Vote Integrity: The One Vote, One Share Dynamic

When it comes to mutual fund proxies, the question of who gets to vote is rather simple. And yet, the realities of our investment ecosystem can sometimes create a picture that’s a bit fuzzy.

In the last few decades, the proxy vote system has expanded into a vast and sprawling infrastructure, with multiple acting agents, issuers and brokers all operating through an intermediated holding system. It’s easy to say one share, one vote. But when shareholder votes are issued and processed through intermediaries, broker-dealers and banks . . . it can take a lot of work to be 100 percent sure.

Think about it: There are multiple communication channels, multiple record-keeping systems and multiple participants — usually acting outside your control. Without the necessary transparency to reconcile proxy vote outcomes, funds are vulnerable to two potential problems:

• Over-voting: Sometimes when votes are submitted by an intermediary, the meeting tabulator cannot establish that the intermediary has the appropriate vote entitlements. In other instances, the number of proxy votes submitted exceeds the number of intermediary vote entitlements calculated by the tabulator. This leads to questions.
• Missing votes: Shareholders and beneficial owners have no reliable means of confirming whether a tabulator or meeting chair accepted their intermediary's proxy votes. Investors have identified instances where the voting results suggested their proxy votes were not included in the tabulation — i.e. “went missing.” This too leads to questions.

Why is this important? Situations can arise where the mutual fund believes they have reached quorum when, in fact, they have not; or the fund may erroneously believe they failed to achieve quorum when, in fact, they have. In an era of increased shareholder activism, both of these flaws pose significant risks. At the extreme, successful meeting outcomes could be overturned if all votes cannot be reconciled with speed and accuracy.

To address these challenges, Broadridge has developed a first-of-its-kind industry utility designed to streamline the proxy vote reconciliation process. Proxy vote reconciliation is a process designed to reconcile vote entitlements to minimize over-voting and missing votes.

Given our position at the center of the financial industry, we are uniquely positioned to track, account for, and accurately tabulate outstanding shares to ensure only entitled beneficiaries vote — and to ensure all votes are accurately counted. Here’s a quick overview of what it takes to overcome gaps in the current system so issuers can have greater confidence in the runup to a shareholder meeting.

Step 1:  Receive data

Registered data is received from Mutual Fund client’s transfer agent.

Network Level 3 and trust networked accounts are identified in the data load process.

Brokers and banks transmit data files (97% utilize Broadridge systems to do so).

Step 2:  Systematic identification of registered data

Cross-reference tables assign bank/broker codes to registered accounts identified as bank/broker accounts.

Network Level 3 accounts are identified by a matrix-level flag.

Trust-Networked Accounts and insurance company masters are systematically identified by registration.

All other accounts retain single-vote status.

Step 3:  Systematic entitlement match

An automated reconciliation process matches the share totals of each bank and broker position to the share totals of the respective accounts that were identified as a master account for that bank/broker and calculates the variance.

Step 4:  Variance identification and research

Significant variances between identified Matrix Level 3 and trust networked positions and bank/broker record date data are researched further.

If the deficit is on the record keeper’s side, additional unidentified or misidentified positions are searched for in the record date data.

If the deficit is on the beneficial side, confirmation with the bank or broker may be required to ensure that all record date data was properly received.

Step 5:  Final vote entitlement applied

After all variances are researched, a cap is put in place equal to the total bank or broker position identified on the record keeper’s file. This cap limits how many shares that bank or broker is entitled to vote and have applied to the official tabulation results.

Our process is only the beginning. We’re constantly working to make the system more efficient, reliable and stable.  We’d welcome your thoughts: When it comes to mutual fund proxies, what challenges do you face? How else can the current system be improved?