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The legislation just adopted by the Senate (Restoring American Financial Stability Act) contain a number of provisions that, if they survive, can only be seen a preempting some of the authority of the stock exchanges in the area of corporate governance.  Congress is doing so by transferring the authority for listing standards and other governance provisions to the Commission.

One example concerns discretionary voting by broker-dealers.  Voting restrictions on street name shares had historically been left to the NYSE under Rule 452.  This will change, however, if the Senate Bill becomes law. 

Specifically, Section 957 prohibits the voting of uninstructed shares for the "election of a member of the board of directors of an issuer" and "executive compensation".  More importantly, it allows the Commission to prohibit voting on "any other significant matter".  The legislative history indicates that the authority is to be construed broadly.  As the Senate Report notes:

• Section 957. Voting by brokers.  Section 957 amends the Securities Exchange Act of 1934 so that brokers who are not beneficial owners of a security cannot vote through company proxies unless the beneficial owner has instructed the broker to do so. The final vote tallies should reflect the  wishes of the beneficial owners of the stock and not be affected by the wishes of the broker that holds the shares.

If adopted, therefore, voting rights of broker-dealers for uninstructed shares ill cease to be the exclusive prerogative of the NYSE.  The provision, therefore, reflects another significant assertion of the SEC directly into the corporate governance process and essentially entails preemption of the authority of the NYSE. 

The provision is a growing trend of transferring corporate governance responsibility from the states and from the stock exchanges directly to the Commission.  While the SEC's authority in the governance area has been increasing, the financial reform bill may result in an exponential increase in that authority, transforming the agency into the primary regulator of corporate governance functions.  

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