Comments Done, E-Proxy Idea Proceeds

A Securities and Exchange Commission proposal to allow companies to post proxy statements online and provide free paper copies only when asked is drawing criticism among some portions of the business community.

The so-called “e-proxy proposal” would let companies furnish proxy materials by posting them on a Web site and providing shareholders with notice of their availability. Currently, companies can deliver paper proxies or send them electronically only with explicit shareholder consent. That opt-in approach to electronic delivery is now used only on a limited basis, the SEC says.

E-proxies would instead use an opt-out approach, assuming that giving electronic access to the proxy statement is the same as delivering a paper one. While hailed by some as modernizing proxy delivery and for its potential to save issuers millions on printing and postage, others say the SEC’s plan would hurt shareholder participation and could actually increase issuer costs.

The SEC unveiled its e-proxy plan in December, and a comment period on the proposal closed last month. More than 100 people and industry organizations responded. SEC spokesman John Nester says no timeline has been established for issuing final rules, but they could come as soon as early summer. He declined to discuss the comments themselves, which are being analyzed by staff, nor whether any changes will be made in the proposal.

One vocal critic is the AARP, the powerful political lobby for retirees. It says the plan will produce “unanticipated and adverse effects on individual shareholder participation rates—especially among investors who are at or near retirement age” and might not be able to navigate corporate Web sites to request paper proxies. The AARP says the default option, at least for the over-50 investor, should continue to be regular mail delivery (see the letter and related comments at right).

The AARP cited a survey of 1,493 individuals who own stock, which asked how those people would choose to be notified of annual meetings; respondents 50 and over were far more likely to choose regular mail. Only 65 percent of those ages 25 to 49 chose regular mail, compared with 81 percent of those 50 to 69, and 92 percent of respondents over 70.

What’s more, when asked how the proposed change might influence their likelihood to read the annual meeting-related documents, 39 percent said they’d be less likely to read the documents. About half also felt the change would have no effect on their likelihood to submit a completed proxy, while one-third said it would make them less likely to submit one and 15 percent said they would be more likely.

“All the research that’s been done shows that investor participation would go down,” says Chuck Callan, vice president of regulatory affairs at ADP, the largest provider of shareholder communications services, referring to data—including outside research—it submitted to the SEC.

Callan says the change would also mean an increase in the number of controversial “broker votes.” Under New York Stock Exchange Rule 452, brokers can vote shares held by individual beneficial owners on routine matters if those owners don’t submit voting instructions 10 days before a vote. On average, the broker vote accounts for 23 percent of the street vote today. Under the proposed rule, Callan estimates, that could increase to 28 or 29 percent.

In December when the e-proxy idea was first unveiled, several securities experts hailed it as a positive step that would help Commission rules keep pace with technology and make it easier, cheaper and quicker for companies to deliver proxies to shareholders. The move is also viewed as a natural extension of the “access-equals-delivery” concept promulgated by the SEC’s Securities Act reform, which took effect late last year.

Weighing The Benefits

SEC Chairman Christopher Cox has cited the potential for more informed votes as another potential benefit of the plan, based on the thinking that investors might be more likely to read proxy materials if they can access them online. Still, the SEC was quick to note that not every investor will prefer Internet access, so shareholders would be able to request free paper proxies under the plan.

ISS COMMENTS

The excerpt below is from the comments of Institutional Shareholder Services, submitted to the SEC on Feb. 13, 2006:

The changes proposed by the SEC will certainly impact the majority of “retail” investors. To ensure that the changes to the existing process are beneficial to all investors, ISS respectfully requests the SEC to consider the following

suggestions when considering the final rule changes:

The changes proposed by the SEC allow for differing means of proxy material distribution depending on issuer preference or agenda type (business combination transactions). Variations in the distribution process will erode suggested cost savings to issuers and potentially confuse investors. To eliminate this possibility, ISS encourages the SEC to require proxy cards/vote forms to be distributed to investors at the same time as the “Notice of available materials”. In addition, ISS suggests that “business combination transactions” should be allowed to follow the “Notice and Access” process. Consistency in the proxy distribution process is very important to

issuers, intermediaries and investors.

The ability to view proxy materials online or to acquire hard copy originals is a requirement if investors are to make informed voting decisions. Requiring issuers and intermediaries to make proxy materials available online is consistent with today’s common practice and is a logical

practice to continue. The process to acquire hardcopy materials under the proposed rules would be a new activity and one that requires some consideration. As mentioned above, consistency of process is important, with timeliness of delivery a key attribute as well. The suggested process of having intermediaries request materials from issuers (or maintain an inventory of materials on hand) to forward to investors will only add time and cost to the process. Instead, ISS would suggest that both issuers and intermediaries make materials available online, but issuers (or their designated agent) bear the responsibility (and cost) to provide hard copy proxy materials to a shareholder upon demand from the shareholder.

The proposed rules for “soliciting parties” offer significant flexibility and will greatly reduce the

costs to conduct a “proxy contest”. The current costs for investors to challenge company management are substantial and that bar would be lowered by the proposed changes. In our opinion, it is preferable for “soliciting parties” to engage in some level of constructive dialogue with company management before launching a proxy contest. Once a contest is launched, it is important for a level playing field with known rules to exist, otherwise investors may be confused by the variation in the proxy voting process from a “normal” shareholder meeting. In this regards, ISS asks the SEC to consider holding “soliciting parties” to the same distribution, notification and access standards as issuer management.

Source

Institutional Shareholder Services Comment To The SEC (13 Feb. 2006)

The SEC figures the plan could save public companies millions in printing and postage costs, which it estimated at $535.5 million for the 2005 proxy season, based on a cost of $5.95 for each mailed paper copy. ADP says the total cost today is actually closer to $5.33 per mailed copy, and that the costs savings under the proposed rule could be significantly less. Issuers’ costs could end up being higher than current costs if large numbers of investors request printed copies, since companies would lose the economies of scale achieved under the current system, says Callan.

Among other things, ADP recommends that if the SEC adopts some form of the proposal, that it do so on a pilot basis to assess the impact on processing volumes and costs and on the broker vote.

Financial printing giant Bowne, meanwhile, says the proposed rules will interfere with investor communications and unfairly shift the burden of proxy costs to the individual investor. “We do not believe Internet technology is the appropriate solution at this point in time,” Bowne’s comment said. Noting a “long-standing tradition” by issuers of providing printed “courtesy” copies of documents filed electronically on EDGAR to the SEC staff, Bowne said it’s difficult to read long documents on a computer screen.

“The printed page remains a superior system for reading and understanding information,” Bowne wrote. “Most investors who read the proxy materials today will certainly not read them in electronic form…Whatever the savings to the issuer, the costs to investors will be greater.”

A committee of the New York State Bar Association says issuers might be “reluctant” to implement e-proxies, or feel compelled to implement it even when the total cost might exceed existing practices. That committee proposed several changes to reduce the potential costs and improve issuers’ ability to forecast the cost of proxy distributions, among them: allowing standard-rate mailing of requested proxy materials, instead of first-class mail; increasing the time for issuers to fulfill requests for copies from two business days to a reasonable time period; and establishing a date prior to the meeting date that would be a deadline for shareholders requesting paper or email delivery, to eliminate questions about whether a beneficial owner will direct the voting of their shares.

Institutional Shareholder Services supported the plan, but suggested that the SEC require proxy cards and vote forms be distributed to investors at the same time as the “notice of available materials” and that “business combination transactions” be allowed to follow the model, since variations in the distribution process would erode cost savings to issuers and potentially confuse investors. ISS also suggested that while both issuers and intermediaries should make materials available online, that issuers (or their designated agent) should bear the responsibility and cost of providing hard copies upon shareholder request. ISS also asked the SEC to consider holding “soliciting parties” to the same distribution, notification and access standards as issuer management.

Related coverage of the e-proxy proposal, as well as the comments letters mentioned in this article, can be found in the box above, right.