SEC Issues Concept Release on the U.S. Proxy System
July 26, 2010
On July 14, 2010, the SEC issued a concept release on the U.S. proxy system which solicits comments on whether any deficiencies in the proxy system warrant rulemaking in the future. The release reviews the mechanics of the proxy system, sometimes referred to as the “proxy plumbing.” The SEC has specifically identified the following three main concerns in the concept release for comments:
1) Accuracy, Transparency, and Efficiency of the Proxy Voting Process – The SEC is soliciting comments to determine whether the proxy system operates with accuracy, transparency and efficiency. To address these concerns, the SEC is specifically addressing the following issues:
- whether securities intermediaries’ use of certain clearance and settlement systems for allocating shares is resulting in significant over-voting and under-voting of shares
- whether the SEC should require more information sharing amongst securities intermediaries to enable both investors and issuers to determine whether their securities have been properly voted
- whether the SEC should allow investors to lend their securities to borrowers that have no long-term economic interest in the loaned securities
- whether fees discourage issuers from communicating with their investors
2) Communications and Investor Participation in the Proxy Voting Process – Because so many investors today own securities in “street name” only, issuers are unable to determine the identity of their investors. As a result of recent changes in securities laws, issuers want more access to information about their investors’ identities. Accordingly, the SEC is soliciting comments that address:
- whether investors should be required to reveal their identity
- in the alternative, whether there are better technological methods that would facilitate communications between issuers and investors without requiring investors to reveal their identities
Additionally, the SEC is soliciting comments on ways to encourage retail investor participation because of historically low levels of voting by retail investors. The SEC is also debating whether it should require issuers to provide proxy statements and voting information in interactive data format, which would increase investors’ ability to analyze proxy statements and voting information.
3) Relationship Between Voting Power and Economic Interest – By providing recommendations to investors and consulting services to issuers, proxy advisory firms have a great deal of influence over the U.S. proxy system. Because of proxy advisory firms’ influence over the proxy system, the SEC is concerned that proxy advisory firms may not be properly disclosing potential conflicts of interest and may be using inaccurate or incomplete data when making their voting recommendations.
When an investor hedges his or her interest in an issuer or votes with borrowed shares, then the investor lacks an underlying economic interest in the shares. This separation of economic interests from voting interests concerns the SEC because votes by investors holding long positions may be cancelled out by the votes of investors who are hedging their interest or using borrowed shares to vote. As a result, the SEC is soliciting comments as to whether to limit voting rights of investors who have hedged their interest or vote using borrowed shares.
Comments are due within 90 days following the publication of the concept release in the Federal Register.
http://www.sec.gov/rules/concept/2010/34-62495.pdf
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