In its long-awaited concept release on the proxy “plumbing” process, the Securities and Exchange Commission on Wednesday sought public comment on making changes to the proxy voting and distribution system but fell far short of advocating any major overhaul.

The SEC is seeking comment on whether it should eliminate or reduce the ability of investors to hide their identities from corporations by categorizing themselves as “objecting beneficial shareholders” (OBOs); whether the New York Stock Exchange’s fee structure for proxy distribution be eliminated in favor of allowing the marketplace to determine the appropriate fees; whether retail investors can or should provide their broker-dealers with standing instructions on how they want to vote their shares; whether shareholders can under any circumstances gain rights to vote a public company’s shares, even if they do not own the shares; and other matters affecting how voting conducted or tabulated.

The areas covered by the concept release, developed by SEC Chairman Mary Schapiro over the past year, are organized into three categories: shareholder communications and participation in the proxy process; the accuracy and transparency of the voting process; and the relationship between voting power and economic interest.

They will be out for a 90 day public comment.

The SEC’s proposals came as no surprise to either broker-dealers or trade associations contacted by Securities Technology Monitor on Wednesday.

Niels Holch, a partner at Holch & Erickson, the Washington, D.C. lobbying firm representing the Shareholder Communications Coalition (SCC), a trade group of issuers and transfer agents, says the SEC’s concept release does take into account his group’s recommendations but broker-dealers aren’t concerned.

“The SEC will not automatically allow issuers to send proxy materials to their beneficial shareholders directly,” one brokerage operations executive told Securities Industry News on Wednesday.

“That issuer-directed model advocated by some issuers and transfer agents in the SCC won’t fly,” the executive said.

In a statement issued to Securities Technology Monitor on Wednesday, Broadridge said ”We applaud Chairman Schapiro and the SEC for their efforts in producing this important concept release regarding the U.S. proxy system, the most transparent, accurate and efficient in the world. We will carefully review the release's content and will work with the SEC, and all market participants, to provide the facts, statistics, and technological infrastructure to ensure the system remains the finest possible.”

The proxy system refers to how investors vote their shares at corporate meetings. Under the current process, which has been criticized as antiquated by some issuers and transfer agents, corporations can communicate and send proxy materials directly to their registered shareholders but not to their beneficial shareholders, who hold their shares in the name of a financial intermediary.

The intermediary – typically a brokerage firm – will reflect the beneficial shareholders’ votes when executing its proxy for shares held in customer accounts.

The votes from the registered shareholders and beneficial shareholders are ultimately delivered to a vote tabulator to determine the outcome of the vote. Issuers must pay broker-dealers for sending out proxy materials to beneficial shareholders. Those fees, set by the New York Stock Exchange, are collected by Broadridge Financial, the world’s largest proxy distribution firm, on behalf of the broker-dealer.

“The proxy is often the principal means for shareholders and public companies to communicate with one another, and for shareholders to weigh in on issues of importance,” Schapiro said at an open meeting held to discuss the proposals. “The transmission of this communication must be -- and must be perceived to be -- timely, accurate, unbiased, and fair.”

Among the specific areas covered by the SEC are:

Shareholder communications and fees: The SEC is seeking comment on whether it should eliminate or reduce the ability of investors to hide their identities from corporations by categorizing themselves as objecting beneficial shareholders (OBOs). Some institutional investors – an estimated 30 percent of beneficial shareholders—prefer to remain anonymous to protect their trading strategies. The SCC, whose members include the Business Roundtable, the National Association of Corporate Directors and Securities Transfer Association, has asked the SEC to abolish the ability of investors to do so with the hopes that the SEC will allow companies to communicate and send proxy materials to their beneficial shareholders directly.

The SEC also wants to know whether the NYSE should revise its fee structure for proxy distribution or eliminate it in favor of allowing the marketplace to determine the appropriate fees.

At issue is whether the NYSE regulated fees are “reasonable reimbursement” for broker dealers to forward proxy materials—transfer agents and some issuers contend that they are artificially too high

Increase Retail Voting: The SEC is considering allowing retail investors to provide their broker-dealers with standing instructions on how they want to vote their shares – a process known as “client-directed voting.” Among other recommendations – improving investor education, enhancing brokers’ Internet platforms and data-tagging of proxy related materials such as information such as information related to executive compensation and director qualifications.

Overvoting and undervoting of shares: Brokers dealers may cast more or fewer shares than the number they actually hold due to recordkeeping errors. The SEC is asking whether overvoting or undervoting is a problem and if so, whether the method used by the broker dealer to prevent them from taking place should be disclosed. In addition, should the regulator require the use of a particular method for fixing the problem of overvoting. One of the methods to fixing overvoting might actually result in undervoting.

That means investors who are allocated the ability to vote fail to do so while other investors who do vote are allocated a number of votes fewer than the number of shares they actually hold.

Empty voting and dual record dates: The SEC wants to know if empty voting is being used to inappropriately influence corporate voting results. Such a scenario occurs when investors are allowed to vote shares without having an economic interest in the company. For instance, a shareholder can buy a put option to sell shares and retain the voting rights for the stock even though it has hedged away some of its economic interest in the company. The SEC is also considering whether to follow state laws which allow for dual record dates. That means one date for determining who can receive notice of a meeting and another one for who can vote at the meeting. Too often shareholders who sell their shares after the record date set by the company still have the right to vote.

Vote Confirmation: The SEC is considering requiring vote tabulators, broker dealers and proxy service providers to give each other access to voting data. That would allow investors and corporations to confirm that the votes have beenh received and calculated correctly.

Oversight of proxy advisory firms: The SEC is seeking comment on improving disclosure of potential conflicts of interest, enhancing regulatory oversight over how voting recommendations are formed and requiring proxy advisory firms to disclose their voting recommendations in filings with the SEC. The U.S. Chamber of Commerce, the nation’s biggest business lobby, has questioned whether advisory companies such as the governance unit of Riskmetrics Group, now owned by MSCI are conflicted. These firms advise pension funds on how to vote while selling consulting services to companies that want shareholders to back their board of director candidates and policies. “The SEC’s stance on proxy advisory firms was widely expected but I would be interested if the SEC were to pay closer attention to how mutual funds and other funds with a fiduciary role select their proxy advisory firms,” says Michael Ryan, president of Proxy Governance, a proxy advisory firm in McLean, Virginia.

Chairman Mary Schapiro's opening statement is here.

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