You and Your Intermediary

You and Your Intermediary

An “intermediary” refers to a broker, bank or financial adviser who assists in managing and purchasing investments on your behalf. Your intermediary can help you understand the benefits of different types of share ownership and the variety of accounts in which your shares can be held. As a shareholder, you are entitled to receive information from the company whose shares you purchased, including annual and interim financial reports and voting materials.

In some instances, however, your intermediary will receive these materials and exercise voting rights on your behalf.

Under NYSE Rule 452, the New York Stock Exchange (NYSE) allows your broker to cast votes on your behalf — if you hold your securities in street name as a beneficial owner, and if you haven’t given the broker specific instructions regarding your vote at least ten days prior to a scheduled shareholder meeting, providing the proxy material is transmitted at least 15 days before the meeting (the broker may cast votes on your behalf fifteen days prior to a scheduled meeting, if the proxy material is transmitted 25 days or more before the meeting). When a broker votes on your behalf without your instruction, it is sometimes referred to as “the broker vote” or “the 10-day rule.” Often, brokers vote as management recommends or in proportion to the other votes they have received. The NYSE governs the rules and regulations around the broker vote.

However, brokers are only able to vote on what the NYSE refers to as “routine” matters, such as the ratification of auditors. They are not allowed to vote on any contested proposal, or one that may significantly affect the rights or privileges of the stock, such as the issuance of additional stock or a merger or acquisition. These are often called “non-routine” matters.

As of January 1, 2010, a rule change provided that the election of
directors became a “non-routine” matter and brokerage firms no longer have the discretion to vote without receiving instructions from their clients about how to vote in an election of directors. As a result, if you don’t provide voting instructions, your shares will not be considered when directors are elected. The changes to Rule 452 do not apply to mutual fund or certain closed-end fund holdings. Your broker will continue, therefore, to retain discretion to vote uninstructed shares in director elections for these companies.

These types of non-routine matters can be important, and may potentially affect your investment. For example, if you, as a beneficial owner, do not give voting authority to your investment adviser, broker or bank, and you yourself do not vote on these non-routine matters, no vote will be cast for your shares. In this scenario, you will not have exercised your rights as a shareholder — and it may affect your investment.

Allowing brokers to vote on routine matters helps ensure that an issuer, or corporation, will meet quorum requirements.

You also have the option of giving your investment adviser the authority to vote on your behalf. Many shareholders select this option, and the Securities and Exchange Commission (SEC) enforces rules and regulations around the practice.

In 2003, the SEC adopted rules with respect to investment advisers containing similar requirements to those applicable to mutual fund companies. These rules are Rule 206(4)-6 called “Proxy Voting by Investment Advisers” and amendments to Rule 204-2 called “Books and Records to be Maintained by Investment Advisers” under the Investment Advisers Act of 1940. The rules address investment advisers’ fiduciary responsibility to their clients by requiring advisers to:

  • Adopt proxy voting policies and procedures that help protect the best interests of their clients
  • Make proxy voting policies and procedures available to clients
  • Disclose how clients can obtain information about how their proxies were voted
  • Maintain records of how proxies were voted

You may hold your shares through different types of accounts. As a shareholder, you are entitled to receive voting materials information and should contact your intermediary for guidance. You should speak with your bank, broker or investment adviser about how you receive your materials and how to vote on your own behalf.

NYSE Rule 452

SEC Order Approving Proposed Rule Change to Amend NYSE Rule 452

SEC Rule 206(4)-6

SEC Rule 204-2

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