The shareholder communication rules have come under increased criticism, particularly by the issuers, perhaps the group most disadvantaged by the requirements. They are the ones denied the right to communicate directly with shareholders, a need perhaps even greater in an era of shareholder activism and increased availability of technology.
Proposals for reform have arisen, although they have so far generated little affirmative response from the Commission. In 2004, the Business Roundtable submitted a petition for rulemaking. The petition cited the article written by this author and used it throughout the petition. See Business Roundtable Petition at n. 1 (quoting from Robert Brown, Jr., The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility?, 13 J. Corp. L. 683, 687 (Spring 1988) ("The [shareholder communication] rules . . . preserve the inefficient, time-consuming, and expensive system of communicating through brokers and banks."). A copy of the article is here. The petition sought reform of the shareholder communication process, specifically to do away with the circuitous system of forwarding materials to beneficial owners. As the petition noted:
- the Business Roundtable requests that the Commission conduct a thorough review of the current shareholder communications system. In particular, we recommend that the Commission consider requiring brokers and banks to provide companies with contact information for all beneficial owners, and permit companies to mail proxy materials directly to all beneficial owners. Direct distribution would require brokers to execute a proxy on behalf of shareholders. Banks already routinely do this.
The petition included a laundry list of reasons why the time was ripe to reexamine and alter the shareholder communication rules, including:
- an increase in shareholder activism, Petition for Rulemaking Regarding Shareholder Communications, The Business Roundtable, April 12, 2004, (“ Moreover, as shareholder activism increases, it becomes increasingly important for companies to be able to communicate with beneficial owners regarding those proposals.”)
- various regulatory changes (the petition noted governance reforms adopted by the NYSE and the requirements in SOX that companies put in place a system for shareholders to communicate with the board. Both, according to the petition, “underscore the importance of opening lines of communications between directors and beneficial owners.”)
- proposed rules designed to facilitate board elections (precursors to the Access Proposal and were never adopted);
- the erosion of the 10 day rule (particularly through an increase in the number of non-routine matters)
- the possible elimination of the 10 day rule. SeePetition for Rulemaking Regarding Shareholder Communications, The Business Roundtable, April 12, 2004 (“ Moreover, if the ten-day rule is abolished, as some commenters have recommended, the overall number of votes cast would decrease considerably because votes would not be cast on behalf of beneficial owners of shares held in street name who do not give voting instructions to their brokers)
- the expense of the system, and
- the advent of new technology. See Petition for Rulemaking Regarding Shareholder Communications, The Business Roundtable, April 12, 2004, (“For example, many companies now are providing Internet voting for their registered shareholders, a technology that was unavailable in the 1980s. If nominees were able to issue omnibus proxies delegating voting power to their customers (i.e., beneficial owners), beneficial owners of shares held in street name would be able to use the same Internet voting system as registered beneficial owners. In addition to Internet voting, companies now have the ability to deliver communications electronically to beneficial owners, a technology that was not available in the 1980s.").
But whatever the merits of these different points, the strength of the petition is something that has been in place since the beginning: the massive inefficiencies that exist in the approach to shareholder communications. As the petition noted: “The current system of shareholder communications is circuitous and unnecessarily time-consuming.”
The main articulated objection seems to be the loss of privacy for share owners. Most do not want their identity revealed and designate themselves as OBOs under the existing system. Nonetheless, even if beneficial owners were disclosed, those seeking to obscure their identity could do so through the use of their own nominee. Petition for Rulemaking Regarding Shareholder Communications, The Business Roundtable, April 12, 2004, (“Those investors who truly care about their anonymity should bear the costs of remaining anonymous by setting up nominee accounts in the name of a partnership or other entity, which would then be the beneficial owner of the shares.”).
Other groups will likely oppose any reforms, particularly those benefiting from the existing system. At least historically, much of the opposition came from brokers that objected to the disclosure of their client names. Much of that concern has, however, been ameliorated by the prohibition on cherry picking. See Petition for Rulemaking Regarding Shareholder Communications, The Business Roundtable, April 12, 2004, (“Brokers have a privacy interest in maintain the confidentiality of whom their customers are. This interest is already being protected in the context of NOBO lists. Currently, since most brokers and banks contract with ADP to create NOBO lists, those lists are provided to companies without the accompanying broker affiliations of individual beneficial owners. This mechanism of maintaining the privacy of broker affiliations would be available if OBOs were included in the list.”).
The denial of companies access to their own street name owners and the concomitant inability to communicate with them in a cost effective manner is a disgrace and a system due for reform. There are systems overseas that permit direct communication. It is time for the SEC to substantially revise the Shareholder Communication Rules and the Petition by the Business Roundtable is a good place to start.
For more on this topic, take a look at "The Shareholder Communications Rules: An Exercise in Regulatory Utility or Futility?"