The SEC has approved an amendment to NYSE Rule 452 (and Section 402.08 of the NYSE Listed Company Manual) that prohibits member organizations, which generally include broker-dealers that are members of FINRA (regardless of the stock exchange on which a company is listed), from voting uninstructed shares on any executive compensation matters. The amendment is designed to implement Section 957 of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).
The amendment to Rule 452 is effective immediately.
Background on NYSE Rule 452
Many shareholders hold shares in “street name” arrangements, in which shareholders retain beneficial ownership, but their bank, broker or other nominee serves as the registered owner of the shares. While such arrangements facilitate the ability to transfer shares, it is generally the registered owner who votes at a company’s shareholder meetings, typically by granting a proxy to the person(s) identified in a company’s proxy materials.
NYSE Rule 452 governs when “member organizations” of the NYSE, which generally include broker-dealers that are members of FINRA, may grant proxies with respect to shares held for the account of a beneficial owner. Generally, Rule 452 allows member organizations to vote on certain “routine” proposals if the beneficial owner of the shares has not provided specific voting instructions. However, Rule 452 lists several items that are considered “non-routine” on which member organizations may not vote without specific instructions from the beneficial owner, including contested matters and several other matters that may affect substantially the rights or privileges of shareholders.
It is important to note that because NYSE Rule 452 applies to broker-dealers, it impacts the voting process at a company regardless of the exchange on which the company is listed.
Amendment to Rule 452 in Light of the Dodd-Frank Act
Section 957 of the Dodd-Frank Act requires national securities exchanges to prohibit members from granting proxies to vote securities in connection with certain matters unless the beneficial owner of the shares has instructed the member to vote the proxy in accordance with voting instructions of the beneficial owner. These matters include (i) director elections, (ii) executive compensation, and (iii) other “significant matters” that the SEC determines by rule. The SEC has not yet identified any other “significant matters.”
The NYSE has already amended Rule 452 to prohibit discretionary voting in director elections (read our alert here).
With the new amendment to Rule 452, the NYSE added matters that “relate to executive compensation” to the list of non-routine matters on which member organizations are not permitted to give a proxy to vote without receiving voting instructions from the beneficial owner.
The commentary to amended Rule 452 provides that matters relating to executive compensation include, among other things, the three advisory executive compensation votes created by Section 951 of the Dodd-Frank Act:
(i) the advisory vote to approve the compensation of executives (“say-on-pay”);
(ii) the advisory vote on whether to hold say-on-pay advisory votes every one, two or three years; and
(iii) the advisory vote to approve any type of compensation that is based on or otherwise relates to an acquisition, merger, consolidation, sale or other disposition of all or substantially all of the assets of the issuer and the aggregate total of all such compensation that may be paid or become payable to or on behalf of an executive officer (“say-on-parachutes”).
The NASDAQ, which is also subject to the requirements of Section 957 of the Dodd-Frank Act, has also submitted a proposed rule amendment to NASDAQ Rule 2251 that will similarly prohibit broker discretionary voting on all executive compensation-related matters that are subject to shareholder vote. The proposal is expected to be adopted promptly.
Conclusion and Outlook
Many “retail” shareholders fail to instruct their bank, broker or other nominee how to vote their shares, and brokers often vote uninstructed shares in favor of management recommendations. With the new amendment to NYSE Rule 452, it may be more difficult for companies to obtain favorable say-on-pay and say-on-parachute votes. Unfortunately, most companies will be seeking these votes for the first time in 2011. With the limited experience in the US regarding say-on-pay proposals, it is difficult to generalize about the reasons that drive shareholder votes in this area. The amendment to NYSE Rule 452 may increase this uncertainty.
We are continuing to monitor the impact of the recent changes in discretionary voting, as well as the implementation of the Dodd-Frank Act generally, and to develop strategic advice for our clients. Please feel free to contact us for further information.