Friday, September 26, 2014

Industry Working Group Calls for SEC to Reform Proxy Voting System

[This story previously appeared in Securities Regulation Daily.]

By John Filar Atwood

A working group led by the Securities Transfer Association (STA) has taken a number of steps to improve the proxy voting process, but said that the overly complex system needs substantive reforms from the SEC to make it more transparent and to ensure more accuracy in the vote count. The group, which includes Broadridge Financial Solutions, Depository Trust Co., Investment Company Institute and others, released a report on the work it has done to improve the back-office “plumbing” in the proxy voting system.

The group was formed after the release of a report in 2011 by the University of Delaware that evaluated the mechanics of providing electronic confirmation to investors that their proxy votes were cast as directed. The University of Delaware report identified a number of problems in the proxy voting system, and recommended solutions that could be implemented without amending federal regulations. STA, Broadridge and others formed the working group to address the problems identified in the report.

Vote confirmation. One issue the working group set out to address was the inability of the current proxy voting system to confirm to investors that their votes at shareholder meetings are recorded by the tabulator according to their instructions. Concern over vote conformation is widespread, and the SEC raised the issue in its 2010 concept release on the proxy voting system.

The University of Delaware proposed a process by which tabulators, nominees, and proxy service providers would furnish each other with sufficient information to permit an investor to confirm that its vote was submitted to the tabulator and tallied properly. Using this and other University of Delaware recommendations as a starting point, the working group developed new procedures to permit investors to receive electronic confirmation that their proxy votes were cast as instructed, develop best practices for determining, reporting and resolving vote discrepancies presented to the vote tabulator, improve the early-stage vote entitlement process, and strengthen the coordination among parties involved in the omnibus proxy process.

Over-voting. The working group said that one significant problem in the vote confirmation process is where votes are submitted in excess of what the tabulator knows to be the maximum share position for a nominee at the Depository Trust Co. This problem, referred to as “over-voting,” makes it difficult for the tabulator to reconcile the total voted shares for each nominee against the number of shares entitled to be voted. The current procedure used by many tabulators is to initially accept the submitted votes and then attempt to resolve the discrepancy using its exception processing procedures.

The working group reported that it has not yet formed a consensus on a uniform method for how a tabulator should handle unresolved vote discrepancies. STA believes that voting discrepancies will occur until there is an SEC rule that requires pre-mailing reconciliation of eligible shares at both the nominee and beneficial owner levels. Progress is being made to improve reconciliation at the nominee level, according to the working group, but the brokerage community still does not uniformly reconcile eligible voters and shares at the investor level before a proxy distribution is made.

Pilot project. In order to test new communications and reconciliation systems, the members of the working group initiated a pilot project for the 2014 proxy season that involved 26 issuers, Broadridge, several broker-dealers, and five transfer agent tabulators. Participants in the pilot reported that, at present, resolving the reconciliation requests involves manual processing steps that are very time-consuming and cumbersome. The working group concluded that the development of automated systems to replace manual ones is critical to sustain more widespread use of the communications portal.

The working group concluded that while progress has been made in providing investors with the ability to receive electronic confirmation that their votes were cast as directed, more work needs to be done. The end result of vote confirmation cannot be accomplished with complete accuracy until other proxy voting issues within the street name system are addressed, the group said, the most important of which is reconciliation of the entitlement of each investor to vote a share position as of the record date.

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