Proxy Plumbing

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Permalink Reply by Sarah Wilson on December 1, 2009 at 4:57am

James, a very thoughtful post.
I wanted to comment on the issue of "direct ownership". We do see this as particularly important, not just in the US but world-wide http://www.nationalpost.com/opinion/columnists/story.html?id=66df1f..." target="_blank">

The UK model of share ownership is just as you describe in terms of a shareholder being on the company's books. Generally it works well - until custodian banks get involved. For "efficiency" reasons they tend to sweep all the small players into a pool and that disenfranchises them all over again. It even happens to the fund managers, much to their frustration. If you succeed in your proposals, this is something which must be guarded against.

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Permalink Reply by James McRitchie on December 5, 2009 at 3:31pm

Sarah,

Thanks for the tip. Excellent point. The proposals I've seen to date leave the principle of broker-dealer control of the market infrastructure intact, simply adding on another layer to the DTCC systems.

Broker-dealers obtain a number of advantages from the indirect holding system, although it is difficult to estimate their value. First among the benefits is likely to be customer loyalty. Under a direct registration, you could take your shares (even virtual shares) to and from any broker.

Secondly, brokers may enjoy under some circumstances is an increase in assets under management, engaging in unnecessary transactions to drive up her commissions ("churning").

Third, under DRS, at least as I envision it, brokers would lose the prestige of controlling "broker votes" often used to support management. Without a system in which proxy materials passed necessarily through brokers, this power would not exist.

A study (I think conducted by the SEC but have to go back and check the source) found that most brokers opposed release of NOBO lists because it endanger their customers' privacy, while 88% of the shareholders responded that they were prepared to unconditionally provide the requested information to issuers.

We face the same kind of problem with proposals concerning Client Directed Voting. BRT, Chamber, banks and brokers generally seem to favor very limited options. If the beneficial owner doesn't provide voting instructions, their broker or bank would vote according to one of these options, selected when opening the account: 1. Vote against Mgt, 2. Vote with Mgt., 3. Abstain, 4. Vote like other customers of the bank or broker who did give instructions.

We are fighting for options that allow voting by "brand." Vote like CalPERS, Domini, Calvert, AFSCME or through a third party like ProxyDemocracy.org or MoxyVote.com. We're afraid Client Directed Voting will simply become a back door approach to broker voting. Any experience in the UK with anything like Client Directed Voting?

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