Over the last several years government agencies, institutional investors and proxy advisory firms have been seeking greater corporate transparency in public filings to build trust and improve corporate governance. However, such efforts would be better served on a level playing field because, at present, not all shareholders are required to play by the same rules of transparency.
Unlike registered shareholders (record holders) who hold their shares directly with a public company, beneficial owners (street-name shareholders) hold their shares indirectly through a brokerage firm or other financial intermediary (custodian), which serves as the beneficial owner’s point of contact in the receipt of proxy materials.
Under a shareholder communication framework established by the SEC in the mid-1980s, beneficial owners are classified as either objecting-beneficial owners (OBOs) or non-objecting beneficial owners (NOBOs). OBOs are beneficial owners who do not want their name, address and share positions disclosed to the company’s management by the broker or intermediary. NOBOs do not object to such information being disclosed. Companies may obtain a list of their NOBO holders for a fee that, depending on the size of the company and its shareholder base, could cost in the range of tens of thousands of dollars if not higher.
Many of these OBO accounts are high net-worth individuals, hedge funds and foreign investors who hide their identity and share positions from management. The ability to mask your identity along with your ownership in a company, at a time when greater transparency and open communications are being demanded of boards and management, is an antiquated and unfair advantage that is both costly and extremely disruptive to management teams who are working to drive the business for the benefit of all stakeholders.
At a time when companies are expected to be more and more transparent, the SEC’s shareholder communication framework has not changed in more than four decades. For companies, it gives OBOs an unfair advantage when they essentially say: ‘We want to know everything that you do, but we don’t want you to know who we are.’
The current OBO/NOBO classification also places an unfair burden on registered owners and those beneficial owners who choose to provide their names, addresses and share positions. To pass both complex proposals as well as those required to run a company’s day-to-day operations, companies need to secure voting support from their shareholders. Having an unidentifiable shareholder segment with a meaningful share position can easily cause havoc to the outcome of a shareholder meeting.
Consider the common scenario of a high net-worth investor, such as a hedge fund, owning 100,000 shares as an OBO or an OBO population that owns 25 percent or more of a company. The company cannot engage with these beneficial owners directly so management must double down on its outreach efforts by trying to contact 1,000 or 10,000 accessible investors who own 1,000 shares each. Imagine how much more efficient and cost effective that outreach campaign would be if management could reach out to that single beneficial owner, whose identity is fully disclosed, with 100,000 shares directly.
Impact on smaller companies and funds
The current SEC shareholder communication framework also has an unintended impact on the smaller issuer community. It is very often small companies that unfairly endure most of the costs of a shareholder outreach campaign.
Smaller companies are mostly owned by individual retail investors. It is well established that retail investors are less likely to vote in corporate elections than large institutional investors. Too often, I have heard companies say it is not worth the time and expense to get a key vote because it’s too much of an uphill battle. There have been situations where a smaller issuer was in desperate need of passing a financing or bylaw amendment proposal and they were unable to secure sufficient investor voting due to a sizeable OBO population.
The impact is even more damaging in the mutual fund and ETF industry where the predominate investors are retail holders and the costs of soliciting proxies are typically borne directly by the shareholders. The OBO class directly raises the costs and difficulty with mutual fund and ETF proxy solicitations, thereby negatively impacting retail investors, many times costing millions of dollars per vote more than it should.
The situation has become so dire that the Investment Company Institute is advocating for lower quorum requirements for mutual fund shareholder meetings. Although this may help, in our opinion this will not be enough to fix the problem.
Additionally, the current OBO/NOBO shareholder communication framework adds another layer of unnecessary expense onto the company because it is stuck paying exorbitant intermediary fees to process proxy materials and it encourages that communications take place over electronic mail or ‘snail mail,’ rather than directly from issuer to investor.
Management should be able to effectively engage with all their beneficial owners directly without the interference and cost of an intermediary. This process would drastically improve the shareholder communication process, expedite shareholder votes and lower operational expenses.
At Alliance Advisors we help public companies secure the necessary votes to hold their shareholder meetings. In 2024 we handled over 750 shareholder meetings on behalf of our clients, so we see firsthand how difficult and expensive it is to work around the OBO ‘problem’. To this end we formed the Shareholder Ownership Transparency Alliance or SOTA. SOTA was formed for the sole purpose of eliminating the OBO classification to allow publicly traded companies equal access to all their shareholders.
SOTA is organizing a grass-roots effort to ask executives of publicly traded companies, mutual funds and their respective industry trade groups to sign our petition, which asks the US Congress and the SEC to eliminate the OBO rule. SOTA is not seeking money, it is seeking support to level the playing field and restore shareholder democracy. When enough signatures are gathered we intend to bring our cause to Congress and the SEC. We believe we will be successful.
We don’t believe there is a single executive of a public company or mutual fund that would be opposed to eliminating the OBO classification. Eliminating the OBO is a common-sense solution to an outdated problematic regulation and is a win-win for companies and shareholders.
It is time for policymakers in Washington, DC to level the playing field and make the rules of transparency apply to companies and beneficial owners alike.
Joseph Caruso is CEO and co-founder of Alliance Advisors
Joseph Caruso
Joseph Caruso is CEO and co-founder of Alliance Advisors
