Handling of Proxies by Broker-Dealers

Overview

Broker-dealers' obligations as to proxies are essentially administrative in nature. As a starting matter, a broker-dealer is required either to give the issuer the identity of the holders of the issuer's securities, so that the issuer may send proxy materials directly, or, if the holder has requested that its identity be kept anonymous, the broker-dealer is generally required to forward proxy documents provided by the issuer. (The issuer is required to pay the broker-dealer an amount that would be sufficient to reimburse the broker-dealer for its proxy mailing expenses.) In addition, for those customers who hold securities through the broker-dealer and wish to vote, the broker-dealer must pass along their votes. While this task seems administrative, it is not necessarily easy to fulfill, as customers may change their holdings of positions daily, and the positions of which the broker-dealer has actual possession may likewise change each day as its SEA Rule 15c3-3 segregation requirements change. (For example, if a security is the subject of a margin loan, the broker-dealer may rehypothecate the securities and so lose the ability to vote it on behalf of the customer who "owns" the security.)

Historically, broker-dealers could vote securities held by their customers, at least on routine matters, when the customers did not exercise their votes. Now broker-dealers are generally prohibited from voting customers' securities in the absence of explicit direction as to how to vote.

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