Randomly Noted

Call him the stock market senator. The fix-the-plumbing stock market senator, to be more precise.

Sen. Edward “Ted” Kaufman, the Democrat from Delaware who is filling out the term of Joe Biden after Biden ascended to the vice presidency, has distinguished himself with his knowledge, concern and vigor about the inner workings of U.S. stock trading. He’s now getting some media attention because of it.

There likely are some in the high-frequency trading community and other pockets of Wall Street pleased with the prospect that Kaufman’s term is winding down and that he won’t run for election when his Senate seat comes up in November of this year. He’s keeping the heat on them, as he is on the Securities and Exchange Commission.

Kaufman’s year-long interest in the current state of stock trading reached a high-point with an early August letter to SEC Chairman Mary Schapiro in which Kaufman makes a series of reform recommendations.

Usually, when legislators send letters to regulators, they are looking for answers because something is affecting their constituents or a media report has shed light on a problem in an area where they have an interest because of committee membership or otherwise.

The Aug. 5 Kaufman letter to the SEC bears no resemblance to such documents. Besides showing an acute understanding of the myriad and obscure workings of today’s stock trading - dark pools, high-frequency trading, excessive messaging and the like – Kaufman has eight pages of proposals.

The “flash crash” of May 6, when stocks gyrated wildly and breathtakingly dropped at warp speed in a few minutes of an otherwise uneventual Spring mid-afternoon, has to a degree borne out Kaufman’s pre-dated concerns. He’s questioning the whole thrust of market developments of recent years.

“The proliferation of exchanges and other market centers that has increased fragmentation, the substantial rise in volume executed internally by broker-dealers in dark pools, excessive messaging traffic, the dissemination of proprietary market data catering to high frequency traders, and order-routing inducements all may be combining in ways that cast doubts on the depth of liquidity, stability, transparency and fairness of our equity markets,” he wrote to Schapiro.

Among Kaufman’s specific suggestions: register high-volume, high-frequency traders with the SEC; raise the standards for becoming a market center (there are more than 50); examine whether too much order flow is being hidden from ‘lit’ markets in dark pools; and essentially rethink the whole structure to emphasize truly liquid markets.

The SEC, of course, has quite a bit on its plate. The Dodd-Frank financial reform bill handed over some important new powers. Indeed, just today, the SEC is expected to vote for a controversial plan to make it easier for large shareholders to nominate directors whose candidacy must be carried in company distributed materials.

Kaufman, who earned a master’s of business adminsitration from the Wharton School at the University of Pennsylvania, told the SEC it is at a historic juncture.

Will it be a “regulator by consensus,” which Kaufman described as one that only moves “when it finds solutions favored by large constituencies on Wall Street?” Or, in his view, something more.

You can agree or disagree with Kaufman’s recommendations. It’s hard to disagree with the notion that what we call the stock market has morphed into a complex web of interactions that few truly understand. And it’s good to see a legislator who knows his stuff before he speaks his mind.

The largest U.S. public pension fund has launched a well-aimed campaign to get more public companies to adopt a “majority” rules policy for uncontested election of directors.

Indeed, the effort by the California Public Employees’ Retirement System is the proper use of this institutional investor’s heft to strike a better balance between shareholders and the boards of directors that are supposed to represent them.

Simply stated, too many companies have stuck with a “plurality” system when a director runs unopposed. Essentially, the plurality has to only be one vote, even if all other holders “withhold” their votes from the director.

“Majority” processes vary but they are pretty much what they sound like and should be familiar to anyone who has sat through a grade school civics class. Essentially, you have to get more “for” votes than those withheld or you have to at least offer to resign.

In this blogger’s previously expressed view, universal acceptance among U.S. publicly traded companies of the majority vote for directors makes unnecessary some of the other investor power pushes in which CalPERS and others have been active.

One of those is the so-called say on pay. It’s a misnomer on its face since most of those proposals for shareholders to have an after-the-fact vote on executive compensation are non-binding. Not much of a say. In majority voting, shareholder votes for directors have real power and can be used against directors at companies where shareholders think CEO compensation is too high.

Also unneeded is the ability of some large holders to nominate directors whose candidacy would be included and voting materials distributed by the company. It’s fascinating that this long-standing governance issue, referred to in short hand as “proxy access,” has now arisen in Senate deliberations about much broader financial regulatory reform, according to today’s Wall Street Journal.

Although I support regulatory or legislative oomph behind adoption of majority voting, it’s a trend that seems to be taking off without official edict. Maybe it’s the undeniable lack of fairness in the “plurality” system.

CalPERs said in a  press release that as of September 2009 about 71% of the S&P 500 companies and 50% of the Russell 1000 had come around to the majority rules concept.

CalPERS specifically said it would ask 58 of the top U.S. companies in its equities portfolio to adopt the majority rules standard. Said George Diehr, chair of the CalPERS investment committee, “The policy should include the required resignation of any director that receives a withhold vote greater than 50% of the votes cast. “

In another sign of Washington, D.C.,’s scatter shot approach to policy and fiscal management, it seems we will now have a tax on Botox. Yes, we’ll dig our way out of our indecent indebtedness by gouging people who occasionally pay up to get rid of their crow’s feet. As DJN colleague Martin Vaughan reports, Senate Democrats want to slap a 5% excise tax on optional cosmetic procedures to help fund health-care reform. This would raise about $5.8 billion over a decade in order to help defray some of the $849 billion bill. Right. it’s a sloppy, cynical move – and it bodes ill. Continue reading…