OBO/NOBO Working Group Submits Report to SEC Staff

[33744]

September 1, 2021

TO: ICI Members
Investment Company Directors
Closed-End Investment Company Committee
ETF (Exchange-Traded Funds) Committee
Operations Committee
Proxy Working Group
SEC Rules Committee
Small Funds Committee
Transfer Agent Advisory Committee SUBJECTS: Disclosure
Distribution
Fees and Expenses
Intermediary Oversight
Operations
Privacy RE: OBO/NOBO Working Group Submits Report to SEC Staff

 

The OBO/NOBO Working Group, an industry working group created at the SEC staff's request, yesterday submitted the attached report to the SEC staff ("Report"). Significantly, Working Group participants representing broker-dealers, public companies, and funds agreed that the SEC should designate electronic delivery, or e-delivery, of proxy and other materials as the default means of communicating with investors, coupled with appropriate investor protections, including allowing investors to "opt in" to paper delivery at any time. The Report is summarized below.

Background

In the summer and fall of 2019, the SEC staff requested the creation of several industry working groups, including the OBO/NOBO Working Group, to discuss and evaluate potential reforms to the US proxy system. The staff's objective was for industry participants, through a series of meetings, to reach consensus on how to reform the outdated proxy processing system.[1] The OBO/NOBO Working Group included representatives of public company issuers, the ICI representing registered investment companies ("funds"), ICI member firms, other institutional investors, broker-dealers, and proxy service providers (including transfer agents, tabulators, proxy solicitors, and others). The Working Group met fourteen times over the course of almost two years.

The Report addresses the implications of SEC rules under which brokers and banks are required to classify their customers who beneficially own shares of a fund or public company (beneficial owners) as either Non-Objecting Beneficial Owners (NOBOs) or Objecting Beneficial Owners (OBOs), generally based on indications by investors at the time they open a brokerage or trading account. Under this framework, public companies and funds may: (1) obtain a list of NOBOs (with name, address, and share amount) after paying a regulated fee; and (2) send certain corporate communications, such as an annual report, directly to them. However, a NOBO list, which is not required to include delivery method preference or email addresses, may not be used for the distribution of proxy materials, and names and contact information for OBOs may not be disclosed to an issuer for any purpose.

Perspectives in the Report

Despite extensive efforts, the Working Group was not able to achieve consensus on many areas of potential reform to the OBO/NOBO system. As a result, the Report includes separate sections reflecting the distinct perspectives of the Working Group participants, including public company representatives, fund representatives, institutional investors, brokerage industry representatives, proxy service providers, and Broadridge Financial Solutions.[2] While many of the Working Group representatives recommended specific reforms to the OBO/NOBO system, the broker-dealer representatives and Broadridge generally expressed satisfaction with the current system. The perspective of the fund representatives is summarized in greater detail below.

The fund representatives explained that funds have difficulty reaching their shareholders. Fund shareholders invest largely through broker-dealers and other intermediaries, who typically hold the shares in omnibus accounts in the intermediaries' names. Funds do not have transparency into the beneficial owners underlying these omnibus positions. The OBO/NOBO system limits the ability of funds to contact their beneficial owners—funds may not directly contact their OBOs and, while SEC rules govern when a fund may obtain a NOBO list, these NOBO lists are expensive and incomplete, lacking sufficient identifying information for funds to send materials to NOBOs directly.

ICI, consistent with our prior advocacy, urged the SEC to take concrete steps to reform the OBO/NOBO system by permitting funds to deliver proxy and other regulatory materials to shareholders, using a vendor of their choosing, opening up service provider competition, and lowering costs for funds and their shareholders.[3] The fund representatives, citing ICI's 2018 survey of members, detailed the higher costs to shareholders to receive materials through intermediaries than to receive them directly.[4] The fund representatives also pointed out that the economic analysis by Compass Lexecon that Broadridge included in its October 2018 comment letter to the SEC focused on total unit costs and bundling of costs rather than on processing fees. That emphasis masked, and unhelpfully distracted from, the key focus of the SEC's 2018 request for comment on processing fees and the concern of fund shareholders.[5]

The fund and public company representatives of the Working Group recommended that the SEC or its staff should remind brokerage firms to review their account opening processes to assure that clients opening new accounts on a going-forward basis are informed prominently that they may choose to receive regulatory communications directly from funds and other issuers. They emphasized the importance of effective investor education as part of any proxy reform measures, so that investors may make an informed choice about whether to elect OBO or NOBO status. To further these goals, the fund and public company representatives submitted a document with sample language that could be used in the future at account opening to facilitate investor understanding about the implications of electing OBO or NOBO status.[6] That document is an exhibit to the Report.

Areas of Common Agreement

Working Group representatives broadly agreed that: (1) investors should be educated about the NOBO/OBO classification system and the importance of voting at shareholder meetings; and (2) investors should be able to choose whether they want their contact information disclosed to the companies in which they are invested.

Areas of agreement also included the following:

• Retail investors should be educated about how their name and contact information may be shared with a fund or other issuer for any investor choosing or defaulting to NOBO status (i.e., when the investor does not affirmatively indicate his or her preference).  Additionally, there was agreement that NOBO status should continue to be the default for classification purposes, as required by the SEC.
• The Long-Term Proxy Working Group should undertake reform of other important areas of the proxy system outside of the OBO/NOBO framework, such as facilitating funds' ability to achieve a quorum. The OBO/NOBO Working Group noted that SEC action on this issue would significantly reduce the costs of fund proxy campaigns and improve their overall efficiency.
• The brokerage community, public company, and fund industry representatives agreed that electronic delivery of proxy and other materials should be made the default means of communicating with investors, subject to appropriate investor protections, including allowing investors to "opt in" to paper delivery at any time. Working Group participants acknowledge that further consideration may need to be given to the potential implications of default electronic delivery under the E-SIGN Act of 2000.
• There should be more, not less, voting by retail investors in the proxy process. Similarly, the SEC and/or the Long-Term Proxy Working Group should evaluate proposals that could lead to greater retail shareholder engagement and participation in shareholder meetings.

 

Dorothy M. Donohue
Deputy General Counsel - Securities Regulation

Sarah A. Bessin
Associate General Counsel

Joanne Kane
Senior Director, Operations & Transfer Agency

 

endnotes

[1] The other industry working groups focused on universal proxy, end-to-end vote confirmations, processing fees and long-term proxy reform. ICI staff has participated in each of these working groups although, to date, the Long-Term Proxy Working Group has not yet met.

[2] Broadridge is a proxy service provider, among its other roles. It describes its functions in more detail in the Report.

[3] The Report includes ICI's specific recommendations, which are discussed in detail in our October 2018 Comment Letter to the SEC in response to the Commission's request for comment on the framework regulating fees that intermediaries charge funds for distributing disclosure materials to fund investors. Last month, the SEC issued an order disapproving a proposed rule change by the New York Stock Exchange to transfer oversight for the processing fee schedule to FINRA. See ICI Memorandum No. 33731 (Aug. 19, 2021), available at https://www.ici.org/memo33731.

[4] For direct-held accounts, ICI's survey found that half of reporting funds pay five cents or less per report. ICI's survey showed that the differences in processing fees between beneficial and direct accounts are significant. A beneficial owner pays three times more in processing fees for mailing a shareholder report than a direct account and pays five times more in processing fees for emailing the shareholder report. See October 2018 Comment Letter.

[5] ICI's analysis, detailed in its January 2019 Comment Letter, provides examples of funds' ability to negotiate a lower rate when they choose the vendor and negotiate the price.

[6] The broker-dealer representatives explicitly disagreed with including the sample investor disclosure document.