SEC urged to unleash sweeping changes to proxy system
As the SEC’s Proxy Plumbing saga rumbles on, the Commission has signalled that public companies, shareholders and other stakeholders in the US may soon get the transparency in the proxy system that many have been demanding.
The investor advisory committee to the US Securities and Exchange Commission has set out proposals to reform the proxy voting system amid continued concerns about under-voting, over-voting and recounts, over the past 20 years.
For many years, the debate around vote plumbing has focussed almost exclusively on proxy advisors, but it now seems that the mechanics of vote execution may finally be drawn into a new era of openness and closer scrutiny.
Indicating a need for greater accuracy over vote counting and more transparency, the SEC’s Investor-as-Owner Subcommittee announced recommendations for changes in July, describing the proxy system as complex and requiring a “multi-step approach to improve it over a long period of time.”
Areas needing urgent attention form the committee’s immediate focus, such as the reconciliation between all parties of vote-related information, but its paper notably added that it’s seeking a consensus and will focus on changes that can be realised sooner, particularly given the vested interests in maintaining the status quo.
The proposals can be broken down into four main pillars:
1. The SEC should require end-to-end vote confirmations to end users of the proxy system, potentially starting with a pilot involving the largest companies;
2. The SEC should require all parties to cooperate in reconciling vote-related information, on a regular schedule, including outside specific votes, to provide a basis for continuously uncovering and remediating flaws;
3. The SEC should conduct studies on investor views on anonymity and share lending;
4. The SEC should adopt its proposed universal proxy rule, with modest changes to address objections that have been raised to it.
Regulatory Enforcement for Proxy Plumbing
Under these over-arching changes, the committee suggested specifics, such as actual enforcement of the duty in point two, to cooperate in more routine, off-cycle reconciliations. The committee also talked of a relaxation of current regulations that inhibit, or prevent, the private market use of universal proxies.
On point one, relating to confirmations, the committee said issues occur when investors can’t determine whether their voting instructions are carried out and counted. Neither companies nor intermediaries are obliged to provide this information, which is just part of the problem, but it often leaves investors unaware of discrepancies.
To remedy this the committee said confirmations should be sent to end users, (individual investors and institutions), with final voting authority over a given share. Confirmations could take “any reasonable form,” the report states, such as electronic delivery for shareholders who don’t opt for written confirmations or be combined with other shareholder communications.
Stock Lending and empty voting
The committee also highlighted a need to study how securities lending affects voting rights in more detail. It recommended SEC staff to conduct surveys on share lending and establish the extent to which it contributes to errors, over-votes or under-votes.
Pressure and consensus
Proxy plumbing reform is not a new issue in the US. This is the SEC’s second attempt since its ill-fated “Proxy Plumbing Concept Release” almost a decade ago. While many organisations, including Minerva, have been calling for changes in the plumbing, issuer pressure groups such as the US Chamber of Commerce, have focussed their attention on proxy analysts.
But the committee is now seeking change by consensus and in doing so, highlighted throughout its report the “routine problems” that emerge in the current system.
Its report notes that SEC staff often receive complaints from individual investors about the administration of the proxy system, including “technical problems with electronic voting platforms offered by proxy service providers and failures (by firms) to respond to shareholder complaints”.
Summarising wider problems, the committee said “systematic and high-profile flaws undermine confidence” in the process, adding: “No one is satisfied with the current system.”
The report states: “Shareholders cannot determine if their votes were cast as they intended; issuers cannot rapidly determine the outcome of close votes; and the legitimacy of corporate elections, which depend on accurate, reliable and transparent vote counts, is routinely called into question.”
Cases in point are littered throughout the report. The committee highlights the fact Yahoo was forced to recount votes in its contested 2008 director election, and concluding that “Broadridge… had made significant errors in reporting votes at (Yahoo’s) annual shareholder meeting. The committee’s report adds that “Broadridge confirmed there was a truncation error in the final printout sent to the tabulator.”
Overall, the raft of proxy plumbing recommendations have been designed to fix the infrastructure of a process that’s evidently important when put into context.
According to the SEC, more than 600 billion shares are voted at more than 13,000 shareholder meetings every year. Amid this scale, the committee hopes improvements to the proxy system will increase confidence in how capital markets function.
Last Updated: 1 August 2019