United States: Proxy Plumbing Is Still A Challenge—will We See Improvement In 2022?

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In 2010, the SEC issued a proxy plumbing concept release that sought public comment on whether there were improvements necessary to promote greater efficiency and transparency in the U.S. proxy system and to enhance the accuracy and integrity of shareholder votes. One category of issues addressed in the release was transparency and accuracy of the voting process-issues such as overvoting and undervoting, which can occur when there is a mismatch between the share amounts shown on the books of the voting intermediary and amounts credited for the account of the intermediary on the company's books; the need for vote confirmation through contact among the vote tabulators, solicitors and others; and proxy voting by institutional shareholders, which may loan shares but may not be able to recall the shares in time to vote them. It was expected, depending on the public reaction, that the SEC would propose new rules tackling those issues, but no action was taken. (See this Cooley News Brief.)

In the last several years, proxy plumbing has reemerged as a serious problem to be addressed. However, while issues related to proxy plumbing have long been identified, actually addressing them has turned out to be profoundly difficult. The IAC took up this issue in 2018 and, in 2019, made a number of recommendations, including a recommendation that the SEC require that confirmations be sent to each individual or institution with final voting authority over any shares indicating that the shares were voted as instructed and, if not, the reason why not. The recommendations argued that this information "would increase confidence in the proxy system and provide incentives for those involved to eliminate routine problems that prevent proxies or voting instructions from being implemented as shareholders direct. Inquiries from investors when instructions are not implemented will organically generate root-causes analyses of the reasons for that failure. Those analyses will provide the foundation for a continuous cycle of system improvements over time." (See this PubCo post.)

At the SEC's proxy process roundtable held in 2018, proxy voting mechanics were actually a hot topic-described by one panelist as "the most boring, least partisan and, honestly, the most important" of the roundtable topics. The SEC staff moderator opened the panel on proxy plumbing by observing that Securities Transfer Association found that, out of 183 meetings its members had tabulated in the past year, 130 had overvoting problems. Although most were ultimately reconciled, the question remained as to why the overvoting occurred. Many of the issues related to the inaccuracy of vote counts-overvoting, undervoting, empty voting, uncertainties regarding the accuracy of vote totals, and difficulties associated with vote counting, confirmation and reconciliation-arise out of the decision made decades ago to move to a system of share immobilization, under which most shares are held in street name and reflected in positions listed at a centralized depositary (DTC), where they are treated as a "fungible mass of shares not traceable to any individual." While the system makes share transfers easier, the arrangement is itself complex, compounded by many layers of intermediation-the transfer agent, the custodian and perhaps several subcustodians-that can complicate and obscure proxy voting and lead to mismatches that ultimately disqualify votes

Anecdotally, panelists described instances of overvoting, delays in counting of registered shares, breaks in the chain of custody leading to separation of necessary documentation and resulting disqualification of votes, and shares not counted because of conflicts on the face of the omnibus proxy. In one example given, a DTC participant had overvoted and, in trying to correct the overvote in the system, was told not to worry about it because it's all a fungible mass and not everyone votes. (So much for accuracy.) In another example, a slight change in the name of the voting custodian-not of the beneficial owner-led to that large beneficial owner's shares not being voted-and the problem not being caught-for ten years. Where share lending is involved, questions arise regarding who has the right to vote the shares, with the result that not all shares are voted in accordance with the instructions of the beneficial owner. What's more, sometimes beneficial owners whose shares have been lent are still sometimes sent a VIF even when, as a technical matter, the shares are no longer on the broker's books, leading to overvoting potential. In some cases, the level of overvoting can be in the millions. To illustrate the importance of these problems, participants discussed various issues associated with obtaining an accurate vote count in connection with a recent proxy contest involving over 2.5 billion shares, where the difference in the vote total came down to ¼ of 1%. In that contest, the final results were not available for two months. Moreover, no reconciliation was done prior to announcement of the preliminary results. That narrow difference made the voting issues more significant, but the panelists confirmed that these issues were omnipresent, even if not determinative in other cases. (See this PubCo post.)