Document ID: SEC-2021-0599-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange, LLC
Posted Date: 2021-04-29T04:00Z

[Federal Register Volume 86, Number 81 (Thursday, April 29, 2021)]
[Notices]
[Pages 22725-22728]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-08905]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91663; File No. SR-NYSE-2020-98]

Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 
2, To Amend Its Rules To Prohibit Member Organizations From Seeking 
Reimbursement, in Certain Circumstances, From Issuers for Forwarding 
Proxy and Other Materials to Beneficial Owners

April 23, 2021.
    On November 30, 2020, New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its rules to prohibit 
member organizations from seeking reimbursement, in certain 
circumstances, from issuers for forwarding proxy and other materials to 
beneficial owners. The proposed rule change was published for comment 
in the Federal Register on December 18, 2020.\3\ On January 29, 2021, 
pursuant to Section 19(b)(2) of the Act,\4\ the Commission designated a 
longer period within which to either approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to disapprove the proposed rule change.\5\ On March 
17, 2021, the Commission instituted proceedings under Section 
19(b)(2)(B) of the Act to determine whether to approve or disapprove 
the proposed rule change.\6\ On April 6, 2021, the Exchange filed 
Amendment No. 1 to the proposed rule change; the Exchange withdrew that 
amendment on April 16, 2021. On April 16, 2021, the Exchange filed 
Amendment No. 2 to the proposed rule change, which superseded the 
proposed rule change as originally filed, and is described in Items I 
and II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Amendment No. 2, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 90653 (December 14, 
2020), 85 FR 82539 (December 18, 2020). Comments received on the 
proposed rule change are available on the Commission's website at: 
https://www.sec.gov/comments/sr-nyse-2020-98/srnyse202098.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 91011 (January 29, 
2021), 86 FR 8246 (February 4, 2021).
    \6\ See Securities Exchange Act Release No. 91343 (March 17, 
2021), 86 FR 15536 (March 23, 2021).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules to prohibit member 
organizations from seeking reimbursement from issuers for forwarding 
proxy and other materials to beneficial owners who received shares from 
their broker at no cost in connection with a promotion by the broker. 
This Amendment No. 2 amends and restates the original filing in its 
entirety.\7\ The proposed rule

[[Page 22726]]

change is available on the Exchange's website at www.nyse.com, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.
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    \7\ The NYSE previously filed a proposed rule filing to amend 
its rules to prohibit member organizations from seeking 
reimbursement from issuers for forwarding proxy and other materials 
to beneficial owners who received shares from their broker at no 
cost or at a substantially discounted price in connection with a 
promotion by the broker. See SR-NYSE-2020-98 (November 30, 2020). 
The proposed rule change was published for comment in the Federal 
Register on December 18, 2020. See Securities Exchange Act Release 
No. 90653 (December 14, 2020), 85 FR 82539 (December 18. 2020). On 
January 29, 2021, pursuant to Section 19(b)(2) of the Exchange Act, 
the Commission designated a longer period within which to either 
approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to disapprove 
the proposed rule change. See Securities Exchange Act Release No. 
91011 (January 29, 2021), 86 FR 8246 (February 4, 2021). By an order 
dated March 17, 2021, the Commission instituted proceedings under 
Section 19(b)(2)(B) to determine whether to approve or disapprove 
the proposed rule change. See Securities Exchange Act Release No. 
91343 (March 17, 2021), 86 FR 15536 (March 23, 2021). The Exchange 
previously withdrew Amendment No. 1 to the filing. Amendment No. 1 
[sic] is being filed to: (1) Remove from the filing the prohibition 
on brokers claiming reimbursement from issuers for distributions to 
any beneficial owner when the shares of the issuer held in such 
beneficial owner's account were purchased from that broker at a 
substantially discounted price; (2) explain why the proposal does 
not apply by its terms to a broker claiming reimbursement for 
distributions relating to shares that the beneficial owner 
transferred into an account at such broker from an account at 
another broker that had transferred those shares to the beneficial 
owner without charge; and (3) explain why the Exchange believes the 
proposal is consistent with the requirement of Rules 14b-1 and 14b-2 
under the Act that brokers are entitled to receive ``reasonable 
reimbursement'' for making proxy distributions on behalf of issuers.
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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 those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

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

1. Purpose
    This Amendment No. 2 amends and restates the original filing in its 
entirety.\8\
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    \8\ See note 7 supra for details of how Amendment No. 2 differs 
from the original filing.
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    NYSE Rule 451 requires NYSE member organizations that hold 
securities for beneficial owners in street name to solicit proxies 
from, and deliver proxy and issuer communication materials to, 
beneficial owners on behalf of issuers.\9\ For this service, issuers 
reimburse NYSE member organizations for out-of-pocket, reasonable 
clerical, postage and other expenses incurred for a particular 
distribution. This reimbursement structure stems from SEC Rules 14b-1 
and 14b-2 under the Act,\10\ which impose obligations on companies and 
nominees to ensure that beneficial owners receive proxy materials and 
are given the opportunity to vote. These rules require companies to 
send their proxy materials to nominees, i.e., broker-dealers or banks 
that hold securities in street name, for forwarding to beneficial 
owners and to pay nominees for reasonable expenses, both direct and 
indirect, incurred in providing proxy information to beneficial owners. 
Similarly, Rule 465 requires member organizations to forward issuer 
communications to beneficial owners on behalf of issuers subject to 
receipt of reimbursement of expenses.
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    \9\ The ownership of shares in street name means that a 
shareholder, or ``beneficial owner,'' has purchased shares through a 
broker-dealer or bank, also known as a ``nominee.'' In contrast to 
direct ownership, where shares are directly registered in the name 
of the shareholder, shares held in street name are registered in the 
name of the nominee, or in the nominee name of a depository, such as 
the Depository Trust Company. For more detail regarding share 
ownership, see Securities Exchange Act Release No. 62495 (July 14, 
2010), 75 FR 42982 (July 22, 2010) (Concept Release on the U.S. 
Proxy System) (``Proxy Concept Release'').
    \10\ 17 CFR 240.14b-1; 17 CFR 240.14b-2.
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    Recently, brokers providing retail brokerage services have 
developed a practice in which customers are given securities without 
charge as a commercial incentive (for example, upon opening a new 
account or referring a new customer to the broker). Typically, these 
incentives involve the transfer of a small number of shares to 
benefiting customers and result in the customer having a position in 
the company whose shares they receive that has a very small dollar 
value. Rule 451 does not distinguish between these beneficial owners 
and beneficial owners that have paid for their shares, so brokers are 
required to solicit proxies from these accounts and are entitled to 
reimbursement of their expenses under Rules 451 and 465, as well as 
pursuant to the applicable rules of any other national securities 
exchange or national securities association of which the NYSE member 
organization is a member.\11\ As a consequence, issuers are billed 
under Exchange rules and the rules of other SROs for the reimbursement 
of expenses the broker incurs in making distributions to these 
beneficial owners who have very small positions, which they acquired 
from their broker without any payment by the customer. In certain 
cases, the issuer can experience a significant increase in its 
distribution reimbursement expenses solely due to its shares being 
included in these broker promotional schemes.
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    \11\ See, for example, FINRA Rule 2251.
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    While the distribution of shares in these broker promotions may 
result in a significant increase in the number of beneficial owners of 
an issuer's stock, the generally very small size of each of these 
positions means that they usually represent a very small percentage of 
the voting power. As such, the costs the issuer incurs in reimbursing 
the broker for distributing proxies to these accounts is very 
disproportionate to the maximum potential vote such shares represent. 
By contrast, the broker using such a scheme chooses to engage in it 
because it believes that it will result in a commercial benefit to the 
broker. Consequently, the Exchange believes that it is more appropriate 
for the broker to bear these proxy distribution costs. Accordingly, the 
Exchange proposes new Rule 451A, which would provide that, 
notwithstanding the applicable provisions of Rules 451 or 465 or what 
may be permitted by the rules of any other national securities exchange 
or national securities association of which a member organization is 
also a member, no member shall seek to be reimbursed for expenses 
incurred in connection with the distribution of proxies or other 
materials on behalf of issuers to the beneficial owners of shares or 
units of an issuer's securities in a nominee account if those shares or 
units were transferred to the account holder by the member organization 
at no cost.
    As proposed, Rule 451A would not limit a broker's right to 
reimbursement for distributions to any beneficial owner if any part of 
that beneficial owner's position in an issuer's securities was received 
by any means other than a transfer without charge from the broker. 
Rules 451 and 465 would continue to apply to all distributions, so the 
broker would continue to be fully obligated to solicit votes from, and 
make other distributions on behalf of issuers to, all beneficial owners 
notwithstanding the limitations on reimbursement of expenses imposed by 
Rule 451A.
    The Exchange's proposal does not limit the right of a broker to 
receive reimbursement under Rules 451 and 465 unless that broker had 
itself transferred those shares without charge into the account of the 
beneficial owner. Specifically, if a beneficial owner transferred 
shares received in this manner into an account at another broker, Rule 
451A would not preclude that other broker from claiming reimbursement 
under Rules 451 and 465. The Exchange notes that it would be impossible 
for the receiving broker in these circumstances to track whether the 
shares of a specific issuer transferred into its custody had all been 
received by the beneficial owner without charge from another broker. 
Moreover, that broker would not have received the commercial benefit 
from the promotional scheme that would accrue to the broker that had 
given the shares

[[Page 22727]]

without charge to its customers. For the foregoing reasons, the 
Exchange believes that it is impracticable to extend the application of 
Rule 451A to the broker to whom the shares are transferred in these 
circumstances and that it is reasonable to limit its application to the 
broker that had chosen to transfer those shares without charge.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act'') 
generally.\12\ Section 6(b)(4) \13\ requires that exchange rules 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among its members and issuers and other persons using the 
facilities of an exchange. Section 6(b)(5) \14\ requires, among other 
things, that exchange rules are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect the public 
interest and the interests of investors, promote just and equitable 
principles of trade and that they are not designed to permit unfair 
discrimination between issuers, brokers or dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(4).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposal is consistent with Sections 
6(b)(4) and 6(b)(5) of the Act as it would only limit the reimbursement 
of distribution expenses in circumstances where a broker distributes 
the shares to its customers as part of a voluntary promotional strategy 
by the broker from which it derives a commercial benefit. The Exchange 
notes that the recipients of shares without charge as part of such 
schemes typically will not be given any choice as to which shares they 
receive and are therefore not making any investment decision. As the 
broker typically has sole control over the allocation of these shares 
to its customers and derives a commercial benefit from doing so, the 
Exchange believes that the proposal is not unfairly discriminatory and 
does not represent an inequitable allocation of the costs of the 
distribution of proxy and other issuer materials.
    The Exchange notes that brokers will continue to be required to 
distribute proxy and other materials on behalf of issuers 
notwithstanding the fact that brokers will not be entitled to any 
reimbursement of expenses and believes that the proposal is therefore 
consistent with Rules 14b-1 and 14b-2 under the Act, which impose 
obligations on companies and nominees to ensure that beneficial owners 
receive proxy materials and are given the opportunity to vote. The 
Exchange also believes that its proposal is consistent with the 
requirement of Rules 14b-1 and 14b-2 that brokers are entitled to 
``reasonable reimbursement'' of expenses in connection with making 
proxy distributions on behalf of issuers. First, the Exchange notes 
that any broker that is prohibited from charging fees under this 
proposal would continue to be reimbursed for its aggregate expenses 
with respect to proxy distribution, as the prohibition on distribution 
fees would be limited to those accounts in which the only shares of the 
applicable issuer are shares received without charge from that broker. 
As such, the effect of the proposal would be to reduce the overall 
reimbursement received by that broker for a distribution, but not to 
eliminate that reimbursement. The Exchange believes that this reduced 
level of reimbursement is reasonable in light of the fact that the 
beneficial owners in question would have received the shares without 
charge as part of a voluntary commercial scheme initiated by the broker 
and which the broker undertook because it believed that it was in its 
own business interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

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

III. 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. 2, is consistent with the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

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

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2020-98. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street, NE, Washington, 
DC 20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should

[[Page 22728]]

submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSE-2020-98 and should be 
submitted on or before May 20, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-08905 Filed 4-28-21; 8:45 am]
BILLING CODE 8011-01-P