[Federal Register Volume 67, Number 62 (Monday, April 1, 2002)]
[Notices]
[Pages 15440-15445]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7781]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45644; File No. SR-NYSE-2001-53]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 Thereto by the New York Stock Exchange, Inc. 
Amending Its Rules Regarding the Transmission of Proxy and Other 
Shareholder Communication Material and the Proxy Reimbursement 
Guidelines Set Forth In Those Rules, and Requesting Permanent Approval 
of the Amended Proxy Reimbursement Guidelines

March 25, 2002.

I. Introduction

    On December 21, 2001, the New York Stock Exchange, Inc. (``NYSE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend the NYSE's proxy fee 
schedule guidelines under its current pilot program, and to seek 
permanent approval of the pilot program. On January 9, 2002, the NYSE 
filed Amendment No. 1 to the proposed rule change.\3\ The proposed rule 
change and Amendment No. 1 were published in the Federal Register on 
January 16, 2002.\4\ Eight comments were received on the proposed rule 
change, as amended.\5\ The NYSE responded to the comments on March 5, 
2002.\6\ This order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Sharon Lawson, Senior Special Counsel, Division of Market 
Regulation (``Division''), Commission, dated January 7, 2002 
(``Amendment No. 1''). In Amendment No. 1, the Exchange made some 
technical and clarifying corrections to the proposed rule change.
    \4\ See Securities Exchange Act Release No. 45263 (January 9, 
2002), 67 FR 2264.
    \5\ See letters from Paul Conn, Executive Vice President, 
Computershare Limited, and Steven Rothbloom, President, 
Computershare Investor Services (US), to Secretary, Commission, 
dated February 6, 2002 (``Computershare Letter''); Rachel E. Kosmal, 
Senior Attorney, Intel Corporation, D. Craig Nordlund, Senior Vice 
President, General Counsel and Secretary, Agilent Technologies, 
Inc., and Keith Dolliver, Senior Attorney, Microsoft Corporation, to 
Secretary, Commission, dated February 6, 2002 (``Intel et al. 
Letter''); Keith G. Berkheimer, President, CTA, to Secretary, 
Commission, dated February 6, 2002 (``CTA Letter''); Carl T. Hagberg 
to Secretary, Commission, dated February 4, 2002 (``Hagberg 
Letter''); David W. Smith, American Society of Corporate Secretaries 
(``ASCS''), to Jonathan G. Katz, Secretary, Commission, dated 
February 7, 2002 (``ASCS Letter''); Peter C. Suhr, Executive Vice 
President, Alamo Direct, to Secretary, Commission, dated February 1, 
2002 (``Alamo Direct Letter''); Elva Gonzalez, Corporate Manager, 
Shareowner Services, SBC Communications, to [email protected], 
Commission, dated February 8, 2002 (``SBC Communications Letter''); 
and Sarah A.B. Teslik, Executive Director, Council of Institutional 
Investors (``CII''), to Secretary, Commission, dated February 7, 
2002 (``CII Letter'') (collectively, ``Letters'').
    \6\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Sharon Lawson, Senior Special Counsel, Division, Commission, 
dated March 4, 2002 (responding to the comment letters received 
regarding the proposed rule change) (``NYSE Response Letter'').
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II. Background

    NYSE member organizations that hold securities for beneficial 
owners in street name \7\ solicit proxies from, and deliver proxy and 
issuer communication materials to, beneficial owners on behalf of NYSE 
issuers. For this service, issuers reimburse NYSE member organizations 
for out-of-pocket, reasonable clerical, postage and other expenses 
incurred for a particular distribution, pursuant to guidelines for 
reimbursement of these expenses as set forth in NYSE Rules 451 and 465, 
and Paragraph 402.10(A) of the NYSE's Listed Company Manual, 
(collectively ``Rules'').\8\
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    \7\ The ownership of shares in street name means that a 
shareholder, or ``beneficial owner,'' has purchased shares through a 
broker-dealer or bank, also known as a ``nominee.'' In contrast to 
direct ownership, where shares are directly registered in the name 
of the shareholder, shares held in street name are registered in the 
name of the nominee, or in the nominee name of a depository, such as 
the Depository Trust Company.
    \8\ The Commission's proxy rules, Rules 14a-13, 14b-1, and 14b-2 
under the Act, impose obligations on companies and nominees to 
ensure that beneficial owners receive proxy materials and are given 
the opportunity to vote. These rules require companies to send their 
proxy materials to nominees, i.e., broker-dealers or banks that hold 
securities in street name, for forwarding to beneficial owners. 
Under these rules, companies must pay nominees for reasonable 
expenses, both direct and indirect, incurred in providing proxy 
information to beneficial owners. The Commission's rules do not 
specify the fees that nominees can charge issuers for proxy 
distribution; rather, they state that issuers must reimburse the 
nominees for ``reasonable expenses'' incurred.
    In adopting the direct shareholder communications rules in the 
early 1980s, the Commission left the determination of reasonable 
costs to the self-regulatory organizations (``SROs'') because they 
were deemed to be in the best position to make fair evaluations and 
allocations of costs associated with these rules. In 1997, during 
the initiation of the pilot on proxy fee reimbursement, see infra 
note 10, the Commission believed that ultimately market competition 
should determine ``reasonable expenses'' and recommended that 
issuers, broker-dealers, and the NYSE develop an approach that may 
foster competition in this area. Rather than having rates of 
reimbursement set by the SROs, the Commission suggested that the 
NYSE and other SROs explore whether reimbursement can be set by 
market forces, and whether this would provide a more efficient, 
competitive, and fair process than SRO standards.
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    Since the late 1960s, NYSE member firms increasingly have 
outsourced their proxy delivery obligations to contractors rather than 
handling proxy processing internally. According to the NYSE, the 
primary reason for this shift was that member firms believed proxy 
distribution was not a core broker-dealer business and that capital 
could be better used elsewhere. Since 1993, Automatic Data Processing, 
Inc. (``ADP'') has distributed close to 100 percent of all proxies sent 
to beneficial owners holding shares in street name.\9\
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    \9\ ADP is the primary distributor of proxy distribution 
services for a large majority of broker-dealers and collects fees 
from issuers based on the NYSE's Pilot Program.
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    On March 14, 1997, the Commission approved an NYSE proposal that 
significantly revised the NYSE reimbursement guidelines set forth in 
the NYSE Rules and established a pilot fee structure (``Pilot Program'' 
or ``Pilot'').\10\ Under the Pilot Program, the NYSE established 
guidelines for the amounts that NYSE issuers should reimburse member 
organizations for the distribution of proxy materials and other issuer 
communications to security holders whose securities are held in street 
name. The Pilot Program was designed to address many of the functional 
and technological changes that had occurred in the proxy distribution 
process since the NYSE Rules were last revised in 1986. The fee 
structure under the Pilot Program reduced certain fees, increased the 
fee for proxy fights, and created several new fees.\11\ The Pilot 
Program was originally

[[Page 15441]]

set to expire on May 13, 1998; however, pursuant to Commission 
extensions of its initial approval, the Pilot Program has remained in 
effect since then with some slight modifications.\12\
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    \10\ See Securities Exchange Act Release No. 38406 (March 14, 
1997), 62 FR 13922 (March 24, 1997) (File No. SR-NYSE-96-36) 
(``Original Pilot Program'').
    \11\ For a more detailed description of the background and 
history of the proxy distribution industry, proxy fees, as well as 
events leading to the NYSE's proposal to revise the NYSE Rules and 
Guideline governing reimbursement of proxy fees, see the Original 
Pilot Program, supra note 10.
    \12\ See Securities Exchange Act Release Nos. 39672 (February 
17, 1998), 63 FR 9275 (February 24, 1998) (notice of filing and 
immediate effectiveness of proposal extending Pilot Fee Structure 
through July 31, 1998, and lowering the rate of reimbursement for 
mailing each set of initial proxies and annual reports from $.55 to 
$.50); 40289 (July 31, 1998), 63 FR 42652 (August 10, 1998) (notice 
of filing and immediate effectiveness of proposal extending Pilot 
Fee Structure through October 31, 1998); 40621 (October 30, 1998), 
63 FR 60036 (November 6, 1998) (notice of filing and immediate 
effectiveness of proposal extending Pilot Fee Structure through 
February 12, 1999); 41044 (February 11, 1999), 64 FR 8422 (February 
19, 1999) (notice of filing and immediate effectiveness of proposal 
extending Pilot Fee Structure through March 15, 1999); 41177 (March 
16,1999), 64 FR 14294 (March 24, 1999) (order extending Pilot Fee 
Structure through August 31, 1999); 41669 (July 29, 1999), 64 FR 
43007 (August 6, 1999) (notice of filing and immediate effectiveness 
of proposal extending Pilot Fee Structure through November 1, 1999); 
42086 (November 1, 1999), 64 FR 60870 (November 8, 1999) (notice of 
filing and immediate effectiveness of proposal extending Pilot Fee 
Structure through January 3, 2000); 42304 (December 30, 1999), 65 FR 
1212 (January 7, 2000) (notice of filing and immediate effectiveness 
of proposal extending Pilot Fee Structure through February 15, 
2000); 42433 (February 16, 2000), 65 FR 10137 (February 25, 2000) 
(notice of filing and immediate effectiveness of proposal extending 
the Pilot Fee Structure through September 1, 2000); 43151 (August 
14, 2000), 65 FR 51382 (August 23, 2000) (notice of filing and 
immediate effectiveness of proposal extending the Pilot Fee 
Structure through October 10, 2000); 43429 (October 10, 2000), 65 FR 
62781 (October 19, 2000) (notice of filing and immediate 
effectiveness of proposal extending the Pilot Fee Structure through 
November 20, 2000); 43603 (November 21, 2000) , 65 FR 75751 
(December 4, 2000) (order extending the Pilot Fee Structure through 
September 1, 2001, and amending the functions that an intermediary 
is expected to perform to recover the nominee coordination fee); and 
44750 (August 29, 2001), 66 FR 46488 (September 5, 2001) (notice of 
filing and immediate effectiveness of proposal extending the Pilot 
Fee Structure through April 1, 2002).
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III. Description of the Proposed Rule Change

    The NYSE's current pilot fee structure, incorporated in the NYSE's 
Rules and guidelines pursuant to the Pilot Program,\13\ is set to 
expire on April 1, 2002.\14\ In this proposed rule change, as amended, 
the Exchange proposes to amend certain reimbursement fees under the 
Pilot Program and has requested permanent approval. The proposed 
amendments seek to decrease the basic mailing fees paid by large 
issuers by 5 cents (from 50 cents to 45 cents) and to cut in half (from 
50 cents to 25 cents) the incentive ``suppression'' fee that large 
issuers \15\ pay to member organizations that succeed in reducing the 
number of sets of material that need to be distributed, such as by 
sending one set of materials to a household holding multiple positions 
in the issuer's securities.\16\
    The following sets forth the background that led to the proposed 
rule change, as provided by the NYSE in its filing.
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    \13\ Supplementary Material .90 to Exchange Rule 451 applies the 
guidelines to the transmission of proxy materials to shareholders. 
Supplementary Material .20 to Exchange Rule 465 applies them to the 
transmission of other materials to shareholders. In addition, 
Paragraph 402.10(A) of the NYSE's Listed Company Manual includes the 
text of Supplementary Material .90 to Exchange Rule 451 and the 
Exchange proposes to conform Paragraph 402.10(A) to the changes 
described below to Exchange Rule 451.
    \14\ See Securities Exchange Act Release No. 44750 (August 29, 
2001), 66 FR 46488 (September 5, 2001) (File No. SR-NYSE-2001-22).
    \15\ The Exchange defines large issuers as issuers whose shares 
are held in at least 200,000 nominee accounts.
    \16\ See Supplementary Material .95 (``Householding'' of 
Reports) to Exchange Rule 451 and Supplementary Material .25 
(``Householding'' of Reports) to Exchange Rule 465.
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A. Permanent Approval

    Over the last year, the NYSE has participated on the Proxy Voting 
Review Committee (the ``Committee''), a private initiative that was set 
up to review the proxy process. It includes SROs, representatives of 
the securities industry, corporate issuers, and institutional 
investors, as well as ADP, the largest provider of proxy intermediary 
services. In a letter to Richard Grasso, the Chairman of the Committee 
stated that the purpose of the Committee was to (i) consider the 
appropriateness of the current pilot proxy fee schedule, and to (ii) 
develop a deregulated structure that would allow for broader 
competition.\17\
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    \17\ See letter to Richard A. Grasso, Chairman and Chief 
Executive Officer, NYSE, from Stephen P. Norman, Chairman, 
Committee, dated November 28, 2001 (the ``Committee Letter''). A 
copy of the Committee Letter is attached as Exhibit C to the 
Exchange's proposed rule change.
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    According to the NYSE, the Committee's experience gained from the 
Pilot Program convinced the Committee that the guidelines have been 
instrumental in setting at fair and reasonable levels the costs that 
issuers incur in having member organizations and intermediaries 
transmit proxy and other materials to security holders. For that 
reason, the Committee unanimously voted, with one abstention,\18\ to 
recommend that the NYSE seek permanent approval of the Pilot Program 
guidelines, as modified by this proposed rule change. As a result, the 
Exchange filed this proposed rule change, which incorporates the 
Committee's recommendations and requests permanent approval of the 
Pilot Program, which is scheduled to end on April 1, 2002.
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    \18\ The National Association of Securities Dealers, Inc., 
abstained from voting.
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B. Guideline Changes

    In addition to seeking permanent approval of the Pilot Program 
guidelines, the Exchange proposes the following amendments to its Rules 
and guidelines:
    (i) Reduce the suggested rate of reimbursement for initial mailings 
of each set of material (i.e., proxy statement, form of proxy, and 
annual report when mailed as a unit) from 50 cents to 40 cents.
    (ii) Increase the suggested per-nominee fee for intermediaries that 
coordinate the proxy and mailing activities of multiple nominees. The 
nominee coordination fee is currently $20 per nominee. The proposal 
would raise it by 10 cents per set of material required for ``Small 
Issuers,'' defined as issuers whose shares are held in fewer than 
200,000 nominee accounts, or 5 cents per set of material required for 
``Large Issuers,'' defined as issuers whose shares are held in at least 
200,000 nominee accounts.
    (iii) Reduce from 50 cents to 25 cents the incentive fee for 
initial mailings of the materials of Large Issuers. As a result, the 
incentive fee for Large Issuers will decrease by 25 cents and the 
incentive fee for Small Issuers will remain at 50 cents.
    The Exchange represents that the net effect of clauses (i) and (ii) 
is to decrease the effective mailing fee by 5 cents for Large Issuers, 
but not for Small Issuers. ADP projected for the Committee that the 
combination of that decrease and the decrease in the incentive fee for 
Large Issuers will decrease the total fees that issuers pay to have 
materials distributed to shareholders by almost $11 million.\19\ The 
NYSE relied on this projection to support its proposal.
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    \19\ See supra note 17.
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    The NYSE Rules and guidelines currently subject Small Issuers and 
Large Issuers to the same rates. According to the NYSE, the Committee 
designed the proposed revamped fee schedule to allocate more fairly the 
costs of distributing proxy and other material between Large Issuers 
and Small Issuers. The Committee's, and ultimately the NYSE's, proposal 
is based on the premise that economies of scale create overall per-
account cost savings for Large Issuers and that those savings justify 
lower fees for Large Issuers. Based on this, the Exchange believes that 
reducing the rates applicable to Large Issuers relative to the rates

[[Page 15442]]

applicable to Small Issuers is fair, reasonable, and appropriate.\20\
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    \20\ The Committee expressed its support for the proposed fee 
changes in the Committee Letter. See Exhibit C to the Exchange's 
proposed rule change.
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    According to the Exchange, the difference between Large and Small 
Issuers is based on the recognition that a member organization 
typically spends less in transmitting material to the nominee account 
of a Large Issuer than in transmitting material to the nominee account 
of a Small Issuer because economies of scale apply to many of the tasks 
of processing material for distribution, and of collecting voting 
instructions. For instance, the NYSE represents that processing search 
dates and record dates, logging receipt of materials, coding proxies, 
reporting voting results, and invoicing fees payable involve costs that 
are essentially fixed. As a result, the NYSE believes that the per-
account cost for these tasks decreases in relation to the number of 
accounts in which the issuer's shares are held. Consequently, the NYSE 
believes that the per-account cost is therefore lower with respect to a 
Large Issuer than with respect to a Small Issuer.
    In addition, according to the NYSE, modern data processing and 
mailing techniques reduce the amount of human intervention involved in 
the process, driving down the actual per-account cost of handling 
mailings in large volume. The NYSE notes that the Committee found that 
the actual cost incurred with respect to Large Issuers in handling 
mailings was lower than the reimbursable amount that results from 
adherence to the current NYSE guidelines. On the other hand, the 
Committee found the actual cost of handling mailings for Small Issuers 
far exceeded the fees set forth in the current NYSE guidelines.\21\ The 
Exchange believes that these factors justify reducing the incentive fee 
from 50 cents to 25 cents for Large Issuers, but not reducing the 
50 cents fee for Small Issuers. They also justify the 5 cents 
difference in the per-set-of-material per-nominee fee for Large Issuers 
and Small Issuers.
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    \21\ The Exchange notes that the Committee found that handling 
costs for Large Issuers are lower than for Small Issuers, due 
primarily to economies of scale. The NYSE represents that ADP 
presented information to the Committee that detailed the costs that 
issuers pay for registered proxy processing. The Exchange notes that 
the information provided by ADP indicated that the per-unit costs 
that Small Issuers pay are, on average, more than 10 times greater 
than the per-unit costs that Large Issuers pay.
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    In applying the proposed revamped fee schedules to the NYSE Rules 
and guidelines, the NYSE decided to establish a line of demarcation 
that separates Large Issuers from Small Issuers in accordance with the 
Committee's recommendations. Under the NYSE's proposal, an issuer 
having 200,000 nominee accounts would qualify as a Large Issuer. As a 
result, the NYSE believes only the largest issuers, currently fewer 
than 200 overall, fall within that definition. The NYSE represents that 
beneficial owners' positions in shares of those Large Issuers account 
for approximately 50 percent of the number of positions that all 
beneficial owners maintain in the shares of all issuers. The Exchange 
therefore adopted the 50 percent mark as an appropriate place at which 
to draw the line.
    The Exchange further states in its proposal that it views the fee-
setting process as an ongoing matter. The Exchange represents that even 
if the Commission grants permanent approval to the proposed fee 
reductions under the guidelines, the Exchange intends to continue to 
meet with the Committee to evaluate and fine tune the guidelines and to 
consider possible approaches to broader reform of the proxy 
distribution system.

IV. Summary of Comments

    The Commission received eight comment letters in response to the 
propose rule change, as amended,\22\ the majority of which supported 
the approval of the proposed rule change.\23\ In general, these 
commenters believed that the proposed fee reductions would give some 
immediate relief to large issuers. One commenter stated that the 
proposed fee changes were a good first step.\24\ Another commenter 
stated that the proposed rule change should be approved immediately and 
enacted for the 2002 proxy season.\25\ Only one commenter stated that 
the proposed rule change should not be approved on a permanent basis 
because the proposed fee reductions do not address the issue of 
competition in the proxy process.\26\
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    \22\ See Letters, supra note 5.
    \23\ See Computershare Letter; Intel et al. Letter; CTA Letter; 
Hagberg Letter; ASCS Letter; SBC Communication Letter; and CII 
Letter, supra note 5. ASCS stated that it is pleased with the 
proposed fee reduction to the fee sharing agreement between ADP and 
brokers.
    \24\ See SBC Communications Letter, supra note 5.
    \25\ See CTA Letter, supra note 5.
    \26\ See Alamo Letter, supra note 5.
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    Several commenters, although urging approval of the current 
proposal, were critical of the current proxy fee structure, and also 
raised concerns regarding the need for competition in the proxy 
distribution system and the issuer's ability to choose service 
providers.\27\ These commenters urged continuing review of the proxy 
fee structure. Two commenters suggested a review of fees in a 
deregulated proxy distribution system, stating that prices might be 
lower if competition and market forces (rather than regulators) 
determined fees.\28\ In addition, one commenter, while supporting 
approval, noted that the guidelines have not been measured against 
market-based rates, which are significantly lower than those being 
proposed.\29\ In addition, one comment letter, jointly sent by three 
issuers, was critical of the lack of issuer control over service 
providers for distribution of proxy and other materials to beneficial 
holders whose shares are held in street name, noting that on the 
registered side, issuers have the right to choose service providers at 
a much lower cost.\30\
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    \27\ See Computershare Letter; Intel et al. Letter; CTA Letter; 
Hagberg Letter; ASCS Letter; and Alamo Direct Letter, supra note 5.
    \28\ See Computershare Letter; and ASCS Letter, supra note 5.
    \29\ See Hagberg Letter, supra note 5. The Hagberg Letter also 
stated the NYSE's proposal fails to address the ``indirect'' income 
that ADP is collecting by retaining half of the savings in postage 
from routine bar-coding and sorting procedures. Furthermore, the 
Hagberg Letter commented that the proposal failed to provide a 
``sunset provision'' for incentive fees, stating that the work 
involved to eliminate mailings is done once and done automatically 
through computer programs. Hagberg had previously written a letter 
to the NYSE in 1996 providing suggestions for a more competitive 
proxy system (which is attached as Exhibit I to the Hagberg Letter).
    \30\ See Intel et al. Letter, supra note 5. The Intel et al. 
Letter also stated that the impact of the proposed fee reductions on 
banks and brokers, which receive a portion of the fees paid by 
issuers to the service provider, is appropriate.
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    Concerns were also raised by three commenters about the composition 
of the Committee, who noted that not all parties affected by this 
proposed fee reduction were represented on the Committee.\31\ Some 
commenters stated that a more independent ``formally-sanctioned'' 
committee with official standing and of balanced representation, rather 
than a private initiative, was needed to further evaluate proxy 
issues.\32\ Other commenters wanted to participate on any future 
committee formed to address other concerns regarding the proxy 
distribution system.\33\
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    \31\ See CTA Letter; Hagberg Letter; and Alamo Direct Letter, 
supra note 5. The Alamo Letter stated that ADP was not a ``neutral'' 
party and that a third party, not ADP, should have evaluated certain 
pricing scenarios.
    \32\ See CTA Letter; Hagberg Letter; and ASCS Letter, supra note 
5.
    \33\ See Computershare Letter; CTA Letter; and Alamo Direct 
Letter, supra note 5.
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    In addition, two commenters addressed the 200,000 nominee accounts 
cut-off that distinguishes

[[Page 15443]]

between large and small issuers for purposes of the proposed fee 
reduction, stating that the cut-off was arbitrary and without any 
factual economic backing.\34\
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    \34\ See CTA Letter and Hagberg Letter, supra note 5. The CTA 
Letter further stated that it supported a multi-tiered pricing 
system and that the fee structure should not only apply to NYSE 
issuers, but to all issuers.
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    One commenter suggested an overall 10 cents reduction from the 
basic mailing fee rather than a 5 cents reduction for large 
issuers.\35\ The commenter also stated that the fees should not be 
greater than those paid by issuers on the registered side.
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    \35\ See SBC Communications Letter, supra note 5.
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    Finally, one commenter, while supporting the proposal, urged the 
Commission to require the NYSE in its ongoing review to obtain and 
evaluate financial information of the proxy distribution firms and 
review ADP's fee sharing arrangements with brokers, which suggest the 
fees may be too generous.\36\
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    \36\ See CII Letter, supra note 5. The CII Letter urged the 
Commission to require the NYSE to study its pricing structure on a 
regular basis and to publicly disclose the findings of these regular 
reviews. See also Intel et al. Letter, supra note 5.
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    Separately, certain members of the Committee submitted letters to 
the NYSE endorsing the Committee's recommendations and proposed fee 
reductions, as well as permanent approval of the NYSE's Pilot 
Program.\37\
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    \37\ See letter to Richard A. Grasso, Chairman and Chief 
Executive Officer, NYSE, from Donald D. Kittell, Executive Vice 
President, SIA, dated November 29, 2001; letter to James E. Buck, 
Senior Vice President and Secretary, NYSE, from David W. Smith, 
President, ASCS, dated November 29, 2001; and letter to James E. 
Buck, Senior Vice President and Secretary, NYSE, from Brian T. 
Borders, President, APTC, dated November 29, 2001. These letters are 
included in Exhibit D to the Exchange's proposed rule change and are 
briefly discussed in the NYSE's proposal. See supra note 4.
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V. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\38\ In particular, the Commission believes that 
the proposed rule change is consistent with section 6(b)(4) of the 
Act,\39\ which provides that an exchange have rules that provide for 
the equitable allocation of reasonable dues, fees and other charges 
among its members and other persons using its facilities. In addition, 
the Commission believes that the proposed rule change is consistent 
with section 6(b)(5) of the Act,\40\ which requires, among other 
things, that the rules of an exchange be designed to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market, and to protect investors and the 
public interest. Furthermore, the Commission believes that the proposed 
rule change is consistent with section 6(b)(8) of the Act,\41\ which 
prohibits any exchange rule from imposing any burden on competition 
that is not necessary or appropriate in furtherance of the Act.
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    \38\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \39\ 15 U.S.C. 78f(b)(4).
    \40\ 15 U.S.C. 78f(b)(5).
    \41\ 15 U.S.C. 78f(b)(8).
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    The Commission finds that the proposed amendments to NYSE Rules and 
guidelines governing proxy fees and permanent approval of the amended 
Pilot Program for the proxy fee reimbursement guidelines should help 
establish a more practical and organized proxy reimbursement structure. 
More specifically, the Commission finds that the Committee's 
recommended fee reductions, as reflected in the NYSE's proposal, are 
reasonable and should help to alleviate the burden and cost that large 
issuers currently bear in the proxy distribution process and more 
fairly allocate the cost among large issuers and small issuers. The 
Commission notes that the NYSE's proposed fee reductions will result in 
a decrease in the basic mailing fee from 50 cents to 40 cents, an 
increase in the nominee coordination fee of 10 cents for Small Issuers, 
as defined by the NYSE above, and 5 cents for Large Issuers, as defined 
by the NYSE above, and a cut from 50 cents to 25 cents in the 
incentive/suppression fee that Large Issuers currently pay. Thus, fees 
for Small Issuers under the proposed rule change are not increased and 
stay the same, while fees for Large Issuers are reduced overall by 
5 cents for the basic mailing fee and by 25 cents for the suppression 
fee. The NYSE has provided information to show that the cost to service 
Large Issuers is cheaper than for Small Issuers because of economies of 
scale. The Commission notes that the differentiation between Large and 
Small Issuers of 200,000 accounts is based on a 50 percent cut-off, as 
discussed above, and believes that this is a fair place to draw the 
line. The Commission therefore believes, as discussed in more detail 
below, that these proposed fee changes are reasonable and fairly 
allocated, do not discriminate among issuers, and do not impose any 
unnecessary burdens on competition.

A. Background

    As noted above, since March 1997, NYSE member organizations have 
charged NYSE issuers proxy reimbursement fees in accordance with a 
Commission-approved Pilot Program that was recently extended until 
April 1, 2002.\42\ At the time of adoption of the Original Pilot 
Program, the Commission received some negative comments regarding the 
proposed fees, in particular the nominee coordination fee, the 
incentive fee, as well as the overall impact of the new fee structure 
on small issuers. While the Commission recognized that the fees could 
have a greater impact on small issuers than large to mid-sized issuers, 
the Commission found that the Pilot Program proxy fee structure, which 
included reduced mailing costs, was, on balance, positive and provided 
some cost savings. However, because of concerns raised about the impact 
and reasonableness of the fees and the difficulty in assessing cost 
savings that might occur as a result of the incentive fee to reduce 
mailings, among other things, the new proxy fee structure was approved 
on a pilot basis and the NYSE committed to conduct an independent audit 
of the pilot fee structure.
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    \42\ See supra note 14.
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    Since then, the Pilot Program has been extended numerous times.\43\ 
Within this time, NYSE has conducted two audits of the pilot fee 
structure.\44\ In addition, Commission staff undertook an in-depth 
review, interviewing numerous proxy industry participants to gather 
information and views on the proxy system and pilot fee structure.\45\ 
As a result of these reviews, the Pilot has been modified twice. The 
first revision was a 5 cents reduction in mailing costs for initial 
proxies and annual reports.\46\ The second revision amended the Pilot 
to set forth the minimum services an intermediary must perform in order 
to receive the nominee coordination fee.\47\
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    \43\ See supra note 12.
    \44\ See Amendment No. 1, supra note 3. See also Securities 
Exchange Act Release No. 41177 (March 16, 1999), 64 FR 14294 (March 
24, 1999), for more detail on the two audits.
    \45\ See Securities Exchange Act release No. 41177 (March 16, 
1999), 64 FR 14294 (March 24, 1999).
    \46\ See Securities Exchange Act Release No. 39672 (February 17, 
1998), 63 FR 9275 (February 24, 1998) (lowering the rate of 
reimbursement for mailing each set of initial proxies and annual 
reports from the original Pilot fee of $.55 to $.50).
    \47\ See Securities Exchange Act Release No. 43603 (November 21, 
2000) , 65 FR 75751 (December 4, 2000).
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    Over the course of the Pilot Program, some issuers, while 
indicating that they are satisfied with the level of service for the 
distribution of proxies, have

[[Page 15444]]

continued to raise concerns about the fees. Generally, larger issuers 
have objected to the proxy fee structure because they are not able to 
enjoy economies of scale, which could result in cost savings to them. 
These issuers appear to be more inclined to favor a tiered fee 
structure that could reduce their costs. Smaller issuers, however, 
could be substantially impacted by a tiered fee structure that could 
result in increased costs, making it difficult to pay for the proxy 
process.
    During the course of the Pilot Program, the Commission has 
consistently encouraged the Exchange, issuers, and member firms to 
consider long-term solutions and to develop an approach that would 
foster competition so that market forces can determine reasonable rates 
of reimbursement rather than the NYSE Rules and guidelines. While the 
Commission today has determined to approve the Pilot Program on a 
permanent basis, the Commission continues to believe that ultimately 
market competition should determine reasonable rates and expects the 
NYSE to continue its ongoing review of the proxy fee process, including 
considering alternatives to SRO standards that would provide a more 
efficient, competitive, and fair process. As noted above, the NYSE has 
indicated its commitment to continue to meet with the Committee to 
consider broader reforms in this area. The Commission recognizes that 
the proxy distribution process raises difficult issues, and that the 
NYSE must balance competing concerns of the issuers who must pay for 
the proxy distributions and the brokers who must be assured of adequate 
reimbursement for making such distributions. The Commission believes 
that permanent approval of the current proxy fee structure will permit 
the NYSE and other interested parties to focus on a long-term solution 
that would allow market forces rather than SRO rules to set rates.

B. Specific Comments

    As noted above, although the majority of commenters supported the 
proposal, the comment letters raised specific concerns about the 
proposed rule change for the pilot fee structure. The Commission 
believes that the NYSE has adequately responded to the comments.\48\
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    \48\ See NYSE Response Letter, supra note 6.
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    Commenters raised concerns, for example, over issuers' lack of 
control over service providers and the higher cost for distribution of 
proxy and other materials to beneficial holders whose shares are held 
in street name, compared to issuers on the registered side, which have 
the right to choose service providers at a lower cost.\49\ The NYSE 
stated that, although the proposed fees will be approved on a permanent 
basis, it views the guideline-setting process as an ongoing matter and 
will continue to meet with the Committee to evaluate and fine tune the 
proposed fees under the guidelines. The Commission notes that, over the 
next year, the Committee, with the NYSE as a member, intends to 
consider the remaining issues, as raised by the commenters, regarding 
the need for more competition and to allow issuers the ability to 
choose among various service providers. The Committee will also 
consider the possibility of a deregulated proxy distribution system, 
which would remove the Commission from the rate-making process.
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    \49\ See Intel et al. Letter, supra note 5.
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    In response to concerns regarding the composition of the Committee, 
the NYSE stated that it did not select the members comprising the 
original Committee and indicated that, going forward, the Committee 
should be both diverse and balanced. The Commission believes that it is 
important that affected parties be afforded the opportunity to 
participate in future discussions regarding reformation of the proxy 
distribution system, and encourages the NYSE to ensure that the 
Committee has balanced representation.
    Furthermore, the NYSE addressed the concerns regarding the use of 
200,000 nominee accounts as a cut-off to distinguish between large and 
small issuers. The NYSE stated that the Committee arrived at the 
200,000 figure because issuers with more than 200,000 nominee accounts 
accounted for approximately 50 percent of the number of positions that 
all beneficial owners maintain in the shares of all issuers. The NYSE 
further stated that, although this is an estimation, the Committee 
unanimously agreed with this 50 percent cut-off. While the Commission 
recognizes that it is difficult to draw lines, the Commission believes 
that the NYSE's use of 200,000 nominee accounts as a measure to 
distinguish between large issuers and small issuers appears reasonable 
and should more fairly allocate the costs associated with proxy 
processing and distribution among large and small issuers.
    The Commission notes that the Committee, which was comprised of 
groups representing both large issuers and small issuers, as well as 
institutional shareholders, unanimously approved (with one abstention) 
the proposed fee reductions incorporated in the NYSE's proposal. While 
the Commission recognizes that some commenters voiced concerns about 
the composition of the Committee, the Commission believes that the 
NYSE's proposal is a good first step. As noted above, the NYSE has 
committed to establish a diversified and balanced Committee as it 
considers other changes. The Commission is therefore approving these 
changes to the NYSE Pilot Program so that they are in place by the 
upcoming 2002 proxy season. In addition, for the reasons stated above, 
the Commission is approving the Pilot Program on a permanent basis.

C. Summary

    In summary, while the Commission has decided to approve the revised 
proxy fees under the Pilot Program on a permanent basis, the Commission 
stresses that permanent approval does not end the discussion of proxy 
fee reform. The main goal is to ensure protection of shareholder voting 
rights in a competitive marketplace for proxy distribution, where 
market forces operate freely to set competitive and reasonable rates. 
The Commission urges the NYSE and the Committee to identify various 
ways to achieve these goals. As long as the NYSE's proxy fee structure 
remains in place, the Commission expects the NYSE to periodically 
review these fees to ensure they are related to ``reasonable expenses'' 
of the NYSE's member brokers in accordance with the Act,\50\ and 
propose changes where appropriate. Such monitoring of fees is 
essential, especially in light of technological advances such as 
electronic proxy delivery and voting, which should help to reduce the 
cost issuers will bear in the future in the proxy distribution process.
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    \50\ See supra note 8.
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VI. Conclusion

    For the foregoing reasons, the Commission finds that the NYSE's 
proposal to amend its Rules and guidelines for proxy fee reimbursement, 
as amended, is consistent with the requirements of the Act and rules 
and regulations thereunder. Therefore, the Commission is approving the 
NYSE's Pilot Program for proxy fee reimbursement, as amended by this 
proposed rule change, on a permanent basis.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\51\ that the proposed rule change (SR-NYSE-2001-53), as amended, 
is approved.
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    \51\ 15 U.S.C. 78s(b)(2).


[[Page 15445]]


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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\52\
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    \52\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7781 Filed 3-29-02; 8:45 am]
BILLING CODE 8010-01-P