 Proxy Voting – An Operational Focus
Presented By: Satish G. Pattegar
Fiduciary & Risk Management Association
2011 National Risk Management Training Conference
April 20, 2011
9:15 AM – 10:15 AM
Atlanta, GA
“Proxy voting is a cumbersome process that
has traditionally frustrated the voter and
confused the issuer. On one hand there is
growing recognition that proxy voting is
increasingly important in fulfilling fiduciary
responsibility and influencing financial
strategy. On the other hand, with
globalisation and the expansion of the
shareholder culture, the technical
considerations of ensuring a smooth proxy
voting process across multiple stakeholders,
time zones and issues are getting more
challenging.”
Neil Daswani
Global Head, Securities Services
Standard Chartered Bank
Importance of Proxy Voting
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Most shareholders are not able to attend
shareholder meetings
Majority of investor shares are held by
Intermediaries for the benefit of their client
The financial crisis and revived shareholder
activism have brought greater attention to
the proxy voting process
The SEC enforced its first action on an RIA
in 2009 for a proxy voting record violation
Regulations, Rules & Standards
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Regulation of the proxy solicitation process
was assigned to the SEC in 1934
The SEC, OCC, FDIC, FRB, DOL, FINRA,
and OTS have implemented proxy related
rules
Fiduciary standards require accurate
implementation and records of the proxy
voting process
The Process
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Majority of securities are held in street
name (i.e. DTC)
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DTC receives the issuer proxy notification
based on record date ownership
DTC is required to pass proxy notification to
its participants based on DTC participant
ownership records
The Process - Continued
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Institutional custodians (DTC participants)
identify discretionary vs. pass-through votes
and provide processing information to proxy
processing service providers
The service provider typically forwards proxy
materials to beneficial owners, collects voting
information from those beneficial owners, and
forwards tabulated votes to the issuer
The Process - Continued
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Fiduciary duties drive the need to ensure
internal processes are adequately structured
to ensure proper compliance
Adjustments to the final tabulation may be
needed due to various factors (loaned
securities, fails, trade errors, etc.)
Trade vs. Settlement
Factors to Consider
1.
2.
3.
4.
5.
6.
Identification of Roles and
Responsibilities
Review of Service Provider Contracts
Understanding the Operating Systems
Ensuring proper segregation of duties
Shareholder Communication Act coding
compliance
Adjustments & Reconciliation processes
Roles
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Internal
Business Lines
 Operations

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SEC rules require banks to respond in one business
day with the names and addresses of all
respondent banks; and within seven days with the
number of customers who are beneficial owners of
shares
External
DTC
 Broker Dealers
 Service Providers

Ownership
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Registered
Beneficial Ownership
The Flow
ISSUER
Delivery of Materials &
Cards
Delivery of Materials
Notification
DTC
Omnibus Proxy
T/A OR OTHER
SERVICE
PROVIDER
SECURITIES
INTERMEDIARIES
POA & Data Feed
of Bene Owners
SERVICE
PROVIDER
REGISTERED
OWNER
Forward Proxy
Mats. and VIFs
INDIVIDUAL
BENEFICIAL
OWNERS
Executed
Proxies
Source: SEC
VOTE TABULATOR
Forward Proxy
Mats. and VIFs
INSTITUTIONAL
BENEFICIAL
OWNERS
PROXY
ADVISORY
AGENT
Executed Proxies on Behalf of Service Intermediary
Executed
Proxies
Third Parties in a Proxy Voting Process
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Transfer Agent
Proxy Service Providers
Proxy Solicitors
Vote Tabulators
Proxy Advisors
In Summary
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The accountability assigned to custodian is
significant since the process is fueled by
system coding to drive efficiencies
System level codes entail:
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Proxy voting authority
Proxy handling
Proxy mailing address
Codes are at:
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Account level
Asset and tax lot level
In Summary - Continued
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Service providers may vary for:
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Domestic proxy
Global proxy
Discretionary vs. directed
Areas of regulatory compliance focus
include:
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Accuracy of coding (account level and tax lot
level)
SCA compliance (OBO vs. Non-OBO)
Proxy solicitors compliance
In Summary - Continued
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Areas of regulatory compliance focus
include:
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Segregation of duties
Conflict of interest
Securities lending impact
Fails & trade errors
Reconciliations
Exception reports & escalation
Documentation & retention
Conclusion
Many in the industry believe the existing
process is too cumbersome and expansive
because issuers must communicate with
their beneficial owners through the
intermediaries holding the shares in street
name, rather than directly with the
beneficial owners.
Several studies are under way and results
may change the process further.
QA