Proxy rules

We learned about proxies in the common stock chapter, which are voting materials. Firms must follow specific procedures when distributing proxies to their customers.

First, firms must cooperate with issuers to forward their customers voting materials. In most circumstances, broker-dealers are reflected as the stockholder on the transfer agent’s books. For example, let’s assume Joe Smith holds Lyft Inc. stock (ticker: LYFT) in their Charles Schwab brokerage account. Charles Schwab likely shows as the owner of the LYFT stock, not Joe Smith. This process is followed to make trades easier for customers. Otherwise, more paperwork requiring actual customer signatures would be required to execute customer transactions. When the broker-dealer is the owner on record for the stock, this is known as holding the security in “street name.”

The issuer distributes proxies to owners on record, including many broker-dealers holding securities in street name. The broker-dealers are then responsible for forwarding the proxies to the appropriate customers that own the stock. Firms holding securities in street name must initially pay for distributing these voting materials to customers. After mailing the voting materials, the broker-dealer is reimbursed by the issuer.

If a customer does not return the proxy, the firm can vote on their behalf, but only on minor issues (e.g., approval of a new accounting firm, stock split approvals). Also, if the customer returns the signed proxy without any votes, the firm will vote according to the issuer’s recommendations.