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Abstract
"26 The industry and SEC led the formation of the central certification service that resulted in "share immobilization" rather than dematerialization.27 Under this model, all paper securities certificates for all issues would be deposited into one or more central pools and kept in custody by such central depositories;28 the more certificates deposited into a central depository, the more efficient the system.29 Eventually, the Depository Trust & Clearing Corporation (DTCC), a holding company of which the Depository Trust Company (DTC) and the National Securities Clearing Corporation are subsidiaries, became the central depository institution.30 Currently, DTC provides depository and book-entry settlement services for substantially all corporate and municipal debt, equity securities, asset-backed securities, and money market instruments available for trading in the United States.31 DTC provides three primary services: (1) custody services; (2) asset services, such as dividend and interest payment, reorganizations, and proxy services; and (3) settlement services.32 Ownership of Mutual Fund Shares A critical and primary step in the proxy solicitation process is identifying the record and/or beneficial shareholders entitled to receive proxy materials and vote at the shareholder meeting where the proposal(s) will be presented.33 Today, the vast majority of shareholders, including nearly all mutual fund shareholders, in the United States have purchased their securities through a financial intermediary that holds them in "street name" through a book-entry account.34 Financial intermediaries, rather than the transfer agent, maintain and update shareholder records, facilitate or execute transfers, and provide other services for the shareholder. "46 The SEC soon re-opened its request for comment on the proxy process, receiving thousands of comment letters as of September 2019, including at least 16 that specifically reference blockchain.47 The SEC Staff Roundtable, Senate Hearings and the Roisman Speech SEC Staff, along with the SEC Commissioners, held the long-awaited SEC Staff Roundtable on the proxy process on November 15, 2018,48 but not before withdrawing two important no-action letters that had provided relief for proxy advisors.49 The Roundtable had three panels focused on voting mechanics and technology, shareholder proposals, and proxy advisory firms.50 The voting mechanics and technology panel raised the topic of traceable shares and discussed how blockchain technology might be used to re-engineer the proxy voting system.51 In particular, John A. Zecca, Senior Vice President, General Counsel North America and Chief Regulatory Officer at Nasdaq, Inc. (Nasdaq) discussed possibilities he saw for blockchain technology in the US proxy voting system, noting that Nasdaq already had participated in two proxy-related projects using blockchain technology, one in Estonia and the other in South Africa.52 Zecca said that he believes blockchain technology has strong potential for effective use in the proxy space because it can accommodate other information technology systems involved and permissioned blockchains could provide opportunities for public companies and mutual funds to communicate with their beneficial shareholders more directly and frequently.53 In December 2018, soon after the SEC Staff Roundtable, the US Senate Banking Committee held a hearing to review the proxy process and potential changes to it.54 Daniel M. Gallagher, a former SEC Commissioner, testified on "plumbing" issues with the system.55 Citing a letter submitted by Ken Bertsch, the Executive Director of the Council of Institutional Investors (the CII), to the SEC's Investor Advisory Committee, Mr. Gallagher explained his view that blockchain-based proxy voting could help enhance timeliness, accessibility, accuracy, certainty, and cost-effectiveness.56 After the SEC Roundtable and Senate hearings, Chairman Clayton passed on the baton for proxy voting reform to SEC Commissioner Elad Roisman.57 In the Roisman Speech, which was made in March 2019 at an Investment Company Institute event, Commissioner Roisman laid out his priorities for examining the proxy voting system and placed mutual funds at the forefront of his review.58 Commissioner Roisman asked how "fund boards and advisers [are] fulfilling their fiduciary duty in the context of proxy voting,"59 and distinguished a fund's duty to listen to the desires of its shareholders and an investment adviser's duty to address the interests of its funds.60 Commissioner Roisman said his objective was to improve the "'plumbing' that underlines our proxy voting system," including by assessing whether there are comprehensive solutions through modern technology.61 As this article was going to press, the SEC held an open meeting on August 21, 2019 at which the SEC voted: * To publish guidance regarding the proxy voting responsibilities of investment advisers under Rule 206(4)-6 under the Investment Advisers Act of 1940, and Form N-1A, Form N-2, Form N-3, and Form N-CSR under the Investment Company Act of 1940 (the Investment Company Act);62 and * To publish an interpretation and related guidance regarding the applicability of certain rules promulgated under Section 14 of the Exchange Act to proxy voting advice.63 Could Blockchain Technology Solve Proxy Voting Problems? [...]by requiring unique log-ins that are connected to a shareholder's AML/KYC information, mutual funds could potentially prevent repetitive voting, which could reduce the potential for over-voting and under-voting. [...]through an application connected to a blockchain, mutual funds could solicit proxy votes from shareholders with Internet access regardless of where they are in the world and receive votes in real-time, which could potentially increase efficiency. [...]as society's communications and commercial preferences continue to shift towards the Internet and mobile devices,92 blockchain-based proxy voting software that relies on smartphones could be used as a more direct and effective method to engage with shareholders, which could in turn increase retail shareholder participation in mutual fund proxy processes. Besides the potential cost savings involved in not adjourning meetings that lack a quorum and not needing to file additional soliciting materials with the SEC to encourage shareholders to vote, this higher engagement, when accurately tabulated, could allow mutual funds to receive information far more directly from its beneficial shareholders regarding their preferences on a range of substantive issues, including ESG topics.93 Further, "smart contracts" could be programmed into a blockchain between (1) an adviser and transfer agent on one end, and (2) both a proxy service provider (such as Broadridge, Inc.) and an issuer on the other.