00-30721. 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 ...

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 “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.

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”).

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]

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]

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

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.

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.

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]

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.

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 of Amendment No. 1 to the proposed rule change.

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.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority. ^[27]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

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.

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”).

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).

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.

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.

17.  See note 4 supra.

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).

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.

23.  See note 4 supra.

24.  15 U.S.C. 78f(b)(5).

25.  15 U.S.C. 78s(b).

26.  15 U.S.C. 78s(b)(2).

27.  17 CFR 200.30-3(a)(12).