Fund managers could end up finding out about corporate agendas far sooner and disclosing far more about their voting activities if some of the Securities and Exchange Commission’s proposed changes to the proxy system eventually become effective.
The SEC on Wednesday issued a broad request for comment about shareholder communications and participation in the proxy process; the accuracy and transparency of the voting process and the relationship between voting power and economic interest.
They will be out for a 90-day public comment.
The proxy system refers to how investors vote their shares at corporate meetings. Under the current process, which has been criticized as antiquated by some issuers and transfer agents, corporations can communicate and send proxy materials directly to their registered shareholders but not to their beneficial shareholders, who hold their shares in the name of a financial intermediary.
More than 600 billion shares are voted at 13,000 shareholder meetings each year.
The SEC now wants to know whether shareholders would be helped by requiring that agenda items at shareholder meetings be announced earlier so that lenders of securities can decide whether or not to recall their shares and vote on issues of importance to them. The regulator is also seeking public comment on whether mutual funds should disclose the number of shares voted in addition to how they voted.
Institutional shareholders – typically mutual funds and pension plans – often lend their securities to earn extra revenues but give up the right to vote in return. Without sufficient advance notice of the corporate agenda, lenders are not able to recall shares through their custodian bank agents in time to vote on matters of interest.
Among the questions the SEC asked: what are the advantages and disadvantages to requiring issues to provide their corporate agendas to the public. For instance, would the corporation know, sufficiently in advance, all of the items on the agenda, particularly shareholder proposals which may be the subject of a request for no-action relief being considered by the Commission’s staff? And thorough what medium should such a notice be made? Would it be a press release or company website.
For mutual funds in particular, there could be additional costs involved with disclosing the actual number of shares voted on the annual Form N-PX. And the SEC wants to know whether mutual funds should disclose not only the actual number of shares they vote but the number of securities for which a fund did not vote its proxy because the securities were out on loan.
Fund managers and other investors which engage in a practice known as empty voting could also end up being required to disclose their activities. That means disclosing they held full economic interest in the shares being voted at the time the proxy was executed or if not, and the extent to which their economic interest was shorted or hedged. The SEC is also considering requiring that only firms which possess a “long position” in the underlying shares of a firm be allowed to vote by proxy; vote commensurate with their net long positions or not at all.
Empty voting occurs when a shareholder’s voting rights substantially exceed its economic interest in a company. That means the voting rights are “decoupled” from its economic interest. Such a scenario can occur if a holder of shares buys a put option to sell those shares or if a shareholder sells its shares after the record date of a shareholder meeting but before the actual time of the meeting.
Among other critical SEC proposals: whether the regulator should eliminate or reduce the ability of investors to hide their identities from corporations by categorizing themselves as objecting beneficial shareholders (OBOs). Some institutional investors – an estimated 30% of beneficial shareholders—prefer to remain anonymous to protect their trading strategies.
The Shareholder Communications Coalition, whose members include the Business Roundtable, the National Association of Corporate Directors and Securities Transfer Association, has asked the SEC to abolish the ability of investors to do so with the hopes that the SEC will allow companies to communicate and send proxy materials to their beneficial shareholders directly.