The STA Slams “Inappropriate Proxy Fees”

Petitions For Regulatory Relief – And Outlines A Proxy Processing “Field Of Dreams”

In what they called an “unprecedented action” the Securities Transfer Association (STA) sent letters to FINRA Chairman and CEO Richard Ketchum and NASDAQ CEO and President Robert Greifeld, requesting regulatory action to prohibit brokers from charging proxy processing fees on Separately Managed Accounts – where the owners have delegated their votes to the brokers, receive no proxy materials and have no ability to vote proxies.

These actions followed an STA cost study, which, the STA asserts, shows an average savings of 42% using Transfer Agent estimates vs. the fees that issuers currently pay.

Two problems seem to jump off the page here, initially: First, it doesn’t really seem that the STA has the standing to issue such a petition – especially when the folks who pay

these bills seem happy as clams with the status-quo. (It was this fact, primarily, that initially led your editor to give up his own long-running objections to the status quo, but more on that in a bit.)

Second, the STA refused to share either its methodology or its math – except for its bottom-line conclusions. And any fool can figure that yes, it’s a snap to beat the going price on anything if (a) you know what the price to beat IS – and (b) you haven’t disclosed your own basic assumptions, much less the price list you used to calculate the “savings”…and (c) no one is asking you to put your money where your mouth is and lay your proposed procedures, your proposed price list and your proposed building plans and timetables on the table.

But there is a much bigger problem here: Any cost savings that might be achieved are based on what can only be described, we say, as a “field of dreams.”

As outlined in earlier STA position papers filed with the SEC, someone would have to build a new playing field to compete with the existing Broadridge platforms. And that someone, they hinted broadly, should be DTCC… but not, please note, the STA or its members. And guess what? Despite all the time and money and risk that such an undertaking would involve – just in the building of it – and all the testing that would have to be done along the way, and on an ongoing basis too – it would operate on a non-profit basis! No wonder that DTCC – or anyone else – hasn’t stepped up to the plate.

But let’s suppose, just for a moment, that someone, out of the goodness of their heart, would build this field of dreams. Would anyone really come?

Would public companies step up as the test-marketers for an untried and unproven proxy distribution, voting and tabulation system – and risk the embarrassment, and the reputational costs – and almost certainly their jobs – should they end up with a bollixed-up shareholder meeting?

Would brokers flock to pass their beneficial owner names around to two or three or four – or more transfer agents via this new system – instead of having a single contact point for all annual and special meetings? Would this new multi- party system really save money for brokers in the end, which could and would be passed along to issuers?

Would institutional investors cheer on such a brave experiment – and decide to parcel their own voting activities out – among even a small and “elite” handful of transfer agents – instead of using the platforms they use now to cast their votes with a single and time-tested vote tabulator?

It also seems to us that the TA straw-man plans – and their numbers – have left out one of the largest and most important cost components: internal and external audits, which do not come cheap. And on that subject, let’s face facts; transfer agents, much as we love them, and as much as we hate to say it, have not, on the whole, developed a great reputation for flawless execution. Sadly, as an ex-transfer agent – and as someone who LOVES competition – your editor does not see how this project could ever get off the ground.

The silliest part of all this debate is that it’s mostly over low- margin enclosing and mailing operations – which most TAs by the way, have outsourced to others. And frankly, while the promised savings sound large, they’re really peanuts in the bigger scheme of things – especially if one posits a system of ongoing, internal and external audits that are SOP at Broadridge but totally unheard of in the average TA operation. Only a fool would try to proceed without these audits – and only a bigger fool would buy in without them.

Yes, there do seem to be some issues with the “optics” when one looks at the way the various fees are assessed to cover the overall data collection, distribution, voting, tabulating and reporting processes. And yes, we do think that FINRA should, as we wrote in the last issue, audit brokers, to make sure that they are not treating proxy distribution as a profit center, which would clearly be against the current rules.

But finally, let’s cut to the real bottom line – and note that Broadridge is a publicly traded company, with its financials are out there for all to see. Do their numbers reflect a firm that is feasting on monopoly profits – or on profit margins that are 42% higher than providers of similar services, as the STA calculations would imply? Check it out for yourselves; No huge margins here.

The saddest part of all this is that Transfer Agents missed the boat way back in 1984 when the STA endorsed the central- distribution system that was on the table and that was ultimately approved by the NYSE and blessed by the SEC.

Back then, registered holders were about 70% of all holders – but my then-and-now colleague Ray Riley, and I, begged our then boss – and the STA – and the “STANY” group too – not to sign off on the plan. We feared – correctly as it turned out – that registered ownership would continue to shrink, street name ownership would continue to grow, and TAs would find it very hard if not impossible to compete for street- name distribution and tabulation business under the system that was approved. That ship sailed long ago. And it’s not likely to come back to take on more passengers at this late date.

We would like nothing better that to be wrong about this, since we love competition, we love transfer agents, and our own mission has been the same for 20 years now: “Helping public companies – and their suppliers – to provide better and more cost-effective services to investors.” We offered to show up for a full day of interrogation at two of the biggest TAs – to share the insights above and to see if they could change our minds, but no takers. So sharpen those pencils, TAs: IT’S TIME TO PUT UP OR SHUT UP, WE SAY…