March 27, 2009
Ms. Elizabeth M. Murphy
Secretary
U.S. Securities and Exchange Commission
100 F. Street, NE
Washington, D.C. 20549
SUBJECT: Proposed Rule Change to NYSE Rule 452, File No. SR-NYSE-2006-92
Dear Ms. Murphy:
On behalf of Manifest, a UK-registered proxy voting agency and corporate governance advisor to European investors, I am writing to comment on the proposal by the New York Stock Exchange to eliminate broker discretionary voting in the election of directors by amending NYSE Rule 452. At a time of increased public scrutiny of the global financial system, market participants are presented with an outstanding opportunity to bring down the barriers to informed ownership and enhance the democratic processes associated with share ownership. Broker discretionary voting is just one of the many barriers to transparent and fully accountable, shareholder democracy. Proxy voting systems are as complicated and cumbersome as the general shareholder communications system in North America, a system which is preventing an informed dialogue and engagement. While we commend the concepts supporting the proposed rule change, we strongly believe that a piecemeal approach to proxy reform will be an opportunity lost. We would therefore respectfully request that the SEC should only take action on proposed Rule 452 in the context of a fully integrated review of the entire reform agenda which will address all the systemic issues which have contributed to the breakdown of such an unnecessarily costly and cumbersome system. Manifest makes this request in the context of over 14 years operational experience of the European proxy area and contributions to both the UK government and European Commission in the context of barriers to voting and associated reforms. We would be happy to furnish our evidence on request. The NYSE Proxy Working Group and other entities have identified a number of important issues in the current proxy system that need to be addressed. These issues include:
1 Communication
Current SEC rules are no longer ‘fit for purpose; they prevent issuers from knowing who their shareholders are and engaging in direct communications with them. Taking the experience of investors in other well-developed financial systems such as Australia or the United Kingdom, electronic shareholder registers are reconciled throughout the trading day to present an accurate picture of share ownership such that at the time of shareholder mailings it is possible for the owners to receive a direct communication by either paper or electronic means in good time. The continuous updating of these share registers means that shareholders can trade up to 48 hours before the AGM and still be represented at the meeting without detriment to efficient market trading, clearing and settlement. This linkage between economic and democratic ownership is a key cornerstone of company law which the trading markets have been required to respect. Contrasted with excessively long record dates which are more reflective of the age of the ‘Pony Express’, a system of ownership which affords shareholders real ownership rights is a mark of a system which is respectful of property ownership rights rather than setting the rights of brokers and market makers at a higher level. It is ironic that market participants around the world work on a T+ 3 settlement basis but votes have been doomed to V+30 or more (Vote + 30).
2 Competition & Service Quality
A choice of one is not a choice. Investors are poorly served by a system which has encouraged monopoly provision and all the attendant problems that brings. We have seen from our own day to day experience that the enforced use of a single counterparty, which is conflicted in its service delivery accountabilities, is not best placed to push forward with a reform agenda, to the detriment of the market. How is it possible that a service provider can be allowed to get away with not being able to process enough ‘Against’ votes at the AGM of a leading internet company? Quite simply because they enjoy the benefits of a monopoly and buyers have no viable choice.
3 Reconciliation Issues
The overly cumbersome process which faces shareholders creates an environment in which the following abuses can flourish: Share lending: Long cut offs and recall timeframes can encourage misuse of stock lending which in turn can be used to manipulate proxy voting; andOver-voting and under-voting problems that are threatening the integrity of the shareholder voting process.
4 Regulation
Manifest would warmly welcome the introduction of regulation of the proxy space both from an operational and advisory perspective. Voting rights are property rights. The right to buy and sell securities is also a property right. Despite the equivalence of these property rights, the financial services markets around the world have created a thriving market for transferability. They have however failed to create a a thriving market for stewardship. Where there is regulation there is a requirement for investment in process and oversight of process. At present it is all to easy for the proxy process to dealt with in a less rigorous way than buying and selling of securities. What message does this send? Why would we not want to protect the assets of clients who want to be careful owners? The sad truth is that such strategies do not create remotely the same levels of advisory and transaction fees, as such it becomes a low priority activity. Proxy advisory services can have significant influence over the institutional investor vote. Investors deserve ‘Best Execution’ of their ownership rights as much as their trading rights.
5 Supporting Institutional Investors
Institutional investors are being called on by G20 governments to play their part in the oversight of world markets. The challenge here is that there are roadblocks placed in their way. Not necessarily because there are laws which prevent shareholders from participating but simply because it does not suit the operational preferences of their custodian banks, for example. The use of pooled ‘street names’ was virtually unheard of in the UK a decade ago. Now the dominance of US banks in European custody has brought with it the use of this inefficient vehicle. As a result there is legal uncertainty regarding ownership of assets and a lack of transparency between investor and issuer. The failure of Lehman Brothers is testimony to the problems associated with this pooling of assets. It is simply not acceptable for a bank to place its P&L desires above the needs and rights of investors.
6 Supporting Retail Investors
Retail investors are in important segment of the share ownership market and deserve better. In the past 15 years we have seen technological developments that have astounded and confounded expectations. Despite this proxy remains stuck in some pre-modern communications paradigm. This sends the wrong message about shareholder democracy in particular and democracy in general. Artificial barriers between public companies and their investors should be eliminated and replaced with a system that encourages investor dialogue and communication.
7 Summary
We recognise the good intentions of the proponents of the Rule 452 change. Nevertheless, unless the proxy system is modernized, piecemeal regulatory action runs the risk of delaying the overhaul of the entire system which is so sorely needed and further disenfranchising large numbers of shareholders. Manifest respectfully urges the SEC to undertake a comprehensive review of the proxy processing system and refrain from adopting piecemeal changes to a system that involves so many integrated elements. Furthermore we request that given given current market conditions and the extreme pressure of the proxy season, the Commission should extend the comment period beyond March 27, 2009, to give interested parties an opportunity to comment, and give itself sufficient time to address these issues in a more comprehensive manner.
Sincerely,
Sarah Wilson
Chief Executive
Manifest- The Proxy Voting Agency