[This story previously appeared in Securities Regulation Daily.]
By Jacquelyn Lumb
SEC Chair Mary Jo White provided the Investor Advisory Committee with an update on its actions since the group last met, which included money market fund reforms, amendments to the registered asset-backed security disclosure regime, and finalization of over a dozen Dodd-Frank Act mandates related to conflict of interest and governance of credit rating agencies. Next on the SEC’s rulemaking front is the Dodd-Frank executive compensation and OTC mandates, she said. She also expects the SEC to act on credit risk retention rules, Regulation SCI and other market structure issues. White added that the Division of Corporation Finance has made good progress on its disclosure effectiveness project.
SEC’s actions on IAC recommendations. With respect to the IAC’s recommendations, White said the SEC will hold a roundtable early next year to explore a number of proxy matters, including universal ballots. The staff is continuing its work on ways to improve the quality and usefulness of structured data while also trying to reduce the compliance burden. On the tick size initiative, White said the SEC should soon publish a proposal for public comment on a 12-month pilot to widen the tick sizes for certain stocks.
The staff also continues to work on the IAC’s recommendations related to target date funds, a uniform fiduciary duty for investment advisers and broker-dealers, and remains focused on efforts to obtain sufficient funding for investment adviser examinations.
Accredited investor definition. Barbara Roper, the director of investor protection at Consumer Federation of America, and chair of the IAC’s investor-as-owner subcommittee, provided an overview of the subcommittee’s work on drafting a definition of accredited investor, which has come to play an important role in determining whether an offering qualifies for a private offering exemption. The recommendation would revise the definition as it pertains to natural persons to address the loss of the protections that existed before the lifting of the general solicitation and advertising bans.
The IAC approved the subcommittee’s recommendations to encourage the SEC to consider allowing individuals to qualify as accredited investors based on their financial sophistication, and to consider whether the current financial thresholds should be adjusted for inflation. The IAC also encouraged the SEC to strengthen the protections for non-accredited investors who rely on recommendations from purchaser representatives to qualify as sophisticated investors.
Disclosure of preliminary proxy votes. Damon Silvers, associate general counsel for the AFL-CIO, presented the recommendation of the subcommittee regarding impartiality in the disclosure of preliminary voting results. The subcommittee analyzed the role of brokers and banks in the proxy distribution process, as well as that of broker agent, Broadridge Financial Solutions. Silvers advised that brokers almost universally contract out to Broadridge the distribution of proxy voting materials and instructions.
Broadridge’s actions. In uncontested solicitations, issuers and their agents can obtain from Broadridge the cumulative voting status beginning the day after the first distribution of proxy materials. The decision to provide preliminary proxy results is at Broadridge’s discretion, but the original intent in doing so was to let issuers know if they had a quorum.
In contested solicitations, Broadridge used to provide a status report to both sides, but in May 2013, it ceased to provide the vote status upon the request of the exempt solicitor—one who sends solicitation materials advocating a position on a shareholder matter but does not distribute its own proxy card. Broadridge then provided the information where authorized by the issuer and subjected it to a three party confidentiality agreement among the issuer, Broadridge and the exempt solicitor. Silvers said the change occurred during the JP Morgan vote in which a shareholder proponent sought to separate the role of CEO and chair.
Ministerial and impartial role. The exemption to the proxy rules contemplates that brokers are not participants and play only a ministerial and impartial role in the solicitation process. The subcommittee noted that concerns have been raised over the lack of impartiality and the failure to act in a ministerial fashion in connection with the disclosure of voting results during an exempt solicitation, and about potential conflicts of interest in the validation of voting results.
The subcommittee recommendation was for the SEC to take the necessary steps to ensure that the Rule 14a-2(a)(1) exemption is conditioned upon the broker or its designated intermediary acting in an impartial and ministerial fashion throughout the proxy process, including the disclosure of preliminary voting information.
The subcommittee members differed on whether the SEC should address this issue through guidance or rulemaking. Former Commissioner Steven Wallman, the founder and CEO of Foliofn, Inc., said there is no support for providing preliminary results to one side and not the other. Any rationale for doing so is weak.
Inaction by SEC. Silvers said the SEC could have resolved the JP Morgan matter with a phone call, but enough time has passed with no SEC action that the subcommittee decided to make its recommendation. When asked to what extent Broadridge has addressed this issue on its own, Ann Yerger, the executive director of the Council of Institutional Investors, replied that it has not. The full committee approved the subcommittee’s recommendations.