SEC staff asked to investigate securities lending’s impact on voting rights

The Investor Advisory Committee (IAC) of the US Securities and Exchange Commission (SEC) has discussed studying in more depth how securities lending affects voting rights and results.
The IAC’s Investor as Owner Subcommittee has recommended that SEC staff should conduct studies and surveys on share lending, as well as on the closely related issue of anonymity of shareholdings.
The committee met last week to discuss the US proxy process, following up on the SEC’s November 2018 roundtable on “proxy plumbing”, which highlighted the lack of accuracy and transparency as key issues of the whole system.
“The substance is that the voter should be able to find out whether their vote was counted as they thought it would be,” John Coates, a Harvard Law School Professor and Chair of the Subcommittee, said to introduce the discussion.
A paper issuing unanimous recommendations from the Subcommittee stated that not all institutional investors have a policy of calling back shares on loan to retain voting power, even in close votes. The Subcommittee added that this is often not explained appropriately to final investors by broker-dealers.
“The staff should study the extent to which share lending in fact contributes to errors, over-votes or under-votes, and whether the effect of share lending on voting entitlements is effectively disclosed to investors,” the Subcommittee recommended.
In addition, it was recommended that staff survey investors and find out the reasons for and the extent to which customers of intermediaries want to remain anonymous to the companies in which they own stock.SEC rules establish that customers will be deemed by default ‘NOBOs’ or Non-Objecting Beneficial Owner, unless the opt out of identification.
However, the Subcommittee wants to investigate whether the “investor ‘choice’ to be anonymous is due to confusion or incentives of intermediaries”.
“As part of the study, the staff should explore whether the nominal default rule – by which broker customers are treated as NOBOs unless they object – has been “flipped” without actual customer knowledge in broker contracts,” it stated.
For both studies and surveys, the Subcommittee suggested customer contracts should be obtained as well as engagement with investors.
Anne Sheehan, Chairman of the IAC and Former Director of Corporate Governance at the California State Teachers’ Retirement System, said it was “an important issue”. “Having been one who can’t figure out our votes getting confirmed, when we own 7,000 securities, the benefit of knowing they were voted as we instructed has a huge benefit to shareholders and to the companies. This system is set up for investors and issuers […] and the people in the middle should facilitate that process.”
The members of the Subcommittee are: Damon Silvers, Vice- Chair and Director of Policy and Special Counsel at AFL–CIO; Lisa Fairfax, Professor of Law at George Washington University Law School; Anne Simpson, Director, Board Governance and Strategy Executive Office, at the California Public Employees’ Retirement System; and Heidi Stam, Former Managing Director and General Counsel at Vanguard.
The IAC will hold a vote on the recommendations.