Technological change now offers the opportunity to construct a better system of share ownership based on traceable shares, with the potential to fix a panoply of problems associated with proxy voting, said the Council of Institutional Investors in a letter that proposes private, permissioned blockchains as one technology the SEC should consider.
They write: We recognize that “blockchain” has become a buzzword and that it cannot solve every problem present in the financial system. But share ownership is an area where the technology matches the use cases particularly well, presenting an opportunity to improve investors’ experience with share ownership and voting.
We believe that pursuing the promising pathway of a blockchain solution enabling traceable shares will require the SEC to offer regulatory relief from the current system of share immobilization and national clearance and settlement established over decades of regulation. To be clear, that relief entails setting regulatory standards that issuers and their agents must meet in order to take advantage of the regulatory relief.
CII understands that the technology can essentially replicate the OBO/NOBO opt-in/optout mechanism and ensure a similar or superior level of investor privacy as currently exists. Under a system of share ownership using a private, permissioned blockchain, it is readily possible to obscure the identities, holdings, and voting decisions of beneficial owners through cryptography.
CII believes a blockchain-based system of share provenance better fulfills the principle that the rights of share ownership, including economic entitlements and voting decisions, belong to beneficial owners, not intermediaries. Changing the proxy system for the better requires a fundamental rethink of its infrastructure, including certain outdated regulations that have created inefficiencies, rather than adding incremental technological improvements atop the existing web of intermediaries.
New technologies offer multiple solutions to the SEC’s concerns about moving beyond an intermediated system of share ownership, clearance, and settlement, but old rules prevent their deployment in the public capital markets. In many ways, a blockchain solution of traceable shares represents a fully electronic version of paper certificates but lacks the associated costs and risks that prompted the paperwork crisis.
CII is a nonprofit, nonpartisan association of public, corporate, and union employee benefit funds, other employee benefit plans, state and local entities charged with investing public assets, and foundations and endowments with combined assets under management exceeding $4 trillion. Its associate members include a range of asset managers with more than $25 trillion in assets under management.