Memo #
32238

Industry Working Groups Examining How to Reform Proxy Plumbing; March 9 Call to Discuss OBO/NOBO Account Opening Disclosure Initiative
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[32238]

February 25, 2020 TO: Operations Committee
Proxy Working Group
SEC Rules Committee RE: Industry Working Groups Examining How to Reform Proxy Plumbing; March 9 Call to Discuss OBO/NOBO Account Opening Disclosure Initiative

 

The SEC published two pieces of proxy-related guidance and issued two proxy-related proposals since August.[1]   In addition, Chairman Clayton announced that, in the longer term, the SEC may consider actions to modernize the proxy system to promote greater efficiency and accuracy in shareholder voting (i.e., improvements to “proxy plumbing”).[2]   To this end, the SEC staff has helped organize, but is not participating in, five informal working groups comprised of a wide range of market participants (including operating companies, asset managers, broker-dealers, service providers, law firms, and trade associations).  The groups are described immediately below.

  • The End-to-End Vote Confirmation Working Group is working to create a means for shareholders, including funds, to confirm that their proxy votes were received and properly registered by companies.  (ICI Contacts: Matt Thornton and Joanne Kane)
  • The OBO/NOBO Working Group is reevaluating the current SEC rules that prohibit funds and operating companies from contacting directly their “objecting beneficial owners” (OBOs) while permitting direct contact with “non-objecting beneficial owners” (NOBOs). (ICI Contacts: Dorothy Donohue and Joanne Kane)
  • The Universal Proxy Working Group is exploring the feasibility and desirability of “universal proxies” for contested director elections, which would permit shareholders to vote by proxy for a mix of management and dissident director candidates. (ICI Contact: Matt Thornton)
  • The Proxy Distribution Fees Working Group is reevaluating the current SEC and NYSE  framework regulating fees that intermediaries charge funds and operating companies to distribute their proxy statements to investors. (ICI Contacts: Dorothy Donohue and Joanne Kane)
  • The Proxy Technology and Fundamental Reform Working Group intends to explore the feasibility of certain longer-term technologies (e.g., blockchain) and reforms that could more dramatically improve the proxy system. (ICI Contacts: Dorothy Donohue, Joanne Kane, and Matt Thornton)

ICI staff and several ICI member firms are members of each working group.  Four of the five groups (all but the last) have had at least one meeting since November.  These meetings have focused primarily on establishing the working groups’ missions, identifying possible deliverables, and advancing them through sub-working groups. 

On processing fees and NOBO/OBO issues, there is quite a divergence of views among the participants.  On the end-to-end vote confirmation and universal proxy initiatives, there is much more consensus on achieving the targeted objectives, with the work relating more to creating an operationally workable solution across market participants (in the case of vote confirmation) and a balanced regulatory approach that does not unduly favor or disfavor parties in contested director elections (in the case of a universal proxy).  It is unclear at this point what the output from these groups will be (or when it would be issued), but it could consist of written reports and/or rulemaking recommendations to the SEC. 

OBO/NOBO Working Group’s Account Opening Disclosure Initiative

It is our understanding that there is no uniform process currently for brokerage and bank customers to choose whether, and for what purposes, an issuer (including a fund) may contact them.  The working group has been discussing how to simplify the communications process and generate cost saving for funds and other companies.

Toward that end, a sub-working group drafted language that would be provided to bank and brokerage customers at account opening that would explain the differences between an “OBO” and a “NOBO” and permit the customer to choose whether or not the issuer may contact them directly. It also drafted as an option designating NOBO as the default. Under that approach, the customer would have to notify the intermediary to remain anonymous.

At our most recent meeting, the broader working group briefly reviewed the draft account opening language, and members agreed to review, including by circulating it more broadly, the language provided immediately below.

We therefore will be having a call to discuss the draft language below on Monday March 9 at 2:00 ET.    Please contact Monique Curtis at Monique.curtis@ici.org or Dom Liberatore at dom.liberatore@ici.org for the dial-in information.

2/25/2020 Draft NOBO/OBO Disclosure to be included in brokerage and bank account opening documentation

Your bank/broker will [may] be [purchasing shares of] or [investing in] [public companies/registered investment companies/mutual funds] on your behalf through your brokerage account. In an effort to increase transparency between the company/fund and its investors, the company/fund may desire to directly reach out to their owners with information on:

  • Securities and Exchange Commission, or SEC, required documents such as proxy material, prospectuses, and shareholder reports including performance, financial, and other information
  • Strategic Goals and Initiatives
  • New Products/Developments

You have the choice to receive this information directly from the company/mutual fund or from [name of brokerage firm]. The company/mutual fund will only use this information to communicate with you, their shareholder.  [name of brokerage firm] will share information such as shareholder name, ownership, postal, and/or electronic mail address or other similar means of communication (e.g., text message, or other common ways that develop in the future).  Choosing to receive the information directly from the company will allow the company, and ultimately you as the shareholder, to save money.

This paragraph to be included if the working group determines to default customers to NOBO:

The company/mutual fund will only use this information to communicate with you, their shareholder.  [name of brokerage firm] will share information such as shareholder name, ownership, postal, and/or electronic mail address or other similar means of communication (e.g., text message, or other common ways that develop in the future). Choosing to receive the information directly from the company will allow the company, and ultimately you as the shareholder, to save money. Should you choose to remain anonymous please notify your bank/broker.

 

Dorothy M. Donohue
Deputy General Counsel - Securities Regulation

Joanne Kane
Director, Operations & Transfer Agency

 

endnotes

[1] See ICI Memorandum No. 31916 (August 22, 2019) and ICI Memorandum No. 32048 (November 11, 2019) for summaries of the guidance and proposals, respectively.  See also ICI’s Proxy Voting Resource Center, available at https://www.ici.org/proxy_voting. 

[2] See, e.g., Chairman Jay Clayton, Statement Announcing SEC Staff Roundtable on the Proxy Process (July 30, 2018), available at https://www.sec.gov/news/public-statement/statement-announcing-sec-staff-roundtable-proxy-process.