Should Brokerage Firms Continue to Vote Their Clients Shares Without Permission, Including for Corporate Directors?

Few stockholders realize that when their shares of stock are held at a brokerage firm that firm can vote their shares without a “proxy”. Thus, if an investor owns 100 shares of XYZ stock held at ABC brokerage firm, without the investors permission, ABC firm can cast the investors vote in annual meetings of XYZ, including for XYZ’s directors.

At a recent meeting at the SEC on the long debated issue, Catherine R. Kinney, president and chief executive officer of the New York Stock Exchange, announced that the NYSE has agreed to amend its rules to eliminate broker discretionary voting, but only in the election of directors. There is no proposal to stop brokerage firms from voting their clients’ shares, without permission, on other matters.

A NYSE rule states that brokers may vote on “routine” proposals if the beneficial owner of the stock has not provided specific voting instructions to the broker 10 days before the voting date. “Routine” proposals have been interpreted to include such important votes as election of directors. The proposed change will consider election of directors as “non-routine.” The change was previously proposed but revised to exclude such voting by mutual funds.

Corporations and their directors are against the change, stating this would increase their costs of notifying shareholders of upcoming votes. More important is their fear this change will diminish their advantage over those opposed to actions by corporate boards. Brokerage firms have a vested interest in pleasing directors in order to keep or obtain companies as investment banking clients.

When opening their accounts brokerage firms currently ask clients if they want their identity revealed to issuers of securities. The knee-jerk reaction to revealing one’s identity these days is to say “no”. Yet, this keeps the investor from receiving voting materials except in “non-routine” matters. The brokerage firm can then cast the investor’s vote on such matters unless the client notifies it 10 days prior to the vote. Many feel the question asked when the account is opened should be clarified or that brokerage firms simply not be allowed to cast such votes.

In response to criticism, some brokerage firms have voluntarily agreed to “proportional voting”, in which the brokerage firm submit a proxy on their clients’ shares to assist in obtaining a quorum, but then vote their clients’ shares along the lines of others voting.

The law firm of Shepherd Smith and Edwards represents institutional and individual investors in claims against investment firms. If you have lost in your account at an investment firm contact us to arrange a free confidential consultation with one of our attorneys.