The Council of Institutional Investors (CII), which represents public, labor, and corporate pension funds, has released a new white paper on the issue of client-directed voting (CDV), which is being considered by the SEC during its review of proxy voting mechanics. 

The CDV concept--whereby retail investors provide standing voting instructions to their brokers or bank custodians in advance--has gotten more attention in the light of the decline in retail participation since the SEC adopted e-proxy rules in 2007. In addition, some corporate officials have raised concern about the need to boost retail voting after New York Stock Exchange Rule 452 was amended to bar broker discretionary voting in uncontested board elections. 

The paper was prepared by Alan Beller and two other lawyers at the law firm of Cleary Gottlieb Steen & Hamilton. Beller served as director of the SEC’s Corporation Finance Division from 2002 to 2006. While CII commissioned the paper to help it prepare a comment letter on proxy voting mechanics, the group said the paper “is an independent study and does not necessarily reflect the views of the Council or its members.”

The paper doesn’t endorse the concept of CDV, but instead calls for more study by regulators. “The complexity of CDV and the policy and regulatory issues it entails suggest to us that a robust CDV model is likely to have a long gestation period,” the authors conclude. 

As the authors note, CDV has the potential to influence the outcome of some corporate matters. “A CDV model that increases genuinely volitional RBO [retail beneficial owner] voting may be seen as facilitating the exercise of an important shareowner right and thus may have a role in evolving proxy mechanics, even if it does not also enhance RBO understanding of ballot items,” they write. “On the other hand, a CDV model that facilitates voting through a streamlined process, but that has the effect (even if unintended) of a standardized voting mechanism may be viewed as little different from uninstructed broker voting. That type of model would nullify the modifications to NYSE Rule 452 and be of great concern to institutional investors.”