Proxy Access Concept Release

8/4/2019 Proxy Access Concept Release

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42982 Federal Register / Vol. 75, No. 140/ Thursday, July 22, 2010/ Proposed Rules

SECURITIES AND EXCHANGECOMMISSION

17 CFR Parts 240, 270, 274, and 275

[Release Nos. 3462495; IA3052; IC29340;File No. S71410]

RIN 3235AK43

Concept Release on the U.S. ProxySystem

AGENCY: Securities and ExchangeCommission.

ACTION: Concept release; request forcomments.

SUMMARY: The Commission ispublishing this concept release to solicitcomment on various aspects of the U.S.proxy system. It has been many yearssince we conducted a broad review ofthe system, and we are aware ofindustry and investor interest in theCommissions consideration of an

update to its rules to promote greaterefficiency and transparency in thesystem and enhance the accuracy andintegrity of the shareholder vote.Therefore, we seek comment on theproxy system in general, including thevarious issues raised in this releaseinvolving the U.S. proxy system andcertain related matters.

DATES: Comments should be received onor before October 20, 2010.

ADDRESSES: Comments may besubmitted by any of the followingmethods:

Electronic Comments

Use the Commissions Internetcomment form (http://www.sec.gov/rules/concept.shtml);

Send an e-mail to [email protected] include FileNumber S71410 on the subject line;or

Use the Federal eRulemaking Portal(http://www.regulations.gov). Follow theinstructions for submitting comments.

Paper Comments

Send paper comments in triplicateto Elizabeth M. Murphy, Secretary,Securities and Exchange Commission,100 F Street, NE., Washington, DC205491090.

All submissions should refer to FileNumber S71410. This file numbershould be included on the subject lineif e-mail is used. To help us process andreview your comments more efficiently,please use only one method. TheCommission will post all comments onthe Commissions Internet Web site(http://www.sec.gov/rules/concept.shtml). Comments are alsoavailable for Web site viewing and

copying in the Commissions PublicReference Room, 100 F Street, NE.,Washington, DC 20549, on official

business days between the hours of 10a.m. and 3 p.m. All comments receivedwill be posted without change; we donot edit personal identifyinginformation from submissions. Youshould submit only information that

you wish to make available publicly.FOR FURTHER INFORMATION CONTACT:Raymond A. Be or Lawrence A.Hamermesh, Division of CorporationFinance, at (202) 5513500, Susan M.Petersen or Andrew Madar, Division ofTrading & Markets, at (202) 5515777,Holly L. Hunter-Ceci or Brian P.Murphy, Division of InvestmentManagement, at (202) 5516825, or

Joshua White, Division of Risk, Strategy,and Financial Innovation, at (202) 5516655, 100 F Street, NE., Washington, DC20549.SUPPLEMENTARY INFORMATION:

I. IntroductionII. The Current Proxy Distribution and Voting

ProcessA. Types of Share Ownership and Voting

Rights1. Registered Owners2. Beneficial OwnersB. The Process of Soliciting Proxies1. Distributing Proxy Materials to

Registered Owners2. Distributing Proxy Materials to

Beneficial Ownersa. The Depository Trust Company

b. Securities Intermediaries: Broker-Dealersand Banks

C. Proxy Voting ProcessD. The Roles of Third Parties in the Proxy

Process1. Transfer Agents2. Proxy Service Providers3. Proxy Solicitors4. Vote Tabulators5. Proxy Advisory Firms

III. Accuracy, Transparency, and Efficiencyof the Voting Process

A. Over-Voting and Under-Voting1. Imbalances in Broker Votesa. Securities Lending

b. Fails To Deliver2. Current Reconciliation and Allocation

Methodologies Used by Broker-DealersTo Address Imbalances

a. Pre-Reconciliation Methodb. Post-Reconciliation Method

c. Hybrid Reconciliation Methods3. Potential Regulatory Responses4. Request for CommentB. Vote Confirmation1. Background2. Potential Regulatory Responses3. Request for CommentC. Proxy Voting by Institutional Securities

Lenders1. Background2. Lack of Advance Notice of Meeting

Agendaa. Background

b. Potential Regulatory Responsesc. Request for Comment

3. Disclosure of Voting by Fundsa. Background

b. Potential Regulatory Responsesc. Request for CommentD. Proxy Distribution Fees1. Backgrounda. Current Fee Schedules

b. Notice and Access Modelc. Current Practice Regarding Fees Charged2. Potential Regulatory Responses

3. Request for CommentIV. Communications and ShareholderParticipation

A. Issuer Communications WithShareholders

1. Background2. Potential Regulatory Responses3. Request for CommentB. Means To Facilitate Retail Investor

Participation1. Background2. Potential Regulatory Responsesa. Investor Education

b. Enhanced Brokers Internet Platformsc. Advance Voting Instructionsd. Investor-to-Investor Communicationse. Improving the Use of the Internet for

Distribution of Proxy Materials3. Request for CommentC. Data-Tagging Proxy-Related Materials1. Background2. Potential Regulatory Responses3. Request for Comment

V. Relationship Between Voting Power andEconomic Interest

A. Proxy Advisory Firms1. The Role and Legal Status of Proxy

Advisory Firms2. Concerns About the Role of Proxy

Advisory Firmsa. Conflicts of Interest

b. Lack of Accuracy and Transparency inFormulating Voting Recommendations

3. Potential Regulatory Responsesa. Potential Solutions Addressing Conflicts

of Interestb. Potential Solutions Addressing Accuracy

and Transparency in Formulating VotingRecommendations

4. Request for CommentB. Dual Record Dates1. Background2. Difficulties in Setting a Voting Record

Date Close to a Meeting Date3. Potential Regulatory Responses4. Request for CommentC. Empty Voting and Related

Decoupling Issues1. Background and Reasons for Concern2. Empty Voting Techniques and Potential

Downsidesa. Empty Voting Using Hedging-Based

Strategiesb. Empty Voting Using Non-Hedging-Based

Strategies3. Potential Regulatory Responses4. Request for Comment

VI. Conclusion

I. Introduction

Regulation of the proxy solicitationprocess is one of the originalresponsibilities that Congress assignedto the Commission in 1934. TheCommission has actively monitored theproxy process since receiving this

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42983Federal Register / Vol. 75, No. 140/ Thursday, July 22, 2010/ Proposed Rules

1For a history of the Commissions efforts toregulate the proxy process since 1934, seeJill E.Fisch, From Legitimacy to Logic: ReconstructingProxy Regulation, 46 Vand. L. Rev. 1129 (Oct.1993).

217 CFR 240.14a16; Shareholder ChoiceRegarding Proxy Materials, Release No. 3456135(July 26, 2007) [72 FR 42222] (Notice and AccessRelease); Amendments to Rules Requiring InternetAvailability of Proxy Materials, Release No. 339108 (Feb. 22, 2010) [75 FR 9074].

317 CFR 240.14a17; Electronic ShareholderForums, Release No. 3457172 (Jan. 18, 2008) [73FR 4450]. These amendments clarified thatparticipation in an electronic shareholder forumthat could potentially constitute a solicitationsubject to the proxy rules is exempt from most ofthe proxy rules if all of the conditions to theexemption are satisfied. In addition, theamendments state that a shareholder, issuer, orthird party acting on behalf of a shareholder orissuer that establishes, maintains or operates anelectronic shareholder forum will not be liableunder the federal securities laws for any statementor information provided by another personparticipating in the forum. The amendments did notprovide an exemption from Rule 14a9 [17 CFR240.14a9], which prohibits fraud in connectionwith the solicitation of proxies.

4See 17 CFR 14b1 and 14b2; TimelyDistribution of Proxy and Other Soliciting Material,Release No. 3433768 (Mar. 16, 1994) [59 FR13517].

5Delivery of Proxy Statements and InformationStatements to Households, Release No. 337912(Oct. 27, 2000) [65 FR 65736]. Householdingpermits a securities intermediary to send only onecopy of proxy materials to multiple accounts withinthe same household under specified conditions. Id.

6See, e.g., Proxy Disclosure Enhancements,Release No. 339089 (Dec. 16, 2009) [74 FR 68334]and Executive Compensation and Related PersonDisclosure, Release No. 338732A (Aug. 9, 2006)[71 FR 53158].

7See Facilitating Shareholder DirectorNominations, Release Nos. 339046, 3460089, IC287665 (June 10, 2009) [74 FR 29024].

8See, e.g., Request for Rulemaking ConcerningShareholder Communications, April 12, 2004Business Roundtable Petition 4493 (BRTPetition); comment letter to Release No. 339046,note 7, above, from Altman Group; comment lettersto Security Holder Director Nominations, ReleaseNo. 3448626 (Oct. 14, 2003) [68 FR 60784] fromIntel and Georgeson Shareholder Communications.

9Most commonly submitted to the CommissionsOffice of Investor Education and Advocacy, thesecomplaints raise issues such as, for example,technical problems with electronic voting platformsoffered by proxy service providers and failures byissuers to respond to shareholder complaints aboutproxy-related matters.

10

See Broadridge 2009 Key Statistics andPerformance Ratings, available athttp://www.broadridge.com/investor-communications/us/2009ProxyStats.pdf.

11Order Approving Proposed Rule Change, asmodified by Amendment No. 4, to Amend NYSERule 452 and Corresponding Listed CompanyManual Section 402.08 to Eliminate BrokerDiscretionary Voting for the Election of Directors,Except for Companies Registered under theInvestment Company Act of 1940, and to CodifyTwo Previously Published Interpretations that DoNot Permit Broker Discretionary Voting for MaterialAmendments to Investment Advisory Contractswith an Investment Company, Release No. 3460215 (July 1, 2009) [74 FR 33293] (Commissionapproval of amendments to NYSE Rule 452).

12Historically, many corporate directors wereelected under a plurality standard, which requiredonly that a candidate receive more votes than othercandidates, but not a majority of the votes. Sincethere ordinarily are not more candidates than seats,the election threshold has historically been low and

shareholder participation was less important toelecting directors. See American Bar AssociationSection of Business Law, Report of the Committeeon Corporate Laws on Voting by Shareholders forthe Election of Directors (Mar. 13, 2006), availableathttp://www.abanet.org/buslaw/committees/CL270000pub/directorvoting/20060313000001.pdf.From 2005 to 2007, however, a majority ofcompanies in the S&P 500 index adopted a votingpolicy, through bylaw amendments or changes incorporate governance principles, that requiresdirectors who do not receive a majority of votes castat the meeting in favor of their election to tendertheir resignation to the board, which resignation theboard may or may not accept. See Claudia H. Allen,Study of Majority Voting in Director Elections (Nov.12, 2007), available athttp://www.ngelaw.com/files/upload/majoritystudy111207.pdf.

13See Final Report of the Securities and Exchange

Commission on the Practice of Recording theOwnership of Securities in the Records of the Issuerin Other than the Name of the Beneficial Owner ofsuch Securities Pursuant to Section 12(m) of theSecurities Exchange Act of 1934, Dec. 3, 1976 (theStreet Name Study).

14The focus of this release is the U.S. proxysystem. We recognize, however, that many U.S.persons hold shares in non-U.S. issuers. While thisrelease does not address the processes andprocedures followed by participants when non-U.S.issuers distribute proxy-related materials to U.S.persons, we are interested in information aboutthose processes and procedures. We also seekcomment about whether we should considerregulatory responses to issues that may arise in thatarea.

authority and has considered changeswhen it appeared that the process wasnot functioning in a manner thatadequately protected the interests ofinvestors.1 In recent years, a number ofour proxy-related rulemakings have

been spurred by the Internet and othertechnological advances that enable moreefficient communications. For example,we have adopted the notice and accessmodel for the delivery of proxymaterials,2 as well as rules to facilitatethe use of electronic shareholderforums.3 Perceived deficiencies in theproxy distribution process haveprompted other proxy-relatedrulemakings, such as rules to reinforcethe obligation of issuers to distributeproxy materials to banks and brokers ona timely basis 4 and to permit thehouseholding of proxy materials.5 Wehave also periodically revised our rulesrequiring certain types of disclosures in

the proxy statement, such asinformation on executive compensationand corporate governance matters.6 Wealso have pending a proposal to adoptrules that would require, under certaincircumstances, a company to include inits proxy materials a shareholders, or

group of shareholders, nominees fordirector.7

During many of these previous proxy-related rulemakings, commentatorsraised concerns about the proxy systemas a whole.8 In addition, theCommissions staff often receivescomplaints from individual investorsabout the administration of the proxysystem.9 We believe that these concernsand complaints merit attention becausethey address a subject of considerableimportancethe corporate proxywhich, given the wide dispersion ofshareholders, is the principal means bywhich shareholders can exercise theirvoting rights.

Accordingly, in this release, we arereviewing and seeking public commentas to whether the U.S. proxy system asa whole operates with the accuracy,reliability, transparency, accountability,and integrity that shareholders andissuers should rightfully expect. Withover 600 billion shares voted every yearat more than 13,000 shareholdermeetings,10 shareholders should beserved by a well-functioning proxysystem that promotes efficient andaccurate voting. Moreover, recentdevelopments, such as the revisions toRule 452 of the New York StockExchange (NYSE) limiting the abilityof brokers to vote uninstructed shares inuncontested director elections 11 andother corporate governance trends suchas increased adoption of a majorityvoting standard for the election of

directors 12 have highlighted theimportance of accuracy andaccountability in the voting process.

The manner in which proxy materialsare distributed and votes are processedand recorded involves a level ofcomplexity not generally understood bythose not involved in the process. Thiscomplexity stems, in large part, from the

nature of share ownership in the UnitedStates, in which the vast majority ofshares are held through securitiesintermediaries such as broker-dealers or

banks; this structure supports promptand accurate clearance and settlement ofsecurities transactions, yet addssignificant complexity to the proxyvoting process.13 As a result, the proxysystem involves a wide array of third-party participants in addition tocompanies and their shareholders,including brokers, banks, custodians,securities depositories, transfer agents,proxy solicitors, proxy service

providers, proxy advisory firms, andvote tabulators.14 The use of some ofthese third parties improves efficienciesin processing and distributing proxymaterials to shareholders, while at thesame time the increased reliance onthese third partiessome of which arenot directly regulated by federal or statesecurities regulatorsadds complexityto the proxy system and makes it less

http://www.broadridge.com/investor-communications/us/2009ProxyStats.pdfhttp://www.broadridge.com/investor-communications/us/2009ProxyStats.pdfhttp://www.broadridge.com/investor-communications/us/2009ProxyStats.pdfhttp://www.abanet.org/buslaw/committees/CL270000pub/directorvoting/20060313000001.pdfhttp://www.abanet.org/buslaw/committees/CL270000pub/directorvoting/20060313000001.pdfhttp://www.ngelaw.com/files/upload/majoritystudy111207.pdfhttp://www.ngelaw.com/files/upload/majoritystudy111207.pdfhttp://www.ngelaw.com/files/upload/majoritystudy111207.pdfhttp://www.ngelaw.com/files/upload/majoritystudy111207.pdfhttp://www.broadridge.com/investor-communications/us/2009ProxyStats.pdfhttp://www.broadridge.com/investor-communications/us/2009ProxyStats.pdfhttp://www.broadridge.com/investor-communications/us/2009ProxyStats.pdfhttp://www.abanet.org/buslaw/committees/CL270000pub/directorvoting/20060313000001.pdfhttp://www.abanet.org/buslaw/committees/CL270000pub/directorvoting/20060313000001.pdf


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15A report from the United Kingdom hascharacterized its voting process as one in which thechain of accountability is complex, where there isa lack of transparency and where there are a largenumber of different participants, each of whom maygive a different priority to voting. See Review of theimpediments to voting UK shares: Report by Paul

Myners to the Shareholder Voting Working Group(Jan. 2004) (Myners Report). The European Unionalso has considered issues related to proxy votingand has enacted rules and legislation in response.As a result, the European Union passed a directiveon the exercise of certain rights of shareholders inlisted companies in July 2007, which covers manyof the matters discussed in this release. SeeDirective 2007/36/EC of the European Parliamentand of the Council (July 11, 2007) (ShareholderRights Directive). The Shareholder Rights Directiveaddresses the issues of record dates, transparency,electronic communications, conflicts of interest,financial intermediaries and other parties involvedin the proxy voting process.

16Beginning in September of 2009, theCommissions staff has met with representatives ofthe following groups and individuals to discussissues about the U.S. proxy system: The Altman

Group; Broadridge Financial Solutions, Inc.;Broadridge Steering Committee; Council ofInstitutional Investors (CII); Edwards, Angell,Palmer & Dodge; Glass, Lewis & Co.; the Hong KongSecurities & Futures Commission; InternationalCorporate Governance Network (ICGN);InvestShare; McKenzie Partners; MediantCommunications; Moxy Vote; National InvestorRelations Institute (NIRI); Proxy Governance, Inc.;RiskMetrics Group; Professor Edward Rock;Shareholder Communications Coalition; SecuritiesIndustry and Financial Markets Association(SIFMA); Society of Corporate Secretaries andGovernance Professionals; Sodali; Target Corp.;TIAACREF; the U.K. Financial Reporting Council;and Weil, Gotshal & Manges, LLP. The staff has alsobeen in communication with other regulators,

including the Federal Reserve, FDIC, Office of theComptroller of Currency, and Office of ThriftSupervision. Several of the above-listed partiesprovided written materials to the staff, which weare including in the public comment file for thisrelease. The SEC Investor Advisory Committee hasalso recommended an inquiry into data-taggingproxy information, as described in Section IV.Cbelow.

17For example, the feasibility of establishing ameans of vote confirmation may depend on whetherand to what extent we continue to allow beneficialowners to object to the disclosure of their identitiesto issuers. See Sections III.B and IV.A, below.

18See, e.g., Del. Code Ann. tit. 8, 211 and 212;Model Bus. Corp. Act 7.01 and 7.21. Whilevoting in the election of directors is largely theexclusive right of stockholders, state law maypermit the corporation to grant voting rights toholders of other securities, such as debt. See, e.g.,Del. Code Ann. tit. 8, 221. For a brief review ofthe rationale for voting by shareholders, see FrankH. Easterbrook and Daniel R. Fischel, The EconomicStructure of Corporate Law (1991). We refer toDelaware law frequently because of the large

percentage of public companies incorporated underthat law. The Delaware Division of Corporationsreports that over 50% of U.S. public companies areincorporated in Delaware. We refer to the ModelBusiness Corporation Act as well because thecorporate statutes of many states adopt or closelytrack its provisions.

19See, e.g., Del Code Ann. tit. 8, 212(b); ModelBus. Corp. Act 7.22(b).

20See, e.g., NYSE Listed Company Manual 402.04(a); Nasdaq Listing Rule 5620(b).

21Although voting rights in public companies areexercised only at the meeting of shareholders, thevotes cast at the meeting are almost entirely byproxy and the voting decisions have been madeduring the proxy solicitation process.

22Rooseveltv. E.I duPont de Nemours & Co., 958F.2d 416, 422 (D.C. Cir. 1992).

2317 CFR 240.14a1 et seq.; 17 CFR 270.20a1.However, securities of foreign private issuers areexempt from the proxy rules. See 17 CFR 240.3a123.

24The Uniform Commercial Code (UCC) definesthe term registered form, as applied to acertificated security, as a form in which the securitycertificate specifies a person entitled to the security,and a transfer of the security may be registered onbooks maintained for that purpose by or on behalf

transparent to shareholders and toissuers. Studies of the proxy systems inother jurisdictions, including the UnitedKingdom and the European Union, havemade similar observations.15

We begin this concept release with anoverview of the U.S. proxy system. Wethen outline some of the concerns thathave been raised regarding the accuracy,

reliability, transparency, accountability,and integrity of this system, as well aspossible regulatory responses to theseconcerns. These concerns generallyrelate to three principal questions:

Whether we should take steps toenhance the accuracy, transparency, andefficiency of the voting process;

Whether our rules should berevised to improve shareholdercommunications and encourage greatershareholder participation; and

Whether voting power is alignedwith economic interest and whether ourdisclosure requirements provide

investors with sufficient informationabout this issue.In reviewing the performance of the

proxy system, the Commissions staffhas recently had numerous discussionswith a variety of participants in theproxy voting process, and we appreciatethe insights these participants haveprovided.16 While we set forth a number

of general and specific questions, wewelcome comments on any otherconcerns related to the proxy processthat commentators may have, and wespecifically invite comment on anycosts, burdens or benefits that mayresult from possible regulatoryresponses identified in this release. Werecognize that the various aspects of the

proxy system that we address in thisrelease are interconnected, and thatchanges to one aspect may affect otheraspects, as well as complement orfrustrate other potential changes.17 Weencourage the public to consider theserelationships when formulatingcomments. Interested persons are alsoinvited to comment on whetheralternative approaches, or acombination of approaches, would

better address the concerns raised by thecurrent process.

We are mindful that, while we haverecently amendedand are considering

amendinga number of our rules thatrelate to the proxy process, furtheramendments to those rules or additionalguidance about our views on theirapplication may be appropriate toaddress concerns raised by theapplication of those rules. Although thediscussion in this release generallyfocuses on the broader proxy system, weremain interested in ways to improveour proxy disclosure, solicitation, anddistribution rules. We seek publiccomment on the concerns about thoserules.

II. The Current Proxy Distribution and

Voting ProcessA fundamental tenet of state

corporation law is that shareholdershave the right to vote their shares toelect directors and to approve or rejectmajor corporate transactions atshareholder meetings.18 Under state

law, shareholders can appoint a proxyto vote their shares on their behalf atshareholder meetings,19 and the majornational securities exchanges generallyrequire their listed companies to solicitproxies for all meetings ofshareholders.20 Because mostshareholders do not attend publiccompany shareholder meetings in

person, voting occurs almost entirely bythe use of proxies that are solicited

before the shareholder meeting,21thereby resulting in the corporate proxy

becoming the forum for shareholdersuffrage. 22 Issuers with a class ofsecurities registered under Section 12 ofthe Securities Exchange Act of 1934(Exchange Act) and issuers that areregistered under the InvestmentCompany Act of 1940 (InvestmentCompany Act) are required to complywith the federal proxy rules inRegulation 14A when soliciting proxiesfrom shareholders.23

A. Types of Share Ownership andVoting Rights

The proxy solicitation process startswith the determination of who has theright to receive proxy materials and voteon matters presented to shareholders fora vote at shareholder meetings. Themethod for making this determinationdepends on the way the shares areowned. There are two types of securityholders in the U.S.registered ownersand beneficial owners.

1. Registered Owners

Registered owners (also known as

record holders) have a directrelationship with the issuer becausetheir ownership of shares is listed onrecords maintained by the issuer or itstransfer agent.24 State corporation law



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of the issuer, or the security certificate so states.UCC 8102(a)(13) (1994). Rule 14a1 under theExchange Act [17 CFR 240.14a1] defines the termrecord holder for purposes of Rules 14a13, 14b1 and 14b2 [17 CFR 240.14a13, 14b1, 14b2] tomean any broker, dealer, voting trustee, bank,association or other entity that exercises fiduciarypowers which holds securities on behalf ofbeneficial owners and deposits such securities forsafekeeping with another bank. Additionally, theCommissions transfer agent rules refer to registeredowners as security holders, which means owners ofsecurities registered on the master security holderfile of the issuer. Rule 17Ad9 under the Exchange

Act [17 CFR 240.17Ad9] defines master securityholder file as the official list of individual securityholder accounts.

25See, e.g., Del. Code Ann. tit. 8, 219(c); ModelBus. Corp. Act 1.40(21); but see Model Bus. Corp.Act 7.23 (permitting corporations to establishprocedures by which beneficial owners becomeentitled to exercise rights, including voting rights,otherwise exercisable by shareholders of record).

26See, e.g., Del. Code Ann. tit. 8, 212(b); ModelBus. Corp. Act 7.22(b).

27A securities certificate evidences that theowner is registered on the books of the issuer as ashareholder. State commercial laws specify rulesconcerning the transfer of the rights that constitutesecurities and the establishment of those rightsagainst the issuer and other parties. See Officialcomment to Article 8101, The American LawInstitute and National Conference of Commissioners

of Uniform State Laws, Uniform Commercial Code,1990 Official Text with Comments (West 1991).28For more information about DRS generally, see

Securities Transactions Settlement, Release No. 338398 (Mar. 11, 2004) [69 FR 12922]. For a detaileddescription of DRS and the DRS facilitiesadministered by DTC, see Order GrantingAccelerated Approval of a Proposed Rule ChangeRelating to the Procedures to Establish a Direct

Registration System, Release No. 3437931 (Nov. 7,1996) [61 FR 58600] (order granting approval toestablish DRS) and Notice of Filing of Amendmentand Order Granting Accelerated Approval of aProposed Rule Change Relating to Implementationof the Profile Modification System Feature of theDirect Registration System, Release No. 3441862(Sept. 10, 1999) [64 FR 51162] (order approving

implementation of the Profile Modification System).29DRS is an industry initiative aimed atdematerializing equities in the U.S. market.Dematerialization of securities occurs where thereare no paper certificates available, and all transfersof ownership are made through book-entrymovements. Immobilization of securities occurswhere the underlying certificate is kept in asecurities depository (or held in custody for thedepository by the issuers transfer agent) andtransfers of ownership are recorded throughelectronic book-entry movements between thedepositorys participants accounts. Securities arepartially immobilized (as is the case with most U.S.equity securities traded on an exchange orsecurities association) when the street namepositions are immobilized at the securitiesdepository but certificates are still available toinvestors directly registered on the issuers books.Although most options, municipal, government and

many debt securities trading in the U.S. markets arecurrently dematerialized, many equity and somedebt securities remain immobilized or partiallyimmobilized at the Depository Trust Company(DTC). For more information about DTC, seeSection II.B.2.a, below. Most if not all equitysecurities not on deposit at DTC but tradingpublicly in the U.S. markets remain fullycertificated.

30For purposes of Commission rules pertaining tothe transfer of certain securities, a securitiesintermediary is defined under Exchange Act Rule

17Ad20 [17 CFR 240.17Ad20] as a clearingagency registered under Exchange Act Section 17A[15 USC 78q1] or a person, including a bank,broker, or dealer, that in the ordinary course of itsbusiness maintains securities accounts for others inits capacity as such. The UCC defines the termslightly differently, but for purposes of this release,this distinction is irrelevant. See UCC 8102(a)(14)(1994).

31The rights and interests that a customer hasagainst a securities intermediarys property arecreated by the agreements between the customerand the securities intermediary, as well as by theUCC, as adopted in the relevant jurisdiction. Underthe UCC, beneficial owners have a securitiesentitlement to the fungible bulk of securities heldby the broker-dealer or bank. An entitlementholder is defined as a person identified in the

records of a securities intermediary as the personhaving a security entitlement against the securitiesintermediary. UCC 8503 (1994). A securitiesintermediary is obligated to provide the entitlementholder with all of the economic and governancerights that comprise the financial asset and that theentitlement holder can look only to thatintermediary for performance of the obligations. SeegenerallyUCC 8501 et seq. (1994).

generally vests the right to vote and theother rights of share ownership inregistered owners.25 Because registeredowners have the right to vote, they alsohave the authority to appoint a proxy toact on their behalf at shareholdermeetings.26

Registered owners can hold theirsecurities either in certificated form 27 or

in electronic (or book-entry) formthrough a direct registration system(DRS),28 which enables an investor to

have his or her ownership of securitiesrecorded on the books of the issuerwithout having a physical securitiescertificate issued.29 Under DRS, aninvestor can electronically transfer hisor her securities to a broker-dealer toeffect a transaction without the risk,expense, or delay associated with theuse of securities certificates. Investors

holding their securities in DRS retainthe rights of registered owners, withouthaving the responsibility of holding andsafeguarding securities certificates.

2. Beneficial Owners

The vast majority of investors inshares issued by U.S. companies today

are beneficial owners, which means thatthey hold their securities in book-entryform through a securities intermediary,such as a broker-dealer or bank.30 Thisis often referred to as owning in streetname. A beneficial owner does not ownthe securities directly. Instead, as acustomer of the securities intermediary,the beneficial owner has an entitlementto the rights associated with ownershipof the securities.31

B. The Process of Soliciting Proxies

The following diagram illustrates theflow of proxy materials that typicallyoccurs during a solicitation. The stepsillustrated in the diagram anddescriptions of the relevant parties arediscussed below.



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32Commission rules provide, generally, that

proxy materials can be provided electronically toshareholders who have affirmatively consented toelectronic delivery. See Use of Electronic Media forDelivery Purposes, Release No. 337233 (Oct. 6,1995) [60 FR 53458]. In addition, the Commissionhas adopted the notice and access model thatpermits issuers to send shareholders a Notice ofInternet Availability of Proxy Materials in lieu ofthe traditional paper packages including the proxystatement, annual report and proxy card. See Noticeand Access Release, note 2, above. These twoconcepts work in tandem. Although an issuerelecting to send a Notice in lieu of a full packagegenerally would be required to send a paper copyof that Notice, it may send that Notice electronicallyto a shareholder who has provided an affirmativeconsent to electronic delivery.

33DTC provides custody and book-entry transferservices of securities transactions in the U.S. market

involving equities, corporate and municipal debt,money market instruments, American depositaryreceipts, and exchange-traded funds. In accordancewith its rules, DTC accepts deposits of securitiesfrom its participants (i.e.,broker-dealers and banks),

credits those securities to the depositingparticipants accounts, and effects book-entrymovements of those securities. For moreinformation about DTC, see http://www.dtcc.com/about/subs/dtc.php.

34Participants in DTC are usually broker-dealersor banks. Currently, there are approximately 400DTC participants. See http://www.dtcc.com/customer/directories/dtc/dtc.php.Otherjurisdictions have entities similar to the DTC. Forexample, Canada has the Clearing and DepositoryServices Inc., which is its national securitiesdepository and clearing and settlement entity.

35See UCC 8503(b) (1994) (a beneficial ownersproperty interest with respect to shares is a pro rataproperty interest in all interests in that financialasset held by the securities intermediary).

1. Distributing Proxy Materials toRegistered Owners

It is a relatively simple process for anissuer to send proxy materials toregistered owners because their namesand addresses are listed in the issuersrecords, which are usually maintained

by a transfer agent. As the left side ofDiagram 1 illustrates, proxy materialsare sent directly from the issuer throughits transfer agent or third-party proxyservice provider to all registered ownersin paper or electronic form.32 Registeredowners execute the proxy card and

return it to the issuers transfer agent orvote tabulator for tabulation.

2. Distributing Proxy Materials toBeneficial Owners

As the right side of Diagram 1illustrates, the process of distributingproxy materials to beneficial owners ismore complicated than it is forregistered owners. The indirect systemof ownership in the U.S. permitssecurities intermediaries to holdsecurities for their customers, and therecan be multiple layers of securitiesintermediaries leading to one beneficialowner. This potential for multiple tiers

of securities intermediaries presents anumber of challenges in the distributionof proxy materials.

a. The Depository Trust Company

In most cases, the chain of ownershipfor beneficially owned securities of U.S.companies begins with the DepositoryTrust Company (DTC), a registeredclearing agency acting as a securitiesdepository.33 Most large U.S. broker-

dealers and banks are DTC participants,meaning that they deposit securitieswith, and hold those securities through,DTC.34 DTCs nominee, Cede & Co.,appears in an issuers stock records asthe sole registered owner of securitiesdeposited at DTC. DTC holds thedeposited securities in fungible bulk,meaning that there are no specificallyidentifiable shares directly owned byDTC participants.35 Rather, each

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36NYSE-listed issuers are also required to providethe NYSE with notification of the record andmeeting dates. See NYSE Listed Company Manual 401.02.

37Exchange Act Rule 17Ad8 defines asecurities position listing as a list of thoseparticipants in the clearing agency on whose behalfthe clearing agency holds the issuers securities andof the participants respective positions in suchsecurities as of a specified date. 17 CFR 240.17Ad8(a).

38Pursuant to Exchange Act Rule 17Ad8, DTCmay charge issuers requesting securities positionlistings a fee designed to recover the reasonablecosts of providing the list. 17 CFR 240.17Ad8(b).An issuer or its agent, generally a transfer agent orauthorized third-party service provider, cansubscribe to DTCs service that allows thesubscriber to obtain the securities position listingonce or on a weekly, monthly, or more frequentbasis.

39Upon request, a registered clearing agency mustfurnish a securities position listing promptly toeach issuer whose securities are held in the nameof the clearing agency or its nominee. 17 CFR140.17Ad8(b).

40 In addition to the shares held in its DTCaccount, some participants may also own additionalsecurities at other securities depositories, throughcustodians, or in registered form.

41Rather than issue each participant a separateproxy to vote its shares, DTC drafts a single proxy(the omnibus proxy) granting to each of themultiple participants listed in the proxy the rightto vote the number of shares attributed to it in theomnibus proxy.

42As noted in recent litigation, the execution byDTC of an omnibus proxy is neither automatic norlegally required, but occurs as a matter of commonpractice. Kurz v. Holbrook, 989 A.2d 140, 170 (Del.Ch. 2010), revd on other grounds, Crown EMAKPartners, LLCv. Kurz, 992 A.2d 377 Del. 2010)(There does not appear to be any authoritygoverning when a DTC omnibus proxy is issued,

who should ask for it, or what event triggers it. Theparties tell me that DTC has no written policies orprocedures on the matter.).

43The search card must request: (1) The numberof beneficial owners; (2) the number of proxysoliciting materials and annual reports needed forforwarding by the intermediaries to their beneficialowner customers; and (3) the name and address ofany agent appointed by the bank or broker-dealerto process a request for a list of beneficial owners.The search card must be sent out at least 20business days prior to the record date unlessimpracticable, in which case it must be sent asmany days before the record date as practicable. 17CFR 240.14a13(a).

4417 CFR 240.14b1(b)(1).45A respondent bank is a bank that holds

securities through another bank that is the recordholder of those securities. See FacilitatingShareholder Communications, Release No. 3423276 (May 29, 1986) [51 FR 20504].

4617 CFR 240.14b2(b)(1) and 17 CFR 240.14b2(b)(2). Banks are required to execute omnibusproxies in favor of respondent banks. 17 CFR240.14b2(b)(2).

4717 CFR 240.14b1(b)(2) and 17 CFR 240.14b2(b)(3). The exchanges have rules that regulate theprocess and procedures by which member firmsmust transmit proxy materials to beneficial owners,collect voting instructions from beneficial owners,and vote shares held in the member firms name.See, e.g., NYSE Rules 450 through 460 and FINRARule 2251.

4817 CFR 240.14a13(a)(5). In addition, most ofthe exchanges have rules specifying the maximumrates that member firms may charge listed issuersas reasonable reimbursement. For example, theNYSE rule includes a schedule offair andreasonable rates of reimbursement of member

broker-dealers for their out-of-pocket expenses,including reasonable clerical expenses, incurred inconnection with issuers proxy solicitations ofbeneficial owners. NYSE Rule 465 SupplementalMaterial. The other exchanges have similar rules.See the discussion on proxy distribution fees inSection III.D below.

49Beneficial owners voting instructionssubmitted by telephone account for a very smallpercentage of votes received by proxy serviceproviders; for the shares of most beneficial ownerswho do not vote through a proprietary service forinstitutional investors, voting instructions areconveyed by paper or via the Internet, inapproximately the same proportion. See Broadridge2009 Key Statistics and Performance Ratings, note10, above.

participant owns a pro rata interest inthe aggregate number of shares of aparticular issuer held at DTC.Correspondingly, each customer of aDTC participantsuch as an individualinvestorowns a pro rata interest in theshares in which the DTC participant hasan interest.

Once an issuer establishes a date for

the shareholder meeting and a recorddate for shareholders entitled to vote onmatters presented at the meeting, itsends a formal announcement of thesedates to DTC, which DTC forwards to allof its participants.36 The issuer thenrequests from DTC a securities positionlisting 37 as of the record date, whichidentifies the participants having aposition in the issuers securities andthe number of securities held by eachparticipant.38 DTC must promptlyrespond by providing the issuer with alist of the number of shares in each DTCparticipants account as of the record

date.39

The record date securitiesposition listing establishes the numberof shares that a participant is entitled tovote through its DTC proxy.40

For each shareholder meeting, DTCexecutes an omnibus proxy 41transferring its right to vote the sharesheld on deposit to its participants.42 In

this manner, broker-dealer and bankparticipants in DTC obtain the right tovote directly the shares that they holdthrough DTC.

b. Securities Intermediaries: Broker-Dealers and Banks

Once the issuer identifies the DTCparticipants holding positions in its

securities, it is required to send a searchcard 43 to each of those participants, aswell as other securities intermediariesthat are registered owners, to determinewhether they are holding shares for

beneficial owners and, if so, the numberof sets of proxy packages needed to beforwarded to those beneficial owners.This process may involve multiple tiersof securities intermediaries holdingsecurities on behalf of other securitiesintermediaries, with search cardsdistributed to each securitiesintermediary in the chain of ownership.

Commission rules require broker-

dealers to respond to the issuer withinseven business days with theapproximate number of customers of the

broker-dealer who are beneficial ownersof the issuers securities.44 TheCommissions rules also require banksto follow a similar process except that

banks must respond to the issuer withinone business day with the names andaddresses of all respondent banks 45 andmust respond within seven businessdays with the approximate number ofcustomers of the bank who are

beneficial owners of shares.46Once the search card process is

complete, the issuer should know the

approximate number of beneficialowners owning shares through eachsecurities intermediary. The issuer mustthen provide the securitiesintermediary, or its third-party proxyservice provider, with copies of itsproxy materials (including, if

applicable, a Notice of InternetAvailability of Proxy Materials) forforwarding to those beneficial owners.The securities intermediary mustforward these proxy materials to

beneficial owners no later than fivebusiness days after receiving suchmaterials.47 Securities intermediariesare entitled to reasonable

reimbursement for their costs inforwarding these materials.48

Instead of receiving and executing aproxy card (as registered owners receiveand do), the beneficial owner receives avoting instruction form or VIF fromthe securities intermediary, whichpermits the beneficial owner to instructthe securities intermediary how to votethe beneficially owned shares. Althoughthe VIF does not give the beneficialowner the right to attend the meeting, a

beneficial owner typically can attendthe meeting by requesting theappropriate documentation from the

securities intermediary.C. Proxy Voting Process

Once the proxy materials have beendistributed to the registered owners and

beneficial owners of the securities, themeans by which shareholders vote theirshares differs. As Diagram 1 illustrates,registered owners execute the proxycard and return it to the vote tabulator,either by mail, by phone, or through theInternet. Beneficial owners, on the otherhand, indicate their voting instructionson the VIF and return it to the securitiesintermediary or its proxy serviceprovider, either by mail, by phone, or

through the Internet.49

The securitiesintermediary, or its proxy serviceprovider, tallies the voting instructions



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50As noted above, the securities intermediaryreceives the right to execute a proxy through theomnibus proxy executed in its favor by DTC and theother securities intermediaries in the chain ofownership through which it holds the securities.Although Rule 14b2(b)(3) [17 CFR 240.14b2(b)(3)]explicitly permits a bank to execute a proxy in favorof its beneficial owners, and nothing in our rulesprohibits a broker-dealer from doing so, it is ourunderstanding that these intermediaries usuallysolicit voting instructions from their beneficial

owner and execute proxies on behalf of theirbeneficial owners rather than executing proxies thatdelegate their voting authority to those beneficialowners. Beneficial owners may, however, request aproxy and attend the shareholder meeting. It is ourunderstanding that both banks and broker-dealerswill issue a proxy that the beneficial owner may useto attend a meeting if requested to do so.

51See NYSE Rule 452.52NYSE Rule 452 and NYSE Listed Issuer Manual

402.08(B). This prohibition does not apply toissuers registered under the Investment CompanyAct.

53E.g., Del. Code Ann. tit. 8, 219(a); Model Bus.Corp. Act 16.01(c).

54Section 3(a)(25) of the Exchange Act defines atransfer agent as any person who engages onbehalf of an issuer of securities or on behalf of itselfas an issuer of securities in (1) countersigning suchsecurities upon issuance, (2) monitoring theissuance of such securities with a view topreventing unauthorized issuance, (3) registeringthe transfer of securities, (4) exchanging orconverting such securities, or (5) transferring recordownership of securities by bookkeeping entrywithout the physical issuance of securitiescertificates. For more information about the role oftransfer agents, see http://www.stai.org.

55Exchange Act Rules 17Ad6, 17Ad7, 17Ad9,17Ad10, and 17Ad11 govern how transfer agents

acting for issuers of securities registered underSection 12 of the Exchange Act (or that would haveto be registered but for the exemption under Section12(g)(2)(b)(i) and (ii) of the Exchange Act) mustmaintain certain records of the issuer, including,but not limited to, the official record of ownership(i.e., the masterfile) and the official record of thenumber of securities issued and outstanding (i.e.,the control book or the registrar). These rules donot address the distribution of issuercommunications, including proxy materials, or theremittance of proxies or voting instructions. To alesser extent, the UCC, as adopted by states, alsogoverns certain aspects of transfer agent activityrelating to rights of issuers, shareholders, securitiesintermediaries, and those holding throughsecurities intermediaries, some of which relate tothe right to vote. The application of the UCC in thiscontext is beyond the scope of this release.

56

Persons acting as transfer agents for anysecurity registered under Section 12 of theExchange Act or which would be required to beregistered except for the exemption fromregistration provided by subsection (g)(2)(B) or(g)(2)(G) of Section 12 must register with theCommission (or, for transfer agents that are banks,with their appropriate regulatory agency) andpursuant to Section 17A of the Exchange Act mustcomply with Commission rules and regulations. 15U.S.C. 78q1(c)(1) and (d)(1).

57A single proxy service provider, BroadridgeFinancial Services, Inc. (Broadridge), states that itcurrently handles over 98% of the U.S. market forsuch proxy vote processing services. See http://www.broadridge.com/investor-communications/us/institutions/proxy-disclosure.asp.

58A Notice is sent pursuant to provisions in Rule14a16. 17 CFR 240.14a16.

59 Item 4 of 17 CFR 240.14a101. If similarservices are performed by employees of the issuer,however, the estimated costs of such services needto be disclosed only if the employees are speciallyengaged for the solicitation.

60See, e.g., Del. Code Ann. tit. 8, 231; ModelBus. Corp. Act 7.29.

that it receives from its customers. Asdiscussed in further detail in SectionIV.A of this release, the securitiesintermediary, or its proxy serviceprovider, then executes and submits tothe vote tabulator a proxy card for allsecurities held by the securitiesintermediarys customers.50

In certain situations, a broker-dealermay use its discretion to vote shares ifit does not receive instructions from the

beneficial owner of the shares.Historically, broker-dealers weregenerally permitted to vote shares onuncontested matters, includinguncontested director elections, withoutinstructions from the beneficialowner.51 The NYSE recently revised thisrule to prohibit broker-dealers fromvoting uninstructed shares with regardto any election of directors.52

D. The Roles of Third Parties in the

Proxy ProcessIssuers, securities intermediaries, and

shareholders often retain third parties toperform a number of proxy-relatedfunctions, including forwarding proxymaterials, collecting voting instructions,voting shares, soliciting proxies,tabulating proxies, and analyzing proxyissues.

1. Transfer Agents

Issuers are required to maintain arecord of security holders for state lawpurposes53 and often hire a transfer

agent 54 to maintain that record.55Transfer agents, as agents of the issuer,are obliged to confirm to a vote tabulator(if the transfer agent does not itselfperform the tabulation function) matterssuch as the amount of sharesoutstanding, as well as the identity andholdings of registered owners entitled tovote. Transfer agents are required to

register with the Commission, whichinspects and currently regulates some oftheir functions.56

2. Proxy Service Providers

To facilitate the proxy materialdistribution and voting process for

beneficial owners, securitiesintermediaries typically retain a proxyservice provider to perform a number ofprocessing functions, includingforwarding the proxy materials by mailor electronically and collecting votinginstructions.57 To enable the proxyservice provider to perform thesefunctions, the securities intermediarygives the service provider an electronicdata feed of a list of beneficial owners

and the number of shares held by eachbeneficial owner on the record date. Theproxy service provider, on behalf of theintermediary, then requests theappropriate number of proxy materialsets from the issuer for delivery to the

beneficial owners. Upon receipt of thepackages, the proxy service provider, on

behalf of the intermediary, mails either

the proxy materials with a VIF, or aNotice of Internet Availability of ProxyMaterials,58 to beneficial owners.Although we do not directly regulatesuch proxy service providers, ourregulations governing the proxy process-related obligations of securitiesintermediaries apply to the way inwhich proxy service providers performtheir services because they act as agentsfor, and on behalf of, thoseintermediaries and typically voteproxies on behalf of thoseintermediaries pursuant to a power ofattorney.

3. Proxy Solicitors

Issuers sometimes hire third-partyproxy solicitors to identify beneficialowners holding large amounts of theissuers securities and to telephoneshareholders to encourage them to votetheir proxies consistent with therecommendations of management. Thisoften occurs when there is a contestedelection of directors, and issuersmanagement and other persons arecompeting for proxy authority to votesecurities in the election (commonlyreferred to as a proxy contest). Inaddition, an issuer may hire a proxysolicitor in uncontested situations whenvoting returns are expected to beinsufficient to meet state quorumrequirements or when an importantmatter is being considered. Issuers andother soliciting persons are required todisclose the use of such services andestimated costs for such services in theirproxy statements.59

4. Vote Tabulators

Under many state statutes, an issuermust appoint a vote tabulator(sometimes called inspectors ofelections or proxy tabulators) to

collect and tabulate the proxy votes aswell as votes submitted by shareholdersin person at a meeting.60 We understandthat often the issuers transfer agent willact as the vote tabulator because most

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61 Id. As noted above, transfer agents, who alreadypossess the list of record owners, often tabulate thevote, so they possess the necessary information tomake this determination. It is our understandingthat, when the vote tabulator is an entity other thanthe transfer agent, the issuer or its transfer agenttypically will provide the vote tabulator with thelist of record owners to enable the vote tabulator tomake this determination.

62See Section V.A.1, below.

63 Id.64 Id.

65SIFMA and individual broker-dealers havesuggested several different methodologies as to howthis may be accomplished, but we do not believethere is consensus among the industry participantsor a standard operating procedure currently inplace.

66See Section III.A.1.b, below.67We understand that because securities are held

in fungible bulk, broker-dealers typically do notallocate loaned securities to a particular account.

68See Section IV.A.1, below.69See Section I.B.2.a, above, for a discussion of

securities position listings.

major transfer agents have theinfrastructure to communicate withregistered holders, proxy serviceproviders, and securities intermediaries,while also being able to reconcile theidentity of voters that are registeredowners and the number of votes to theissuers records. However, sometimesthe issuer will hire an independent

third party to perform this function,often to certify important votes. Thevote tabulator is ultimately responsiblefor determining that the correct numberof votes has been submitted by eachregistered owner.61 In addition, proxiessubmitted by securities intermediariesthat are not registered owners, but have

been granted direct voting rightsthrough DTCs omnibus proxy, arereconciled with DTCs securitiesposition listing. Although theCommission does regulate transferagents (which often serve as votetabulators) in their roles as transfer

agents, the Commission does notcurrently regulate vote tabulators or thefunction of tabulating proxies bytransfer agents.

5. Proxy Advisory Firms

Institutional investors typically ownsecurities positions in a large number ofissuers. Therefore, they are presentedannually with the opportunity to voteon many matters and often mustexercise fiduciary responsibility invoting.62 Some institutional investorsmay retain an investment adviser tomanage their investments, and may alsodelegate proxy voting authority to thatadviser. To assist them in their votingdecisions, investment advisers (orinstitutional investors if they retainvoting authority) frequently hire proxyadvisory firms to provide analysis andvoting recommendations on mattersappearing on the proxy. In some cases,proxy advisory firms are given authorityto execute proxies or voting instructionson behalf of their client. Some proxyadvisory firms also provide consultingservices to issuers on corporategovernance or executive compensationmatters, such as helping to develop anexecutive compensation proposal to be

submitted for shareholder approval.Some proxy advisory firms may alsoqualitatively rate or score issuers, basedon judgments about the issuers

governance structure, policies, andpractices. As discussed in more detailelsewhere in this release, some of theactivities of a proxy advisory firm canconstitute a solicitation, which isgoverned by our proxy rules.63 Some,

but not all, proxy advisory firmsoperating in our markets are currentlyregistered with us as investment

advisers.64III. Accuracy, Transparency, andEfficiency of the Voting Process

Investor and issuer interests may beundermined when perceived defects inthe proxy systemor uncertaintiesabout whether there are any suchdefectsare believed to impair itsaccuracy, transparency, and cost-efficiency. Because even the perceptionof such defects can lead to lack ofconfidence in the proxy process, weseek to explore concerns that have beenexpressed about the accuracy,transparency, and efficiency of thatprocess and ways in which thoseconcerns might be addressed.

A. Over-Voting and Under-Voting

On occasion, vote tabulators(including transfer agents acting in thatcapacity) receive votes from a securitiesintermediary that exceed the number ofshares that the securities intermediary isentitled to vote. The extent to whichsuch votes are accepted depends oninstructions from the issuer, state law,and the vote tabulators internalpolicies. For example, it is ourunderstanding that some vote tabulators

accept votes from a DTC participant ona first-inbasis up to the aggregateamount indicated in DTCs recordsthat is, once the votes cast by theparticipant exceed the number ofpositions indicated on the securitiesposition listing, the vote tabulator willrefuse to accept any votes subsequentlyremitted. Conversely, other votetabulators, we understand, refuse toaccept any votes from a securitiesintermediary if the aggregate number ofvotes submitted exceeds the votetabulators records for that intermediary.

In an attempt to address issuers

concerns about the potential for over-voting, securities intermediaries andtheir service providers haveimplemented systems that compare thenumber of votes submitted by asecurities intermediary to its ownershippositions as reflected in DTCs recordsand notify that securities intermediarywhen it has submitted votes in excess ofits ownership positions. The securitiesintermediary may then adjust its vote to

reflect the correct number of votesbefore the service provider submits thatvote to the vote tabulator.65 Thecorrected information is then sent to thevote tabulator. The means by whichsecurities intermediaries reconcile thesedifferences has raised some concernregarding the accuracy of the vote,including whether the votes are being

allocated to the beneficial owners in thecorrect amounts.

1. Imbalances in Broker Votes

For securities held at DTC, a DTCparticipant may vote only the number ofsecurities held by that participant in itsDTC account on the record date for ashareholder meeting. Sometimes thenumber of securities of a particularissuer held in the DTC participantsaccount will be less than the number ofsecurities that the DTC participant hascredited in its own books and records toits customers accounts. Although theremay be many reasons why the numberof securities held by a broker-dealer atDTC does not match the total number ofsecurities credited to the broker-dealerscustomers accounts, as discussed inmore detail below, this situationprincipally arises in connection withlending transactions and fails todeliver 66 in the clearance andsettlement system.

Because of the way broker-dealerstrack securities lending transactions,67 ifall of a broker-dealers customersowning a particular issuers securitiesactually voted, the broker-dealer mayreceive voting instructions for more

securities than it is entitled to vote.Moreover, the existing clearance andsettlement system was not designed toassign particular shares of a security toa particular investor, due to netting andholding securities in fungible bulk.68Thus, it is not currently possible tomatch a particular investors vote to aspecific securities position held at asecurities depository. When a broker-dealer has fewer positions or sharesreflected on the securities positionlisting 69 than it has reflected on its

books and records, the broker-dealermust determine if and how it should

allocate the votes it has among itscustomer and proprietary accounts and



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70A broker-dealer must maintain possession andcontrol of all fully-paid and excess marginsecurities. 17 CFR 240.15c33(b)(1).

71When borrowing fully-paid securities,Exchange Act Rule 15c33(b)(3) requires, amongother things, that a broker-dealer enter into aseparate written agreement with the customer andprovide the customer with a schedule of thesecurities actually borrowed as well as the collateralprovided to the customer. 17 CFR 240.15c33(b)(3).

72See Master Securities Lending Agreement at 6,available atwww.sifma.org/services/stdforms/pdf/master_sec_loan.pdf.

73 If an institutional lender lends out portfoliosecurities after the record date for a particularshareholder vote, the lender would normally retainthe right to vote the proxies for that particularshareholder vote.

74 If the lending broker-dealer attempts to recallthe loan, the borrowing broker-dealer may not beable to return the securities in a timely mannerbecause, among other things, it may have reloanedor sold the security to another party and is unableto obtain shares to return to the lending broker-dealer.

75Fails to deliver in all equity securities havedeclined significantly since the adoption of InterimFinal Temporary Rule 204T in October 2008. SeeAmendments to Regulation SHO, Release No. 3458773 (Oct. 14, 2008) [73 FR 61706]. See alsoMemorandum from the Staff Re: Impact of RecentSHO Rule Changes on Fails to Deliver, Nov. 4, 2009,available athttp://www.sec.gov/spotlight/shortsales/oeamemo110409.pdf(stating, amongother things, that the average daily number ofaggregate fails to deliver for all securities decreasedfrom 2.21 billion to 0.25 billion for a total declineof 88.5% when comparing a pre-Rule to post-Ruleperiod); Memorandum from the Staff Re: Impact ofRecent SHO Rule Changes on Fails to Deliver, Nov.26, 2008, available athttp://www.sec.gov/comments/s7-30-08/s73008-37.pdf; Memorandumfrom the Staff Re: Impact of Recent SHO RuleChanges on Fails to Deliver, Mar. 20, 2009,available athttp://www.sec.gov/comments/s7-30-08/s73008-107.pdf.

76NSCC nets securities in its Continuous NetSettlement system pursuant to rules andprocedures approved by the Commission. For moreinformation on NSCCs rules and procedures, seewww.dtcc.com/legal/rules_proc/nscc_rules.pdf.SeeSection IV.A.1, below, for additional informationabout the role of NSCC.

77For example, broker-dealers may fail to deliversecurities because of: (1) Delays by customersdelivering to the broker-dealer the shares beingsold; (2) a broker-dealers inability to purchase orborrow shares needed for settlement; or (3) a broker-

dealers inability to obtain transfer of title ofsecurities in time for settlement. For moreinformation on fails to deliver in the U.S. clearanceand settlement system, see Short Sales, Release No.3450103 (July 28, 2004) [69 FR 48008] andAmendments to Regulation SHO, Release No. 3460388 (July 27, 2009) [74 FR 38266].

78 If a broker-dealer fails to deliver securities toNSCC, NSCC allocates this fail to a broker-dealermember that is due to receive the securities.

79For more information on proxy processing andbroker-dealers reconciliation and allocationprocesses, see Briefing Paper: Roundtable on ProxyVoting Mechanics, (May 24, 2007), available athttp://www.sec.gov/spotlight/proxyprocess/proxyvotingbrief.htm(Roundtable Briefing Paper),or Unofficial Transcript of the RoundtableDiscussion on Proxy Voting Mechanics, (May 24,2007), available athttp://www.sec.gov/news/openmeetings/2007/openmtg_trans052407.pdf

then reconcile the actual votinginstructions it receives with the numberof securities the broker-dealer ispermitted to vote with the issuer.Depending on a variety of factors, thisprocess can lead to over-voting orunder-voting by beneficial owners.

a. Securities Lending

When a customer purchases shares onmargin, a portion of the securities in thecustomers account may be used tocollateralize the margin loan.70 As partof the customers margin agreement, thecustomer typically agrees to allow the

broker-dealer to use those securities toraise money to fund the margin loan.Consequently, broker-dealers may lendout customers margin securities. Inaddition, broker-dealers may enter intostock loan arrangements with investors(typically institutional investors or other

broker-dealers) whereby the broker-dealer borrows the investors fully-paid

securities.71

Stock loan agreements typicallytransfer to the borrower the right to votethe borrowed securities.72 Thus, forexample, when an institutional investor,such as a fund, lends its portfoliosecurities to a borrower, the right to votethose securities also transfers to the

borrower.73 As a result, the institutionalinvestor that lends its portfoliosecurities generally loses its ability tovote those securities, unless and untilthe loan is terminated and the securitiesare returned before the record date inquestion.74

Even though a broker-dealer has the

ability to lend its customers marginsecurities pursuant to a stock loanagreement, because shares are held infungible bulk, it may not be practical toinform a customer when an actual loanhas been made and it may be unclearwhich lending investor has lost the right

to vote. Therefore, a customer mayexpect to vote all of its securities

because it does not necessarily knowwhether its securities have in fact beenloaned. If the lending broker-dealer doesnot allocate a certain number of sharesto a lending investor as having been

borrowed, but instead sends a VIFindicating that the lending investor has

the right to vote all of the securitiescredited to its account, including theloaned margin securities, both thelending and borrowing broker-dealersmay submit voting instructions fromtwo customers for a single share, whichmay give rise to an over-votingsituation.

b. Fails to Deliver

An imbalance between a securitiesintermediarys position reflected on thesecurities position listing and theposition reflected in its own books andrecords may also occur because of failsto deliver in the clearance andsettlement system.75 Every day theNSCC, a registered clearing agency, netseach of its members trades to a single

buy or sell obligation for each issuetraded.76 Because NSCC acts as a centralcounterparty for its members trades, itsmembers are obligated to deliversecurities to, and entitled to receivesecurities from, NSCC at settlement, andnot to or from other broker-dealers.Although the delivery of securitiesusually occurs as expected on thesettlement date, there are occasionswhen broker-dealers fail to make timelydelivery, often for reasons outside of

their control.77

Pursuant to NSCC rules, if an NSCCbroker-dealer member fails to deliverthe securities it owes to NSCC on thesettlement date, NSCC will allocate thisfail to one of many contra-side broker-dealers due to receive securities withouttrying to attribute the fail to the specific

broker-dealer that originally traded withthe broker-dealer that failed to deliver.78

The broker-dealer to which the fail isallocated will not receive the securitiesand will not be credited with thisposition at DTC until delivery isactually made.

Even though the broker-dealer has notactually received the securities, the

broker-dealer usually will credit itscustomers accounts with the purchasedsecurities on settlement date. If the

broker-dealers fail-to-receive positioncontinues through the record date for acorporate election, DTC may not yetrecognize the broker-dealersentitlement to vote this position. As

with loaned securities, the broker-dealermay still try to allocate votes to all ofits customers that its records reflect asowning those securities, even thoughDTC has not credited the brokersaccount with those securities or withthe corresponding right to vote thosesecurities through DTC.

2. Current Reconciliation and AllocationMethodologies Used by Broker-DealersTo Address Imbalances

Because the ownership of individualshares held beneficially is not tracked inthe U.S. clearance and settlementsystem, when imbalances occur, broker-dealers must decide which of theircustomers will be permitted to vote andhow many shares each customer will bepermitted to vote. Neither our rules norSRO rules currently mandate that areconciliation be performed, or the useof a particular reconciliation orallocation methodology. Broker-dealershave developed a number of differentapproaches as to how votes areallocated among customer accounts.79

http://www.sifma.org/services/stdforms/pdf/master_sec_loan.pdfhttp://www.sifma.org/services/stdforms/pdf/master_sec_loan.pdfhttp://www.sifma.org/services/stdforms/pdf/master_sec_loan.pdfhttp://www.sifma.org/services/stdforms/pdf/master_sec_loan.pdfhttp://www.sifma.org/services/stdforms/pdf/master_sec_loan.pdfhttp://www.sifma.org/services/stdforms/pdf/master_sec_loan.pdfhttp://www.sec.gov/spotlight/shortsales/oeamemo110409.pdfhttp://www.sec.gov/spotlight/shortsales/oeamemo110409.pdfhttp://www.sec.gov/comments/s7-30-08/s73008-37.pdfhttp://www.sec.gov/comments/s7-30-08/s73008-37.pdfhttp://www.sec.gov/comments/s7-30-08/s73008-37.pdfhttp://www.sec.gov/comments/s7-30-08/s73008-107.pdfhttp://www.sec.gov/comments/s7-30-08/s73008-107.pdfhttp://www.sec.gov/comments/s7-30-08/s73008-107.pdfhttp://www.dtcc.com/legal/rules_proc/nscc_rules.pdfhttp://www.dtcc.com/legal/rules_proc/nscc_rules.pdfhttp://www.dtcc.com/legal/rules_proc/nscc_rules.pdfhttp://www.dtcc.com/legal/rules_proc/nscc_rules.pdfhttp://www.dtcc.com/legal/rules_proc/nscc_rules.pdfhttp://www.sec.gov/spotlight/proxyprocess/proxyvotingbrief.htmhttp://www.sec.gov/spotlight/proxyprocess/proxyvotingbrief.htmhttp://www.sec.gov/news/openmeetings/2007/openmtg_trans052407.pdfhttp://www.sec.gov/news/openmeetings/2007/openmtg_trans052407.pdfhttp://www.sec.gov/news/openmeetings/2007/openmtg_trans052407.pdfhttp://www.sec.gov/news/openmeetings/2007/openmtg_trans052407.pdfhttp://www.dtcc.com/legal/rules_proc/nscc_rules.pdfhttp://www.sec.gov/comments/s7-30-08/s73008-37.pdfhttp://www.sec.gov/comments/s7-30-08/s73008-37.pdfhttp://www.sec.gov/comments/s7-30-08/s73008-107.pdfhttp://www.sec.gov/comments/s7-30-08/s73008-107.pdfhttp://www.sifma.org/services/stdforms/pdf/master_sec_loan.pdfhttp://www.sifma.org/services/stdforms/pdf/master_sec_loan.pdfhttp://www.sec.gov/spotlight/shortsales/oeamemo110409.pdfhttp://www.sec.gov/spotlight/shortsales/oeamemo110409.pdfhttp://www.sec.gov/spotlight/proxyprocess/proxyvotingbrief.htmhttp://www.sec.gov/spotlight/proxyprocess/proxyvotingbrief.htmhttp://www.sec.gov/news/openmeetings/2007/openmtg_trans052407.pdfhttp://www.sec.gov/news/openmeetings/2007/openmtg_trans052407.pdf


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(Roundtable Transcript). The term allocationrefers to the process by which a broker-dealerdetermines which of its customers will be allowedto vote and how many shares will be allotted toeach of those customers.

80Not all broker-dealers have developed policiesand procedures to address the reconciliation andallocation of votes among their customers becausehistorically broker-dealers have usually had enoughshares on deposit at DTC to provide a vote to allcustomers wanting to vote.

81Roundtable Transcript, note 79, above.82 Id.

83 Id.84 Id.85The aggregate number of shares the broker-

dealer is entitled to vote may constitute more thanjust its position on deposit at DTC. For example, thebroker-dealer may have additional securities ondeposit at a foreign depository or in certificatedform.

86Roundtable Transcript, note 79, above. 87 Id.

We understand that these approachesare often influenced by whether the

broker-dealers customers are primarilyretail or institutional investors.

Most broker-dealers have adopted areconciliation method to balance theaggregate number of shares they areentitled to vote with the aggregate

number of shares credited to customerand proprietary accounts.80 The primaryreconciliation methods are: (1) Pre-mailing reconciliation (pre-reconciliation); (2) post-mailingreconciliation (post-reconciliation);and (3) a hybrid form of the pre-reconciliation and post-reconciliationmethods.81 These methods aredescribed in more detail below. If the

broker-dealer finds that it is holdingfewer shares at DTC than it has creditedto customer and proprietary accounts, itmay choose to give up its own votes, asrepresented by shares credited to itsproprietary accounts, by allocating someor all of those votes to its customers, orit may choose to allocate to itscustomers only the voting rightsattributable to customer accounts.

a. Pre-Reconciliation Method

A broker-dealer using the pre-reconciliation method compares thenumber of shares it holds in aggregateat DTC and elsewhere with its aggregatecustomer account position before itsends VIFs to its customers.82 If theaggregate number of shares it holds isless than the number of shares the

broker-dealer has credited to itscustomer accounts, then the broker-dealer will determine which of itscustomers will be permitted to vote andhow many votes will be allocated toeach of those customers. Broker-dealersusing the pre-reconciliation methodrequest voting instructions from theircustomers with respect to only thosecustomer positions to which votes have

been allocated. We understand thatmost broker-dealers give customers withfully-paid securities and excess marginsecurities first priority in thedistribution of votes. It is also ourunderstanding that broker-dealers usingthe pre-reconciliation method tend to

have more institutional customers thanretail customers.83

Broker-dealers using the pre-reconciliation method have indicatedthat this method ensures that the votescustomers cast will be counted.84 On theother hand, given that some broker-dealers have estimated that only 20% to30% of their retail customers usually

vote, some believe that pre-reconciliation may result in an under-votebecause investors allocated theability to vote may not do so, and otherinvestors who do vote may be allocateda number of votes fewer than thenumber of shares they beneficially own.In addition, some broker-dealers haveindicated that the pre-reconciliationmethod is more expensive than the post-reconciliation method because post-reconciliation only needs to beperformed when a broker-dealerreceives voting instructions in excess ofthe number of shares that it holds.

b. Post-Reconciliation Method

A broker-dealer using the post-reconciliation method compares itsaggregate position at DTC andelsewhere85 with its actual aggregatecustomer account position only afterreceiving VIFs from its customers.Broker-dealers using the post-reconciliation method request votinginstructions from their customers withrespect to all shares credited to theircustomer accounts, including for thoseshares that may have been purchased onmargin, loaned to another entity, or notreceived because of a fail to deliver. Weunderstand that broker-dealers using thepost-reconciliation method tend to haveprimarily retail customers rather thaninstitutional customers.86

In the event that a broker-dealerreceives voting instructions from itscustomers in excess of its aggregatesecurities position, the broker-dealeradjusts its vote count prior to casting itsvote with the issuer. The manner inwhich the adjustment is made variesamong broker-dealers. Some firmssimply reduce the number ofproprietary position votes cast. Othersallocate fewer votes to customers with

securities purchased on margin or onloan.

Because of the low level ofparticipation by retail voters, some ofthe broker-dealers using the post-

reconciliation method have indicated tothe Commission that the number ofover-vote situations is not a significantproblem and can be addressed in anumber of ways, including, but notlimited to, the broker-dealer using itsproprietary positions to redress anyimbalance. The costs associated withthe post-reconciliation method are

generally considered to be less thanthose associated with the pre-reconciliation method because the

broker-dealer does not have to gothrough the costly process of allocatingvotes among customers unless itscustomers remit VIFs for more sharesthan the broker-dealer is entitled to votein the aggregate.

c. Hybrid Reconciliation Methods

Some broker-dealers have developedhybrid reconciliation methods that useaspects of both pre- and post-reconciliation methods. For example, inone hybrid reconciliation method, a

broker-dealer will allocate votes to all ofits customers with fully-paid securities

but will also allow each margin accountcustomer to instruct the broker-dealerthat it would like to vote its shares. The

broker-dealer will allocate any sharesnot needed to cover fully-paid accountholders to those margin customers whoindicated they wanted to vote, therebygiving these margin customers priorityover other margin customers.87

3. Potential Regulatory Responses

Broker-dealers have indicated to theCommission staff that most broker-

dealers select an allocation andreconciliation method that bestaccommodates their particular customer

base and best advances the firmsparticular business strategy. Forexample, those firms focusing on retailcustomers generally will have morecustomer accounts owning smalleramounts of securities and castingrelatively few votes and, as a result, mayprefer the post-reconciliation methodover the pre-reconciliation method.

The customers of a broker-dealer maynot be aware of the allocation andreconciliation method used by the firm.

We are interested in receiving views onwhether it would be helpful to investorsif broker-dealers publicly disclosed theallocation and reconciliation methodused by the firm during each proxyseason, as well as the likely effect of thatmethod on whether the customersvoting instructions would actually bereflected in the broker-dealers proxysent to the vote tabulator. Suchdisclosure could be in writing andprovided to customers upon opening an



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88Some securities intermediaries may not havesufficient shares on deposit at DTC to allocate avote to every share position credited to everycustomers account. In those cases, the securitiesintermediary may have to allocate a specificnumber of votes to some customers that is fewerthan the number of shares credited to thosecustomers accounts. See Section III.A, above, for amore in-depth discussion of why and howsecurities intermediaries reconcile and allocatevotes to their customers.

89See, e.g., Adam Jones, Riddle of the MissingUnilever Votes Solved, Financial Times, Aug. 15,

2003;Mum on a Recount,

Pensions &Investments, Aug. 10, 2009, available athttp://

www.pionline.com/article/20090810/PRINTSUB/308109996;Meagan Thompson-Mann, PolicyBriefing No. 3Voting Integrity: Practices forInvestors and the Global Proxy Advisory Industry,The Millstein Center for Corporate Governance andPerformance, Mar. 2, 2009, at 1011 (Thompson-Mann Policy Briefing).

90The Organisation of Economic Co-operationand Development (OECD), consisting primarily ofjurisdictions with high income and developedmarkets, has voiced similar concerns about this lackof transparency in several jurisdictions andrecommends addressing it through legal andregulatory changes. Corporate Governance: ASurvey of OECD Countries (2004) (OECD Survey).

account and on an annual basis, andmade available to the general public onthe broker-dealers Web site. Thisdisclosure could help investors todecide if a particular broker-dealersmethod suits their investment goals.Alternatively, we are interested inreceiving views on whether it would be

beneficial to investors if broker-dealers

were required to use a particularreconciliation method.

Given the lack of empirical data onwhether over-voting or under-voting isoccurring and if so, to what extent, wealso would like to receive views onwhether investors, issuers, and theproxy system overall would benefit fromhaving additional data from proxyparticipants regarding over-voting andunder-voting to determine whetherfurther regulatory action should beconsidered. This data would allow us todetermine the scope of the problem, ifany, and give us detailed information

that would further assist us indetermining whether current regulationsare effective or additional regulation isappropriate. Such information may alsoindicate if one particular method isworking better for investors and themarket than other methods.

4. Request for Comment

What are the advantages ordisadvantages of the various methods ofallocation or reconciliation currentlyused by securities intermediaries andthe effectiveness of such methods?

Is there any evidence, statistical,anecdotal or otherwise, of material over-

voting or under-voting, and if so, whatis the size and impact of over-voting orunder-voting? For example, is there anyevidence that over-voting or under-voting has determined the outcome of avote or materially changed the votingresults?

Are there any concerns caused byover-voting or under-voting that are notdescribed above? Are there particularconcerns regarding the impact of eitherover-voting or under-voting with respectto specific types of voting decisions,such as merger transactions, the electionof directors where a majority vote is

required, or shareholder advisory votesregarding executive compensation?What, if any, alternatives should weconsider to the current system, andwhat would be the costs and benefits ofany alternative process?

Would requiring broker-dealers todisclose their allocation andreconciliation process adequatelyaddress the concerns related to over-voting and under-voting by beneficialowners?

Would information about voteallocation and reconciliation methods

be helpful to investors or adequatelyaddress any concerns related to thoseprocesses?

Would a particular type of voteallocation and reconciliation method

better protect investors interests? Do the varying methods of vote

allocation affect the potential to auditvotes cast by beneficial holders?

Should investors who have fullypaid for their securities be allocatedvoting rights over those who purchasedthe securities on margin? Should

beneficial holders be allocated votingrights over broker-dealer proprietaryaccounts?

Should brokers be required todisclose the effect of share lendingprograms on the ability of retailinvestors to cast votes?

Does the current system ofsettlement and clearance of securitiestransactions in the U.S. create anyproblems or inefficiencies in the proxy

process in regard to matters other thanover-voting or under-voting? If so, whatare they, and what steps should weconsider in order to address them?

B. Vote Confirmation

1. Background

A number of market participants,including both individual andinstitutional investors, have raisedconcerns regarding the inability toconfirm whether an investors shareshave been voted in accordance with theinvestors instructions. As discussedmore fully in Section II, beneficial

owners cast their votes through asecurities intermediary, which, in turn,uses a proxy service provider to collectand send the votes to the votetabulator.88 Beneficial owners,particularly institutional investors, oftenwant or need to confirm that their voteshave been timely received by the votetabulator and accurately recorded.Similarly, securities intermediarieswant to be able to confirm to theircustomers that their votes have beentimely received and accuratelyrecorded. Issuers also want to be able toconfirm that the votes that they receive

from securities intermediaries on behalfof beneficial owners properly reflect thevotes of those beneficial owners. Weunderstand that, on occasion, errors

have been made when a third party failsto timely submit votes on behalf of itsclients.89

The inability to confirm votinginformation is caused in part because noone individual participant in the votingprocessneither issuers, transfer agents,vote tabulators, securitiesintermediaries, nor third party proxy

service providerspossesses all of theinformation necessary to confirmwhether a particular beneficial ownersvote has been timely received andaccurately recorded. A number ofmarket participants contend that someproxy service providers, transfer agents,or vote tabulators are unwilling orunable to share voting information witheach other or with investors andsecurities intermediaries. There arecurrently no legal or regulatoryrequirements that compel these entitiesto share information with each other inorder to allow for vote confirmations.

The inabilit

Documents

Proxy Access Concept Release