SEC Approves NYSE Rule 452 Amendment to Eliminate Broker Discretionary Voting

At an open meeting last week, a split Commission voted 3-to-2 to approve an amendment to NYSE Rule 452 that eliminates broker discretionary voting for the election of directors, whether the election is contested or not. The rule change, which does not apply to registered investment companies, will be in effect for shareholder meetings held on or after January 1, 2010.

Prior to the change, NYSE Rule 452 allowed brokers to vote on behalf of their beneficial owner customers in uncontested elections of directors if the customers did not return voting instructions. The rule change adds "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. It also codifies two previously published interpretations that do not permit broker discretionary voting for material amendments to investment advisory contracts with an investment company.

The rule change is intended to enhance corporate governance and accountability by ensuring that investors with an economic interest in a company vote on the election of its directors. It also addresses concerns that broker discretionary voting for directors has impacted election results.

The SEC published the NYSE proposal in March and received 153 comment letters. Chair Mary Schapiro acknowledged that some commenters expressed logistical concerns about the rule's implementation. She noted, however, that the rule was developed by the diverse and experienced NYSE Proxy Working Group, and has been awaiting Commission approval for nearly three years. Keeping hard decisions on hold indefinitely does not solve problems, and it is time to move forward, she said.

Commissioner Kathleen Casey did not support the rule change, saying that the SEC was doing investors a disservice by adopting the rule without studying its likely impact. She noted that many commenters asked the Commission not to adopt the rule without undertaking a larger effort to study the proxy system and to educate investors about the process.

Casey also expressed concern that the rule change would increase the power of institutional shareholders and disenfranchise retail shareholders. Commissioner Elisse Walter disagreed, noting that by definition the shares affected are voted by brokers who have not been instructed by beneficial owners.

Commissioner Troy Paredes sided with Casey on this point, noting that some believe Rule 452 actually enfranchises retail shareholders by providing a means through which their voice can be expressed. He noted that retail shareholders tend to side with management by a wide margin when voting, so the discretionary broker vote would appear to reflect the overall preference of retail shareholders. Eliminating the discretionary broker vote may cut off an avenue by which the overall preference of retail shareholders can be communicated, thus quieting their voice, he said.

Paredes believes the SEC should evaluate the elimination of the broker vote as part of a broader reconsideration of the proxy process. Changing broker discretionary voting without changing other interconnected parts of the proxy system could have unintended and counterproductive consequences, he said.

He noted that in the NYSE Proxy Working Group's comment letter, it recommended that the SEC consider using the opportunity created by the proposed change to Rule 452 to review the broader proxy process. Paredes favored undertaking the larger review prior to the approval of Rule 452.

In voting for the rule change, Walter said that the action must mark the beginning of a more in depth look into other "proxy plumbing" issues, such as shareholder communications and over-voting and empty voting. Schapiro said that the SEC is committed to studying the areas of shareholder communication and voting later this year.