Cooley: SEC’s Investor Advisory Committee considers “proxy plumbing” recommendations

Inaccuracies in vote count. To say that there doesn’t seem to be a lot of confidence in the accuracy of the vote count would be an understatement. The Securities Transfer Association found that, out of 183 meetings its members had tabulated in that past year, 130 had overvoting problems. Although most were ultimately reconciled, the question remained as to why the overvoting occurred. There are many issues related to the inaccuracy of vote counts—overvoting, undervoting, empty voting (when voting rights and economic interest are separated), breaks in the chain of custody, improperly completed proxy cards and difficulties associated with vote counting, confirmation and reconciliation. These issues arise out of the decision made decades ago to move to a system of share immobilization, under which most shares are held in street name and reflected in positions listed at a centralized depositary (DTC), where they are treated as a “fungible mass of shares not traceable to any individual.” While the system makes share transfers easier, the arrangement is itself complex, compounded by many layers of intermediation—the transfer agent, the custodian and perhaps several subcustodians—that can complicate and obscure proxy voting and lead to mismatches that ultimately disqualify votes. What’s more, not all shares are voted in accordance with the instructions of the beneficial owner. For example, custodians generally can’t vote shares that have been lent out and are not on their books on the record date, and yet the custodians may not directly receive information about the record date on a sufficiently timely basis to recall the shares in to order to vote them. Similarly, shares transferred after the record date are often not voted or voted inaccurately.

Vote confirmation. Shareholders tend to assume their shares have been voted, but that may not really be the case. As a basic matter, investors should have the ability to see through the chain of intermediaries to confirm that their shares have been voted as directed, but it’s often difficult or impossible for them to do so. This problem is exacerbated by the practice of share lending, as noted above, and there is apparently little transparency regarding share lending practices.

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