SEC Votes to Issue "Proxy Plumbing" Concept Release

By Cydney Posner

At an open meeting this morning, the SEC voted to issue a concept release soliciting public comment on whether the SEC should propose revisions to its proxy rules to address the infrastructure supporting the proxy system, so-called "proxy plumbing." As Commissioner Walter, quoting Kurt Vonnegut, stated at the meeting: "It's a flaw in the human character that everyone wants to build, but nobody wants to do maintenance." The SEC has decided that it's time to do some maintenance on the creaky old plumbing system. Apparently, it's been 30 years since the SEC last performed a comprehensive review of the proxy system and, since that time, there have been many technical and structural changes that have affected the proxy process. The concept release is designed to seek public comment on whether there are improvements that should be made in the system to promote greater efficiency and transparency in the U.S. proxy system and to enhance the accuracy and integrity of shareholder votes. Depending on the public reaction, the SEC expects to propose new rules tackling these issues.

The release is divided into three parts:

• transparency and accuracy of the process;
• shareholder participation and communications; and
• relationship between voting power and economic interest.

In the first category, the release addresses issues such as overvoting and undervoting, which can occur when there is a mismatch between the share amounts shown on the books of the voting intermediary and amounts credited for the account of the intermediary on the company's books; the need for vote confirmation through contact among the vote tabulators, solicitors and others; proxy voting by institutional shareholders, which may loan shares but may not be able to recall the shares in time to vote them; and the reasonableness of and method for calculating fees for distribution of proxy materials. Interestingly, the SEC expressly withheld comment on the propriety of share lending practices.

In the second category, the release address the ability of companies to communicate with their shareholders, including topics such as shares held in street name and NOBO and OBO lists (where the SEC will reexamine whether OBO lists still are appropriate, balancing the interests of companies in communicating directly with their shareholders and the shareholders' privacy interests); ways to encourage retail participation through investor education or improvement of internet platforms; and data tagging of the proxy statement (probably the tables and director qualifications).

In the third category, the release looks at proxy advisory firms, including whether they may be riddled with conflicts of interest, fail to conduct proper research or publish incorrect information and whether they should be subject to enhanced oversight, including a requirement for SEC filings by these firms; whether the proxy rules should be revised to accommodate dual record dates (as permitted in some cases in Delaware) and to address issues related to the ability of a former shareholder to continue to vote shares after they have been sold; and empty voting, which can occur when voting rights associated with shares are decoupled from the shares' economic interest, for example, when a shareholder buys a put option on shares the holder retains the right to vote.

The concept release did not create any real controversy, although Commissioner Casey did take the opportunity to slam some of the SEC's prior rulemaking, such as approval of changes to discretionary broker voting under NYSE Rule 452, that she thought gave too much power to those villainous unions. The only concern raised was that the SEC might be too overwhelmed with the rulemaking required under the Reform Act, expected to be passed on Thursday, to pursue the important maintenance issues discussed in the concept release.

View a copy of the press release and a copy of the concept release on proxy plumbing.

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