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The SEC has voted to approve an amendment to Rule 452 of the New York Stock Exchange that prohibits brokers from casting discretionary votes in any election of directors.

NYSE Rule 452 (and Section 401.08 of the NYSE Listed Company Manual) allows member organizations, which generally includes broker-dealers that are members of FINRA, to vote on certain “routine” proposals if the beneficial owner of the stock has not provided specific voting instructions. However, Rule 452 lists several items that are considered “non-routine,” including contested matters and several other matters that may affect substantially the rights or privileges of stockholders. With the SEC’s approval of the amendment to NYSE Rule 452, “the election of directors” has been added to the list of non-routine matters on which member organizations are not permitted to give a proxy to vote without instruction from the beneficial owner.

The amendment to NYSE Rule 452, voted on by the SEC on July 1, 2009, contains a specific exception for companies registered under the Investment Company Act of 1940, as amended. In addition, the amendment codifies NYSE two previously published interpretations that do not permit broker discretionary voting for material amendments to investment advisory contracts with an investment company.

The amendment will be effective for shareholder meetings held on or after January 1, 2010.

The NYSE first proposed eliminating broker discretionary voting in October 2006, and it amended its initial filing in 2007. The proposed rule change triggered extensive controversy. In March 2009, the SEC published the NYSE proposed rule change for public comment and received 153 comment letters from issuers, transfer agents, institutional investors, proxy advisory firms and others.

This amendment is expected to make it more difficult for companies with “majority voting” provisions to achieve successful elections. Under most state corporate laws, directors are elected by a "plurality" vote, in which a director nominee who receives the highest number of votes cast “for” an open director's seat is elected to that position, regardless of the number of "withhold" or “against” votes.

However, some companies have established a majority voting standard for the election of directors, typically requiring a director nominee to receive the affirmative votes of a majority of either the votes cast at the meeting or the shares eligible to be voted at a meeting, depending on the standard established. The exclusion of broker discretionary voting in the election of directors could have the effect of preventing a director nominee from receiving a sufficient number of affirmative votes, resulting in a failed election.