The Securities and Exchange Commission recently announced it is seeking public comment on a wide number of what many people called “proxy plumbing” issues. Mostly mundane changes to the proxy voting infrastructure.

However, buried on the list is a practice favored by some activist hedge funds to boost their voting power in a company without putting up much money. It is called “empty voting.” The regulator wants to determine whether this practice is being used to inappropriately influence corporate voting results.

The regulator notes that “empty voting” occurs, for example, if a holder of shares buys a put option to sell those shares, the holder retains voting rights on all of those shares, even though it has hedged away at least some of its economic interest. Empty voting can also occur if a shareholder sells its shares after the record date of a shareholder meeting, but before the meeting. In that instance, the shareholder retains the right to vote those shares, even though it no longer has an economic interest in those shares.

“This decoupling -- which we call ‘the new vote buying’ -- is often hidden from public view and is largely untouched by current regulation,” asserted a paper published several years ago by Henry Hu, at the time Allan Shivers Chair in the Law of Banking and Finance, University of Texas Law School, and Professor Bernard Black, Hayden W. Head Regents Chair for Faculty Excellence, University of Texas Law School, and Professor of Finance, University of Texas, McCombs School of Business. “Hedge funds have been especially creative in decoupling voting rights from economic ownership.”

It is no coincidence that last September, Hu was named the Director of the SEC’s newly-established Division of Risk, Strategy, and Financial Innovation, with the mandate to cover three broad areas: risk and economic analysis; strategic research; and financial innovation.

The most high profile use of “empty voting” took place several years ago when Mylan Laboratories agreed to buy rival King Pharmaceuticals for a huge premium. Richard Perry’s hedge fund Perry Corp. owned seven million shares of King. In a typical merger arbitrage deal, Perry also shorted the stock of Mylan.

However, after Mylan’s shares slumped on the takeover news, Perry bought 9.9 percent of Mylan’s stock, becoming its largest shareholder. However, he fully hedged the market risk of his Mylan stake, enabling him to have 9.9 percent voting ownership of Mylan but absolutely no economic ownership.