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Coalition Asks For Rule Allowing Advance Voting Instructions for Retail Investors

The American Business Conference, a coalition of mid-size companies founded by former SEC chairman Arthur Levitt, asked the commission to adopt a rule that would facilitate the voting process for retail investors at shareholder meetings. The coalition believes that so-called advance voting instructions will increase the retail investor voting rate, which has been historically low.

The American Business Conference (ABC) asked the SEC to adopt a rule that would make it easier for retail investors to vote at annual shareholder meetings using so-called advance voting instructions.

Advance voting instructions, which are sometimes called client-directed voting, would allow individual investors to register voting preferences with their stock broker for every stock they own. Each year, retail shareholders would receive their proxy ballots reflecting advance instructions on such issues as the election of directors, ratification of auditors, and action on shareholder proposals. Investors could change those instructions before submitting their ballots.

“We believe that encouraging individual investors to vote in corporate elections is the single most important way to improve the proxy system by insuring that shareholder votes truly reflect broad shareholder sentiment,” ABC President John Endean wrote in a February 26, 2018, rulemaking petition. The group wants the SEC to amend Rule 14a of the Securities Exchange Act of 1934 and permit the use of existing technology that institutional investors already use to facilitate the voting process for retail investors.

The group, a coalition of growing medium-sized companies, believes that advance voting instructions will help address the problem of low retail voting rate. The coalition was founded in 1981 by Arthur Levitt who served as chairman of the SEC from 1993 to 2001.

The group said only 29 percent of shares owned by individuals voted in corporate board elections in the 2017 proxy season. By contrast, institutional investors voted 91 percent of their shares. The difference in voting rates has remained constant for years.

“At a time of intensifying governance activism, this disparity has become increasingly problematic. As much as 30 percent of all shares are owned by individuals,” Endean said. “The failure of this large segment of retail shareholders to match the voting rate of the institutions can result in elections that are not accurate measures of shareholder preferences.”

For example, in the 2017 proxy season, 66 percent of institutional shares were cast in favor of climate change proposals, compared to only 13 percent of retail shares voted.

“There is no way of knowing what the tally would have been if significantly more retail votes had been cast,” Endean said. “That’s the point: in many cases it is difficult to know overall shareholder sentiment regarding this and other contentious governance issues. This predicament also applies to director elections and other shareholder matters.”

Endean pointed out that the SEC has been worried about the low voting rate among retail investors for years. In July 2010, the SEC issued Release No. 34-62495, Concept Release on the U.S. Proxy System, to solicit comment on ways to improve the proxy system. The preliminary rulemaking document included a discussion of advance voting instructions and asked a series of related questions for comment.

The SEC has not taken any action on Release No. 34-62495, and ABC said that it is time for the commission to act.

Endean said the SEC should take a look at a 2017 paper by Jill Fisch of the University of Pennsylvania, which could provide a roadmap on advance voting instructions. Fisch addresses the various technological and regulatory concerns that have blocked implementation of advance voting instructions.

Endean noted that the technical challenges are surmountable because the technologies that institutional investors use to set their voting preferences have been in use for at least a decade and are readily adaptable for use by retail investors. He said that intermediaries are also ready to support and encourage shareholders to engage more fully in the proxy process.

Moreover, on regulatory matters, Endean noted that Fisch describes “very modest changes” to existing provisions, mostly pertaining to the broker exemption to allow advance voting instructions to go forward.

In addition, Endean said he was not concerned that advance voting instructions would be used as a “set it and forget” tool and increase “uninformed voting.” Once retail investors have expressed their voting preferences, critics argue that the investors and unlikely to revisit theme each time there is a corporate election resulting in uninformed votes.

“Should the Commission feel the need to address this concern, it should look for factual support for the assertion that AVI and ‘uninformed voting’ pose a risk to good corporate governance,” Endean said. “This evidence will be hard to find. ABC believes that the notion that shareholders would use AVI and then pay no attention to the issues raised in corporate elections is based solely on a low view of retail holders—or perhaps a fear that retail holders have inconvenient opinions.”

While a retail shareholder many not currently find the time necessary to vote annually on each investment, the ability to establish preliminary and changeable preferences could increase their participation, he said.

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