It appears there may be an agreement by SEC Investor Advisory Committee (SECIAC) members to concentrate their efforts on retail investors. At least that was the message of several Committee members and the expressed wish of Commissioner Luis A. Aguilar. The SECIAC would do well to recommend leveling the playing field between retail and institutional investors and between investors of all types and corporate management. Retail investors are more likely to return to the market if the scales aren’t so often tipped against them. In his remarks to Committee members, Agular noted:
According to a recent survey, only 15% of Americans trust the stock market. Investors continued to withdraw cash from U.S. equity funds in 2011, continuing a trend that has seen a total outflow of a half a trillion dollars from domestic equity funds since 2006. Some of this shift may be a natural result of the aging population of baby boomers. But research suggests there may also be a decline in the willingness of even younger investors to invest in the stock market.
Agular gave Committee members some of his priorities:
- what the SEC can do to address the growing pressure on our nation’s growing senior population and the increasing incidence of financial abuse to which they are subject;
- the disparate and confusing standards of conduct between broker-dealers and investment advisers;
- the desire of shareholders for input regarding the use of corporate resources;
- and investor demands for disclosure on diversity in corporate board rooms and leadership ranks.
SEC Chairman Mary L. Schapiro’s remarks noted the work of the Committee will be supplemented by the addition of the SEC’s new Office of the Investor Advocate, also established by the Dodd-Frank Act and indicated they are in the process of receiving applications for the new Investor Advocate, “who will lead that office and by statute work with you as a member of this Committee.” She reminded members the Dodd-Frank Act stated the purpose of the Committee is to advise and consult with the Commission on
- Regulatory priorities;
- Issues relating to the regulation of securities products, trading strategies, fee structures and the effectiveness of disclosure;
- Initiatives to protect investor interest; and
- Initiatives to promote
According to New SEC Investor Advisory Committee to Put Retail Investors First (advisorone.com, 6/12/2012) Committee member James Glassman, executive director of the George W. Bush Institute, told newly appointed Committee Chairman Joe Dear that he wanted to be “assured” that the committee’s agenda would focus on retail investors. “Yes,” Dear replied. Barbara Roper, director of investor protection for the Consumer Federation of America, told AdvisorOne that most committee members expressed a desire to focus on the needs of retail investors-
there is no issue of higher importance for retail investors than how we regulate the intermediaries [such as the advisors and broker-dealers] they rely on.
Members of the new Investor Advisory Committee are:
- Chairman Joseph Dear, Chief Investment Officer, California Public Employees’ Retirement System
- Vice Chairman, Craig Goettsch, Director of Investor Education and Consumer Outreach, Iowa Insurance Division
- Secretary, J. Robert Brown, Jr., Law Professor, University of Denver
- Darcy Bradbury, Managing Director and Director of External Affairs, D.E. Shaw & Co., L.P.
- Eugene Duffy, Partner and Principal, Paradigm Asset Management Co. LLC
- Roger Ganser, Chairman of the Board of Directors of BetterInvesting
- James Glassman, Executive Director, George W. Bush Institute
- Joseph Grundfest, William A. Franke Professor of Law and Business, Stanford Law School
- Mellody Hobson, President and Director of Ariel Investments, LLC
- Stephen Holmes, General Partner and Chief Operating Officer, InterWest Partners
- Adam Kanzer, Managing Director and General Counsel of Domini Social Investments and Chief Legal Officer of the Domini Funds
- Roy Katzovicz, Partner, Investment Team Member and Chief Legal Officer, Pershing Square Capital Management, L.P.
- Barbara Roper, Director of Investor Protection, Consumer Federation of America
- Kurt Schacht, Managing Director, CFA Institute
- Alan Schnitzer, Vice Chairman and Chief Legal Officer, The Travelers Companies, Inc.
- Jean Setzfand, Director of Financial Security for the AARP
- Anne Sheehan, Director of Corporate Governance, California State Teachers’ Retirement System
- Damon Silvers, Associate General Counsel for the AFL-CIO
- Mark Tresnowski, Managing Director and General Counsel, Madison Dearborn Partners, LLC
- Steven Wallman, Founder and Chief Executive Officer, Foliofn, Inc.
- Ann Yerger, Executive Director, Council of Institutional Investors
Recently, I received an invitation from the SEC regarding a meeting with “key stakeholders in the shareholder proposal process to engage in an open and productive dialogue” about the staff’s involvement in the process. (my emphasis)
You are one of the representatives from public companies, law firms, public pension funds, union pension funds, religious proponents and other institutional investor proponents that we would like to invite to attend the meeting… Topics to be discussed include proof of ownership and notices of defect, and we also welcome suggestions for other agenda items. (my emphasis)
Of course, I’m delighted to be invited. Yet, I’m a bit perplexed with the emphasis on institutional investors, given that individual retail investors are the largest category of proposal proponents.
See the table below from John Laide at SharkRepellent.net (modified slightly to fit). The SEC Investor Advisory Committee (SECIAC) has its work cut out for it, if it is to refocus attention on individual investors.
|Top Sponsors of Shareholder Proxy Proposals|
A focus on individual investors is critical both as direct shareowners and as indirect shareowners. Too many, including those at the SEC, view individuals as irrelevant. We’re basically viewed as uninformed and incompetent, not to be trusted with tools like proxy access. Institutional investors will look out for our interests.
Many have written about inherent conflicts of interests faced by institutional investors. One recent example is Simon Wong’s How Conflicts of Interest Thwart Institutional Investor Stewardship. Funds hope to run 401(k) plans for companies, so don’t want to be seen as biting the hand that feeds them. All funds are under pressure to keep expenses down. Active monitoring and engagement raises costs money and creates a collective action problem because the benefits of engagement go to all, not just those who expend resources. Individual investors shouldn’t rely on institutional investors to speak on their behalf, since we have different interests.
Most at the SEC will say the individual retail investor is key but let’s see them put it to practice. Where to begin? The SECIAC could lend considerable assistance to retail shareowners by helping to reduce the unnecessary paperwork burden around shareowner proposals, get the SEC to apply the rules governing proxies to voter information forms, eliminate blank votes going to management and by creating a framework that will encourage open systems of client directed voting.
The process to obtain proof of ownership from retail investors should be less onerous. What real problem did Staff Legal Bulletin No. 14F (CF) address? Many retail shareowner proposal proponents viewed this SLB as a complicated labor intensive answer seeking a problem. Had introducing brokers provided false evidence of ownership letters for retail investors holding shares in street name?
I have never heard of any brokerage providing a letter saying one of their clients owned shares when he or she did not. If such cases exist, why aren’t these incidents brought to the attention of prosecutors for criminal violation? Wouldn’t that be a much simpler process unless such practices are rampant? If such practices are rampant, where is the evidence?
If I were on the SECIAC I would ask staff for examples of fraudulent broker letters or whatever else set off the writing of SLB 14F (CF).
Voter Information Forms
Retail investors holding shares in “street name” should be entitled to the same protections as shareowners holding actual proxies. Retail investors typically hold their shares in “street name” and receive voter instruction forms (VIFs) from Broadridge, rather than actual proxies. Broadridge claims (in correspondence and conversations) the rules that apply to proxies don’t apply to VIFs.
If VIFs go out to about 1/3 of the total number of shareowners and the rules don’t apply to them, then the SEC appears to sanction the treatment of retail shareowners as second class citizens, in comparison to those who receive actual proxies. (I don’t know the actual proportion going out as VIFs, but 1/3 seems like a reasonable guess.) SEC Rule 14a-4(a)(3) states the proxy
shall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters, and whether proposed by the registrant or by security holders.
Broadridge claims the rules for proxies don’t apply to voter information forms (VIFs), since they are not legal proxies. It may be helpful here to provide an example. John Chevedden submitted a proposal to Altera, asking them to end supermajority voting requirements. His resolved language read as follows:
Shareholders request that our board take the steps necessary so that each shareholder voting requirement in our charter and bylaws, that calls for a greater than simple majority vote, be changed to a majority of the votes cast for and against the proposal in compliance with applicable laws. This includes each 80% supermajority provision in our charter and bylaws.
Broadridge identified the item to be voted on the VIF, which most retail shareowners got, as follows:
TO CONSIDER A STOCKHOLDER PROPOSAL REQUESTING THAT BOARD TAKE THE STEPS NECESSARY SO THAT EACH STOCKHOLDER VOTING REQUIREMENT IN ALTERA S CERTIFICATE OF INCORPORATION.
In an April 1, 2010, letter to the SEC and Altera, Chevedden complained that voting would not be accurate with such a description of his resolution. On April 2nd, I posted an article entitled Abusive Practices Continue as VIFs Tilt Voting in Favor of Management and urged readers to bring this abusive practice to the attention of the former SEC Investor Advisory Committee through use of their online comment form. On April 9, 2010 I heard Broadridge had acknowledged the error “corrected” ballot language so that it read as follows:
A STOCKHOLDER PROPOSAL REQUESTS A CHANGE TO ALTERA’S VOTING REQUIREMENTS, SEE PROXY STATEMENT FOR FURTHER DETAILS.
I was told by a Broadridge representative that they “try” to summarize the issues but if that can’t be done easily, they put a general statement on the VIF, referring the shareowner to the proxy materials, such as that used at Altera. It is difficult for me to understand why Broadridge claimed to not be able to summarize this proposal as “end supermajority voting requirements,” or something similar. It certainly was not a unique or hard to understand proposal. Many, many such proposals had gone before.
This “corrected” ballot language certainly does not meet the requirements of SEC Rule 14a-4(a)(3). I asked the SEC for clarification on whether or not proxy rules apply to VIFs but received no response. If the SEC is trying to set up a system of rules that will persuade retail investors to come back into the market, why does it allow VIFs to obfuscate the issues?
If I were on the SECIAC I would ask staff for a legal opinion discussing what requirements VIFs are required to meet.
If the SEC ever gets around to determining their rules do apply to VIFs, that may take care of the issue of the including a “clear and impartial” description, required by Rule 14a-4(a)(3) and as discussed above. Additionally, such a finding might also somewhat address another issues — votes left blank that turn, almost magically, into votes for management. At least more voters would be alerted to the fact that blank votes will be counted as votes in favor of the position taken by the company’s soliciting committee because warnings would then have to be in bold-type, instead of in micro-type footnotes, as Broadridge now uses.
However, I would argue that Rule 14a-4(b)(1) still needs to be changed. See my post on the HLS Forum at Don’t Let Companies Change Shareholders’ Blank Votes and my petition to the SEC 4-583. Just as the SEC finally agreed to abolish the practice of “broker voting” in most instances because a non-vote isn’t necessarily intended to be a vote for management, the SEC should also amend 14a-4(b)(1) so that blank votes are counted as blank votes, not as votes in favor of the position taken by the company’s soliciting committee.
If I were on the SECIAC I would try to level the playing field by recommending the Commission take action on my rulemaking petition to eliminate blank votes from automatically going to management.
Client Directed Voting
Historically, most retail shareowners toss their proxies. During the first year under the “notice and access” method for Internet delivery of proxy materials, less than 6% voted. This contrasts with almost all institutional investors voting, since they have a fiduciary duty to do so.
“Client directed voting” (CDV), a term coined by Stephen Norman, is seen by many as a solution for getting more retail shareowners to vote, ensuring companies get a quorum, and helping management recapture a good portion of the broker-votes cast in their favor that evaporated with recent reforms. Norman’s proposal was seen by many as an extension of the “Vote with the Board’s Recommendations” button seen on VIFs. An open form of CDV could result in similar impacts but would create much more thoughtful and robust corporate elections.
The key issue in any open CDV system is to let shareowners control where their electronic ballots are delivered. Just as there is no question shareowners can control where hardcopy ballots are delivered, there should be no question they can direct where their electronic ballots are delivered. This simple requirement would insure third-party content providers an opportunity to compete and improve the quality of voting advice.
Additional elements for a more effective CDV system include:
- A wide range of voting opinion sources that will eventually cover all issues;
- Open access for any new opinion sources to publish their opinions;
- Open access for shareowners to choose any opinion source for our standing instructions on voting;
- Sufficient funding for professional voting opinion sources that compete for funding allocated by retail shareowner vote (or by beneficial owners of funds that may choose to “pass through” their votes).
Under an open system for of CDV, feeds will offer the ability for retail shareowners to essentially build a “voting policy,” just as institutional voters are now able to do. That model will increase participation and voting quality. We shouldn’t ask shareowners to affirm every single pre-filled ballot. That could be a deal breaker for people with stock in many different companies who would rather spend their time on other activities.
Third-party CDV systems, like Moxy Vote, will allow investors to create hierarchies of voting instructions. (Vote like X. If X hasn’t voted the item, vote per Y. If Y hasn’t voted, vote per Z, etc. Eventually, these systems could become very complex. Vote like X on issue A; vote like Y on issue B, also specifying defaults if either X or Y don’t have votes recorded.) See Client Directed Voting Q&A on the VoterMedia.org site.
If brokers are required to deliver proxies as directed by their clients, another whole model could emerge around “proxy assignments.” Proxies assigned to organizations or individuals, for example, could give annual meetings a new meaning. See Investor Suffrage Movement by Glyn A. Holton.
If I were on the SECIAC I would ask staff what rulemaking changes would be needed to create an open and robust form of client directed voting.
See also, Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration and find additional posts on my site by doing a search on google for “blank votes petition corpgov.net.” Ross Kerber at Reuters also wrote a piece on zombie voting (Top U.S. proxy vote site favors boards, critics say, 5/29/2012) that might be addressed if VIFs have to meet the same standards as proxies. Search CorpGov.net for any of topics mentioned above. None are new.
To contact James McRitchie directly, please email firstname.lastname@example.org