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Proxy Voting, Proxy Fees and Call for Change

The August recess is welcomed by our elected officials in Congress. They will likely take some vacation through Labor Day, spending time in their home districts and getting caught up in fall election campaigning. For the rest of us in Washington, this is also a time to try to catch up before the fall legislative session begins. There is no rest for the SEC, however, as the clock ticks on Dodd-Frank items to complete before various deadlines.

The NYSE recently sent a notice to its listed companies and member organizations (as required by Dodd-Frank) that it will file an amendment to NYSE Rule 452 relating to executive compensation. For proxy statements that include executive compensation proposals for which member organizations had previously been allowed to vote uninstructed shares, the NYSE will treat these matters as "May Not Vote" rulings effective immediately. NASDAQ will do the same.

Tomorrow night I will moderate a Dodd-Frank program for the NIRI NY chapter that will include panelists from NYSE, NASDAQ and others. I also continue to await the SEC final proxy access rules, and as I have stated, I expect this to occur before Labor Day and likely the last week of August – some say it may be August 25.

Now, let’s continue our examination of the SEC’s proxy mechanics concept release and how your company might participate in the process by offering comments to the SEC. Last week, I highlighted over-voting and under-voting, as well as issues related to proxy voting confirmation. This week we look at several additional proxy matters in this lengthy message.

Proxy Concept Release – Proxy Voting by Institutional Securities Lenders (pp. 43-47)

In stock lending situations, current rules transfer voting privileges from the lender to the borrower of shares. This creates proxy solicitation uncertainty for companies and IR professionals, especially related to large institutional holders with stock lending programs. The SEC seeks opinions on this and, in particular, whether providing increased information to institutional shareholders would help them determine if they should recall lent stock in order to vote. Questions asked by the SEC in this area include: Should the Commission propose a rule requiring issuers to disclose the meeting agenda sufficiently in advance of the record date to permit securities lenders to determine if the matters warrant a loan termination so they may vote? Would the issuer know, sufficiently in advance, all of the agenda items, particularly shareholder proposals which may become the subject of a request for no-action relief? Could the SEC address concerns by allowing issuers to publish an agenda that is subject to change? How often does uncertainty about a meeting agenda preclude issuers from disclosing the agenda in sufficient time for shareholders to recall loans before the record date? Should issuers be required to issue a press release or make a company Web site posting in addition to filing a notice with the Commission?

Proxy Concept Release – Disclosure of Voting by Funds (pp. 47-49)

Management investment companies are currently required to disclose on Form N-PX how they vote proxies related to their portfolio securities. However, there is no requirement to disclose the number of shares for which proxies were voted or any stock lending information. Questions asked by the SEC in this area include: Should Form N-PX require disclosure of the actual number of shares voted? Should Form N-PX require disclosure of the number of portfolio securities for which a fund did not vote because the securities were on loan or for other reasons?

Proxy Concept Release – Proxy Distribution Fees (pp. 50-63)

Most IR professionals are aware of the costs associated with proxy distribution, including the “notice and access” method. While proxy fees are set by the NYSE, notice and access fees have no similar mandated fees. The SEC notes issuers have raised concerns over the reasonableness of these fees, as well as concerns about the OBO/NOBO system. The SEC also states that “market forces should ultimately determine competitive and reasonable rates,” and suggests “a process that fosters competition could give issuers, which are responsible for reimbursing only reasonable proxy distribution costs, more control over that process and remove the Commission and SROs from the business of setting rates.” However, the SEC understands that lack of a competitive market requires regulated fees.

NIRI, as a member of the Shareholder Communications Coalition, has suggested the alternative of creating a utility function to aggregate beneficial owner information data, and then permit service providers to compete for proxy materials distribution. As the concept paper states, “This would also place the choice of proxy service provider in the hands of the entity that must pay for the distribution—the issuer—rather than the securities intermediary, which has no incentive to reduce costs.” We understand that managing these costs is one of the highest priority proxy items for issuers and we believe the Coalition solution has a high likelihood of meeting issuer’s needs. Therefore, we urge issuers to write to the SEC with their specific thoughts and opinions on this subject, as well as any details of perceived inequities in fees.

Questions asked by the SEC in this section include: Does the current fee structure discourage issuers from communicating with beneficial owners beyond delivery of the required proxy materials? Should there be an independent third-party audit of the current fee structure? Should the current fee structure that is set forth in SRO rules be revised to include fees for notice and access delivery? If so, what fees for the notice and access model might constitute “reasonable reimbursement?” Does the current proxy distribution system – in which the proxy service provider is selected by a broker-dealer but paid by the issuer – create a lack of incentives to reduce costs? Should the issuer have more control over the selection and payment of the proxy service provider, and if so, what alternatives to the current system would facilitate this? What are the potential benefits and drawbacks of such alternatives? What factors are currently affecting the level of competition in the market for proxy service providers and their fees? What principles should guide the Commission’s current consideration of competition among proxy service providers? If issuers were able to solicit proxies directly from beneficial owners, what effect would that likely have on proxy distribution costs? What are the potential merits and drawbacks of having a central data aggregator collect beneficial owner information from securities intermediaries? Would changes to the OBO/NOBO mechanism, or the creation of a central data aggregator, encourage competition in the proxy distribution sector?

I urge you and your company to review these items, and share your views and company-specific instances of problems with the SEC. Next week I will review the Communications and Shareholder Participation section.

NIRI’s highly-rated Introduction to Investor Relations takes place September 12-15 in Boston – an excellent place for IR career development. And if you have a full week to devote to IR education, the University of Michigan IR Certificate program, Theory and Practice of Investor Relations takes place August 15-20.

Until next week,

Jeff Morgan, CAE
President & CEO
jmorgan@niri.org
www.twitter.com/jeffreydmorgan

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