Secure Exchanges: The SEC’s Online Alternative to Paper Proxies

Article ImageTwenty-first century business is transacted online—even the Securities and Exchange Commission (SEC) has trouble getting people to read paper versions of corporate proxy statements in the econtent age. In a move to regain investors' attention, a recently proposed SEC rule change would allow them to read and post proxy communications via the Web.

SEC rules have traditionally required that all proxy communication to stockholders in publicly traded companies be sent as paper mail, but a proposal to allow these mailings to be posted on a Web site that investors could visit in order to read the statements was unveiled in November at the SEC's annual Open Meeting. The proposal faced the requisite 60-day public comment period and will be up for a final vote by SEC leadership sometime this year. If passed, electronic proxy communications will be ready, technologically and logistically, to debut in mid-2007.

Although details won't be finalized until after the public comment period is over in January, the proposal outlines a "notice and access" model for proxy communications, sending investors a postcard telling them when and where on the Web proxy statements and corporate annual reports are posted. Internet proxy reports would still be considered the alternative instead of the norm, and stockholders would receive a phone number to call if they would rather continue receiving proxy statements by mail.

The SEC's Electronic Data Gathering, Analysis, and Retrieval system, better known as EDGAR, has been undergoing some serious upgrades recently. In May 1996, the SEC began requiring a growing number of companies to submit EDGAR filings, including registration statements and periodic updates required by law, via the Internet. Currently, most companies' EDGAR filings are available in a searchable database, allowing investors unprecedented access to critical corporate information. More archived paper submissions are also appearing online every day.

The driving force behind EDGAR's electronic transformation is newly-appointed SEC chairman Christopher Cox, a former Republican congressman from California. Since the beginning of his tenure, Cox has been a strong advocate of capitalizing on technological resources to make corporate information more accessible to shareholders. In July 2003, Cox's predecessor, William Donaldson, proposed his own proxy communication reform that called for, among other things, companies to make election ballots available for shareholder review. While Donaldson failed to collect enough support, Cox's version, his first proposed governance initiative since taking office, was unanimously backed by SEC commissioners by a vote of 5-0.

John Heine, a press officer with the SEC, is reluctant to predict what the public reception will be, but he notices some fundamental differences between the 2003 and 2005 proposals. "The differences between those proposals and these new proposals is that these have simply to do with delivery, whereas the old proposals had to do with substance."

What changed SEC minds since 2003? The number of corporate scandals—Enron, Worldcom, Tyco, even Martha—have demonstrated a need for greater executive accountability and transparency. "Under the mantle of being the good guys and protecting investors, it's a logical step for the SEC," says Shore Communications analyst Jack McConville. Besides saving trees, the SEC's switch from paper to electronic mailings will have the most impact on the way companies elect their directors and board members.

Most elections are uncontested, giving stockholders few options or reasons to take action against corrupt or ineffective corporate leadership. Stockholders are allowed to nominate and vet their own candidates to run for these positions, but they almost never do because of the prohibitively high mailing costs of printing and sending materials out to the entire stockholder list. Thanks to the relatively cheap and powerful communications capabilities of the Internet, stockholders and companies alike will be able to nominate and publicize their own candidates for board elections without having to shell out money for stamps, envelopes, and the intermediary mailing agencies like Automated Data Processing (ADP) required by SEC rules to send out the mailings.

On November 29, Cox addressed the Internet's potential to make information flow freer for investors in his opening statement at the SEC Open Meeting. "[S]ince most investors are already online, and more are coming online every day, we can use that as the wind at our back to make disclosure more accessible. Internet delivery is but the first step in this process. Down the road, I hope that we can exploit the potential of the Web to provide disclosure that can be customized to each investor's tastes—starting with clear summaries, and drilling down into as much detail as one wishes." Despite this ambitious future vision for the SEC, Cox emphasizes that the most revolutionary effect of the proposed change is eliminating the "prohibitive cost" of paper proxy mailings for individual investors.

Many stockholders are so used to ignoring the paper proxy mailings that even the switch to the Internet might leave them indifferent to corporate communication. There is some concern about who can access stockholder mailing lists, since many stockholders prefer to protect their anonymity by having proxy communications shipped to different addresses under pseudonyms. Security issues are still sketchy, but McConville says he doesn't see the investor at risk. 

While the proposal itself isn't rocking many boats, it indicates that the new SEC leadership is eager to tap into technology to make market information more manageable for the average investor with an Internet connection. Cox and the SEC are opening doors online for a more open, accessible dialogue between stockholders and corporations.