The Council of Institutional Investors (CII) and Templum, Inc. (Templum) each recently submitted comments to the SEC to call for the agency to embrace blockchain technology in a variety of contexts regarding the registration and transfer of securities. The dominant system for clearance and settlement of securities in the United States has its roots in the “paperwork crisis” of the early 1970s, and the resulting regulatory regime based on immobilization of securities is largely inconsistent with a blockchain-based system of traceable shares.
The CII letter to the SEC highlights current SEC regulations that impede broader adoption of blockchain solutions. Chief among them, securities are currently required to be made depository-eligible for clearing agency book-entry services in order to be listed on an exchange, and the SEC allows clearing agencies to deny requests to withdraw securities from such agencies. According to CII, the SEC also prohibits issuers from adopting provisions in their governance documents allowing alternative security clearance and settlement mechanisms.
CII envisions a variety of uses for blockchain technology in the proxy voting context. For example, blockchain technology could provide a more secure method of allowing shareholders to opt out of having their private information disclosed to issuers. Several inefficiencies in the proxy voting process could be alleviated or eliminated through the use of blockchain, such as the processes involved in communicating with shareholders and soliciting votes, lengthy voting tabulation, and the lack of reliable end-to-end vote confirmation.
Other areas of the current system that CII asserts blockchain technology can improve include what it describes as:
- The two-business day delay (T+2) in the settlement of equity securities transactions
- The excessively early record date for determining voting rights ahead of annual meetings
- The laborious, lengthy process of position reconciliation ahead of annual meetings
- The costly and complex processes surrounding shareholder communication and solicitation
- Anomalies in share ownership, such as naked short selling and over-traded shares
- Anomalies in share voting, such as under-and over-voting
- Uncertainties resulting from the lack of reliable end-to-end vote confirmation
- Uncertainties in close shareholder votes that can trigger long, manual tabulations
- The difficulty of achieving share identification for antifraud claims and appraisal rights
- The manual processes surrounding blackout periods, stock splits, and recapitalizations
- The costs of monopolistic firms and SROs setting fees for elements of the proxy process
In a petition to the SEC to undertake rulemaking, Templum, a technology firm that provides regulated market infrastructure for the digital asset sector, expanded on several of the same regulatory concerns as the CII, with an emphasis on the lack of clarity in how blockchain technology should be treated under current SEC regulations. Templum’s letter recommends that the SEC clearly define when a blockchain technology platform must register as a clearing agency or transfer agent and how blockchain technology may be used by clearing agencies. Templum also recommended modernizing custody and consumer protection rules in order to allow the use of blockchain to track securities transactions. The clarifications requested by Templum would provide valuable insight on how new, blockchain-based platforms could (or could not) be used in clearing and settling security transfers.
The CII and Templum both acknowledge that several of these regulations now seen as roadblocks were once important steps in modernizing shareholder clearing and voting processes to eliminate inefficiencies caused by the use of paper certificates. Their letters encourage the SEC to once again modernize the same processes by altering current regulations to allow the use of promising new blockchain technologies.