Document ID: SEC-2021-0393-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2021-03-23T04:00Z

[Federal Register Volume 86, Number 54 (Tuesday, March 23, 2021)]
[Notices]
[Pages 15536-15538]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-05918]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91343; File No. SR-NYSE-2020-98]

Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove 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

March 17, 2021.

I. Introduction

    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 from issuers for 
forwarding proxy and other materials to beneficial owners who received 
shares from their broker at no cost or at a price substantially less 
than the market price in connection with a promotion by the broker. 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 Exchange 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\ This order 
institutes proceedings under Section 19(b)(2)(B) of the Exchange Act 
\6\ to determine whether to approve or disapprove the proposed rule 
change.
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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 (``Notice''). Certain comments filed in response 
to File No. SR-NYSE-2020-96 by Paul Conn, President, Global Capital 
Markets, Computershare, dated January 11, 2021 (``Computershare 
Letter''), and Niels Holch, Executive Director, Shareholder 
Communications Coalition, dated January 20, 2021 (``Coalition 
Letter''), also address this proposed rule change. These comments on 
the proposed rule change are available 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, 86 FR 8246 
(February 4, 2021). The Commission designated March 18, 2021, as the 
date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal

    NYSE Rules (``Rule'') 451 and 465 require 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.\7\ For this service, issuers 
reimburse NYSE member organizations for out-of-pocket, reasonable 
clerical, postage and other expenses incurred for a particular 
distribution.\8\ This reimbursement structure stems from SEC Rules 14b-
1 and 14b-2 under the Act,\9\ which impose obligations on companies and 
nominees to ensure that beneficial owners receive proxy materials. 
These rules require companies to send their proxy materials to broker-
dealers or banks, who are nominees 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.\10\ The Commission's rules do not 
specify the fees that nominees can charge issuers for proxy 
distribution; rather, they state that

[[Page 15537]]

issuers must reimburse the nominees for ``reasonable expenses'' 
incurred.\11\
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    \7\ See Rules 451 and 465; Notice, supra note 3, at 82539. 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. See Securities Exchange Act Release No. 
70720 (October 18, 2013), 78 FR 63530 n.14 (October 24, 2013) (order 
approving SR-NYSE-2013-07) (``2013 Approval Order'').
    \8\ See Rule 451 and 465; 2013 Approval Order, supra note 7, at 
63531.
    \9\ 17 CFR 240.14b-1; 17 CFR 240.14b-2.
    \10\ See 17 CFR 240.14b-1 and 14b-2; see also 2013 Approval 
Order, supra note 7, at 63531.
    \11\ See 17 CFR 240.14b-1 and 14b-2; see also 2013 Approval 
Order, supra note 7, at 63531. Currently, the Supplementary Material 
to Rule 451, which is cross-referenced by the Supplementary Material 
to Rule 465, establishes maximum rates at which a NYSE member 
organization may be reimbursed for expenses incurred in connection 
with distributing proxy and other issuer communication materials to 
beneficial shareholders.
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    The Exchange has proposed to adopt Rule 451A, pursuant to which, 
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 fee shall be imposed for a nominee account that 
contains only shares or units of the securities involved that were 
transferred to the account holder by the member organization at no cost 
or at a price substantially less than the market price.\12\
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    \12\ See proposed Rule 451A.
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    According to the Exchange, the proposed rule is meant to address a 
recent practice in which retail brokers provide customers, without 
charge, a small number of shares with a very small dollar value as a 
commercial incentive (for example, upon opening a new account or 
referring a new customer to the broker).\13\ NYSE notes that 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 for these accounts and are entitled to reimbursement of 
their expenses under NYSE and other SRO rules.\14\ The Exchange states 
that, 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.\15\
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    \13\ See Notice, supra note 3, at 82539.
    \14\ Id.; see also, e.g., FINRA Rule 2251.
    \15\ See Notice, supra note 3, at 82539.
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    The Exchange believes that it would be more appropriate for the 
broker to bear the proxy distribution costs in these circumstances.\16\ 
According to the Exchange, 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.\17\ As such, according to the 
Exchange, 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.\18\ The Exchange states 
that, 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.\19\ In addition, the Exchange notes that recipients of 
shares without charge or at a price substantially less than the market 
price from the broker 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.\20\
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    \16\ Id.
    \17\ Id.
    \18\ Id.
    \19\ Id. 82539-40.
    \20\ Id. at 82540.
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    The Exchange states that 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 or at a price substantially less than the market price from the 
broker.\21\ The Exchange further states that 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 proposed Rule 
451A.\22\
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    \21\ Id. at 82540.
    \22\ Id.
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III. Summary of Comment Letters Received

    Two commenters expressed general support for the proposal.\23\ One 
commenter stated that the recent broker practice of gifting small 
amounts of securities to retail brokerage clients as a promotional 
measure has caused significant increases in proxy costs for some 
issuers, and expressed the view that the proposal would alleviate much 
of the cost impact to issuers from this broker practice, particularly 
for accounts defaulted to e-delivery.\24\ The other commenter stated 
that it was supportive of the proposal, and that these types of 
promotions provide commercial benefits to broker-dealers without 
providing any parallel benefits to public companies.\25\
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    \23\ See Computershare Letter at 2-3; Coalition Letter at 5 
n.14.
    \24\ See Computershare Letter at 2-3. This commenter also stated 
that while it understood that the accounts that receive such 
``gifted'' securities generally are set for electronic 
communications, as a technical matter it should be noted that if a 
street-name holder of gifted securities receives hardcopy proxy 
communications rather than electronic delivery, the issuer will 
still bear increased costs from printing the materials to be 
disseminated by the broker. Id.
    \25\ See Coalition Letter at 5 n.14.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-NYSE-
2020-98 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the proposal should be 
approved or disapproved.\26\ Institution of such proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change, as discussed below. Institution of 
disapproval proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved.
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    \26\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act, the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis and input concerning the proposed rule change's consistency 
with the Act and, in particular, with Section 6(b)(4) of the Act,\27\ 
which requires that an exchange have rules that provide for the 
equitable allocation of reasonable dues, fees and other charges among 
its members, issuers and other persons using its facilities, and with 
Section 6(b)(5) of the Exchange Act,\28\ which requires, among other 
things, that the rules of a national securities exchange be 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 a national market system, 
and, in general, to protect investors and the public interest; and are 
not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
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    \27\ 15 U.S.C. 78f(b)(4).
    \28\ 15 U.S.C. 78f(b)(5).
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    Proposed Rule 451A would prohibit an NYSE member firm from seeking 
reimbursement for expenses incurred in connection with the distribution 
of proxies or other materials to a beneficial owner on behalf of an 
issuer, in cases where the member has provided the shares held in the 
beneficial owner's account at no cost or at a price ``substantially 
less than the market price.'' However, the Exchange does not explain 
how it would determine whether a price is ``substantially less than the 
market price,'' such that reimbursement could not be sought, or provide 
any other guidance on the meaning of that term. In addition, the 
proposed prohibition on reimbursement would not apply if any part of 
the beneficial owner's position in an

[[Page 15538]]

issuer's securities was received by any means other than a below-market 
price transfer from the member seeking reimbursement. As a result, if a 
customer transferred its account to a new broker-dealer, or held any 
other shares of the issuer in its account, the member would be 
permitted to seek reimbursement for its expenses. The Exchange does not 
explain why it is consistent with the Act for the issuer to bear the 
distribution costs in these scenarios, or address the feasibility of 
tracking shares held by a particular beneficial owner where the 
eligibility for reimbursement may change over time. Finally, the 
Commission notes that Rule 14b-1 under the Act provides that a broker-
dealer need not satisfy its obligations to distribute proxies or other 
materials to a beneficial owner unless it is provided ``assurance of 
reimbursement of [its] reasonable expenses, both direct and indirect, 
incurred in connection with performing [those] obligations.'' \29\ 
Under the Exchange's proposal, a broker-dealer would be required to 
distribute proxies or other materials in the circumstances described, 
but be precluded from seeking reimbursement of its expenses. The 
Exchange has not explained how this is consistent with the provisions 
of Rule 14b-1. Accordingly, the Commission believes questions are 
raised as to the consistency of the proposal with Sections 6(b)(4) and 
6(b)(5) of the Act, including whether it provides for the equitable 
allocation of reasonable fees, protects investors and the public 
interest, and is not designed permit unfair discrimination between 
customers, issuers and broker-dealers.
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    \29\ 17 CFR 240.14b-1.
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    The Commission notes that, under the Commission's Rules of 
Practice, the ``burden to demonstrate that a proposed rule change is 
consistent with the Exchange Act and the rules and regulations issued 
thereunder . . . is on the self-regulatory organization [`SRO'] that 
proposed the rule change.'' \30\ The description of a proposed rule 
change, its purpose and operation, its effect, and a legal analysis of 
its consistency with applicable requirements must all be sufficiently 
detailed and specific to support an affirmative Commission finding,\31\ 
and any failure of an SRO to provide this information may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Exchange Act and the 
applicable rules and regulations.\32\
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    \30\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \31\ See id.
    \32\ See id.
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    For these reasons, the Commission believes it is appropriate to 
institute proceedings pursuant to Section 19(b)(2)(B) of the Exchange 
Act \33\ to determine whether the proposal should be approved or 
disapproved.
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    \33\ 15 U.S.C. 78s(b)(2)(B).
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V. Commission's Solicitation of Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
view of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Exchange 
Act, or the rules and regulations thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval that would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4, any request for 
an opportunity to make an oral presentation.\34\
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    \34\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Act Amendments of 
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by April 13, 2021. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by April 27, 
2021.
    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 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should 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 April 13, 2021. Rebuttal comments should be submitted by 
April 27, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-05918 Filed 3-22-21; 8:45 am]
BILLING CODE 8011-01-P