We have specified to our securities lending agent NAB as part of our securities lending agreement under the NAB Principal Operating Model, that all equity shareholdings must be made available/recalled back for voting purposes.
Australian listed company AGMs are usually announced 4-6 weeks in advance giving the local NAB securities lending team time to recall and restrict loans ahead of record date.
For non-Australian listed equities, this is implemented via a "Global Share Recall Service" which feeds in both pre-announced future meeting dates, as well as using predictive methodologies for markets where retrospective record dates are announced, based on previous years’ record dates to assess when the likely record date will be this year. National Asset Services (NAS) can then recall stock for the 'predicted record date'. For example, approximately 60-70% of U.S. company announcements of their AGM's occur with a retrospective record date (i.e. typically within two months of the actual meeting date).
Many European equities combine one record date for both AGM's and dividends. By recalling stock on loan over record, the opportunity to generate significant securities lending revenue via scrip dividends and dividend re-investment plans over dividend date has also been forgone. This is a significant forgone portion of securities lending revenue for Vision Super.
Vision Super generally holds greater than 500 listed equities at any one time that are available to lend within the markets that NAB lends in. However, on average Vision Super may only have between 5 and 50 companies out on loan through NAB’s securities lending program on any given day; this is dependent upon demand for stock borrow in each market. Given the low number of individual stocks on loan on each day, the probability of a single stock also being out on loan over a meeting record date is low. However, NAB’s program still provides a stock recall service to Vision Super to recall loaned securities for AGMs.
A summary of the proxy recall service process is as follows:
Vision Super security holdings:
· Deutsche currently receives daily SWIFT of Vision Super security holdings, as security lending agent
Notice of corporate meetings:
· Deutsche receives a daily file from Glass Lewis of upcoming record dates
· This file includes upcoming predictive record dates
Stock recalled from loan:
· NAB (through their agent Deutsche) will recall stock where a future record date or future predicted record date is upcoming
Stock restricted from new loans:
· NAB (through their agent Deutsche) will restrict any new loans where a future record date, or future predicted record date is upcoming
Stock restriction lifted post record date:
· NAB (through their agent Deutsche) will remove the restriction once the record date has passed, so that loans can flow again
There is added complexity with foreign stocks as many U.S. companies have their record darts a few months before the actual AGM, so at times, it becomes difficult to predict.
Vision Super internally also checks its shareholdings on an ad-hoc basis on Bloomberg terminal in-house to confirm what level of stock we have when voting for our equity shareholdings.
Glass Lewis and ISS Coverage & Governance
· Glass Lewis and ISS Governance are market leaders in global services with similar offerings for share recall services
· Glass Lewis is already built into Deutsche Bank's ASL's existing systems and procedures and this is a proven service currently utilizes by many of Deutsche's global securities lending clients, particularly in the U.S...
· Both ISS Governance and Glass Lewis cover over 100 markets worldwide
· NAB lends securities in 26 markets. These 26 markets are all covered by both providers.
Securities lending & recalling stocks out on loan
Domestically, NAB custody was able to return all stock back for our proxy votes to be cast well before annual meeting cut-off times.
For the 2019 period and specifically for our foreign holdings, there were 3 instances (Pernod Ricard SA - France, Meituan Dianping - Cayman Islands & Yangzijiang Ship building (Holdings) Ltd. - Singapore) where NAB’s agent bank (Deutsche AG), were unable to recall stock back for the casting of our votes because those meetings where either Special or Extraordinary Meetings. These types of meetings are much harder to predict than the Annual General Meetings and are usually not telegraphed ahead of time.
NAB are relying on predicting the AGM record date based on past dates for some AGM’s where little or no warnings are given.
Overall, across our aggregate total ballots this is a good result when balanced with revenue in the lending program.
Securities lending and voting rights
NAS cannot guarantee the voting rights for stocks that are lent out for votes to count. The stock needs to be back in the custody Holder Identification Number (HIN) which is the unique number that is issued by the ASX.
Basically, any stocks NAS have lent out (which have been physically delivered to the borrower, change in legal registered name), must be recalled. Technically NAS could ask a borrower to vote on their behalf, but there is no guarantee that they would vote that way, or that they even still hold the stock (e.g. if they have on-lent or sold it, they now no longer hold it, so can’t vote).
Based on this point, we must action a recall so that the stock comes back onto the custody account to be sure the vote counts and its guaranteed. This is where NAS uses this predictive record date modelling for offshore holdings and for local companies, they work on the announcements that the record date is coming up and NAB ensure the stock is recalled back.
Technically positions that are loaned out do retain voting rights but it’s a matter of the position ultimately being settled in the right account when voted. Furthermore, we could be faced with scenarios where a vote has ultimately been passed down the chain but its fraught with risk for the reasons outlined above.