Institutional Investor Advocates Weigh In on Universal Proxies


SEC HQs

A week remains in the comment period for the SEC’s universal proxy rule proposal. In October 2016, the SEC proposed a rule that would require the use of universal proxies in all non-exempt solicitations in connection with contested director elections. As proposed, the rule would require the use of universal proxies that include the names of candidates nominated by the registrant as well as dissidents. The SEC intends for the rule to allow shareholders to vote by proxy in a manner that more closely resembles how they can vote in person at a shareholder meeting.

To date, the proposal has attracted the attention of few public commenters, as only seven letters have been filed. Ken Bertsch, executive director of the Council of Institutional Investors (CII), enthusiastically supported the proposal. Initially, he expressed support for the amendments to the “bona fide nominee rule” to require that a nominee consent to being named in any proxy statement for the meeting. As proposed, director nominees would not be required to provide specific consent to being named in the proxy card of an opposing party. Bertsch suggested that any potential concerns that the listing of registrant nominees on a dissident’s proxy card could imply that registrant nominees support the dissidents, or that listing dissident nominees on a registrant’s proxy card could lend credibility to them or imply that the registrant supports the dissidents could be eliminated by requiring that the nominees of each party be grouped together clearly and presented as competing slates.

CII strongly supported the proposed requirement for the mandatory use of universal proxy cards, and for the requirement that a dissident must solicit the holders of shares representing at least a majority of the voting power of shares eligible to vote. According to CII, “[w]e believe a dissident should not be permitted to rely on the benefit of the proposed universal proxy cards without undertaking a solicitation, including the time, effort and costs entailed with filing proxy materials with the SEC within the prescribed time frame.” Given the solicitation requirement and the need for dissidents to file a proxy statement with the SEC, CII does not believe that the proposed amendments would result in an increase in contested elections.

The Investment Company Institute (ICI) analyzed the proposal from the perspective of funds as issuers with their own directors and shareholders, as well as from the view of funds as shareholders of the companies in which they invest. It is not surprising that ICI supported the exclusion of investment companies as issuers from the scope of the rule. Dorothy M. Donohue, ICI's deputy general counsel, wrote that funds are subject to both Investment Company Act and state law provisions that provide specific rights to shareholders to approve fundamental features of a fund. She also noted that a typical fund's governance structure differs from that of operating companies, and would be disrupted by split-ticket voting. Funds are also not required to hold annual meetings, and director elections are rarely contested. According to Donohue, "With no opportunity to profit from a ‘discount’ between the market price of a mutual fund’s shares and its NAV, dissidents have little incentive to nominate directors or otherwise take steps to influence the management of mutual funds."

Speaking for funds as investors, Donohue stated that the adoption of a mandatory universal proxy for operating companies would serve the public interest in giving all shareholders the same voting options, regardless of whether they voted in person or by proxy. While funds generally do not undertake dissident proxy solicitations, they do on occasion vote for dissident nominees. Under the current system, a fund that wanted to vote for a mix of registrant and dissident nominees could do so only by incurring the cost of sending a representative to the shareholder meeting in order to cast a split vote.

ICI also supported the proposed minimum solicitation requirement. Without an obligation to engage in a significant solicit of shareholders on behalf of its nominees, dissidents could use the company’s proxy machinery “to further parochial or short-term interests that the company’s other shareholders do not share.”

Finally, in the most succinct comment letter filed, an individual, Jack Thomas, used one sentence to express his views. According to Thomas, “CEOs are grossly overpaid and need to be held in check.”