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In 2009, the SEC eliminated broker discretionary voting in director elections for corporate issuers. Importantly, the rule change exempted mutual funds and other companies registered under the Investment Company Act of 1940 (40Act). Almost a decade later, not every fund knows about this exemption, nor ways they can strategically use discretionary voting to achieve their goals.
What is discretionary voting?
A “broker discretionary vote” is a proxy ballot that brokers cast on behalf of shareholders who do not provide a specific voting instruction. The rule stipulates that after a specified date, the broker may return a proxy on the shareholder’s behalf. Only brokers can submit discretionary votes, banks cannot do so.
Although discretionary voting is permitted exclusively on routine proposals,it can have an impact (via the broker non-vote) on non-routine proposals that may be part of the same agenda. Currently, the election of directors/trustees and the ratification of auditors are the only proposals categorized as “routine” under the rule. The NYSE provides guidance on when and how these votes can be used.
The advantage is that discretionary voting can reduce the impact of lower shareholder voting. But discretionary voting varies depending on the percentage of shares held through brokers. In addition, funds should be aware of timing issues that may, in some cases, decrease voting rates.
Reach quorum faster.
In certain cases, funds may rely on broker discretionary voting to reach quorum on routine items. It is important to know when planning for a proxy which brokers support the process and which do not. Broadridge can help you access historical voting data, so you can identify brokers that tend to submit discretionary votes, as well as brokers that tend to vote according to management recommendations.
Reduce costs associated with proxy mailings.
Proactive proxy campaign planning enables funds to adopt alternative communication strategies that may involve:
For example, Notice and Access enables funds to forward a “Notice” in lieu of distributing full proxy statements. In this way, funds can reduce expenses and still distribute compliant materials to shareholders.
We want to hear from you: Has your fund used discretionary voting recently? What was the outcome? Did you rely on Notice and Access?
