December 9, 2005
Mr. Chairman, Commissioners.
I appreciate this opportunity to provide comment to the most recent SEC proposal pertaining to Electronic Voting of Proxies.
Over the last few years the SEC has clearly taken a closer look at the rights of shareholders and has begun to pave the way for the proxy process to exercise those rights. As such, this most recent proposal to bring the process into the 21st Century by taking the paper process to a more efficient electronic process is certainly a positive move. I would, however, like to present a problem with this proposal and present SEC and SRO rules pertaining to the Proxy Process.
In reading the SEC and SROs present proxy rules, the rights to a proxy vote are rights afforded to the beneficial holder in a security. While securities may be held for safe keeping in the name of a bank or broker-dealer the proxy rights belong to the beneficial shareholder with whom control and custody of a share is being maintained for.
During a recent Open Public Forum on the impacts of naked short selling, an issue came forward regarding proxy voting. In the Forum Dr. Susanne Trimbath, a 10-year employee of the DTC Stock Lending and Clearing Operations identified a study of the proxy voting process conducted by a single transfer agent on 341 securities they were responsible for. The study revealed that in each of 341 securities reviewed each one had a reported over-voting of proxies due to a system breakdown in the proxy process. The report was later published in a Securities Transfer Association Newsletter.
To further expose this issue of non-compliance Anand Ramtahal, Vice President, Market Member of Firm Regulation for the NYSE identified a similar study conducted by the Exchange on several of its members and found the same results as the Transfer Agent Study. The conclusion being that members were not following the rules and regulations pertaining to voting to beneficial owners only but instead allowed all book-entry non-controlled shares to also be voted.
Also in this forum James Brigagliano, Asst. Director of Market Regulation for the SEC provided the audience with a scenario where it is not the retail investors piddly margin accounts that are being raided by the member firms stock lending department to use to generate money through the stock lending business but instead it was the banks, pension funds, and educational institutions that typically loan out their shares for a fee. In addition, Hedge Funds will loan out their shares as well to seek a higher return through the stock lending fees that can be generated off their shares.
The problem I see, and certainly not being addressed in this draft as written, is how the SEC is defining a beneficial holder so as to stop this over-voting of shares.
By law there can only be the number of beneficial owner votes as there are shares registered by the company. Those institutions and clients who have used the stock lending program to seek a higher return on their investment have given up beneficial rights when the shares were signed to another. It is all part of the short sale process and the controls in the market place. To have knowledge of and allow the firms to violate present SEC Rule 14 Guidelines and SRO level laws without making adjustments in outstanding proposals to clarify the issue would be an injustice to the shareholders.
Doing Google Searches of Proxy Battles, you can see that the Hedge Funds are growingly using the Proxy to drive changes in the manner and direction of a corporation. Hedge Funds have generated the power to force changes as the Hedge Fund Industry has grown over these past years. I question how many of these battles are being done by Individuals and Funds that, by law, have no rights in this arena due to the stock lending process and the definition of Beneficial Owner.
The Industry has admitted, and the Regulators have confirmed, that Proxy Laws are not being followed today. One share does not mean one vote but it should. The fact that not a single Regulatory Enforcement Action at the SEC or SRO level has taken place is inexcusable. The fact that this proposal to move to electronic voting does not address the most basic systemic flaw in the Proxy process is irresponsible.
I hope that by the time this proposal is written into law the process and the problems have been addressed within this document. I will afford the SEC the benefit of the doubt that they hold an ace up their sleeve as they did with Regulation SHO. Under SHO there was no proposal for comment to a Grandfather Clause and yet the SEC threw that feature into law as one of the more controversial features of the reform. Evidence that the SEC did not want the publics comment on that.
Lets hope this time that the SEC makes change that forces the industry to protect the rights of shareholders instead of protecting the financial liabilities of the industry members at the risk of the shareholders rights as previously took place. The grandfather clause on settlement failures will continue to play a role in proxy voting rights. The investing public needs to be informed of that role.
The text of the Open Public Forum where Proxy Voting Fraud was discussed can be located at :