13922 Federal Register / Vol. 62, No. 56 / Monday, March 24, 1997 / Notices

4The Commission notes that use of the Forms

will supplement, rather than replace, the current

forms utilized by members, when effecting an

account transfer. NASD Regulation represents that

the use of the Forms is necessary because these

securities are held in the member’s name for the

benefit of the investor. Thus, it is necessary to

notify the general partner of the ‘‘change in

ownership’’ when an investor transfers its account

to a different member so the general partner may

adjust its records accordingly. Telephone

conversation between Suzanne E. Rothwell,

Dorothy Kennedy, NASD Regulation, and Anthony

P. Pecora, Division of Market Regulation, SEC (Mar.

7, 1997).

5 15 U.S.C. 78o–3.

6 17 C.F.R. 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See letter from James E. Buck, Senior Vice

President and Secretary, NYSE, to Jonathan G. Katz,

Secretary, SEC, dated February 10, 1997 (‘‘NYSE

Letter’’).

4See 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.

5Street 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.

ii. Amendment to Rule 11870. Since

the adoption of NASD Rue 11580,

members have inquired as to whether

the Standardized Transfer Forms can be

used to accomplish account transfers

under NASD Rule 11870. In order to

clarify this issue, NASD Regulation is

proposing to amend Rule 11870 to

provide that in the case of limited

partnership securities, members must

use the Standardized Transfer Forms

unless exempted by that rule.4

2. Statutory Basis

NASD Regulation believes the

proposed rule change is consistent with

the provisions of Section 15A(b)(6) of

the Act 5 in that the proposed rule

change is designed to foster cooperation

and coordination with persons engaged

in regulating, clearing, settling,

processing information with respect to,

and facilitating transactions in securities

and, in general, to protect the public

interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

NASD Regulation believes the

proposed rule change will not impose

any burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

NASD Regulation has neither

solicited nor received written

comments.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the publication of

this notice in the Federal Register or

within such longer period (i) as the

Commission may designate up to 90

days of such date if it finds such longer

period to be appropriate and publishes

its reasons for so finding or (ii) as to

which the self-regulatory organization

consents, the Commission will:

(A) By order approve the proposed

rule change, or

(B) institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

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

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. Also, copies of

such filing will be available for

inspection and copying at the principal

office of NASD. All submissions should

refer to File No. SR–NASD–97–05 and

should be submitted by April 14, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.6

Jonathan G. Katz,

Secretary.

[FR Doc. 97–7281 Filed 3–21–97; 8:45 am]

BILLING CODE 8010–01–M

[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.

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.

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.

Since the late 1960’s, NYSE member

firms increasingly have used an outside

contractor for these types of services
Federal Register / Vol. 62, No. 56 / Monday, March 24, 1997 / Notices 13923

6The identity of the soliciting broker remains on

all communications.

7According 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.

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.

9These 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.

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

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

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.

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

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:

• 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.

• 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.

• 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.

• Use of bulk mail: If intermediaries

combine nominees, issuers could

qualify for bulk discounts.

• 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
13924 Federal Register / Vol. 62, No. 56 / Monday, March 24, 1997 / Notices

10See NYSE Rule 451.92.

11See letters from William A. Bowen, VicePresident, 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’’).

12See NYSE Letter, supra note 3.

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.

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
Federal Register / Vol. 62, No. 56 / Monday, March 24, 1997 / Notices 13925

13See 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.

14See Credo Letter, Hagberg Letter, Pinnacle West

Letter, supra note 11.

15See e.g., ABA Letter, APTC Letter, Lucent

Letter, supra note 11.

16See Apollo Letter, Cornerstone Letter, Goodrich

Letter, Isomedix Letter, see also Edward Jones

Letter, Gradco Letter, Nasdaq Letter, PepBoys

Letter, supra note 11.

17See Apollo Letter, Cornerstone Letter, Goodrich

Letter, Isomedix Letter, supra note 11.

18See 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.

19See Orphan Medical Letter, Walt Disney Letter,

supra note 11; see also Legg Mason Letter, supra

note 11.

20See Texaco Letter, supra note 11.

21See Liberty Letter, PepBoys Letter, supra note

11.

22See Smith Barney Letter, supra note 11.

23NYSE Letter, supra note 3.

24See 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.

25See Pinnacle West Letter and US West Letter,

supra note 11.

26See Credo Letter, supra note 11.

27See Credo Letter, supra note 11.

28See Pinnacle West Letter, supra note 11.

29See Credo Letter, supra note 11.

30See Hagberg Letter, supra note 11.

31See DQE Letter, supra note 11.

32See DQE Letter, supra note 11.

33See DQE Letter, supra note 11.

34See CTA Letter, Mobil Letter, supra note 11.

35See CTA Letter, supra note 11.

36See Lucent Letter, supra note 11.

37See AAON Letter, Ameritech Letter, Apollo

Letter, Cornerstone Letter, Goodrich Letter,

Isomedix Letter, supra note 11.

38See US West Letter, supra note 11.

39See DQE Letter, supra note 11.

40See AFLAC Letter, supra note 11.

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

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

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

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

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

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

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

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

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

Several commenters specifically

address the proposed $.50 incentive fee.
13926 Federal Register / Vol. 62, No. 56 / Monday, March 24, 1997 / Notices

41See Texas instruments Letter, supra note 11.

42See Westvaco Letter, supra note 11.

43See Reynolds Metal Letter, supra note 11.

44See Reynolds Metal Letter, supra note 11.

45See Pinnacle West Letter, supra note 11.

46See DQE Letter, supra note 11.

47See 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.

48See GTE Letter, supra note 11.

49See 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.

50See Legg Mason Letter, supra note 11.

51See 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.

52See NYSE Letter, supra note 3.

53See AFLAC Letter, CTA Letter, supra note 11.

54See CTA Letter, supra note 11.

55See Mobil Letter, supra note 11.

56See ABA Letter and Nasdaq Letter, supra note

11.

57See ABA Letter, supra note 11.

58See DOE Letter, Reynolds Metal Letter and

Pinnacle West Letter, supra note 11.

59See 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.

60See Reynolds Metal Letter, supra note 11.

61See DOE Letter, supra note 11.

62See 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.

63See Texaco Letter, supra note 11.

64See US West Letter, supra note 11.

65See Mobil Letter, supra note 11.

66See Smith Barney Letter, supra note 11.

67See Hagberg Letter, Lucent Letter, supra note

11.

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

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

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

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

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

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

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 brokerdealers, banks and nominees.65

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
Federal Register / Vol. 62, No. 56 / Monday, March 24, 1997 / Notices 13927

68See Hagberg Letter, supra note 11.

69See NYSE Letter, supra note 3.

70See NYSE Letter, supra note 3.

71See CTA Letter, GTE Letter, Lucent Letter,

Mobil Letter, Smith Barney Letter, US West Letter,

supra note 11.

72See CTA Letter, GTE Letter, Mobil Letter, US

West Letter, supra note 11.

73See Hagberg Letter, supra note 11.

74See Texaco Letter, supra note 11.

75See AFLAC Letter, supra note 11.

76See DOE Letter, supra note 11.

77See SIA Letter, supra note 11.

78See SIA Letter, supra note 11.

79See SIA Letter, supra note 11.

80See A.G. Edwards Letter, Legg Mason Letter,

Oppenheimer Letter, supra note 11.

81See A.G. Edwards Letter, Legg Mason Letter,

supra note 11.

82See NYSE Letter, supra note 3.

83See Apollo Letter, Cornerstone Letter, Goodrich

Letter, GTE Letter, Isomedix Letter, supra note 11.

84See CTA Letter, supra note 11.

85See DQE Letter, supra note 11.

86See CTA Letter, Lucent Letter, Mobil Letter,

Orphan Medical Letter, Reynolds Metal Letter,

Texaco Letter, US West Letter, Walt Disney Letter,

supra note 11.

87See CTA Letter, supra note 11.

88See Texas Instruments Letter, supra note 11.

89See Mobil Letter, Texaco Letter, supra note 11.

90See A.G. Edwards Letter, Legg Mason Letter,

Smith Barney Letter, supra note 11.

91See A.G. Edwards Letter, supra note 11.

92See NYSE Letter, supra note 3.

93See SIA Letter, Smith Barney Letter, supra note

11.

94See SIA Letter, supra note 11.

95See A.G. Edwards Letter, Legg Mason Letter,

supra note 11.

96See NYSE Letter, supra note 3.

97See Texaco Letter, supra note 11.

economies of scale would be

appropriate.68

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

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

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

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

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 brokerdealers 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.

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

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, brokerdealers, 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

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

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

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

V. Discussion

The Commission finds that the

proposed rule change is consistent with
13928 Federal Register / Vol. 62, No. 56 / Monday, March 24, 1997 / Notices

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).

102The 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.

103Although 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.

104See Hagbert Letter, supra note 11.

105See DQE Letter, supra note 11.

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.

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

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

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.

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.
Federal Register / Vol. 62, No. 56 / Monday, March 24, 1997 / Notices 13929

106See NYSE Letter, supra note 3.

107See GTE Letter, supra note 11.

108See US West Letter, supra note 11.

109See JP Morgan Letter, supra note 11.

110See Mobil Letter, Smith Barney Letter, US

West Letter, supra note 11.

111See 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.

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 freemarket 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.

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

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 nonU.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.

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
13930 Federal Register / Vol. 62, No. 56 / Monday, March 24, 1997 / Notices

112See Mobil Letter, supra note 11.

113See CTA Letter, GTE Letter, Mobil Letter, US

West Letter, supra note 11.

114See 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.

item for the broker-dealers, banks and

nominees.112

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 brokerdealer outsources to an intermediary, it

does not typically outsource 100% of

the activities covered by the fees.114

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 brokerdealers, 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
Federal Register / Vol. 62, No. 56 / Monday, March 24, 1997 / Notices 13931

115 15 U.S.C. 78s(b)(2).

116 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2Securities Exchange Act Release No. 38188

(January 21, 1997), 62 FR 4089.

3Securities Exchange Act Release No. 37616

(August 28, 1996), 61 FR 46887 [File Nos. SR–

MBSCC–96–02, SR–GSCC–96–03, and SR–ISCC–

96–04] (order approving proposed rule changes

seeking authority to enter into limited crossguaranty agreements).

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.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.116

Jonathan G. Katz,

Secretary.

[FR Doc. 97–7280 Filed 3–21–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38410; File No. SR–OCC–

96–18]

Self-Regulatory Organizations: The

Option Clearing Corporation Order

Granting Approval of a Proposed Rule

Change To Revise Rules To Include

Limited Cross-Guarantee Agreement

March 17, 1997.

On December 9, 1996, The Options

Clearing Corporation (‘‘OCC’’) filed with

the Securities and Exchange

Commission (‘‘Commission’’) a

proposed rule change (File No. SR–

OCC–96–18) pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 1 Notice of the proposal

was published in the Federal Register

on January 28, 1997.2 No comment

letters were received. For the reasons

discussed below, the Commission is

approving the proposed rule change.

I. Description

The rule change revises OCC’s bylaws and rules to authorize OCC to

execute ‘‘Limited cross-guarantee

agreements’’ with other clearing

agencies. A limited cross-guarantee

agreement is an agreement between two

or more clearing agencies that provides

that if the parties to the agreement must

liquidate the assets of an entity that is

a member of two or more of the agencies

(‘‘common member’’) and at least one of

the clearing agencies liquidates the

assets of the common member in its

control to a loss and at least one

liquidates the assets of the common

member to a gain, each clearing agency

liquidating to a gain will make the

excess assets of the common member in

its control available to each clearing

agency liquidating to a loss up to the

amount of the loss. If all of the parties

to a limited cross-guarantee agreement

liquidate the assets of a common

member in their respective control to a

gain or if all liquidate to a loss, the

agreement provides that no assets will

be made available by any party to the

agreement to any other party. The crossguaranties established in a limited

cross-guarantee agreement are limited in

the sense that each part to the agreement

guarantees funds to the other parties

only if it liquidates the assets of a

common member in its control to a net

gain and only up to the amount of the

net gain.

The effect of a limited cross-guarantee

agreement is to enable each part to the

agreement to have recourse to the assets

of a defaulting common member in the

control of the other parties to the

agreement. Therefore, a limited crossguarantee agreement should reduce the

risk of each of the clearing agencies

which is a party to such an agreement

because a defaulting common member

may have positions spread across

markets in such a manner that its net

asset position at one clearing agency is

positive even though its net asset

position at another clearing agency is

negative.

OCC is currently pursuing discussion

of the terms of a limited cross-guarantee

agreement with other clearing agencies.

OCC anticipates that it will be filing

with the Commission one or more

limited cross-guarantee agreements to

which it has become a party following

the conclusion of those discussions.

The Commission has generally stated

its support of the use of limited crossguarantee agreements as a mean of

reducing the exposure of clearing

agencies to loss as a result of the default

of common members.3

As part of its rules revision to provide

for limited cross-guarantee agreements,

OCC will add definitions of ‘‘common

member,’’ ‘‘cross guarantee party,’’ and

‘‘limited cross-guarantee agreement’’ to

Article I of its by-laws. OCC will add

new paragraph (i) to Section 5 of Article

VIII of its by-laws to provide explicitly

that OCC may use the clearing fund

contributions of a clearing member to

satisfy its limited cross-guarantee

obligations to other clearing agencies

with respect to that clearing member.

New paragraph (i) provides that the

amount charged against a clearing

member’s contributions to the stock

clearing fund and non-equity securities

clearing fund will be in proportion to

the clearing member’s contributions to

the stock clearing fund and the nonequity securities clearing fund as fixed

at the time of the suspension of the

clearing member. New paragraph (i)

does not provide OCC with any

authority to use the clearing fund

contributions of other clearing members

(i.e., other than the defaulting clearing

member) to satisfy any limited crossguarantee obligation that OCC has to

another clearing agency because OCC

will not have any obligation pursuant to

a limited cross-guarantee agreement

which could require recourse to the

clearing fund contributions of other

clearing members.

OCC also will add new paragraph (j)

to Section 5 of Article VIII of its by-laws

to establish a rule for allocating funds

received by OCC pursuant to a limited

cross-guarantee agreement where OCC

has charged, or will charge, the stock

clearing fund and the non-equity

securities clearing fund. The new

paragraph provides that the funds will

be credited to the stock clearing fund

and the non-equity securities clearing

fund in proportion to the computed

contributions of the suspended clearing

member to the two clearing funds as

fixed at the time of the suspension of

the clearing member. If one of the two

clearing funds is made whole then the

remainder of the funds will be credited

entirely to the other clearing fund.

OCC will add three new

interpretations to Article VIII, Section 5

of its by-laws. New interpretation .03

states explicitly that if OCC has a

deficiency after the application of all

available funds of a suspended clearing

member and if OCC cannot determine