Ten months after the New York Stock Exchange (NYSE) first proposed the elimination of discretionary broker voting in board elections, investors are still waiting for the Securities and Exchange Commission to address the issue.

When the SEC issued draft rules on proxy access and sought comment on shareholder proposals in late July, some investors expected that the agency would also issue the proposed NYSE rule (which requires agency approval) for public comment. Broker voting was discussed during a trio of SEC roundtables on proxy rights in May, and Chairman Christopher Cox told lawmakers in June that the agency was looking at the issue during its review of the proxy process.

"It's strange that [SEC officials are] taking their time, since the stock exchange really wants this rule change," Brishen Rogers, a lawyer with the CtW Investment Group, which manages funds for the Change to Win labor federation, told Governance Weekly. "It’s really puzzling."

The NYSE has proposed changing Rule 452, which now permits brokers to vote client shares in uncontested elections and other “routine matters” if they don’t receive instructions within 10 days of a company’s meeting. Brokers generally cast these uninstructed shares in favor of management nominees, a practice that some investor advocates have likened to "legalized ballot-box stuffing."

The proposed rule change is supported by the Council of Institutional Investors (CII), CtW, and other shareholder advocates. They complain that broker votes can blunt the impact of “vote no” campaigns and can be decisive in whether a director receives majority support, which a growing number of U.S. companies now require. Investors point to the disputed election of CVS/Caremark director Roger Headrick (whom CtW contends was elected only because of broker votes) as an example how these votes can affect the outcome of board elections.

Broker votes 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 has noted in a briefing paper on voting mechanics. While most institutions now vote their shares or give 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.

The NYSE started looking at broker voting in April 2005 when it convened a “proxy working group” to assess Rule 452 and other rules that concern the proxy process. In June 2006, the group recommended that the election of directors should no longer be considered routine.

Last October, the NYSE proposed amending Rule 452 to bar brokers from voting their clients’ uninstructed shares in board elections after Jan. 1, 2008. While acknowledging that such a change would likely result “in some greater costs and difficulties for issuers, it is a cost required to be paid for by better corporate governance and transparency of the election process,” the NYSE said in its rule proposal to the SEC.

NYSE President Catherine R. Kinney declared in a press release that "the election of directors is simply too important to ever be considered routine, even where the election is uncontested. Shareholder voting on the election of directors is a critical component of good corporate governance."

At the SEC roundtable on May 24, Kinney defended the rule change against complaints that it would be too expensive, noting that companies raised similar concerns about costs when the NYSE in 2003 removed equity plans from the list of routine matters under Rule 452.

Most of the other roundtable panelists said Rule 452 should be changed, but they differed over how to do that. While John Endean, president of the American Business Conference, agreed that broker votes "serve as a thumb on the scale in vote-no campaigns," he argued that broker votes should only be barred from certain elections, e.g., those with an organized vote-no campaign.

In late May, the NYSE revised its proposal to exempt mutual fund companies after industry advocates warned that the funds, which already have trouble meeting quorum requirements, would see their proxy solicitation costs more than double.