SEC Proposes to Eliminate Broker Votes

This post from George R. Bason, Jr. is by his colleagues Phillip R. Mills and Justine Lee.

The SEC recently published for public comment the NYSE’s proposal to eliminate broker discretionary voting in uncontested director elections, signaling that the Commission’s new leadership is prepared to move forward on an issue that has been on hold at the SEC since it was originally proposed in 2006. The rule change—which would not become effective until 2010 at the earliest—could make it more difficult for companies that have adopted a majority voting standard to elect management’s slate of nominees, as discussed below.

The NYSE has long classified uncontested director elections under Rule 452 as a “routine matter,” giving brokers the discretion to vote shares held in investors’ accounts when they do not receive voting instructions from the beneficial owner within ten days of a company’s meeting. Such uninstructed votes can make up a meaningful percent of the vote and have routinely been cast with management in the past. Several close elections have attracted scrutiny in recent years as activists contended that the outcomes would have been different if broker discretionary votes were excluded. In the absence of SEC action on this issue, a number of brokers have recently moved to voluntary policies of proportional voting, under which they vote uninstructed shares in proportion to how their voting clients cast their ballots. While the proportional voting policy was likely chosen over abstention (which would be closer to the NYSE proposal) in order to address quorum and other concerns, it can also skew voting results by disproportionately magnifying the vote of those retail investors that provide instructions to their brokers—a particular concern in the current climate for embattled companies that may have a dissatisfied retail shareholder base. It can also make outcomes less predictable since, unlike instructed shares, which are cast ten days prior to the meeting, shares voted proportionally are not cast until 72 hours before the meeting.

The NYSE proposal would re-classify director elections as a non-routine matter on which NYSE member organizations are not permitted to vote—regardless of which exchange the company is listed on—without instructions from the beneficial owner. If the SEC adopts the NYSE proposal, brokers would no longer be able to vote uninstructed shares, effectively reducing the number of votes in favor of board-nominated directors. This could make it difficult for directors to attain the requisite majority vote at companies with majority vote standards, particularly if there is a large retail investor base or if directors are facing a “withhold vote” campaign.

The proposed amendment is available here.

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