[Federal Register Volume 61, Number 62 (Friday, March 29, 1996)]
[Notices]
[Pages 14183-14185]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7643]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37015; File No. SR-NYSE-96-02]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Notice of Filing 
and Order Granting Accelerated Approval of Amendment No. 1 Relating to 
Voting of Proxies by Member Firms for Holders of Auction Rate Preferred 
Securities

March 22, 1996.

I. Introduction

    On February 1, 1996, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') submitted to 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 that would allow the Exchange's 
member firms, under certain conditions, to vote the shares of auction 
rate preferred securities \3\ that they hold on behalf of their 
customers, notwithstanding the failure of the beneficial holders to 
provide instructions regarding the voting of such shares.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The proposed rule change defines an auction rate preferred 
security as a preferred security pursuant to which the dividend rate 
is established periodically by auction or remarketing at specified 
reset periods.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 36813 (February 6, 1996), 61 FR 5592 (February 
13, 1996). One comment letter was received on the proposal.\4\ The NYSE 
filed Amendment No. 1 with the Commission on March 18, 1996.\5\ This 
order approves the proposal, including Amendment No. 1 on an 
accelerated basis.

    \4\ See Letter from Dorothy M. Donohue, Assistant Counsel, 
Investment Company Institute, to Jonathan G. Katz, Secretary, SEC, 
dated March 5, 1996.
    \5\ Amendment No. 1 made clarifying changes to the text of the 
rule proposal. See Letter dated March 13, 1996, from James E. Buck, 
Senior Vice President and Secretary, NYSE, to Glen Barrentine, Team 
Leader, SEC.
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II. Description

    Auction rate preferred securities are preferred securities with 
dividend rates that are established periodically by auction or 
remarketing at specified reset periods. At the auction date, which 
typically runs every seven days but in some instances can be one to 
five years, the investors receive their entire investment along with 
accrued dividends, and may, if they so chose, participate in the 
repurchase of shares at

[[Page 14184]]
the new dividend rate for the ensuing rate period.
    Because of the short-term nature of these securities, auction rate 
preferred shareholders generally have little economic interest in the 
performance of the issuer and its governance structure. As a result, 
the Exchange has represented that corporate issuers of these securities 
often find it difficult to obtain a quorum of auction rate preferred 
shareholders when such a requirement exists. Such failure blocks the 
approval of matters that require such a quorum.
    The proposed rule change would allow member firms to vote the 
shares of auction rate preferred securities with auction reset periods 
of less than one year, on non-routine items,\6\ in proportion to those 
votes cast by beneficial holders of each class of such securities (or 
of each series where an item must be voted upon separately by each 
series), as long as:

    \6\ Voting by member firms on routine items is governed by NYSE 
Rule 452.10, which allows member firms to vote without customer 
instructions on routine items, provided that the member has 
transmitted proxy soliciting material to the beneficial owner in 
accordance with NYSE Rule 451 and the member has not received voting 
instructions from the beneficial owner by the date specified in the 
statement accompanying such material.
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    (i) The issuer has transmitted proxy soliciting material to the 
beneficial owner or its designee;\7\

    \7\ The transmittal of proxy soliciting material to the 
beneficial owner must be undertaken in accordance with NYSE Rule 
451.
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    (ii) It has not received voting instructions from the beneficial 
owner or its designee within the time period specified in the proxy 
material;
    (iii) At least 30% of the outstanding shares of the same class or 
series (where a series vote is required) has been voted by preferred 
security holders;
    (iv) Less than 10% of the outstanding shares of the same class or 
series (where a series vote is required) has been voted by preferred 
security holders against the proposal;\8\

    \8\ Because the 10% threshold is based upon the outstanding 
shares of a class or series rather than the shares actually voted, 
the proportion of negative votes among the shares actually voted is 
likely to be significantly higher than the 10% threshold. For 
example, where only 30% of the outstanding shares of a class vote, a 
negative vote of at least 33% of the shares of such class that 
actually vote would be necessary to exceed the 10% threshold. 
However, even a situation where the proportion of negative votes 
approached the 10% threshold, the measure will have been approved by 
a substantial majority of the outstanding shares voting.
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    (v) For any proposal as to which both the common and the preferred 
holders vote as a single class, proportional voting would not be 
allowed unless common shareholders have also approved the item;
    (vi) A majority of the independent directors of the issuer's board 
of directors have approved the item; and
    (vii) Adequate disclosure of proportional voting has been provided.
    The proposed rule change will insert a new Rule 452.12 into the 
Exchange's Rules of the Board of Governors as well as an identical 
Paragraph 402.08(C) into the Exchange's Listed Company Manual.\9\

    \9\ The proposed rule change also renumbers existing Exchange 
Rules 452.12 through 452.16 without change to Rules 452.13 through 
452.17 and Listed Company Manual Paragraphs 402.08 (C) through (G) 
without change to 402.08 (D) through (H).
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III. Summary of Comments

    The Commission received one comment letter from the Investment 
Company Institute (the ``Comment Letter'').\10\ The Comment Letter 
supported the proposed amendment and urged the Commission to approve it 
promptly. It did note its belief, however, that the term ``issue,'' as 
used in conditions (3) and (4) of the proposed rule, was ambiguous.\11\ 
The Comment Letter stated its understanding that the term ``issue'' was 
intended to refer to all of the outstanding preferred shares of an 
issuer rather than the separate series of the issuer's preferred shares 
and recommended that it be defined in the proposed rules in such manner 
or that such understanding be reflected in the Commission's release 
adopting the proposed amendment.

    \10\ See letter from Dorothy M. Donohue, Assistant Counsel, 
Investment Company Institute, to Jonathan G. Katz, Secretary, SEC, 
dated March 5, 1996 (``Comment Letter'').
    \11\ These provisions set forth conditions that must be 
satisfied before a member organization may vote auction rate 
preferred securities and, as originally proposed, required that at 
least 30% of the outstanding issue be voted by beneficial holders 
and that less than 10% of the issue voted against the proposal.
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    In response, the NYSE submitted Amendment No. 1 amending conditions 
(3) and (4) of the proposed rules. These provisions set forth 
conditions that must be satisfied before a member organization may vote 
auction rate preferred securities. As proposed to be amended by 
Amendment No. 1, these provisions would prohibit a member firm from 
voting the shares of auction rate preferred securities that it held on 
behalf of its customers unless at lest 30% of the outstanding shares of 
each class or each series, where a series vote is required, vote and 
less than 10% of each such class or series vote against the proposal.

IV. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a Commission believes 
the proposal is consistent with the Section 6(b)(5) requirements that 
the rules of an exchange be designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts, and, 
in general, to protect investors and the public.
    The Commission has reviewed carefully the Exchange's proposal to 
amend its rules to allow member firms, under very limited conditions, 
to vote on non-routine matters the auction rate preferred securities 
that they hold on behalf of their customers, notwithstanding the 
failure of the beneficial holders to provide instructions regarding the 
voting of such shares. The Commission believes that such proposal 
adequately addresses the particular needs of issuers of such securities 
to be able to obtain a quorum of preferred shareholders, while, at the 
same time, protecting the rights of the holders of such shares.
    Under the Exchange's proposal, member firms would be allowed to 
vote auction rate preferred securities that are held on behalf of their 
customers in proportion to the voting instructions received from 
holders of the same class (or of the same series where the item must be 
voted upon separately by each series) only under very limited 
circumstances. These circumstances would include a condition that the 
securities must have reset periods of one year or less, which serves to 
limit this provision to those securities that, because of their short-
term nature, leave shareholders with little economic interest in the 
performance of the issuer. Further, the issuer must have transmitted 
proxy those securities that, because of their short-term nature, leave 
shareholders with little economic interest in the performance of the 
issuer. Further, the issuer must have transmitted proxy soliciting 
material to the beneficial owner or its designee in accordance with 
NYSE Rule 451. This condition ensures that beneficial holders will 
continue to have the choice of voting their shares if they so desire 
and the information necessary to allow them to make an informed voting 
decision.\13\ The shareholder also must receive adequate disclosure of 
the member firm's ability to vote such

[[Page 14185]]
shares in the absence of the beneficial holder exercising such right.

    \13\ Of course, where the beneficial shareholder actually does 
vote his or her shares, the proposed rules would prohibit the member 
firm from proportionally voting such shares.
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    Moreover, under the proposal a member firm's right to vote such 
shares would be limited to proposals that have received the vote of at 
least 30% of the outstanding shares of each class or series (where a 
series vote is required) of the auction rate preferred shares. This 
will ensure that the member firm's proportional vote mirrors the vote 
of a significant portion of the total outstanding auction rate 
preferred shares. In addition, the member firm would be prohibited from 
voting where 10% or more of the outstanding shares of the same class or 
series (where a series vote is required) voted against the proposal 
and, in the case of a proposal that requires both the common and the 
preferred holders to vote as a single class, where the proposal does 
not receive the separate approval of the common shareholders.\14\ These 
provisions effectively limit the member firm's proportional vote to 
matters that are strongly supported by those auction rate preferred 
holders who do vote and, where necessary, approved by the common 
shareholders. Finally, to further ensure fairness, the member firm may 
only vote on matters that have been approved by a majority of an 
issuer's independent directors.

    \14\ As to any proposal that requires the common and preferred 
holders to vote as a single class, the above provisions, if read in 
combination, could be understood as conditioning the member firm's 
right to vote on the requirement that less than 10% of the 
outstanding shares of such combined class not vote against the 
proposal. The Exchange has informed the Commission, however, that it 
would interpret the 10% threshold as applying only to the 
outstanding preferred shares such that a member would not be 
prohibited from voting if 10% or more of the outstanding shares of a 
combined class of common and preferred voted against the proposal so 
long as less than 10% of the preferred shares did not vote against 
the proposal. The Exchange has further represented that it intends 
to notify its members of this interpretation though an 
Interpretation Memo. Telephone conversation between John Longobardi, 
Managing Director, NYSE, and Glen Barrentine, SEC, dated March 21, 
1996.
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    The Commission believes that these conditions protect the rights of 
the holders of auction rate preferred securities by sufficiently 
limiting the right of member firms to vote, on non-routine items, the 
shares of such securities that they hold on behalf of their customers. 
At the same time, the Exchange's proposal should meet its objective of 
assisting issuers in obtaining approval of matters that are 
overwhelmingly supported by auction rate preferred shareholders who do 
vote.
    Moreover, the Commission believes that the amended language adopted 
by the Exchange with regard to subsections (iii) and (iv) of the 
proposed rule change is preferable to the alternative offered in the 
Comment Letter. The Exchange's approach, which applies the 30% and 10% 
thresholds to the same class or series (where a series vote is 
required) instead of to all of the outstanding preferred shares, offers 
greater protection to the voting interests of holders of each class or 
series, as applicable.
    The Commission finds good cause for approving Amendment No. 1 prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register. Amendment No. 1 made clarifying, technical 
changes to the text of the rule, and did not propose new substantive 
provisions to the proposed rule change. Accordingly, the Commission 
believes that consistent with Section 19(b)(2), good cause exists to 
accelerate approval of Amendment No. 1.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1 to the proposed rule change. 
Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rules 
change that are filed with the Commission, and all written 
communications relating to Amendment No. 1 between the Commission and 
any persons, other than those that may be withheld from the public in 
for inspection and copying in the Commission's Public Reference 
Section, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such 
filing will also be available at the principal office of the NYSE. All 
submissions should refer to File No. SR-NYSE-96-02 and should be 
submitted by April 19, 1996.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-NYSE-96-02), as amended, is 
approved.

    \15\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\

    \16\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-7643 Filed 3-29-96; 8:45 am]
BILLING CODE 8010-01-M