Determining whether a vote was actually counted at a corporate meeting has resurrected a sparring match among transfer agents, financial intermediaries, issuers and Broadridge Financial over how to operationally get the job done.
Among the participants on a new end-to-end vote confirmation committee set up by the Securities and Exchange Commission to address the issue, transfer agents and Broadridge appear to be the most at odds. They disagree whether end-to-end vote confirmation requires pre-reconciliation and other more radical changes to the current proxy voting system. The other members of the committee include representatives of the Society for Corporate Governance on behalf of corporate issuers, the Council of Institutional Investors (CII) and the broker-dealer trade group Securities Industry and Financial Markets Association (SIFMA).
The idea of end-to-end vote confirmation isn’t anything new. What is new is the securities industry’s hope that the SEC will finally resolve the matter as it tackles proxy reform through several industry-run committees including the one on end-to-end vote confirmation. Proxy reform is the buzzword for changes to the voting process popularized about a decade ago when the SEC issued a “concept release” prompting a flurry of recommendations on position reconciliation and more dramatic alterations. Since then, the SEC has not made any changes to the proxy plumbing instead focusing on checks on proxy advisors who counsel investors on how to vote in corporate elections.
End-to-end vote confirmation ensures that votes cast by investors made their way to tabulators and ultimately to issuers. That sometimes doesn’t happen when it comes to votes cast by beneficial shareholders, or those who hold their shares in the name of their financial intermediaries as is the case with institutional investors and many retail investors. Registered shareholders, serviced by transfer agents, hold their shares in their own names. Activist investors, in particular, are eager to verify their voices were correctly reflected and issuers need to make certain that happens particularly when it comes to proxy contests when every vote matters.
Some transfer agents, represented by the trade group Securities Transfer Association (STA). are lobbying for the idea of end-to-end vote confirmation to be directly linked to a requirement for pre-reconciliation and a major overhaul of the proxy voting process. That overhaul would allow corporations to send proxy materials directly to some beneficial investors. It’s a scenario opposed by Broadridge and financial intermediaries which advocate only tweaks to the status quo. At best, reconciliation should be recommended with no particular type should be required, some operations managers at US broker-dealers tell FinOps Report.
The current proxy voting system doesn’t permit issuers to mail materials directly to beneficial investors because corporations don’t even know who they are. All they know as the investors are the bank and broker-dealer members of the Depository Trust Company (DTC). They are listed on the books of the DTC as the account holders and typically hire Broadridge or its smaller rival Mediant to do their proxy mailings. Despite being the US’ national securities depository responsible for settling trades in US securities, the DTC can’t vote anyone’s shares. Instead, the DTC gives banks and brokers omnibus proxies to vote shares they hold on behalf of beneficial investors. The DTC will also give the tabulator of a corporate meeting a securities position record reflecting who is entitled to vote shares and how many shares it can vote. Transfer agents often act as tabulators. Broadridge can do so as well.
Reconciliation, as defined by transfer agents, is all about banks and brokers matching the correct number of vote entitlements with the right number of positions they hold on the books of the DTC. Without such reconciliation, transfer agents claim, a beneficial investor’s vote might ultimately be lost in the pile of votes an issuer’s tabulator might have to discard without the investors’ knowlege. The votes would be thrown out when the bank or brokerage firm tries to cast more votes than it should based on its holdings on a company’s shares reflected on the books of the DTC. The phenomenon has been coined “overvoting,” although the extra votes never make their way to the issuer.
“Vote confirmation can be implemented in the current environment in the sense that a confirmation can be issued against any vote, both when it is lodged and after the meeting to confirm how it was counted at the meeting,” says Todd May, president of the STA in a letter to the SEC. “Reconciliation, however, goes to the foundational issue of validation of entitlement to vote and must also be addressed either in parallel with end-to-end vote confirmation or as part of the long term and technology working group agenda. Anything else will continue to taint the integrity of the voting process.” Translation: without reconciliation no one can know for certain whether his or her vote made it all the way to the corporate issuer.
If reconciliation is appropriate, the question now becomes what type of reconciliation should be used. Pre-reconciliation refers to broker-dealers and banks matching the number of shares entitled to vote on their books with the positions of banks and brokers held on the books of the DTC before proxies are mailed out to beneficial investors. Post-reconciliation would still require that such reconciliation were completed before votes were sent to a proxy tabulator, but after proxies were mailed out.
Broadridge, the world’s largest proxy mailing firm, has a different interpretation to the term reconciliation which also appears in its correspondence with the SEC advocating end-to-end vote confirmation. For Broadridge, if the tabulator can’t figure out to whom a vote it receives should be ascribed it should tell the nominee or financial intermediary address the problem. “Nominees must be timely notified by issuers of discrepancies between the issuer’s entitlement records and those reported by nominees,” recommends Robert Schifellite, president of Broadridge’s investor communications services unit in his letter to the SEC. “Issuers need to confirm vote entitlements with nominees and notify them of discrepancies within five business date of their receipt of record date position and vote confirmation.”
Broadridge already has a end-to-end vote confirmation service which can be used by investors relying on its electronic voting services, but only if Broadridge is the tabulator. About 100 issuers have signed up to use the service for the 2020 proxy season. A pilot service on end-to-end vote confirmation relying on transfer agents as tabulators was completed in 2014 and 2016, but it has not been subsequently supported by transfer agents, alleging it is too costly and cumbersome to implement.
Computershare, the US’ largest transfer agent, says that during the 2020 proxy season it will provide vote confirmations to financial intermediaries via their agents, such as Broadridge and Mediant. The vote confirmation service will initially be limited for corporate meetings in which Computershare is the tabulator, but Computershare hopes to expand its reach to other transfer agent tabulators as well. The confirmations will be available only at the omnibus, not individual investor level and Computershare will waive any fees for issuers during the first proxy season’s use. Dealing with Individual investor level confirmations is a matter between the omnibus account operator and its intermediary agent– Broadridge or Mediant– and the end investors to work out, say Computershare officials.
How often overvoting takes place isn’t clear. Based on the STA’s claims it sounds like a common phenomenon. In his letter to the SEC, the STA’s May who also serves as chief executive officer of transfer agency Equiniti says that in 2018 overvoting happened in 134 of the 183 meetings in which transfer agents served as tabulators. As a result, about 5.9 million votes were discarded.
Here are three reasons overvoting can take place, according to transfer agents who gave FinOps Report the following scenarios:
Scenario 1 of split holdings: Brokerage firm A has clients with 1.5 million shares of a company, yet Brokerage A holds only 1 million of the 1.5 million shares. The other 500,000 shares are held equally by brokerage firm B and brokerage firm C. Brokerage firm A mails proxies to all of the investors holding 1.5 million shares counting on the fact it may never exceed its 1 million share voting entitlement. However, if votes representing more than 1 million shares are cast, all hell breaks lose because the problem can’t be fixed at the 11th hour. The tabulator will have to reject the 500,000 shares.
Scenario 2 of missed share delivery: The same brokerage firm A has a customer that purchases and pays for 100 shares to be settled on record date. However, the selling brokerage firm B fails to deliver the shares to brokerage firm A. Brokerage firm A then sends its buying customer a proxy for the 100 shares without having the shares in its possession. Brokerage firm B will also send a proxy to the seller. Both the buyer and seller might have voted the shares even though the seller shouldn’t have. Brokerage firm A’s voting entitlement on the books of the tabulator will be long the 100 shares, but if brokerage firm A and brokerage firm B’s customers voted there will be a 100 share overvote at the tabulator, the tabulator will have to eliminate.
Scenario 3 of lent shares: Brokerage firm A has a customer who lent 1000 shares to brokerage firm B’s customer. Brokerage firm A has records showing the shares in its customer account “on loan” and brokerage firm A does not have possession of the shares. Brokerage firm B has possession of the shares and its books reflect that 1,000 shares are borrowed. Brokerage firm B will send a proxy to its customer who has the right to vote the 1,000 shares. What if brokerage firm A’s customer also votes the shares even though it wasn’t supposed to? There is now an overvote the tabulator must eliminate unless the lender recalls the shares.
Now here is how each of the three common scenarios of overvoting could have been resolved through pre-reconciliation, some ransfer agent operations managers tell FinOps Report.
Scenario 1 of split holdings: All brokerage firm A would have to do is obtain legal proxies for 250,000 shares from Brokerage firm B and Brokerage firm C and present them to the issuer so the tabulator can amend the voting register. The amendment would reflect an increase of 500,000 shares from brokerage A’s voting entitlement and an offsetting reduction of 250,000 shares to Brokerage firm B and 250,000 shares to Brokerage firm C’s voting entitlement.
Scenario 2 of failed delivery: Brokerage firm A must approach the selling brokerage firm B to obtain a legal proxy for the 100 shares at issue and pass it onto the issuer and its tabulator. The appropriate adjustments can then be made to both brokerage firm A and brokerage firm B’s voting entitlement. The selling brokerage firm B must also provide brokerage firm A with a legal proxy and ensure that the 100 shares involved in the failed delivery are not provided the right to vote.
Scenario 3 of lent shares: Brokerage firm A must ensure that the customer who lent the shares and gave voting authority to the borrower doesn’t get the right to vote the shares in question.
Broker-dealers aren’t willing to explain what’s so hard about fixing any of the three common overvoting scenarios using pre-reconciliation. Cost likely plays a factor as it takes more time and better technology to conduct pre-reconciliation than post-reconciliation. About eighty percent of brokerages do practice pre-reconciliation, says the STA’s May attributing the figure to the SEC’s end-to-end vote confirmation committee. That still leaves 20 percent not doing so.
In his letter to the SEC recommending a broad range of changes to the proxy voting system, Paul Conn, president of the global markets unit for transfer agent Computershare, acknowledges that the number of cases of overvoting has declined over the past few years because of Broadridge Financial’s overvoting prevention service. “ORPS creates an alert for intermediaries where Broadridge receives an instruction that would result in an overvote,” he explains. “The alert allows the intermediary to amend the vote position before it is passed to the tabulator.”
That sounds like a great plan, but it hasn’t eliminated the problem of overvoting entirely, says the STA’s May in his letter to the SEC. Instead it has just masked it. Broadridge says that it doesn’t charge for its overvote prevention service, but won’t disclose how many of its bank and brokerage clients are using it. Broadridge also doesn’t release figures on how often the service has caught and prevented overvoting.
Conn, whose firm is the US’ largest transfer agent, doesn’t go as far as some other transfer agents, in saying that the SEC should require pre-reconciliation of voting entitlements to ensure end-to-end vote confirmation. Instead, he recommends the regulatory agency require “record date position reconciliation” but when asked by FinOps Report to clarify the distinction between his terminology and pre or post-reconciliation, Conn would only say that record date position reconciliation would allow for end-to-end reconciliation to occur regardless of whether a broker has performed pre or post- reconciliation.
“Where record date reconciliation is not mandated, a discrepancy between who is entitled and who is in fact voting is likely to remain in the system,” says Conn in his letter to the SEC. “Delivery of vote confirmation without reconciliation of record date positions risks the creation of false comfort for shareholders, regulators and the broader community of stakeholder interests.”
But will any reconciliation of positions alone solve the issue of end-to-end vote confirmation? It will but the process will still be too difficult to achieve. In his letter to the SEC, the STA’s May suggests that end-to-end vote confirmation would be a lot easier if issuers were allowed to mail proxies directly to non-objecting beneficial owners (NOBOs) or those who allow their names to be disclosed to issuers. Issuers could then bear the costs of such voting confirmation. Otherwise, a two-step process would have to take place. One is that issuers would have to alert broker-dealers and banks to a confirmation of voting by the aggregate block of shares held in omnibus name or the name of the broker-dealer or bank. Then brokers and banks would have to tell investors of what happened to their individual votes.
Under the two step-process of vote confirmation, the issuer would have to pay for the first step whereas the financial intermediary should pay for the second, says May. By contrast, under the STA’s proposed one step process using a NOBO list in its possession, the issuer would bear all the costs.
In his letter to the SEC, Conn also directly ties the concept of end-to-end vote confirmation to the ability of issuers to mail proxy materials directly to NOBOs. If issuers had that right they could provide vote confirmation for NOBOs directly to investors, he explains. Conn suggests that down the road OBOs- or objecting beneficial owners– who refuse to have their identities disclosed to investors should bear the cost of receiving physical corporate agendas in the mail from broker-dealers. “Issuers should not be required to produce physical materials to OBO investors but make the electronic forms available for dissemination,” he says.
What does Broadridge think? The two-step confirmation approach appears to be perfectly fine as it relies on the current proxy plumbing system. “Issuers need to confirm to nominees that the vote reported by nominees are included in the final voting tabulation. Nominees need to confirm votes of beneficial account holders and issuers need to confirm votes of registered account holders,” says Broadridge’s Schifellite in his letter to the SEC.
Overhauling the current proxy voting system for beneficial investors isn’t necessary because it isn’t broken, suggests Schifellite. Instead, he recommends that the SEC investigate what happens to registered shareholder votes during a proxy contest. In citing the 2017 pricey proxy contest involving Proctor & Gamble and billionaire activist shareholder Nelson Peltz who wanted a seat on P&G’s board, Schifellite notes that there was no problem counting the votes of beneficial shareholders. However, there was a glitch counting the votes of registered shareholders which required the creation of a so–called “snake pit” between attorneys of the opposing sides who fought tooth and nail for each vote to be counted on their side.
Ultimately, P&G won the proxy contest but still decided to grant Peltz, chief executive of Trian Fund Management a seat on its board of directors. Schifellite’s recommendation to the SEC: require an independent third-party instead of a tabulator appointed by the issuer to count registered shareholder votes during a proxy battle.
In a letter co-signed with Broadridge’s Schifellite, the Society for Corporate Governance, the CII and SIFMA said they agreed over the need for end-to-end vote confirmation, but didn’t elaborate on how that process should occur. The STA’s glaring absence as a signatory leads one to believe that the SGC, CII and SIFMA might be more receptive to a tempered approach to end-to-end vote confirmation than a radical one.
“Our members wold like to see routine end-to-end vote confirmation, which I think would require early reconciliation and likely also require SEC involvement,” Ken Bertsch, executive director of the CII tells FinOps Report. He declined to specify whether early reconciliation meant pre-reconciliation.
Bertsch was far clearer in disputing the need for linking end-to-end vote confirmation with direct mailings to NOBOs. “We also think that the issue of direct mailings to NOBOs is separate and should not be necessary for end-to-end vote confirmtion,” he says. Bertsch believes that transfer agents are erroneously connecting the two concepts as a means of deflecting from their responsibilities in ensuring end-to-end vote confirmation.
Officials at SIFMA and the Society for Corporate Governance were unavailable for comment at press time. An impromptu telephone survey of two dozen proxy operations managers at US brokerages conducted by FinOps Report over the past month showed an even-split between those advocating pre-reconciliation and post-reconciliation as a precondition for end-to-end vote confirmation. Corporate secretaries at several US corporations say they are indifferent to how reconciliation takes place. They would not discuss their views on direct mailings to NOBOs.
Given that there is no consensus on the operational requirements for end-to-end vote confirmation or even the terminology to be used, the SEC might ultimately decide to recommend the concept of reconciliation rather than mandate any type. Whether the regulatory agency actually addresses the thornier issue of direct communications between issuers and beneficial investors remains even more doubtful. The SEC did not respond to a request for comment about the end-to-end vote confirmation committee.