Document ID: SEC-2010-1101-0001
Agency: sec
Document Type: Proposed Rule
Title: Concept Release on U.S. Proxy System
Posted Date: 2010-07-22T04:00Z

[Federal Register Volume 75, Number 140 (Thursday, July 22, 2010)]
[Proposed Rules]
[Pages 42982-43020]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-17615]

[[Page 42981]]

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Part V

Securities and Exchange Commission

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17 CFR Parts 240, 270, 274, et al.

 Concept Release on the U.S. Proxy System; Proposed Rule

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

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 270, 274, and 275

[Release Nos. 34-62495; IA-3052; IC-29340; File No. S7-14-10]
RIN 3235-AK43

Concept Release on the U.S. Proxy System

AGENCY: Securities and Exchange Commission.

ACTION: Concept release; request for comments.

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SUMMARY: The Commission is publishing this concept release to solicit 
comment on various aspects of the U.S. proxy system. It has been many 
years since we conducted a broad review of the system, and we are aware 
of industry and investor interest in the Commission's consideration of 
an update to its rules to promote greater efficiency and transparency 
in the system and enhance the accuracy and integrity of the shareholder 
vote. Therefore, we seek comment on the proxy system in general, 
including the various issues raised in this release involving the U.S. 
proxy system and certain related matters.

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

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/concept.shtml);
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-14-10 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-14-10. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/concept.shtml). Comments 
are also available for Web site viewing and copying in the Commission's 
Public Reference Room, 100 F Street, NE., Washington, DC 20549, on 
official business days between the hours of 10 a.m. and 3 p.m. All 
comments received will be posted without change; we do not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Raymond A. Be or Lawrence A. 
Hamermesh, Division of Corporation Finance, at (202) 551-3500, Susan M. 
Petersen or Andrew Madar, Division of Trading & Markets, at (202) 551-
5777, Holly L. Hunter-Ceci or Brian P. Murphy, Division of Investment 
Management, at (202) 551-6825, or Joshua White, Division of Risk, 
Strategy, and Financial Innovation, at (202) 551-6655, 100 F Street, 
NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: 
I. Introduction
II. The Current Proxy Distribution and Voting Process
    A. Types of Share Ownership and Voting Rights
    1. Registered Owners
    2. Beneficial Owners
    B. The Process of Soliciting Proxies
    1. Distributing Proxy Materials to Registered Owners
    2. Distributing Proxy Materials to Beneficial Owners
    a. The Depository Trust Company
    b. Securities Intermediaries: Broker-Dealers and Banks
    C. Proxy Voting Process
    D. The Roles of Third Parties in the Proxy Process
    1. Transfer Agents
    2. Proxy Service Providers
    3. Proxy Solicitors
    4. Vote Tabulators
    5. Proxy Advisory Firms
III. Accuracy, Transparency, and Efficiency of the Voting Process
    A. Over-Voting and Under-Voting
    1. Imbalances in Broker Votes
    a. Securities Lending
    b. Fails To Deliver
    2. Current Reconciliation and Allocation Methodologies Used by 
Broker-Dealers To Address Imbalances
    a. Pre-Reconciliation Method
    b. Post-Reconciliation Method
    c. Hybrid Reconciliation Methods
    3. Potential Regulatory Responses
    4. Request for Comment
    B. Vote Confirmation
    1. Background
    2. Potential Regulatory Responses
    3. Request for Comment
    C. Proxy Voting by Institutional Securities Lenders
    1. Background
    2. Lack of Advance Notice of Meeting Agenda
    a. Background
    b. Potential Regulatory Responses
    c. Request for Comment
    3. Disclosure of Voting by Funds
    a. Background
    b. Potential Regulatory Responses
    c. Request for Comment
    D. Proxy Distribution Fees
    1. Background
    a. Current Fee Schedules
    b. Notice and Access Model
    c. Current Practice Regarding Fees Charged
    2. Potential Regulatory Responses
    3. Request for Comment
IV. Communications and Shareholder Participation
    A. Issuer Communications With Shareholders
    1. Background
    2. Potential Regulatory Responses
    3. Request for Comment
    B. Means To Facilitate Retail Investor Participation
    1. Background
    2. Potential Regulatory Responses
    a. Investor Education
    b. Enhanced Brokers' Internet Platforms
    c. Advance Voting Instructions
    d. Investor-to-Investor Communications
    e. Improving the Use of the Internet for Distribution of Proxy 
Materials
    3. Request for Comment
    C. Data-Tagging Proxy-Related Materials
    1. Background
    2. Potential Regulatory Responses
    3. Request for Comment
V. Relationship Between Voting Power and Economic Interest
    A. Proxy Advisory Firms
    1. The Role and Legal Status of Proxy Advisory Firms
    2. Concerns About the Role of Proxy Advisory Firms
    a. Conflicts of Interest
    b. Lack of Accuracy and Transparency in Formulating Voting 
Recommendations
    3. Potential Regulatory Responses
    a. Potential Solutions Addressing Conflicts of Interest
    b. Potential Solutions Addressing Accuracy and Transparency in 
Formulating Voting Recommendations
    4. Request for Comment
    B. Dual Record Dates
    1. Background
    2. Difficulties in Setting a Voting Record Date Close to a 
Meeting Date
    3. Potential Regulatory Responses
    4. Request for Comment
    C. ``Empty Voting'' and Related ``Decoupling'' Issues
    1. Background and Reasons for Concern
    2. Empty Voting Techniques and Potential Downsides
    a. Empty Voting Using Hedging-Based Strategies
    b. Empty Voting Using Non-Hedging-Based Strategies
    3. Potential Regulatory Responses
    4. Request for Comment
VI. Conclusion

I. Introduction

    Regulation of the proxy solicitation process is one of the original 
responsibilities that Congress assigned to the Commission in 1934. The 
Commission has actively monitored the proxy process since receiving 
this

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authority and has considered changes when it appeared that the process 
was not functioning in a manner that adequately protected the interests 
of investors.\1\ In recent years, a number of our proxy-related 
rulemakings have been spurred by the Internet and other technological 
advances that enable more efficient communications. For example, we 
have adopted the ``notice and access'' model for the delivery of proxy 
materials,\2\ as well as rules to facilitate the use of electronic 
shareholder forums.\3\ Perceived deficiencies in the proxy distribution 
process have prompted other proxy-related rulemakings, such as rules to 
reinforce the obligation of issuers to distribute proxy materials to 
banks and brokers on a timely basis \4\ and to permit the 
``householding'' of proxy materials.\5\ We have also periodically 
revised our rules requiring certain types of disclosures in the proxy 
statement, such as information on executive compensation and corporate 
governance matters.\6\ We also have pending a proposal to adopt rules 
that would require, under certain circumstances, a company to include 
in its proxy materials a shareholder's, or group of shareholders', 
nominees for director.\7\
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    \1\ For a history of the Commission's efforts to regulate the 
proxy process since 1934, see Jill E. Fisch, From Legitimacy to 
Logic: Reconstructing Proxy Regulation, 46 Vand. L. Rev. 1129 (Oct. 
1993).
    \2\ 17 CFR 240.14a-16; Shareholder Choice Regarding Proxy 
Materials, Release No. 34-56135 (July 26, 2007) [72 FR 42222] 
(``Notice and Access Release''); Amendments to Rules Requiring 
Internet Availability of Proxy Materials, Release No. 33-9108 (Feb. 
22, 2010) [75 FR 9074].
    \3\ 17 CFR 240.14a-17; Electronic Shareholder Forums, Release 
No. 34-57172 (Jan. 18, 2008) [73 FR 4450]. These amendments 
clarified that participation in an electronic shareholder forum that 
could potentially constitute a solicitation subject to the proxy 
rules is exempt from most of the proxy rules if all of the 
conditions to the exemption are satisfied. In addition, the 
amendments state that a shareholder, issuer, or third party acting 
on behalf of a shareholder or issuer that establishes, maintains or 
operates an electronic shareholder forum will not be liable under 
the federal securities laws for any statement or information 
provided by another person participating in the forum. The 
amendments did not provide an exemption from Rule 14a-9 [17 CFR 
240.14a-9], which prohibits fraud in connection with the 
solicitation of proxies.
    \4\ See 17 CFR 14b-1 and 14b-2; Timely Distribution of Proxy and 
Other Soliciting Material, Release No. 34-33768 (Mar. 16, 1994) [59 
FR 13517].
    \5\ Delivery of Proxy Statements and Information Statements to 
Households, Release No. 33-7912 (Oct. 27, 2000) [65 FR 65736]. 
``Householding'' permits a securities intermediary to send only one 
copy of proxy materials to multiple accounts within the same 
household under specified conditions. Id.
    \6\ See, e.g., Proxy Disclosure Enhancements, Release No. 33-
9089 (Dec. 16, 2009) [74 FR 68334] and Executive Compensation and 
Related Person Disclosure, Release No. 33-8732A (Aug. 9, 2006) [71 
FR 53158].
    \7\ See Facilitating Shareholder Director Nominations, Release 
Nos. 33-9046, 34-60089, IC-287665 (June 10, 2009) [74 FR 29024].
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    During many of these previous proxy-related rulemakings, 
commentators raised concerns about the proxy system as a whole.\8\ In 
addition, the Commission's staff often receives complaints from 
individual investors about the administration of the proxy system.\9\ 
We believe that these concerns and complaints merit attention because 
they address a subject of considerable importance--the corporate 
proxy--which, given the wide dispersion of shareholders, is the 
principal means by which shareholders can exercise their voting rights.
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    \8\ See, e.g., Request for Rulemaking Concerning Shareholder 
Communications, April 12, 2004-Business Roundtable Petition 4-493 
(``BRT Petition''); comment letter to Release No. 33-9046, note 7, 
above, from Altman Group; comment letters to Security Holder 
Director Nominations, Release No. 34-48626 (Oct. 14, 2003) [68 FR 
60784] from Intel and Georgeson Shareholder Communications.
    \9\ Most commonly submitted to the Commission's Office of 
Investor Education and Advocacy, these complaints raise issues such 
as, for example, technical problems with electronic voting platforms 
offered by proxy service providers and failures by issuers to 
respond to shareholder complaints about proxy-related matters.
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    Accordingly, in this release, we are reviewing and seeking public 
comment as to whether the U.S. proxy system as a whole operates with 
the accuracy, reliability, transparency, accountability, and integrity 
that shareholders and issuers should rightfully expect. With over 600 
billion shares voted every year at more than 13,000 shareholder 
meetings,\10\ shareholders should be served by a well-functioning proxy 
system that promotes efficient and accurate voting. Moreover, recent 
developments, such as the revisions to Rule 452 of the New York Stock 
Exchange (``NYSE'') limiting the ability of brokers to vote 
uninstructed shares in uncontested director elections \11\ and other 
corporate governance trends such as increased adoption of a majority 
voting standard for the election of directors \12\ have highlighted the 
importance of accuracy and accountability in the voting process.
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    \10\ See Broadridge 2009 Key Statistics and Performance Ratings, 
available at http://www.broadridge.com/investor-communications/us/2009ProxyStats.pdf.
    \11\ Order Approving Proposed Rule Change, as modified by 
Amendment No. 4, to Amend NYSE Rule 452 and Corresponding Listed 
Company Manual Section 402.08 to Eliminate Broker Discretionary 
Voting for the Election of Directors, Except for Companies 
Registered under the Investment Company Act of 1940, and to Codify 
Two Previously Published Interpretations that Do Not Permit Broker 
Discretionary Voting for Material Amendments to Investment Advisory 
Contracts with an Investment Company, Release No. 34-60215 (July 1, 
2009) [74 FR 33293] (Commission approval of amendments to NYSE Rule 
452).
    \12\ Historically, many corporate directors were elected under a 
plurality standard, which required only that a candidate receive 
more votes than other candidates, but not a majority of the votes. 
Since there ordinarily are not more candidates than seats, the 
election threshold has historically been low and shareholder 
participation was less important to electing directors. See American 
Bar Association Section of Business Law, Report of the Committee on 
Corporate Laws on Voting by Shareholders for the Election of 
Directors (Mar. 13, 2006), available at http://www.abanet.org/buslaw/committees/CL270000pub/directorvoting/20060313000001.pdf. 
From 2005 to 2007, however, a majority of companies in the S&P 500 
index adopted a voting policy, through bylaw amendments or changes 
in corporate governance principles, that requires directors who do 
not receive a majority of votes cast at the meeting in favor of 
their election to tender their resignation to the board, which 
resignation the board may or may not accept. See Claudia H. Allen, 
Study of Majority Voting in Director Elections (Nov. 12, 2007), 
available at http://www.ngelaw.com/files/upload/majoritystudy111207.pdf.
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    The manner in which proxy materials are distributed and votes are 
processed and recorded involves a level of complexity not generally 
understood by those not involved in the process. This complexity stems, 
in large part, from the nature of share ownership in the United States, 
in which the vast majority of shares are held through securities 
intermediaries such as broker-dealers or banks; this structure supports 
prompt and accurate clearance and settlement of securities 
transactions, yet adds significant complexity to the proxy voting 
process.\13\ As a result, the proxy system involves a wide array of 
third-party participants in addition to companies and their 
shareholders, including brokers, banks, custodians, securities 
depositories, transfer agents, proxy solicitors, proxy service 
providers, proxy advisory firms, and vote tabulators.\14\ The use of 
some of these third parties improves efficiencies in processing and 
distributing proxy materials to shareholders, while at the same time 
the increased reliance on these third parties--some of which are not 
directly regulated by federal or state securities regulators--adds 
complexity to the proxy system and makes it less

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transparent to shareholders and to issuers. Studies of the proxy 
systems in other jurisdictions, including the United Kingdom and the 
European Union, have made similar observations.\15\
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    \13\ See Final Report of the Securities and Exchange Commission 
on the Practice of Recording the Ownership of Securities in the 
Records of the Issuer in Other than the Name of the Beneficial Owner 
of such Securities Pursuant to Section 12(m) of the Securities 
Exchange Act of 1934, Dec. 3, 1976 (the ``Street Name Study'').
    \14\ The focus of this release is the U.S. proxy system. We 
recognize, however, that many U.S. persons hold shares in non-U.S. 
issuers. While this release does not address the processes and 
procedures followed by participants when non-U.S. issuers distribute 
proxy-related materials to U.S. persons, we are interested in 
information about those processes and procedures. We also seek 
comment about whether we should consider regulatory responses to 
issues that may arise in that area.
    \15\ A report from the United Kingdom has characterized its 
voting process as one in which the chain of accountability is 
complex, where there is a lack of transparency and where there are a 
large number of different participants, each of whom may give a 
different priority to voting. See Review of the impediments to 
voting UK shares: Report by Paul Myners to the Shareholder Voting 
Working Group (Jan. 2004) (``Myners Report''). The European Union 
also has considered issues related to proxy voting and has enacted 
rules and legislation in response. As a result, the European Union 
passed a directive on the exercise of certain rights of shareholders 
in listed companies in July 2007, which covers many of the matters 
discussed in this release. See Directive 2007/36/EC of the European 
Parliament and of the Council (July 11, 2007) (``Shareholder Rights 
Directive''). The Shareholder Rights Directive addresses the issues 
of record dates, transparency, electronic communications, conflicts 
of interest, financial intermediaries and other parties involved in 
the proxy voting process.
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    We begin this concept release with an overview of the U.S. proxy 
system. We then outline some of the concerns that have been raised 
regarding the accuracy, reliability, transparency, accountability, and 
integrity of this system, as well as possible regulatory responses to 
these concerns. These concerns generally relate to three principal 
questions:
     Whether we should take steps to enhance the accuracy, 
transparency, and efficiency of the voting process;
     Whether our rules should be revised to improve shareholder 
communications and encourage greater shareholder participation; and
     Whether voting power is aligned with economic interest and 
whether our disclosure requirements provide investors with sufficient 
information about this issue.
    In reviewing the performance of the proxy system, the Commission's 
staff has recently had numerous discussions with a variety of 
participants in the proxy voting process, and we appreciate the 
insights these participants have provided.\16\ While we set forth a 
number of general and specific questions, we welcome comments on any 
other concerns related to the proxy process that commentators may have, 
and we specifically invite comment on any costs, burdens or benefits 
that may result from possible regulatory responses identified in this 
release. We recognize that the various aspects of the proxy system that 
we address in this release are interconnected, and that changes to one 
aspect may affect other aspects, as well as complement or frustrate 
other potential changes.\17\ We encourage the public to consider these 
relationships when formulating comments. Interested persons are also 
invited to comment on whether alternative approaches, or a combination 
of approaches, would better address the concerns raised by the current 
process.
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    \16\ Beginning in September of 2009, the Commission's staff has 
met with representatives of the following groups and individuals to 
discuss issues about the U.S. proxy system: The Altman Group; 
Broadridge Financial Solutions, Inc.; Broadridge Steering Committee; 
Council of Institutional Investors (``CII''); Edwards, Angell, 
Palmer & Dodge; Glass, Lewis & Co.; the Hong Kong Securities & 
Futures Commission; International Corporate Governance Network 
(``ICGN''); InvestShare; McKenzie Partners; Mediant Communications; 
Moxy Vote; National Investor Relations Institute (``NIRI''); Proxy 
Governance, Inc.; RiskMetrics Group; Professor Edward Rock; 
Shareholder Communications Coalition; Securities Industry and 
Financial Markets Association (``SIFMA''); Society of Corporate 
Secretaries and Governance Professionals; Sodali; Target Corp.; 
TIAA-CREF; the U.K. Financial Reporting Council; and Weil, Gotshal & 
Manges, LLP. The staff has also been in communication with other 
regulators, including the Federal Reserve, FDIC, Office of the 
Comptroller of Currency, and Office of Thrift Supervision. Several 
of the above-listed parties provided written materials to the staff, 
which we are including in the public comment file for this release. 
The SEC Investor Advisory Committee has also recommended an inquiry 
into data-tagging proxy information, as described in Section IV.C 
below.
    \17\ For example, the feasibility of establishing a means of 
vote confirmation may depend on whether and to what extent we 
continue to allow beneficial owners to object to the disclosure of 
their identities to issuers. See Sections III.B and IV.A, below.
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    We are mindful that, while we have recently amended--and are 
considering amending--a number of our rules that relate to the proxy 
process, further amendments to those rules or additional guidance about 
our views on their application may be appropriate to address concerns 
raised by the application of those rules. Although the discussion in 
this release generally focuses on the broader proxy system, we remain 
interested in ways to improve our proxy disclosure, solicitation, and 
distribution rules. We seek public comment on the concerns about those 
rules.

II. The Current Proxy Distribution and Voting Process

    A fundamental tenet of state corporation law is that shareholders 
have the right to vote their shares to elect directors and to approve 
or reject major corporate transactions at shareholder meetings.\18\ 
Under state law, shareholders can appoint a proxy to vote their shares 
on their behalf at shareholder meetings,\19\ and the major national 
securities exchanges generally require their listed companies to 
solicit proxies for all meetings of shareholders.\20\ Because most 
shareholders do not attend public company shareholder meetings in 
person, voting occurs almost entirely by the use of proxies that are 
solicited before the shareholder meeting,\21\ thereby resulting in the 
corporate proxy becoming ``the forum for shareholder suffrage.'' \22\ 
Issuers with a class of securities registered under Section 12 of the 
Securities Exchange Act of 1934 (``Exchange Act'') and issuers that are 
registered under the Investment Company Act of 1940 (``Investment 
Company Act'') are required to comply with the federal proxy rules in 
Regulation 14A when soliciting proxies from shareholders.\23\
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    \18\ See, e.g., Del. Code Ann. tit. 8, Sec. Sec.  211 and 212; 
Model Bus. Corp. Act Sec. Sec.  7.01 and 7.21. While voting in the 
election of directors is largely the exclusive right of 
stockholders, state law may permit the corporation to grant voting 
rights to holders of other securities, such as debt. See, e.g., Del. 
Code Ann. tit. 8, Sec.  221. For a brief review of the rationale for 
voting by shareholders, see Frank H. Easterbrook and Daniel R. 
Fischel, The Economic Structure of Corporate Law (1991). We refer to 
Delaware law frequently because of the large percentage of public 
companies incorporated under that law. The Delaware Division of 
Corporations reports that over 50% of U.S. public companies are 
incorporated in Delaware. We refer to the Model Business Corporation 
Act as well because the corporate statutes of many states adopt or 
closely track its provisions.
    \19\ See, e.g., Del Code Ann. tit. 8, Sec.  212(b); Model Bus. 
Corp. Act Sec.  7.22(b).
    \20\ See, e.g., NYSE Listed Company Manual Sec.  402.04(a); 
Nasdaq Listing Rule 5620(b).
    \21\ Although voting rights in public companies are exercised 
only at the meeting of shareholders, the votes cast at the meeting 
are almost entirely by proxy and the voting decisions have been made 
during the proxy solicitation process.
    \22\ Roosevelt v. E.I duPont de Nemours & Co., 958 F.2d 416, 422 
(D.C. Cir. 1992).
    \23\ 17 CFR 240.14a-1 et seq.; 17 CFR 270.20a-1. However, 
securities of foreign private issuers are exempt from the proxy 
rules. See 17 CFR 240.3a12-3.
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A. Types of Share Ownership and Voting Rights

    The proxy solicitation process starts with the determination of who 
has the right to receive proxy materials and vote on matters presented 
to shareholders for a vote at shareholder meetings. The method for 
making this determination depends on the way the shares are owned. 
There are two types of security holders in the U.S.--registered owners 
and beneficial owners.
1. Registered Owners
    Registered owners (also known as ``record holders'') have a direct 
relationship with the issuer because their ownership of shares is 
listed on records maintained by the issuer or its transfer agent.\24\ 
State corporation law

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generally vests the right to vote and the other rights of share 
ownership in registered owners.\25\ Because registered owners have the 
right to vote, they also have the authority to appoint a proxy to act 
on their behalf at shareholder meetings.\26\
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    \24\ The Uniform Commercial Code (``UCC'') defines the term 
``registered form,'' as applied to a certificated security, as a 
form in which the security certificate specifies a person entitled 
to the security, and a transfer of the security may be registered on 
books maintained for that purpose by or on behalf of the issuer, or 
the security certificate so states. UCC 8-102(a)(13) (1994). Rule 
14a-1 under the Exchange Act [17 CFR 240.14a-1] defines the term 
``record holder'' for purposes of Rules 14a-13, 14b-1 and 14b-2 [17 
CFR 240.14a-13, 14b-1, 14b-2] to mean any broker, dealer, voting 
trustee, bank, association or other entity that exercises fiduciary 
powers which holds securities on behalf of beneficial owners and 
deposits such securities for safekeeping with another bank. 
Additionally, the Commission's transfer agent rules refer to 
registered owners as security holders, which means owners of 
securities registered on the master security holder file of the 
issuer. Rule 17Ad-9 under the Exchange Act [17 CFR 240.17Ad-9] 
defines master security holder file as the official list of 
individual security holder accounts.
    \25\ See, e.g., Del. Code Ann. tit. 8, Sec.  219(c); Model Bus. 
Corp. Act Sec.  1.40(21); but see Model Bus. Corp. Act Sec.  7.23 
(permitting corporations to establish procedures by which beneficial 
owners become entitled to exercise rights, including voting rights, 
otherwise exercisable by shareholders of record).
    \26\ See, e.g., Del. Code Ann. tit. 8, Sec.  212(b); Model Bus. 
Corp. Act Sec.  7.22(b).
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    Registered owners can hold their securities either in certificated 
form \27\ or in electronic (or ``book-entry'') form through a direct 
registration system (``DRS''),\28\ which enables an investor to have 
his or her ownership of securities recorded on the books of the issuer 
without having a physical securities certificate issued.\29\ Under DRS, 
an investor can electronically transfer his or her securities to a 
broker-dealer to effect a transaction without the risk, expense, or 
delay associated with the use of securities certificates. Investors 
holding their securities in DRS retain the rights of registered owners, 
without having the responsibility of holding and safeguarding 
securities certificates.
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    \27\ A securities certificate evidences that the owner is 
registered on the books of the issuer as a shareholder. State 
commercial laws specify rules concerning the transfer of the rights 
that constitute securities and the establishment of those rights 
against the issuer and other parties. See Official comment to 
Article 8-101, The American Law Institute and National Conference of 
Commissioners of Uniform State Laws, Uniform Commercial Code, 1990 
Official Text with Comments (West 1991).
    \28\ For more information about DRS generally, see Securities 
Transactions Settlement, Release No. 33-8398 (Mar. 11, 2004) [69 FR 
12922]. For a detailed description of DRS and the DRS facilities 
administered by DTC, see Order Granting Accelerated Approval of a 
Proposed Rule Change Relating to the Procedures to Establish a 
Direct Registration System, Release No. 34-37931 (Nov. 7, 1996) [61 
FR 58600] (order granting approval to establish DRS) and Notice of 
Filing of Amendment and Order Granting Accelerated Approval of a 
Proposed Rule Change Relating to Implementation of the Profile 
Modification System Feature of the Direct Registration System, 
Release No. 34-41862 (Sept. 10, 1999) [64 FR 51162] (order approving 
implementation of the Profile Modification System).
    \29\ DRS is an industry initiative aimed at dematerializing 
equities in the U.S. market. Dematerialization of securities occurs 
where there are no paper certificates available, and all transfers 
of ownership are made through book-entry movements. Immobilization 
of securities occurs where the underlying certificate is kept in a 
securities depository (or held in custody for the depository by the 
issuer's transfer agent) and transfers of ownership are recorded 
through electronic book-entry movements between the depository's 
participants' accounts. Securities are partially immobilized (as is 
the case with most U.S. equity securities traded on an exchange or 
securities association) when the street name positions are 
immobilized at the securities depository but certificates are still 
available to investors directly registered on the issuer's books. 
Although most options, municipal, government and many debt 
securities trading in the U.S. markets are currently dematerialized, 
many equity and some debt securities remain immobilized or partially 
immobilized at the Depository Trust Company (``DTC''). For more 
information about DTC, see Section II.B.2.a, below. Most if not all 
equity securities not on deposit at DTC but trading publicly in the 
U.S. markets remain fully certificated.
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2. Beneficial Owners
    The vast majority of investors in shares issued by U.S. companies 
today are beneficial owners, which means that they hold their 
securities in book-entry form through a securities intermediary, such 
as a broker-dealer or bank.\30\ This is often referred to as owning in 
``street name.'' A beneficial owner does not own the securities 
directly. Instead, as a customer of the securities intermediary, the 
beneficial owner has an entitlement to the rights associated with 
ownership of the securities.\31\
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    \30\ For purposes of Commission rules pertaining to the transfer 
of certain securities, a ``securities intermediary'' is defined 
under Exchange Act Rule 17Ad-20 [17 CFR 240.17Ad-20] as a clearing 
agency registered under Exchange Act Section 17A [15 USC 78q-1] or a 
person, including a bank, broker, or dealer, that in the ordinary 
course of its business maintains securities accounts for others in 
its capacity as such. The UCC defines the term slightly differently, 
but for purposes of this release, this distinction is irrelevant. 
See UCC 8-102(a)(14) (1994).
    \31\ The rights and interests that a customer has against a 
securities intermediary's property are created by the agreements 
between the customer and the securities intermediary, as well as by 
the UCC, as adopted in the relevant jurisdiction. Under the UCC, 
beneficial owners have a ``securities entitlement'' to the fungible 
bulk of securities held by the broker-dealer or bank. An 
``entitlement holder'' is defined as a person identified in the 
records of a securities intermediary as the person having a security 
entitlement against the securities intermediary. UCC 8-503 (1994). A 
securities intermediary is obligated to provide the entitlement 
holder with all of the economic and governance rights that comprise 
the financial asset and that the entitlement holder can look only to 
that intermediary for performance of the obligations. See generally 
UCC 8-501 et seq. (1994).
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B. The Process of Soliciting Proxies

    The following diagram illustrates the flow of proxy materials that 
typically occurs during a solicitation. The steps illustrated in the 
diagram and descriptions of the relevant parties are discussed below.

[[Page 42986]]

[GRAPHIC] [TIFF OMITTED] TP22JY10.124

1. Distributing Proxy Materials to Registered Owners
    It is a relatively simple process for an issuer to send proxy 
materials to registered owners because their names and addresses are 
listed in the issuer's records, which are usually maintained by a 
transfer agent. As the left side of Diagram 1 illustrates, proxy 
materials are sent directly from the issuer through its transfer agent 
or third-party proxy service provider to all registered owners in paper 
or electronic form.\32\ Registered owners execute the proxy card and 
return it to the issuer's transfer agent or vote tabulator for 
tabulation.
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    \32\ Commission rules provide, generally, that proxy materials 
can be provided electronically to shareholders who have 
affirmatively consented to electronic delivery. See Use of 
Electronic Media for Delivery Purposes, Release No. 33-7233 (Oct. 6, 
1995) [60 FR 53458]. In addition, the Commission has adopted the 
notice and access model that permits issuers to send shareholders a 
Notice of Internet Availability of Proxy Materials in lieu of the 
traditional paper packages including the proxy statement, annual 
report and proxy card. See Notice and Access Release, note 2, above. 
These two concepts work in tandem. Although an issuer electing to 
send a Notice in lieu of a full package generally would be required 
to send a paper copy of that Notice, it may send that Notice 
electronically to a shareholder who has provided an affirmative 
consent to electronic delivery.
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2. Distributing Proxy Materials to Beneficial Owners
    As the right side of Diagram 1 illustrates, the process of 
distributing proxy materials to beneficial owners is more complicated 
than it is for registered owners. The indirect system of ownership in 
the U.S. permits securities intermediaries to hold securities for their 
customers, and there can be multiple layers of securities 
intermediaries leading to one beneficial owner. This potential for 
multiple tiers of securities intermediaries presents a number of 
challenges in the distribution of proxy materials.
a. The Depository Trust Company
    In most cases, the chain of ownership for beneficially owned 
securities of U.S. companies begins with the Depository Trust Company 
(``DTC''), a registered clearing agency acting as a securities 
depository.\33\ Most large U.S. broker-dealers and banks are DTC 
participants, meaning that they deposit securities with, and hold those 
securities through, DTC.\34\ DTC's nominee, Cede & Co., appears in an 
issuer's stock records as the sole registered owner of securities 
deposited at DTC. DTC holds the deposited securities in ``fungible 
bulk,'' meaning that there are no specifically identifiable shares 
directly owned by DTC participants.\35\ Rather, each

[[Page 42987]]

participant owns a pro rata interest in the aggregate number of shares 
of a particular issuer held at DTC. Correspondingly, each customer of a 
DTC participant--such as an individual investor--owns a pro rata 
interest in the shares in which the DTC participant has an interest.
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    \33\ DTC provides custody and book-entry transfer services of 
securities transactions in the U.S. market involving equities, 
corporate and municipal debt, money market instruments, American 
depositary receipts, and exchange-traded funds. In accordance with 
its rules, DTC accepts deposits of securities from its participants 
(i.e., broker-dealers and banks), credits those securities to the 
depositing participants' accounts, and effects book-entry movements 
of those securities. For more information about DTC, see http://www.dtcc.com/about/subs/dtc.php.
    \34\ Participants in DTC are usually broker-dealers or banks. 
Currently, there are approximately 400 DTC participants. See http://www.dtcc.com/customer/directories/dtc/dtc.php. Other jurisdictions 
have entities similar to the DTC. For example, Canada has the 
Clearing and Depository Services Inc., which is its national 
securities depository and clearing and settlement entity.
    \35\ See UCC 8-503(b) (1994) (a beneficial owner's property 
interest with respect to shares ``is a pro rata property interest in 
all interests in that financial asset held by the securities 
intermediary'').
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    Once an issuer establishes a date for the shareholder meeting and a 
record date for shareholders entitled to vote on matters presented at 
the meeting, it sends a formal announcement of these dates to DTC, 
which DTC forwards to all of its participants.\36\ The issuer then 
requests from DTC a ``securities position listing'' \37\ as of the 
record date, which identifies the participants having a position in the 
issuer's securities and the number of securities held by each 
participant.\38\ DTC must promptly respond by providing the issuer with 
a list of the number of shares in each DTC participant's account as of 
the record date.\39\ The record date securities position listing 
establishes the number of shares that a participant is entitled to vote 
through its DTC proxy.\40\
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    \36\ NYSE-listed issuers are also required to provide the NYSE 
with notification of the record and meeting dates. See NYSE Listed 
Company Manual Sec.  401.02.
    \37\ Exchange Act Rule 17Ad-8 defines a ``securities position 
listing'' as a list of those participants in the clearing agency on 
whose behalf the clearing agency holds the issuer's securities and 
of the participant's respective positions in such securities as of a 
specified date. 17 CFR 240.17Ad-8(a).
    \38\ Pursuant to Exchange Act Rule 17Ad-8, DTC may charge 
issuers requesting securities position listings a fee designed to 
recover the reasonable costs of providing the list. 17 CFR 240.17Ad-
8(b). An issuer or its agent, generally a transfer agent or 
authorized third-party service provider, can subscribe to DTC's 
service that allows the subscriber to obtain the securities position 
listing once or on a weekly, monthly, or more frequent basis.
    \39\ Upon request, a registered clearing agency must furnish a 
securities position listing promptly to each issuer whose securities 
are held in the name of the clearing agency or its nominee. 17 CFR 
140.17Ad-8(b).
    \40\ In addition to the shares held in its DTC account, some 
participants may also own additional securities at other securities 
depositories, through custodians, or in registered form.
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    For each shareholder meeting, DTC executes an ``omnibus proxy'' 
\41\ transferring its right to vote the shares held on deposit to its 
participants.\42\ In this manner, broker-dealer and bank participants 
in DTC obtain the right to vote directly the shares that they hold 
through DTC.
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    \41\ Rather than issue each participant a separate proxy to vote 
its shares, DTC drafts a single proxy (the ``omnibus proxy'') 
granting to each of the multiple participants listed in the proxy 
the right to vote the number of shares attributed to it in the 
omnibus proxy.
    \42\ As noted in recent litigation, the execution by DTC of an 
omnibus proxy is neither automatic nor legally required, but occurs 
as a matter of common practice. Kurz v. Holbrook, 989 A.2d 140, 170 
(Del. Ch. 2010), rev'd on other grounds, Crown EMAK Partners, LLC v. 
Kurz, 992 A.2d 377 Del. 2010) (``There does not appear to be any 
authority governing when a DTC omnibus proxy is issued, who should 
ask for it, or what event triggers it. The parties tell me that DTC 
has no written policies or procedures on the matter.'').
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b. Securities Intermediaries: Broker-Dealers and Banks
    Once the issuer identifies the DTC participants holding positions 
in its securities, it is required to send a search card \43\ to each of 
those participants, as well as other securities intermediaries that are 
registered owners, to determine whether they are holding shares for 
beneficial owners and, if so, the number of sets of proxy packages 
needed to be forwarded to those beneficial owners. This process may 
involve multiple tiers of securities intermediaries holding securities 
on behalf of other securities intermediaries, with search cards 
distributed to each securities intermediary in the chain of ownership.
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    \43\ The search card must request: (1) The number of beneficial 
owners; (2) the number of proxy soliciting materials and annual 
reports needed for forwarding by the intermediaries to their 
beneficial owner customers; and (3) the name and address of any 
agent appointed by the bank or broker-dealer to process a request 
for a list of beneficial owners. The search card must be sent out at 
least 20 business days prior to the record date unless 
impracticable, in which case it must be sent as many days before the 
record date as practicable. 17 CFR 240.14a-13(a).
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    Commission rules require broker-dealers to respond to the issuer 
within seven business days with the approximate number of customers of 
the broker-dealer who are beneficial owners of the issuer's 
securities.\44\ The Commission's rules also require banks to follow a 
similar process except that banks must respond to the issuer within one 
business day with the names and addresses of all respondent banks \45\ 
and must respond within seven business days with the approximate number 
of customers of the bank who are beneficial owners of shares.\46\
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    \44\ 17 CFR 240.14b-1(b)(1).
    \45\ A respondent bank is a bank that holds securities through 
another bank that is the record holder of those securities. See 
Facilitating Shareholder Communications, Release No. 34-23276 (May 
29, 1986) [51 FR 20504].
    \46\ 17 CFR 240.14b-2(b)(1) and 17 CFR 240.14b-2(b)(2). Banks 
are required to execute omnibus proxies in favor of respondent 
banks. 17 CFR 240.14b-2(b)(2).
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    Once the search card process is complete, the issuer should know 
the approximate number of beneficial owners owning shares through each 
securities intermediary. The issuer must then provide the securities 
intermediary, or its third-party proxy service provider, with copies of 
its proxy materials (including, if applicable, a Notice of Internet 
Availability of Proxy Materials) for forwarding to those beneficial 
owners. The securities intermediary must forward these proxy materials 
to beneficial owners no later than five business days after receiving 
such materials.\47\ Securities intermediaries are entitled to 
reasonable reimbursement for their costs in forwarding these 
materials.\48\
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    \47\ 17 CFR 240.14b-1(b)(2) and 17 CFR 240.14b-2(b)(3). The 
exchanges have rules that regulate the process and procedures by 
which member firms must transmit proxy materials to beneficial 
owners, collect voting instructions from beneficial owners, and vote 
shares held in the member firm's name. See, e.g., NYSE Rules 450 
through 460 and FINRA Rule 2251.
    \48\ 17 CFR 240.14a-13(a)(5). In addition, most of the exchanges 
have rules specifying the maximum rates that member firms may charge 
listed issuers as reasonable reimbursement. For example, the NYSE 
rule includes a schedule of ``fair and reasonable rates of 
reimbursement'' of member broker-dealers for their out-of-pocket 
expenses, including reasonable clerical expenses, incurred in 
connection with issuers' proxy solicitations of beneficial owners. 
NYSE Rule 465 Supplemental Material. The other exchanges have 
similar rules. See the discussion on proxy distribution fees in 
Section III.D below.
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    Instead of receiving and executing a proxy card (as registered 
owners receive and do), the beneficial owner receives a ``voting 
instruction form'' or ``VIF'' from the securities intermediary, which 
permits the beneficial owner to instruct the securities intermediary 
how to vote the beneficially owned shares. Although the VIF does not 
give the beneficial owner the right to attend the meeting, a beneficial 
owner typically can attend the meeting by requesting the appropriate 
documentation from the securities intermediary.

C. Proxy Voting Process

    Once the proxy materials have been distributed to the registered 
owners and beneficial owners of the securities, the means by which 
shareholders vote their shares differs. As Diagram 1 illustrates, 
registered owners execute the proxy card and return it to the vote 
tabulator, either by mail, by phone, or through the Internet. 
Beneficial owners, on the other hand, indicate their voting 
instructions on the VIF and return it to the securities intermediary or 
its proxy service provider, either by mail, by phone, or through the 
Internet.\49\ The securities intermediary, or its proxy service 
provider, tallies the voting instructions

[[Page 42988]]

that it receives from its customers. As discussed in further detail in 
Section IV.A of this release, the securities intermediary, or its proxy 
service provider, then executes and submits to the vote tabulator a 
proxy card for all securities held by the securities intermediary's 
customers.\50\
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    \49\ Beneficial owners' voting instructions submitted by 
telephone account for a very small percentage of votes received by 
proxy service providers; for the shares of most beneficial owners 
who do not vote through a proprietary service for institutional 
investors, voting instructions are conveyed by paper or via the 
Internet, in approximately the same proportion. See Broadridge 2009 
Key Statistics and Performance Ratings, note 10, above.
    \50\ As noted above, the securities intermediary receives the 
right to execute a proxy through the omnibus proxy executed in its 
favor by DTC and the other securities intermediaries in the chain of 
ownership through which it holds the securities. Although Rule 14b-
2(b)(3) [17 CFR 240.14b-2(b)(3)] explicitly permits a bank to 
execute a proxy in favor of its beneficial owners, and nothing in 
our rules prohibits a broker-dealer from doing so, it is our 
understanding that these intermediaries usually solicit voting 
instructions from their beneficial owner and execute proxies on 
behalf of their beneficial owners rather than executing proxies that 
delegate their voting authority to those beneficial owners. 
Beneficial owners may, however, request a proxy and attend the 
shareholder meeting. It is our understanding that both banks and 
broker-dealers will issue a proxy that the beneficial owner may use 
to attend a meeting if requested to do so.
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    In certain situations, a broker-dealer may use its discretion to 
vote shares if it does not receive instructions from the beneficial 
owner of the shares. Historically, broker-dealers were generally 
permitted to vote shares on uncontested matters, including uncontested 
director elections, without instructions from the beneficial owner.\51\ 
The NYSE recently revised this rule to prohibit broker-dealers from 
voting uninstructed shares with regard to any election of 
directors.\52\
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    \51\ See NYSE Rule 452.
    \52\ NYSE Rule 452 and NYSE Listed Issuer Manual Sec.  
402.08(B). This prohibition does not apply to issuers registered 
under the Investment Company Act.
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D. The Roles of Third Parties in the Proxy Process
    Issuers, securities intermediaries, and shareholders often retain 
third parties to perform a number of proxy-related functions, including 
forwarding proxy materials, collecting voting instructions, voting 
shares, soliciting proxies, tabulating proxies, and analyzing proxy 
issues.
1. Transfer Agents
    Issuers are required to maintain a record of security holders for 
state law purposes \53\ and often hire a transfer agent \54\ to 
maintain that record.\55\ Transfer agents, as agents of the issuer, are 
obliged to confirm to a vote tabulator (if the transfer agent does not 
itself perform the tabulation function) matters such as the amount of 
shares outstanding, as well as the identity and holdings of registered 
owners entitled to vote. Transfer agents are required to register with 
the Commission, which inspects and currently regulates some of their 
functions.\56\
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    \53\ E.g., Del. Code Ann. tit. 8, Sec.  219(a); Model Bus. Corp. 
Act Sec.  16.01(c).
    \54\ Section 3(a)(25) of the Exchange Act defines a ``transfer 
agent'' as any person who engages on behalf of an issuer of 
securities or on behalf of itself as an issuer of securities in (1) 
countersigning such securities upon issuance, (2) monitoring the 
issuance of such securities with a view to preventing unauthorized 
issuance, (3) registering the transfer of securities, (4) exchanging 
or converting such securities, or (5) transferring record ownership 
of securities by bookkeeping entry without the physical issuance of 
securities certificates. For more information about the role of 
transfer agents, see http://www.stai.org.
    \55\ Exchange Act Rules 17Ad-6, 17Ad-7, 17Ad-9, 17Ad-10, and 
17Ad-11 govern how transfer agents acting for issuers of securities 
registered under Section 12 of the Exchange Act (or that would have 
to be registered but for the exemption under Section 12(g)(2)(b)(i) 
and (ii) of the Exchange Act) must maintain certain records of the 
issuer, including, but not limited to, the official record of 
ownership (i.e., the ``masterfile'') and the official record of the 
number of securities issued and outstanding (i.e., the ``control 
book'' or the ``registrar''). These rules do not address the 
distribution of issuer communications, including proxy materials, or 
the remittance of proxies or voting instructions. To a lesser 
extent, the UCC, as adopted by states, also governs certain aspects 
of transfer agent activity relating to rights of issuers, 
shareholders, securities intermediaries, and those holding through 
securities intermediaries, some of which relate to the right to 
vote. The application of the UCC in this context is beyond the scope 
of this release.
    \56\ Persons acting as transfer agents for any security 
registered under Section 12 of the Exchange Act or which would be 
required to be registered except for the exemption from registration 
provided by subsection (g)(2)(B) or (g)(2)(G) of Section 12 must 
register with the Commission (or, for transfer agents that are 
banks, with their appropriate regulatory agency) and pursuant to 
Section 17A of the Exchange Act must comply with Commission rules 
and regulations. 15 U.S.C. 78q-1(c)(1) and (d)(1).
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2. Proxy Service Providers
    To facilitate the proxy material distribution and voting process 
for beneficial owners, securities intermediaries typically retain a 
proxy service provider to perform a number of processing functions, 
including forwarding the proxy materials by mail or electronically and 
collecting voting instructions.\57\ To enable the proxy service 
provider to perform these functions, the securities intermediary gives 
the service provider an electronic data feed of a list of beneficial 
owners and the number of shares held by each beneficial owner on the 
record date. The proxy service provider, on behalf of the intermediary, 
then requests the appropriate number of proxy material sets from the 
issuer for delivery to the beneficial owners. Upon receipt of the 
packages, the proxy service provider, on behalf of the intermediary, 
mails either the proxy materials with a VIF, or a Notice of Internet 
Availability of Proxy Materials,\58\ to beneficial owners. Although we 
do not directly regulate such proxy service providers, our regulations 
governing the proxy process-related obligations of securities 
intermediaries apply to the way in which proxy service providers 
perform their services because they act as agents for, and on behalf 
of, those intermediaries and typically vote proxies on behalf of those 
intermediaries pursuant to a power of attorney.
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    \57\ A single proxy service provider, Broadridge Financial 
Services, Inc. (``Broadridge''), states that it currently handles 
over 98% of the U.S. market for such proxy vote processing services. 
See http://www.broadridge.com/investor-communications/us/institutions/proxy-disclosure.asp.
    \58\ A Notice is sent pursuant to provisions in Rule 14a-16. 17 
CFR 240.14a-16.
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3. Proxy Solicitors
    Issuers sometimes hire third[dash]party proxy solicitors to 
identify beneficial owners holding large amounts of the issuers' 
securities and to telephone shareholders to encourage them to vote 
their proxies consistent with the recommendations of management. This 
often occurs when there is a contested election of directors, and 
issuer's management and other persons are competing for proxy authority 
to vote securities in the election (commonly referred to as a ``proxy 
contest''). In addition, an issuer may hire a proxy solicitor in 
uncontested situations when voting returns are expected to be 
insufficient to meet state quorum requirements or when an important 
matter is being considered. Issuers and other soliciting persons are 
required to disclose the use of such services and estimated costs for 
such services in their proxy statements.\59\
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    \59\ Item 4 of 17 CFR 240.14a-101. If similar services are 
performed by employees of the issuer, however, the estimated costs 
of such services need to be disclosed only if the employees are 
specially engaged for the solicitation.
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4. Vote Tabulators
    Under many state statutes, an issuer must appoint a vote tabulator 
(sometimes called ``inspectors of elections'' or ``proxy tabulators'') 
to collect and tabulate the proxy votes as well as votes submitted by 
shareholders in person at a meeting.\60\ We understand that often the 
issuer's transfer agent will act as the vote tabulator because most

[[Page 42989]]

major transfer agents have the infrastructure to communicate with 
registered holders, proxy service providers, and securities 
intermediaries, while also being able to reconcile the identity of 
voters that are registered owners and the number of votes to the 
issuer's records. However, sometimes the issuer will hire an 
independent third party to perform this function, often to certify 
important votes. The vote tabulator is ultimately responsible for 
determining that the correct number of votes has been submitted by each 
registered owner.\61\ In addition, proxies submitted by securities 
intermediaries that are not registered owners, but have been granted 
direct voting rights through DTC's omnibus proxy, are reconciled with 
DTC's securities position listing. Although the Commission does 
regulate transfer agents (which often serve as vote tabulators) in 
their roles as transfer agents, the Commission does not currently 
regulate vote tabulators or the function of tabulating proxies by 
transfer agents.
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    \60\ See, e.g., Del. Code Ann. tit. 8, Sec.  231; Model Bus. 
Corp. Act Sec.  7.29.
    \61\ Id. As noted above, transfer agents, who already possess 
the list of record owners, often tabulate the vote, so they possess 
the necessary information to make this determination. It is our 
understanding that, when the vote tabulator is an entity other than 
the transfer agent, the issuer or its transfer agent typically will 
provide the vote tabulator with the list of record owners to enable 
the vote tabulator to make this determination.
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5. Proxy Advisory Firms
    Institutional investors typically own securities positions in a 
large number of issuers. Therefore, they are presented annually with 
the opportunity to vote on many matters and often must exercise 
fiduciary responsibility in voting.\62\ Some institutional investors 
may retain an investment adviser to manage their investments, and may 
also delegate proxy voting authority to that adviser. To assist them in 
their voting decisions, investment advisers (or institutional investors 
if they retain voting authority) frequently hire proxy advisory firms 
to provide analysis and voting recommendations on matters appearing on 
the proxy. In some cases, proxy advisory firms are given authority to 
execute proxies or voting instructions on behalf of their client. Some 
proxy advisory firms also provide consulting services to issuers on 
corporate governance or executive compensation matters, such as helping 
to develop an executive compensation proposal to be submitted for 
shareholder approval. Some proxy advisory firms may also qualitatively 
rate or score issuers, based on judgments about the issuer's governance 
structure, policies, and practices. As discussed in more detail 
elsewhere in this release, some of the activities of a proxy advisory 
firm can constitute a solicitation, which is governed by our proxy 
rules.\63\ Some, but not all, proxy advisory firms operating in our 
markets are currently registered with us as investment advisers.\64\
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    \62\ See Section V.A.1, below.
    \63\ Id.
    \64\ Id.
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III. Accuracy, Transparency, and Efficiency of the Voting Process

    Investor and issuer interests may be undermined when perceived 
defects in the proxy system--or uncertainties about whether there are 
any such defects--are believed to impair its accuracy, transparency, 
and cost-efficiency. Because even the perception of such defects can 
lead to lack of confidence in the proxy process, we seek to explore 
concerns that have been expressed about the accuracy, transparency, and 
efficiency of that process and ways in which those concerns might be 
addressed.

A. Over-Voting and Under-Voting

    On occasion, vote tabulators (including transfer agents acting in 
that capacity) receive votes from a securities intermediary that exceed 
the number of shares that the securities intermediary is entitled to 
vote. The extent to which such votes are accepted depends on 
instructions from the issuer, state law, and the vote tabulator's 
internal policies. For example, it is our understanding that some vote 
tabulators accept votes from a DTC participant on a ``first-in'' basis 
up to the aggregate amount indicated in DTC's records--that is, once 
the votes cast by the participant exceed the number of positions 
indicated on the securities position listing, the vote tabulator will 
refuse to accept any votes subsequently remitted. Conversely, other 
vote tabulators, we understand, refuse to accept any votes from a 
securities intermediary if the aggregate number of votes submitted 
exceeds the vote tabulator's records for that intermediary.
    In an attempt to address issuers' concerns about the potential for 
over-voting, securities intermediaries and their service providers have 
implemented systems that compare the number of votes submitted by a 
securities intermediary to its ownership positions as reflected in 
DTC's records and notify that securities intermediary when it has 
submitted votes in excess of its ownership positions. The securities 
intermediary may then adjust its vote to reflect the correct number of 
votes before the service provider submits that vote to the vote 
tabulator.\65\ The corrected information is then sent to the vote 
tabulator. The means by which securities intermediaries reconcile these 
differences has raised some concern regarding the accuracy of the vote, 
including whether the votes are being allocated to the beneficial 
owners in the correct amounts.
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    \65\ SIFMA and individual broker-dealers have suggested several 
different methodologies as to how this may be accomplished, but we 
do not believe there is consensus among the industry participants or 
a standard operating procedure currently in place.
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1. Imbalances in Broker Votes
    For securities held at DTC, a DTC participant may vote only the 
number of securities held by that participant in its DTC account on the 
record date for a shareholder meeting. Sometimes the number of 
securities of a particular issuer held in the DTC participant's account 
will be less than the number of securities that the DTC participant has 
credited in its own books and records to its customers' accounts. 
Although there may be many reasons why the number of securities held by 
a broker-dealer at DTC does not match the total number of securities 
credited to the broker-dealer's customers' accounts, as discussed in 
more detail below, this situation principally arises in connection with 
lending transactions and ``fails to deliver'' \66\ in the clearance and 
settlement system.
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    \66\ See Section III.A.1.b, below.
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    Because of the way broker-dealers track securities lending 
transactions,\67\ if all of a broker-dealer's customers owning a 
particular issuer's securities actually voted, the broker-dealer may 
receive voting instructions for more securities than it is entitled to 
vote. Moreover, the existing clearance and settlement system was not 
designed to assign particular shares of a security to a particular 
investor, due to netting and holding securities in fungible bulk.\68\ 
Thus, it is not currently possible to match a particular investor's 
vote to a specific securities position held at a securities depository. 
When a broker-dealer has fewer positions or shares reflected on the 
securities position listing \69\ than it has reflected on its books and 
records, the broker-dealer must determine if and how it should allocate 
the votes it has among its customer and proprietary accounts and

[[Page 42990]]

then reconcile the actual voting instructions it receives with the 
number of securities the broker-dealer is permitted to vote with the 
issuer. Depending on a variety of factors, this process can lead to 
over-voting or under-voting by beneficial owners.
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    \67\ We understand that because securities are held in fungible 
bulk, broker-dealers typically do not allocate loaned securities to 
a particular account.
    \68\ See Section IV.A.1, below.
    \69\ See Section I.B.2.a, above, for a discussion of securities 
position listings.
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a. Securities Lending
    When a customer purchases shares on margin, a portion of the 
securities in the customer's account may be used to collateralize the 
margin loan.\70\ As part of the customer's margin agreement, the 
customer typically agrees to allow the broker-dealer to use those 
securities to raise money to fund the margin loan. Consequently, 
broker-dealers may lend out customers' margin securities. In addition, 
broker-dealers may enter into stock loan arrangements with investors 
(typically institutional investors or other broker-dealers) whereby the 
broker-dealer borrows the investors' fully-paid securities.\71\
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    \70\ A broker-dealer must maintain possession and control of all 
fully-paid and excess margin securities. 17 CFR 240.15c3-3(b)(1).
    \71\ When borrowing fully-paid securities, Exchange Act Rule 
15c3-3(b)(3) requires, among other things, that a broker-dealer 
enter into a separate written agreement with the customer and 
provide the customer with a schedule of the securities actually 
borrowed as well as the collateral provided to the customer. 17 CFR 
240.15c3-3(b)(3).
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    Stock loan agreements typically transfer to the borrower the right 
to vote the borrowed securities.\72\ Thus, for example, when an 
institutional investor, such as a fund, lends its portfolio securities 
to a borrower, the right to vote those securities also transfers to the 
borrower.\73\ As a result, the institutional investor that lends its 
portfolio securities generally loses its ability to vote those 
securities, unless and until the loan is terminated and the securities 
are returned before the record date in question.\74\
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    \72\ See Master Securities Lending Agreement at 6, available at 
www.sifma.org/services/stdforms/pdf/master_sec_loan.pdf.
    \73\ If an institutional lender lends out portfolio securities 
after the record date for a particular shareholder vote, the lender 
would normally retain the right to vote the proxies for that 
particular shareholder vote.
    \74\ If the lending broker-dealer attempts to recall the loan, 
the borrowing broker-dealer may not be able to return the securities 
in a timely manner because, among other things, it may have reloaned 
or sold the security to another party and is unable to obtain shares 
to return to the lending broker-dealer.
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    Even though a broker-dealer has the ability to lend its customers' 
margin securities pursuant to a stock loan agreement, because shares 
are held in fungible bulk, it may not be practical to inform a customer 
when an actual loan has been made and it may be unclear which lending 
investor has lost the right to vote. Therefore, a customer may expect 
to vote all of its securities because it does not necessarily know 
whether its securities have in fact been loaned. If the lending broker-
dealer does not allocate a certain number of shares to a lending 
investor as having been borrowed, but instead sends a VIF indicating 
that the lending investor has the right to vote all of the securities 
credited to its account, including the loaned margin securities, both 
the lending and borrowing broker-dealers may submit voting instructions 
from two customers for a single share, which may give rise to an over-
voting situation.
b. Fails to Deliver
    An imbalance between a securities intermediary's position reflected 
on the securities position listing and the position reflected in its 
own books and records may also occur because of fails to deliver in the 
clearance and settlement system.\75\ Every day the NSCC, a registered 
clearing agency, nets each of its members' trades to a single buy or 
sell obligation for each issue traded.\76\ Because NSCC acts as a 
central counterparty for its members' trades, its members are obligated 
to deliver securities to, and entitled to receive securities from, NSCC 
at settlement, and not to or from other broker-dealers. Although the 
delivery of securities usually occurs as expected on the settlement 
date, there are occasions when broker-dealers fail to make timely 
delivery, often for reasons outside of their control.\77\
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    \75\ Fails to deliver in all equity securities have declined 
significantly since the adoption of Interim Final Temporary Rule 
204T in October 2008. See Amendments to Regulation SHO, Release No. 
34-58773 (Oct. 14, 2008) [73 FR 61706]. See also Memorandum from the 
Staff Re: Impact of Recent SHO Rule Changes on Fails to Deliver, 
Nov. 4, 2009, available at http://www.sec.gov/spotlight/shortsales/oeamemo110409.pdf (stating, among other things, that the average 
daily number of aggregate fails to deliver for all securities 
decreased from 2.21 billion to 0.25 billion for a total decline of 
88.5% when comparing a pre-Rule to post-Rule period); Memorandum 
from the Staff Re: Impact of Recent SHO Rule Changes on Fails to 
Deliver, Nov. 26, 2008, available at http://www.sec.gov/comments/s7-30-08/s73008-37.pdf; Memorandum from the Staff Re: Impact of Recent 
SHO Rule Changes on Fails to Deliver, Mar. 20, 2009, available at 
http://www.sec.gov/comments/s7-30-08/s73008-107.pdf.
    \76\ NSCC nets securities in its ``Continuous Net Settlement'' 
system pursuant to rules and procedures approved by the Commission. 
For more information on NSCC's rules and procedures, see 
www.dtcc.com/legal/rules_proc/nscc_rules.pdf. See Section IV.A.1, 
below, for additional information about the role of NSCC.
    \77\ For example, broker-dealers may fail to deliver securities 
because of: (1) Delays by customers delivering to the broker-dealer 
the shares being sold; (2) a broker-dealer's inability to purchase 
or borrow shares needed for settlement; or (3) a broker-dealer's 
inability to obtain transfer of title of securities in time for 
settlement. For more information on fails to deliver in the U.S. 
clearance and settlement system, see Short Sales, Release No. 34-
50103 (July 28, 2004) [69 FR 48008] and Amendments to Regulation 
SHO, Release No. 34-60388 (July 27, 2009) [74 FR 38266].
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    Pursuant to NSCC rules, if an NSCC broker-dealer member ``fails to 
deliver'' the securities it owes to NSCC on the settlement date, NSCC 
will allocate this fail to one of many contra-side broker-dealers due 
to receive securities without trying to attribute the fail to the 
specific broker-dealer that originally traded with the broker-dealer 
that failed to deliver.\78\ The broker-dealer to which the fail is 
allocated will not receive the securities and will not be credited with 
this position at DTC until delivery is actually made.
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    \78\ If a broker-dealer fails to deliver securities to NSCC, 
NSCC allocates this fail to a broker-dealer member that is due to 
receive the securities.
---------------------------------------------------------------------------

    Even though the broker-dealer has not actually received the 
securities, the broker-dealer usually will credit its customers' 
accounts with the purchased securities on settlement date. If the 
broker-dealer's fail-to-receive position continues through the record 
date for a corporate election, DTC may not yet recognize the broker-
dealer's entitlement to vote this position. As with loaned securities, 
the broker-dealer may still try to allocate votes to all of its 
customers that its records reflect as owning those securities, even 
though DTC has not credited the broker's account with those securities 
or with the corresponding right to vote those securities through DTC.
2. Current Reconciliation and Allocation Methodologies Used by Broker-
Dealers To Address Imbalances
    Because the ownership of individual shares held beneficially is not 
tracked in the U.S. clearance and settlement system, when imbalances 
occur, broker-dealers must decide which of their customers will be 
permitted to vote and how many shares each customer will be permitted 
to vote. Neither our rules nor SRO rules currently mandate that a 
reconciliation be performed, or the use of a particular reconciliation 
or allocation methodology. Broker-dealers have developed a number of 
different approaches as to how votes are ``allocated'' among customer 
accounts.\79\

[[Page 42991]]

We understand that these approaches are often influenced by whether the 
broker-dealers' customers are primarily retail or institutional 
investors.
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    \79\ For more information on proxy processing and broker-
dealer's reconciliation and allocation processes, see ``Briefing 
Paper: Roundtable on Proxy Voting Mechanics,'' (May 24, 2007), 
available at http://www.sec.gov/spotlight/proxyprocess/proxyvotingbrief.htm (``Roundtable Briefing Paper''), or 
``Unofficial Transcript of the Roundtable Discussion on Proxy Voting 
Mechanics,'' (May 24, 2007), available at http://www.sec.gov/news/openmeetings/2007/openmtg_trans052407.pdf (``Roundtable 
Transcript''). The term ``allocation'' refers to the process by 
which a broker-dealer determines which of its customers will be 
allowed to vote and how many shares will be allotted to each of 
those customers.
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    Most broker-dealers have adopted a reconciliation method to balance 
the aggregate number of shares they are entitled to vote with the 
aggregate number of shares credited to customer and proprietary 
accounts.\80\ The primary reconciliation methods are: (1) Pre-mailing 
reconciliation (``pre-reconciliation''); (2) post-mailing 
reconciliation (``post-reconciliation''); and (3) a hybrid form of the 
pre-reconciliation and post-reconciliation methods.\81\ These methods 
are described in more detail below. If the broker-dealer finds that it 
is holding fewer shares at DTC than it has credited to customer and 
proprietary accounts, it may choose to give up its own votes, as 
represented by shares credited to its proprietary accounts, by 
allocating some or all of those votes to its customers, or it may 
choose to allocate to its customers only the voting rights attributable 
to customer accounts.
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    \80\ Not all broker-dealers have developed policies and 
procedures to address the reconciliation and allocation of votes 
among their customers because historically broker-dealers have 
usually had enough shares on deposit at DTC to provide a vote to all 
customers wanting to vote.
    \81\ Roundtable Transcript, note 79, above.
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a. Pre-Reconciliation Method
    A broker-dealer using the pre-reconciliation method compares the 
number of shares it holds in aggregate at DTC and elsewhere with its 
aggregate customer account position before it sends VIFs to its 
customers.\82\ If the aggregate number of shares it holds is less than 
the number of shares the broker-dealer has credited to its customer 
accounts, then the broker-dealer will determine which of its customers 
will be permitted to vote and how many votes will be allocated to each 
of those customers. Broker-dealers using the pre-reconciliation method 
request voting instructions from their customers with respect to only 
those customer positions to which votes have been allocated. We 
understand that most broker-dealers give customers with fully-paid 
securities and excess margin securities first priority in the 
distribution of votes. It is also our understanding that broker-dealers 
using the pre-reconciliation method tend to have more institutional 
customers than retail customers.\83\
---------------------------------------------------------------------------

    \82\ Id.
    \83\ Id.
---------------------------------------------------------------------------

    Broker-dealers using the pre-reconciliation method have indicated 
that this method ensures that the votes customers cast will be 
counted.\84\ On the other hand, given that some broker-dealers have 
estimated that only 20% to 30% of their retail customers usually vote, 
some believe that pre-reconciliation may result in an ``under-vote'' 
because investors allocated the ability to vote may not do so, and 
other investors who do vote may be allocated a number of votes fewer 
than the number of shares they beneficially own. In addition, some 
broker-dealers have indicated that the pre-reconciliation method is 
more expensive than the post-reconciliation method because post-
reconciliation only needs to be performed when a broker-dealer receives 
voting instructions in excess of the number of shares that it holds.
---------------------------------------------------------------------------

    \84\ Id.
---------------------------------------------------------------------------

b. Post-Reconciliation Method
    A broker-dealer using the post-reconciliation method compares its 
aggregate position at DTC and elsewhere\85\ with its actual aggregate 
customer account position only after receiving VIFs from its customers. 
Broker-dealers using the post-reconciliation method request voting 
instructions from their customers with respect to all shares credited 
to their customer accounts, including for those shares that may have 
been purchased on margin, loaned to another entity, or not received 
because of a fail to deliver. We understand that broker-dealers using 
the post-reconciliation method tend to have primarily retail customers 
rather than institutional customers.\86\
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    \85\ The aggregate number of shares the broker-dealer is 
entitled to vote may constitute more than just its position on 
deposit at DTC. For example, the broker-dealer may have additional 
securities on deposit at a foreign depository or in certificated 
form.
    \86\ Roundtable Transcript, note 79, above.
---------------------------------------------------------------------------

    In the event that a broker-dealer receives voting instructions from 
its customers in excess of its aggregate securities position, the 
broker-dealer adjusts its vote count prior to casting its vote with the 
issuer. The manner in which the adjustment is made varies among broker-
dealers. Some firms simply reduce the number of proprietary position 
votes cast. Others allocate fewer votes to customers with securities 
purchased on margin or on loan.
    Because of the low level of participation by retail voters, some of 
the broker-dealers using the post-reconciliation method have indicated 
to the Commission that the number of over-vote situations is not a 
significant problem and can be addressed in a number of ways, 
including, but not limited to, the broker-dealer using its proprietary 
positions to redress any imbalance. The costs associated with the post-
reconciliation method are generally considered to be less than those 
associated with the pre-reconciliation method because the broker-dealer 
does not have to go through the costly process of allocating votes 
among customers unless its customers remit VIFs for more shares than 
the broker-dealer is entitled to vote in the aggregate.
c. Hybrid Reconciliation Methods
    Some broker-dealers have developed hybrid reconciliation methods 
that use aspects of both pre- and post-reconciliation methods. For 
example, in one hybrid reconciliation method, a broker-dealer will 
allocate votes to all of its customers with fully-paid securities but 
will also allow each margin account customer to instruct the broker-
dealer that it would like to vote its shares. The broker-dealer will 
allocate any shares not needed to cover fully-paid account holders to 
those margin customers who indicated they wanted to vote, thereby 
giving these margin customers priority over other margin customers.\87\
---------------------------------------------------------------------------

    \87\ Id.
---------------------------------------------------------------------------

3. Potential Regulatory Responses
    Broker-dealers have indicated to the Commission staff that most 
broker-dealers select an allocation and reconciliation method that best 
accommodates their particular customer base and best advances the 
firm's particular business strategy. For example, those firms focusing 
on retail customers generally will have more customer accounts owning 
smaller amounts of securities and casting relatively few votes and, as 
a result, may prefer the post-reconciliation method over the pre-
reconciliation method.
    The customers of a broker-dealer may not be aware of the allocation 
and reconciliation method used by the firm. We are interested in 
receiving views on whether it would be helpful to investors if broker-
dealers publicly disclosed the allocation and reconciliation method 
used by the firm during each proxy season, as well as the likely effect 
of that method on whether the customers' voting instructions would 
actually be reflected in the broker-dealer's proxy sent to the vote 
tabulator. Such disclosure could be in writing and provided to 
customers upon opening an

[[Page 42992]]

account and on an annual basis, and made available to the general 
public on the broker-dealer's Web site. This disclosure could help 
investors to decide if a particular broker-dealer's method suits their 
investment goals. Alternatively, we are interested in receiving views 
on whether it would be beneficial to investors if broker-dealers were 
required to use a particular reconciliation method.
    Given the lack of empirical data on whether over-voting or under-
voting is occurring and if so, to what extent, we also would like to 
receive views on whether investors, issuers, and the proxy system 
overall would benefit from having additional data from proxy 
participants regarding over-voting and under-voting to determine 
whether further regulatory action should be considered. This data would 
allow us to determine the scope of the problem, if any, and give us 
detailed information that would further assist us in determining 
whether current regulations are effective or additional regulation is 
appropriate. Such information may also indicate if one particular 
method is working better for investors and the market than other 
methods.
4. Request for Comment
     What are the advantages or disadvantages of the various 
methods of allocation or reconciliation currently used by securities 
intermediaries and the effectiveness of such methods?
     Is there any evidence, statistical, anecdotal or 
otherwise, of material over-voting or under-voting, and if so, what is 
the size and impact of over-voting or under-voting? For example, is 
there any evidence that over-voting or under-voting has determined the 
outcome of a vote or materially changed the voting results?
     Are there any concerns caused by over-voting or under-
voting that are not described above? Are there particular concerns 
regarding the impact of either over-voting or under-voting with respect 
to specific types of voting decisions, such as merger transactions, the 
election of directors where a majority vote is required, or shareholder 
advisory votes regarding executive compensation? What, if any, 
alternatives should we consider to the current system, and what would 
be the costs and benefits of any alternative process?
     Would requiring broker-dealers to disclose their 
allocation and reconciliation process adequately address the concerns 
related to over-voting and under-voting by beneficial owners?
     Would information about vote allocation and reconciliation 
methods be helpful to investors or adequately address any concerns 
related to those processes?
     Would a particular type of vote allocation and 
reconciliation method better protect investors' interests?
     Do the varying methods of vote allocation affect the 
potential to audit votes cast by beneficial holders?
     Should investors who have fully paid for their securities 
be allocated voting rights over those who purchased the securities on 
margin? Should beneficial holders be allocated voting rights over 
broker-dealer proprietary accounts?
     Should brokers be required to disclose the effect of share 
lending programs on the ability of retail investors to cast votes?
     Does the current system of settlement and clearance of 
securities transactions in the U.S. create any problems or 
inefficiencies in the proxy process in regard to matters other than 
over-voting or under-voting? If so, what are they, and what steps 
should we consider in order to address them?

B. Vote Confirmation

1. Background
    A number of market participants, including both individual and 
institutional investors, have raised concerns regarding the inability 
to confirm whether an investor's shares have been voted in accordance 
with the investor's instructions. As discussed more fully in Section 
II, beneficial owners cast their votes through a securities 
intermediary, which, in turn, uses a proxy service provider to collect 
and send the votes to the vote tabulator.\88\ Beneficial owners, 
particularly institutional investors, often want or need to confirm 
that their votes have been timely received by the vote tabulator and 
accurately recorded. Similarly, securities intermediaries want to be 
able to confirm to their customers that their votes have been timely 
received and accurately recorded. Issuers also want to be able to 
confirm that the votes that they receive from securities intermediaries 
on behalf of beneficial owners properly reflect the votes of those 
beneficial owners. We understand that, on occasion, errors have been 
made when a third party fails to timely submit votes on behalf of its 
clients.\89\
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    \88\ Some securities intermediaries may not have sufficient 
shares on deposit at DTC to allocate a vote to every share position 
credited to every customer's account. In those cases, the securities 
intermediary may have to allocate a specific number of votes to some 
customers that is fewer than the number of shares credited to those 
customers' accounts. See Section III.A, above, for a more in-depth 
discussion of why and how securities intermediaries reconcile and 
allocate votes to their customers.
    \89\ See, e.g., Adam Jones, ``Riddle of the Missing Unilever 
Votes Solved,'' Financial Times, Aug. 15, 2003; ``Mum on a 
Recount,'' Pensions & Investments, Aug. 10, 2009, available at 
http://www.pionline.com/article/20090810/PRINTSUB/308109996; Meagan 
Thompson-Mann, Policy Briefing No. 3--Voting Integrity: Practices 
for Investors and the Global Proxy Advisory Industry, The Millstein 
Center for Corporate Governance and Performance, Mar. 2, 2009, at 
10-11 (``Thompson-Mann Policy Briefing'').
---------------------------------------------------------------------------

    The inability to confirm voting information is caused in part 
because no one individual participant in the voting process--neither 
issuers, transfer agents, vote tabulators, securities intermediaries, 
nor third party proxy service providers--possesses all of the 
information necessary to confirm whether a particular beneficial 
owner's vote has been timely received and accurately recorded. A number 
of market participants contend that some proxy service providers, 
transfer agents, or vote tabulators are unwilling or unable to share 
voting information with each other or with investors and securities 
intermediaries. There are currently no legal or regulatory requirements 
that compel these entities to share information with each other in 
order to allow for vote confirmations.
    The inability to confirm that votes have been timely received and 
accurately recorded creates uncertainty regarding the accuracy and 
integrity of votes cast at shareholder meetings. At a time when votes 
on matters presented to shareholders are increasingly meaningful and 
consequential to all shareholders, this lack of transparency could 
potentially impair confidence in the proxy system.\90\ Because of the 
inability to ascertain the integrity of the votes cast by beneficial 
owners, concerns have been raised by investors that it may be difficult 
to assess the accuracy of the current proxy system as a whole.
---------------------------------------------------------------------------

    \90\ The Organisation of Economic Co-operation and Development 
(``OECD''), consisting primarily of jurisdictions with high income 
and developed markets, has voiced similar concerns about this lack 
of transparency in several jurisdictions and recommends addressing 
it through legal and regulatory changes. Corporate Governance: A 
Survey of OECD Countries (2004) (``OECD Survey'').
---------------------------------------------------------------------------

2. Potential Regulatory Responses
    In the Commission's view, both record owners and beneficial owners 
should be able to confirm that the votes they cast have been timely 
received and accurately recorded and included in the tabulation of 
votes, and issuers should be able to confirm that the votes that they 
receive from securities intermediaries/proxy advisory firms/

[[Page 42993]]

proxy service providers on behalf of beneficial owners properly reflect 
the votes of those beneficial owners. We understand that there may be a 
number of operational and legal complexities with any proposed solution 
and that the costs and benefits associated with any options should be 
carefully weighed.
    One possible solution may be for all participants in the voting 
chain to grant to issuers, or their transfer agents or vote tabulators, 
access to certain information relating to voting records, for the 
limited purpose of enabling a shareholder or securities intermediary to 
confirm how a particular shareholder's shares were voted. To protect 
the identities of objecting beneficial owners from issuers, a system 
could assign each beneficial owner a unique identifying code, which 
could then be used to create an audit trail from beneficial owner to 
proxy service provider to transfer agent/vote tabulator. Issuers (or 
their agents, such as transfer agents or vote tabulators) would, in 
turn, confirm to record owners, beneficial owners, and securities 
intermediaries upon request that any particular votes cast by them or 
on their behalf have been received and voted as instructed. This 
process could be fully automated such that a vote confirmation could be 
provided by the issuer (or its agent) to the record owner or, in the 
case of beneficial owners, to the securities intermediary or proxy 
service provider and sent by e-mail to the beneficial owner.
    Confirmation of the vote information may also facilitate the 
ability of market participants and state and federal regulatory 
authorities or courts to ascertain the accuracy of a particular 
election or the overall proxy system. Moreover, transparency of the 
process should promote investor confidence as well.
3. Request for Comment
     To what extent have shareholders had difficulty in 
confirming whether their submitted votes have been tabulated? To what 
extent have issuers had difficulty in determining whether the votes 
submitted by securities intermediaries/proxy advisory firms/proxy 
service providers accurately reflect the voting instructions submitted 
by beneficial owners?
     To what extent do investors believe that their votes have 
not been accurately transmitted or tabulated, and what is the basis for 
such belief? Is there sufficient information about the ways that 
investors actually place their votes, for example, by telephone, on 
paper, or via the Internet? \91\ Do investors have concerns about 
whether the method they use to place their votes affects the likelihood 
that their vote will be accurately recorded?
---------------------------------------------------------------------------

    \91\ See note 49, above.
---------------------------------------------------------------------------

     Should all participants in the voting chain grant access 
to their share voting records to issuers and their transfer agents/vote 
tabulators, for the limited purpose of enabling confirmation of a 
shareholder's vote? What are the benefits and costs associated with 
sharing such information?
     What is the best way to preserve any continuing anonymity 
of those investors who choose not to have their identities disclosed to 
the issuer?
     Would the creation of a unique identifier for each 
beneficial owner be feasible? Would such a system achieve the objective 
of allowing record owners and beneficial owners to confirm that their 
vote was cast in accordance with their instructions and confirm the 
number of shares cast on their behalf? What are the costs and benefits 
associated with such a system?
     Should issuers (and their agents) confirm to registered 
owners, beneficial owners, or securities intermediaries that the issuer 
has received and properly tabulated their votes? Should this 
confirmation be limited to an informal confirmation that votes have 
been counted, or should shareholders be able to obtain some form of 
proof that their votes have been counted? What type of documentation 
would constitute sufficient proof? What are the benefits and costs of 
such alternatives? Are there other steps that would enable beneficial 
owners to verify that their votes have been counted?
     Should investors also be able to obtain access to share 
voting records for the limited purpose of enabling an audit of the 
shareholder vote?
     Should issuers and securities intermediaries (and their 
agents) be required to reconcile and verify voting at the beneficial 
owner level? Would this be consistent with state law, which vests 
voting rights in the registered owner? Would other reconciliation and 
verification requirements be consistent with the purposes underlying 
state law?
     Should proxy participants periodically evaluate and test 
the effectiveness of their voting controls and procedures? If so, to 
whom should the results of these tests or the participants' conclusions 
on effectiveness be disclosed? Should disclosure be to the Commission, 
to clients, or also to the public?

C. Proxy Voting by Institutional Securities Lenders

    Institutional securities lenders play a significant role in the 
proxy voting process, and we believe that it is important to evaluate 
the impact of their share lending on that process, and to consider ways 
in which the efficacy and transparency of share voting on the part of 
such institutions could potentially be improved. In particular, and as 
discussed below, we seek to examine whether decisions to recall loaned 
securities in connection with shareholder votes might be more timely 
and better informed. We also seek to examine whether increased 
disclosure of the votes cast by institutional securities lenders might 
improve the transparency of the voting process.
1. Background
    Many institutions with investment portfolios of securities--such as 
insurance companies, pension funds, mutual funds, and college 
endowments--engage in securities lending to earn additional income on 
securities that would otherwise be sitting idle in their portfolios. 
When an institution lends out its portfolio securities, all incidents 
of ownership relating to the loaned securities, including voting 
rights, generally transfer to the borrower for the duration of the 
loan.\92\ Accordingly, if the lender wants, or is obligated, to vote 
the loaned securities, the lender must terminate the loan and recall 
the loaned securities prior to the record date.\93\
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    \92\ See, e.g., Thomas P. Lemke et al., Regulation of Investment 
Companies at 8.02[1][2][vi][A] (2006) (``legal title to the [loaned] 
securities (along with voting rights and rights to dividends and 
distributions) passes to the borrower for the term of the loan; when 
the securities are returned, the fund regains title''). See also 
Master Securities Loan Agreement, note 72, above, at 7.1 (generally 
the borrower receives all the incidents of ownership of the borrowed 
securities while loan is open).
    \93\ It is not typically feasible for the lender to retain proxy 
voting rights while the loan is open because the borrower typically 
transfers the loaned securities (for example, in a short sale), and 
the eventual transferee needs full right and title to the acquired 
securities.
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2. Lack of Advance Notice of Meeting Agenda
a. Background
    Some institutional securities lenders have proxy voting policies 
that require the lender, in the event of a material vote, to get back 
the loaned securities in order to vote the proxies.\94\ While issuers 
are required to provide information in the proxy statement

[[Page 42994]]

about the matters to be voted on at a shareholder meeting, the proxy 
statement typically is not mailed out until after the record date. 
Therefore, those institutional lenders that desire, or are obligated, 
to vote proxies with respect to securities on loan in the event of a 
material vote face the challenge of learning what matters will be voted 
on at shareholder meetings sufficiently in advance of the record date 
so that the lenders can determine whether they want to get the loaned 
securities back before the record date.
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    \94\ For example, the Commission staff has agreed not to object 
if voting rights pass with the lending of securities provided that 
if the management of the lending fund has knowledge that a material 
event will occur with respect to a security on loan, the fund 
directors would be obligated to recall such loan in time to vote the 
proxies. See, e.g., State Street Bank & Trust Company, SEC Staff No-
Action Letter (Sept. 29, 1972).
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    We understand that some institutional securities lenders may try to 
obtain timely information about meeting agendas through a variety of 
informal means, including media reports. We are also told, however, 
that this informal process is not an effective substitute for a formal 
process that would alert securities lenders to the matters to be voted 
on at shareholder meetings in time to terminate the loan and receive 
the loaned securities. We understand that, in some instances, 
securities lenders learn of material votes too late to recall the loans 
to vote the proxies.\95\
---------------------------------------------------------------------------

    \95\ See Roundtable Transcript, note 79, above.
---------------------------------------------------------------------------

b. Potential Regulatory Responses
    In considering possible solutions, we note that, under Section 
401.02 of the NYSE Listed Company Manual, NYSE-listed issuers must 
provide the exchange with notice of the record and meeting dates for 
shareholder meetings at least ten days prior to the record date for the 
meeting, unless it is not possible to do so. That notice must describe 
the matters to be voted upon at the meeting, unless it is accompanied 
by printed material being sent to shareholders which describes those 
matters. We understand, however, that this formal notice is not 
disseminated to the public and may not contain specific descriptions of 
all matters to be voted on at the meeting.
    Consequently, one possible regulatory response is to ask the NYSE 
to revise its rules to require public dissemination of a notice, in 
advance of the record date, that contains information about the record 
and meeting dates as well as specific descriptions of all matters to be 
voted upon. Other SROs could also be asked to adopt similar rules. An 
alternative possibility is a requirement for all issuers subject to our 
proxy rules to disclose the agenda by public means, such as by filing a 
report on Form 8-K (or as an alternative to such a filing requirement, 
permitting the issuance of a press release or a posting on a corporate 
Web site).
    In identifying these alternatives, we are mindful that it can be 
difficult for issuers to disclose complete meeting agendas in advance 
of the record date because the agenda may not be established at that 
time for a variety of reasons, including board consideration of 
initiatives proposed by management and Commission staff review of no-
action requests regarding Rule 14a-8 shareholder proposals.
c. Request for Comment
     Should the Commission propose a rule to require issuers to 
disclose publicly the meeting agenda sufficiently in advance of the 
record date to permit securities lenders to determine whether any of 
the matters warrant a termination of the loan so that they may vote the 
proxies? If so, how many days would constitute sufficient notice to the 
public?
     What are the advantages and disadvantages, practical and 
as a matter of policy, to requiring issuers to provide this advance 
notice to the public? For instance, would the issuer know, sufficiently 
in advance, all of the items to be on the agenda, particularly 
shareholder proposals which may be the subject of a request for no-
action relief being considered by the Commission's staff? \96\ How 
could such a requirement provide notice of contested matters and other 
non-management proposals to be considered at the meeting? Could we 
address concerns by allowing issuers to publish an agenda that is 
``subject to change''? If so, should we limit such changes to 
shareholder proposals for which the issuer is seeking no-action relief? 
How often does uncertainty about a meeting agenda preclude issuers from 
disclosing the agenda in sufficient time for shareholders to recall 
loans before the record date?
---------------------------------------------------------------------------

    \96\ When an issuer seeks to exclude a shareholder proposal 
submitted pursuant to Rule 14a-8, it must file its reasons with the 
Commission. 17 CFR 240.14a-8(j).
---------------------------------------------------------------------------

     Would a mechanism that alerts lending shareholders to 
meeting agendas well in advance of record dates have positive and 
desirable effects on the proxy solicitation system such that the 
Commission should encourage and facilitate this? Would such a mechanism 
increase the number of lenders recalling loans, and result in greater 
loan instability, with adverse effects on the capital markets? If there 
are competing interests, which should prevail, and why?
     How could an advance notice requirement be effected? 
Should the Commission propose rules applicable to all issuers subject 
to the proxy rules? Or, should the SROs amend or adopt listing 
standards requiring their listed issuers to provide advance notice to 
the public of record and meeting dates and specific descriptions of all 
matters to be voted on at the shareholder meeting?
     If we required advance notice, through what medium should 
such notice to shareholders be made? Should issuers be required to 
issue a press release or make a company Web site posting in addition to 
filing a notice with the Commission? Would such notice be sufficient 
for shareholders?
     We also request data regarding the recall of loaned 
securities by institutional shareholder lenders in order to vote the 
shares. Please include information regarding the circumstances in which 
the recalls did and did not occur, and whether the shares were 
ultimately voted.
3. Disclosure of Voting by Funds
a. Background
    Management investment companies registered under the Investment 
Company Act (collectively, ``funds'') are required to disclose on Form 
N-PX how they vote proxies relating to portfolio securities.\97\ In 
adopting this requirement in 2003, the Commission stated that 
``[i]nvestors in mutual funds have a fundamental right to know how the 
fund casts proxy votes on shareholders' behalf.'' \98\ Indeed, the 
Commission required funds to disclose whether they cast their vote for 
or against management, in an effort to benefit fund shareholders by 
improving transparency and enabling them to monitor whether their funds 
approved or disapproved of the governance of portfolio companies.\99\
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    \97\ See Disclosure of Proxy Voting Policies and Proxy Voting 
Records by Registered Management Investment Companies, Release No. 
IC-25932 (Jan. 31, 2003) [68 FR 6564].
    \98\ Id. at 6566.
    \99\ Id. at 6565.
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    As noted above, when a fund lends its portfolio securities, all 
incidents of ownership relating to the loaned securities, including 
proxy voting rights, generally transfer to the borrower for the 
duration of the loan.\100\ Accordingly, the fund generally loses its 
ability to vote the proxies of such securities, unless and until the 
loan is terminated and the securities are returned to the lender prior 
to the record date in question.
---------------------------------------------------------------------------

    \100\ See note 92, above.
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    Currently, Form N-PX requires disclosure of proxy voting 
information ``for each matter relating to a portfolio security 
considered at any shareholder meeting held during the period covered by 
the report and with respect to which

[[Page 42995]]

the registrant was entitled to vote.'' \101\ However, Form N-PX does 
not require disclosure of the number of shares for which proxies were 
voted, nor does the Form require disclosure with respect to portfolio 
securities on loan when, as is generally the case, the fund is not 
entitled to vote proxies relating to those securities. Thus, for 
example, if a fund lends out 99% of its portfolio holdings of XYZ 
Corporation and therefore votes only 1% of its holdings of XYZ, Form N-
PX would disclose that the fund voted proxies with respect to shares of 
XYZ, but would not also disclose that the fund did not vote 99% of its 
holdings of XYZ because they were on loan.
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    \101\ See Item 1 to Form N-PX. Form N-PX requires disclosure of 
the following: The name of the issuer of the portfolio security; the 
exchange ticker symbol of the portfolio security; the Council on 
Uniform Securities Identification Procedures (CUSIP) number for the 
portfolio security; the shareholder meeting date; a brief 
identification of the matter voted on; whether the matter was 
proposed by the issuer or by a security holder; whether the fund 
cast its vote on the matter; how the fund cast its vote (e.g., for 
or against proposal, or abstain; for or withhold regarding election 
of directors); and whether the fund cast its vote for or against 
management.
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b. Potential Regulatory Responses
    We seek to examine whether Form N-PX should be amended to require 
disclosure of the actual number of votes cast by funds.
c. Request for Comment
     Should Form N-PX require disclosure of the actual number 
of shares voted? Should Form N-PX require disclosure of the number of 
portfolio securities for which a fund did not vote proxies because the 
securities were on loan or for other reasons?
     What would be the costs to funds of disclosing the actual 
number of proxy votes? What would be the costs to funds of disclosing 
the number of portfolio securities for which a fund did not vote 
proxies?

D. Proxy Distribution Fees

1. Background
    One of the most persistent concerns that has been expressed to the 
Commission's staff, particularly by issuers, involves the structure and 
size of fees charged for the distribution of proxy materials to 
beneficial owners.
a. Current Fee Schedules
    Pursuant to Exchange Act Rules 14b-1 and 14b-2, respectively, 
broker-dealers and banks must distribute certain materials received 
from an issuer or other soliciting party to their customers who are 
beneficial owners of securities of that issuer. These materials include 
proxy statements, information statements, annual reports, proxy cards, 
and other proxy soliciting materials.\102\ A broker-dealer or bank does 
not need to satisfy this obligation, however, unless the issuer 
provides ``assurance of reimbursement of the broker's or dealer's 
reasonable expenses, both direct and indirect,'' that the broker-dealer 
will incur in distributing the materials to its customers.\103\
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    \102\ 17 CFR 240.14b-1(b); 17 CFR 240.14b-2(b).
    \103\ 17 CFR 240.14b-1(c)(2); 17 CFR 240.14b-2(c)(2).
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    In adopting these rules, we did not determine what constituted 
``reasonable expenses'' that were eligible for reimbursement. Rather, 
the SROs submitted rule filings with us pursuant to Section 19(b) of 
the Exchange Act to establish these amounts.\104\ Because SROs 
represent both issuers and broker-dealers, we believed that SROs would 
be best positioned to ``make a fair evaluation and allocation'' of the 
costs associated with the distribution of shareholder materials.\105\ 
Accordingly, SRO-adopted rules, approved by the Commission, establish 
the maximum amount that an SRO member may receive for soliciting 
proxies from, and distributing other issuer materials to, beneficial 
owners on behalf of issuers.\106\
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    \104\ 15 U.S.C. 78s(b). See, e.g., Order Granting Approval to 
Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval to Amendment No. 1 to Proposed Rule Change 
Relating to a One-Year Pilot Program for Transmission of Proxy and 
Other Shareholder Communication Material, Release No. 34-38406 (Mar. 
14, 1997) [62 FR 13922]. We note that, in approving a rule filing, 
we must find that such filing is consistent with the Exchange Act. 
For example, Section 6(b)(4) of the Exchange Act requires that the 
rules of an exchange ``provide for the equitable allocation of 
reasonable dues, fees, and other charges among its members and 
issuers and other persons using its facilities.'' 15 U.S.C. 
78f(b)(4).
    \105\ See Release No. 34-38406, note 104, above.
    \106\ See text accompanying notes 116 to 120, below.
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    Since 1937, the New York Stock Exchange has required issuers, as a 
matter of policy, to reimburse its members for out of pocket costs of 
forwarding proxy materials.\107\ Reimbursement rates were formally 
established by rule in 1952, and have been revised periodically since 
then.\108\ Today, NYSE Rules 451 and 465 establish the fee structure 
for which a NYSE member organization may be reimbursed \109\ for 
expenses incurred in connection with the forwarding of proxy materials, 
annual reports, and other materials to beneficial owners.\110\ The NYSE 
initially proposed this fee structure as part of a one-year pilot 
program, which elicited a number of comments before the Commission 
approved the pilot program in 1997.\111\ The pilot program was extended 
several times, during which time the NYSE participated in the Proxy 
Voting Review Committee, which was established to review the pilot fee 
structure.\112\ In 2002, the NYSE proposed to implement the fee 
structure on a permanent basis, with some changes, in light of the 
recommendations of the Proxy Voting Review Committee.\113\ Some 
commentators raised concerns about the amount of the fees and the 
absence of competition that might help determine the appropriate level 
for those fees.\114\ In approving the fee structure on a permanent 
basis, we stated that we expected the NYSE to monitor the fees to 
confirm that they continued to relate to ``reasonable expenses.'' \115\
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    \107\ See Report and Recommendations of the Proxy Working Group 
to the New York Stock Exchange (``Proxy Working Group Report''), 
June 5, 2006, available at http://www.nyse.com/pdfs/REVISED_NYSE_Report_6_5_06.pdf, at 23.
    \108\ Id.
    \109\ It should be noted that the NYSE fee schedule under Rule 
451 for expenses incurred in connection with proxy solicitations is 
the same as the fee schedule for expenses incurred in mailing 
interim reports or other material pursuant to Rule 465. For purposes 
of this release, references to fees will cite to NYSE Rule 465. 
Pursuant to Rule 465, member organizations are entitled to receive 
reimbursement for all out of pocket expenses, including clerical 
expenses as well as actual costs, including postage costs, the cost 
of envelopes, and communication expenses incurred in receiving 
voting returns either electronically or telephonically. See NYSE 
Rule 465(2) and Supplementary Material to Rule 465.20.
    \110\ The vast majority of firms that distribute issuer material 
to beneficial owners are reimbursed at the NYSE fee schedule rates 
because most of the brokerage firms are NYSE members or members of 
other exchanges that have rules similar to the NYSE's rules.
    \111\ See Release No. 34-38406, note 104, above.
    \112\ See Order Approving Proposed Rule Change and Amendment No. 
1 Thereto by the New York Stock Exchange, Inc. Amending Its Rules 
Regarding the Transmission of Proxy and Other Shareholder 
Communication Material and the Proxy Reimbursement Guidelines Set 
Forth In Those Rules, and Requesting Permanent Approval of the 
Amended Proxy Reimbursement Guidelines, Release No. 34-45644 (Mar. 
25, 2002) [67 FR 15440] (``NYSE Fee Structure Order'').
    \113\ Id.
    \114\ Id. See also Order Approving Proposed Rule Change and 
Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 1 to Proposed Rule Change Relating to the 
Reimbursement of Member Organizations for Costs Incurred in the 
Transmission of Proxy and Other Shareholder Communication Material, 
Release No. 34-41177 (Mar. 16, 1999) [64 FR 14294].
    \115\ See NYSE Fee Structure Order, note 112, above.
---------------------------------------------------------------------------

    Currently, the rates set by the NYSE for the forwarding of an 
issuer's proxy materials include: \116\
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    \116\ See NYSE Supplementary Material to Rule 465.20.

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[[Page 42996]]

     A ``Base Mailing Fee'' of $0.40 for each beneficial owner 
account when there is not an opposing proxy (the ``Base Mailing Fee''). 
This fee applies for each set of proxy materials, regardless of whether 
the materials have been mailed or the mailing has been suppressed or 
eliminated.
     An ``Incentive Fee'' of $0.25 per beneficial owner account 
for issuers whose securities are held by many beneficial owners and 
$0.50 per account for issuers with few beneficial owners.\117\ This 
fee, which is in addition to the Base Mailing Fee, applies when the 
need to mail materials in paper format has been eliminated, for 
instance, by eliminating duplicative mailings to multiple accounts at 
the same address.\118\
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    \117\ The Incentive Fee is $0.25 for each account for issuers 
whose shares are held in at least 200,000 nominee accounts, and $.50 
for each account for issuers whose shares are held in fewer than 
200,000 accounts. According to the NYSE, the cost to service large 
issuers, i.e., issuers whose shares are held in at least 200,000 
nominee accounts, is less than the cost to service small issuers 
because of economies of scale, which justifies a smaller Incentive 
Fee for large issuers. See NYSE Fee Structure Order, note 112, 
above.
    \118\ NYSE Rule 465 includes the following examples as being 
eligible for the Incentive Fee: ``multiple proxy ballots or forms in 
one envelope with one set of material mailed to the same household, 
by distributing multiple proxy ballots or forms electronically 
thereby reducing the sets of material mailed, or by distributing 
some or all material electronically.''
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     A ``Nominee Coordination Fee'' of $20 per ``nominee''--
i.e., securities intermediaries that are either registered holders or 
identified on the DTC securities position listing--which is paid to a 
proxy service provider that coordinates the mailings for multiple 
securities intermediaries.
     An additional ``Nominee Coordination Fee'' of $0.05 per 
beneficial owner account for issuers whose securities are held by many 
beneficial owners \119\ and $0.10 per account for issuers with few 
beneficial owners.\120\
---------------------------------------------------------------------------

    \119\ The per-account Nominee Coordination Fee is $0.05 for each 
account for each issuer's securities for issuers whose shares are 
held in at least 200,000 beneficial owner accounts held by nominees, 
and $.10 for each account for each issuer's securities for issuers 
whose shares are held in fewer than 200,000 beneficial owner 
accounts held by nominees. See NYSE Fee Structure Order, note 112, 
above. According to the NYSE, as with Incentive Fees, the cost to 
service large issuers is less than the cost to service small issuers 
because of economies of scale, which justifies a smaller Nominee 
Coordination Fee per account for large issuers. Id.
    \120\ For example, if an issuer's securities are held in 10,000 
beneficial owner accounts holding in street name, and those accounts 
are divided among ten securities intermediaries, the fees discussed 
above would be assessed as follows:
     Base Mailing Fee of 10,000 accounts x $0.40 per account, or 
$4,000;
    Incentive Fee of 5,000 accounts suppressed x $0.50 per account, 
or $2,500 (assuming 50% of the accounts are eligible for the 
incentive fee);
    Nominee Coordination Fee of 10 securities intermediaries x $20 
per intermediary, or $200; and
    Additional Nominee Coordination Fee of 10,000 accounts x $0.10 
per account, or $1,000.
---------------------------------------------------------------------------

    While a member organization, such as a securities intermediary, may 
seek reimbursement for less than the approved rates, it may not seek 
reimbursement for an amount higher than the approved rates listed in 
Rule 465, or for items or services not enumerated in Rule 465, 
``without the prior notification to and consent of the person 
soliciting proxies or the issuer.'' \121\
---------------------------------------------------------------------------

    \121\ See NYSE Supplementary Material to Rule 465.23.
---------------------------------------------------------------------------

    When the fees were approved in 2002, we expected the NYSE ``to 
continue its ongoing review of the proxy fee process, including 
considering alternatives to SRO standards that would provide a more 
efficient, competitive, and fair process.'' \122\ We also indicated 
that market participants should consider ways in which market forces 
could determine reasonable rates of reimbursement, rather than have 
these rates be set by the NYSE under its rules.\123\
---------------------------------------------------------------------------

    \122\ See NYSE Fee Structure Order, note 112, above. In the NYSE 
Order, we also stated that we expected NYSE to ``periodically review 
these fees to ensure they are related to `reasonable expenses * * * 
in accordance with the [Exchange] Act, and propose changes where 
appropriate.'' Id.
    \123\ Id.
---------------------------------------------------------------------------

    In 2006, the Proxy Working Group considered the NYSE's current fee 
structure and indicated that Rule 465's fees ``may be expensive to 
issuers but generally result[] in shareholders receiving and being able 
to vote proxies in a timely manner. This is an important benefit of the 
current system.'' \124\ The Proxy Working Group also noted, however, 
that ``issuers and shareholders deserve periodic confirmation that the 
system is performing as cost-effectively, efficiently and accurately as 
possible, with the proper level of responsibility and accountability in 
the system.'' \125\ The Proxy Working Group also recommended that the 
NYSE should ``continue to explore alternative systems * * * such that a 
competitive system, with fees set by the free market, could eventually 
succeed the current system.'' \126\ The Proxy Working Group recommended 
that the NYSE engage an independent third party to analyze and make 
recommendations regarding the structure and amount of fees paid under 
Rule 465 and to study the performance of the proxy service provider 
that currently has the largest market share and the business process by 
which the distribution of proxies occurs. To date, this review has not 
been done. Subsequently, the Proxy Working Group's Cost and Pricing 
Subcommittee considered the changes brought about through the notice 
and access model and decided that the notice and access fees were not 
covered under current NYSE fee rules and concluded that they should 
allow participants to negotiate their own fees.\127\
---------------------------------------------------------------------------

    \124\ Proxy Working Group Report, note 107, above, at 5.
    \125\ Id., at 26.
    \126\ Id., at 29.
    \127\ See August 27, 2007 Addendum to the Report and 
Recommendations of the Proxy Working Group to the New York Stock 
Exchange dated June 5, 2006 (``Proxy Working Group Addendum''), 
available at http://www.nyse.com/pdfs/PWGAddendumfinal.pdf.
---------------------------------------------------------------------------

    After the NYSE fee structure for proxy distribution was established 
on a permanent basis in 2002, other SROs adopted similar rules. For 
example, the NYSE Amex LLC (``Amex'') and the Financial Industry 
Regulatory Authority, Inc. (``FINRA'') revised their rules (Amex Rule 
576, Amex Section 722 of the Amex Company Guide, and NASD IM-2260, 
respectively) to adopt similar provisions.\128\
---------------------------------------------------------------------------

    \128\ See Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change by the American Stock Exchange LLC Amending 
Exchange Rules 576 and 585, and Sections 722 and 725 of the Amex 
Company Guide, Release No. 34-46146 (June 28, 2002) [67 FR 44902] 
and Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. 
Relating to an Amendment to NASD Interpretive Material 2260, Release 
No. 34-47392 (Feb. 21, 2003) [68 FR 9730]. NASD Rule 2260 and NASD 
IM-2260 were recently renumbered as FINRA Rule 2251 in the 
Consolidated FINRA Rulebook. See Order Granting Approval of Proposed 
Rule Change to Adopt FINRA Rule 2251 (Forwarding of Proxy and Other 
Issuer-Related Materials) in the Consolidated FINRA Rulebook, 
Release No. 34-61052 (Nov. 23, 2009) [74 FR 62857].
---------------------------------------------------------------------------

b. Notice and Access Model
    Neither the NYSE nor any other SRO has established maximum fees 
that member firms may charge issuers for deliveries of proxy materials 
using the notice and access method. The majority of broker-dealers have 
contracts with one proxy service provider to distribute proxies to 
beneficial owners.\129\ If an issuer elects the ``notice-only'' 
delivery option for any or all accounts, that proxy service provider 
currently charges an ``Incremental Fee,'' ranging from $0.05 to $0.25 
per account for positions

[[Page 42997]]

in excess of 6,000,\130\ in addition to the other fees permitted to be 
charged under NYSE Rule 465. This Incremental Fee is charged to all 
accounts, even if the issuer has elected to continue ``full set'' 
delivery to some accounts. Several issuers have expressed concerns 
about these fees associated with the notice and access model.
---------------------------------------------------------------------------

    \129\ Broadridge, as the service provider for most U.S. broker-
dealers holding customer accounts, distributes the vast majority of 
proxy mailings to beneficial owners. See Proxy Working Group Report, 
note 107, above, at 24 (``ADP [(now Broadridge) is] the agent for 
almost all banks and brokerage houses.'').
    \130\ The Incremental Fee for 1 to 6,000 positions is $1,500. 
Above 6,000 positions, the fee is charged on a per-account basis, 
and varies according to the number of positions. As such, the 
Incremental Fee ranges from $.25 per account for 6,001 to 10,000 
positions to $.05 per account for greater than 500,000 positions. 
See Broadridge Fee Schedule, at http://www.broadridge.com/notice-and-access/pdfs/Reference_Rev1_31.pdf.
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c. Current Practice Regarding Fees Charged
    As noted above, broker-dealers generally outsource their delivery 
obligations to proxy service providers.\131\ The proxy service provider 
enters into a contract with the broker-dealer and acts as a billing and 
collection agent for that broker-dealer. As such, the proxy service 
provider bills issuers on behalf of the broker-dealer with which it has 
contracted, collects the fees from the issuer to which the broker-
dealer is entitled pursuant to SRO rules, and pays to the broker-dealer 
any difference between the fee that the broker-dealer is entitled to 
collect and the amount that the broker-dealer has agreed to pay the 
proxy service provider for its services.\132\
---------------------------------------------------------------------------

    \131\ See NYSE Fee Structure Order, note 112, above. According 
to the NYSE, this shift was attributable to the fact that member 
firms believed that proxy distribution ``was not a core broker-
dealer business and that capital could be better used elsewhere.'' 
Id.
    \132\ See Release No. 34-38406, note 104, above. See also 
Broadridge Form 10-K for the fiscal year ended June 30, 2009, at 4.
---------------------------------------------------------------------------

    It is our understanding that Broadridge currently bills issuers, on 
behalf of its broker-dealer clients, the maximum fees allowed by NYSE 
Rule 465.\133\ However, we understand that the fees that Broadridge 
charges its large broker-dealer clients for its services sometimes are 
less than the maximum NYSE fees charged to issuers on the broker-
dealers' behalf, resulting in funds being remitted from Broadridge to a 
subset of its broker-dealer clients. This practice raises the question 
as to whether the fees in the NYSE schedule currently reflect 
``reasonable reimbursement.'' While the issuer pays the proxy 
distribution fees, the issuer has little or no control over the process 
by which the proxy service provider is selected, the terms of the 
contract between the broker-dealer and the proxy service provider, or 
the fees that are incurred through the proxy distribution process.
---------------------------------------------------------------------------

    \133\ See Broadridge Fee Schedule, note 130, above.
---------------------------------------------------------------------------

    Several other issues concerning the appropriateness of fees have 
also been raised in recent years. For example, it is our understanding 
that, once a paper mailing is suppressed, the securities intermediary, 
or its agent, collects the Incentive Fee, not only for the year in 
which the shareholder makes that election, but also for every 
subsequent year, even though the continuing role of the securities 
intermediary, or its agent, in eliminating these paper mailings is 
limited to keeping track of the shareholder's election.\134\ Further, 
it is our understanding that, with respect to certain managed accounts, 
where hundreds or thousands of beneficial owners may delegate their 
voting decisions to a single investment manager, the Base Mailing Fee 
and the Incentive Fee are assessed for all accounts, even though only 
one set of proxy materials is transmitted to the investment 
manager.\135\
---------------------------------------------------------------------------

    \134\ This Incentive Fee is intended to encourage securities 
intermediaries to reduce proxy distribution costs on behalf of 
issuers because intermediaries otherwise may have no motivation to 
reduce an issuer's forwarding costs. See SIFMA, Report on the 
Shareholder Communications Process with Street Name Holders, and the 
NOBO-OBO Mechanism (June 10, 2010) (``SIFMA Report''), at 14 
(describing categories of ongoing costs of maintaining current e-
mail addresses and related databases and systems), available in the 
public comment file to this release.
    \135\ See letter from Thomas L. Montrone of The Securities 
Transfer Association to Chairman Mary Schapiro, dated June 2, 2010 
(stating that ``We believe that many issuers are being assessed 
unreasonable fees under Rule 465 related to share ownership in 
separate managed accounts (``SMAs'') in which the investor has 
delegated responsibility for management of the account and is not 
being provided with any proxy materials''), available in the public 
comment file to this release.
---------------------------------------------------------------------------

    In summary, many issues have been raised about fees, focusing 
mostly on whether the current fee structure for delivering proxy 
materials to beneficial owners reflects reasonable rates of 
reimbursement.
2. Potential Regulatory Responses
    We have previously recognized the potential benefits of allowing 
the marketplace, rather than SRO rules and guidelines, to determine 
reasonable rates of reimbursement for the distribution of proxy 
materials. As noted above, at the time of adoption of the current fee 
structure, we did not expect that the discussion of reasonable rates of 
reimbursement would end. Rather, we noted that market forces should 
ultimately determine competitive and reasonable rates of reimbursement, 
and urged the NYSE to identify ways to achieve this goal, consistent 
with the continued protection of shareholder voting rights in a 
competitive marketplace for proxy distribution.\136\ While the Proxy 
Working Group did suggest ways to re-evaluate the NYSE's current fee 
structure, such as conducting ``cost studies, commission audits and 
surveys of various constituencies involved,'' \137\ to date those 
suggestions have not been implemented. A proxy distribution process 
that fosters competition could give issuers, which are responsible for 
reimbursing only reasonable proxy distribution costs, more control over 
that process and remove the Commission and SROs from the business of 
setting rates. However, we understand that, without a competitive 
market, there may be a continued need for regulated fees.
---------------------------------------------------------------------------

    \136\ See NYSE Fee Structure Order, note 112, above.
    \137\ See Proxy Working Group Report, note 107, above, at 26-27.
---------------------------------------------------------------------------

    In addition, we recognize the importance of maintaining a proxy 
distribution system that is efficient, reliable, and accurate. We note 
that various groups have previously attested to the efficiency, 
reliability, and accuracy of the current proxy distribution 
system.\138\ However, given developments in the securities market 
overall and proxy solicitation rules, such as the notice and access 
model, it appears to be an appropriate time for SROs to review their 
existing fee schedules to determine whether they continue to be 
reasonably related to the actual costs of proxy solicitation.
---------------------------------------------------------------------------

    \138\ See, e.g., letter from Donald D. Kittell, Securities 
Industry Association, to Nancy M. Morris, Secretary, Commission, 
dated Feb. 13, 2006 (``The current system for delivering proxies to 
80 percent of shareholders--those holding in `street name'--has 
proven to be very efficient and cost-effective.'') available in the 
public comment file to this release. See also Proxy Working Group 
Report, note 107, above, at 25 (citing to letter from Richard H. 
Koppes, Facilitator, Proxy Voting Review Committee, to Sharon 
Lawson, Senior Special Counsel, Commission, dated Feb. 28, 2002).
---------------------------------------------------------------------------

    One alternative that has been suggested by a commentator is the 
creation of a central data aggregator that is given the right to 
collect beneficial owner information from securities intermediaries, 
but is required to provide that information to any agent designated by 
the issuer.\139\ The aggregator would be entitled to structured 
compensation for its activities. This could create competition among 
service providers for the distribution of the proxy materials by making 
the beneficial owner

[[Page 42998]]

information available to all service providers, allowing them to 
compete in providing services to forward proxy materials. This would 
also place the choice of proxy service provider in the hands of the 
entity that must pay for the distribution--the issuer--rather than the 
securities intermediary, which has no incentive to reduce costs.
---------------------------------------------------------------------------

    \139\ See Shareholder Communications Coalition, Public Issuer 
Proxy Voting: Empowering Individual Investors and Encouraging Open 
Shareholder Communications (Aug. 4, 2009) (``SCC Discussion 
Draft''), at 6, available in the public comment file to this 
release.
---------------------------------------------------------------------------

    Some of the other potential regulatory responses discussed in this 
release also would affect the current system of distributing proxy 
materials and, therefore, the process of setting proxy distribution 
fees. For instance, adopting a system under which securities 
intermediaries grant proxies to underlying beneficial owners (as 
discussed in Section III.A) would permit issuers to negotiate fees and 
services with proxy service providers because the issuers would be 
directly soliciting proxies from those beneficial owners.
3. Request for Comment
     Does the current fee/rebate structure reflect reasonable 
expenses? Why or why not? If not, how should these rates be revised?
     Should the fee structure allow for reimbursement of the 
Incentive Fee on an ongoing basis once the paper mailings have already 
been eliminated?
     How are proxy distribution fees billed with respect to 
separately managed accounts? Should certain kinds of accounts, such as 
separately managed accounts, where multiple beneficial owners may 
delegate their voting decisions to a single investment manager, be 
eligible for different treatment under the current fee structure?
     Are separately managed accounts different from ``wrap'' 
accounts for which issuers may not be charged suppression fees for 
providing proxy communication services to holders of WRAP accounts? 
\140\
---------------------------------------------------------------------------

    \140\ It is our understanding that a wrap account is a certain 
type of account that is managed by an outside investment manager.
---------------------------------------------------------------------------

     Does the current fee structure discourage issuers from 
communicating with beneficial owners beyond delivery of the required 
proxy materials?
     Should there be an independent third-party audit of the 
current fee structure, as recommended by the Proxy Working Group?
     Do broker-dealers using a proxy service provider incur 
costs that justify rebates from the proxy service provider? If so, what 
are the costs, can they be quantified, and are they commensurate with 
the payments received from the proxy service provider? Do these costs 
exist only for larger broker-dealers or for broker-dealers of all 
sizes? Should the current rebates between Broadridge and larger broker-
dealers be permitted under the current fee structure? Should current 
contractual arrangements between proxy service providers and their 
clients affect the determination of whether fees are fair and 
reasonable?
     Currently, SRO rules do not set rates for reimbursement of 
expenses associated with the notice and access model. In the absence of 
SRO rules, on what basis do market participants currently determine 
whether the reimbursement of expenses associated with the notice and 
access model is, in fact, reasonable?
     Should the current fee structure that is set forth in SRO 
rules be revised to include fees for notice and access delivery? If so, 
what fees for the notice and access model might constitute ``reasonable 
reimbursement?''
     Does the current proxy distribution system--in which the 
proxy service provider is selected by a broker-dealer but paid by the 
issuer--create a lack of incentives to reduce costs for issuers? Should 
the issuer have more control over the selection and payment of the 
proxy service provider, and if so, what alternatives to the current 
system would facilitate this? What are the potential benefits and 
drawbacks of such alternatives?
     What factors are currently affecting the level of 
competition in the market for proxy service providers and their fees? 
What principles should guide the Commission's current consideration of 
competition among proxy service providers? Would multiple competing 
service providers affect the quality of service?
     What steps would be necessary to enable prices to be based 
on competitive market forces? What are the potential benefits and 
drawbacks of moving to a system where prices are determined by 
competitive market forces? What effect, if any, would this have in 
terms of accuracy, accountability, reliability, cost, and efficiency of 
the proxy distribution system? Would a market-based model increase or 
decrease costs for issuers? Would cost increases or decreases be more 
likely for small to midsize issuers?
     If issuers were able to solicit proxies directly from 
beneficial owners, what effect would that likely have on proxy 
distribution costs? Would costs be reduced through the introduction of 
competition and better alignment of economic incentives? Or, could the 
loss of economies of scale increase costs? Would each issuer likely 
negotiate fees on its own with a proxy service provider? Would the 
impact be different for large, medium, or small issuers?
     What are the practical and legal implications of 
deregulating fees in light of the existing contracts between proxy 
service providers and broker-dealers? For example, would these 
contracts need to be re-negotiated?
     What are the potential merits and drawbacks of having a 
central data aggregator collect beneficial owner information from 
securities intermediaries? How would reimbursement to the aggregator, 
as the distributor of information, be determined?
     Would changes to the OBO/NOBO mechanism, or the creation 
of a central data aggregator, encourage competition in the proxy 
distribution sector? Would competition increase or lower costs? Would 
competition increase or decrease accountability?
     A number of investors have complained about the services 
of proxy service providers (and transfer agents performing similar 
functions). How are investors' interests addressed, if at all, in the 
selection of proxy service providers? Are the interests of investors in 
this process given adequate weight?

IV. Communications and Shareholder Participation

    We first examine a number of concerns relating to the ability of 
issuers to communicate with shareholders, the level of shareholder 
participation in the proxy voting process, and the ability of investors 
to obtain and evaluate information pertinent to voting decisions. 
Because of the importance of shareholder voting, as discussed above, we 
seek additional information about ways in which issuer communications 
with shareholders, shareholder participation and shareholder use of 
information might be improved.

A. Issuer Communications With Shareholders

1. Background
    The first area of concern that we address arises out of the 
practice of holding securities in street name--that is, interposing 
securities intermediaries between issuers and the beneficial owners of 
their securities. This practice developed in order to facilitate the 
prompt and accurate processing of an increasingly large volume of 
securities transactions.\141\ The efficiency of the

[[Page 42999]]

clearance and settlement system in the U.S. is due in large part to the 
ability to ``net'' transactions, whereby contracts to buy or sell 
securities between broker-dealers are replaced with net obligations to 
a registered clearing agency, the National Securities Clearing 
Corporation (``NSCC''). To make netting possible, securities must be 
held in fungible bulk at DTC.
---------------------------------------------------------------------------

    \141\ For a history of the U.S. shareholder system, see Alan L. 
Beller & Janet L. Fisher, The OBO/NOBO Distinction in Beneficial 
Ownership: Implications for Shareowner Communications and Voting 
(February 2010), available at http://www.cii.org/UserFiles/file/CII%20White%20Paper%20-%20The%20OBO-
NOBO%20Distinction%20in%20Beneficial%20Ownership%20February%202010.pd
f, at 8-10. This report (the ``CII OBO/NOBO Report'') was published 
by the Council of Institutional Investors.
---------------------------------------------------------------------------

    There is broad consensus \142\ that the enormous volume of 
transactions cleared and settled in the U.S., which currently involve 
transactions valued at over $1.48 quadrillion annually,\143\ requires a 
centralized netting facility (i.e., NSCC) and a depository (i.e., DTC) 
that facilitates book-entry settlement of securities transactions. It 
is our understanding that this approach to clearance and settlement has 
produced significant efficiencies, lower costs, and risk management 
advantages. At the same time, however, the practice of holding 
securities in fungible bulk has made it more difficult for issuers to 
identify their beneficial owners and to communicate directly with them.
---------------------------------------------------------------------------

    \142\ See ``Recommendations for Securities Settlement Systems,'' 
CFSS/IOSCO Task Force (Nov. 2001) and ``Global Clearing and 
Settlement, A Plan of Action,'' published by the Group of Thirty 
(``G-30'') (Jan. 30, 2003).
    \143\ See http://www.dtcc.com/about/business/ statistics.php.
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    In light of recent developments in corporate governance, including 
the elimination of the broker discretionary vote on uncontested 
elections of directors, commentators have claimed a greater need for 
issuers to be able to communicate with their shareholders.\144\ These 
commentators have argued that the number of contested issues in 
shareholder meetings has increased, that voting outcomes are under more 
pressure, and that, as a result, certain changes should be made to our 
rules in order to facilitate communications by issuers with their 
beneficial owners.\145\ More broadly, commentators have questioned 
whether the current system of share ownership and the Commission's 
communications and proxy rules adequately serve the needs of investors 
and issuers.\146\
---------------------------------------------------------------------------

    \144\ See Proxy Working Group Report, note 107, above, at 22 
(discussing comments received with respect to a then-proposed 
amendment, which was recently adopted, to Rule 452 eliminating 
broker-dealer voting in the election of directors).
    \145\ See, e.g., CII OBO/NOBO Report, note 141, above, at 11 
(``Recent developments in corporate governance will place more 
pressure on voting outcomes and increase the need for both companies 
and shareowners to have an effective and reliable framework for 
communications.''); letter from Shareholder Communications Coalition 
to Chairman Mary Schapiro (Aug. 4, 2009), available at http://www.shareholdercoalition.com/SCCLetterto 
SECChairmanMarySchapiroAug2009.pdf.
    \146\ In 2004, the BRT Petition urged the Commission ``to 
conduct a thorough review of the current shareholder communications 
system.'' BRT Petition, note 8, above. The petition recommended that 
``the Commission require brokers and banks to provide issuers with 
contact information for all beneficial owners and permit the direct 
mailing of all communications (including proxy materials) to 
beneficial owners.'' Id. See also Marcel Kahan & Edward B. Rock, The 
Hanging Chads of Corporate Voting, 96 Georgetown Law Journal 1227 
(2008); J. Robert Brown Jr., The Shareholder Communication Rules and 
the Securities and Exchange Commission: An Exercise in Regulatory 
Utility or Futility, 13 Journal of Corporation Law 683 (1988); David 
C. Donald, The Rise and Effects of the Indirect Holding System: How 
Corporate America Ceded Its Shareholders to Intermediaries (Sept. 
26, 2007), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1017206.
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    The history of our efforts to address the impediments to 
communication associated with our securities ownership system goes back 
more than three decades.
    In 1976, we reported to Congress on the effects of the practice of 
holding securities in street name.\147\ While we concluded that the 
practice of registering securities in nominee (that is, DTC or a 
securities intermediary) and street name was consistent with the 
purposes of the Exchange Act, we recognized that issuers were 
experiencing difficulties in communicating with their shareholders who 
hold securities in nominee and street name. In an effort to enhance 
communication, we revised the proxy rules to require issuers, as more 
fully described above, to do the following:
---------------------------------------------------------------------------

    \147\ Street Name Study, note 13, above.
---------------------------------------------------------------------------

     Inquire of securities intermediaries whether other persons 
beneficially owned the securities they held of record; and
     Supply securities intermediaries with a sufficient number 
of sets of proxy materials to forward to beneficial owners.\148\
---------------------------------------------------------------------------

    \148\ Notice of Adoption of Amendments to Rules 14a-3, 14c-3 and 
14c-7 under the Exchange Act to Improve the Disclosure in, and the 
Dissemination of, Annual Reports to Security Holders and to Improve 
the Dissemination of Annual Reports on Form 10-K or 12-K Filed with 
the Commission Under the Exchange Act, Release No. 34-11079 (Oct. 
31, 1974) [39 FR 40766]. These requirements, which were originally 
included in Rule 14a-3(d), are currently set forth in Rule 14a-13 
[17 CFR 240.14a-13]. Facilitating Shareholder Communications, 
Release No. 34-22533 (Oct. 15, 1985) [51 FR 44276]. Based in part on 
the recommendation of the Street Name Study, we adopted additional 
rules in 1977 facilitating the transmission of proxy materials from 
issuers to beneficial owners. Requirements for Dissemination of 
Proxy Information to Beneficial Owners by Issuers and Intermediary 
Broker-Dealers, Release No. 34-13719 (July 5, 1977) [42 FR 35953].
---------------------------------------------------------------------------

    To promote direct communication between issuers and their 
beneficial owners, we adopted rules in 1983, effective in 1985, to 
require broker-dealers and banks to provide issuers, at their request, 
with lists of the names and addresses of beneficial owners who did not 
object to having such information provided to issuers.\149\ These 
owners are often referred to as ``non-objecting beneficial owners'' or 
``NOBOs.'' When a beneficial owner objects to disclosure of its name 
and address to the issuer--often referred to as ``objecting beneficial 
owners'' or ``OBOs''--the beneficial owner may be contacted only by the 
securities intermediary (or the intermediary's agent) with the customer 
relationship with the beneficial owner.\150\ According to one estimate, 
70% to 80% of all public issuers' shares are held in street name, and 
75% of those shares, or 52% to 60% of all shares, are held by 
OBOs.\151\ It is our understanding that some types of large 
institutional investors, such as mutual funds \152\ and retirement 
plans, often choose OBO status.\153\
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    \149\ See Facilitating Shareholder Communications Provisions, 
Release No. 34-20021 (July 28, 1983) [48 FR 35082]. Exchange Act 
Rule 14a-13(b)(5) enables an issuer to obtain a list of its NOBOs 
only, which means that broker-dealers and banks must classify their 
beneficial owners as either objecting or non-objecting beneficial 
owners, based on the investor's election. A requesting issuer must 
reimburse the intermediaries for their reasonable expenses in 
preparing the NOBO list. 17 CFR 240.14a-13(b)(5). The NYSE and other 
exchanges establish a per-holder fee that member brokers can charge 
for preparation of the NOBO list. E.g., NYSE Rule 465. 
Notwithstanding these limitations on the fees, issuers, particularly 
those with large shareholder bases, have indicated that the cost to 
obtain such lists can be prohibitive.
    \150\ See 17 CFR 240.14b-1(b)(3)(i). Several commentators have 
indicated that, in a number of foreign jurisdictions, public issuers 
have the right to learn the identity of individuals and institutions 
with voting rights or beneficial owner interests in their shares. 
See, e.g., BRT Petition, note 8, above; Kahan, note 146, above; 
Donald, note 146, above.
    \151\ Proxy Working Group Report at 10-11, note 107, above.
    \152\ Although mutual funds disclose their securities holdings 
on Forms N-Q and N-CSR, those disclosures are made as of the end of 
the quarter, which may not coincide with the record date used to 
determine shareholders entitled to vote at a meeting.
    \153\ One recent report states that while ``73% of retail 
shareholders are NOBOs, * * * [m]ost institutional shareholders--
about 71%--are OBOs, accounting for about 91% of all institutionally 
held shares.'' SIFMA Report, note 134, above, at 7.
---------------------------------------------------------------------------

    We understand that there are concerns about the cost and efficiency 
of the current system of communications between issuers and investors, 
including the following: \154\
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    \154\ Concerns about whether or not to disclose shareholder 
identities are shared by regulators in several jurisdictions. For 
example, in Canada, companies are under no obligation to send proxy 
materials to shareholders who do not disclose their underlying 
identity. See OECD Survey, note 90, above. In the United Kingdom, 
companies have the right to ask any person whom the company knows or 
has reasonable cause to believe has an interest in its shares to 
declare that interest. UK Companies Act 2006--Section 793: Notice by 
company requiring information about interests in its shares, 
available at (http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en_45) The failure to do so may enable the company to apply for a 
court order directing that the shares in question be subject to 
certain restrictions involving voting rights, transfers and other 
limitations. UK Companies Act 2006--Sections 794 and 797. Given that 
shareholders have the right to dismiss the board at any time in the 
United Kingdom, companies generally believe it is important that the 
board know who its shareholders are and pay attention to what they 
want. Thus, the company should be entitled to know who owns its 
shares in order to ensure accountability in both directions.

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[[Page 43000]]

     Issuers have indicated to the staff that the majority of 
their street name securities are held by OBOs through securities 
intermediaries, making it very difficult to determine the identity and 
holdings of their investors. Issuers believe that the recent changes in 
corporate governance, including the move to majority voting of 
directors, the elimination of broker discretionary voting in 
uncontested director elections, and a possible drop in retail voting 
percentages,\155\ call for more direct communication between issuers 
and their shareholders. These communications may include using a proxy 
solicitor to contact shareholders by telephone. However, an issuer 
cannot make these direct appeals for shareholders to participate in the 
issuer's corporate governance if it does not know the identity of those 
shareholders.
---------------------------------------------------------------------------

    \155\ It is unclear whether such a drop has occurred. See note 
196 and accompanying text, below.
---------------------------------------------------------------------------

     Issuers also have indicated to the staff that they face 
considerable expense in communicating with beneficial owners, either 
OBOs or NOBOs, indirectly through securities intermediaries or their 
agents. Issuers are required to reimburse securities intermediaries for 
expenses incurred in forwarding communications to beneficial owners. 
These expenses include reimbursement for postage, envelopes and 
communication expenses as well as fees to proxy service providers.\156\
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    \156\ See Section III.D, above. See also Supplementary Material 
to NYSE Rules 451 and 465; NYSE Listed Issuer Manual Sec.  
402.10(A).
---------------------------------------------------------------------------

     Some issuers have claimed that the expense of obtaining 
the list of NOBOs from the securities intermediary or its proxy service 
provider deters some issuers, particularly widely-held issuers, from 
using the NOBO list to communicate with beneficial owners.\157\ We have 
also received expressions of concern from broker-dealers about the 
difficulty of maintaining an accurate NOBO list when a class of 
securities is actively traded.
---------------------------------------------------------------------------

    \157\ Under current NYSE rules, the issuer is required to pay 
$0.065 per NOBO name, plus reasonable expenses of the broker-
dealer's agent in providing the information. NYSE Rule 465 
Supplementary Material, available at http://nyserules.nyse.com/NYSETools/PlatformViewer.asp?searched=1&selectednode=chp%5F1%5F5%5F13%5F1&CiRestriction=465&manual=%2Fnyse%2Frules%2Fnyse%2Drules%2F; FINRA Rule 
2251 Supplementary Material.
---------------------------------------------------------------------------

     We also have heard that issuers may desire more 
flexibility to design the proxy materials (e.g., forms of VIFs, 
packaging of materials, etc.) that are sent to beneficial owners. Some 
issuers believe that the current uniform appearance of proxy materials 
used by some of the proxy service providers may lead to reduced 
interest in the materials by beneficial owners. Other commentators have 
suggested that VIFs do not sufficiently inform shareholders as to how 
their shares will be voted if they do not provide instructions on all 
the matters included on the VIFs.\158\
---------------------------------------------------------------------------

    \158\ See James McRitchie, Request for rulemaking to amend Rule 
14a-4(b)(1) under the Securities Exchange Act of 1934 to prohibit 
conferring discretionary authority to issuers with respect to non-
votes on the voter information form or proxy. No. 4-583 (May 15, 
2009).
---------------------------------------------------------------------------

     Some issuers also have expressed concerns regarding 
potential quality control problems that have arisen, from time to time, 
with the services provided by proxy service providers. Similarly, 
retail investors have complained to our Office of Investor Education 
and Advocacy, from time to time, that proxy materials have been 
delivered late. To the extent that delivery of proxy materials is 
delayed, the utility of issuer-investor communication through the proxy 
process is impaired.
2. Potential Regulatory Responses
    Many issuers, securities intermediaries and commentators believe 
that there can be more efficient and cost-effective ways for issuers to 
communicate directly with their shareholders. Some commentators have 
advocated for significant changes. The 2004 Business Roundtable 
rulemaking petition (``BRT Petition'') \159\ recommended that the 
Commission enable issuers to communicate directly with their beneficial 
owners by requiring broker-dealers and banks to execute an omnibus 
proxy in favor of their underlying beneficial owners and by eliminating 
the ability of beneficial owners to object to the disclosure of their 
identities to issuers. The BRT Petition argued that eliminating 
objecting beneficial owner status would create a more efficient proxy 
system by allowing issuers to bypass securities intermediaries and 
their agents in forwarding proxy materials and by simplifying the 
voting and tabulation process.
---------------------------------------------------------------------------

    \159\ See BRT Petition, note 8, above.
---------------------------------------------------------------------------

    In 2009, the Shareholder Communications Coalition \160\ filed a 
letter supporting the BRT Petition and providing more specific 
recommendations on how to implement a system that eliminates objecting 
beneficial owner status and grants the right to vote directly to the 
beneficial owners through an omnibus proxy.\161\ This proposed system 
would separate the functions of beneficial owner data aggregation and 
proxy communications distribution, thereby making beneficial owner data 
available to the issuer's (and not the securities intermediary's) 
agent. The system would identify all beneficial owners except those 
that elect to remain anonymous by registering shares in a nominee 
account.\162\
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    \160\ The Shareholder Communications Coalition is an umbrella 
group that represents the views of The Business Roundtable, the 
Society of Corporate Secretaries and Governance Professionals, the 
National Investor Relations Institute, and the Securities Transfer 
Association.
    \161\ See SCC Discussion Draft, note 139, above.
    \162\ A beneficial owner could continue to remain anonymous by 
hiring a third party to hold the securities for the beneficial 
owner. In this circumstance, however, the cost of this agency 
arrangement would be borne by the beneficial owner.
---------------------------------------------------------------------------

    Others advocate less comprehensive change and encourage adoption of 
an approach in which an issuer would be entitled to a list of all 
beneficial owners, but only as of the record date for a particular 
meeting.\163\ In such a system (an ``annual NOBO'' system), objecting 
beneficial owners would not be able to shield their identity for 
purposes of a shareholder meeting. At any other time during the year, 
objecting beneficial owner information would not be available to the 
issuer or any other party. An annual NOBO system would enable issuers 
to communicate directly with all of their shareholders, both registered 
and beneficial owners, for purposes of a shareholder meeting, while 
minimizing the possibility that the investor information will be used 
for purposes other than proxy solicitation,

[[Page 43001]]

such as determining an investor's trading strategies.
---------------------------------------------------------------------------

    \163\ The Altman Group, ``Practical Solutions to Improve the 
Proxy Voting System'' (Oct. 2009), available at http://altmangroup.com/pdf/PracticalSolutionTAG.pdf (identifying this 
approach as the ``ABO'' or ``all beneficial owners''system). We use 
the term ``annual NOBO'' because we believe it better reflects the 
fact that, under the system, an OBO would be treated as if it were a 
NOBO, but only annually or for specific proxy solicitations.
---------------------------------------------------------------------------

    Others have suggested more gradual change.\164\ In order to 
encourage holding in NOBO rather than OBO status, some have suggested 
various steps to promote selection of NOBO status, such as educating 
investors about OBO and NOBO status when they open their accounts or 
periodically. Other steps may involve the elections made by investors 
when they open their accounts. While our rules contemplate that 
investors must object to disclosure of their identities to 
issuers,\165\ neither our rules nor self-regulatory organization 
(``SRO'') rules currently require disclosure of the consequences of 
choosing OBO or NOBO status, or specify broker-dealer policies or 
procedures with regard to their clients' choice of OBO or NOBO status. 
In particular, if a securities intermediary's standard customer 
agreement includes a default election of OBO status, it could promote a 
less than fully considered election of OBO status. While several 
broker-dealers have informed us that they currently default beneficial 
owners to NOBO status, it has been recommended that the default 
agreement used by all broker-dealers be NOBO status, or that broker-
dealers provide informational materials to their customers prior to 
allowing the customers to elect OBO status and contact customers who 
elect OBO status periodically to re-elect their OBO/NOBO status.
---------------------------------------------------------------------------

    \164\ See, e.g., CII OBO/NOBO Report, note 141, above.
    \165\ See Exchange Act Rule 14b-1(b)(3)(i) [17 CFR 240.14b-
1(b)(3)(i)] (requiring broker-dealers to provide names, addresses, 
and securities positions of customers who have not objected to 
disclosure of such information); Exchange Act Rule 14b-2(b)(4) [17 
CFR 240.14b-1(b)(3)(i)] (requiring banks to provide names, 
addresses, and securities positions of customers that have not 
objected to disclosure of such information for customer accounts 
established after December 28, 1986, but requiring affirmative 
consent to disclosure of such information for customer accounts 
opened before that date).
---------------------------------------------------------------------------

    In addition, there remains the issue of whether beneficial owners 
have a privacy right with respect to the disclosure of their ownership 
positions. We have been informed of a variety of privacy 
considerations: some investors, particularly institutional investors, 
select OBO status for competitive reasons, in order to mask their 
investment strategies; other investors may prefer OBO status in order 
to minimize the communications (particularly telephone calls) they 
receive regarding their investments.\166\ In either case, however, 
according to a study by the NYSE, investor preference for OBO status 
may be cost-sensitive and perhaps even overstated.\167\
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    \166\ See SIFMA Report, note 134, above, at 10, 12, 20-22.
    \167\ Investor Attitudes Study Conducted for NYSE Group--April 
7, 2006, available at http://www.nyse.com/pdfs/Final_ORC_Survey.pdf. In that study, 71% of respondents indicated that they 
would provide contact information to the issuers in which they 
invest if asked. In addition, the study notes that investor 
preference for NOBO status increases if fees are imposed on 
continuing to maintain OBO status: with the imposition of a $50 
annual fee, preference for OBO status declines from 36% to 5%. Id. 
at 3.
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3. Request for Comment
    As discussed above, we are considering whether regulatory action is 
needed to make it easier for issuers to communicate with their 
investors. In particular, we seek comment on whether we should 
eliminate the OBO/NOBO distinction, thereby making all beneficial owner 
information available to the issuer, or require broker-dealers to 
disclose the consequences of choosing OBO or NOBO status, or whether 
OBO or NOBO status should be the default choice. We also are exploring 
ways in which issuers can communicate directly with beneficial owners, 
such as requiring securities intermediaries to transfer proxy voting 
authority to some or all beneficial owners, so that issuers can solicit 
proxies directly from such holders. In this regard, we seek comment on 
the following questions:
     Do our existing rules inappropriately inhibit issuers from 
effectively communicating with investors? If so, what changes should we 
make to our rules to improve investor communication? Even if our rules 
do not inappropriately inhibit issuers from effectively communicating 
with investors, do the rules significantly raise the cost of 
communicating? Do any non-Commission rules inappropriately inhibit 
issuers from effectively communicating with investors? What are the 
benefits and costs of the various changes proposed by commentators?
     Do investors consider the degree and manner of 
communication with issuers to be adequate?
     To what extent are proxy materials not being delivered in 
a timely fashion? Are any changes in our rules or other rules required 
to improve timeliness of delivery, either with respect to registered or 
beneficial owners?
     What impact does the uniform appearance of proxy materials 
such as the VIF have on shareholder participation in proxy voting? 
Would investors, especially retail investors, be more likely to vote if 
there was less uniformity in the appearance of proxy materials?
     Is the format and layout of proxy cards and VIFs clear and 
easy to use from the perspective of investors? Could the layout be 
improved to enhance investor participation? Do the formats of proxy 
cards and VIFs appropriately set out the consequences of not voting or 
giving voting instructions on one or more specific matters?
     To what extent has the loss of broker discretionary votes 
in uncontested elections of directors increased the likelihood that 
issuers will not meet quorum requirements? Would the availability of 
less-costly means of communication with shareholders improve issuers' 
ability to meet quorum requirements?
     Do investors have legitimate privacy interests with 
respect to the disclosure of their share ownership? In what ways would 
an investor be harmed if his or her identity and the size of his or her 
holdings are disclosed to issuers? Should an investor be able to 
indicate that he or she does not wish to be contacted by an issuer? Do 
broker-dealers or banks have legitimate commercial interests in keeping 
the identities of their customers confidential? How should these 
interests be balanced against an issuer's interest in identifying and 
communicating with its investors? Is this balance different for 
individual and institutional investors, and if so, would different 
treatment in regard to OBO status be appropriate? Are there 
technological solutions that would facilitate communication while 
protecting the identities of shareholders?
     Issuers have expressed interest in not only communicating 
with shareholders, but also in identifying them. While these interests 
can be complementary, is one more important than the other? Should any 
regulatory changes that may be considered by the Commission emphasize 
one over the other?
     Are there merits to, or concerns about, establishing a 
central beneficial owner data aggregator for use by issuers, as 
suggested by the Shareholder Communications Coalition and as described 
above?
     Is competition in the proxy distribution service market 
needed, and if so, what changes to facilitate issuers' communications 
with investors would also encourage competition in the proxy 
distribution service market?
     Should we consider rules that would shift the cost of 
distributing proxy materials to broker-dealers for customers who choose 
to be objecting beneficial owners?

[[Page 43002]]

     Do our rules adequately address how beneficial owners 
elect objecting or non-objecting beneficial owner status when they open 
their accounts? Should there be a requirement that beneficial owners' 
account agreements adopt any specific election as the default choice? 
If so, would it matter whether the Commission, FINRA, or the stock 
exchanges imposed that requirement? Should the required default choice 
be for objecting or non-objecting beneficial owner status? Are there 
other ways in which default positions can be established for customers 
of securities intermediaries? Should there be a standardized form for 
customers to elect either NOBO or OBO status?
     Should we or SROs instead, or in addition, consider 
requiring securities intermediaries to provide informational materials 
to their customers prior to allowing the customer to elect OBO or NOBO 
status? What should be included in such informational materials, and 
how frequently should investors be provided with such materials? Should 
we consider requiring securities intermediaries to inform customers of 
the reasons for and against choosing to disclose or shield their 
identities?
     Should a broker-dealer periodically request that customers 
reaffirm their OBO/NOBO status selection? If so, how should the cost of 
this periodic evaluation be allocated?
     Should we consider revising our rules to require that 
securities intermediaries provide an omnibus proxy to their underlying 
beneficial owners and identify them to the issuer? If we were to 
propose such a rule, should we limit it to granting proxies to NOBOs 
since their identities are already available to issuers? How would such 
a system address the way securities transactions are cleared and 
settled?
     What are the costs and benefits of the annual NOBO system 
suggested by commentators? Would disclosure of all beneficial owners, 
limited to information as of the record date of a shareholder meeting, 
harm those investors (for example, would it reveal trading strategies 
of those investors)? Would implementing the annual NOBO system 
adversely affect any privacy interests of OBOs? As a practical matter, 
would issuers be able to contact OBOs using this information for 
subsequent shareholder meetings?
     What problems might arise if issuers or their transfer 
agents have greater access to or control of shareholder lists? How 
could we provide for fair and efficient access to those lists by other 
soliciting parties?

B. Means To Facilitate Retail Investor Participation

1. Background
    As we seek to promote and facilitate shareholder voting in general, 
we understand that the level of voting by retail investors is a 
particular area of concern. Retail investor participation rates in the 
proxy voting process historically have been low.\168\ Given the 
importance of proxy voting, we view significant lack of participation 
by retail investors in proxy voting as a source of concern, even in 
companies in which retail share ownership represents a relatively small 
portion of total voting power. We understand that this situation is not 
limited to the U.S., as the level of voting by shareholders in other 
jurisdictions has also caused concern.\169\
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    \168\ See Roundtable Briefing Paper, note 79, above.
    \169\ See, e.g., Myners Report, note 15, above.
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2. Potential Regulatory Responses
a. Investor Education
    Commentators have indicated that there is confusion among investors 
regarding the proxy voting process and the importance of voting.\170\ 
Investors accustomed to brokers voting their shares on their behalf may 
be unaware that, as a result of the recent revisions to NYSE Rule 452, 
brokers can no longer vote investors' shares in uncontested elections 
of corporate directors without instructions from the investors. In 
addition, many investors may be confused by the distinction between 
record and beneficial ownership and how that may affect their voting 
rights. These commentators have recommended the development of a 
significant investor education campaign to inform investors about the 
proxy voting process and the importance of voting as one way in which 
communication and proxy voting could be improved.
---------------------------------------------------------------------------

    \170\ See Proxy Working Group Report, note 107, above, at 15.
---------------------------------------------------------------------------

    We believe that improved investor education may help dispel some of 
these potential misunderstandings and create interest in the voting 
process. There are several ways in which we can enhance the educational 
opportunities for investors. We recently created a new section on our 
investor site, http://www.investor.gov, to provide educational 
materials about proxy mechanics generally and the notice and access 
model for the delivery of proxy materials. The new proxy matters 
section can be found at http://www.investor.gov/proxy-matters.\171\ We 
understand that a number of issuers and shareholder organizations have 
provided links from their Web sites to these educational materials. In 
addition, NYSE recently revised examples of letters containing the 
information and instructions required to be given by NYSE members to 
beneficial owners to inform beneficial owners that brokers are no 
longer allowed to vote shares held by beneficial owners on uncontested 
elections of directors, unless the beneficial owner has provided voting 
instructions.\172\
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    \171\ The staff of the Commission initiated an educational 
program on proxy voting matters for retail investors with the goal 
of increasing investor awareness about the importance of 
participating in director elections and other issues brought before 
shareholders at annual and special meetings. A plain-language 
``Spotlight on Proxy Matters page'' in question and answer format 
was developed on the SEC Web site to explain proxy voting 
procedures. In addition, the staff of our Office of Investor 
Education and Advocacy has spoken before investor and issuer 
organizations to promote the Web site material and to urge their 
involvement in proxy voting educational programming. To date, this 
ongoing effort has yielded more than 25,000 unique visits to the 
Proxy Matters Web site and 1,430 references on Google. The staff 
plans to continue and expand the education and outreach to retail 
investors in preparation for the 2011 proxy season. As part of this 
outreach program, we are exploring potential opportunities to link 
proxy educational materials directly to online brokerage accounts 
and other locations that may be visited frequently by retail 
shareholders.
    \172\ See Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change to Modify the Sample Broker Letters Set Forth 
In Rule 451, Release No. 34-61046 (Nov. 20, 2009) [74 FR 62849].
---------------------------------------------------------------------------

    Another possible venue for investor education is issuers' Web sites 
and brokers' Web sites. Many investors go to issuer Web sites to obtain 
information about the issuers in which they invest, and an increasing 
number of investors review their holdings and effect securities 
transactions through their brokers' Web sites. More proxy-related 
educational materials located on an issuer's or broker's Web site may 
be helpful to investors. In addition, although some explanation of how 
the proxy process works is often included on the back of the proxy card 
(or on the VIF), that information can be difficult to read and is often 
presented in small print. We are interested in whether improving the 
presentation of information on the proxy card or VIF would have an 
effect on voting participation.
    Finally, we are interested in whether we should also consider the 
scope, format, and content of the communications between brokers and 
their customers that occur in connection with opening customers' 
accounts. The account-opening process may be a good

[[Page 43003]]

opportunity to communicate important information about the shareholder 
voting process.
b. Enhanced Brokers' Internet Platforms
    As noted above, many investors use their brokers' Web sites as 
``one-stop shopping'' for their investment needs. It is our 
understanding, however, that many of these Web sites do not provide 
information about upcoming corporate actions or enable retail investors 
to use the same platform for proxy voting. Rather, many brokers hire a 
third-party proxy service provider to handle the collection of voting 
instructions. Therefore, those investors must go to a different Web 
site, not run by the broker, in order to submit voting instructions to 
their broker. We are interested in receiving views on whether receiving 
notices of upcoming corporate votes and having the ability to access 
proxy materials and a VIF through the investor's account page on the 
broker's Web site would be helpful to investors. We also wish to 
explore whether other communications from broker to customer could 
encourage more active and better informed participation in the proxy 
voting process.
c. Advance Voting Instructions
    Some commentators have recommended that we adopt rules to 
facilitate what has been called ``client-directed voting'' as a means 
to increase investor participation in the voting process.\173\ In 
general, this concept contemplates that brokers or other parties \174\ 
would solicit voting instructions from retail investors on particular 
topics (e.g., election of directors, ratification of auditors, approval 
of equity compensation plans, action on shareholder proposals) in 
advance of their receiving the proxy materials from companies.\175\ The 
advance voting instructions would then be applied to proxy cards or 
VIFs related to the investors' securities holdings, unless the 
investors changed those instructions. Investors would be able (but not 
required) to instruct their securities intermediaries or other parties 
to vote their shares in any number of ways, including the following:
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    \173\ See Proxy Working Group Addendum, note 127, above. We use 
the term ``advance voting instructions'' rather than ``client-
directed voting'' because we believe it more precisely identifies 
the salient feature of this approach to shareholder voting.
    \174\ Such parties could include proxy advisory firms or other 
third parties offering voting platforms to facilitate voting by 
retail investors.
    \175\ As noted above, proxy advisory services sometimes submit 
votes on behalf of their institutional investor clients pursuant to 
the clients' proxy voting policies.
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     Vote shares in accordance with the board of directors' 
recommendations;
     Vote shares against the board of directors' 
recommendations;
     Vote shares related to particular types of proposals (for 
example, shareholder proposals related to environmental or social 
issues) consistent with recommendations issued by specified interest 
groups, proxy advisory firms, investors, or voting policies;
     Abstain from voting shares; or
     Vote shares proportionally with the brokerage firm's 
customers' instructed votes, or the instructed votes of its 
institutional or retail customers only.\176\
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    \176\ See Proxy Working Group Addendum, note 127, above; see 
also John Wilcox, Fixing the Problems with Client-Directed Voting, 
March 5, 2010, available at http://blogs.law.harvard.edu/corpgov/2010/03/05/fixing-the-problems-with-client-directed-voting/.
---------------------------------------------------------------------------

    The advance voting instructions would generally be given by the 
investors at the time they sign their brokerage agreements or sign up 
for the proxy voting service, or periodically thereafter, and would 
always be revocable. Investors would also be able to change the advance 
voting instructions at any time.
    In connection with each proxy solicitation, investors who had given 
advance voting instructions would receive a proxy card or VIF pre-
marked in accordance with those voting instructions, along with the 
proxy materials required by the federal securities laws. Investors 
could override any of the advanced voting instructions applicable to 
that proxy solicitation by checking or clicking on an appropriate 
election box before the vote is submitted. Absent instructions to the 
contrary, the securities intermediary or other party would vote the 
investor's shares in accordance with the advance voting instructions as 
pre-marked on the proxy card or VIF.
    In connection with the proposal to amend NYSE Rule 452,\177\ we 
received several comment letters that discussed advance voting 
instructions as an alternative to the NYSE Rule 452 amendment \178\ or 
advocated that such voting instructions should be considered in 
conjunction with the NYSE Rule 452 amendment.\179\ In the order 
approving the NYSE Rule 452 amendment, we noted that advance voting 
instructions raise a variety of questions and concerns, such as 
requiring investors to make a voting decision in advance of receiving a 
proxy statement containing the disclosures mandated under the federal 
securities laws and possibly without consideration of the specific 
issues to be voted upon.\180\ The Proxy Working Group also expressed 
concern that advance voting instructions could act as a disincentive 
for retail investors to vote after reviewing proxy materials if they 
had already given such instructions.\181\ On the other hand, supporters 
of advance voting instructions stated that the implementation of voting 
based on such instructions could help issuers solve quorum problems, 
encourage greater retail shareholder participation in the voting 
process by making it easier for investors to vote, better permit 
shareholders to exercise their franchise, and result in more discussion 
and involvement between investors and their brokers on proxy 
issues.\182\
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    \177\ On July 1, 2009, the Commission approved an amendment to 
NYSE Rule 452 and Section 402.08 of the NYSE Listed Issuer Manual 
that eliminated discretionary voting by brokers in uncontested 
director elections. See Release No. 34-60215, note 11, above.
    \178\ See comment letters from American Bar Association (``ABA 
Letter''); American Business Conference; Agilent Technologies, Inc.; 
Business Roundtable; United States Chamber of Commerce; Connecticut 
Water; DTE Energy; First Financial Holdings, Inc.; Furniture Brands 
International; General Electric; Intel Corporation; Jacksonville 
Bancorp Inc.; McKesson Corporation; Monster Worldwide, Inc.; Nucor 
Corporation; Provident Bank; Provident Financial Services, Inc.; 
Quest Diagnostics Inc.; Synalloy Corporation; and Veeco Instruments 
Inc to Notice of Filing of Proposed Rule Change, as modified by 
Amendment No. 4, to Amend NYSE Rule 452 and Listed Company Manual 
Section 402.08 to Eliminate Broker Discretionary Voting for the 
Election of Directors and Codify Two Previously Published 
Interpretations That Do Not Permit Broker Discretionary Votes for 
Material Amendments to Investment Advisory Contracts, Release No. 
34-59464 (Feb. 26, 2009), available at http://www.sec.gov/comments/sr-nyse-2006-92/nyse200692.shtml.
    \179\ See comment letters from American Express; Society of 
Corporate Secretaries and Governance Professionals (``Governance 
Professionals Letter''); Honeywell; JPMorgan Chase & Co.; and 
Shareholder Communications Coalition to Release No. 34-59464, note 
178, above, available at http://www.sec.gov/comments/sr-nyse-2006-92/nyse200692.shtml.
    \180\ See Release No. 34-60215, note 11, above, at 34.
    \181\ See Proxy Working Group Addendum, note 127, above, at 5.
    \182\ Id. at 5-6. See also Governance Professionals Letter, note 
179, above; ABA Letter, note 177, above; and Frank G. Zarb, Jr. and 
John Endean, ``The Case for `Client Directed Voting,' '' Law 360 
(Jan. 4, 2010).
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    While we will continue to consider the advisability of allowing 
third parties, such as broker-dealers, to solicit instructions 
regarding the voting of shares by retail investors without the benefit 
of information that is contained in disclosures that our rules require 
in connection with shareholder votes, we recognize that facilitating 
the use of advance voting instructions can be

[[Page 43004]]

viewed as providing retail investors with a component of the services 
now made available to institutional investors by proxy advisory firms. 
However, retail investors are not necessarily in the same position as 
institutional investors. Some institutional investors rely upon pre-
developed voting policies and procedures to ensure consistency across 
portfolios, to aid in post-vote monitoring and reporting, and otherwise 
to comply with applicable fiduciary duties. Some retail shareholders 
may not be as likely to monitor, or hire others to monitor, the 
application of their advance voting instructions.
    There is currently no applicable exemption for securities 
intermediaries to solicit advance voting instructions from their 
customers. Exchange Act Rule 14a-2(a)(1) provides an exemption from the 
proxy solicitation rules to securities intermediaries when they forward 
proxy materials on behalf of issuers and request voting 
instructions.\183\ This exemption, however, requires securities 
intermediaries to ``promptly furnish'' proxy materials to the person 
solicited. By definition, brokers seeking to obtain advance voting 
instructions from customers would not be able to satisfy this 
requirement. In the absence of an applicable exemption for the 
solicitation of advance voting instructions, Rule 14a-4(d) states that 
no proxy shall confer authority to vote at any annual meeting other 
than the next annual meeting after the date on which the form of proxy 
is first sent.\184\ In addition, that rule prohibits a proxy from 
granting authority to vote with respect to more than one meeting.\185\
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    \183\ 17 CFR 240.14a-2(a)(1).
    \184\ 17 CFR 240.14a-4(d)(2).
    \185\ 17 CFR 240.14a-4(d)(3).
---------------------------------------------------------------------------

    To pursue this alternative further, there are a number of issues 
that would need to be considered. Advance voting instructions could be 
solicited to varying levels of detail. For instance, such an 
instruction could be very broad, such as ``vote consistent with 
management's recommendations'' or ``vote consistent with the 
recommendations of XYZ Environmental Group.'' The grant of such broad 
authority could raise concerns about the extent to which the investor's 
vote is an informed one. Greater specificity in a request for 
instructions, however, could provide an investor with greater certainty 
regarding what his or her instruction relates to. For example, an 
instruction to ``vote consistent with [management's or other party's] 
recommendations regarding corporate governance issues'' would provide 
more certainty.
    In addition, if we were to permit advance voting instructions, we 
would need to address other issues including whether such instructions 
should be re-affirmed on a periodic basis; whether they should apply to 
the voting of shares of issuers that the investor did not own when the 
original instructions were submitted; whether they should be re-
affirmed each time an investor purchases additional shares of an 
issuer's stock for which that investor has already submitted voting 
instructions; and whether brokers can seek from investors advance 
voting instructions that vary by company.
    We are interested in receiving views on whether permitting advance 
voting instructions would increase retail investor participation in the 
voting process, and on whether such instructions would be appropriate 
as a general matter. If such instructions would increase retail 
investor participation and would be appropriate, we are interested in 
receiving views on any conditions or requirements that we should 
consider applying to the solicitation of such instructions.
d. Investor-to-Investor Communications
    We are interested in receiving views on whether investor interest 
in matters presented to shareholders is affected by the extent to which 
investors are able to communicate with other investors about their 
opinions regarding matters up for a vote. It is our understanding that 
there tends to be higher voting participation in situations that 
involve increased communications and high investor interest, such as 
well-publicized proxy contests. We have, in the past, adopted several 
provisions designed to enhance shareholder communications between 
investors and the issuer, as well as among investors, including:
     Exempting communications with investors from the proxy 
statement delivery and disclosure requirements where the soliciting 
person is not seeking proxy authority and does not have, among other 
things, a substantial interest in the matter (other than as an investor 
in the issuer);\186\
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    \186\ 17 CFR 240.14a-2(b)(1). The rule specifies certain 
individuals and entities, such as affiliates of the registrant, that 
are not entitled to rely on the exemption. Also, if the shareholder 
owns more than $5 million of the registrant's securities, it must 
furnish a Notice of Exempt Solicitation to the Commission. 17 CFR 
240.14a-6(g).
---------------------------------------------------------------------------

     Permitting an investor to publicly announce how it intends 
to vote and provide the reasons for that decision without having to 
comply with the proxy rules;\187\ and
---------------------------------------------------------------------------

    \187\ 17 CFR 240.14a-1(l)(2)(iv).
---------------------------------------------------------------------------

     Broadening the types of communications that are 
permissible prior to the distribution of a definitive proxy 
statement.\188\
---------------------------------------------------------------------------

    \188\ 17 CFR 240.14a-12; Regulation of Takeovers and Security 
Holder Communications, Release No. 33-7760 (Oct. 22, 1999) [64 FR 
61408].
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    In addition, in 2007, we adopted rules promoting the use of 
electronic shareholder forums on the Internet for investor 
communications.\189\ It is our understanding that such forums have not 
been used extensively. We are interested in receiving views on whether, 
if further steps are taken to facilitate informed discussion among 
investors, the level of investor voting participation and informed 
proxy voting would be likely to increase. In addition, we are 
interested in receiving views on whether any additional forums for 
shareholder-to-shareholder communications would be helpful.
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    \189\ See Release No. 34-57172, note 3, above.
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e. Improving the Use of the Internet for Distribution of Proxy 
Materials
    In 2007, we amended the proxy rules to adopt a ``notice and access 
model.'' \190\ This model provides issuers with two options for making 
their proxy materials available: the ``notice-only option'' \191\ and 
the ``full set delivery option.'' Under the notice-only option, the 
issuer must post its proxy materials on a publicly-accessible Web site 
and send a notice to shareholders at least 40 days before the 
shareholder meeting date to inform them of the electronic availability 
of the proxy materials, and explain how to access those materials.\192\ 
Under this option, an issuer must also provide paper or e-mail copies 
of proxy materials at no charge to shareholders who request such 
copies.\193\
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    \190\ See Notice and Access Release, note 2, above.
    \191\ The notice and access model is a concept separate from, 
but complementary to, electronic delivery. The notice and access 
model permits an issuer (or a securities intermediary at the 
direction of the issuer) to deliver a notice (typically in paper) 
informing shareholders that proxy materials are available on the 
Internet in lieu of sending a full paper set of proxy materials. 
Electronic delivery, on the other hand, arises from our guidance in 
Release No. 33-7233, note 32, above. In that release, we explained 
that delivery of materials (including proxy materials) may be made 
electronically under certain circumstances, including if a 
shareholder has provided affirmative consent to electronic delivery. 
An issuer or securities intermediary may send this notice 
electronically to a shareholder if that shareholder has 
affirmatively consented to electronic delivery.
    \192\ See 17 CFR 240.14a-16; Notice and Access Release, note 2, 
above.
    \193\ 17 CFR 240.14a-16.
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    Issuers may also select the ``full set delivery'' option, where the 
issuer

[[Page 43005]]

delivers a full set of proxy materials to shareholders, along with the 
Notice of Internet Availability of Proxy Materials on a Web site, and 
posts the proxy materials to a publicly-accessible Web site.\194\ An 
issuer may use the notice-only option to provide proxy materials to 
some shareholders, and the full set delivery option to provide proxy 
materials to other shareholders.\195\
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    \194\ Id. The issuer may elect to include all of the information 
required to appear in the Notice in the proxy statement and proxy 
card. Id.
    \195\ Id.
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    It has been suggested that our adoption of rules permitting the 
dissemination of proxy materials through a ``notice and access'' model 
has contributed to a decline in retail investor participation in 
voting. We believe that it is difficult to conclude, based on existing 
data, that notice and access has caused changes in voter participation. 
To be sure, the number of retail accounts submitting voting 
instructions when issuers use the notice-only option is lower than the 
number of retail accounts submitting voting instructions when issuers 
use the full-set delivery option. The number of retail shares being 
voted, however, does not appear to differ substantially.\196\ More 
importantly, because issuers can elect whether to use the notice-only 
model, it is difficult to discern whether patterns in voting behavior 
are due to notice and access or to other factors. Issuers who choose 
the notice-only model may differ from other issuers in ways that may 
also correlate with voter participation, such as size or other 
characteristics. Some issuers have chosen a hybrid model, continuing to 
distribute full packages of proxy solicitation materials to selected 
shareholders based on the size of their holdings or their voting 
histories,\197\ suggesting that these issuers may believe that full-set 
delivery affects voter participation in some cases.
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    \196\ See Broadridge, Notice and Access: 2010 Statistical 
Overview of Use with Beneficial Shareholders, available at http://www.broadridge.com/notice-and-access/FY10_full_year.pdf (``2010 
Broadridge Statistical Overview''). This report indicates that, 
during the 2009 and 2010 proxy seasons, 31.95% and 27.29%, 
respectively, of retail shares were voted at issuers not using 
notice and access, while 28.70% and 31.01%, respectively of retail 
shares were voted at issuers using notice and access. On the other 
hand, 19.39% and 19.21%, respectively, of retail accounts were voted 
at issuers not using notice and access, while 12.72% and 13.85%, 
respectively, of retail accounts were voted at issuers using notice 
and access.
    \197\ Id.
---------------------------------------------------------------------------

    Another possible option to encourage shareholder participation, 
while still allowing issuers to use the notice-only option, would be to 
permit the inclusion of a proxy card or VIF with the Notice of Internet 
Availability of Proxy Materials when an issuer or other soliciting 
shareholder elects to use the notice-only option under the notice and 
access model for the delivery of proxy materials. Currently, Exchange 
Act Rule 14a-16 explicitly prohibits the soliciting party from 
including a proxy card or VIF with the Notice in the same mailing.\198\ 
Although we initially proposed a model that would have allowed 
soliciting parties to include a proxy card or VIF with the Notice, we 
ultimately adopted a rule that prohibited the inclusion of the proxy 
card or VIF and noted commentators' concerns that ``physically 
separating the card from the proxy statement, as originally proposed, 
may lead to the type of uninformed voting that the proxy rules are 
intended to prevent.'' \199\
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    \198\ 17 CFR 240.14a-16(e). A proxy card or VIF may be included 
with a Notice if at least 10 days have passed since the date a 
Notice was first sent to shareholders. 17 CFR 240.14a-16(h)(1).
    \199\ Internet Availability of Proxy Materials, Release No. 34-
55146 (Jan. 22, 2007) [72 FR 4148] at 4153.
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3. Request for Comment
    With respect to investor education, we ask the following questions:
     To what extent should we take additional steps to 
encourage retail investor participation in the proxy process?
     To what extent would greater use of plain English, some 
form of summary of proxy materials, or layered formats in Web-based 
disclosure make proxy materials more accessible to retail investors?
     To what extent are retail voter participation levels 
affected by process-related impediments to participation? If affected 
by impediments, what are they and should we seek to remove them? What 
costs and benefits are associated with efforts to increase 
participation?
     Would additional investor education improve retail 
investor participation in the proxy process? How could such a program 
best reach both registered owners and beneficial owners? What would be 
the benefits and costs of such a program? What should be in the 
educational materials and who should decide what goes in them?
     Should brokers more clearly highlight and disclose key 
policies, including a shareholder's voting rights and default 
positions, such as OBO/NOBO, when a customer enters into a brokerage 
agreement? Should brokers provide counseling to potential customers to 
enhance understanding of such provisions in the brokerage agreement? 
When a customer enters into a brokerage agreement, should brokers be 
required to obtain the preferences of the client regarding whether to 
receive proxy materials electronically, and inform issuers of that 
election automatically when securities of that issuer are purchased?
     What role should the Commission play in promoting or 
developing the education campaign? How can the SEC's investor education 
Web sites be made more useful? For example, should the Web site provide 
interactive instruction?
    With respect to enhanced issuers' and brokers' Internet platforms, 
we ask the following questions:
     Would an issuer's Web site or a broker's Web site be a 
useful location for investor educational information? Are there other 
methods to effectively educate investors? What would be the costs and 
benefits of requiring issuers or securities intermediaries to include 
such information on their Web sites?
     Should issuers or brokers enhance their Web sites, if they 
have one, to provide the issuers' shareholders or the brokers' 
customers, respectively, with the ability to receive notices of 
upcoming corporate votes, to access proxy materials and to vote shares 
through their personal account pages? What would be the costs of such a 
system? Would adding this service for investors make them more likely 
to vote? To what extent do issuers and brokers currently provide such 
functionality on their Web sites?
     Should we encourage the creation of inexpensive or free 
proxy voting platforms that would provide retail investors with access 
to proxy research, vote recommendations, and vote execution? If so, 
how?
    With respect to advance voting instructions, we ask the following 
questions:
     Should we consider allowing securities intermediaries to 
solicit voting instructions in advance of distribution of proxy 
materials pursuant to an exemption from the proxy solicitation rules? 
Should there be any conditions on any such exemption, and if so, what 
should they be?
     To what extent would voting instructions made without the 
benefit of proxy materials result in less informed voting decisions? 
Are there countervailing benefits to permitting the solicitation of 
such instructions? To what extent does the revocability of advance 
voting instructions mitigate concerns over less informed voting 
decisions?
     With regard to the use of advance voting instructions, are 
retail investors at a disadvantage as compared to institutional 
investors that use the

[[Page 43006]]

services of a proxy advisory firm? If so, how? Are there aspects of the 
services and relationship between proxy advisory firms and their 
clients that would not exist between securities intermediaries 
soliciting advance voting instructions and their customers? If so, how 
should these differences be addressed, if at all?
     If such solicitation of advance voting instructions were 
permitted, what level of specificity should the solicitation of 
advanced voting instructions be required (or permitted) to have? Is it 
appropriate to permit the solicitation of a broad scope of voting 
authority?
     Should we allow the solicitation by securities 
intermediaries of advance voting instructions for all types of proxy 
proposals, or should it be limited to certain types of proposals? For 
example, should we permit solicitation of advance voting instructions 
with respect to shareholder proposals, proxy contests, or proposals 
subject to ``vote no'' campaigns?
     If solicitation of advance voting instructions were 
permitted, should the investor be permitted to instruct the securities 
intermediary to vote in accordance with the recommendations of 
management, a proxy advisory firm, or other specified persons? How 
neutral or balanced should the solicitation of advance voting 
instructions be?
     If we were to allow the solicitation of advance voting 
instructions, should we require an investor to reaffirm its voting 
instructions periodically? If so, how often? Should we require an 
investor to reaffirm its voting instructions every time it purchases 
additional shares of a stock for which that investor has already 
submitted a voting instruction, or when it purchases shares of a new 
issuer?
     If we were to allow advance voting instructions, what 
would be an appropriate range of options available to an investor? 
Should advance voting instructions only be permitted when the investor 
has meaningful options from which to choose?
     How difficult would it be to obtain advance voting 
instructions from existing brokerage customers? What would be the costs 
of obtaining advance voting instructions for existing accounts? Who 
should bear the costs of soliciting such instructions?
     If we were to allow the solicitation of advance voting 
instructions, would it undermine or promote the purpose of the recent 
amendment to NYSE Rule 452 to prohibit brokers from voting uninstructed 
shares in uncontested elections of directors?
    With respect to investor-to-investor communications, we ask the 
following questions:
     To what extent are investor interest in matters presented 
to shareholders and investor voting participation affected by the lack 
of investor-to-investor communications regarding those matters?
     Have electronic shareholder forums been used extensively? 
Are there any revisions to Rule 14a-2(b)(6), which currently provides 
an exemption for electronic shareholder forums, that would make it 
easier to establish such forums? For example, is there a way for an 
entity establishing an electronic shareholder forum to confirm the 
shareholder status of participants on the forum? If a securities 
intermediary provides information, such as a control number, to enable 
such confirmation, should precautions be taken to ensure that personal 
information about those investors is not disclosed?
     Should we consider revising the electronic shareholder 
forum rules to shorten the 60-day period to promote more shareholder-
to-shareholder communication closer to the meeting date? If so, what 
would be an appropriate time period?
     Are there any other new rules or revisions to existing 
rules that would facilitate communications among investors? If so, what 
would those revisions be?
     Would any additional guidance regarding the scope of our 
rules and definitions, such as the definition of the term 
``solicitation,'' improve the extent and quality of investor 
participation in the proxy voting process?
    With respect to possible revisions to the notice and access model, 
we ask the following questions:
     Should we consider requiring that companies using a 
``notice and access'' model for distributing proxy materials use that 
model on a stratified basis to encourage retail voting participation? 
For example, should we require that issuers send full sets of proxy 
materials to shareholders who have voted on paper in the past two 
years?
     Should we consider amending our rules to permit inclusion 
of a proxy card or VIF with a Notice of Internet Availability of Proxy 
Materials?
     Are there other changes that we can make to the notice and 
access model to improve voting participation? For example, should we 
require affirmative consent from a shareholder before an issuer is 
allowed to send that customer only a Notice of Internet Availability of 
Proxy Materials? Should we eliminate the notice and access model 
altogether?

C. Data-Tagging Proxy-Related Materials

1. Background
    Issuers soliciting proxies are required to distribute a proxy 
statement \200\ and to disclose the results of shareholder votes within 
four business days after the end of the meeting at which the vote was 
held.\201\ Funds are generally required to disclose annually on Form N-
PX \202\ how they vote proxies relating to portfolio securities.\203\ 
In the discussion below, we address whether this information could be 
organized and made available to investors in ways that might enhance 
the level and quality of shareholder participation in the proxy voting 
process.
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    \200\ The proxy statement must include the information required 
by Schedule 14A of the Exchange Act. [17 CFR 240.14a-101] The 
Commission's rules also generally require issuers not soliciting 
proxies from shareholders entitled to vote on a matter to distribute 
an information statement that must include the similar information 
required by Schedule 14C of the Exchange Act [17 CFR 240.14c-101]. 
Accordingly, the data-tagging discussion in this Section IV.C 
relates to the information required by Schedule 14C in the same 
manner it relates to corresponding information required by Schedule 
14A.
    \201\ Item 5.07 of Form 8-K [referenced in 17 CFR 249.308].
    \202\ 17 CFR 274.129. See Section III.C, above, for a further 
discussion of Form N-PX.
    \203\ In this Section IV.C, we use the term ``proxy statement 
and voting information'' to refer collectively to the information 
required by Schedule 14A, Schedule 14C, Item 5.07 of Form 8-K and 
Form N-PX.
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    In 2004, as part of our longstanding efforts to increase 
transparency in general and the usefulness of information in 
particular, we began an initiative to assess the benefits of 
interactive data \204\ and its potential for improving the timeliness, 
accuracy, and analysis of financial and other filed information.\205\ 
Data becomes interactive when it is labeled, or ``tagged,'' using a 
computer markup language that can be processed by software for 
analysis. Such computer markup languages use standard sets of 
definitions, or ``taxonomies,'' that translate text-based information 
in Commission filings into interactive data that can be retrieved, 
searched, and analyzed through automated means.
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    \204\ In this Section IV.C, we generally refer to ``tagged 
data'' as ``interactive data'' because users are able to interact 
with the data by processing it.
    \205\ See Press Release No. 2004-97 (July 22, 2004), available 
at http://www.sec.gov/news/press/2004-97.htm.
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    Our efforts regarding interactive data thus far have resulted in 
our adoption of rules that, in general, currently or ultimately will 
require:
     Public issuers, including foreign private issuers, to 
provide their financial statements to the Commission and on their 
corporate Web sites, if any,

[[Page 43007]]

in interactive data format using eXtensible Business Reporting Language 
(``XBRL''); \206\
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    \206\ Interactive Data to Improve Financial Reporting, Release 
No. 33-9002 (Jan. 30, 2009) [74 FR 6776] as corrected by Interactive 
Data to Improve Financial Reporting, Release No. 33-9002A (Apr. 1, 
2009) [74 FR 15666]. Issuers that are or will be required to provide 
their financial statements in interactive data format using XBRL are 
permitted to provide such interactive data before they are required 
to do so. Funds are permitted to provide financial information in 
interactive data format using XBRL as an exhibit to certain filings 
in our electronic filing system under a voluntary filer program that 
initially was implemented in 2005.
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     Mutual funds \207\ to provide the risk/return summary 
section of their prospectuses to the Commission and on their Web sites, 
if any, in XBRL format; \208\
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    \207\ In this Section IV.C, we use the term ``mutual fund'' to 
mean an open-end management investment company. An open-end 
management investment company is an investment company, other than a 
unit investment trust or face-amount certificate company, which 
offers for sale or has outstanding any redeemable security of which 
it is the issuer. See Sections 4 and 5(a)(1) of the Investment 
Company Act [15 U.S.C. 80a-4 and 80a-5(a)(1)].
    \208\ Interactive Data for Mutual Fund Risk/Return Summary, 
Release No. 33-9006 (Feb. 11, 2009) [74 FR 7748] as corrected by 
Interactive Data for Mutual Fund Risk/Return Summary; Correction, 
Release No. 33-9006A (May 1, 2009) [74 FR 21255]. Mutual funds are 
permitted to provide their risk/return summary information in 
interactive data format (using XBRL) before they are required to do 
so. The public companies, foreign private issuers and mutual funds 
permitted or required to provide financial statement or risk/return 
summary information in interactive data format are required to 
continue to provide the information in traditional format as well.
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     Rating agencies to provide certain ratings information on 
their Web sites in XBRL format; \209\
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    \209\ Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, Release No. 34-61050 (Nov. 23, 2009) [74 FR 
63832] and Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, Release No. 34-59342 (Feb. 2, 2009) [74 FR 
6456].
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     Money market funds to provide portfolio holdings 
information to the Commission in interactive data format using 
eXtensible Markup Language (``XML''); \210\
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    \210\ Money Market Fund Reform, Release No. IC-29132 (Feb. 23, 
2010) [75 FR 10060]. The XBRL format is compatible with and derives 
from the XML format.
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     Transfer agents to provide registration, activity and 
withdrawal information to the Commission in XML format; \211\
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    \211\ Electronic Filing of Transfer Agent Forms, Release No. 34-
54864 (Dec. 4, 2006) [71 FR 74698].
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     Issuers to provide notice of Regulation D \212\ exempt 
offering information to the Commission in XML format \213\ or through 
the Commission's online forms Web site that tags the information in 
XML; \214\ and
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    \212\ 17 CFR 230.501-508.
    \213\ See EDGAR Form D XML Technical Specification (Version 
7.4.0), available at http://www.sec.gov/info/edgar/formdxmltechspec.htm.
    \214\ Electronic Filing and Revision of Form D, Release No. 33-
8891 (Feb. 6, 2008) [73 FR 10592].
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     Officers, directors, and principal owners to provide 
beneficial ownership information under Section 16(a) of the Exchange 
Act \215\ to the Commission in XML format \216\ or through the 
Commission's online forms Web site that tags the information in 
XML.\217\
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    \215\ 15 U.S.C. 78p(a).
    \216\ See EDGAR Ownership XML Technical Specification (Version 
3), available at http://www.sec.gov/info/edgar/ownershipxmltechspec.htm.
    \217\ Mandated Electronic Filing and Web Site Posting for Forms 
3, 4 and 5, Release No. 33-8230 (May 7, 2003) [68 FR 25788].
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    Currently, proxy statement and voting information is neither 
required nor permitted to be provided to the Commission in interactive 
data format. As a result, shareholders cannot retrieve, search, and use 
this information through automated means in the form in which it is 
provided to the Commission.
2. Potential Regulatory Responses
    We are interested in receiving views on whether it would be 
beneficial to investors to permit or require issuers, including funds, 
to provide proxy statement and voting information in interactive data 
format in addition to the traditional format. We are also interested in 
understanding the costs of providing additional tagged information. A 
significant amount of the textual data in the proxy statement is well-
structured and may be suitable for data tagging. If issuers provided 
reportable items in interactive data format, shareholders may be able 
to more easily obtain specific information about issuers, compare 
information across different issuers, and observe how issuer-specific 
information changes over time as the same issuer continues to file in 
an interactive data format. This could both facilitate more informed 
voting and investment decisions and assist in automating regulatory 
filings and business information processing.\218\
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    \218\ We anticipate that any interactive data format version of 
the information permitted or required would not replace the 
traditional format version, at least not initially. In general, 
interactive data currently is machine-readable only. Without the use 
of software, interactive data is illegible to the human eye. As a 
result, we expect that any interactive data would be provided in a 
separate schedule or exhibit. It is possible, however, that at some 
point in the future technology will evolve in a manner that would 
permit human-readable text and interactive data to appear in the 
same document.
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    Under our current rules, issuers are permitted or required to 
provide specified information in interactive data format only as 
described above. We have, however, previously considered, and sought 
comment on, permitting or requiring interactive data for other types of 
information in XBRL or another format.\219\ Most recently, in the 2008 
release proposing the required filing of financial statements in XBRL 
format,\220\ we expanded upon our 2006 request for comment on making 
executive compensation information available in interactive data 
format.\221\ In the 2008 release, we did not propose permitting or 
requiring interactive data for executive compensation, but asked a 
series of questions related to whether we should. As noted in the 2009 
release adopting the financial statement XBRL requirements, some 
commentators supported the idea of eventually tagging non-financial 
statement information such as executive compensation because of its 
usefulness to investors,\222\ while others expressed concern that 
variations among issuers in executive compensation practices may not 
lend themselves to the development of standard tags and suggested that 
any tagging be voluntary rather than required.\223\
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    \219\ With regard to format, we solicited comment in our 2004 
interactive data concept release regarding the ability of 
interactive data to add value to Commission filings, whether in XBRL 
or another interactive data format. Enhancing Commission Filings 
Through the Use of Tagged Data, Release No. 33-8497 (Sept. 27, 2004) 
[69 FR 59111].
    \220\ Interactive Data to Improve Financial Reporting, Release 
No. 33-8924 (May 30, 2008) [73 FR 32794].
    \221\ Executive Compensation and Related Party Disclosure, 
Release No. 33-8655 (Jan. 27, 2006) [71 FR 6542]. In 2007, as 
further discussed below, our staff used XBRL to tag Summary 
Compensation Table data provided by large filers and created 
rendering software that enabled investors to not only view 
compensation information but also manually calculate compensation 
and compare compensation across companies. The software was called 
the Executive Compensation Reader. We made these efforts to show how 
interactive data might provide investors with easier and faster 
analysis. SEC Press Release 2007-268 (Dec. 21, 2007).
    \222\ See, e.g., comment letter to Release No. 33-9002, note 
206, above, from California Public Employees' Retirement System.
    \223\ See, e.g., comment letters to Release 33-9002, note 206, 
above, from American Bar Association, Johnson & Johnson, Pfizer, 
General Mills, and Society of Corporate Secretaries and Governance 
Professionals.
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    In connection with our efforts to improve communication in the 
proxy context, we are interested in receiving views on whether we 
should reconsider whether to permit or require proxy statement and 
voting information to be provided in interactive data format.\224\
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    \224\ Our solicitation of comment regarding providing proxy 
statement and voting information in interactive data format is 
consistent with the Resolution on Tag Data for Proxy and Vote 
Filings adopted by the Securities and Exchange Commission Investor 
Advisory Committee. See http://www.sec.gov/spotlight/invadvcomm/iacproposedresproxyvotingtrans.pdf.

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[[Page 43008]]

3. Request for Comment
     Should we permit issuers, including funds, to provide 
proxy statement and voting information to the Commission and on their 
corporate Web sites, if any, in an interactive data format? If so, are 
there benefits to one tagging language (e.g., XBRL) over another? \225\ 
Should we require issuers to provide such information to the Commission 
and on their corporate Web sites, if any, in an interactive data 
format? Should we also permit or require the tagging of executive 
compensation information even if it is not in the proxy statement, but 
rather, in the annual report on Form 10-K? \226\
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    \225\ Currently, there apparently is no standard set of XBRL 
definitions, or ``taxonomy,'' available to enable an issuer to 
provide proxy statement and voting information or any subset of such 
information in XBRL format. XBRL US, however, is developing a 
taxonomy for at least some information a proxy statement requires. 
See http://xbrl.us/Learn/Pages/Initiatives.aspx (``Broadridge 
Financial Solutions contributed a proxy taxonomy to XBRL US in Q4 
2008. XBRL US will incorporate the taxonomy into a master digital 
dictionary of terms.'').
    \226\ 17 CFR 249.310.
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     Are there any other types of information for which we 
should permit or require tagging in order to improve the efficiency and 
quality of proxy voting? For example, should we permit or require 
tagging of information contained in proxy statements filed by non-
management parties?
     If we permit or require interactive data for the 
information contained in a proxy statement, should we permit or require 
it for only a subset of that information, such as executive 
compensation,\227\ director experience \228\ and other 
directorships,\229\ transactions with related persons,\230\ or 
corporate governance? \231\ Should we permit or require it for only a 
subset of executive compensation information, such as the Summary 
Compensation Table,\232\ Director Compensation Table,\233\ Outstanding 
Equity Awards at Fiscal Year-End Table,\234\ or Compensation Discussion 
and Analysis? \235\
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    \227\ As we noted in Release No. 33-8924, note 220, above, there 
was substantial interest in financial Web pages that linked to the 
Executive Compensation Reader that temporarily was posted on our Web 
site beginning in late 2007. The Executive Compensation Reader 
displayed the Summary Compensation Table disclosure of 500 large 
companies that followed the executive compensation rules adopted in 
2006 in reporting 2006 compensation information in their proxy 
statements filed with the Commission. By using the reader, an 
investor could view amounts included in the Summary Compensation 
Table Stock Awards and Option Awards columns based on either the 
full grant date fair value of the awards granted during the fiscal 
year, or the compensation cost of awards recognized for financial 
statement reporting purposes with respect to the fiscal year, and 
recalculate the Total Compensation column accordingly.
    \228\ Item 401(e)(1) of Regulation S-K [17 CFR 229.401(e)(1)].
    \229\ Item 401(e)(2) of Regulation S-K [17 CFR 229.401(e)(2)].
    \230\ Item 404(a) of Regulation S-K [17 CFR 229.404(a)].
    \231\ Item 407 of Regulation S-K [17 CFR 229.407].
    \232\ Items 402(c) and 402(n) of Regulation S-K [17 CFR 
229.402(c) and 402(n)].
    \233\ Items 402(k) and 402(r) of Regulation S-K [17 CFR 
229.402(k) and 402(r)].
    \234\ Items 402(f) and 402(p) of Regulation S-K [17 CFR 
229.402(f) and 402(p)].
    \235\ Item 402(b) of Regulation S-K [17 CFR 229.402(b)].
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     Would it be useful to investors for issuers to provide 
their proxy statement and voting information, or some subset of that 
information, in interactive data format? If so, would it be useful for 
issuers to provide the information both to the Commission and on their 
corporate Web sites, if any? Would data-tagging enable investors to 
access proxy information more easily or to compare information 
regarding different issuers and/or changes in information over time 
with respect to a specific issuer or a set of issuers? Would this 
ability result in better informed voting decisions? For insance, should 
officer and director identities be tagged and linked to their unique 
Commission Central Index Key (CIK) identifier, which would enable 
investors to more easily determine whether they have relationships with 
other Commission filers? Would investors benefit if governance 
attributes, such as board leadership structure \236\ and director 
independence, were tagged? \237\
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    \236\ Item 407(h) of Regulation S-K [17 CFR 229.407(h)].
    \237\ Item 407(a) of Regulation S-K [17 CFR 229.407(a)].
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     Would requiring issuers to provide proxy statements and 
voting information in interactive data format assist issuers in 
automating their business information processing?
     Approximately how much would it cost issuers to provide 
each of the following in interactive data format:
      All information contained in a proxy statement;
      Executive compensation information only; and
      Voting information disclosed pursuant to Item 5.07 of 
Form 8-K or Form N-PX?
     With respect to cost, would it be preferable to defer any 
requirement to tag proxy-related materials until the issuer has been 
fully phased-in to the financial statement interactive data 
requirements, or would it be relatively easy to accomplish the tagging 
of proxy-related materials before, or at the same time as, becoming 
subject to the financial statement requirements?
     Is it feasible for funds to tag Form N-PX in a manner that 
provides for uniform identification of each matter voted (e.g., for 
every fund to assign the same tag to the election of directors at XYZ 
Corporation) if issuers of portfolio securities do not themselves 
create these tags by tagging their proxy statements? What alternatives 
exist, other than having issuers of portfolio securities tag their 
proxy statements and assign tags to each matter on their proxy 
statements, that could result in uniform tags being assigned by all 
funds on Form N-PX to each corporate matter? What would be the costs 
associated with those alternatives?
     Whether or not we permit or require interactive data 
tagging, should Form N-PX require standardized reporting formats so 
that comparisons between funds are easier?
     Should persons other than the issuer be required to file 
proxy materials in interactive data format?
     How will retail investors have access to interactive data/
XBRL software that will enable them to take advantage of interactive 
data formats?

V. Relationship Between Voting Power and Economic Interest

    As discussed below, investor and issuer confidence in the 
legitimacy of shareholder voting may be based on the belief that, 
except as expressly agreed otherwise, shareholders entitled to vote in 
the election of directors and other matters have a residual economic 
(or equity) interest in the company that is commensurate with their 
voting rights. To the extent that votes are cast by persons lacking 
such an economic interest in the company, confidence in the proxy 
system could be undermined. This section examines the possibility of 
misalignment of voting power in general and three areas in which 
concerns have been expressed about whether our regulations play a role 
in the misalignment of voting power from economic interest: The 
increasingly important role of proxy advisory firms; the impediments in 
our rules to allowing issuers to set voting record dates that more 
closely match the date on which voting actually occurs; and hedging and 
other strategies that allow the voting rights of equity securities to 
be held or controlled by persons without an equivalent economic 
interest in the company.

[[Page 43009]]

A. Proxy Advisory Firms

1. The Role and Legal Status of Proxy Advisory Firms
    Over the last twenty-five years, institutional investors, including 
investment advisers, pension plans, employee benefit plans, bank trust 
departments and funds, have substantially increased their use of proxy 
advisory firms, reflecting the tremendous growth in institutional 
investment as well as the fact that, in many cases, institutional 
investors have fiduciary obligations to vote the shares they hold on 
behalf of their beneficiaries.\238\ Institutional investors typically 
own securities positions in a large number of issuers.
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    \238\ See, e.g., GAO Report to Congress, Corporate Shareholder 
Meetings--Issues Relating to Firms That Advise Institutional 
Investors on Proxy Voting (June 2007) (``GAO Report'') at 6-7 
(attributing the growth in the use of proxy voting advisers, in 
part, to the Commission's recognition of fiduciary obligations 
associated with voting proxies by registered investment advisers and 
its adoption of the proxy voting Advisers Act Rule 206(4)-6(17 CFR 
275.206(4)-6), requiring registered investment advisers to ``adopt 
and implement written policies and procedures that are reasonably 
designed to ensure that you vote client securities in the best 
interest of clients, which procedures must include how you address 
material conflicts that may arise between your interests and those 
of your clients'').
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    Every year, at shareholders' meetings, these investors face 
decisions on how to vote their shares on a significant number of 
matters, ranging from the election of directors and the approval of 
stock option plans to shareholder proposals submitted under Exchange 
Act Rule 14a-8,\239\ which often raise significant policy questions and 
corporate governance issues. At special meetings of shareholders, 
investors also face voting decisions when a merger or acquisition or a 
sale of all or substantially all of the assets of the company is 
presented to them for approval.
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    \239\ 17 CFR 240.14a-8.
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    In order to assist them in exercising their voting rights on 
matters presented to shareholders, institutional investors may retain 
proxy advisory firms to perform a variety of functions, including the 
following:
     Analyzing and making voting recommendations on the matters 
presented for shareholder vote and included in the issuers' proxy 
statements;
     Executing votes on the institutional investors' proxies or 
VIFs in accordance with the investors' instructions, which may include 
voting the shares in accordance with a customized proxy voting policy 
resulting from consultation between the institutional investor and the 
proxy advisory firm, the proxy advisory firm's proxy voting policies, 
or the institution's own voting policy;
     Assisting with the administrative tasks associated with 
voting and keeping track of the large number of voting decisions;
     Providing research and identifying potential risk factors 
related to corporate governance; and
     Helping mitigate conflict of interest concerns raised when 
the institutional investor is casting votes in a matter in which its 
interest may differ from the interest of its clients.\240\
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    \240\ See Proxy Voting by Investment Advisers, Release No. IA-
2106 (Jan. 31, 2003) at text accompanying note 25 (stating that an 
adviser could demonstrate that the vote was not a product of a 
conflict of interest if it voted client securities, in accordance 
with a pre-determined policy, based upon the recommendations of an 
independent third party).
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    Firms that are in the business of supplying these services to 
clients for compensation--in particular, analysis of and 
recommendations for voting on matters presented for a shareholder 
vote--are widely known as proxy advisory firms.\241\ Institutional 
clients compensate proxy advisory firms on a fee basis for providing 
such services, and proxy advisory firms typically represent that their 
analysis and recommendations are prepared with a view toward maximizing 
long-term share value or the investment goals of the institutional 
client.
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    \241\ E.g., GAO Report, note 238, above, at 1.
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    Issuers may also be consumers of the services provided by some 
proxy advisory firms. Some proxy advisory firms provide consulting 
services to issuers on corporate governance or executive compensation 
matters, such as assistance in developing proposals to be submitted for 
shareholder approval. Some proxy advisory firms also qualitatively rate 
or score issuers' corporate governance structures, policies, and 
practices,\242\ and provide consulting services to corporate clients 
seeking to improve their corporate governance ratings. As a result, 
some proxy advisory firms provide vote recommendations to institutional 
investors on matters for which they also provided consulting services 
to the issuer. Some proxy advisory firms disclose these dual client 
relationships; others also have opted to attempt to address the 
conflict through the creation of ``fire walls'' between the investor 
and corporate lines of business.
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    \242\ For example, The RiskMetrics Group (``RiskMetrics'') 
publishes ``governance risk indicators.'' Information on these 
ratings is available at http://www.riskmetrics.com/GRId-info. Proxy 
advisory firms are not the only types of businesses that offer 
corporate governance ratings or scores.
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    Depending on their activities, proxy advisory firms may be subject 
to the federal securities laws in at least two notable respects. First, 
because of the breadth of the definition of ``solicitation,'' \243\ 
proxy advisory firms may be subject to our proxy rules because they 
provide recommendations that are reasonably calculated to result in the 
procurement, withholding, or revocation of a proxy. As a general 
matter, the furnishing of proxy voting advice constitutes a 
``solicitation'' subject to the information and filing requirements in 
the proxy rules.\244\ In 1979, however, we adopted Exchange Act Rule 
14a-2(b)(3) \245\ to exempt the furnishing of proxy voting advice by 
any advisor to any other person with whom the advisor has a business 
relationship from the informational and filing requirements of the 
federal proxy rules, provided certain conditions are met.\246\ 
Specifically, the advisor:
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    \243\ Exchange Act Rule 14a-1(l)(iii) [17 CFR 240.14a-1(l)(iii)] 
defines the solicitation of proxies to include ``[t]he furnishing of 
a form of proxy or other communication to security holders under 
circumstances reasonably calculated to result in the procurement, 
withholding or revocation of a proxy.''
    \244\ See Shareholder Communications, Shareholder Participation 
in the Corporate Electoral Process and Corporate Governance 
Generally, Release No. 34-16104 (Aug. 13, 1979) at note 25. Of 
course, the issue of whether or not a particular communication 
constitutes a solicitation depends both upon the specific nature and 
content of the communication and the circumstances under which it is 
transmitted. See Broker-Dealer Participation in Proxy Solicitations, 
Release No. 34-7208 (Jan. 7, 1964).
    \245\ 17 CFR 240.14a-2(b)(3).
    \246\ See Shareholder Communications and Shareholder 
Participation in the Corporate Electoral Process and Corporate 
Governance Generally, Release No. 34-16356 (Nov. 21, 1979) [44 FR 
68769]. In 1992, the Commission confirmed that the Rule 14a-2(b)(3) 
exemption is available to proxy advisory firms that render only 
proxy voting advice. See Regulation of Communications Among 
Shareholders, Release No. 34-31326 (Oct. 16, 1992) [57 FR 48276], at 
note 41.
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     Must render financial advice in the ordinary course of its 
business;
     Must disclose to the person any significant relationship 
it has with the issuer or any of its affiliates, or with a shareholder 
proponent of the matter on which advice is given, in addition to any 
material interest of the advisor in the matter to which the advice 
relates;
     May not receive any special commission or remuneration for 
furnishing the proxy voting advice from anyone other than the 
recipients of the advice; and
     May not furnish proxy voting advice on behalf of any 
person soliciting proxies.
    Even if exempt from the informational and filing requirements of 
the federal

[[Page 43010]]

proxy rules, the furnishing of proxy voting advice remains subject to 
the prohibition on false and misleading statements in Rule 14a-9.\247\
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    \247\ 17 CFR 240.14a-9.
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    Second, when proxy advisory firms provide certain services, they 
meet the definition of investment adviser under the Advisers Act and 
thus are subject to regulation under that Act. A person is an 
``investment adviser'' if the person, for compensation, engages in the 
business of providing advice to others as to the value of securities, 
whether to invest in, purchase, or sell securities, or issues reports 
or analyses concerning securities.\248\ As described above, proxy 
advisory firms receive compensation for providing voting 
recommendations and analysis on matters submitted for a vote at 
shareholder meetings. These matters may include shareholder proposals, 
elections for boards of directors, or corporate actions such as 
mergers. We understand that typically proxy advisory firms represent 
that they provide their clients with advice designed to enable 
institutional clients to maximize the value of their investments. In 
other words, proxy advisory firms provide analyses of shareholder 
proposals, director candidacies or corporate actions and provide advice 
concerning particular votes in a manner that is intended to assist 
their institutional clients in achieving their investment goals with 
respect to the voting securities they hold. In that way, proxy advisory 
firms meet the definition of investment adviser because they, for 
compensation, engage in the business of issuing reports or analyses 
concerning securities and providing advice to others as to the value of 
securities.
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    \248\ Advisers Act Section 202(a)(11) [15 U.S.C. 80b-2(a)(11)]. 
Sections 202(a)(11)(A) through (G) of the Advisers Act address 
exclusions to the definition of the term ``investment adviser.'' [15 
U.S.C. 80b-2(a)(11)(A)-(G)].
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    The Supreme Court has construed Section 206 of the Advisers Act as 
establishing a federal fiduciary standard governing the conduct of 
investment advisers.\249\ The Court stated that ``[t]he Advisers Act of 
1940 reflects a congressional recognition of the delicate fiduciary 
nature of an investment advisory relationship as well as a 
congressional intent to eliminate, or at least to expose, all conflicts 
of interest which might incline an investment adviser--consciously or 
unconsciously--to render advice which was not disinterested.'' \250\ As 
investment advisers, proxy advisory firms owe fiduciary duties to their 
advisory clients.
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    \249\ Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 
11, 17 (1979); SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 
180, 191-192 (1963).
    \250\ Capital Gains, 375 U.S. at 191-192.
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    In addition, Section 206 of the Advisers Act,\251\ the antifraud 
provision, applies to any person that meets the definition of 
investment adviser, regardless of whether that person is registered 
with the Commission. Section 206(1) of the Advisers Act prohibits an 
investment adviser from ``employ[ing] any device, scheme, or artifice 
to defraud any client or prospective client.'' \252\ Section 206(2) 
prohibits an investment adviser from engaging in ``any transaction, 
practice or course of business which operates as a fraud or deceit on 
any client or prospective client.'' \253\ As we stated recently, the 
Commission has authority under Section 206(4) of the Advisers Act to 
adopt rules ``reasonably designed to prevent, such acts, practices, and 
courses of business as are fraudulent, deceptive or manipulative.'' 
\254\ Congress gave the Commission this authority to, among other 
things, address the ``question as to the scope of the fraudulent and 
deceptive activities which are prohibited [by Section 206],'' \255\ and 
thereby permit the Commission to adopt prophylactic \256\ rules that 
may prohibit acts that are not themselves fraudulent.\257\
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    \251\ 15 U.S.C. 80b-6.
    \252\ 15 U.S.C. 80b-6(1).
    \253\ 15 U.S.C. 80b-6(2).
    \254\ Political Contributions by Certain Investment Advisers, 
Advisers Act Release No. 3043 (July 1, 2010) at 16, citing 15 U.S.C. 
80b-6(4). Section 206(4) was added to the Advisers Act in Pub. L. 
No. 86-750, 74 Stat. 885, at sec. 9 (1960).
    \255\ See H.R. REP. NO. 2197, 86th Cong., 2d Sess., at 7-8 
(1960) (stating that ``[b]ecause of the general language of section 
206 and the absence of express rulemaking power in that section, 
there has always been a question as to the scope of the fraudulent 
and deceptive activities which are prohibited and the extent to 
which the Commission is limited in this area by common law concepts 
of fraud and deceit * * * [Section 206(4)] would empower the 
Commission, by rules and regulations to define, and prescribe means 
reasonably designed to prevent, acts, practices, and courses of 
business which are fraudulent, deceptive, or manipulative. This is 
comparable to Section 15(c)(2) of the Securities Exchange Act [15 
U.S.C. 78o(c)(2)] which applies to brokers and dealers.''). See also 
S. REP. NO. 1760, 86th Cong., 2d Sess., at 8 (1960) (``This [section 
206(4) language] is almost the identical wording of section 15(c)(2) 
of the Securities Exchange Act of 1934 in regard to brokers and 
dealers.''). The Supreme Court, in United States v. O'Hagan, 
interpreted nearly identical language in section 14(e) of the 
Securities Exchange Act [15 U.S.C. 78n(e)] as providing the 
Commission with authority to adopt rules that are ``definitional and 
prophylactic'' and that may prohibit acts that are ``not themselves 
fraudulent * * * if the prohibition is `reasonably designed to 
prevent * * * acts and practices [that] are fraudulent.' '' United 
States v. O'Hagan, 521 U.S. 642, 667, 673 (1997). The wording of the 
rulemaking authority in section 206(4) remains substantially similar 
to that of section 14(e) and section 15(c)(2) of the Securities 
Exchange Act. See also Prohibition of Fraud by Advisers to Certain 
Pooled Investment Vehicles, Advisers Act Release No. 2628 (Aug. 3, 
2007) [72 FR 44756] (stating, in connection with the suggestion by 
commenters that section 206(4) provides us authority only to adopt 
prophylactic rules that explicitly identify conduct that would be 
fraudulent under a particular rule, ``We believe our authority is 
broader. We do not believe that the commenters' suggested approach 
would be consistent with the purposes of the Advisers Act or the 
protection of investors.'').
    \256\ S. REP. NO. 1760, note 255, above, at 4, 8. The Commission 
has used this authority to adopt eight rules that address abusive 
advertising practices, custodial arrangements, the use of 
solicitors, required disclosures regarding advisers' financial 
conditions and disciplinary histories, prohibition against political 
contributions by certain investment advisers (``pay to play''), 
proxy voting, compliance procedures and practices, and deterring 
fraud with respect to pooled investment vehicles. 17 CFR 275.206(4)-
1; 275.206(4)-2; 275.206(4)-3; 275.206(4)-4; 275.206(4)-5; 
275.206(4)-6; 275.206(4)-7; and 275.206(4)-8.
    \257\ See HR. REP. NO. 2197, note 255, above.
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    Proxy advisory firms also may have to register with the Commission 
as investment advisers. Whether a particular investment adviser is 
required to register with the Commission depends on several factors. 
Investment advisers are generally prohibited from registering with the 
Commission if they have less than $25 million in assets under 
management.\258\ Congress established this threshold in 1996 to 
bifurcate regulatory responsibility between the Commission and the 
states.\259\ The Commission retains authority to exempt advisers from 
the prohibition on registration if the prohibition would be ``unfair, a 
burden on interstate commerce, or otherwise inconsistent with the 
purposes'' of the prohibition.\260\
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    \258\ Advisers Act Section 203A [15 USC 80b-3(a)]. If such an 
adviser is an adviser to an investment company registered under the 
Investment Company Act, however, it must register with the 
Commission. See id.
    \259\ National Securities Markets Improvement Act of 1996, Pub. 
L. No. 104-290, 110 Stat. 3416 (codified as amended in scattered 
sections of the United States Code).
    \260\ Advisers Act Section 203A(c) [15 U.S.C. 80b-3(c)].
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    Proxy advisory firms are unlikely to have sufficient assets under 
management to register with the Commission because they typically do 
not manage client assets.\261\ Proxy advisory firms may nonetheless be 
eligible to register because they qualify for one of the exemptions 
from the registration prohibition under Rule 203A-2 under the Advisers 
Act. In particular, some proxy advisory firms

[[Page 43011]]

may be able to rely on the exemption for ``pension consultants'' \262\ 
if they have pension plan clients with an aggregate minimum value of 
$50 million.\263\
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    \261\ For the purpose of calculating assets under management, an 
adviser must look to those securities portfolios for which it 
provides ``continuous and regular supervisory or management 
services.'' See Instruction 5 to Item 5F of Form ADV [17 CFR 279.1].
    \262\ Advisers Act Rule 203A-2(b) [17 CFR 275.203A-2(b)] 
provides that ``[a]n investment adviser is a pension consultant * * 
* if the investment adviser provides investment advice to: Any 
employee benefit plan described in Section 3(3) of the Employee 
Retirement Income Security Act of 1974 (``ERISA'') [29 U.S.C. 
1002(3)]; Any governmental plan described in Section 3(32) of ERISA 
(29 U.S.C. 1002(32); or Any church plan described in Section 3(33) 
of ERISA (29 U.S.C. 1002(33).''
    \263\ See id. A number of proxy advisory firms are currently 
registered with the Commission under the pension consultant 
exemption.
---------------------------------------------------------------------------

    Proxy advisory firms that are registered as investment advisers 
with the Commission are subject to a number of additional regulatory 
requirements that provide important protections to the firm's clients. 
For example, registered investment advisers have to make certain 
disclosures on their Form ADV.\264\ Among other things, these 
disclosures include information about arrangements that the adviser has 
that involve certain conflicts of interest with its advisory 
client.\265\ In addition, proxy advisory firms that are registered 
investment advisers are required to adopt, implement, and annually 
review an internal compliance program consisting of written policies 
and procedures that are reasonably designed to prevent the adviser or 
its supervised persons from violating the Advisers Act.\266\ Every 
registered proxy advisory firm that is registered as an investment 
adviser also must designate a chief compliance officer to oversee its 
compliance program. This compliance officer must be knowledgeable about 
the Advisers Act and have authority to develop and enforce appropriate 
compliance policies and procedures for the adviser.\267\ A proxy 
advisory firm that is registered as an investment adviser also is 
required to establish, maintain, and enforce policies and procedures 
reasonably designed to prevent the misuse of material non-public 
information.\268\ Proxy advisory firms that are registered as 
investment advisers also are required to create and preserve certain 
records that our examiners review when performing an inspection of an 
adviser.\269\
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    \264\ See Advisers Act Rule 203-1 [17 CFR 275.203-1]. Form ADV 
consists of two parts. The information provided by advisers in Part 
I of that form provides the Commission with census-like information 
on investment adviser registrants and is critical to the examination 
program in assessing risk and planning examinations. It also 
requires investment advisers to report disciplinary events of the 
adviser and its employees. See Advisers Act Rule 204-1 [17 CFR 
275.204-1].
    \265\ Part II of Form ADV, or a brochure containing the 
information in the Form, is required to be delivered to advisory 
clients or prospective clients by Rule 204-3 under the Advisers Act 
[17 CFR 275.204-3]. In addition to the disclosure of certain 
conflicts of interest, Part II contains information including the 
adviser's fee schedule and the educational and business background 
of management and key advisory personnel of the adviser. Part II is 
currently not submitted to the SEC but must be kept by advisers in 
their files and made available to the SEC upon request and is 
``considered filed.'' See Advisers Act Rule 204-1(c) [17 CFR 
275.204-1(c)]. Form ADV must be updated at least annually or when 
there are material changes. See Advisers Act Rule 204-1 [17 CFR 
275.204-1].
    \266\ Advisers Act Rule 206(4)-7 [17 CFR 275.206(4)-7].
    \267\ Advisers Act Rule 206(4)-7(c) [17 CFR 275.206(4)-7(c)].
    \268\ Section 204A of the Advisers Act [15 U.S.C. 80b-4a].
    \269\ Advisers Act Rule 204-2 [17 CFR 275.204-2].
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2. Concerns About the Role of Proxy Advisory Firms
    The use of proxy advisory firms by institutional investors raises a 
number of potential issues. For example, to the extent that conflicts 
of interest on the part of proxy advisory firms are insufficiently 
disclosed and managed, shareholders could be misled and informed 
shareholder voting could be impaired. To the extent that proxy advisory 
firms develop, disseminate, and implement their voting recommendations 
without adequate accountability for informational accuracy in the 
development and application of voting standards, informed shareholder 
voting may be likewise impaired. Furthermore, some have argued that 
proxy advisory firms are controlling or significantly influencing 
shareholder voting without appropriate oversight, and without having an 
actual economic stake in the issuer.\270\ In evaluating any potential 
regulatory response to such issues, we are interested in learning 
commentators' views regarding appropriate means of addressing these 
issues, including the application of the proxy solicitation rules and 
Advisers Act registration provisions to proxy advisory firms. We are 
also interested in learning commentators' views as to whether these 
issues are affected--and if so, how--by the fact that there is one 
dominant proxy advisory firm in the marketplace, Institutional 
Shareholder Services (``ISS''),\271\ whose long-standing position, 
according to the Government Accountability Office, ``has been cited by 
industry analysts as a barrier to competition.'' \272\
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    \270\ See comment letters to Release No. 33-9046, note 7, above, 
from The Business Roundtable and IBM. It has been suggested, for 
example, that some issuers have adopted corporate governance 
practices simply to meet a proxy advisory firm's standards, even 
though they may not see the value of doing so. See GAO Report, note 
238, above, at 10.
    \271\ See GAO Report, note 238, above, at 13 (stating that, 
``[a]s the dominant proxy advisory firm, ISS has gained a reputation 
with institutional investors for providing reliable, comprehensive 
proxy research and recommendations, making it difficult for 
competitors to attract clients and compete in the market''). As of 
June 2007, ISS's client base included an estimate of 1,700 
institutional investors, more than the other four major firms 
combined. Id. ISS was acquired by RiskMetrics in January 2007, which 
in turn was acquired on June 1, 2010 by MSCI, Inc. See ``MSCI 
Completes Acquisition of RiskMetrics,'' (June 1, 2010), available at 
http://www.riskmetrics.com/news_releases/20100601_msci.
    \272\ GAO Report, note 238, above, at 2.
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    In order to address these issues, which we describe in additional 
detail below, we would like to receive views about the role that proxy 
advisory firms play in the proxy voting process, which could, for 
instance, assist in determining whether additional regulatory 
requirements might be appropriate, such as the extent to which 
oversight of proxy advisory firms registered as investment advisers 
might be improved. Below we outline the two principal areas of concern 
about the proxy advisory industry that have come to our attention.
a. Conflicts of Interest
    Perhaps the most frequently raised concern about the proxy advisory 
industry relates to conflicts of interest.\273\ The Government 
Accountability Office has issued two reports since 2004 examining 
conflicts of interest in proxy voting by institutional investors.\274\ 
The GAO Report issued in 2007 addressed, among other things, conflicts 
of interest that may exist for proxy advisory firms, institutional 
investors' use of the firms' services and the firms' potential 
influence on proxy vote outcomes, as well as the steps that the 
Commission has taken to oversee these firms.\275\ The GAO Report noted 
that the most commonly cited conflict of interest for proxy advisory 
firms is when they provide both proxy voting recommendations to 
investment advisers and other institutional investors and consulting 
services to corporations seeking assistance with proposals to be 
presented to

[[Page 43012]]

shareholders or with improving their corporate governance ratings.\276\
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    \273\ See generally Thompson-Mann Policy Briefing, note 89, 
above, at 8; GAO Report, note 238, above.
    \274\ GAO Report, note 238, above. The GAO issued an earlier 
report in 2004 that described, among other things, conflicts of 
interest in the proxy voting system with respect to pension plans 
and actions taken to manage them by plan fiduciaries. See GAO, 
Pension Plans: Additional Transparency and Other Actions Needed in 
Connection with Proxy Voting (Aug. 10, 2004), available at http://www.gao.gov/new.items/d04749.pdf.
    \275\ GAO Report, note 238, above. That report noted that the 
Commission had not identified any major violations in its 
examinations of such firms that were registered as investment 
advisers.
    \276\ In its report, GAO described the business model of ISS as 
containing this particular conflict and noted that the proxy 
advisory firm took steps to manage the conflict by disclosing the 
relationships it had with corporate governance clients and 
implementing policies and procedures to separate its consulting 
services from proxy voting services. See GAO Report, note 238, 
above, at 10-11. These potential conflicts of interest of proxy 
advisory firms are not limited to the United States. See OECD 
Survey, note 90, above (expressing concern about the integrity of 
financial intermediaries and the need for more concrete rules).
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    In particular, this conflict of interest arises if a proxy advisory 
firm provides voting recommendations on matters put to a shareholder 
vote while also offering consulting services to the issuer or a 
proponent of a shareholder proposal on the very same matter.\277\ The 
issuer in this situation may purchase consulting services from the 
proxy advisory firm in an effort to garner the firm's support for the 
issuer when the voting recommendations are made.\278\ Similarly, a 
proponent may engage the proxy advisory firm for advice on voting 
recommendations in an effort to garner the firm's support for its 
shareholder proposals. The GAO Report also noted that the firm might 
recommend a vote in favor of a client's shareholder proposal in order 
to keep the client's business.
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    \277\ See GAO Report, note 238, above. Not all proxy advisory 
firms provide both types of services; some proxy advisory firms 
differentiate their services by not providing consulting services to 
corporations. See http://www.ejproxy.com/about.aspx; http://www.glasslewis.com/solutions/proxypaper.php; and 
www.marcoconsulting.com/2.3.html.
    \278\ See Thompson-Mann Policy Briefing, note 89, above, at 9. 
See also comment letter to Proxy Disclosure and Solicitation 
Enhancements, Release No. 33-9052 (July 10, 2009) [74 FR 35076], 
from Pearl Meyer and Partners, at 12.
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    A conflict also arises when a proxy advisory firm provides 
corporate governance ratings on issuers to institutional clients, while 
also offering consulting services to corporate clients so that those 
issuers can improve their corporate governance ranking.\279\ The GAO 
Report also described the potential for conflicts of interest when 
owners or executives of the proxy advisory firm have significant 
ownership interests in, or serve on the board of directors of, issuers 
with matters being put to a shareholder vote on which the proxy 
advisory firm is offering vote recommendations. In such cases, 
institutional investors told the GAO that some proxy advisory firms 
would not offer vote recommendations to avoid the appearance of a 
conflict of interest.
---------------------------------------------------------------------------

    \279\ See Paul Rose, The Corporate Governance Industry, 32 Iowa 
J. Corp. L. 887, 903 (2007).
---------------------------------------------------------------------------

    It is our understanding that at least one proxy advisory firm 
provides a generic disclosure of such conflicts of interest by stating 
that the proxy advisory firm ``may'' have a consulting relationship 
with the issuer, without affirmatively stating whether the proxy 
advisory firm has or had a relationship with a specific issuer or the 
nature of any such relationship. Some have argued that this type of 
general disclosure is insufficient, even if the proxy advisory firm has 
confidentiality walls between its corporate consulting and proxy 
research departments.\280\
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    \280\ See generally comment letter to Release No. 33-9052, note 
278, above, from Oppenheimer Funds.
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b. Lack of Accuracy and Transparency in Formulating Voting 
Recommendations
    Some commentators have expressed the concern that voting 
recommendations by proxy advisory firms may be made based on materially 
inaccurate or incomplete data, or that the analysis provided to an 
institutional client may be materially inaccurate or incomplete.\281\ 
To the extent that a voting recommendation is based on flawed data or 
analysis, issuers have expressed a desire for a process to correct the 
mistake. We understand, however, that proxy advisory firms may be 
unwilling, as a matter of policy, to accept any attempted communication 
from the issuer or to reconsider recommendations in light of such 
communications. Even if a proxy advisory firm entertains comment from 
the issuer and amends its recommendation, votes may have already been 
cast based on the prior recommendation. Accordingly, some issuers have 
expressed a desire to be involved in reviewing a draft of the proxy 
advisory firm's report, if only for the limited purpose of ensuring 
that the voting recommendations are based on accurate issuer data. Some 
proxy advisory firms have claimed that they are willing to discuss 
matters with issuers, but that some issuers are unwilling to enter into 
such discussions.
---------------------------------------------------------------------------

    \281\ See, e.g., White Paper on RiskMetrics Report on Target 
Corporation, available at http://tgtfiles.target.com/empl/pdfs/RMG_Analysis.pdf (identifying asserted inaccurate or misleading 
statements or assessments in RiskMetrics' report on the 2009 proxy 
contest involving Target Corporation); Matthew Greco, ``New, New 
Ranking of the Shareholder Friendly, Unfriendly,'' Securities Data 
Publishing, May 13, 1996.
---------------------------------------------------------------------------

    There also is a concern that proxy advisory firms may base their 
recommendation on one-size-fits-all governance approach.\282\ As a 
result, a policy that would benefit some issuers, but that is less 
suitable for other issuers, might not receive a positive 
recommendation, making it less likely to be approved by shareholders.
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    \282\ The concern regarding a potential one-size-fits-all 
approach to proxy advice is not limited to U.S. proxy participants. 
The OECD also has expressed concern that there is a danger of one-
size-fits-all voting advice (e.g., applicable to compensation and a 
box-ticking approach by shareholders minimizing analysis and 
responsibilities of shareholders) so that a competitive market for 
advice needs to be encouraged. See OECD, Corporate Governance and 
the Financial Crisis: Key Findings and Main Messages (June 2009), 
available at http://www.oecd.org/dataoecd/3/10/43056196.pdf.
---------------------------------------------------------------------------

    Rule 14a-2(b)(3)'s exemption of proxy advisory firms does not 
mandate that a firm relying on the exemption have specific procedures 
in place to ensure that its research or analysis is materially accurate 
or complete prior to recommending a vote.\283\ While voting advice by 
firms relying on the Rule 14a-2(b)(3) exemption remains subject to the 
antifraud provisions of the proxy rules contained in Rule 14a-9 \284\--
and those antifraud provisions should deter the rendering of voting 
advice that is misleading or inaccurate--it is our understanding that 
certain participants in the proxy process believe that additional 
oversight mechanisms could improve the likelihood that voting 
recommendations are based on materially accurate and complete 
information. In addition, as a fiduciary, the proxy advisory firm has a 
duty of care requiring it to make a reasonable investigation to 
determine that it is not basing its recommendations on materially 
inaccurate or incomplete information.
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    \283\ 17 CFR 240.14a-2(b)(3).
    \284\ 17 CFR 240.14a-9.
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3. Potential Regulatory Responses
a. Potential Solutions Addressing Conflicts of Interest
    Revising or providing interpretive guidance on the proxy rule 
exemption in Exchange Act Rule 14a-2(b)(3) \285\ could be one potential 
solution to the concerns regarding a proxy advisory firm's disclosures 
about conflicts of interest. Exchange Act Rule 14a-2(b)(3)(ii) requires 
that a person furnishing proxy voting advice to another person must 
disclose to its client ``any significant relationship'' it has with the 
issuer, its affiliates, or a shareholder proponent of the matter on 
which advice is given. It appears that some proxy advisory firms 
currently provide disclosure limited to the fact that the firm ``may'' 
provide consulting

[[Page 43013]]

or other advisory services to issuers. However, we believe that such 
disclosure should be examined further to determine whether it 
adequately indicates to shareholders the existence of a potential 
conflict with respect to any particular proposal. Therefore, we are 
interested in receiving views on whether this rule should be revised or 
whether we should provide additional guidance regarding the 
requirements of this rule. Specifically, we could revise the rule to 
require more specific disclosure regarding the presence of a potential 
conflict.
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    \285\ 17 CFR 240.14a-2(b)(3).
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    Alternatively, or in addition, we seek comment on whether proxy 
advisory firms operate the kind of national business or have an impact 
on the securities markets that Advisers Act Section 203A(c) \286\ was 
designed to address, and whether, as a result, we should establish an 
additional exemption from the prohibition on federal registration for 
proxy advisory firms to register with the Commission as investment 
advisers. We could also provide additional guidance, if necessary, on 
the fiduciary duty of proxy advisors who are investment advisers to 
deal fairly with clients and prospective clients, and to disclose fully 
any material conflict of interest. We also could provide guidance or 
propose a rule requiring specific disclosure by proxy advisory firms 
that are registered as investment advisers regarding their conflicts of 
interest, including, for example, on Form ADV.
---------------------------------------------------------------------------

    \286\ 15 U.S.C. 80b-3a(c).
---------------------------------------------------------------------------

    Finally, in light of the similarity between the proxy advisory 
relationship and the ``subscriber-paid'' model for credit ratings, we 
could consider whether additional regulations similar to those 
addressing conflicts of interest on the part of Nationally Recognized 
Statistical Rating Organizations (``NRSROs'') \287\ would be useful 
responses to stated concerns about conflicts of interest on the part of 
proxy advisory firms. For example, such regulations could prohibit 
certain conflicts of interest and require proxy advisory firms to file 
periodic disclosures, akin to Form NRSRO, describing any conflicts of 
interest and procedures to manage them.
---------------------------------------------------------------------------

    \287\ NRSROs are credit rating agencies that assess the 
creditworthiness of obligors as entities or with respect to specific 
securities or money market instruments and that have elected to be 
registered with the Commission under Section 15E of the Exchange 
Act. 15 U.S.C. 78o-7. Sections 15E and 17 of the Exchange Act 
provide the Commission with exclusive authority to implement 
registration, recordkeeping, financial reporting, and oversight 
rules with respect to NRSROs. 15 U.S.C. 78o-7 and 78q.
    One commentator has suggested that the Commission's rules that 
govern NRSROs may be useful templates for developing a regulatory 
program addressing conflicts of interest and other issues with 
respect to the accuracy and transparency of voting recommendations 
provided by proxy advisory firms. Such rules include provisions 
that: (i) Require rating actions to be made publicly available on 
the NRSRO's Internet Web site [17 CFR 240.17g-2(d)(3)]; (ii) 
prohibit certain conflicts of interest [17 CFR 240.17g-5(c); Form 
NRSRO Exhibits 6-7]; (iii) require the disclosure and management of 
certain other conflicts of interest that arise in the normal course 
of engaging in the business of issuing credit ratings [17 CFR 
240.17g-5(b)]; and (iv) require disclosure of, among other things, 
performance measurement statistics, sources of information, models 
and metrics used, qualifications and compensation of analysts, and 
procedures and methodologies used to determine credit ratings, 
including procedures for (A) interacting with management of rated 
issuers, (B) informing issuers of rating decisions, and (C) 
appealing final or pending rating decisions. [Form NRSRO, Exhibits 
1, 2, 8 and 13]. We recognize that the role of NRSROs and proxy 
advisory firms differ and that following a similar regulatory 
approach might not be appropriate. We also recognize that the costs 
and benefits of the NRSRO regulation differ from the costs and 
benefits of potential additional regulation of proxy advisory firms.
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b. Potential Solutions Addressing Accuracy and Transparency in 
Formulating Voting Recommendations
    We have identified a number of potential approaches that might 
address concerns about accuracy or transparency in the formulation of 
voting recommendations by proxy advisory firms. For example, proxy 
advisory firms could provide increased disclosure regarding the extent 
of research involved with a particular recommendation and the extent 
and/or effectiveness of its controls and procedures in ensuring the 
accuracy of issuer data. Proxy advisory firms could also disclose 
policies and procedures for interacting with issuers, informing issuers 
of recommendations, and handling appeals of recommendations.\288\ We 
could also consider requiring proxy advisory firms to file their voting 
recommendations with us as soliciting material, at least on a delayed 
basis, to facilitate independent evaluation by market participants of 
the quality of those recommendations.
---------------------------------------------------------------------------

    \288\ See, e.g., Thompson-Mann Policy Briefing, note 89, above, 
at 25 (advocating that a proxy advisory firm should, where feasible 
and appropriate, prior to issuing or revising a recommendation, 
advise the issuer of the critical information and principal 
considerations upon which a recommendation will be based and afford 
the issuer an opportunity to clarify any likely factual 
misperceptions).
---------------------------------------------------------------------------

3. Request for Comment
    As discussed above, we are considering the extent to which the 
voting recommendations of proxy advisory firms serve the interests of 
investors in informed proxy voting, and whether, and if so, how, we 
should take steps to improve the utility of such recommendations to 
investors. In particular, we seek comment on whether we should clarify 
existing regulations or propose additional regulations to address 
concerns about the existence and disclosure of conflicts of interest on 
the part of proxy advisory firms, and about the accuracy and 
transparency of the formulation of their voting recommendations. 
Accordingly, we seek commentators' views generally on proxy advisory 
firms and invite comment on the following questions:
     Do proxy advisory firms perform services for their clients 
in addition to or different from those noted above?
     Is additional regulation of proxy advisory firms necessary 
or appropriate for the protection of investors? Why or why not? If so, 
what are the implications of regulation through the Advisers Act or the 
proxy solicitation rules under the Exchange Act? Are any other 
regulatory approaches equally or better suited to provide appropriate 
additional regulation? Are there regulatory approaches used in 
connection with NRSROs that may be appropriate to consider applying to 
proxy advisory firms?
     Are there conflicts of interest (other than those 
described above) when a proxy advisory firm provides services to both 
investors, including shareholder proponents, and issuers? If so, are 
those conflicts appropriately addressed by current laws, regulations, 
and industry practices?
     Are there conflicts of interest where a proxy advisory 
firm is itself a publicly held company? If so, what are they and how 
should they be addressed?
     What policies and procedures, if any, do proxy advisory 
firms use to ensure that their voting recommendations are independent 
and not influenced by the fees they receive for services to corporate 
clients or shareholder proponent clients?
     Is the disclosure that proxy advisory firms currently 
provide to investor clients regarding conflicts of interest adequate? 
Would specific disclosure of potential conflicts and conflict of 
interest policies be sufficient, or is some other form of regulation 
necessary (e.g., prohibiting such conflicts)?
     Do issuers modify or change their proposals to increase 
the likelihood of favorable recommendations by a proxy advisory firm?
     Do issuers adopt particular governance standards solely to 
meet the standards of a proxy advisory firm? If so, why do issuers 
behave in this manner?

[[Page 43014]]

     Should proxy advisory firms be required to disclose 
publicly their decision models for approval of executive compensation 
plans? Would this alleviate concerns regarding potential conflicts of 
interest when issuers pay consulting fees for access to such models?
     What is the competitive structure of the market for proxy 
advisory firms, and what are the reasons for it? Does competition vary 
across the types of services provided by the proxy advisory firms or 
the subset of issuers that they cover? Does the industry's competitive 
structure affect the quality of the recommendations? If there is, as we 
understand it, one proxy advisory firm that has a significantly larger 
market share than other firms,\289\ does that affect the quality of the 
recommendations made by that proxy advisory firm or by other proxy 
advisory firms? Are there any other effects caused by the fact that 
there is one dominant proxy advisory firm?
---------------------------------------------------------------------------

    \289\ GAO Report, note 238, above, at 13 (describing ISS as 
``the dominant proxy advisory firm'').
---------------------------------------------------------------------------

     How do institutional investors use the voting 
recommendations provided by proxy advisory firms? What empirical data 
exists regarding how, and to what extent, institutional investors vote 
consistently, or inconsistently, with such recommendations?
     What criteria and processes do proxy advisory firms use to 
formulate their recommendations and corporate governance ratings? Does 
the lack of a direct pecuniary interest in the effects of their 
recommendations on shareholder value affect how they formulate 
recommendations and corporate governance ratings? Would greater 
disclosure about how recommendations and corporate governance ratings 
are generated and how voting recommendations are made affect the 
quality of the ratings and the recommendations?
     Are existing procedures followed by proxy advisory firms 
sufficient to ensure that proxy research reports provided to investor 
clients are materially accurate and complete? If not, how should proxy 
advisory firms be encouraged to provide investors with the information 
they need to make informed voting decisions?
     If additional oversight is needed, should it be in the 
form of regulatory oversight or issuer involvement? Would requiring 
delayed public disclosure of voting recommendations be an appropriate 
means to promote accurate voting recommendations?
     Do proxy advisory firms control or significantly influence 
shareholder voting without appropriate oversight? If so, is there 
empirical evidence that demonstrates this control or significant 
influence? If such proxy advisory firms do control or significantly 
influence shareholder voting, is that inappropriate, and if so, should 
the Commission take action to address it? If so, what specific action 
should the Commission take?
     Are there any proxy advisory firms that cannot rely on an 
exemption to the prohibition on Advisers Act registration? If so, why 
do the exemptions not apply to those proxy advisory firms?
     Do proxy advisory firms operate the kind of national 
business that the Advisers Act Section 203A(c) was designed to address? 
Should we create an additional exemption from the prohibition on 
federal registration for proxy advisory firms to register as investment 
advisers? If so, what standard should we use?
     Do the current regulatory requirements for registered 
investment advisers adequately address advisers whose business is 
primarily providing proxy voting services? If we consider new 
rulemaking in this area, what should the rules address? Should we amend 
Form ADV to require specific disclosures by registered investment 
advisers that are proxy advisory firms?
     Do proxy advisory firms maintain an audit trail for votes 
cast on behalf of clients? Do proxy advisory firms monitor whether 
votes cast are appropriately counted, and if so, how?

B. Dual Record Dates

1. Background
    Under state corporation law, issuers set a record date in advance 
of a shareholder meeting, and holders of record on the record date are 
entitled to notice of the meeting and to vote at the meeting. State 
corporation law also governs how far in advance of the meeting a record 
date can be--typically, no more than 60 days before the date of the 
meeting.\290\ The record date that an issuer selects has implications 
under the federal securities laws. Our rules require issuers that have 
a class of securities registered under Section 12 of the Exchange Act 
and certain investment companies to provide either proxy materials or 
an information statement to every investor of the class entitled to 
vote.\291\ Additionally, Rule 14a-13 requires that if an issuer intends 
to solicit proxies for an upcoming meeting and knows that its 
securities are held by securities intermediaries, it generally must 
make an inquiry of each such securities intermediary at least 20 
business days prior to the record date to ascertain the number of 
copies of sets of proxy materials needed to supply the materials to the 
beneficial owners.\292\
---------------------------------------------------------------------------

    \290\ See, e.g., Del. Code Ann. tit. 8, Sec.  213(a) ; Model 
Bus. Corp. Act Sec.  7.05.
    \291\ Additionally, Section 402.04 of the NYSE Listed Issuer 
Manual provides that ``[a]ctively operating issuers are required to 
solicit proxies for all meetings of shareholders,'' and NASDAQ 
Listing Rule 5620(b) provides that ``[e]ach Issuer that is not a 
limited partnership shall solicit proxies and provide proxy 
statements for all meetings of Shareholders.''
    \292\ 17 CFR 240.14a-13. Rule 14c-7 contains a parallel 
requirement for issuers intending to distribute information 
statements. 17 CFR 240.14c-7.
---------------------------------------------------------------------------

    Historically, the same record date has been used for determining 
both which shareholders are entitled to notice of an upcoming meeting 
and which shareholders are entitled to vote. However, some states are 
enacting changes to this procedure. For example, effective August 1, 
2009, the Delaware General Corporation Law permits, but does not 
require, Delaware corporations to use separate record dates for making 
these two determinations.\293\ One important result of this change is 
that it potentially allows an issuer, by establishing a voting record 
date close to the meeting date, to decrease the likelihood that as of 
the meeting date persons entitled to vote at the meeting (i.e., the 
holders on the voting record date) will no longer have an economic 
interest in the issuer.\294\
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    \293\ Del. Code Ann. tit. 8, Sec.  213(a). Section 213 provides 
that the record date for determining which shareholders are entitled 
to notice of a meeting ``shall not be more than 60 nor less than 10 
days before the date of such meeting,'' and that Unless the board 
determines otherwise, ``such date shall also be the record date for 
determining the stockholders entitled to vote at such meeting.'' The 
August 1, 2009 amendment provides that as an alternative, the board 
may determine ``that a later date on or before the date of the 
meeting shall be the date for making such determination.'' Recently 
proposed amendments to the Model Business Corporation Act, 
especially Sec.  7.07(e) of that Act, adopt a similar approach in 
permitting dual record dates. See Changes in the Model Business 
Corporation Act--Proposed Amendments to Shareholder Voting 
Provisions Authorizing Remote Participation in Shareholder Meetings 
and Bifurcated Record Dates, 65 Bus. Law. 153, 156-160 (Nov. 2009).
    \294\ See James L. Holzman and Paul A. Fioravanti, Jr., ``Review 
of Developments in Delaware Corporation Law,'' Apr. 2009, at 2, 
available at http://www.prickett.com/PrinterFriendly/Articles/2009_Review_of_Developments.pdf (explaining that the ability to move 
the voting record date closer to meeting date should promote voting 
only by those who continue to have an economic interest).
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2. Difficulties in Setting a Voting Record Date Close to a Meeting Date
    Although Delaware's amended statute permits a voting record date 
\295\ to be as

[[Page 43015]]

late as the date of the meeting itself,\296\ certain logistical and 
legal matters currently prevent issuers from setting such a voting 
record date.\297\ For example, Rule 14c-2(b) requires that if 
information statements are being distributed, they must be sent or 
given to holders of the class of securities entitled to vote at least 
20 calendar days prior to the meeting date. Because the investors 
entitled to receive the information statements, by definition, cannot 
be identified until the voting record date,\298\ issuers intending to 
distribute information statements currently would be unable to set a 
voting record date that is fewer than 20 calendar days prior to the 
corresponding meeting.
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    \295\ For purposes of this release, the term ``voting record 
date'' refers to the date used in determining the stockholders 
entitled to vote at the meeting, and the term ``notice record date'' 
refers to the date used for determining the stockholders entitled to 
notice of the meeting. ``Voting-record-date shareholders'' and 
``notice-record-date shareholders'' refer to shareholders who hold 
their shares as of the record date that is specified.
    \296\ See Charles M. Nathan, ```Empty Voting' and Other Fault 
Lines Undermining Shareholder Democracy: The New Hunting Ground for 
Hedge Funds,'' available at http://lw.com/upload/pubContent/_pdf/pub1878_1.Commentary.Empty.Voting.pdf (explaining that, ``[w]ith 
modern technology, there is no apparent need to retain an advance 
record date concept to manage shareholder voting. Rather, the record 
date could be as late as the close of business on the night 
preceding the meeting, with a voting period (i.e., the time for 
which the polls remain open) at or in conjunction with the meeting 
lasting several hours or perhaps a full working day.'').
    \297\ Conversely, the record date for traded companies in the 
United Kingdom must be set at a time that is not more than 48 hours 
before the time for the holding of the meeting. The Companies 
(Shareholders' Rights) Regulations 2009 No. 1632 (Regulation 20, 
section 360B), available at http://www.opsi.gov.uk/si/si2009/uksi_20091632_en_3#pt3-l1g9.
    \298\ Rules 14a-1(h) and 14c-1(h) define ``record date'' as 
``the date as of which the record holders of securities entitled to 
vote at a meeting or by written consent or authorization shall be 
determined'' (emphasis added).
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    We have not adopted a 20 calendar day requirement with respect to 
proxy materials,\299\ but we have stated that ``the materials must be 
mailed sufficiently in advance of the meeting date to allow five 
business days for processing by the banks and broker-dealers and an 
additional period to provide ample time for delivery of the material, 
consideration of the material by the beneficial owners, return of their 
voting instructions, and transmittal of the vote from the bank or 
broker-dealer to the tabulator.'' \300\ Additionally,
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    \299\ We note, however, that Section 401.03 of the NYSE Listed 
Issuer Manual ``recommends that a minimum of 30 days be allowed 
between the record and meeting dates so as to give ample time for 
the solicitation of proxies.''
    \300\ Release No. 34-33768, note 4, above.
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     Instructions to Schedule 14A, Form S-4, and Form F-4 
prescribe certain situations in which, if the materials being sent to 
shareholders incorporate information by reference, the issuer must send 
its proxy statement or prospectus to investors at least 20 business 
days before the meeting; \301\
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    \301\ See Note D.3 to Schedule 14A, General Instruction A.2 to 
Form S-4, and General Instruction A.2 to Form F-4.
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     Rule 14a-16(a)(1) requires issuers not relying on the full 
set delivery option to provide a Notice of Internet Availability of 
Proxy Materials at least 40 calendar days before the meeting date; 
\302\ and
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    \302\ 17 CFR 240.14a-16(a)(1).
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     Certain of our rules and forms require that if a limited 
partnership roll-up transaction is being proposed, the disclosure 
document must be distributed no later than the lesser of 60 calendar 
days prior to the meeting date or the maximum number of days permitted 
for giving notice under applicable state law.\303\
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    \303\ Section 14(h)(1)(J) of the Exchange Act, Rule 14a-6(l), 
Rule 14c-2(c), General Instruction I.2 to Form S-4, and General 
Instruction G.2 to Form F-4.
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    Because these provisions require a period of time between the 
mailing of materials and the meeting date and because, under a dual 
record date system, the investors to whom the materials must be mailed 
(that is, those investors entitled to vote at the meeting) would not be 
identified until the voting record date,\304\ issuers are limited in 
how close to the meeting date their voting record date can be.
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    \304\ Under our rules, the issuer must send an information 
statement to all shareholders entitled to vote at a meeting, but 
from whom no proxy is being solicited. 17 CFR 240.14c-2. Thus, the 
issuer effectively must send either a proxy statement or an 
information statement to any shareholder entitled to vote at a 
meeting, including those that acquire the securities after the 
notice record date, but before the voting record date.
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    Issuers also need to consider logistical matters in deciding the 
timing of their voting record date and their mailing. They need to find 
out how many copies of their materials to print, print the materials, 
and distribute the materials to transfer agents and to proxy service 
providers so that they can be delivered to registered and beneficial 
owners. Exchange Act Rules 14a-13, 14b-1, 14b-2, and 14c-7 govern this 
process, but we understand that in practice those rules reflect only a 
subset of the time-consuming logistical hurdles issuers need to go 
through. In this release, we are inviting submission of additional 
information on this process and suggestions for streamlining it.
3. Potential Regulatory Responses
    In light of the changes to state law, we seek to explore whether to 
propose action to accommodate issuers that wish to use separate record 
dates where permitted by state law, and if so, what action we should 
take. In analyzing this situation, we are faced with competing 
considerations. On one hand, the closer to a meeting date a voting 
record date is, the more likely it is that investors who are entitled 
to vote will still have an economic interest in the issuer at the time 
of the shareholder meeting. Thus, setting the voting record date close 
to the meeting date avoids disenfranchising the shareholders who 
purchase their shares after the record date for notice of the meeting. 
Moreover, facilitating the use of a notice record date that 
significantly precedes a voting record date may assist shareholders in 
recalling loaned securities in order to vote them. On the other hand, 
investors who are entitled to vote need adequate time to receive the 
proxy materials and consider the matters presented to them for 
approval. Inadequate time can lead to uninformed voting decisions or, 
in some cases, a decision by the investor not to vote at all, a problem 
that was highlighted in 2007 as we considered adopting the notice and 
access rules.\305\
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    \305\ See Release 34-55146, note 199, above, at note 25.
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    If we choose to facilitate issuers' use of separate record dates, 
we could choose between two general models, one focusing principally on 
the notice record date and the other focusing principally on the voting 
record date. The first model would be to require issuers to provide 
proxy materials or an information statement, as applicable, to those 
who are investors as of the notice record date. This model parallels 
the Delaware provision in that it focuses the information-delivery 
obligation on persons who are investors as of the notice record date. 
One open question under this first model is whether issuers should 
subsequently be obligated to send the disclosure document to those who 
were not investors as of the notice record date but who become 
investors by the voting record date.\306\
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    \306\ The theory for not imposing this requirement would be that 
voting-record-date shareholders will have the information available 
to them if they desire to see it. The information will be available 
on the Internet pursuant to Rule 14a-16(b)(1) and (d), and in many 
cases press releases and media reports would publicize the 
availability of the information.
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    The second model would be to require issuers to provide the 
disclosure document to those who are investors as of the voting record 
date. An open issue under this model is whether and how issuers should 
be obligated to make the disclosure document public at some point 
before the voting record date.

[[Page 43016]]

    Under either model, it is possible that some investors will obtain 
a proxy card or VIF, fill it out and submit it, and then buy additional 
shares or sell some shares, all prior to the voting record date. Thus, 
the number of shares held at the time of submission of the proxy or VIF 
may differ from the number of shares that are ultimately voted on 
behalf of the investor. In such a situation, we would need to consider 
how the proxy or VIF already submitted by the investor would be 
affected, as well as the legal and operational implications that this 
situation may impose on broker-dealers and their customers and the 
costs associated with developing a process to address it, in light of 
the complex beneficial ownership structure described earlier in this 
release.
    Investors may benefit from receiving information about the effect 
that trades subsequent to the submission of their proxy or VIF will 
have on their voting rights. Therefore, additional disclosure may be 
necessary in proxy and information statements. One possible disclosure 
would be to establish that if an investor submits a proxy or VIF prior 
to the voting record date, all of the shares held by the investor as of 
the voting record date would be voted in accordance with the proxy or 
VIF, in the absence of specific contrary instructions from the 
investor.\307\ Another alternative would be to clarify that a proxy or 
VIF would not be used to vote more shares than the investor held at the 
time he or she submitted the proxy or VIF, so that shares acquired 
after the notice record date would not be voted unless that investor 
submits a separate proxy or voting instruction for those shares. 
However, it appears that each of these approaches may risk undermining 
the purpose of facilitating a voting record date that is closer to the 
meeting date.
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    \307\ The investor would, of course, continue to be able to 
revise his or her previous votes prior to the meeting.
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4. Request for Comment
     Do issuers wish to use dual record dates? If so, why?
     The Delaware amendment became effective on August 1, 2009. 
Should we first see how popular the dual-record-date provision is 
before providing a regulatory response? Or, are our rules an impediment 
to using dual record dates, so that it is difficult to assess whether 
this new approach would be viewed favorably by issuers or investors 
unless we change our rules?
     In view of the competing policy considerations described 
above, if we respond, should we respond in a way that generally 
facilitates issuers' ability to use the dual-record-date approach or in 
a way that discourages it? Which direction would be better for 
investors? Is there a more neutral approach that would better serve the 
interests of investors?
     Even if it is too early for us to take action that either 
facilitates or discourages issuers' use of dual record dates, does the 
mere existence of a two-record-date regime create confusion or 
uncertainty in the interpretation of any of our existing rules? If so, 
which rules need to be clarified or revised? For example, should we 
consider proposing to clarify or to revise:
     Rules 14a-1(h) and 14c-1(h), which define ``record date'' 
as, essentially, the voting record date;
     Item 6(b) of Schedule 14A, which requires issuers to 
``[s]tate the record date, if any, with respect to this solicitation''; 
or
     Rules 14a-13(a)(3) and 14c-7(a)(3), which require issuers 
to send an inquiry at least 20 business days prior to the record date?
     Would any SRO rules or recommendations need to be revised 
or clarified in order to facilitate the use of dual record dates?
     Under the first model described above, after an issuer 
distributes its disclosure document to investors as of the notice 
record date, the issuer might need to send the disclosure document, or 
at least a notice of the availability of the disclosure document, to 
those who become investors after the notice record date but before the 
voting record date.
     Would this obligation be appropriate?
     If not, how would new investors obtain the means to vote, 
such as a proxy card, a VIF, or a control number to vote electronically 
or telephonically? Would they be limited to attending the meeting in 
person? Would new beneficial owners be able to vote or attend at all?
     Given that the investors who are entitled to vote are the 
investors as of the voting record date, would the first model (in which 
some investors who ultimately would not be entitled to vote would 
receive proxy materials) serve any useful interest if such an 
obligation were not imposed?
     If we do not impose such an obligation on issuers, should 
they be able to choose which new investors to send the disclosure 
document to, or should an ``all or none'' requirement apply? If they 
should have a choice, on what basis should they be able to choose?
     Finally, what impact would the first model have on the 
costs of distributing proxy materials?
     Under the second model described above, because the voting 
record date might be close to, or on, the meeting date, would it be 
necessary to require issuers to make public their disclosure document 
at some point before the voting record date? What would be the most 
appropriate way for them to do so, and how far in advance of the voting 
record date or the meeting date should they be required to do so? 
Should we consider different requirements for different sizes of 
issuers (for example, permit more reliance on media outlets and less 
reliance on physical mailings for larger issuers)?
     Which of the two general approaches outlined above is more 
appropriate? What other general approaches should we consider?
     Would broker-dealers be able, or have sufficient time, to 
track accurately which beneficial owners would have the right to vote 
on the voting record date if it is close to the shareholder meeting? If 
so, what would be the cost to broker-dealers to establish such tracking 
systems?
     As discussed above, some of our rules specify a minimum 
number of days before a meeting by which an issuer must distribute its 
disclosure document. Should we consider shortening or eliminating any 
of these time periods? If we shorten any of them, what is an 
appropriate amount of time to replace it with?
     Should we propose to specify a minimum number of days that 
must elapse between the mailing of a proxy statement and a meeting, as 
Rule 14c-2(b) does with information statements? If we were to do so, 
what would be an appropriate number of days, and should the number be 
flexible to account for such possibilities as overnight or electronic 
delivery, or electronic or telephonic voting? \308\ In what ways can or 
should we rely on technology to reduce these time periods?
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    \308\ The OECD recommends that measures should be taken, both by 
regulators and by all the institutions involved in the voting chain 
(issuers, custodians, etc.) to remove obstacles and to encourage the 
use of flexible voting mechanisms such as electronic voting. 
Corporate Governance and the Financial Crisis--Key Findings and Main 
Messages, note 282, above.
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     Should we propose that federal proxy rules prescribe a 
form of proxy that permits the shareholder to specify the extent to 
which an executed proxy should be applied to shares that are bought 
after the proxy is submitted and before the voting record date?

[[Page 43017]]

     Would voting all of the shares in accordance with the 
instructions on the proxy or VIF present issues under Rule 14a-10(b), 
which prohibits the solicitation of ``any proxy which provides that it 
shall be deemed to be dated as of any date subsequent to the date on 
which it is signed by the security holder''? If so, should that rule be 
amended, and how?

C. ``Empty Voting'' and Related ``Decoupling'' Issues

1. Background and Reasons for Concern
    As noted in the Introduction, this release primarily focuses on 
whether the U.S. proxy system operates with the accuracy, reliability, 
transparency, accountability, and integrity that shareholders and 
issuers should rightfully expect. These expectations are shaped in part 
by the Commission's proxy solicitation, disclosure and other rules, the 
rules of the national securities exchanges, as well as by the 
substantive rights granted under state corporate law and the charter 
and bylaw provisions of individual corporations.
    At their core, these expectations are based on the foundational 
understanding that, absent contractual or legal provisions to the 
contrary, a ``shareholder'' possesses both voting rights and an 
economic interest in the company.
    The ability to separate a share's voting rights from the economic 
stake through, for instance, what has been dubbed ``empty voting'' and 
``decoupling'' challenges this foundational understanding.\309\ The 
term ``empty voting'' has been defined to refer to the circumstance in 
which a shareholder's voting rights substantially exceed the 
shareholder's economic interest in the company.\310\ In this 
circumstance, the exercise of the right to vote is viewed as ``empty'' 
because the votes have been emptied of a commensurate economic interest 
in the shares (and, at the extreme, may even be associated with a 
negative economic interest in the sense of benefiting from a decline in 
the share price). Here, the bundle of rights and obligations 
customarily associated with share ownership has been ``decoupled.'' 
Empty voting is an example of decoupling and can occur in a variety of 
ways, some of which we describe briefly below.
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    \309\ See, e.g., Henry T. C. Hu & Bernard Black, Equity and Debt 
Decoupling and Empty Voting II: Importance and Extensions, 156 
University of Pennsylvania Law Review 625-739 (2008) [hereinafter, 
Hu & Black, Empty Voting II]; Henry T. C. Hu & Bernard Black, Debt, 
Equity, and Hybrid Decoupling: Governance and Systemic Risk 
Implications, 14 European Financial Management 663-709 (2008) 
[hereinafter Hu and Black, Debt and Hybrid Decoupling]. Henry Hu 
currently serves as the Director of the Division of Risk, Strategy, 
and Financial Innovation at the Commission.
    \310\ For the purposes of this release, empty voting does not 
include dual class or similar share structures in which the 
corporate charter prescribes disproportionate allocation of voting 
and economic rights, albeit in a fully disclosed fashion. Likewise, 
for purposes of this release empty voting does not encompass the 
situation in which the individuals within an institutional investor 
who determine that investor's voting decisions act independently of 
the person or persons making economic investment decisions in regard 
to the security being voted. See, e.g., Charles M. Nathan & Parul 
Mehta, The Parallel Universes of Institutional Investing and 
Institutional Voting (Mar. 6, 2010), available at http://www.lw.com/upload/pubContent/_pdf/pub3463_1.pdf; cf. James McRitchie, 
Parallel Universes Undercuts Its Own Arguments (Apr. 16, 2010), 
available at http://corpgov.net/wordpress/?tag=nathan. Unlike the 
dual class situation, this latter situation could involve 
undisclosed decoupling of voting decisions from economic 
considerations.
---------------------------------------------------------------------------

    Such decoupling raises potential practical and theoretical 
considerations for voting of shares. For example, an empty voter with a 
negative economic interest in the company may prefer that the company's 
share price fall rather than increase. Such a person's voting 
motivation contradicts the widely-held assumption that equity 
securities are voted based on an interest in increasing shareholder 
value and in a way to protect shareholders' interests or enhance the 
value of the investment in the securities. That assumption--a core 
premise of state statutes requiring shareholder votes to elect 
directors and approve certain corporate decisions--may be undermined by 
the possibility that persons with voting power may have little or no 
economic interest or, even worse, have a negative economic interest in 
the shares they vote. It is a source of some concern that elections of 
directors and other important corporate actions, such as business 
combinations, might be decided by persons who could have the incentive 
to elect unqualified directors or block actions that are in the 
interests of the shareholders as a whole. Significant decoupling of 
voting rights from economic interest could potentially undermine 
investor confidence in the public capital markets.\311\
---------------------------------------------------------------------------

    \311\ For an academic analysis of many of the efficiency-related 
effects of equity decoupling, positive as well as negative, see Hu & 
Black, Debt and Hybrid Decoupling, note 309, above, at 667-672. For 
a discussion of how outsiders as well as incumbent management (e.g., 
managers, controlling shareholders, and corporations themselves) may 
try engaging in equity decoupling strategies, see Hu & Black, Empty 
Voting II, note 309, above, at 628-654 and 661-681.
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    On the other hand, empty voting may not always be contrary to the 
interests of shareholders. One article argues, for instance, that 
informed investors \312\ could potentially improve electoral outcomes 
through empty voting by taking long economic positions, acquiring 
disproportionate voting power from less informed shareholders,\313\ and 
casting votes that are more informed and thus more likely to contribute 
to shareholder value.\314\
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    \312\ We do not express an opinion as to whether any particular 
class of investor will always make a shareholder-maximizing vote. 
For purposes of this discussion, it is sufficient to assume that, 
generally speaking, a highly informed investor is more likely to 
vote in a manner that will add to shareholder value than a less 
informed investor.
    \313\ Notably, the nature of the decoupling in these 
circumstances is qualitatively different than that in which a person 
holding the right to vote has no economic interest, or a negative 
economic interest, in the issuer. Rather, such an investor has a 
positive economic interest, and while there is decoupling insofar as 
that investor holds voting rights that derive from shares owned by a 
different investor, that investor has voting interests that are 
aligned with the economic interest of investors generally.
    \314\ See Susan E. K. Christoffersen, Christopher C. Geczy, 
David K. Musto, and Adam V. Reed, Vote Trading and Information 
Aggregation, Journal of Finance, Vol. 62, 2007, pp. 2897-2929.
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    As discussed below, regardless of whether empty voting is deemed to 
be ``good'' or ``bad,'' there is a strong argument for ensuring that 
there is transparency about the use of empty voting. If a voter 
acquires shares with a view to influencing or controlling the outcome 
of a vote but takes steps to reduce the risk of economic loss or even 
achieve a negative economic interest, disclosure of the empty voter's 
status and intentions could be important information to other 
shareholders.\315\
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    \315\ Item 6 of Schedule 13D requires disclosure of contracts, 
arrangements, understandings, or relationships with respect to the 
securities covered by the Schedule, but the filing of Schedule 13D 
is triggered only when a person owns greater than 5% of a Section 
12-registered equity security, as such ownership is calculated 
according to the pertinent rules.
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    The Commission needs to further evaluate empty voting and related 
techniques in order to properly review the reliability, accuracy, 
transparency, accountability, and integrity of the current proxy system 
and the challenges that may be posed by empty voting and related 
techniques. Therefore, we are seeking information on the myriad ways in 
which decoupling can occur, and its nature, extent, and effects on 
shareholder voting and the proxy process.\316\ We understand that 
responses explicitly intended to address aspects of empty voting have 
already

[[Page 43018]]

started to occur at the state corporate law and individual corporation 
level.\317\
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    \316\ Separately, as described in Section V.C.2.b, below, the 
staff has initiated a project to review longstanding requirements as 
to disclosure of holdings of securities. The information gathered in 
connection with both projects, as well as any rule changes that may 
flow from such projects, could be helpful to the Commission, as well 
as to shareholders, issuers and state legislatures.
    \317\ For example, Delaware has amended its General Corporation 
Law to allow corporations to adopt measures to respond to certain 
record date capture strategies. See Bryn Vaaler, United States: DGCL 
Amendments Authorize Proxy Access And Expense Reimbursement Bylaws, 
Reverse Schoon v. Troy Corp., Mondaq Business Briefing, May 12, 
2009, available at http://www.mondaq.com/unitedstates/article.asp?articleid=79322. Some corporations have adopted bylaws 
that, under certain circumstances, require shareholders submitting a 
proposal to disclose how they have hedged the economic interests 
associated with their share positions. See Matt Andrejczak, ``Sara 
Lee, Coach set rules to deter devious shareholders,'' MarketWatch, 
Apr. 2, 2008.
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2. Empty Voting Techniques and Potential Downsides
a. Empty Voting Using Hedging-Based Strategies
    A variety of techniques can be used to accomplish empty voting. One 
technique is to hold shares but to hedge the economic interest in those 
shares. A shareholder could hedge that economic interest in a wide 
variety of ways, including by buying either exchange-traded or OTC put 
options. In a recent Commission enforcement action, a registered 
investment adviser agreed to settle charges that it had violated 
Section 13(d) of the Exchange Act in furtherance of a strategy of 
``essentially buying votes.'' \318\ The investment adviser purchased 
shares of a prospective acquirer ``for the exclusive purpose of voting 
the shares in a merger and influencing the outcome of the vote'' on a 
proposed acquisition of a company in which the investment adviser owned 
a large block of stock.\319\ At the same time, the investment adviser 
entered into swap transactions with the banks from which it purchased 
the acquirer's shares, so that it ``was able to acquire the voting 
rights to nearly ten percent of [the acquirer]'s stock without having 
any economic risk and no real economic stake in the company, [and] was 
able to do this without making a significant financial outlay.'' \320\
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    \318\ See In the Matter of Perry Corp., Release No. 34-60351, 
July 21, 2009 at ]19, available at http://www.sec.gov/litigation/admin/2009/34-60351.pdf.
    \319\ Id. at ]33.
    \320\ Id. at ]18.
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    While the practice of empty voting was not asserted as a 
substantive violation in the enforcement action, the matter illustrates 
how hedging techniques can be used to obtain voting power without 
having economic exposure on the securities being voted. The use of 
hedging by insiders also can result in empty voting. Executives 
entering into ``collars'' transactions, for instance, retain full 
voting rights despite having hedged a portion of their economic 
interest.\321\
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    \321\ In a ``collar'' transaction, the investor sells a call 
option at one strike price and purchases a put option at a lower 
strike price. For little or no cost, the investor thereby limits the 
potential for appreciation or depreciation to the range--the 
``collar''--defined by the two strike prices. Academic research 
indicates that CEOs, directors, and senior executives have used this 
strategy to hedge their economic interest in the firm's stock. See 
Carr Bettis, John Bizjak, and Michael Lemmon, Managerial Ownership, 
Incentive Contracting, and the Use of Zero-Cost Collars and Equity 
Swaps by Corporate Insiders, Journal of Financial and Quantitative 
Analysis, 2001, at 3.
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    Empty voting can also be accomplished by the use of credit 
derivatives (rather than through the use of put options and other 
equity derivatives), a process dubbed ``hybrid decoupling.'' \322\ For 
example, instead of using put options to hedge its economic interest in 
shares, a shareholder may enter into credit default swap transactions 
with a derivatives dealer. If a company experiences poor economic 
performance, the likelihood of the company defaulting on its debt 
increases, and so the shareholder's credit default swap holdings will 
likely rise in value.\323\
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    \322\ See Hu & Black, Debt and Hybrid Decoupling, note 309, 
above, at 688-690.
    \323\ And just as ``equity decoupling'' and ``hybrid 
decoupling'' could sometimes incentivize some shareholders to use 
their voting rights against the best interests of the company and 
other shareholders, some believe that a pattern that has been termed 
``debt decoupling''--the unbundling of the economic rights, 
contractual control rights, and other rights normally associated 
with debt--may sometimes raise incentive issues as to some 
debtholders. These debtholders, dubbed ``empty creditors,'' may 
sometimes even have the incentive to use the control rights the 
debtholders have in their loan agreements or bond indentures to try 
to cause a company to go into bankruptcy. See Hu & Black, Debt and 
Hybrid Decoupling, note 309 above, at 665-66 and 679-688; ``CDSs and 
bankruptcy--No empty threat,'' The Economist, June 18, 2009.
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    Finally, hedging-based strategies need not even involve holding 
either the debt or equity of the company in which the shareholder is 
voting, or derivatives linked to such debt or equity. A shareholder 
may, for instance, be able to hedge its exposure to a company's shares 
through purchasing assets correlated in some fashion to the company's 
share price. In the case of an acquisition, for example, a shareholder 
in the potential acquirer which also holds a larger equity interest in 
the target company, may arguably be characterized as being an empty 
voter with a negative economic interest in the acquirer. That is, the 
more the acquirer overpays for the target, the more net profit the 
investor would achieve. Other correlated assets that may be used in 
empty voting strategies may include, for example, shares of a 
competitor or a supplier.
b. Empty Voting Using Non-Hedging Based Strategies
    There are a variety of situations in which empty voting may arise 
without any hedging at all. For example, active trading between a 
voting record date and the actual voting date may result in many voters 
having voting rights different from their economic stakes. An investor 
who sells shares after the voting record date retains the right to vote 
the shares without having any economic interest in them. Another 
example of empty voting without hedging is the voting of employees' 
unallocated shares in an employee stock ownership plan (``ESOP''). In 
an ESOP, while employees only have a contingent economic interest in 
the unallocated shares, the shares have full voting rights and are 
voted by a trustee, who either exercises discretion in voting or votes 
in proportion to vested ESOP shares. Effectively, either the trustee or 
the employees may become empty voters.\324\
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    \324\ See Hu & Black, Empty Voting II, note 309 above, at 648-
651 (as to restricted stock voting rights and certain ESOPs).
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    One important non-hedging based technique that appears to have been 
used outside the United States is borrowing shares in the stock lending 
market. Under standard stock lending arrangements, the borrower of the 
shares has the voting rights associated with the shares borrowed, but 
relatively little or no economic interest in the shares.\325\ Thus, 
simply by paying a fee to borrow the shares, the borrower can ``buy'' 
votes associated with the shares without having any corresponding 
economic interest. And the size of the fee could be reduced by 
borrowing the shares immediately before the record date, and returning 
the shares immediately afterwards.\326\ Within the U.S. this sort of 
practice appears to be limited by Regulation T, under which securities 
loans by institutional investors through their broker-dealers are 
restricted to distinct ``permitted purposes'' under the Federal Reserve 
Board's Regulation T, such as execution of a short sale.\327\

[[Page 43019]]

Borrowing securities to obtain the right to vote, however, may occur 
outside the purview of Regulation T in certain circumstances.
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    \325\ See, e.g., Master Securities Lending Agreement at 7.1-7.5, 
note 72, above.
    \326\ Some observers believe that this stock lending-based 
strategy has occurred in Hong Kong and the United Kingdom. See Kara 
Scannell, ``Outside Influence: How Borrowed Shares Swing Company 
Votes--SEC and Others Fear Hedge-Fund Strategy May Subvert 
Elections,'' Wall Street Journal, Jan. 26, 2007, at page A1.
    \327\ See Federal Reserve Board Regulation T, 12 CFR Sec.  
220.2. This regulation limits the purposes for which broker-dealers 
who do not transact with customers from the general public may lend 
shares. Regulation T's ``purpose test'' generally provides that 
borrowers may only borrow securities for short selling, covering 
delivery fails, and similar purposes. For a fuller description of 
Regulation T, see Charles E. Dropkin, ``Developing Effective 
Guidelines for Managing Legal Risks-U.S. Guidelines,'' Securities 
Lending and Repurchase Agreements 167, 172-176 (Frank J. Fabozzi and 
Steven V. Mann, eds., 2005). Essentially, Regulation T requires 
broker-dealers to make a good faith effort to ascertain the 
borrower's purpose and cannot lend shares for voting purposes 
because that is not a permitted purpose under Regulation T. 17 CFR 
220.10(a). The standard securities lending agreement in the U.S. 
generally will contain a representation and warranty that the 
borrower, and any person to whom the borrower relends the borrowed 
securities, are only borrowing consistent with the ``purpose test'' 
(unless the borrowed securities are ``exempted securities''). See, 
e.g., Master Securities Lending Agreement, note 72, above, at 9.5 
(at www.sifma.org/services/stdforms/pdf/master_sec_loan.pdf).
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3. Potential Regulatory Responses
    As one possible response to empty voting and related phenomena, the 
Commission could consider requiring disclosure that creates 
transparency.\328\ The proxy rules, the periodic reporting system, and 
rules adopted pursuant to statutory provisions such as Sections 13(d), 
13(f), and 13(g) of the Exchange Act might be modified or a new 
disclosure system could be developed to elicit fuller disclosure of 
empty voting. More robust disclosure may be helpful to all of the 
participants in the proxy process as well as for regulators. For 
instance, if an investor acquires substantial voting rights that are 
not disclosed, then the other shareholders may not be aware of the 
potentially heightened importance of their vote. Without such 
information, shareholders may have insufficient information as to the 
need to vote and to take coordinated or other actions to protect their 
interests. By improving transparency, investors would have the option 
to choose to respond to such information and make a better informed 
investment or voting decision. Issuers also may be in a position to 
take responsible and appropriate action in response to disclosure of 
empty voting strategies, such as increasing their solicitation efforts.
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    \328\ The staff is also working on the separate but related 
project of reviewing current disclosure requirements relating to 
holdings of financial instruments, including short sale positions 
and derivatives positions.
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    Beyond gathering information and enhancing transparency, the 
following are some of the possible responses to empty voting and other 
types of decoupling that could be considered by the Commission, 
Congress, state legislatures, and individual issuers.
     Require voters to certify on the form of proxy or VIF that 
they held the full economic interest in the shares being voted at the 
time the proxy was executed, or, if not, disclose the extent to which 
their economic interest in the shares was shorted or hedged.
     Require disclosure of the shareholder meeting agenda 
sufficiently ahead of the record date to enable investors who have 
loaned their securities to recall those loans to retain voting control 
of those securities.\329\
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    \329\ See Section III.C.2, above.
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     Permit only persons who possess pure long positions (i.e., 
economic interests not shorted or hedged) in the underlying shares to 
vote by proxy, or allow proxy voting only commensurate with their net 
long positions (e.g., economic interests after adjusting for equity or 
credit derivative-based hedging or short positions), or require a 
cooling-off period for those who have no or negative economic interests 
(after public disclosure) before voting.
     Prohibit empty voting, especially in situations where 
there is a negative economic interest.
4. Request for Comment
     What is the potential for, and actual prevalence of, all 
forms of equity, debt, and hybrid decoupling (including empty voting)? 
Are these techniques employed differently by ``outside'' investors, 
company insiders, and the company itself? Does decoupling raise public 
policy concerns, for example in relation to the disclosure requirements 
of Section 13(d)? Are existing disclosure requirements under Section 
13(d) and other provisions of federal securities laws sufficient to 
address the entire range of concerns raised by equity, debt, and hybrid 
decoupling?
     Can the potentially beneficial and potentially detrimental 
aspects of debt, equity, or hybrid decoupling be meaningfully 
distinguished? Are there adverse consequences if there are empty 
voters, or even empty voters with negative economic interests, 
especially if their votes are outcome determinative? Are there examples 
of situations in which empty voting was outcome determinative?
     What are the mechanisms that result in debt, equity, and 
hybrid decoupling giving rise to public policy concerns? How important 
are these different mechanisms? To what extent can credit derivatives, 
correlated assets (such as, for example, shares of other participants 
in a takeover battle), or other financial instruments be used, and to 
what extent are they being used, to accomplish empty voting? To what 
extent does debt decoupling raise issues similar to those raised by 
equity decoupling or hybrid decoupling and how might regulatory or 
other responses to debt decoupling differ?
     At what economic threshold or percentage of voting power 
threshold is decoupling--by any one individual, by group, or by 
shareholders in the aggregate--material to the company and its security 
holders?
     Are certain companies (for instance, due to their 
ownership or capital structure) particularly vulnerable to potential 
adverse effects of debt, equity, or hybrid decoupling?
     Do concerns about decoupling economic interests and voting 
rights extend to the decoupling of voting and investment management 
functions within institutional investors? \330\ If so, would one or 
more regulatory responses, involving disclosure or otherwise, be 
appropriate?
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    \330\ See Nathan & Mehta, note 310, above.
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     Under what circumstances should disclosure of a 
shareholder's net economic interest be required, along with any 
associated decoupling? If such net economic interest is required to be 
disclosed, how should ``net economic interest'' be defined, given the 
myriad ways in which such decoupling can occur? Should our rules 
require disclosure regarding, and/or certification of, beneficial and 
economic ownership as part of the form of proxy or VIF? Or should this 
matter be left to state law or bylaws adopted by individual companies?
     If companies and company executives themselves engage in 
decoupling, do existing disclosure requirements result in sufficient 
transparency for investors to observe this behavior? If not, what level 
of disclosure would provide sufficient transparency? What changes to 
Schedules 13D or 13G, periodic disclosure requirements, Securities Act 
disclosure rules, the proxy rules, or other aspects of securities law 
are advisable?
     Are there circumstances (such as empty voting while 
holding a negative economic interest) where debt, equity, and hybrid 
decoupling appear to be fundamentally detrimental to the shareholders, 
debtholders, or the issuer itself? Are existing disclosure 
requirements, or changes to existing disclosure requirements, 
sufficient to address any such concerns? Should the Commission consider 
additional remedial actions? What role should federal law, state law 
and individual corporate actions play in addressing any such concerns?
     Should we propose rule changes to provide more disclosure 
and transparency as to equity, debt, or

[[Page 43020]]

hybrid decoupling? If so, should this disclosure be in proxy 
solicitation materials, periodic reports, or disclosures pursuant to 
Sections 13(d), 13(g), and/or 13(f)? Should we develop a specific new 
form or report relating to short sales, short sale positions, and debt, 
equity, or other derivatives that could be used to identify instances 
of potential or actual empty voting or other kinds of equity, debt, or 
hybrid decoupling? Should any requirements related to decoupling 
disclosure also require disclosure of credit derivatives positions, as 
would occur with hybrid decoupling? Should debt decoupling be subject 
to disclosure requirements and, if so, what disclosure requirements 
would be appropriate? To what extent would new legislation be necessary 
in order to impose any of these requirements?
     If we were to propose any enhanced or new disclosure 
requirements, what should the filing deadlines be under various 
circumstances in order to inform the marketplace on a timely basis, 
while providing adequate time for those responsible for complying with 
the requirement to collect the information and prepare the filing?
     What should be the triggers for such disclosure 
requirements? For instance, in establishing such a trigger, is the more 
than 5% equity ownership threshold of Exchange Act Section 13(d) 
analogous in any way? Are the current ``beneficial owner'' concepts 
contemplated by Regulation 13D-G, some variation of such concepts, or 
some altogether different concept of ownership appropriate for 
determining whether a disclosure requirement is triggered? Or should 
decoupling-related disclosures not be based on conceptions of 
ownership, but instead be based on the nature of the investor and 
presence of investment discretion, as with Form 13F? Are there 
alternatives to ``ownership,'' the nature of the investor, and presence 
of investment discretion that should be considered?
     What level of detail should be required for decoupling-
related disclosures, recognizing the complexity of, for example, many 
OTC derivatives?
     If, pursuant to state law or a company's articles or 
bylaws, there are substantive limitations on empty voting or other 
forms of decoupling, should the Commission accommodate the 
implementation of such limitations by, for instance, requiring 
disclosure or ownership certifications on the form of proxy or VIF?
     To what extent is Regulation T, by its terms, effective in 
limiting the borrowing of shares for voting purposes? Should the 
Commission or another regulator propose a new rule that would prohibit 
or restrict borrowing securities for purposes of obtaining the right to 
vote those securities?

VI. Conclusion

    The U.S. proxy system is the fundamental infrastructure of 
shareholder suffrage since the corporate proxy is the principal means 
by which shareholders exercise their voting rights. The development of 
issuer, securities intermediary, and shareholder practices over the 
years, spurred in part by technological advances, has made the system 
complex and, as a result, less transparent to shareholders and to 
issuers. It is our intention that this system operate with the 
reliability, accuracy, transparency, and integrity that shareholders 
and issuers should rightfully expect.
    We are interested in the public's opinions regarding the matters 
discussed in this concept release. We encourage all interested parties 
to submit comment on these topics. In addition, we solicit comment on 
any other aspect of the mechanics of proxy distribution and collection 
that commentators believe may be improved upon.

    Dated: July 14, 2010.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-17615 Filed 7-21-10; 8:45 am]
BILLING CODE 8010-01-P