The Securities and Exchange Commission heard industry panelists raise concerns about the costs of, and suggest potential alternatives to, a proposed New York Stock Exchange rule to bar brokers from voting uninstructed shares in uncontested director elections.

While most of the panelists agreed the current rule should be changed, they differed on how that should be done. "I can't think of anything that is more important than who are the directors of our public companies," Catherine Kinney, president of NYSE Euronext, told the SEC on May 24.

The discussions on the NYSE rule change took place during a half-day SEC roundtable on proxy voting mechanics, which also included panels on voting issues and shareholder communications. The event was the second of three forums that the agency is holding on shareholder rights and the proxy voting process as it seeks to craft new proxy rules this summer. A final roundtable, which will be held May 25, will feature comments from investors and business advocates on shareholder proposals.

In October, the NYSE proposed changing Rule 452 to remove director elections from the list of "routine" matters that brokers may vote on if their clients don’t send voting instructions within 10 days of an annual meeting. The NYSE rule change, which would apply to meetings after Jan. 1, 2008, requires SEC approval.

Traditionally, brokers have cast those shares in favor of management nominees, prompting the Council of Institutional Investors and other investor advocates to describe the practice as"ballot-box stuffing." The CtW Investment Group, which manages union assets, notes that broker votes can be decisive in "vote-no" campaigns and points to the recent close vote on a CVS/Caremark director.

Broker votes do account for a significant percentage of the shares in U.S. companies. About 85 percent of exchange-traded securities are held by brokers and banks on behalf of their clients, the SEC noted in a briefing paper on voting mechanics. While most institutions now vote their shares or give voting instructions, only 30 to 40 percent of retail investors bother to vote their shares. According to Broadridge Financial, broker votes on average account for about 19 percent of the votes cast at U.S. corporate meetings.

"While Rule 452 historically has worked well for issuers and investors, the time has come for the NYSE not to have brokers vote for investors in all uncontested elections," said David J. Berger, a partner with the law firm of Wilson Sonsini Goodrich & Rosati.

John Endean, president of the American Business Conference, said he agreed with shareholder activists that broker votes "serve as a thumb on the scale in vote-no campaigns." However, Endean argued that not every director election is non-routine, and broker votes should only be barred from certain elections, e.g., those with an organized vote-no campaign. Excluding broker votes from all director elections would increase the solicitation costs for small and mid-cap firms that need those votes to meet quorum requirements without changing the outcome of those board elections, Endean said. "Broker voting should be mended, not ended," he added.

Anthony Horan, the corporate secretary at J.P. Morgan Chase, warned that the rule change could disenfranchise retail investors who don’t follow proxy matters as closely as institutions. "Just eliminating broker votes would have the adverse effect of leaving out a lot of people who expect their votes to be cast," he said.

Paul Schott Stevens, president of the Investment Company Institute, which represents mutual funds, said the NYSE rule change should not be applied to funds, which have a greater proportion of retail investors and already have difficulty meeting quorum requirements. In a statement, he warned that the solicitation costs for mutual funds would more than double if they were not exempted.

Kinney defended the rule and noted that companies raised similar concerns about potential costs when the NYSE in 2003 removed equity plans from the list of routine matters under Rule 452.