An investor casts its vote at an annual or other corporate meeting, but has no way of knowing whether it was actually received and counted. It could be rejected or even partially accepted, which defeats the purpose of casting the vote in the first place.
While the US Securities and Exchange Commission has left market players to work out a way to implement end-to-end vote confirmation on their own, Canada’s provincial regulators are taking a more pro-active approach. They are leaning on Broadridge, transfer agents, and financial intermediaries to follow a workflow process the umbrella organization Canadian Securities Administrators (CSA) has proposed to ensure that the correct number of shares from beneficial investors -hit the books of issuers. Of course, investors need to know the status of their votes and ideally that would take place before the corporate meeting is held.
Although the CSA’s proposals are technically voluntary, given its clout as a financial industry watchdog, they carry the weight of a regulatory mandate. Responses to the CSA’s request for feedback on its recommendations and a transcript of a roundtable held by the Ontario Securities Commission on November 18 show that Broadridge Financial, the Securities Transfer Association of Canada (STAC), institutional investors, banks and broker-dealers are still at odds. With so little time left for anyone to make any necessary operational tweaks, it is uncertain whether the CSA’s protocol can be implemented during the 2017 February to June proxy season as the umbrella regulatory agency for Canada’s provinces wants.
Akin to the US market, Canada has only a handful of stock transfer agents, of which Computershare as the largest. Those transfer agents are also hired by issuers to tabulate all the votes and do most of the work to fix any recordkeeping errors before the final vote count is delivered to the issuer. Broadridge is hired by banks and broker-dealers to deliver proxy materials to beneficial shareholders and serve as a proxy voting agent. Beneficial investors are those who hold their shares in the names of their financial intermediaries.
The CSA’s protocols are supposed to solve what the Canadian regulatory agency says are two shortcomings with current proxy voting infrastructure. The first is that tabulators may not have accurate or complete vote entitlement information from financial intermediaries before a corporate meeting occurs. The other is that there is no standardized way for financial intermediaries and tabulators to communicate with each other about any data discrepancies. Tabulators could end up either rejecting or pro-rating votes without the investor ever finding out.
Rejected or pro-rated votes translate into missing votes. In the case of rejected votes, the investor had no say in the corporate agenda. Pro-rated votes means that less than all of the investor’s shares were voted the way it wanted. Therefore, the investor doesn’t have its full say.
Broadridge appears to be the most fervent supporter of the CSA’s protocols, while stock transfer agents have the most reservations. “At the core of the proposals is a streamlined process for communications between all of the players in the proxy voting process to achieve end-to-end vote confirmation,” explains Patricia Rosch, president of Broadridge Financial’s investor communications unit worldwide.
Just what is Broadridge’s definition of end-to-end vote confirmation? Tracking the investor’s vote from the time it was cast by the bank or broker-dealer to the tabulator and from the tabulator to the issuer. As long as Broadridge is notified by the issuer’s meeting tabulator that the votes of beneficial shareholders were correctly included in its final count, Broadridge can then confirm electronically to beneficial investors that their votes were counted, says Rosch.
Represented by STAC, Canadian transfer agents agree that reducing the number of mistakes in vote counting may increase the potential that an investor’s vote will be accurately reflected on the books of the issuer. However, that doesn’t mean that investors will ever find out what really happened. For starters, transfer agents can’t communicate directly with beneficial shareholders or those who hold their shares in the name of their financial intermediaries. Only broker-dealers and banks can, because they are the only ones who know the identities of their customers. By contrast, registered investors hold their shares in their own names on the books of the transfer agent.
What’s more, the tabulator can only confirm to Broadridge the number of votes counted for each financial intermediary. A shareholder, whose vote might be included in the bulk vote received by the transfer agent might not find its vote included in the votes ultimately counted as received by the issuer until after the corporate meeting is over. That is because of the tabulator’s last minute recordkeeping adjustments. Canadian fund managers also complain that such a late notification doesn’t really help the investor whose vote was “erased.”
What Goes Wrong
Banks and broker-dealers can sometimes send more votes because of bookkeeping glitches on their end. Some shares are held at another depository — such as the US Depository Trust Company (DTC) — or represent corporate treasury shares or are part of a securities lending program. Somehow the tabulator is supposed to figure out how to “tweak” the numbers so that the correct number of votes are counted. When the tabulator receives missing, incomplete or inaccurate vote entitlement information it can either reject the votes or pro-rate the votes. Rejected or pro-rated shares translates into missing votes for the ultimate investor and according to the CSA, financial intermediaries aren’t even routinely notified when that occurs. Therefore, neither is the end investor.
Among the key procedures in the CSA’s new proposed guidelines are that Canada’s national securities depository CDS and the US Depository Trust Company prepare an omnibus proxy for each of their participants to the meeting tabulator. With the help of Broadridge Financial as their proxy distributor and voting agent, banks and broker-dealers would prepare a supplemental omnibus proxy. Broadridge would obtain and review with its clients annually their entity name, Alpha CUID identifier and DTC participant account number and match all the information up with the Broadridge client code.
Tabulators have to set up vote entitlement accounts for each financial intermediary that is a participant of CDS or DTC or both. Tabulators will also have to match up the votes received through Broadridge on behalf of banks and broker-dealers on formal vote report with its vote entitlement information obtained from CDS or DTC. Vote entitlement information refers to how many votes should each bank or broker-dealer have based on the number of shares they own in a particular issuer.
If the tabulator thinks an overvote has occurred, it needs to make a “reasonable effort” to obtain any missing vote entitlement information from Broadridge and the financial intermediary. The CSA says that the tabulator can use an association table provided by Broadridge that relies on several codes to identify each intermediary. The tabulator can also notify Broadridge and the bank or broker-dealer involved within a day of discovering the possible mistake in votes. Tabulators would provide Broadridge with a confirmation of the total number of votes received for each financial intermediary 48 hours before a corporate meeting takes place. Broadridge can then determine if the number of votes received by the tabulator matches its records.
As long as financial intermediaries provide the right vote entitlement information and tabulators may reasonable efforts to correct any data, votes shouldn’t be rejected or pro-rated, says the CSA. However, in a worse case scenario, the tabulator would inform Broadridge of any vote rejection or pro-ration within two days of completing its final vote count. Broadridge would then tell its bank or broker-dealer client two days later and the customer would be told five days after the bank or broker-dealer is told.
However, even following the CSA’s protocol doesn’t guarantee end-to-end vote confirmation, says the CSA. It encourages tabulators, financial intermediaries and Broadridge to work together to enable investors to confirm whether their proxy votes have been accepted, including in real-time where appropriate.
If their effort in the US is any indication, the process could be doomed. Broadridge says it has come up with an end-to-end voting confirmation service in the US when it serves as the voting tabulator and investors cast their votes through Broadridge’s electronic voting platforms. However, the uptake from retail investors who predominantly rely on proxy ballots, has been scant. US transfer agents serving as meeting ttabulators are refusing to use a separate end-to-end voting confirmation service which they pilot-tested with Broadridge and financial intermediaries in 2014 and 2016.
“The STA is not able to agree that vote confirmation can be considered capable of full implementation across the US with or without regulatory changes on the basis of the pilots conducted to date,” says the STA in an August 2016 letter to members calling the pilot process costly and unscaleable. The STA counters that investors can always rely on the on-demand post-meeting confirmation services offered by some tabulator transfer agents for a fee.
Broadridge is likely hoping it generate sufficient interest in the same end-to-end service vote confirmation services in Canada. Institutional investors using its Proxy Edge electronic service can receive a post-meeting confirmation. Canadian transfer agents tell FinOps Report they aren’t aware of any service Broadridge offers in their market that matches the US service when transfer agents serve as meeting tabulators. Nor are they interested in using the CSA’s protocol as currently drafted.
More Fixes Needed
Transfer agents are concerned that the CSA’s recommendations would result in the beneficial investor receiving one notification that its vote was received by the bank or broker-dealer and the other notification that its vote was rejected or pro-rated by the tabulator. Their alternative: have banks and broker-dealers do a “pre-reconciliation” of beneficial shareholder records before sending their records of vote entitlement of beneficial investors to Broadridge.
However, broker-dealers counter that approach isn’t feasible. “To the extent that expansion of prereconciliation of record date vote entitlement by intermediaries may be advocated, we also note that this would cause a significant change to the nature of proxy voting which would necessitate adding days to the process at significant cost,” says Naomi Solomon, managing director of the Investment Industry Association of Canada (IIAC) in her letter to the CSA.
Barring the operational changes that might need to be implemented, most Canadian banks and broker-dealers do have a safety net that gives them little incentive for change. They can always do “post-reconciliation” by relying on an overreporting prevention service offered by Broadridge, which allows them to fix any mistakes or overvotes before the final number of votes is sent to the tabulator.
Ultimately, when it comes to end-to-end voting confirmation it remains unclear whether a more extensive overhaul of the proxy voting pipeline is required or a few operational tweaks will do the trick. However, even reaching a consensus on a bandaid might be a step in the right direction.