Discretionary Voting by Brokers and the SEC: Movement, Finally

When we did a series of posts on corporate governance agenda items for the new Commission, we strongly urged the Commission to consider action in the area of shareholder communications and voting.  Clearly, the Commission needs to simplify direct communications between shareholders and companies.  This means reform of the shareholder communication rules, rules that are currently a mess. 

In addition, however, we also recommended that the Commission move on the rule proposal submitted by the NYSE that would prevent brokers from voting uninstructed shares for directors.  Under NYSE Rule 452, brokers may not cast uninstructed shares on controversial matters.  This prevents these shares from having any significant influence on most matters of importance to shareholders.  There is, however, one significant exception. The provision applies to any matter that is "the subject of a counter-solicitation, or is part of a proposal made by a stockholder which is being opposed by management (i.e., a contest)" but does not apply to the unopposed election of directors.  In an era where unopposed directors must increasingly be elected by a majority of the votes cast, the broker votes can be outcome determinative. 

Back in 2006, after a study of the issue, the NYSE sent a proposed rule to the SEC to do away with discretionary voting in director elections by brokers.  The SEC sat on the proposal, inactivity the rule of the day.  We have learned from the Shareholder Communications Coalition that the NYSE has resubmitted the proposal and the SEC intends to take it up. 

It is an important albeit long overdue step in the governance area. 

For more on the problems of the shareholder communication rules, take a look at The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility?