[Federal Register Volume 62, Number 56 (Monday, March 24, 1997)]
[Notices]
[Pages 13922-13931]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7280]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38406; File No. SR-NYSE-96-36]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change and Notice of Filing
and Order Granting Accelerated Approval to Amendment No. 1 to Proposed
Rule Change Relating to a One-Year Pilot Program for Transmission of
Proxy and Other Shareholder Communication
March 14, 1997.
I. Introduction
On December 6, 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 to amend NYSE Rules 451 and 465,
which establish guidelines for the reimbursement of expenses by issuers
to NYSE member organizations for the processing of proxy materials and
other issuer communications to security holders whose securities are
held in street name.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 38058 (Dec. 18, 1996), 61 FR 68082 (Dec. 26,
1996). Thirty-nine comment letters were received on the proposal, which
include a letter submitted by the NYSE in response to the Commission's
request for comment.\3\ On March 7, 1997, the NYSE submitted Amendment
No. 1 to the proposed rule change.\4\ This order approves, on a one-
year pilot basis, the proposed rule change, as amended, and Amendment
No. 1 on an accelerated basis.
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\3\ See letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, dated February
10, 1997 (``NYSE Letter'').
\4\ See letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, dated March 5,
1997. In Amendment No. 1, the NYSE changes the proposal to a one-
year pilot and represents that, following the 1997 proxy season, a
certified public accounting firm will audit the results of the pilot
period. The NYSE states that the independent accountant will report
to the Commission and the NYSE no later than October 31, 1997. As
discussed below, the independent accounting firm must conduct an
audit of the results of operations of ADP Investor Communication
Services, the division of Automatic Data Processing, Inc. (``ADP'')
that performs proxy intermediary services for approximately 200 NYSE
member firms.
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II. Background
NYSE member organizations holding securities in street name solicit
proxies and deliver communications to and from beneficial owners of
securities on behalf of issuers.\5\ For this service, issuers reimburse
member organizations for out-of-pocket, reasonable clerical, postage
and other expenses incurred for a particular distribution. NYSE Rules
451 and 465 provide guidelines for the reimbursement of these expenses.
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\5\ Street ownership encompasses shares purchased through a
broker or bank (referred to as a nominee). The shares are then
registered in the name of that nominee, or in the nominee name of a
depository such as The Depository Trust Company (``DTC''). According
to a recent NYSE analysis, on average, approximately 70 to 80
percent of all outstanding shares are held in street name.
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Since the late 1960's, NYSE member firms increasingly have used an
outside contractor for these types of services
[[Page 13923]]
rather than handling proxy processing internally. For example, a firm
would contract with a division of Automatic Data Processing, Inc.
(``ADP''), ADP Investor Communication Services, the only intermediary
offering these services to broker-dealers, for the solicitation of
proxy voting instructions and the distribution of reports to
shareholders.\6\
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\6\ The identity of the soliciting broker remains on all
communications.
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In submitting this rule proposal, the Exchange explains that there
have been changes in the market since the last review of the
reimbursement guidelines in 1986 that prompt the Exchange to reevaluate
its current fee reimbursement schedule. First, the Exchange believes
that proxy solicitation and report distributions costs have increased
since 1986, in large part, because of the general cost increases in the
economy. For example, the Exchange notes that the cost of postage has
doubled since 1979. The Exchange believes that the brokers pass these
costs through to the issuers, directly or through ADP.
Second, the Exchange believes that the aggregate costs also have
increased for issuers because there has been a substantial increase in
the number of beneficial owners, a result of the increased
participation of individual investors in the securities market. The
Exchange further notes that the percentage of holdings of securities
through institutional investors, mutual funds, pension and savings
plans also has increased.\7\
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\7\ According to the Exchange, these institutions have an
obligation, or, in some cases, a statutory duty, to vote the shares
being held and that institutions have developed mechanisms to vote
their shares in conformity with their own internal policies and
governing regulations. The Exchange believes that many institutional
investors have difficulty voting on a timely basis during the spring
proxy season where over 40% of all annual meetings occur within a
few weeks and some large institutions vote close to the meeting
date, particularly during the proxy season because of the increase
in paperwork.
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Third, the Exchange believes that, in addition to the changing
stock ownership patterns, stock holdings continue to migrate from
registered to street or nominee ownership.\8\ Currently, street name
holdings are concentrated with approximately 1,000 nominees, and the
Exchange believes that an efficient infrastructure is necessary to
coordinate these nominees and their customers and that service bureaus,
as agents of nominees, should build and maintain such systems.
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\8\ ``Nominees'' are those names that appear on either the list
of record shareholders or on an omnibus proxy sent to the issuer on
the record date by a depository, but who are, in fact, acting for
someone else. In practice, they are self-clearing brokers, banks, or
other financial institutions participating in DTC or some other
depository.
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Finally, the Exchange notes that there have been significant
technological advances in the corporate governance process. For
example, nominees and their agents have developed communication systems
for obtaining shareholder votes electronically rather than through a
physical proxy. To accommodate this development, the Exchange amended
its rules to permit telephone voting. The Exchange is concerned,
however, that the current fee structure does not recognize the value
that some of these systems provide to issuers in reducing the costs of
coordination and solicitation. Despite the progress that has been made
in the distribution and proxy solicitation process, the Exchange states
that the issuers often express their belief that mailing fees are
unnecessarily high and that the procedures are not responsive to the
needs of the issuers.
In proposing a revised fee reimbursement structure, the Exchange
believes that the current fee structure does not provide incentives for
nominees and other intermediaries to use the most current and efficient
technology. The Exchange believes that without financial incentives, it
is unlikely that new cost-reducing technology will be implemented. The
Exchange also believes that the current fee structure ignores the
economies of scale and costs of coordinating multiple nominees and the
value that consolidating material distribution and voting collection
provides to issuers.\9\
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\9\ These services, which are not expressly required by any
regulation, include: (i) Sending a single search card for multiple
nominees; (ii) coordinating multiple nominees to generate a single
material request for each issuer; (iii) delivering material to a
single place for multiple nominees; (iv) sorting bulk mail across
multiple nominees for maximum discounts; (v) daily reporting of
votes for multiple broker and bank nominees; and (vi) consolidating
multiple nominees into a single invoice. As discussed infra note
111, however, the NYSE has indicated that the voting-related
services described in the preceding textual paragraph--electronic
and telephonic voting services now offered by member firms and/or
ADP acting as their agent--will not be covered by the new fee
structure.
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III. Description of Proposal
The Exchange proposes to reduce the suggested rate of reimbursement
from $.60 or $.70 to $.55 for each set of proxy materials, i.e., proxy
statement, form of proxy and annual report, when mailed as a unit. The
Exchange proposes to eliminate the current distinction between
proposals that require beneficial owner instructions and those that do
not. The Exchange believes that this change will produce substantial
savings for all issuers.
The Exchange also proposes to reduce the rate for mailing other
reports from $.20 to $.15. The rate of reminder notices would remain at
$.40 unless a proxy fight is involved. The Exchange proposes to
eliminate the special fee of $.60 for mailing only to shareholders who
have not voted.
For mailings involving proxy fights, the Exchange proposes to
include a new fee of $1.00 for each set of proxy materials mailed. The
Exchange believes that proxy contests require significant efforts by
all participants in the proxy process and can occur under difficult
circumstances.
The Exchange also proposes to implement a new $20 fee per nominee
(applicable to each proxy solicitation) to compensate an intermediary
for coordinating a series of functions across a multitude of nominees.
These services include:
Searches: Rule 14a-13 under the Act requires an issuer to
inquire of each record holder to determine the number of beneficial
owners holding shares through nominees. Issuers would only incur the
expense of performing one ``search'' for all the nominees if an
intermediary coordinates multiple nominees.
Search responses: Nominees must respond to an issuer's
search request within seven business days of receipt. An intermediary
can consolidate responses where there are multiple levels of entities
and save administrative expenses for issuers.
Delivering materials: Providing material to hundreds of
nominees requires an issuer to sort and ship a parcel to each nominee.
An intermediary can reduce the cost to issuers if it can make one
material delivery for hundreds of nominees.
Use of bulk mail: If intermediaries combine nominees,
issuers could qualify for bulk discounts.
Preliminary voting information: To help issuers determine
whether they have a quorum, many brokers currently report a
discretionary vote 10 or 15 days before a meeting in accordance with
NYSE Rule 451(b)(1), and again at the time of the meeting. For example,
ADP sends daily consolidated vote reports 15 or 10 days before a
meeting, and then every business day until the night before the
meeting. Issuers may save certain expenses if issuers obtain the vote
from a single source for hundreds of nominees.
The Exchange believes that the coordination fee is consistent with
current Exchange rules that authorize the payment of a coordination fee
for agents that coordinate providing information regarding non-
objecting
[[Page 13924]]
beneficial owners (``NOBOs'').\10\ The Exchange estimates that the
smallest 4,000 U.S. issuers would pay, on average, an intermediary
nominee coordination fee of $800, which partially would be offset by
the lower basic rate and lower expenses.
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\10\ See NYSE Rule 451.92.
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The Exchange also proposes to clarify the policy with respect to
out-of-pocket expenses by providing for reimbursement only of actual
costs, such as outgoing postage (plus third class sorting fee),
envelopes and business reply envelopes, and custom printing of
envelopes and ballots. The exchange proposes that the business reply
postage would be billed at the Business Mailing Accounting System
(``BRMAS'') rate. The Exchange believes that additional savings are
possible by sorting mail to obtain postal discounts as well as through
other efforts undertaken by nominees or their agents to reduce issuers'
postage expenses, which could be shared between the issuer and the
processor.
The Exchange also is proposing a new incentive fee to compensate
member organizations and/or intermediaries for eliminating the need to
send materials in paper form. The Exchange believes that this fee will
encourage member organizations to apply technology to sort materials so
that multiple proxy instruction forms are included in a single envelope
with a single set of materials to be mailed to the same household. The
Exchange is encouraging ``householding,'' whereby the member firm or
intermediary could earn the paper elimination fee by distributing
multiple proxy instruction forms electronically or by distributing all
material to a household electronically. Therefore, the Exchange is
proposing a fee of $.50 ($.10 for a quarterly report) for each set of
material that is not mailed.
Finally, the Exchange clarifies the manner in which the fees are
collected. The Exchange notes that ADP is the agent for many of the
brokerage firms that are Exchange members, and that these firms
subcontract the data processing functions of the proxy solicitation
process to ADP but retain all the obligations to comply with the
relevant Exchange rules as well as the Commission's proxy rules (e.g.,
Rule 14b-1). ADP has developed a ``single invoice'' procedure for all
brokers with whom they have subcontracted to avoid issuers having to
pay multiple brokers. Under this procedure, ADP bills issuers on behalf
of brokers and banks and remits to their clients the amounts specified
in their contracts, which the firms will retain to cover their own
costs. The Exchange believes that this billing procedure does not
affect issuer costs. If the broker billed issuers directly, the issuers
would pay the same amount but to several brokers rather than to a
central data processor. The Exchange believes that there is no economic
difference in the brokerage firms retaining part of the costs paid by
the issuers or such firms receiving the same amount paid by ADP through
the single invoice system and that issuers benefit from this procedure
because they are able to pay a single processor rather than multiple
brokerage firms.
The Exchange proposes the new fee structure for a one-year pilot
term. Following the 1997 proxy season, the NYSE proposes that a
certified public accounting firm audit the results of the pilot period
by examining the costs and experiences of the issuers, NYSE member
organizations and intermediaries during the pilot. The Commission
expects this audit to encompass ADP's results of operations for the
one-year pilot period. The independent accountant will present a
written report detailing the methodology and results of its audit to
the Commission and the NYSE, respectively, no later than October 31,
1997 so that appropriate changes, if necessary, may be made for a
second pilot.
IV. Summary of Comments
The Commission received a total of 38 comment letters on the NYSE's
proposal.\11\ The NYSE also submitted a letter in response to the
comments requested by the Commission.\12\ A substantial majority of the
letters
[[Page 13925]]
support the proposal, \13\ although several commenters do not support
the proposal.\14\ Some commenters support the proposal overall, but
express concern about one or two aspects of the proposal.\15\
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\11\ See letters from William A. Bowen, Vice-President, Finance,
AAON, Inc., to Margaret H. McFarland, Deputy Secretary, SEC, dated
January 30, 1997 (``AAON Letter''); John D. Quinn, Vice President,
A.G. Edwards & Sons, Inc., to Margaret H. McFarland, Deputy
Secretary, SEC, dated February 5, 1997 (``A.G. Edwards Letter'');
Patricia A. Bell, Second Vice President, Shareholder Services, AFLAC
Incorporated, to Secretary, SEC, dated February 6, 1997 (``AFLAC
Letter''); Sarah A. Miller, Senior Government Relations Counsel,
Trust and Securities, American Bankers Association, to Jonathan G.
Katz, Secretary, SEC, dated February 21, 1997 (``ABA Letter''); Sari
L. Macrie, Vice President, Investor Relations Ameritech, to
Secretary, SEC, dated January 31, 1997 (``Ameritech Letter''); Brian
T. Borders, President, Association of Publicly Traded Companies, to
Jonathan G. Katz, Secretary, SEC, dated February 10, 1997 (``APTC
Letter''); Carol A. Gasson, Senior Financial Analyst, Apollo Group,
Inc., to Margaret H. McFarland, SEC, dated January 15, 1997
(``Apollo Letter''); Carl T. Hagberg, Cart T. Hagberg and
Associates, to Secretary, dated February 11, 1997 (``Hagberg
Letter''); John Finegan, Chief Financial Officer, Cornerstone
Imaging, Inc., to Richard Grasso, Chairman and Chief Executive
Officer, NYSE, dated September 11, 1996 (``Cornerstone Letter'');
James T. Huffman, President, Credo Petroleum Corporation, to
Secretary, SEC, dated February 7, 1997 (``Credo Letter''); Gordon G.
Garney, President, Corporate Transfer Agents Association, Inc. to
Secretary, SEC, dated February 3, 1997 (``CTA Letter''); Thomas E.
Ross, Manager, Shareholder Relations Department, DQE, to Secretary,
SEC, dated February 5, 1997 (``DQE Letter''); H. John Sauer III,
Principal/Operations, Edward Jones, to SEC, dated January 15, 1997
(``Edward Jones Letter''); Glynn E. Williams, Jr., Vice President,
Finance, Goodrich Petroleum Corporation, to Margaret McFarland,
Deputy Secretary, SEC, dated January 17, 1997 (``Goodrich Letter'');
James P. Owens, V.P. Finance, Gradco (USA) Inc., to Margaret
McFarland, Deputy Secretary, SEC, dated January 14, 1997 (``Gradco
Letter''); David S. Ruksznis, Director, Shareholder Operations and
Securities Services, GTE Service Corporation, to SEC, dated February
3, 1997 (``GTE Letter''); James R. Klucharits, Controller, Isomedix
Inc., to Secretary, SEC, dated January 15, 1997 (``Isomedix
Letter''); Rene Vanguestaine, Managing Director, JP Morgan, to
Jonathan G. Katz, Secretary, SEC, dated February 14, 1997 (``JP
Morgan Letter''); Nancie W. LaDuke, Vice President, Secretary, Kmart
Corporation, to SEC, dated February 6, 1997 (``Kmart Letter'');
Robert Donovan, Senior Vice President, Legg Mason Wood Walker,
Incorporated, to Secretary, SEC, dated January 31, 1997 (``Legg
Mason Letter''); Sophia G. Vergas, Assistant Secretary, The Liberty
Corporation, to Secretary, SEC, dated February 6, 1997 (``Liberty
Letter''); Rhonda Anderson, Director, Corporate Secretary's
Department, Lucent Technologies, to Secretary, SEC, dated February
10, 1997 (``Lucent Letter''); Martin J. McDermott, Senior Assistant
Secretary, Merck & Co., Inc., to Jonathan G. Katz, Secretary, SEC,
dated February 11, 1997 (``Merck Letter''); Gordon G. Garney, Senior
Assistant Secretary, Mobil Corporation, to Secretary, SEC, dated
February 6, 1997 (``Mobil Letter); John T. Wall, Executive Vice
President, The Nasdaq Stock Market, Inc., to Jonathan G. Katz,
Secretary, SEC, dated March 13, 1997 (``Nasdaq Letter''); Kathryn G.
Casparian, Managing Director, Oppenheimer & Co., Inc., to SEC, dated
January 29, 1997 (``Oppenheimer Letter''); John Howell Bullion,
Chief Executive Officer, Orphan Medical, to Secretary, SEC, dated
January 14, 1997 (``Orphan Medical Letter''); Nancy R. Kyle,
Director, Investor Relations, PepBoys, to Secretary, SEC, dated
February 7, 1997 (``PepBoys Letter''); Faye Widenmann, Vice
President, Corporate Relations & Administration and Secretary,
Pinnacle West Capital Corporation, to Jonathan G. Katz, Secretary,
SEC, dated February 5, 1997 (``Pinnacle West Letter''); Patrick J.
Callans, Corporate Counsel, Price Costco, Secretary, SEC, dated
February 11, 1997 (``Price Costco Letter''); Donna Dabney, Secretary
and Assistant General Counsel, Reynolds Metals Company, to Jonathan
G. Katz, Secretary, SEC, dated February 7, 1997 (``Reynolds Metals
Letter''); Donald D. Kittell, Executive Vice President, Securities
Industry Association, to Jonathan G. Katz, Secretary, SEC, dated
February 10, 1997 (``SIA Letter''); Jerome J. Clair, Senior Vice
President, Smith Barney, to Margaret H. McFarland, Deputy Secretary,
SEC, dated February 5, 1997 (``Smith Barney Letter''); George M.
Holston, Assistant General Manager and Assistant Secretary, Texaco
Inc., to Jonathan G. Katz, Secretary, SEC, dated February 6, 1997
(``Texaco Letter''); Robert J. Agnich, Senior Vice President,
Secretary and General Counsel, Texas Instruments Incorporated, to
Secretary, SEC, dated January 31, 1997 (``Texas Instruments
Letter''); James T. Anderson, Vice President and Treasurer, US West,
to Arthur Levitt, Chairman, SEC, dated February 5, 1997 (``US West
Letter''); Jennifer LaGrow, Manager, Shareholder Services, the Walt
Disney Company, to Secretary, SEC, dated January 17, 1997 (``Walt
Disney Letter''); John W. Hetherington, Vice President and Corporate
Secretary, Westvaco, to Secretary, SEC, dated February 7, 1997
(``Westvaco Letter'').
\12\ See NYSE Letter, supra note 3.
\13\ See AAON Letter, A.G. Edwards Letter, ABA Letter, Ameritech
Letter, Apollo Letter, Cornerstone Letter, CTA Letter, Edward Jones
Letter, Goodrich Letter, Gradco Letter, GTE Letter, Isomedix Letter,
Kmart Letter, Legg Mason Letter, Liberty Letter, Merck Letter, Mobil
Letter, Oppenheimer Letter, Orphan Medical Letter, PepBoys Letter,
Price Costco Letter, Smith Barney Letter, Texaco Letter, Texas
Instruments Letter, US West Letter, Walt Disney Letter, Westvaco
Letter, supra note 11. See also APTC Letter (not opposing proposal
as pilot program and recognizing it as a necessary first step toward
improving upon the effectiveness and the efficiency of the overall
issuer/shareholder communication system), SIA Letter (supporting the
reimbursement fees, nominee fee and householding fee because they
are the result of open and extensive negotiations between issuer
representatives and broker dealers that process independently and
through an intermediary), supra note 11.
\14\ See Credo Letter, Hagberg Letter, Pinnacle West Letter,
supra note 11.
\15\ See e.g., ABA Letter, APTC Letter, Lucent Letter, supra
note 11.
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Most of the commenters express general support for the NYSE's
proposed rule change. Many commenters believe that the proposal would
provide incentives to the industry to continue to explore and develop
new technologies that would help issuers achieve greater economies
while improving communications with the shareholders.\16\ Several
commenters believe that the proposed rule change should improve the
timeliness, accuracy and participation rate of proxy tabulation for the
issuer.\17\ Two commenters believe that the application of advanced
technology will result in decreased costs to all corporate issuers,
both large and small, and better service for all investors.\18\
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\16\ See Apollo Letter, Cornerstone Letter, Goodrich Letter,
Isomedix Letter, see also Edward Jones Letter, Gradco Letter, Nasdaq
Letter, PepBoys Letter, supra note 11.
\17\ See Apollo Letter, Cornerstone Letter, Goodrich Letter,
Isomedix Letter, supra note 11.
\18\ See Orphan Medical Letter, Walt Disney Letter, supra note
11. Several commenters note a related issue of late proxy voting by
pension funds and institutions that arises with the application of
new technology in the proxy voting process. These commenters explain
that these funds and institutions have used advancements in
technology to vote later than before the introduction of these
services. See Mobil Letter, Pinnacle West Letter, US West Letter,
supra note 11.
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Moreover, several commenters argue that the proposed fees are fair
and equitable to all parties.\19\ One commenter believes that, although
the proposed fee structure represents a departure from the original
concept of ``reimbursement,'' the proposed fee structure represents a
step in the right direction to establish fees that are truly more
representative of actual costs.\20\ Two commenters support the proposed
fee structure although the new fee structure may increase its fees.\21\
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\19\ See Orphan Medical Letter, Walt Disney Letter, supra note
11; see also Legg Mason Letter, supra note 11.
\20\ See Texaco Letter, supra note 11.
\21\ See Liberty Letter, PepBoys Letter, supra note 11.
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One commenter also believes that the proposed fee structure is
consistent with the obligations of issuers to reimburse brokers for
processing proxy and other materials.\22\ In its comment letter, the
NYSE reiterates that the proposed fee structure is consistent with the
obligations of issuers to reimburse brokers for processing proxy and
other materials.\23\ The NYSE explains that the proposed fees resulted
from consultations with listed companies, member firms and other
industry organizations involved in the proxy solicitation process and
that the proposal contains compromises intended to address the
interests and concerns of all participants.\24\
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\22\ See Smith Barney Letter, supra note 11.
\23\ NYSE Letter, supra note 3.
\24\ See NYSE Letter, supra note 3. One commenter agrees with
the NYSE that the current fee structure does not recognize the value
that service bureaus, such as ADP, provide through their coordinated
system of distribution and proxy solicitation and that the proposal
would recognize the services provided and upon which many member
firms rely. This commenter believes that without an incentive to
invest in enhanced technology, service bureaus could not effectively
build the infrastructure necessary to support sophisticated
applications. See Oppenheimer Letter, supra note 11. Another
commenter notes that ADP offers services that small issuers use and
appreciate although small issuers do not utilize certain
sophisticated services because many shareholders lack the equipment
and/or sophistication to take advantage of modern technology. See
Liberty Letter, supra note 11.
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Several commenters express general concern about the proposed fee
structure. Several commenters question why costs to distribute proxy
materials to street accounts remain significantly higher than to
registered owners.\25\ One commenter also argues that advancing
technology should reduce, not increase, servicing costs, and that the
increasing level of beneficial ownership should reduce, not increase,
per unit servicing costs.\26\ Moreover, this commenter believes that
the brokerage houses should pay the majority of the servicing cost of
beneficial ownership because they encourage and derive the major
benefit from beneficial ownership.\27\
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\25\ See Pinnacle West Letter and US West Letter, supra note 11.
\26\ See Credo Letter, supra note 11.
\27\ See Credo Letter, supra note 11.
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One commenter argues that at least one study shows that the
proposed fee structure will increase proxy mailing costs from 20% to
30%, with no recognizable offsetting benefit.\28\ Another commenter
notes that the proposal would increase its costs by over 450%.\29\ One
commenter argues that the proposed fees are higher than what an issuer
would pay in a ``free market environment.''\30\
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\28\ See Pinnacle West Letter, supra note 11.
\29\ See Credo Letter, supra note 11.
\30\ See Hagberg Letter, supra note 11.
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One commenter believes that the NYSE should ensure that the proxy
fees offer only reimbursement of costs to the nominees.\31\ This
commenter believes that the nominees have some obligation to enhance
and improve the proxy process, whether they perform the proxy
solicitation process in house or through an intermediary.\32\ The
commenter argues that the NYSE should encourage the free market to
develop and implement new technologies by allowing individual issuers
to choose whether to take advantage of a new process or procedure and
to make their own decisions based on internal cost/benefit
analysis.\33\
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\31\ See DQE Letter, supra note 11.
\32\ See DQE Letter, supra note 11.
\33\ See DQE Letter, supra note 11.
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Several commenters address specific aspects of the NYSE's rule
proposal. Two commenters support the reduction of the suggested rate of
reimbursement to $.55 for each set of proxy materials when mailed as a
unit.\34\ Specifically, one commenter notes that the reduced rate would
still be sufficient for the broker-dealers to handle all of the
functions relating to proxy materials.\35\ Another commenter, however,
is not convinced that $.55 is the right number for enclosing and
tabulating proxy materials and notes that it pays a much lower fee to
vendors for its registered accounts.\36\
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\34\ See CTA Letter, Mobil Letter, supra note 11.
\35\ See CTA Letter, supra note 11.
\36\ See Lucent Letter, supra note 11.
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Several commenters endorse the recommendation that actual cost for
all out-of-pocket expenses be passed along to the issuers and that
issuers share in postage discounts.\37\ One commenter believes that all
out-of-pocket expenses should be passed along to the issuers at
cost.\38\ One commenter suggests that all postal discounts should be
passed on to the issuers.\39\ Another commenter suggests that there be
an annual review of out-of-pocket expenses.\40\
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\37\ See AAON Letter, Ameritech Letter, Apollo Letter,
Cornerstone Letter, Goodrich Letter, Isomedix Letter, supra note 11.
\38\ See US West Letter, supra note 11.
\39\ See DQE Letter, supra note 11.
\40\ See AFLAC Letter, supra note 11.
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Several commenters specifically address the proposed $.50 incentive
fee.
[[Page 13926]]
One commenter supports this fee because it would not only help to
reduce further the proxy fee, postage, and printing costs for the
annual report and proxy statement but also reduce stockholder
frustration caused by multiple mailings.\41\ Another commenter believes
that the proposal would provide an incentive for the elimination of
duplicate mailings.\42\ One commenter believes that the
``householding'' incentive fee will result in net savings to the
company.\43\ This commenter believes that the fee should be structured
so that mailing list reductions are quantified prior to the print date
for annual reports and other proxy materials to maximize the potential
savings to issuers.\44\
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\41\ See Texas instruments Letter, supra note 11.
\42\ See Westvaco Letter, supra note 11.
\43\ See Reynolds Metal Letter, supra note 11.
\44\ See Reynolds Metal Letter, supra note 11.
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One commenter, however, questions how issuers would determine the
savings realized by using the householding process and whether
householding would cause a further delaying getting the vote to the
issuer.\45\ Another commenter argues that the NYSE should require that
all recordkeepers minimize the number of duplicate mailings or should
ensure that any consolidation fee permitted is based on direct cost
savings to issuers, payable only in the first year of savings, and
shared between the issuers and the intermediary.\46\
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\45\ See Pinnacle West Letter, supra note 11.
\46\ See DQE Letter, supra note 11.
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One commenter believes that the paper and postage elimination fees
are significantly higher than what most transfer agents charge for
these same services and that it would be appropriate to pass these
charges on to issuers only if the fees are market driven and comparable
to what other companies in the marketplace are charging for similar
activity.\47\ Another commenter believes that any fee paid to a broker
for assistance in eliminating duplicate mailings should be based on
actual reasonable costs incurred by the broker.\48\ One commenter also
notes that the proposed incentive fee would increase fees for foreign
issuers with a relatively small U.S. float.\49\
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\47\ See US West Letter, supra note 11. This commenter also
disagrees with the NYSE's contention that it is impracticable to
develop reimbursement guidelines that vary based on the size of
one's mailing because this method is standard procedure in a number
of industries.
\48\ See GTE Letter, supra note 11.
\49\ See JP Morgan Letter, supra note 11. This commenter argues
that the NYSE should amend its rules to exempt non-U.S. issuers from
NYSE's proxy requirements.
---------------------------------------------------------------------------
Several commenters address the $20 per nominee fee. One commenter
believes that the per nominee fee is fair compensation for the services
of an intermediary and would provide the proper incentives to focus on
technology initiatives that will save the issuer community additional
money in the long term.\50\ In its comment letter, the NYSE further
explains that the nominee coordination fee represents reimbursement for
coordination costs incurred by ADP and that the fee is a reasonable
attempt to provide compensation for new services being offered under
the current proxy solicitation process.\51\ Moreover, the NYSE believes
that coordination of nominees reduces costs for issuers.\52\
---------------------------------------------------------------------------
\50\ See Legg Mason Letter, supra note 11.
\51\ See NYSE Letter, supra note 3. The Commission notes, again,
that the NYSE has indicated that the costs of electronic and/or
telephonic voting will not be passed through to issuers under the
new fee structure. See supra note 9; infra note 111.
\52\ See NYSE Letter, supra note 3.
---------------------------------------------------------------------------
Two commenters request a description of services included in the
$20 per nominee fee.\53\ Specifically, one commenter believes that such
a breakdown would help the issuers determine if the amounts charged for
the fees are justified and comparable to free-market costs.\54\ Another
commenter believes that the $20 nominee fee should be followed by
establishing new rules to govern the various services handled by
intermediaries.\55\ Two commenters express concern about the impact of
the proposed new nominee fee on small issuers.\56\ Specifically, one
commenter suggests that the NYSE and the Commission review the market
data during the pilot period to ensure that small issuers are not being
disadvantaged unfairly under the proposed fee structure.\57\
---------------------------------------------------------------------------
\53\ See AFLAC Letter, CTA Letter, supra note 11.
\54\ See CTA Letter, supra note 11.
\55\ See Mobil Letter, supra note 11.
\56\ See ABA Letter and Nasdaq Letter, supra note 11.
\57\ See ABA Letter, supra note 11.
---------------------------------------------------------------------------
Several commenters object to the $20 nominee fee because it would
increase the costs of transmitting proxy materials even though no new
or additional services would be provided.\58\ One commenter notes that
the proposed structure unduly penalizes smaller companies that do not
have large institutional share concentrations but have numerous
nominees who represent only a few beneficial owners.\59\ One commenter
suggests that a progressive nominee service fee based on the number of
shareholder accounts would be more equitable.\60\ Another commenter
argues that before a per nominee fee can be considered, there must be
an independent way to confirm the number of nominees associated with an
issuer.\61\
---------------------------------------------------------------------------
\58\ See DOE Letter, Reynolds Metal Letter and Pinnacle West
Letter, supra note 11.
\59\ See Credo Letter, supra note 11.
One commenter expresses concern that the proposed nominee fee
would increase fees for foreign issuers with relatively small U.S.
float. See JP Morgan Letter, supra note 11. This commenter argues
that the NYSE should amend its rules to exempt non-U.S. issuers from
NYSE's proxy requirements.
\60\ See Reynolds Metal Letter, supra note 11.
\61\ See DOE Letter, supra note 11.
---------------------------------------------------------------------------
Several commenters address the Commission's request for comment on
what should be deemed as ``reasonable expenses'' under the Commission's
proxy rules. Some commenters believe that reasonable expenses should
include an intermediary's cost to coordinate an issuer's proxy mailing
to multiple nominees and the expenses of operating an electronic proxy
voting system.\62\ One commenter, however, believes that only member
organizations or intermediaries that perform extra functions relating
to coordinating the mailing and voting of proxy material to multiple
nominee accounts should be entitled to receive fair and reasonable
compensation for their associated efforts.\63\ Another commenter
believes that the ``[c]osts to develop and operate an electronic proxy
voting system, which appears to be designed primarily to facilitate ADP
and the institutions and not the industry as whole, should not be
passed along to issuers.'' \64\ One commenter believes the definition
of reasonable expenses should include actual out-of-pocket expenses and
not represent a profit item for the broker-dealers, banks and
nominees.\65\
---------------------------------------------------------------------------
\62\ See CTA Letter, Mobil Letter, Smith Barney Letter, US West
Letter (commenting only on coordinating an issuer's proxy mailing to
multiple nominees), supra note 11.
\63\ See Texaco Letter, supra note 11.
\64\ See US West Letter, supra note 11.
\65\ See Mobil Letter, supra note 11.
---------------------------------------------------------------------------
With respect to the Commission's request for comment on whether the
determination of ``reasonableness'' should vary with the size of the
issuer, one commenter believes that the determination of reasonableness
should not vary based on issuer size or any other criteria.\66\ Two
commenters support varying reasonable fees with the size of the
issuer.\67\ Specifically, one believes that a tiered pricing structure
that properly recognizes the true
[[Page 13927]]
economies of scale would be appropriate.\68\
---------------------------------------------------------------------------
\66\ See Smith Barney Letter, supra note 11.
\67\ See Hagberg Letter, Lucent Letter, supra note 11.
\68\ See Hagberg Letter, supra note 11.
---------------------------------------------------------------------------
In its comment letter, the NYSE explains that the NYSE Committee on
Shareholder Communications has not been able to reach a consensus on
tiering because of the different service requirements of companies of
different sizes.\69\ To illustrate, the NYSE explains that, although
large issuers may believe that they subsidize smaller issuers, larger
issuers drive more of the cost of infrastructure such as vote
processing.\70\
---------------------------------------------------------------------------
\69\ See NYSE Letter, supra note 3.
\70\ See NYSE Letter, supra note 3.
---------------------------------------------------------------------------
Several commenters address whether the reasonableness determination
should take into account any fee sharing arrangements between an
intermediary and its broker-dealer clients. Several commenters argue
that reasonable expenses should not include reimbursement to subsidize
revenue sharing or a rebate system.\71\ Moreover, several of these
commenters believe that revenue sharing and rebates artificially
inflate expenses charged to issuers and create an unnecessary barrier
to entry for competition in the business.\72\ One commenter argues that
the rebates available only to a single, dominant provider have made it
impossible for new providers who might otherwise be able to offer lower
fees or money saving technologies to enter the business.\73\
---------------------------------------------------------------------------
\71\ See CTA Letter, GTE Letter, Lucent Letter, Mobil Letter,
Smith Barney Letter, US West Letter, supra note 11.
\72\ See CTA Letter, GTE Letter, Mobil Letter, US West Letter,
supra note 11.
\73\ See Hagberg Letter, supra note 11.
---------------------------------------------------------------------------
Another commenter states that issuers have no way of knowing how
much of their fees are actually being rebated to member organizations
and that rebates should be only made to cover a broker's actual
costs.\74\ One commenter questions why revenue sharing occurs.\75\
Another commenter believes that the rebate process should be fully
investigated to determine if it is in the best interests of the capital
markets and is consistent with the goal of free and fair
competition.\76\
---------------------------------------------------------------------------
\74\ See Texaco Letter, supra note 11.
\75\ See AFLAC Letter, supra note 11.
\76\ See DOE Letter, supra note 11.
---------------------------------------------------------------------------
One commenter explicitly supports the fee sharing arrangement
between broker-dealers and intermediaries as appropriate within the fee
structure.\77\ This commenter notes that when a broker-dealer
outsources to an intermediary, it does not typically outsource 100% of
the activities covered by the fees.\78\ The commenter believes that the
amount of the fee sharing should be determined by negotiation between
each broker-dealer and its intermediary.\79\
---------------------------------------------------------------------------
\77\ See SIA Letter, supra note 11.
\78\ See SIA Letter, supra note 11.
\79\ See SIA Letter, supra note 11.
---------------------------------------------------------------------------
A few broker-dealer commenters also explain that nominee does not
eliminate all costs by outsourcing their proxy mailings.\80\ These
commenters note certain costs that nominees must bear as it: (1)
Continues to maintain proxy personnel in its office to answer broker
and customer questions as well as to handle the operational aspects of
balancing positions and voting totals; (2) transmits data each day to
and from ADP; (3) writes and maintains programs to support and enhance
the transmission and continue to do so; and (4) has other overhead and
administrative costs.\81\ The NYSE agrees with these commenters that
broker-dealers continue to incur some costs in the proxy solicitation
process and that it would be reasonable that the fees issuers pay be
split between the intermediary and the broker-dealer.\82\ During the
pilot, such costs would be identified more fully and assessed by the
independent accounting firm.
---------------------------------------------------------------------------
\80\ See A.G. Edwards Letter, Legg Mason Letter, Oppenheimer
Letter, supra note 11.
\81\ See A.G. Edwards Letter, Legg Mason Letter, supra note 11.
\82\ See NYSE Letter, supra note 3.
---------------------------------------------------------------------------
Several commenters support the formation of an industry committee
to evaluate the effectiveness of the proposal during the pilot
period.\83\ Moreover, one commenter suggests that unresolved issues can
be addressed by an industry committee during the pilot period.\84\ One
commenter suggests that if a pilot program is implemented, the
intermediary should be required to send two invoices to customers over
the pilot period, with one under the old billing arrangement and one
under the new.\85\
---------------------------------------------------------------------------
\83\ See Apollo Letter, Cornerstone Letter, Goodrich Letter, GTE
Letter, Isomedix Letter, supra note 11.
\84\ See CTA Letter, supra note 11.
\85\ See DQE Letter, supra note 11.
---------------------------------------------------------------------------
Several commenters address the issue of whether an independent
audit during the pilot period would be helpful in assessing the
reasonableness of the costs passed through to issuers. Most of these
commenters support an independent audit.\86\ One commenter suggests
that to be truly meaningful, the independent audit should include all
reasonable costs incurred by the issuers, broker-dealers, ADP, and
nominees in mailing proxy material to beneficial holders and the
processing of votes back to the issuer's vote tabulator.\87\ Another
commenter believes that auditing of actual cost of material such as
envelopes will lead to even more savings and make it easier for
stockholders to register their votes.\88\ Two commenters suggest that
profit sharing arrangements should be audited to determine the
reasonableness of these costs.\89\
---------------------------------------------------------------------------
\86\ See CTA Letter, Lucent Letter, Mobil Letter, Orphan Medical
Letter, Reynolds Metal Letter, Texaco Letter, US West Letter, Walt
Disney Letter, supra note 11.
\87\ See CTA Letter, supra note 11.
\88\ See Texas Instruments Letter, supra note 11.
\89\ See Mobil Letter, Texaco Letter, supra note 11.
---------------------------------------------------------------------------
Other commenters believe that the expense of an independent audit
is not necessary.\90\ Specifically, one commenter believes that there
should be some definite reason to believe that an independent audit is
worth the expense.\91\ The NYSE also believes that, although an audit
would be useful in determining whether member firms and intermediaries
accurately implemented the new fees and for some elements of the costs
to be tested in an audit, an audit would not be useful to determine the
``right'' fee.\92\
---------------------------------------------------------------------------
\90\ See A.G. Edwards Letter, Legg Mason Letter, Smith Barney
Letter, supra note 11.
\91\ See A.G. Edwards Letter, supra note 11.
\92\ See NYSE Letter, supra note 3.
---------------------------------------------------------------------------
With regard to the Commission's request for comment on whether the
proposed NYSE nominee fee and incentive fee should be deemed to apply
to reimbursement by non-NYSE issuers to NYSE member firms, two
commenters believe that the new fee structure should apply to all
issuers and not be limited to NYSE listed companies.\93\ Specifically,
one believes that these fees should apply to all issuers because the
covered activities are the same for all issuers, regardless of the
listing.\94\ Two commenters argue that the fees should apply to all
domestic corporations when dealing with NYSE members.\95\ The NYSE
agrees with these commenters in that limiting fees to NYSE issuers
would result in confusion and an increase of expenditure of scarce
resources to duplicate efforts.\96\
---------------------------------------------------------------------------
\93\ See SIA Letter, Smith Barney Letter, supra note 11.
\94\ See SIA Letter, supra note 11.
\95\ See A.G. Edwards Letter, Legg Mason Letter, supra note 11.
\96\ See NYSE Letter, supra note 3.
---------------------------------------------------------------------------
One commenter, however, believes that the proposed NYSE nominee fee
and incentive fees should not necessarily apply to non-NYSE issuers
because the non-NYSE issuers should be permitted to negotiate lower
proxy fees from other stock exchanges.\97\
---------------------------------------------------------------------------
\97\ See Texaco Letter, supra note 11.
---------------------------------------------------------------------------
V. Discussion
The Commission finds that the proposed rule change is consistent
with
[[Page 13928]]
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange, and, in particular, with
the requirements of Section 6(b).\98\ Section 6(b)(4) requires that
exchange rules provide for the equitable allocation of reasonable dues,
fees, and other charges among its members and issuers and other persons
using the facilities of an exchange.\99\ Section 6(b)(5) requires,
among other things, that exchange rules promote just and equitable
principles of trade and that they are not designed to permit unfair
discrimination between issuers, brokers or dealers.\100\ Section
6(b)(8) prohibits any exchange rule from imposing any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.\101\ Based on the record adduced by the NYSE, the
Commission believes that the fees under the proposed reimbursement
schedule are reasonable and fairly allocated, do not discriminate among
issuers, and do not impose any unnecessary burdens on competition. The
Commission will re-evaluate this preliminary determination in light of
the results of the pilot program and the independent accounting firm's
report.
---------------------------------------------------------------------------
\98\ 15 U.S.C. 78f(b).
\99\ 15 U.S.C. 78f(b)(4).
\100\ In approving these rules, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\101\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
The Commission believes that the NYSE's proposal to amend the
suggested rate of reimbursement for the distribution of materials and
to impose certain incentive and nominee fees are consistent with the
Act because the proposal reflects changes in the market, such as
advances in technology and increases in distribution costs, and changes
in the corporate governance process since the last update of the fee
reimbursement schedule in 1986. The Commission also believes that the
proposed fee reimbursement structure should promote the application of
advanced technology to the shareholder communication process and is a
reasonable accommodation of the interests of various market
participants involved in the proxy solicitation process. A majority of
the commenters also support the proposal, believing that it would
provide the industry with incentives to continue to develop new
technologies that would help issuers reduce costs while improving
communications with shareholders.
Moreover, the proposal also reduces the basic rates of
reimbursement for the first time since the adoption of the rules. The
proposal reduces the fees for mailing each set of proxy materials from
$.60 or $.70 to $.55 and reduces the rate for mailing other reports
from $.20 to $.15. The Commission believes that these reductions should
produce substantial savings for issuers.
The NYSE has examined the cost increases of its issuers under the
proposed fee structure and believes that, in general, most of the
issuers would receive a cost reduction with this proposal. There may be
some increases for small issuers, but the new nominee cost may be
partially offset by the lower basic rates and lower expenses. Moreover,
there may be other costs savings, particularly ``out-of-pocket
savings,'' and the new incentive fees may result in fewer mailings,
decreasing printing and mailing costs.\102\
---------------------------------------------------------------------------
\102\ The NYSE conducted an analysis of the proposed fee
reimbursement structure on several small issuers based on the
figures from the 1996 proxy season. For example, for one small
issuer, although the proxy costs under the proposed fee structure
would increase by $2,766, this issuer could realize savings in the
range of $630 to $2,520 by suppressing proxy mailings by
householding, which could offset the increase in proxy costs.
---------------------------------------------------------------------------
The Commission believes that the new reimbursement schedule is the
result of the NYSE's careful balancing of interests of issuers and
broker-dealers. The Commission has, nevertheless, determined to approve
the NYSE's proposed fee structure on a one-year pilot basis to allow
the Exchange and the Commission to review the progress and effect of
the fee structure. The Commission believes that the experience with the
proposed fee structure during the one-year pilot period would be
valuable to the NYSE and to the Commission in determining whether any
modifications are necessary. The Commission notes that the NYSE has
committed to an independent audit, at the conclusion of the 1997 proxy
season, of the new fee structure to assess the reasonableness of the
costs passed through to issuers with a report of the findings made to
the Commission.\103\
---------------------------------------------------------------------------
\103\ Although several commenters support the formation of an
industry committee to evaluate the proposal over the pilot period,
the Commission believes that an independent audit would better
alleviate concerns of market participants with varying interests
regarding the reasonableness of the proposed fee structure in
relation to the services provided.
The NYSE has represented to the Commission that the report of
the independent accountant will be provided to the Commission and
the NYSE no later than October 31, 1997. The Commission will review
the report to determine whether any change would be appropriate for
the 1998 proxy season.
---------------------------------------------------------------------------
A. Commenters' Concerns
AS discussed above, the NYSE is proposing to adopt two new fees for
the first time--the nominee fee and the automation incentive fee. These
fees are different from the other mailing reimbursement fees set forth
in the NYSE rules in that they are related costs other than actual
mailing costs. As a result, several commenters express specific concern
about these fees.
Several commenters also express general concern that the proposed
fee structure may increase costs to issuers. The Commission believes
that, although in certain instances costs to issuers may increase under
the proposed fee structure, the reduction of mailing fees and the
design of the structure to encourage savings in the long term should be
beneficial to all market participants.
One commenter argues that the proposed fees are higher than what an
issuer would pay in a ``free market'' environment.\104\ The Commission
notes that, in adopting the direct shareholder communications rules, it
left the determination of reasonable costs to the self-regulatory
organizations (``SROs'') because, as representatives of both issuers
and brokers, the SROs were deemed to be in the best position to make a
fair evaluation and allocation of the costs associated with the
distribution of shareholder materials. The Commission believes that, at
this time, it is appropriate for the NYSE to propose the amount for
each fee in the fee reimbursement structure, with the Commission
reviewing the fee schedule to ensure its compliance with the standards
of the Act. As discussed below, however, the Commission encourages the
NYSE and the issuer and broker-dealer communities to initiate dialogue
so that competition may play a greater role in this process.
---------------------------------------------------------------------------
\104\ See Hagbert Letter, supra note 11.
---------------------------------------------------------------------------
Another commenter argues that NYSE's fee schedule should offer only
reimbursement of costs to the nominees and that the NYSE should
encourage a free market to develop and implement new technologies by
allowing individual issuers to choose whether to take advantage of a
new process or procedure.\105\ The Commission believes, however, that
because the current fee schedule only provides for reimbursement of
costs, service providers do not have any incentive to develop and
implement new technologies. As discussed in more detail below, the
Commission believes that certain incentive fees are necessary to
encourage these service providers to develop cost effective methods of
distributing shareholder materials.
---------------------------------------------------------------------------
\105\ See DQE Letter, supra note 11.
---------------------------------------------------------------------------
[[Page 13929]]
1. Nominee Fee
As discussed above, the NYSE proposes a new $10 nominee fee for
intermediaries that provide coordination for a series of functions
across a multitude of nominees. Several commenters object to the
nominee fee because it may increase costs to smaller issuers. The NYSE
represents that the fee is intended to be reimbursement for
coordination costs incurred by intermediaries and that the fee is a
reasonable attempt to provide compensation for services that are being
currently offered. Moreover, the NYSE believes that coordination by
nominees should reduce costs for issuers.
The Commission has considered the NYSE's representations as to the
effect of the new ``nominee fee'' of $20 per nominee for their
potential impact on issuers. The Commission recognizes that, although
these fees may have a greater impact on small issuers than large and
mid-sized issuers, the combined effect of the reduced rates of
reimbursement for mailing proxy and other materials along with the
imposition of these new fees could result in greater benefit to all
issuers in general, depending, of course, on the results of the pilot.
Based on the information provided by the NYSE and the supportive
comment letters, the Commission believes--subject, again, to the
results of the pilot--that the nominee fee would appear to constitute
reasonable compensation for the services provided by an intermediary
that could produce savings for issuers in the long term. The Exchange
estimates that the smallest U.S. issuers would pay, on average, an
intermediary nominee fee of $800. This is a relatively small sum and is
designed to compensate for the services provided by the intermediary.
The Commission also believes that the new fees will provide
incentives for intermediaries to develop technologically innovative
ways to communicate with issuers and to lower costs overall. Although
these fees may have relatively greater impact on small issuers, the new
fee structure reflects economies of scale and may more accurately
reflect the actual distribution and proxy solicitation costs. Moreover,
the Commission believes that these fees, by encouraging the use of
technology for shareholder communications, could help to promote
further improvement of the corporate governance process.
Commenters also express concern about whether any new or additional
services are being provided by an intermediary for the $20 nominee fee
and ask, in any case, whether such services are being provided at free-
market cost. First, the Commission notes that the NYSE has provided a
list of coordinating functions that would qualify a nominee for the
reimbursement of the $20 fee. Any intermediary that coordinates these
functions for multiple nominees would be entitled to the fee. Although
ADP is the only intermediary currently offering these services to
broker-dealers, there is nothing in the NYSE proposal that would
restrict the payment of this fee to another entity providing similar
services and thus the rule is not anti-competitive in application.
Second, the Commission notes that an intermediary coordinating
multiple nominees could result in reduced costs to issuers in printing,
posting and administrative costs.\106\ Although this has not been
quantified specifically by the NYSE in its rule proposal, during the
one-year pilot, the Exchange and the Commission can review the results
of the pilot program, including but not limited to the independent
accounting firm's report, to ensure that no issuers are unfairly
disadvantaged under the proposed fee structure, and that the nominee
fee is a reasonable expense incurred to distribute proxy and other
shareholder material. At the conclusion of the pilot, if necessary, the
Exchange can propose further modifications to the fee structure to
avoid any unintended adverse effects.
---------------------------------------------------------------------------
\106\ See NYSE Letter, supra note 3.
---------------------------------------------------------------------------
2. Automation Incentive Fee
The NYSE proposes a new incentive fee to compensate member
organizations for eliminating materials in paper form (i.e., additional
fee of $.50 ($.10 for a quarterly report) for each set of material that
is not mailed). One commenter believes that incentive fees should be
based on actual reasonable costs incurred by the broker for eliminating
duplicate mailings.\107\ Another believes that the incentive fees
should be passed on to issuers only if the fees are market driven and
comparable to what other companies in the marketplace are charging for
similar activity.\108\
---------------------------------------------------------------------------
\107\ See GTE Letter, supra note 11.
\108\ See US West Letter, supra note 11.
---------------------------------------------------------------------------
The Exchange has represented to the Commission that the
householding fee is intended to encourage members firms to apply
technology to distribute materials electronically. The Commission
believes that, if the incentive fee only reimburses the cost of
eliminating the duplicate mailings, nominees would have no incentive to
provide these services because nominees would be reimbursed for their
costs regardless of whether they provide these types of services.
Moreover, the Commission notes that the fee would produce the
unquantifiable benefit of reducing shareholder frustration and
confusion by eliminating duplicate mailings to shareholders.
One commenter expresses concern that the proposed incentive fee as
well as the nominee fee would increase fees for foreign issuers with a
relatively small U.S. float and argues that the NYSE should amend its
rules to exempt non-U.S. issuers from NYSE's proxy requirements.\109\
The Exchange states, and the Commission agrees, that in this context
there are no compelling reasons to treat non-U.S. issuers and U.S.
companies differently. Although non-U.S. issuers are exempt from most
of the Commission's proxy rules pursuant to Rule 3a12-3 under the Act,
non-U.S. issuers generally do provide U.S. shareholders with proxy and
related information and seek votes of their U.S. holders. The Exchange,
therefore, states that broker-dealers and other intermediaries face the
same reimbursement issues with non-U.S. companies as they do with U.S.
companies.
---------------------------------------------------------------------------
\109\ See JP Morgan Letter, supra note 11.
---------------------------------------------------------------------------
Finally, the Commission notes that the independent audit should
help to assess whether the householding incentive fee has had the
intended effect of eliminating duplicate mailings and is providing cost
savings to issuers.
B. Reasonableness Determination
The Commission also requested comments on what should be deemed
``reasonable expenses'' within the meaning of the Commission's proxy
rules. As summarized above, the Commission received a variety of
responses to this issue. Among them are that reasonable expenses should
include an intermediary's cost to coordinate an issuer's proxy mailing
to multiple nominees,\110\ an intermediary's expense of operating an
electronic proxy voting system,\111\ and actual out-of-pocket expenses
that do not represent a profit
[[Page 13930]]
item for the broker-dealers, banks and nominees.\112\
---------------------------------------------------------------------------
\110\ See Mobil Letter, Smith Barney Letter, US West Letter,
supra note 11.
\111\ See Mobil Letter, Smith Barney Letter, supra note 11.
Another commenter believes that the costs to develop and operate
an electronic proxy voting system should not be passed along to
issuers because the electronic system appears to be designed
primarily to facilitate ADP and the institutions. See US West
Letter, supra note 11. See also supra note 64 and accompanying text.
In response, the NYSE states that it has not been led to believe
that the fees should cover such a system and, therefore, such costs
are not included in the proposal. See NYSE Letter, supra note 3. See
also supra notes 9 and 51.
\112\ See Mobil Letter, supra note 11.
---------------------------------------------------------------------------
Finally, in response to the issue of fee sharing arrangements
between brokers and intermediaries, several commenters believe that
reasonable expenses should not include such arrangements because
revenue sharing and rebates artificially inflate expenses charged to
issuers and create an unnecessary barrier to entry for competition in
the business.\113\ At least one commenter, however, believes that fee
sharing arrangements are appropriate because when a broker-dealer
outsources to an intermediary, it does not typically outsource 100% of
the activities covered by the fees.\114\
---------------------------------------------------------------------------
\113\ See CTA Letter, GTE Letter, Mobil Letter, US West Letter,
supra note 11.
\114\ See SIA Letter, supra note 11. The NYSE also agrees
Several broker-dealer commenters also explain that a nominee
does not eliminate all costs by outsourcing their proxy mailings.
See supra note 80 and accompanying text. The NYSE also agrees with
these commenters. See NYSE Letter, supra note 3.
---------------------------------------------------------------------------
Although the Commission has carefully considered these comments
regarding ``reasonable expenses,'' it has reached no final resolution
of the issues noted by commenters. Rule 14a-13(a)(5) requires issuers
to reimburse broker-dealers, banks, and other nominees for the
reasonable expenses they incur in mailing proxy soliciting materials
and annual reports to beneficial holders of such issuers' voting
securities. As noted by the NYSE, the fee structure that surrounded the
development of the reimbursement of such fees was devised prior to the
use of intermediaries by many broker-dealers. In addition, the current
fee structure does not recognize the benefits from enabling more
shareholder communications to be received through the technological
advances made over the past decade. The one-year pilot and the audit
that will cover the results of ADP's operations for this period should
provide the NYSE and the Commission with the information necessary to
determine whether the fee structure needs to be further revised. The
Commission will continue to consider the comments during the one-year
pilot period and reevaluate these comments before approving a permanent
fee schedule.
Finally, with regard to whether the proposed NYSE nominee fee and
incentive fee should be deemed to apply to reimbursement by non-NYSE
issuers to NYSE firms, the Commission believes that it is preferable
that the new fees apply to reimbursement by NYSE issuers to NYSE member
firms. At the same time, as the NYSE has noted, member firms, non-
member firms and banks historically have used the NYSE guidelines for
all mailings, which provide uniformity in the industry. The Commission,
however, believes that the reimbursement structure apply to member
firms and not to issuers and Section 19(b) does not provide the NYSE
with the authority to enforce the reimbursement of these fees on
issuers that are not listed on the NYSE and do not use its facilities.
This approach is consistent with Section 6(b)(4) of the Act, which
allows an exchange to adopt equitable fees for its members, issuers,
and other persons using its facilities.
In determining to approve the NYSE's proposal for a one-year pilot
period, the Commission has had to assess whether the proposal provides
for the equitable allocation of fees among issuers consistent with
Section 6(b)(4) of the Act, as well as ensure that it is consistent
with Sections 6(b)(5) and 6(b)(8) of the Act by not unfairly
discriminating among issuers and imposing a burden on competition that
is not necessary under the Act.
As noted above, the proposal has raised a number of concerns about
whether the effect of the new fee structure would unduly increase the
costs to small issuers and whether both the nominee and householding
incentive fees are related to the reasonable expenses of mailing proxy
soliciting materials. Although the Commission recognizes that the
quantitative material submitted by NYSE to support its proposal is not
conclusive on this issue, we believe that that NYSE has made a
reasonable case that the fee changes taken together could have a
beneficial effect on the costs for mailing proxy material for many
issuers. Moreover, to the extent that the nominee fee and household
incentive fee encourage the use of new technologies for the electronic
distribution of proxy materials, overall mailing costs of issuers could
be reduced. As a result, although the Commission recognizes that some
issuers may, in the short run, experience an increase in costs, on
balance, the Commission believes that the overall effect of the changes
may be positive and provide some cost savings.
In conclusion, the Commission believes that the proposal to amend
the suggested rate of reimbursement for the distribution of materials
and to impose certain new fees is consistent with the Section 6(b)(4)
requirement that exchange rules provide for the equitable allocation of
fees among its members and issuers. The proposed fee structure appears
to provide for reasonable fees and does not appear to discriminate
between issuers, brokers or dealers in contravention of Section
6(b)(5). Moreover, the Commission believes that the proposed
reimbursement schedule does not impose any burden on competition that
is not necessary or appropriate in furtherance of the purposes of the
Act as required by Section 6(b)(8).
The pilot period and independent audit should help the Commission
assess whether the potential benefits of the fee structure change do,
in fact, have a positive effect overall on the proxy fee reimbursement
structure. Indeed, during this period, the Commission encourages the
Exchange, issuers, and member firms to consider a long term solution to
determining reasonable expenses in connection with broker-dealers'
mailing of proxy soliciting materials and annual reports to beneficial
holders. In doing so, the Commission notes that in adopting the direct
shareholder communications rules in the early 1980s the Commission left
the determination of reasonable costs to the SROs, because they were
deemed to be in the best position to make fair evaluation and
allocations of costs associated with these rules. The Commission
believes that ultimately market competition should determine
``reasonable expenses'' and recommends that issuers, broker-dealers and
the NYSE develop an approach that may foster competition in this area.
Rather than having the rates of reimbursement set by the SROs, the
Commission suggests 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.
The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof. This amendment merely changes
the length of the pilot from three years to one year. Based on the
above, the Commission finds that there is good cause, consistent with
Section 6(b)(5) of the Act, to accelerate approval of Amendment No. 1.
VI. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1. 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 rule
[[Page 13931]]
change that are filed with the Commission, and all written
communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for inspection and copying at the Commission's Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of such filing will also be available for inspection and copying
at the principal office of the Exchange. All submissions should refer
to File No. SR-NYSE-96-36 and should be submitted by April 14, 1997.
VII. Conclusion
For the foregoing reasons, 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 national securities
exchange and, in particular, the requirements of Sections 6(b)(4),
6(b)(5), and 6(b)(8) and the rules and regulations thereunder.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\115\ that the proposed rule change (SR-NYSE-96-36) is approved on
a pilot basis ending May 13, 1998.
\115\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\116\
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\116\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-7280 Filed 3-21-97; 8:45 am]
BILLING CODE 8010-01-M