SEC Approves NYSE Amendments to Eliminate Broker Discretionary Voting in Uncontested Director Elections

07/28/2009

On July 1, 2009, the Securities and Exchange Commission (“SEC”) approved long-awaited amendments to the New York Stock Exchange (“NYSE”) Rule 452 and corresponding Section 402.08 of the Listed Company Manual that eliminate broker discretionary voting for the election of directors, except for companies registered under the Investment Company Act of 1940.1 The amendments apply to shareholder meetings held on or after January 1, 2010. The amended Rule 452 will affect nearly all public companies because most large brokerage firms are member organizations of the NYSE and subject to its rules. After the rule becomes effective on January 1, 2010, these brokerage firms will be unable to engage in discretionary voting for the election of directors of most public companies, even those not listed on the NYSE.

History of Discretionary Voting
A shareholder of a public company can hold shares directly, as a record holder, or indirectly, through a broker. Over the years, the quantity of shares that are held indirectly, or “in street name,” has grown dramatically and now represents the vast majority of publicly traded shares. Under NYSE rules, brokerage firms controlling shares held in street name are required to deliver the proxy materials to the beneficial shareholders and request voting instructions regarding matters to be considered at the shareholder meeting. If the broker has not received voting instructions from a beneficial shareholder by the tenth day preceding a shareholder meeting, the broker may vote on behalf of the shareholder on any matter that is considered “routine” by the NYSE.

Historically, “uncontested” director elections were considered routine while “contested” director elections were considered “non-routine.” Thus, brokers could exercise their discretion in voting on uncontested elections but not contested elections. The amendment eliminates the distinction between contested and uncontested elections by reclassifying uncontested elections as a non-routine matter, thereby prohibiting brokers from exercising voting discretion on any director elections.

Reason for the Amendments
In 2005, the NYSE formed a “Proxy Working Group” to focus on NYSE Rule 452 and other proxy rules in response to criticism that participation in director elections should be limited to persons who have an economic interest in the company. Opponents of the discretionary voting rule also argued that limiting discretionary voting to uncontested elections was not sufficient because the NYSE’s definition of uncontested elections included elections which were quite competitive through “vote no” campaigns. The Proxy Working Group concluded that “[d]irectors are simply too important to the corporation for their election to ever be considered routine,” and submitted a proposal to the SEC to categorize uncontested director elections as non-routine.2

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1 The SEC’s order approving the changes to NYSE Rule 452 is available here. In addition to approving the NYSE proposal to treat uncontested director elections as a non-routine matter, the SEC also approved the NYSE proposal to codify two previously published interpretations that prohibit broker discretionary voting for material amendments to investment advisory contracts.

2 The Proxy Working Group recommended other actions as an “integral part” of its proposal to amend Rule 452. The NYSE and SEC did not act on those recommended actions. The full text of the Report and Recommendations of the Proxy Working Group to the New York Stock Exchange is available here.

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