October 21, 2010
Dear Ms. Murphy:
Please accept my letter with regards to the SEC's Concept Release on the U.S. Proxy System, #S7-14-10. I appreciate this opportunity to comment on the U.S. proxy system, as there is much that needs to be done to improve critical aspects surrounding share ownership. Also, I would like to thank the Commission for its implementation last December of rules to enhance proxy disclosure, including requiring companies to disclose proxy vote results much quicker than previously -- I must say that a four-business day turnaround is far, far better than the historical two weeks-plus that I have experienced.
As an individual investor, it is readily evident that there are facets of the U.S. proxy system that are dominated by special interests. It is my hope that by way of the comments the Commission is soliciting, that the SEC will be further capable of fostering a more level playing field, placing emphasis on transparency and accuracy, so as to support the overall integrity and attractiveness of the U.S. capital markets. Below I express some of my concerns in response to the Concept Release.
First, allow me to say that under/over/empty-voting of shares is unacceptable: that individual investors' shares are being lent out, ostensibly solely for the purpose of other investors to enter short positions, is both disappointing and damaging, not only since it contradicts the long bias of the original investment, but also since there is no disclosure of said activity to individual investors that I am aware of (aside from one's own brokerage account), and because individuals are paying fees to managers to increase fund (net asset) value, not to enable them to make money on the side themselves by lending shares while they simultaneously increase the likelihood of limited gains or even losses due to the short-sellers' counter position. I am not opposed to short-selling. However, I do take issue with the security lending practices found amongst mutual and exchange-traded funds.
Second, I strongly support wider and deeper availability of interactive data, in terms of the selection of SEC forms issuers are required to file in XBRL format and the types of data that must be included in the forms. As an individual investor, such availability is increasingly important. At present, individual investors are at a material disadvantage compared to institutional investors and issuers. Provision of data with proper data-tagging, along with more robust disclosures, would do much to empower individual investors. Forms Def-14A and N-PX are two critical filings that come to mind. For instance, in the case of the former, a uniform presentation (in table or list format) and tagging of board directors' other directorships, would simplify analyses of director elections. As for N-PX, disclosure (and tagging) of the actual number of shares voted would be helpful for purposes including auditing of votes, ownership positions, and firm-wide voting practices.
Third, I am troubled in general by the near-monopoly of Broadridge as a provider of proxy services it self-reports controlling 97% of the U.S. market. It is not unreasonable for shareholders to have concerns about voting accuracy based on said near-monopoly and evidence of cases of under, over, and empty voting. In addition, I believe that individual investors are confused, and potentially harmed, by the actions of proxy advisory firms, comprising a very small number of firms wielding a considerable amount of influence. Some regulation is clearly needed. For example, while seemingly being proponents of sound corporate governance, it is not uncommon to see proxy advisories taking dissenting positions. The real problem in these instances is that individual shareholders often do not know the reasons for the respective firms' position. And, although shareholders know that proxy advisories are getting paid, there is no disclosure of fees, and neither is their disclosure of any possible conflicts of interest. An entrenched management (of an issuer) can hire a proxy advisory, at the expense of shareholders, and formulate a position, which may not be in the best interest of non-insider shareholders. Such a case is indicative of individual investors being most disadvantaged.
Finally, I would like to share my experiences from my attempts to submit shareowner proposals to a non-U.S. issuer. The case involves a Japanese company that is listed in Tokyo and cross-listed in the U.S. I initially submitted a letter and my proposals directly to the company's Investor Relations Officer. However, I was informed that in order for the proposals to be formally considered for shareholder resolution at the company's Annual Meeting, that I needed to re-submit them by way of the company's ADR custodian bank in the U.S. I did so accordingly. Nevertheless, the final opinion of the issuer was that I was not a shareholder under Japanese law, since I was holding ADRs. Contradictory, and interestingly, I was allowed to vote for the re-election of directors and matters submitted by management for shareholder approval. Separately, it is worth nothing that the re-election of directors involved numerous individuals. However, the voting platform provided by Broadridge only allowed for a batch FOR, AGAINST, or ABSTAIN vote. It was not possible to vote for an individual. I subsequently submitted an electronic inquiry at Broadridge's website, but never received a reply. Based on the above, I encourage the SEC to require ADR issuers (those filing Form 20-F) to inform ADR holders, by way of their SEC filings, that ADR status is inferior to Ordinary shareowner status, if that is in fact the case. In addition, I ask that the SEC review the voting platform for non-U.S. issuer directors to ensure that votes for the election of directors are being provided and processed correctly.
Thank you again for this opportunity, and for undertaking such an important review of the U.S. proxy system at this critical time. Note that a more thorough response to the questions posed in the Commission's Concept Release can be found in the letter submitted by the United States Proxy Exchange, of which I am a member and was a contributing author of its response letter.
Sincerely,
Steven Towns
Member, United States Proxy Exchange (USPX)
Individual investor, http://steventowns.com