An investor receives information about a corporate agenda and casts its votes. It happens every day of the week and most frequently from February through June when most US firms hold their annual meetings.
But just because a shareholder votes, doesn’t necessarily mean there’s any way to verify the vote made its way to the issuer, and was counted in the election. Although there are no solid figures on how often the glitch might occur, it has triggered discussion of potential solutions among institutional fund managers, the Securities and Exchange Commission, Broadridge Financial, broker-dealers, securities transfer agents, and corporations organized into the so-called End-to-End Vote Confirmation Working Group. A new report from the Securities Transfer Association (STA), a participant in the working group, details the problems and potential solutions.
Amidst all this discussion, the Securities and Exchange Commission is apparently waiting before it comes up with any requirements and until it does so, it is unlikely that investors can ever be certain issuers received their votes. If they took the trouble to vote, it is only reasonable they want that reassurance, particularly if they intend to play a more active-investor role in corporate governance .
Broker-dealers tell FinOps Report they have little incentive to implement any change in the status quo. “The recommendation for early reconciliation of votes is way too expensive for us to implement,” says one operations manager at a New York brokerage. “And for what purpose? We don’t see the benefit to our investors when the chance of an error is negligible.”
What is Negligible?
What’s negligible is a matter of interpretation. None of the five brokerage operations specialists would estimate how many beneficial investors or how many votes are affected each year. Still, the potential for lost votes was apparently important enough for institutional investors that the Council for Institutional Investors (CII) in April 2010 recommended vote verification in a position paper. The SEC took up the issue in July 2010 when studying how to reform proxy plumbing — aka proxy distribution and voting.
Other industry groups, such as the mutual fund trade group giant Investment Company Institute (ICI), the National Investor Relations Institute, the Society of Corporate Secretaries and Governance Professionals backed the CII’s stance. In 2011 a University of Delaware study highlighted glitches in the end-to-end vote confirmation process and offered some high-level suggestions which the end-to-end vote confirmation group began evaluating the following year.
At the core of the inability to ensure end-to-end vote confirmation is the widely publicized issue of overvoting — or overreporting — and the procedures used to correct it. Ultimately, the number of votes an issuer receives is supposed to match the number of votes actually cast of those entitled to be cast. Any discrepancies must be corrected before the tabulator — or vote counter — sends the final count to an issuer. Correcting those discrepancies — or balancing the books — is a valid recordkeeping task, except to the investor whose vote may conceivably evaporate in a bookkeeping exercise.
The STA highlighted the commercial and broader-reaching solutions under consideration in its whitepaper , yet others on that group were unwilling speak with FinOps Report on the findings. The Washington, D.C.-headquartered ICI declined to comment. So did Broadridge, the world’s largest proxy distribution firm and its far smaller competitors Mediant Communications and Inveshare. No one would explain the reticence about what has clearly been a significant initiative for the past few years.
As the trade group representing shareholder recordkeepers, the STA may have the most reason to talk about the findings and recommendations of this group. Transfer agents are angling for the SEC to decide that the current convoluted proxy distribution and voting infrastructure is broken and needs radical change. Should the SEC agree to allow issuers to send proxy materials directly to street-name shareholders, rather than having to go through financial intermediaries, transfer agents would be in the catbird’s seat to take over those mailings.
Here is how the current proxy distribution, voting and tabulation process works — a scenario which the STA suggests inevitably leads to errors and the inability to ensure end-to-end vote confirmation. Registered investors — or those holding their shares in their own name on the books of issuers — receive their proxy information and voting ballots either through their transfer agent or through its website. Not so with beneficial, or street-name shareholders. They will often receive their information and voting ballots through their broker dealers or bank intermediaries in the mail or website operated by those financial firms.
The issuer doesn’t know who those beneficial investors are, because their identities are obscured on the books of the issuer under the names of those financial firms. Either way, a tabulator is ultimately responsible for counting up the votes and forwarding them to the issuer. Broadridge, which is hired by banks and broker-dealers to handle their proxy mailings, sometimes acts as the tabulator. However, most of the time the tabulator is a transfer agent or third-party firm.
Tweaking the Numbers
So what can go wrong? Plenty, as outlined in the STA’s report. When Broadridge serves as the broker-dealer or bank’s agent — that is as the transfer agent sending the proxy mail and the tabulator — it can generally provide a vote confirmation. However, more than 80 percent of the time, transfers agent serve as tabulators and have no clue as to just who the actual underlying investors are and therein lies the problem. They rely on the broker-dealers and banks to forward the correct number of votes. If they don’t, tabulators will have to do some tweaking to the numbers.
The numbers can become easily become confused before they are shipped out from the broker-dealers. A broker-dealer can hold one million shares of a US issuer on the books of Depository Trust Company, the US national securities depository, but submit 1.2 million votes for several reasons. Some of the shares may held on the books of another depository such as international depositories Euroclear, Clearstream or Canada’s depository CDS. Alternatively, the shares could represent corporate treasury shares or could be part of a securities lending program — out on loan and not returned in time to meet a settlement deadline.
According to the STA, the working group has not agreed on how the tabulator should handle vote discrepancies. Ideally, the answer would involve the SEC mandating broker-dealers and banks cleaning up their act and ensuring they can vote the correct number of shares for the correct number of investors. Such a “reconciliation” should be handled at both the nominee and beneficial owner levels, according to the trade group.
Broadridge Steps In
That’s easier said than done. “The brokerage community does not reconcile eligible votes and shares at the investor level before a proxy distribution is made,” according to the STA report. And what about the nominee level? That is where Broadridge is offering to help out, the STA acknowledges. Broadridge has established a communications service to enable broker-dealers and banks and the issuer’s tabulator to agree on the number of shares each financial intermediary should vote. A separate service also allows a broker-dealer or bank to determine whether a nominee — aka a bank or broker dealer — is really entitled to cast votes on behalf of beneficial investors at a corporate meeting.
How are the services panning out? The jury is still out, says the STA. The working group has yet to publish the results of a pilot group of 26 issuers, several broker-dealers, and five tabulator transfer agents which used Broadridge’s services for pre-entitlement account reconciliation — a practice which would occur after a proxy mailing is done, but before final tabulation of votes must take place. The STA’s report did not identify which broker-dealers took part in the pilot study handling over one hundred reconciliation requests, but claimed their participation was weak and it couldn’t determine why. The trade group, which identified Bank of New York Mellon, National Financial and Bank of America Merrill Lynch as members of the end-to-end vote confirmation group, did praise Broadridge’s services as going a long way to helping ensure overvoting or overreporting was kept to a minimum, but emphasized the need for more far-reaching change.
The big questions is whether the SEC will overhaul proxy plumbing and, if so, will allow issuers to communicate directly with registered and beneficial investors as transfer agents want? Based on the fact it has been studying the idea for years and done nothing so far, it seem unlikely. As for requiring early reconciliation, broker-dealers and banks complain it is too expensive. Unless institutional investors light a bigger fire under this issue, and convince the SEC they are damaged by not having end-to-end vote confirmation, the SEC might not think a new regulatory mandate is in order.
So what’s left? Broadridge has often griped that transfer agents serving as tabulators just need to work more closely with banks and broker-dealers, while transfer agents argue that the cause of lost votes is more fundamental. Regardless, if the SEC can’t come up with any required solution, using Broadridge’s bandaids may be all that’s left.