SEC Approves NYSE Proposal Eliminating Broker Discretionary Voting for Directors

The SEC has approved an NYSE proposal eliminating broker discretionary voting for all elections of directors, whether contested or not. Currently, NYSE Rule 452 and corresponding Listed Company Manual Section 401.08 permit brokers to vote on behalf of their beneficial owner customers in uncontested elections of directors if the customers have not returned voting instructions.

According to the Commission, the NYSE’s proposal is designed to enhance corporate governance and accountability by helping assure that investors with an economic interest in the company vote on the election of directors. It also would address concerns that broker discretionary voting for directors has impacted election results.
Specifically, the NYSE proposal would add the election of directors to the list of enumerated items for which a member generally may not give a proxy to vote without instructions from the beneficial owner.

The proposal contains a specific exception for companies registered under the Investment Company Act. In addition, the NYSE proposes to codify two previously published interpretations that do not permit broker discretionary voting for material amendments to investment advisory contracts with an investment company.

In announcing that he could not support approval of the NYSE proposal, Commissioner Troy Parades said that Rule 452 should be addressed as part of a comprehensive assessment of the proxy voting system instead of being amended in isolation. Also, he noted that eliminating broker voting if other changes are not made to the proxy process may suppress the voice of retail shareholders. Broker discretionary voting in director elections is just one piece of a proxy system made up of numerous nterconnected parts that must work together. Commissioner Parades cautioned that changing one component but not others may have unintended and counterproductive consequences.

The Commission published the NYSE proposed rule change for public comment on March 6, 2009, and received 153 comment letters from issuers, transfer agents, institutional investors, proxy advisory firms and others.

In their letter to the SEC, the Society of Corporate Secretaries & Governance Professionals opposed the NYSE proposal unless the action is done as part of a comprehensive reform of the proxy voting system. Removal of the retail shareholder voice from the proxy process, without the simultaneous implementation of countervailing measures, would destabilize the proxy voting process by shifting disproportionate weight to the views of institutional investors.

Broker discretionary voting in director elections may be an imperfect mechanism, conceded the Society, but it should only be eliminated in connection with an approach that clearly and directly includes the voice of retail shareholders in the proxy voting process. Further, declining levels of retail shareholder voting means that it is more important than ever to preserve the retail shareholder voice in the proxy voting process.