In the area of public disclosure of short positions (one of NI RI’s priority financial regulatory reform issues), SEC Commissioner Aguilar indicated, “Some public disclosure of short selling positions is appropriate.” I will be meeting with Commissioner Aguilar in mid-May on this and other proxy matters, but am very pleased as this public pronouncement may mean the SEC is warming to improved disclosure of positions (long or short) to issuers.
Mission
NIRI is dedicated to advancing the practice of investor relations (IR) and professional competency and stature of its members.
Priority Advocacy Issues
• NIRI supports equity ownership position transparency – full and frequent ownership disclosure by all institutional investors (mutual funds, hedge funds, activist investors, etc.) including:
o Long equity positions
o Short equity positions
o Derivative positions
• NIRI supports a comprehensive evaluation of the current shareholder voting and communications system in order to modernize the corporate governance processes used by public company shareholders.
• NIRI supports a comprehensive evaluation of market stabilizing systems and processes during times of extreme volatility including some form of short selling circuit breakers during these periods.
Background
Ownership Transparency
NIRI supports the need for greater transparency within the investment community, favoring a reporting regime that promotes more timely and frequent long position reporting, as well as commensurate full and fair short position disclosure.
Public companies should expect the same level of disclosure from all institutional investors (investment funds, hedge funds, activists etc.) maintaining a short position in their stocks as are required of the funds that are long investors of their stocks. Investment managers are currently required to publicly file periodic reports disclosing only their long equity positions – not their short positions. The SEC’s recent temporary order concerning short position disclosure requires confidential short position reporting to the U.S. Securities and Exchange Commission (SEC), and does not contemplate making these filings publicly available. NIRI sees no reasonable basis for the different long and short disclosure requirements of all institutional asset managers, including hedge funds.
Public companies currently operate in an environment of great transparency governed by federal, state and stock exchange rules and regulations. Current SEC rules generally require institutional investors to disclose share ownership
positions on a quarterly basis (Form 13F), with an exception made for those that petition the SEC to delay these disclosures on the basis of confidentiality. Quarterly reporting was established many years ago before technology advances made reporting much easier. It seems proper that the reporting schema should be similar to what now occurs with retail investors - receiving investment reports on a monthly basis within ten days of the end of the month. Institutional holders should abide by the same frequent public reporting scheme and abandon the quarterly requirement. Reporting rules should be strictly enforced with meaningful penalties for non-compliance.
Shareholder Communications
More than 75% of the shares of public companies are held in "street name," meaning that they are held in the name of a third-party financial intermediary, such as a broker or a bank. This system ensures an efficient transfer of shares among owners and promotes liquidity in our capital markets.
Unfortunately, short selling practices, complex derivative transactions, empty voting and an outdated process for shareholder voting are now challenging the integrity of the corporate election system. Brokers and other financial institutions are not able to accurately account for shares that are entitled to vote on important corporate matters. Hedge funds and other financial players are using share lending and swap transactions to separate economic interest from voting rights, in order to influence the results of a shareholder meeting. Empty voting and the use of “pump and dump” schemes that offer the opportunity to manipulate corporate governance affairs and stock prices should be prohibited.
The current shareholder voting and communications system is more than 30 years old and needs to be updated and reformed. Public companies are not able to use modern technology to communicate with individual investors who own shares in their enterprises. For the protection of individual investors and other participants in our capital markets, the SEC should be directed to initiate a comprehensive evaluation of the current shareholder voting and communications system, focusing on the following:
1. Direct Communications with Individual Investors. The SEC should eliminate the NOBO/OBO (non-objecting beneficial owner/objecting beneficial owner) distinction in order to give companies access to contact information for all of their beneficial owners and to permit companies to communicate with them directly. Shareholders desiring to remain anonymous should bear the cost of maintaining their own privacy, such as through the establishment of nominee accounts.
2. Voting By Retail Investors. The SEC should examine how to protect the vote of the retail investor, particularly in the case of unvoted shares. Institutional investors generally vote 100% of the time in order to meet their legal responsibilities. This voting is facilitated by electronic systems, and also aided by third-party proxy advisory services. Retail investors have no similar voting facilitators or proxy advisory services, and, in fact, often have no motivation to vote their shares. Among the alternatives that the SEC should consider to protect the interests of retail investors are: pass through of voting rights directly to beneficial owners, client directed voting and customer choice voting.
3. Competition Among Proxy Service Providers. Brokers, banks, and other intermediaries should not stand in the way of direct communications between companies and the beneficial owners of their securities. Companies should have the ability to determine the distributors of their communications, and should not be forced to pay for the costs of a system in which the fees and service providers are determined by third parties.
4. Proxy Voting Integrity. The SEC should consider additional steps to ensure that the proxy voting system is transparent and verifiable. The SEC should examine its ownership disclosure rules and require disclosure of both voting and economic ownership in respect to both long and short positions.
5. Proxy Advisory Services. The SEC should review the role of proxy advisory services and the procedures used by these firms in generating recommendations.
Refer to www.shareholdercoalition.com for more information on shareholder communications issues.
Short Sale Circuit Breakers
NIRI supports a comprehensive evaluation of market stabilizing systems and processes (circuit breakers) during times of extreme volatility including some form of short selling circuit breakers during these periods. NIRI urges the SEC to either reinstate the short-sale uptick rule (eliminated in 2007), or implement a new short-sale circuit breaker rule in order to enhance market stability in times of extreme market volatility.
