Section 957 of the Dodd-Frank Act requires all national securities exchanges to modify their rules governing member brokers so that brokers may not vote shares that they do not beneficially own without instructions from the beneficial owner on (1) all director elections (including uncontested elections), (2) compensation-related matters and (3) “other significant matters” as determined by the SEC. The prohibition on uninstructed voting in uncontested elections codifies the change to NYSE’s Rule 452 that became effective prior to the 2010 proxy season, as described in our January 2010 Public Company Alert. In response to the Dodd-Frank requirement, the NYSE has further modified Rule 452 to eliminate uninstructed broker voting on all compensation-related matters, including the three “say on pay” matters in the Act described elsewhere in this Alert. Similarly, the NASDAQ has adopted conforming changes to its rule governing uninstructed voting by its member brokers.
Brokers have typically voted uninstructed shares in favor of management’s nominees and proposals, and many retail shares are likely to go unvoted, as holders typically fail to provide voting instructions to their brokers. As a result, these changes will likely increase the power of institutional shareholders and proxy voting advisory firms like ISS to influence the outcome of director elections and say on pay advisory votes, increasing the chances that shareholders will vote against the say on pay proposal and that directors in elections in which a majority vote is required by the issuer’s bylaws will fail to receive the requisite number of votes.