[Federal Register Volume 85, Number 244 (Friday, December 18, 2020)]
[Notices]
[Pages 82539-82541]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27836]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90653; File No. SR-NYSE-2020-98]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change To Amend Its Rules To Prohibit 
Member Organizations From Seeking Reimbursement, in Certain 
Circumstances, From Issuers for Forwarding Proxy and Other Materials to 
Beneficial Owners

December 14, 2020.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on November 30, 2020, New York Stock Exchange LLC (``NYSE'' 
or the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules to prohibit member 
organizations from seeking reimbursement from issuers for forwarding 
proxy and other materials to beneficial owners who received shares from 
their broker at no cost or at a price substantially less than the 
market price in connection with a promotion by the broker. The proposed 
rule change is available on the Exchange's website at www.nyse.com, at 
the principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

    In its filing with the Commission, the self-regulatory organization 
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 those 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 parts of such statements.

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

1. Purpose
    NYSE Rule 451 requires NYSE member organizations that hold 
securities for beneficial owners in street name to solicit proxies 
from, and deliver proxy and issuer communication materials to, 
beneficial owners on behalf of issuers.\4\ For this service, issuers 
reimburse NYSE member organizations for out-of-pocket, reasonable 
clerical, postage and other expenses incurred for a particular 
distribution. This reimbursement structure stems from SEC Rules 14b-1 
and 14b-2 under the Act,\5\ which 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 and to pay nominees for reasonable expenses, both direct and 
indirect, incurred in providing proxy information to beneficial owners. 
Similarly, Rule 465 requires member organizations to forward issuer 
communications to beneficial owners on behalf of issuers subject to 
receipt of reimbursement of expenses.
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    \4\ 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. For more detail regarding share 
ownership, see Securities Exchange Act Release No. 62495 (July 14, 
2010), 75 FR 42982 (July 22, 2010) (Concept Release on the U.S. 
Proxy System) (``Proxy Concept Release'').
    \5\ 17 CFR 240.14b-1; 17 CFR 240.14b-2.
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    Recently, brokers providing retail brokerage services have 
developed a practice in which customers are given securities without 
charge as a commercial incentive (for example, upon opening a new 
account or referring a new customer to the broker). Typically, these 
incentives involve the transfer of a small number of shares to 
benefiting customers and result in the customer having a position in 
the company whose shares they receive that has a very small dollar 
value. Rule 451 does not distinguish between these beneficial owners 
and beneficial owners that have paid for their shares, so brokers are 
required to solicit proxies from these accounts and are entitled to 
reimbursement of their expenses under Rules 451 and 465, as well as 
pursuant to the applicable rules of any other national securities 
exchange or national securities association of which the NYSE member 
organization is a member.\6\ As a consequence, issuers are billed under 
Exchange rules and the rules of other SROs for the reimbursement of 
expenses the broker incurs in making distributions to these beneficial 
owners who have very small positions, which they acquired from their 
broker without any payment by the customer. In certain cases, the 
issuer can experience a significant increase in its distribution 
reimbursement expenses solely due to its shares being included in these 
broker promotional schemes.
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    \6\ See, for example, FINRA Rule 2251.
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    While the distribution of shares in these broker promotions may 
result in a significant increase in the number of beneficial owners of 
an issuer's stock, the generally very small size of each of these 
positions means that they usually represent a very small percentage of 
the voting power. As such, the costs the issuer incurs in reimbursing 
the broker for distributing proxies to these accounts is very 
disproportionate to the maximum potential vote such shares represent. 
By contrast, the broker using such a scheme chooses to engage in it 
because it believes that it will result in a commercial benefit to the 
broker. Consequently, the Exchange believes that it is more appropriate 
for the broker to bear these proxy distribution costs. Accordingly, the 
Exchange proposes new Rule 451A, which would provide that, 
notwithstanding the applicable provisions of Rules 451 or 465 or what 
may be permitted by the rules of any other national securities exchange 
or national securities association of which a member organization is 
also a

[[Page 82540]]

member, no member shall seek to be reimbursed for expenses incurred in 
connection with the distribution of proxies or other materials on 
behalf of issuers to the beneficial owners of shares or units of an 
issuer's securities in a nominee account if those shares or units were 
transferred to the account holder by the member organization at no cost 
or at a price substantially less than the market price.
    As proposed, Rule 451A would not limit a broker's right to 
reimbursement for distributions to any beneficial owner if any part of 
that beneficial owner's position in an issuer's securities was received 
by any means other than a transfer without charge or at a price 
substantially less than the market price from the broker. Rules 451 and 
465 would continue to apply to all distributions, so the broker would 
continue to be fully obligated to solicit votes from, and make other 
distributions on behalf of issuers to, all beneficial owners 
notwithstanding the limitations on reimbursement of expenses imposed by 
Rule 451A.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act'') generally.\7\ 
Section 6(b)(4) \8\ 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. Section 6(b)(5) \9\ requires, among other things, that 
exchange rules are designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect the public interest and the 
interests of investors, promote just and equitable principles of trade 
and that they are not designed to permit unfair discrimination between 
issuers, brokers or dealers.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(4).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposal is consistent with Sections 
6(b)(4) and 6(b)(5) of the Act as it would only limit the reimbursement 
of distribution expenses in circumstances where a broker distributes 
the shares to its customers as part of a voluntary promotional strategy 
by the broker from which it derives a commercial benefit. The Exchange 
notes that the recipients of shares without charge or at a price 
substantially less than the market price from the broker as part of 
such schemes typically will not be given any choice as to which shares 
they receive and are therefore not making any investment decision. As 
the broker typically has sole control over the allocation of these 
shares to its customers and derives a commercial benefit from doing so, 
the Exchange believes that the proposal is not unfairly discriminatory 
and does not represent an inequitable allocation of the costs of the 
distribution of proxy and other issuer materials. The Exchange also 
notes that brokers will continue to be required to distribute proxy and 
other materials on behalf of issuers notwithstanding the fact that 
brokers will not be entitled to any reimbursement of expenses and 
believes that the proposal is therefore consistent with Rules 14b-1 and 
14b-2 under the Act,\10\ which impose obligations on companies and 
nominees to ensure that beneficial owners receive proxy materials and 
are given the opportunity to vote.
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    \10\ 17 CFR 240.14b-1; 17 CFR 240.14b-2.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed limitation on 
distribution expense reimbursement would apply to any broker that 
adopts a commercial strategy of distributing shares to account holders 
free of charge or at a substantial discount to the market price. 
Brokers that adopt this strategy do so because they believe that they 
derive a commercial and competitive advantage from doing so. As such, 
the Exchange believes that any burden on competition associated with 
this proposal is appropriate in light of the fact that brokers will 
only be subject to any such burden as a consequence of voluntarily 
adopting a strategy that they believe is beneficial for their business. 
There would be no effect on the competition among issuers resulting 
from the proposed rule change, as all issuers would benefit from the 
proposed restriction in the same manner if their shares have been 
distributed without charge as part of such a commercial arrangement.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or up to 90 days (i) as the Commission may designate 
if it finds such longer period to be appropriate and publishes its 
reasons for so finding or (ii) as to which the self-regulatory 
organization consents, the Commission will:
    (A) By order approve or disapprove 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NYSE-2020-98 on the subject line.

Paper Comments

     Send paper comments in triplicate to: Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number SR-NYSE-2020-98. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
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

[[Page 82541]]

provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSE-2020-98 and should be 
submitted on or before January 8, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-27836 Filed 12-17-20; 8:45 am]
BILLING CODE 8011-01-P