NYSE Rule 452 and the Problems of Uninstructed Shares (Part 1)
NYSE Rule 452 has always been a bit of an anomaly. With the rise of street name accounts, most shareholders no longer hold record title to their shares. Instead, they are held in the account of a broker (or bank). The broker or bank typically transfers the shares to a depository, typically DTC. So it is DTC that had record title to the shares.
Under state law, voting rights belong to record owners. DTC, however, does not want the voting rights. Instead, the depository routinely (but not always) transfers voting rights to the brokers and banks that have deposited the shares. At the time of a meeting, therefore, it is the broker that for the most part has the legal right to vote shares.
A complicated set of rules requires that brokers pass voting rights to street name owners. They typically do so by distributing voting instructions to the account holders. These instructions are executed then returned to the broker. The broker will total up the votes and send the company a proxy card that reflects the views of street name owners. For a discussion of this system, see The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility?
The system gives street name ownes a guaranteed opportunity to vote at shareholder meetings even though they are not record owners for state law purposes. Many street name owners, however, do not return their voting instructions. Without some kind of regulatory or contractual intervention, brokers can vote the shares. This gives them a potentially significant role in shareholder decisions even though they have no economic interest in the shares.
The easiest thing to do would be a rule that bans brokers from voting uninstructed shares. Opposition to this usually centers around the perceived concern that without voting the shares, they will not be deemed present at the meeting for quorum purposes. To the extent a company lacks a quorum, it will have to reschedule and hold another meeting, causing additional delay and cost.
As a result, brokers are allowed to vote uninstructed shares. Rule 452 delineates the circumstances where they are not allowed to do so. Thus, if something is not listed in the Rule, brokers can vote the uninstructed shares. Rule 452 in turn contains a complicated list of 21 items, including such matters as those relating to "executive compensation," something that, according to the notes, encompasses say on pay.
The Rule has undergone considerable revision over the years. An Information Memorandum issued by the NYSE effectively continues this process. It prohibits brokers from voting uninstructed shares for certain corporate governance provisions even when supported by management. We will discuss this interpretation in the next post.