Transcript: Roundtable Discussion Re: CSA Consultation Paper and Request for Comment - 54-401 Review of The Proxy Voting Infrastructure (January 29, 2014)
Transcript: Roundtable Discussion Re: CSA Consultation Paper and Request for Comment - 54-401 Review of The Proxy Voting Infrastructure (January 29, 2014)
DISCLAIMER: This is the unedited transcript of the Proxy Voting Infrastructure Roundtable on January 29, 2014 which the OSC received directly from the transcriber. The transcript is being provided in this form to make it available as soon as possible.
CANADIAN SECURITIES ADMINISTRATORS
AUTORITÉS CANADIENNES EN VALEURS MOBILIÈRES
ROUNDTABLE DISCUSSION RE
CSA CONSULTATION PAPER AND REQUEST FOR COMMENT
REVIEW OF THE PROXY VOTING INFRASTRUCTURE
|DATE:||Wednesday, January 29th, 2014|
|HELD AT:||Ontario Securities Commission
22nd floor, 20 Queen Street West
|MARY G. CONDON Vice-Chair
JAMES E. A. TURNER Vice-Chair
DEBORAH LECKMAN Commissioner
Public Sector Pension Investment Board
Canadian Society of Corporate Secretaries
Shorecrest Group Ltd.
Canadian Imperial Bank of Commerce
Kingsdale Shareholder Services Inc.
TMX Group, CDS Clearing and Depository Services Inc.
TABLE OF CONTENTS
INDEX OF PROCEEDINGS:
TOPIC 1: UNDERSTANDING AND IMPROVING VOTE RECONCILIATION.
INTRODUCTION AND OPENING REMARKS
PRESENTATION BY MR. MacDONALD
PRESENTATION BY MS. DONALDSON
PRESENTATION BY MR. TEEMAL
GENERAL DISCUSSION OF TOPIC 1
TOPIC 2: DESIGNING AND IMPLEMENTING END-TO-END VOTE CONFIRMATION.
PRESENTATION BY MS. TROTTER
PRESENTATION BY MR. PASFIELD
GENERAL DISCUSSION OF TOPIC 2
--- Upon commencing at 9:00 a.m.
INTRODUCTION AND OPENING REMARKS:
THE CHAIR: There is a hush descending over the room, so I think it must be time to get started.
Good morning, everybody, and welcome to our round table on the proxy voting infrastructure. My name is Mary Condon, I'm one of the vice-chairs at the Ontario Securities Commission and I'm co-moderating this panel this morning with my fellow vice-chair, James Turner, and Commissioner Deborah Leckman.
Welcome to everybody. Let me just begin with a few remarks to kick us off and to address some housekeeping issues. As you know, the reason why we're all here this morning is that proxy voting is a fundamental feature of our modern capital markets. It's the centrepiece of shareholder democracy and a number of our initiatives of securities regulators depend on the idea of the integrity of the shareholder vote.
We think that a fair and efficient capital market and market confidence requires a proxy voting infrastructure that's accurate, and by accurate we mean that every vote counts and no vote counts more than once.
So, as you know, we issued a consultation paper last year. We received a number of comment letters based on that consultation and I think it's clear, if you look at those comment letters, that there is a certain consensus that there are issues with the proxy voting infrastructure as it currently operates. What's not so clear and about which there is less consensus is exactly what those issues are, how significant they are, and what we as regulators should be thinking about in terms of policy solutions.
One of the things that is also clear from the comment letters is that there are a large number of participants involved in operating the proxy voting infrastructure, and so one of the things that we felt would be useful to do as a next step after our consultation paper was try to bring all of the participants with all of their different perspectives together to have a conversation about the issues that are raised by the proxy voting infrastructure.
We thought that it would be helpful for us as regulators to hear everybody's perspective in an open forum like this, and also for the participants to hear from each other. And so we're very pleased that all of our panel members this morning have been able to join us. Some of them have come from outside Ontario. Indeed, some have come from outside of Canada.
Let me just very briefly introduce our panellists before I deal with a couple of housekeeping comments and discuss how the forum this morning will play out.
So I've got Lara Donaldson from the Securities Transfer Association of Canada on my right. Scott MacDonald from RBC Investor and Treasury Services. Narry Teemal from CIBC. Jeri Trotter and Chip Pasfield from Broadridge. Eric Miller from Agrium. Zach Oleksiuk, and I apologize if I'm mispronouncing your name, from BlackRock Asset Management. Stéphanie Lachance from the Public Sector Pension Investment Board. Fran Daly from the TMX. Penny Rice from Shorecrest. Hooman Tabesh from Kingsdale. And David Masse from the Canadian Society of Corporate Secretaries.
So we thank you all very much for taking the time to come and have this discussion with us this morning. So as all of you can see from the schedule that hopefully you have on your seats, we are having two panels; one to really address the issue of how vote reconciliation works and what our policy options are with respect to the issues associated with the way vote reconciliation works today.
Because it's such a complicated system and so many participants are involved, we thought that it would be helpful to have a brief presentation so that everyone has a common knowledge base about the way the system is working. And so we're going to have a presentation from CIBC, RBC Investor Services and the Securities Transfer Association, their representatives will explain how the system works today and that will be the basis for our panel discussion that will follow.
In the second panel we're going to have another presentation to kick us off, and that will be a presentation from representatives from Broadridge who will discuss how end-to-end vote confirmation is being developed in the U.S. and we can then have a discussion about whether that's an appropriate way for us to go here in Canada.
So with respect to housekeeping, those of you in the audience will have the opportunity hopefully to address some questions to the panellists. There are cards that you can use to write a question or a comment and there's staff members from the OSC who will be going around to pick those up. Rest assured that if we don't get to put your question to a panel member this morning, we will retain all of those questions and comments and we'll use them in our deliberations going forward.
We are taking photographs for our own OSC communications purposes. This is, of course, a public event. There are members of the media in attendance. Speaking of media, please turn off your cell phones if you haven't done that already. And just to say also that we will be posting a transcript of this roundtable this morning on our website shortly after -- in the next short while and we have a court reporter who is going to help us with keeping that transcript accurate.
So with that, let's begin with our presentation from Lara and Scott and Narry. Thank you very much.
TOPIC 1: UNDERSTANDING AND IMPROVING VOTE RECONCILIATION.
PRESENTATION BY MR. MacDONALD:
MR. MacDONALD: Thank you very much. I'm going to kick it off on behalf of the three of us. As you know, it's a multi-party process and so we correct throughout the process.
I'm going to speak at the outset on behalf of RBC Investor and Treasury Service. So we're an institutional custodian, so we custody the assets on behalf of large institutions, so it's not the entire universe, although we're happy to custody the entire universe if that makes life simpler.
By way of walking through handouts, I'll just open on the beginning of the process and then hand it off to Lara to talk about some more details throughout the timeline. We're certainly not going to talk through every sub bullet on this slide, but give you a sense of how it starts and where it goes from point A to point Z.
So sort of a 25 days to 35 days, in there, before record date, Broadridge, the transfer agents, will receive a notice from an issuer of a meeting or of an event. We're going to get, as a custodian we're going to get a notice from Broadridge of the fact that there's an upcoming meeting and that kind of kicks off the process.
From our perspective, the first thing we do is we recall securities on loan. So securities lending is an important part of the marketplace. We facilitate that, but the first thing that we do is recall securities on loan. It is very clear with everybody in the lending program that that's going to happen. Different lenders have different requirements about always recalling securities because they want to vote, never, only certain things, but we have a process that's well entrenched to recall securities on loan.
On record date, Broadridge is then going to give us a daily trigger file to say, again, here's the security and needs the data back from us as to who holds what positions, as well as some other information about what materials are required, what language, that sort of thing. So on record date we receive that file from Broadridge and we prepare ourselves to deliver a file back with the required information to Broadridge on record date plus one.
So I think the second material point, from our perspective, is reconciled information from us to Broadridge. We reconcile to depositories and to sub-custodians every single day, and that is not particular to the proxy voting process, it's not something that we do periodically when it seems important, that is a fundamental piece of our business and it's done continuously.
So when we transmit data on record date plus one to Broadridge, we are providing a whole bunch of information to them in terms of the requirements for various parties, but that is audited, daily reconciled information.
The next point that I would want to make clear before handing it off to Lara is that we've recalled securities from loan, as I indicated earlier, and we block those securities from being reloaned until record date plus two. So there are clear lockout periods, it's automated, it's a well-entrenched process, and so those positions cannot be reloaned until record date plus two after we have already sent the reconciled data to Broadridge.
So I'm going to hand it over to Lara and just point out that, you know, because we are the largest custodian in Canada, we have been involved in this debate for a number of years and so we did host a kickoff symposium in 2011 to address some of these issues and see what could be made better in the system. And I think some of the things that Lara and Narry will talk to are continuous double check and reconciliation points throughout the process, which are things that the various market participants have engaged in since we were kicking that off in 2011. But I'll leave it to Lara --
VICE-CHAIR TURNER: Scott, can I just ask one question. You say information reconciled is sent to Broadridge. Tell me what that specific information is. I think there's been some suggestion in the material that there's not enough backup information that's being submitted. So is that an issue in terms of what you're doing in providing to Broadridge?
MR. MacDONALD: Not an issue from our perspective. As I say, the daily reconciliation happens all the time, so it's a matter of who are the account holders, how many shares do they hold of the security in question, as well as other pieces of information about they want materials or they don't want materials; what language do they want the materials. There's a bunch of little things.
But the big one in terms of how many positions are there and is that going to be the same data that Broadridge would receive from the depository themselves? It will all be reconciled because we do that continuously.
THE CHAIR: Lara, I think you're going to speak next.
PRESENTATION BY MS. DONALDSON:
MS. DONALDSON: Thank you. The transfer agent specific processes at this point are mapped out on page 3 of the handout that you received.
So we have various administrative tasks prior to record date and notice of meeting, but our first few reconciliation steps occur one day after record date, and at that point we ensure that the shareholder register is balanced with issued and outstanding shares, which is the total number of shares that are entitled to vote at the meeting.
If there are pending transfers or issuances from treasury on or prior to record date, we ensure that all processing has been completed. It is important to note that pending transfers does not necessarily translate to any trades that may have taken place just prior to or on record date. Intermediaries would have their own processes to ensure these trades settle prior to the record date file being produced.
So record date plus two, the omnibus proxy is received from the Canadian Depository for Securities. If there is a position with DTC, DTC will also create an omnibus. We have a question mark there because it doesn't necessarily always happen at the same time as far as when the transfer agent receives it. It's sent directly to the issuer, which is an SEC requirement, so we get it when the issuer decides to send it to us.
Upon receipt of the omnibus proxies, the total shares represented are balanced with the record date positions on the register for those depositories. There are problems that can occur with the balancing for various reasons, such as there is a position on the opposite depository omnibus, the total positions can't be balanced with the register, or there's multiple depository positions on the register, such as restricted securities held outside regular depository positions.
If the DTC omnibus is not received, votes received from U.S. financial intermediaries cannot be tabulated, which is a really important point, because it can result in problems down the road as far as over reporting and over voting.
Once the omnibus proxies can be balanced the voting rights associated with the depository shares are allocated to the financial intermediaries shown on the omnibus proxy position reports. Supplemental omnibus proxies can also be received at any time after record date to right before the meeting.
These are required if voting rights must be allocated from one FI to another, who may or may not already appear on one of the omnibus proxies. All omnibus proxies received by transfer agents are processed and the shares reallocated. This must be done in order to ensure that accounts represent the true number of shares available for voting. So even if proxies are not received from one of those FIs who is being credited with shares, the other FI must have their position reduced to ensure that they're not voting shares that they shouldn't be allowed to.
THE CHAIR: Can I just ask you to clarify a little bit when you say that the positions must be reduced. You're the one who is charged with making that decision? Not you personally, but your --
MS. DONALDSON: It's not a decision we make. We receive paperwork and documentation that advises us that the right to vote must be moved from one financial intermediary to another and we take that paperwork and we change the position allocation on our systems so that when the votes start coming in, the number of votes that are allowed for that financial intermediary have been allocated appropriately.
THE CHAIR: And the paperworks comes from?
MS. DONALDSON: It typically comes from Broadridge in the form of supplemental omnibus proxies.
VICE-CHAIR TURNER: And tell me what happens if you don't get a DTC omnibus.
MS. DONALDSON: If we don't receive the DTC omnibus proxy, the DTC position on the share register cannot be reallocated to the financial intermediaries.
VICE-CHAIR TURNER: So what does that mean in terms of voting? Does that mean that those intermediaries don't get to vote?
MS. DONALDSON: They get to vote, but their vote cannot be allocated, so we cannot cast the vote and put it in the proxy tabulation report.
VICE-CHAIR TURNER: Okay.
MS. DONALDSON: So the other facet to the Canadian proxy system is the ability for the issuer to mail directly to NOBO holders, and that requires additional steps to be taken by the transfer agent. What would happen is that on record date plus 3 we would receive a NOBO list and it would include all NOBO holders, including people who are coded for the different meeting types, so A, S or D holders, material selection.
So along with that list we also receive an omnibus proxy and that omnibus proxy removes the right to vote from those financial intermediaries to the issuer. So upon receipt from the NOBO holders in the form of the voting instruction form, those votes are then cast directly.
The F4 omnibus proxy which we receive is reviewed against the omnibus proxy for the CDS and the total shares for each financial intermediary are drawn down. So the CUID is provided on the NOBO list and on the omnibus proxy, and we use that to identify the positions that need to be reallocated.
Each NOBO holder, including those that don't receive a VIF, because they are coded with a D or an S type if the issuer is not mailing to those holders still has a position created for them. So, in effect, we turn them into a registered shareholder and those shares cannot be voted by anybody else. So even if one of those NOBO holders does not cast a vote, the shares still remain in their account and they can't be allocated elsewhere.
The remaining shares from those FI positions are then left for any votes received through Broadridge on behalf of the OBO holders.
There have been situations with the NOBO list where we have had concerns or problems. There is the possibility that insufficient shares are in the FI position to account for all of the NOBOs on the list that we receive. Often in this situation it is determined that the NOBO file has contained OBO information or shares that actually appear on the register itself.
We also have problems with the CUID reference which appears on the broker account in that it's not available. It is sometimes replaced with a Broadridge client number, which indicates to the transfer agent that a secondary omnibus has already been issued. If it has not yet been received by the transfer agent we need to wait for that to come in so that we can balance the NOBO file.
There's also the possibility that participant holdings may be listed on the DTC omnibus, and if we don't receive that, again, we have problems with balancing for the NOBO file.
So once all the record date proxy files have been balanced and the NOBO file, if applicable, the mailing file is run and for the registered shareholders we eliminate suppressed accounts, but they still have the right to vote, that account still remains on the register because not receiving material does not remove their right to vote. And then the elimination of the requirement -- sorry, if the transfer agent is mailing to the NOBO holders, we also run that mail file, again using the material consent indicators, the A, S and D, and that distribution is done only through mail. We are not allowed to use the e-mail addresses on the accounts because the consent for e-mail does not move from the intermediary or Broadridge to the issuer, so they're not allowed to take advantage of that efficiency in distribution.
The mail files are then bounced back to the expected positions and the mailings are completed.
And that takes us to the mail date.
PRESENTATION BY MR. TEEMAL:
MR. TEEMAL: I'll start off from where Scott left off, record date plus 3 on the second page of this flow chart.
Described there is two things, one is the Broadridge, Broadridge managing the event for us, and the second is where they're not managing the event they let us know.
Scott's already talked to the first part that you put on the slide where Broadridge is managing the event. Scott's already talked to the first three blocks.
We get to record date 3 where Broadridge has loaded on the files that they have received from us into their system. Through Broadridge ICSOnline we can see the vote control numbers that have been created for clients. That's the OBO clients. And then we sub-manage the process from there.
So we get an over vote from Broadridge if there is any issues and we also get a position missing report, so we rely on these reports from Broadridge to address any discrepancies in our positions, book of records versus the legends.
We investigate each one of these occurrences and we resolve them. Some of the issues we see could be CDS has not provided the report to Broadridge for the omnibus position, omnibus proxy position. There may be borrowed loans that we record. We may have holdings in multiple depositories, example, DTC and CDS. DTC's position may not have been received, but, again, we use these reports to resolve the issues and we correct it on the Broadridge ICS system.
So Broadridge then will meet the file holder and send it off to the agent or the issuer so that the votes can be completed per Lara's description.
We have followed the next thing, if there's any discrepancies, it will keep showing up on that report until it's resolved. So unless it's not on the report we're happy that we've completed the reconciliation process and we've sent all the correct votes off to the agent. That's about it.
THE CHAIR: Can I just ask you, our understanding is that there are a number of intermediaries who don't use Broadridge.
MR. TEEMAL: I believe that number is fairly small, speaking to Broadridge.
MS. TROTTER: We have about 98 percent, but there are definitely intermediaries and participants that do not use our services.
THE CHAIR: And do you have any of sense of the size in terms of the number of the clients that would be implicated?
MS. TROTTER: I don't. They would have their own internal processes with respect to how to provide voting instructions. At some point some may have done restricted proxies and sent them out to the beneficial shareholders for them to send back directly to the tabulator, but those are their own internal processes and we're just not privy to them at this point.
MR. TEEMAL: If you look at the second work flow, the one that Broadridge hasn't acted on the meeting, those are the ones where the issuers haven't actually provided material, I guess.
Our initiative is to make sure that the clients are made aware of the event, the vote event. We go through our investment advisors, they advise their client that the votes have been -- you know, whether or not the client wants to vote. If they want to vote then we do an omnibus proxy and present it to the agent and fulfill the obligation that way.
I assume that's what they would -- somebody that does reporting would also do.
THE CHAIR: So from your point of view, then, as intermediaries, you're satisfied that reconciliation is done before the files are sent to Broadridge? Scott, you referred to this earlier.
MR. TEEMAL: We all have the same controls in place in terms of reconciling or book our records against the legends. That's an IIROC requirement and we do that daily. It's attested to monthly. The position that we send to Broadridge always should be accurate.
VICE-CHAIR TURNER: So from your perspective there's no problem with the system?
MR. TEEMAL: As far as we know. We haven't come across any occurrence of anybody coming back to us saying otherwise.
THE CHAIR: Let me ask you about an issue that was raised in the IIAC letter which is to do with retail accounts on margin. The suggestion in the letter was that there's no way of dealing with those accounts in order to provide those retail investors with the opportunity to vote because the tracking systems involved would be very costly and onerous, and the suggestion was that retail voting typically is not at a level that it would affect the outcome of an issue raised in a meeting. So can you comment on that?
MR. TEEMAL: It's really difficult to track margin calls and the vote entitlement because the price of shares fluctuates every day. I mean, we certainly don't have the system to track that one.
When you look at the percentage of votes on any issue the retail accounts are very small, maybe 40 percent on average. It's fairly low.
You know, to track margin accounts in terms of vote entitlement, it's a challenge because our portfolio, margin is based on the client's entire portfolio, right. We wouldn't be able to tell which shares are on margin and which ones are not.
VICE-CHAIR TURNER: How can that be? For dividends you can distinguish between shares. Why can't you distinguish based on votes?
MR. TEEMAL: When you say dividends distinguished between shares, each client is still entitled to their dividends, regardless of margin.
VICE-CHAIR TURNER: I'm sorry, say that again.
MR. TEEMAL: Each client is entitled to the dividend, regardless of margin. So they will get the dividends as of record date, regardless.
VICE-CHAIR TURNER: Okay, why can't they then get the number of relevant votes?
MR. TEEMAL: They do get the votes. The control numbers are created for all of the shares, margin or not.
VICE-CHAIR TURNER: But if the shares have been lent out and have been sold into the market, what does your record show?
MR. TEEMAL: The lending positions, the positions that have been lent out are blocked, so there's no vote made on behalf of those lent positions.
THE CHAIR: But the retail investors involved are aware or not aware that they don't have the opportunity to vote because their shares have been lent out?
MR. TEEMAL: If there is an over vote situation, yes, we would make them aware. Or like institution, the larger ones that we can identify.
VICE-CHAIR TURNER: But if I'm a retail holder holding securities, I'm the beneficial owner holding securities for which you are the intermediary, you have lent those securities out, they have been sold in the market, but I'm still your client and I think I still have the hundred shares, do I get a hundred votes?
MR. TEEMAL: Yes.
VICE-CHAIR TURNER: How can that happen if those shares have been disposed of?
MR. TEEMAL: Again, we can't segregate margin.
VICE-CHAIR TURNER: No, but I'm talking about just segregating based on whether the shares are lent or not lent.
MR. MacDONALD: I can't comment from a retail perspective. As I say, from an institutional perspective it's cut and dried. We recall positions from loan for those clients who want to vote. It's an established process. We block those shares from being re-lent until after we have transmitted the data to Broadridge. Institutionally, I can say it's a non-issue.
THE CHAIR: Just following up on that then, Scott, is there a system in place to ensure that the borrower who subsequently sold the shares, that the person who has purchased them is not voting the same shares?
MR. MacDONALD: Yes, that's been a little bit longer dissertation into the whole lending program, but what I can say is that, you know, it is established for many years. There is clarity as to who has the voting rights.
We discuss with clients who are in the lending program what their desire is and we have automated processes to make sure the recall happens in a timely manner. As you can see from the flow chart, this is well before record date and it's been blocked. It's reconciled daily, as I say, as part of our normal course business, not just for proxy events, and then transmitted and then unblocked thereafter. So it's very plain.
VICE-CHAIR TURNER: But when you say this, these are shares held by institutions?
MR. MacDONALD: Yes.
VICE-CHAIR TURNER: Not retail.
MR. MacDONALD: Correct.
MR. TEEMAL: Retail is a challenge. We don't have the facilities to track retail account by margin.
VICE-CHAIR TURNER: Well, I'm not sure I care about margin. I just want you to track it based on the entitlement to vote, whether or not they have been lent out or not lent out. I mean, I think what we're hearing from Scott is they have to recall, but --
MR. TEEMAL: For institutional.
VICE-CHAIR TURNER: For institutional. But if you're a retail holder and those shares have been lent, somebody else now owns them. You must know that position. I mean, you do have a mechanism for ensuring that the dividends get back to that holder.
So I'm just not sure I understand why it's so difficult to track the votes.
MR. TEEMAL: It's -- each holder is entitled to the dividends, regardless. So it's the same concept. Everybody that's holders of record gets issued a control number, same as you get the dividends. It's determined what percentage of that vote you're entitled to. It's difficult to track because somebody that has a margin account may have ten different securities in that account, the margin that's allocated to the client, right, is based on all those securities.
We can't pick on one security and say this is a percentage that's marginable or not.
COMMISSIONER LECKMAN: So, Narry, the revenue that's generated from stock lending on retail accounts, is it accrued to the retail investor or to the firm, the dealer?
MR. TEEMAL: To the firm, because it affords margin to the client.
COMMISSIONER LECKMAN: But you also charge the client interest to have margin, right? So you're making revenue off the client and off the stock lending. So to make the system more accurate, if you just stopped lending on margin retail accounts, because the retail investor doesn't get the money anyways, wouldn't that solve the problem?
MR. TEEMAL: That's the business we're in, right? Everybody on the street does this.
COMMISSIONER LECKMAN: I just have another question for Scott. When you said that you reconcile daily, do you also reconcile the intermediary files or do the intermediaries also reconcile, I mean if there's custodians in the system?
MR. MacDONALD: Yes, we reconcile. Primarily the parties we're talking about here are the depositories of CDS and DTC and sub-custodians like BNY Mellon in the U.S. So those are the principal checks that we have on a daily basis for all our business, as I said, and we audit those and so on. That's very much the core of our business.
COMMISSIONER LECKMAN: Okay. So your intermediary files balance when you send them to Broadridge.
MR. MacDONALD: Absolutely.
THE CHAIR: We've kept you guys in the hot seat, I think, for a few of minutes now. Perhaps we should open up to other panellists.
I'm going to turn to you first, Stephanie, on behalf of institutional investors. We have heard some commentary in the comment letters that we should be moving in Canada to a system of one for one vote reconciliation.
Can you tell us what your view is on that and if there are obstacles to doing that, what you think those obstacles are?
GENERAL DISCUSSION OF TOPIC 1:
MS. LACHANCE: Thank you. The illustration of the reconciliation that was just described a few minutes ago is still raising a few questions for us as institutional investors.
What is important for us, there is a lot of attention that has been paid to whether institutions were voting their shares or not and how they were processing their votes. There is a lot of effort, time and energy and resources allocated to casting votes at most institutional investors in Canada.
We are getting to be worried about whether the full weight of our votes are being cast and carried through the process. When I'm hearing about the description of the reconciliation, I do understand that there's form of reconciliation being made on the record date, making sure that the right files are being sent, but I still have a question mark and probably a question open, when I'm reading STAC's comment letter that there is very troublesome statistical information where in 2013, 51 percent of meetings had over voting and over reporting issues.
Just as statistical information is worrisome that maybe there is a bigger problem that we're thinking of, whether it's fully addressed or fully resolved before the meeting -- well, I hope, but, still, it's very worrisome.
So for us, as institutional investor, we want to make sure that the vote that we're casting in our offices is reaching the shareholders' meeting floor and carries the full weight and is not either diluted if there is no proper voting reconciliation or sometimes could be ignored if we're in an over voting situation where we do understand that there are some adjustments being made on the shareholders' meeting date.
So that's very troublesome for us. That's why we have been pushing for a greater transparency, making sure that we do have a full picture and a full understanding and I thank the previous speakers about clarification about the process, but I still have some question marks. Is our full weight of our casting efforts, voting casting efforts, being carried through?
Those are issues that are important for us if we're spending time as investors and taking the time to review the proxy voting materials, I want to make sure that the ten million shares that I may own in a large Canadian bank will reach the meeting floor and will carry the full weight.
So that's why we have been pushing on vote reconciliation, making sure that the entitlement for voting is attached to a share and it follows through the process.
And when I'm hearing about margin accounts, I'm getting to be worried. We may find some comfort that the retail investor does not necessarily represent a large amount of shareholders in Canada in terms of basis, but still, it's worrisome, what we're hearing, that there is not a full reconciliation made at the shareholder level.
The other thing is I'm not so sure that I'm getting a full understanding why it's working for dividend and why it's not working for votes. So that's the type of clarification that we're looking for. Because from our perspective, we just want to make sure that we are getting the full voting entitlement and that the meeting is carried through with shareholders having their full weight and making sure that we, as investors, have our voices heard.
And is it only at contentious meetings that we will roll up our sleeves and start by looking down at the vote chain? No, contentious meetings are not the only ones that we should care about in Canada. Other meetings are of importance and we need to make sure that when we're talking about majority voting for directors that there is a clear message being sent to the issuer as to what shareholders are looking for in terms of board composition, for example.
THE CHAIR: Let me ask you, Stéphanie, have you personally, as a representative of an institutional investor, encountered any specific problems with respect to vote reconciliation where you can say, okay, that's where the blockage or the obstacle is that we should be looking into more directly?
MS. LACHANCE: I would love to be able to share some experience, but we don't have any visibility as to whether there is an issue or where the problem does happen.
I don't know where the bottleneck is, but when I'm reading comment letters and the Davies report that was issued in 2010, I get to be worried. I don't know if my full proxy is being carried through the process completely. I may have an idea if I've got a large block that I can try to follow it up to the meeting floor and looking at the voting results when they are published in detail, but other than that, I don't have visibility at all on the system as a shareholder, despite the fact that we are an institutional investor and that we have the internal processes.
I do know that I'm voting the shares that I am entitled to because my custodian is confirming the exact number that we have. Securities have been recalled when they are on loan, so I know that when I'm casting my vote that I'm doing it on the full position of PSP, but what I don't know is if that vote is reaching the floor in its entirely.
THE CHAIR: So, David, I think, did you -- I should have said at the beginning for panellists who want to intervene or contribute to the discussion, perhaps if you can put your name card up so that -- all right.
So clearly Hooman is keen to get started, and then we'll turn to Penny after that.
MR. TABESH: Thank you, Ms. Vice-Chair. I think I could address that question.
We get involved in contested situations and we have the luxury of straddling the transfer agent, Broadridge, and the back office, kind of seeing that dynamic and the flow.
We had a contested meeting where the directors were essentially replaced with a differential of 250,000 votes, yet I just came off another contested meeting that my colleagues in the audience were involved and there were three and a half million over votes. So these mistakes does result in the replacement of the directors, and if you saw this in a political arena there would be an outcry.
From our perspective, and by no means -- you know, there are processes, and after going through documents I realize there are processes in place, however, apparently they are only available to subscribing intermediaries, but from our perspective, the real gap is communication between transfer agent and Broadridge.
I think if the transfer agent provided a CDS list, a full list to Broadridge and then Broadridge was able to reconcile that list against the votes coming in, that would address a lot of the over voting and the over reporting, because what happens, it only gets realized at the end, and if we're involved, that's the benefit of having us involved, then we go back and we try to reconcile by speaking to the back office, by speaking to Broadridge and by speaking to the transfer agent. However, when we're not involved, I could imagine there would be tremendous amount of over voting.
The one other thing I want to address is the share lending. From our perspective, it doesn't comprise a major amount of double voting. We have seen it, however, it's not a significant portion of it. From our perspective really, the overreporting is a big chunk of that issue and I think depending on --
VICE-CHAIR TURNER: Can I just ask, I think in your submission letter you said the biggest problem is missing omnibus proxy documentation. So let me ask you, what's the problem there?
MR. TABESH: I think the intermediaries sometimes don't have the full documentation. So whatever they report to Broadridge, Broadridge then passes on. Whereas, if there were full reconciliation and backup documentation that Broadridge should require, then they would be able to reconcile the votes instead of just kind of passing on whatever is reported in.
VICE-CHAIR TURNER: So one of the other questions through this is the use of identification numbers. What do you say about that as a mechanism?
MR. TABESH: I don't know enough about it to be able to make a comment on it.
MR. MASSE: But I think --
THE CHAIR: Sorry, David, I'm just keeping order. Penny had wanted to come in to the discussion.
MS. RICE: I was just going to say, when it comes to over voting, a lot of times the problem is security lending, and it's not a huge problem because for institutions, they have clear guidelines, they either call the shares back over record date or they have left the shares out and they know they don't have the right to vote.
What seems to be a problem is with the margin accounts, and what happens is the margin person thinks they have the right to vote and the person who buys the shares thinks they have the right, and the reason that doesn't work with retail shareholders is it's a large block of shares with an institution and they know what they're doing.
With retail, they are taking a portion of a pooled share and lending those out. So they don't take it from the margin account because it's no one person shares. The reason it works with a dividend is the person who buys the shares in the market thinks they get the vote because they don't know they bought borrowed shares, and the person in the margin account thinks they get the vote.
The reason it works with a dividend though is somewhere in that circle is a person who short sold those shares and they made good on the dividend and nobody cares where the money comes from, they only care that they got their money. There is a limited number of votes and that person who is sitting in the short position doesn't have the votes to give to the margin account or to the person who bought it.
Now, most of the time that doesn't make a difference because if it's an annual meeting, only a portion of the shareholder base is getting a proxy in the first place. Everybody is coded and I opt to only get it if it's an annual meeting, so there are people who coded special and decline who never get a proxy, so that broker never usually goes into a over vote position.
When it becomes a problem is, as Hooman said, when your vote is down to 250,000 shares and it determines the outcome of the vote, then everybody cares and then you have to fix it. Sometimes it's fixable in that they're just holding it in a sub-account and we can get an omnibus proxy and the vote goes through, and sometimes it's not fixable because two people are trying to vote the same share.
It doesn't affect an institution in the sense that they can determine their vote, but it will affect an institution if the broker they're holding those shares in goes into an over vote, then everybody's shares get prorated because there's no way to tell which institution, okay, you're entitled to vote and which brokers over voted because they've got margin votes in the same custodian position.
As I said, it only becomes a problem or at least gets the attention of a problem if you're at a close vote in a proxy fight.
THE CHAIR: David, I'll turn to you. You had wanted to come in.
MR. MASSE: First of all, in terms of anecdotal evidence that I am personally aware of, we had an institution with a very, very large position, 14 million shares, and you don't know you've got a problem typically at an AGM until you file your voting results. And then we got a call from that institution saying we withheld our entire portfolio against X director. We would have expected to see a hit in his withholds and we didn't. What happened?
Of course, this is after the fact. And a lot of effort went into tracking what happened to that vote and it was impossible.
So we started with the transfer agent, the transfer agent moved to Broadridge. It was clear, clear, clear, because the institution was very exercised over this, that they were looking down their end of the pipe and they were positive that they had an entitlement and had voted those shares, and it was clear looking down the other end of the pipe that those votes never came through. That's a very serious problem.
If you heard this from a retail shareholder, you would say, well, you know, what do you expect? Retail shareholder, you know, it doesn't account for all that much, but when you hear it from an institution, a very large prominent institution with a very large position, I agree, it's very troubling, very worrisome.
THE CHAIR: So if there's some blockage in the pipe, as you put it, do you have a view on --
MR. MASSE: The issue is that the sense you get from reviewing all of the contributions and all of the information that's come out is that, one, there are a large number of different processes, there's a lot of manual labour involved with accounting numbers, there's large numbers of faxes that are information being trade by fax, which in this day and age you might as well send smoke signals, I don't know what's up with that.
I think that when you look at the evolution of the capital markets generally, all of the improvements we have seen in terms of volume and timely execution of trades and so on, have all been pushed by IT. And then when you look at voting, if there is one gap in the overall system where IT is not doing its job or not given an opportunity to do its job, it's there. And you've got a massive amount of data that needs to be crunched in a very, very short period of time in order for the vote to have some form of integrity.
THE CHAIR: Just on that point, David, one of the questions that's come in from the audience is on this issue of whether those timelines need to be adjusted somewhat. I mean, the question is, is there always enough time to allow shares on loan to be recalled. You know, enough time to do the reconciliation, either pre or post the record date.
MR. MASSE: I have heard, for instance, if it's T plus 3 to recognize a trade, recall is a more burdensome process and it's not happening in T plus 3. I have heard anecdotal evidence that it's T plus 7, T plus 8. It's all over the map.
That's one problem. The other problem is that at the time the shares would have to be recalled effectively, if, let's say, you take an optimistic view that's it T plus five, you've got to recall at least record date minus five. How do you know that you're going to, if you're an institution that you're going to want to vote those shares? You are not going to see the agenda for the meeting until substantially beyond the record date.
In my case my record date was December 13 and I mailed on December 22. So there's a gap there which means that all the institutions would have to be recalling all of their portfolios well in advance. Is that happening? I can tell you it's not happening because another large institution that holds a position in our stock routinely can't vote their entire position.
And the frustration there is that when you have an issue on your agenda and you reach out to them and you lobby them hard, you know, to win their hearts and souls and you find out afterwards that, well, you know what, they're not going to be able to vote their entire position, you kind of feel that there is a little bit of a disconnect.
I'm not blaming the institutions. For instance, I understand Ontario Teachers is here and Paul Schneider can kill me if I'm wrong, but I understand that Ontario Teachers no longer lends and they no longer lend -- is that still correct, Paul? They no longer lend because of issues with voting.
But what if lending dries up? What's the impact on the capital markets and the efficiency of capital markets of lending drying up? I would suggest it's probably not a good thing.
I'm not sufficiently versed in the capital markets to understand what the absolute impact would be, but intuitively I don't think that's a good thing.
VICE-CHAIR TURNER: So if you increase the notice of the period, notice of the record date, does that solve it?
MR. MASSE: No, it makes matters worse, and I'll tell you why it makes matters worse. Because, in my opinion, if you look at the gap between the record date and the meeting date, okay, we have a September 30 year-end for instance, so it means that the Christmas holidays fall right in the middle of the range of possible dates for me.
So if I don't want to take a chance, which I don't, I kind of back-end load everything and I get going as soon as possible, so I have a very, very long record date. I typically go out to 55, 56 days, something like that. That period of time between the record date and the meeting date, think of that as the potential volume of issues in terms of over voting and reconciliation issues and all of that.
Think of the record date as a volume control. If you expand that period, you're increasing the volume of problems that you're going to have to deal with. If you contract that period, you reduce. If all you did was narrow the record date to, let's say, five business days, you would solve a large portion of the problem without touching any other gear or nut in the system. You can't do that as long as you're dedicated to paper.
And the perfect example of that is notice and access, okay. You go to notice and access as an opportunity to take paper out of the system, but it's still anchored in paper. And it came as a shock to me when I was doing my key dates because we used notice and access this year and we do a NOBO mailing, and I saw that, whereas I had a range of dates for every other date in my planning calendar, when it came down to delivering to intermediaries I was down to one day. If I couldn't have made everything work on that one day, I wouldn't have been able to use notice and access. Why? Because the deadline went from four or five business days before the -- I think it was the 20th day before the meeting or the 30th day before the meeting, it went to 40 days before the meeting to accommodate notice and access.
That just took my corset and, you know, it clamped it right down. Why? I understand why. Because you've got a mechanism that has to play where you allow people to get paper and so you've got to allow, being logical, additional time for those shareholders who want paper to get paper.
So the paper, under notice and access, ends up making the problem even more difficult, let's say, for an issuer to comply with.
COMMISSIONER LECKMAN: David, just picking up on your point on stock lending and recall, Scott, can you address that? That there are issues with recall and T plus 3, T plus 5, or failed recalls and why institutions don't get their shares back in time.
MR. MacDONALD: Well, again, from an institutional perspective, we almost never see an issue, and without getting, again, into a lengthy dissertation on securities lending, there is a number of fail safes, for lack of a better word, built into the process to allow lending to happen and to allow people to vote.
So, for example, and, again, I'm speaking as one custodian, I can't speak on behalf of others and their policies, but, again, if PSP and Teachers want to give me their custody business I'm happy to help.
Certainly from a lending policy perspective, we're not lending out a hundred percent of the shares of anything, right. There's processes around making sure that you have buffer. Even a percentage of the assets that you're lending out, there's only a percentage of those that people want to vote.
We do proactively understand which institutions want to vote everything all the time, certain things, certain securities, certain markets and so forth, and all of that is built in. So there is kind of margin upon margin upon margin that minimizes the occasions of that happening. Again, there are more technical explanations of how we can ensure it happens even in complicated situations.
So, you know, again, 99 percent of the time, from our perspective, the lending is not an issue, the processes are sound, the information we transmit to Broadridge on record date is a reconciled number so that the positions are always correct and everybody is happy.
THE CHAIR: So speaking of everybody being happy, I'm going to turn over to Zach as someone who has a number of different roles in the capital markets, but one of which is obviously as an asset manager. Do you have any comments on this discussion from your perspective?
MR. OLEKSIUK: Sure. Thank you for having me today. I would echo much of what my colleague to my right here has said about supporting a move broadly towards pre-reconciliation, to the extent it's not already happening.
The remarks I've heard here today lead me to believe that it is in many cases, but, nonetheless, acknowledge the challenges of the complexity of the system and the lack of transparency from the downstream perspective, the recipient of the voting entitlement.
In our own operations we seek to have a high degree of control in making sure we're receiving the balance for the accounts for which we're expecting voting entitlements, but our focus is on just missing entitlements, period. It's not on making sure that we are receiving the exact number of shares that we may be entitled to vote. And the reason for that is because of the lack of transparency into these upstream processes.
We have over 75 custodians on a global basis that our clients use to custody their shares, and so we don't know when there is lending, when there's lending recall going on, et cetera, in every case, so what we do is seek to look at our data internally, our trade date data, and make sure that we are, broadly speaking, receiving entitlements for accounts that we're expecting to be receiving entitlements. And to the extent that we observe patterns in missing entitlements that may lead us to believe there is an account set-up issue at the custodian, but we're not even looking to make sure that we are receiving all the voteable shares that we would expect just because of these various issues that are discussed today.
So we would support this upstream reconciliation, because we think to the extent that that's happening on a more consistent basis, that could help us even better improve our controls over our proxy voting.
VICE-CHAIR TURNER: Zach, you know, because you're from outside the jurisdiction, do you have a comment on the DTC issue?
MR. OLEKSIUK: Primarily, I guess our experience has been, and this is, I think, very BlackRock specific, but we actually are our own custodian in the U.S. market and there are certain Canadian securities that may clear through either CDS or DTC, and so we have internal controls to make sure that we suppress any positions that may be on the DTC side so that we only vote the position through the CDS, and that prevents an over voting situation. So we do have control for that, but, again, I think that's a BlackRock specific situation.
VICE-CHAIR TURNER: So will one institution, will the shares be reflected in CDS and potentially DTC?
MR. OLEKSIUK: That's right.
VICE-CHAIR TURNER: So it's going to overlap, and how you deal with that is suppressing, in your case, the DTC shares.
MR. OLEKSIUK: In our own processes, that's correct.
THE CHAIR: Lara, do you have any comment on this? You raise it in your opening remarks. Is there something more systemic that needs to happen with respect to that lack of continuity between DTC and CDS on the Canadian issuer?
MS. DONALDSON: The DTC problem is something that is inherent in the system as it is now. We're dealing with paper omnibus proxies, and that is from CDS as well. Everything is still received through a paper format so that we have the proper authorization to reallocate the vote.
The DTC adds complexity because of the rule that they're not allowed to send the omnibus directly to the transfer agent until the issuer provides an annual certification and direction to DTC allowing them to do that. Very few issuers are prepared to go that route or have the time to take that step.
VICE-CHAIR TURNER: Why are they not prepared to do that?
MS. DONALDSON: It's just one more thing that they need to do to make the process work and, frankly, it's not a high priority for some of them.
VICE-CHAIR TURNER: Presumably you could do a standing consent.
MS. DONALDSON: No, that's not allowed through DTC.
VICE-CHAIR TURNER: You have to do it for each specific meeting.
MS. DONALDSON: Correct.
VICE-CHAIR TURNER: Or each year.
MS. TROTTER: Could I just add to a couple of things? Lara is right, with DTC the issuer can allocate or assign the transfer agent to receive the information, but that has to come from the issuer and, again, has to be done on an annual basis.
A couple of other things with respect to Hooman, with respect to Broadridge being the reconciler for CDS. Intermediaries hold CDS, they hold in DTC, they hold in omnis. So we get a position. It makes sense for the final tabulator to actually have that vote entitlement and the intermediary and the tabulator actually agree on what that voting entitlement should be.
So there is a gap, and I think you said it as well, between the communication between the intermediary and the tabulator as to what that actual vote entitlement is. I think that's very important in terms of this process.
THE CHAIR: And so is the solution, then, in terms of more effective technology to allow that communication to happen?
MS. TROTTER: I think it's to ensure that the tabulator understands where the vote, or how much of the vote or what the vote entitlement is for the intermediary. That if the intermediary is seeing that their depository position and their shares that they have sent to Broadridge, there's a discrepancy, the tabulator is only going to see what the depositories have seen, unless an omni is created.
The nominees need to be able to communicate to the tabulator to say, hey, I hold in a registered position as well; you have to take that into consideration with respect to my entitlement.
So, you know, as we go onto the second topic this afternoon, but that communication and that confirmation of what the actual vote entitlement is and there is agreement between the two, eliminates some of the concerns that we have with respect to the 51 percent where there is over reporting because an omni was missing.
If we start that early in the process and we agree that there is X amount of shares to be voted by this intermediary, net of any omnibuses, other positions being held, registered positions, then you're starting from a whole place as opposed to from behind trying to catch up.
VICE-CHAIR TURNER: Is that a communication from Broadridge to the tabulator?
MS. TROTTER: It is a communication between nominee and the tabulator. The tabulator is the ultimate --
VICE-CHAIR TURNER: They're calculating the votes.
MS. TROTTER: Yes, the ultimate entity that says, yes, I understand where all your entitlement is and I understand how many votes you have submitted and, you know, at this point we're not in an over vote position because we have all of the pieces in place and we have -- we know exactly where we are. The nominee knows that they can't vote beyond their vote entitlement because that agreement has come through the tabulator.
THE CHAIR: Just on that issue, if I can turn to Lara, one of the audience questions is where there is a reconciliation issue can you describe in a little more detail the steps that you require to take to resolve that issue. And the question is asking both where they're managing the event because of a NOBO situation or where Broadridge is managing the event.
MS. DONALDSON: I assume the question is referring to a reconciliation issue in the -- if we receive more votes than we are able to allocate to a particular position.
THE CHAIR: Right.
MS. DONALDSON: Just to comment on Jeri's comment; the process is in place now for us to receive our omnibus proxies from DTC and CDS. We also receive the supplemental omnibus proxy moving the voting entitlement around, which we take as the votes that each of these brokers has the ability to vote.
I'm not sure how adding another layer of responsibility on top of the tabulator would help at all. If we need to communicate back to the intermediaries what their voting entitlement is, they should already know that. That should already have been identified on record date.
MS. TROTTER: Maybe I misspoke. I wasn't saying that the tabulator communicates to say what their entitlement is. The intermediary, if they are shown on -- and, again, this is a Broadridge intermediary on the over reporting prevention service that says that their voting entitlement has a discrepancy in terms of the number of shares that are in their file.
It is then up to the nominee to reach out to the tabulator to say I have shares in the register and, you know, that needs to be taken into consideration with respect to my vote entitlement.
I agree totally, it is the nominee's responsibility to ensure that the tabulator is made aware and knows where all of the shares are being held in terms of after their vote entitlement. It's not another layer, but it is a communication back and forth to ensure that everyone knows exactly where all of the shares are being held and that the nominee can vote up until is that position and be confident that they can vote up to that position so as we get through a vote confirmation process, that that confirmation can actually flow back down the chain.
MS. DONALDSON: But if the nominee has beneficial shareholders voting through that position, are they even going to know when they hit that point? Are they monitoring it through other systems available through Broadridge?
MS. TROTTER: That's right, yes, absolutely. So that as soon as the nominee hits the maximum vote entitlement, there are mechanisms in place to do that alert which Narry talked about in terms of, you know, that votes are pended and we go through that in our comment letter, and not released until the intermediary or nominee rectifies that situation, and rectifies it with the tabulator.
MR. MASSE: It sounds to me like all of those calculations are happening at kind of macro level where you're talking about the overall voting entitlement for a nominee. What I'm not hearing is the distance between, let's say, the beneficial holder and the tabulator.
I get the sense, because I have been doing a NOBO mailing for a long time now, I don't know how many issuers do NOBO mailings, but I get the sense that when you do a NOBO mailing, intuitively the controls are better, whereas where there appears to be a lot of fudging the system.
MS. TROTTER: I wouldn't say that the controls are better. I would say that the information is more granular. We have heard from these two gentlemen to say that they're required to balance daily, that their records are balanced every day, whether it's, you know, in their CDS file, whether it's in DTC, whether it's held in a custodial account. So according these gentlemen, the records are balanced. So then you have to go to --
MR. MASSE: Right, their records are balancing, but you don't know, there's no way to trace those, I mean, I may be wrong, but there's no way to trace those votes back to a beneficial shareholder.
MS. TROTTER: Of course there is. Each beneficial shareholder has their own control number and their own control number for which they vote on, and that vote, which, granted, is aggregated and submitted to the tabulator, but at all times the intermediary knows exactly which of their clients have voted.
VICE-CHAIR TURNER: But do you know when you get an omnibus proxy, can you track back through those numbers to see back to the beneficial owner?
MS. TROTTER: You can. So I think that in the consultation paper, you know, the CSA did a good job in terms of distributing where the first layer of intermediary may have what's called an omnibus account representing the second intermediary. That omnibus account creates that omnibus proxy and that voting authority flow down to the second intermediary.
That omnibus account is prevented obviously from voting because an omnibus was issued. But you can flow down to the next intermediary, and, as I say, we can see it as long as Broadridge is the service provider for that second intermediary, but absolutely you can see beyond that second intermediary who those beneficial shareholders are and who voted.
THE CHAIR: Lara, to get back to the question about steps to resolve reconciliation problems, according to Jeri this should not really be happening, but if it does happen can you explain what you do?
MS. DONALDSON: Sure. So on the last page of the handout we have actually mapped out what happened with votes that come in through Broadridge. They're registered and if the NOBOs have been mailed by the transfer agent it's very straightforward. The votes come directly back to us and they're allocated against that holder specific account. So there's no question about who has and has not voted.
What happens with the votes from Broadridge, so as the beneficial holders vote, those voting instruction forms are received back by Broadridge or the financial intermediary. The votes are provided to the transfer agent as a single proxy, so there's multiple beneficial shareholders compiled and communicated to the TA on that single proxy representing a block of shares.
The transfer agents will continue to receive these supplemental omnibus proxies, in some cases both in electronic and paper format. We continue to audit those and make adjustments as required.
The total votes represented on the proxies received from the FI are compared back to the FI's positions on the omnibus proxies and adjustments that have been made after the fact.
If there are sufficient shares, the total is drawn down on and the balance remains for the next proxy vote submitted. If there are insufficient shares, there is various steps that the transfer agent can take and they may do some or all of the following depending on the scenario.
We review the records to determine if another account can be located. There can be multiple accounts held by FIs in different names throughout different positions, different depositories. We review for any incoming supplemental omnibus proxies not yet processed. We can follow up with Broadridge for any missing supplemental omnibus proxies. We can follow up with the affected FI for missing supplemental omnibus proxies.
I would note that that step can only occur if we actually have the appropriate contact information with the FI. We have had some responses where they would say, well, Broadridge deals with that on our behalf. And then we provide details of the over vote to the issuer and their proxy solicitor for potential other steps to be taken.
Once all steps are exhausted, if the over vote cannot be cured, the tabulator will process the over votes in accordance with the instructions received from the issuer or the meeting chairperson. Some TAs will have a proxy protocol option that is their default as well which may be followed in the absence of specific instructions.
THE CHAIR: So what, in your experience, is the most likely instruction that is received from the issuer?
MS. DONALDSON: The most common one is the over vote option where the votes are allocated to the total available based on the percentage of for, against, withheld on the proxy received.
COMMISSIONER LECKMAN: So pro rata.
MS. DONALDSON: Yes. So as the proxies continue to be received, and they can continue to be received after an over vote is identified, they are tabulated and adjustments are made to the FI positions to reflect the increase or decrease on the votes.
Once the proxy cutoff has been reached no more proxies are tabulated and the final proxy tabulation reports are provided to the issuer. Revocations can be typically accepted up to meeting date, so if they are received they must be tabulated, the reports adjusted, and then it could potentially affect positions that have been previously over voted. And then revocations can also be received at the meeting which then require additional adjustments to take place at the meeting prior to the actual final tabulation of votes.
MR. TABESH: I just have one comment regarding over votes and I can only speak to contested situations, and this is where we come in. In a contested situation where vote is closed the chair often disallows those votes --
THE CHAIR: I'm sorry, the chair often disallows...
MR. TABESH: Disallows any over votes, if it affects the meeting, obviously with advice from counsel. Then it becomes our job after the meeting dates to go back and see whether we could cure, along with a tabulation agent, those that haven't been able to be cured, and that is a whole other process and there is disagreements back and forth.
So if the over votes can be cured beforehand, obviously it would take away a lot of difficulties post meeting.
THE CHAIR: Eric, can I turn to you. You haven't had a chance to get into the conversation yet, but from an issuer perspective do you have any experiences that you wanted to contribute to this discussion about the difficulties with respect to vote reconciliation?
MR. MILLER: You know, this has been a great learning for me through all of this. First of all, thank you for allowing me to be here.
What I find interesting is a lot of what we're talking about is trying to get it close. For me it's -- when we were faced with the situation we had last year, last proxy season, the difficulty was exactly what we've talked around the table here, and my first reaction was where have we lost our trail? What are the principles that we should be following and what are the sacred cows that we have let slip under the rug in order to facilitate the market?
I'm not saying -- I'm not bashing that side of it, because everybody wants to see an efficient market and everybody wants to see their stock traded properly and investors protected, but when it comes down to the vote, you know, it really came to my mind that the vote is as important today as buying and selling a security.
So we really have to go back, I think, to first principles and think about what it is that we're managing and managing it in a way that has actually let the vote become this, you know, as David talks about, you know, it's this pipeline that we can't see in or out of.
I appreciate that all the participants have sophisticated systems and are trying to manage it, but the market moves very fast. I kind of come back to first principles and would ask the question, you know, what are the needs that we need to have in place to make sure the vote is accurate, and I think some of that is actually really tracking shares, because as an issuer you have lost control. It's like a country losing control of its voters.
We have, to some extent, lost control of that process and I think if we want it to work we are going to maybe have to compromise on some of the things we need for principles where we lock down potentially, we lock down who gets the vote and when and if shares trade after or you're trying to manage all these different things we will, from an issuer's perspective, say this system needs to be open, it needs to be transparent, we need to have the right numbers and we're going to find a way to make sure the vote is correct.
I think from an issuer's perspective, being close enough and dealing with over vote and pro-rationing and all that is frustrating, it's frustrating, and I'm not sure that from an issuer's perspective we can really manage that. It's gotten so far out of our hands that we are relying on the market participants to make it work.
So that's sort of a general comment and I do agree with David that I think that if we could get to a more electronic system we would be able to have better timelines. I do think that investors today don't need paper. I think we're trying to satisfy the investor at the margin and it's impacting the entire system, so if we could get to a more electronic-based system and appreciate that most people do have access to a computer and do have access to their own printer and they don't need all of these time frames.
If we could do some of those things, I think that would be important from an issuer's perspective.
THE CHAIR: Thanks, Eric. Just following up on that, maybe I could ask some of the professionals in the room. One of the comment letters or perhaps several of them suggested this idea of a centralized system, similar to CDS for settlement processes that should be put in place for voting.
Is there an appetite to consider that? Is that something we as regulators should be considering in terms of, you know, trying to reduce the complexity of the latest system?
MS. TROTTER: Maybe I can take that first. CDS is one component of the overall voting process. DTC, omnibuses, custodial account. So having a system in CDS, or whatever, may only move an existing problem somewhere else.
We need to look at it in terms of the infrastructure that we have today, intermediaries, shareholders, they do cross border trades, they hold shares in Canada and the U.S. Forty percent of the accounts for intermediaries are U.S. issuers. So we have to look sort of beyond just the Canadian component, but look beyond that because the investors are impacted on both sides of the border.
VICE-CHAIR TURNER: But what conclusion do you take from that?
MS. TROTTER: Well, the conclusion that I take, again, what I said before is that the tabulator needs to understand what the total vote entitlement and where those votes are being held or shares are being held, and that the nominee's responsible for their book of record to ensure they don't vote beyond that vote entitlement.
VICE-CHAIR TURNER: But I think Mary's question was should you have an aggregator who is covering the whole system.
MS. TROTTER: But the thing is somebody in CDS isn't the whole system. So how do you bring in the U.S. intermediaries?
THE CHAIR: I was thinking about CDS in its settlement capacity. It's the centralized mechanism for doing that, so is there some parallel, not necessarily run by CDS, but by some other provider that would be a voting aggregate?
MS. TROTTER: I think that we just need to recognize that the voting and the shareholders of Canadian issuers aren't solely Canadian. That it does go beyond the borders. That there are investors that hold through U.S. intermediaries because we have cross-border trading, et cetera. We have come to a point where it can almost be borderless.
Granted that the Canadian marketplace is different and the rights of the Canadian shareholders through Canadian intermediaries is slightly different, but I think that we need to ensure that we take a very broad approach from a voting perspective. I don't think that we should be abandoning the existing proxy voting infrastructure because it does support so many other pieces of the capital markets.
THE CHAIR: Fran, what about your perspective? We haven't introduced the --
MR. DALY: We have been left to the last. That's okay.
I want to reiterate, I agreed with a lot of what Scott has talked about with respect to pre-reconciliation as it occurs at CDS between CDS and its participants, between CDS and DTC, et cetera.
We need to recognize that DTC is a unique situation in that DTC itself holds a registered position on their code with the transfer agent or with the issuer, but DTC also holds a position at CDS as a participant. So you've got two positions that DTC has to be responsible and accountable for.
Not being able to get that information flowing through and having it go directly to an issuer versus going to a tabulator or going directly to Broadridge or whatever does cause a problem.
If we were to take your point as to whether or not there needs to be a central tabulator or central entity that would be responsible for getting all of that information and if all of that information is, either from a regulatory perspective or from a market perspective, required to go there, then whether or not it's something that you tag onto the existing proxy process that we have in Canada or not or whether it's something new that we work with, if we don't have a reconciled position, if we don't know where everybody's shares are and if we can't account for each and every one of those shares we're never going to get proxy right.
MR. MASSE: And it seems to me that it's a settlement and clearing issue at the end of the day. That's why CDS was set up to begin with, because the registered format for shares just completely broke down, wasn't working, couldn't keep pace with the transactions in the capital markets and, you know, the system works for transactions and the system works for dividends, as we have heard, but no one thought voting was important.
So what happened is that if you've got all the logic gates aligned for the other pieces of the settlement puzzle, the information flows dramatically well, I mean, really, really well. We're talking about hours, we're not talking about days and weeks.
When you look at the voting side, the problem is that as a result of neglect all those gates are in disarray, and so the information goes in, pops out, and it's a little bit of a conundrum as to how the information gets through.
It does get through for the most part, but it doesn't get through, to Eric's point, in a principled and verifiable way. It's almost like you're throwing money around and people collect their money and mostly people get the money that they thought was coming to them. It's not an appropriate settlement and reconciliation method. And the only way you're going to get there is if you dematerialize, and it's not that complicated.
It's a question of normalizing data flows. It's not a question of having one grandfather system that looks after everything. That's not the way systems work anymore. You've got to decentralize and the only way to decentralize is to dematerialize the data flows and normalize them. At that point everybody can have separate back office systems, but when you get a voting report, a voting record is a voting record is a voting record, and you map it into your back office system and all of a sudden everybody can talk. It's an exchange meeting. I think that's what has to happen.
MS. RICE: I think it's important to reconcile and that will eventually solve some of the problems, but if you have a system where a broker is allowed to send out more proxies than they actually have, I'm not sure what reconciling really does for you.
If you've got somebody who is sitting with a margin account who thinks he's entitled to vote and somebody has been lent those shares who thinks they're entitled to vote, reconciling is just going to tell you that you've put more proxies out there than you've got and, as I said, in most cases it doesn't matter because most brokers don't get enough floats in that it takes them over their threshold, but unless you put regulation also in place to stop people from issuing more shares or more votes than they actually have, reconciling isn't really going to help you.
Reconciling itself seems to me pretty easy. As Jeri said, the nominee is just responsible to make sure they've got enough shares, whether it's registered with DTC or CDS, and before they mail out and make sure it matches, but if their system doesn't allow them to match I'm not sure how reconciling really helps you.
THE CHAIR: Well, I understood from what Scott said that that reconciliation was happening, so maybe I can ask him to respond, but Lara had also wanted to jump into this.
MS. DONALDSON: The concept of the buffer or if the proxies don't all get mailed there's never doing to be a over vote is a real concern for us. If there's not enough proxies out there to vote all the shares that are there, there should be an over vote. An over vote is indicative of a very serious and extreme out of balance situation.
With the way the capital market is set up in Canada, with the different options beneficial shareholders have for receiving material, there's no way an over vote should ever technically be reached if proper reconciliation is actually occurring at the broker level.
I would just like to say that STAC has promoted the idea of a central data hub, which would go along with dematerialization and the concept of full transparency in the marketplace. It would allow data to go to a centralized hub and have mailing agents with full competition in the marketplace, use the date to complete mailings on behalf of the issuer and their clients. We do think that is something that should be considered.
THE CHAIR: Thanks, Lara. Scott, can I ask you if you have any comment on what Penny just said about the role of brokers in sending out proxies and the difficulty?
MR. MacDONALD: I think that's more for Narry from a retail perspective.
MR. TEEMAL: We use the purpose of a vote report to do our reconciliation, our post reconciliations. We rely on that system. We validate our positions before we adjust -- if we have an over vote situation, we validate where our positions are. To Jeri's point, it may be that DTC hasn't reported the position or maybe CDS has picked up the wrong record data or something has gone awry, but we make sure we validate what we put into the system and we, from a reputational perspective, we're not going to put something out there that's not right.
So we go back and do our investigations, we update the Broadridge system because our vote will not go out unless we rectify the situation and we validate what we're sending out. Normally we validate the positions that we put on the report and reconcile.
MS. TROTTER: If I can just -- the over reporting positions that we have, you know, are they primarily resulting from missing omnibus proxies? Is that one of the main concerns is that the entitlement or the vote authority has been passed to a position where you're getting a vote in?
MS. DONALDSON: We certainly know that missing DTC omnibus proxies is a concern and will cause over reporting and over voting situations. We don't have problems with receipt of CDS omnibus proxies. Those come directly to the transfer agent.
As far as supplemental omnibuses, we don't know what we don't know. If we haven't received something, we have no idea because we don't have that line of sight into what is pending.
MS. TROTTER: But if you have a vote that comes in without a DTC position or a CDS position from an entity in Europe, for example, obviously there is a missing omnibus proxy somewhere to delegate that vote authority to that entity at that point.
MS. DONALDSON: Yes.
MS. TROTTER: So we have to look at what is the major issues with the system. I mean, can we resolve some of these issues by looking at where the omnibuses are and should there be an obligation to ensure that is. And that's when I go back to vote entitlement, but also, you know, that the intermediaries are saying that they're reconciling accounts and we have heard that perhaps some are adjusting margin accounts and some are not, but I think to Penny's point, maybe there's some regulation or best practice perhaps around that particular type of account that needs to be instilled, as opposed to looking at it from a perspective of the whole infrastructure needs to be revamped, redone, when we're trying to fix some of the problems that may be fixed in isolation or looking at that problem, what is the solution for that.
I think that's important is what is the systemic issue that is the problem with the system, without sort of saying let's blow it up and start again.
VICE-CHAIR TURNER: Except just to pick up a little bit on what Lara said, it's not good enough just to say, well, there are a hundred shares outstanding and a hundred are voted, and only looking at the over vote on that because the real question is are the right shareholders voting the right number of shares out of that hundred.
MS. TROTTER: Absolutely. And I think everyone agrees that the shareholder expects the vote that they have cast is being counted and accepted at the meeting. And we look to the nominees to ensure that their records are in such a manner that that situation is correct in that the right person did, in fact, receive the vote.
I think that we have the nominees and they have said that they reconcile their files. So if the nominees are reconciling the files, the tabulators are saying that there are over reporting situations, there is something, you know, when you say there's a blockage in that system, what is that? It could just purely be that the positions are held where the tabulator doesn't know where they're being held and, again, we need to make sure that those two entities are in agreement so that the nominee never votes over that vote entitlement that the tabulator --
VICE-CHAIR TURNER: But to make the point, it's not just a question of the over vote, it's a question of the underlying vote.
MS. TROTTER: Absolutely. And, again, when I go back to the nominee, the nominee has said that their underlying accounts are reconciled. That they reconciled their positions, they reconciled their records.
I can't look into the records to say yes or no because I don't know where all of their positions are held, so you have to rely on the nominee to indicate that this is my vote entitlement and these were all of the shares are being held.
THE CHAIR: Zach, can I go to you. You have been patiently waiting.
MR. OLEKSIUK: Thank you. I wanted to pick up on this point of standardization and dematerialization, if you will, and raise the OBO NOBO issue. From our perspective, that is an obstacle to achieving a more standardized system in this market.
We believe that most investors at the institutional level, at least, have their controls built around the electronic receipt and transmittal of proxy voting entitlements and the disparate treatment of NOBO holders and the way that we can receive a voting entitlement via fax or some other intermediary that's outside of our tested controls, is it a problem for us, and that has been treated as an exceptional case.
So to the extent that there may be other upstream implications for NOBO, OBO, we would suggest there being some thought to whether standardization of treatment of those various types of owners might improve the system.
THE CHAIR: Yes, and that issue certainly has come up in some of the questions that we have received from the audience, so I think we do have to reflect on that a little bit more carefully as well. Stéphanie.
MS. LACHANCE: As an institutional investor, we do appreciate, of course, the OBO NOBO system and we don't necessarily believe that by changing the OBO NOBO would necessarily bring greater clarity on the system.
What I'm really worried about, we have been talking about this issue for more than one hour now, and I really feel that we're looking at an iceberg where the tip of the iceberg is over voting and what's undersea is the potential for over reporting. And I'm not leaving this panel discussion with great assurance that we are doing it right.
I have more questions than probably when I started the discussion this morning. It's really troublesome because everyone is saying that they are doing a great job, but at the end we have some statistical information saying, well, more than half of the meetings we're in the over voting or over reporting system and we cannot attribute it only to retail because we know that the retail representation in the capital market is quite low.
Then it's the omnibus, then it's maybe DTC. At the end I just want to make sure that my vote is counted and I'm not sure that I'm carrying the full weight that I'm entitled to. And I'm really hoping that there will be efforts, and I thank the OSC for taking the leadership on this one, to take a look at the system and saying where it's not working, where in the plumbing system we've got either a bottleneck or we've got someone that is counting votes twice or entitlement to vote that are being sent out to multiple shareholders, but not all have the entitlement for voting.
But to get back to the point of the OBO NOBO system, I don't believe that by changing our mailing and communication with shareholder will necessarily resolve this, and I'm going back to the point where of course we're dividends. Gee, we need to find a way to make sure that it works as well for votes, and to take on David's point, it's a system that is going very well for when we're talking about dividend issuance. I'm not so sure why it's not working as well for voting, which is as important as any other aspects of share entitlement.
THE CHAIR: I'm just conscious of our time. We have several other people who want to jump in and a comment from the audience which I won't ask anyone to respond to, except just to say that the comment is the issue seems to be a lack of visibility, and I think various commentators have already said this on the panel, that there is something about the lack of transparency associated with the communication between beneficial owners and nominees and then the various participants who are involved with post record date reconciliation that maybe we need to look at.
I think the question is going to be what about the system needs to be rendered more visible so people can have more confidence in it.
Hooman, can I turn to you. You wanted to make a comment.
MR. TABESH: Absolutely. I was going to offer some practical suggestions. And to that point, in the long term I think we need to go to a technology-based system, however, my fear is that that's an initiative we're not going to see for another ten years.
In the short term, my suggestion would be, and it's really echoing Penny and Lara's suggestion, and as well Jeri. Maybe some regulation around the back office nominees, intermediaries having to report accurate numbers and having the backup documentation to back that up. I know that doesn't make me a popular person to suggest that, but maybe in the short term that's the right thing to do as we look towards what's a long term solution.
THE CHAIR: Thank you for that. David.
MR. MASSE: Just a couple of points on OBO NOBO. You know, when you try to get to the bottom of the value or the distractions of OBO NOBO, often that's a proxy for, pardon the pun, for the ability to vote. There was anecdotal evidence that some institutions prefer being OBOs, not because they're trying to protect their privacy or any proprietary information, but because they find that when they're NOBOs they have difficulty voting. Because when they are OBOs they're able to use the proxy edge system and voting is a well oiled machine, but when they are NOBOs, all of a sudden the vote comes in in kind of a fractured way and they find that they're disenfranchised.
It seems to me that when I look at privacy, because privacy issues and proprietary information issues are the prominent reasons why OBO NOBO is a requirement, it just doesn't withstand any logical testing.
When I get, let's say, like the Glass, Lewis Report, which I got a couple of days ago on our annual meeting, which is today, they proudly list out my top twenty holders with the positions and the whole thing.
I can go to SEDAR and I can see my top ten percent holders. I can go to EDGAR and I can see those who have filed down to five percent in the U.S. And then I get a monthly investor relations report that takes me down to the hundred thousand share threshold. No one appears to be squawking that their privacy is being violated, but you also know that when you see these results, they are the process of maybe a Ouija board and some voodoo in a back closet, because if a proxy solicitor takes that report and says, hey, you haven't voted your position, sometimes you'll get the answer I don't have a position in that stock.
So I don't see where the privacy issue is, but I do see the impact of OBO NOBO in terms of how the system can operate. I'll make my final point here that there are only two parties that have an interest in voting. There's the issuer on the one hand, and there's the investor, the beneficial shareholder, if you wish, on the other.
Everybody else is an agent, okay, and when you see the dislocation and the problems that you have here, what it amounts to is a massive agency cost and there's no reason for that.
I understand, Hooman, when you say that, you know, ten years, but I worry that you look at this and you think, wow, ten years, man, what's the point? Why tackle the problem?
I think if people thought that way when they were looking at the St. Lawrence Seaway, we would still have donkeys carting stuff to Toronto over a rutted road. So I think at one point or another there is an opportunity to be seized, really, by Canadian capital markets participants.
I don't see any downside for anybody, I really, really don't. From the point of view of brokers, right, if you've got normalized data flows and you can plumb the whole thing into your back office, it's just going to be blinking lights in a closet, you know.
You're not going to have people answering queries, I don't understand, I can't reconcile the position, where the heck did this go? Wait a minute, I'll send you a fax, okay? It just doesn't make a lot of sense.
I see from the brokerage side, if you suspend your fear for a second, okay, I see huge benefits. From the issuer's side, we'll stop talking about this because at least we'll know, and from the investor's side as well, you'll have a sense, okay, I know that vote has integrity. Are there going to be glitches? Yes, but they will be auditable and it will be statistical thing, you know, like occasionally a pedestrian gets hit by a car, right, as opposed to massive numbers of pedestrians that don't show up at work because they can't figure out how to get there, right?
VICE-CHAIR TURNER: I'm not sure about the analogy.
THE CHAIR: That does sound like a good note on which to have a break. Hopefully no one will have an accident during the break, but we'll take twenty minutes and then we'll resume at eleven o'clock. Thank you very much for that discussion.
--- Recess taken at 10:40 a.m.
--- On resuming at 11:00 a.m.
THE CHAIR: I think we should probably get started, please, again. Perhaps we could all take our seats and, in particular, our panellists perhaps could join us again so that we can get started.
So as I mentioned earlier, our second topic for the roundtable this morning is a look at end-to-end vote confirmation, and we're going to begin that discussion by having a fifteen minute presentation from Broadridge to describe the system that they are working on in the U.S., and then we can have a discussion about whether this is something that would help solve some of the issues that we've identified earlier today. Over to you, Chip and Jeri.
TOPIC 2: DESIGNING AND IMPLEMENTING END-TO-END VOTE CONFIRMATION
PRESENTATION BY MS. TROTTER:
MS. TROTTER: Good morning. We would like to thank the OSC for providing us with the opportunity to discuss the progress being made on end-to-end vote confirmation in the United States.
We have the privilege of having my colleague, Chip Pasfield, from our U.S. office, who is working with the U.S. tabulators, intermediaries and DTC on the vote confirmation solution.
Before turning over to Chip, it's important to understand the foundation on which the vote confirmation solution is being built. As a result of the Securities and Exchange Commission concept release on the U.S. proxy system in June 2010, a roundtable through the University of Delaware, Weinberg Centre for Corporate Governance was created to identify and develop realistic steps for an end-to-end vote confirmation solution.
The roundtable participants composed of issuers such as American Express, United Health Group, The Society of Corporate Secretaries, transfer agents such as ComputerShare and Wells Fargo; proxy solicitors such as Georgeson, brokers such as Goldman Sachs and Merrill Lynch, shareholders such California Teachers and BlackRock, Broadridge, DTC and FINRA, which is a financial industry regulatory authority in the U.S.
The roundtable agreed that unless elections are fair and transparent in both reality and perception, the critical governance control mechanism is endangered. It is also fundamental that, once cast, shareholder votes are properly transmitted and tallied. Corporations expect the elections of their directors and the outcome of other shareholder votes to be legitimate, above reproach and final.
Shareholders expect that their votes are received and tabulated as they have instructed and in a timely fashion. It is a belief of the roundtable participants that upon the implementation of the recommendations, that voting integrity desired by all parties can be enhanced.
To prevent over voting, the nominee must take steps to report only votes that fall within the nominees voting entitlement. Nominees will perform adjustments to beneficial vote entitlements before, pre-reconciliation, or after, post-reconciliation, distribution of voting instruction forms.
Since end-to-end confirmation is possible under either pre or post-reconciliation, the roundtable did not express an opinion on whether either reconciliation method is preferable.
The recommendations of the roundtable include that early stage disclosure by participants of share positions that are not clearly identified in the depository position and that the simultaneous granting of sub-omnibus proxy or mini omnibus proxy, and lastly, that the decrease of the participant entitlement positions by the amount of shares for which voting authority has been delegated to others will significantly aid tabulators in establishing overall voting entitlement.
Most importantly, by taking these steps early in the process, the stress of late stage high volume vote tabulation and reconciliation processes can be materially reduced and that all shareholders, whether large or small, institution or retail, are encouraged to cast their votes early in the solicitation period.
That there should be enhancements to exception processing. Tabulators should promptly communicate to vote recording entities the reason why votes are being rejected, and vote confirmation, which should be available to investors to obtain via the internet or other electronic means on a demand or as needed basis. If the tabulator confirms back to the nominee that the nominee's aggregate position was voted in accordance with the nominee's instruction, the nominee will then be able to confirm back to its client that the client's vote was received on a timely basis, accurately recorded, and included in the final tabulation of votes, thus completing the confirmation chain from tabulator to nominee to shareholder. Furthermore, the proxy voting system as a whole should be regularly audited and confirmed to be accurate, reliable and efficient.
So at this time I'll turn it over to Chip to describe the U.S. development with these fundamentals in mind.
PRESENTATION BY MR. PASFIELD:
MR. PASFIELD: Thank you, Jeri, and thank you for allowing me to come up and speak to you today.
What I would like to try to do is just give you a sense of the steps that we have taken down in the U.S. over the last couple of years, where we are today and where we hope to go tomorrow.
As Jeri said, a roundtable was convened down in Delaware, we had a good cross-section of the industry there. Came out with the white paper and identified some points to be looked at.
I think probably the most unique part of this whole effort is that the SEC included the concept of end-to-end vote confirmation in their concept released in 2010, but what was unique was that they didn't regulate, they didn't want to regulate. They, in essence, said to the industry in the U.S. this is something that we think is inherent, a need that's inherent, and we don't want to take the time or the focus because we have a lot to deal with, we want you to solve it, we want the industry to solve it.
So that's what we started with, the premise that we started with, and immediately after that roundtable in the proxy season of 2011, one of the participants, United Health Group, was actually the first issuer to step forward and say, look, I want my shareholders to have the ability to confirm their vote and we want you to build something coming into Broadridge, we want you to build something to allow them to do that.
So that was really the first shot, first test pilot premise to allow shareholders on the beneficial side and the registered side to be able to confirm outside the Proxy Edge platform that we have been doing for a number of years.
That was relatively successful. We have learned some things coming out of it. The next step was to come back and convene the industry to say now what we need is some cooperation across the constituents.
So a steering group was formed, and that was formed in 2012, in June 2012, and it was comprised of members of the STA, certain regulators, Broadridge, banks, brokerage, and that group said we understand the concepts, but what we need is a group to tactically identify what's needed on a systemic basis to get this done. So a working group was formed out of that steering committee.
That working group identified two major points. One was the ability for a tabulator to accumulate, I'm going to use the term omnibus proxy, and I have learned a lot today and one thing I've learned is that we use different terms to mean different things.
A U.S. tabulator and a Canadian tabulator as well will receive omnibus proxies, I think sometimes referred to as supplemental proxies or mini omnibus proxies. These are documents that are transferring voting entitlement, not DTC or CDS, but at larger institutions into names of smaller institutions that are maintaining an account on their books. In the U.S. it's a record holder bank and a respondent bank, those are the terms that we're using.
So that was identified as an issue to cover low hanging fruit, to say this is a problem because there's many of these, it's currently produced in paper form or provided via a PDF file. So we had to solve that issue as step one.
That was done by creating an electronic file transfer mechanism that took that information, put it into electronic form, and we allowed transfer agents to come in and pick that information up. They could pick it up, ingest it into their tabulation systems without having to enter it manually. We circumvented that manual process.
To give you a sense, there were files made available in February of 2012. We have two tabulators today that are receiving the file, ComputerShare is one, and American Stock Transfer, working out of Brooklyn is the other. I believe ComputerShare is, in fact, using it with their system. I'm not sure of the status of AST.
So the other thing that became very apparent was that there had to be a mechanism for the tabulator and the intermediary to talk to one another. So a process had to be developed that would allow an issuer that was not being tabulated by Broadridge, outside the Broadridge tabulation process, to offer confirmation to their shareholders.
In order to do that, the tabulator and the intermediary had to come to agreement on the voting entitlement. So we endeavoured to create a communication platform, which is like a work flow type application, that would allow the intermediary to go in, view their position on a given issuer, all right, and agree or disagree with that position.
So let me see if I can make an example out of that statement. If Merrill Lynch goes into the work flow application for IBM, identifies the position for Merrill Lynch has one million shares, that, by the way, is coming from DTC, so DTC is communicating that entitlement as a baseline. But Merrill Lynch looks at that position and says, well, I have a million shares in DTC, but in addition to, that I have a hundred thousand shares in registered form on the books of IBM. They have the ability then to go to the tabulator and say I have a hundred thousand shares in registered form in my name, firm name, on the books of the IBM. So we establish that communication link. That, by the way, is still in process.
Conceptually, that's where we started and now what I would like to do is just give you a status of where we are today.
As I mentioned before, we have automated the omnibus proxy files, that's out there, it's working, transfer agents can pick them up and take advantage of that. We also recognized that nominees that need to address their beneficial holder positions in some cases have a significant number of accounts. We talked a little bit about margin accounts before. Some firms, as you know, will go in and they will identify their margin accounts, they will identify the number of shares that were loaned as an aggregate number, and they need to adjust those accounts accordingly.
There's two ways to do that. You go in and try to individually identify each account, which is almost impossible. The second way, at least to my knowledge, is to take that position and drive the shares down for that account. So we create a facility that allows the intermediary to come into the system and to adjust positions based upon a percentage or an aggregate number.
The third item which I just touched on was this communication tool. This has become quite large, okay, fairly detailed, but it's grown that way only because of the input and the cooperation of the group that was working on it.
I think it's safe to say that this is a significant industry effort, but the real point and common ground that was reached was quite gratifying actually. So we're still in process with the communication tool. We hope to have that in place by mid-February and hope to put it into use, at least to a certain extent, for practices in 2012.
The other focus that we have is to reach out to all our clients on the Broadridge U.S. side and ensure that they can participate in the over vote service, hopefully down to even the respondent bank level, so kind of peel that onion back a bit, and to focus on the integrity of the relationship between the respondent banks and the larger banks to make sure there is a valid connect there.
So that brings us to the 2012 season. At this point we have two things going on. We have the agreement of four U.S. transfer agents that they will select five issuers that they are tabulating for, and we will use that group as a pilot for the 2012 -- or the 2014 season, going backward in time there.
Thus far we have commitment from ComputerShare, Wells Fargo, and we're waiting for AST and RNT.
In addition to that, the group has identified that we needed a document so that when this tool is rolled out there is a best practices parameter around the use of the tool. And, specifically, they were looking at trying to avoid a back and forth free form text type question and answer going back and forth, trying to debate whether they have a position or not, so we spent a lot of time on looking at the number or the specific circumstances or instances where a nominee would need to request additional shares above and beyond the depository position. Registered shares being one example.
So there was a dialogue back and forth between the transfer agent and the nominee to determine what information the tabulator would need to authenticate that position. That's a work in progress. It's coming to the end of the job hopefully fairly soon, but registered positions was number one, multiple positions was another. I'm not sure what the environment is in Canada, but in the U.S. there's many instances where a nominee will have multiple DTC numbers or accounts, so the tabulator needs to take into account not just a primary, but, in fact, multiple numbers in certain cases.
So we have agreed to come up with a list, which actually is available today, but a more expansive and updated list that will identify Merrill Lynch has a DTC position in 161 in DTC, but they also have 5198. That's the best example that we've used over and over, but that's the reality and tabulators know that, but this is really to confirm it and to give the tabulators some comfort in viewing that document.
So at this point those two issues, how to identify and reconcile fails, those type of instances, is still a work in progress, but I think we've come a long way. I'm very hopeful that the pilot for this season will be as successful as the progress that we've seen to come to this point has been.
VICE-CHAIR TURNER: Chip, let me ask you a couple of questions.
MR. PASFIELD: Sure.
VICE-CHAIR TURNER: If you're the intermediary, the intermediary is talking to the tabulator, so they both agree as to what the number of shares being voted is and so they're going to agree or adjust. But the tabulator doesn't know the breakdown from the intermediary in terms of their beneficial holders.
MR. PASFIELD: No.
VICE-CHAIR TURNER: And the system doesn't track it down to individual beneficial holders?
MR. PASFIELD: No, sir.
VICE-CHAIR TURNER: Okay.
THE CHAIR: Anything else from you, James?
VICE-CHAIR TURNER: No.
GENERAL DISCUSSION OF TOPIC 2:
THE CHAIR: David, can I turn to you and ask for a comment perhaps on to what extent you think that this type of innovation would help us in Canada?
MR. MASSE: I have been hearing about that initiative for a while. I heard about it for the first time a couple of years back at the U.S. Corporate Secretary's Conference and there was a fair amount of skepticism expressed at that time and the issue being that it's referred to as end-to-end vote confirmation, but it's really kind of like middle to end, it's not end-to-end. Maybe middle to end is an unfair characterization, but I think that what happens is that it gets reconciled to that macro level at the intermediary, but it doesn't make its way down to the beneficial account.
So that you know that there's no overvoting in kind of a macro sense, but you're not getting down to the micro level to know whether the right share is voted.
My understanding, I may be wrong, Chip, but my understanding is that what's happening is that when there is an overage it's getting pro-rated at the intermediary level, correct?
MR. PASFIELD: It can. It depends. I think we can go back to the point that says it's the intermediary's responsibility to identify shares in their position and control on the record date. That's inherent. That's incumbent upon them to do that. If that's done, then the flow downstream will be consistent and accurate.
What this tool will allow is, I think, a couple of things. Number one, it will provide an easy mechanism for the nominee to go in and look to see what their entitlement is at that point. If they disagree with it, it provides a good communication, an easy communication tool to say I've got shares someplace else, they're legitimate shares in my possession and control, but they're not in DTC, and provides a mechanism for that communication.
MR. MASSE: But if those shares were in the register, though, I would have thought that's the easiest thing, the lowest hanging fruit to be able to check. The TA has the register so all you need to do is provide a little bit of identifying information, they should be able to track down the registered side of that equation really easily, I would have thought. No?
MR. PASFIELD: I think from a tabulating point of view you're right in that it could be somewhat apparent, but you've got to take that step to look. So if the nominee simply reports the position included in their beneficial position they're going to over vote because if the tabulator hasn't found it --
MR. MASSE: They will be seeming to over vote.
MR. PASFIELD: Correct.
MR. MASSE: When they might not be because they've got a registered position as well.
MR. PASFIELD: Absolutely.
MR. MASSE: There's always challenges in the register, right, because I could be in there as D. Masse, D.G. Masse, David Masse, Masse, David, right. You know, I could have my cottage address, my home address, my office address, so I might show up as five different holders, right?
MR. PASFIELD: Right. So there is a lot of dialogue around what type of information the tabulator would need to absolutely identify that. We went back and forth. It was not really the brokerage going back and forth, it was more the nominees talking with the tabulators.
Tabulators were saying, you know, I have an account number on my registered file. The tabulators say I have no idea what that number is. Well, what about a certificate number? They're trying to come to common ground and I'm not sure exactly what we're going to settle on, but I think the fact that the issue has been fleshed out and there is a dialogue around it is very, very positive.
MR. MASSE: Mr. Turner mentioned earlier in the discussion about identifying or identification numbers or whatever the heck, right. If accounts, if ultimate beneficial accounts were identified, uniquely identified at the KYC level when a broker opens an account for whoever it might be, that would go a long way, potentially could be a tool to allow some of this reconciliation to happen in an accurate way, without necessarily fessing up private information. There's ways now that you can have authentication and unique identifiers without in any way compromising anybody's privacy. That would allow you to go the extra mile and get down to the account level.
MR. PASFIELD: I'll respond. I'm not exactly sure of all the thoughts around that. I'm not familiar with that process.
MS. TROTTER: One of the pieces that Chip didn't get to is the shareholder themselves. So if the nominee has not exceeded their vote entitlement, then the chain of confirmation can continue down to those shareholders, whether they're Proxy Edge, whether they use another proxy agent or they're retail.
So it does flow down as long as, when you talk about the top level, as long as the vote entitlement has been accepted and the nominee has not exceeded that vote entitlement, then vote confirmation from the tabulator to the nominee down to the shareholder can occur, which is end-to-end.
MR. MASSE: Yes, that would be end-to-end. Is that occurring? My understanding --
MS. TROTTER: That's part of it.
MR. PASFIELD: The ultimate goal or the ultimate result is that the shareholder can come into our site, to proxyvote.com. As long as their custodian has been already identified to be in line with their entitlement they can receive a vote confirmation, so they can see what they voted, they can seen when, and they have the ability to confirm that the vote was included in the tabulation.
MR. MASSE: But, I mean, there's incidents, when we're talking about over voting, over reporting, we're talking about the nominee position being exceeded. Presumably if you eliminate that problem, you could still have a kind of layer of over reporting, it just wouldn't be visible, right.
MR. PASFIELD: Layer of over reporting? So if the nominee's position is in line with DTC or their entitlement, number one, and number two, they have done their due diligence to validate their individual positions, if those two components are met I think we're okay.
COMMISSIONER LECKMAN: I'm sorry, but aren't you really talking about one for one reconciliation and then end-to-end vote confirmation?
MR. MASSE: Right. I mean, that would be the objective, right? I'm not sure that's happening.
MR. TABESH: It doesn't necessarily get rid of over voting, it just highlights it. To the extent that your votes weren't count or pro-rated, then that gets fed back to the nominee, who realizes that not all of their shares were necessarily voted because they may have, they or somebody else may have over reported. Is that right?
MR. PASFIELD: Well, it provides the opportunity for the nominee to see what their entitlement is, adjust their accounts if need be, or to reach out to the tabulator to identify additional shares outside the --
COMMISSIONER LECKMAN: Sorry, Chip, that point where you say adjust the shares as need be, that's, I guess, the point that we're trying to dig deeper into, which is, I guess, the pre-mail reconciliation, which is that's the part we talked about the nominee adjusts. I think that's kind of where we're kind of digging into here.
MR. PASFIELD: Okay, so pre-reconciliation, we'll use that term, or post-reconciliation, either process is, at least my understanding, where a nominee and brokerage is going to look at their stock record. They see that their position for margin or fail, whatever the case may be, is out of sync with their depository position, so they need to adjust something.
If that is to reduce their margin accounts or to adjust for a fail, whatever they need to do to bring that position, that total aggregate position in line with their entitlement. That process is going to require adjustment at the account level. Does that help?
VICE-CHAIR TURNER: But then did you say that if I'm the ultimate beneficial holder I can go into the system and get confirmation that my shares were voted?
MR. PASFIELD: Yes. That's absolutely the goal. Just to give a little bit more of a view into it, we have actually done end-to-end confirmation for five companies in 2012 and six in 2013 and the results were, I think, as expected.
We had a large number of institutional shareholders come in and confirm their votes. We had relatively small number of retail holders come in to confirm their vote, both on the beneficial side and the record side, but that was, I think, expected. But I think it was successful in that it showed that that process can work.
Now, given all those issuers were tabulated by Broadridge, so we were doing the communication, if you will, from Broadridge back to the broker or intermediary, so what we're doing now is the next step. To have the issuer tabulating outside of Broadridge, be able to do the same thing, but facilitate the communication between the broker and the tabulator. That's the process that we're building.
THE CHAIR: Lara, you had wanted to make a comment?
MS. DONALDSON: Just one comment on the fact that David mentioned it's not true end-to-end. I appreciate that the shareholder can go into the Broadridge system to confirm that the vote has been received by the tabulator, but it doesn't fix the issue of what we often experience at shareholder meetings as the scrutineer and as the issuer themselves with shareholders showing up at the meeting and saying do you have my vote. They're a beneficial holder, we can't identify them, we still don't have the methodology by which we can say, yes, we have your vote, it's part of the vote that the chairman is casting on your behalf. You're being represented at the meeting and your voice is being heard.
That part is still missing, so you don't really have true end-to-end for the holders who don't have access to the Broadridge system when they show up at the meeting because the issuer doesn't have that level of transparency.
MR. MASSE: I guess it's not really relevant to that discussion, but that's the thing that really, really gets my goat. The way the system works now, at virtually every single annual meeting in Canada, it may not be the case in the U.S. and it may not be the case where Broadridge is tabulating, but you've got shareholders coming in and I can tell you -- actually, I used to say it was more than 80 percent, but, in fact, it's more than about 98 percent of our beneficial shareholders, and we don't kick anybody out at the meeting.
So when they come in and they show up at the registration desk they get equal treatment. But in the case of a registered shareholder, you know, our transfer agent says, oh, yes, Mr. Smith. Yes, there he is. Yes, Mr. Smith, welcome to the meeting, go have a seat, glad you're here.
When Jones shows up and he's got a far larger beneficial position, they go Mr. Jones, Mr. Jones, Mr. Jones, they come up dry. They don't give him the bum's rush. They say go have a seat and they give him the same speech.
If there's a ballot, you know, they both raise their hands, they both fill out ballots very diligently. It goes into the back room and Smith's ballot is diligently counted and then Jones is not so much. Round file, right? But nobody comes out afterwards and says, oh, by the way, Mr. Jones, we trashed your ballot.
So they both go home feeling pretty good about themselves, right, but the fact of the matter is there is a kind of a charade going on and it's an uncomfortable place to be, to be quite frank.
VICE-CHAIR TURNER: But if the system worked, that beneficial holder should have the confidence that, in fact, the vote was recorded.
MR. MASSE: Exactly, and I don't see why, like, for instance at its source it's a corporate law problem. It's not a securities law problem. It's because the corporation statutes are still in the Victorian age and we still have to register and all that stuff and that stopped working probably twenty years ago, but the corporate law people haven't kept up or they've kept up very, very marginally.
There's no reason why, with adequate systems, you know, let's say a distributed voter authentication system or whatever you want call it, there's no reason why you couldn't treat the beneficial and registered shareholder on exactly the same footing, give them exactly the same right. They can attend the meeting, they can do shareholder proposals if they want to, they can vote at the meeting, they can vote by proxy.
This whole distinction between voting instruction forms and proxies, for instance, is nebulous to most people. If you ask the average shareholder did you get a voting instruction form, did you get a proxy form, they don't understand. Why should a beneficial shareholder who wants to attend a meeting legitimately, why should they have to appoint themselves as a proxy holder? That's completely counter-intuitive. And even though we explain it in our proxy circulars and stuff like that, this is not the security regulator's problem, this is not the industry's problem, this is the corporate regulator's problem.
They ought to be here. They ought to be here, they ought to be listening. You know, Industry Canada has put out a consultation paper at last on some of these issues, maybe not all of them, but they've got to be held accountable for the fact that they haven't kept pace with what's going on in the markets.
I think if on the beneficial side you had a good voter identification system that was at least as good as the register, right, you could eliminate the distinction and solve some of this problem.
MR. TABESH: Just the corollary to that, if a shareholder wants to come to the meeting and vote at the meeting they would first have to register the shares. They would have to go through a bunch of hurdles, register, and then be able to do that, otherwise there would be no chance. But I really haven't made up my mind, I want to come to the meeting and ask the question and vote my shares then. You can't, right? So you're right, it is a problem.
MS. TROTTER: There is a different mechanism.
MS. DONALDSON: They need to follow the appointment process set out on the voting instruction form and then go through all the steps required so that their name is with the tabulator at registration. There is a process, it's long and convoluted.
MR. MASSE: In fairness, I think it improved under the latest -- but I have no visibility as to whether it's improved to the point where it can work.
In 2011 I think somebody at ComputerShare had done the analysis that in order for the system, the way it used to work, in order for it to work, paper would have to cross Canada Post seven times or something between receipt of the materials and the meeting, which I don't think it could cross two times.
MS. TROTTER: It's more electronic now.
MR. MASSE: I think it works a little bit better.
MR. TEEMAL: We appoint people from time to time to go to meetings.
THE CHAIR: Sorry, Narry, can you say that again?
MR. TEEMAL: We have shareholders who come up to us, even beyond the Broadridge platform, to attend the meeting. It's just giving them a piece of paper that says you can attend.
MR. MASSE: And, Lara, is that showing up on the ComputerShare side? They would show up as, I can't remember the term for them, appointees.
MS. DONALDSON: Right. So the process that was removed is the legal form of proxy where the paper did have to go back and forth numerous times, and that has been removed from 54-101, but now what we see coming in through the Broadridge vote is a separate vote that's an appointee other than management, which is how it's typically referred to.
So that individual is set aside, we draw down the number of shares from that broker account and set them aside for that individual and then when they show up at the meeting we have their name, we have their shares, we have their voting pattern, whether they have been instructed how to vote or it's discretionary, and then they are able to vote once they appear at the meeting, but the vote does not get cast until they are present.
MR. MASSE: That would be whether they're OBOs or NOBOs, right?
MS. DONALDSON: Yes.
MR. MASSE: That's a huge improvement.
THE CHAIR: Narry, can I turn to you as an intermediary, and you've already explained earlier what your back office systems are. Do you have any comment on this development in the U.S., this end-to-end vote confirmation? Is this something that you could see being implemented?
Would it change any of the processes that you need to engage in in your back office?
MR. TEEMAL: Well, it would be an improvement to the process currently. We have investors who ask whether or not their vote was accepted. This way they would be able to see on the system, electronically they would be able to see whether or not their votes were accepted.
You know, the large institutions that we deal with, some of them ask for this, can you confirm if my vote was accepted. We don't get that right now, but if we had the system it would be a good improvement and we would be able to validate, which we do now to some extent, the positions that are missing. We could do that directly with the tabulator.
THE CHAIR: So would it require more communication with the tabulator than you currently do?
MR. TEEMAL: It would, which would be a good thing. Understanding from Lara, the DTC sometimes doesn't give the omnibus proxy. We're not aware of that right now. So that's why I think most of these over votes occur, because DTC hasn't given up the omnibus proxy because they don't have the share --
MS. DONALDSON: Just to clarify, DTC does always issue the omnibus proxy. It's where it ends up that's the issue.
It goes to the issuer's address. If the address is incorrect, then they have no way of correcting it and the issuer then needs to take the extra step once they've received it of forwarding it to the transfer agent. But DTC does always issue the omnibus.
MR. MASSE: Yes, except I don't think they're mailing it anymore. We had to go through a whole rigmarole last week to get it. We had to go in to DTC to get it and it was an afternoon of back and forth and head scratching.
MS. DONALDSON: There is an on-line system they have set up, which is optional still, to my knowledge. They are still issuing paper.
MR. MASSE: They told us they wouldn't. I guess we're not big enough.
MR. TEEMAL: There would be more transparency for us to be able to reconcile and to make sure there is no over vote situation.
VICE-CHAIR TURNER: Can I just confirm, because I think I heard it. You said that where you give the authority to the beneficial holder to show up and vote at the meeting, you then adjust the holding and it has to come off of ---
MR. TEEMAL: We reduce that on the Broadridge system simultaneously.
MS. TROTTER: Just to be clear, the vote entitlement is still there and it's the tabulator that reduces the total entitlement for that intermediary to account for the individual that will be showing up at the meeting. But the entitlement has to be there at the beginning in order for the acceptance of that appointee.
COMMISSIONER LECKMAN: A question for Chip or Jeri. On this end-to-end system you have, would that system enable an audit across all the intermediaries if the system was instituted or when it's instituted in the U.S. fully?
MR. PASFIELD: We really didn't address an audit question. When you say audit, you're saying to determine whether the position of each intermediary matched DTC?
COMMISSIONER LECKMAN: Yes, and to verify.
MR. PASFIELD: In reality, that's what the tabulator is doing because the position that the intermediary has seen on the work flow application is coming in from DTC, but separately DTC is providing numbers to the tabulator. So they have the authority or the authentic entitlement, and the nominee is looking at the same number presumably, but ultimately the tabulator's job is to ensure that the nominee's votes not exceed that entitlement.
That kind of a check and balance, perhaps, gives you a bit more comfort on the audit question.
COMMISSIONER LECKMAN: Just to follow up, when we were talking about the nominees adjusting their positions or trades or share lending, whatever, why would there have to be any adjustments anyways, because they all state that they reconcile every day anyways.
MR. PASFIELD: If they've reconciled then there is no adjustment, you're absolutely right.
COMMISSIONER LECKMAN: Okay. Thank you.
THE CHAIR: Anybody else want to make a comment on this issue from their perspective about the end-to-end confirmation? Penny, do you...
MS. RICE: I was just going to ask one question. Because the proxy voting system is always fluid in that your vote may be accepted today, but tomorrow it's not because they've got more shares than I have or a mini omnibus has come in and taken my shares away from the broker, do they continually update it so that right now it shows accepted, but tomorrow when it gets pro-rated does it go back and overwrite the initial confirmation? How does that work?
MR. PASFIELD: This is at the shareholder level?
MS. RICE: Yes.
MR. PASFIELD: The concept is if there's any adjustment needed, it's done up front and the agreement between the intermediary and the tabulator is affected at that point. This is now well in advance of having anything being issued at all.
Once that agreement is made, unless there's a change to it, which, you know, we'll learn as we go here, but we don't anticipate a need for that, there should be no issue.
MS. RICE: Does that happen on a timely basis? I'm just thinking, by the time you get the beneficial shareholder information and you reconcile it back to what the transfer agent thinks you're supposed to have, I assume all that happens before you mail it? Is there enough time to do that and get a timely mailing out?
MR. PASFIELD: We believe so. We believe there is. Again, this is a work in progress, it's a pilot. In anticipation of not being in a perfect world, we have a mechanism that we've also discussed that will trigger communication between the tabulator and Broadridge should a vote go out that, for whatever reason, still exceeds entitlement, not that we can perceive the coming of everything on the front end, but if that happens there is a mechanism.
VICE-CHAIR TURNER: One of the questions, I think, from the comment letters was whether or not someone at the intermediary should certify the appropriate allocation of the voting rights across the beneficial holders. Anybody have a view on that? Sounds like a good idea.
THE CHAIR: Maybe we should ask Narry to comment, since he might be someone who has to certify.
MR. TEEMAL: Our position, the reconciliation that takes place is audited, right? We wouldn't make a change unless it's valid. I mean, if somebody was to challenge us, we would have to be able to back up, you know --
THE CHAIR: When you say it's audited, what do you mean by that?
MR. TEEMAL: The books and records of the broker is audited from time to time -- not time to time, it's audited every year. There's spot checks, there's a lot of different things that happen.
VICE-CHAIR TURNER: But that's not to determine allocation of voting rights.
MR. TEEMAL: No, it's not. It's to determine the position is accurate and that's the basis, we make sure that our positions reconcile.
VICE-CHAIR TURNER: The positions being your beneficial clients?
MR. TEEMAL: Correct, yes.
THE CHAIR: So where does that lead you to in terms of this discussion about certification?
MR. TEEMAL: If I had to certify a position it wouldn't be an issue. If I had to certify that what I'm reporting is correct, that wouldn't be an issue.
MR. MILLER: Wouldn't that also leave you with the same issue on the retail side? You were saying with the margin and being able to understand that, so you would have to accept that because you're certifying for voting purposes.
MR. TEEMAL: Well, margin accounts make up two percent of my overall positions, right, and it's integrated with the other positions as well. I mean, as Chip said, we could probably look into pro-rating percentage. There's a lot of options available to us with this new system. It's something that we need to look at and procedurize.
MR. MILLER: My only comment from an issuer perspective is that we are still struggling to get to all the shareholders when you need to get to all the shareholders. So this is a system that works, I think, for institutions, and you're going to get the majority of those confirmed and I think that's important, but I think, from an issuer's perspective, we're still missing what I would consider the nuts and bolts of it, which is how do we get information and get information to all of our shareholders so that they can vote in every circumstance, and I'm not sure that addresses that at all.
MR. MASSE: During the break I had a comment from someone here about small cap issuers who feel that they are very, very substantially at a loss with the current system and that it has dramatic impacts on then in terms of their ability to not only reach out to their shareholders on votes, but also to deal with financing issues and reach out to their shareholders to see if they want to participate in additional rounds of financing, particularly for issuers that don't have income that are in, say, the mining industry. I think it's a huge issue.
I gather that there's a huge sense of frustration from that quarter that they're completely left in the margins by this system.
THE CHAIR: Can you elaborate on how this occurs? Is that because their shares are more likely to be held as registered shares, as opposed to in intermediary accounts?
MR. MASSE: No, they're being held in intermediary accounts and they just don't have any visibility into their shareholder base. They're small enough that they're off the radar of the large institutions, so they're kind of marginalized. My understanding is that they're marginalized right now and it's a source of --
THE CHAIR: But if the system works for issuers, as Narry has described it, that reconciliation should be happening in the same way, even if it's a small issuer, no?
MR. MASSE: Except that they're not getting to the information. It may be reconciled, let's say, at the intermediary level, but the issuer themselves is not able to get at the information, so they can't identify their shareholder base.
MR. TEEMAL: Are you talking about issuers that don't go through the Broadridge process or are you talking about issuers that just try to get information out to the end beneficiary?
MR. MASSE: That's my understanding.
MR. TEEMAL: So people that are outside the Broadridge system. So internally we have a process. If you have NOBO clients and they want information, we can release that information and they can perform their mailing as they see fit.
The OBO clients, we go through a different process. We can let those clients know via the investment advisors or whatever, we do have a process if those issuers approach us as a broker and they want to pass that information on to the end investor, we do have an internal process to address those.
MR. MASSE: So I think, you know, that's kind of early stages, but I gather that as a society we're going to be hearing more from that quarter. We have been engaging with them increasingly over the past year or so and I think there may be a voice coming out of that sector.
THE CHAIR: Do you have a sense of what proportion of issuers are not using the Broadridge platform?
MR. MASSE: No.
MR. TABESH: I have a question. I understand at CIBC you have daily audits. Is it your understanding that every intermediary and every broker has the same process, substantially the same as yours?
MR. TEEMAL: We all have to play by the IIROC rules, right? We have strict, rigid processes in place to make sure books and records are reconciled. So I assume every broker would play by those rules.
THE CHAIR: Stéphanie, you wanted to come in on this conversation.
MS. LACHANCE: Yes. Just going back to the system that Broadridge is working on. First of all, thank you very much for the effort that you're putting, probably bringing a bit more transparency or at least confirmation for shareholders. That's really greatly appreciated, but we have to all be on the same page that we are working on the assumption that the records are straight at the beginning, because otherwise there's no hope.
Where I would like to encourage additional efforts is that as institutional investors to be logging on multiple platforms, to be having visibility as to whether our vote has went through and has been confirmed and counted becomes to be like a burden as well.
Just, for example, PSP owns position in more than 350 Canadian issuers. If I need to log on a platform to trace my vote each and every time I wouldn't get through the processes with all my hair, that's for sure. So thank you very much for the effort, I think that is going to be very helpful, but we need to find a way of making sure that the various participants in the system of proxy voting, the system of those participants are speaking to each other, making sure that our life is made easy as well for big institutional investors.
MR. PASFIELD: Just out of curiosity, how do you vote today?
MS. LACHANCE: We vote using the platforms or either ISS or Glass Lewis, depending on the accounts. We don't use Proxy Edge.
So that's a problem. If I have to log on Proxy Edge each and every time, and you will appreciate that if one of their requirements is a control number per account, and the same securities can be held in multiple accounts, so that means multiple verifications and that gets to be a nightmare for us.
MR. PASFIELD: Okay, I think understand your concern. We're working on that.
MS. LACHANCE: Okay.
THE CHAIR: Stéphanie, from your point of view, pushing the information out to you, as opposed to you having to log on to retrieve it would be --
MS. LACHANCE: Fantastic, just because of the volume. Otherwise, it's a very nice project, but it's not as user friendly for institution of our size and volume. I don't believe that PSP's position is different than any other institutional investor in Canada.
MR. MASSE: If you had a dematerialized system and you had normalized data flows, there's no reason why all types of participants couldn't build dashboards. Let's say if I'm a client of CIBC, for instance, there's no reason why you couldn't provide me with a loading dashboard where I could look at my portfolio and very, very easily vote my shares without any complexity. I could see what I voted, I could change my mind, I can vote and so on.
But today people who use Proxy Edge have that advantage or if you're an institution and you have most of your portfolio sitting with ISS, for instance, you have that kind of advantage. Perhaps not with the intended confirmation behind it, but at least the voting process is good.
But if you had a really, really high performing system with good data it would be two ways. You would vote and you'd get your confirmation at relatively at the same time.
COMMISSIONER LECKMAN: One of the comments that came through I think in the funds letter particularly was that anyone who participates in the system should be a market participant, and therefore they get under the umbrella of the regulators.
What are your thoughts on that? I guess I would ask the people most impacted by that.
MS. DONALDSON: STAC is of the opinion that we are open to the suggestions that are being made and we'll certainly review whatever it is deemed necessary, if that's a step that regulators think is necessary for the transfer agent, it is certainly something that we will review as an option.
MR. MacDONALD: I think I'm kind of following on Stéphanie's comments as much as anything here. I think we're certainly open to that idea. As a part of the process, we think we interact in a lot of ways to make sure that the system works as well as it can.
I think, going forward as an industry, we need to be really careful about clearly and narrowly identifying the problems that we're trying to fix. So if we're talking about accuracy is one thing, Stephanie veered off on to sort of ease of use as well, and because there's the PSPs of the world and then there's everybody else.
The volumes for PSP I can totally appreciate would be a separate issue. Maybe there is a system that's built that's accurate as anything, but when you have to go through all those accurate steps 350 times there's, let's say, eight to ten players in the marketplace who would also lose all their hair. Because I know we're wrapping up now, but I would say on a next steps, go forward basis, that we be really careful as to narrowly defining the problem that we're trying to solve and take them in an order of priority. If we lump in too many things you'll be talking about it forever.
THE CHAIR: Since you invited me to ask this question, if you had to prioritize the things that we should take on as a first order of priority what would it be?
MR. MacDONALD: As I said from the outset, it's more of a retail issue than an institutional issue. Certainly from our perspective and partly why we kicked off a symposium at the request of some clients almost three years ago now was really to get greater clarity as to how securities lending interfered or did not, and we have great clarity on that. We're very transparent in terms of what our regular responsibilities are in terms of accurate reconciliation to custodians and depositories. So that's fairly sound.
But it does seem like when the retail element gets involved it's less clear and I'm less able to comment on it. It seems like that's area number one, but easy for me to say.
THE CHAIR: Narry, do you want to add to that?
MR. TEEMAL: For me it would be working to build a better reconciliation process.
THE CHAIR: Stéphanie?
MS. LACHANCE: Well, the most important area for us is let's get the record straight at the mailing date, making sure that whatever proxy material is sent is sent to the right individual to the right institution for the right account of shares. That's my main priority.
End-to-end vote information will be then reliable and we'll be confident that when we get access, when the pilot is tested, then when we get that confirmation that it's true and it's complete and my vote is carrying the full weight, that it's not being diluted because we are either over voting or vote reporting position and we've got individuals or institutions that may be voting, but are not necessarily entitled to. So's let get the record straight at the get go.
That's the main priority, at least for us, as institutional investors, and end-to-end vote confirmation will be a nice addition, that's for sure.
THE CHAIR: Anybody else want to give us some advice? Lara?
MS. DONALDSON: We agree that the initial records being a hundred percent accurate should be the first priority. There has been a lot of comments that the transfer agent should somehow be the gatekeeper to identify and correct problems that we believe really shouldn't have occurred in the first place.
When we're dealing with issues, problems with votes that can't be validated or accepted typically occur shortly will have proxy cutoff, which is 48 hours before the meeting, so the expectation that the transfer agent should be able to identify the problem, determine who to contact, provide details of the problem, receive back corrected documentation, re-tabulate the vote, all in time to have new proxy tabulation results to the issuer before their meeting so they can review them and not get them at the start of the meeting, it's not realistic.
Ultimately issuers need to be able to depend on their final tabulation results being accurate and I think most issuers would probably say they're not a hundred percent there and shareholders need to have the confidence that their voice is being heard and their vote has been cast as they have intended. We don't believe this can happen unless the initial records are one hundred percent accurate.
THE CHAIR: Hooman.
MR. TABESH: That's interesting, because I was just mentioning at the break to both Mr. Turner and Ms. Condon, one of our advice to our clients is always to have their cutoff on Friday so that you have the weekend to work through all the votes, because inevitably there's always inaccuracies.
I one hundred percent agree with you, you know, when it get into the pipeline it's inaccurate and by the time it gets to you it's inaccurate and you have to do everything backhand.
So we are very supportive of making sure that what is reported at initial stage is accurate, versus when it gets to you.
THE CHAIR: Thank you. Jeri?
MS. TROTTER: If I could just add on to that, it's important that entitlement is determined early in the process. That the vote entitlement is agreed upon and that the tabulator understands where the shares are being voted, whether it's part of registered or whatever, and as long as that's done early in the process, to Lara's point, it is difficult 48 hours before, 3600 meetings, across whatever number of tabulators. It is very difficult, but if that's started early in the process and the vote entitlement is established, then you don't have those late stage reconciliation issues or the over vote at that particular time.
THE CHAIR: Thank you. Last opportunity for anyone who wants to comment before we finish up?
VICE-CHAIR TURNER: Nobody has mentioned restricted proxies. I take it from the comment letters that that's a minor problem, if there is one?
MS. DONALDSON: We don't see restricted proxies as often as we used to. They do still come in, typically in contentious meeting situations where people are very anxious to ensure that their vote is being cast.
The problem with restricted proxies isn't the proxy itself, the problem is is that the tabulator has no assurance that the shares being held behind that broker haven't already been voted in another way. We don't have the transparency to say, yes, this vote has been removed from this person behind the intermediary and is now being cast as a restricted proxy.
So unless the entire position is voted and you're in an over vote position, there is a real risk that you're double counting the vote, and we can't provide any assurance to the issuer that that has not happened.
MR. TEEMAL: To answer your question, in the three years I have been directly involved with shareholder communications and proxies, I've only seen one request for a restricted proxy because part of process is to make sure that you know that the vote below that hasn't occurred, and we couldn't validate that. So in order to issue it you also need management approval, so we declined that. So that's a very small issue.
THE CHAIR: David.
MR. MASSE: I was going to say the whole issue of restricted proxies kind of makes me a little bit queasy and it doesn't help to find out that it's mostly in the contentious ones, which is where the risk is highest. To me, I mean, that's a little bit of monkey business and I think it lends itself to loose practice. Because of the situation that you've got a system which is not reconciling sufficiently, it means there is a lot of rubber and there is a lot of room for restricted proxies and that really honestly needs very, very tight controls around it. And I don't think that the infrastructure is there to permit it.
MS. TROTTER: In the IIAC letter they were very clear with respect to the controls that are in place from their own firms and that they are controlled in such a way to ensure that votes were submitted on the Broadridge system that were then being represented on a restricted proxy.
I think the IIAC certainly addressed that from their member firms.
THE CHAIR: Thank you very much. I think the time has come to call this to a close. Just by way of conclusion, I guess what is clear, I think to us as moderators, is that certainly the debate has moved beyond the question of is there an issue to one of identifying what those issues are and to focusing on more what are the appropriate answers to the concerns that have been raised.
I think I would say that given that there are multiple participants in the system, it's also very clear, I hope, that it's a collective responsibility, including ourselves as regulators, to try to solve these problems. And so we would hope for continued involvement, continued engagement and continued dialogue in order to really come to an understanding of what would be the appropriate role that we can play in the system.
But given the very informative and very candid discussions that we have had this morning,I want to thank all of the panellists for the effort that they have put into coming and to considering their remarks and their responses, and I think on behalf of the audience as a whole, I'd like to just thank them again for their participation today and thank you all for coming. We're adjourned.
--- Whereupon the proceedings adjourned at 12:00 p.m.
I HEREBY CERTIFY THE FOREGOING
to be a true and accurate
transcription of my shorthand notes
to the best of my skill and ability
SHARI CORKUM, C.S.R.