February 13, 2006
Jonathan G. Katz
Re: File No. S7-10-05 – Internet Availability of Proxy Materials
Dear Mr. Katz,
Swingvote, LLC appreciates the opportunity to respond to the request for comments from the Securities and Exchange Commission on the proposed rule change on the Internet Availability of Proxy Materials. We believe the Commission's electronic Notice and Access Proposal is both timely and appropriate, given the advanced state and wide accessibility of Internet technology.
Swingvote was founded on the belief that the more than $1Billion companies currently expend on the processing of shareholder materials would be much better spent on actually communicating with their shareholders. As such, we applaud the Chairman's vision and believe the Commission's Proposed Rule Changes will bring improvements to the process that would far exceed the more than half-billion dollar cost savings to corporate issuers.
Current technology exists to provide shareholders with a complete electronic proxy distribution and voting platform, including proxy statement, annual report and all relevant solicitation materials. Such systems seamlessly integrate the delivery of material with built-in voting mechanisms so that the shareholder can see the details of every proposal without ever having to leave the ballot.
We believe that an electronic proxy material distribution and voting platform should also act as the foundation of something larger and more significant: a proxy communication hub, which will be critical to the success of Commission's proposed rule changes for three reasons:
Because we believe that the ideal corporate governance utility must include six key features, the Swingvote platform incorporates:
Issuers (corporations and mutual funds) should be allowed to enjoy the benefits of using the existing technology to enhance communications as long as they offer shareholders numerous options to request hard copies; prepaid envelopes, web-links and phone numbers.
Shareholders also must have the option to join an "always requests paper" database to be maintained by either the issuer or the intermediary. To facilitate this process, issuers and intermediaries should have access to current databases (including email addresses) as well as developing and maintaining new ones.
Mechanics of the Proposed "Notice and Access" Model
While notifications will be sent separately, the Commission should require that the proxy statement be delivered both in the same form as the proxy card and combined with the ballot in order to ensure that the details of each proposal are readily accessible to the voter.
Under no circumstances should proxies be printable from the Internet. Paper proxies should be delivered with paper materials. Electronic delivery of materials should be linked to electronic ballots. Mixing the two invites chaos and fraud. Because we believe that electronic materials should be connected to the electronic ballot, authentication must occur prior to access.
Because the Commission requires companies to deliver to their registered shareholders and intermediaries to deliver to their ‘street-name' shareholders, each company and intermediary should elect the method it determines best fulfills its responsibilities. We would expect most intermediaries to offer proxy distribution through their internal client websites and believe it unlikely that they will receive many requests from registered holders.
The Role of the Institutional Investor and the Need for Guidance from the Commission
Just as each company and intermediary is entitled to choose the best method to fulfill its obligations to deliver, so should institutional investors (who cast the vast majority of the shares voted in corporate elections) be entitled to choose how best to fulfill their voting obligations. Institutional investors need a reliable "consolidator" to deliver shareholder material and ballots electronically for all public companies. Otherwise, they would have to go to hundreds or thousands of websites to access the proxy material for every stock in their portfolios.
Because these critical voters require a central source for accessing and voting all proxy materials, intermediaries (who sometimes derive financial benefits from outsourcing the delivery of material) should not be allowed to erect barriers that inhibit an institutional investor from choosing such a proxy delivery provider. This is a significant and persistent problem. Although the SEC issued the "Swingvote Interpretive Release" in 2005, allowing custodians to name more than one agent for delivery of proxy materials at the request of an institutional investor, compliance has been entirely voluntary. This has not been effective, as some intermediaries have chosen to willfully ignore the wishes of these institutional investors.
If the Commission does not take action on behalf of these professional investors, including fiduciaries for widely held mutual funds and pension funds, the benefits of this visionary and far-reaching proposal will be limited to the technology capabilities of the current provider.
Internet Website Posting of Proxy Materials
The Commission is correct that EDGAR is not the appropriate source for all shareholder material, as it was neither set up for the purpose nor organized in such a way as to make access to materials easy for shareholders. These functions are better provided by the issuer, the intermediary and the aggregator.
The Broker Discretionary Vote
The Proposed Rule Changes should enhance communication between companies and their shareholders and promote better-managed companies. The broker discretionary vote, almost always cast with management, distorts the will of the shareholders who devote significant resources to voting for good "corporate governance."
As the Commission notes, in the 2005 proxy season, 56% of ballots were not voted. At least initially, additional steps and the uncertainty inherent in change will increase dependency on the broker vote. For that reason, the Commission should use this opportunity to require the broker vote to be cast in the same proportion as the "voting instructions" returned by their clients. This accomplishes the twin goals of assuring quorum for companies while ensuring that each vote reflects the views of an actual investor.
Additionally, the broker vote should not be a factor in determining a contested election, and changing the "discretionary" component will make it possible to permit dissident shareholders exclusively to solicit electronically without concern for artificial triggers
The Role of the Intermediary
Under the proposed rules, companies may choose the best method to deliver materials to their registered shareholders. Intermediaries must have the same rights regardless of the decision made by each company. It would be inappropriate for any issuer to compel an intermediary to deliver by a certain method. Otherwise, intermediaries would lose the ability to operate a consistent delivery system. Intermediaries should be allowed to use the email addresses of their clients to enhance the efficiency of their process.
We believe that any cross responsibilities between issuers and intermediaries would be confusing and redundant, and each should perform all functions inherent in the delivery process from beginning to end.
There are natural tensions between companies that want timely and efficient methods to communicate with their shareholders and those investors who insist on confidentiality because of the inherent conflicts of interest in the process, proprietary trading and investment strategies or simple privacy concerns. It is imperative that OBO's be assured of that right and as inappropriate to suggest that they be charged for it as it would be to insist that voters in political elections pay to pull the curtain behind them in the voting booth .
Proxy-delivery and voting systems are available in the marketplace today that specifically enable companies (or dissident shareholders) to provide additional solicitation information that is then embedded into the appropriate proxy ballot. Through a "one-way mirror," voters can choose to receive these multimedia communications while protecting their confidentiality from companies and their solicitors.
With regard to fees paid by the issuer to the proxy material distributor, the current rules are appropriate in that the company is responsible for its annual or special meeting and should "reimburse" any entity that facilitates the process. We believe that neither the voter nor the intermediary should pay, and Swingvote's business model allows us to provide services to issuers within the fees set by the New York Stock Exchange and approved by the SEC.
That said our experience leads us to report that the "fees" are currently mislabeled. The process of maintaining historical record dates, responding to search cards, pulling position data from numerous sources on record date, reconciling share discrepancies, aggregating those positions, maintaining data feeds from other sources, hosting and archiving the materials, distributing and verifying voting results to tabulators then issuing confirmations are functions performed by proxy delivery companies regardless of whether the material is mailed or appears in electronic form. They are not "one-time" expenses; they are inherent in the process.
Soliciting Shareholder Other Than Issuers
Shareholders other than issuers should also be able to take advantage of the Notice and Access model, as this will both increase participation in the corporate governance process and accountability by management. While the new rules will permit legitimate parties to leverage the proxy ballot to compel change or at least dialogue, there should be appropriate requirements to inhibit nuisance contests.
The proposed rules should cover business transactions and all other corporate or mutual fund voting events as long as the standard requests for paper are honored. The proxy card should always accompany the solicitation material, regardless of form or sender.
On behalf of all of us at Swingvote, thank you for considering our perspective. We sincerely appreciated the opportunity to offer our comments and I would be pleased to discuss our views with you further at your convenience. I can be reached at (404) 812-0700.
Anne O. Faulk