SEC Seeks Public Comment on Reform of the U.S. Proxy System

July 14, 2010


Today the Securities and Exchange Commission issued a concept release to seek public input on the reform of the proxy solicitation and voting system in the U.S. As noted by Chairman Mary Schapiro and Meredith Cross, Director of the Division of Corporation Finance, the U.S. proxy system governs the voting of over 600 billion shares at over 14,000 shareholder meetings each year, yet it has not undergone a substantial review in almost thirty years. Public comment will be sought for a period of ninety days. The Concept Release is available here.

The Concept Release, organized by the three general topics on which the Commission is seeking public input, requests comment on (1) ensuring the accuracy, transparency, and efficiency of the voting process, (2) enhancing shareholder communication and participation, and (3) addressing the relationship between voting power and economic interest.

Ensuring the Accuracy, Transparency, and Efficiency of the Voting Process

1. Over-Voting and Under-Voting of Shares -- Securities intermediaries (such as brokers) on occasion may cast greater or fewer votes than the number of shares they are entitled to vote, depending on the method of allocation each intermediary employs for recording transactions and for matching the accounts of their customers to the shares held for those customers. The Commission is seeking comment on whether over-voting or under-voting of shares is a problem and, if so, whether the Commission should require securities intermediaries to disclose the method of allocation or reconciliation they employ to address concerns about the potential for over-voting and under-voting or whether the Commission should regulate which allocation or reconciliation methods may be used.

2. Vote Confirmation -- The Commission is seeking comment on market participants’ ability to assess whether their votes were timely received and accurately recorded, as well as issuers’ ability to assess whether third-party voting accurately reflects the instructions of beneficial owners. Further, the Commission is seeking comment on whether vote tabulators should be required to provide access to their voting data.

3. Proxy Voting by Institutional Securities Lenders -- Institutional shareholders often loan the shares they hold to third parties and may find themselves unable to vote such shares if there is insufficient time to recall the shares on loan once notice of an upcoming vote is received. The Commission is seeking comment on (a) whether issuers should identify the items that will be presented for a vote earlier to allow institutional shareholders sufficient time to recall their shares on loan in order to vote such shares; and (b) whether registered management investment companies (mutual funds) should be required to disclose the number of shares that they vote in addition to the current requirement that they disclose how they vote.

4. Proxy Distribution Fees -- The Commission is seeking comment on whether it continues to be appropriate to have the self-regulatory organizations establish the fee structure for forwarding proxy materials. In this regard, the Commission is seeking comment on whether the fee amounts should be revised or eliminated to allow for free market determination of the appropriate fee amount.

Enhancing Shareholder Communication and Participation

5. Communications with Shareholders -- Brokers and banks report the names of non-objecting beneficial owners (“NOBOs”) to issuers, but remain the sole parties who may directly contact objecting beneficial owners (“OBOs”). The Commission is seeking comment on methods of improving corporate communications and whether the NOBO/OBO system remains useful and appropriately balances shareholder privacy concerns.

6. Voting Participation -- The Commission is seeking comment on possible means by which it could increase individual shareholder voting participation, including: (a) improving investor education; (b) enhancing broker internet platforms; (c) allowing client-directed voting in advance of meetings; (d) increasing investor-to-investor communications; and (e) improving the use of the internet for delivery of proxy materials.

7. Data Tagging -- The Commission is seeking comment on whether requiring issuers to tag proxy-related data (e.g., executive compensation, director qualifications, etc.) would enable shareholders to make more informed voting decisions.

Addressing the Relationship Between Voting Power and Economic Interest

8. Role of Proxy Advisory Firms -- In response to concerns that proxy advisory firms may be subject to undisclosed conflicts of interest or may fail to conduct adequate research before issuing their voting recommendations, the Commission is seeking comment on whether to enhance regulatory oversight of such advisory firms and the appropriateness of requiring disclosure regarding conflicts of interest and the manner in which their voting recommendations are made.

9. Dual Record Dates -- A shareholder may sell its shares after the record date for a meeting of shareholders and still maintain the right to vote at that meeting, despite its lack of continuing economic interest in the well-being of the issuer. Certain states now provide for the establishment of dual record dates -- one record date for receiving notice of the meeting and one record date for the right to vote at that meeting. The Commission is seeking comment on the adoption of a system of dual record dates that would address concerns in this area and align the federal requirements with these state law developments.

10. Empty Voting -- The Commission is seeking comment on whether empty voting -- such as when a shareholder maintains ownership and voting rights with regard to shares but hedges its economic interest in those shares or when a shareholder sells its shares after the voting record date but before the meeting date -- may be improperly impacting votes. In this regard, the Commission is seeking comment on whether it would be appropriate to require disclosure in situations where voting rights are decoupled from economic interest and other possible responses to empty voting.


If you have any questions regarding the Concept Release or the submission of comments to the Commission, please contact the authors of this Client Alert or any of O’Melveny’s Corporate Finance partners.