The New York Stock Exchange (“NYSE”) recently fi led an amended proposal to its discretionary broker voting rule (Rule 452) that would preserve discretionary voting by brokers for the election of registered investment company directors. The proposal, if approved by the SEC, will make it easier for investment companies to obtain quorums and the required votes at their meetings with regard to election of directors than under the NYSE’s original proposal. Broker-dealers who are members of the NYSE may cast a vote on behalf of a customer who is a benefi cial shareholder without fi rst obtaining instructions from the customer on any item that is designated in Rule 452 as “routine.” Election of directors is designated as “routine” under the current rule. However, in October 2006 the NYSE proposed (“2006 Proposal”) that the election of directors no longer be considered a “routine” matter because it viewed shareholder voting as a “critical component of good corporate governance” and therefore too important to be considered “routine.” The result of removing the election of directors as a “routine” matter would be that member fi rms would have to obtain instructions from the underlying benefi cial shareholder before casting a vote on the shareholder’s behalf. The 2006 Proposal covered all votes on proposals for election of directors, including those for investment company directors.

The ICI and others in the investment management industry objected to the 2006 Proposal because they perceived that it would result in increased costs and other burdens on investment companies. They argued that unlike operating companies, investment companies have a higher proportion of retail investors, and a substantial number of those investors hold shares through their NYSE member fi rms’ street names. According to an ICI study, investment company benefi cial owners tend to return proxies at a fairly low rate by comparison to operating company shareholders. As a result, if discretionary voting by brokers is removed for election of directors, investment companies would likely have to engage in multiple, costly solicitations and there would be more adjourned shareholder meetings. The re-solicitations and adjourned meetings, according to the study, would likely cause fund expense ratios to increase from one to two basis points or more for smaller funds. In response to the study, the NYSE Proxy Working Group reviewed the 2006 Proposal and determined that an exception for investment companies was appropriate in view of the costs and burdens on such companies and the “unique regulatory scheme governing investment companies.”

The 2006 Proposal, as amended with the investment company exception, awaits SEC approval.