 Proxy Voting – An Operational Focus Presented By: Satish G. Pattegar Fiduciary & Risk Management Association 2011 National Risk Management Training Conference April 20, :15 AM – 10:15 AM Atlanta, GA

“Proxy voting is a cumbersome process that has traditionally frustrated the voter and confused the issuer. On one hand there is growing recognition that proxy voting is increasingly important in fulfilling fiduciary responsibility and influencing financial strategy. On the other hand, with globalisation and the expansion of the shareholder culture, the technical considerations of ensuring a smooth proxy voting process across multiple stakeholders, time zones and issues are getting more challenging.” Neil Daswani Global Head, Securities Services Standard Chartered Bank

Importance of Proxy Voting Most shareholders are not able to attend shareholder meetings Most shareholders are not able to attend shareholder meetings Majority of investor shares are held by Intermediaries for the benefit of their client Majority of investor shares are held by Intermediaries for the benefit of their client The financial crisis and revived shareholder activism have brought greater attention to the proxy voting process The financial crisis and revived shareholder activism have brought greater attention to the proxy voting process The SEC enforced its first action on an RIA in 2009 for a proxy voting record violation The SEC enforced its first action on an RIA in 2009 for a proxy voting record violation

Regulations, Rules & Standards Regulation of the proxy solicitation process was assigned to the SEC in 1934 Regulation of the proxy solicitation process was assigned to the SEC in 1934 The SEC, OCC, FDIC, FRB, DOL, FINRA, and OTS have implemented proxy related rules The SEC, OCC, FDIC, FRB, DOL, FINRA, and OTS have implemented proxy related rules Fiduciary standards require accurate implementation and records of the proxy voting process Fiduciary standards require accurate implementation and records of the proxy voting process

The Process Majority of securities are held in street name (i.e. DTC) Majority of securities are held in street name (i.e. DTC)  DTC receives the issuer proxy notification based on record date ownership  DTC is required to pass proxy notification to its participants based on DTC participant ownership records

The Process - Continued  Institutional custodians (DTC participants) identify discretionary vs. pass-through votes and provide processing information to proxy processing service providers  The service provider typically forwards proxy materials to beneficial owners, collects voting information from those beneficial owners, and forwards tabulated votes to the issuer

The Process - Continued  Fiduciary duties drive the need to ensure internal processes are adequately structured to ensure proper compliance  Adjustments to the final tabulation may be needed due to various factors (loaned securities, fails, trade errors, etc.)  Trade vs. Settlement

Factors to Consider 1. Identification of Roles and Responsibilities 2. Review of Service Provider Contracts 3. Understanding the Operating Systems 4. Ensuring proper segregation of duties 5. Shareholder Communication Act coding compliance 6. Adjustments & Reconciliation processes

Roles Internal Internal  Business Lines  Operations  SEC rules require banks to respond in one business day with the names and addresses of all respondent banks; and within seven days with the number of customers who are beneficial owners of shares External External  DTC  Broker Dealers  Service Providers

Ownership Registered Beneficial Ownership

T/A OR OTHER SERVICE PROVIDER REGISTERED OWNER VOTE TABULATOR INDIVIDUAL BENEFICIAL OWNERS INSTITUTIONAL BENEFICIAL OWNERS PROXY ADVISORY AGENT SERVICE PROVIDER SECURITIES INTERMEDIARIES DTC ISSUER Notification Delivery of Materials POA & Data Feed of Bene Owners Omnibus Proxy Forward Proxy Mats. and VIFs Executed Proxies Forward Proxy Mats. and VIFs Executed Proxies on Behalf of Service Intermediary Executed Proxies Delivery of Materials & Cards The Flow Source: SEC

Third Parties in a Proxy Voting Process Transfer Agent Transfer Agent Proxy Service Providers Proxy Service Providers Proxy Solicitors Proxy Solicitors Vote Tabulators Vote Tabulators Proxy Advisors Proxy Advisors

In Summary The accountability assigned to custodian is significant since the process is fueled by system coding to drive efficiencies The accountability assigned to custodian is significant since the process is fueled by system coding to drive efficiencies System level codes entail: System level codes entail:  Proxy voting authority  Proxy handling  Proxy mailing address Codes are at: Codes are at:  Account level  Asset and tax lot level

In Summary - Continued Service providers may vary for: Service providers may vary for:  Domestic proxy  Global proxy  Discretionary vs. directed Areas of regulatory compliance focus include: Areas of regulatory compliance focus include:  Accuracy of coding (account level and tax lot level)  SCA compliance (OBO vs. Non-OBO)  Proxy solicitors compliance

In Summary - Continued Areas of regulatory compliance focus include: Areas of regulatory compliance focus include:  Segregation of duties  Conflict of interest  Securities lending impact  Fails & trade errors  Reconciliations  Exception reports & escalation  Documentation & retention

Conclusion Many in the industry believe the existing process is too cumbersome and expansive because issuers must communicate with their beneficial owners through the intermediaries holding the shares in street name, rather than directly with the beneficial owners. Several studies are under way and results may change the process further.

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