Source: https://www.sec.gov/rules/petitions/petn4-493.htm
Timestamp: 2019-04-20 00:59:38+00:00

Document:
This Petition for Rulemaking is submitted on behalf of the Business Roundtable, an association of chief executive officers of leading corporations with a combined workforce of more than 10 million employees in the United States and $3.7 trillion in annual revenues. We are concerned about ongoing problems with the current shareholder communications system pursuant to which we communicate with the beneficial owners of our securities held in street or nominee name. Accordingly, we urge the Commission to re-examine the system in light of technological and regulatory developments.
As described in detail in the attached Petition for Rulemaking, the current communication system is overly cumbersome, circuitous and expensive. It prevents companies from communicating directly with most of their street name holders. Instead, they must go through brokers and banks or their agents to distribute proxy materials to street name holders and tabulate voting results. As a result, it is very difficult and expensive for companies to communicate with their beneficial owners.
The Commission developed the current system in the 1980s. During the ensuing 20 years, companies' need to communicate with their shareholders has grown, and technological advances have made direct communications far more feasible. As we wrote in our December 22, 2003, comment letter to the Commission on its proposed director election rules, companies' would have an even greater need to communicate with their shareholders if the proposed rules were adopted.
Therefore, the Business Roundtable requests that the Commission conduct a thorough review of the current shareholder communications system. In particular, we recommend that the Commission consider requiring brokers and banks to provide companies with contact information for all beneficial owners, and permit companies to mail proxy materials directly to all beneficial owners. We believe this is an important step in improving communications between companies and all their shareholders.
The time has come for the U.S. Securities and Exchange Commission (the "Commission" or "SEC") to re-examine the shareholder communications system. Although communicating with shareholders is becoming increasingly important, companies remain hampered by a communications process developed in the mid-1980s that is cumbersome, circuitous and overly expensive.1 Companies' lack of ability to communicate with beneficial owners of their stock is primarily a result of the increased prevalence of shares held in the names of brokers and banks (so-called "street name" holdings). As discussed below, the current communications system provides companies only a limited ability to communicate directly with their beneficial owners whose shares are held in street name.
The street name system of share ownership was developed to enable securities transactions to be cleared more efficiently, but it should not stand in the way of efficient shareholder communications, especially given recent technological advances.3 Enhanced communication among directors, management and shareholders is an important part of enhancing corporate governance. Therefore, we urge the Commission to conduct a thorough review of the current shareholder communications system.4 In particular, we recommend that the Commission require brokers and banks to provide companies with contact information for all beneficial owners and permit the direct mailing of all communications (including proxy materials) to beneficial owners. We also encourage the Commission to require brokers and banks to execute omnibus proxies on behalf of beneficial owners, thereby allowing them to vote their shares directly.
Because DTC's role is only that of custodian, a number of mechanisms have been developed in order to pass its legal rights down the chain to the beneficial owners. The first step in passing voting rights down the chain is the "omnibus proxy," which DTC executes to transfer its voting rights to its participant brokers and banks.8 What happens next depends on whether a DTC participant is a broker or a bank.
Where the DTC participant is a broker, New York Stock Exchange ("NYSE") rules govern the voting of proxies.9 Under SEC and NYSE rules, brokers must deliver proxy materials to beneficial owners and request voting instructions.10 Where voting instructions have not been received by the broker by the tenth day preceding the meeting date, the so-called "ten-day rule" permits brokers to vote on certain matters deemed "routine" by the NYSE.11 On "non-routine" matters, NYSE rules prohibit brokers from casting uninstructed votes for shares they do not beneficially own without receiving instructions from the beneficial owners.12 It is important to note that the voting rights received by brokers are not passed on via proxy to their customers; instead, brokers retain the right to vote the shares, but may only do so with instructions, or as otherwise permitted by ten-day rule.
The names of the ultimate beneficial owners of street name shares - i.e., the customers of the brokers and banks who have deposited the shares with DTC - are maintained by the brokers and banks, not by companies themselves. Recognizing that this system left companies without direct contact with a large proportion of their beneficial owners, the Commission adopted rules in 1983, which went into effect in 1986, requiring brokers and banks to provide companies with lists of "non-objecting beneficial owners" (or "NOBOs") who did not object to having their names and addresses supplied to companies.17 Objecting beneficial owners (or "OBOs"), which constitute an estimated 75 percent of shares held in street name,18 still may be contacted directly only by the broker or bank, or its agent. Although companies may mail proxy materials directly to NOBOs, as a practical matter they never do so, because current SEC rules require companies to forward proxy materials through brokers and banks regardless of whether they are also mailed directly.19 Therefore, companies only use NOBO lists to mail out supplemental materials, annual reports and quarterly reports, which do not have to be mailed through brokers and banks.20 Furthermore, because only the brokers and banks are legally entitled to vote shares held in street name, companies cannot use NOBO lists to enable beneficial owners to vote directly with the company.
Increased shareholder activism in recent years has heightened the need for companies to be able to communicate with beneficial owners. For example, the number of shareholder proposals submitted in connection with annual meetings has risen from 221 in 1999 to 1,081 in 2003.26 Moreover, as shareholder activism increases, it becomes increasingly important for companies to be able to communicate with beneficial owners regarding those proposals.
Once the Election Contest procedure is triggered and shareholder nominees are included in company proxy materials, the board will have a resultant fiduciary duty to support the nominees it believes would best serve the interests of the company and all of its shareholders. In this regard, when a board of directors nominates a slate of director candidates, it must act in a manner it believes to be in the best interests of the company and all of its shareholders. Accordingly, a board that receives a shareholder nominee through the Election Contest procedure would be required to consider whether the board's own nominees would better manage the company and better satisfy applicable independence standards (e.g., the NYSE and NASDAQ independence requirements). If so, the board's fiduciary duties would require it to act to counter the shareholder nominee. This would result in additional communication between the company and its shareholders, in order to solicit support for board-nominated candidates. In this regard, there generally are at least five times more communications to shareholders in a proxy contest than during a routine annual meeting solicitation. Even before the Election Contest procedure is triggered, companies will need to communicate with the beneficial owners of their shares in connection with triggering events. Companies will need to provide shareholders with information regarding Election Contest shareholder proposals, and will need to support board-nominated candidates in order to avoid tripping the "withhold" votes trigger.
As noted above, the NYSE's "ten-day rule," embodied in NYSE Rule 452, gives brokers discretionary authority to vote proxies on "routine" matters for beneficial owners who have not given voting instructions by the tenth day before the meeting at which the votes are to be cast. The ten-day rule is an important tool for enabling companies to achieve quorum at meetings of stockholders. The applicability of the ten-day rule has been limited recently, however, as a result of the NYSE's new listing standards requiring shareholder approval of equity compensation plans. The amended listing standards deem shareholder approval of equity compensation plans to be a "non-routine" matter on which broker votes are prohibited. As a result, companies now have an increased need to communicate with shareholders in order to support the board's recommendations regarding equity compensation plans.
The Election Contest Rules could, if adopted, further limit the effectiveness of the ten-day rule. Because brokers' discretionary voting authority under the ten-day rule is limited to voting on routine matters, the NYSE may deny brokers the authority to vote in a contested director election or on a shareholder proposal to activate the Election Contest procedure.35 If brokers were unable to vote on behalf of non-responding shareholders on Election Contest shareholder proposals, companies would have an even greater need to communicate with their shareholders to solicit votes in support of board-nominated candidates or against Election Contest shareholder proposals.
The current system of shareholder communications is circuitous and unnecessarily time-consuming. As noted earlier, companies may communicate directly only with NOBOs, and only for the purpose of mailing annual and quarterly reports and supplementary materials. Proxy mailings and vote tabulations for beneficial owners of shares held in street name must all be conducted by the broker, bank or ADP. OBOs may be contacted directly by only the broker, bank or ADP, regardless of the purpose of the communication. Going through a broker, bank or ADP to forward proxy materials and other communications to beneficial owners inserts an unnecessary time delay in delivering those materials to beneficial owners.
Where the beneficial owner is an institutional investor, the right to provide voting instructions often lies with Institutional Shareholder Services, Inc. ("ISS") or Investor Responsibility Research Center ("IRRC"). Many institutional investors outsource the voting process to ISS and IRRC, who provide voting instructions on their behalf to ADP through ADP's proprietary ProxyEdge system. ADP then tabulates and communicates these instructions to the broker or bank, or to the company itself by executing the proxies on behalf of the broker or bank.
This process could be greatly simplified if companies were able to communicate directly with the beneficial owners of their securities. While it would still be necessary to coordinate between companies and record holders (brokers and banks) for the purpose of compiling lists of beneficial owners, the time delay involved in physically delivering materials to brokers, banks or ADP, and then to beneficial owners, could be avoided and communications between companies and their beneficial owners would be facilitated.
These fees add up rather quickly, and can act as a disincentive for companies to communicate with beneficial owners beyond the required proxy and annual reports. Furthermore, they are borne by the company, and therefore all shareholders, whereas they benefit only a subset of shareholders - those who choose to remain anonymous. The fees for forwarding materials to beneficial owners could be avoided if companies were permitted to communicate directly with beneficial owners.
As noted above, the current framework for distinguishing between NOBOs and OBOs and permitting companies to obtain contact information only for NOBOs was developed in the early 1980s. In addition to the continuing increase in street name share ownership over the ensuing two decades,58 thereby further restricting companies' ability to communicate with beneficial owners of their shares, tremendous technological advance have also taken place. The current system does not take advantage of these technological improvements. For example, many companies now are providing Internet voting for their registered shareholders, a technology that was unavailable in the 1980s. If nominees were able to issue omnibus proxies delegating voting power to their customers (i.e., beneficial owners), beneficial owners of shares held in street name would be able to use the same Internet voting system as registered beneficial owners. In addition to Internet voting, companies now have the ability to deliver communications electronically to beneficial owners, a technology that was not available in the 1980s. 59 This means that many companies and shareholders are technologically equipped to avoid the largely paper-based system of delivering hard copies of proxy materials. These are only a few examples, and a broad review of the shareholder communications process is likely to illuminate other technological advancements that could be used to provide companies with "real time" access to databases of beneficial ownership information.
At the time the Commission adopted the NOBO/OBO distinction, the primary reason given for the distinction was to respect some investors' wishes that their identities remain private and confidential.60 However, this privacy interest is not a sufficient reason to maintain the current cumbersome system, which makes it difficult and extremely expensive for companies to communicate with all their beneficial owners. Furthermore, those who value their privacy should bear the cost of maintaining their anonymity, rather than passing the cost on to all shareholders.
Brokers have a privacy interest in maintain the confidentiality of whom their customers are. This interest is already being protected in the context of NOBO lists. Currently, since most brokers and banks contract with ADP to create NOBO lists, those lists are provided to companies without the accompanying broker affiliations of individual beneficial owners. This mechanism of maintaining the privacy of broker affiliations would be available if OBOs were included in the list.
The Commission should take steps to make the system of shareholder communications more efficient. First, as mentioned earlier, the NOBO/OBO distinction should be eliminated, so as to permit companies to obtain a list of all beneficial owners and communicate with them directly.64 This would permit companies to avoid sending communications through brokers, banks and ADP, and enable them to communicate with beneficial owners more quickly and more cost-effectively. Those beneficial owners who have a strong interest in maintaining their anonymity could continue to do so, but would bear the costs of such anonymity.
Third, the Commission should permit companies to bypass brokers and banks in the mailing of proxy materials. By transmitting proxy materials directly to beneficial owners, an unnecessary time delay would be avoided. The Commission last considered (and rejected) this approach in 1982, when it found that technical and cost impediments would make such a system unworkable.66 The tremendous technological advances since 1982 suggest that it would now be feasible for companies to disseminate proxy materials directly to their beneficial owners.
A thorough review of the shareholder communication system is likely to reveal other ways to improve shareholder communications that technological advances since the 1980s have made possible.
1 See letter from American Society of Corporate Secretaries to Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission, Attachment A, at para. K.3 (Dec. 22, 2003), SEC File No. S7-19-03 [hereinafter "ASCS Letter"]; letter from Henry A. McKinnell, Ph.D., Chairman, Business Roundtable, to Jonathan A. Katz, Secretary, U.S. Securities and Exchange Commission (Dec. 22, 2003), SEC File No. S7-19-03 [hereinafter "Roundtable Letter"]; Robert Brown, Jr., The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility?, 13 J. Corp. L. 683, 687 (Spring 1988) ("The [shareholder communication] rules . . . preserve the inefficient, time-consuming, and expensive system of communicating through brokers and banks.").
2 Approximately 70-80 percent of all public stock is held in street name. See infra note 5. Of that stock, approximately 75 percent is held by OBOs. See infra note 18. Therefore, roughly 52-60 percent of all shares of public companies are held by OBOs.
3 See Division of Corporate Finance, Securities and Exchange Commission, Report to Senate Comm. on Banking, Housing and Urban Affairs, 96th Cong., Staff Report on Corporate Accountability 328 (Comm. Print 1980) [hereinafter "Staff Report"] ("The efficiency and practicality of street and other nominee registration is beyond dispute. Indeed, formation of a national market system is premised on such processing efficiency").
4 The United Kingdom's Shareholder Voting Working Group has recently conducted an independent review of the U.K.'s shareholder communications system. See Paul Myners, Report by Paul Myners to the Shareholder Voting Working Group: Review of the impediments to voting UK Shares (Jan. 2004), available at http://www.manifest.co.uk/myners/myners.htm (last visited Mar. 22, 2004).
5 See Release No. 34-38406 (Mar. 14, 1997), at n.5.
6 DTC states that it is the registered owner of 83 percent of all shares listed on the NYSE, 72 percent of the shares listed on NASDAQ, and 91 percent of the principal outstanding corporate debt listed on the NYSE. See DTC's 1999 Annual Report.
7 See, e.g., In Re Giant Portland Cement Co., 21 A.2d 697 (Del. Ch. 1941) ("The right to vote shares of corporate stock having voting powers has always been incident to legal ownership"); Enstar Corp. v. Senouf, 535 A.2d 1351, 1353-55 (Del. 1987), citing American Hardware Corp. v. Savage Arms Corp., 136 A.2d 690, 692 (Del. 1957) ("If an owner of stock chooses to register his shares in the name of a nominee, he takes the risks attendant upon such an arrangement, including the risk that he may not receive notice of corporate proceedings, or be able to obtain proxy from his nominee. The corporation, except in special cases, is entitled to recognize the exclusive right of the registered owner to vote.").
8 See Brown, supra note 1, at 753 ("As a practical matter . . . depositories execute omnibus proxies in favor of participants shortly after the issuer's record date. In this way, participants obtain the power to vote shares and can vote them as instructed by beneficial owners."); John C. Wilcox & John J. Purcell III, "Street Name" Registration & The Proxy Process, A Practical Guide to SEC Proxy and Compensation Rules § 12.3, at 12-7 (Amy L. Goodman and John F. Olson eds., Aspen Law and Business, 3rd ed. Supp. 2004) [hereinafter "Wilcox"].
9 See, e.g., NYSE Rules 450 and 452.
10 17 C.F.R. § 240.14b-2(b)(2); NYSE Rule 451(b).
13 See Wilcox, supra note 8, § 12.3[b], at 12-9.
14 17 C.F.R. § 240.14b-2(b)(2).
15 17 C.F.R. § 240.14b-2(b)(3).
16 See Wilcox, supra note 8, § 12.3[b], at 12-9.
17 See Release No. 34-20021 (July 28, 1983).
18 Based on information provided by ADP representatives at meetings of the Proxy Voting Review Committee, held on August 29, 2001 and October 17, 2001.
19 17 C.F.R. § 240.14a-13(b)(4) (permitting companies to use NOBO lists for any "corporate communications"). See Brown, supra note 1, at 760.
20 See Brown, supra note 1, at 758.
21 See, e.g. Thomas M. Ball, A Box Full of Proxies, 2 The M & A Lawyer No. 7 (Nov. 1998) ("ADP is a service bureau that provides mailing and tabulation services to virtually all major U.S. banks and brokers, making ADP the conduit for over 90 percent of holders in street name.").
22 See Wilcox, supra note 8, § 12.3[c], at 12-10.
24 See Harold S. Bloomenthal and Samuel Wolff, Going Public and the Public Corporation, § 11.10 (discussing the important role played by the Independent Election Corporation of America, which was subsequently purchased by ADP, in assembling NOBO lists).
25 NYSE Rules 451 and 465; NYSE Listed Company Manual, Para. 402.10(A); Release No. 34-45644 (Mar. 25, 2002) (approving the NYSE fee structure).
26 Investor Responsibility Research Center, www.irrc.org (last visited Feb. 20, 2004).
27 See Release No. 34-48825 (Apr. 11, 2003); See Schedule 14A, Item 7(h)(1).
28 See Schedule 14A, Item 7(h)(2).
29 See Release No. 34-48745 (Nov. 4, 2003); Commentary to Paragraph 303A(3) of the NYSE Listed Company Manual ("In order that interested parties may be able to make their concerns known to the non-management directors, a company must disclose a method for such parties to communicate directly with the presiding director or with the non-management directors as a group.").
30 17 C.F.R. § 240.14a-7(a)(2)(ii).
31 See Release No. 34-48626 (Oct. 14, 2003).
34 See Letter from Cary Klafter, Vice President, Legal and Government Affairs and Corporate Secretary, Intel Corporation, to Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission (Dec. 22, 2003), SEC File No. S7-19-03 [hereinafter "Intel Letter"] ("Dealing with the [Election Contest Rules] in seeming isolation from the rest of the system runs the risk of unanticipated material expense, breakdown and frustration of the state and national policies which support and encourage voting by shareholders").
35 See Supplementary Material .11(2) to NYSE Rule 452 (providing that brokers may not use the "ten-day rule" to give a proxy where the matter to be voted upon "is the subject of a counter-solicitation, or is part of a proposal made by a stockholder which is being opposed by management (i.e., a contest).").
36 See, e.g., Letter from Sarah A.B. Teslik, Executive Director, Council of Institutional Investors, to Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission (May 10, 2003), SEC File No. S7-10-03; Letter from James E. Heard, Chief Executive Officer, Institutional Shareholder Services, to Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission (June 13, 2003), SEC File No. S7-10-03; See also John C. Wilcox, What Next for the 10-Day Rule?, The Corporate Governance Advisor, Sept./Oct. 2003, at 12 ("There is no question that there will be pressure for the SEC and the NYSE to prohibit discretionary broker voting altogether.").
37 See Letter from John C. Wilcox, Vice Chairman, Georgeson Shareholder Communications, Inc., to U.S. Securities and Exchange Commission (Dec. 12, 2003), SEC File No. S7-19-03 ("If the practice [of broker voting] were disallowed, a comprehensive effort by regulators to educate investors about the changes and their additional responsibilities would be necessary.").
38 See Brown, supra note 1 at 746.
39 17 C.F.R. § 240.14a-13(a).
40 17 C.F.R. § 240.14a-13(a)(1)(i).
41 17 C.F.R. § 240.14a-13(a) n.1 ("If the registrant's list of security holders indicates that some of its securities are registered in the name of a clearing agency registered pursuant to Section 17A of the Act (e.g., "Cede & Co.," nominee for Depository Trust Company), the registrant shall make appropriate inquiry of the clearing agency and thereafter of the participants in such clearing agency. . .").
42 See 17 C.F.R. § 240.17Ad-8(b) ("A registered clearing agency may charge issuers requesting securities position listings a fee designed to recover the reasonable costs of providing the securities position listing to the issuer.").
43 See supra note 8.
44 17 C.F.R. § 240.14b-1(b)(1).
46 See Brown, supra note 1, at 741 (discussing the "piggybacking" of shares held through a chain of banks).
47 17 C.F.R. § 240.14b-2(b)(1).
48 17 C.F.R. § 240.14b-2(b)(2).
49 17 C.F.R. § 240.14b-1(b)(2); 17 C.F.R. § 240.14b-2(b)(3).
50 Supplementary Material to NYSE Rules 451 and 465; NYSE Listed Company Manual, Para. 402.10(A).
53 When an intermediary, such as ADP, coordinates multiple nominees (i.e., brokers and banks), ADP is entitled to charge $20 per nominee, plus $0.10 or $0.05 per set of proxy material (depending on the number of nominee accounts) in addition to the per-mailing fees described above. Id.
54 ADP is entitled to charge an "incentive fee" for each mailing eliminated in the amount of $0.25 per set of proxy material (where shares are held in at least 200,000 nominee accounts), $0.50 per set of proxy material (where shares are held in fewer than 200,000 nominee accounts), or $0.10 per interim report. Id.
55 See Supplementary Material .92 to NYSE Rule 451.
56 See ADP Fee Schedule (Mar. 2003).
58 See Release No. 34-38406 (Mar. 14, 1997) (noting that "stockholdings continue to migrate from registered to street or nominee ownership.").
59 See Release No. 34-36345 (Oct. 6, 1995) (issuing guidance on the use of electronic media to deliver communications to shareholders, noting that "[a]dvances in computers and electronic media technology are enabling companies to disseminate information to more people at a faster and more cost-effective rate than traditional distribution methods, which have been largely paper-based.").
60 See Advisory Committee on Shareholder Communications, Securities and Exchange Commission, Improving Communications between Issuers and Beneficial Owners of Nominee Held Securities 68 (1982) [hereinafter "Advisory Committee Report"], 68 and 71 (noting privacy concerns, and recommending that the Commission adopt the NOBO/OBO distinction).
61 See Staff Report, supra note 3, at D46, n. 114 (indicating that 8.2 percent of brokerage customers object); Advisory Committee Report, supra note 60, at 68 (indicating that 12 percent of securities held through banks or brokers object); supra note 18 (indicating that OBOs represent 75 percent of all shares held in street name).
62 Other countries take a different approach to enhance the availability of beneficial owner information to companies, irrespective of beneficial owners' privacy interests. In the United Kingdom, for example, public companies are entitled to obtain details of all persons who are interested in their shares, including beneficial owners. See Companies Act 1985 § 212. In addition, public companies in the United Kingdom have greater ongoing access to the names of large beneficial owners, in that any person with an interest of at least 3% (or 10% in the case of a discretionary fund manager) of a company's stock is required to disclose the nature of that interest to the company. See Companies Act 1985, §§ 198-208. Furthermore, any information which a company obtains under §§ 198 and 212 of the Companies Act is required to be entered into a register that is available for inspection by the public. In the case of listed companies, changes to interests which are notified to the company must be announced to the market without delay. See UK Listing Authority Listing Rules, para. 9.11 and 9.12.
63 See ASCS Letter, supra note 1 (supporting the notion that the NOBO/OBO distinction should be eliminated, and that beneficial owners valuing their privacy should bear the costs associated with such privacy); Roundtable Letter, supra note 1.
64 See, e.g., Intel Letter, supra note 34; ASCS Letter, supra note 1; Roundtable Letter, supra note 1.
65 See ASCS Letter, supra note 1 (recommending that beneficial owners of shares held in street name be permitted to vote their shares directly with the company); Roundtable Letter, supra note 1.
66 See Advisory Committee Report, supra note 60, at 69.
67 Consistent with the Commission's existing communications rules, we would anticipate that any means of direct communication available to companies also would be available to nominating shareholders.

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