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Reactions To The Proxy Plumbing Comment Letters…

An Interview With Chuck Callan, Senior Vice President, Regulatory Affairs, Broadridge Financial Solutions

What is your overall reaction, Chuck, to the comment letters that were filed with the SEC on socalled “proxy plumbing” issues?

Everyone wants a system that functions smoothly and transparently and, most of all, reliably. And I think there was widespread recognition that current systems do just that, and that any potential changes have to be made with the greatest of care.

That said, several constructive improvements were suggested. There was a very strong consensus about the desirability of having end-to-end confirmation of proxy votes. Broadridge currently provides end-to-end confirmation to ProxyEdge users for the 1,600+ meetings for which Broadridge serves as tabulator. There is growing understanding among participants that end-to-end confirmation
can be provided across the industry at little or no cost to issuers and without changing an investor’s NOBO/OBO status. This, however, requires that tabulators confirm back that the vote reports we submit on behalf of banks and brokers are included in the final tabulation. It also requires that banks and brokers provide confirmation back to their client accounts. From a systems and technology standpoint, the solutions already exist.

Another area in which there was broad interest and consensus was in finding efficient ways to increase retail investor participation. This is also an area that can be further enabled by technology.

What about the idea of a new “hub” to collect and disseminate the names, addresses and positions of all a company’s eligible voters – as proposed by some transfer agents?

Compass Lexecon, a firm comprised of leading economists, evaluated the idea and concluded that it was “economically incoherent” and would likely result in higher costs to issuers and shareholders. The devil is always in the details, isn’t it? Think about what’s involved. In 2010, Broadridge processed approximately 14,000 annual and special shareholder meetings. This involves processing
approximately 100 million unique investor accounts for multiple functions, including several searches, information requests, vote status updates and the like. Each account is profiled on its preference for how it wants to receive proxy voting information.

Considering all of the votes processed by Broadridge, now over 93% of the shares are voted electronically. The process is highly efficient, timely, and “straight through.” This system was built over the course of many years and at the cost of hundreds of millions of dollars and it is continually evolving to reflect the needs of participants and new regulations. It works and it works well.
Some vendors have suggested that if there were a non-profit data hub they could gain a larger share of physical mailings.

We were one of the comment filers who said, “Bid the name-collection business out – to make it easier for other providers to compete for the mailing and tabulation business”…mainly because it seems to us that competition is a good thing. But since then, it struck us that we don’t really need to have the SECor the NYSE do anything in particular to stimulate competition here, do we?

Not at all. There’s nothing I can think of that would prevent a serious would-be competitor from putting a business plan on the table – with a complete menu of the services they propose to offer, a projected fee schedule and a projected timetable for being ready.

The reality is that brokers have a choice of servicing agents. And some intermediaries have chosen to do it themselves. The same holds true for the many trust companies that use providers other than Broadridge as their agents.

Broadridge also competes, as you know, for registered-shareholder servicing. In 2010, many issuers chose us to process their registered shareholder communications and voting. In fact, over the past five years, the number of issuers choosing us directly has increased over four fold. Interestingly, the Compass Lexecon study – which examined over 12,000 invoices – observed that issuers pay less in fees and costs for a beneficial shareholder proxy delivery than they do for a registered shareholder proxy. This speaks to the question of efficiency.

Earlier, you alluded to commodity mail house vendors as being a driver of calls for more competition. But aren’t there other areas involved, with a much bigger value-add?

Absolutely. Since the hub idea was originally proposed, the proxy process has become even more technologically- sophisticated and advanced. Broadridge’s ProxyEdge platform, for example, now accounts for 80% of all shares we process. It provides institutional investors with proxy information, workflow management, voting, and compliance. It is a time-tested and proven process.

At the end of the day, many commenters indicated that the hub idea is difficult to evaluate because it lacks sufficient detail. For example, little detail was provided on how issuers would obtain quorum without the broker vote on routine proposals which accounted for 17 percentage points, on average, of the average quorum of 84% that companies achieved in 2010.

There is also substantial value added in the extensive auditing procedures and independent reviews Broadridge provides. No other proxy processor comes close. We have quarterly reviews of vote accuracy, annual reviews of compliance with applicable NYSE/SEC proxy performance criteria, annual attestation to the integrity of the process in a SAS 70 Type 2 report, and many other controls and reviews. In addition, this year, for the first time, there is independent review of the endto- end process when Broadridge serves as tabulator. This is unique in the industry.

Another very important area to be aware of is the significant investments in technology necessary to support changing regulations. We estimate that implementation of the “say-on-pay” frequency vote will require over 18,400 hours for systems development alone. And that’s before counting in all the customer service requests and client questions we’ve fielded so far.

So from your perspective, whatare the biggest takeaways from the proxy plumbing comment letter process?

A smoothly functioning, accurate, and reliable proxy distribution and tabulation system is of the utmost importance to issuers – and to voters. Issuers and investors alike have come to expect excellence – and rightly so.

They also expect the highest possible levels of data security, understandably, for sensitive data such as the names, addresses and share positions of securities owners.

And clearly, cost-controls and cost savings opportunities are of very high importance to all participants.

Broadridge technologies have reduced the stream of paper mail by a record 54% in the 2010 proxy season – and a significant and growing portion of mail is now processed by Notice & Access.

All in, using NIRI’s estimates of the printing costs of proxy materials and USPS actual postage rates, we calculate that the 2010 savings to issuers for postage and paper exceeds $1 billion.

One last comment, and something that you and your readers will find very interesting I’m sure: This year, as a group, companies using Notice & Access received votes from 31% of their total retail shares. In contrast, companies that chose not to use Notice & Access received votes representing only 27% of their total retail shares.

The technologies Broadridge provides for processing investor preferences and implementing stratified mailing strategies are helping
issuers realize increasing levels of participation with significant process efficiencies.

Contact Chuck Callan at Chuck.Callan@broadridge.com