May 8, 2012

Clarifying Confusion Over Proxy Distribution Invoices

Recently, I have heard from a few members who received increasingly threatening invoices from non-Broadridge service providers who claim to have forwarded proxy materials to shareholders on behalf of the company. Since most companies have only received invoices from Broadridge in the past in this area, they were confused and wondered whether these invoices were legitimate and whether Broadridge had “outsourced” its distribution services.

Here is what is happening: While Broadridge does not outsource its distribution services, it has until recently, facilitated invoicing for the three other providers of proxy services serving some banks and brokers – Mediant, Inveshare and ProxyTrust – by aggregating their beneficial fees with its own, collecting the fees and then passing those fees to those entities. As of last month, Broadridge decided that these providers should invoice companies directly.

Unfortunately, while Broadridge apparently notified its clients (although perhaps not as carefully as it should have since I have heard that the letters looked like junk mail), some of the providers are not helping themselves by resorting to very threatening and short letters rather than explaining who they are and what is happening.

And all of this is an issue because of the bizarre proxy distribution framework whereby companies get billed by entities with whom they don’t have a direct contracting relationship with. In other words, it’s odd to get a bill from someone you don’t know was providing services to you and where you can’t, in fact, confirm that they actually did anything for you.

And to boot, all of these providers wind up posting PDF versions of the company’s proxy materials to sites that they use for their brokerage clients and the company doesn’t have any say/involvement/verification in that process (such as the quality of the PDF or even the use of an HTML version of the proxy statement, etc.). If anyone really cares about whether shareholders get access to proxy materials, this process needs to get fixed as part of the SEC’s proxy plumbing initiative because companies have little incentive to spend the resources to provide “usable” materials online if they actually don’t get presented to the shareholders that vote…

What Are the Proxy Distribution Rules Anyways?

For those that want to know which rules govern this scenario: The rules that govern Broadridge’s distribution of proxy materials also apply to the other service providers: Rule 14b-1 and 14b-2 under the SEC’s proxy rules, NYSE Rule 451 and FINRA Rule 2251. All of the rules generally require that a company provide a bank or broker (or the agent of the bank or broker) with reasonable assurance that the company will reimburse the bank or broker for the reasonable expenses incurred in connection with the distribution of the company ‘s proxy materials. If a company provides a bank or broker with these assurances, the bank or broker must distribute the company ‘s soliciting materials to the beneficial owner clients of such banks and brokers.

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season Blog” for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Judge Jed Rakoff’s Profile Piece
– New Shareholder Initiative Seeking Disclosure of Lobbying
– A Final Review of 2011 E&S Shareholder Proposals
– Calculating Your Deadlines: A Nifty Tool
– Gaming Warren Buffett’s Annual Shareholders Meeting
– Corp Fin’s 2012 Shareholder Proposal Task Force
– Elimination of Broker Voting: Ineffective Regulation by the SEC?

– Broc Romanek