Proxy rules

We learned about proxies in the common stock chapter. A proxy is the set of voting materials shareholders use to vote on corporate matters. Firms must follow specific procedures when distributing proxies to customers.

Firms must cooperate with issuers to forward voting materials to the customers who actually own the shares. In most cases, broker-dealers appear as the stockholder on the transfer agent’s books.

For example, assume Joe Smith holds Lyft Inc. stock (ticker: LYFT) in a Charles Schwab brokerage account. Charles Schwab will likely be listed as the owner of record of the LYFT shares, not Joe Smith. This setup makes trading easier because the broker-dealer can process transactions without needing extra paperwork and customer signatures for each trade. When the broker-dealer is the owner of record, the security is held in street name.

The issuer sends proxies to the owners of record, which often includes broker-dealers holding securities in street name. The broker-dealer is then responsible for forwarding the proxies to the customers who own the stock. Firms holding securities in street name must initially pay the costs of distributing these voting materials to customers. After the materials are mailed, the broker-dealer is reimbursed by the issuer.

If a customer does not return the proxy, the firm may vote on the customer’s behalf, but only on minor issues (e.g., approval of a new accounting firm, stock split approvals). If the customer returns a signed proxy but does not mark any voting choices, the firm will vote according to the issuer’s recommendations.