proxy mailings to beneficial owners. See Proxy Working Group Report,
note 107, above, at 24 (``ADP [(now Broadridge) is] the agent for
almost all banks and brokerage houses.'').
    \130\ The Incremental Fee for 1 to 6,000 positions is $1,500.
Above 6,000 positions, the fee is charged on a per-account basis,
and varies according to the number of positions. As such, the
Incremental Fee ranges from $.25 per account for 6,001 to 10,000
positions to $.05 per account for greater than 500,000 positions.
See Broadridge Fee Schedule, at http://www.broadridge.com/notice-and-access/pdfs/Reference_Rev1_31.pdf.
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c. Current Practice Regarding Fees Charged
    As noted above, broker-dealers generally outsource their delivery
obligations to proxy service providers.\131\ The proxy service provider
enters into a contract with the broker-dealer and acts as a billing and
collection agent for that broker-dealer. As such, the proxy service
provider bills issuers on behalf of the broker-dealer with which it has
contracted, collects the fees from the issuer to which the broker-
dealer is entitled pursuant to SRO rules, and pays to the broker-dealer
any difference between the fee that the broker-dealer is entitled to
collect and the amount that the broker-dealer has agreed to pay the
proxy service provider for its services.\132\
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    \131\ See NYSE Fee Structure Order, note 112, above. According
to the NYSE, this shift was attributable to the fact that member
firms believed that proxy distribution ``was not a core broker-
dealer business and that capital could be better used elsewhere.''
Id.
    \132\ See Release No. 34-38406, note 104, above. See also
Broadridge Form 10-K for the fiscal year ended June 30, 2009, at 4.
---------------------------------------------------------------------------

    It is our understanding that Broadridge currently bills issuers, on
behalf of its broker-dealer clients, the maximum fees allowed by NYSE
Rule 465.\133\ However, we understand that the fees that Broadridge
charges its large broker-dealer clients for its services sometimes are
less than the maximum NYSE fees charged to issuers on the broker-
dealers' behalf, resulting in funds being remitted from Broadridge to a
subset of its broker-dealer clients. This practice raises the question
as to whether the fees in the NYSE schedule currently reflect
``reasonable reimbursement.'' While the issuer pays the proxy
distribution fees, the issuer has little or no control over the process
by which the proxy service provider is selected, the terms of the
contract between the broker-dealer and the proxy service provider, or
the fees that are incurred through the proxy distribution process.
---------------------------------------------------------------------------

    \133\ See Broadridge Fee Schedule, note 130, above.
---------------------------------------------------------------------------

    Several other issues concerning the appropriateness of fees have
also been raised in recent years. For example, it is our understanding
that, once a paper mailing is suppressed, the securities intermediary,
or its agent, collects the Incentive Fee, not only for the year in
which the shareholder makes that election, but also for every
subsequent year, even though the continuing role of the securities
intermediary, or its agent, in eliminating these paper mailings is
limited to keeping track of the shareholder's election.\134\ Further,
it is our understanding that, with respect to certain managed accounts,
where hundreds or thousands of beneficial owners may delegate their
voting decisions to a single investment manager, the Base Mailing Fee
and the Incentive Fee are assessed for all accounts, even though only
one set of proxy materials is transmitted to the investment
manager.\135\
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    \134\ This Incentive Fee is intended to encourage securities
intermediaries to reduce proxy distribution costs on behalf of
issuers because intermediaries otherwise may have no motivation to
reduce an issuer's forwarding costs. See SIFMA, Report on the
Shareholder Communications Process with Street Name Holders, and the
NOBO-OBO Mechanism (June 10, 2010) (``SIFMA Report''), at 14
(describing categories of ongoing costs of maintaining current e-
mail addresses and related databases and systems), available in the
public comment file to this release.
    \135\ See letter from Thomas L. Montrone of The Securities
Transfer Association to Chairman Mary Schapiro, dated June 2, 2010
(stating that ``We believe that many issuers are being assessed
unreasonable fees under Rule 465 related to share ownership in
separate managed accounts (``SMAs'') in which the investor has
delegated responsibility for management of the account and is not
being provided with any proxy materials''), available in the public
comment file to this release.
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    In summary, many issues have been raised about fees, focusing
mostly on whether the current fee structure for delivering proxy
materials to beneficial owners reflects reasonable rates of
reimbursement.
2. Potential Regulatory Responses
    We have previously recognized the potential benefits of allowing
the marketplace, rather than SRO rules and guidelines, to determine
reasonable rates of reimbursement for the distribution of proxy
materials. As noted above, at the time of adoption of the current fee
structure, we did not expect that the discussion of reasonable rates of
reimbursement would end. Rather, we noted that market forces should
ultimately determine competitive and reasonable rates of reimbursement,
and urged the NYSE to identify ways to achieve this goal, consistent
with the continued protection of shareholder voting rights in a
competitive marketplace for proxy distribution.\136\ While the Proxy
Working Group did suggest ways to re-evaluate the NYSE's current fee
structure, such as conducting ``cost studies, commission audits and
surveys of various constituencies involved,'' \137\ to date those
suggestions have not been implemented. A proxy distribution process
that fosters competition could give issuers, which are responsible for
reimbursing only reasonable proxy distribution costs, more control over
that process and remove the Commission and SROs from the business of
setting rates. However, we understand that, without a competitive
market, there may be a continued need for regulated fees.
---------------------------------------------------------------------------

    \136\ See NYSE Fee Structure Order, note 112, above.
    \137\ See Proxy Working Group Report, note 107, above, at 26-27.
---------------------------------------------------------------------------

    In addition, we recognize the importance of maintaining a proxy
distribution system that is efficient, reliable, and accurate. We note
that various groups have previously attested to the efficiency,
reliability, and accuracy of the current proxy distribution
system.\138\ However, given developments in the securities market
overall and proxy solicitation rules, such as the notice and access
model, it appears to be an appropriate time for SROs to review their
existing fee schedules to determine whether they continue to be
reasonably related to the actual costs of proxy solicitation.
---------------------------------------------------------------------------

    \138\ See, e.g., letter from Donald D. Kittell, Securities
Industry Association, to Nancy M. Morris, Secretary, Commission,
dated Feb. 13, 2006 (``The current system for delivering proxies to
80 percent of shareholders--those holding in `street name'--has
proven to be very efficient and cost-effective.'') available in the
public comment file to this release. See also Proxy Working Group
Report, note 107, above, at 25 (citing to letter from Richard H.
Koppes, Facilitator, Proxy Voting Review Committee, to Sharon
Lawson, Senior Special Counsel, Commission, dated Feb. 28, 2002).
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    One alternative that has been suggested by a commentator is the
creation of a central data aggregator that is given the right to
collect beneficial owner information from securities intermediaries,
but is required to provide that information to any agent designated by
the issuer.\139\ The aggregator would be entitled to structured
compensation for its activities. This could create competition among
service providers for the distribution of the proxy materials by making
the beneficial owner

information available to all service providers, allowing them to
compete in providing services to forward proxy materials. This would
also place the choice of proxy service provider in the hands of the
entity that must pay for the distribution--the issuer--rather than the
securities intermediary, which has no incentive to reduce costs.
---------------------------------------------------------------------------

    \139\ See Shareholder Communications Coalition, Public Issuer
Proxy Voting: Empowering Individual Investors and Encouraging Open
Shareholder Communications (Aug. 4, 2009) (``SCC Discussion
Draft''), at 6, available in the public comment file to this
release.
---------------------------------------------------------------------------

    Some of the other potential regulatory responses discussed in this
release also would affect the current system of distributing proxy
materials and, therefore, the process of setting proxy distribution
fees. For instance, adopting a system under which securities
intermediaries grant proxies to underlying beneficial owners (as
discussed in Section III.A) would permit issuers to negotiate fees and
services with proxy service providers because the issuers would be
directly soliciting proxies from those beneficial owners.
3. Request for Comment
     Does the current fee/rebate structure reflect reasonable
expenses? Why or why not? If not, how should these rates be revised?
     Should the fee structure allow for reimbursement of the
Incentive Fee on an ongoing basis once the paper mailings have already
been eliminated?
     How are proxy distribution fees billed with respect to
separately managed accounts? Should certain kinds of accounts, such as
separately managed accounts, where multiple beneficial owners may
delegate their voting decisions to a single investment manager, be
eligible for different treatment under the current fee structure?
     Are separately managed accounts different from ``wrap''
accounts for which issuers may not be charged suppression fees for
providing proxy communication services to holders of WRAP accounts?
\140\
---------------------------------------------------------------------------

    \140\ It is our understanding that a wrap account is a certain
type of account that is managed by an outside investment manager.
---------------------------------------------------------------------------

     Does the current fee structure discourage issuers from
communicating with beneficial owners beyond delivery of the required
proxy materials?
     Should there be an independent third-party audit of the
current fee structure, as recommended by the Proxy Working Group?
     Do broker-dealers using a proxy service provider incur
costs that justify rebates from the proxy service provider? If so, what
are the costs, can they be quantified, and are they commensurate with
the payments received from the proxy service provider? Do these costs
exist only for larger broker-dealers or for broker-dealers of all
sizes? Should the current rebates between Broadridge and larger broker-
dealers be permitted under the current fee structure? Should current
contractual arrangements between proxy service providers and their
clients affect the determination of whether fees are fair and
reasonable?
     Currently, SRO rules do not set rates for reimbursement of
expenses associated with the notice and access model. In the absence of
SRO rules, on what basis do market participants currently determine
whether the reimbursement of expenses associated with the notice and
access model is, in fact, reasonable?
     Should the current fee structure that is set forth in SRO
rules be revised to include fees for notice and access delivery? If so,
what fees for the notice and access model might constitute ``reasonable
reimbursement?''
     Does the current proxy distribution system--in which the
proxy service provider is selected by a broker-dealer but paid by the
issuer--create a lack of incentives to reduce costs for issuers? Should
the issuer have more control over the selection and payment of the
proxy service provider, and if so, what alternatives to the current
system would facilitate this? What are the potential benefits and
drawbacks of such alternatives?
     What factors are currently affecting the level of
competition in the market for proxy service providers and their fees?
What principles should guide the Commission's current consideration of
competition among proxy service providers? Would multiple competing
service providers affect the quality of service?
     What steps would be necessary to enable prices to be based
on competitive market forces? What are the potential benefits and
drawbacks of moving to a system where prices are determined by
competitive market forces? What effect, if any, would this have in
terms of accuracy, accountability, reliability, cost, and efficiency of
the proxy distribution system? Would a market-based model increase or
decrease costs for issuers? Would cost increases or decreases be more
likely for small to midsize issuers?
     If issuers were able to solicit proxies directly from
beneficial owners, what effect would that likely have on proxy
distribution costs? Would costs be reduced through the introduction of
competition and better alignment of economic incentives? Or, could the
loss of economies of scale increase costs? Would each issuer likely
negotiate fees on its own with a proxy service provider? Would the
impact be different for large, medium, or small issuers?
     What are the practical and legal implications of
deregulating fees in light of the existing contracts between proxy
service providers and broker-dealers? For example, would these
contracts need to be re-negotiated?
     What are the potential merits and drawbacks of having a
central data aggregator collect beneficial owner information from
securities intermediaries? How would reimbursement to the aggregator,
as the distributor of information, be determined?
     Would changes to the OBO/NOBO mechanism, or the creation
of a central data aggregator, encourage competition in the proxy
distribution sector? Would competition increase or lower costs? Would
competition increase or decrease accountability?
     A number of investors have complained about the services
of proxy service providers (and transfer agents performing similar
functions). How are investors' interests addressed, if at all, in the
selection of proxy service providers? Are the interests of investors in
this process given adequate weight?

IV. Communications and Shareholder Participation

    We first examine a number of concerns relating to the ability of
issuers to communicate with shareholders, the level of shareholder
participation in the proxy voting process, and the ability of investors
to obtain and evaluate information pertinent to voting decisions.
Because of the importance of shareholder voting, as discussed above, we
seek additional information about ways in which issuer communications
with shareholders, shareholder participation and shareholder use of
information might be improved.

A. Issuer Communications With Shareholders

1. Background
    The first area of concern that we address arises out of the
practice of holding securities in street name--that is, interposing
securities intermediaries between issuers and the beneficial owners of
their securities. This practice developed in order to facilitate the
prompt and accurate processing of an increasingly large volume of
securities transactions.\141\ The efficiency of the

clearance and settlement system in the U.S. is due in large part to the
ability to ``net'' transactions, whereby contracts to buy or sell
securities between broker-dealers are replaced with net obligations to
a registered clearing agency, the National Securities Clearing
Corporation (``NSCC''). To make netting possible, securities must be
held in fungible bulk at DTC.
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    \141\ For a history of the U.S. shareholder system, see Alan L.
Beller & Janet L. Fisher, The OBO/NOBO Distinction in Beneficial
Ownership: Implications for Shareowner Communications and Voting
(February 2010), available at http://www.cii.org/UserFiles/file/CII%20White%20Paper%20-%20The%20OBO-
NOBO%20Distinction%20in%20Beneficial%20Ownership%20February%202010.pd
f, at 8-10. This report (the ``CII OBO/NOBO Report'') was published
by the Council of Institutional Investors.
---------------------------------------------------------------------------

    There is broad consensus \142\ that the enormous volume of
transactions cleared and settled in the U.S., which currently involve
transactions valued at over $1.48 quadrillion annually,\143\ requires a
centralized netting facility (i.e., NSCC) and a depository (i.e., DTC)
that facilitates book-entry settlement of securities transactions. It
is our understanding that this approach to clearance and settlement has
produced significant efficiencies, lower costs, and risk management
advantages. At the same time, however, the practice of holding
securities in fungible bulk has made it more difficult for issuers to
identify their beneficial owners and to communicate directly with them.
---------------------------------------------------------------------------

    \142\ See ``Recommendations for Securities Settlement Systems,''
CFSS/IOSCO Task Force (Nov. 2001) and ``Global Clearing and
Settlement, A Plan of Action,'' published by the Group of Thirty
(``G-30'') (Jan. 30, 2003).
    \143\ See http://www.dtcc.com/about/business/ statistics.php.
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    In light of recent developments in corporate governance, including
the elimination of the broker discretionary vote on uncontested
elections of directors, commentators have claimed a greater need for
issuers to be able to communicate with their shareholders.\144\ These
commentators have argued that the number of contested issues in
shareholder meetings has increased, that voting outcomes are under more
pressure, and that, as a result, certain changes should be made to our
rules in order to facilitate communications by issuers with their
beneficial owners.\145\ More broadly, commentators have questioned
whether the current system of share ownership and the Commission's
communications and proxy rules adequately serve the needs of investors
and issuers.\146\
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    \144\ See Proxy Working Group Report, note 107, above, at 22
(discussing comments received with respect to a then-proposed
amendment, which was recently adopted, to Rule 452 eliminating
broker-dealer voting in the election of directors).
    \145\ See, e.g., CII OBO/NOBO Report, note 141, above, at 11
(``Recent developments in corporate governance will place more
pressure on voting outcomes and increase the need for both companies
and shareowners to have an effective and reliable framework for
communications.''); letter from Shareholder Communications Coalition
to Chairman Mary Schapiro (Aug. 4, 2009), available at http://www.shareholdercoalition.com/SCCLetterto
SECChairmanMarySchapiroAug2009.pdf.
    \146\ In 2004, the BRT Petition urged the Commission ``to
conduct a thorough review of the current shareholder communications
system.'' BRT Petition, note 8, above. The petition recommended that
``the Commission require brokers and banks to provide issuers with
contact information for all beneficial owners and permit the direct
mailing of all communications (including proxy materials) to
beneficial owners.'' Id. See also Marcel Kahan & Edward B. Rock, The
Hanging Chads of Corporate Voting, 96 Georgetown Law Journal 1227
(2008); J. Robert Brown Jr., The Shareholder Communication Rules and
the Securities and Exchange Commission: An Exercise in Regulatory
Utility or Futility, 13 Journal of Corporation Law 683 (1988); David
C. Donald, The Rise and Effects of the Indirect Holding System: How
Corporate America Ceded Its Shareholders to Intermediaries (Sept.
26, 2007), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1017206.
---------------------------------------------------------------------------

    The history of our efforts to address the impediments to
communication associated with our securities ownership system goes back
more than three decades.
    In 1976, we reported to Congress on the effects of the practice of
holding securities in street name.\147\ While we concluded that the
practice of registering securities in nominee (that is, DTC or a
securities intermediary) and street name was consistent with the
purposes of the Exchange Act, we recognized that issuers were
experiencing difficulties in communicating with their shareholders who
hold securities in nominee and street name. In an effort to enhance
communication, we revised the proxy rules to require issuers, as more
fully described above, to do the following:
---------------------------------------------------------------------------

    \147\ Street Name Study, note 13, above.
---------------------------------------------------------------------------

     Inquire of securities intermediaries whether other persons
beneficially owned the securities they held of record; and
     Supply securities intermediaries with a sufficient number
of sets of proxy materials to forward to beneficial owners.\148\
---------------------------------------------------------------------------

    \148\ Notice of Adoption of Amendments to Rules 14a-3, 14c-3 and
14c-7 under the Exchange Act to Improve the Disclosure in, and the
Dissemination of, Annual Reports to Security Holders and to Improve
the Dissemination of Annual Reports on Form 10-K or 12-K Filed with
the Commission Under the Exchange Act, Release No. 34-11079 (Oct.
31, 1974) [39 FR 40766]. These requirements, which were originally
included in Rule 14a-3(d), are currently set forth in Rule 14a-13
[17 CFR 240.14a-13]. Facilitating Shareholder Communications,
Release No. 34-22533 (Oct. 15, 1985) [51 FR 44276]. Based in part on
the recommendation of the Street Name Study, we adopted additional
rules in 1977 facilitating the transmission of proxy materials from
issuers to beneficial owners. Requirements for Dissemination of
Proxy Information to Beneficial Owners by Issuers and Intermediary
Broker-Dealers, Release No. 34-13719 (July 5, 1977) [42 FR 35953].
---------------------------------------------------------------------------

    To promote direct communication between issuers and their
beneficial owners, we adopted rules in 1983, effective in 1985, to
require broker-dealers and banks to provide issuers, at their request,
with lists of the names and addresses of beneficial owners who did not
object to having such information provided to issuers.\149\ These
owners are often referred to as ``non-objecting beneficial owners'' or
``NOBOs.'' When a beneficial owner objects to disclosure of its name
and address to the issuer--often referred to as ``objecting beneficial
owners'' or ``OBOs''--the beneficial owner may be contacted only by the
securities intermediary (or the intermediary's agent) with the customer
relationship with the beneficial owner.\150\ According to one estimate,
70% to 80% of all public issuers' shares are held in street name, and
75% of those shares, or 52% to 60% of all shares, are held by
OBOs.\151\ It is our understanding that some types of large
institutional investors, such as mutual funds \152\ and retirement
plans, often choose OBO status.\153\
---------------------------------------------------------------------------

    \149\ See Facilitating Shareholder Communications Provisions,
Release No. 34-20021 (July 28, 1983) [48 FR 35082]. Exchange Act
Rule 14a-13(b)(5) enables an issuer to obtain a list of its NOBOs
only, which means that broker-dealers and banks must classify their
beneficial owners as either objecting or non-objecting beneficial
owners, based on the investor's election. A requesting issuer must
reimburse the intermediaries for their reasonable expenses in
preparing the NOBO list. 17 CFR 240.14a-13(b)(5). The NYSE and other
exchanges establish a per-holder fee that member brokers can charge
for preparation of the NOBO list. E.g., NYSE Rule 465.
Notwithstanding these limitations on the fees, issuers, particularly
those with large shareholder bases, have indicated that the cost to
obtain such lists can be prohibitive.
    \150\ See 17 CFR 240.14b-1(b)(3)(i). Several commentators have
indicated that, in a number of foreign jurisdictions, public issuers
have the right to learn the identity of individuals and institutions
with voting rights or beneficial owner interests in their shares.
See, e.g., BRT Petition, note 8, above; Kahan, note 146, above;
Donald, note 146, above.
    \151\ Proxy Working Group Report at 10-11, note 107, above.
    \152\ Although mutual funds disclose their securities holdings
on Forms N-Q and N-CSR, those disclosures are made as of the end of
the quarter, which may not coincide with the record date used to
determine shareholders entitled to vote at a meeting.
    \153\ One recent report states that while ``73% of retail
shareholders are NOBOs, * * * [m]ost institutional shareholders--
about 71%--are OBOs, accounting for about 91% of all institutionally
held shares.'' SIFMA Report, note 134, above, at 7.
---------------------------------------------------------------------------

    We understand that there are concerns about the cost and efficiency
of the current system of communications between issuers and investors,
including the following: \154\
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    \154\ Concerns about whether or not to disclose shareholder
identities are shared by regulators in several jurisdictions. For
example, in Canada, companies are under no obligation to send proxy
materials to shareholders who do not disclose their underlying
identity. See OECD Survey, note 90, above. In the United Kingdom,
companies have the right to ask any person whom the company knows or
has reasonable cause to believe has an interest in its shares to
declare that interest. UK Companies Act 2006--Section 793: Notice by
company requiring information about interests in its shares,
available at (http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en_45) The failure to do so may enable the company to apply for a
court order directing that the shares in question be subject to
certain restrictions involving voting rights, transfers and other
limitations. UK Companies Act 2006--Sections 794 and 797. Given that
shareholders have the right to dismiss the board at any time in the
United Kingdom, companies generally believe it is important that the
board know who its shareholders are and pay attention to what they
want. Thus, the company should be entitled to know who owns its
shares in order to ensure accountability in both directions.

---------------------------------------------------------------------------

     Issuers have indicated to the staff that the majority of
their street name securities are held by OBOs through securities
intermediaries, making it very difficult to determine the identity and
holdings of their investors. Issuers believe that the recent changes in
corporate governance, including the move to majority voting of
directors, the elimination of broker discretionary voting in
uncontested director elections, and a possible drop in retail voting
percentages,\155\ call for more direct communication between issuers
and their shareholders. These communications may include using a proxy
solicitor to contact shareholders by telephone. However, an issuer
cannot make these direct appeals for shareholders to participate in the
issuer's corporate governance if it does not know the identity of those
shareholders.
---------------------------------------------------------------------------

    \155\ It is unclear whether such a drop has occurred. See note
196 and accompanying text, below.
---------------------------------------------------------------------------

     Issuers also have indicated to the staff that they face
considerable expense in communicating with beneficial owners, either
OBOs or NOBOs, indirectly through securities intermediaries or their
agents. Issuers are required to reimburse securities intermediaries for
expenses incurred in forwarding communications to beneficial owners.
These expenses include reimbursement for postage, envelopes and
communication expenses as well as fees to proxy service providers.\156\
---------------------------------------------------------------------------

    \156\ See Section III.D, above. See also Supplementary Material
to NYSE Rules 451 and 465; NYSE Listed Issuer Manual Sec.
402.10(A).
---------------------------------------------------------------------------

     Some issuers have claimed that the expense of obtaining
the list of NOBOs from the securities intermediary or its proxy service
provider deters some issuers, particularly widely-held issuers, from
using the NOBO list to communicate with beneficial owners.\157\ We have
also received expressions of concern from broker-dealers about the
difficulty of maintaining an accurate NOBO list when a class of
securities is actively traded.
---------------------------------------------------------------------------

    \157\ Under current NYSE rules, the issuer is required to pay
$0.065 per NOBO name, plus reasonable expenses of the broker-
dealer's agent in providing the information. NYSE Rule 465
Supplementary Material, available at http://nyserules.nyse.com/NYSETools/PlatformViewer.asp?searched=1&selectednode=chp%5F1%5F5%5F13%5F1&CiRestriction=465&manual=%2Fnyse%2Frules%2Fnyse%2Drules%2F; FINRA Rule
2251 Supplementary Material.
---------------------------------------------------------------------------

     We also have heard that issuers may desire more
flexibility to design the proxy materials (e.g., forms of VIFs,
packaging of materials, etc.) that are sent to beneficial owners. Some
issuers believe that the current uniform appearance of proxy materials
used by some of the proxy service providers may lead to reduced
interest in the materials by beneficial owners. Other commentators have
suggested that VIFs do not sufficiently inform shareholders as to how
their shares will be voted if they do not provide instructions on all
the matters included on the VIFs.\158\
---------------------------------------------------------------------------

    \158\ See James McRitchie, Request for rulemaking to amend Rule
14a-4(b)(1) under the Securities Exchange Act of 1934 to prohibit
conferring discretionary authority to issuers with respect to non-
votes on the voter information form or proxy. No. 4-583 (May 15,
2009).
---------------------------------------------------------------------------

     Some issuers also have expressed concerns regarding
potential quality control problems that have arisen, from time to time,
with the services provided by proxy service providers. Similarly,
retail investors have complained to our Office of Investor Education
and Advocacy, from time to time, that proxy materials have been
delivered late. To the extent that delivery of proxy materials is
delayed, the utility of issuer-investor communication through the proxy
process is impaired.
2. Potential Regulatory Responses
    Many issuers, securities intermediaries and commentators believe
that there can be more efficient and cost-effective ways for issuers to
communicate directly with their shareholders. Some commentators have
advocated for significant changes. The 2004 Business Roundtable
rulemaking petition (``BRT Petition'') \159\ recommended that the
Commission enable issuers to communicate directly with their beneficial
owners by requiring broker-dealers and banks to execute an omnibus
proxy in favor of their underlying beneficial owners and by eliminating
the ability of beneficial owners to object to the disclosure of their
identities to issuers. The BRT Petition argued that eliminating
objecting beneficial owner status would create a more efficient proxy
system by allowing issuers to bypass securities intermediaries and
their agents in forwarding proxy materials and by simplifying the
voting and tabulation process.
---------------------------------------------------------------------------

    \159\ See BRT Petition, note 8, above.
---------------------------------------------------------------------------

    In 2009, the Shareholder Communications Coalition \160\ filed a
letter supporting the BRT Petition and providing more specific
recommendations on how to implement a system that eliminates objecting
beneficial owner status and grants the right to vote directly to the
beneficial owners through an omnibus proxy.\161\ This proposed system
would separate the functions of beneficial owner data aggregation and
proxy communications distribution, thereby making beneficial owner data
available to the issuer's (and not the securities intermediary's)
agent. The system would identify all beneficial owners except those
that elect to remain anonymous by registering shares in a nominee
account.\162\
---------------------------------------------------------------------------

    \160\ The Shareholder Communications Coalition is an umbrella
group that represents the views of The Business Roundtable, the
Society of Corporate Secretaries and Governance Professionals, the
National Investor Relations Institute, and the Securities Transfer
Association.
    \161\ See SCC Discussion Draft, note 139, above.
    \162\ A beneficial owner could continue to remain anonymous by
hiring a third party to hold the securities for the beneficial
owner. In this circumstance, however, the cost of this agency
arrangement would be borne by the beneficial owner.
---------------------------------------------------------------------------

    Others advocate less comprehensive change and encourage adoption of
an approach in which an issuer would be entitled to a list of all
beneficial owners, but only as of the record date for a particular
meeting.\163\ In such a system (an ``annual NOBO'' system), objecting
beneficial owners would not be able to shield their identity for
purposes of a shareholder meeting. At any other time during the year,
objecting beneficial owner information would not be available to the
issuer or any other party. An annual NOBO system would enable issuers
to communicate directly with all of their shareholders, both registered
and beneficial owners, for purposes of a shareholder meeting, while
minimizing the possibility that the investor information will be used
for purposes other than proxy solicitation,

such as determining an investor's trading strategies.
---------------------------------------------------------------------------

    \163\ The Altman Group, ``Practical Solutions to Improve the
Proxy Voting System'' (Oct. 2009), available at http://altmangroup.com/pdf/PracticalSolutionTAG.pdf (identifying this
approach as the ``ABO'' or ``all beneficial owners''system). We use
the term ``annual NOBO'' because we believe it better reflects the
fact that, under the system, an OBO would be treated as if it were a
NOBO, but only annually or for specific proxy solicitations.
---------------------------------------------------------------------------

    Others have suggested more gradual change.\164\ In order to
encourage holding in NOBO rather than OBO status, some have suggested
various steps to promote selection of NOBO status, such as educating
investors about OBO and NOBO status when they open their accounts or
periodically. Other steps may involve the elections made by investors
when they open their accounts. While our rules contemplate that
investors must object to disclosure of their identities to
issuers,\165\ neither our rules nor self-regulatory organization
(``SRO'') rules currently require disclosure of the consequences of
choosing OBO or NOBO status, or specify broker-dealer policies or
procedures with regard to their clients' choice of OBO or NOBO status.
In particular, if a securities intermediary's standard customer
agreement includes a default election of OBO status, it could promote a
less than fully considered election of OBO status. While several
broker-dealers have informed us that they currently default beneficial
owners to NOBO status, it has been recommended that the default
agreement used by all broker-dealers be NOBO status, or that broker-
dealers provide informational materials to their customers prior to
allowing the customers to elect OBO status and contact customers who
elect OBO status periodically to re-elect their OBO/NOBO status.
---------------------------------------------------------------------------

    \164\ See, e.g., CII OBO/NOBO Report, note 141, above.
    \165\ See Exchange Act Rule 14b-1(b)(3)(i) [17 CFR 240.14b-
1(b)(3)(i)] (requiring broker-dealers to provide names, addresses,
and securities positions of customers who have not objected to
disclosure of such information); Exchange Act Rule 14b-2(b)(4) [17
CFR 240.14b-1(b)(3)(i)] (requiring banks to provide names,
addresses, and securities positions of customers that have not
objected to disclosure of such information for customer accounts
established after December 28, 1986, but requiring affirmative
consent to disclosure of such information for customer accounts
opened before that date).
---------------------------------------------------------------------------

    In addition, there remains the issue of whether beneficial owners
have a privacy right with respect to the disclosure of their ownership
positions. We have been informed of a variety of privacy
considerations: some investors, particularly institutional investors,
select OBO status for competitive reasons, in order to mask their
investment strategies; other investors may prefer OBO status in order
to minimize the communications (particularly telephone calls) they
receive regarding their investments.\166\ In either case, however,
according to a study by the NYSE, investor preference for OBO status
may be cost-sensitive and perhaps even overstated.\167\
---------------------------------------------------------------------------

    \166\ See SIFMA Report, note 134, above, at 10, 12, 20-22.
    \167\ Investor Attitudes Study Conducted for NYSE Group--April
7, 2006, available at http://www.nyse.com/pdfs/Final_ORC_Survey.pdf. In that study, 71% of respondents indicated that they
would provide contact information to the issuers in which they
invest if asked. In addition, the study notes that investor
preference for NOBO status increases if fees are imposed on
continuing to maintain OBO status: with the imposition of a $50
annual fee, preference for OBO status declines from 36% to 5%. Id.
at 3.
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3. Request for Comment
    As discussed above, we are considering whether regulatory action is
needed to make it easier for issuers to communicate with their
investors. In particular, we seek comment on whether we should
eliminate the OBO/NOBO distinction, thereby making all beneficial owner
information available to the issuer, or require broker-dealers to
disclose the consequences of choosing OBO or NOBO status, or whether
OBO or NOBO status should be the default choice. We also are exploring
ways in which issuers can communicate directly with beneficial owners,
such as requiring securities intermediaries to transfer proxy voting
authority to some or all beneficial owners, so that issuers can solicit
proxies directly from such holders. In this regard, we seek comment on
the following questions:
     Do our existing rules inappropriately inhibit issuers from
effectively communicating with investors? If so, what changes should we
make to our rules to improve investor communication? Even if our rules
do not inappropriately inhibit issuers from effectively communicating
with investors, do the rules significantly raise the cost of
communicating? Do any non-Commission rules inappropriately inhibit
issuers from effectively communicating with investors? What are the
benefits and costs of the various changes proposed by commentators?
     Do investors consider the degree and manner of
communication with issuers to be adequate?
     To what extent are proxy materials not being delivered in
a timely fashion? Are any changes in our rules or other rules required
to improve timeliness of delivery, either with respect to registered or
beneficial owners?
     What impact does the uniform appearance of proxy materials
such as the VIF have on shareholder participation in proxy voting?
Would investors, especially retail investors, be more likely to vote if
there was less uniformity in the appearance of proxy materials?
     Is the format and layout of proxy cards and VIFs clear and
easy to use from the perspective of investors? Could the layout be
improved to enhance investor participation? Do the formats of proxy
cards and VIFs appropriately set out the consequences of not voting or
giving voting instructions on one or more specific matters?
     To what extent has the loss of broker discretionary votes
in uncontested elections of directors increased the likelihood that
issuers will not meet quorum requirements? Would the availability of
less-costly means of communication with shareholders improve issuers'
ability to meet quorum requirements?
     Do investors have legitimate privacy interests with
respect to the disclosure of their share ownership? In what ways would
an investor be harmed if his or her identity and the size of his or her
holdings are disclosed to issuers? Should an investor be able to
indicate that he or she does not wish to be contacted by an issuer? Do
broker-dealers or banks have legitimate commercial interests in keeping
the identities of their customers confidential? How should these
interests be balanced against an issuer's interest in identifying and
communicating with its investors? Is this balance different for
individual and institutional investors, and if so, would different
treatment in regard to OBO status be appropriate? Are there
technological solutions that would facilitate communication while
protecting the identities of shareholders?
     Issuers have expressed interest in not only communicating
with shareholders, but also in identifying them. While these interests
can be complementary, is one more important than the other? Should any
regulatory changes that may be considered by the Commission emphasize
one over the other?
     Are there merits to, or concerns about, establishing a
central beneficial owner data aggregator for use by issuers, as
suggested by the Shareholder Communications Coalition and as described
above?
     Is competition in the proxy distribution service market
needed, and if so, what changes to facilitate issuers' communications
with investors would also encourage competition in the proxy
distribution service market?
     Should we consider rules that would shift the cost of
distributing proxy materials to broker-dealers for customers who choose
to be objecting beneficial owners?

     Do our rules adequately address how beneficial owners
elect objecting or non-objecting beneficial owner status when they open
their accounts? Should there be a requirement that beneficial owners'
account agreements adopt any specific election as the default choice?
If so, would it matter whether the Commission, FINRA, or the stock
exchanges imposed that requirement? Should the required default choice
be for objecting or non-objecting beneficial owner status? Are there
other ways in which default positions can be established for customers
of securities intermediaries? Should there be a standardized form for
customers to elect either NOBO or OBO status?
     Should we or SROs instead, or in addition, consider
requiring securities intermediaries to provide informational materials
to their customers prior to allowing the customer to elect OBO or NOBO
status? What should be included in such informational materials, and
how frequently should investors be provided with such materials? Should
we consider requiring securities intermediaries to inform customers of
the reasons for and against choosing to disclose or shield their
identities?
     Should a broker-dealer periodically request that customers
reaffirm their OBO/NOBO status selection? If so, how should the cost of
this periodic evaluation be allocated?
     Should we consider revising our rules to require that
securities intermediaries provide an omnibus proxy to their underlying
beneficial owners and identify them to the issuer? If we were to
propose such a rule, should we limit it to granting proxies to NOBOs
since their identities are already available to issuers? How would such
a system address the way securities transactions are cleared and
settled?
     What are the costs and benefits of the annual NOBO system
suggested by commentators? Would disclosure of all beneficial owners,
limited to information as of the record date of a shareholder meeting,
harm those investors (for example, would it reveal trading strategies
of those investors)? Would implementing the annual NOBO system
adversely affect any privacy interests of OBOs? As a practical matter,
would issuers be able to contact OBOs using this information for
subsequent shareholder meetings?
     What problems might arise if issuers or their transfer
agents have greater access to or control of shareholder lists? How
could we provide for fair and efficient access to those lists by other
soliciting parties?

B. Means To Facilitate Retail Investor Participation

1. Background
    As we seek to promote and facilitate shareholder voting in general,
we understand that the level of voting by retail investors is a
particular area of concern. Retail investor participation rates in the
proxy voting process historically have been low.\168\ Given the
importance of proxy voting, we view significant lack of participation
by retail investors in proxy voting as a source of concern, even in
companies in which retail share ownership represents a relatively small
portion of total voting power. We understand that this situation is not
limited to the U.S., as the level of voting by shareholders in other
jurisdictions has also caused concern.\169\
---------------------------------------------------------------------------

    \168\ See Roundtable Briefing Paper, note 79, above.
    \169\ See, e.g., Myners Report, note 15, above.
---------------------------------------------------------------------------

2. Potential Regulatory Responses
a. Investor Education
    Commentators have indicated that there is confusion among investors
regarding the proxy voting process and the importance of voting.\170\
Investors accustomed to brokers voting their shares on their behalf may
be unaware that, as a result of the recent revisions to NYSE Rule 452,
brokers can no longer vote investors' shares in uncontested elections
of corporate directors without instructions from the investors. In
addition, many investors may be confused by the distinction between
record and beneficial ownership and how that may affect their voting
rights. These commentators have recommended the development of a
significant investor education campaign to inform investors about the
proxy voting process and the importance of voting as one way in which
communication and proxy voting could be improved.
---------------------------------------------------------------------------

    \170\ See Proxy Working Group Report, note 107, above, at 15.
---------------------------------------------------------------------------

    We believe that improved investor education may help dispel some of
these potential misunderstandings and create interest in the voting
process. There are several ways in which we can enhance the educational
opportunities for investors. We recently created a new section on our
investor site, http://www.investor.gov, to provide educational
materials about proxy mechanics generally and the notice and access
model for the delivery of proxy materials. The new proxy matters
section can be found at http://www.investor.gov/proxy-matters.\171\ We
understand that a number of issuers and shareholder organizations have
provided links from their Web sites to these educational materials. In
addition, NYSE recently revised examples of letters containing the
information and instructions required to be given by NYSE members to
beneficial owners to inform beneficial owners that brokers are no
longer allowed to vote shares held by beneficial owners on uncontested
elections of directors, unless the beneficial owner has provided voting
instructions.\172\
---------------------------------------------------------------------------

    \171\ The staff of the Commission initiated an educational
program on proxy voting matters for retail investors with the goal
of increasing investor awareness about the importance of
participating in director elections and other issues brought before
shareholders at annual and special meetings. A plain-language
``Spotlight on Proxy Matters page'' in question and answer format
was developed on the SEC Web site to explain proxy voting
procedures. In addition, the staff of our Office of Investor
Education and Advocacy has spoken before investor and issuer
organizations to promote the Web site material and to urge their
involvement in proxy voting educational programming. To date, this
ongoing effort has yielded more than 25,000 unique visits to the
Proxy Matters Web site and 1,430 references on Google. The staff
plans to continue and expand the education and outreach to retail
investors in preparation for the 2011 proxy season. As part of this
outreach program, we are exploring potential opportunities to link
proxy educational materials directly to online brokerage accounts
and other locations that may be visited frequently by retail
shareholders.
    \172\ See Notice of Filing and Immediate Effectiveness of
Proposed Rule Change to Modify the Sample Broker Letters Set Forth
In Rule 451, Release No. 34-61046 (Nov. 20, 2009) [74 FR 62849].
---------------------------------------------------------------------------

    Another possible venue for investor education is issuers' Web sites
and brokers' Web sites. Many investors go to issuer Web sites to obtain
information about the issuers in which they invest, and an increasing
number of investors review their holdings and effect securities
transactions through their brokers' Web sites. More proxy-related
educational materials located on an issuer's or broker's Web site may
be helpful to investors. In addition, although some explanation of how
the proxy process works is often included on the back of the proxy card
(or on the VIF), that information can be difficult to read and is often
presented in small print. We are interested in whether improving the
presentation of information on the proxy card or VIF would have an
effect on voting participation.
    Finally, we are interested in whether we should also consider the
scope, format, and content of the communications between brokers and
their customers that occur in connection with opening customers'
accounts. The account-opening process may be a good

opportunity to communicate important information about the shareholder
voting process.
b. Enhanced Brokers' Internet Platforms
    As noted above, many investors use their brokers' Web sites as
``one-stop shopping'' for their investment needs. It is our
understanding, however, that many of these Web sites do not provide
information about upcoming corporate actions or enable retail investors
to use the same platform for proxy voting. Rather, many brokers hire a
third-party proxy service provider to handle the collection of voting
instructions. Therefore, those investors must go to a different Web
site, not run by the broker, in order to submit voting instructions to
their broker. We are interested in receiving views on whether receiving
notices of upcoming corporate votes and having the ability to access
proxy materials and a VIF through the investor's account page on the
broker's Web site would be helpful to investors. We also wish to
explore whether other communications from broker to customer could
encourage more active and better informed participation in the proxy
voting process.
c. Advance Voting Instructions
    Some commentators have recommended that we adopt rules to
facilitate what has been called ``client-directed voting'' as a means
to increase investor participation in the voting process.\173\ In
general, this concept contemplates that brokers or other parties \174\
would solicit voting instructions from retail investors on particular
topics (e.g., election of directors, ratification of auditors, approval
of equity compensation plans, action on shareholder proposals) in
advance of their receiving the proxy materials from companies.\175\ The
advance voting instructions would then be applied to proxy cards or
VIFs related to the investors' securities holdings, unless the
investors changed those instructions. Investors would be able (but not
required) to instruct their securities intermediaries or other parties
to vote their shares in any number of ways, including the following:
---------------------------------------------------------------------------

    \173\ See Proxy Working Group Addendum, note 127, above. We use
the term ``advance voting instructions'' rather than ``client-
directed voting'' because we believe it more precisely identifies
the salient feature of this approach to shareholder voting.
    \174\ Such parties could include proxy advisory firms or other
third parties offering voting platforms to facilitate voting by
retail investors.
    \175\ As noted above, proxy advisory services sometimes submit
votes on behalf of their institutional investor clients pursuant to
the clients' proxy voting policies.
---------------------------------------------------------------------------

     Vote shares in accordance with the board of directors'
recommendations;
     Vote shares against the board of directors'
recommendations;
     Vote shares related to particular types of proposals (for
example, shareholder proposals related to environmental or social
issues) consistent with recommendations issued by specified interest
groups, proxy advisory firms, investors, or voting policies;
     Abstain from voting shares; or
     Vote shares proportionally with the brokerage firm's
customers' instructed votes, or the instructed votes of its
institutional or retail customers only.\176\
---------------------------------------------------------------------------

    \176\ See Proxy Working Group Addendum, note 127, above; see
also John Wilcox, Fixing the Problems with Client-Directed Voting,
March 5, 2010, available at http://blogs.law.harvard.edu/corpgov/2010/03/05/fixing-the-problems-with-client-directed-voting/.
---------------------------------------------------------------------------

    The advance voting instructions would generally be given by the
investors at the time they sign their brokerage agreements or sign up
for the proxy voting service, or periodically thereafter, and would
always be revocable. Investors would also be able to change the advance
voting instructions at any time.
    In connection with each proxy solicitation, investors who had given
advance voting instructions would receive a proxy card or VIF pre-
marked in accordance with those voting instructions, along with the
proxy materials required by the federal securities laws. Investors
could override any of the advanced voting instructions applicable to
that proxy solicitation by checking or clicking on an appropriate
election box before the vote is submitted. Absent instructions to the
contrary, the securities intermediary or other party would vote the
investor's shares in accordance with the advance voting instructions as
pre-marked on the proxy card or VIF.
    In connection with the proposal to amend NYSE Rule 452,\177\ we
received several comment letters that discussed advance voting
instructions as an alternative to the NYSE Rule 452 amendment \178\ or
advocated that such voting instructions should be considered in
conjunction with the NYSE Rule 452 amendment.\179\ In the order
approving the NYSE Rule 452 amendment, we noted that advance voting
instructions raise a variety of questions and concerns, such as
requiring investors to make a voting decision in advance of receiving a
proxy statement containing the disclosures mandated under the federal
securities laws and possibly without consideration of the specific
issues to be voted upon.\180\ The Proxy Working Group also expressed
concern that advance voting instructions could act as a disincentive
for retail investors to vote after reviewing proxy materials if they
had already given such instructions.\181\ On the other hand, supporters
of advance voting instructions stated that the implementation of voting
based on such instructions could help issuers solve quorum problems,
encourage greater retail shareholder participation in the voting
process by making it easier for investors to vote, better permit
shareholders to exercise their franchise, and result in more discussion
and involvement between investors and their brokers on proxy
issues.\182\
---------------------------------------------------------------------------

    \177\ On July 1, 2009, the Commission approved an amendment to
NYSE Rule 452 and Section 402.08 of the NYSE Listed Issuer Manual
that eliminated discretionary voting by brokers in uncontested
director elections. See Release No. 34-60215, note 11, above.
    \178\ See comment letters from American Bar Association (``ABA
Letter''); American Business Conference; Agilent Technologies, Inc.;
Business Roundtable; United States Chamber of Commerce; Connecticut
Water; DTE Energy; First Financial Holdings, Inc.; Furniture Brands
International; General Electric; Intel Corporation; Jacksonville
Bancorp Inc.; McKesson Corporation; Monster Worldwide, Inc.; Nucor
Corporation; Provident Bank; Provident Financial Services, Inc.;
Quest Diagnostics Inc.; Synalloy Corporation; and Veeco Instruments
Inc to Notice of Filing of Proposed Rule Change, as modified by
Amendment No. 4, to Amend NYSE Rule 452 and Listed Company Manual
Section 402.08 to Eliminate Broker Discretionary Voting for the
Election of Directors and Codify Two Previously Published
Interpretations That Do Not Permit Broker Discretionary Votes for
Material Amendments to Investment Advisory Contracts, Release No.
34-59464 (Feb. 26, 2009), available at http://www.sec.gov/comments/sr-nyse-2006-92/nyse200692.shtml.
    \179\ See comment letters from American Express; Society of
Corporate Secretaries and Governance Professionals (``Governance
Professionals Letter''); Honeywell; JPMorgan Chase & Co.; and
Shareholder Communications Coalition to Release No. 34-59464, note
178, above, available at http://www.sec.gov/comments/sr-nyse-2006-92/nyse200692.shtml.
    \180\ See Release No. 34-60215, note 11, above, at 34.
    \181\ See Proxy Working Group Addendum, note 127, above, at 5.
    \182\ Id. at 5-6. See also Governance Professionals Letter, note
179, above; ABA Letter, note 177, above; and Frank G. Zarb, Jr. and
John Endean, ``The Case for `Client Directed Voting,' '' Law 360
(Jan. 4, 2010).
---------------------------------------------------------------------------

    While we will continue to consider the advisability of allowing
third parties, such as broker-dealers, to solicit instructions
regarding the voting of shares by retail investors without the benefit
of information that is contained in disclosures that our rules require
in connection with shareholder votes, we recognize that facilitating
the use of advance voting instructions can be

viewed as providing retail investors with a component of the services
now made available to institutional investors by proxy advisory firms.
However, retail investors are not necessarily in the same position as
institutional investors. Some institutional investors rely upon pre-
developed voting policies and procedures to ensure consistency across
portfolios, to aid in post-vote monitoring and reporting, and otherwise
to comply with applicable fiduciary duties. Some retail shareholders
may not be as likely to monitor, or hire others to monitor, the
application of their advance voting instructions.
    There is currently no applicable exemption for securities
intermediaries to solicit advance voting instructions from their
customers. Exchange Act Rule 14a-2(a)(1) provides an exemption from the
proxy solicitation rules to securities intermediaries when they forward
proxy materials on behalf of issuers and request voting
instructions.\183\ This exemption, however, requires securities
intermediaries to ``promptly furnish'' proxy materials to the person
solicited. By definition, brokers seeking to obtain advance voting
instructions from customers would not be able to satisfy this
requirement. In the absence of an applicable exemption for the
solicitation of advance voting instructions, Rule 14a-4(d) states that
no proxy shall confer authority to vote at any annual meeting other
than the next annual meeting after the date on which the form of proxy
is first sent.\184\ In addition, that rule prohibits a proxy from
granting authority to vote with respect to more than one meeting.\185\
---------------------------------------------------------------------------

    \183\ 17 CFR 240.14a-2(a)(1).
    \184\ 17 CFR 240.14a-4(d)(2).
    \185\ 17 CFR 240.14a-4(d)(3).
---------------------------------------------------------------------------

    To pursue this alternative further, there are a number of issues
that would need to be considered. Advance voting instructions could be
solicited to varying levels of detail. For instance, such an
instruction could be very broad, such as ``vote consistent with
management's recommendations'' or ``vote consistent with the
recommendations of XYZ Environmental Group.'' The grant of such broad
authority could raise concerns about the extent to which the investor's
vote is an informed one. Greater specificity in a request for
instructions, however, could provide an investor with greater certainty
regarding what his or her instruction relates to. For example, an
instruction to ``vote consistent with [management's or other party's]
recommendations regarding corporate governance issues'' would provide
more certainty.
    In addition, if we were to permit advance voting instructions, we
would need to address other issues including whether such instructions
should be re-affirmed on a periodic basis; whether they should apply to
the voting of shares of issuers that the investor did not own when the
original instructions were submitted; whether they should be re-
affirmed each time an investor purchases additional shares of an
issuer's stock for which that investor has already submitted voting
instructions; and whether brokers can seek from investors advance
voting instructions that vary by company.
    We are interested in receiving views on whether permitting advance
voting instructions would increase retail investor participation in the
voting process, and on whether such instructions would be appropriate
as a general matter. If such instructions would increase retail
investor participation and would be appropriate, we are interested in
receiving views on any conditions or requirements that we should
consider applying to the solicitation of such instructions.
d. Investor-to-Investor Communications
    We are interested in receiving views on whether investor interest
in matters presented to shareholders is affected by the extent to which
investors are able to communicate with other investors about their
opinions regarding matters up for a vote. It is our understanding that
there tends to be higher voting participation in situations that
involve increased communications and high investor interest, such as
well-publicized proxy contests. We have, in the past, adopted several
provisions designed to enhance shareholder communications between
investors and the issuer, as well as among investors, including:
     Exempting communications with investors from the proxy
statement delivery and disclosure requirements where the soliciting
person is not seeking proxy authority and does not have, among other
things, a substantial interest in the matter (other than as an investor
in the issuer);\186\
---------------------------------------------------------------------------

    \186\ 17 CFR 240.14a-2(b)(1). The rule specifies certain
individuals and entities, such as affiliates of the registrant, that
are not entitled to rely on the exemption. Also, if the shareholder
owns more than $5 million of the registrant's securities, it must
furnish a Notice of Exempt Solicitation to the Commission. 17 CFR
240.14a-6(g).
---------------------------------------------------------------------------

     Permitting an investor to publicly announce how it intends
to vote and provide the reasons for that decision without having to
comply with the proxy rules;\187\ and
---------------------------------------------------------------------------

    \187\ 17 CFR 240.14a-1(l)(2)(iv).
---------------------------------------------------------------------------

     Broadening the types of communications that are
permissible prior to the distribution of a definitive proxy
statement.\188\
---------------------------------------------------------------------------

    \188\ 17 CFR 240.14a-12; Regulation of Takeovers and Security
Holder Communications, Release No. 33-7760 (Oct. 22, 1999) [64 FR
61408].
---------------------------------------------------------------------------

    In addition, in 2007, we adopted rules promoting the use of
electronic shareholder forums on the Internet for investor
communications.\189\ It is our understanding that such forums have not
been used extensively. We are interested in receiving views on whether,
if further steps are taken to facilitate informed discussion among
investors, the level of investor voting participation and informed
proxy voting would be likely to increase. In addition, we are
interested in receiving views on whether any additional forums for
shareholder-to-shareholder communications would be helpful.
---------------------------------------------------------------------------

    \189\ See Release No. 34-57172, note 3, above.
---------------------------------------------------------------------------

e. Improving the Use of the Internet for Distribution of Proxy
Materials
    In 2007, we amended the proxy rules to adopt a ``notice and access
model.'' \190\ This model provides issuers with two options for making
their proxy materials available: the ``notice-only option'' \191\ and
the ``full set delivery option.'' Under the notice-only option, the
issuer must post its proxy materials on a publicly-accessible Web site
and send a notice to shareholders at least 40 days before the
shareholder meeting date to inform them of the electronic availability
of the proxy materials, and explain how to access those materials.\192\
Under this option, an issuer must also provide paper or e-mail copies
of proxy materials at no charge to shareholders who request such
copies.\193\
---------------------------------------------------------------------------

    \190\ See Notice and Access Release, note 2, above.
    \191\ The notice and access model is a concept separate from,
but complementary to, electronic delivery. The notice and access
model permits an issuer (or a securities intermediary at the
direction of the issuer) to deliver a notice (typically in paper)
informing shareholders that proxy materials are available on the
Internet in lieu of sending a full paper set of proxy materials.
Electronic delivery, on the other hand, arises from our guidance in
Release No. 33-7233, note 32, above. In that release, we explained
that delivery of materials (including proxy materials) may be made
electronically under certain circumstances, including if a
shareholder has provided affirmative consent to electronic delivery.
An issuer or securities intermediary may send this notice
electronically to a shareholder if that shareholder has
affirmatively consented to electronic delivery.
    \192\ See 17 CFR 240.14a-16; Notice and Access Release, note 2,
above.
    \193\ 17 CFR 240.14a-16.
---------------------------------------------------------------------------

    Issuers may also select the ``full set delivery'' option, where the
issuer

delivers a full set of proxy materials to shareholders, along with the
Notice of Internet Availability of Proxy Materials on a Web site, and
posts the proxy materials to a publicly-accessible Web site.\194\ An
issuer may use the notice-only option to provide proxy materials to
some shareholders, and the full set delivery option to provide proxy
materials to other shareholders.\195\
---------------------------------------------------------------------------

    \194\ Id. The issuer may elect to include all of the information
required to appear in the Notice in the proxy statement and proxy
card. Id.
    \195\ Id.
---------------------------------------------------------------------------

    It has been suggested that our adoption of rules permitting the
dissemination of proxy materials through a ``notice and access'' model
has contributed to a decline in retail investor participation in
voting. We believe that it is difficult to conclude, based on existing
data, that notice and access has caused changes in voter participation.
To be sure, the number of retail accounts submitting voting
instructions when issuers use the notice-only option is lower than the
number of retail accounts submitting voting instructions when issuers
use the full-set delivery option. The number of retail shares being
voted, however, does not appear to differ substantially.\196\ More
importantly, because issuers can elect whether to use the notice-only
model, it is difficult to discern whether patterns in voting behavior
are due to notice and access or to other factors. Issuers who choose
the notice-only model may differ from other issuers in ways that may
also correlate with voter participation, such as size or other
characteristics. Some issuers have chosen a hybrid model, continuing to
distribute full packages of proxy solicitation materials to selected
shareholders based on the size of their holdings or their voting
histories,\197\ suggesting that these issuers may believe that full-set
delivery affects voter participation in some cases.
---------------------------------------------------------------------------

    \196\ See Broadridge, Notice and Access: 2010 Statistical
Overview of Use with Beneficial Shareholders, available at http://www.broadridge.com/notice-and-access/FY10_full_year.pdf (``2010
Broadridge Statistical Overview''). This report indicates that,
during the 2009 and 2010 proxy seasons, 31.95% and 27.29%,
respectively, of retail shares were voted at issuers not using
notice and access, while 28.70% and 31.01%, respectively of retail
shares were voted at issuers using notice and access. On the other
hand, 19.39% and 19.21%, respectively, of retail accounts were voted
at issuers not using notice and access, while 12.72% and 13.85%,
respectively, of retail accounts were voted at issuers using notice
and access.
    \197\ Id.
---------------------------------------------------------------------------

    Another possible option to encourage shareholder participation,
while still allowing issuers to use the notice-only option, would be to
permit the inclusion of a proxy card or VIF with the Notice of Internet
Availability of Proxy Materials when an issuer or other soliciting
shareholder elects to use the notice-only option under the notice and
access model for the delivery of proxy materials. Currently, Exchange
Act Rule 14a-16 explicitly prohibits the soliciting party from
including a proxy card or VIF with the Notice in the same mailing.\198\
Although we initially proposed a model that would have allowed
soliciting parties to include a proxy card or VIF with the Notice, we
ultimately adopted a rule that prohibited the inclusion of the proxy
card or VIF and noted commentators' concerns that ``physically
separating the card from the proxy statement, as originally proposed,
may lead to the type of uninformed voting that the proxy rules are
intended to prevent.'' \199\
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    \198\ 17 CFR 240.14a-16(e). A proxy card or VIF may be included
with a Notice if at least 10 days have passed since the date a
Notice was first sent to shareholders. 17 CFR 240.14a-16(h)(1).
    \199\ Internet Availability of Proxy Materials, Release No. 34-
55146 (Jan. 22, 2007) [72 FR 4148] at 4153.
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3. Request for Comment
    With respect to investor education, we ask the following questions:
     To what extent should we take additional steps to
encourage retail investor participation in the proxy process?
     To what extent would greater use of plain English, some
form of summary of proxy materials, or layered formats in Web-based
disclosure make proxy materials more accessible to retail investors?
     To what extent are retail voter participation levels
affected by process-related impediments to participation? If affected
by impediments, what are they and should we seek to remove them? What
costs and benefits are associated with efforts to increase
participation?
     Would additional investor education improve retail
investor participation in the proxy process? How could such a program
best reach both registered owners and beneficial owners? What would be
the benefits and costs of such a program? What should be in the
educational materials and who should decide what goes in them?
     Should brokers more clearly highlight and disclose key
policies, including a shareholder's voting rights and default
positions, such as OBO/NOBO, when a customer enters into a brokerage
agreement? Should brokers provide counseling to potential customers to
enhance understanding of such provisions in the brokerage agreement?
When a customer enters into a brokerage agreement, should brokers be
required to obtain the preferences of the client regarding whether to
receive proxy materials electronically, and inform issuers of that
election automatically when securities of that issuer are purchased?
     What role should the Commission play in promoting or
developing the education campaign? How can the SEC's investor education
Web sites be made more useful? For example, should the Web site provide
interactive instruction?
    With respect to enhanced issuers' and brokers' Internet platforms,
we ask the following questions:
     Would an issuer's Web site or a broker's Web site be a
useful location for investor educational information? Are there other
methods to effectively educate investors? What would be the costs and
benefits of requiring issuers or securities intermediaries to include
such information on their Web sites?
     Should issuers or brokers enhance their Web sites, if they
have one, to provide the issuers' shareholders or the brokers'
customers, respectively, with the ability to receive notices of
upcoming corporate votes, to access proxy materials and to vote shares
through their personal account pages? What would be the costs of such a
system? Would adding this service for investors make them more likely
to vote? To what extent do issuers and brokers currently provide such
functionality on their Web sites?
     Should we encourage the creation of inexpensive or free
proxy voting platforms that would provide retail investors with access
to proxy research, vote recommendations, and vote execution? If so,
how?
    With respect to advance voting instructions, we ask the following
questions:
     Should we consider allowing securities intermediaries to
solicit voting instructions in advance of distribution of proxy
materials pursuant to an exemption from the proxy solicitation rules?
Should there be any conditions on any such exemption, and if so, what
should they be?
     To what extent would voting instructions made without the
benefit of proxy materials result in less informed voting decisions?
Are there countervailing benefits to permitting the solicitation of
such instructions? To what extent does the revocability of advance
voting instructions mitigate concerns over less informed voting
decisions?
     With regard to the use of advance voting instructions, are
retail investors at a disadvantage as compared to institutional
investors that use the

services of a proxy advisory firm? If so, how? Are there aspects of the
services and relationship between proxy advisory firms and their
clients that would not exist between securities intermediaries
soliciting advance voting instructions and their customers? If so, how
should these differences be addressed, if at all?
     If such solicitation of advance voting instructions were
permitted, what level of specificity should the solicitation of
advanced voting instructions be required (or permitted) to have? Is it
appropriate to permit the solicitation of a broad scope of voting
authority?
     Should we allow the solicitation by securities
intermediaries of advance voting instructions for all types of proxy
proposals, or should it be limited to certain types of proposals? For
example, should we permit solicitation of advance voting instructions
with respect to shareholder proposals, proxy contests, or proposals
subject to ``vote no'' campaigns?
     If solicitation of advance voting instructions were
permitted, should the investor be permitted to instruct the securities
intermediary to vote in accordance with the recommendations of
management, a proxy advisory firm, or other specified persons? How
neutral or balanced should the solicitation of advance voting
instructions be?
     If we were to allow the solicitation of advance voting
instructions, should we require an investor to reaffirm its voting
instructions periodically? If so, how often? Should we require an
investor to reaffirm its voting instructions every time it purchases
additional shares of a stock for which that investor has already
submitted a voting instruction, or when it purchases shares of a new
issuer?
     If we were to allow advance voting instructions, what
would be an appropriate range of options available to an investor?
Should advance voting instructions only be permitted when the investor
has meaningful options from which to choose?
     How difficult would it be to obtain advance voting
instructions from existing brokerage customers? What would be the costs
of obtaining advance voting instructions for existing accounts? Who
should bear the costs of soliciting such instructions?
     If we were to allow the solicitation of advance voting
instructions, would it undermine or promote the purpose of the recent
amendment to NYSE Rule 452 to prohibit brokers from voting uninstructed
shares in uncontested elections of directors?
    With respect to investor-to-investor communications, we ask the
following questions:
     To what extent are investor interest in matters presented
to shareholders and investor voting participation affected by the lack
of investor-to-investor communications regarding those matters?
     Have electronic shareholder forums been used extensively?
Are there any revisions to Rule 14a-2(b)(6), which currently provides
an exemption for electronic shareholder forums, that would make it
easier to establish such forums? For example, is there a way for an
entity establishing an electronic shareholder forum to confirm the
shareholder status of participants on the forum? If a securities
intermediary provides information, such as a control number, to enable
such confirmation, should precautions be taken to ensure that personal
information about those investors is not disclosed?
     Should we consider revising the electronic shareholder
forum rules to shorten the 60-day period to promote more shareholder-
to-shareholder communication closer to the meeting date? If so, what
would be an appropriate time period?
     Are there any other new rules or revisions to existing
rules that would facilitate communications among investors? If so, what
would those revisions be?
     Would any additional guidance regarding the scope of our
rules and definitions, such as the definition of the term
``solicitation,'' improve the extent and quality of investor
participation in the proxy voting process?
    With respect to possible revisions to the notice and access model,
we ask the following questions:
     Should we consider requiring that companies using a
``notice and access'' model for distributing proxy materials use that
model on a stratified basis to encourage retail voting participation?
For example, should we require that issuers send full sets of proxy
materials to shareholders who have voted on paper in the past two
years?
     Should we consider amending our rules to permit inclusion
of a proxy card or VIF with a Notice of Internet Availability of Proxy
Materials?
     Are there other changes that we can make to the notice and
access model to improve voting participation? For example, should we
require affirmative consent from a shareholder before an issuer is
allowed to send that customer only a Notice of Internet Availability of
Proxy Materials? Should we eliminate the notice and access model
altogether?

C. Data-Tagging Proxy-Related Materials

1. Background
    Issuers soliciting proxies are required to distribute a proxy
statement \200\ and to disclose the results of shareholder votes within
four business days after the end of the meeting at which the vote was
held.\201\ Funds are generally required to disclose annually on Form N-
PX \202\ how they vote proxies relating to portfolio securities.\203\
In the discussion below, we address whether this information could be
organized and made available to investors in ways that might enhance
the level and quality of shareholder participation in the proxy voting
process.
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    \200\ The proxy statement must include the information required
by Schedule 14A of the Exchange Act. [17 CFR 240.14a-101] The
Commission's rules also generally require issuers not soliciting
proxies from shareholders entitled to vote on a matter to distribute
an information statement that must include the similar information
required by Schedule 14C of the Exchange Act [17 CFR 240.14c-101].
Accordingly, the data-tagging discussion in this Section IV.C
relates to the information required by Schedule 14C in the same
manner it relates to corresponding information required by Schedule
14A.
    \201\ Item 5.07 of Form 8-K [referenced in 17 CFR 249.308].
    \202\ 17 CFR 274.129. See Section III.C, above, for a further
discussion of Form N-PX.
    \203\ In this Section IV.C, we use the term ``proxy statement
and voting information'' to refer collectively to the information
required by Schedule 14A, Schedule 14C, Item 5.07 of Form 8-K and
Form N-PX.
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    In 2004, as part of our longstanding efforts to increase
transparency in general and the usefulness of information in
particular, we began an initiative to assess the benefits of
interactive data \204\ and its potential for improving the timeliness,
accuracy, and analysis of financial and other filed information.\205\
Data becomes interactive when it is labeled, or ``tagged,'' using a
computer markup language that can be processed by software for
analysis. Such computer markup languages use standard sets of
definitions, or ``taxonomies,'' that translate text-based information
in Commission filings into interactive data that can be retrieved,
searched, and analyzed through automated means.
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    \204\ In this Section IV.C, we generally refer to ``tagged
data'' as ``interactive data'' because users are able to interact
with the data by processing it.
    \205\ See Press Release No. 2004-97 (July 22, 2004), available
at http://www.sec.gov/news/press/2004-97.htm.
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    Our efforts regarding interactive data thus far have resulted in
our adoption of rules that, in general, currently or ultimately will
require:
     Public issuers, including foreign private issuers, to
provide their financial statements to the Commission and on their
corporate Web sites, if any,

in interactive data format using eXtensible Business Reporting Language
(``XBRL''); \206\
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    \206\ Interactive Data to Improve Financial Reporting, Release
No. 33-9002 (Jan. 30, 2009) [74 FR 6776] as corrected by Interactive
Data to Improve Financial Reporting, Release No. 33-9002A (Apr. 1,
2009) [74 FR 15666]. Issuers that are or will be required to provide
their financial statements in interactive data format using XBRL are
permitted to provide such interactive data before they are required
to do so. Funds are permitted to provide financial information in
interactive data format using XBRL as an exhibit to certain filings
in our electronic filing system under a voluntary filer program that
initially was implemented in 2005.
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     Mutual funds \207\ to provide the risk/return summary
section of their prospectuses to the Commission and on their Web sites,
if any, in XBRL format; \208\
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    \207\ In this Section IV.C, we use the term ``mutual fund'' to
mean an open-end management investment company. An open-end
management investment company is an investment company, other than a
unit investment trust or face-amount certificate company, which
offers for sale or has outstanding any redeemable security of which
it is the issuer. See Sections 4 and 5(a)(1) of the Investment
Company Act [15 U.S.C. 80a-4 and 80a-5(a)(1)].
    \208\ Interactive Data for Mutual Fund Risk/Return Summary,
Release No. 33-9006 (Feb. 11, 2009) [74 FR 7748] as corrected by
Interactive Data for Mutual Fund Risk/Return Summary; Correction,
Release No. 33-9006A (May 1, 2009) [74 FR 21255]. Mutual funds are
permitted to provide their risk/return summary information in
interactive data format (using XBRL) before they are required to do
so. The public companies, foreign private issuers and mutual funds
permitted or required to provide financial statement or risk/return
summary information in interactive data format are required to
continue to provide the information in traditional format as well.
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     Rating agencies to provide certain ratings information on
their Web sites in XBRL format; \209\
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    \209\ Amendments to Rules for Nationally Recognized Statistical
Rating Organizations, Release No. 34-61050 (Nov. 23, 2009) [74 FR
63832] and Amendments to Rules for Nationally Recognized Statistical
Rating Organizations, Release No. 34-59342 (Feb. 2, 2009) [74 FR
6456].
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     Money market funds to provide portfolio holdings
information to the Commission in interactive data format using
eXtensible Markup Language (``XML''); \210\
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    \210\ Money Market Fund Reform, Release No. IC-29132 (Feb. 23,
2010) [75 FR 10060]. The XBRL format is compatible with and derives
from the XML format.
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     Transfer agents to provide registration, activity and
withdrawal information to the Commission in XML format; \211\
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    \211\ Electronic Filing of Transfer Agent Forms, Release No. 34-
54864 (Dec. 4, 2006) [71 FR 74698].
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     Issuers to provide notice of Regulation D \212\ exempt
offering information to the Commission in XML format \213\ or through
the Commission's online forms Web site that tags the information in
XML; \214\ and
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    \212\ 17 CFR 230.501-508.
    \213\ See EDGAR Form D XML Technical Specification (Version
7.4.0), available at http://www.sec.gov/info/edgar/formdxmltechspec.htm.
    \214\ Electronic Filing and Revision of Form D, Release No. 33-
8891 (Feb. 6, 2008) [73 FR 10592].
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     Officers, directors, and principal owners to provide
beneficial ownership information under Section 16(a) of the Exchange
Act \215\ to the Commission in XML format \216\ or through the
Commission's online forms Web site that tags the information in
XML.\217\
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    \215\ 15 U.S.C. 78p(a).
    \216\ See EDGAR Ownership XML Technical Specification (Version
3), available at http://www.sec.gov/info/edgar/ownershipxmltechspec.htm.
    \217\ Mandated Electronic Filing and Web Site Posting for Forms
3, 4 and 5, Release No. 33-8230 (May 7, 2003) [68 FR 25788].
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    Currently, proxy statement and voting information is neither
required nor permitted to be provided to the Commission in interactive
data format. As a result, shareholders cannot retrieve, search, and use
this information through automated means in the form in which it is
provided to the Commission.
2. Potential Regulatory Responses
    We are interested in receiving views on whether it would be
beneficial to investors to permit or require issuers, including funds,
to provide proxy statement and voting information in interactive data
format in addition to the traditional format. We are also interested in
understanding the costs of providing additional tagged information. A
significant amount of the textual data in the proxy statement is well-
structured and may be suitable for data tagging. If issuers provided
reportable items in interactive data format, shareholders may be able
to more easily obtain specific information about issuers, compare
information across different issuers, and observe how issuer-specific
information changes over time as the same issuer continues to file in
an interactive data format. This could both facilitate more informed
voting and investment decisions and assist in automating regulatory
filings and business information processing.\218\
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    \218\ We anticipate that any interactive data format version of
the information permitted or required would not replace the
traditional format version, at least not initially. In general,
interactive data currently is machine-readable only. Without the use
of software, interactive data is illegible to the human eye. As a
result, we expect that any interactive data would be provided in a
separate schedule or exhibit. It is possible, however, that at some
point in the future technology will evolve in a manner that would
permit human-readable text and interactive data to appear in the
same document.
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    Under our current rules, issuers are permitted or required to
provide specified information in interactive data format only as
described above. We have, however, previously considered, and sought
comment on, permitting or requiring interactive data for other types of
information in XBRL or another format.\219\ Most recently, in the 2008
release proposing the required filing of financial statements in XBRL
format,\220\ we expanded upon our 2006 request for comment on making
executive compensation information available in interactive data
format.\221\ In the 2008 release, we did not propose permitting or
requiring interactive data for executive compensation, but asked a
series of questions related to whether we should. As noted in the 2009
release adopting the financial statement XBRL requirements, some
commentators supported the idea of eventually tagging non-financial
statement information such as executive compensation because of its
usefulness to investors,\222\ while others expressed concern that
variations among issuers in executive compensation practices may not
lend themselves to the development of standard tags and suggested that
any tagging be voluntary rather than required.\223\
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    \219\ With regard to format, we solicited comment in our 2004
interactive data concept release regarding the ability of
interactive data to add value to Commission filings, whether in XBRL
or another interactive data format. Enhancing Commission Filings
Through the Use of Tagged Data, Release No. 33-8497 (Sept. 27, 2004)
[69 FR 59111].
    \220\ Interactive Data to Improve Financial Reporting, Release
No. 33-8924 (May 30, 2008) [73 FR 32794].
    \221\ Executive Compensation and Related Party Disclosure,
Release No. 33-8655 (Jan. 27, 2006) [71 FR 6542]. In 2007, as
further discussed below, our staff used XBRL to tag Summary
Compensation Table data provided by large filers and created
rendering software that enabled investors to not only view
compensation information but also manually calculate compensation
and compare compensation across companies. The software was called
the Executive Compensation Reader. We made these efforts to show how
interactive data might provide investors with easier and faster
analysis. SEC Press Release 2007-268 (Dec. 21, 2007).
    \222\ See, e.g., comment letter to Release No. 33-9002, note
206, above, from California Public Employees' Retirement System.
    \223\ See, e.g., comment letters to Release 33-9002, note 206,
above, from American Bar Association, Johnson & Johnson, Pfizer,
General Mills, and Society of Corporate Secretaries and Governance
Professionals.
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    In connection with our efforts to improve communication in the
proxy context, we are interested in receiving views on whether we
should reconsider whether to permit or require proxy statement and
voting information to be provided in interactive data format.\224\
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    \224\ Our solicitation of comment regarding providing proxy
statement and voting information in interactive data format is
consistent with the Resolution on Tag Data for Proxy and Vote
Filings adopted by the Securities and Exchange Commission Investor
Advisory Committee. See http://www.sec.gov/spotlight/invadvcomm/iacproposedresproxyvotingtrans.pdf.

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3. Request for Comment
     Should we permit issuers, including funds, to provide
proxy statement and voting information to the Commission and on their
corporate Web sites, if any, in an interactive data format? If so, are
there benefits to one tagging language (e.g., XBRL) over another? \225\
Should we require issuers to provide such information to the Commission
and on their corporate Web sites, if any, in an interactive data
format? Should we also permit or require the tagging of executive
compensation information even if it is not in the proxy statement, but
rather, in the annual report on Form 10-K? \226\
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    \225\ Currently, there apparently is no standard set of XBRL
definitions, or ``taxonomy,'' available to enable an issuer to
provide proxy statement and voting information or any subset of such
information in XBRL format. XBRL US, however, is developing a
taxonomy for at least some information a proxy statement requires.
See http://xbrl.us/Learn/Pages/Initiatives.aspx (``Broadridge
Financial Solutions contributed a proxy taxonomy to XBRL US in Q4
2008. XBRL US will incorporate the taxonomy into a master digital
dictionary of terms.'').
    \226\ 17 CFR 249.310.
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     Are there any other types of information for which we
should permit or require tagging in order to improve the efficiency and
quality of proxy voting? For example, should we permit or require
tagging of information contained in proxy statements filed by non-
management parties?
     If we permit or require interactive data for the
information contained in a proxy statement, should we permit or require
it for only a subset of that information, such as executive
compensation,\227\ director experience \228\ and other
directorships,\229\ transactions with related persons,\230\ or
corporate governance? \231\ Should we permit or require it for only a
subset of executive compensation information, such as the Summary
Compensation Table,\232\ Director Compensation Table,\233\ Outstanding
Equity Awards at Fiscal Year-End Table,\234\ or Compensation Discussion
and Analysis? \235\
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    \227\ As we noted in Release No. 33-8924, note 220, above, there
was substantial interest in financial Web pages that linked to the
Executive Compensation Reader that temporarily was posted on our Web
site beginning in late 2007. The Executive Compensation Reader
displayed the Summary Compensation Table disclosure of 500 large
companies that followed the executive compensation rules adopted in
2006 in reporting 2006 compensation information in their proxy
statements filed with the Commission. By using the reader, an
investor could view amounts included in the Summary Compensation
Table Stock Awards and Option Awards columns based on either the
full grant date fair value of the awards granted during the fiscal
year, or the compensation cost of awards recognized for financial
statement reporting purposes with respect to the fiscal year, and
recalculate the Total Compensation column accordingly.
    \228\ Item 401(e)(1) of Regulation S-K [17 CFR 229.401(e)(1)].
    \229\ Item 401(e)(2) of Regulation S-K [17 CFR 229.401(e)(2)].
    \230\ Item 404(a) of Regulation S-K [17 CFR 229.404(a)].
    \231\ Item 407 of Regulation S-K [17 CFR 229.407].
    \232\ Items 402(c) and 402(n) of Regulation S-K [17 CFR
229.402(c) and 402(n)].
    \233\ Items 402(k) and 402(r) of Regulation S-K [17 CFR
229.402(k) and 402(r)].
    \234\ Items 402(f) and 402(p) of Regulation S-K [17 CFR
229.402(f) and 402(p)].
    \235\ Item 402(b) of Regulation S-K [17 CFR 229.402(b)].
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     Would it be useful to investors for issuers to provide
their proxy statement and voting information, or some subset of that
information, in interactive data format? If so, would it be useful for
issuers to provide the information both to the Commission and on their
corporate Web sites, if any? Would data-tagging enable investors to
access proxy information more easily or to compare information
regarding different issuers and/or changes in information over time
with respect to a specific issuer or a set of issuers? Would this
ability result in better informed voting decisions? For insance, should
officer and director identities be tagged and linked to their unique
Commission Central Index Key (CIK) identifier, which would enable
investors to more easily determine whether they have relationships with
other Commission filers? Would investors benefit if governance
attributes, such as board leadership structure \236\ and director
independence, were tagged? \237\
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    \236\ Item 407(h) of Regulation S-K [17 CFR 229.407(h)].
    \237\ Item 407(a) of Regulation S-K [17 CFR 229.407(a)].
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     Would requiring issuers to provide proxy statements and
voting information in interactive data format assist issuers in
automating their business information processing?
     Approximately how much would it cost issuers to provide
each of the following in interactive data format:
      All information contained in a proxy statement;
      Executive compensation information only; and
      Voting information disclosed pursuant to Item 5.07 of
Form 8-K or Form N-PX?
     With respect to cost, would it be preferable to defer any
requirement to tag proxy-related materials until the issuer has been
fully phased-in to the financial statement interactive data
requirements, or would it be relatively easy to accomplish the tagging
of proxy-related materials before, or at the same time as, becoming
subject to the financial statement requirements?
     Is it feasible for funds to tag Form N-PX in a manner that
provides for uniform identification of each matter voted (e.g., for
every fund to assign the same tag to the election of directors at XYZ
Corporation) if issuers of portfolio securities do not themselves
create these tags by tagging their proxy statements? What alternatives
exist, other than having issuers of portfolio securities tag their
proxy statements and assign tags to each matter on their proxy
statements, that could result in uniform tags being assigned by all
funds on Form N-PX to each corporate matter? What would be the costs
associated with those alternatives?
     Whether or not we permit or require interactive data
tagging, should Form N-PX require standardized reporting formats so
that comparisons between funds are easier?
     Should persons other than the issuer be required to file
proxy materials in interactive data format?
     How will retail investors have access to interactive data/
XBRL software that will enable them to take advantage of interactive
data formats?

V. Relationship Between Voting Power and Economic Interest

    As discussed below, investor and issuer confidence in the
legitimacy of shareholder voting may be based on the belief that,
except as expressly agreed otherwise, shareholders entitled to vote in
the election of directors and other matters have a residual economic
(or equity) interest in the company that is commensurate with their
voting rights. To the extent that votes are cast by persons lacking
such an economic interest in the company, confidence in the proxy
system could be undermined. This section examines the possibility of
misalignment of voting power in general and three areas in which
concerns have been expressed about whether our regulations play a role
in the misalignment of voting power from economic interest: The
increasingly important role of proxy advisory firms; the impediments in
our rules to allowing issuers to set voting record dates that more
closely match the date on which voting actually occurs; and hedging and
other strategies that allow the voting rights of equity securities to
be held or controlled by persons without an equivalent economic
interest in the company.

A. Proxy Advisory Firms

1. The Role and Legal Status of Proxy Advisory Firms
    Over the last twenty-five years, institutional investors, including
investment advisers, pension plans, employee benefit plans, bank trust
departments and funds, have substantially increased their use of proxy
advisory firms, reflecting the tremendous growth in institutional
investment as well as the fact that, in many cases, institutional
investors have fiduciary obligations to vote the shares they hold on
behalf of their beneficiaries.\238\ Institutional investors typically
own securities positions in a large number of issuers.
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    \238\ See, e.g., GAO Report to Congress, Corporate Shareholder
Meetings--Issues Relating to Firms That Advise Institutional
Investors on Proxy Voting (June 2007) (``GAO Report'') at 6-7
(attributing the growth in the use of proxy voting advisers, in
part, to the Commission's recognition of fiduciary obligations
associated with voting proxies by registered investment advisers and
its adoption of the proxy voting Advisers Act Rule 206(4)-6(17 CFR
275.206(4)-6), requiring registered investment advisers to ``adopt
and implement written policies and procedures that are reasonably
designed to ensure that you vote client securities in the best
interest of clients, which procedures must include how you address
material conflicts that may arise between your interests and those
of your clients'').
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    Every year, at shareholders' meetings, these investors face
decisions on how to vote their shares on a significant number of
matters, ranging from the election of directors and the approval of
stock option plans to shareholder proposals submitted under Exchange
Act Rule 14a-8,\239\ which often raise significant policy questions and
corporate governance issues. At special meetings of shareholders,
investors also face voting decisions when a merger or acquisition or a
sale of all or substantially all of the assets of the company is
presented to them for approval.
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    \239\ 17 CFR 240.14a-8.
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    In order to assist them in exercising their voting rights on
matters presented to shareholders, institutional investors may retain
proxy advisory firms to perform a variety of functions, including the
following:
     Analyzing and making voting recommendations on the matters
presented for shareholder vote and included in the issuers' proxy
statements;
     Executing votes on the institutional investors' proxies or
VIFs in accordance with the investors' instructions, which may include
voting the shares in accordance with a customized proxy voting policy
resulting from consultation between the institutional investor and the
proxy advisory firm, the proxy advisory firm's proxy voting policies,
or the institution's own voting policy;
     Assisting with the administrative tasks associated with
voting and keeping track of the large number of voting decisions;
     Providing research and identifying potential risk factors
related to corporate governance; and
     Helping mitigate conflict of interest concerns raised when
the institutional investor is casting votes in a matter in which its
interest may differ from the interest of its clients.\240\
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    \240\ See Proxy Voting by Investment Advisers, Release No. IA-
2106 (Jan. 31, 2003) at text accompanying note 25 (stating that an
adviser could demonstrate that the vote was not a product of a
conflict of interest if it voted client securities, in accordance
with a pre-determined policy, based upon the recommendations of an
independent third party).
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    Firms that are in the business of supplying these services to
clients for compensation--in particular, analysis of and
recommendations for voting on matters presented for a shareholder
vote--are widely known as proxy advisory firms.\241\ Institutional
clients compensate proxy advisory firms on a fee basis for providing
such services, and proxy advisory firms typically represent that their
analysis and recommendations are prepared with a view toward maximizing
long-term share value or the investment goals of the institutional
client.
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    \241\ E.g., GAO Report, note 238, above, at 1.
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    Issuers may also be consumers of the services provided by some
proxy advisory firms. Some proxy advisory firms provide consulting
services to issuers on corporate governance or executive compensation
matters, such as assistance in developing proposals to be submitted for
shareholder approval. Some proxy advisory firms also qualitatively rate
or score issuers' corporate governance structures, policies, and
practices,\242\ and provide consulting services to corporate clients
seeking to improve their corporate governance ratings. As a result,
some proxy advisory firms provide vote recommendations to institutional
investors on matters for which they also provided consulting services
to the issuer. Some proxy advisory firms disclose these dual client
relationships; others also have opted to attempt to address the
conflict through the creation of ``fire walls'' between the investor
and corporate lines of business.
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    \242\ For example, The RiskMetrics Group (``RiskMetrics'')
publishes ``governance risk indicators.'' Information on these
ratings is available at http://www.riskmetrics.com/GRId-info. Proxy
advisory firms are not the only types of businesses that offer
corporate governance ratings or scores.
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    Depending on their activities, proxy advisory firms may be subject
to the federal securities laws in at least two notable respects. First,
because of the breadth of the definition of ``solicitation,'' \243\
proxy advisory firms may be subject to our proxy rules because they
provide recommendations that are reasonably calculated to result in the
procurement, withholding, or revocation of a proxy. As a general
matter, the furnishing of proxy voting advice constitutes a
``solicitation'' subject to the information and filing requirements in
the proxy rules.\244\ In 1979, however, we adopted Exchange Act Rule
14a-2(b)(3) \245\ to exempt the furnishing of proxy voting advice by
any advisor to any other person with whom the advisor has a business
relationship from the informational and filing requirements of the
federal proxy rules, provided certain conditions are met.\246\
Specifically, the advisor:
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    \243\ Exchange Act Rule 14a-1(l)(iii) [17 CFR 240.14a-1(l)(iii)]
defines the solicitation of proxies to include ``[t]he furnishing of
a form of proxy or other communication to security holders under
circumstances reasonably calculated to result in the procurement,
withholding or revocation of a proxy.''
    \244\ See Shareholder Communications, Shareholder Participation
in the Corporate Electoral Process and Corporate Governance
Generally, Release No. 34-16104 (Aug. 13, 1979) at note 25. Of
course, the issue of whether or not a particular communication
constitutes a solicitation depends both upon the specific nature and
content of the communication and the circumstances under which it is
transmitted. See Broker-Dealer Participation in Proxy Solicitations,
Release No. 34-7208 (Jan. 7, 1964).
    \245\ 17 CFR 240.14a-2(b)(3).
    \246\ See Shareholder Communications and Shareholder
Participation in the Corporate Electoral Process and Corporate
Governance Generally, Release No. 34-16356 (Nov. 21, 1979) [44 FR
68769]. In 1992, the Commission confirmed that the Rule 14a-2(b)(3)
exemption is available to proxy advisory firms that render only
proxy voting advice. See Regulation of Communications Among
Shareholders, Release No. 34-31326 (Oct. 16, 1992) [57 FR 48276], at
note 41.
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     Must render financial advice in the ordinary course of its
business;
     Must disclose to the person any significant relationship
it has with the issuer or any of its affiliates, or with a shareholder
proponent of the matter on which advice is given, in addition to any
material interest of the advisor in the matter to which the advice
relates;
     May not receive any special commission or remuneration for
furnishing the proxy voting advice from anyone other than the
recipients of the advice; and
     May not furnish proxy voting advice on behalf of any
person soliciting proxies.
    Even if exempt from the informational and filing requirements of
the federal

proxy rules, the furnishing of proxy voting advice remains subject to
the prohibition on false and misleading statements in Rule 14a-9.\247\
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    \247\ 17 CFR 240.14a-9.
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    Second, when proxy advisory firms provide certain services, they
meet the definition of investment adviser under the Advisers Act and
thus are subject to regulation under that Act. A person is an
``investment adviser'' if the person, for compensation, engages in the
business of providing advice to others as to the value of securities,
whether to invest in, purchase, or sell securities, or issues reports
or analyses concerning securities.\248\ As described above, proxy
advisory firms receive compensation for providing voting
recommendations and analysis on matters submitted for a vote at
shareholder meetings. These matters may include shareholder proposals,
elections for boards of directors, or corporate actions such as
mergers. We understand that typically proxy advisory firms represent
that they provide their clients with advice designed to enable
institutional clients to maximize the value of their investments. In
other words, proxy advisory firms provide analyses of shareholder
proposals, director candidacies or corporate actions and provide advice
concerning particular votes in a manner that is intended to assist
their institutional clients in achieving their investment goals with
respect to the voting securities they hold. In that way, proxy advisory
firms meet the definition of investment adviser because they, for
compensation, engage in the business of issuing reports or analyses
concerning securities and providing advice to others as to the value of
securities.
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    \248\ Advisers Act Section 202(a)(11) [15 U.S.C. 80b-2(a)(11)].
Sections 202(a)(11)(A) through (G) of the Advisers Act address
exclusions to the definition of the term ``investment adviser.'' [15
U.S.C. 80b-2(a)(11)(A)-(G)].
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    The Supreme Court has construed Section 206 of the Advisers Act as
establishing a federal fiduciary standard governing the conduct of
investment advisers.\249\ The Court stated that ``[t]he Advisers Act of
1940 reflects a congressional recognition of the delicate fiduciary
nature of an investment advisory relationship as well as a
congressional intent to eliminate, or at least to expose, all conflicts
of interest which might incline an investment adviser--consciously or
unconsciously--to render advice which was not disinterested.'' \250\ As
investment advisers, proxy advisory firms owe fiduciary duties to their
advisory clients.
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    \249\ Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S.
11, 17 (1979); SEC v. Capital Gains Research Bureau, Inc., 375 U.S.
180, 191-192 (1963).
    \250\ Capital Gains, 375 U.S. at 191-192.
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    In addition, Section 206 of the Advisers Act,\251\ the antifraud
provision, applies to any person that meets the definition of
investment adviser, regardless of whether that person is registered
with the Commission. Section 206(1) of the Advisers Act prohibits an
investment adviser from ``employ[ing] any device, scheme, or artifice
to defraud any client or prospective client.'' \252\ Section 206(2)
prohibits an investment adviser from engaging in ``any transaction,
practice or course of business which operates as a fraud or deceit on
any client or prospective client.'' \253\ As we stated recently, the
Commission has authority under Section 206(4) of the Advisers Act to
adopt rules ``reasonably designed to prevent, such acts, practices, and
courses of business as are fraudulent, deceptive or manipulative.''
\254\ Congress gave the Commission this authority to, among other
things, address the ``question as to the scope of the fraudulent and
deceptive activities which are prohibited [by Section 206],'' \255\ and
thereby permit the Commission to adopt prophylactic \256\ rules that
may prohibit acts that are not themselves fraudulent.\257\
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    \251\ 15 U.S.C. 80b-6.
    \252\ 15 U.S.C. 80b-6(1).
    \253\ 15 U.S.C. 80b-6(2).
    \254\ Political Contributions by Certain Investment Advisers,
Advisers Act Release No. 3043 (July 1, 2010) at 16, citing 15 U.S.C.
80b-6(4). Section 206(4) was added to the Advisers Act in Pub. L.
No. 86-750, 74 Stat. 885, at sec. 9 (1960).
    \255\ See H.R. REP. NO. 2197, 86th Cong., 2d Sess., at 7-8
(1960) (stating that ``[b]ecause of the general language of section
206 and the absence of express rulemaking power in that section,
there has always been a question as to the scope of the fraudulent
and deceptive activities which are prohibited and the extent to
which the Commission is limited in this area by common law concepts
of fraud and deceit * * * [Section 206(4)] would empower the
Commission, by rules and regulations to define, and prescribe means
reasonably designed to prevent, acts, practices, and courses of
business which are fraudulent, deceptive, or manipulative. This is
comparable to Section 15(c)(2) of the Securities Exchange Act [15
U.S.C. 78o(c)(2)] which applies to brokers and dealers.''). See also
S. REP. NO. 1760, 86th Cong., 2d Sess., at 8 (1960) (``This [section
206(4) language] is almost the identical wording of section 15(c)(2)
of the Securities Exchange Act of 1934 in regard to brokers and
dealers.''). The Supreme Court, in United States v. O'Hagan,
interpreted nearly identical language in section 14(e) of the
Securities Exchange Act [15 U.S.C. 78n(e)] as providing the
Commission with authority to adopt rules that are ``definitional and
prophylactic'' and that may prohibit acts that are ``not themselves
fraudulent * * * if the prohibition is `reasonably designed to
prevent * * * acts and practices [that] are fraudulent.' '' United
States v. O'Hagan, 521 U.S. 642, 667, 673 (1997). The wording of the
rulemaking authority in section 206(4) remains substantially similar
to that of section 14(e) and section 15(c)(2) of the Securities
Exchange Act. See also Prohibition of Fraud by Advisers to Certain
Pooled Investment Vehicles, Advisers Act Release No. 2628 (Aug. 3,
2007) [72 FR 44756] (stating, in connection with the suggestion by
commenters that section 206(4) provides us authority only to adopt
prophylactic rules that explicitly identify conduct that would be
fraudulent under a particular rule, ``We believe our authority is
broader. We do not believe that the commenters' suggested approach
would be consistent with the purposes of the Advisers Act or the
protection of investors.'').
    \256\ S. REP. NO. 1760, note 255, above, at 4, 8. The Commission
has used this authority to adopt eight rules that address abusive
advertising practices, custodial arrangements, the use of
solicitors, required disclosures regarding advisers' financial
conditions and disciplinary histories, prohibition against political
contributions by certain investment advisers (``pay to play''),
proxy voting, compliance procedures and practices, and deterring
fraud with respect to pooled investment vehicles. 17 CFR 275.206(4)-
1; 275.206(4)-2; 275.206(4)-3; 275.206(4)-4; 275.206(4)-5;
275.206(4)-6; 275.206(4)-7; and 275.206(4)-8.
    \257\ See HR. REP. NO. 2197, note 255, above.
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    Proxy advisory firms also may have to register with the Commission
as investment advisers. Whether a particular investment adviser is
required to register with the Commission depends on several factors.
Investment advisers are generally prohibited from registering with the
Commission if they have less than $25 million in assets under
management.\258\ Congress established this threshold in 1996 to
bifurcate regulatory responsibility between the Commission and the
states.\259\ The Commission retains authority to exempt advisers from
the prohibition on registration if the prohibition would be ``unfair, a
burden on interstate commerce, or otherwise inconsistent with the
purposes'' of the prohibition.\260\
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    \258\ Advisers Act Section 203A [15 USC 80b-3(a)]. If such an
adviser is an adviser to an investment company registered under the
Investment Company Act, however, it must register with the
Commission. See id.
    \259\ National Securities Markets Improvement Act of 1996, Pub.
L. No. 104-290, 110 Stat. 3416 (codified as amended in scattered
sections of the United States Code).
    \260\ Advisers Act Section 203A(c) [15 U.S.C. 80b-3(c)].
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    Proxy advisory firms are unlikely to have sufficient assets under
management to register with the Commission because they typically do
not manage client assets.\261\ Proxy advisory firms may nonetheless be
eligible to register because they qualify for one of the exemptions
from the registration prohibition under Rule 203A-2 under the Advisers
Act. In particular, some proxy advisory firms

may be able to rely on the exemption for ``pension consultants'' \262\
if they have pension plan clients with an aggregate minimum value of
$50 million.\263\
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    \261\ For the purpose of calculating assets under management, an
adviser must look to those securities portfolios for which it
provides ``continuous and regular supervisory or management
services.'' See Instruction 5 to Item 5F of Form ADV [17 CFR 279.1].
    \262\ Advisers Act Rule 203A-2(b) [17 CFR 275.203A-2(b)]
provides that ``[a]n investment adviser is a pension consultant * *
* if the investment adviser provides investment advice to: Any
employee benefit plan described in Section 3(3) of the Employee
Retirement Income Security Act of 1974 (``ERISA'') [29 U.S.C.
1002(3)]; Any governmental plan described in Section 3(32) of ERISA
(29 U.S.C. 1002(32); or Any church plan described in Section 3(33)
of ERISA (29 U.S.C. 1002(33).''
    \263\ See id. A number of proxy advisory firms are currently
registered with the Commission under the pension consultant
exemption.
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    Proxy advisory firms that are registered as investment advisers
with the Commission are subject to a number of additional regulatory
requirements that provide important protections to the firm's clients.
For example, registered investment advisers have to make certain
disclosures on their Form ADV.\264\ Among other things, these
disclosures include information about arrangements that the adviser has
that involve certain conflicts of interest with its advisory
client.\265\ In addition, proxy advisory firms that are registered
investment advisers are required to adopt, implement, and annually
review an internal compliance program consisting of written policies
and procedures that are reasonably designed to prevent the adviser or
its supervised persons from violating the Advisers Act.\266\ Every
registered proxy advisory firm that is registered as an investment
adviser also must designate a chief compliance officer to oversee its
compliance program. This compliance officer must be knowledgeable about
the Advisers Act and have authority to develop and enforce appropriate
compliance policies and procedures for the adviser.\267\ A proxy
advisory firm that is registered as an investment adviser also is
required to establish, maintain, and enforce policies and procedures
reasonably designed to prevent the misuse of material non-public
information.\268\ Proxy advisory firms that are registered as
investment advisers also are required to create and preserve certain
records that our examiners review when performing an inspection of an
adviser.\269\
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    \264\ See Advisers Act Rule 203-1 [17 CFR 275.203-1]. Form ADV
consists of two parts. The information provided by advisers in Part