The vote is in on the contest over whether position of chair and CEO should be divided at JP Morgan Chase. But a fundamental shift in the traditional dynamics of a proxy contest occurred during the voting process. Shareholders were denied an important piece of data. Unlike management, shareholders were at least temporarily denied data on the running vote totals obtained by Broadridge. As the WSJ noted:
- in the midst of one of the most closely watched investor votes in years — over whether to separate the roles of chairman and chief executive at JPMorgan Chase — that protocol has changed. The firm that is providing tabulations of the JPMorgan vote stopped giving voting snapshots to the proposal’s sponsors last week.
According to the article, Broadridge received a call from SIFMA, described as Wall Street's "main lobby group" and was told to "cut off access to organizations that are sponsoring proposals". As the WSJ described:
- Lyell Dampeer, a senior executive at Broadridge, said his firm was required to give real-time results to companies, and for years Broadridge gave that same information to proposal sponsors. But late last week, he received a call from an employee of the Securities Industry and Financial Markets Association, Wall Street’s main lobby group, requesting that Broadridge cut off access to organizations that are sponsoring proposals, he said. Sifma represents JPMorgan and other big banks and brokerage firms.
The tallies apparently resumed following pressure placed on JP Morgan. As the Dealbook reported: "After a series of conference calls on Saturday between lawyers for JPMorgan and the attorney general’s office, JPMorgan agreed to direct a firm that provides early tabulations to restart the tallies."
The information matters. In the case of close tallies, proponents and opponents may want to increase the resources devoted to a proxy contest. Significant shifts in the tallies may indicate the success or failure of a particular strategy. The information also typically becomes public and can help publicize the context, something that may benefit the side with the fewest resources. Thus, the practice by Broadridge denies shareholders information that may well be useful in a proxy contest.
There are several observations to make about this new policy. First, it is hard to understate the role played by Broadridge in the proxy process. As the SEC recently noted: "almost all proxy processing in the U.S. is handled by a single intermediary, Broadridge Financial Solutions, Inc. ("Broadridge"). Broadridge reported that during the year ended April 30, 2012 it processed over 12,000 proxy distribution jobs involving over 638 billion shares. Broadridge has estimated that in recent years it handles distributions to some 90 million beneficial owners with accounts at over 900 custodian banks and brokers." Exchange Act Release No. 68936 (Feb. 15, 2013).
Second, it is unlikely that SIFMA intervened only in the case of tallies involving JP Morgan Chase. The article suggests that SIFMA sought an end to the disclosure of ongoing tallies more systematically. Thus, while the practice was apparent in the context of JP Morgan Chase, it may well apply to future proxy contests involving other companies.
Third, while issuers may have a desire to retain a monopoly on the running tallies, they are not the ones that hired Broadridge. Broadridge is fulfilling the legal obligations of the brokers (and some banks). Thus, the instruction to terminate came not from an issuer organization but one that represents broker dealers. As SIFMA describes on its web site, the organization "brings together the shared interests of hundreds of securities firms, banks and asset managers." In other words, it is brokers, not issuers, that are instructing Broadridge to cut off the tallies to shareholders.
Fourth, the circumstances are complicated by the fact that issuers, not brokers, pay Broadridge. See Id. ("Since 1937 the NYSE has specified the level of reimbursement which, if provided to the member broker-dealers, would obligate them to effect the distribution of proxy materials to street name holders"). The fees are not insignificant. Id. ("Based on information from Broadridge, the PFAC estimated that issuers spend approximately $ 200 million in aggregate on fees for proxy distribution to street name shareholders during a year."). Moreover, JP Morgan Chase is likely a member of SIFMA because of its role as an investment bank. Nonetheless, Broadridge as a legal matters fulfills obligations of brokers. It is an agent for those intermediaries.
The bottom line is that brokers are effectively instructing Broadridge to provide information to one side but not the other in a proxy contest. Yet the proxy system is designed to ensure that the intermediaries not directly involved in the contest remain impartial. Thus, brokers are exempt from the proxy rules for forwarding materials to beneficial owners so long as they remain impartial in doing so. See Rule 14a-2(a)(1), 17 CFR 240.14a-2(a)(1). Similarly, brokers cannot vote uninstructed shares held by street name owners for controversial matters. In other words, they are not allowed to use these shares to influence the outcome of the final tally of a controversial matters, something that includes the election of directors.
Impartiality would mean that both sides (or neither side) received the data. Although the flow of information to shareholders was resumed, The Council of Institutional Investors has raised the issue with the Commission. To the extent the Securities and Exchange Commission views impartiality by intermediaries as an important element of the proxy process, this may be an instance where regulatory intervention is necessary.