A:

The registered owner of the security, known as the holder of record, is the investor who retains voting rights. This means the holder of record is entitled to vote on any corporate action that is decided upon by shareholders. (For further reading, see What Are Corporate Actions?) When it comes to short sales, the problem that arises is determining who is the holder of record on the shares being shorted.

To understand the flow of voting rights, it is important to first understand the short sale transaction itself. Shares that are available to be shorted come from three sources: the brokerage firm's inventory, another customer's account, or another brokerage firm. The only shares that can be taken from other customer accounts are those from margin accounts. When opening margin accounts, investors enter an agreement with the brokerage firm that their shares can be loaned out, but they still maintain their position in the security.

The short sale transaction starts with the investor inputting an order to short the shares by calling his or her broker or entering the trade online. The brokerage firm then finds the shares from one of the aforementioned three sources and sells the shares in the market; the proceeds are transferred to the account of the investor going short. The position is then closed out when the investor repurchases the equivalent amount of shares and they are returned to the brokerage firm.

To understand who is the holder of record, and thus who retains the voting rights, you just need to follow the shares. Initially, the shares are held by one of the three sources. Whichever source initially held the shares was also the holder of record. When the shares were used in the short sale transaction, the initial source lost its voting rights as it was no longer the holder of record. Even the margin account customer who holds the shares long will lose his or her voting rights in this situation - this is part of the margin account agreement.

The shares are then sold in the market, and the investor who purchases these shares becomes the holder of record for these shares, thus controlling the voting rights. The investor going short does not get the voting rights. When this investor closes his or her short position, the shares are returned to the brokerage firm, and the voting rights return to the initial owner whose shares were used in the short sale.

(For more information about short sales, read our Short Selling Tutorial. To learn more about voting rights, see Knowing Your Rights As A Shareholder.)

RELATED FAQS
  1. What happens when the lender of the borrowed shares in a short sale transaction wants ...

    In a short sale transaction, shares are borrowed from the lender by the short seller and sold in the market. The lender of ... Read Answer >>
  2. If I own a stock in a company, do I get a say in the company's operations?

    You don't get a direct say in a company's day-to-day operations, but, depending on whether you own voting or non-voting stock, ... Read Answer >>
  3. How long can you short sell for?

    When an investor or trader enters a short position, he or she does so with the intention of profiting from falling prices. ... Read Answer >>
  4. Under what circumstances is short selling advisable?

    Find out when short selling a stock is profitable and what an investor should keep in mind before deciding to pursue a short ... Read Answer >>
  5. What rights do all common shareholders have?

    Learn what rights all common shareholders have, and understand the remedies that can be taken if those rights are violated ... Read Answer >>
  6. How long can a trader keep a short position?

    Learn whether there are any limitations on how long may an investor hold a short position, and explore the costs associated ... Read Answer >>
Related Articles
  1. Investing

    What Is Tenure Voting?

    This stockholder voting structure, one of three types, has advantages and disadvantages. Here’s a look at the pros and cons of all three.
  2. Investing

    Shareholders: Vote Your Proxy and Be Heard

    Voting shares, in person or via proxy ballot, is a right every shareholder should exercise. Here's why.
  3. Trading

    Introduction to Margin Accounts

    Find out what your broker is doing with your securities when you invest on margin.
  4. Investing

    The Basics Of Short Selling

    Short sellers enable the markets to function smoothly by providing liquidity, and also serve as a restraining influence on investors’ over-exuberance.
  5. Trading

    Short Sales For Market Downturns

    This strategy can help in market downturns, but it's not for inexperienced traders.
  6. Investing

    Proxy Voting Gives Fund Shareholders A Say

    You have the right to take part in important company decisions - even if you cannot attend the meetings.
  7. Trading

    Pick the Right Brokerage Account for Options Trading

    Follow these steps to pick the right options brokerage account depending on your trading needs and style of trading.
  8. Financial Advisor

    The 5 Most Shorted NYSE Stocks (VALE, CHK)

    Understand what a short sale is and why people would want to initiate a short strategy. Learn about the top five most shorted stocks on the NYSE.
  9. Managing Wealth

    Keeping Control of Your Business After the IPO

    Taking a company public doesn't mean founders must completely give up calling the shots. Before the IPO, consider these tactics to keep control after it.
  10. Investing

    What's a Brokerage Account?

    A brokerage account is a contractual arrangement between an investor and a licensed securities broker or brokerage.
RELATED TERMS
  1. Voting Right

    The right of a stockholder to vote on matters of corporate policy ...
  2. Registered Holder

    Shareholders who hold their shares directly with a company.
  3. Statutory Voting

    A corporate voting procedure in which each shareholder is entitled ...
  4. Common Shareholder

    An individual, business or institution that holds common shares ...
  5. Cumulative Voting

    The procedure of voting for a company's directors; each shareholder ...
  6. Class A Shares

    A classification of common stock that may be accompanied by more ...
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  6. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
Trading Center