[Federal Register Volume 65, Number 233 (Monday, December 4, 2000)]
[Notices]
[Pages 75751-75754]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30721]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43603; File No. SR-NYSE-00-36]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 to the Proposed Rule Change by the New York Stock 
Exchange, Inc. Extending the Pilot Fee Structure Governing the 
Reimbursement of Member Organizations for Costs Incurred in the 
Transmission of Proxy and Other Shareholder Communication Materials and 
Amending the Components of Coordination Activities

November 21, 2000.

I. Introduction

    On August 11, 2000, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or

[[Page 75752]]

``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 extend the pilot fee structure governing the 
reimbursement of member organizations for costs incurred in the 
transmission of proxy and other shareholder communication materials and 
to amend the list of coordination services an intermediary must perform 
to collect the $20.00 nominee coordination fee. The proposed rule 
change was published in the Federal Register on August 23, 2000.\3\ The 
Commission received one comment letter on the proposed rule change.\4\ 
On October 20, 2000, the Exchange submitted Amendment No. 1 to the 
proposed rule change.\5\ This order approves the amended proposed rule 
change, including Amendment No. 1 on an accelerated basis through 
September 1, 2001. The Commission is also soliciting comment on 
Amendment No. 1 to the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 43159 (August 16, 2000), 
65 FR 51384 (``Proposal'').
    \4\ See letter from T. Peter Townsend, Vice President, Investor 
Relations, Secretary, Exxon Mobil Corp., to Secretary, SEC, dated 
September 13, 2000.
    \5\ See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Sharon Lawson, Senior Special Counsel, Office of 
Market Supervision, Division of Market Regulation, SEC, dated 
October 18, 2000 (``Amendment No. 1''). In Amendment No. 1, the 
Exchange amended the language of the nominee coordination fee 
provision to more clearly articulate what services an intermediary 
is expected to perform to earn the $20.00 coordination fee.
---------------------------------------------------------------------------

II. Background

    NYSE member organizations that hold securities for beneficial 
owners in street name solicit proxies from, and deliver proxy and 
issuer communications to, beneficial owners on behalf of NYSE-listed 
companies.\6\ For this service, NYSE issuers reimburse NYSE member 
organizations for reasonable out-of-pocket, clerical, postage, and 
other expenses incurred in performing such activities. The 
reimbursement of NYSE member organizations by NYSE issuers is governed 
by NYSE rules.\7\ Today, many NYSE member organizations outsource their 
proxy delivery obligations to proxy distribution intermediaries. 
Currently, one intermediary handles the majority of the proxy 
distribution business, Automatic Data Processing, Inc. (``ADP'').
---------------------------------------------------------------------------

    \6\ The ownership of shares in street name means that a 
shareholder, or ``beneficial owner,'' has purchased shares through a 
broker-dealer or bank, also known as a ``nominee.'' In contrast to 
direct ownership, where the shares are directly registered in the 
name of the shareholder, shares held in street name are registered 
in the name of the nominee, or in the nominee name of a depository, 
such as the Depository Trust Company.
    \7\ See NYSE Rules 451, ``Transmission of Proxy Material,'' and 
465 ``Transmission of Interim Reports and other Materials.'' In 
addition, the text of NYSE Rule 451 also is included at Paragraph 
402.10(A) of the Exchange's Listed Company Manual (collectively 
``Rules'').
---------------------------------------------------------------------------

    Currently, the Exchange has a pilot fee structure (``Pilot Fee 
Structure'') set forth in its Rules that governs the reimbursement of 
expenses by NYSE issuers to NYSE member organizations for processing 
and delivering proxy materials and other issuer communications 
(collectively ``Materials'') with respect to security holders whose 
securities are held in street name. Among other things, the Pilot Fee 
Structure sets certain guidelines concerning the reimbursement of fees 
for the distribution of Materials, creates incentive fees to eliminate 
duplicative mailings, and establishes a supplemental fee for 
intermediaries that coordinate multiple nominees.\8\ The Pilot Fee 
Structure has been modified and extended several times,\9\ most 
recently until November 20, 2000.\10\
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 38406 (March 14, 
1997), 62 FR 13922 (March 24, 1997). The Commission originally 
approved the Pilot Fee Structure for a one-year period, expiring on 
May 13, 1998. See note 9 infra for additional extensions and changes 
to the original pilot.
    \9\ See Securities Exchange Act Release Nos. 39672 (February 17, 
1998), 63 FR 9034 (February 23, 1998) (order extending Pilot Fee 
Structure through July 31, 1998, and lowering the rate of 
reimbursement for mailing each set of initial proxies and annual 
reports from $.55 to $.50); 40289 (July 31, 1998), 63 FR 42652 
(August 10, 1998) (order extending Pilot Fee Structure through 
October 31, 1998); 40621 (October 30, 1998), 63 FR 60036 (November 
6, 1998) (order extending Pilot Fee Structure through February 12, 
1999); 41044 (February 11, 1999), 64 FR 8422 (February 19, 1999) 
(order extending Pilot Fee Structure through March 15, 1999); 41177 
(March 16, 1999), 64 FR 14294 (March 24, 1999) (order extending 
Pilot Fee Structure through August 31, 1999); 41669 (July 29, 1999), 
64 FR 43007 (August 6, 1999) (order extending Pilot Fee Structure 
through November 1, 1999); 42086 (November 1, 1999), 64 FR 60870 
(November 8, 1999) (order extending Pilot Fee Structure through 
January 3, 2000); 42304 (December 30, 1999), 65 FR 1212 (January 7, 
2000) (order extending Pilot Fee Structure through February 15, 
2000); 42433 (February 16, 2000), 65 FR 10137 (February 25, 2000) 
(order extending the Pilot Fee Structure through September 1, 2000); 
and 43151 (August 14, 2000), 65 FR 51382 (August 23, 2000) (order 
extending the Pilot Fee Structure through October 10, 2000).
    \10\ See Securities Exchange Act Release No. 43429 (October 10, 
2000), 65 FR 62781 (October 19, 2000).
---------------------------------------------------------------------------

    In February 2000, the Exchange proposed extending the Pilot Fee 
Structure through September 1, 2000.\11\ At that time, the Commission 
requested that the Exchange and ADP provide the Commission with 
descriptions and analysis of the fees permissible under the Pilot Fee 
Structure. In response, the Exchange submitted the Proposal and ADP 
submitted a letter to the Commission.\12\
---------------------------------------------------------------------------

    \11\ Securities Act Release No. 4243 (February 16, 2000), 65 FR 
10137 (February 25, 2000).
    \12\ See letter from Richard J. Daly, Group Co-President, ADP, 
to Jonathan G. Katz, Secretary, SEC, dated June 28, 2000.
---------------------------------------------------------------------------

III. Description of the Proposal

    In the Proposal, the Exchange has requested that the Pilot Fee 
Structure be extended through September 1, 2001.
    In addition, the Proposal would amend the functions that an 
intermediary is expected to perform to recover the nominee coordination 
fee.\13\ Specifically, the Proposal contains detailed descriptions of 
the minimum services that must be provided by an intermediary that 
coordinates the delivery and processing of proxies across multiple 
nominees. For example, the Proposal specifies that an intermediary must 
coordinate the search of nominees and beneficial owners by: (1) 
Searching for all nominees that are clients of the intermediary; (2) 
obtaining beneficial ownership lists from nominee clients; (3) 
consolidating nominees' responses to an issuer's requests for the 
number of beneficial owner customers of the nominee clients; and (4) 
providing the names and addresses of nominee clients when requested by 
an issuer pursuant to Rule 14a-13(a)(1)(D) under the Act.\14\ In 
addition, intermediaries collecting the coordination fee will be 
required to (1) accept issuers' proxies at a single location and 
prepare such proxies across multiple nominees for distribution to 
beneficial owners, including packaging, if necessary; (2) transmit 
issuers' proxy materials by making effective use of bulk mail 
opportunities; (3) receive and tabulate vote responses; and (4) provide 
vote reports across multiple nominees.\15\

[[Page 75753]]

Finally, intermediaries must submit consolidated invoices to issuers 
for the processing of proxies on behalf of multiple nominees.\16\
---------------------------------------------------------------------------

    \13\ There is some overlap of the functions that an intermediary 
needs to perform to collect the proxy mailing fee and the nominee 
coordination fee. For example, under the Commission's rules, an 
intermediary is required to respond to an issuer's request for the 
number of beneficial owners served by the intermediary and forward 
issuer proxy materials to the beneficial owners, even if the 
intermediary is not coordinating these functions on behalf of 
multiple nominees. Intermediaries also traditionally have received 
and tabulated vote responses from beneficial owners and provided 
vote reports to the issuer in return for the proxy mailing fee. The 
proposed rule change is not intended to change existing practices or 
fee allocation in this regard. The listed functions are relevant to 
the nominee coordination fee only to the extent that an intermediary 
performs them on behalf of multiple nominees.
    \14\ 17 CFR 240.14a-13(a)(1)(D).
    \15\ The intermediary must provide a vote report, consolidated 
across multiple nominee clients no less than 10 days before the 
shareholder meeting. Thereafter, the intermediary must provide 
updated consolidated vote reports each day before the shareholder 
meeting. On the day before the shareholder meeting, the intermediary 
must provide two vote reports consolidated across multiple clients. 
Finally, on the day of the shareholder meeting, the intermediary 
must provide a final vote report consolidated across multiple 
nominee clients.
    \16\ In the Proposal, the Exchange clarified that the list of 
coordination activities that an intermediary must perform was not 
intended to be exclusive. By setting forth the list of coordination 
activities in the Rules, the Exchange intended to add a level of 
specificity to provide both intermediaries and issuers with notice 
as to the minimum services that an intermediary is expected to 
perform.
---------------------------------------------------------------------------

IV. Summary of Comments

    The Commission received one comment letter on the Proposal.\17\ The 
commenter argued that the Pilot Fee Structure is not competitive and 
ultimately is costly to shareholders. The commenter suggested that the 
fee for mailing issuer materials be reduced from $0.50 to $0.25 per 
mailing to make it consistent with similar services for registered 
shareholders. The commenter argued that the current $0.50 mailing fee 
does not reflect continued technological improvements that have lowered 
costs. According to the commenter, this reduction could be recovered in 
the $0.50 elimination fee and $20.00 nominee coordination fee. Further, 
the commenter requested that intermediaries be required to provide 
annual justification of their costs that would be subject to an 
independent review. Finally, the commenter suggests the use of a 
sliding scale based on volume or a cap on total proxy fees paid by 
large issuers. In support of this, the commenter states that the 
current flat fee structure fails to take into account economies 
resulting from large shareholder bases.
---------------------------------------------------------------------------

    \17\ See note 4 supra.
---------------------------------------------------------------------------

V. Discussion

    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, with the requirements of Section 6(b) \18\ of the Act.\19\ 
Section 6(b)(4) of the Act \20\ requires that exchange rules provide 
the equitable allocation of reasonable dues, fees, and other charges 
among its members, issuers, and other persons using the facilities of 
an exchange. Section 6(b)(5) of the Act \21\ requires, among other 
things, that the rules of an exchange be designed to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, processing information 
with respect to, and facilitating transactions in securities, and in 
general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78f(b).
    \19\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition and capital formation. 15 
U.S.C. 78c(f).
    \20\ 15 U.S.C. 78f(b)(4).
    \21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has decided to extend the pilot through September 1, 
2001. The Commission believes that this time frame will permit further 
consideration by market participants and the Commission of the proxy 
fee structure.\22\
---------------------------------------------------------------------------

    \22\ See Securities Exchange Act Release No. 41177 (March 16, 
1999), 64 FR 14294 (March 24, 1999) for a complete description of 
the Pilot Fee Structure and the Commission's basis for approval, 
which is incorporated herein.
---------------------------------------------------------------------------

    The Commission also believes that the components of the nominee 
coordination fee are consistent with the requirements of the Act. 
Currently, the Rules only require that an intermediary provide an 
issuer with the names and address of the nominees in response to the 
issuer's request and transmit the issuer's proxies to beneficial 
owners. The Proposal provides more specific information as to the 
services an intermediary is expected to perform, at a minimum, in order 
to collect the $20.00 nominee coordination fee. The Commission believes 
that clarifying the minimum services to be provided by intermediaries 
and specifying these in the Rules will provide market participants, 
including issuers, with more complete information about the scope of 
the fees charged and services provided by intermediaries.
    The Commission notes that, under the NYSE Proposal, the list of 
services that an intermediary is required to provide for collecting the 
$20.00 nominee coordination fee is not exclusive. The list is 
considered the minimum services required to be performed for collection 
of the coordination fee and should be helpful to issuers by providing 
them with information on the services being provided for the fees they 
are paying. The Commission also believes that the additional 
specificity in the rule on the minimum requirements to collect the 
$20.00 coordination fee should help to address some of the concerns 
that have been raised since the inception of the Pilot Fee Structure.
    As noted above, there is one intermediary, ADP that provides the 
majority of proxy and issuer communication delivery services. Thus, 
there is a lack of competitive market forces to dictate appropriate 
fees for services. The Commission believes that until an approach can 
be developed that would foster competition in the proxy distribution 
industry so that market forces could determine reasonable expenses for 
services, that it is appropriate for the Exchange to specify rates of 
reimbursement for NYSE member organizations that distribute Materials 
to beneficial owners on behalf of NYSE issuers.
    The Commission received one comment letter in response to the 
proposed rule change.\23\ The commenter argued that the Pilot Fee 
Structure is not competitive and ultimately costly to shareholders and 
therefore, the commenter believed that certain mailing fees should be 
reduced. The commenter also raised concerns that the fee structure does 
not reflect economies of scale from issuers with a large shareholder 
base.
---------------------------------------------------------------------------

    \23\ See note 4 supra.
---------------------------------------------------------------------------

    The Commission, as noted above, also continues to be concerned 
about the lack of competitive forces driving the fees charged for the 
delivery and processing of issuer Materials and that is one of the main 
reasons why the Commission has decided to continue to approve the Rules 
on a pilot basis. The Commission hopes that market participants will 
further consider other more competitive approaches to establishing 
reasonable fees for distributing issuer Materials. The Commission 
believes that competitive market forces would best dictate reasonable 
fees. However, in the absence of such a competitive scheme, the 
Commission believes that it is appropriate for the minimum fees to be 
governed by NYSE Rules. The Commission also will continue to consider 
the appropriateness of the fees over the course of the pilot.
    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 in the Federal Register. In Amendment No. 1, the Exchange 
merely added clarifying language to the text of the proposed Rules. The 
substance of the minimum services expected to be provided by an 
intermediary in order to earn the nominee coordination fee was not 
changed. Therefore, because the substance of the Rules was not amended 
and the Proposal was subject to notice and comment by interested 
persons, the Commission believes that good cause exists pursuant to 
Sections 6(b)(5) \24\ and 19(b) \25\ of the Act to accelerate approval

[[Page 75754]]

of Amendment No. 1 to the proposed rule change.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f(b)(5).
    \25\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
is consistent with the Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. Copies 
of the submission, 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 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 in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NYSE. All submissions should refer to File No. SR-NYSE-00-36 and should 
be submitted by December 26, 2000.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
\26\ that the proposed rule change (SR-NYSE-00-36), as amended, is 
approved through September 1, 2001.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78s(b)(2).
    \27\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \27\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-30721 Filed 12-1-00; 8:45 am]
BILLING CODE 8010-01-M