Voting of Partially Instructed Shares by Brokers

[PDF]

Christie Nicks* 

I. INTRODUCTION

Most shareholders in public companies own shares in nominee or “street name” accounts.[1] In these circumstances, banks and brokers (or a depository) hold record title and retain voting rights under state law.[2] Under the rules of the stock exchange, however, brokers must request voting instructions from beneficial owners.[3]

Not all owners return voting instruction forms (VIF). In those circumstances, brokers have the legal right to vote the shares.[4] New York Stock Exchange (NYSE) Rule 452, however, limits voting rights to “routine” matters.[5] Section 957 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) also prohibits brokers from voting uninstructed shares in any election of directors and on matters related to executive compensation.[6]

Although brokers may vote uninstructed shares, the Rules of the NYSE do not expressly address the rights of brokers when beneficial owners return partially executed or blank VIFs. Sample letters in NYSE Rule 451 suggest some ability to vote unmarked or blank instructions. They do not, however, address VIFs that are partially executed. Nonetheless, brokers, or their intermediaries, often vote the unexecuted portions in a manner consistent with the recommendations of management.

This paper will first discuss the system of street name ownership and the forwarding requirement imposed on brokers. Next, it will examine broker dealer voting rights under NYSE Rules 451 and 452. The discussion will consider the current practice of voting partially or entirely blank VIFs for management. Finally, the paper will discuss some potential alternative solutions to this current practice.

II. SYSTEM OF “STREET NAME” OWNERSHIP

Under state law, the voting rights of shareholders rest with the record owners.[7] Record owners are identified in the books of the corporation and retain all legal rights incident to ownership.[8] Beneficial or street name owners, in contrast, hold shares through a nominee, typically a broker or bank. It is the nominee that has voting rights.[9] The proxy rules and the requirements of the stock exchange, however, provide a complex system intended to ensure that brokers vote shares in a manner consistent with the instructions of beneficial owners.

A. Forwarding Obligation

Under the proxy rules, brokers are required to distribute solicitation materials to street name owners.[10] These rules “ensure that beneficial owners receive timely notice and delivery of proxy materials . . . for securities that are held through intermediaries.”[11] The forwarded materials must also include an executed proxy or voting instructions.[12] Brokers universally rely on VIFs.[13] VIFs are intended to resemble proxies[14] and allow beneficial owners to instruct brokers on how to vote each matter submitted to shareholders.[15] Upon receipt of the VIF, brokers reflect the instructions on a proxy card that is delivered to the company.[16]  

Unlike the detailed form and content requirement applicable to proxy cards in Rule 14a-4, VIFs are not filed with, or directly regulated by, the SEC. Brokers distributing materials, however, have an obligation to act in an impartial manner. Rule 14a-2(a)(1) exempts brokers from the proxy rules so long as materials are distributed “promptly” and do no more than “impartially instruct the person solicited to forward a proxy” or “impartially request” voting instructions.[17] Failure to act in an impartial manner can result in the loss of the exemption.[18]

B. Broadridge 

In fulfilling their legal obligations with respect to proxy materials and voting instructions, brokers almost universally rely on a single service provider, Broadridge Financial Services, Inc. (Broadridge).[19] In 2012, Broadridge reported processing more than 12,000 proxy distributions involving billions of shares on behalf of 90 million beneficial owners at more than 900 banks and brokers.[20]

As agent for brokers, Broadridge is also subject to an obligation of impartiality. The SEC reiterated the requirement in connection with advice provided to Broadridge concerning the use of a “vote with the board’s recommendations” button on one of the firm’s electronic voting platforms. The button allowed investors to vote for all of management’s recommendations without having to address each issue separately.[21]

The SEC found that the practice was “inconsistent with the plain language of Rule 14a-4 and the ‘impartiality’ requirement of Rule 14a-2(a)(1).”[22] The staff clarified that impartiality could be met by eliminating the button or by providing a “vote against the board’s recommendations” button.[23] In response, Broadridge removed the “vote with the board’s recommendations” button from ProxyVote.com and Mobile ProxyVote prior to the 2013 proxy season.[24]

III. VOTING RIGHTS AND PARTIALLY EXECUTED INSTRUCTIONS

Beneficial owners do not always return the VIF. Even when they do, the instructions can reflect a variety of formats. Beneficial owners may return an executed VIF that provides instructions on every matter. They may also return instructions that, while executed, are otherwise unmarked or blank. Finally, investors may provide explicit instructions on some matters but not on others. The voting practices of the broker vary depending upon the approach taken by the beneficial owners.

NYSE rules govern broker-voting rights with respect to shares held by street name owners. Brokers must vote shares in accordance with instructions received from beneficial owners.[25] Where the beneficial owner does not return the VIF, brokers retain voting rights but may only vote on routine matters.[26] Routine matters do not include actions that could significantly affect shareholders’ rights or privileges.[27] With respect to instructions that are returned to the broker but are left entirely, or partially, blank, the rules are silent.

A. Rule 452 and Historical Overview

First adopted in 1937, Rule 452 prohibited brokers from voting without instructions on only four matters: authorizations of “a merger, consolidation or dissolution” of the corporation, and the reclassification of outstanding securities.[28] Subsequent amendments would expand the categories of nonroutine matters in an effort to reduce the influence of brokers in the governance process.  

Amendments in 1968 increased the number of nonroutine matters to eighteen, including the approval to mortgage property, create indebtedness, waive preemptive rights, change the quorum requirements, modify voting provisions, and authorize the acquisition or sale of assets.[29] Later changes prohibited brokers from voting uninstructed shares on equity compensation plans[30] and investor advisory agreements.[31]

Amendments in 2010 prohibited brokers from voting uninstructed shares for any election of directors, even if “uncontested.” [32] Investor groups had raised concern over the influence of broker votes in connection with majority vote provisions and “just vote no” campaigns.[33] In response, the SEC approved changes to Rule 452 that end the ability of brokers to influence the outcome of these elections.[34]

Congress likewise sought to reduce the role of brokers in the shareholder voting process. In adopting the Dodd-Frank Act, Congress determined that “[t]he final vote tallies should reflect the wishes of the beneficial owners of the stock and not be affected by the wishes of the broker that holds the shares.”[35] As a result, Section 957 prohibits brokers from voting uninstructed shares in the election of directors on matters related to executive compensation.[36]

Brokers, therefore, no longer have the ability to use uninstructed shares to influence the corporate governance of a company.[37] They are limited to largely symbolic measures such as the approval of accounting firms.[38] To the extent they retain the authority to vote uninstructed shares, however, brokers routinely favor the recommendations of management.[39]

B. Blank and Partially Executed Instructions

Beneficial owners sometimes return instructions that are entirely or partially blank. In these circumstances, the VIF typically states that in the absence of “specific instructions,” the form “will be voted as recommended” by management.[40] This will occur even if the matters are nonroutine.

The treatment of blank portions of a VIF as an instruction to vote for management is not expressly sanctioned by the proxy rules or the rules of the exchanges. Rule 14a-4(b)(1) does provide that a “proxy may confer discretionary authority with respect to matters as to which a choice is not specified” by the beneficial owner.[41] The authority apparently arose from the belief that a blank item on the proxy was deliberate and reflected an intention by shareholders to support management.[42] In order to ensure that shareholders in fact had this intent, the rule required disclosure of discretionary authority in “bold-face type.”[43]

VIFs are not subject to Rule 14a-4, and, as a result, the rule is not a source of authority for voting blank or partially executed instructions.[44] Moreover, even if Rule 14a-4 was used as guidance for the contents of a VIF, the authority to vote where a “choice has not been specified” must be set out in “bold-face type,” placing shareholders on clear notice of the possibility.[45] No similar requirement exists for VIFs[46] nor does it appear to be the practice.[47]

The text of NYSE Rule 451 is also silent on the issue. Three nonmandatory form letters, however, do suggest some right to vote shares where instructions are returned but left entirely blank[48] The letters provide that, where the beneficial owner signs and returns the VIF “without otherwise marking the form,” brokers can vote the shares for management.[49] The requirement that there be no marking indicates that discretionary voting is permitted only where the beneficial owner returned a blank (unmarked) rather than partially executed form (marked).[50] The language, therefore, at most provides support for the right to vote where the VIF is entirely blank but not where the VIF is partially executed.

Other language in the same letters is consistent with this interpretation. The letters state that brokers cannot vote street name shares “on matters related to executive compensation or in uncontested elections of directors . . . unless the client has provided voting instructions.”[51] The letters further state that shares will only be represented at the shareholders’ meeting where the beneficial owner has provided “specific voting instructions.”[52] The reference to providing voting instructions and specific voting instructions suggests the need for an affirmative act by street name owners. The decision to leave a matter blank on the VIF does not meet this affirmative obligation.  

Voting partially executed instructions for positions recommended by management also appears to conflict with the requirement in Rule 14a-2 that brokers “impartially request” instructions “as to the authority to be conferred by the proxy.” The SEC determined that use of the “vote with management” button was inconsistent with this requirement because the approach favored one side.[53] Voting partially executed instructions only with management likewise favors one side in a solicitation.[54]

C. Investor Intent

In returning blank or partially blank voting instructions, there is no affirmative evidence that this reflected a deliberate decision by investors to support management. For one thing, street name owners may be unaware of this practice. Unlike proxy cards, VIFs are not required to,[55] and apparently do not,[56] disclose this possibility in bold-face type. Even where the authority is sought in a more apparent fashion, however, the SEC has indicated concern that voting the shares is inconsistent with the intent of investors.[57]

Moreover, some investors have indicated that the practice of voting blank portions of the VIF is not consistent with their intent.[58] They have asserted that blank portions of partially executed VIFs “should be counted as cast” to preserve “[t]he integrity of the [proxy] voting system.”[59] Investors have also highlighted that like nonvotes in civic elections, blank votes by shareholders should be treated as abstentions.[60]

VI. GOING FORWARD

The 2010 SEC Concept Release recognized that the amendment to Rule 452 eliminating broker discretionary voting in uncontested director elections “highlighted the importance of accuracy and accountability” in the proxy process.[61] Congress reemphasized in the Dodd-Frank Act that brokers should not play a role in director elections and compensation decisions. [62] Allowing brokers to vote blank instructions for management absent clear authority from investors conflicts with these goals.

In order to ensure that VIFs remain impartial, the staff of the SEC should provide clarification and guidance on the issue. First, the staff should indicate that the issue of partially blank instructions should be handled in an impartial fashion. Much like the “vote for management button,” there are multiple ways of doing so. Brokers (and their intermediaries) could decline to vote the unexecuted portions of the instructions or could adopt “a proportional voting system.”[63]

Second, the staff should require that brokers or their intermediaries take steps to ensure that any practice with respect to partially executed instructions be set out in a manner that is likely to be read by street name owners. At a minimum, this should require a statement on the VIF in a prominent location and “bold-face print.” Third, the staff should consider requiring brokers (and their intermediaries) to file VIFs and other materials produced in connection with the voting process with the SEC. To the extent that the staff intends to enforce the requirement of impartiality, it will need to examine these forms.  

A more radical approach would be the elimination of voting instructions entirely. Brokers could opt to execute proxies in favor of beneficial owners.[64] In addition to facilitating shareholder participation in the proxy process, this approach “eliminates the need for broker discretionary voting under Rule 452” and reduces the involvement of third party service providers.[65] With voting rights in the hands of street name owners, brokers would no longer have a role in the governance process.  

Brokers may opt to send an executed proxy card.[66] In addition, however, the form letters in Rule 451 apparently provide street name owners with the same authority.[67] The impetus for the replacement of instructions with proxies could, therefore, originate with investors. The approach may sometimes make a quorum more difficult to achieve since uninstructed shares would not be present at the meeting.[68] Nonetheless, the approach may be an appropriate alternative to the practice of voting instructions where the intent of beneficial owners is otherwise unclear.

Absent reform, brokers will continue to vote blank instructions in favor of management even when shareholders did not necessarily intend for them to do so. The “importance of accuracy and accountability” in the proxy process,[69] however, calls for the elimination of this practice. Moreover, ensuring that vote tallies truly “reflect the wishes of the beneficial owners”[70] simply requires reform to prohibit brokers from voting blank instructions as recommended by management.


       [1].     Concept Release on the U.S. Proxy System, Exchange Act Release No. 62495, 2010 WL 2779423, at *6 (July 14, 2010) [hereinafter Concept Release].

       [2].     See J. Robert Brown, Jr., The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility?, 13 J. Corp. L. 683, 687–95 (1988), available at http://ssrn.com/abstract=993866. Most banks and brokers hold securities through the Depostiory Trust Company (DTC) and DTC transfers the voting rights associated with the deposited shares to the banks and brokers by executing an omnibus proxy. Concept Release, supra note 1, at 12–18.

       [3].     See NYSE Rule 451, 1997 WL 34652003 (2014).

       [4].     See Brown, supra note 2, at 694–95.

       [5].     NYSE, Report and Recommendations of the Proxy Working Group to the New York Stock Exchange (2006) [hereinafter Report and Recommendations of the Proxy Working Group], available at http://www.nyse.com/pdfs/REVISED_NYSE_Report_6_5_06.pdf.

       [6].     Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376, 1906–07 (2010) [hereinafter Dodd-Frank Act]; see also Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change to Amend NYSE Rule 452 and Listed Company Manual Section 402.8 to Eliminate Broker Discretionary Voting on Executive Compensation Matters, Exchange Act Release No. 62874, 2010 WL 3523175, at *1–2 (Sept. 9, 2010) (amending Rule 452 to prohibit voting of uninstructed shares in election of directors and for compensation plans).

       [7].     Brown, supra note 2, at 694–95.

       [8].     Id.

       [9].     Brokers and banks typically put shares in the name of a depository. See Kurz v. Hollbrook, 989 A.2d 140, 147–48 (Del. Ch. 2010). As a result, depositories usually appear as the record owner of the shares. See id. at 147. Depositories, however, transfer voting rights to brokers and banks prior to a shareholder meeting through an omnibus proxy. See id. at 148.

     [10].     Concept Release, supra note 1, at *39.

     [11].     Keir D. Gumbs, Todd Hamblet & Kristin Stortini, Debunking the Myths Behind Voting Instruction Forms and Vote Reporting, Corp. Governance Advisor, July/Aug. 2013, at 1, 2, available at http://www.cov.com/files/Publication/87c02cb1-d867-42d4-ad05-121f1ba7c86b/Presentation/PublicationAttachment/b51c699e-b1a6-4126-91d6-1a882cd4e985/Corp_Gov_Advisor_Article-Voting_Instruction_Forms_and_VIF_Reporting.pdf (“Specifically, Rule 14b-1 and Rule 14b-2 of the Exchange Act provide that a broker or bank that receives proxy soliciting materials from an issuer or other soliciting person must forward that material to the broker’s or bank’s customers that own beneficial title to that issuer’s securities.”).

     [12].     NYSE Rule 451, supra note 3. Under NYSE Rule 451(b)(1) and (2), brokers have the option of forwarding proxy cards or VIFs to beneficial owners. Id. Specifically, the Rule provides that “(b) such member organization shall transmit with such material either: (1) a request for voting instructions . . . or (2) a signed proxy . . . .” Id.

     [13].     Concept Release, supra note 1, at *39.

     [14].     See Internet Availability of Proxy Materials, Exchange Act Release No. 55146, 2007 WL 148704, at *15 (Jan. 22, 2007) (“The request for voting instructions is similar to the proxy card, but is prepared by the intermediary instead of the issuer and the beneficial owner returns his or her voting instructions to the intermediary rather than to the issuer or independent vote tabulator.”).  

     [15].     Gumbs, Hamblet & Stortini, supra note 11, at 3.

     [16].     Concept Release, supra note 1, at *39.

     [17].     17 C.F.R. § 240.14a–2(a)(1) (2014).

     [18].     Broker-Dealer Participation in Proxy Solicitations, Exchange Act Release No. 7208 (Jan. 7, 1964), 1964 WL 66932, at *3 (“[T]he exemption will be lost if the firm does not act in an ‘impartial’ manner, for example, if it transmits the material of one side promptly and delays transmission of the material of the other side, or passes on some but not all soliciting literature.”) [hereinafter Release No. 7208].

     [19].     Concept Release, supra note 1, at *8–9 n.57. Acting as an agent, the proxy service provider takes over the intermediaries’ obligation to distribute the proxy materials to beneficial owners and typically vote on their behalf. See id.

     [20].     Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change Amending NYSE Rules 451 and 456, and the Related Provisions of Section 402.10 of the NYSE Listed Company Manual, Which Provide a Schedule for the Reimbursement of Expenses by Issuers to NYSE Member Organizations for the Processing of Proxy Materials and Other Issuer Communications Provided to Investors Holding Securities in Street Name and to Establish a Five-Year Fee for the Development of an Enhanced Brokers Internet Platform, Release No. 68936, 2013 WL 603321, at *2 (Feb. 15, 2013).

     [21].     See Gumbs, Hamblet & Stortini, supra note 11, at 4.

     [22].     Id. (The “vote with management” button gives shareholders “the opportunity to, with one click of a button, vote a proxy or provide voting instructions in accordance with the recommendations of management.”).

     [23].     Letter from Broadridge Financial Solutions, Inc., to Clients 1 (Dec. 20, 2012), available at http://www.thecorporatecounsel.net/nonMember/docs/12_12_Vote.pdf.

     [24].     Id.

     [25].     See generally NYSE Rule 451, supra note 3; see also Spotlight on Proxy Matters—Receiving Proxy Materials, SEC, https://www.sec.gov/spotlight/proxymatters/proxy_materials.shtml (last modified May 24, 2012) (“Beneficial owners . . . receive a ‘voting instruction form’ directing their broker or other financial institution how to vote their shares. The broker-dealer (or bank or custodian) then casts the vote with the company after receiving instructions from its customer, the beneficial owner.”).

     [26].     Report and Recommendations of the Proxy Working Group, supra note 5, at 1.

     [27].     Notice of Filing of Proposed Rule Change, as modified to Amend No. 4, to Amend NYSE Rule 452 and Listed Company Manual Section 402.8 to Eliminate Broker Discretionary Voting for the Election of Directors and Codify Two Previously Published Interpretations That Do Not Permit Broker Discretionary Votes for Material Amendments to Investment Advisory Contracts, Exchange Act Release No. 59464, 2009 WL 586446, at *3 (Feb. 26, 2009).

     [28].     Report and Recommendations of the Proxy Working Group, supra note 5, at 7 (In 1937, Rule 452 prohibited brokers from voting on matters relating to “authorizations for a merger, consolidation or dissolution, or for the reclassification of any outstanding security.”)

     [29].     See NYSE Rule 451, supra note 3.

     [30].     Order Approving NYSE and Nasdaq Proposed Rule Changes and Nasdaq Amendment No. 1 and Notice of Filing and Order Granting Accelerated Approval to NYSE Amendments No. 1 and 2 and Nasdaq Amendments No. 2 and 3 Thereto Relating to Equity Compensation Plan, Exchange Act Release No. 48108, 2003 WL 21488831, at *4 (June 30, 2003) (“[T]he NYSE propose[d] to make a conforming change to NYSE Rule 452 subsection .11(9) to reflect the amendments that are being proposed to NYSe Rule 452 subsection .11(12) . . . .”).

     [31].     See Order Approving Proposed Rule Change, as modified by Amendment No. 4, to Amend NYSE Rule 452 and Corresponding Listed Company Manual Section 402.08 to Eliminate Broker Discretionary Voting for the Election of Directors, Except for Companies Registered under the Investment Company Act of 1940, and to Codify Two Previously Published Interpretations that Do Not Permit Broker Discretionary Voting for Material Amendments to Investment Advisory Contracts with an Investment Company, Exchange Act Release No. 60215, 2009 WL 1897466, at *14 (July 1, 2009) [hereinafter Exchange Act Release No. 60215] (“[T]he Exchange . . . amend[ed] NYSE Rule 452 to codify two previously published interpretations . . . . [P]reclud[ing] broker discretionary voting on a matter that materially amends an investment advisory contract with an investment company. [And establishing that] a material amendment to an investment advisory contract would include any proposal to obtain shareholder approval of an investment company’s investment advisory contract with a new investment adviser for which shareholder approval is required by the 1940 Act . . . .”).

     [32].     Concept Release, supra note 1, at *8 n.52 (stating that the amendment does not apply to companies registered under the Investment Company Act of 1940).

     [33].     See Exchange Act Release No. 60215, supra note 31, at *3. Walt Disney Company offers a striking example:

[I]n the Walt Disney Company’s 2004 Annual Meeting, involving one of the best known and organized ‘just vote no’ campaigns, Disney CEO Michael Eisner was re-elected to the board with 55% of the votes cast, while 45% of the shares voted were ‘no’ votes. Had broker votes not counted in this election then Mr. Eisner would have received only 45% of the votes in favor of re-election, and a majority of the votes cast, 54%, would have been withheld from him.

Report and Recommendations of the Proxy Working Group, supra note 5, at 9.

     [34].     See Exchange Act Release No. 60215, supra note 31, at *1–4.

     [35].     The Restoring American Financial Stability Act of 2010, S. Rep. No. 111–176, at 136 (2010), available at http://www.gpo.gov/fdsys/pkg/CRPT-111srpt176/pdf/CRPT-111srpt176.pdf. Moreover, in § 971, Congress empowered the SEC to enact rules to improve proxy access for shareholders dissatisfied with the slate of directors nominated by management. See Dodd-Frank Act, supra note 6, at 1915.

     [36].     See Dodd-Frank Act, supra note 6, at 1906–07 (The provision also gave the Commission the authority to define “any other significant matter . . . .”).

     [37].     See Exchange Act Release No. 60215, supra note 31, at *4–5. One result of brokers voting uninstructed shares is to establish a quorum at annual meetings of shareholders. See Report and Recommendations of the Proxy Working Group, supra note 5, at 12.

     [38].     See J. Robert Brown, Jr., The Politicization of Corporate Governance: Bureaucratic Discretion, the SEC, and Shareholder Ratification of Auditors, 2 Harv. Bus. L. Rev. 501, 518 (2012) (For instance, “[c]ompanies routinely ask shareholders to ratify the choice of outside auditors . . . .”).

     [39].     This has long been the case. See Stuart Gillan & Jennifer E. Bethel, The Impact of Institutional and Regulatory Environment on Shareholder Voting 9 (Ctr for Corp. Governance Univ of Del., Working Paper No. 2002-002, 2002), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=354820 (“In fact, brokers vote beneficial owners’ uninstructed shares in favor of management. The SEC conducted two surveys of brokerage firms to determine how they vote uninstructed shares. In 1976, all of the respondents in a survey of 118 brokerage firms indicated they always voted beneficial owners’ uninstructed shares with management. In 1998, the SEC polled six of the largest brokerage firms, all of which indicated they voted uninstructed shares for management.”).

     [40].     Broadridge’s Voting Instruction Form, Proxy Vote, https://materials.proxyvote.com/Approved/S60019/20130201/OTHER_153135.PDF (last visited Feb. 17, 2014) (“In the absence of any specific instructions as to voting being provided by you on this form, the item(s) will be voted as recommended on the reverse of this form or as stated in the information/proxy circular, except in the case of your appointment of an Appointee.”). In 2009, James McRitchie wrote a letter asserting that when a beneficial owner attempts to submit their VIF on proxyvote.com after voting on only one item, the next screen notifies the voter that they are “voting with management” on everything left blank using “a small asterisk next to each of these votes.” Letter from James McRitchie, Publisher, Corp. Governance, to Elizabeth M. Murphy, Sec’y, SEC 2 (May 15, 2009), available at http://www.sec.gov/rules/petitions/2009/petn4-583.pdf (requesting rulemaking to amend Rule 14a–4(b)(1) under Securities Exchange Act of 1934 to prohibit conferring discretionary authority to issuers with respect to nonvotes on the voter information form or proxy). The asterisk corresponds with a statement that appears “in very small type: ‘*No vote entered. Your vote will be cast as recommended by the soliciting committee.’” Id.

     [41].     17 C.F.R. § 240.14a–4(b)(1), (b)(2)(iv) (2014). The rule, however, requires proxies to state in “bold-face type” how the shares will be voted when a choice is not specified. Id. With respect to the election of directors, the failure to “withhold authority to vote for the election of any nominee shall be deemed to grant such authority, provided that the form of proxy so states in bold-face type.” Id.; see also Letter from James McRitchie, supra note 40, at 2 (Rule 14a–4(b)(1) “requires that when the security holder does not specify a choice, a proxy may confer discretionary authority ‘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.’”).

     [42].     The Commission at one time proposed to eliminate this authority. See Shareholder Communications, Shareholder Participation in the Corporate Electoral Process and Corporate Governance Generally, Exchange Act Release No. 16104, 1979 WL 170069, at *10 (Aug. 13, 1979) [hereinafter Release No. 16104]. In declining to do so, the Commission noted comments asserting that “there is little reason to doubt that shareholders intend an unmarked proxy to be voted for management's positions.” Shareholder Communications, Shareholder Participation in the Corporate Electoral Process and Corporate Governance Generally, Exchange Act Release No. 16356, 1979 WL 173198, at *8 (Nov. 21, 1979). The Commission has indicated concern over this conclusion. See Release No. 16104, supra, at *5 (“Under the present proxy rules, however, proxy cards on which a choice has not been specified may be voted in the issuer's discretion. Such a result may not be consistent with the intent of shareholders and could dilute the meaning of the vote conveyed to the issuer's board of directors.”).

     [43].     Andrew Tuch, Don’t Let Companies Change Shareholders’ Blank Votes, Harv. L. Sch. F. on Corp. Governance & Fin. Reg. (June 2, 2009, 10:41 AM), http://blogs.law.harvard.edu/corpgov/2009/06/02/dont-let-companies-change-shareholders-blank-votes/#more-1608 (“Rule 14a–4(b)(1) requires that when a choice is not specified by the security holder, a proxy may confer discretionary authority ‘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.’”). Accordingly, Rule 14a–4(b)(1) allows signed but unexecuted ballots to be voted for management as long as the proxy card indicates it in bold-face type. See id.; see also 17 C.F.R. § 240.14a–4(b)(1) (2014).

     [44].     Gumbs, Hamblet & Stortini, supra note 11, at 4.

     [45].     17 C.F.R. § 240.14a–4(b)(1) (2014).

     [46].     Nothing in NYSE Rules 451 or 452 require the use of bold print. See NYSE Rule 451, supra note 3; NYSE Rule 452, 1996 WL 34424015 (2014).

     [47].     The master VIF form apparently relied upon by Broadridge does not use bold print where discretionary authority is requested. See Proxy Vote, supra note 40, at 2.

     [48].     See NYSE Rule 451, supra note 3.

     [49].     Id. (“It is understood that, if you sign without otherwise marking the form, this will be construed as an instruction to vote the shares as recommended by the management on all matters considered at the meeting.”) (emphasis added).

     [50].     Id.

     [51].     Id. (emphasis added). Moreover, the explanation for this language supports the interpretation that brokers may not vote the instructions involving compensation and the election of directors that are left blank. The language was added out of concern “that many shareholders receiving proxy materials from their brokers for meetings scheduled after effectiveness of the amendments to the NYSE broker voting rules in relation to executive compensation proposals will not be aware of those amendments and may therefore assume that the broker as record holder will vote their shares on such proposals if they do not return voting instructions to their broker.” Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Forms of Broker Letters Set Forth in Exchange Rule 451, Exchange Act Release No. 63855, 2011 WL 439558, at *2 (Feb. 7, 2011).

     [52].     The language suggests that voting can only occur where beneficial owners have provided explicit instructions, something that is not the case with respect to a blank item on a VIF. See NYSE Rule 451, supra note 3, at *2. (“In order for your shares to be represented at the meeting, it will be necessary for us to have your specific voting instructions.”).

     [53].     Gumbs, Hamblet & Stortini, supra note 11, at 4. (The “vote with management” button gives shareholders “the opportunity to, with one click of a button, vote a proxy or provide voting instructions in accordance with the recommendations of management.”).

     [54].     See 17 C.F.R. § 240.14a–2(a)(1) (2014); see also Release No. 7208, supra note 18, at *1.

     [55].     See Gumbs, Hamblet & Stortini, supra note 11, at 4, n.21.

     [56].     See supra note 47.

     [57].     Shareholder Communications, Shareholder Participation in the Corporate Electoral Process and Corporate Governance Generally, Exchange Act Release No. 16356, 1979 WL 173198, at *5 (Nov. 21, 1979). Specifically, the SEC noted:

[T]he Commission expressed concern that shareholders may choose to abstain on matters by not marking certain of the boxes provided, yet under the present proxy rules such unmarked proxies will be voted in favor of management's positions. The Commission observed that “such a result may not be consistent with the intent of shareholders and could dilute the meaning of the vote conveyed to the issuer's board of directors.”

Id.

     [58].     See Letter from James McRitchie, supra note 40, at 3; see also Letter from Less Greenberg, Chairman, Comm. of Concerned S’holders 1 (May 28, 2009), available at http://www.sec.gov/comments/4-583/4583-4.htm (“The rule change proposed is consistent with other initiatives [to] strengthen the link between the actual votes cast (or not cast) by beneficial owners and the outcome of the shareholder vote . . . (where discretionary voting by brokers or banks of fields left blank by beneficial shareholders has historically biased this link in favor of the issuer). It effectively takes away a layer of voting that does not truly reflect the interests of the beneficial owners and which does not exist in civic voting.”).

     [59].     See Letter from James McRitchie, supra note 40, at 3–4.

     [60].     Letter from Holly A. Testa, First Affirmative Fin. Network, to Elizabeth M. Murphy, Sec’y, SEC (Aug. 7, 2009), available at http://www.sec.gov/comments/4-583/4583-26.pdf (requesting rulemaking to amend Rule 14a–4(b)(1) under the Securities Exchange Act of 1934 to prohibit conferring discretionary authority to issuers with respect to nonvotes on the voter information form or proxy).

     [61].     Concept Release, supra note 1, at *3.

     [62].     The Restoring American Financial Stability Act, supra note 35, at 136.

     [63].     Report and Recommendations of the Proxy Working Group, supra note 5, at 16–17. “Proportional voting does not have the same disadvantages as discretionary voting under Rule 452 with respect to brokers voting uninstructed shares in favor of the board’s recommendations and would eliminate the need for the NYSE to determine which matters are ‘routine.’” Id. Under a system of proportional voting, “uninstructed shares would be voted in the same proportion” as instructed shares instead of “giving brokers discretion to vote” them. Id. In other words, “the percentage of the uninstructed shares voted ‘yes’ and ‘no’ would mirror the vote of the instructed shares.” Id.

     [64].     NYSE Rule 451, supra note 3, at §§ (b)(1)–(2). Under NYSE Rule 451(b)(1) and (2), brokers have the option of forwarding proxy cards or VIFs to beneficial owners. See id. Specifically, the rule provides that “(b) such member organization shall transmit with such material either: (1) a request for voting instructions . . . or (2) a signed proxy . . . .” Id.

     [65].     Letter from Niels Holch, Exec. Dir., S’holder Commc’ns Coal., to Elizabeth M. Murphy, Sec’y, SEC 27 (Oct. 20, 2010), available at http://www.sec.gov/comments/s7-14-10/s71410-206.pdf.

     [66].     NYSE Rule 451, supra note 3, at § (b)(1).

     [67].     Id. at *2. Specifically, the form letters state: “Should you wish to have a proxy covering your shares issued to yourself or others, we shall be pleased to issue the same.” Id.

     [68].     See Roundtable on Proxy Voting Mechanics, SEC, http://www.sec.gov/spotlight/proxyprocess/proxyvotingbrief.htm (last modified May 23, 2007) (“Broker votes of uninstructed shares help issuers meet quorum at shareholder meetings since many beneficial owners do not regularly vote their shares.”).

     [69].     Concept Release, supra note 1, at *3.

     [70].     The Restoring American Financial Stability Act, supra note 35, at 136.

        *     J.D. Candidate 2015, University of Denver Sturm College of Law.