Proxy Voting

Proxy voting is the exercise of a shareholder's vote through an authorization given to another person, rather than in person at the meeting. The SEC's definition is deliberately wide. 17 CFR 240.14a-1(f) provides that "[t]he term 'proxy' includes every proxy, consent or authorization within the meaning of section 14(a) of the Act," and adds that "[t]he consent or authorization may take the form of failure to object or to dissent." A separate rule, 17 CFR 275.206(4)-6, is itself titled "Proxy voting" and governs the different case in which an investment adviser holds voting authority over a client's shares. The practical subject of the term is therefore two things at once: the instrument a shareholder signs or clicks, and the chain of intermediaries that carries the instruction from the shareholder to whoever counts the votes.

Street-name holding is why proxy voting has a chain rather than a transaction. Shares bought through a brokerage are ordinarily registered in the firm's name, so the company's own records do not show the beneficial owner. The proxy rules bridge that gap by placing duties on the broker. Under 17 CFR 240.14b-1(b)(1), a registered broker or dealer must respond to a company's inquiry "no later than seven business days after the date it receives" it, reporting the approximate number of its customers who beneficially own the company's securities and the number "who have objected to disclosure of their names, addresses, and securities positions." That count is where the industry's objecting and non-objecting categories get reported: a company can be given the names and addresses of the customers who have not objected, and must reach the rest through the intermediary. Rule 14b-1(b)(2) then requires the broker to forward the proxy, the soliciting material and the annual report to security holders to its customers "no later than five business days after receipt."

Notice and access changed what physically arrives. Under 17 CFR 240.14a-16(a)(1) a company may satisfy its obligation to furnish a proxy statement or an annual report to security holders by sending a Notice of Internet Availability of Proxy Materials "40 calendar days or more prior to the security holder meeting date." The materials must be "publicly accessible, free of charge" at the address given in the notice, and must stay there "through the conclusion of the meeting of security holders." The notice itself must carry a bold-face legend reading "Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting To Be Held on [insert meeting date]," must state that it is not a voting form, and must explain how to request a paper or email copy at no charge. So the thin card in the envelope is often the notice, and the substance is a click away.

The card is designed to be readable, and its default is stated rather than hidden. Rule 14a-4(a)(3) requires the form of proxy to "identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters, and whether proposed by the registrant or by security holders." Rule 14a-4(b)(1) requires boxes for approval, disapproval or abstention on each separate matter other than elections to office and the frequency of say-on-pay votes. The same paragraph then permits the default that surprises people, letting a proxy carry authority to vote "with respect to matters as to which a choice is not specified by the security holder provided that the form of proxy states in bold-face type how it is intended to vote the shares represented by the proxy in each such case." Returning a signed card with boxes left blank is therefore a vote, in the direction printed on the card.

The broker non-vote is the most consequential rule here, and it runs the other way. Exchange Act Section 6(b)(10), 15 USC 78f(b)(10)(A), requires that the rules of a national securities exchange "prohibit any member that is not the beneficial owner of a security registered under section 78l of this title from granting a proxy to vote the security in connection with a shareholder vote described in subparagraph (B), unless the beneficial owner of the security has instructed the member to vote the proxy in accordance with the voting instructions of the beneficial owner." Subparagraph (B) describes a vote "with respect to the election of a member of the board of directors of an issuer, executive compensation, or any other significant matter," and carves out the uncontested election of directors of a registered investment company. The exchange rule that implements this is NYSE Rule 452 and Section 402.08 of the Listed Company Manual, which the SEC approved in 2009 to eliminate broker discretionary voting for all elections of directors at shareholder meetings held on or after January 1, 2010, whether contested or not, with an exception for companies registered under the Investment Company Act of 1940. Items on which a broker may still vote without instruction are conventionally called routine. The consequence is precise: if a street-name holder returns nothing, their shares are simply absent from the director election and the pay vote, while still being available to be voted on routine business.

When someone else votes for you. Rule 275.206(4)-6 makes it a fraudulent, deceptive or manipulative act under the Investment Advisers Act for a registered investment adviser to exercise voting authority over client securities unless it adopts and implements "written policies and procedures that are reasonably designed to ensure that you vote client securities in the best interest of clients, which procedures must include how you address material conflicts that may arise between your interests and those of your clients," discloses "to clients how they may obtain information from you about how you voted with respect to their securities," and describes those policies to clients, furnishing a copy on request. The right that matters to a client is the second one. Whether an adviser voted a holding, and which way, is information the adviser must tell clients how to obtain.

A company sets a record date and asks intermediaries how many beneficial owners they hold for. The broker answers within seven business days. The company sends the notice or the full materials, and the broker forwards them within five business days. The investor submits voting instructions, by internet, telephone or paper. The broker aggregates the instructions and votes the shares accordingly, and a tabulator counts them at the meeting. Uninstructed shares are voted only on items the exchange rules still permit.

A hypothetical, showing what an unreturned card actually costs. A company has 10,000,000 shares outstanding. Holders of 5,000,000 shares submit instructions or vote directly. A further 2,000,000 shares sit in street name with no instruction returned. On the ratification of the auditors, a routine item, the brokers may vote those shares without instruction, so 5,000,000 + 2,000,000 = 7,000,000 shares are voted. On the election of directors and on the advisory vote on executive compensation, they may not, so only 5,000,000 shares are voted and the 2,000,000 are broker non-votes. The same shares are present for one item and absent for the other, and the only thing that changed was the subject matter.

Pros

• It makes the vote usable. A shareholder with a hundred shares in another state can still vote every item on the agenda.
• The materials must be free and available online through the conclusion of the meeting, so a holder can read the proposals before deciding.
• The card has to identify each matter "clearly and impartially," which is a rule about presentation and not just about content.
• The default direction for unmarked items must be printed in bold-face type, so it can be checked before signing.

Cons

• A signed card with blanks can be voted in the direction the company chose, which is the opposite of abstaining.
• Doing nothing removes the shares from precisely the votes that decide the board and executive pay, because a broker may not vote them there.
• The chain has several links, and a holder who never opens the notice never learns a vote was available.
• Where an adviser holds the voting authority, the client's practical right is to be told how to find out how the vote was cast, which is not the same as choosing it.