[Federal Register Volume 67, Number 62 (Monday, April 1, 2002)]
[Notices]
[Pages 15440-15445]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7781]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-45644; File No. SR-NYSE-2001-53]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Amendment No. 1 Thereto by the New York Stock Exchange, Inc.
Amending Its Rules Regarding the Transmission of Proxy and Other
Shareholder Communication Material and the Proxy Reimbursement
Guidelines Set Forth In Those Rules, and Requesting Permanent Approval
of the Amended Proxy Reimbursement Guidelines
March 25, 2002.
I. Introduction
On December 21, 2001, the New York Stock Exchange, Inc. (``NYSE''
or ``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend the NYSE's proxy fee
schedule guidelines under its current pilot program, and to seek
permanent approval of the pilot program. On January 9, 2002, the NYSE
filed Amendment No. 1 to the proposed rule change.\3\ The proposed rule
change and Amendment No. 1 were published in the Federal Register on
January 16, 2002.\4\ Eight comments were received on the proposed rule
change, as amended.\5\ The NYSE responded to the comments on March 5,
2002.\6\ This order approves the proposed rule change, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE,
to Sharon Lawson, Senior Special Counsel, Division of Market
Regulation (``Division''), Commission, dated January 7, 2002
(``Amendment No. 1''). In Amendment No. 1, the Exchange made some
technical and clarifying corrections to the proposed rule change.
\4\ See Securities Exchange Act Release No. 45263 (January 9,
2002), 67 FR 2264.
\5\ See letters from Paul Conn, Executive Vice President,
Computershare Limited, and Steven Rothbloom, President,
Computershare Investor Services (US), to Secretary, Commission,
dated February 6, 2002 (``Computershare Letter''); Rachel E. Kosmal,
Senior Attorney, Intel Corporation, D. Craig Nordlund, Senior Vice
President, General Counsel and Secretary, Agilent Technologies,
Inc., and Keith Dolliver, Senior Attorney, Microsoft Corporation, to
Secretary, Commission, dated February 6, 2002 (``Intel et al.
Letter''); Keith G. Berkheimer, President, CTA, to Secretary,
Commission, dated February 6, 2002 (``CTA Letter''); Carl T. Hagberg
to Secretary, Commission, dated February 4, 2002 (``Hagberg
Letter''); David W. Smith, American Society of Corporate Secretaries
(``ASCS''), to Jonathan G. Katz, Secretary, Commission, dated
February 7, 2002 (``ASCS Letter''); Peter C. Suhr, Executive Vice
President, Alamo Direct, to Secretary, Commission, dated February 1,
2002 (``Alamo Direct Letter''); Elva Gonzalez, Corporate Manager,
Shareowner Services, SBC Communications, to [email protected],
Commission, dated February 8, 2002 (``SBC Communications Letter'');
and Sarah A.B. Teslik, Executive Director, Council of Institutional
Investors (``CII''), to Secretary, Commission, dated February 7,
2002 (``CII Letter'') (collectively, ``Letters'').
\6\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE,
to Sharon Lawson, Senior Special Counsel, Division, Commission,
dated March 4, 2002 (responding to the comment letters received
regarding the proposed rule change) (``NYSE Response Letter'').
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II. Background
NYSE member organizations that hold securities for beneficial
owners in street name \7\ solicit proxies from, and deliver proxy and
issuer communication materials to, beneficial owners on behalf of NYSE
issuers. For this service, issuers reimburse NYSE member organizations
for out-of-pocket, reasonable clerical, postage and other expenses
incurred for a particular distribution, pursuant to guidelines for
reimbursement of these expenses as set forth in NYSE Rules 451 and 465,
and Paragraph 402.10(A) of the NYSE's Listed Company Manual,
(collectively ``Rules'').\8\
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\7\ The ownership of shares in street name means that a
shareholder, or ``beneficial owner,'' has purchased shares through a
broker-dealer or bank, also known as a ``nominee.'' In contrast to
direct ownership, where shares are directly registered in the name
of the shareholder, shares held in street name are registered in the
name of the nominee, or in the nominee name of a depository, such as
the Depository Trust Company.
\8\ The Commission's proxy rules, Rules 14a-13, 14b-1, and 14b-2
under the Act, impose obligations on companies and nominees to
ensure that beneficial owners receive proxy materials and are given
the opportunity to vote. These rules require companies to send their
proxy materials to nominees, i.e., broker-dealers or banks that hold
securities in street name, for forwarding to beneficial owners.
Under these rules, companies must pay nominees for reasonable
expenses, both direct and indirect, incurred in providing proxy
information to beneficial owners. The Commission's rules do not
specify the fees that nominees can charge issuers for proxy
distribution; rather, they state that issuers must reimburse the
nominees for ``reasonable expenses'' incurred.
In adopting the direct shareholder communications rules in the
early 1980s, the Commission left the determination of reasonable
costs to the self-regulatory organizations (``SROs'') because they
were deemed to be in the best position to make fair evaluations and
allocations of costs associated with these rules. In 1997, during
the initiation of the pilot on proxy fee reimbursement, see infra
note 10, the Commission believed that ultimately market competition
should determine ``reasonable expenses'' and recommended that
issuers, broker-dealers, and the NYSE develop an approach that may
foster competition in this area. Rather than having rates of
reimbursement set by the SROs, the Commission suggested that the
NYSE and other SROs explore whether reimbursement can be set by
market forces, and whether this would provide a more efficient,
competitive, and fair process than SRO standards.
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Since the late 1960s, NYSE member firms increasingly have
outsourced their proxy delivery obligations to contractors rather than
handling proxy processing internally. According to the NYSE, the
primary reason for this shift was that member firms believed proxy
distribution was not a core broker-dealer business and that capital
could be better used elsewhere. Since 1993, Automatic Data Processing,
Inc. (``ADP'') has distributed close to 100 percent of all proxies sent
to beneficial owners holding shares in street name.\9\
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\9\ ADP is the primary distributor of proxy distribution
services for a large majority of broker-dealers and collects fees
from issuers based on the NYSE's Pilot Program.
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On March 14, 1997, the Commission approved an NYSE proposal that
significantly revised the NYSE reimbursement guidelines set forth in
the NYSE Rules and established a pilot fee structure (``Pilot Program''
or ``Pilot'').\10\ Under the Pilot Program, the NYSE established
guidelines for the amounts that NYSE issuers should reimburse member
organizations for the distribution of proxy materials and other issuer
communications to security holders whose securities are held in street
name. The Pilot Program was designed to address many of the functional
and technological changes that had occurred in the proxy distribution
process since the NYSE Rules were last revised in 1986. The fee
structure under the Pilot Program reduced certain fees, increased the
fee for proxy fights, and created several new fees.\11\ The Pilot
Program was originally
[[Page 15441]]
set to expire on May 13, 1998; however, pursuant to Commission
extensions of its initial approval, the Pilot Program has remained in
effect since then with some slight modifications.\12\
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\10\ See Securities Exchange Act Release No. 38406 (March 14,
1997), 62 FR 13922 (March 24, 1997) (File No. SR-NYSE-96-36)
(``Original Pilot Program'').
\11\ For a more detailed description of the background and
history of the proxy distribution industry, proxy fees, as well as
events leading to the NYSE's proposal to revise the NYSE Rules and
Guideline governing reimbursement of proxy fees, see the Original
Pilot Program, supra note 10.
\12\ See Securities Exchange Act Release Nos. 39672 (February
17, 1998), 63 FR 9275 (February 24, 1998) (notice of filing and
immediate effectiveness of proposal extending Pilot Fee Structure
through July 31, 1998, and lowering the rate of reimbursement for
mailing each set of initial proxies and annual reports from $.55 to
$.50); 40289 (July 31, 1998), 63 FR 42652 (August 10, 1998) (notice
of filing and immediate effectiveness of proposal extending Pilot
Fee Structure through October 31, 1998); 40621 (October 30, 1998),
63 FR 60036 (November 6, 1998) (notice of filing and immediate
effectiveness of proposal extending Pilot Fee Structure through
February 12, 1999); 41044 (February 11, 1999), 64 FR 8422 (February
19, 1999) (notice of filing and immediate effectiveness of proposal
extending Pilot Fee Structure through March 15, 1999); 41177 (March
16,1999), 64 FR 14294 (March 24, 1999) (order extending Pilot Fee
Structure through August 31, 1999); 41669 (July 29, 1999), 64 FR
43007 (August 6, 1999) (notice of filing and immediate effectiveness
of proposal extending Pilot Fee Structure through November 1, 1999);
42086 (November 1, 1999), 64 FR 60870 (November 8, 1999) (notice of
filing and immediate effectiveness of proposal extending Pilot Fee
Structure through January 3, 2000); 42304 (December 30, 1999), 65 FR
1212 (January 7, 2000) (notice of filing and immediate effectiveness
of proposal extending Pilot Fee Structure through February 15,
2000); 42433 (February 16, 2000), 65 FR 10137 (February 25, 2000)
(notice of filing and immediate effectiveness of proposal extending
the Pilot Fee Structure through September 1, 2000); 43151 (August
14, 2000), 65 FR 51382 (August 23, 2000) (notice of filing and
immediate effectiveness of proposal extending the Pilot Fee
Structure through October 10, 2000); 43429 (October 10, 2000), 65 FR
62781 (October 19, 2000) (notice of filing and immediate
effectiveness of proposal extending the Pilot Fee Structure through
November 20, 2000); 43603 (November 21, 2000) , 65 FR 75751
(December 4, 2000) (order extending the Pilot Fee Structure through
September 1, 2001, and amending the functions that an intermediary
is expected to perform to recover the nominee coordination fee); and
44750 (August 29, 2001), 66 FR 46488 (September 5, 2001) (notice of
filing and immediate effectiveness of proposal extending the Pilot
Fee Structure through April 1, 2002).
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III. Description of the Proposed Rule Change
The NYSE's current pilot fee structure, incorporated in the NYSE's
Rules and guidelines pursuant to the Pilot Program,\13\ is set to
expire on April 1, 2002.\14\ In this proposed rule change, as amended,
the Exchange proposes to amend certain reimbursement fees under the
Pilot Program and has requested permanent approval. The proposed
amendments seek to decrease the basic mailing fees paid by large
issuers by 5 cents (from 50 cents to 45 cents) and to cut in half (from
50 cents to 25 cents) the incentive ``suppression'' fee that large
issuers \15\ pay to member organizations that succeed in reducing the
number of sets of material that need to be distributed, such as by
sending one set of materials to a household holding multiple positions
in the issuer's securities.\16\
The following sets forth the background that led to the proposed
rule change, as provided by the NYSE in its filing.
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\13\ Supplementary Material .90 to Exchange Rule 451 applies the
guidelines to the transmission of proxy materials to shareholders.
Supplementary Material .20 to Exchange Rule 465 applies them to the
transmission of other materials to shareholders. In addition,
Paragraph 402.10(A) of the NYSE's Listed Company Manual includes the
text of Supplementary Material .90 to Exchange Rule 451 and the
Exchange proposes to conform Paragraph 402.10(A) to the changes
described below to Exchange Rule 451.
\14\ See Securities Exchange Act Release No. 44750 (August 29,
2001), 66 FR 46488 (September 5, 2001) (File No. SR-NYSE-2001-22).
\15\ The Exchange defines large issuers as issuers whose shares
are held in at least 200,000 nominee accounts.
\16\ See Supplementary Material .95 (``Householding'' of
Reports) to Exchange Rule 451 and Supplementary Material .25
(``Householding'' of Reports) to Exchange Rule 465.
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A. Permanent Approval
Over the last year, the NYSE has participated on the Proxy Voting
Review Committee (the ``Committee''), a private initiative that was set
up to review the proxy process. It includes SROs, representatives of
the securities industry, corporate issuers, and institutional
investors, as well as ADP, the largest provider of proxy intermediary
services. In a letter to Richard Grasso, the Chairman of the Committee
stated that the purpose of the Committee was to (i) consider the
appropriateness of the current pilot proxy fee schedule, and to (ii)
develop a deregulated structure that would allow for broader
competition.\17\
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\17\ See letter to Richard A. Grasso, Chairman and Chief
Executive Officer, NYSE, from Stephen P. Norman, Chairman,
Committee, dated November 28, 2001 (the ``Committee Letter''). A
copy of the Committee Letter is attached as Exhibit C to the
Exchange's proposed rule change.
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According to the NYSE, the Committee's experience gained from the
Pilot Program convinced the Committee that the guidelines have been
instrumental in setting at fair and reasonable levels the costs that
issuers incur in having member organizations and intermediaries
transmit proxy and other materials to security holders. For that
reason, the Committee unanimously voted, with one abstention,\18\ to
recommend that the NYSE seek permanent approval of the Pilot Program
guidelines, as modified by this proposed rule change. As a result, the
Exchange filed this proposed rule change, which incorporates the
Committee's recommendations and requests permanent approval of the
Pilot Program, which is scheduled to end on April 1, 2002.
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\18\ The National Association of Securities Dealers, Inc.,
abstained from voting.
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B. Guideline Changes
In addition to seeking permanent approval of the Pilot Program
guidelines, the Exchange proposes the following amendments to its Rules
and guidelines:
(i) Reduce the suggested rate of reimbursement for initial mailings
of each set of material (i.e., proxy statement, form of proxy, and
annual report when mailed as a unit) from 50 cents to 40 cents.
(ii) Increase the suggested per-nominee fee for intermediaries that
coordinate the proxy and mailing activities of multiple nominees. The
nominee coordination fee is currently $20 per nominee. The proposal
would raise it by 10 cents per set of material required for ``Small
Issuers,'' defined as issuers whose shares are held in fewer than
200,000 nominee accounts, or 5 cents per set of material required for
``Large Issuers,'' defined as issuers whose shares are held in at least
200,000 nominee accounts.
(iii) Reduce from 50 cents to 25 cents the incentive fee for
initial mailings of the materials of Large Issuers. As a result, the
incentive fee for Large Issuers will decrease by 25 cents and the
incentive fee for Small Issuers will remain at 50 cents.
The Exchange represents that the net effect of clauses (i) and (ii)
is to decrease the effective mailing fee by 5 cents for Large Issuers,
but not for Small Issuers. ADP projected for the Committee that the
combination of that decrease and the decrease in the incentive fee for
Large Issuers will decrease the total fees that issuers pay to have
materials distributed to shareholders by almost $11 million.\19\ The
NYSE relied on this projection to support its proposal.
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\19\ See supra note 17.
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The NYSE Rules and guidelines currently subject Small Issuers and
Large Issuers to the same rates. According to the NYSE, the Committee
designed the proposed revamped fee schedule to allocate more fairly the
costs of distributing proxy and other material between Large Issuers
and Small Issuers. The Committee's, and ultimately the NYSE's, proposal
is based on the premise that economies of scale create overall per-
account cost savings for Large Issuers and that those savings justify
lower fees for Large Issuers. Based on this, the Exchange believes that
reducing the rates applicable to Large Issuers relative to the rates
[[Page 15442]]
applicable to Small Issuers is fair, reasonable, and appropriate.\20\
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\20\ The Committee expressed its support for the proposed fee
changes in the Committee Letter. See Exhibit C to the Exchange's
proposed rule change.
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According to the Exchange, the difference between Large and Small
Issuers is based on the recognition that a member organization
typically spends less in transmitting material to the nominee account
of a Large Issuer than in transmitting material to the nominee account
of a Small Issuer because economies of scale apply to many of the tasks
of processing material for distribution, and of collecting voting
instructions. For instance, the NYSE represents that processing search
dates and record dates, logging receipt of materials, coding proxies,
reporting voting results, and invoicing fees payable involve costs that
are essentially fixed. As a result, the NYSE believes that the per-
account cost for these tasks decreases in relation to the number of
accounts in which the issuer's shares are held. Consequently, the NYSE
believes that the per-account cost is therefore lower with respect to a
Large Issuer than with respect to a Small Issuer.
In addition, according to the NYSE, modern data processing and
mailing techniques reduce the amount of human intervention involved in
the process, driving down the actual per-account cost of handling
mailings in large volume. The NYSE notes that the Committee found that
the actual cost incurred with respect to Large Issuers in handling
mailings was lower than the reimbursable amount that results from
adherence to the current NYSE guidelines. On the other hand, the
Committee found the actual cost of handling mailings for Small Issuers
far exceeded the fees set forth in the current NYSE guidelines.\21\ The
Exchange believes that these factors justify reducing the incentive fee
from 50 cents to 25 cents for Large Issuers, but not reducing the
50 cents fee for Small Issuers. They also justify the 5 cents
difference in the per-set-of-material per-nominee fee for Large Issuers
and Small Issuers.
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\21\ The Exchange notes that the Committee found that handling
costs for Large Issuers are lower than for Small Issuers, due
primarily to economies of scale. The NYSE represents that ADP
presented information to the Committee that detailed the costs that
issuers pay for registered proxy processing. The Exchange notes that
the information provided by ADP indicated that the per-unit costs
that Small Issuers pay are, on average, more than 10 times greater
than the per-unit costs that Large Issuers pay.
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In applying the proposed revamped fee schedules to the NYSE Rules
and guidelines, the NYSE decided to establish a line of demarcation
that separates Large Issuers from Small Issuers in accordance with the
Committee's recommendations. Under the NYSE's proposal, an issuer
having 200,000 nominee accounts would qualify as a Large Issuer. As a
result, the NYSE believes only the largest issuers, currently fewer
than 200 overall, fall within that definition. The NYSE represents that
beneficial owners' positions in shares of those Large Issuers account
for approximately 50 percent of the number of positions that all
beneficial owners maintain in the shares of all issuers. The Exchange
therefore adopted the 50 percent mark as an appropriate place at which
to draw the line.
The Exchange further states in its proposal that it views the fee-
setting process as an ongoing matter. The Exchange represents that even
if the Commission grants permanent approval to the proposed fee
reductions under the guidelines, the Exchange intends to continue to
meet with the Committee to evaluate and fine tune the guidelines and to
consider possible approaches to broader reform of the proxy
distribution system.
IV. Summary of Comments
The Commission received eight comment letters in response to the
propose rule change, as amended,\22\ the majority of which supported
the approval of the proposed rule change.\23\ In general, these
commenters believed that the proposed fee reductions would give some
immediate relief to large issuers. One commenter stated that the
proposed fee changes were a good first step.\24\ Another commenter
stated that the proposed rule change should be approved immediately and
enacted for the 2002 proxy season.\25\ Only one commenter stated that
the proposed rule change should not be approved on a permanent basis
because the proposed fee reductions do not address the issue of
competition in the proxy process.\26\
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\22\ See Letters, supra note 5.
\23\ See Computershare Letter; Intel et al. Letter; CTA Letter;
Hagberg Letter; ASCS Letter; SBC Communication Letter; and CII
Letter, supra note 5. ASCS stated that it is pleased with the
proposed fee reduction to the fee sharing agreement between ADP and
brokers.
\24\ See SBC Communications Letter, supra note 5.
\25\ See CTA Letter, supra note 5.
\26\ See Alamo Letter, supra note 5.
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Several commenters, although urging approval of the current
proposal, were critical of the current proxy fee structure, and also
raised concerns regarding the need for competition in the proxy
distribution system and the issuer's ability to choose service
providers.\27\ These commenters urged continuing review of the proxy
fee structure. Two commenters suggested a review of fees in a
deregulated proxy distribution system, stating that prices might be
lower if competition and market forces (rather than regulators)
determined fees.\28\ In addition, one commenter, while supporting
approval, noted that the guidelines have not been measured against
market-based rates, which are significantly lower than those being
proposed.\29\ In addition, one comment letter, jointly sent by three
issuers, was critical of the lack of issuer control over service
providers for distribution of proxy and other materials to beneficial
holders whose shares are held in street name, noting that on the
registered side, issuers have the right to choose service providers at
a much lower cost.\30\
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\27\ See Computershare Letter; Intel et al. Letter; CTA Letter;
Hagberg Letter; ASCS Letter; and Alamo Direct Letter, supra note 5.
\28\ See Computershare Letter; and ASCS Letter, supra note 5.
\29\ See Hagberg Letter, supra note 5. The Hagberg Letter also
stated the NYSE's proposal fails to address the ``indirect'' income
that ADP is collecting by retaining half of the savings in postage
from routine bar-coding and sorting procedures. Furthermore, the
Hagberg Letter commented that the proposal failed to provide a
``sunset provision'' for incentive fees, stating that the work
involved to eliminate mailings is done once and done automatically
through computer programs. Hagberg had previously written a letter
to the NYSE in 1996 providing suggestions for a more competitive
proxy system (which is attached as Exhibit I to the Hagberg Letter).
\30\ See Intel et al. Letter, supra note 5. The Intel et al.
Letter also stated that the impact of the proposed fee reductions on
banks and brokers, which receive a portion of the fees paid by
issuers to the service provider, is appropriate.
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Concerns were also raised by three commenters about the composition
of the Committee, who noted that not all parties affected by this
proposed fee reduction were represented on the Committee.\31\ Some
commenters stated that a more independent ``formally-sanctioned''
committee with official standing and of balanced representation, rather
than a private initiative, was needed to further evaluate proxy
issues.\32\ Other commenters wanted to participate on any future
committee formed to address other concerns regarding the proxy
distribution system.\33\
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\31\ See CTA Letter; Hagberg Letter; and Alamo Direct Letter,
supra note 5. The Alamo Letter stated that ADP was not a ``neutral''
party and that a third party, not ADP, should have evaluated certain
pricing scenarios.
\32\ See CTA Letter; Hagberg Letter; and ASCS Letter, supra note
5.
\33\ See Computershare Letter; CTA Letter; and Alamo Direct
Letter, supra note 5.
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In addition, two commenters addressed the 200,000 nominee accounts
cut-off that distinguishes
[[Page 15443]]
between large and small issuers for purposes of the proposed fee
reduction, stating that the cut-off was arbitrary and without any
factual economic backing.\34\
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\34\ See CTA Letter and Hagberg Letter, supra note 5. The CTA
Letter further stated that it supported a multi-tiered pricing
system and that the fee structure should not only apply to NYSE
issuers, but to all issuers.
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One commenter suggested an overall 10 cents reduction from the
basic mailing fee rather than a 5 cents reduction for large
issuers.\35\ The commenter also stated that the fees should not be
greater than those paid by issuers on the registered side.
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\35\ See SBC Communications Letter, supra note 5.
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Finally, one commenter, while supporting the proposal, urged the
Commission to require the NYSE in its ongoing review to obtain and
evaluate financial information of the proxy distribution firms and
review ADP's fee sharing arrangements with brokers, which suggest the
fees may be too generous.\36\
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\36\ See CII Letter, supra note 5. The CII Letter urged the
Commission to require the NYSE to study its pricing structure on a
regular basis and to publicly disclose the findings of these regular
reviews. See also Intel et al. Letter, supra note 5.
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Separately, certain members of the Committee submitted letters to
the NYSE endorsing the Committee's recommendations and proposed fee
reductions, as well as permanent approval of the NYSE's Pilot
Program.\37\
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\37\ See letter to Richard A. Grasso, Chairman and Chief
Executive Officer, NYSE, from Donald D. Kittell, Executive Vice
President, SIA, dated November 29, 2001; letter to James E. Buck,
Senior Vice President and Secretary, NYSE, from David W. Smith,
President, ASCS, dated November 29, 2001; and letter to James E.
Buck, Senior Vice President and Secretary, NYSE, from Brian T.
Borders, President, APTC, dated November 29, 2001. These letters are
included in Exhibit D to the Exchange's proposed rule change and are
briefly discussed in the NYSE's proposal. See supra note 4.
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V. Discussion
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\38\ In particular, the Commission believes that
the proposed rule change is consistent with section 6(b)(4) of the
Act,\39\ which provides that an exchange have rules that provide for
the equitable allocation of reasonable dues, fees and other charges
among its members and other persons using its facilities. In addition,
the Commission believes that the proposed rule change is consistent
with section 6(b)(5) of the Act,\40\ which requires, among other
things, that the rules of an exchange be designed to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market, and to protect investors and the
public interest. Furthermore, the Commission believes that the proposed
rule change is consistent with section 6(b)(8) of the Act,\41\ which
prohibits any exchange rule from imposing any burden on competition
that is not necessary or appropriate in furtherance of the Act.
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\38\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\39\ 15 U.S.C. 78f(b)(4).
\40\ 15 U.S.C. 78f(b)(5).
\41\ 15 U.S.C. 78f(b)(8).
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The Commission finds that the proposed amendments to NYSE Rules and
guidelines governing proxy fees and permanent approval of the amended
Pilot Program for the proxy fee reimbursement guidelines should help
establish a more practical and organized proxy reimbursement structure.
More specifically, the Commission finds that the Committee's
recommended fee reductions, as reflected in the NYSE's proposal, are
reasonable and should help to alleviate the burden and cost that large
issuers currently bear in the proxy distribution process and more
fairly allocate the cost among large issuers and small issuers. The
Commission notes that the NYSE's proposed fee reductions will result in
a decrease in the basic mailing fee from 50 cents to 40 cents, an
increase in the nominee coordination fee of 10 cents for Small Issuers,
as defined by the NYSE above, and 5 cents for Large Issuers, as defined
by the NYSE above, and a cut from 50 cents to 25 cents in the
incentive/suppression fee that Large Issuers currently pay. Thus, fees
for Small Issuers under the proposed rule change are not increased and
stay the same, while fees for Large Issuers are reduced overall by
5 cents for the basic mailing fee and by 25 cents for the suppression
fee. The NYSE has provided information to show that the cost to service
Large Issuers is cheaper than for Small Issuers because of economies of
scale. The Commission notes that the differentiation between Large and
Small Issuers of 200,000 accounts is based on a 50 percent cut-off, as
discussed above, and believes that this is a fair place to draw the
line. The Commission therefore believes, as discussed in more detail
below, that these proposed fee changes are reasonable and fairly
allocated, do not discriminate among issuers, and do not impose any
unnecessary burdens on competition.
A. Background
As noted above, since March 1997, NYSE member organizations have
charged NYSE issuers proxy reimbursement fees in accordance with a
Commission-approved Pilot Program that was recently extended until
April 1, 2002.\42\ At the time of adoption of the Original Pilot
Program, the Commission received some negative comments regarding the
proposed fees, in particular the nominee coordination fee, the
incentive fee, as well as the overall impact of the new fee structure
on small issuers. While the Commission recognized that the fees could
have a greater impact on small issuers than large to mid-sized issuers,
the Commission found that the Pilot Program proxy fee structure, which
included reduced mailing costs, was, on balance, positive and provided
some cost savings. However, because of concerns raised about the impact
and reasonableness of the fees and the difficulty in assessing cost
savings that might occur as a result of the incentive fee to reduce
mailings, among other things, the new proxy fee structure was approved
on a pilot basis and the NYSE committed to conduct an independent audit
of the pilot fee structure.
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\42\ See supra note 14.
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Since then, the Pilot Program has been extended numerous times.\43\
Within this time, NYSE has conducted two audits of the pilot fee
structure.\44\ In addition, Commission staff undertook an in-depth
review, interviewing numerous proxy industry participants to gather
information and views on the proxy system and pilot fee structure.\45\
As a result of these reviews, the Pilot has been modified twice. The
first revision was a 5 cents reduction in mailing costs for initial
proxies and annual reports.\46\ The second revision amended the Pilot
to set forth the minimum services an intermediary must perform in order
to receive the nominee coordination fee.\47\
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\43\ See supra note 12.
\44\ See Amendment No. 1, supra note 3. See also Securities
Exchange Act Release No. 41177 (March 16, 1999), 64 FR 14294 (March
24, 1999), for more detail on the two audits.
\45\ See Securities Exchange Act release No. 41177 (March 16,
1999), 64 FR 14294 (March 24, 1999).
\46\ See Securities Exchange Act Release No. 39672 (February 17,
1998), 63 FR 9275 (February 24, 1998) (lowering the rate of
reimbursement for mailing each set of initial proxies and annual
reports from the original Pilot fee of $.55 to $.50).
\47\ See Securities Exchange Act Release No. 43603 (November 21,
2000) , 65 FR 75751 (December 4, 2000).
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Over the course of the Pilot Program, some issuers, while
indicating that they are satisfied with the level of service for the
distribution of proxies, have
[[Page 15444]]
continued to raise concerns about the fees. Generally, larger issuers
have objected to the proxy fee structure because they are not able to
enjoy economies of scale, which could result in cost savings to them.
These issuers appear to be more inclined to favor a tiered fee
structure that could reduce their costs. Smaller issuers, however,
could be substantially impacted by a tiered fee structure that could
result in increased costs, making it difficult to pay for the proxy
process.
During the course of the Pilot Program, the Commission has
consistently encouraged the Exchange, issuers, and member firms to
consider long-term solutions and to develop an approach that would
foster competition so that market forces can determine reasonable rates
of reimbursement rather than the NYSE Rules and guidelines. While the
Commission today has determined to approve the Pilot Program on a
permanent basis, the Commission continues to believe that ultimately
market competition should determine reasonable rates and expects the
NYSE to continue its ongoing review of the proxy fee process, including
considering alternatives to SRO standards that would provide a more
efficient, competitive, and fair process. As noted above, the NYSE has
indicated its commitment to continue to meet with the Committee to
consider broader reforms in this area. The Commission recognizes that
the proxy distribution process raises difficult issues, and that the
NYSE must balance competing concerns of the issuers who must pay for
the proxy distributions and the brokers who must be assured of adequate
reimbursement for making such distributions. The Commission believes
that permanent approval of the current proxy fee structure will permit
the NYSE and other interested parties to focus on a long-term solution
that would allow market forces rather than SRO rules to set rates.
B. Specific Comments
As noted above, although the majority of commenters supported the
proposal, the comment letters raised specific concerns about the
proposed rule change for the pilot fee structure. The Commission
believes that the NYSE has adequately responded to the comments.\48\
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\48\ See NYSE Response Letter, supra note 6.
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Commenters raised concerns, for example, over issuers' lack of
control over service providers and the higher cost for distribution of
proxy and other materials to beneficial holders whose shares are held
in street name, compared to issuers on the registered side, which have
the right to choose service providers at a lower cost.\49\ The NYSE
stated that, although the proposed fees will be approved on a permanent
basis, it views the guideline-setting process as an ongoing matter and
will continue to meet with the Committee to evaluate and fine tune the
proposed fees under the guidelines. The Commission notes that, over the
next year, the Committee, with the NYSE as a member, intends to
consider the remaining issues, as raised by the commenters, regarding
the need for more competition and to allow issuers the ability to
choose among various service providers. The Committee will also
consider the possibility of a deregulated proxy distribution system,
which would remove the Commission from the rate-making process.
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\49\ See Intel et al. Letter, supra note 5.
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In response to concerns regarding the composition of the Committee,
the NYSE stated that it did not select the members comprising the
original Committee and indicated that, going forward, the Committee
should be both diverse and balanced. The Commission believes that it is
important that affected parties be afforded the opportunity to
participate in future discussions regarding reformation of the proxy
distribution system, and encourages the NYSE to ensure that the
Committee has balanced representation.
Furthermore, the NYSE addressed the concerns regarding the use of
200,000 nominee accounts as a cut-off to distinguish between large and
small issuers. The NYSE stated that the Committee arrived at the
200,000 figure because issuers with more than 200,000 nominee accounts
accounted for approximately 50 percent of the number of positions that
all beneficial owners maintain in the shares of all issuers. The NYSE
further stated that, although this is an estimation, the Committee
unanimously agreed with this 50 percent cut-off. While the Commission
recognizes that it is difficult to draw lines, the Commission believes
that the NYSE's use of 200,000 nominee accounts as a measure to
distinguish between large issuers and small issuers appears reasonable
and should more fairly allocate the costs associated with proxy
processing and distribution among large and small issuers.
The Commission notes that the Committee, which was comprised of
groups representing both large issuers and small issuers, as well as
institutional shareholders, unanimously approved (with one abstention)
the proposed fee reductions incorporated in the NYSE's proposal. While
the Commission recognizes that some commenters voiced concerns about
the composition of the Committee, the Commission believes that the
NYSE's proposal is a good first step. As noted above, the NYSE has
committed to establish a diversified and balanced Committee as it
considers other changes. The Commission is therefore approving these
changes to the NYSE Pilot Program so that they are in place by the
upcoming 2002 proxy season. In addition, for the reasons stated above,
the Commission is approving the Pilot Program on a permanent basis.
C. Summary
In summary, while the Commission has decided to approve the revised
proxy fees under the Pilot Program on a permanent basis, the Commission
stresses that permanent approval does not end the discussion of proxy
fee reform. The main goal is to ensure protection of shareholder voting
rights in a competitive marketplace for proxy distribution, where
market forces operate freely to set competitive and reasonable rates.
The Commission urges the NYSE and the Committee to identify various
ways to achieve these goals. As long as the NYSE's proxy fee structure
remains in place, the Commission expects the NYSE to periodically
review these fees to ensure they are related to ``reasonable expenses''
of the NYSE's member brokers in accordance with the Act,\50\ and
propose changes where appropriate. Such monitoring of fees is
essential, especially in light of technological advances such as
electronic proxy delivery and voting, which should help to reduce the
cost issuers will bear in the future in the proxy distribution process.
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\50\ See supra note 8.
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VI. Conclusion
For the foregoing reasons, the Commission finds that the NYSE's
proposal to amend its Rules and guidelines for proxy fee reimbursement,
as amended, is consistent with the requirements of the Act and rules
and regulations thereunder. Therefore, the Commission is approving the
NYSE's Pilot Program for proxy fee reimbursement, as amended by this
proposed rule change, on a permanent basis.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\51\ that the proposed rule change (SR-NYSE-2001-53), as amended,
is approved.
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\51\ 15 U.S.C. 78s(b)(2).
[[Page 15445]]
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\52\
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\52\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7781 Filed 3-29-02; 8:45 am]
BILLING CODE 8010-01-P