Over the past 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, as currently 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 Securities and Exchange Commission 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, while NOBOs do not object to such information being disclosed.
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 run and drive the business for the benefit of all stakeholders.
The current OBO/NOBO classification also places an unfair burden on registered owners and those beneficial owners who do 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.
The current SEC’s 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.
Additionally, under the current OBO/NOBO shareholder framework any shareholder can hide behind an OBO registration, this includes U.S. Government-sanctioned individuals, institutions and hostile foreign entities.
In 2021, Congress passed a bipartisan bill called the 2021 Corporate Transparency Act. CTA was enacted to combat illicit activity including tax fraud, money laundering and financing for terrorism by capturing more ownership information for U.S. private corporations, LLCs and S businesses operating in or accessing the U.S. market. Under the new legislation, most businesses must submit a Beneficial Ownership Information (BOI) Report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). This report provides details identifying individuals who are associated with the reporting company.
The CTA was established to prevent individuals with malicious intent from hiding or benefitting from the ownership of their U.S. entities to facilitate illegal operations which, according to Congress, is a widely used tactic that affects national security and economic integrity.
So, the result is, banks must know their customers, brokers must know their customers, private companies must file with Fin CEN as to who their beneficial owners are—yet the most important, largest publicly traded companies in the world are not allowed to know who their actual owners are.
At Alliance Advisors, we help public companies secure the necessary votes to hold their shareholder meetings, 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 (sotanow.org). SOTA was formed for the sole purpose of eliminating the Objecting Beneficial Owner (OBO) classification to allow publicly traded companies equal access to all their shareholders.
We don’t believe there is a single executive of a public company that would be opposed to eliminating the OBO classification, equally most retail investors would agree to have a lower cost and more efficient open line of communication with management. 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 to level the playing field and make the rules of transparency apply to companies and beneficial owners alike.
