The governance of public companies is driven by the proper election of a board of directors by the proxy voting of shareholders. An important factor in voting is how securities firms allocate votes to their customers. At the moment, firms allocate votes using various methods; lack of a consistent method can lead to confusion and to votes not being properly allocated. Pershing and BNY Mellon strongly support the notion of "pre-reconciliation," that is, reducing reduces the number of votes held by the number of shares loaned to others.

An important issue in the corporate governance of public companies is the mechanism for governance itself, namely the proper election of a public company’s board of directors by the proxy voting of shareholders. The Securities and Exchange Commission (SEC) focused on corporate governance issues calling for comment on the proxy voting process, and Pershing and BNY Mellon responded.

One of the important questions asked by the SEC in its request for comment was about the mechanics of how securities firms allocate votes to their customers. At the moment, firms allocate votes using various methods. But, absent a proper method for all firms to follow, this can lead to confusion and to votes not being properly allocated.

In response to the SEC, Pershing and BNY Mellon strongly supported the notion of “pre-reconciliation.” In pre-reconciliation, the brokerage firm reduces the number of votes they have by the number of shares they loaned to others. The following example illustrates why pre-reconciliation makes sense.

• Broker A holds 1,000 shares of Underwater Aircraft (UA) on margin
• UA trades for $1 a share and customer A has a $500 margin debit
• 700 shares are available for loan and are, in fact, loaned by Broker A to Broker B to cover Broker B’s customer’s 700 share short sale of UA
• Broker C’s customer is the buyer of UA shares from Broker B

In this example, one can readily see that if Broker C allocates 700 votes and Broker A allocates 1,000 votes, there will be 1,700 votes—when in fact only 1,000 votes exist. With pre-reconciliation, Broker A reduces the customer’s vote to 300 shares to account for the 700 shares they loaned, and the math works out.

Pershing implemented pre-reconciliation some years ago and we believe other firms should do the same.