[Federal Register Volume 63, Number 58 (Thursday, March 26, 1998)]
[Notices]
[Pages 14745-14747]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-7918]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39774; File No. SR-NYSE-98-05]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc., Relating to the 
Reimbursement of Member Organizations for Costs Incurred in the 
Transmission of Proxy and Other Shareholder Communication Material

March 19, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on February 6, 1998, the New 
York Stock Exchange, Inc. (``Exchange'' or ``NYSE'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the Exchange. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange seeks to extend the pilot period during which recent 
changes to Exchange Rule 451, ``Transmission of Proxy Material,'' and 
Exchange Rule 465, ``Transmission of Interim Reports and Other 
Material'' (collectively the ``Rules''), became operative. The Rules 
establish guidelines for the reimbursement of expenses by issuers to 
NYSE member

[[Page 14746]]

organizations for the processing of proxy materials and other issuer 
communications (``Materials'') with respect to security holders whose 
securities are held in street name. The Rules also allow NYSE member 
organizations to employ the practice of ``householding'' to eliminate 
multiple mailings of Materials to beneficial security holders at the 
same address.
    On March 14, 1997, the Commission approved a NYSE proposal that 
significantly amended the Rules and the reimbursement guidelines set 
forth therein (the ``Previous Filing'').\2\ In a separate filing 
related to this proposed rule change (the ``Companion Filing''), the 
Commission approved the Exchange's proposal to reduce the rate of 
reimbursement for mailing each set of Materials from $.55 to $.50, and 
to extend the current pilot period through July 31, 1998.\3\ This 
filing proposes one change to the Rules, regarding the use of 
householding through implied consent, and also proposes to extend the 
effectiveness of the Rules, as amended by this filing, the Previous 
Filing and the Companion Filing, through June 30, 2001.
---------------------------------------------------------------------------

    \2\ Securities Exchange Act Release No. 38406 (Mar. 14, 1997), 
62 FR 13922 (Mar. 24, 1997). The Previous Filing contains a detailed 
description regarding the background and history of the Rules.
    \3\ See Securities Exchange Act Release No. 39672 (Feb. 17, 
1998), 63 FR 9034 (Feb. 23, 1998).
---------------------------------------------------------------------------

    The text of the proposed rule change is available at the Office of 
the Secretary, the Exchange, and at the Commission.

Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Previous Filing and the Companion Filing lowered certain 
reimbursement guidelines, created incentive fees to eliminate 
duplicative mailings, established a supplemental fee for intermediaries 
that coordinate multiple nominees, and established rules allowing 
householding.
    The Commission approved the Previous Filing on a pilot basis and 
established an initial expiration date of May 13, 1998. The Companion 
Filing extended the expiration date through July 31, 1998.\4\ In the 
Previous Filing, the Exchange committed to undertake an independent 
audit that would analyze the application of the modified Rules during 
the 1997 proxy season (the ``Audit''). The Exchange stated that it 
would submit the Audit to the Commission by October 31, 1997. Due to 
delays in the audit procedure, the Exchange did not deliver the Audit 
to the Commission until January, 1998.\5\
---------------------------------------------------------------------------

    \4\ In the Companion Filing, the Commission noted that the May 
13, 1998, expiration date intersected the time period when proxy 
materials traditionally are distributed to shareholders. As a 
result, NYSE member organizations potentially would have been 
reimbursed at two different rates--the rates established by the 
Previous Filing, and the rates in effect prior to the implementation 
of the Previous Filing (the default rates)--if the expiration date 
were not extended.
    \5\ A copy of the Audit is publicly available for review in File 
No. SR-NYSE-98-05 at the Commission's Public Reference Section 
located at the address specified in Item IV.
---------------------------------------------------------------------------

    In addition to its proposal to extend the pilot period through June 
30, 2001, the Exchange seeks to amend the Rules regarding householding 
to provide for the use of ``implied consent.'' This amendment would 
allow a member organization to send only one set of Materials to a 
household encompassing multiple beneficial holders if the member 
organization provided at least 60 days' notice of the proposed 
householding and the beneficial holders did not object to such 
practice.\6\
---------------------------------------------------------------------------

    \6\ The Exchange represents that its proposal is substantively 
identical to the implied consent provision set forth in the 
Commission's recent proposed rulemaking release concerning 
householding. See Securities Act Release No. 7475; Securities 
Exchange Act Release No. 39321; and Investment Company Act Release 
No. 22884 (Nov. 13, 1997), 62 FR 61933 (Nov. 20, 1997). The rules 
currently permit NYSE members to household annual reports, interim 
reports, proxy statements, and other materials where the beneficial 
holders have provided actual consent. However, it should be noted 
that the Commission's proposed rule only would allow the 
householding of prospectuses, annual reports, and semiannual reports 
if the consent (actual or implied) of beneficial holders was 
obtained.
---------------------------------------------------------------------------

    As to the extension of the pilot period through June 30, 2001,\7\ 
the Exchange believes that the Audit indicates the reimbursement fees 
implemented during the pilot period are reasonable. However, the 
Exchange believes that additional experience with the pilot period fee 
structure would be useful before determining whether to seek permanent 
approval of such fee structure or to propose additional amendments. The 
Exchange contends that a three-year extension would provide that 
experience, while also providing the market with sufficient certainty 
that the current rules will be available for a reasonable period of 
time. The Exchange believes such certainty is necessary to allow market 
participants to invest in the infrastructure necessary to support the 
proxy communication process.
---------------------------------------------------------------------------

    \7\ In connection with the Exchange's request for a thirty-five 
month extension of the pilot reimbursement guidelines, the 
Commission notes that the Exchange has committed to undertake an 
independent audit of the revised fee structure during the 1998 proxy 
season. Conversation between James E. Buck, Senior Vice President 
and Secretary, Exchange, and Sharon M. Lawson, Senior Special 
Counsel, Division of Market Regulation, Commission, March 18, 1998.
---------------------------------------------------------------------------

    In its order approving the Previous Filing, the Commission stated 
that it was then appropriate for the Exchange to propose specific rates 
of reimbursement. However, the Commission went on to recommend that the 
Exchange, issuers, and broker-dealers develop and approach that would 
foster competition in this area. The Commission also suggested that the 
Exchange and other self-regulatory organizations (``SOR's'') ``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 Exchange appreciates the Commission's concerns. However, the 
Exchange believes it is unlikely that competition will develop to the 
extent necessary to relieve the Exchange of its role in establishing 
reimbursement guidelines. for example, within the last year, three 
large NYSE member organizations contracted with the industry leader, 
ADP Financial Information Services, Inc. (``ADP''), to handle the 
mailing of Materials, rather than continuing to process such mailings 
through in-house operations.\8\ While the Exchange certainly would 
encourage competition in this industry, the Exchange believes that 
experience indicates that the proxy communication process benefits from 
the economies of scales and uniform procedures that arise when most 
mailings are coordinated through a single entity.
---------------------------------------------------------------------------

    \8\ The NYSE member organizations are: Merrill Lynch, Pierce, 
Fenner & Smith, Inc.; Paine Webber Incorporated; and Prudential 
Securities Incorporated. The Audit states that of the sixty-nine 
NYSE member organizations that responded to the Audit-Related 
survey, ninety-three percent indicated they subcontract their proxy 
distribution responsibilities to ADP. It should be noted that this 
rate of subcontracting does not include the three NYSE member 
organizations named above.

---------------------------------------------------------------------------

[[Page 14747]]

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirement under Section 6(b)(5) of the Act \9\ that an exchange 
maintain rules that are designed to prevent fraudulent and manipulative 
acts and practices; promote just and equitable principles of trade; 
foster cooperation and coordination with persons engaged in regulating, 
clearing settling, processing information with respect to, and 
facilitating transactions in securities; remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system; and, in general, protect investors and the public interest.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change does not impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on the proposed rule change. Nor has the Exchange received any 
unsolicited written comments from members or other interested parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the exchange consents, the Commission will:
    (A) By order approved the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. The Commission generally solicits 
comment on the questions set forth below to facilitate its independent 
determination as to whether the new fee structure: (1) provides for the 
equitable allocation of reasonable fees among NYSE-listed companies and 
NYSE member firms, consistent with Section 6(b)(4) of the Act; (2) 
conforms 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; and (3) imposes fees that are 
``reasonable'' within the meaning of Rules 14a-13, 14b-1, and 14b-2 
under Sections 14(a) and 14(b) of the Act. The Commission notes that 
Rules 14a-13, 14b-1, and 14b-2 require registered broker-dealers, banks 
and other covered nominees to deliver proxy materials, annual reports 
and other corporate communications to street-name security holders. 
These rules are meant to ensure, among other things, that public 
companies reimburse these nominees, upon request, for ``reasonable 
expenses'' incurred in delivering such communications.
    At stated in the Previous Filing, the Commission has reached no 
final resolution of the issues noted by commenters. The Commission will 
continue to closely examine the impact of the revised proxy fee 
reimbursement guidelines on NYSE-listed companies and NYSE member 
firms. Because the Audit did not analyze recent developments such as 
the shifting of proxy distribution activities to ADP from three of four 
self-distributing broker-dealers, and ADP's Internet proxy delivery and 
voting mechanism, the Commission solicits specific comment on the 
following questions: (1) ADP introduced its Internet delivery and 
voting services after the fee structure was approved on a pilot basis 
on March 14, 1997. Accordingly, the Commission solicits comment 
regarding the itemized fees that ADP charges issuers for Internet proxy 
delivery and voting services. In addition, should the processing fee 
that relates to the mailing of materials in paper format (which the 
Exchange recently reduced from $0.55 to $0.50 per basic proxy package) 
be modified to reflect the actual costs of electronic delivery? (2) Is 
the incentive fee ($0.50 per mailing eliminated) necessary or 
appropriate, in whole or part, now that ADP is offering the Internet as 
a vehicle for delivery of proxy materials and other corporate 
communications to street-name holders? (3) Is the proposed thirty-five 
month extension of the pilot more appropriate than a longer or shorter 
period? (4) Are issuers with small but diffuse shareholder bases 
realizing the same benefits from ADP's nominee coordination activities 
as larger issuers whose securities are widely owned but more 
concentrated in the accounts of nominees? (5) Does the $20 nominee 
coordination fee have a disproportionate impact on smaller issuers?
    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 submissions, all 
subsequent amendments, all written statements with respect to the 
proposed rule change that are filed with the Commission, and all 
written communications relating to the proposed rule change between the 
Commission and any persons, 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 in 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-98-05 and should be submitted by April 16, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-7918 Filed 3-25-98; 8:45 am]
BILLING CODE 8010-10-M