[Federal Register Volume 62, Number 56 (Monday, March 24, 1997)]
[Notices]
[Pages 13922-13931]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7280]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38406; File No. SR-NYSE-96-36]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Notice of Filing 
and Order Granting Accelerated Approval to Amendment No. 1 to Proposed 
Rule Change Relating to a One-Year Pilot Program for Transmission of 
Proxy and Other Shareholder Communication

March 14, 1997.

I. Introduction

    On December 6, 1996, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') submitted to 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 NYSE Rules 451 and 465, 
which establish guidelines for the reimbursement of expenses by issuers 
to NYSE member organizations for the processing of proxy materials and 
other issuer communications to security holders whose securities are 
held in street name.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 38058 (Dec. 18, 1996), 61 FR 68082 (Dec. 26, 
1996). Thirty-nine comment letters were received on the proposal, which 
include a letter submitted by the NYSE in response to the Commission's 
request for comment.\3\ On March 7, 1997, the NYSE submitted Amendment 
No. 1 to the proposed rule change.\4\ This order approves, on a one-
year pilot basis, the proposed rule change, as amended, and Amendment 
No. 1 on an accelerated basis.
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    \3\ See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, dated February 
10, 1997 (``NYSE Letter'').
    \4\ See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, dated March 5, 
1997. In Amendment No. 1, the NYSE changes the proposal to a one-
year pilot and represents that, following the 1997 proxy season, a 
certified public accounting firm will audit the results of the pilot 
period. The NYSE states that the independent accountant will report 
to the Commission and the NYSE no later than October 31, 1997. As 
discussed below, the independent accounting firm must conduct an 
audit of the results of operations of ADP Investor Communication 
Services, the division of Automatic Data Processing, Inc. (``ADP'') 
that performs proxy intermediary services for approximately 200 NYSE 
member firms.
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II. Background

    NYSE member organizations holding securities in street name solicit 
proxies and deliver communications to and from beneficial owners of 
securities on behalf of issuers.\5\ For this service, issuers reimburse 
member organizations for out-of-pocket, reasonable clerical, postage 
and other expenses incurred for a particular distribution. NYSE Rules 
451 and 465 provide guidelines for the reimbursement of these expenses.
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    \5\ Street ownership encompasses shares purchased through a 
broker or bank (referred to as a nominee). The shares are then 
registered in the name of that nominee, or in the nominee name of a 
depository such as The Depository Trust Company (``DTC''). According 
to a recent NYSE analysis, on average, approximately 70 to 80 
percent of all outstanding shares are held in street name.
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    Since the late 1960's, NYSE member firms increasingly have used an 
outside contractor for these types of services

[[Page 13923]]

rather than handling proxy processing internally. For example, a firm 
would contract with a division of Automatic Data Processing, Inc. 
(``ADP''), ADP Investor Communication Services, the only intermediary 
offering these services to broker-dealers, for the solicitation of 
proxy voting instructions and the distribution of reports to 
shareholders.\6\
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    \6\ The identity of the soliciting broker remains on all 
communications.
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    In submitting this rule proposal, the Exchange explains that there 
have been changes in the market since the last review of the 
reimbursement guidelines in 1986 that prompt the Exchange to reevaluate 
its current fee reimbursement schedule. First, the Exchange believes 
that proxy solicitation and report distributions costs have increased 
since 1986, in large part, because of the general cost increases in the 
economy. For example, the Exchange notes that the cost of postage has 
doubled since 1979. The Exchange believes that the brokers pass these 
costs through to the issuers, directly or through ADP.
    Second, the Exchange believes that the aggregate costs also have 
increased for issuers because there has been a substantial increase in 
the number of beneficial owners, a result of the increased 
participation of individual investors in the securities market. The 
Exchange further notes that the percentage of holdings of securities 
through institutional investors, mutual funds, pension and savings 
plans also has increased.\7\
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    \7\ According to the Exchange, these institutions have an 
obligation, or, in some cases, a statutory duty, to vote the shares 
being held and that institutions have developed mechanisms to vote 
their shares in conformity with their own internal policies and 
governing regulations. The Exchange believes that many institutional 
investors have difficulty voting on a timely basis during the spring 
proxy season where over 40% of all annual meetings occur within a 
few weeks and some large institutions vote close to the meeting 
date, particularly during the proxy season because of the increase 
in paperwork.
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    Third, the Exchange believes that, in addition to the changing 
stock ownership patterns, stock holdings continue to migrate from 
registered to street or nominee ownership.\8\ Currently, street name 
holdings are concentrated with approximately 1,000 nominees, and the 
Exchange believes that an efficient infrastructure is necessary to 
coordinate these nominees and their customers and that service bureaus, 
as agents of nominees, should build and maintain such systems.
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    \8\ ``Nominees'' are those names that appear on either the list 
of record shareholders or on an omnibus proxy sent to the issuer on 
the record date by a depository, but who are, in fact, acting for 
someone else. In practice, they are self-clearing brokers, banks, or 
other financial institutions participating in DTC or some other 
depository.
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    Finally, the Exchange notes that there have been significant 
technological advances in the corporate governance process. For 
example, nominees and their agents have developed communication systems 
for obtaining shareholder votes electronically rather than through a 
physical proxy. To accommodate this development, the Exchange amended 
its rules to permit telephone voting. The Exchange is concerned, 
however, that the current fee structure does not recognize the value 
that some of these systems provide to issuers in reducing the costs of 
coordination and solicitation. Despite the progress that has been made 
in the distribution and proxy solicitation process, the Exchange states 
that the issuers often express their belief that mailing fees are 
unnecessarily high and that the procedures are not responsive to the 
needs of the issuers.
    In proposing a revised fee reimbursement structure, the Exchange 
believes that the current fee structure does not provide incentives for 
nominees and other intermediaries to use the most current and efficient 
technology. The Exchange believes that without financial incentives, it 
is unlikely that new cost-reducing technology will be implemented. The 
Exchange also believes that the current fee structure ignores the 
economies of scale and costs of coordinating multiple nominees and the 
value that consolidating material distribution and voting collection 
provides to issuers.\9\
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    \9\ These services, which are not expressly required by any 
regulation, include: (i) Sending a single search card for multiple 
nominees; (ii) coordinating multiple nominees to generate a single 
material request for each issuer; (iii) delivering material to a 
single place for multiple nominees; (iv) sorting bulk mail across 
multiple nominees for maximum discounts; (v) daily reporting of 
votes for multiple broker and bank nominees; and (vi) consolidating 
multiple nominees into a single invoice. As discussed infra note 
111, however, the NYSE has indicated that the voting-related 
services described in the preceding textual paragraph--electronic 
and telephonic voting services now offered by member firms and/or 
ADP acting as their agent--will not be covered by the new fee 
structure.
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III. Description of Proposal

    The Exchange proposes to reduce the suggested rate of reimbursement 
from $.60 or $.70 to $.55 for each set of proxy materials, i.e., proxy 
statement, form of proxy and annual report, when mailed as a unit. The 
Exchange proposes to eliminate the current distinction between 
proposals that require beneficial owner instructions and those that do 
not. The Exchange believes that this change will produce substantial 
savings for all issuers.
    The Exchange also proposes to reduce the rate for mailing other 
reports from $.20 to $.15. The rate of reminder notices would remain at 
$.40 unless a proxy fight is involved. The Exchange proposes to 
eliminate the special fee of $.60 for mailing only to shareholders who 
have not voted.
    For mailings involving proxy fights, the Exchange proposes to 
include a new fee of $1.00 for each set of proxy materials mailed. The 
Exchange believes that proxy contests require significant efforts by 
all participants in the proxy process and can occur under difficult 
circumstances.
    The Exchange also proposes to implement a new $20 fee per nominee 
(applicable to each proxy solicitation) to compensate an intermediary 
for coordinating a series of functions across a multitude of nominees. 
These services include:
    <bullet> Searches: Rule 14a-13 under the Act requires an issuer to 
inquire of each record holder to determine the number of beneficial 
owners holding shares through nominees. Issuers would only incur the 
expense of performing one ``search'' for all the nominees if an 
intermediary coordinates multiple nominees.
    <bullet> Search responses: Nominees must respond to an issuer's 
search request within seven business days of receipt. An intermediary 
can consolidate responses where there are multiple levels of entities 
and save administrative expenses for issuers.
    <bullet> Delivering materials: Providing material to hundreds of 
nominees requires an issuer to sort and ship a parcel to each nominee. 
An intermediary can reduce the cost to issuers if it can make one 
material delivery for hundreds of nominees.
    <bullet> Use of bulk mail: If intermediaries combine nominees, 
issuers could qualify for bulk discounts.
    <bullet> Preliminary voting information: To help issuers determine 
whether they have a quorum, many brokers currently report a 
discretionary vote 10 or 15 days before a meeting in accordance with 
NYSE Rule 451(b)(1), and again at the time of the meeting. For example, 
ADP sends daily consolidated vote reports 15 or 10 days before a 
meeting, and then every business day until the night before the 
meeting. Issuers may save certain expenses if issuers obtain the vote 
from a single source for hundreds of nominees.
    The Exchange believes that the coordination fee is consistent with 
current Exchange rules that authorize the payment of a coordination fee 
for agents that coordinate providing information regarding non-
objecting

[[Page 13924]]

beneficial owners (``NOBOs'').\10\ The Exchange estimates that the 
smallest 4,000 U.S. issuers would pay, on average, an intermediary 
nominee coordination fee of $800, which partially would be offset by 
the lower basic rate and lower expenses.
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    \10\ See NYSE Rule 451.92.
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    The Exchange also proposes to clarify the policy with respect to 
out-of-pocket expenses by providing for reimbursement only of actual 
costs, such as outgoing postage (plus third class sorting fee), 
envelopes and business reply envelopes, and custom printing of 
envelopes and ballots. The exchange proposes that the business reply 
postage would be billed at the Business Mailing Accounting System 
(``BRMAS'') rate. The Exchange believes that additional savings are 
possible by sorting mail to obtain postal discounts as well as through 
other efforts undertaken by nominees or their agents to reduce issuers' 
postage expenses, which could be shared between the issuer and the 
processor.
    The Exchange also is proposing a new incentive fee to compensate 
member organizations and/or intermediaries for eliminating the need to 
send materials in paper form. The Exchange believes that this fee will 
encourage member organizations to apply technology to sort materials so 
that multiple proxy instruction forms are included in a single envelope 
with a single set of materials to be mailed to the same household. The 
Exchange is encouraging ``householding,'' whereby the member firm or 
intermediary could earn the paper elimination fee by distributing 
multiple proxy instruction forms electronically or by distributing all 
material to a household electronically. Therefore, the Exchange is 
proposing a fee of $.50 ($.10 for a quarterly report) for each set of 
material that is not mailed.
    Finally, the Exchange clarifies the manner in which the fees are 
collected. The Exchange notes that ADP is the agent for many of the 
brokerage firms that are Exchange members, and that these firms 
subcontract the data processing functions of the proxy solicitation 
process to ADP but retain all the obligations to comply with the 
relevant Exchange rules as well as the Commission's proxy rules (e.g., 
Rule 14b-1). ADP has developed a ``single invoice'' procedure for all 
brokers with whom they have subcontracted to avoid issuers having to 
pay multiple brokers. Under this procedure, ADP bills issuers on behalf 
of brokers and banks and remits to their clients the amounts specified 
in their contracts, which the firms will retain to cover their own 
costs. The Exchange believes that this billing procedure does not 
affect issuer costs. If the broker billed issuers directly, the issuers 
would pay the same amount but to several brokers rather than to a 
central data processor. The Exchange believes that there is no economic 
difference in the brokerage firms retaining part of the costs paid by 
the issuers or such firms receiving the same amount paid by ADP through 
the single invoice system and that issuers benefit from this procedure 
because they are able to pay a single processor rather than multiple 
brokerage firms.
    The Exchange proposes the new fee structure for a one-year pilot 
term. Following the 1997 proxy season, the NYSE proposes that a 
certified public accounting firm audit the results of the pilot period 
by examining the costs and experiences of the issuers, NYSE member 
organizations and intermediaries during the pilot. The Commission 
expects this audit to encompass ADP's results of operations for the 
one-year pilot period. The independent accountant will present a 
written report detailing the methodology and results of its audit to 
the Commission and the NYSE, respectively, no later than October 31, 
1997 so that appropriate changes, if necessary, may be made for a 
second pilot.

IV. Summary of Comments

    The Commission received a total of 38 comment letters on the NYSE's 
proposal.\11\ The NYSE also submitted a letter in response to the 
comments requested by the Commission.\12\ A substantial majority of the 
letters

[[Page 13925]]

support the proposal, \13\ although several commenters do not support 
the proposal.\14\ Some commenters support the proposal overall, but 
express concern about one or two aspects of the proposal.\15\
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    \11\ See letters from William A. Bowen, Vice-President, Finance, 
AAON, Inc., to Margaret H. McFarland, Deputy Secretary, SEC, dated 
January 30, 1997 (``AAON Letter''); John D. Quinn, Vice President, 
A.G. Edwards & Sons, Inc., to Margaret H. McFarland, Deputy 
Secretary, SEC, dated February 5, 1997 (``A.G. Edwards Letter''); 
Patricia A. Bell, Second Vice President, Shareholder Services, AFLAC 
Incorporated, to Secretary, SEC, dated February 6, 1997 (``AFLAC 
Letter''); Sarah A. Miller, Senior Government Relations Counsel, 
Trust and Securities, American Bankers Association, to Jonathan G. 
Katz, Secretary, SEC, dated February 21, 1997 (``ABA Letter''); Sari 
L. Macrie, Vice President, Investor Relations Ameritech, to 
Secretary, SEC, dated January 31, 1997 (``Ameritech Letter''); Brian 
T. Borders, President, Association of Publicly Traded Companies, to 
Jonathan G. Katz, Secretary, SEC, dated February 10, 1997 (``APTC 
Letter''); Carol A. Gasson, Senior Financial Analyst, Apollo Group, 
Inc., to Margaret H. McFarland, SEC, dated January 15, 1997 
(``Apollo Letter''); Carl T. Hagberg, Cart T. Hagberg and 
Associates, to Secretary, dated February 11, 1997 (``Hagberg 
Letter''); John Finegan, Chief Financial Officer, Cornerstone 
Imaging, Inc., to Richard Grasso, Chairman and Chief Executive 
Officer, NYSE, dated September 11, 1996 (``Cornerstone Letter''); 
James T. Huffman, President, Credo Petroleum Corporation, to 
Secretary, SEC, dated February 7, 1997 (``Credo Letter''); Gordon G. 
Garney, President, Corporate Transfer Agents Association, Inc. to 
Secretary, SEC, dated February 3, 1997 (``CTA Letter''); Thomas E. 
Ross, Manager, Shareholder Relations Department, DQE, to Secretary, 
SEC, dated February 5, 1997 (``DQE Letter''); H. John Sauer III, 
Principal/Operations, Edward Jones, to SEC, dated January 15, 1997 
(``Edward Jones Letter''); Glynn E. Williams, Jr., Vice President, 
Finance, Goodrich Petroleum Corporation, to Margaret McFarland, 
Deputy Secretary, SEC, dated January 17, 1997 (``Goodrich Letter''); 
James P. Owens, V.P. Finance, Gradco (USA) Inc., to Margaret 
McFarland, Deputy Secretary, SEC, dated January 14, 1997 (``Gradco 
Letter''); David S. Ruksznis, Director, Shareholder Operations and 
Securities Services, GTE Service Corporation, to SEC, dated February 
3, 1997 (``GTE Letter''); James R. Klucharits, Controller, Isomedix 
Inc., to Secretary, SEC, dated January 15, 1997 (``Isomedix 
Letter''); Rene Vanguestaine, Managing Director, JP Morgan, to 
Jonathan G. Katz, Secretary, SEC, dated February 14, 1997 (``JP 
Morgan Letter''); Nancie W. LaDuke, Vice President, Secretary, Kmart 
Corporation, to SEC, dated February 6, 1997 (``Kmart Letter''); 
Robert Donovan, Senior Vice President, Legg Mason Wood Walker, 
Incorporated, to Secretary, SEC, dated January 31, 1997 (``Legg 
Mason Letter''); Sophia G. Vergas, Assistant Secretary, The Liberty 
Corporation, to Secretary, SEC, dated February 6, 1997 (``Liberty 
Letter''); Rhonda Anderson, Director, Corporate Secretary's 
Department, Lucent Technologies, to Secretary, SEC, dated February 
10, 1997 (``Lucent Letter''); Martin J. McDermott, Senior Assistant 
Secretary, Merck & Co., Inc., to Jonathan G. Katz, Secretary, SEC, 
dated February 11, 1997 (``Merck Letter''); Gordon G. Garney, Senior 
Assistant Secretary, Mobil Corporation, to Secretary, SEC, dated 
February 6, 1997 (``Mobil Letter); John T. Wall, Executive Vice 
President, The Nasdaq Stock Market, Inc., to Jonathan G. Katz, 
Secretary, SEC, dated March 13, 1997 (``Nasdaq Letter''); Kathryn G. 
Casparian, Managing Director, Oppenheimer & Co., Inc., to SEC, dated 
January 29, 1997 (``Oppenheimer Letter''); John Howell Bullion, 
Chief Executive Officer, Orphan Medical, to Secretary, SEC, dated 
January 14, 1997 (``Orphan Medical Letter''); Nancy R. Kyle, 
Director, Investor Relations, PepBoys, to Secretary, SEC, dated 
February 7, 1997 (``PepBoys Letter''); Faye Widenmann, Vice 
President, Corporate Relations & Administration and Secretary, 
Pinnacle West Capital Corporation, to Jonathan G. Katz, Secretary, 
SEC, dated February 5, 1997 (``Pinnacle West Letter''); Patrick J. 
Callans, Corporate Counsel, Price Costco, Secretary, SEC, dated 
February 11, 1997 (``Price Costco Letter''); Donna Dabney, Secretary 
and Assistant General Counsel, Reynolds Metals Company, to Jonathan 
G. Katz, Secretary, SEC, dated February 7, 1997 (``Reynolds Metals 
Letter''); Donald D. Kittell, Executive Vice President, Securities 
Industry Association, to Jonathan G. Katz, Secretary, SEC, dated 
February 10, 1997 (``SIA Letter''); Jerome J. Clair, Senior Vice 
President, Smith Barney, to Margaret H. McFarland, Deputy Secretary, 
SEC, dated February 5, 1997 (``Smith Barney Letter''); George M. 
Holston, Assistant General Manager and Assistant Secretary, Texaco 
Inc., to Jonathan G. Katz, Secretary, SEC, dated February 6, 1997 
(``Texaco Letter''); Robert J. Agnich, Senior Vice President, 
Secretary and General Counsel, Texas Instruments Incorporated, to 
Secretary, SEC, dated January 31, 1997 (``Texas Instruments 
Letter''); James T. Anderson, Vice President and Treasurer, US West, 
to Arthur Levitt, Chairman, SEC, dated February 5, 1997 (``US West 
Letter''); Jennifer LaGrow, Manager, Shareholder Services, the Walt 
Disney Company, to Secretary, SEC, dated January 17, 1997 (``Walt 
Disney Letter''); John W. Hetherington, Vice President and Corporate 
Secretary, Westvaco, to Secretary, SEC, dated February 7, 1997 
(``Westvaco Letter'').
    \12\ See NYSE Letter, supra note 3.
    \13\ See AAON Letter, A.G. Edwards Letter, ABA Letter, Ameritech 
Letter, Apollo Letter, Cornerstone Letter, CTA Letter, Edward Jones 
Letter, Goodrich Letter, Gradco Letter, GTE Letter, Isomedix Letter, 
Kmart Letter, Legg Mason Letter, Liberty Letter, Merck Letter, Mobil 
Letter, Oppenheimer Letter, Orphan Medical Letter, PepBoys Letter, 
Price Costco Letter, Smith Barney Letter, Texaco Letter, Texas 
Instruments Letter, US West Letter, Walt Disney Letter, Westvaco 
Letter, supra note 11. See also APTC Letter (not opposing proposal 
as pilot program and recognizing it as a necessary first step toward 
improving upon the effectiveness and the efficiency of the overall 
issuer/shareholder communication system), SIA Letter (supporting the 
reimbursement fees, nominee fee and householding fee because they 
are the result of open and extensive negotiations between issuer 
representatives and broker dealers that process independently and 
through an intermediary), supra note 11.
    \14\ See Credo Letter, Hagberg Letter, Pinnacle West Letter, 
supra note 11.
    \15\ See e.g., ABA Letter, APTC Letter, Lucent Letter, supra 
note 11.
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    Most of the commenters express general support for the NYSE's 
proposed rule change. Many commenters believe that the proposal would 
provide incentives to the industry to continue to explore and develop 
new technologies that would help issuers achieve greater economies 
while improving communications with the shareholders.\16\ Several 
commenters believe that the proposed rule change should improve the 
timeliness, accuracy and participation rate of proxy tabulation for the 
issuer.\17\ Two commenters believe that the application of advanced 
technology will result in decreased costs to all corporate issuers, 
both large and small, and better service for all investors.\18\
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    \16\ See Apollo Letter, Cornerstone Letter, Goodrich Letter, 
Isomedix Letter, see also Edward Jones Letter, Gradco Letter, Nasdaq 
Letter, PepBoys Letter, supra note 11.
    \17\ See Apollo Letter, Cornerstone Letter, Goodrich Letter, 
Isomedix Letter, supra note 11.
    \18\ See Orphan Medical Letter, Walt Disney Letter, supra note 
11. Several commenters note a related issue of late proxy voting by 
pension funds and institutions that arises with the application of 
new technology in the proxy voting process. These commenters explain 
that these funds and institutions have used advancements in 
technology to vote later than before the introduction of these 
services. See Mobil Letter, Pinnacle West Letter, US West Letter, 
supra note 11.
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    Moreover, several commenters argue that the proposed fees are fair 
and equitable to all parties.\19\ One commenter believes that, although 
the proposed fee structure represents a departure from the original 
concept of ``reimbursement,'' the proposed fee structure represents a 
step in the right direction to establish fees that are truly more 
representative of actual costs.\20\ Two commenters support the proposed 
fee structure although the new fee structure may increase its fees.\21\
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    \19\ See Orphan Medical Letter, Walt Disney Letter, supra note 
11; see also Legg Mason Letter, supra note 11.
    \20\ See Texaco Letter, supra note 11.
    \21\ See Liberty Letter, PepBoys Letter, supra note 11.
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    One commenter also believes that the proposed fee structure is 
consistent with the obligations of issuers to reimburse brokers for 
processing proxy and other materials.\22\ In its comment letter, the 
NYSE reiterates that the proposed fee structure is consistent with the 
obligations of issuers to reimburse brokers for processing proxy and 
other materials.\23\ The NYSE explains that the proposed fees resulted 
from consultations with listed companies, member firms and other 
industry organizations involved in the proxy solicitation process and 
that the proposal contains compromises intended to address the 
interests and concerns of all participants.\24\
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    \22\ See Smith Barney Letter, supra note 11.
    \23\ NYSE Letter, supra note 3.
    \24\ See NYSE Letter, supra note 3. One commenter agrees with 
the NYSE that the current fee structure does not recognize the value 
that service bureaus, such as ADP, provide through their coordinated 
system of distribution and proxy solicitation and that the proposal 
would recognize the services provided and upon which many member 
firms rely. This commenter believes that without an incentive to 
invest in enhanced technology, service bureaus could not effectively 
build the infrastructure necessary to support sophisticated 
applications. See Oppenheimer Letter, supra note 11. Another 
commenter notes that ADP offers services that small issuers use and 
appreciate although small issuers do not utilize certain 
sophisticated services because many shareholders lack the equipment 
and/or sophistication to take advantage of modern technology. See 
Liberty Letter, supra note 11.
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    Several commenters express general concern about the proposed fee 
structure. Several commenters question why costs to distribute proxy 
materials to street accounts remain significantly higher than to 
registered owners.\25\ One commenter also argues that advancing 
technology should reduce, not increase, servicing costs, and that the 
increasing level of beneficial ownership should reduce, not increase, 
per unit servicing costs.\26\ Moreover, this commenter believes that 
the brokerage houses should pay the majority of the servicing cost of 
beneficial ownership because they encourage and derive the major 
benefit from beneficial ownership.\27\
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    \25\ See Pinnacle West Letter and US West Letter, supra note 11.
    \26\ See Credo Letter, supra note 11.
    \27\ See Credo Letter, supra note 11.
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    One commenter argues that at least one study shows that the 
proposed fee structure will increase proxy mailing costs from 20% to 
30%, with no recognizable offsetting benefit.\28\ Another commenter 
notes that the proposal would increase its costs by over 450%.\29\ One 
commenter argues that the proposed fees are higher than what an issuer 
would pay in a ``free market environment.''\30\
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    \28\ See Pinnacle West Letter, supra note 11.
    \29\ See Credo Letter, supra note 11.
    \30\ See Hagberg Letter, supra note 11.
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    One commenter believes that the NYSE should ensure that the proxy 
fees offer only reimbursement of costs to the nominees.\31\ This 
commenter believes that the nominees have some obligation to enhance 
and improve the proxy process, whether they perform the proxy 
solicitation process in house or through an intermediary.\32\ The 
commenter argues that the NYSE should encourage the free market to 
develop and implement new technologies by allowing individual issuers 
to choose whether to take advantage of a new process or procedure and 
to make their own decisions based on internal cost/benefit 
analysis.\33\
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    \31\ See DQE Letter, supra note 11.
    \32\ See DQE Letter, supra note 11.
    \33\ See DQE Letter, supra note 11.
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    Several commenters address specific aspects of the NYSE's rule 
proposal. Two commenters support the reduction of the suggested rate of 
reimbursement to $.55 for each set of proxy materials when mailed as a 
unit.\34\ Specifically, one commenter notes that the reduced rate would 
still be sufficient for the broker-dealers to handle all of the 
functions relating to proxy materials.\35\ Another commenter, however, 
is not convinced that $.55 is the right number for enclosing and 
tabulating proxy materials and notes that it pays a much lower fee to 
vendors for its registered accounts.\36\
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    \34\ See CTA Letter, Mobil Letter, supra note 11.
    \35\ See CTA Letter, supra note 11.
    \36\ See Lucent Letter, supra note 11.
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    Several commenters endorse the recommendation that actual cost for 
all out-of-pocket expenses be passed along to the issuers and that 
issuers share in postage discounts.\37\ One commenter believes that all 
out-of-pocket expenses should be passed along to the issuers at 
cost.\38\ One commenter suggests that all postal discounts should be 
passed on to the issuers.\39\ Another commenter suggests that there be 
an annual review of out-of-pocket expenses.\40\
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    \37\ See AAON Letter, Ameritech Letter, Apollo Letter, 
Cornerstone Letter, Goodrich Letter, Isomedix Letter, supra note 11.
    \38\ See US West Letter, supra note 11.
    \39\ See DQE Letter, supra note 11.
    \40\ See AFLAC Letter, supra note 11.
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    Several commenters specifically address the proposed $.50 incentive 
fee.

[[Page 13926]]

One commenter supports this fee because it would not only help to 
reduce further the proxy fee, postage, and printing costs for the 
annual report and proxy statement but also reduce stockholder 
frustration caused by multiple mailings.\41\ Another commenter believes 
that the proposal would provide an incentive for the elimination of 
duplicate mailings.\42\ One commenter believes that the 
``householding'' incentive fee will result in net savings to the 
company.\43\ This commenter believes that the fee should be structured 
so that mailing list reductions are quantified prior to the print date 
for annual reports and other proxy materials to maximize the potential 
savings to issuers.\44\
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    \41\ See Texas instruments Letter, supra note 11.
    \42\ See Westvaco Letter, supra note 11.
    \43\ See Reynolds Metal Letter, supra note 11.
    \44\ See Reynolds Metal Letter, supra note 11.
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    One commenter, however, questions how issuers would determine the 
savings realized by using the householding process and whether 
householding would cause a further delaying getting the vote to the 
issuer.\45\ Another commenter argues that the NYSE should require that 
all recordkeepers minimize the number of duplicate mailings or should 
ensure that any consolidation fee permitted is based on direct cost 
savings to issuers, payable only in the first year of savings, and 
shared between the issuers and the intermediary.\46\
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    \45\ See Pinnacle West Letter, supra note 11.
    \46\ See DQE Letter, supra note 11.
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    One commenter believes that the paper and postage elimination fees 
are significantly higher than what most transfer agents charge for 
these same services and that it would be appropriate to pass these 
charges on to issuers only if the fees are market driven and comparable 
to what other companies in the marketplace are charging for similar 
activity.\47\ Another commenter believes that any fee paid to a broker 
for assistance in eliminating duplicate mailings should be based on 
actual reasonable costs incurred by the broker.\48\ One commenter also 
notes that the proposed incentive fee would increase fees for foreign 
issuers with a relatively small U.S. float.\49\
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    \47\ See US West Letter, supra note 11. This commenter also 
disagrees with the NYSE's contention that it is impracticable to 
develop reimbursement guidelines that vary based on the size of 
one's mailing because this method is standard procedure in a number 
of industries.
    \48\ See GTE Letter, supra note 11.
    \49\ See JP Morgan Letter, supra note 11. This commenter argues 
that the NYSE should amend its rules to exempt non-U.S. issuers from 
NYSE's proxy requirements.
---------------------------------------------------------------------------

    Several commenters address the $20 per nominee fee. One commenter 
believes that the per nominee fee is fair compensation for the services 
of an intermediary and would provide the proper incentives to focus on 
technology initiatives that will save the issuer community additional 
money in the long term.\50\ In its comment letter, the NYSE further 
explains that the nominee coordination fee represents reimbursement for 
coordination costs incurred by ADP and that the fee is a reasonable 
attempt to provide compensation for new services being offered under 
the current proxy solicitation process.\51\ Moreover, the NYSE believes 
that coordination of nominees reduces costs for issuers.\52\
---------------------------------------------------------------------------

    \50\ See Legg Mason Letter, supra note 11.
    \51\ See NYSE Letter, supra note 3. The Commission notes, again, 
that the NYSE has indicated that the costs of electronic and/or 
telephonic voting will not be passed through to issuers under the 
new fee structure. See supra note 9; infra note 111.
    \52\ See NYSE Letter, supra note 3.
---------------------------------------------------------------------------

    Two commenters request a description of services included in the 
$20 per nominee fee.\53\ Specifically, one commenter believes that such 
a breakdown would help the issuers determine if the amounts charged for 
the fees are justified and comparable to free-market costs.\54\ Another 
commenter believes that the $20 nominee fee should be followed by 
establishing new rules to govern the various services handled by 
intermediaries.\55\ Two commenters express concern about the impact of 
the proposed new nominee fee on small issuers.\56\ Specifically, one 
commenter suggests that the NYSE and the Commission review the market 
data during the pilot period to ensure that small issuers are not being 
disadvantaged unfairly under the proposed fee structure.\57\
---------------------------------------------------------------------------

    \53\ See AFLAC Letter, CTA Letter, supra note 11.
    \54\ See CTA Letter, supra note 11.
    \55\ See Mobil Letter, supra note 11.
    \56\ See ABA Letter and Nasdaq Letter, supra note 11.
    \57\ See ABA Letter, supra note 11.
---------------------------------------------------------------------------

    Several commenters object to the $20 nominee fee because it would 
increase the costs of transmitting proxy materials even though no new 
or additional services would be provided.\58\ One commenter notes that 
the proposed structure unduly penalizes smaller companies that do not 
have large institutional share concentrations but have numerous 
nominees who represent only a few beneficial owners.\59\ One commenter 
suggests that a progressive nominee service fee based on the number of 
shareholder accounts would be more equitable.\60\ Another commenter 
argues that before a per nominee fee can be considered, there must be 
an independent way to confirm the number of nominees associated with an 
issuer.\61\
---------------------------------------------------------------------------

    \58\ See DOE Letter, Reynolds Metal Letter and Pinnacle West 
Letter, supra note 11.
    \59\ See Credo Letter, supra note 11.
    One commenter expresses concern that the proposed nominee fee 
would increase fees for foreign issuers with relatively small U.S. 
float. See JP Morgan Letter, supra note 11. This commenter argues 
that the NYSE should amend its rules to exempt non-U.S. issuers from 
NYSE's proxy requirements.
    \60\ See Reynolds Metal Letter, supra note 11.
    \61\ See DOE Letter, supra note 11.
---------------------------------------------------------------------------

    Several commenters address the Commission's request for comment on 
what should be deemed as ``reasonable expenses'' under the Commission's 
proxy rules. Some commenters believe that reasonable expenses should 
include an intermediary's cost to coordinate an issuer's proxy mailing 
to multiple nominees and the expenses of operating an electronic proxy 
voting system.\62\ One commenter, however, believes that only member 
organizations or intermediaries that perform extra functions relating 
to coordinating the mailing and voting of proxy material to multiple 
nominee accounts should be entitled to receive fair and reasonable 
compensation for their associated efforts.\63\ Another commenter 
believes that the ``[c]osts to develop and operate an electronic proxy 
voting system, which appears to be designed primarily to facilitate ADP 
and the institutions and not the industry as whole, should not be 
passed along to issuers.'' \64\ One commenter believes the definition 
of reasonable expenses should include actual out-of-pocket expenses and 
not represent a profit item for the broker-dealers, banks and 
nominees.\65\
---------------------------------------------------------------------------

    \62\ See CTA Letter, Mobil Letter, Smith Barney Letter, US West 
Letter (commenting only on coordinating an issuer's proxy mailing to 
multiple nominees), supra note 11.
    \63\ See Texaco Letter, supra  note 11.
    \64\ See US West Letter, supra  note 11.
    \65\ See Mobil Letter, supra  note 11.
---------------------------------------------------------------------------

    With respect to the Commission's request for comment on whether the 
determination of ``reasonableness'' should vary with the size of the 
issuer, one commenter believes that the determination of reasonableness 
should not vary based on issuer size or any other criteria.\66\ Two 
commenters support varying reasonable fees with the size of the 
issuer.\67\ Specifically, one believes that a tiered pricing structure 
that properly recognizes the true

[[Page 13927]]

economies of scale would be appropriate.\68\
---------------------------------------------------------------------------

    \66\ See Smith Barney Letter, supra  note 11.
    \67\ See Hagberg Letter, Lucent Letter, supra  note 11.
    \68\ See Hagberg Letter, supra  note 11.
---------------------------------------------------------------------------

    In its comment letter, the NYSE explains that the NYSE Committee on 
Shareholder Communications has not been able to reach a consensus on 
tiering because of the different service requirements of companies of 
different sizes.\69\ To illustrate, the NYSE explains that, although 
large issuers may believe that they subsidize smaller issuers, larger 
issuers drive more of the cost of infrastructure such as vote 
processing.\70\
---------------------------------------------------------------------------

    \69\ See NYSE Letter, supra note 3.
    \70\ See NYSE Letter, supra note 3.
---------------------------------------------------------------------------

    Several commenters address whether the reasonableness determination 
should take into account any fee sharing arrangements between an 
intermediary and its broker-dealer clients. Several commenters argue 
that reasonable expenses should not include reimbursement to subsidize 
revenue sharing or a rebate system.\71\ Moreover, several of these 
commenters believe that revenue sharing and rebates artificially 
inflate expenses charged to issuers and create an unnecessary barrier 
to entry for competition in the business.\72\ One commenter argues that 
the rebates available only to a single, dominant provider have made it 
impossible for new providers who might otherwise be able to offer lower 
fees or money saving technologies to enter the business.\73\
---------------------------------------------------------------------------

    \71\ See CTA Letter, GTE Letter, Lucent Letter, Mobil Letter, 
Smith Barney Letter, US West Letter, supra note 11.
    \72\ See CTA Letter, GTE Letter, Mobil Letter, US West Letter, 
supra note 11.
    \73\ See Hagberg Letter, supra note 11.
---------------------------------------------------------------------------

    Another commenter states that issuers have no way of knowing how 
much of their fees are actually being rebated to member organizations 
and that rebates should be only made to cover a broker's actual 
costs.\74\ One commenter questions why revenue sharing occurs.\75\ 
Another commenter believes that the rebate process should be fully 
investigated to determine if it is in the best interests of the capital 
markets and is consistent with the goal of free and fair 
competition.\76\
---------------------------------------------------------------------------

    \74\ See Texaco Letter, supra note 11.
    \75\ See AFLAC Letter, supra note 11.
    \76\ See DOE Letter, supra note 11.
---------------------------------------------------------------------------

    One commenter explicitly supports the fee sharing arrangement 
between broker-dealers and intermediaries as appropriate within the fee 
structure.\77\ This commenter notes that when a broker-dealer 
outsources to an intermediary, it does not typically outsource 100% of 
the activities covered by the fees.\78\ The commenter believes that the 
amount of the fee sharing should be determined by negotiation between 
each broker-dealer and its intermediary.\79\
---------------------------------------------------------------------------

    \77\ See SIA Letter, supra note 11.
    \78\ See SIA Letter, supra note 11.
    \79\ See SIA Letter, supra note 11.
---------------------------------------------------------------------------

    A few broker-dealer commenters also explain that nominee does not 
eliminate all costs by outsourcing their proxy mailings.\80\ These 
commenters note certain costs that nominees must bear as it: (1) 
Continues to maintain proxy personnel in its office to answer broker 
and customer questions as well as to handle the operational aspects of 
balancing positions and voting totals; (2) transmits data each day to 
and from ADP; (3) writes and maintains programs to support and enhance 
the transmission and continue to do so; and (4) has other overhead and 
administrative costs.\81\ The NYSE agrees with these commenters that 
broker-dealers continue to incur some costs in the proxy solicitation 
process and that it would be reasonable that the fees issuers pay be 
split between the intermediary and the broker-dealer.\82\ During the 
pilot, such costs would be identified more fully and assessed by the 
independent accounting firm.
---------------------------------------------------------------------------

    \80\ See A.G. Edwards Letter, Legg Mason Letter, Oppenheimer 
Letter, supra note 11.
    \81\ See A.G. Edwards Letter, Legg Mason Letter, supra note 11.
    \82\ See NYSE Letter, supra note 3.
---------------------------------------------------------------------------

    Several commenters support the formation of an industry committee 
to evaluate the effectiveness of the proposal during the pilot 
period.\83\ Moreover, one commenter suggests that unresolved issues can 
be addressed by an industry committee during the pilot period.\84\ One 
commenter suggests that if a pilot program is implemented, the 
intermediary should be required to send two invoices to customers over 
the pilot period, with one under the old billing arrangement and one 
under the new.\85\
---------------------------------------------------------------------------

    \83\ See Apollo Letter, Cornerstone Letter, Goodrich Letter, GTE 
Letter, Isomedix Letter, supra note 11.
    \84\ See CTA Letter, supra note 11.
    \85\ See DQE Letter, supra note 11.
---------------------------------------------------------------------------

    Several commenters address the issue of whether an independent 
audit during the pilot period would be helpful in assessing the 
reasonableness of the costs passed through to issuers. Most of these 
commenters support an independent audit.\86\ One commenter suggests 
that to be truly meaningful, the independent audit should include all 
reasonable costs incurred by the issuers, broker-dealers, ADP, and 
nominees in mailing proxy material to beneficial holders and the 
processing of votes back to the issuer's vote tabulator.\87\ Another 
commenter believes that auditing of actual cost of material such as 
envelopes will lead to even more savings and make it easier for 
stockholders to register their votes.\88\ Two commenters suggest that 
profit sharing arrangements should be audited to determine the 
reasonableness of these costs.\89\
---------------------------------------------------------------------------

    \86\ See CTA Letter, Lucent Letter, Mobil Letter, Orphan Medical 
Letter, Reynolds Metal Letter, Texaco Letter, US West Letter, Walt 
Disney Letter, supra note 11.
    \87\ See CTA Letter, supra note 11.
    \88\ See Texas Instruments Letter, supra note 11.
    \89\ See Mobil Letter, Texaco Letter, supra note 11.
---------------------------------------------------------------------------

    Other commenters believe that the expense of an independent audit 
is not necessary.\90\ Specifically, one commenter believes that there 
should be some definite reason to believe that an independent audit is 
worth the expense.\91\ The NYSE also believes that, although an audit 
would be useful in determining whether member firms and intermediaries 
accurately implemented the new fees and for some elements of the costs 
to be tested in an audit, an audit would not be useful to determine the 
``right'' fee.\92\
---------------------------------------------------------------------------

    \90\ See A.G. Edwards Letter, Legg Mason Letter, Smith Barney 
Letter, supra note 11.
    \91\ See A.G. Edwards Letter, supra note 11.
    \92\ See NYSE Letter, supra note 3.
---------------------------------------------------------------------------

    With regard to the Commission's request for comment on whether the 
proposed NYSE nominee fee and incentive fee should be deemed to apply 
to reimbursement by non-NYSE issuers to NYSE member firms, two 
commenters believe that the new fee structure should apply to all 
issuers and not be limited to NYSE listed companies.\93\ Specifically, 
one believes that these fees should apply to all issuers because the 
covered activities are the same for all issuers, regardless of the 
listing.\94\ Two commenters argue that the fees should apply to all 
domestic corporations when dealing with NYSE members.\95\ The NYSE 
agrees with these commenters in that limiting fees to NYSE issuers 
would result in confusion and an increase of expenditure of scarce 
resources to duplicate efforts.\96\
---------------------------------------------------------------------------

    \93\ See SIA Letter, Smith Barney Letter, supra note 11.
    \94\ See SIA Letter, supra note 11.
    \95\ See A.G. Edwards Letter, Legg Mason Letter, supra note 11.
    \96\ See NYSE Letter, supra note 3.
---------------------------------------------------------------------------

    One commenter, however, believes that the proposed NYSE nominee fee 
and incentive fees should not necessarily apply to non-NYSE issuers 
because the non-NYSE issuers should be permitted to negotiate lower 
proxy fees from other stock exchanges.\97\
---------------------------------------------------------------------------

    \97\ See Texaco Letter, supra note 11.
---------------------------------------------------------------------------

V. Discussion

    The Commission finds that the proposed rule change is consistent 
with

[[Page 13928]]

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).\98\ Section 6(b)(4) 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.\99\ Section 6(b)(5) requires, 
among other things, that exchange rules promote just and equitable 
principles of trade and that they are not designed to permit unfair 
discrimination between issuers, brokers or dealers.\100\ Section 
6(b)(8) prohibits any exchange rule from imposing any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.\101\ Based on the record adduced by the NYSE, the 
Commission believes that the fees under the proposed reimbursement 
schedule are reasonable and fairly allocated, do not discriminate among 
issuers, and do not impose any unnecessary burdens on competition. The 
Commission will re-evaluate this preliminary determination in light of 
the results of the pilot program and the independent accounting firm's 
report.
---------------------------------------------------------------------------

    \98\ 15 U.S.C. 78f(b).
    \99\ 15 U.S.C. 78f(b)(4).
    \100\ In approving these rules, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \101\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    The Commission believes that the NYSE's proposal to amend the 
suggested rate of reimbursement for the distribution of materials and 
to impose certain incentive and nominee fees are consistent with the 
Act because the proposal reflects changes in the market, such as 
advances in technology and increases in distribution costs, and changes 
in the corporate governance process since the last update of the fee 
reimbursement schedule in 1986. The Commission also believes that the 
proposed fee reimbursement structure should promote the application of 
advanced technology to the shareholder communication process and is a 
reasonable accommodation of the interests of various market 
participants involved in the proxy solicitation process. A majority of 
the commenters also support the proposal, believing that it would 
provide the industry with incentives to continue to develop new 
technologies that would help issuers reduce costs while improving 
communications with shareholders.
    Moreover, the proposal also reduces the basic rates of 
reimbursement for the first time since the adoption of the rules. The 
proposal reduces the fees for mailing each set of proxy materials from 
$.60 or $.70 to $.55 and reduces the rate for mailing other reports 
from $.20 to $.15. The Commission believes that these reductions should 
produce substantial savings for issuers.
    The NYSE has examined the cost increases of its issuers under the 
proposed fee structure and believes that, in general, most of the 
issuers would receive a cost reduction with this proposal. There may be 
some increases for small issuers, but the new nominee cost may be 
partially offset by the lower basic rates and lower expenses. Moreover, 
there may be other costs savings, particularly ``out-of-pocket 
savings,'' and the new incentive fees may result in fewer mailings, 
decreasing printing and mailing costs.\102\
---------------------------------------------------------------------------

    \102\ The NYSE conducted an analysis of the proposed fee 
reimbursement structure on several small issuers based on the 
figures from the 1996 proxy season. For example, for one small 
issuer, although the proxy costs under the proposed fee structure 
would increase by $2,766, this issuer could realize savings in the 
range of $630 to $2,520 by suppressing proxy mailings by 
householding, which could offset the increase in proxy costs.
---------------------------------------------------------------------------

    The Commission believes that the new reimbursement schedule is the 
result of the NYSE's careful balancing of interests of issuers and 
broker-dealers. The Commission has, nevertheless, determined to approve 
the NYSE's proposed fee structure on a one-year pilot basis to allow 
the Exchange and the Commission to review the progress and effect of 
the fee structure. The Commission believes that the experience with the 
proposed fee structure during the one-year pilot period would be 
valuable to the NYSE and to the Commission in determining whether any 
modifications are necessary. The Commission notes that the NYSE has 
committed to an independent audit, at the conclusion of the 1997 proxy 
season, of the new fee structure to assess the reasonableness of the 
costs passed through to issuers with a report of the findings made to 
the Commission.\103\
---------------------------------------------------------------------------

    \103\ Although several commenters support the formation of an 
industry committee to evaluate the proposal over the pilot period, 
the Commission believes that an independent audit would better 
alleviate concerns of market participants with varying interests 
regarding the reasonableness of the proposed fee structure in 
relation to the services provided.
    The NYSE has represented to the Commission that the report of 
the independent accountant will be provided to the Commission and 
the NYSE no later than October 31, 1997. The Commission will review 
the report to determine whether any change would be appropriate for 
the 1998 proxy season.
---------------------------------------------------------------------------

A. Commenters' Concerns

    AS discussed above, the NYSE is proposing to adopt two new fees for 
the first time--the nominee fee and the automation incentive fee. These 
fees are different from the other mailing reimbursement fees set forth 
in the NYSE rules in that they are related costs other than actual 
mailing costs. As a result, several commenters express specific concern 
about these fees.
    Several commenters also express general concern that the proposed 
fee structure may increase costs to issuers. The Commission believes 
that, although in certain instances costs to issuers may increase under 
the proposed fee structure, the reduction of mailing fees and the 
design of the structure to encourage savings in the long term should be 
beneficial to all market participants.
    One commenter argues that the proposed fees are higher than what an 
issuer would pay in a ``free market'' environment.\104\ The Commission 
notes that, in adopting the direct shareholder communications rules, it 
left the determination of reasonable costs to the self-regulatory 
organizations (``SROs'') because, as representatives of both issuers 
and brokers, the SROs were deemed to be in the best position to make a 
fair evaluation and allocation of the costs associated with the 
distribution of shareholder materials. The Commission believes that, at 
this time, it is appropriate for the NYSE to propose the amount for 
each fee in the fee reimbursement structure, with the Commission 
reviewing the fee schedule to ensure its compliance with the standards 
of the Act. As discussed below, however, the Commission encourages the 
NYSE and the issuer and broker-dealer communities to initiate dialogue 
so that competition may play a greater role in this process.
---------------------------------------------------------------------------

    \104\ See Hagbert Letter, supra note 11.
---------------------------------------------------------------------------

    Another commenter argues that NYSE's fee schedule should offer only 
reimbursement of costs to the nominees and that the NYSE should 
encourage a free market to develop and implement new technologies by 
allowing individual issuers to choose whether to take advantage of a 
new process or procedure.\105\ The Commission believes, however, that 
because the current fee schedule only provides for reimbursement of 
costs, service providers do not have any incentive to develop and 
implement new technologies. As discussed in more detail below, the 
Commission believes that certain incentive fees are necessary to 
encourage these service providers to develop cost effective methods of 
distributing shareholder materials.
---------------------------------------------------------------------------

    \105\ See DQE Letter, supra note 11.

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

[[Page 13929]]

1. Nominee Fee
    As discussed above, the NYSE proposes a new $10 nominee fee for 
intermediaries that provide coordination for a series of functions 
across a multitude of nominees. Several commenters object to the 
nominee fee because it may increase costs to smaller issuers. The NYSE 
represents that the fee is intended to be reimbursement for 
coordination costs incurred by intermediaries and that the fee is a 
reasonable attempt to provide compensation for services that are being 
currently offered. Moreover, the NYSE believes that coordination by 
nominees should reduce costs for issuers.
    The Commission has considered the NYSE's representations as to the 
effect of the new ``nominee fee'' of $20 per nominee for their 
potential impact on issuers. The Commission recognizes that, although 
these fees may have a greater impact on small issuers than large and 
mid-sized issuers, the combined effect of the reduced rates of 
reimbursement for mailing proxy and other materials along with the 
imposition of these new fees could result in greater benefit to all 
issuers in general, depending, of course, on the results of the pilot. 
Based on the information provided by the NYSE and the supportive 
comment letters, the Commission believes--subject, again, to the 
results of the pilot--that the nominee fee would appear to constitute 
reasonable compensation for the services provided by an intermediary 
that could produce savings for issuers in the long term. The Exchange 
estimates that the smallest U.S. issuers would pay, on average, an 
intermediary nominee fee of $800. This is a relatively small sum and is 
designed to compensate for the services provided by the intermediary.
    The Commission also believes that the new fees will provide 
incentives for intermediaries to develop technologically innovative 
ways to communicate with issuers and to lower costs overall. Although 
these fees may have relatively greater impact on small issuers, the new 
fee structure reflects economies of scale and may more accurately 
reflect the actual distribution and proxy solicitation costs. Moreover, 
the Commission believes that these fees, by encouraging the use of 
technology for shareholder communications, could help to promote 
further improvement of the corporate governance process.
    Commenters also express concern about whether any new or additional 
services are being provided by an intermediary for the $20 nominee fee 
and ask, in any case, whether such services are being provided at free-
market cost. First, the Commission notes that the NYSE has provided a 
list of coordinating functions that would qualify a nominee for the 
reimbursement of the $20 fee. Any intermediary that coordinates these 
functions for multiple nominees would be entitled to the fee. Although 
ADP is the only intermediary currently offering these services to 
broker-dealers, there is nothing in the NYSE proposal that would 
restrict the payment of this fee to another entity providing similar 
services and thus the rule is not anti-competitive in application.
    Second, the Commission notes that an intermediary coordinating 
multiple nominees could result in reduced costs to issuers in printing, 
posting and administrative costs.\106\ Although this has not been 
quantified specifically by the NYSE in its rule proposal, during the 
one-year pilot, the Exchange and the Commission can review the results 
of the pilot program, including but not limited to the independent 
accounting firm's report, to ensure that no issuers are unfairly 
disadvantaged under the proposed fee structure, and that the nominee 
fee is a reasonable expense incurred to distribute proxy and other 
shareholder material. At the conclusion of the pilot, if necessary, the 
Exchange can propose further modifications to the fee structure to 
avoid any unintended adverse effects.
---------------------------------------------------------------------------

    \106\ See NYSE Letter, supra note 3.
---------------------------------------------------------------------------

2. Automation Incentive Fee
    The NYSE proposes a new incentive fee to compensate member 
organizations for eliminating materials in paper form (i.e., additional 
fee of $.50 ($.10 for a quarterly report) for each set of material that 
is not mailed). One commenter believes that incentive fees should be 
based on actual reasonable costs incurred by the broker for eliminating 
duplicate mailings.\107\ Another believes that the incentive fees 
should be passed on to issuers only if the fees are market driven and 
comparable to what other companies in the marketplace are charging for 
similar activity.\108\
---------------------------------------------------------------------------

    \107\ See GTE Letter, supra note 11.
    \108\ See US West Letter, supra note 11.
---------------------------------------------------------------------------

    The Exchange has represented to the Commission that the 
householding fee is intended to encourage members firms to apply 
technology to distribute materials electronically. The Commission 
believes that, if the incentive fee only reimburses the cost of 
eliminating the duplicate mailings, nominees would have no incentive to 
provide these services because nominees would be reimbursed for their 
costs regardless of whether they provide these types of services. 
Moreover, the Commission notes that the fee would produce the 
unquantifiable benefit of reducing shareholder frustration and 
confusion by eliminating duplicate mailings to shareholders.
    One commenter expresses concern that the proposed incentive fee as 
well as the nominee fee would increase fees for foreign issuers with a 
relatively small U.S. float and argues that the NYSE should amend its 
rules to exempt non-U.S. issuers from NYSE's proxy requirements.\109\ 
The Exchange states, and the Commission agrees, that in this context 
there are no compelling reasons to treat non-U.S. issuers and U.S. 
companies differently. Although non-U.S. issuers are exempt from most 
of the Commission's proxy rules pursuant to Rule 3a12-3 under the Act, 
non-U.S. issuers generally do provide U.S. shareholders with proxy and 
related information and seek votes of their U.S. holders. The Exchange, 
therefore, states that broker-dealers and other intermediaries face the 
same reimbursement issues with non-U.S. companies as they do with U.S. 
companies.
---------------------------------------------------------------------------

    \109\ See JP Morgan Letter, supra note 11.
---------------------------------------------------------------------------

    Finally, the Commission notes that the independent audit should 
help to assess whether the householding incentive fee has had the 
intended effect of eliminating duplicate mailings and is providing cost 
savings to issuers.

B. Reasonableness Determination

    The Commission also requested comments on what should be deemed 
``reasonable expenses'' within the meaning of the Commission's proxy 
rules. As summarized above, the Commission received a variety of 
responses to this issue. Among them are that reasonable expenses should 
include an intermediary's cost to coordinate an issuer's proxy mailing 
to multiple nominees,\110\ an intermediary's expense of operating an 
electronic proxy voting system,\111\ and actual out-of-pocket expenses 
that do not represent a profit

[[Page 13930]]

item for the broker-dealers, banks and nominees.\112\
---------------------------------------------------------------------------

    \110\ See Mobil Letter, Smith Barney Letter, US West Letter, 
supra note 11.
    \111\ See Mobil Letter, Smith Barney Letter, supra note 11.
    Another commenter believes that the costs to develop and operate 
an electronic proxy voting system should not be passed along to 
issuers because the electronic system appears to be designed 
primarily to facilitate ADP and the institutions. See US West 
Letter, supra note 11. See also supra note 64 and accompanying text. 
In response, the NYSE states that it has not been led to believe 
that the fees should cover such a system and, therefore, such costs 
are not included in the proposal. See NYSE Letter, supra note 3. See 
also supra notes 9 and 51.
    \112\ See Mobil Letter, supra note 11.
---------------------------------------------------------------------------

    Finally, in response to the issue of fee sharing arrangements 
between brokers and intermediaries, several commenters believe that 
reasonable expenses should not include such arrangements because 
revenue sharing and rebates artificially inflate expenses charged to 
issuers and create an unnecessary barrier to entry for competition in 
the business.\113\ At least one commenter, however, believes that fee 
sharing arrangements are appropriate because when a broker-dealer 
outsources to an intermediary, it does not typically outsource 100% of 
the activities covered by the fees.\114\
---------------------------------------------------------------------------

    \113\ See CTA Letter, GTE Letter, Mobil Letter, US West Letter, 
supra note 11.
    \114\ See SIA Letter, supra note 11. The NYSE also agrees
    Several broker-dealer commenters also explain that a nominee 
does not eliminate all costs by outsourcing their proxy mailings. 
See supra note 80 and accompanying text. The NYSE also agrees with 
these commenters. See NYSE Letter, supra note 3.
---------------------------------------------------------------------------

    Although the Commission has carefully considered these comments 
regarding ``reasonable expenses,'' it has reached no final resolution 
of the issues noted by commenters. Rule 14a-13(a)(5) requires issuers 
to reimburse broker-dealers, banks, and other nominees for the 
reasonable expenses they incur in mailing proxy soliciting materials 
and annual reports to beneficial holders of such issuers' voting 
securities. As noted by the NYSE, the fee structure that surrounded the 
development of the reimbursement of such fees was devised prior to the 
use of intermediaries by many broker-dealers. In addition, the current 
fee structure does not recognize the benefits from enabling more 
shareholder communications to be received through the technological 
advances made over the past decade. The one-year pilot and the audit 
that will cover the results of ADP's operations for this period should 
provide the NYSE and the Commission with the information necessary to 
determine whether the fee structure needs to be further revised. The 
Commission will continue to consider the comments during the one-year 
pilot period and reevaluate these comments before approving a permanent 
fee schedule.
    Finally, with regard to whether the proposed NYSE nominee fee and 
incentive fee should be deemed to apply to reimbursement by non-NYSE 
issuers to NYSE firms, the Commission believes that it is preferable 
that the new fees apply to reimbursement by NYSE issuers to NYSE member 
firms. At the same time, as the NYSE has noted, member firms, non-
member firms and banks historically have used the NYSE guidelines for 
all mailings, which provide uniformity in the industry. The Commission, 
however, believes that the reimbursement structure apply to member 
firms and not to issuers and Section 19(b) does not provide the NYSE 
with the authority to enforce the reimbursement of these fees on 
issuers that are not listed on the NYSE and do not use its facilities. 
This approach is consistent with Section 6(b)(4) of the Act, which 
allows an exchange to adopt equitable fees for its members, issuers, 
and other persons using its facilities.
    In determining to approve the NYSE's proposal for a one-year pilot 
period, the Commission has had to assess whether the proposal provides 
for the equitable allocation of fees among issuers consistent with 
Section 6(b)(4) of the Act, as well as ensure that it is consistent 
with Sections 6(b)(5) and 6(b)(8) of the Act by not unfairly 
discriminating among issuers and imposing a burden on competition that 
is not necessary under the Act.
    As noted above, the proposal has raised a number of concerns about 
whether the effect of the new fee structure would unduly increase the 
costs to small issuers and whether both the nominee and householding 
incentive fees are related to the reasonable expenses of mailing proxy 
soliciting materials. Although the Commission recognizes that the 
quantitative material submitted by NYSE to support its proposal is not 
conclusive on this issue, we believe that that NYSE has made a 
reasonable case that the fee changes taken together could have a 
beneficial effect on the costs for mailing proxy material for many 
issuers. Moreover, to the extent that the nominee fee and household 
incentive fee encourage the use of new technologies for the electronic 
distribution of proxy materials, overall mailing costs of issuers could 
be reduced. As a result, although the Commission recognizes that some 
issuers may, in the short run, experience an increase in costs, on 
balance, the Commission believes that the overall effect of the changes 
may be positive and provide some cost savings.
    In conclusion, the Commission believes that the proposal to amend 
the suggested rate of reimbursement for the distribution of materials 
and to impose certain new fees is consistent with the Section 6(b)(4) 
requirement that exchange rules provide for the equitable allocation of 
fees among its members and issuers. The proposed fee structure appears 
to provide for reasonable fees and does not appear to discriminate 
between issuers, brokers or dealers in contravention of Section 
6(b)(5). Moreover, the Commission believes that the proposed 
reimbursement schedule does not impose any burden on competition that 
is not necessary or appropriate in furtherance of the purposes of the 
Act as required by Section 6(b)(8).
    The pilot period and independent audit should help the Commission 
assess whether the potential benefits of the fee structure change do, 
in fact, have a positive effect overall on the proxy fee reimbursement 
structure. Indeed, during this period, the Commission encourages the 
Exchange, issuers, and member firms to consider a long term solution to 
determining reasonable expenses in connection with broker-dealers' 
mailing of proxy soliciting materials and annual reports to beneficial 
holders. In doing so, the Commission notes that in adopting the direct 
shareholder communications rules in the early 1980s the Commission left 
the determination of reasonable costs to the SROs, because they were 
deemed to be in the best position to make fair evaluation and 
allocations of costs associated with these rules. The Commission 
believes that ultimately market competition should determine 
``reasonable expenses'' and recommends that issuers, broker-dealers and 
the NYSE develop an approach that may foster competition in this area. 
Rather than having the rates of reimbursement set by the SROs, the 
Commission suggests 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.
    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 of notice of filing thereof. This amendment merely changes 
the length of the pilot from three years to one year. Based on the 
above, the Commission finds that there is good cause, consistent with 
Section 6(b)(5) of the Act, to accelerate approval of Amendment No. 1.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule

[[Page 13931]]

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 at the Commission's Public 
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of such filing will also be available for inspection and copying 
at the principal office of the Exchange. All submissions should refer 
to File No. SR-NYSE-96-36 and should be submitted by April 14, 1997.

VII. Conclusion

    For the foregoing reasons, 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, the requirements of Sections 6(b)(4), 
6(b)(5), and 6(b)(8) and the rules and regulations thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\115\ that the proposed rule change (SR-NYSE-96-36) is approved on 
a pilot basis ending May 13, 1998.

    \115\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\116\
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    \116\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-7280 Filed 3-21-97; 8:45 am]
BILLING CODE 8010-01-M