Response of the Office of Chief Counsel
Without necessarily agreeing with the statements or analysis in your incoming letter, the Division confirms that we are not aware of any constraints imposed by Exchange Act Rule 14b-1 or 14b-2 that would prevent a broker-dealer or bank, at its discretion, from designating more than one agent to act on its behalf in performing the proxy delivery obligations imposed by either rule.
This position is based on the representations made to the Division in your letter. Any different facts or conditions might require different conclusions.
July 13, 2005
David Lynn, Esquire
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Mail Stop 0402
Washington, D.C. 20549-2001
Re: Swingvote, LLC
Dear Mr. Lynn:
Swingvote, LLC ("Swingvote"), a Delaware limited liability company, is an Internet-based communications platform that assists institutional investors with their corporate governance responsibilities by providing them, among other things, with an electronic platform upon which to vote electronically across thousands of accounts and companies with a few keystrokes, and in a manner consistent with their internal corporate governance policies. As part of this service, Swingvote provides investors or their voting fiduciaries1 with on-line access to all proxy materials disseminated by the companies. Swingvote will soon be capable of providing clients with the analysis and recommendations of the client's proxy advisers, client and regulatory reporting tools, and an electronic interface with plan sponsors, corporations, custodians, transfer agents and tabulators, including the ability to provide audit trails and end-to-end voting confirmations.
We submit this letter to request that the Staff of the Division of Corporation Finance ("the Staff") concur that a bank and broker-dealer nominee ("Nominee"), when notified by its institutional clients that they wish to appoint Swingvote as the client's agent, may satisfy its proxy delivery obligations by designating Swingvote as the Nominee's intermediary for the purposes of delivering proxy materials and processing voting instructions, in addition to any other agent or service appointed by the Nominee with respect to other accounts, even though this approach could result in multiple agents being designated by the Nominee for service of the Nominee's position as recordholder.
Swingvote is a utility that provides a passive communications hub, through which public companies disseminate their proxy materials and other shareholder communications, and investors can retrieve the information and process their voting decisions by completing and submitting voting instruction forms disseminated by recordholder Nominees. Swingvote's platform allows investors to retrieve text and multi-media electronic messages from management (or dissident shareholders) while protecting the investors' confidentiality through a "one way mirror." These electronic communications will reside on Swingvote's servers accessible to voters from the electronic ballot itself. In short, Swingvote will offer companies the ability to contact the voters at the moment of decision, while providing the investor both valuable information and complete anonymity.2
Unlike other electronic voting platforms, Swingvote provides this service free to its institutional investor clients. Swingvote anticipates invoicing the companies pursuant to the fee schedules established by the NYSE and other exchanges for reimbursement of the costs associated with the delivery of proxy materials and ancillary services.
The current system for proxy distribution is primarily paper-based and highly complex. At the top of the pyramid is The Depository Trust Company ("DTC"), which technically has legal ownership of most "street name" shares and all related rights. It holds those shares in the name of "Cede & Co." Because DTC does not have a beneficial interest in the shares, it passes the rights of ownership, though the execution of an "omnibus proxy," down to its participants, generally brokers who hold shares for their own account and/or in client accounts, and banks, which hold shares as nominee largely on behalf of institutional investors.
Thus, upon the setting of a record date, each participant receives an "omnibus proxy" from Cede & Co. conferring voting rights to the participating broker or bank in the number of shares it holds. Although the "omnibus proxy" confers voting rights on the broker, stock exchange rules prohibit brokers from voting shares held in client accounts, subject to some exceptions. Banks likewise are generally prohibited from voting shares that they hold as nominee on behalf of institutional investors, based on contractual arrangements between them. While they remain the recordholder of the shares on behalf of clients, brokers normally pass voting rights down to its clients by sending voting instruction cards to them. Upon receipt of voting instructions, the broker (normally through the Proxy Services Division of Automatic Data Processing, Inc. ("ADP") acting pursuant to a power of attorney3) executes a proxy, which it then forwards on to the company or vote tabulator.
As you know, the distribution of proxy materials is governed by the Commission's Shareholder Communication Rules: Rules 14a-13, 14b-1, and 14b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under Rule 14a-13, at least 20 business days prior to the record date, companies subject to the proxy solicitation and information statement rules under Section 14 of the Exchange Act are required to notify brokers and banks of the record date in question, and inquire how many sets of materials are required for distribution to beneficial owners.4 Rules 14b-1 and 14b-2 require brokers and banks to respond within seven business days to the companies' inquiries, and to forward the proxy materials to beneficial owners. As a condition to their obligation to distribute materials, companies must undertake to compensate brokers and banks for their reasonable expenses incurred forwarding materials to beneficial owners. The rates that brokers may charge are set by stock exchange and NASD rules, subject to SEC approval.
Swingvote has developed a proxy voting service that is free to institutional investors. Once an institutional investor selects Swingvote as its agent, Swingvote will ensure that it receives, and responds to, search cards received from the investor's portfolio companies. Because Swingvote's platform is entirely electronic, Swingvote would respond to such inquiries by notifying the portfolio companies that it requires one electronic file containing the proxy materials in lieu of any paper copies.5 Once the investor downloads its own corporate governance guidelines, the Swingvote platform is designed to remind the investor of its stated policy on each ballot proposal. The platform will also include other helpful information, such as the portfolio company's public filings, a direct electronic link to the broker or bank that the investor can use to resolve problems that develop, such as share discrepancies, and will soon be capable of providing analysis and vote recommendations of proxy advisers engaged by the investor.
The Swingvote platform is constantly updated with new meeting information, including proxy materials and a voting instruction form. Once the institutional investor or its agent fills out an electronic voting instruction form, it is stored in the Swingvote system for subsequent transmission to the tabulator. Each vote that moves through the system receives a unique tag so that Swingvote can provide vote audits when needed. The system also gathers every vote cast along with any recorded notes and provides the user with internal, client and Form N-PX reporting capabilities (the proxy disclosure of voting results required of mutual funds). The Swingvote system is capable of interfacing with tabulators to provide end-to-end voting confirmations for each voter.
Swingvote provides a platform for multi-way communication between the institutional investor, the corporate community, and other parties engaging in proxy solicitations, subject to compliance with federal and state proxy rules. Corporations will have immediate access to voting results, be able to send e-reminders to all investment managers who have not yet voted, and provide brief text, video or other types of messages from a company. In effect, management will have the opportunity to make their case to institutional investors, without compromising the latter's anonymity. Dissidents and other soliciting parties will also have the opportunity to include text or multi-media messages on the platform in a manner that complies with the proxy rules.
Swingvote intends to seek reimbursement from companies on behalf of the Nominees that appoint them to service the Swingvote accounts based upon the rates established by the NYSE. Swingvote will also seek direct reimbursement for fees it will be entitled to as an intermediary for multiple Nominees with respect to those accounts. As noted above, it will not charge institutional investors any fees for its services. Companies will remain responsible for separate payment for accounts not represented by Swingvote.
Request for Relief- Confirm that a Nominee can satisfy its delivery obligations under the proxy rules by designating multiple agents to service the proxy material of its beneficial owner clients.
As you are aware, the existing regulatory structure was designed to accommodate the then existing system of proxy voting. At the time the rules were adopted, the technology available today did not exist. In 1976, for example, the Commission's "Street Name Study" looked into whether the system should be simplified by providing for direct communication between companies and their shareholders, but concluded that the necessary technology was not yet available.6
We believe that Swingvote can operate effectively under the current regulatory regime if the Staff provides the requested interpretive guidance with respect to the proper application of Rules 14a-13, 14b-1, and 14b-2 as they apply to an entity such as Swingvote. As noted above, these rules effectively require a company to identify the recordholders of its shares, notify them of a record date, make an inquiry regarding the number of beneficial holders that hold shares on account with them, and reimburse the recordholder Nominees for delivery of the proxy materials; in turn, recordholders are required to respond to the inquiries and disseminate the proxy materials provided by the companies. Because Swingvote is not a participant in DTC, and is not a broker or bank, the rules do not directly address its responsibilities. The rules do, however, contemplate that the Nominee recordholders may designate other intermediaries to assist in carrying out their responsibilities.
It is our opinion that more than one intermediary could be designated to so assist recordholders. For instance, Rule 14a-13(a)(3) - which requires companies to send search cards to brokers and banks holding its shares of record at least twenty business days before the record date - includes a proviso stating that
if a recordholder or respondent bank has informed the registrant that a designated office(s) or department(s) is to receive such inquiries, the inquiry shall be made to such designated office(s) or department(s); . . .
Rule 14b-1 includes a corresponding proviso in paragraph (b)(1)(iii), as does Rule 14b-2 in paragraph (b)(1)(ii). While many brokers and banks have designated ADP as their agent, we believe that the language quoted above, particularly the words "office(s)" and "department(s)," that the rules contemplate that there may be multiple intermediaries designated by each recordholder, rather than a single such office or department.
The service offered by Swingvote will allow investors to select the proxy platform that best meets their needs. Investors will inform the Nominees of their desire to have their votes processed directly by Swingvote. Those Nominees that choose to comply with a request by a client to designate Swingvote as the client's agent would notify the issuer upon setting of the record date or upon receipt of the search card, that Swingvote has been designated as the bank's or broker's proxy agent with respect to the accounts of certain of its clients. In addition, the Nominees would execute an omnibus proxy or power of attorney with respect to voting the securities held in those accounts, specifying the number of shares represented by those accounts as of the record date.
In turn, the companies will be required under Rule 14a-13(a)(3) to separately inquire of Swingvote and any other designated agents as to the number of copies of materials necessary to service the accounts, which in the case of Swingvote, would be a single electronic version of the materials. While issuers would henceforth have to communicate with more than one designated agent in the search process, issuers will be able to accommodate their shareholders' desire to use Swingvote to process their voting decisions at no additional cost to the issuer (other than the fee for each nominee serviced) or the shareholder. With respect to its designated accounts, only Swingvote would be entitled to reimbursement as the agent or intermediary designated under the Shareholder Communication Rules, and would be solely responsible for delivery of the proxy materials on behalf of the recordholder Nominees to those accounts.
Accordingly, issuers would not have to print paper copies for accounts serviced by Swingvote and Nominees would not have to separately forward paper copies with respect to those accounts, ultimately resulting in significant cost savings for all participants in the proxy voting process. Investors and issuers alike will benefit from the more direct communications afforded by Swingvote. Companies will achieve a more direct means to communicate with their significant investors and investors will have a means to preserve their anonymity, if they so choose.
* * *
In these circumstances, we request the advice of the Division by way of interpretation that a Nominee, when notified by its institutional clients that they wish to appoint Swingvote as the client's agent, may satisfy its proxy delivery obligations by designating Swingvote as the Nominee's intermediary for the purposes of delivering proxy materials and processing voting instructions, in addition to any other agent or service appointed by the Nominee with respect to other accounts, even though this approach could result in multiple agents being designated by the Nominee for service of the Nominee's position as recordholder. Please do not hesitate to contact me at the above number, or David A. Sirignano of this firm at (202) 739-5420, if you need further information.
/s/ Frank G. Zarb, Jr.
Frank G. Zarb, Jr.
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