Broker Non-Voting and the SEC: Background

We are a bit late (as usual) in commenting on the Commission's decision (by a thin 3-2 margin) to amend Rule 452 of the NYSE to designate the uncontested election of directors as a controversial matter not subject to discretionary voting by brokers. 

Discretionary voting covers shares owned by broker clients where the clients do not submit voting instructions.  Brokers have a legal right to vote the uninstructed shares under state law (Of course, in actuality, it is the depositories that, as record owners, have the legal right to vote but these entities issue omnibus proxies to the brokers, transfering to them the voting rights; for more on this subject, see The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility?)

The concept of discretionary voting is an odd one.  The brokers have no economic interest in the underlying shares or the company.  Thus, they can vote without any consideration of the consequences of the vote to shareholders or even to the business of the company.  Nonetheless, voting the shares does serve a purpose.  They can be voted present at the meeting for purposes of obtaining a quorum so that companies do not have to go through the cost and expense of holding another meeting. 

These votes, therefore, should be allowed to provide a certain degree of cost avoidance that benefits both management and shareholders.  They should not be used to tip the balance on an issue that can affect shareholders.  The decision to not allow discretionary voting in the case of uncontested elections for the board was a common sense change given the rise in the use of majority vote provisions.  The only odd thing about the Commission's action was that it took years and engendered the opposition of two commissioners.

In any event, the Commission has issued the Release on the matter.  We think it appropriate to highlight a bit of the analysis contained in the release and will do so in the next couple of posts.