Document ID: SEC-2009-0298-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rules Changes: New York Stock Exchange LLC
Posted Date: 2009-03-06T05:00Z

[Federal Register: March 6, 2009 (Volume 74, Number 43)]
[Notices]               
[Page 9864-9867]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06mr09-71]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59464; File No. SR-NYSE-2006-92]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 
4, To Amend NYSE Rule 452 and Listed Company Manual Section 402.08 To 
Eliminate Broker Discretionary Voting for the Election of Directors and 
Codify Two Previously Published Interpretations That Do Not Permit 
Broker Discretionary Votes for Material Amendments to Investment 
Advisory Contracts

February 26, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on October 24, 2006, the New York Stock Exchange LLC 
(``Exchange'' or ``NYSE'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change as 
described in items I, II and III below, which items have been prepared 
by the self-regulatory organization. On May 23, 2007, the Exchange 
filed Amendment No. 1 to the proposed rule change. On June 28, 2007, 
the Exchange filed Amendment No. 2 to the proposed rule change. On 
February 26, 2009, the Exchange filed and withdrew Amendment No. 3 to 
the proposed rule change. On February 26, 2009, the Exchange filed 
Amendment No. 4.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as modified by Amendment No. 4, 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 4 supersedes and replaces the Exchange's 
original Form 19b-4 and Amendment Nos. 1 and 2.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NYSE is proposing to amend NYSE Rule 452 to eliminate broker 
discretionary voting for the election of directors. Rule 452, titled 
Giving Proxies by Member Organizations, allows brokers to vote on 
``routine'' proposals if the beneficial owner of the stock has not 
provided specific voting instructions to the broker at least 10 days 
before a scheduled meeting. The proposed amendment will be applicable 
to proxy voting for shareholder meetings held on or after January 1, 
2010. Notwithstanding the foregoing, in the event the proposed 
amendment is not approved by the Commission until after August 31, 
2009, the effective date shall be delayed to a date which is at least 
four months after the approval date, and which does not fall within the 
first six months of the calendar year. In addition, in any case the 
proposed amendment will not apply to a meeting that was originally 
scheduled to be held prior to the effective date but was properly 
adjourned to date on or after the effective date.\4\
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    \4\ The Commission notes that the proposal also codifies two 
previously published interpretations that do not permit broker votes 
for material amendments to investment advisory contracts. See infra 
notes 10-11 and accompanying text.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below and is set forth in Sections A, B 
and C below. The NYSE has prepared summaries, set forth in Sections A, 
B and C below, of the most significant aspects of such statements.
    The text of the proposed rule change is available on the Exchange's 
Web site (http://www.nyse.com), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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

1. Purpose
    The NYSE is proposing to amend NYSE Rule 452 to eliminate broker 
discretionary voting for the election of directors. Rule 452, titled 
Giving Proxies by Member Organizations, allows brokers to vote on 
``routine'' proposals if the beneficial owner of the stock has not 
provided specific voting instructions to the broker at least 10 days 
before a scheduled meeting. The proposed amendment will be applicable 
to proxy voting for shareholder meetings held on or after January 1, 
2010. Notwithstanding the foregoing, in the event the proposed 
amendment is not approved by the Commission until after August, 31, 
2009, the effective date shall be delayed to a date which is at least 
four months after the approval date, and which does not fall within the 
first six months of the calendar year. In addition, in any case the 
proposed amendment will not apply to a meeting that was originally 
scheduled to be held prior to the effective date but was properly 
adjourned to a date on or after the effective date.
    The NYSE originally filed these proposed amendments on October 24, 
2006. The first amendment to the rule filing was filed on May 23, 2007. 
The most significant difference being proposed in that amendment was to 
provide that the proposed amendment to Rule 452 is not applicable to 
companies registered under the Investment Company Act of 1940. The 
second amendment to the rule filing was filed on June 27, 2007 
[sic].\5\ It reflected minor SEC staff comments to Amendment No. 1 and 
added another non-routine item to the list enumerated in Rule 452.11 
relating to amendments to investment contracts. That proposed change 
codified a NYSE interpretation that was published in 1992. This 
amendment is being filed to update the provision regarding the 
effective date and to reflect minor SEC staff comments on Amendment No. 
2. Amendment No. 3 was withdrawn for technical reasons.
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    \5\ The Commission notes that the Exchange filed Amendment No. 2 
on June 28, 2007.
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Current Requirements of NYSE Rule 452
    Under the current NYSE and SEC proxy rules, brokers must deliver 
proxy materials to beneficial owners and request voting instructions in 
return. If voting instructions have not been received by the tenth day 
preceding the meeting date, Rule 452 provides that brokers may vote on 
certain matters deemed ``routine'' by the NYSE. One of the most 
important results of broker votes of uninstructed shares is their use 
in establishing a quorum at shareholder meetings.
    Among the other matters which the current NYSE Rule 452 treats as 
routine is an ``uncontested'' election for a

[[Page 9865]]

company's board of directors.\6\ Such elections remain the general 
practice in corporate America today, with contested elections occurring 
relatively infrequently. According to ADP, there were only thirty-four 
officially contested elections in calendar year 2004.
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    \6\ Rule 452.11(2) defines a ``contest'' as a matter that ``is 
the subject of a counter-solicitation, or is part of a proposal made 
by a stockholder which is being opposed by management.''
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    However in recent years the definition of a ``contested election'' 
has been questioned by a number of parties and interest groups.\7\ This 
is because of the rise of a number of new types of proxy campaigns, 
including ``just vote no'' campaigns. Because these campaigns often do 
not result in competing solicitations, historically these efforts have 
not been considered ``contests'' for purposes of NYSE Rule 452, and 
thus broker votes have been counted. This has drawn the ire of some 
investor groups since generally brokers vote uninstructed shares in 
accordance with the incumbent board's recommendations.
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    \7\ For example, in 2002, the Council of Institutional Investors 
publicly criticized in the media the NYSE's definition of 
``contests'' as ``problematic'' because it fails to classify as 
contests ``just vote no'' campaigns, it fails to recognize the use 
of the Internet as a means of contesting management, it puts ADP in 
an inappropriate and conflicted role, and it is inconsistent with 
securities laws which recognize the validity of exempt 
solicitations. In a letter to the SEC dated June 13, 2003, 
Institutional Shareholders Services expressed concern that because 
``the NYSE classifies the election of directors as a routine voting 
item unless a full-blown proxy contest has erupted,'' the efforts of 
shareholders to express disapproval of board actions at companies 
like Sprint and Tyco in the 2003 proxy season were ``watered down by 
broker votes.'' Moreover, in their presentations to the Working 
Group, several groups recommended that the definition of a contest 
be expanded or changed, including the AFL-CIO and the American 
Business Conference.
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    On ``non-routine'' matters, which generally speaking are those 
involving a contest or any matter which may affect substantially the 
rights or privileges of stockholders, NYSE rules prohibit brokers from 
voting without receiving instructions from the beneficial owners. At 
present, the NYSE Rule 452.11 lists by way of example eighteen such 
``non-routine'' matters, including items such as stockholder proposals 
opposed by management, and mergers or consolidations.
NYSE Proxy Working Group
    The Proxy Working Group was created by the NYSE in April 2005 to 
review the NYSE rules regulating the proxy voting process, and more 
specifically to review and make recommendations with respect to NYSE 
Rules 450-460 (with a particular focus on Rule 452) and 465. In 
creating the Working Group, the NYSE sought to obtain a wide diversity 
of views as well as a broad range of expertise. As a result, the 
Working Group contains representatives from a number of different 
constituencies, all of whom have significant experience with the proxy 
voting process.
    In June 2006, the Proxy Working Group prepared a draft report and a 
series of recommendations relating to their findings. In this report, 
the Proxy Working Group expressed its belief that the election of 
directors should no longer be viewed as routine under Rule 452 and thus 
that brokers should no longer be permitted to cast uninstructed shares 
for the election of directors.
    The Proxy Working Group report notes that this proposed change 
could significantly impact the director election process. For example, 
it is likely to increase the costs of uncontested elections, as issuers 
will have to spend more money and effort to reach shareholders who 
previously did not vote. These costs may increase substantially with 
the rise of majority voting for directors, as issuers have to obtain 
the votes from shareholders who may not realize that their failure to 
vote constitutes a ``no'' vote. Such a change may also increase the 
influence of special interest groups or others with a particular agenda 
to challenge an incumbent board, at the expense of smaller 
shareholders. These consequences could fall most dramatically on 
smaller issuers, who have a smaller proportion of institutional 
investors and/or have greater difficulty in contacting shareholders and 
convincing them to vote in uncontested elections.
    Despite these potential difficulties, the Proxy Working Group 
stated in its report that it is important to recognize that the 
election of a director, even where the election is uncontested, is not 
a routine event in the life of a corporation. While this is likely to 
result in some greater costs and difficulties for issuers, it is a cost 
required to be paid for better corporate governance and transparency of 
the election process.
    Following the issuance of the draft Proxy Working Group Report, in 
June 2006, the NYSE circulated the report to its listed companies and 
certain other entities and asked for comment on all of the proposed 
recommendations. The NYSE received approximately 46 comment letters or 
emails on the proposed recommendations; 39 of these letters related to 
amending Rule 452 to make the election of directors a non-routine 
matter. 15 of these comment letters strongly supported the proposed 
change to Rule 452, 8 letters expressed the view that the SEC should 
undertake an extensive review of shareholder communications before Rule 
452 is amended, and 16 letters expressed concern regarding the proposed 
amendment. Among the primary concerns expressed with respect to the 
proposed amendment to Rule 452 was the potential difficulty in 
obtaining a quorum in uncontested elections without the use of the 
broker discretionary vote pursuant to existing Rule 452. This issue was 
raised by a number of operating companies, especially representatives 
of small and mid-size companies.
    The investment company community raised similar issues, emphasizing 
the cost and difficulties of obtaining a quorum as well as general 
problems in getting fund shareholders to vote.\8\ In addition, the 
investment companies emphasized the different and unique regulatory and 
statutory regime governing their actions, which provides additional 
protections to investors. The Investment Company Institute (``ICI'') 
provided detailed information to the Proxy Working Group, including 
analyses about the additional costs that would be incurred by 
investment companies if such companies would not be allowed to count 
broker-votes in uncontested elections for directors, as well as the 
different shareholder profiles of investment companies and operating 
companies, and the differing regulatory regimes of investment 
companies.\9\
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    \8\ The ICI submitted a report to the Proxy Working Group titled 
``Costs of Eliminating Discretionary Broker Voting on Uncontested 
Elections of Investment Company Directors,'' which found, among 
other things, that if ``discretionary broker voting is eliminated, 
typical proxy costs [for investment companies] are estimated to more 
than double'' and that therefore ``fund expense ratios could rise by 
approximately 1 to 2 basis points owing to higher proxy costs''.
    \9\ The ICI Report made the point that eliminating discretionary 
broker voting will have a disproportionate impact on funds as 
compared to operating companies because funds have a higher 
proportion of retail investors. The Report also noted that funds 
already have a high number of re-solicitations and adjournments of 
shareholder meetings when there are non-routine items on the agenda.
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    These issues were discussed at length by and among the members of 
the Proxy Working Group. In particular, the Proxy Working Group 
considered the heightened problems that investment companies face 
because of their disproportionately large retail shareholder base. In 
addition, the Proxy Working Group reviewed the types of issues often 
presented to shareholders of investment companies, and noted that such 
companies often do not include other ``routine'' matters on their 
ballot,

[[Page 9866]]

which would allow broker discretionary voting for quorum purposes.
    The Proxy Working Group reviewed the materials submitted by the ICI 
and other representatives of investment companies concerning the 
difficulties such companies would have if they were subject to the 
amendment to Rule 452 making director elections ``non-routine.'' 
Additionally, the Proxy Working Group reviewed and considered the fact 
that investment companies are subject to regulation under the 
Investment Company Act of 1940 (which also regulates shareholder 
participation in key decisions affecting such regulated funds), while 
operating companies are not subject to this Act.
    The Proxy Working Group also had a number of discussions about the 
difficulties faced by smaller issuers, and recognizes that smaller 
issuers may be subject to some of the very same problems that 
investment companies are subject to, including a high percentage of 
shares held by ``retail'' investors, and an increased cost in obtaining 
a quorum as a result of the proposed changes to Rule 452. There was 
considerable concern and discussion about the potential problems facing 
smaller issuers as a result of the potential rule change, as well as 
discussion about the similarities and differences between smaller 
operating companies and investment companies.
    Ultimately, the Working Group concluded that the unique regulatory 
regime governing investment companies made such companies sufficiently 
different from operating companies (regardless of size) that it was 
appropriate to treat such companies differently. Accordingly, the Proxy 
Working Group determined to amend its initial recommendation to the 
NYSE with respect to Rule 452 to recommend that such changes to Rule 
452 not apply to any company registered under the Investment Company 
Act of 1940.

Conclusion

    In light of the recommendations of the Proxy Working Group and 
based on the NYSE's own conclusion that the election of directors 
should no longer be deemed to be a ``routine matter,'' the NYSE 
proposes to amend NYSE Rule 452, and corresponding NYSE Listed Company 
Manual Section 402.08, to eliminate broker discretionary voting for the 
election of directors, but to except from that amendment companies 
registered under the Investment Company Act of 1940.

Effective Date

    The proposed amendment will be applicable to proxy voting for 
shareholder meetings held on or after January 1, 2010. Notwithstanding 
the foregoing, in the event the proposed amendment is not approved by 
the Commission until after August, 31, 2009, the effective date shall 
be delayed to a date which is at least four months after the approval 
date, and which does not fall within the first six months of the 
calendar year. In addition, in any case the proposed amendment will not 
apply to a meeting that was originally scheduled to be held prior to 
the effective date but was properly adjourned to a date on or after the 
effective date.

Material Amendments to Investment Contracts

    In addition to the current 18 specific actions set out in 
Supplementary Material .11 to Rule 452, the Exchange has long 
interpreted Rule 452 to preclude member organizations from voting 
without instructions in certain other situations, including on any 
material amendment to the investment advisory contract with an 
investment company.\10\
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    \10\ See Exchange Act Release No. 30697 (May 13, 1992) (SR-NYSE-
1992-05).
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    In addition, in 2005, the NYSE published an interpretation,\11\ 
pursuant to a request from the SEC's Trading and Markets [sic] \12\ 
Investment Management, that provided that any proposal to obtain 
shareholder approval of an investment company's investment advisory 
contract with a new investment adviser, which approval is required by 
the Investment Company Act of 1940, as amended (the ``1940 Act''), and 
the rules thereunder, will be deemed to be a ``matter which may affect 
substantially the rights or privileges of such stock'' for purposes of 
Rule 452 so that a member organization may not give a proxy to vote 
shares registered in its name absent instruction from the beneficial 
holder of the shares. As a result, for example, a member organization 
may not give a proxy to vote shares registered in its name, absent 
instruction from the beneficial holder of the shares, on any proposal 
to obtain shareholder approval required by the 1940 Act of an 
investment advisory contract between an investment company and a new 
investment adviser due to an assignment of the investment company's 
investment advisory contract, including an assignment caused by a 
change in control of the investment adviser that is party to the 
assigned contract.
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    \11\ See Exchange Act Release No. 52569 (November 6, 2005) [sic] 
(SR-NYSE-2005-61). The Commission notes that the Release was dated 
October 6, 2005.
    \12\ The Commission notes that the correct reference is to the 
Commission's Division of Investment Management, as stated in the 
Form 19b-4.
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    The NYSE proposes to amend Rule 452 to specifically codify these 
interpretations.
2. Statutory Basis
    The basis under the Exchange Act for this proposed rule change is 
the requirement under Section 6(b)(5) \13\ that an exchange have rules 
that are designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
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    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Exchange Act.

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

    Comment letters received on the proposed amendments are discussed 
above.

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

    Within 35 days of the date of 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, including whether the proposed rule 
change, as modified by Amendment No. 4, is consistent with the Act. 
Comments may be submitted by any of the following methods:

[[Page 9867]]

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2006-92 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2006-92. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSE-2006-92 and should be 
submitted on or before March 27, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-4754 Filed 3-5-09; 8:45 am]

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