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The Council of Institutional Investors (CII) has recently called on the Securities and Exchange Commission (SEC) to set off a formal comment procedure to give guidelines on the use of blockchain technology in proxy voting.
Jeffrey P. Mahoney, general counsel, and Ken Bertsch, executive director of CII, addressed the SEC in a letter dated Jan. 31 stating that the watchdog should focus its efforts, particularly on proxy system mechanics. The CII wants the SEC to shift from focusing on policy issues associated with shareholder proposals and proxy advisers and instead focus on proxy voting.
In November 2018, the SEC hosted roundtable discussions seeking input from all the stakeholders in the industry on improving the proxy voting system. During that meeting, Mr. Bertsch supported looking into using blockchain technology in proxy voting as a viable method of streamlining the entire process. The implementation of this technology would boost security and privacy, guarantee vote confirmation, and minimize mailing costs.
Innovators are ‘Waiting at the Gates’
Since the November meeting, CII stated that they have met with several firms developing blockchain-based solutions to share voting and ownership. According to the letter, the innovators are literally waiting at the gates of the public capital markets keen to enter but they are locked out by outdated regulations.
The Council of Institutional Investors believes that the SEC should work directly with the private sector innovators and issuers willing to adopt the new technologies and create case-by-case regulatory relief. The whole process may comprise individual guidance, no-action letters, and/or exemption orders.
CII suggests that the issuers would first require clarity through regulatory relief for a blockchain-based system of share ownership could be successfully implemented. The new technologies provide many solutions to the SEC’s worries about moving beyond an intermediated system of share ownership, clearance, and also a settlement. However, the old rules prohibit the solutions’ deployment in the public capital markets.
With the implementation of a blockchain-based network of share ownership, the existing issuers have the capability to elect to recall their fungible bundle of securities straight from the (Depository Trust Co.). On the other hand, they can record share ownership digitally on the blockchain with every share distinctly identified cryptographically as being owned by a beneficial owner.
The CII also requested the SEC to adopt a rule that is comparable in scope to its 2016 proposed rule that would make it necessary for the use of universal proxies in any contested elections as something to think about. The move would enable investors to divide their tickets in proxy contests to serve the principle that shareholders voting by proxy must have similar voting privileges as those who vote in person.