Over the past few years, government agencies, institutional investors, and agency advisors have increased transparency in public companies to build trust and improve corporate governance. However, such efforts would be better targeted in a level playing field, as not all shareholders are currently required to play under the same rules of transparency.
Unlike “registered” shareholders (“recorded holders”) who hold direct shares with public companies, the beneficial owners (“street name shareholders”) hold shares indirectly through a securities company or other financial intermediaries (custodians).
Under the shareholder communications framework established by the Securities and Exchange Commission in the mid-1980s, beneficiaries are classified as opposed to beneficiaries (OBOS) or non-objective beneficiaries (NOBOs). OBOS is a useful owner who does not want a name, address or shared position disclosed to the management of the company by a broker or intermediary, but Novos does not oppose such information being disclosed.
Many of these ABO accounts are high net worth individuals, hedge funds, and foreign investors who hide their identities and share positions from management. Along with company ownership, the ability to obscure your identity is a time when greater transparency and open communication are demanding board and management demands, an outdated and unfair advantage that is expensive, highly disruptive, highly disruptive, for the management teams working to run and drive businesses for the benefit of all stakeholders.
The current OBO/NOBO classification places an unfair burden on registered owners and beneficial owners who choose to provide their name, address and shared positions. To pass both complex proposals and the suggestions needed to carry out the company's day-to-day operations, the company must ensure voting support from its shareholders. Having an unidentified shareholder segment with a meaningful stock position can easily wreaking havoc in the outcome of a shareholder meeting.
The current SEC shareholder communication framework has an unintended impact on small issuer communities. It is often the case that it is unfairly endure most of the costs of a shareholder outreach campaign. Small and medium-sized businesses are primarily owned by individual retail investors. It is well established that retail investors are less likely to vote in corporate elections than large institutional investors.
Furthermore, under the current OBO/NOBO shareholder framework, shareholders can hide behind OBO registration. This includes US government-approved individuals, agencies and hostile foreign companies.
In 2021, Congress passed a bipartisan bill called the 2021 Corporate Transparency Act. The CTA was enacted to combat illegal activities such as tax fraud, money laundering, terrorist financing, and other by acquiring more ownership information for US private companies, LLCs and S businesses operating or accessing the US market. Under the new law, most companies will need to submit useful Ownership Information (BOI) reports to the US Treasury Department's Financial Crime Enforcement Network (FINCEN). This report provides details that identifies individuals associated with the reporting company.
The CTA was established to prevent individuals with malicious intent from hiding or gaining benefits from US ownership, and, according to Congress, promotes illegal operations, a widely used tactic that affects national security and economic integrity.
As a result, banks need to know their customers, brokers need to know their customers, and private companies must submit to Fin Cen about who the beneficial owner is.
Alliance Advisors sees firsthand how difficult and expensive it can be to avoid the “problem” of an alumni, as they help public companies secure the necessary votes to hold shareholder meetings. To this end, we formed the Shareholder Ownership Transparent Alliance or SOTA (sotanow.org). SOTA was established for the sole purpose of eliminating conflicting beneficial ownership (OBO) classifications, allowing equal access for companies published to all shareholders.
I don't think there's one executive from a public company who opposes eliminating the OBO classification, but most retail investors would agree that there's a lower cost and more efficient open communication with management. Eliminating OBOs is a common sense solution to outdated, problematic regulations, a victory for businesses and shareholders.
It's time for Washington policymakers to level the arena and apply the rules of transparency to businesses and beneficial owners alike.
