by the issuer or its transfer agent. 24 State corporation law 25 Because registered owners have the right to vote, they also have the authority to appoint a proxy to act on their behalf at shareholder meetings. 26
24 The Uniform Commercial Code (“UCC”) defines the term “registered form,” as applied to a certificated security, as a form in which the security certificate specifies a person entitled to the security, and a transfer of the security may be registered on books maintained for that purpose by or on behalf
25 See, e.g., Del. Code Ann. tit. 8, § 219(c); Model Bus. Corp. Act § 1.40(21); but see Model Bus. Corp. Act § 7.23 (permitting corporations to establish procedures by which beneficial owners become entitled to exercise rights, including voting rights, otherwise exercisable by shareholders of record).
26 See, e.g., Del. Code Ann. tit. 8, § 212(b); Model Bus. Corp. Act § 7.22(b).
Registered owners can hold their securities either in certificated form 27 or in electronic (or “book-entry”) form through a direct registration system (“DRS”), 28 which enables an investor to have his or her ownership of securities recorded on the books of the issuer without having a physical securities certificate issued. 29 Under DRS, an investor can electronically transfer his or her securities to a broker-dealer to effect a transaction without the risk, expense, or delay associated with the use of securities certificates. Investors holding their securities in DRS retain the rights of registered owners, without having the responsibility of holding and safeguarding securities certificates.
27 A securities certificate evidences that the owner is registered on the books of the issuer as a shareholder
dealer to effect a transaction without the risk, expense, or delay associated with the use of securities certificates. Investors holding their securities in DRS retain the rights of registered owners, without having the responsibility of holding and safeguarding securities certificates.
27 A securities certificate evidences that the owner is registered on the books of the issuer as a shareholder. State commercial laws specify rules concerning the transfer of the rights that constitute securities and the establishment of those rights against the issuer and other parties. See Official comment to Article 8-101, The American Law Institute and National Conference of Commissioners of Uniform State Laws, Uniform Commercial Code, 1990 Official Text with Comments (West 1991).
28 For more information about DRS generally, see Securities Transactions Settlement, Release No. 33-8398 (Mar. 11, 2004) [69 FR 12922]. For a detailed description of DRS and the DRS facilities administered by DTC, see Order Granting Accelerated Approval of a Proposed Rule Change Relating to the Procedures to Establish a Direct Registration System, Release No. 34-37931 (Nov. 7, 1996) [61 FR 58600] (order granting approval to establish DRS) and Notice of Filing of Amendment and Order Granting Accelerated Approval of a Proposed Rule Change Relating to Implementation of the Profile Modification System Feature of the Direct Registration System, Release No. 34-41862 (Sept. 10, 1999) [64 FR 51162] (order approving implementation of the Profile Modification System).
29 DRS is an industry initiative aimed at dematerializing equities in the U.S. market. Dematerialization of securities occurs where there are no paper certificates available, and all transfers of ownership are made through book-entry movements
f the Direct Registration System, Release No. 34-41862 (Sept. 10, 1999) [64 FR 51162] (order approving implementation of the Profile Modification System).
29 DRS is an industry initiative aimed at dematerializing equities in the U.S. market. Dematerialization of securities occurs where there are no paper certificates available, and all transfers of ownership are made through book-entry movements. Immobilization of securities occurs where the underlying certificate is kept in a securities depository (or held in custody for the depository by the issuer's transfer agent) and transfers of ownership are recorded through electronic book-entry movements between the depository's participants' accounts. Securities are partially immobilized (as is the case with most U.S. equity securities traded on an exchange or securities association) when the street name positions are immobilized at the securities depository but certificates are still available to investors directly registered on the issuer's books. Although most options, municipal, government and many debt securities trading in the U.S. markets are currently dematerialized, many equity and some debt securities remain immobilized or partially immobilized at the Depository Trust Company (“DTC”). For more information about DTC, see Section II.B.2.a, below. Most if not all equity securities not on deposit at DTC but trading publicly in the U.S. markets remain fully certificated.
2. Beneficial Owners
The vast majority of investors in shares issued by U.S. companies today are beneficial owners, which means that they hold their securities in book-entry form through a securities intermediary, such as a broker-dealer or bank. 30 This is often referred to as owning in “street name.” A beneficial owner does not own the securities directly. Instead, as a customer of the securities intermediary, the beneficial owner has an entitlement to the rights associated with ownership of the securities
s, which means that they hold their securities in book-entry form through a securities intermediary, such as a broker-dealer or bank. 30 This is often referred to as owning in “street name.” A beneficial owner does not own the securities directly. Instead, as a customer of the securities intermediary, the beneficial owner has an entitlement to the rights associated with ownership of the securities. 31
30 For purposes of Commission rules pertaining to the transfer of certain securities, a “securities intermediary” is defined under Exchange Act Rule 17Ad-20 [17 CFR 240.17Ad-20] as a clearing agency registered under Exchange Act Section 17A [15 USC 78q-1] or a person, including a bank, broker, or dealer, that in the ordinary course of its business maintains securities accounts for others in its capacity as such. The UCC defines the term slightly differently, but for purposes of this release, this distinction is irrelevant. See UCC 8-102(a)(14) (1994).
31 The rights and interests that a customer has against a securities intermediary's property are created by the agreements between the customer and the securities intermediary, as well as by the UCC, as adopted in the relevant jurisdiction. Under the UCC, beneficial owners have a “securities entitlement” to the fungible bulk of securities held by the broker-dealer or bank. An “entitlement holder” is defined as a person identified in the records of a securities intermediary as the person having a security entitlement against the securities intermediary. UCC 8-503 (1994). A securities intermediary is obligated to provide the entitlement holder with all of the economic and governance rights that comprise the financial asset and that the entitlement holder can look only to that intermediary for performance of the obligations. See generally UCC 8-501 et seq. (1994).
B. The Process of Soliciting Proxies
The following diagram illustrates the flow of proxy materials that typically occurs during a solicitation
rovide the entitlement holder with all of the economic and governance rights that comprise the financial asset and that the entitlement holder can look only to that intermediary for performance of the obligations. See generally UCC 8-501 et seq. (1994).
B. The Process of Soliciting Proxies
The following diagram illustrates the flow of proxy materials that typically occurs during a solicitation. The steps illustrated in the diagram and descriptions of the relevant parties are discussed below.
EP22JY10.124
1. Distributing Proxy Materials to Registered Owners
It is a relatively simple process for an issuer to send proxy materials to registered owners because their names and addresses are listed in the issuer's records, which are usually maintained by a transfer agent. As the left side of Diagram 1 illustrates, proxy materials are sent directly from the issuer through its transfer agent or third-party proxy service provider to all registered owners in paper or electronic form. 32 Registered owners execute the proxy card and return it to the issuer's transfer agent or vote tabulator for tabulation.
32 Commission rules provide, generally, that proxy materials can be provided electronically to shareholders who have affirmatively consented to electronic delivery. See Use of Electronic Media for Delivery Purposes, Release No. 33-7233 (Oct. 6, 1995) [60 FR 53458]. In addition, the Commission has adopted the notice and access model that permits issuers to send shareholders a Notice of Internet Availability of Proxy Materials in lieu of the traditional paper packages including the proxy statement, annual report and proxy card. See Notice and Access Release, note 2, above. These two concepts work in tandem. Although an issuer electing to send a Notice in lieu of a full package generally would be required to send a paper copy of that Notice, it may send that Notice electronically to a shareholder who has provided an affirmative consent to electronic delivery.
2
ncluding the proxy statement, annual report and proxy card. See Notice and Access Release, note 2, above. These two concepts work in tandem. Although an issuer electing to send a Notice in lieu of a full package generally would be required to send a paper copy of that Notice, it may send that Notice electronically to a shareholder who has provided an affirmative consent to electronic delivery.
2. Distributing Proxy Materials to Beneficial Owners
As the right side of Diagram 1 illustrates, the process of distributing proxy materials to beneficial owners is more complicated than it is for registered owners. The indirect system of ownership in the U.S. permits securities intermediaries to hold securities for their customers, and there can be multiple layers of securities intermediaries leading to one beneficial owner. This potential for multiple tiers of securities intermediaries presents a number of challenges in the distribution of proxy materials.
a. The Depository Trust Company
In most cases, the chain of ownership for beneficially owned securities of U.S. companies begins with the Depository Trust Company (“DTC”), a registered clearing agency acting as a securities depository. 33 Most large U.S. broker-dealers and banks are DTC participants, meaning that they deposit securities with, and hold those securities through, DTC. 34 DTC's nominee, Cede & Co., appears in an issuer's stock records as the sole registered owner of securities deposited at DTC. DTC holds the deposited securities in “fungible bulk,” meaning that there are no specifically identifiable shares directly owned by DTC participants. 35 Rather, each
33 DTC provides custody and book-entry transfer services of securities transactions in the U.S. market involving equities, corporate and municipal debt, money market instruments, American depositary receipts, and exchange-traded funds
C holds the deposited securities in “fungible bulk,” meaning that there are no specifically identifiable shares directly owned by DTC participants. 35 Rather, each
33 DTC provides custody and book-entry transfer services of securities transactions in the U.S. market involving equities, corporate and municipal debt, money market instruments, American depositary receipts, and exchange-traded funds. In accordance with its rules, DTC accepts deposits of securities from its participants ( i.e., broker-dealers and banks), credits those securities to the depositing participants' accounts, and effects book-entry movements of those securities. For more information about DTC, see http://www.dtcc.com/about/subs/dtc.php.
34 Participants in DTC are usually broker-dealers or banks. Currently, there are approximately 400 DTC participants. See http://www.dtcc.com/customer/directories/dtc/dtc.php. Other jurisdictions have entities similar to the DTC. For example, Canada has the Clearing and Depository Services Inc., which is its national securities depository and clearing and settlement entity.
35 See UCC 8-503(b) (1994) (a beneficial owner's property interest with respect to shares “is a pro rata property interest in all interests in that financial asset held by the securities intermediary”).
Once an issuer establishes a date for the shareholder meeting and a record date for shareholders entitled to vote on matters presented at the meeting, it sends a formal announcement of these dates to DTC, which DTC forwards to all of its participants. 36 The issuer then requests from DTC a “securities position listing” 37 as of the record date, which identifies the participants having a position in the issuer's securities and the number of securities held by each participant. 38 DTC must promptly respond by providing the issuer with a list of the number of shares in each DTC participant's account as of the record date
o all of its participants. 36 The issuer then requests from DTC a “securities position listing” 37 as of the record date, which identifies the participants having a position in the issuer's securities and the number of securities held by each participant. 38 DTC must promptly respond by providing the issuer with a list of the number of shares in each DTC participant's account as of the record date. 39 The record date securities position listing establishes the number of shares that a participant is entitled to vote through its DTC proxy. 40
36 NYSE-listed issuers are also required to provide the NYSE with notification of the record and meeting dates. See NYSE Listed Company Manual § 401.02.
37 Exchange Act Rule 17Ad-8 defines a “securities position listing” as a list of those participants in the clearing agency on whose behalf the clearing agency holds the issuer's securities and of the participant's respective positions in such securities as of a specified date. 17 CFR 240.17Ad-8(a).
38 Pursuant to Exchange Act Rule 17Ad-8, DTC may charge issuers requesting securities position listings a fee designed to recover the reasonable costs of providing the list. 17 CFR 240.17Ad-8(b). An issuer or its agent, generally a transfer agent or authorized third-party service provider, can subscribe to DTC's service that allows the subscriber to obtain the securities position listing once or on a weekly, monthly, or more frequent basis.
39 Upon request, a registered clearing agency must furnish a securities position listing promptly to each issuer whose securities are held in the name of the clearing agency or its nominee. 17 CFR 140.17Ad-8(b).
40 In addition to the shares held in its DTC account, some participants may also own additional securities at other securities depositories, through custodians, or in registered form.
For each shareholder meeting, DTC executes an “omnibus proxy” 41 transferring its right to vote the shares held on deposit to its participants
the name of the clearing agency or its nominee. 17 CFR 140.17Ad-8(b).
40 In addition to the shares held in its DTC account, some participants may also own additional securities at other securities depositories, through custodians, or in registered form.
For each shareholder meeting, DTC executes an “omnibus proxy” 41 transferring its right to vote the shares held on deposit to its participants. 42 In this manner, broker-dealer and bank participants in DTC obtain the right to vote directly the shares that they hold through DTC.
41 Rather than issue each participant a separate proxy to vote its shares, DTC drafts a single proxy (the “omnibus proxy”) granting to each of the multiple participants listed in the proxy the right to vote the number of shares attributed to it in the omnibus proxy.
42 As noted in recent litigation, the execution by DTC of an omnibus proxy is neither automatic nor legally required, but occurs as a matter of common practice. Kurz v. Holbrook, 989 A.2d 140, 170 (Del. Ch. 2010), rev'd on other grounds, Crown EMAK Partners, LLC v. Kurz, 992 A.2d 377 Del. 2010) (“There does not appear to be any authority governing when a DTC omnibus proxy is issued, who should ask for it, or what event triggers it. The parties tell me that DTC has no written policies or procedures on the matter.”).
b. Securities Intermediaries: Broker-Dealers and Banks
Once the issuer identifies the DTC participants holding positions in its securities, it is required to send a search card 43 to each of those participants, as well as other securities intermediaries that are registered owners, to determine whether they are holding shares for beneficial owners and, if so, the number of sets of proxy packages needed to be forwarded to those beneficial owners. This process may involve multiple tiers of securities intermediaries holding securities on behalf of other securities intermediaries, with search cards distributed to each securities intermediary in the chain of ownership
red owners, to determine whether they are holding shares for beneficial owners and, if so, the number of sets of proxy packages needed to be forwarded to those beneficial owners. This process may involve multiple tiers of securities intermediaries holding securities on behalf of other securities intermediaries, with search cards distributed to each securities intermediary in the chain of ownership.
43 The search card must request: (1) The number of beneficial owners; (2) the number of proxy soliciting materials and annual reports needed for forwarding by the intermediaries to their beneficial owner customers; and (3) the name and address of any agent appointed by the bank or broker-dealer to process a request for a list of beneficial owners. The search card must be sent out at least 20 business days prior to the record date unless impracticable, in which case it must be sent as many days before the record date as practicable. 17 CFR 240.14a-13(a).
Commission rules require broker-dealers to respond to the issuer within seven business days with the approximate number of customers of the broker-dealer who are beneficial owners of the issuer's securities. 44 The Commission's rules also require banks to follow a similar process except that banks must respond to the issuer within one business day with the names and addresses of all respondent banks 45 and must respond within seven business days with the approximate number of customers of the bank who are beneficial owners of shares. 46
44 17 CFR 240.14b-1(b)(1).
45 A respondent bank is a bank that holds securities through another bank that is the record holder of those securities. See Facilitating Shareholder Communications, Release No. 34-23276 (May 29, 1986) [51 FR 20504].
46 17 CFR 240.14b-2(b)(1) and 17 CFR 240.14b-2(b)(2). Banks are required to execute omnibus proxies in favor of respondent banks. 17 CFR 240.14b-2(b)(2)
44 17 CFR 240.14b-1(b)(1).
45 A respondent bank is a bank that holds securities through another bank that is the record holder of those securities. See Facilitating Shareholder Communications, Release No. 34-23276 (May 29, 1986) [51 FR 20504].
46 17 CFR 240.14b-2(b)(1) and 17 CFR 240.14b-2(b)(2). Banks are required to execute omnibus proxies in favor of respondent banks. 17 CFR 240.14b-2(b)(2).
Once the search card process is complete, the issuer should know the approximate number of beneficial owners owning shares through each securities intermediary. The issuer must then provide the securities intermediary, or its third-party proxy service provider, with copies of its proxy materials (including, if applicable, a Notice of Internet Availability of Proxy Materials) for forwarding to those beneficial owners. The securities intermediary must forward these proxy materials to beneficial owners no later than five business days after receiving such materials. 47 Securities intermediaries are entitled to reasonable reimbursement for their costs in forwarding these materials. 48
47 17 CFR 240.14b-1(b)(2) and 17 CFR 240.14b-2(b)(3). The exchanges have rules that regulate the process and procedures by which member firms must transmit proxy materials to beneficial owners, collect voting instructions from beneficial owners, and vote shares held in the member firm's name. See, e.g., NYSE Rules 450 through 460 and FINRA Rule 2251.
48 17 CFR 240.14a-13(a)(5). In addition, most of the exchanges have rules specifying the maximum rates that member firms may charge listed issuers as reasonable reimbursement. For example, the NYSE rule includes a schedule of “fair and reasonable rates of reimbursement” of member broker-dealers for their out-of-pocket expenses, including reasonable clerical expenses, incurred in connection with issuers' proxy solicitations of beneficial owners. NYSE Rule 465 Supplemental Material. The other exchanges have similar rules. See the discussion on proxy distribution fees in Section III.D below
YSE rule includes a schedule of “fair and reasonable rates of reimbursement” of member broker-dealers for their out-of-pocket expenses, including reasonable clerical expenses, incurred in connection with issuers' proxy solicitations of beneficial owners. NYSE Rule 465 Supplemental Material. The other exchanges have similar rules. See the discussion on proxy distribution fees in Section III.D below.
Instead of receiving and executing a proxy card (as registered owners receive and do), the beneficial owner receives a “voting instruction form” or “VIF” from the securities intermediary, which permits the beneficial owner to instruct the securities intermediary how to vote the beneficially owned shares. Although the VIF does not give the beneficial owner the right to attend the meeting, a beneficial owner typically can attend the meeting by requesting the appropriate documentation from the securities intermediary.
C. Proxy Voting Process
Once the proxy materials have been distributed to the registered owners and beneficial owners of the securities, the means by which shareholders vote their shares differs. As Diagram 1 illustrates, registered owners execute the proxy card and return it to the vote tabulator, either by mail, by phone, or through the Internet. Beneficial owners, on the other hand, indicate their voting instructions on the VIF and return it to the securities intermediary or its proxy service provider, either by mail, by phone, or through the Internet. 49 The securities intermediary, or its proxy service provider, tallies the voting instructions 50
49 Beneficial owners' voting instructions submitted by telephone account for a very small percentage of votes received by proxy service providers; for the shares of most beneficial owners who do not vote through a proprietary service for institutional investors, voting instructions are conveyed by paper or via the Internet, in approximately the same proportion. See Broadridge 2009 Key Statistics and Performance Ratings, note 10, above
ons submitted by telephone account for a very small percentage of votes received by proxy service providers; for the shares of most beneficial owners who do not vote through a proprietary service for institutional investors, voting instructions are conveyed by paper or via the Internet, in approximately the same proportion. See Broadridge 2009 Key Statistics and Performance Ratings, note 10, above.
50 As noted above, the securities intermediary receives the right to execute a proxy through the omnibus proxy executed in its favor by DTC and the other securities intermediaries in the chain of ownership through which it holds the securities. Although Rule 14b-2(b)(3) [17 CFR 240.14b-2(b)(3)] explicitly permits a bank to execute a proxy in favor of its beneficial owners, and nothing in our rules prohibits a broker-dealer from doing so, it is our understanding that these intermediaries usually solicit voting instructions from their beneficial owner and execute proxies on behalf of their beneficial owners rather than executing proxies that delegate their voting authority to those beneficial owners. Beneficial owners may, however, request a proxy and attend the shareholder meeting. It is our understanding that both banks and broker-dealers will issue a proxy that the beneficial owner may use to attend a meeting if requested to do so.
In certain situations, a broker-dealer may use its discretion to vote shares if it does not receive instructions from the beneficial owner of the shares. Historically, broker-dealers were generally permitted to vote shares on uncontested matters, including uncontested director elections, without instructions from the beneficial owner. 51 The NYSE recently revised this rule to prohibit broker-dealers from voting uninstructed shares with regard to any election of directors. 52
51 See NYSE Rule 452.
52 NYSE Rule 452 and NYSE Listed Issuer Manual § 402.08(B). This prohibition does not apply to issuers registered under the Investment Company Act.
D
uncontested director elections, without instructions from the beneficial owner. 51 The NYSE recently revised this rule to prohibit broker-dealers from voting uninstructed shares with regard to any election of directors. 52
51 See NYSE Rule 452.
52 NYSE Rule 452 and NYSE Listed Issuer Manual § 402.08(B). This prohibition does not apply to issuers registered under the Investment Company Act.
D. The Roles of Third Parties in the Proxy Process
Issuers, securities intermediaries, and shareholders often retain third parties to perform a number of proxy-related functions, including forwarding proxy materials, collecting voting instructions, voting shares, soliciting proxies, tabulating proxies, and analyzing proxy issues.
1. Transfer Agents
Issuers are required to maintain a record of security holders for state law purposes 53 and often hire a transfer agent 54 to maintain that record. 55 Transfer agents, as agents of the issuer, are obliged to confirm to a vote tabulator (if the transfer agent does not itself perform the tabulation function) matters such as the amount of shares outstanding, as well as the identity and holdings of registered owners entitled to vote. Transfer agents are required to register with the Commission, which inspects and currently regulates some of their functions. 56
53 E.g., Del. Code Ann. tit. 8, § 219(a); Model Bus. Corp. Act § 16.01(c).
54 Section 3(a)(25) of the Exchange Act defines a “transfer agent” as any person who engages on behalf of an issuer of securities or on behalf of itself as an issuer of securities in (1) countersigning such securities upon issuance, (2) monitoring the issuance of such securities with a view to preventing unauthorized issuance, (3) registering the transfer of securities, (4) exchanging or converting such securities, or (5) transferring record ownership of securities by bookkeeping entry without the physical issuance of securities certificates. For more information about the role of transfer agents, see http://www.stai.org
nce, (2) monitoring the issuance of such securities with a view to preventing unauthorized issuance, (3) registering the transfer of securities, (4) exchanging or converting such securities, or (5) transferring record ownership of securities by bookkeeping entry without the physical issuance of securities certificates. For more information about the role of transfer agents, see http://www.stai.org.
55 Exchange Act Rules 17Ad-6, 17Ad-7, 17Ad-9, 17Ad-10, and 17Ad-11 govern how transfer agents acting for issuers of securities registered under Section 12 of the Exchange Act (or that would have to be registered but for the exemption under Section 12(g)(2)(b)(i) and (ii) of the Exchange Act) must maintain certain records of the issuer, including, but not limited to, the official record of ownership ( i.e., the “masterfile”) and the official record of the number of securities issued and outstanding ( i.e., the “control book” or the “registrar”). These rules do not address the distribution of issuer communications, including proxy materials, or the remittance of proxies or voting instructions. To a lesser extent, the UCC, as adopted by states, also governs certain aspects of transfer agent activity relating to rights of issuers, shareholders, securities intermediaries, and those holding through securities intermediaries, some of which relate to the right to vote. The application of the UCC in this context is beyond the scope of this release.
56 Persons acting as transfer agents for any security registered under Section 12 of the Exchange Act or which would be required to be registered except for the exemption from registration provided by subsection (g)(2)(B) or (g)(2)(G) of Section 12 must register with the Commission (or, for transfer agents that are banks, with their appropriate regulatory agency) and pursuant to Section 17A of the Exchange Act must comply with Commission rules and regulations. 15 U.S.C. 78q-1(c)(1) and (d)(1).
2
or which would be required to be registered except for the exemption from registration provided by subsection (g)(2)(B) or (g)(2)(G) of Section 12 must register with the Commission (or, for transfer agents that are banks, with their appropriate regulatory agency) and pursuant to Section 17A of the Exchange Act must comply with Commission rules and regulations. 15 U.S.C. 78q-1(c)(1) and (d)(1).
2. Proxy Service Providers
To facilitate the proxy material distribution and voting process for beneficial owners, securities intermediaries typically retain a proxy service provider to perform a number of processing functions, including forwarding the proxy materials by mail or electronically and collecting voting instructions. 57 To enable the proxy service provider to perform these functions, the securities intermediary gives the service provider an electronic data feed of a list of beneficial owners and the number of shares held by each beneficial owner on the record date. The proxy service provider, on behalf of the intermediary, then requests the appropriate number of proxy material sets from the issuer for delivery to the beneficial owners. Upon receipt of the packages, the proxy service provider, on behalf of the intermediary, mails either the proxy materials with a VIF, or a Notice of Internet Availability of Proxy Materials, 58 to beneficial owners. Although we do not directly regulate such proxy service providers, our regulations governing the proxy process-related obligations of securities intermediaries apply to the way in which proxy service providers perform their services because they act as agents for, and on behalf of, those intermediaries and typically vote proxies on behalf of those intermediaries pursuant to a power of attorney.
57 A single proxy service provider, Broadridge Financial Services, Inc. (“Broadridge”), states that it currently handles over 98% of the U.S. market for such proxy vote processing services
oxy service providers perform their services because they act as agents for, and on behalf of, those intermediaries and typically vote proxies on behalf of those intermediaries pursuant to a power of attorney.
57 A single proxy service provider, Broadridge Financial Services, Inc. (“Broadridge”), states that it currently handles over 98% of the U.S. market for such proxy vote processing services. See http://www.broadridge.com/investor-communications/us/institutions/proxy-disclosure.asp.
58 A Notice is sent pursuant to provisions in Rule 14a-16. 17 CFR 240.14a-16.
3. Proxy Solicitors
Issuers sometimes hire third-party proxy solicitors to identify beneficial owners holding large amounts of the issuers' securities and to telephone shareholders to encourage them to vote their proxies consistent with the recommendations of management. This often occurs when there is a contested election of directors, and issuer's management and other persons are competing for proxy authority to vote securities in the election (commonly referred to as a “proxy contest”). In addition, an issuer may hire a proxy solicitor in uncontested situations when voting returns are expected to be insufficient to meet state quorum requirements or when an important matter is being considered. Issuers and other soliciting persons are required to disclose the use of such services and estimated costs for such services in their proxy statements. 59
59 Item 4 of 17 CFR 240.14a-101. If similar services are performed by employees of the issuer, however, the estimated costs of such services need to be disclosed only if the employees are specially engaged for the solicitation.
4. Vote Tabulators
Under many state statutes, an issuer must appoint a vote tabulator (sometimes called “inspectors of elections” or “proxy tabulators”) to collect and tabulate the proxy votes as well as votes submitted by shareholders in person at a meeting
uer, however, the estimated costs of such services need to be disclosed only if the employees are specially engaged for the solicitation.
4. Vote Tabulators
Under many state statutes, an issuer must appoint a vote tabulator (sometimes called “inspectors of elections” or “proxy tabulators”) to collect and tabulate the proxy votes as well as votes submitted by shareholders in person at a meeting. 60 We understand that often the issuer's transfer agent will act as the vote tabulator because most 61 In addition, proxies submitted by securities intermediaries that are not registered owners, but have been granted direct voting rights through DTC's omnibus proxy, are reconciled with DTC's securities position listing. Although the Commission does regulate transfer agents (which often serve as vote tabulators) in their roles as transfer agents, the Commission does not currently regulate vote tabulators or the function of tabulating proxies by transfer agents.
60 See, e.g., Del. Code Ann. tit. 8, § 231; Model Bus. Corp. Act § 7.29.
61 Id. As noted above, transfer agents, who already possess the list of record owners, often tabulate the vote, so they possess the necessary information to make this determination. It is our understanding that, when the vote tabulator is an entity other than the transfer agent, the issuer or its transfer agent typically will provide the vote tabulator with the list of record owners to enable the vote tabulator to make this determination.
5. Proxy Advisory Firms
Institutional investors typically own securities positions in a large number of issuers. Therefore, they are presented annually with the opportunity to vote on many matters and often must exercise fiduciary responsibility in voting. 62 Some institutional investors may retain an investment adviser to manage their investments, and may also delegate proxy voting authority to that adviser
sory Firms
Institutional investors typically own securities positions in a large number of issuers. Therefore, they are presented annually with the opportunity to vote on many matters and often must exercise fiduciary responsibility in voting. 62 Some institutional investors may retain an investment adviser to manage their investments, and may also delegate proxy voting authority to that adviser. To assist them in their voting decisions, investment advisers (or institutional investors if they retain voting authority) frequently hire proxy advisory firms to provide analysis and voting recommendations on matters appearing on the proxy. In some cases, proxy advisory firms are given authority to execute proxies or voting instructions on behalf of their client. Some proxy advisory firms also provide consulting services to issuers on corporate governance or executive compensation matters, such as helping to develop an executive compensation proposal to be submitted for shareholder approval. Some proxy advisory firms may also qualitatively rate or score issuers, based on judgments about the issuer's governance structure, policies, and practices. As discussed in more detail elsewhere in this release, some of the activities of a proxy advisory firm can constitute a solicitation, which is governed by our proxy rules. 63 Some, but not all, proxy advisory firms operating in our markets are currently registered with us as investment advisers. 64
62 See Section V.A.1, below.
63 Id.
64 Id.
III. Accuracy, Transparency, and Efficiency of the Voting Process
Investor and issuer interests may be undermined when perceived defects in the proxy system—or uncertainties about whether there are any such defects—are believed to impair its accuracy, transparency, and cost-efficiency
s are currently registered with us as investment advisers. 64
62 See Section V.A.1, below.
63 Id.
64 Id.
III. Accuracy, Transparency, and Efficiency of the Voting Process
Investor and issuer interests may be undermined when perceived defects in the proxy system—or uncertainties about whether there are any such defects—are believed to impair its accuracy, transparency, and cost-efficiency. Because even the perception of such defects can lead to lack of confidence in the proxy process, we seek to explore concerns that have been expressed about the accuracy, transparency, and efficiency of that process and ways in which those concerns might be addressed.
A. Over-Voting and Under-Voting
On occasion, vote tabulators (including transfer agents acting in that capacity) receive votes from a securities intermediary that exceed the number of shares that the securities intermediary is entitled to vote. The extent to which such votes are accepted depends on instructions from the issuer, state law, and the vote tabulator's internal policies. For example, it is our understanding that some vote tabulators accept votes from a DTC participant on a “first-in” basis up to the aggregate amount indicated in DTC's records—that is, once the votes cast by the participant exceed the number of positions indicated on the securities position listing, the vote tabulator will refuse to accept any votes subsequently remitted. Conversely, other vote tabulators, we understand, refuse to accept any votes from a securities intermediary if the aggregate number of votes submitted exceeds the vote tabulator's records for that intermediary.
In an attempt to address issuers' concerns about the potential for over-voting, securities intermediaries and their service providers have implemented systems that compare the number of votes submitted by a securities intermediary to its ownership positions as reflected in DTC's records and notify that securities intermediary when it has submitted votes in excess of its ownership positions
iary.
In an attempt to address issuers' concerns about the potential for over-voting, securities intermediaries and their service providers have implemented systems that compare the number of votes submitted by a securities intermediary to its ownership positions as reflected in DTC's records and notify that securities intermediary when it has submitted votes in excess of its ownership positions. The securities intermediary may then adjust its vote to reflect the correct number of votes before the service provider submits that vote to the vote tabulator. 65 The corrected information is then sent to the vote tabulator. The means by which securities intermediaries reconcile these differences has raised some concern regarding the accuracy of the vote, including whether the votes are being allocated to the beneficial owners in the correct amounts.
65 SIFMA and individual broker-dealers have suggested several different methodologies as to how this may be accomplished, but we do not believe there is consensus among the industry participants or a standard operating procedure currently in place.
1. Imbalances in Broker Votes
For securities held at DTC, a DTC participant may vote only the number of securities held by that participant in its DTC account on the record date for a shareholder meeting. Sometimes the number of securities of a particular issuer held in the DTC participant's account will be less than the number of securities that the DTC participant has credited in its own books and records to its customers' accounts. Although there may be many reasons why the number of securities held by a broker-dealer at DTC does not match the total number of securities credited to the broker-dealer's customers' accounts, as discussed in more detail below, this situation principally arises in connection with lending transactions and “fails to deliver” 66 in the clearance and settlement system.
66 See Section III.A.1.b, below
though there may be many reasons why the number of securities held by a broker-dealer at DTC does not match the total number of securities credited to the broker-dealer's customers' accounts, as discussed in more detail below, this situation principally arises in connection with lending transactions and “fails to deliver” 66 in the clearance and settlement system.
66 See Section III.A.1.b, below.
Because of the way broker-dealers track securities lending transactions, 67 if all of a broker-dealer's customers owning a particular issuer's securities actually voted, the broker-dealer may receive voting instructions for more securities than it is entitled to vote. Moreover, the existing clearance and settlement system was not designed to assign particular shares of a security to a particular investor, due to netting and holding securities in fungible bulk. 68 Thus, it is not currently possible to match a particular investor's vote to a specific securities position held at a securities depository. When a broker-dealer has fewer positions or shares reflected on the securities position listing 69 than it has reflected on its books and records, the broker-dealer must determine if and how it should allocate the votes it has among its customer and proprietary accounts and
67 We understand that because securities are held in fungible bulk, broker-dealers typically do not allocate loaned securities to a particular account.
68 See Section IV.A.1, below.
69 See Section I.B.2.a, above, for a discussion of securities position listings.
a. Securities Lending
When a customer purchases shares on margin, a portion of the securities in the customer's account may be used to collateralize the margin loan. 70 As part of the customer's margin agreement, the customer typically agrees to allow the broker-dealer to use those securities to raise money to fund the margin loan. Consequently, broker-dealers may lend out customers' margin securities
urities Lending
When a customer purchases shares on margin, a portion of the securities in the customer's account may be used to collateralize the margin loan. 70 As part of the customer's margin agreement, the customer typically agrees to allow the broker-dealer to use those securities to raise money to fund the margin loan. Consequently, broker-dealers may lend out customers' margin securities. In addition, broker-dealers may enter into stock loan arrangements with investors (typically institutional investors or other broker-dealers) whereby the broker-dealer borrows the investors' fully-paid securities. 71
70 A broker-dealer must maintain possession and control of all fully-paid and excess margin securities. 17 CFR 240.15c3-3(b)(1).
71 When borrowing fully-paid securities, Exchange Act Rule 15c3-3(b)(3) requires, among other things, that a broker-dealer enter into a separate written agreement with the customer and provide the customer with a schedule of the securities actually borrowed as well as the collateral provided to the customer. 17 CFR 240.15c3-3(b)(3).
Stock loan agreements typically transfer to the borrower the right to vote the borrowed securities. 72 Thus, for example, when an institutional investor, such as a fund, lends its portfolio securities to a borrower, the right to vote those securities also transfers to the borrower. 73 As a result, the institutional investor that lends its portfolio securities generally loses its ability to vote those securities, unless and until the loan is terminated and the securities are returned before the record date in question. 74
72 See Master Securities Lending Agreement at 6, available at www.sifma.org/services/stdforms/pdf/master_sec_loan.pdf.
73 If an institutional lender lends out portfolio securities after the record date for a particular shareholder vote, the lender would normally retain the right to vote the proxies for that particular shareholder vote
urities are returned before the record date in question. 74
72 See Master Securities Lending Agreement at 6, available at www.sifma.org/services/stdforms/pdf/master_sec_loan.pdf.
73 If an institutional lender lends out portfolio securities after the record date for a particular shareholder vote, the lender would normally retain the right to vote the proxies for that particular shareholder vote.
74 If the lending broker-dealer attempts to recall the loan, the borrowing broker-dealer may not be able to return the securities in a timely manner because, among other things, it may have reloaned or sold the security to another party and is unable to obtain shares to return to the lending broker-dealer.
Even though a broker-dealer has the ability to lend its customers' margin securities pursuant to a stock loan agreement, because shares are held in fungible bulk, it may not be practical to inform a customer when an actual loan has been made and it may be unclear which lending investor has lost the right to vote. Therefore, a customer may expect to vote all of its securities because it does not necessarily know whether its securities have in fact been loaned. If the lending broker-dealer does not allocate a certain number of shares to a lending investor as having been borrowed, but instead sends a VIF indicating that the lending investor has the right to vote all of the securities credited to its account, including the loaned margin securities, both the lending and borrowing broker-dealers may submit voting instructions from two customers for a single share, which may give rise to an over-voting situation.
b. Fails to Deliver
An imbalance between a securities intermediary's position reflected on the securities position listing and the position reflected in its own books and records may also occur because of fails to deliver in the clearance and settlement system. 75 Every day the NSCC, a registered clearing agency, nets each of its members' trades to a single buy or sell obligation for each issue traded
ls to Deliver
An imbalance between a securities intermediary's position reflected on the securities position listing and the position reflected in its own books and records may also occur because of fails to deliver in the clearance and settlement system. 75 Every day the NSCC, a registered clearing agency, nets each of its members' trades to a single buy or sell obligation for each issue traded. 76 Because NSCC acts as a central counterparty for its members' trades, its members are obligated to deliver securities to, and entitled to receive securities from, NSCC at settlement, and not to or from other broker-dealers. Although the delivery of securities usually occurs as expected on the settlement date, there are occasions when broker-dealers fail to make timely delivery, often for reasons outside of their control. 77
75 Fails to deliver in all equity securities have declined significantly since the adoption of Interim Final Temporary Rule 204T in October 2008. See Amendments to Regulation SHO, Release No. 34-58773 (Oct. 14, 2008) [73 FR 61706]. See also Memorandum from the Staff Re: Impact of Recent SHO Rule Changes on Fails to Deliver, Nov. 4, 2009, available at http://www.sec.gov/spotlight/shortsales/oeamemo110409.pdf (stating, among other things, that the average daily number of aggregate fails to deliver for all securities decreased from 2.21 billion to 0.25 billion for a total decline of 88.5% when comparing a pre-Rule to post-Rule period); Memorandum from the Staff Re: Impact of Recent SHO Rule Changes on Fails to Deliver, Nov. 26, 2008, available at http://www.sec.gov/comments/s7-30-08/s73008-37.pdf ; Memorandum from the Staff Re: Impact of Recent SHO Rule Changes on Fails to Deliver, Mar. 20, 2009, available at http://www.sec.gov/comments/s7-30-08/s73008-107.pdf .
76 NSCC nets securities in its “Continuous Net Settlement” system pursuant to rules and procedures approved by the Commission. For more information on NSCC's rules and procedures, see www.dtcc.com/legal/rules_proc/nscc_rules.pdf
; Memorandum from the Staff Re: Impact of Recent SHO Rule Changes on Fails to Deliver, Mar. 20, 2009, available at http://www.sec.gov/comments/s7-30-08/s73008-107.pdf .
76 NSCC nets securities in its “Continuous Net Settlement” system pursuant to rules and procedures approved by the Commission. For more information on NSCC's rules and procedures, see www.dtcc.com/legal/rules_proc/nscc_rules.pdf. See Section IV.A.1, below, for additional information about the role of NSCC.
77 For example, broker-dealers may fail to deliver securities because of: (1) Delays by customers delivering to the broker-dealer the shares being sold; (2) a broker-dealer's inability to purchase or borrow shares needed for settlement; or (3) a broker-dealer's inability to obtain transfer of title of securities in time for settlement. For more information on fails to deliver in the U.S. clearance and settlement system, see Short Sales, Release No. 34-50103 (July 28, 2004) [69 FR 48008] and Amendments to Regulation SHO, Release No. 34-60388 (July 27, 2009) [74 FR 38266].
Pursuant to NSCC rules, if an NSCC broker-dealer member “fails to deliver” the securities it owes to NSCC on the settlement date, NSCC will allocate this fail to one of many contra-side broker-dealers due to receive securities without trying to attribute the fail to the specific broker-dealer that originally traded with the broker-dealer that failed to deliver. 78 The broker-dealer to which the fail is allocated will not receive the securities and will not be credited with this position at DTC until delivery is actually made.
78 If a broker-dealer fails to deliver securities to NSCC, NSCC allocates this fail to a broker-dealer member that is due to receive the securities.
Even though the broker-dealer has not actually received the securities, the broker-dealer usually will credit its customers' accounts with the purchased securities on settlement date
dited with this position at DTC until delivery is actually made.
78 If a broker-dealer fails to deliver securities to NSCC, NSCC allocates this fail to a broker-dealer member that is due to receive the securities.
Even though the broker-dealer has not actually received the securities, the broker-dealer usually will credit its customers' accounts with the purchased securities on settlement date. If the broker-dealer's fail-to-receive position continues through the record date for a corporate election, DTC may not yet recognize the broker-dealer's entitlement to vote this position. As with loaned securities, the broker-dealer may still try to allocate votes to all of its customers that its records reflect as owning those securities, even though DTC has not credited the broker's account with those securities or with the corresponding right to vote those securities through DTC.
2. Current Reconciliation and Allocation Methodologies Used by Broker-Dealers To Address Imbalances
Because the ownership of individual shares held beneficially is not tracked in the U.S. clearance and settlement system, when imbalances occur, broker-dealers must decide which of their customers will be permitted to vote and how many shares each customer will be permitted to vote. Neither our rules nor SRO rules currently mandate that a reconciliation be performed, or the use of a particular reconciliation or allocation methodology. Broker-dealers have developed a number of different approaches as to how votes are “allocated” among customer accounts
rs must decide which of their customers will be permitted to vote and how many shares each customer will be permitted to vote. Neither our rules nor SRO rules currently mandate that a reconciliation be performed, or the use of a particular reconciliation or allocation methodology. Broker-dealers have developed a number of different approaches as to how votes are “allocated” among customer accounts. 79
79 For more information on proxy processing and broker-dealer's reconciliation and allocation processes, see “Briefing Paper: Roundtable on Proxy Voting Mechanics,” (May 24, 2007), available at http://www.sec.gov/spotlight/proxyprocess/proxyvotingbrief.htm (“Roundtable Briefing Paper”), or “Unofficial Transcript of the Roundtable Discussion on Proxy Voting Mechanics,” (May 24, 2007), available at http://www.sec.gov/news/openmeetings/2007/openmtg_trans052407.pdf
Most broker-dealers have adopted a reconciliation method to balance the aggregate number of shares they are entitled to vote with the aggregate number of shares credited to customer and proprietary accounts. 80 The primary reconciliation methods are: (1) Pre-mailing reconciliation (“pre-reconciliation”); (2) post-mailing reconciliation (“post-reconciliation”); and (3) a hybrid form of the pre-reconciliation and post-reconciliation methods. 81 These methods are described in more detail below. If the broker-dealer finds that it is holding fewer shares at DTC than it has credited to customer and proprietary accounts, it may choose to give up its own votes, as represented by shares credited to its proprietary accounts, by allocating some or all of those votes to its customers, or it may choose to allocate to its customers only the voting rights attributable to customer accounts.
80 Not all broker-dealers have developed policies and procedures to address the reconciliation and allocation of votes among their customers because historically broker-dealers have usually had enough shares on deposit at DTC to provide a vote to all customers wanting to vote
to its customers, or it may choose to allocate to its customers only the voting rights attributable to customer accounts.
80 Not all broker-dealers have developed policies and procedures to address the reconciliation and allocation of votes among their customers because historically broker-dealers have usually had enough shares on deposit at DTC to provide a vote to all customers wanting to vote.
81 Roundtable Transcript, note 79, above.
a. Pre-Reconciliation Method
A broker-dealer using the pre-reconciliation method compares the number of shares it holds in aggregate at DTC and elsewhere with its aggregate customer account position before it sends VIFs to its customers. 82 If the aggregate number of shares it holds is less than the number of shares the broker-dealer has credited to its customer accounts, then the broker-dealer will determine which of its customers will be permitted to vote and how many votes will be allocated to each of those customers. Broker-dealers using the pre-reconciliation method request voting instructions from their customers with respect to only those customer positions to which votes have been allocated. We understand that most broker-dealers give customers with fully-paid securities and excess margin securities first priority in the distribution of votes. It is also our understanding that broker-dealers using the pre-reconciliation method tend to have more institutional customers than retail customers. 83
82 Id.
83 Id.
Broker-dealers using the pre-reconciliation method have indicated that this method ensures that the votes customers cast will be counted. 84 On the other hand, given that some broker-dealers have estimated that only 20% to 30% of their retail customers usually vote, some believe that pre-reconciliation may result in an “under-vote” because investors allocated the ability to vote may not do so, and other investors who do vote may be allocated a number of votes fewer than the number of shares they beneficially own
ast will be counted. 84 On the other hand, given that some broker-dealers have estimated that only 20% to 30% of their retail customers usually vote, some believe that pre-reconciliation may result in an “under-vote” because investors allocated the ability to vote may not do so, and other investors who do vote may be allocated a number of votes fewer than the number of shares they beneficially own. In addition, some broker-dealers have indicated that the pre-reconciliation method is more expensive than the post-reconciliation method because post-reconciliation only needs to be performed when a broker-dealer receives voting instructions in excess of the number of shares that it holds.
84 Id.
b. Post-Reconciliation Method
A broker-dealer using the post-reconciliation method compares its aggregate position at DTC and elsewhere 85 with its actual aggregate customer account position only after receiving VIFs from its customers. Broker-dealers using the post-reconciliation method request voting instructions from their customers with respect to all shares credited to their customer accounts, including for those shares that may have been purchased on margin, loaned to another entity, or not received because of a fail to deliver. We understand that broker-dealers using the post-reconciliation method tend to have primarily retail customers rather than institutional customers. 86
85 The aggregate number of shares the broker-dealer is entitled to vote may constitute more than just its position on deposit at DTC. For example, the broker-dealer may have additional securities on deposit at a foreign depository or in certificated form.
86 Roundtable Transcript, note 79, above.
In the event that a broker-dealer receives voting instructions from its customers in excess of its aggregate securities position, the broker-dealer adjusts its vote count prior to casting its vote with the issuer. The manner in which the adjustment is made varies among broker-dealers
ecurities on deposit at a foreign depository or in certificated form.
86 Roundtable Transcript, note 79, above.
In the event that a broker-dealer receives voting instructions from its customers in excess of its aggregate securities position, the broker-dealer adjusts its vote count prior to casting its vote with the issuer. The manner in which the adjustment is made varies among broker-dealers. Some firms simply reduce the number of proprietary position votes cast. Others allocate fewer votes to customers with securities purchased on margin or on loan.
Because of the low level of participation by retail voters, some of the broker-dealers using the post-reconciliation method have indicated to the Commission that the number of over-vote situations is not a significant problem and can be addressed in a number of ways, including, but not limited to, the broker-dealer using its proprietary positions to redress any imbalance. The costs associated with the post-reconciliation method are generally considered to be less than those associated with the pre-reconciliation method because the broker-dealer does not have to go through the costly process of allocating votes among customers unless its customers remit VIFs for more shares than the broker-dealer is entitled to vote in the aggregate.
c. Hybrid Reconciliation Methods
Some broker-dealers have developed hybrid reconciliation methods that use aspects of both pre- and post-reconciliation methods. For example, in one hybrid reconciliation method, a broker-dealer will allocate votes to all of its customers with fully-paid securities but will also allow each margin account customer to instruct the broker-dealer that it would like to vote its shares. The broker-dealer will allocate any shares not needed to cover fully-paid account holders to those margin customers who indicated they wanted to vote, thereby giving these margin customers priority over other margin customers. 87
87 Id.
3
ts customers with fully-paid securities but will also allow each margin account customer to instruct the broker-dealer that it would like to vote its shares. The broker-dealer will allocate any shares not needed to cover fully-paid account holders to those margin customers who indicated they wanted to vote, thereby giving these margin customers priority over other margin customers. 87
87 Id.
3. Potential Regulatory Responses
Broker-dealers have indicated to the Commission staff that most broker-dealers select an allocation and reconciliation method that best accommodates their particular customer base and best advances the firm's particular business strategy. For example, those firms focusing on retail customers generally will have more customer accounts owning smaller amounts of securities and casting relatively few votes and, as a result, may prefer the post-reconciliation method over the pre-reconciliation method.
The customers of a broker-dealer may not be aware of the allocation and reconciliation method used by the firm. We are interested in receiving views on whether it would be helpful to investors if broker-dealers publicly disclosed the allocation and reconciliation method used by the firm during each proxy season, as well as the likely effect of that method on whether the customers' voting instructions would actually be reflected in the broker-dealer's proxy sent to the vote tabulator. Such disclosure could be in writing and provided to customers upon opening an
Given the lack of empirical data on whether over-voting or under-voting is occurring and if so, to what extent, we also would like to receive views on whether investors, issuers, and the proxy system overall would benefit from having additional data from proxy participants regarding over-voting and under-voting to determine whether further regulatory action should be considered
s upon opening an
Given the lack of empirical data on whether over-voting or under-voting is occurring and if so, to what extent, we also would like to receive views on whether investors, issuers, and the proxy system overall would benefit from having additional data from proxy participants regarding over-voting and under-voting to determine whether further regulatory action should be considered. This data would allow us to determine the scope of the problem, if any, and give us detailed information that would further assist us in determining whether current regulations are effective or additional regulation is appropriate. Such information may also indicate if one particular method is working better for investors and the market than other methods.
4. Request for Comment
• What are the advantages or disadvantages of the various methods of allocation or reconciliation currently used by securities intermediaries and the effectiveness of such methods?
• Is there any evidence, statistical, anecdotal or otherwise, of material over-voting or under-voting, and if so, what is the size and impact of over-voting or under-voting? For example, is there any evidence that over-voting or under-voting has determined the outcome of a vote or materially changed the voting results?
• Are there any concerns caused by over-voting or under-voting that are not described above? Are there particular concerns regarding the impact of either over-voting or under-voting with respect to specific types of voting decisions, such as merger transactions, the election of directors where a majority vote is required, or shareholder advisory votes regarding executive compensation? What, if any, alternatives should we consider to the current system, and what would be the costs and benefits of any alternative process?
• Would requiring broker-dealers to disclose their allocation and reconciliation process adequately address the concerns related to over-voting and under-voting by beneficial owners?
• Would information about vote allocation
regarding executive compensation? What, if any, alternatives should we consider to the current system, and what would be the costs and benefits of any alternative process?
• Would requiring broker-dealers to disclose their allocation and reconciliation process adequately address the concerns related to over-voting and under-voting by beneficial owners?
• Would information about vote allocation and reconciliation methods be helpful to investors or adequately address any concerns related to those processes?
• Would a particular type of vote allocation and reconciliation method better protect investors' interests?
• Do the varying methods of vote allocation affect the potential to audit votes cast by beneficial holders?
• Should investors who have fully paid for their securities be allocated voting rights over those who purchased the securities on margin? Should beneficial holders be allocated voting rights over broker-dealer proprietary accounts?
• Should brokers be required to disclose the effect of share lending programs on the ability of retail investors to cast votes?
• Does the current system of settlement and clearance of securities transactions in the U.S. create any problems or inefficiencies in the proxy process in regard to matters other than over-voting or under-voting? If so, what are they, and what steps should we consider in order to address them?
B. Vote Confirmation
1. Background
A number of market participants, including both individual and institutional investors, have raised concerns regarding the inability to confirm whether an investor's shares have been voted in accordance with the investor's instructions. As discussed more fully in Section II, beneficial owners cast their votes through a securities intermediary, which, in turn, uses a proxy service provider to collect and send the votes to the vote tabulator
both individual and institutional investors, have raised concerns regarding the inability to confirm whether an investor's shares have been voted in accordance with the investor's instructions. As discussed more fully in Section II, beneficial owners cast their votes through a securities intermediary, which, in turn, uses a proxy service provider to collect and send the votes to the vote tabulator. 88 Beneficial owners, particularly institutional investors, often want or need to confirm that their votes have been timely received by the vote tabulator and accurately recorded. Similarly, securities intermediaries want to be able to confirm to their customers that their votes have been timely received and accurately recorded. Issuers also want to be able to confirm that the votes that they receive from securities intermediaries on behalf of beneficial owners properly reflect the votes of those beneficial owners. We understand that, on occasion, errors have been made when a third party fails to timely submit votes on behalf of its clients. 89
88 Some securities intermediaries may not have sufficient shares on deposit at DTC to allocate a vote to every share position credited to every customer's account. In those cases, the securities intermediary may have to allocate a specific number of votes to some customers that is fewer than the number of shares credited to those customers' accounts. See Section III.A, above, for a more in-depth discussion of why and how securities intermediaries reconcile and allocate votes to their customers.
89 See, e.g., Adam Jones, “Riddle of the Missing Unilever Votes Solved,” Financial Times, Aug. 15, 2003; “Mum on a Recount,” Pensions & Investments, Aug. 10, 2009, available at http://www.pionline.com/article/20090810/PRINTSUB/308109996; Meagan Thompson-Mann, Policy Briefing No. 3—Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry, The Millstein Center for Corporate Governance and Performance, Mar. 2, 2009, at 10-11 (“Thompson-Mann Policy Briefing”)
Times, Aug. 15, 2003; “Mum on a Recount,” Pensions & Investments, Aug. 10, 2009, available at http://www.pionline.com/article/20090810/PRINTSUB/308109996; Meagan Thompson-Mann, Policy Briefing No. 3—Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry, The Millstein Center for Corporate Governance and Performance, Mar. 2, 2009, at 10-11 (“Thompson-Mann Policy Briefing”).
The inability to confirm voting information is caused in part because no one individual participant in the voting process—neither issuers, transfer agents, vote tabulators, securities intermediaries, nor third party proxy service providers—possesses all of the information necessary to confirm whether a particular beneficial owner's vote has been timely received and accurately recorded. A number of market participants contend that some proxy service providers, transfer agents, or vote tabulators are unwilling or unable to share voting information with each other or with investors and securities intermediaries. There are currently no legal or regulatory requirements that compel these entities to share information with each other in order to allow for vote confirmations.
The inability to confirm that votes have been timely received and accurately recorded creates uncertainty regarding the accuracy and integrity of votes cast at shareholder meetings. At a time when votes on matters presented to shareholders are increasingly meaningful and consequential to all shareholders, this lack of transparency could potentially impair confidence in the proxy system. 90 Because of the inability to ascertain the integrity of the votes cast by beneficial owners, concerns have been raised by investors that it may be difficult to assess the accuracy of the current proxy system as a whole
ers presented to shareholders are increasingly meaningful and consequential to all shareholders, this lack of transparency could potentially impair confidence in the proxy system. 90 Because of the inability to ascertain the integrity of the votes cast by beneficial owners, concerns have been raised by investors that it may be difficult to assess the accuracy of the current proxy system as a whole.
90 The Organisation of Economic Co-operation and Development (“OECD”), consisting primarily of jurisdictions with high income and developed markets, has voiced similar concerns about this lack of transparency in several jurisdictions and recommends addressing it through legal and regulatory changes. Corporate Governance: A Survey of OECD Countries (2004) (“OECD Survey”).
2. Potential Regulatory Responses
In the Commission's view, both record owners and beneficial owners should be able to confirm that the votes they cast have been timely received and accurately recorded and included in the tabulation of votes, and issuers should be able to confirm that the votes that they receive from securities intermediaries/proxy advisory firms/
One possible solution may be for all participants in the voting chain to grant to issuers, or their transfer agents or vote tabulators, access to certain information relating to voting records, for the limited purpose of enabling a shareholder or securities intermediary to confirm how a particular shareholder's shares were voted. To protect the identities of objecting beneficial owners from issuers, a system could assign each beneficial owner a unique identifying code, which could then be used to create an audit trail from beneficial owner to proxy service provider to transfer agent/vote tabulator. Issuers (or their agents, such as transfer agents or vote tabulators) would, in turn, confirm to record owners, beneficial owners, and securities intermediaries upon request that any particular votes cast by them or on their behalf have been received and voted as instructed
could then be used to create an audit trail from beneficial owner to proxy service provider to transfer agent/vote tabulator. Issuers (or their agents, such as transfer agents or vote tabulators) would, in turn, confirm to record owners, beneficial owners, and securities intermediaries upon request that any particular votes cast by them or on their behalf have been received and voted as instructed. This process could be fully automated such that a vote confirmation could be provided by the issuer (or its agent) to the record owner or, in the case of beneficial owners, to the securities intermediary or proxy service provider and sent by e-mail to the beneficial owner.
Confirmation of the vote information may also facilitate the ability of market participants and state and federal regulatory authorities or courts to ascertain the accuracy of a particular election or the overall proxy system. Moreover, transparency of the process should promote investor confidence as well.
3. Request for Comment
• To what extent have shareholders had difficulty in confirming whether their submitted votes have been tabulated? To what extent have issuers had difficulty in determining whether the votes submitted by securities intermediaries/proxy advisory firms/proxy service providers accurately reflect the voting instructions submitted by beneficial owners?
• To what extent do investors believe that their votes have not been accurately transmitted or tabulated, and what is the basis for such belief? Is there sufficient information about the ways that investors actually place their votes, for example, by telephone, on paper, or via the Internet? 91 Do investors have concerns about whether the method they use to place their votes affects the likelihood that their vote will be accurately recorded?
91 See note 49, above
accurately transmitted or tabulated, and what is the basis for such belief? Is there sufficient information about the ways that investors actually place their votes, for example, by telephone, on paper, or via the Internet? 91 Do investors have concerns about whether the method they use to place their votes affects the likelihood that their vote will be accurately recorded?
91 See note 49, above.
• Should all participants in the voting chain grant access to their share voting records to issuers and their transfer agents/vote tabulators, for the limited purpose of enabling confirmation of a shareholder's vote? What are the benefits and costs associated with sharing such information?
• What is the best way to preserve any continuing anonymity of those investors who choose not to have their identities disclosed to the issuer?
• Would the creation of a unique identifier for each beneficial owner be feasible? Would such a system achieve the objective of allowing record owners and beneficial owners to confirm that their vote was cast in accordance with their instructions and confirm the number of shares cast on their behalf? What are the costs and benefits associated with such a system?
• Should issuers (and their agents) confirm to registered owners, beneficial owners, or securities intermediaries that the issuer has received and properly tabulated their votes? Should this confirmation be limited to an informal confirmation that votes have been counted, or should shareholders be able to obtain some form of proof that their votes have been counted? What type of documentation would constitute sufficient proof? What are the benefits and costs of such alternatives? Are there other steps that would enable beneficial owners to verify that their votes have been counted?
• Should investors also be able to obtain access to share voting records for the limited purpose of enabling an audit of the shareholder vote?
• Should issuers and securities intermediaries (and their agents) be required to reconcile and verify
e the benefits and costs of such alternatives? Are there other steps that would enable beneficial owners to verify that their votes have been counted?
• Should investors also be able to obtain access to share voting records for the limited purpose of enabling an audit of the shareholder vote?
• Should issuers and securities intermediaries (and their agents) be required to reconcile and verify voting at the beneficial owner level? Would this be consistent with state law, which vests voting rights in the registered owner? Would other reconciliation and verification requirements be consistent with the purposes underlying state law?
• Should proxy participants periodically evaluate and test the effectiveness of their voting controls and procedures? If so, to whom should the results of these tests or the participants' conclusions on effectiveness be disclosed? Should disclosure be to the Commission, to clients, or also to the public?
C. Proxy Voting by Institutional Securities Lenders
Institutional securities lenders play a significant role in the proxy voting process, and we believe that it is important to evaluate the impact of their share lending on that process, and to consider ways in which the efficacy and transparency of share voting on the part of such institutions could potentially be improved. In particular, and as discussed below, we seek to examine whether decisions to recall loaned securities in connection with shareholder votes might be more timely and better informed. We also seek to examine whether increased disclosure of the votes cast by institutional securities lenders might improve the transparency of the voting process.
1. Background
Many institutions with investment portfolios of securities—such as insurance companies, pension funds, mutual funds, and college endowments—engage in securities lending to earn additional income on securities that would otherwise be sitting idle in their portfolios
sclosure of the votes cast by institutional securities lenders might improve the transparency of the voting process.
1. Background
Many institutions with investment portfolios of securities—such as insurance companies, pension funds, mutual funds, and college endowments—engage in securities lending to earn additional income on securities that would otherwise be sitting idle in their portfolios. When an institution lends out its portfolio securities, all incidents of ownership relating to the loaned securities, including voting rights, generally transfer to the borrower for the duration of the loan. 92 Accordingly, if the lender wants, or is obligated, to vote the loaned securities, the lender must terminate the loan and recall the loaned securities prior to the record date. 93
92 See, e.g., Thomas P. Lemke et al., Regulation of Investment Companies at 8.02[1][2][vi][A] (2006) (“legal title to the [loaned] securities (along with voting rights and rights to dividends and distributions) passes to the borrower for the term of the loan; when the securities are returned, the fund regains title”). See also Master Securities Loan Agreement, note 72, above, at 7.1 (generally the borrower receives all the incidents of ownership of the borrowed securities while loan is open).
93 It is not typically feasible for the lender to retain proxy voting rights while the loan is open because the borrower typically transfers the loaned securities (for example, in a short sale), and the eventual transferee needs full right and title to the acquired securities.
2. Lack of Advance Notice of Meeting Agenda
a. Background
Some institutional securities lenders have proxy voting policies that require the lender, in the event of a material vote, to get back the loaned securities in order to vote the proxies
lly transfers the loaned securities (for example, in a short sale), and the eventual transferee needs full right and title to the acquired securities.
2. Lack of Advance Notice of Meeting Agenda
a. Background
Some institutional securities lenders have proxy voting policies that require the lender, in the event of a material vote, to get back the loaned securities in order to vote the proxies. 94 While issuers are required to provide information in the proxy statement
94 For example, the Commission staff has agreed not to object if voting rights pass with the lending of securities provided that if the management of the lending fund has knowledge that a material event will occur with respect to a security on loan, the fund directors would be obligated to recall such loan in time to vote the proxies. See, e.g., State Street Bank & Trust Company, SEC Staff No-Action Letter (Sept. 29, 1972).
We understand that some institutional securities lenders may try to obtain timely information about meeting agendas through a variety of informal means, including media reports. We are also told, however, that this informal process is not an effective substitute for a formal process that would alert securities lenders to the matters to be voted on at shareholder meetings in time to terminate the loan and receive the loaned securities. We understand that, in some instances, securities lenders learn of material votes too late to recall the loans to vote the proxies. 95
95 See Roundtable Transcript, note 79, above.
b. Potential Regulatory Responses
In considering possible solutions, we note that, under Section 401.02 of the NYSE Listed Company Manual, NYSE-listed issuers must provide the exchange with notice of the record and meeting dates for shareholder meetings at least ten days prior to the record date for the meeting, unless it is not possible to do so
95 See Roundtable Transcript, note 79, above.
b. Potential Regulatory Responses
In considering possible solutions, we note that, under Section 401.02 of the NYSE Listed Company Manual, NYSE-listed issuers must provide the exchange with notice of the record and meeting dates for shareholder meetings at least ten days prior to the record date for the meeting, unless it is not possible to do so. That notice must describe the matters to be voted upon at the meeting, unless it is accompanied by printed material being sent to shareholders which describes those matters. We understand, however, that this formal notice is not disseminated to the public and may not contain specific descriptions of all matters to be voted on at the meeting.
Consequently, one possible regulatory response is to ask the NYSE to revise its rules to require public dissemination of a notice, in advance of the record date, that contains information about the record and meeting dates as well as specific descriptions of all matters to be voted upon. Other SROs could also be asked to adopt similar rules. An alternative possibility is a requirement for all issuers subject to our proxy rules to disclose the agenda by public means, such as by filing a report on Form 8-K (or as an alternative to such a filing requirement, permitting the issuance of a press release or a posting on a corporate Web site).
In identifying these alternatives, we are mindful that it can be difficult for issuers to disclose complete meeting agendas in advance of the record date because the agenda may not be established at that time for a variety of reasons, including board consideration of initiatives proposed by management and Commission staff review of no-action requests regarding Rule 14a-8 shareholder proposals.
c
In identifying these alternatives, we are mindful that it can be difficult for issuers to disclose complete meeting agendas in advance of the record date because the agenda may not be established at that time for a variety of reasons, including board consideration of initiatives proposed by management and Commission staff review of no-action requests regarding Rule 14a-8 shareholder proposals.
c. Request for Comment
• Should the Commission propose a rule to require issuers to disclose publicly the meeting agenda sufficiently in advance of the record date to permit securities lenders to determine whether any of the matters warrant a termination of the loan so that they may vote the proxies? If so, how many days would constitute sufficient notice to the public?
• What are the advantages and disadvantages, practical and as a matter of policy, to requiring issuers to provide this advance notice to the public? For instance, would the issuer know, sufficiently in advance, all of the items to be on the agenda, particularly shareholder proposals which may be the subject of a request for no-action relief being considered by the Commission's staff? 96 How could such a requirement provide notice of contested matters and other non-management proposals to be considered at the meeting? Could we address concerns by allowing issuers to publish an agenda that is “subject to change”? If so, should we limit such changes to shareholder proposals for which the issuer is seeking no-action relief? How often does uncertainty about a meeting agenda preclude issuers from disclosing the agenda in sufficient time for shareholders to recall loans before the record date?
96 When an issuer seeks to exclude a shareholder proposal submitted pursuant to Rule 14a-8, it must file its reasons with the Commission. 17 CFR 240.14a-8(j)
hareholder proposals for which the issuer is seeking no-action relief? How often does uncertainty about a meeting agenda preclude issuers from disclosing the agenda in sufficient time for shareholders to recall loans before the record date?
96 When an issuer seeks to exclude a shareholder proposal submitted pursuant to Rule 14a-8, it must file its reasons with the Commission. 17 CFR 240.14a-8(j).
• Would a mechanism that alerts lending shareholders to meeting agendas well in advance of record dates have positive and desirable effects on the proxy solicitation system such that the Commission should encourage and facilitate this? Would such a mechanism increase the number of lenders recalling loans, and result in greater loan instability, with adverse effects on the capital markets? If there are competing interests, which should prevail, and why?
• How could an advance notice requirement be effected? Should the Commission propose rules applicable to all issuers subject to the proxy rules? Or, should the SROs amend or adopt listing standards requiring their listed issuers to provide advance notice to the public of record and meeting dates and specific descriptions of all matters to be voted on at the shareholder meeting?
• If we required advance notice, through what medium should such notice to shareholders be made? Should issuers be required to issue a press release or make a company Web site posting in addition to filing a notice with the Commission? Would such notice be sufficient for shareholders?
• We also request data regarding the recall of loaned securities by institutional shareholder lenders in order to vote the shares. Please include information regarding the circumstances in which the recalls did and did not occur, and whether the shares were ultimately voted.
3. Disclosure of Voting by Funds
a
ing a notice with the Commission? Would such notice be sufficient for shareholders?
• We also request data regarding the recall of loaned securities by institutional shareholder lenders in order to vote the shares. Please include information regarding the circumstances in which the recalls did and did not occur, and whether the shares were ultimately voted.
3. Disclosure of Voting by Funds
a. Background
Management investment companies registered under the Investment Company Act (collectively, “funds”) are required to disclose on Form N-PX how they vote proxies relating to portfolio securities. 97 In adopting this requirement in 2003, the Commission stated that “[i]nvestors in mutual funds have a fundamental right to know how the fund casts proxy votes on shareholders' behalf.” 98 Indeed, the Commission required funds to disclose whether they cast their vote for or against management, in an effort to benefit fund shareholders by improving transparency and enabling them to monitor whether their funds approved or disapproved of the governance of portfolio companies. 99
97 See Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, Release No. IC-25932 (Jan. 31, 2003) [68 FR 6564].
98 Id. at 6566.
99 Id. at 6565.
As noted above, when a fund lends its portfolio securities, all incidents of ownership relating to the loaned securities, including proxy voting rights, generally transfer to the borrower for the duration of the loan. 100 Accordingly, the fund generally loses its ability to vote the proxies of such securities, unless and until the loan is terminated and the securities are returned to the lender prior to the record date in question.
100 See note 92, above
all incidents of ownership relating to the loaned securities, including proxy voting rights, generally transfer to the borrower for the duration of the loan. 100 Accordingly, the fund generally loses its ability to vote the proxies of such securities, unless and until the loan is terminated and the securities are returned to the lender prior to the record date in question.
100 See note 92, above.
Currently, Form N-PX requires disclosure of proxy voting information “for each matter relating to a portfolio security considered at any shareholder meeting held during the period covered by the report and with respect to which 101 However, Form N-PX does not require disclosure of the number of shares for which proxies were voted, nor does the Form require disclosure with respect to portfolio securities on loan when, as is generally the case, the fund is not entitled to vote proxies relating to those securities. Thus, for example, if a fund lends out 99% of its portfolio holdings of XYZ Corporation and therefore votes only 1% of its holdings of XYZ, Form N-PX would disclose that the fund voted proxies with respect to shares of XYZ, but would not also disclose that the fund did not vote 99% of its holdings of XYZ because they were on loan.
101 See Item 1 to Form N-PX. Form N-PX requires disclosure of the following: The name of the issuer of the portfolio security; the exchange ticker symbol of the portfolio security; the Council on Uniform Securities Identification Procedures (CUSIP) number for the portfolio security; the shareholder meeting date; a brief identification of the matter voted on; whether the matter was proposed by the issuer or by a security holder; whether the fund cast its vote on the matter; how the fund cast its vote ( e.g., for or against proposal, or abstain; for or withhold regarding election of directors); and whether the fund cast its vote for or against management.
b
ortfolio security; the shareholder meeting date; a brief identification of the matter voted on; whether the matter was proposed by the issuer or by a security holder; whether the fund cast its vote on the matter; how the fund cast its vote ( e.g., for or against proposal, or abstain; for or withhold reg

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/FR_PRORULE_2010-17615. Check the current official text before relying on it. Not legal advice.