Justia Agencies And Commissions Securities And Exchange Commission Self-Regulatory Organizations; New York Stock Exchange LLC; Order Granting Approval to Proposed Rule Change Amending NYSE Rules 451 and 465, and the Related Provisions of Section 402.10 of the NYSE Listed Company Manual, Which Provide a Schedule for the Reimbursement of Expenses by Issuers to NYSE Member Organizations for the Processing of Proxy Materials and Other Issuer Communications Provided to Investors Holding Securities in Street Name, and To Establish a Five-Year Fee for the Development of an Enhanced Brokers Internet Platform, 63530-63547 [2013-24920]

Self-Regulatory Organizations; New York Stock Exchange LLC; Order Granting Approval to Proposed Rule Change Amending NYSE Rules 451 and 465, and the Related Provisions of Section 402.10 of the NYSE Listed Company Manual, Which Provide a Schedule for the Reimbursement of Expenses by Issuers to NYSE Member Organizations for the Processing of Proxy Materials and Other Issuer Communications Provided to Investors Holding Securities in Street Name, and To Establish a Five-Year Fee for the Development of an Enhanced Brokers Internet Platform, 63530-63547 [2013-24920]

Download as PDF 63530 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: SECURITIES AND EXCHANGE COMMISSION Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NYSE–2013–70 on the subject line. Self-Regulatory Organizations; New York Stock Exchange LLC; Order Granting Approval to Proposed Rule Change Amending NYSE Rules 451 and 465, and the Related Provisions of Section 402.10 of the NYSE Listed Company Manual, Which Provide a Schedule for the Reimbursement of Expenses by Issuers to NYSE Member Organizations for the Processing of Proxy Materials and Other Issuer Communications Provided to Investors Holding Securities in Street Name, and To Establish a Five-Year Fee for the Development of an Enhanced Brokers Internet Platform mstockstill on DSK4VPTVN1PROD with NOTICES 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–2013–70. 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 Web site (https://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 Web site 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; 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– 2013–70 and should be submitted on or before November 14, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.11 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–24850 Filed 10–23–13; 8:45 am] BILLING CODE 8011–01–P 11 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 [Release No. 34–70720; File No. SR–NYSE– 2013–07] October 18, 2013. I. Introduction On February 1, 2013, 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 the fees set forth in NYSE Rules 451 and 465, and the related provisions of Section 402.10 of the NYSE Listed Company Manual, for the reimbursement of expenses by issuers to NYSE member organizations for the processing of proxy materials and other issuer communications provided to investors holding securities in street name, and to establish a five-year fee for the development of an enhanced brokers internet platform. The proposed rule change was published for comment in the Federal Register on February 22, 2013.3 The Commission initially received twenty-four comment letters on the proposed rule change.4 On April 3, 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 68936 (February 15, 2013), 78 FR 12381 (‘‘Notice’’). 4 See letters to Elizabeth M. Murphy, Secretary, Commission from: Charles V. Rossi, President, The Securities Transfer Association, dated February 20, 2013 (‘‘STA Letter’’) and March 4, 2013 (‘‘STA Letter II’’); Karen V. Danielson, President, Shareholder Services Association, dated March 4, 2013 (‘‘SSA Letter’’); Jeanne M. Shafer, dated March 6, 2013 (‘‘Schafer Letter’’); David W. Lovatt, dated March 6, 2013 (‘‘Lovatt Letter’’); Stephen Norman, Chair, The Independent Steering Committee of Broadridge, dated March 7, 2013 (‘‘Steering Committee Letter’’); Jeffrey D. Morgan, President & CEO, National Investor Relations Institute, dated March 7, 2013 (‘‘NIRI Letter’’); Kenneth Bertsch, President and CEO, Society of Corporate Secretaries & Governance Professionals, dated March 7, 2013 (‘‘SCSGP Letter’’); Niels Holch, Executive Director, Shareholder Communications Coalition, dated 2 17 PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 2013, the Commission extended the time period for Commission action to May 23, 2013.5 The Commission thereafter received four more comment letters.6 On May 17, 2013, NYSE submitted a response to the comment letters.7 On May 23, 2013, the Commission initiated proceedings to determine whether to disapprove the proposed rule change.8 In response to the Order March 12, 2013 (‘‘SCC Letter’’); Geoffrey M. Dugan, General Counsel, iStar Financial Inc., dated March 13, 2013 (‘‘iStar Letter’’); Paul E. Martin, Chief Financial Officer, Perficient, Inc., dated March 13, 2013 (‘‘Perficient Letter’’); John Harrington, President, Harrington Investments, Inc., dated March 14, 2013 (‘‘Harrington Letter’’); James McRitchie, Shareowner, Corporate Governance, dated March 14, 2013 (‘‘CG Letter’’); Clare A. Kretzman, General Counsel, Gartner, Inc., dated March 15, 2013 (‘‘Gartner Letter’’); Tom Quaadman, Vice President, Center for Capital Markets Competitiveness, dated March 15, 2013 (‘‘CCMC Letter’’); Dennis E. Nixon, President, International Bancshares Corporation, dated March 15, 2013 (‘‘IBC Letter’’); Argus I. Cunningham, Chief Executive Officer, Sharegate Inc., dated March 15, 2013 (‘‘Sharegate Letter’’); Laura Berry, Executive Director, Interfaith Center on Corporate Responsibility, dated March 15, 2013 (‘‘ICC Letter’’); Dorothy M. Donohue, Deputy General Counsel—Securities Regulation, Investment Company Institute, dated March 15, 2013 (‘‘ICI Letter’’); Charles V. Callan, Senior Vice President— Regulatory Affairs, Broadridge Financial Solutions, Inc., dated March 15, 2013 (‘‘Broadridge Letter’’); Brad Philips, Treasurer, Darling International Inc., dated March 15, 2013 (‘‘Darling Letter’’); John Endean, President, American Business Conference, dated March 18, 2013 (‘‘ABC Letter’’); Tom Price, Managing Director, The Securities Industry and Financial Markets Association, dated March 18, 2013 (‘‘SIFMA Letter’’); and Michael S. O’Brien, Vice President—Corporate Governance Officer, BNY Mellon, dated March 28, 2013 (‘‘BNY Letter’’). 5 See Securities Exchange Act Release No. 69286 (April 3, 2013), 78 FR 21481 (April 10, 2013). 6 See letters to Elizabeth M. Murphy, Secretary, Commission from: Jeff Mahoney, General Counsel, Council of Institutional Investors, dated April 5, 2013 (‘‘CII Letter’’); Paul Torre, Executive Vice President, AST Fund Solutions, LLC, dated May 16, 2013 (‘‘AST Letter’’); and John M. Payne, Chief Executive Officer, Zumbox, Inc., dated May 20, 2013 (‘‘Zumbox Letter’’); see also letter to the Honorable Mary Jo White, Chair, Commission from Dieter Waizenegger, Executive Director, CtW Investment Group, dated May 17, 2013 (‘‘CtW Letter’’). 7 See letter to Elizabeth M. Murphy, Secretary, Commission from Janet McGinnis, EVP & Corporate Secretary, NYSE Euronext, dated May 17, 2013 (‘‘NYSE Letter’’). 8 See Securities Exchange Act Release No. 69622 (May 23, 2013), 78 FR 32510 (May 30, 2013) (‘‘Order Instituting Proceedings’’). In the Order Instituting Proceedings, the Commission, among other things, expressed its belief that questions remained as to whether the Exchange’s proposal was consistent with the requirements of: (1) Section 6(b)(4) of the Act, including whether it provides for the equitable allocation of reasonable fees among its members, issuers and other persons using its facilities; (2) Section 6(b)(5) of the Act, including whether it is not designed to permit unfair discrimination, or would promote just and equitable principles of trade, or protect investors and the public interest; and (3) Section 6(b)(8) of the Act, including whether it would not impose any burden on competition that is not necessary or E:\FR\FM\24OCN1.SGM 24OCN1 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES Instituting Proceedings, the Commission received fourteen additional comment letters on the proposal.9 On July 9, 2013, NYSE responded to the Order Instituting Proceedings.10 On August 15, 2013, the Commission extended the time period for Commission action to October 20, 2013.11 On September 9, 2013, NYSE submitted an additional letter in further support of its proposal.12 On October 1, 2013, NYSE submitted an additional letter in response to FOLIOfn Letter and FOLIOfn Letter II.13 This order approves the proposed rule change. appropriate in furtherance of the purposes of the Act. 9 See letters to Elizabeth M. Murphy, Secretary, Commission from: Katie J. Sevcik, Legal and Regulatory Committee Chair, Shareholder Services Association, dated June 12, 2013 (‘‘SSA Letter II’’); Paul Torre, Executive Vice President, AST Fund Solutions, LLC, dated June 18, 2013 (‘‘AST Letter II’’); Loren Hanson, Assistant Secretary/Assistant Treasurer, Otter Tail Corporation, dated June 17, 2013 (‘‘OTC Letter’’); Michael J. Hogan, Chief Executive Officer, FOLIOfn Investments, Inc., dated June 18, 2013 (‘‘FOLIOfn Letter’’); Harold Westervelt, President, INVeSHARE, dated June 18, 2013 (‘‘INVeSHARE Letter’’); Dieter Waizenegger, Executive Director, Investment Group, dated June 20, 2013 (‘‘CtW Letter II’’); Dorothy M. Donohue, Deputy General Counsel—Securities Regulation, Investment Company Institute, dated June 20, 2013 (‘‘ICI Letter II’’); Lisa Lindsley, Director, Capital Strategies Program, The American Federation of State, County and Municipal Employees, dated July 3, 2013 (‘‘AFSCME Letter’’); Brandon Rees, Acting Director, American Federation of Labor and Congress of Industrial Organizations Office of Investment, dated July 5, 2013 (‘‘AFL–CIO Letter’’); Charles V. Rossi, President, The Securities Transfer Association, Inc., dated July 5, 2013 (‘‘STA Letter III’’); James J. Angel, dated July 5, 2013 (‘‘Angel Letter’’); and Michael J. Hogan, Chief Executive Officer, FOLIOfn Investments, Inc., dated July 12, 2013 (‘‘FOLIOfn Letter II’’); see also letters to the Honorable Mary Jo White, Chair, Commission from Ann Yerger, Executive Director, Council of Institutional Investors, dated May 17, 2013 (‘‘CII Letter II’’); and Charles E. Schumer, United States Senator, dated May 23, 2013 (‘‘Schumer Letter’’). 10 See letter to Elizabeth M. Murphy, Secretary, Commission from Janet McGinnis, EVP & Corporate Secretary, NYSE Euronext, dated July 9, 2013 (‘‘NYSE Letter II’’). 11 See Securities Exchange Act Release No. 70217 (August 15, 2013), 78 FR 51780 (August 21, 2013). 12 See letter to Elizabeth M. Murphy, Secretary, Commission from Janet McGinnis, EVP & Corporate Secretary, NYSE Euronext, dated September 9, 2013 (‘‘NYSE Letter III’’). NYSE Letter III provided additional information from Broadridge about the costs involved in providing proxy and report distribution services (the ‘‘Broadridge Material’’). 13 See letter to Elizabeth M. Murphy, Secretary, Commission from Janet McGinnis, EVP & Corporate Secretary, NYSE Euronext, dated October 1, 2013 (‘‘NYSE Letter IV’’). In addition, on October 15, 2013, the Chairman of NYSE’s Proxy Fee Advisory Committee submitted a letter in support of NYSE’s proposal. See letter to Elizabeth M. Murphy, Secretary, Commission from Paul F. Washington, Chairman, NYSE Proxy Fee Advisory Committee, dated October 15, 2013 (‘‘Washington Letter’’). Furthermore, on October 18, 2013, the Society of Corporate Secretaries & Governance Professionals submitted a letter in support of the statements made in NYSE Letter IV regarding (i) the elimination of the preference management fee for managed VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 II. Background NYSE member organizations that hold securities for beneficial owners in street name solicit proxies from, and deliver proxy and issuer communication materials to, beneficial owners on behalf of NYSE issuers.14 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,15 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. Under these rules, companies must pay nominees for reasonable expenses, both direct and indirect, incurred in providing proxy information to beneficial owners. The Commission’s rules do not specify the fees that nominees can charge issuers for proxy distribution; rather, they state that issuers must reimburse the nominees for ‘‘reasonable expenses’’ incurred.16 Currently, the Supplementary Material to NYSE Rules 451 and 465 establish the fee structure for which a NYSE member organization may be reimbursed for expenses incurred in connection with distributing proxy materials to beneficial shareholders.17 accounts with fewer than five shares and (ii) EBIPs. See letter to Elizabeth M. Murphy, Secretary, Commission from Darla C. Stuckey, Senior Vice President, Policy & Advocacy, Society of Corporate Secretaries & Governance Professionals, dated October 18, 2013. 14 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’’). 15 17 CFR 240.14b–1; 17 CFR 240.14b–2. 16 In adopting the direct shareholder communications rules in the early 1980s, the Commission left the determination of reasonable costs to the self-regulatory organizations (‘‘SROs’’) because they were deemed to be in the best position to make fair evaluations and allocations of costs associated with these rules. See Securities Exchange Act Release No. 20021 (July 28, 1983), 48 FR 35082 (August 3, 1983); see also Securities Exchange Act Release No. 45644 (March 25, 2002), 67 FR 15440, 15440 n.8 (April 1, 2002) (order approving NYSE program revising reimbursement rates) (‘‘2002 Approval Order’’). 17 See Rules 451 and 465. PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 63531 This fee structure is also replicated in Section 402.10 of the NYSE Listed Company Manual.18 The NYSE fee structure represents the maximum approved rates that an issuer can be billed for proxy distribution services absent prior notification to and consent of the issuer.19 NYSE member firms may seek reimbursement for less than the approved rates; 20 however, it is the Commission’s understanding that in practice most issuers are billed at the maximum approved rates. The vast majority of nominees that distribute issuer proxy material to beneficial owners are entitled to reimbursement at the NYSE fee schedule rates because most of the brokerage firms are NYSE members or members of other exchanges that have rules similar to the NYSE’s rules.21 Over time, however, NYSE member organizations increasingly have outsourced their proxy delivery obligations to third-party proxy service providers, which are generally called ‘‘intermediaries,’’ rather than handling proxy processing internally.22 At the present time, a single intermediary, Broadridge Financial Solutions, Inc. (‘‘Broadridge’’), handles almost all proxy processing and distribution to beneficial owners holding shares in street name in the United States.23 In general, Broadridge enters into a contract with the NYSE member firm and acts as a billing and collection agent for that member firm.24 As a result, it is Broadridge that, on behalf of its member firm clients, most frequently bills and collects proxy distribution fees from issuers based on the NYSE fee schedule. The NYSE’s current proxy fee structure is the product of a multi-year, multi-task force effort that began in 1995 and culminated in 2002 with the Commission’s approval of an NYSE program that significantly revised the then-current NYSE reimbursement guidelines.25 In the 2002 Approval Order, the Commission stated that, as long as the NYSE’s proxy fee structure remains in place, the Commission expected the NYSE to periodically 18 See Section 402.10, NYSE Listed Company Manual. 19 See Rules 451.93 and 465.23. 20 Id. 21 See Proxy Concept Release, 75 FR 42995 n.110. 22 See 2002 Approval Order, 67 FR 15540. According to the NYSE, this shift was attributable to the fact that NYSE member firms believed that proxy distribution was not a core broker-dealer business and that capital could be better used elsewhere. Id. 23 See Proxy Concept Release, 75 FR 42988, n. 57, and at 42996, n.129; see also Notice, 78 FR 12382. 24 See Proxy Concept Release, 75 FR 42997. 25 See 2002 Approval Order; see also Notice, 78 FR 12383. E:\FR\FM\24OCN1.SGM 24OCN1 63532 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices review the fees to ensure that they are related to the reasonable proxy expenses of the NYSE member firms, and to propose changes as appropriate.26 Similarly, in the Proxy Concept Release, the Commission stated that ‘‘it appears to be an appropriate time for SROs to review their existing fee schedules to determine whether they continue to be reasonably related to the actual costs of proxy solicitation.’’ 27 As is also noted in the Proxy Concept Release, in 2006, a working group formed to review the NYSE proxy fee structure (‘‘Proxy Working Group’’) recommended that the NYSE engage an independent third party to analyze and make recommendations regarding the fee structure and to study the performance of the largest proxy service provider (i.e., Broadridge) and the business process by which the distribution of proxies occurs.28 The Proxy Concept Release further noted that, as of the date of the release, such review had not been done.29 The proposed rule change represents the most recent effort to revise the NYSE proxy fee structure. In September 2010, the Exchange formed a Proxy Fee Advisory Committee (‘‘PFAC’’), composed of representatives of issuers, broker-dealers and investors, to review the existing NYSE fee structure and make recommendations for change as the PFAC deemed appropriate.30 The proposed rule change is an outgrowth of the PFAC’s recommendations.31 III. Description of the Proposal In the proposal, the Exchange has proposed to amend its schedule for the reimbursement of proxy fees by amending the Supplementary Material to NYSE Rules 451 and 465, and Section 402.10 of the NYSE Listed Company Manual.32 The Exchange represents that the proposed changes reduce some fees and increase others.33 Broadridge has estimated that, under the proposed 26 See 2002 Approval Order, 67 FR 15444. Proxy Concept Release, 75 FR 42997; see also Notice, 78 FR 12382. 28 See Proxy Concept Release, 75 FR 42996. 29 Id. 30 See Notice, 78 FR 12382. 31 For a more detailed description of the background and history of the proxy distribution industry, proxy fees, and events leading to the instant proposal, see the 2002 Approval Order, Proxy Concept Release, and Notice. 32 The Exchange has proposed to amend Rule 451 and to delete the text of Rule 465, which duplicates Rule 451, and replace it with a general cross reference to proposed Rule 451. Proposed Section 402.10 of the NYSE Listed Company Manual would reproduce proposed Rule 451 as amended. See notes 43 and 44 and accompanying text, infra. 33 See Notice, 78 FR 12384. mstockstill on DSK4VPTVN1PROD with NOTICES 27 See VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 changes, overall fees paid by issuers would decrease by approximately 4%.34 Currently, the reimbursement rates set by the Exchange for the distribution of an issuer’s proxy materials include: 35 • A base mailing or basic processing fee of $0.40 for each beneficial owner account of an issuer that is entitled to receive proxy materials when there is not an opposing proxy. When there is an opposing proxy, the base mailing or processing unit fee is $1.00 for each beneficial owner account of the issuer. While NYSE Rule 451.90(1) currently refers to this fee as being for each set of proxy material when mailed as a unit, this fee, in practice, applies regardless of whether the materials have been mailed or the mailing has been suppressed or eliminated.36 • As supplemental fees for intermediaries or proxy service providers that coordinate proxy distributions for multiple nominees, a fee of $20 per nominee plus an additional fee of $0.05 per beneficial owner account for issuers whose securities are held in 200,000 or more beneficial owner accounts and $0.10 per beneficial owner account for issuers whose securities are held in fewer than 200,000 beneficial owner accounts.37 • An incentive fee of $0.25 per beneficial owner account for issuers whose securities are held in 200,000 or more beneficial owner accounts and $0.50 per beneficial owner account for issuers whose securities are held in fewer than 200,000 beneficial owner accounts. This fee, which is in addition to the basic processing fee and supplemental intermediary fees, applies when the need to mail materials in paper format has been eliminated, for instance, by eliminating duplicative mailings to multiple accounts at the same address 38 or distributing some or all material electronically.39 34 Id. 35 See NYSE Rules 451.90–451.95, 465.20–465.25, and Section 402.10 of the NYSE Listed Company Manual; see also Proxy Concept Release, 75 FR 42995–96. For an example of the application of the current reimbursement rates, see Proxy Concept Release, 75 FR 42996 n.120. 36 See NYSE Rules 451.90, 465.20, and Section 402.10(A) of the NYSE Listed Company Manual; see also Proxy Concept Release, 75 FR 42996. 37 Id. 38 Id. The elimination of duplicative mailings to multiple accounts at the same address is referred to as ‘‘householding.’’ See Proxy Concept Release, 75 FR 42983 n.5; see also NYSE Rule 451.95. Specifically, the incentive fee may be collected for such ‘‘householding’’ when NYSE member firms ‘‘eliminate multiple transmissions of reports, statements or other materials to beneficial owners having the same address, provided they comply with applicable SEC rules with respect thereto. . . .’’ NYSE Rule 451.95. 39 Proxy materials can be provided electronically to shareholders that have affirmatively consented to PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 NYSE’s current fee schedule also sets forth fees that issuers must pay to brokers and their intermediaries for obtaining a list of the non-objecting beneficial owners holding the issuer’s securities, commonly referred to as a ‘‘NOBO list.’’ 40 Currently, these fees are $0.065 per name of non-objecting beneficial owner provided to a requesting issuer and, where the nonobjecting beneficial ownership information is furnished to the issuer by an agent designated by the member organization instead of directly by the member organization, issuers are expected to pay the reasonable expenses of the agent in providing such information.41 As an initial, technical matter, the Exchange has proposed to eliminate some of the duplication and obsolete language in the NYSE rules in which the fee schedule is set forth.42 The same proxy fees are currently presented multiple times in Rule 451, Rule 465 and Section 402.10 of the Listed Company Manual.43 To clarify matters, proposed Rules 465.20–465.25 would cross-reference proposed Rules 451.90– 451.95, and proposed Section 402.10 of the Listed Company Manual would reproduce the text of proposed Rules 451.90–451.95.44 Additionally, the proposed rule change would eliminate obsolete references to the effective dates of past changes to the fee structure as well as to the amount of a surcharge, set forth in Rule 451.91, that was temporarily applied in the mid-1980s.45 Further, the Exchange has proposed to eliminate several references to ‘‘mailings’’ in the proposed rules, given that the processing fees apply even where physical mailings have been suppressed.46 Lastly, the Exchange has proposed to eliminate several minor minimum fees of $5 or less as irrelevant electronic delivery. See Proxy Concept Release, 75 FR 42986 n.32. Such affirmative consent also is required before the notice of internet availability of proxy materials—a component of the notice and access method of proxy distribution, which is an additional alternative to paper mailing of proxy materials, as discussed below—can be sent to shareholders electronically. Id. Without such consent, the notice must be mailed to shareholders in paper format. Id. If the notice is sent in paper format, the incentive fee would not be applied. 40 See, e.g., NYSE Rule 451.92. 41 Id. 42 See Notice, 78 FR 12390. 43 Id. 44 Id. Where the proposed Rules are cited below, for the sake of simplicity, such citations will include only Rules 451.90–451.95 and not the corresponding provisions of proposed Section 402.10 of the NYSE Listed Company Manual. 45 See Notice, 78 FR 12390. 46 Id. E:\FR\FM\24OCN1.SGM 24OCN1 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices As set forth above, there is currently a fee of $0.40 for each beneficial owner account of an issuer that is entitled to receive proxy materials when there is not an opposing proxy.51 This fee is commonly referred to as the base mailing or basic processing fee.52 The Exchange has proposed to replace this flat $0.40 fee with a tiered fee structure for each set of proxy material processed as a unit, which the Exchange has proposed to call a ‘‘Processing Unit Fee.’’ 53 The tiers would be based on the number of nominee accounts through which an issuer’s securities are beneficially owned: • $0.50 for each account up to 10,000 accounts; • $0.47 for each account above 10,000 accounts, up to 100,000 accounts; • $0.39 for each account above 100,000 accounts, up to 300,000 accounts; • $0.34 for each account above 300,000 accounts, up to 500,000 accounts; • $0.32 for each account above 500,000 accounts.54 Under this tiered schedule, every issuer would pay the first tier rate—$0.50—for the first 10,000 accounts, or portion thereof, with decreasing rates applicable only to the incremental additional accounts in the additional tiers.55 In addition, the Exchange has proposed to clarify that references in proposed Rule 451 to the ‘‘number of accounts’’ have a different meaning for a nominee that distributes proxy materials without the services of an intermediary as compared to a nominee that is served by an intermediary. For a nominee that distributes proxy materials without the services of an intermediary, references to number of accounts in proposed Rule 451 mean the number of accounts holding securities of the issuer at the nominee.56 For a nominee that is served by an intermediary, such references mean the aggregate number of nominee accounts with beneficial ownership in the issuer served by the intermediary.57 As the Exchange has noted in the proposal, this means that, for a particular issuer, the fee charged by an intermediary or a nominee that self-distributes (and therefore does not use an intermediary) within the 47 Id. Proposed Rule 451.90(3), which would set forth the fee for interim reports and other material, is an example of the proposed technical amendments. As proposed, the pre-existing $0.15 fee in current Rule 451.90 would not change, but the $2.00 minimum for all sets mailed would be eliminated, and the language of the rule would be amended to eliminate the reference to the effective date of the pre-existing rule and to replace the word ‘‘mailed’’ with ‘‘processed.’’ See proposed Rule 451.90(3). 48 The Exchange has also proposed to codify definitions of the terms ‘‘nominee’’ and ‘‘intermediary.’’ Under proposed Rule 451.90(1)(a), the term ‘‘nominee’’ would be defined to mean a broker or bank subject to SEC Rule 14b–1 or 14b–2, respectively, and the term ‘‘intermediary’’ would be defined to mean a proxy service provider that coordinates the distribution of proxy or other materials for multiple nominees. 49 See proposed Rule 451.90. 50 See proposed Rule 451.90(6). 51 See Rule 451.90; see also Proxy Concept Release, 75 FR 42996. 52 See Notice, 78 FR 12385; see also Proxy Concept Release, 75 FR 42996. 53 See proposed Rule 451.90(1)(b)(i). The Exchange has not proposed to replace the current $0.40 flat fee for proxy follow-up materials with a tiered structure. The Exchange has proposed to keep a flat Processing Unit Fee of $0.40 per account for each set of follow-up material, but for those relating to an issuer’s annual meeting for the election of directors, the Exchange has proposed to reduce the fee by half, to $0.20 per account. See proposed Rule 451.90(2). The Exchange notes that issuers have a choice whether or not to use reminder mailings, and that the reduced fee may induce more issuers to use reminder mailings, which could increase investor participation, particularly among retail investors. See Notice, 78 FR 12390. 54 See proposed Rule 451.90(1)(b)(i). 55 Id. 56 Id. 57 Id. While the definition of the term nominee in NYSE’s proposal includes both brokers and banks for purposes of determining which tiers apply, the Commission notes that the scope of the rule being approved here today applies to reasonable rates of reimbursement of NYSE member firms. See also note 48, supra. to the overall fees imposed or collected.47 Substantively, the Exchange has proposed to revise certain aspects of the existing fee schedule and add new fees.48 These revisions, described in turn below, include: (a) Amending the base mailing/basic processing fees; (b) amending the supplemental fees for intermediaries that coordinate proxy mailings for multiple nominees; (c) amending the incentive/preference management fees, including the manner in which such fees are applied to managed accounts; (d) adding fees for proxy materials distributed by what is known as the notice and access method; (e) adding fees for enhanced brokers’ internet platforms; and (f) amending the fees for providing beneficial ownership information.49 In addition, notwithstanding any other provision of proposed Rule 451.90, the Exchange has proposed that no fee be incurred by an issuer for any nominee account that contains only a fractional share—i.e. less than one share or unit—of the issuer’s securities or for any nominee account that is a managed account and contains five or fewer shares or units of the issuer’s securities.50 mstockstill on DSK4VPTVN1PROD with NOTICES A. Base Mailing/Basic Processing Fees VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 63533 different tiers will depend on the number of accounts holding shares in that issuer that are served by the intermediary or held by the particular nominee.58 Accordingly, for an issuer with a large number of beneficial accounts, intermediaries or selfdistributing nominees serving a small portion of the issuer’s accounts would bill the issuer at the higher tier-one rates whereas an intermediary serving a large number of the issuer’s accounts would bill the issuer at rates that reflect the progressive decrease in rates across the tiers as the number of accounts served increases.59 The Exchange has also proposed to specify that, in the case of a meeting for which an opposition proxy has been furnished to security holders, the proposed Processing Unit Fee shall be $1.00 per account, in lieu of the tiered fee schedule set forth above.60 This would, therefore, be no departure from the current $1.00 fee that is assessed when an opposition proxy has been furnished. B. Supplemental Intermediary Fees As stated above, the Exchange’s fee schedule currently provides for supplemental fees for intermediaries or proxy service providers that coordinate proxy distributions for multiple nominees of $20 per nominee, plus an additional fee of $0.05 per beneficial owner account for issuers whose securities are held in 200,000 or more beneficial owner accounts and $0.10 per beneficial owner account for issuers whose securities are held in fewer than 200,000 beneficial owner accounts.61 The Exchange has proposed to replace the $20 per-nominee fee with a $22 fee for each nominee served by the intermediary that has at least one account beneficially owning shares in the issuer.62 The Exchange also has proposed to replace the $0.05 and $0.10 fees, which are determined based on whether or not the issuer’s securities are held in at least 200,000 beneficial owner accounts, with a tiered fee structure called the ‘‘Intermediary Unit Fee,’’ which would be based on the number of nominee accounts through which the issuer’s securities are beneficially owned: • $0.14 for each account up to 10,000 accounts; • $0.13 for each account above 10,000 accounts, up to 100,000 accounts; 58 See Notice, 78 FR 12385 n.20. 59 Id. 60 See proposed Rule 451.90(1)(b)(ii). Rule 451.90; see also Proxy Concept Release, 75 FR 42996. 62 See proposed Rule 451.90(1)(c)(i). 61 See E:\FR\FM\24OCN1.SGM 24OCN1 mstockstill on DSK4VPTVN1PROD with NOTICES 63534 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices • $0.11 for each account above 100,000 accounts, up to 300,000 accounts; • $0.09 for each account above 300,000 accounts, up to 500,000 accounts; • $0.07 for each account above 500,000 accounts.63 Under this tiered schedule, every issuer would pay the first tier rate—$0.14—for the first 10,000 accounts, or portion thereof, with decreasing rates applicable only to the incremental additional accounts in the additional tiers.64 Additionally, the Exchange has proposed the following tiered fee schedule for special meetings that would apply in lieu of the schedule set forth immediately above: • $0.19 for each account up to 10,000 accounts; • $0.18 for each account above 10,000 accounts, up to 100,000 accounts; • $0.16 for each account above 100,000 accounts, up to 300,000 accounts; • $0.14 for each account above 300,000 accounts, up to 500,000 accounts; • $0.12 for each account above 500,000 accounts.65 Under this tiered schedule, every issuer would pay the first tier rate— $0.19—for the first 10,000 accounts, or portion thereof, with decreasing rates applicable only to the incremental additional accounts in the additional tiers.66 The Exchange has proposed that, for purposes of proposed Rule 451.90(1)(c)(iii), a special meeting is a meeting other than the issuer’s meeting for the election of directors.67 The Exchange has also proposed that, in the case of a meeting for which an opposition proxy has been furnished to security holders, the proposed Intermediary Unit Fee shall be $0.25 per account, with a minimum fee of $5,000.00 per soliciting entity, in lieu of the tiered fee schedules set forth in proposed Rules 451.90(1)(c)(ii) and (iii).68 Where there are separate solicitations by management and an opponent, the Exchange has proposed that the opponent would be separately billed for the costs of its solicitation.69 The Exchange estimates that the proposed tiered fee structures discussed above—for the Intermediary Unit Fee as well as the proposed Processing Unit Fee—entail fee increases that are 63 See proposed Rule 451.90(1)(c)(ii). 64 Id. 65 See proposed Rule 451.90(1)(c)(iii). 66 Id. 67 Id. 68 See proposed Rule 451.90(1)(b)(iv). 69 Id. VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 estimated to add approximately $9–10 million to overall proxy distribution fees.70 The Exchange states that the PFAC took note of the fact that since the fees were last revised in 2002, there has been an effective decline in the fees of approximately 20% due to the impact of inflation.71 The Exchange also states that the PFAC believed that economies of scale exist when handling distributions for more widely held issuers, which is why the per-account fees decrease as the number of accounts increases.72 Further, the Exchange believes that its proposed tiered structures would approximate the sliding impact of such economies of scale better than the current processing and intermediary fee structures.73 C. Incentive/Preference Management Fees As stated above, the Exchange’s fee schedule currently provides for an incentive fee of $0.25 per beneficial owner account for issuers whose securities are held in 200,000 or more beneficial owner accounts and $0.50 per beneficial owner account for issuers whose securities are held in fewer than 200,000 beneficial owner accounts.74 The Exchange has proposed to refer to this fee as the ‘‘Preference Management Fee’’ and to amend it to be: (a) $0.32 for each set of proxy material described in proposed Rule 451.90(1)(b) (proxy statement, form of proxy and annual report when processed as a unit), unless the account is a Managed Account (as defined in proposed Rule 451.90(6), discussed below), in which case the fee would be $0.16; 75 and (b) $0.10 for each set of material described in proposed Rule 451.90(2) (proxy follow-up material) or proposed Rule 451.90(3) (interim reports and other material).76 The Preference Management Fee would apply to each beneficial owner account for which the nominee has eliminated the need to send materials in paper format through the mails (or by courier service), and would be in addition to, 70 See Notice, 78 FR 12385. at 12384. 72 Id. at 12385. 73 Id. 74 See Rule 451.90. 75 See proposed Rule 451.90(4)(a). The $0.16 Preference Management Fee for Managed Accounts would apply only to Managed Accounts holding more than five shares or units of an issuer’s securities, as the Exchange has proposed that there be no proxy processing fees charged to an issuer for Managed Accounts holding five or fewer shares or units of the issuer’s securities. See note 50 and accompanying text, supra, and discussion of Managed Accounts, infra. 76 See proposed Rule 451.90(4)(b); see also notes 47 and 53, supra, which discuss proposed Rules 451.90(2) and 451.90(3). 71 Id. PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 and not in lieu of, the other proposed fees.77 The Preference Management Fee would apply not only in the year when paper delivery is first eliminated, but also in each year thereafter.78 The Exchange represents that the PFAC was persuaded that there was significant processing work involved in keeping track of the shareholders’ election, especially given that the shareholder is entitled to change that election from time to time.79 According to the Exchange, although few shareholders do in fact change their election, data processing has to look at each account position relative to each shareholder meeting or proxy distribution event to determine whether paper mailing has been eliminated.80 1. Managed Accounts For purposes of proposed Rule 451.90, the Exchange has proposed to define the term ‘‘Managed Account’’ as: [A]n account at a nominee which is invested in a portfolio of securities selected by a professional advisor, and for which the account holder is charged a separate asset-based fee for a range of services which may include ongoing advice, custody and execution services. The advisor can be either employed by or affiliated with the nominee, or a separate investment advisor contracted for the purpose of selecting investment portfolios for the managed account. Requiring that investments or changes to the account be approved by the client would not preclude an account from being a ‘‘managed account’’ for this purpose, nor would the fact that commissions or transaction-based charges are imposed in addition to the asset-based fee.81 As noted above, the Exchange has proposed that the Preference Management Fee applied to Managed Accounts be half that applied to nonmanaged accounts.82 In the proposal, the Exchange notes that, with Managed Accounts, the investor has elected to delegate the voting of its shares to a broker or investment manager who chooses to manage this process 77 See proposed Rule 451.90(4). The need for paper mailings can be eliminated through householding and affirmative consent to electronic delivery. See notes 38 and 39, supra. 78 See Notice, 78 FR 12386. 79 Id. 80 Id. 81 See Proposed Rule 451.90(6); see also Notice, 78 FR 12388. 82 See Proposed Rule 451.90(4)(a). The Exchange represents that its proposal that the Preference Management Fee applied to Managed Accounts be half that applied to non-managed accounts would result in an estimated $15 million reduction in fees. See Notice, 78 FR 12385. E:\FR\FM\24OCN1.SGM 24OCN1 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices electronically rather than by receiving multiple paper copies of proxy statements and voting instructions.83 According to the Exchange, however, tracking the beneficial owner’s voting and distribution election is as necessary with Managed Accounts as it is with any other proxy distribution election eliminating the need for paper mailing, such as consent to e-delivery.84 But the Exchange states that the PFAC concluded that making some distinctions between Managed Accounts and non-managed accounts for fee purposes was appropriate.85 Among other things, the Exchange states that the popularity of Managed Accounts demonstrates that they offer advantages to investors and brokerage firms.86 The Exchange states that issuers also reap benefits from inclusion in Managed Account portfolios, including the added investment in the company’s stock and a higher rate of voting due to the fact that almost all Managed Account investors delegate voting to the investment manager.87 Since both issuers and brokers benefit from Managed Accounts, the Exchange represents that the PFAC determined that issuers and brokers should share the cost of tracking the voting and distribution elections of beneficial owners of the stock positions in Managed Accounts, and therefore recommended that the Exchange propose a Preference Management Fee for Managed Accounts at a rate that is half that for other accounts.88 Additionally, in recognition of what the Exchange notes is a proliferation of Managed Accounts containing a very small number of an issuer’s shares, the Exchange, as noted above, has proposed not to impose any proxy processing fees, including the Preference Management Fee, on an issuer for a Managed Account holding five or fewer shares or units of the issuer’s securities.89 The Exchange states that in certain situations in which Managed Accounts hold very small numbers of shares of an issuer, the benefits of increased stock ownership and increased voting participation were practically nonexistent for the issuer, while the added expense on a relative 83 See Notice, 78 FR 12387. In support of this the Exchange states that Commission rules require each beneficial owner holding shares in a Managed Account to be treated as the individual owner of those shares for purposes of having the ability to elect to vote those shares and receive proxy materials. Id. 85 Id. 86 Id. 87 Id. 88 Id. 89 See proposed Rule 451.90(6); see also Notice, 78 FR 12388. mstockstill on DSK4VPTVN1PROD with NOTICES 84 Id. VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 basis was extraordinary.90 According to the Exchange, because one of the PFAC’s goals was to avoid severe impacts on proxy distribution in the United States, the PFAC drew the line at five shares based on certain information supplied by Broadridge, including information from the 2011 proxy season depicting what the financial impact on proxy revenue would have been of setting the fee proscription for Managed Accounts at different levels.91 According to the Exchange, setting the proscription at five shares or less in the 2011 proxy season would have created an overall decrease in proxy revenue of approximately $4.2 million.92 The Exchange states that the PFAC determined that five shares or less was the appropriate level to draw the line and that the PFAC ‘‘was comfortable that, given the relative benefit/burden on issuers and brokerage firms, it is not reasonable to make issuers reimburse the cost of proxy distribution to managed accounts holding five shares or less.’’ 93 Lastly, the Exchange states that no fee distinction would be based on whether or not a Managed Account is referred to as a ‘‘wrap account.’’ 94 As described by the Exchange, a wrap account is a managed account product with a relatively low minimum investment that tends to have many very small, even fractional, share positions, which led Broadridge to process such wrap accounts without any charge—either for basic processing or incentive fees.95 Broadridge relied on its client firms to specify whether or not an account should be treated as a wrap account for this purpose, and positions in small minimum investment managed accounts which were not marketed with that appellation were subjected to ordinary fees, including incentive fees.96 Under the Exchange’s proposal, accounts identified as wrap accounts would no longer be treated as distinct from Managed Accounts not identified as such, and would therefore be subject to 90 See Notice, 78 FR 12388. The Exchange represents that, based on the Broadridge-supplied information, the overall impact varied from approximately $2.6 million at the fractional (less than one) share level, up to approximately $16 million if the proscription applied to accounts holding 25 shares or less. Id. 92 Id. The Commission understands that this figure does not account for the inclusion of wrap accounts in the proposed fee structure for Managed Accounts. 93 Id. 94 Id. The Commission understands a wrap account to be a certain type of account that is managed by an outside investment adviser. See Proxy Concept Release, 75 FR 42998 n.140. 95 See Notice, 78 FR 12387. 96 Id. at 12387–88. 91 Id. PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 63535 the same proxy fees as Managed Accounts. D. Notice and Access Fees The Commission has adopted a notice and access model that permits issuers to send shareholders what is called a ‘‘Notice of Internet Availability of Proxy Materials’’ in lieu of the traditional paper mailing of proxy materials.97 Currently, the NYSE proxy fee structure does not include maximum fees that member firms—or, in practice, thirdparty proxy service providers—can charge issuers for deliveries of proxy materials using the notice and access method.98 Broadridge currently imposes fees on issuers for use of the notice and access method, in addition to the other fees permitted to be charged under NYSE Rule 451.90.99 In the proposal, the Exchange has proposed to codify the notice and access fees currently charged by Broadridge, with one adjustment.100 Specifically, for issuers that elect to utilize the notice and access method of proxy distribution, the Exchange has proposed an incremental fee based on all nominee accounts through which the issuer’s securities are beneficially owned, as follows: • $0.25 for each account up to 10,000 accounts; • $0.20 for each account over 10,000 accounts, up to 100,000 accounts; • $0.15 for each account over 100,000 accounts, up to 200,000 accounts; • $0.10 for each account over 200,000 accounts, up to 500,000 accounts; • $0.05 for each account over 500,000 accounts.101 The Exchange has also proposed to clarify that, under this schedule, every 97 See Proxy Concept Release, 75 FR 42986 n.32. The notice and access model works in tandem with electronic delivery—although an issuer electing to send a notice in lieu of a full proxy package would be required to send a paper copy of that notice, it may send that notice electronically to a shareholder who has provided an affirmative consent to electronic delivery. Id. These concepts are distinct because the issuer elects whether to use the noticeonly option of the notice and access model on the one hand, while affirmative consents to electronic delivery are a matter between a broker and its customer. 98 Id. at 42996. 99 See Notice, 78 FR 12389. As of the date of the Proxy Concept Release, Broadridge charged issuers that elected the notice and access method of proxy delivery a fee ranging from $0.05 to $0.25 per account for positions in excess of 6,000, in addition to the other fees permitted to be charged under NYSE Rule 451. See Proxy Concept Release, 75 FR 42996–97. 100 See Notice, 78 FR 12389. The Exchange has proposed to exclude from its proposed notice and access fee schedule the $1,500 minimum fee that Broadridge currently charges issuers that are held by 10,000 accounts or less and elect notice and access. The Exchange states that, in its view, such a minimal charge could be unfairly high on a small issuer billed by several intermediaries. Id. 101 See proposed Rule 451.90(5). E:\FR\FM\24OCN1.SGM 24OCN1 63536 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices issuer would pay the tier one rate for the first 10,000 accounts, or portion thereof, with decreasing rates applicable only to the incremental additional accounts in the additional tiers.102 The Exchange has further proposed that follow-up notices would not incur an incremental fee for notice and access, and that no incremental fee would be imposed for fulfillment transactions (i.e., a full pack of proxy materials sent to a notice recipient at the recipient’s request), although out of pocket costs such as postage would be passed on as in ordinary proxy distributions.103 E. Enhanced Brokers’ Internet Platform Fee In the Proxy Concept Release, the Commission solicited views on whether retail investors might be encouraged to vote if they received notices of upcoming corporate votes, and had the ability to access proxy materials and vote, through their own broker’s Web site—a service that the Commission referred to as enhanced brokers’ internet platforms (‘‘EBIP’’).104 According to the Exchange, Broadridge discussed with the PFAC a similar service that it offers, and maintained that while some brokerage firms have already implemented services like the EBIP, it appeared likely that some financial incentive would be necessary to achieve widespread adoption.105 Accordingly, the Exchange has proposed, for a five-year test period, a one-time, supplemental fee of $0.99 for each new account that elects, and each full package recipient among a brokerage firm’s accounts that converts to, electronic delivery while having access to an EBIP.106 According to the Exchange, this fee is intended to persuade firms to develop and encourage the use of EBIPs by their customers.107 To qualify for the fee, an EBIP would have to provide notices of upcoming corporate votes, including record and meeting dates for shareholder meetings, and the ability to access proxy materials and a voting instruction form, and cast the vote, 102 Id. mstockstill on DSK4VPTVN1PROD with NOTICES 103 Id. 104 See Notice, 78 FR 12391; see also Proxy Concept Release, 75 FR 43003. This is in contrast to the current situation in which, for most brokers, a beneficial owner must go to a separate Web site in order to view proxy materials and vote. 105 See Notice, 78 FR 12391. 106 See proposed Rule 451.90(7). As a one-time fee, NYSE member organizations could bill an issuer only once for each account covered by the rule. Id. Billing for the fee would be separately indicated on the issuer’s invoice and would await the next proxy or consent solicitation by the issuer that follows the triggering of the fee by an eligible account’s electronic delivery election. Id. 107 See Notice, 78 FR 12393. VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 through the investor’s account page on the firm’s Web site without an additional log-in.108 This fee would not apply to electronic delivery consents captured by issuers, positions held in Managed Accounts, or accounts voted by investment managers using electronic voting platforms.109 This fee also would not be triggered by accounts that receive a notice pursuant to notice and access or accounts to which mailing is suppressed by householding.110 The Exchange has proposed to require NYSE member organizations with a qualifying EBIP to provide notice thereof to the Exchange, including the date such EBIP became operational, and any limitations on the availability of the EBIP to its customers.111 The Exchange has also noted in the proposed rule that records of conversions to electronic delivery by accounts with access to an EBIP, marketing efforts to encourage account holders to use the EBIP, and the proportion of non-institutional accounts that vote proxies after being provided access to an EBIP must be maintained for the purpose of reporting such records to the NYSE when requested.112 The Exchange states that the EBIP fee would be available to firms that already have EBIP facilities, as even a firm that already has an EBIP can be incented to engage in marketing efforts to persuade its account holders to utilize the EBIP.113 Further, the Exchange states that the fee would be triggered when a new account elects e-delivery immediately (and has access to an EBIP), except for accounts subject to notice and access or householding.114 However, the Exchange represents that a firm making the EBIP available to only a limited segment of its account holders could not earn the EBIP fee from an edelivery election by an account not within the segment having access to the EBIP.115 The Exchange represents that a study of the impact of the program would be conducted after three years.116 F. Fee for Providing Beneficial Ownership Information As noted by the Exchange, since 1986 NYSE rules have provided for fees which issuers must pay to brokers and 108 See proposed Rule 451.90(7). In addition, the Commission notes that the EBIP fee does not apply to accounts that converted to electronic delivery prior to the approval of the EBIP fee in this order. 110 Id. 111 Id. 112 Id. 113 See Notice, 78 FR 12392. 114 Id. 115 Id. 116 Id. 109 Id. PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 their intermediaries for obtaining a list of the non-objecting beneficial owners holding the issuer’s stock.117 Such a list is commonly referred to as a NOBO list, and the fees are charged per name in the NOBO list.118 Currently, Rule 451.92 sets forth a $0.065 fee per NOBO name provided to the requesting issuer, but where the NOBO list is not furnished directly to the issuer by the member organization, and is instead furnished through an agent of the member organization, the current rule does not specify a fee—rather, it says only that the issuer will be expected to pay the reasonable expenses of the agent in providing such information.119 The Exchange states that it understands that Broadridge, acting as such an agent, charges a $100 minimum fee per requested NOBO list, as well as a tiered per-name fee of: $0.10 per name for the first 10,000 names; $0.05 per name from 10,001 to 100,000 names, and $0.04 per each name above 100,000.120 The Exchange has proposed to adopt and codify Broadridge’s minimum and tiered per-name fees into its rules, and to delete its existing language that allows payment of the ‘‘reasonable expenses of the agent.’’ 121 The Exchange also notes that it has been customary for brokers, through their intermediary, to require that issuers desiring a NOBO list take (and pay for) a list of all shareholders who are NOBOs, even in circumstances where an issuer would consider it more cost-effective to limit its communication to NOBOs having more than a certain number of shares, or to those that have not yet voted on a solicitation.122 The Exchange has proposed to depart from this practice, so that when an issuer requests beneficial ownership information as of a date which is the record date for an annual or special meeting or a solicitation of written shareholder consent, the issuer may ask to eliminate names holding more or less than a specified number of shares, or names of shareholders that have already voted, and the issuer may not be charged a fee for the NOBO names so eliminated—a process commonly referred to as ‘‘stratification.’’ 123 For all other requested lists, however, the issuer would be required to take and pay for complete lists.124 117 Id. at 12390; see also Rule 451.92. Notice, 78 FR 12390. 119 See Rule 451.92. 120 See Notice, 78 FR 12390. 121 See proposed Rule 451.92; see also Notice, 78 FR 12391. 122 See Notice, 78 FR 12390–91. 123 See proposed Rule 451.92. 124 Id.; see also Notice, 78 FR 12391. 118 See E:\FR\FM\24OCN1.SGM 24OCN1 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices IV. Summary of Comment Letters and the Exchange’s Responses As noted above, the Commission received a total of 44 comment letters concerning the Exchange’s proposal,125 as well as four supplemental submissions from the NYSE.126 Fourteen commenters expressed general support for the proposed rule change,127 and other commenters supported certain aspects of the proposed rule change. Generally, six commenters believed that the proposal would improve transparency of the proxy fee structure; 128 five believed that the proposal eliminates the ‘‘cliff’’ pricing schedule, in favor of a more rational tiered system; 129 two expressly supported the Exchange’s approach to charges for managed accounts; 130 one stated that the elimination of fees for fractional share positions would eliminate exposure that issuers face from unanticipated increases in the number of street name accounts on a yearly basis; 131 twelve believed that the proposed EBIP fees would reduce costs, enhance efficiency and/or lead to more retail shareholder participation; 132 one believed that providing additional incentives for integration of a customer’s documents in EBIPs would provide a benefit to investors; 133 and six supported the stratification of NOBO lists.134 One commenter also believed that failure to approve the proposal would keep in place a fee structure that is less transparent and less connected to the current work and costs associated with proxy processing.135 mstockstill on DSK4VPTVN1PROD with NOTICES 125 See supra notes 4, 6, 9 and 13. 126 See supra notes 7, 10, 12 and 13. As previously noted, NYSE Letter responded to the comments submitted in response to the Notice, NYSE Letter II responded to the Order Instituting Proceedings, NYSE Letter III provided additional cost information from Broadridge, and NYSE Letter IV responded to FOLIOfn Letter and FOLIOfn Letter II. 127 See Steering Committee Letter, SCSGP Letter, iStar Letter, SCC Letter, Perficient Letter, Gartner Letter, CCMC Letter, Broadridge Letter, Darling Letter, ABC Letter, SIFMA Letter, Zumbox Letter, INVeSHARE Letter, Washington Letter; see also Schumer Letter (strongly supporting success fee to ‘‘encourage the use of enhanced brokers’ internet platforms’’). 128 See Steering Committee Letter, SCSGP Letter, SCC Letter, Broadridge Letter, NIRI Letter, Washington Letter. 129 See SCSGP Letter, ABC Letter, Broadridge Letter, BNY Letter, SCC Letter. 130 See SCSGP Letter, INVeSHARE Letter. 131 See Broadridge Letter. 132 See Steering Committee Letter, SCSGP Letter, iStar Letter, SCC Letter, Perficient Letter, CCMC Letter, Broadridge Letter, Darling Letter, ABC Letter, SIFMA Letter, NIRI Letter, Schumer Letter. 133 See Zumbox Letter. 134 See ABC Letter, Broadridge Letter, NIRI Letter, SCC Letter, ICI Letter, ICI Letter II, SCSGP Letter. 135 See Washington Letter. VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 Other commenters raised concerns regarding the proposal. Generally, twelve commenters expressed concern about the lack of an independent thirdparty review of actual costs in the proxy distribution process; 136 five expressed concern with the lack of a thorough cost/benefit analysis of the proposed rule change; 137 four believed that the processing and intermediary unit fees do not allocate fees equitably between large and small issuers; 138 seven questioned the fairness of the proposed fee schedule; 139 four believed that the structure and level of the proposed proxy fees place a burden on competition; 140 nine expressed concern about the incentive structure for developing EBIPs; 141 four raised concerns regarding the five share limit for fees for processing shares held through managed accounts; 142 three believed the stratified NOBO lists should be made available outside of a record date; 143 two expressed concern about the impact of the proposal on mutual funds in particular; 144 and one believed that the rule proposal is inconsistent with and violates Regulation 14A of the Act, including specifically Rules 14a–13, 14b–1 and 14b–2.145 These issues, and the Exchange’s response, are discussed below.146 136 See STA Letter, STA Letter II, STA Letter III, SSA Letter, Schafer Letter, Lovatt Letter, SCC Letter, IBC Letter, NIRI Letter, ICI Letter, ICI Letter II, BNY Letter, OTC Letter, CtW Letter II, AFL–CIO Letter; see also AST Letter. In addition, one commenter questioned whether the fee structure used by Broadridge should be subject to an independent audit. See CtW Letter. 137 See STA Letter, STA Letter II, SSA Letter, Schafer Letter, Lovatt Letter, IBC Letter. 138 See STA Letter II, Schafer Letter, Lovatt Letter, IBC Letter. 139 See STA Letter II, Schafer Letter, Lovatt Letter, IBC Letter, BNY Letter, ICI Letter, CtW Letter. 140 See SSA Letter, IBC Letter, Schafer Letter, Lovatt Letter. 141 See Harrington Letter, ICC Letter, Sharegate Letter, CG Letter, CII Letter, Zumbox Letter, CtW Letter, CtW Letter II, AFSCME Letter, AFL–CIO Letter. 142 See Broadridge Letter, SIFMA Letter, FOLIOfn Letter, FOLIOfn Letter II, Angel Letter. 143 See SCSGP Letter, Broadridge Letter, BNY Letter. 144 See ICI Letter, AST Letter. 145 See FOLIOfn Letter. 146 The Commission also received comments regarding Broadridge’s decision to end its practice of disclosing voting tallies to shareholder proponents of shareholder proposals (see CII Letter II, Schumer Letter, AFSCME Letter, AFL–CIO Letter), establishing a performance based proxy fee structure (see Angel Letter), and Voting Instruction Forms applied to EBIPs (see CII Letter, Angel Letter; see also infra note 307 and accompanying text for discussion of Voting Instruction Forms). The Commission notes that these issues are beyond the subject of this proposed rule change by the NYSE. In addition, the Commission received a comment regarding the effective date for the proposed rules (see SIFMA Letter) and comments regarding the PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 63537 A. Independent Third-Party Review of Proxy Costs Four commenters that expressed general support for the proposal commented on the issue of whether an independent third-party audit of proxy costs should be conducted.147 One commenter noted that while ‘‘an independent third party may be desirable, the PFAC made a determination that ‘utility rate making’ which could be independently audited would not work for proxy fees.’’ 148 Another commenter believed that determining the cost of proxy processing services based on utility style ‘‘cost-of-service’’ calculations would be very difficult as a practical matter.149 Yet another commenter stated that while an independent review ‘‘is often attractive in the abstract, the regulatory landscape is laden with examples where the costs of such reviews outweigh the benefits.’’ 150 Finally, one commenter stated that an independent review is not necessary because the PFAC is an independent committee with representatives from all parties.151 However, several commenters stated that the NYSE should engage an independent third party to evaluate the structure and level of fees being paid for proxy distribution, as recommended by the NYSE Proxy Working Group in 2006.152 Two commenters argued that an independent third-party audit is the best way to evaluate whether the fees are reimbursed fairly, equitably and propriety of assigning the task of proxy regulation to the NYSE (see FOLIOfn Letter, Angel Letter). In its initial response letter, the Exchange stated its belief that a lengthy period before effectiveness of the proposed fee structure would appear to be unnecessary given that invoicing of proxy fees is typically handled by the intermediary rather than the broker-dealer and given that Broadridge stated in its comment letter that it is prepared to implement the new fee structure soon after approval. See NYSE Letter; see also Broadridge Letter. Further, subsequent to the Exchange’s initial response letter, Broadridge stated that it ‘‘is committed to implementing the new [fee] structure within a short time of its approval.’’ See Broadridge Material. With regard to the comment that the Commission has assigned the task of proxy regulation to the NYSE, although the NYSE participates in some aspects of regulating the proxy process, the Commission has engaged in and overseen numerous rulemakings and overseen and reviewed SRO proposed rules relating to the proxy process. 147 See Broadridge Letter, ABC Letter, INVeSHARE Letter, Angel Letter. 148 See Broadridge Letter. 149 See Angel Letter. 150 See ABC Letter. 151 See INVeSHARE Letter. 152 See STA Letter, STA Letter II, SSA Letter, Schafer Letter, Lovatt Letter, NIRI Letter, SCC Letter, IBC Letter, ICI Letter, ICI Letter II, OTC Letter, CtW Letter II; see also AST Letter, FOLIOfn Letter. E:\FR\FM\24OCN1.SGM 24OCN1 63538 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices objectively, and would eliminate the vested interests of those involved in the process.153 Three other commenters believed the Commission should not approve the proposed rule change until the audit has been commissioned and completed,154 while two others suggested that the Commission approve the proposal, but require an independent third-party review as part of an ongoing process.155 One commenter believed that, without a third-party audit, many issuers would continue to question the validity of proxy fees.156 Another commenter noted that there was no independent verification of the data on the Securities Industry and Financial Markets Association (‘‘SIFMA’’) study related to the costs of proxy processing,157 and yet another believed that the PFAC did not have access to the information necessary to determine whether particular fees were reasonable.158 Finally, one commenter expressed the view that a comprehensive assessment of the NYSE proposal’s net impact on proxy distribution costs for all issuers, including mutual funds, would require further analysis.159 In its initial response, the Exchange stated that the PFAC determined that an independent review of proxy costs was unnecessary.160 The Exchange noted that the PFAC itself was an independent body and that it reviewed audited financial information on Broadridge, segment information provided by Broadridge on its Web site, and several independent analyst reports on Broadridge that gave the PFAC comfort that the existing fees were not providing Broadridge with excessive margin on its activities.161 Further, the Exchange stated that the NYSE proxy fees have been revised a number of times over the years without an independent review of proxy costs.162 The Exchange stated that 153 See NIRI Letter, ICI Letter. STA Letter, STA Letter II, IBC Letter, AFL–CIO Letter; see also OTC Letter (stating the mere fact that much of the data supplied to the PFAC for its analysis of the proposed rule change came exclusively from Broadridge without an independent review and without additional sources discredits the results of the PFAC’s research). 155 See SCC Letter, SCSGP Letter. 156 See NIRI Letter. 157 See BNY Letter. 158 See AFSCME Letter. 159 See AST Letter, AST Letter II. 160 See NYSE Letter. 161 Id. See also Washington Letter (stating that the PFAC ‘‘conducted an independent evaluation of how the underlying work and expenses have evolved (including a detailed analysis of the categories of work currently performed by Broadridge, the costs incurred by Broadridge and by bankers and brokers, and independent investment analyst reports regarding Broadridge’s margins).’’). 162 Id. The Exchange also recognized, as noted by several commenters, that the Proxy Working Group mstockstill on DSK4VPTVN1PROD with NOTICES 154 See VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 there is no requirement that an independent third-party review be conducted, and that such a review was conducted only in the context of significant rule changes developed in the late 1990s.163 The Exchange also stated that ‘‘given the availability of audited financials on Broadridge and the SIFMA survey of costs at representative brokerage firms undertaken at the NYSE’s request, arguably the proposed fee changes have been based on information comparable to that used in the independent studies conducted in the late 1990s.’’ 164 In a supplemental response, the Exchange explained that the costs of the proxy distribution process have not typically been segregated from other costs incurred at firms and intermediaries.165 The Exchange stated that the PFAC learned from conversations with various brokerage firms and intermediaries, including Broadridge, that there is no common methodology for tracking proxy distribution costs, ‘‘nor do these entities segregate these costs from the cost of other similar processing activities that are not reimbursable by issuers.’’ 166 The Exchange explained that this is why the ‘‘PFAC and the Exchange ‘judged that it would likely be impossible and certainly not cost effective, to engage an auditing firm to review industry data for purposes of the Committee’s work.’ ’’ 167 The Exchange reiterated that the PFAC requested that Broadridge provide it non-public financial data, but Broadridge declined.168 However, the Exchange stressed that the ‘‘PFAC did study available materials that allowed it to conclude that the fees it proposed did constitute a reasonable reimbursement of the industry’s costs for proxy distribution to street name accounts.’’ 169 formed in 2006 recommended that the NYSE engage an independent third party to analyze the reasonableness of the proxy fees and to commission an audit of Broadridge’s costs and revenues for proxy mailing, but the Exchange pointed out that that Proxy Working Group did not renew its call for such independent analysis at the time an addendum to the group’s report was published in 2007. See STA II Letter, NIRI Letter, SCC Letter, IBC Letter, BNY Letter, NYSE Letter. 163 Id. 164 Id. The Exchange also asserted that ‘‘throughout the history of the NYSE proxy fees, negotiation among the members of a committee of issuers and brokers, supplemented by the comment process which accompanies a rule filing with the SEC, has been an effective method for reaching a workable consensus on what constitutes ‘reasonable reimbursement.’ ’’ Id. 165 See NYSE Letter II. 166 Id. 167 Id. (quoting Notice). 168 Id. 169 Id. PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 The Exchange also stated that the PFAC accepted that it was appropriate for Broadridge to make a reasonable profit.170 In this context, the Exchange noted that, based on public information showing Broadridge’s pre-tax margin on its Investment Communication Solutions Segment, Broadridge’s margin was consistent with, and in most cases was significantly lower than, ‘‘other firms in comparable businesses, such as transaction processing firms (e.g., Visa), financial processing firms (e.g., Fiserv), other processing firms (e.g., MSCI) and securities industry infrastructure firms (e.g., Computershare).’’ 171 The Exchange stated that the ‘‘PFAC found this credible evidence that the profit being earned by Broadridge on this business segment was reasonable.’’ 172 In response to concerns that the PFAC relied substantially on the limited information provided by Broadridge, the Exchange noted that the PFAC requested that Broadridge provide it non-public financial data, but Broadridge declined.173 However, the Exchange explained that ‘‘Broadridge was otherwise forthcoming with the PFAC and described at length their processes, and provided the PFAC with the detailed task list that was included with the Exchange’s rule filing as an appendix to the SIFMA survey.’’ 174 In addition, the Exchange noted that the PFAC met with a number of other industry participants to discuss the proxy processing business.175 The Exchange also provided additional information from Broadridge about the costs involved in providing proxy and report distribution services.176 Among other things, Broadridge represented that the ‘‘proposed fee structure results in a high degree of alignment between the overall fees paid and the reasonable costs of the services provided.’’ 177 Broadridge estimated that the work associated with the basic processing fee, nominee coordination and intermediary unit fee and preference management fee would 170 Id. 171 Id. 172 Id. 173 Id., see also supra note 161. NYSE Letter II. In particular, the Exchange stated that the ‘‘PFAC requested that Broadridge run tests of various proposals, so that the PFAC could analyze and compare in some detail how different fee structures would impact the issuer population, assisting the PFAC in determining to its satisfaction that its proposals fairly allocated the fees among different size issuers.’’ Id. 175 These market participants included Mediant Communications, Bank of America Merrill Lynch, Citibank, Morgan Stanley Smith Barney, Fidelity’s National Financial and Curian Capital. Id. 176 See supra note 12. 177 See NYSE Letter III. 174 See E:\FR\FM\24OCN1.SGM 24OCN1 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices be 56.7%, 26% and 17.5% of total work effort, respectively, and that if the proposed fees had been in place in fiscal year 2012, such fees would have represented 55.4%, 27% and 18.9% of total fees paid, respectively. Accordingly, in Broadridge’s estimation, there is a high degree of alignment between costs and services.178 B. Cost/Benefit Analysis of the Proxy Fee Proposals Several commenters stated that the NYSE failed to undertake an analysis of the costs and benefits of the fee proposal, using the same degree of rigor applicable to SEC rule changes.179 Two commenters stated that until an objective and comprehensive costbenefit analysis can be developed, the SEC should disapprove this rule filing.180 The Exchange responded by noting that no such cost-benefit analysis is required by the relevant statute or SEC rules.181 However, the Exchange also noted that ‘‘the essence of the PFAC process was a negotiation among parties with often divergent interests seeking an outcome which to each was a balance of the costs and benefits involved.’’ 182 C. Equitable Allocation of Processing and Intermediary Unit Fees Between Large and Small Issuers Several commenters stated that the proposed processing and intermediary fees do not allocate fees equitably between large and small issuers.183 Moreover, two commenters believed that these fees should not be charged at the same level for beneficial owners who are not receiving an actual proxy package.184 These commenters also stated that such fees fall disproportionately on smaller issuers, especially those with less than 300,000 beneficial owner positions.185 They further stated that it was not fair for smaller issuers to be subject to more than a 20% increase in their proxy fees, while an issuer with 1,000,000 beneficial owners would have a mstockstill on DSK4VPTVN1PROD with NOTICES 178 See NYSE Letter III. See also further summary of Broadridge Material in subpart D, Fairness of the Fee Proposals, infra. 179 See STA Letter, STA Letter II, Schafer Letter, Lovatt Letter, IBC Letter. 180 See STA Letter, STA Letter II, IBC Letter. 181 See NYSE Letter. See infra Section V, Discussion and Commission Findings, for a discussion of the likely economic impact that the Commission considered in this context. 182 Id. The Exchange also cited the PFAC’s conclusions regarding Managed Accounts as an example of the PFAC’s cost-benefit analysis. Id. 183 See STA Letter II, IBC Letter, Schafer Letter, Lovatt Letter. 184 See STA Letter II, IBC Letter. 185 See STA Letter II, IBC Letter; see also OTC Letter. VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 decrease in processing and intermediary unit fees.186 The Commission also raised concerns in the Order Instituting Proceedings regarding the proposed tiered fees, noting that while the proposed tiered structures appeared to be an incremental improvement over the status quo, the Exchange had not clearly explained why the particular tiers or rates within each tier were chosen, nor had the Exchange provided evidence that either the Exchange or PFAC had ‘‘conducted a meaningful review of the economies of scale present in the proxy processing business, or the overall costs associated therewith.’’ 187 In response, the Exchange stated that the PFAC requested and reviewed numerous pricing scenarios from Broadridge to ensure that small issuers were not unduly impacted under the proposal.188 The Exchange explained that ‘‘the PFAC wished to develop a more equitable tiering arrangement, in which fees would decline not for all accounts with issuers of a certain size, but where the same price would apply to the first tier in all companies, a reduced price to the second tier in all companies, and so on.’’ 189 According to the Exchange, the PFAC considered and analyzed a number of scenarios and determined that the proposed tiered arrangement was the most effective in removing the distortions of the current fee structure, which has a pricing ‘‘cliff’’ in that it applies a lower fee to all accounts with issuers of a certain size.190 The Exchange also noted that ‘‘[a]s a final check regarding the propriety of the proposed tiers, the PFAC had secured from Broadridge the estimate that overall under the current fees issuers with 100,000 or fewer accounts paid approximately 38% of proxy processing fees, issuers owned by more than 100,000 up to 500,000 accounts paid approximately 30% of such fees, and issuers owned by more than 500,000 accounts paid approximately 32% of the fees.’’ 191 The Exchange stated that 186 See STA Letter II, IBC Letter. These commenters concluded that even ‘‘after accounting for economies of scale, the processing and intermediary unit fees proposed by the NYSE are not equitably allocated between large and small issuers, in light of the fact that there is no substantive justification for why smaller issuers with less than 300,000 beneficial owners should be bearing such a significantly large burden under the proposed fee schedule.’’ 187 Order Instituting Proceedings, 78 FR 32522. 188 See NYSE Letter II. See also Washington Letter (stating that the PFAC ‘‘ ‘reality tested’ the fee structure to assess whether there would be unintended consequences of significantly changing fees for categories of users.’’). 189 Id. 190 Id. 191 Id. PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 63539 estimates of the impact of the proposed fees were that ‘‘such proportions would continue, which the PFAC considered to be consistent with its goals and to represent a fair allocation among the issuer population.’’ 192 D. Fairness of the Fee Proposals Six commenters believed that the proposal would improve transparency of the proxy fee structure so that it is clearer to issuers what services they are paying for and that the fees are consistent with the type and amount of work involved.193 In addition, six commenters believed that the proposal is an improvement that helps eliminate the ‘‘cliff’’ pricing schedule.194 However, several commenters raised concerns about the possibility that issuers may be paying more than would constitute ‘‘reasonable’’ reimbursement for actual costs.195 As a result, several commenters stated that the fee proposal favors the interests of broker-dealers and discriminates against issuers.196 One commenter noted that a 2011 survey of transfer agent pricing compared to the NYSE proxy fee schedule concluded that market-based proxy fees for registered shareholders were more than 40% less than the proxy fees being charged to provide the same services to beneficial owners.197 This commenter also noted that the same study found that all transfer agents participating in the survey charged processing and suppression fees that were significantly less than the fees being charged by broker-dealers under the current NYSE proxy fee schedule.198 This commenter concluded that the NYSE proxy fee schedule, as proposed, does not satisfy the requirements of Section 6(b)(5) of the Act because the proposed fees are ‘‘not based on actual costs incurred and exceed similar charges under competitive pricing and through other broker-dealer utilities operating on an at-cost basis.’’ 199 Another commenter also disputed the NYSE’s assertion that market forces currently shape the fees issuers are required to pay for proxy distribution, and believed a fuller explanation of how the proposed fees represent reimbursement for actual costs 192 Id. 193 See Steering Committee Letter, SCSGP Letter, SCC Letter, Broadridge Letter, NIRI Letter, Washington Letter. 194 See SCSGP Letter, ABC Letter, Broadridge Letter, BNY Letter, SCC Letter, INVeSHARE Letter. 195 See STA Letter, STA Letter II, Schafer Letter, Lovatt Letter, IBC Letter, BNY Letter, ICI Letter. 196 See STA Letter II, IBC Letter, Schafer Letter, Lovatt Letter, OTC Letter. 197 See STA Letter II. 198 Id. 199 Id. E:\FR\FM\24OCN1.SGM 24OCN1 63540 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices is necessary to ensure compliance with statutory requirements.200 In response to concerns regarding the fairness of the proposed rule change, the Exchange, through the Broadridge Material, took the position that the proposal improves the overall fairness and reasonableness of the fee allocation by considering a number of factors, such as an issuer’s size and the characteristics of an issuer’s shareholder base.201 The Broadridge Material expressed the view that, under the current fee structure, fees paid for processing the largest issuers and jobs subsidize the fees paid for processing smaller issuers and jobs, and that the ‘‘subsidy of smaller firms by larger firms is narrowed, but not eliminated, by the proposed fee structure.’’ 202 Furthermore, according to the Broadridge Material, ‘‘in comparison to the current, ‘one-size-fits-all’ fee structure, the proposed fee structure better recognizes economies of scale for issuers of different sizes, as measured by their number of beneficial shareholders.’’ 203 The Exchange, through the Broadridge Material, also represented that the ‘‘proposed fees are lower than current fees, they provide greater total savings, and they contain measures and incentives to improve retail participation.’’ 204 In particular, the Broadridge Material stated that issuers would have saved an estimated 4%–6% on average if the proposal had been in effect for 2012,205 and expressed the view that the incentive fee structure would help continue to drive additional reductions in printing and postage costs.206 In addition, the Broadridge Material cited a study indicating that the regulated fees issuers pay for delivering mstockstill on DSK4VPTVN1PROD with NOTICES 200 See AFSCME Letter. 201 See NYSE Letter III. 202 Id. 203 Id. 204 Id. See also Washington Letter. 205 Id. The Broadridge Material indicated that this figure is based on an analysis of ‘‘all of the invoices Broadridge processed on behalf of its clients, using the proposed fees in place of the current fees, as charged, for U.S. equity proxy meetings.’’ 206 Id. The Broadridge Material also stated that the ‘‘total cost to issuers (fees, printing and postage) is lower by several hundred million dollars each year than it was at the time of the last fee review in 2002,’’ and represented that in ‘‘each of the past six years, the estimated annual savings not only exceeded the incentive fees paid out but all fees issuers paid.’’ The Broadridge Material further expressed the view that the preference management fee and one-time EBIP incentive fee will ‘‘drive investments in technology, and systems development by Broadridge and its clients— resulting in greater use of technology—with large and growing savings to issuers, and greater conveniences to shareholders in accessing proxy information and voting their shares.’’ VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 a proxy to a beneficial shareholder (e.g., through Broadridge) were lower on average than unregulated fees issuers pay for delivering a proxy to a registered shareholder, as well as a supplemental review performed by Broadridge that confirmed that conclusion.207 Finally, the Broadridge Material highlighted its major systems enhancements in recent years, and noted that its IT infrastructure, development and labor costs have risen by 8.4%, 15.4% and 8.1%, respectively, on a compound annual basis, over the past six years, while NYSE’s regulated fees have not changed.208 Below is a more detailed summary of the comments regarding the significant fees on the NYSE schedule, as proposed in the rule filing. 1. Preference Management Fee Several commenters raised concerns regarding the change of the paper and postage elimination fee into a preference management fee, which is assessed for all accounts for which a mailing is suppressed.209 These commenters also highlighted the lack of any detailed analysis about the cost of the work involved for the fee.210 In addition, these commenters questioned the appropriateness of the ‘‘evergreen’’ nature of the fees, which currently are charged not only in the year in which the electronic delivery is elected but also in each year thereafter.211 One commenter stated that if ‘‘Broadridge is paid to ‘keep track’ of a shareholder preference regarding householding or electronic delivery, it should not also be permitted to charge a basic processing fee and an intermediary unit fee for accounts that are suppressed.’’ 212 207 Id. In addition, Broadridge stated that it compared the invoices for the registered shareholder processing services it performed on behalf of issuers in fiscal year 2012 to NYSE’s proposed fees and the results showed that for ‘‘over 80% of issuers and meetings, the proposed regulated fee issuers pay for delivering a proxy to a beneficial shareholder would be lower than the unregulated fee issuers pay for delivering a proxy to a registered shareholder.’’ 208 Id. The Broadridge Material described how costs had been impacted by ‘‘inflation, processing volumes, market activity, regulatory requirements and the evolution of technology, and highlighted the significant growth (116%) in the lines of computer code necessary to process communications from 2002 to 2011. In addition, Broadridge stated that as a result of these costs, and flat to declining volumes and fee revenues, profit margins at Broadridge’s Investor Communications Services business group are at the low end of the processing services industry, on after-tax basis ranging from 9% to 11%. 209 See STA Letter II, BNY Letter, ICI Letter, AFSCME Letter. 210 Id. 211 See STA Letter II, BNY Letter, ICI Letter, AFSCME Letter. 212 See STA Letter II. PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 Another commenter stated that the preference management fee has ‘‘no apparent connection to the amount of effort involved in recording the beneficial owner’s preference on the broker’s system nor that involved in the suppression of mailing.’’ 213 Furthermore, one commenter questioned why the tiered system was appropriate for the ‘‘basic processing fee’’ and ‘‘supplemental fees,’’ and not for the preference management fee.214 In its first response letter, the Exchange referred to its discussion in its rule filing of the appropriateness of charging the preference management fee every year, and noted that, following the SEC’s review of the proxy fees put in place in 1997, the every-year approach was maintained by an independent proxy review committee.215 In its second letter, in response to concerns raised in the Order Instituting Proceedings that the Exchange had not clearly explained why a tiered approach would be inappropriate for the preference management fee,216 the Exchange stated that a tiered approach was not appropriate because preference management processing ‘‘appeared to have fewer economies of scale than the other processing activities.’’ 217 The Exchange also noted that the PFAC asked Broadridge ‘‘to model a tiered approach for preference management fees, but determined that it was too complex, especially in light of the fact that the basic processing fees were being tiered.’’ 218 The Exchange also represented that the work effort associated with both the basic processing fee and intermediary unit fee are separate and in addition to the activities supporting the preference management fee.219 2. Separately Managed and Wrap Accounts 220 One commenter fully supported the reduction of the separately managed account fees 221 and another believed that the Exchange has taken a fair and 213 See BNY Letter. OTC Letter. 215 See NYSE Letter. 216 See Order Instituting Proceedings, 78 FR 32522. 217 See NYSE Letter II. The NYSE stated that performance management fees have low set-up costs, as opposed to the basic processing fee, which has certain set-up costs irrespective of the size of the job. In addition, the Exchange noted that the PFAC determined to distinguish between managed accounts and other accounts in terms of the amount of the preference management fee. 218 Id. 219 See NYSE Letter III. 220 See infra subpart E, Minimum Share Threshold for Managed Accounts. 221 See INVeSHARE Letter. 214 See E:\FR\FM\24OCN1.SGM 24OCN1 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices reasonable approach with respect to charges for managed accounts by cutting the preference management fee in half for positions in managed accounts and eliminating the fee altogether for any position under five shares.222 Several other commenters, however, expressed concern regarding the proxy fees for separately managed accounts, including wrap accounts.223 One commenter highlighted the lack of detailed analysis for why the managed account fees should remain an issuer expense.224 Three commenters questioned the validity of the amount of work involved in managing a separately managed account.225 One commenter expressed uncertainty ‘‘on the value or need to track accounts where there is no need or expectation to deliver proxy materials, since these accounts are voted by a single manager.’’ 226 Another commenter expressed concern that ‘‘private, nonpublic information is being sent to the broker-dealer’s service provider when the broker-dealer should be the entity eliminating the accounts for proxy distribution. With today’s technology, the broker-dealer would easily be able to extract only the accounts which truly should receive proxy materials.’’ 227 Yet another commenter concluded that a fee prohibition should apply when a beneficial owner has instructed an investment adviser to receive issuer proxy materials and vote his or her proxies in lieu of the beneficial owner.228 In its first and fourth response letter, the Exchange referred to the discussion in its rule filing of the issue of the appropriateness of applying the preference management fee to managed accounts.229 In its second letter, in response to concerns raised in the Order Instituting Proceedings that the Exchange had not provided a rationale for treating managed accounts 222 See SCSGP Letter. STA Letter II, SSA Letter, BNY Letter. 224 See STA Letter II. This commenter stated that the ‘‘documentation and data processing for both wrap fee accounts and separately managed accounts are standardized within a broker-dealer’s accounting platform.’’ See also AFSCME Letter (noting that the proposal ‘‘does not explain why issuers should reimburse indefinitely fees associated with not sending materials to a beneficial owner . . . because those owners have delegated their voting rights to an investment manager.’’). 225 See STA Letter II, BNY Letter, FOLIOfn Letter. 226 See BNY Letter. 227 See SSA Letter. 228 See STA Letter II. 229 See NYSE Letter, NYSE Letter IV. According to the Exchange, there is ‘‘processing work to track and maintain the voting and distribution elections made by the beneficial owners of the stock positions in the managed account.’’ See Notice, 78 FR 12387. mstockstill on DSK4VPTVN1PROD with NOTICES 223 See VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 differently only with respect to preference management fees,230 the Exchange explained that the PFAC discussion focused on the preference management fee because the suppression of paper delivery for a managed account ‘‘appeared to be more a consequence of the nature of the account than an effort made to suppress paper delivery.’’ 231 3. Nominee and Coordination Fees One commenter stated that the proposed increase in the nominee coordination fee would be 10%, from $20 to $22 for each nominee holding at least one share of an issuer’s stock.232 This commenter noted that the fee appeared to be significantly higher than similar fees charged by the Depository Trust Company (‘‘DTC’’) and the National Securities Clearing Corporation (‘‘NSCC’’), two broker-dealer utilities that work on an at-cost basis.233 This commenter stated that without independent confirmation of the actual cost of sending electronic search requests to nominees and processing the responses, ‘‘it is hard to justify a 10% increase in this fee, especially when the cost of sending electronic requests, messages, and beneficial owner account information is significantly less expensive when conducted through the DTC and/or NSCC processing systems.’’ 234 4. Notice and Access Fees Two commenters stated that there needs to be an independent review of the actual costs incurred for notice and access fees to reflect a rate of reasonable reimbursement.235 Another commenter stated that the proposal does not provide information sufficient to analyze in detail the cost basis for notice and access fees.236 One commenter noted that the proposal would generally codify Broadridge’s current notice and access fees.237 This commenter stated that ‘‘even if the Commission determines that it is appropriate for such a fee to be charged, it is not reasonable for the fee to apply to all accounts, even those which receive the full set of proxy materials.’’ 238 One 230 See Order Instituting Proceedings, 78 FR 32522–23. 231 See NYSE Letter II. 232 See STA Letter II. 233 Id. 234 Id. The Commission notes that the Exchange stated in the Notice that the nominee coordination fee has declined by approximately 29% on an inflation-adjusted basis since it was first introduced in 1997. See Notice, 78 FR 12384. 235 See STA Letter II, ICI Letter. 236 See AST Letter. 237 See ICI Letter. 238 Id. PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 63541 commenter reiterated that the ‘‘lack of an independent audit hampers the ability of issuers to know what costs are incurred, and why these fees are needed to handle a much lower level of mail processing, i.e., the mailing of one piece instead of a four-piece proxy package.’’ 239 In its initial response letter, the Exchange referred to the discussion in its rule filing of notice and access fees, but emphasized that the PFAC members were satisfied with the overall level of notice and access costs.240 The Exchange represented that the only question was whether Broadridge’s approach with respect to those costs made sense and, after reviewing alternative approaches, the PFAC came to a consensus that Broadridge’s approach was best.241 In addition, the NYSE explained, through the Broadridge Material, that notice and access requires ‘‘incremental software and maintenance, additional processing of an issuer’s shareholder position file, printing of the Notice . . ., establishment of a new production line for Notice processing, and management of inventory to timely fulfill shareholder requests for hard copies of proxy materials.’’ 242 In addition, the Broadridge Material stated that every notice and access request ‘‘makes different demands on three production streams, i.e., for processing mailed Notices, for processing full sets and for processing electronic deliveries.’’ 243 Thus, according to the Exchange, ‘‘each and every issuer that chooses to use [notice and access] places additional demands on proxy systems and servicing costs.’’ 244 5. NOBO List Fees and Stratification One commenter stated that the current NOBO list fees far exceed what should be considered reasonable and deserves further scrutiny.245 This commenter noted that the proposed fee schedule codifies the fee that Broadridge historically has charged for issuers to obtain a list of NOBOs.246 This commenter also raised concerns about the level of fees charged given the relatively uncomplicated nature of the work involved and the possibility that 239 See 240 See STA Letter II. NYSE Letter. 241 Id. 242 See NYSE Letter III. In addition, the Exchange, through the Broadridge Material, represented that every notice and access request ‘‘makes different demands on three production streams, i.e., for processing mailed Notices, for processing full sets and for processing electronic deliveries.’’ 243 Id. 244 Id. 245 See ICI Letter. 246 Id. E:\FR\FM\24OCN1.SGM 24OCN1 63542 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices issuers may be paying twice for the same information.247 Six commenters, however, supported the stratification of NOBO lists.248 Three commenters believed that the proposal to provide stratified NOBO lists would reduce issuers’ costs in communicating with shareholders.249 Another commenter believed that stratified NOBO lists would enhance retail voter participation, as well as help issuers communicate with their shareholders at proxy time.250 Four commenters believed that the stratified NOBO lists should be made available outside of a record date.251 One commenter noted its disappointment that an issuer could not request a stratified NOBO list outside of a record date, ‘‘especially at a time when issuers have a greater need to communicate more frequently with their shareholders, and especially their street name holders.’’ 252 Another commenter stated that the justification used by the NYSE for limiting stratification ‘‘is the impact such a change would have on the proxy system, which appears to be the impact this would have on the vendor (Broadridge) that provides this information,’’ 253 and took the position that any potential negative impact on the vendor is not sufficient justification to restrict potential benefits to issuers.254 One commenter, however, believed that if the proposal were expanded to include requests for stratified lists at any time of the year, there would be an imbalance between fees and the work involved.255 This commenter recommended that the Commission and the NYSE monitor developments with respect to NOBO lists for the first year of the new fees and, at the end of the first year, adjust the rule if necessary.256 The Exchange stated in its first response letter that it believes that there is a rational basis to distinguish between record date lists and other lists, and that it is concerned about the potential impact of the proposed NOBO list fee change on overall proxy fee revenues mstockstill on DSK4VPTVN1PROD with NOTICES 247 Id. 248 See ABC Letter, Broadridge Letter, NIRI Letter, SCC Letter, ICI Letter, ICI Letter II, SCSGP Letter. 249 See ABC Letter, Broadridge Letter, NIRI Letter. 250 See SCSGP Letter. 251 See SCSGP Letter, STA Letter II, BNY Letter, NIRI Letter. 252 See STA Letter II. This commenter also stated that ‘‘issuers find it more cost-effective to order a subset of the NOBO list, segmented by whether or not a beneficial owner already voted on a solicitation, or stratified by a minimum threshold of shares held.’’ 253 See BNY Letter. 254 Id. 255 See Broadridge Letter. 256 See Broadridge Letter. VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 available to reimburse brokers for their costs.257 The Exchange added that issuer and broker experience with the new rule would inform whether future changes are desirable.258 E. Minimum Share Threshold for Managed Accounts One commenter, who stated that it has been adversely affected by fees attributable to managed accounts that hold fractional shares of its own stock, expressed full support for the proposal.259 In addition, one commenter stated that the removal of fees for fractional share positions would help eliminate exposure some issuers have to large, unanticipated increases in the number of street name accounts from one year to the next.260 This commenter estimated that this amendment would save issuers approximately $3.6 million over a period of twelve months.261 However, four commenters raised concerns regarding the five-share limit for fees for processing shares held through managed accounts.262 One commenter stated that the rules for reimbursement should be based on actual (or a reasoned estimate of) proxy processing costs rather than on arbitrarily fixed thresholds.263 Two commenters stated that the proposal lacked a detailed analysis concerning the basis for selecting any particular threshold.264 Two commenters stated that the work required to process proxy distribution to managed accounts is the same, regardless of the number of shares held,265 and one commenter stated the proposed approach has the potential to create an imbalance between the fees and the amount of work involved.266 Instead of drawing the line at five shares, one commenter believed that issuers should not be required to reimburse brokers for processing managed accounts that have less than one whole share.267 Another commenter believed that the same fees should apply regardless of how many shares—or fractions of shares—a shareholder owns if the account holder retains voting rights and thus receives the voting materials, rather than delegating voting 257 See NYSE Letter. 258 Id. 259 See 260 See Gartner Letter. Broadridge Letter. 261 Id. 262 See Broadridge Letter, SIFMA Letter, AST Letter, FOLIOfn Letter, FOLIOfn Letter II. 263 See SIFMA Letter. 264 See AST Letter, FOLIOfn Letter. 265 See Broadridge Letter, SIFMA Letter. 266 See Broadridge Letter. 267 Id. PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 rights to a manager.268 In addition, one commenter suggested a per distribution fee that equals the average cost for all distributions actually made regardless of the number of shares held in a managed account.269 Furthermore, this commenter took the position that the proposal effectively disenfranchises shareholders who hold five or fewer shares in a security in a managed account because it would provide no reimbursement of costs for distribution of proxy materials to those shareholders.270 In the Order Instituting Proceedings, the Commission expressed concerns that the Exchange had not provided a clear explanation as to why the fiveshare threshold for charging proxy fees for managed accounts was chosen.271 In its second response letter, the Exchange reiterated that ‘‘the PFAC was concerned with the proliferation of managed accounts containing a very small number of an issuer’s shares’’ and that ‘‘[t]he basic question was at what point did the benefit to an issuer in terms of shares voted become so minimal as to justify charging the issuer nothing for processing the account.’’ 272 According to the Exchange, the PFAC considered setting the minimum share threshold for managed accounts at various points from a fractional share to 5, 10, 15, 20 and 25 shares, and obtained estimates of the economic impact of each of those, but ultimately reached consensus at the five share threshold.273 The Exchange stated that ‘‘the estimated impact on aggregate proxy fees was considered relatively modest (approximately $4.2 million), and it seemed clear that the voting benefit of five shares or less was limited, [t]o say the least.’’ 274 In its fourth response letter, the Exchange emphasized that the schedule of proxy fees is appropriately based on overall industry costs, not the costs of any individual firm.275 The Exchange also referred to its discussion in its rule filing of the reimbursement of brokers 268 See Angel Letter; see also FOLIOfn Letter II (stating that the costs for distribution to an account that holds three shares in a security is identical to the costs for distribution to an account that holds thirty or more shares). 269 See FOLIOfn Letter II. 270 See FOLIOfn Letter. This commenter stated further that ‘‘although the argument is that no disenfranchisement occurs because firms would still be required to distribute materials to all shareholders, even though distribution to some would not be compensated, the result is that smaller investors are materially disfavored.’’ 271 See Order Instituting Proceedings, 78 FR 32522. 272 See NYSE Letter II. 273 Id. 274 Id. 275 Id. E:\FR\FM\24OCN1.SGM 24OCN1 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices for their reasonable expenses, and stated that by providing ‘‘reimbursement of the reasonable overall expenses of brokers/ banks in the aggregate, the fees as proposed are consistent with the Exchange Act Rules 14b–1 and 14b–2, and are consistent in this respect with the fees approved by the SEC in prior proxy fee rule filings over the years.’’ 276 In addition, the Exchange asserted that the ‘‘average’’ reimbursement approach suggested by one commenter is outdated and might benefit one particular firm, but it would not remedy the anomalous fee impact experienced by issuers resulting from the growth of low minimum investment managed accounts or encourage efforts to eliminate paper distribution.277 F. Burden on Competition Several commenters stated that the structure and level of the proposed NYSE proxy fees place a burden on competition.278 Five commenters stated that the NYSE rule filing does not adequately address the contract arrangements between broker-dealers and Broadridge.279 In particular, two commenters expressed the view that the rule filing does not adequately address the rebates being provided by Broadridge to broker-dealers as a result of excess profits generated by the NYSE proxy fee schedule, which they believe create a burden on competition that is not necessary or appropriate,280 while another commenter believed that the most significant burden to competition is the business practice of the primary provider of services in the proxy fee market and not the fee structure.281 Two commenters believed that the SEC should ‘‘disapprove the rule filing on the basis that the excess profits being generated are creating a burden on competition, as the dominant service provider in this area is able to use these 276 Id. mstockstill on DSK4VPTVN1PROD with NOTICES 277 Id. 278 See STA Letter II, IBC Letter, SSA Letter, Lovatt Letter, Schafer Letter. 279 See STA Letter II, IBC Letter, SSA Letter, BNY Letter, CtW Letter II; see also AFSCME Letter (stating that the Commission should fully explore the conflicts of interest involving Broadridge and provide any guidance it deems appropriate before approving the proxy fee proposal). 280 See STA Letter II, STA Letter III, IBC Letter. One of these commenters stated that there should be an examination of the rebates being provided to ensure that they do not come at the issuer’s expense. See STA Letter II. This commenter also noted that this issue was previously raised by the Proxy Working Group in 2006 and the Proxy Concept Release, and expressed the view that the PFAC did not address this issue in any meaningful way. Id. See infra Section V, Discussion and Commission Findings, for a discussion of the likely economic impact that the Commission considered in this context. 281 See INVeSHARE Letter. VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 excess profits to subsidize its ability to successfully encroach on the proxy servicing business of transfer agents.’’ 282 One commenter stated, however, that although there is one dominant intermediary on the street side, brokers remain free to contract with any entity that can fulfill proxy process services to their clients or can provide those services themselves.’’ 283 In its first response letter, the Exchange referred to the discussion in its rule filing and the PFAC report of the payments made by Broadridge to certain of its broker-dealer clients pursuant to their contractual arrangements, but reiterated that ‘‘the existence of these cost recovery payments is a completely rational result of the fact that the fees are ‘one size’ but have to ‘fit all,’ so that the firms with large volumes can be served at a lower unit cost, while those with smaller volumes have a higher unit cost to Broadridge.’’ 284 The Exchange suggested that, contrary to one commenter’s contention that the rebates reflect excess profits,285 the rebates ‘‘may also be viewed as a demonstration that market forces are directing the ‘excess’ to firms that can be serviced by Broadridge for a lower unit price but have themselves greater internal street name proxy administration costs, given their larger number of accounts.’’ 286 In its second letter, in response to concerns raised in the Order Instituting Proceedings that Broadridge’s rebate arrangements may result in an unnecessary or inappropriate burden on competition,287 the Exchange noted that, according to Broadridge approximately 200 of its 900 bank/ broker clients receive ‘‘cost recovery’’ payments.288 The Exchange noted that ‘‘all firms have to incur at least some costs related to proxy distribution beyond the cost of retaining Broadridge,’’ and took the position that those larger clients who receive cost recovery payments ‘‘are most likely to have more sophisticated operations and greater costs.’’ 289 In addition, the Exchange referred to a survey conducted by SIFMA that, according to the Exchange, ‘‘demonstrated that on an industry basis, brokerage firms are not receiving reimbursement in excess of the costs they expend.’’ 290 On this point, the Exchange referred to SIFMA’s 282 See STA Letter II, IBC Letter. ABC Letter. 284 See NYSE Letter. 285 See STA II Letter. 286 See NYSE Letter. 287 See Order Instituting Proceedings, 78 FR 32523–24. 288 See NYSE Letter II. 289 Id. 290 Id. 283 See PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 63543 extended description of the proxy distribution activities undertaken by broker-dealers, beyond what is outsourced to third-party service providers like Broadridge.291 In particular, the SIFMA description outlined major categories of activities broker-dealers engage in to support proxy services, including: (i) Preference management, (ii) data infrastructure, (iii) oversight and supervision, (iv) client service, and (v) record retention.292 G. Enhanced Broker Internet Platforms Twelve commenters expressed general support for the proposed EBIP incentive fee, noting that it would reduce costs, enhance efficiency and/or lead to more retail shareholder participation.293 Two of these commenters believed that the proposed success fee would increase the availability of EBIPs and potentially spur innovation in such platforms.294 Two additional commenters that supported the proposed fee believed that it would result in higher retail shareholder engagement.295 Six commenters believed that the incentive structure for developing EBIPs could be further improved.296 Three commenters expressed concern that the incentives provided to brokers for developing EBIPs do not extend to other more open platforms, such as ProxyDemocracy.org, Sharegate.com or other Web sites.297 Two commenters stated that these and other entities should be afforded at least the same incentives as brokers.298 These commenters also argued that EBIPs offer no real benefit to retail shareowners over e-delivery.299 Several commenters expressed concern that brokers who set up EBIPs could be incentivized to create default voting mechanisms that essentially replicate uninformed ‘‘broker voting,’’ 300 or that the design of EBIPs otherwise could be unfair or biased.301 Two commenters were of the view that the EBIP proposal addresses the needs 291 See NYSE Letter III. 292 Id. 293 See Perficient Letter, SIFMA Letter, ABC Letter, CCMC Letter, Broadridge Letter, Darling Letter, SCSGP Letter, iStar Letter, Steering Committee Letter, SCC Letter, INVeSHARE Letter, Schumer Letter. 294 See SIFMA Letter, ABC Letter. 295 See NIRI Letter, Schumer Letter. 296 See Harrington Letter, ICC Letter, Sharegate Letter, CG Letter, CII Letter, Zumbox Letter. 297 See ICC Letter, Harrington Letter, CG Letter. 298 See ICC Letter, CG Letter. 299 Id. 300 See ICC Letter, Harrington Letter, CG Letter; see also CtW Letter II. 301 See AFSCME Letter, CtW Letter II, AFL–CIO Letter. E:\FR\FM\24OCN1.SGM 24OCN1 63544 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices of issuers, brokers and Broadridge, rather than shareholders.302 One commenter noted that the ‘‘99 cent fee level was not based on any survey of brokers, or on the anticipated impact of any particular level of success fee on individual broker decisions to implement EBIPs.’’ 303 One commenter requested that the Commission include investment advisors and beneficial owners in developing the incentive plan for EBIPs.304 Two commenters recommended that the proposed rule change be delayed and amended to encourage an open form of client directed voting.305 Another commenter recommended an approach to EBIPs that provides revenue streams to companies who prove they can provide a superior service to the investor customer.306 One commenter requested that the Commission consider issues regarding Voting Instruction Forms (‘‘VIFs’’) and EBIPs before finalizing the proposed rule change.307 However, another commenter believed it is premature to regulate these details of EBIPs, and that experimentation with different types of platforms should be permitted.308 Yet another commenter believed that providing additional incentives for integration of a customer’s documents within one brokerage Web site would provide a stronger benefit to investors.309 One commenter questioned whether the proposal improperly encourages the adoption of Internet voting procedures such as EBIP 302 See ICC Letter, CG Letter. SIFMA Letter. This commenter also suggested that the rules for brokers’ eligibility to receive a success fee be drafted to provide bright lines so that brokers are not compelled to conduct extensive analysis to determine how the fee might apply in their individual circumstances. 304 See Harrington Letter. 305 See ICC Letter, CG Letter; see also Angel Letter (stating that client directed voting will help increase shareholder participation). 306 See Sharegate Letter. 307 See CII Letter. Specifically, this commenter requested that the Commission consider (1) whether VIFs, including those distributed to beneficial shareowners by EBIPs, should be subject to the same degree of Commission oversight as proxy ballots; (2) whether EBIPs that distribute VIFs to beneficial shareowners should be prohibited from presenting voting options in a manner that unfairly tilts votes in favor of management recommendations; (3) whether VIFs, including those distributed to beneficial shareowners by EBIPs, should be prohibited from describing proxy ballot items using wording, headings, or fonts that differ from those used on the related proxy card; and (4) whether VIFs, including those distributed to beneficial shareowners by EBIPs, should not be permitted to tally unmarked shareowner votes in favor of management’s recommendations when the underlying voting items are otherwise ineligible for discretionary voting by brokers. The Commission notes that these comments are beyond the subject of this proposed rule change by the NYSE. 308 See Angel Letter. 309 See Zumbox Letter. mstockstill on DSK4VPTVN1PROD with NOTICES 303 See VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 that, according to the commenter, shift control of the voting process to brokers and corporate managers.310 This commenter also questioned whether the proposal would ensure proper Commission oversight of the preparation of clear, informative and balanced VIFs, and whether it would enable the creation of open rather than proprietary client directed voting systems.311 One commenter believed that the proposed EBIP fee is inequitable because it does not apply to accounts that already have converted to electronic delivery while having access to an EBIP,312 and another commenter believed the incentive fees for EBIPs should apply to all EBIPs, not just new ones.313 However, another commenter urged the Commission not to adopt an incentive fee for the development of EBIPs ‘‘without evidence that such an incentive is necessary’’ and noted that no evidence is presented that the PFAC obtained any data in support of the proposed financial incentive.314 The Exchange, in its initial response letter, noted that it proposed the EBIP incentive fee because it was supported by the PFAC and issuer representatives.315 The Exchange expressed no opinion as to whether EBIPs would be used to facilitate client directed voting, as this was not an issue discussed with the PFAC.316 The Exchange noted one commenter’s concerns regarding the VIF used to obtain voting instructions from street name shareholders,317 but stated that these concerns similarly were not discussed with the PFAC or in follow up EBIP discussions.318 With respect to concerns about firms that have already instituted EBIPs, the Exchange referred to a related discussion in its rule filing, and noted that the proposed fee is premised on the expectation that investors who are provided EBIP will be more likely to elect to switch to edelivery, with the attendant significant savings to issuers in paper and postage.319 H. Impact on Mutual Funds Two commenters took the position that there should be further analysis of the impact the proposed rule change would have on proxy distribution fees 310 See CtW Letter, CtW Letter II. 311 Id. 312 See FOLIOfn Letter. Angel Letter. 314 See AFSCME Letter. 315 See NYSE Letter. 316 Id. 317 See CII Letter. 318 See NYSE Letter. 319 See NYSE Letter IV. 313 See PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 paid by mutual funds and, in particular, the open-end funds that hold special meetings each year.320 One of these commenters stated that the proposal could result in a significant fee increase in combined processing and intermediary unit fees for many mutual funds.321 This commenter also stated that the ‘‘net impact of the proposed changes will vary widely due to the complexity of a proposed fee structure that raises combined processing and intermediary costs for many funds (and especially funds conducting special meetings without the election of directors/trustees), while also reducing certain costs associated with ‘managed accounts.’ ’’ 322 This commenter noted that there was insufficient information to determine the cost basis and impact of the fee changes, including the extent to which related cost reductions could mitigate the impact of higher combined processing and intermediary unit fees.323 In its first response letter, the Exchange expressed the view that these two commenters 324 had premised their comments on a misunderstanding of the meaning of a ‘‘special meeting.’’ 325 According to the Exchange, such misunderstanding may have impacted the proxy fee analysis performed by the other commenter.326 One commenter responded that ‘‘the [Exchange’s] response did not change (or specifically address) our view that there is a need for additional analysis of the proxy distribution fees paid by funds.’’ 327 V. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations 320 See ICI Letter, AST Letter. AST Letter. 322 See AST Letter. 323 See AST Letter. 324 See, e.g., ICI Letter. 325 See NYSE Letter. 326 Id., see also AST Letter. With respect to that analysis, the Exchange asserts that it is not clear how many issuers were included, and that the experiences of particular issuers will differ. See NYSE Letter. The Exchange also noted that that analysis clearly states that it looks only at the basic processing and intermediary fees, and only at the fees applicable to special meetings. Id. In addition, the Commission notes that the Exchange has stated that the increased special meeting fees reflect the additional work required of the intermediary for these meetings, such as faster turnaround and more frequent vote tabulation, analytics and reporting because of the need for approval and concerns about quorum. See Notice, 78 FR 12390. 327 See ICI Letter II. The commenter acknowledged its inclusion in the Exchange’s Mutual Fund Proxy Fee Review group, which, according to the commenter, has been focusing on the ‘‘interim fees’’ associated with the distribution of annual and semi-annual reports to fund shareholders. See ICI Letter. 321 See E:\FR\FM\24OCN1.SGM 24OCN1 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES thereunder applicable to a national securities exchange.328 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(4) of the Act,329 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; 330 Section 6(b)(5) of the Act,331 which requires that the rules of an exchange be designed, among other things, 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 not be designed to permit unfair discrimination between customers, issuers, brokers or dealers; and Section 6(b)(8) of the Act,332 which prohibits any exchange rule from imposing any burden on competition that is not necessary or appropriate in furtherance of the Act. The Exchange’s proposal has presented a number of complex and controversial issues, and generated substantial comment, both for and against. The Commission’s Order Instituting Proceedings identified several areas where questions were raised as to whether the Exchange’s proposal was consistent with the requirements of the Act, including those relating to the reasonableness of fees and their equitable allocation, unfair discrimination, and unnecessary burdens on competition. After carefully considering the proposal, the comment letters received and NYSE’s responses, the Commission finds that, on balance, the proposal is consistent with the Act and therefore must be approved.333 The Commission recognizes that some commenters did not support certain aspects of the proposed rule change. The Commission, however, must approve a proposed rule change if it finds that the proposed rule change is 328 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). We address comments about the potential competitive impact of the proposed rule change below. 329 15 U.S.C. 78f(b)(4). 330 Relatedly, SEC Rules 14b–1 and 14b–2 condition broker-dealer’s and bank’s obligation to forward issuer proxy materials to beneficial owners on the issuer’s assurance that it will reimburse the broker-dealer’s or bank’s reasonable expenses, both direct and indirect, incurred in connection with performing that obligation. See 17 CFR 240.14b–1 and 17 CFR 240.14b–2. 331 15 U.S.C. 78f(b)(5). 332 15 U.S.C. 78f(b)(8). 333 15 U.S.C. 78s(b)(2)(C)(i). VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 consistent with the requirements of the Act and the applicable rules and regulations thereunder. NYSE responded to the comments received and the issues identified in the Order Instituting Proceedings, and no comments otherwise convinced us that the proposed rule change was not consistent with the Act and the applicable rules and regulations thereunder. As more fully discussed below, the Commission believes that, overall, the proposed rule change will improve the way proxy distribution and related expenses are allocated. The Exchange has proposed to amend its rules that provide a schedule of ‘‘fair and reasonable’’ rates of reimbursement by issuers to NYSE member organizations for expenses in connection with the processing of proxy materials and other issuer communications provided to investors holding securities in street name. The Exchange’s proposal relies substantially on the recommendations of the PFAC, an advisory committee composed of representatives of issuers, broker-dealers and investors. The PFAC’s recommendations, according to the Exchange, were intended to serve several goals, including supporting the current proxy distribution system given that it provides a reliable and accurate process for distributing proxies to street name stockholders; 334 encouraging and facilitating retail investor voting; improving the transparency of the fee structure; and ensuring that the fees are as fair as possible.335 In the Order Instituting Proceedings, the Commission acknowledged that aspects of the Exchange’s proposal appear designed to make incremental improvements to the existing fee structure.336 Nevertheless, the Commission believed significant questions existed as to whether the Exchange had provided adequate justification for material aspects of its proposal such that the Commission could make a determination that the proposal is consistent with the Act.337 Specifically, in the Order Instituting Proceedings, the Commission questioned the rigor with which the PFAC and the Exchange reviewed the costs associated with proxy processing in developing its recommendations, and noted the PFAC’s reliance on publicly available financial information about Broadridge that did not break out the proxy distribution business as a 334 See Proxy Concept Release, supra note 24. Notice, 78 FR 12384. 336 See Order Instituting Proceedings, 78 FR 32521–22. 337 Id. at 32522. 335 See PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 63545 standalone segment, as well as related analyst reports.338 In addition, several commenters fundamentally questioned the basis for the proposed fee schedule, and believed the Exchange should first engage an independent third party to audit the actual costs incurred in proxy distribution activities.339 In the Order Instituting Proceedings, the Commission concluded that neither the Exchange nor the PFAC had articulated a sufficient analysis of Broadridge’s costs of providing proxy processing services, so that the Commission lacked a sufficient basis on which to assess whether the incremental changes proposed to the existing fee structure were consistent with the statutory standard.340 In response, the Exchange explained that, today, there is no common methodology for tracking the costs incurred in the proxy distribution process, and that they typically have not been segregated from other related costs either at broker-dealers or at intermediaries such as Broadridge.341 The Exchange reiterated the information that led it to conclude that the proposed fees overall were reasonable, including the fact that the profit margins on Broadridge’s broader business segment were consistent with the margins of firms in comparable businesses.342 In addition, the Exchange cited a recent analysis by Broadridge indicating that the fees issuers pay for delivering proxies to registered shareholders, which are not governed by NYSE rule, generally are higher than the proposed fees for delivering proxies to beneficial shareholders.343 The Exchange also provided supplemental information from Broadridge about the higher technology costs it incurred as the delivery of proxies became increasingly electronic, and detailed Broadridge’s major technology investments over the past decade.344 In this regard, the Commission recognizes the difficulties associated with attempts to assign substantial fixed costs, such as those incurred in building and maintaining technological infrastructure, to specific functions or activities. Finally, the Exchange stressed that the proposal was expected to lower overall proxy 338 Id. 339 See 340 See Section IV.A, supra. Order Instituting Proceedings, 78 FR 32523. 341 See NYSE Letter II. 342 See notes 170–172, supra and accompanying text and NYSE Letter III. 343 See note 207, supra and accompanying text and NYSE Letter III. 344 See note 208, supra and accompanying text and NYSE Letter III. E:\FR\FM\24OCN1.SGM 24OCN1 mstockstill on DSK4VPTVN1PROD with NOTICES 63546 Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices distribution fees by at least 4%.345 After reviewing the comments and the Exchange’s responses, we conclude that the Exchange has adequately addressed these issues, and we find that the incremental changes proposed to the existing fee structure are consistent with applicable statutory and regulatory requirements. In the Order Instituting Proceedings, the Commission also questioned the rigor with which the PFAC and the Exchange analyzed the individual components of the proposed fees to assure they met the statutory standards.346 For example, with respect to the basic processing and supplemental fees, the Exchange proposed to introduce a new five-tiered rate structure, with incrementally lower fees for issuers with larger numbers of beneficial owner accounts. Although the Commission acknowledged the Exchange’s desire to better reflect the economies of scale in processing issuers with a larger number of accounts, the Commission expressed concern, among other things, that the Exchange had not explained why the particular five tiers were chosen, or conducted a meaningful review of the economies of scale present in the proxy processing business.347 In response, the Exchange stressed that there were significant fixed ‘‘setup’’ costs associated with each proxy distribution job, and provided an estimate from Broadridge that such fixed costs conservatively represent 25%, and for some functions as much as 50–60%, of total costs.348 According to the Exchange, the proposed fee schedule does not fully reflect the benefits of economies of scale when providing services to large issuers but, sensitive to the potential impact of proxy distribution fees on small issuers, the PFAC determined it was equitable to continue a structure where there was some subsidization of smaller issuers by larger ones.349 The Exchange also noted that, in assessing the fairness of the proposal, the PFAC considered that the overall percentage of proxy processing fees borne by small, medium, and large issuers would remain roughly the same under the new fee schedule.350 Finally, as noted above, the Exchange provided supplemental information indicating that, in Broadridge’s judgment, there was a high degree of alignment between the proposed fees and the required 345 See NYSE Letter III. 346 See Order Instituting Proceedings, 78 FR 32522–23. 347 Id. at 32522. 348 See NYSE Letter III. 349 See NYSE Letter II. 350 Id. VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 ‘‘work efforts’’ to provide the corresponding service (e.g., basic processing is estimated to require 56.7% of the work effort and would represent approximately 55.4% of the proposed fees).351 We find that the Exchange’s responses adequately address our concerns about the individual components of the proposed fees and demonstrate that they are consistent with the Act and relevant rules and regulations thereunder. With respect to the preference management fee, which currently is characterized as an ‘‘incentive’’ fee for eliminating paper mailings, the Commission raised questions in the Order Instituting Proceedings as to the nature of the ongoing work that would justify such a fee, and the rationale for eliminating the existing tiered rate structure.352 The Exchange’s response adequately addressed these concerns. The Exchange explained that ‘‘preference management’’ required confirmation of each preference record on a daily basis.353 According to the Exchange, these ongoing tasks were largely a variable cost, and appeared to have fewer economies of scale than other processing activities.354 The Exchange also provided Broadridge’s assessment that its work effort associated with preference management activities (17.5%) is highly aligned with the proportion of preference management fees (18.9%).355 In the Order Instituting Proceedings, the Commission also raised questions as to the rationale for generally charging managed accounts one-half the rate of other accounts for the preference management fee, and for charging managed accounts with five or fewer shares no fees.356 We find that the Exchange’s further responses adequately articulate the rationale for this proposed change. The Exchange noted that managed accounts generate approximately half of all preference management fees,357 and indicated that it was equitable for issuers and brokerdealers, in effect, to share the cost of ongoing preference management services, because managed accounts benefit broker-dealers by allowing them to gather assets and generate fee income.358 The Exchange also noted the proliferation of low minimum 351 See 352 See NYSE Letter III. Order Instituting Proceedings, 78 FR 32522. 353 See NYSE Letter. 354 See NYSE Letter II. 355 See NYSE Letter III. 356 See Order Instituting Proceedings, 78 FR 32522–23. 357 See NYSE Letter IV. 358 See NYSE Letter II. PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 investment managed accounts,359 and indicated that, for very small managed account positions, it was equitable for there to be no fee given the minimal benefit to an issuer of the number of shares voted from these accounts.360 The Exchange stressed that its rule is designed to provide reasonable reimbursement of the overall expenses of broker-dealers in the aggregate, and the extent of reimbursement of any individual firm would vary depending on the specifics of its account population.361 According to the Exchange, the PFAC—representing issuers, brokerdealers and investors—examined several possible thresholds, but reached consensus at the five-share level.362 The Commission acknowledges that any general rule setting forth an industrywide fee schedule for the reimbursement of reasonable brokerdealer expenses necessarily will not precisely reimburse the actual expenses incurred by individual firms. Brokerdealers nevertheless must comply with their obligations pursuant to Rules 14b1 and 14b-2 under the Act if provided assurance of reimbursement of reasonable expenses as provided in NYSE Rules 451 and 465 and the related material.363 With respect to the notice and access fees, the Commission expressed concern in the Order Instituting Proceedings that the proposal essentially would codify Broadridge’s existing fee schedule.364 The Exchange responded to this concern by providing supplemental information from Broadridge detailing the work effort associated with notice and access services.365 The Exchange previously had represented that there was general satisfaction with the current Broadridge notice and access fees, and although the PFAC had explored alternatives, none were more attractive. Finally, in the Order Instituting Proceedings, the Commission expressed concern regarding the practice by Broadridge of rebating a portion of the fees paid by issuers for proxy processing to its larger broker-dealer clients, and questioned why these savings were not 359 See NYSE Letter IV. NYSE Letter II. 361 See NYSE Letter IV. 362 See NYSE Letter II. 363 Issuers must likewise nevertheless comply with their obligations under Rule 14a–13; the Commission does not view the rule change as inconsistent with or violating Regulation 14A. Accordingly, the Commission does not believe the NYSE proposal could effectively ‘‘disenfranchise’’ shareholders, as alleged by one commenter. See FOLIOfn Letter. 364 See Order Instituting Proceedings, 78 FR 32523. 365 See NYSE Letter III. 360 See E:\FR\FM\24OCN1.SGM 24OCN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 78, No. 206 / Thursday, October 24, 2013 / Notices passed on to issuers.366 Several commenters also were of the view that this practice placed an unnecessary burden on competition. In considering the impact on competition of these rebate practices, the Commission took into account the Exchange’s representations that broker-dealers incur some costs related to proxy distribution beyond the cost of retaining Broadridge, and that, given the economies of scale associated with Broadridge’s services, Broadridge can afford to make ‘‘cost recovery’’ payments to larger brokerdealers to reimburse them for some proxy distribution costs not outsourced to Broadridge.367 Accordingly, these rebate arrangements may in fact appropriately reimburse broker-dealers for reasonable expenses incurred in connection with proxy distribution, and not represent an inappropriate competitive action. The Commission also considered the Exchange’s representation that the proposal was expected to lower overall proxy distribution fees by at least 4%, in which case the proposal would not use Broadridge’s competitive position to adversely affect, on average, the prices paid by issuers. We conclude the Exchange has adequately demonstrated that to the extent the proposed rule change allows rebate practices to continue, that does not place an unnecessary burden on competition in contravention of relevant statutory and regulatory requirements. The Commission recognizes, as it did in the Order Instituting Proceedings, that the Exchange’s proposal appears designed to make incremental improvements to the existing fee structure. For example, as noted above, the proposed five-tiered rate structure for the basic processing and supplemental fees arguably would more equitably allocate such fees among issuers by better reflecting the economies of scale in proxy processing. The proposal also would incrementally apply the rates in higher tiers, so as to avoid the rate ‘‘cliff’’ that currently exists with the supplemental fee tiers. In addition, the proposal would appear to impose fees more equitably on managed accounts, where voting often is delegated by the beneficial shareholder to the investment manager and the positions held frequently are small. Specifically, the proposal would charge managed accounts one-half the rate of non-managed accounts for the 366 See Order Instituting Proceedings, 78 FR 32523. 367 See NYSE Letter III. NYSE supported its representations with a description prepared by SIFMA of these additional proxy distribution costs. VerDate Mar<15>2010 17:25 Oct 23, 2013 Jkt 232001 preference management fee, and no fee for managed accounts with five or fewer shares. In addition, the proposal would provide the same treatment to wrap accounts and other managed accounts, ending the current disparate practice of charging no fees to managed accounts labeled as wrap accounts, but full fees to other managed accounts. Finally, the proposal would, for a five-year test period, provide an EBIP incentive fee to encourage brokerdealers to offer customers the ability, among other things, to access proxy materials and vote through the brokerdealers’ Web sites.368 Commenters expressed the view that the availability of EBIPs would re-engage individual shareholders and encourage retail voting in corporate elections, which the Commission believes would further the protection of investors and the public interest.369 In sum, and as discussed in detail above, the Exchange has proposed a variety of revisions to its schedule of reasonable rates of reimbursement by issuers for the processing of proxy materials and other issuer communications provided to beneficial holders, including with respect to the basic, supplemental, preference management, notice and access, NOBO list, and EBIP incentive fees. The Commission views the proposed rule change as an overall package of changes and fees that is, on balance, an improvement to the NYSE’s existing reimbursement rate structure. The proposed rule change reflects the consensus recommendation of the PFAC, which is composed of representatives of issuers, broker-dealers and investors, key constituencies impacted by the proposal. In the Order Instituting Proceedings, the Commission questioned the rigor with which the PFAC and the Exchange reviewed the costs associated with proxy processing in developing its recommendations, and analyzed the individual components of the proposed fees to assure they met the statutory standards. The Exchange responded by providing the additional explanation and supplemental information described above, including responses to specific comments on the individual components of the proposal. The Commission believes the Exchange has addressed the questions raised in the Order Instituting Proceedings sufficiently to allow the Commission, on balance, to find that the proposal is consistent with the Act. In approving the proposal, the Commission notes that 368 See supra notes 106, 108, 109, 110 and accompanying text for a description of the EBIP fee. 369 See Section IV.G, supra. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 63547 the proxy system need not be reformed in a single step, and the Commission welcomes improvements to the current system, even incremental ones. In this regard, the Commission emphasizes that it continues to review the issues raised in the Proxy Concept Release, including ways to encourage competition in the proxy distribution process, so that more reliance can be placed on market forces to determine reasonable rates of reimbursement. VI. Conclusion For the foregoing reasons, the Commission believes that the proposed rule change is consistent with the Act. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,370 that the proposed rule change (SR–NYSE–2013– 07) be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.371 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–24920 Filed 10–23–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–70713; SR–NYSE–2013–21; SR–NYSEMKT–2013–25] Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE MKT LLC; Notice of Designation of Longer Period for Commission Action on Proceedings To Determine Whether To Disapprove Proposed Rule Changes, as Modified by Amendment Nos. 1, Amending NYSE Rule 104 and NYSE MKT Rule 104—Equities to Codify Certain Traditional Trading Floor Functions That May Be Performed by Designated Market Makers, To Make Exchange Systems Available to DMMs That Would Provide DMMs With Certain Market Information, To Amend the Exchanges’ Rules Governing the Ability of DMMs To Provide Market Information To Floor Brokers, and To Make Conforming Amendments to Other Rules October 18, 2013. On April 9, 2013, the New York Stock Exchange LLC (‘‘NYSE’’) and NYSE MKT LLC (‘‘NYSE MKT’’) (collectively, the ‘‘Exchanges’’) each filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act 370 15 371 17 E:\FR\FM\24OCN1.SGM U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 24OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 206 (Thursday, October 24, 2013)]
[Notices]
[Pages 63530-63547]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-24920]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70720; File No. SR-NYSE-2013-07]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Granting Approval to Proposed Rule Change Amending NYSE Rules 451 and 
465, and the Related Provisions of Section 402.10 of the NYSE Listed 
Company Manual, Which Provide a Schedule for the Reimbursement of 
Expenses by Issuers to NYSE Member Organizations for the Processing of 
Proxy Materials and Other Issuer Communications Provided to Investors 
Holding Securities in Street Name, and To Establish a Five-Year Fee for 
the Development of an Enhanced Brokers Internet Platform

October 18, 2013.

I. Introduction

    On February 1, 2013, 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 the fees set forth in 
NYSE Rules 451 and 465, and the related provisions of Section 402.10 of 
the NYSE Listed Company Manual, for the reimbursement of expenses by 
issuers to NYSE member organizations for the processing of proxy 
materials and other issuer communications provided to investors holding 
securities in street name, and to establish a five-year fee for the 
development of an enhanced brokers internet platform. The proposed rule 
change was published for comment in the Federal Register on February 
22, 2013.\3\ The Commission initially received twenty-four comment 
letters on the proposed rule change.\4\ On April 3, 2013, the 
Commission extended the time period for Commission action to May 23, 
2013.\5\ The Commission thereafter received four more comment 
letters.\6\
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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. 68936 (February 15, 
2013), 78 FR 12381 (``Notice'').
    \4\ See letters to Elizabeth M. Murphy, Secretary, Commission 
from: Charles V. Rossi, President, The Securities Transfer 
Association, dated February 20, 2013 (``STA Letter'') and March 4, 
2013 (``STA Letter II''); Karen V. Danielson, President, Shareholder 
Services Association, dated March 4, 2013 (``SSA Letter''); Jeanne 
M. Shafer, dated March 6, 2013 (``Schafer Letter''); David W. 
Lovatt, dated March 6, 2013 (``Lovatt Letter''); Stephen Norman, 
Chair, The Independent Steering Committee of Broadridge, dated March 
7, 2013 (``Steering Committee Letter''); Jeffrey D. Morgan, 
President & CEO, National Investor Relations Institute, dated March 
7, 2013 (``NIRI Letter''); Kenneth Bertsch, President and CEO, 
Society of Corporate Secretaries & Governance Professionals, dated 
March 7, 2013 (``SCSGP Letter''); Niels Holch, Executive Director, 
Shareholder Communications Coalition, dated March 12, 2013 (``SCC 
Letter''); Geoffrey M. Dugan, General Counsel, iStar Financial Inc., 
dated March 13, 2013 (``iStar Letter''); Paul E. Martin, Chief 
Financial Officer, Perficient, Inc., dated March 13, 2013 
(``Perficient Letter''); John Harrington, President, Harrington 
Investments, Inc., dated March 14, 2013 (``Harrington Letter''); 
James McRitchie, Shareowner, Corporate Governance, dated March 14, 
2013 (``CG Letter''); Clare A. Kretzman, General Counsel, Gartner, 
Inc., dated March 15, 2013 (``Gartner Letter''); Tom Quaadman, Vice 
President, Center for Capital Markets Competitiveness, dated March 
15, 2013 (``CCMC Letter''); Dennis E. Nixon, President, 
International Bancshares Corporation, dated March 15, 2013 (``IBC 
Letter''); Argus I. Cunningham, Chief Executive Officer, Sharegate 
Inc., dated March 15, 2013 (``Sharegate Letter''); Laura Berry, 
Executive Director, Interfaith Center on Corporate Responsibility, 
dated March 15, 2013 (``ICC Letter''); Dorothy M. Donohue, Deputy 
General Counsel--Securities Regulation, Investment Company 
Institute, dated March 15, 2013 (``ICI Letter''); Charles V. Callan, 
Senior Vice President--Regulatory Affairs, Broadridge Financial 
Solutions, Inc., dated March 15, 2013 (``Broadridge Letter''); Brad 
Philips, Treasurer, Darling International Inc., dated March 15, 2013 
(``Darling Letter''); John Endean, President, American Business 
Conference, dated March 18, 2013 (``ABC Letter''); Tom Price, 
Managing Director, The Securities Industry and Financial Markets 
Association, dated March 18, 2013 (``SIFMA Letter''); and Michael S. 
O'Brien, Vice President--Corporate Governance Officer, BNY Mellon, 
dated March 28, 2013 (``BNY Letter'').
    \5\ See Securities Exchange Act Release No. 69286 (April 3, 
2013), 78 FR 21481 (April 10, 2013).
    \6\ See letters to Elizabeth M. Murphy, Secretary, Commission 
from: Jeff Mahoney, General Counsel, Council of Institutional 
Investors, dated April 5, 2013 (``CII Letter''); Paul Torre, 
Executive Vice President, AST Fund Solutions, LLC, dated May 16, 
2013 (``AST Letter''); and John M. Payne, Chief Executive Officer, 
Zumbox, Inc., dated May 20, 2013 (``Zumbox Letter''); see also 
letter to the Honorable Mary Jo White, Chair, Commission from Dieter 
Waizenegger, Executive Director, CtW Investment Group, dated May 17, 
2013 (``CtW Letter'').
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    On May 17, 2013, NYSE submitted a response to the comment 
letters.\7\
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    \7\ See letter to Elizabeth M. Murphy, Secretary, Commission 
from Janet McGinnis, EVP & Corporate Secretary, NYSE Euronext, dated 
May 17, 2013 (``NYSE Letter'').
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    On May 23, 2013, the Commission initiated proceedings to determine 
whether to disapprove the proposed rule change.\8\ In response to the 
Order

[[Page 63531]]

Instituting Proceedings, the Commission received fourteen additional 
comment letters on the proposal.\9\ On July 9, 2013, NYSE responded to 
the Order Instituting Proceedings.\10\ On August 15, 2013, the 
Commission extended the time period for Commission action to October 
20, 2013.\11\ On September 9, 2013, NYSE submitted an additional letter 
in further support of its proposal.\12\ On October 1, 2013, NYSE 
submitted an additional letter in response to FOLIOfn Letter and 
FOLIOfn Letter II.\13\ This order approves the proposed rule change.
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    \8\ See Securities Exchange Act Release No. 69622 (May 23, 
2013), 78 FR 32510 (May 30, 2013) (``Order Instituting 
Proceedings''). In the Order Instituting Proceedings, the 
Commission, among other things, expressed its belief that questions 
remained as to whether the Exchange's proposal was consistent with 
the requirements of: (1) Section 6(b)(4) of the Act, including 
whether it provides for the equitable allocation of reasonable fees 
among its members, issuers and other persons using its facilities; 
(2) Section 6(b)(5) of the Act, including whether it is not designed 
to permit unfair discrimination, or would promote just and equitable 
principles of trade, or protect investors and the public interest; 
and (3) Section 6(b)(8) of the Act, including whether it would not 
impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.
    \9\ See letters to Elizabeth M. Murphy, Secretary, Commission 
from: Katie J. Sevcik, Legal and Regulatory Committee Chair, 
Shareholder Services Association, dated June 12, 2013 (``SSA Letter 
II''); Paul Torre, Executive Vice President, AST Fund Solutions, 
LLC, dated June 18, 2013 (``AST Letter II''); Loren Hanson, 
Assistant Secretary/Assistant Treasurer, Otter Tail Corporation, 
dated June 17, 2013 (``OTC Letter''); Michael J. Hogan, Chief 
Executive Officer, FOLIOfn Investments, Inc., dated June 18, 2013 
(``FOLIOfn Letter''); Harold Westervelt, President, INVeSHARE, dated 
June 18, 2013 (``INVeSHARE Letter''); Dieter Waizenegger, Executive 
Director, Investment Group, dated June 20, 2013 (``CtW Letter II''); 
Dorothy M. Donohue, Deputy General Counsel--Securities Regulation, 
Investment Company Institute, dated June 20, 2013 (``ICI Letter 
II''); Lisa Lindsley, Director, Capital Strategies Program, The 
American Federation of State, County and Municipal Employees, dated 
July 3, 2013 (``AFSCME Letter''); Brandon Rees, Acting Director, 
American Federation of Labor and Congress of Industrial 
Organizations Office of Investment, dated July 5, 2013 (``AFL-CIO 
Letter''); Charles V. Rossi, President, The Securities Transfer 
Association, Inc., dated July 5, 2013 (``STA Letter III''); James J. 
Angel, dated July 5, 2013 (``Angel Letter''); and Michael J. Hogan, 
Chief Executive Officer, FOLIOfn Investments, Inc., dated July 12, 
2013 (``FOLIOfn Letter II''); see also letters to the Honorable Mary 
Jo White, Chair, Commission from Ann Yerger, Executive Director, 
Council of Institutional Investors, dated May 17, 2013 (``CII Letter 
II''); and Charles E. Schumer, United States Senator, dated May 23, 
2013 (``Schumer Letter'').
    \10\ See letter to Elizabeth M. Murphy, Secretary, Commission 
from Janet McGinnis, EVP & Corporate Secretary, NYSE Euronext, dated 
July 9, 2013 (``NYSE Letter II'').
    \11\ See Securities Exchange Act Release No. 70217 (August 15, 
2013), 78 FR 51780 (August 21, 2013).
    \12\ See letter to Elizabeth M. Murphy, Secretary, Commission 
from Janet McGinnis, EVP & Corporate Secretary, NYSE Euronext, dated 
September 9, 2013 (``NYSE Letter III''). NYSE Letter III provided 
additional information from Broadridge about the costs involved in 
providing proxy and report distribution services (the ``Broadridge 
Material'').
    \13\ See letter to Elizabeth M. Murphy, Secretary, Commission 
from Janet McGinnis, EVP & Corporate Secretary, NYSE Euronext, dated 
October 1, 2013 (``NYSE Letter IV''). In addition, on October 15, 
2013, the Chairman of NYSE's Proxy Fee Advisory Committee submitted 
a letter in support of NYSE's proposal. See letter to Elizabeth M. 
Murphy, Secretary, Commission from Paul F. Washington, Chairman, 
NYSE Proxy Fee Advisory Committee, dated October 15, 2013 
(``Washington Letter''). Furthermore, on October 18, 2013, the 
Society of Corporate Secretaries & Governance Professionals 
submitted a letter in support of the statements made in NYSE Letter 
IV regarding (i) the elimination of the preference management fee 
for managed accounts with fewer than five shares and (ii) EBIPs. See 
letter to Elizabeth M. Murphy, Secretary, Commission from Darla C. 
Stuckey, Senior Vice President, Policy & Advocacy, Society of 
Corporate Secretaries & Governance Professionals, dated October 18, 
2013.
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II. Background

    NYSE member organizations that hold securities for beneficial 
owners in street name solicit proxies from, and deliver proxy and 
issuer communication materials to, beneficial owners on behalf of NYSE 
issuers.\14\ 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,\15\ 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. Under these rules, companies 
must pay nominees for reasonable expenses, both direct and indirect, 
incurred in providing proxy information to beneficial owners. The 
Commission's rules do not specify the fees that nominees can charge 
issuers for proxy distribution; rather, they state that issuers must 
reimburse the nominees for ``reasonable expenses'' incurred.\16\
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    \14\ 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'').
    \15\ 17 CFR 240.14b-1; 17 CFR 240.14b-2.
    \16\ In adopting the direct shareholder communications rules in 
the early 1980s, the Commission left the determination of reasonable 
costs to the self-regulatory organizations (``SROs'') because they 
were deemed to be in the best position to make fair evaluations and 
allocations of costs associated with these rules. See Securities 
Exchange Act Release No. 20021 (July 28, 1983), 48 FR 35082 (August 
3, 1983); see also Securities Exchange Act Release No. 45644 (March 
25, 2002), 67 FR 15440, 15440 n.8 (April 1, 2002) (order approving 
NYSE program revising reimbursement rates) (``2002 Approval 
Order'').
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    Currently, the Supplementary Material to NYSE Rules 451 and 465 
establish the fee structure for which a NYSE member organization may be 
reimbursed for expenses incurred in connection with distributing proxy 
materials to beneficial shareholders.\17\ This fee structure is also 
replicated in Section 402.10 of the NYSE Listed Company Manual.\18\ The 
NYSE fee structure represents the maximum approved rates that an issuer 
can be billed for proxy distribution services absent prior notification 
to and consent of the issuer.\19\ NYSE member firms may seek 
reimbursement for less than the approved rates; \20\ however, it is the 
Commission's understanding that in practice most issuers are billed at 
the maximum approved rates.
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    \17\ See Rules 451 and 465.
    \18\ See Section 402.10, NYSE Listed Company Manual.
    \19\ See Rules 451.93 and 465.23.
    \20\ Id.
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    The vast majority of nominees that distribute issuer proxy material 
to beneficial owners are entitled to reimbursement at the NYSE fee 
schedule rates because most of the brokerage firms are NYSE members or 
members of other exchanges that have rules similar to the NYSE's 
rules.\21\ Over time, however, NYSE member organizations increasingly 
have outsourced their proxy delivery obligations to third-party proxy 
service providers, which are generally called ``intermediaries,'' 
rather than handling proxy processing internally.\22\ At the present 
time, a single intermediary, Broadridge Financial Solutions, Inc. 
(``Broadridge''), handles almost all proxy processing and distribution 
to beneficial owners holding shares in street name in the United 
States.\23\ In general, Broadridge enters into a contract with the NYSE 
member firm and acts as a billing and collection agent for that member 
firm.\24\ As a result, it is Broadridge that, on behalf of its member 
firm clients, most frequently bills and collects proxy distribution 
fees from issuers based on the NYSE fee schedule.
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    \21\ See Proxy Concept Release, 75 FR 42995 n.110.
    \22\ See 2002 Approval Order, 67 FR 15540. According to the 
NYSE, this shift was attributable to the fact that NYSE member firms 
believed that proxy distribution was not a core broker-dealer 
business and that capital could be better used elsewhere. Id.
    \23\ See Proxy Concept Release, 75 FR 42988, n. 57, and at 
42996, n.129; see also Notice, 78 FR 12382.
    \24\ See Proxy Concept Release, 75 FR 42997.
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    The NYSE's current proxy fee structure is the product of a multi-
year, multi-task force effort that began in 1995 and culminated in 2002 
with the Commission's approval of an NYSE program that significantly 
revised the then-current NYSE reimbursement guidelines.\25\ In the 2002 
Approval Order, the Commission stated that, as long as the NYSE's proxy 
fee structure remains in place, the Commission expected the NYSE to 
periodically

[[Page 63532]]

review the fees to ensure that they are related to the reasonable proxy 
expenses of the NYSE member firms, and to propose changes as 
appropriate.\26\ Similarly, in the Proxy Concept Release, the 
Commission stated that ``it appears to be an appropriate time for SROs 
to review their existing fee schedules to determine whether they 
continue to be reasonably related to the actual costs of proxy 
solicitation.'' \27\ As is also noted in the Proxy Concept Release, in 
2006, a working group formed to review the NYSE proxy fee structure 
(``Proxy Working Group'') recommended that the NYSE engage an 
independent third party to analyze and make recommendations regarding 
the fee structure and to study the performance of the largest proxy 
service provider (i.e., Broadridge) and the business process by which 
the distribution of proxies occurs.\28\ The Proxy Concept Release 
further noted that, as of the date of the release, such review had not 
been done.\29\
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    \25\ See 2002 Approval Order; see also Notice, 78 FR 12383.
    \26\ See 2002 Approval Order, 67 FR 15444.
    \27\ See Proxy Concept Release, 75 FR 42997; see also Notice, 78 
FR 12382.
    \28\ See Proxy Concept Release, 75 FR 42996.
    \29\ Id.
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    The proposed rule change represents the most recent effort to 
revise the NYSE proxy fee structure. In September 2010, the Exchange 
formed a Proxy Fee Advisory Committee (``PFAC''), composed of 
representatives of issuers, broker-dealers and investors, to review the 
existing NYSE fee structure and make recommendations for change as the 
PFAC deemed appropriate.\30\ The proposed rule change is an outgrowth 
of the PFAC's recommendations.\31\
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    \30\ See Notice, 78 FR 12382.
    \31\ For a more detailed description of the background and 
history of the proxy distribution industry, proxy fees, and events 
leading to the instant proposal, see the 2002 Approval Order, Proxy 
Concept Release, and Notice.
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III. Description of the Proposal

    In the proposal, the Exchange has proposed to amend its schedule 
for the reimbursement of proxy fees by amending the Supplementary 
Material to NYSE Rules 451 and 465, and Section 402.10 of the NYSE 
Listed Company Manual.\32\ The Exchange represents that the proposed 
changes reduce some fees and increase others.\33\ Broadridge has 
estimated that, under the proposed changes, overall fees paid by 
issuers would decrease by approximately 4%.\34\
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    \32\ The Exchange has proposed to amend Rule 451 and to delete 
the text of Rule 465, which duplicates Rule 451, and replace it with 
a general cross reference to proposed Rule 451. Proposed Section 
402.10 of the NYSE Listed Company Manual would reproduce proposed 
Rule 451 as amended. See notes 43 and 44 and accompanying text, 
infra.
    \33\ See Notice, 78 FR 12384.
    \34\ Id.
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    Currently, the reimbursement rates set by the Exchange for the 
distribution of an issuer's proxy materials include: \35\
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    \35\ See NYSE Rules 451.90-451.95, 465.20-465.25, and Section 
402.10 of the NYSE Listed Company Manual; see also Proxy Concept 
Release, 75 FR 42995-96. For an example of the application of the 
current reimbursement rates, see Proxy Concept Release, 75 FR 42996 
n.120.
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     A base mailing or basic processing fee of $0.40 for each 
beneficial owner account of an issuer that is entitled to receive proxy 
materials when there is not an opposing proxy. When there is an 
opposing proxy, the base mailing or processing unit fee is $1.00 for 
each beneficial owner account of the issuer. While NYSE Rule 451.90(1) 
currently refers to this fee as being for each set of proxy material 
when mailed as a unit, this fee, in practice, applies regardless of 
whether the materials have been mailed or the mailing has been 
suppressed or eliminated.\36\
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    \36\ See NYSE Rules 451.90, 465.20, and Section 402.10(A) of the 
NYSE Listed Company Manual; see also Proxy Concept Release, 75 FR 
42996.
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     As supplemental fees for intermediaries or proxy service 
providers that coordinate proxy distributions for multiple nominees, a 
fee of $20 per nominee plus an additional fee of $0.05 per beneficial 
owner account for issuers whose securities are held in 200,000 or more 
beneficial owner accounts and $0.10 per beneficial owner account for 
issuers whose securities are held in fewer than 200,000 beneficial 
owner accounts.\37\
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    \37\ Id.
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     An incentive fee of $0.25 per beneficial owner account for 
issuers whose securities are held in 200,000 or more beneficial owner 
accounts and $0.50 per beneficial owner account for issuers whose 
securities are held in fewer than 200,000 beneficial owner accounts. 
This fee, which is in addition to the basic processing fee and 
supplemental intermediary fees, applies when the need to mail materials 
in paper format has been eliminated, for instance, by eliminating 
duplicative mailings to multiple accounts at the same address \38\ or 
distributing some or all material electronically.\39\
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    \38\ Id. The elimination of duplicative mailings to multiple 
accounts at the same address is referred to as ``householding.'' See 
Proxy Concept Release, 75 FR 42983 n.5; see also NYSE Rule 451.95. 
Specifically, the incentive fee may be collected for such 
``householding'' when NYSE member firms ``eliminate multiple 
transmissions of reports, statements or other materials to 
beneficial owners having the same address, provided they comply with 
applicable SEC rules with respect thereto. . . .'' NYSE Rule 451.95.
    \39\ Proxy materials can be provided electronically to 
shareholders that have affirmatively consented to electronic 
delivery. See Proxy Concept Release, 75 FR 42986 n.32. Such 
affirmative consent also is required before the notice of internet 
availability of proxy materials--a component of the notice and 
access method of proxy distribution, which is an additional 
alternative to paper mailing of proxy materials, as discussed 
below--can be sent to shareholders electronically. Id. Without such 
consent, the notice must be mailed to shareholders in paper format. 
Id. If the notice is sent in paper format, the incentive fee would 
not be applied.
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    NYSE's current fee schedule also sets forth fees that issuers must 
pay to brokers and their intermediaries for obtaining a list of the 
non-objecting beneficial owners holding the issuer's securities, 
commonly referred to as a ``NOBO list.'' \40\ Currently, these fees are 
$0.065 per name of non-objecting beneficial owner provided to a 
requesting issuer and, where the non-objecting beneficial ownership 
information is furnished to the issuer by an agent designated by the 
member organization instead of directly by the member organization, 
issuers are expected to pay the reasonable expenses of the agent in 
providing such information.\41\
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    \40\ See, e.g., NYSE Rule 451.92.
    \41\ Id.
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    As an initial, technical matter, the Exchange has proposed to 
eliminate some of the duplication and obsolete language in the NYSE 
rules in which the fee schedule is set forth.\42\ The same proxy fees 
are currently presented multiple times in Rule 451, Rule 465 and 
Section 402.10 of the Listed Company Manual.\43\ To clarify matters, 
proposed Rules 465.20-465.25 would cross-reference proposed Rules 
451.90-451.95, and proposed Section 402.10 of the Listed Company Manual 
would reproduce the text of proposed Rules 451.90-451.95.\44\ 
Additionally, the proposed rule change would eliminate obsolete 
references to the effective dates of past changes to the fee structure 
as well as to the amount of a surcharge, set forth in Rule 451.91, that 
was temporarily applied in the mid-1980s.\45\ Further, the Exchange has 
proposed to eliminate several references to ``mailings'' in the 
proposed rules, given that the processing fees apply even where 
physical mailings have been suppressed.\46\ Lastly, the Exchange has 
proposed to eliminate several minor minimum fees of $5 or less as 
irrelevant

[[Page 63533]]

to the overall fees imposed or collected.\47\
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    \42\ See Notice, 78 FR 12390.
    \43\ Id.
    \44\ Id. Where the proposed Rules are cited below, for the sake 
of simplicity, such citations will include only Rules 451.90-451.95 
and not the corresponding provisions of proposed Section 402.10 of 
the NYSE Listed Company Manual.
    \45\ See Notice, 78 FR 12390.
    \46\ Id.
    \47\ Id. Proposed Rule 451.90(3), which would set forth the fee 
for interim reports and other material, is an example of the 
proposed technical amendments. As proposed, the pre-existing $0.15 
fee in current Rule 451.90 would not change, but the $2.00 minimum 
for all sets mailed would be eliminated, and the language of the 
rule would be amended to eliminate the reference to the effective 
date of the pre-existing rule and to replace the word ``mailed'' 
with ``processed.'' See proposed Rule 451.90(3).
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    Substantively, the Exchange has proposed to revise certain aspects 
of the existing fee schedule and add new fees.\48\ These revisions, 
described in turn below, include: (a) Amending the base mailing/basic 
processing fees; (b) amending the supplemental fees for intermediaries 
that coordinate proxy mailings for multiple nominees; (c) amending the 
incentive/preference management fees, including the manner in which 
such fees are applied to managed accounts; (d) adding fees for proxy 
materials distributed by what is known as the notice and access method; 
(e) adding fees for enhanced brokers' internet platforms; and (f) 
amending the fees for providing beneficial ownership information.\49\ 
In addition, notwithstanding any other provision of proposed Rule 
451.90, the Exchange has proposed that no fee be incurred by an issuer 
for any nominee account that contains only a fractional share--i.e. 
less than one share or unit--of the issuer's securities or for any 
nominee account that is a managed account and contains five or fewer 
shares or units of the issuer's securities.\50\
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    \48\ The Exchange has also proposed to codify definitions of the 
terms ``nominee'' and ``intermediary.'' Under proposed Rule 
451.90(1)(a), the term ``nominee'' would be defined to mean a broker 
or bank subject to SEC Rule 14b-1 or 14b-2, respectively, and the 
term ``intermediary'' would be defined to mean a proxy service 
provider that coordinates the distribution of proxy or other 
materials for multiple nominees.
    \49\ See proposed Rule 451.90.
    \50\ See proposed Rule 451.90(6).
---------------------------------------------------------------------------

A. Base Mailing/Basic Processing Fees

    As set forth above, there is currently a fee of $0.40 for each 
beneficial owner account of an issuer that is entitled to receive proxy 
materials when there is not an opposing proxy.\51\ This fee is commonly 
referred to as the base mailing or basic processing fee.\52\ The 
Exchange has proposed to replace this flat $0.40 fee with a tiered fee 
structure for each set of proxy material processed as a unit, which the 
Exchange has proposed to call a ``Processing Unit Fee.'' \53\ The tiers 
would be based on the number of nominee accounts through which an 
issuer's securities are beneficially owned:
---------------------------------------------------------------------------

    \51\ See Rule 451.90; see also Proxy Concept Release, 75 FR 
42996.
    \52\ See Notice, 78 FR 12385; see also Proxy Concept Release, 75 
FR 42996.
    \53\ See proposed Rule 451.90(1)(b)(i). The Exchange has not 
proposed to replace the current $0.40 flat fee for proxy follow-up 
materials with a tiered structure. The Exchange has proposed to keep 
a flat Processing Unit Fee of $0.40 per account for each set of 
follow-up material, but for those relating to an issuer's annual 
meeting for the election of directors, the Exchange has proposed to 
reduce the fee by half, to $0.20 per account. See proposed Rule 
451.90(2). The Exchange notes that issuers have a choice whether or 
not to use reminder mailings, and that the reduced fee may induce 
more issuers to use reminder mailings, which could increase investor 
participation, particularly among retail investors. See Notice, 78 
FR 12390.
---------------------------------------------------------------------------

     $0.50 for each account up to 10,000 accounts;
     $0.47 for each account above 10,000 accounts, up to 
100,000 accounts;
     $0.39 for each account above 100,000 accounts, up to 
300,000 accounts;
     $0.34 for each account above 300,000 accounts, up to 
500,000 accounts;
     $0.32 for each account above 500,000 accounts.\54\
---------------------------------------------------------------------------

    \54\ See proposed Rule 451.90(1)(b)(i).

Under this tiered schedule, every issuer would pay the first tier 
rate--$0.50--for the first 10,000 accounts, or portion thereof, with 
decreasing rates applicable only to the incremental additional accounts 
in the additional tiers.\55\
---------------------------------------------------------------------------

    \55\ Id.
---------------------------------------------------------------------------

    In addition, the Exchange has proposed to clarify that references 
in proposed Rule 451 to the ``number of accounts'' have a different 
meaning for a nominee that distributes proxy materials without the 
services of an intermediary as compared to a nominee that is served by 
an intermediary. For a nominee that distributes proxy materials without 
the services of an intermediary, references to number of accounts in 
proposed Rule 451 mean the number of accounts holding securities of the 
issuer at the nominee.\56\ For a nominee that is served by an 
intermediary, such references mean the aggregate number of nominee 
accounts with beneficial ownership in the issuer served by the 
intermediary.\57\ As the Exchange has noted in the proposal, this means 
that, for a particular issuer, the fee charged by an intermediary or a 
nominee that self-distributes (and therefore does not use an 
intermediary) within the different tiers will depend on the number of 
accounts holding shares in that issuer that are served by the 
intermediary or held by the particular nominee.\58\ Accordingly, for an 
issuer with a large number of beneficial accounts, intermediaries or 
self-distributing nominees serving a small portion of the issuer's 
accounts would bill the issuer at the higher tier-one rates whereas an 
intermediary serving a large number of the issuer's accounts would bill 
the issuer at rates that reflect the progressive decrease in rates 
across the tiers as the number of accounts served increases.\59\
---------------------------------------------------------------------------

    \56\ Id.
    \57\ Id. While the definition of the term nominee in NYSE's 
proposal includes both brokers and banks for purposes of determining 
which tiers apply, the Commission notes that the scope of the rule 
being approved here today applies to reasonable rates of 
reimbursement of NYSE member firms. See also note 48, supra.
    \58\ See Notice, 78 FR 12385 n.20.
    \59\ Id.
---------------------------------------------------------------------------

    The Exchange has also proposed to specify that, in the case of a 
meeting for which an opposition proxy has been furnished to security 
holders, the proposed Processing Unit Fee shall be $1.00 per account, 
in lieu of the tiered fee schedule set forth above.\60\ This would, 
therefore, be no departure from the current $1.00 fee that is assessed 
when an opposition proxy has been furnished.
---------------------------------------------------------------------------

    \60\ See proposed Rule 451.90(1)(b)(ii).
---------------------------------------------------------------------------

B. Supplemental Intermediary Fees

    As stated above, the Exchange's fee schedule currently provides for 
supplemental fees for intermediaries or proxy service providers that 
coordinate proxy distributions for multiple nominees of $20 per 
nominee, plus an additional fee of $0.05 per beneficial owner account 
for issuers whose securities are held in 200,000 or more beneficial 
owner accounts and $0.10 per beneficial owner account for issuers whose 
securities are held in fewer than 200,000 beneficial owner 
accounts.\61\ The Exchange has proposed to replace the $20 per-nominee 
fee with a $22 fee for each nominee served by the intermediary that has 
at least one account beneficially owning shares in the issuer.\62\ The 
Exchange also has proposed to replace the $0.05 and $0.10 fees, which 
are determined based on whether or not the issuer's securities are held 
in at least 200,000 beneficial owner accounts, with a tiered fee 
structure called the ``Intermediary Unit Fee,'' which would be based on 
the number of nominee accounts through which the issuer's securities 
are beneficially owned:
---------------------------------------------------------------------------

    \61\ See Rule 451.90; see also Proxy Concept Release, 75 FR 
42996.
    \62\ See proposed Rule 451.90(1)(c)(i).
---------------------------------------------------------------------------

     $0.14 for each account up to 10,000 accounts;
     $0.13 for each account above 10,000 accounts, up to 
100,000 accounts;

[[Page 63534]]

     $0.11 for each account above 100,000 accounts, up to 
300,000 accounts;
     $0.09 for each account above 300,000 accounts, up to 
500,000 accounts;
     $0.07 for each account above 500,000 accounts.\63\
---------------------------------------------------------------------------

    \63\ See proposed Rule 451.90(1)(c)(ii).

Under this tiered schedule, every issuer would pay the first tier 
rate--$0.14--for the first 10,000 accounts, or portion thereof, with 
decreasing rates applicable only to the incremental additional accounts 
in the additional tiers.\64\
---------------------------------------------------------------------------

    \64\ Id.
---------------------------------------------------------------------------

    Additionally, the Exchange has proposed the following tiered fee 
schedule for special meetings that would apply in lieu of the schedule 
set forth immediately above:
     $0.19 for each account up to 10,000 accounts;
     $0.18 for each account above 10,000 accounts, up to 
100,000 accounts;
     $0.16 for each account above 100,000 accounts, up to 
300,000 accounts;
     $0.14 for each account above 300,000 accounts, up to 
500,000 accounts;
     $0.12 for each account above 500,000 accounts.\65\
---------------------------------------------------------------------------

    \65\ See proposed Rule 451.90(1)(c)(iii).

    Under this tiered schedule, every issuer would pay the first tier 
rate--$0.19--for the first 10,000 accounts, or portion thereof, with 
decreasing rates applicable only to the incremental additional accounts 
in the additional tiers.\66\ The Exchange has proposed that, for 
purposes of proposed Rule 451.90(1)(c)(iii), a special meeting is a 
meeting other than the issuer's meeting for the election of 
directors.\67\
---------------------------------------------------------------------------

    \66\ Id.
    \67\ Id.
---------------------------------------------------------------------------

    The Exchange has also proposed that, in the case of a meeting for 
which an opposition proxy has been furnished to security holders, the 
proposed Intermediary Unit Fee shall be $0.25 per account, with a 
minimum fee of $5,000.00 per soliciting entity, in lieu of the tiered 
fee schedules set forth in proposed Rules 451.90(1)(c)(ii) and 
(iii).\68\ Where there are separate solicitations by management and an 
opponent, the Exchange has proposed that the opponent would be 
separately billed for the costs of its solicitation.\69\
---------------------------------------------------------------------------

    \68\ See proposed Rule 451.90(1)(b)(iv).
    \69\ Id.
---------------------------------------------------------------------------

    The Exchange estimates that the proposed tiered fee structures 
discussed above--for the Intermediary Unit Fee as well as the proposed 
Processing Unit Fee--entail fee increases that are estimated to add 
approximately $9-10 million to overall proxy distribution fees.\70\ The 
Exchange states that the PFAC took note of the fact that since the fees 
were last revised in 2002, there has been an effective decline in the 
fees of approximately 20% due to the impact of inflation.\71\ The 
Exchange also states that the PFAC believed that economies of scale 
exist when handling distributions for more widely held issuers, which 
is why the per-account fees decrease as the number of accounts 
increases.\72\ Further, the Exchange believes that its proposed tiered 
structures would approximate the sliding impact of such economies of 
scale better than the current processing and intermediary fee 
structures.\73\
---------------------------------------------------------------------------

    \70\ See Notice, 78 FR 12385.
    \71\ Id. at 12384.
    \72\ Id. at 12385.
    \73\ Id.
---------------------------------------------------------------------------

C. Incentive/Preference Management Fees

    As stated above, the Exchange's fee schedule currently provides for 
an incentive fee of $0.25 per beneficial owner account for issuers 
whose securities are held in 200,000 or more beneficial owner accounts 
and $0.50 per beneficial owner account for issuers whose securities are 
held in fewer than 200,000 beneficial owner accounts.\74\ The Exchange 
has proposed to refer to this fee as the ``Preference Management Fee'' 
and to amend it to be: (a) $0.32 for each set of proxy material 
described in proposed Rule 451.90(1)(b) (proxy statement, form of proxy 
and annual report when processed as a unit), unless the account is a 
Managed Account (as defined in proposed Rule 451.90(6), discussed 
below), in which case the fee would be $0.16; \75\ and (b) $0.10 for 
each set of material described in proposed Rule 451.90(2) (proxy 
follow-up material) or proposed Rule 451.90(3) (interim reports and 
other material).\76\ The Preference Management Fee would apply to each 
beneficial owner account for which the nominee has eliminated the need 
to send materials in paper format through the mails (or by courier 
service), and would be in addition to, and not in lieu of, the other 
proposed fees.\77\
---------------------------------------------------------------------------

    \74\ See Rule 451.90.
    \75\ See proposed Rule 451.90(4)(a). The $0.16 Preference 
Management Fee for Managed Accounts would apply only to Managed 
Accounts holding more than five shares or units of an issuer's 
securities, as the Exchange has proposed that there be no proxy 
processing fees charged to an issuer for Managed Accounts holding 
five or fewer shares or units of the issuer's securities. See note 
50 and accompanying text, supra, and discussion of Managed Accounts, 
infra.
    \76\ See proposed Rule 451.90(4)(b); see also notes 47 and 53, 
supra, which discuss proposed Rules 451.90(2) and 451.90(3).
    \77\ See proposed Rule 451.90(4). The need for paper mailings 
can be eliminated through householding and affirmative consent to 
electronic delivery. See notes 38 and 39, supra.
---------------------------------------------------------------------------

    The Preference Management Fee would apply not only in the year when 
paper delivery is first eliminated, but also in each year 
thereafter.\78\ The Exchange represents that the PFAC was persuaded 
that there was significant processing work involved in keeping track of 
the shareholders' election, especially given that the shareholder is 
entitled to change that election from time to time.\79\ According to 
the Exchange, although few shareholders do in fact change their 
election, data processing has to look at each account position relative 
to each shareholder meeting or proxy distribution event to determine 
whether paper mailing has been eliminated.\80\
---------------------------------------------------------------------------

    \78\ See Notice, 78 FR 12386.
    \79\ Id.
    \80\ Id.
---------------------------------------------------------------------------

1. Managed Accounts
    For purposes of proposed Rule 451.90, the Exchange has proposed to 
define the term ``Managed Account'' as:
    [A]n account at a nominee which is invested in a portfolio of 
securities selected by a professional advisor, and for which the 
account holder is charged a separate asset-based fee for a range of 
services which may include ongoing advice, custody and execution 
services. The advisor can be either employed by or affiliated with the 
nominee, or a separate investment advisor contracted for the purpose of 
selecting investment portfolios for the managed account. Requiring that 
investments or changes to the account be approved by the client would 
not preclude an account from being a ``managed account'' for this 
purpose, nor would the fact that commissions or transaction-based 
charges are imposed in addition to the asset-based fee.\81\
---------------------------------------------------------------------------

    \81\ See Proposed Rule 451.90(6); see also Notice, 78 FR 12388.
---------------------------------------------------------------------------

    As noted above, the Exchange has proposed that the Preference 
Management Fee applied to Managed Accounts be half that applied to non-
managed accounts.\82\ In the proposal, the Exchange notes that, with 
Managed Accounts, the investor has elected to delegate the voting of 
its shares to a broker or investment manager who chooses to manage this 
process

[[Page 63535]]

electronically rather than by receiving multiple paper copies of proxy 
statements and voting instructions.\83\ According to the Exchange, 
however, tracking the beneficial owner's voting and distribution 
election is as necessary with Managed Accounts as it is with any other 
proxy distribution election eliminating the need for paper mailing, 
such as consent to e-delivery.\84\ But the Exchange states that the 
PFAC concluded that making some distinctions between Managed Accounts 
and non-managed accounts for fee purposes was appropriate.\85\ Among 
other things, the Exchange states that the popularity of Managed 
Accounts demonstrates that they offer advantages to investors and 
brokerage firms.\86\ The Exchange states that issuers also reap 
benefits from inclusion in Managed Account portfolios, including the 
added investment in the company's stock and a higher rate of voting due 
to the fact that almost all Managed Account investors delegate voting 
to the investment manager.\87\ Since both issuers and brokers benefit 
from Managed Accounts, the Exchange represents that the PFAC determined 
that issuers and brokers should share the cost of tracking the voting 
and distribution elections of beneficial owners of the stock positions 
in Managed Accounts, and therefore recommended that the Exchange 
propose a Preference Management Fee for Managed Accounts at a rate that 
is half that for other accounts.\88\
---------------------------------------------------------------------------

    \82\ See Proposed Rule 451.90(4)(a). The Exchange represents 
that its proposal that the Preference Management Fee applied to 
Managed Accounts be half that applied to non-managed accounts would 
result in an estimated $15 million reduction in fees. See Notice, 78 
FR 12385.
    \83\ See Notice, 78 FR 12387.
    \84\ Id. In support of this the Exchange states that Commission 
rules require each beneficial owner holding shares in a Managed 
Account to be treated as the individual owner of those shares for 
purposes of having the ability to elect to vote those shares and 
receive proxy materials. Id.
    \85\ Id.
    \86\ Id.
    \87\ Id.
    \88\ Id.
---------------------------------------------------------------------------

    Additionally, in recognition of what the Exchange notes is a 
proliferation of Managed Accounts containing a very small number of an 
issuer's shares, the Exchange, as noted above, has proposed not to 
impose any proxy processing fees, including the Preference Management 
Fee, on an issuer for a Managed Account holding five or fewer shares or 
units of the issuer's securities.\89\ The Exchange states that in 
certain situations in which Managed Accounts hold very small numbers of 
shares of an issuer, the benefits of increased stock ownership and 
increased voting participation were practically nonexistent for the 
issuer, while the added expense on a relative basis was 
extraordinary.\90\ According to the Exchange, because one of the PFAC's 
goals was to avoid severe impacts on proxy distribution in the United 
States, the PFAC drew the line at five shares based on certain 
information supplied by Broadridge, including information from the 2011 
proxy season depicting what the financial impact on proxy revenue would 
have been of setting the fee proscription for Managed Accounts at 
different levels.\91\ According to the Exchange, setting the 
proscription at five shares or less in the 2011 proxy season would have 
created an overall decrease in proxy revenue of approximately $4.2 
million.\92\ The Exchange states that the PFAC determined that five 
shares or less was the appropriate level to draw the line and that the 
PFAC ``was comfortable that, given the relative benefit/burden on 
issuers and brokerage firms, it is not reasonable to make issuers 
reimburse the cost of proxy distribution to managed accounts holding 
five shares or less.'' \93\
---------------------------------------------------------------------------

    \89\ See proposed Rule 451.90(6); see also Notice, 78 FR 12388.
    \90\ See Notice, 78 FR 12388.
    \91\ Id. The Exchange represents that, based on the Broadridge-
supplied information, the overall impact varied from approximately 
$2.6 million at the fractional (less than one) share level, up to 
approximately $16 million if the proscription applied to accounts 
holding 25 shares or less. Id.
    \92\ Id. The Commission understands that this figure does not 
account for the inclusion of wrap accounts in the proposed fee 
structure for Managed Accounts.
    \93\ Id.
---------------------------------------------------------------------------

    Lastly, the Exchange states that no fee distinction would be based 
on whether or not a Managed Account is referred to as a ``wrap 
account.'' \94\ As described by the Exchange, a wrap account is a 
managed account product with a relatively low minimum investment that 
tends to have many very small, even fractional, share positions, which 
led Broadridge to process such wrap accounts without any charge--either 
for basic processing or incentive fees.\95\ Broadridge relied on its 
client firms to specify whether or not an account should be treated as 
a wrap account for this purpose, and positions in small minimum 
investment managed accounts which were not marketed with that 
appellation were subjected to ordinary fees, including incentive 
fees.\96\ Under the Exchange's proposal, accounts identified as wrap 
accounts would no longer be treated as distinct from Managed Accounts 
not identified as such, and would therefore be subject to the same 
proxy fees as Managed Accounts.
---------------------------------------------------------------------------

    \94\ Id. The Commission understands a wrap account to be a 
certain type of account that is managed by an outside investment 
adviser. See Proxy Concept Release, 75 FR 42998 n.140.
    \95\ See Notice, 78 FR 12387.
    \96\ Id. at 12387-88.
---------------------------------------------------------------------------

D. Notice and Access Fees

    The Commission has adopted a notice and access model that permits 
issuers to send shareholders what is called a ``Notice of Internet 
Availability of Proxy Materials'' in lieu of the traditional paper 
mailing of proxy materials.\97\ Currently, the NYSE proxy fee structure 
does not include maximum fees that member firms--or, in practice, 
third-party proxy service providers--can charge issuers for deliveries 
of proxy materials using the notice and access method.\98\ Broadridge 
currently imposes fees on issuers for use of the notice and access 
method, in addition to the other fees permitted to be charged under 
NYSE Rule 451.90.\99\ In the proposal, the Exchange has proposed to 
codify the notice and access fees currently charged by Broadridge, with 
one adjustment.\100\
---------------------------------------------------------------------------

    \97\ See Proxy Concept Release, 75 FR 42986 n.32. The notice and 
access model works in tandem with electronic delivery--although an 
issuer electing to send a notice in lieu of a full proxy package 
would be required to send a paper copy of that notice, it may send 
that notice electronically to a shareholder who has provided an 
affirmative consent to electronic delivery. Id. These concepts are 
distinct because the issuer elects whether to use the notice-only 
option of the notice and access model on the one hand, while 
affirmative consents to electronic delivery are a matter between a 
broker and its customer.
    \98\ Id. at 42996.
    \99\ See Notice, 78 FR 12389. As of the date of the Proxy 
Concept Release, Broadridge charged issuers that elected the notice 
and access method of proxy delivery a fee ranging from $0.05 to 
$0.25 per account for positions in excess of 6,000, in addition to 
the other fees permitted to be charged under NYSE Rule 451. See 
Proxy Concept Release, 75 FR 42996-97.
    \100\ See Notice, 78 FR 12389. The Exchange has proposed to 
exclude from its proposed notice and access fee schedule the $1,500 
minimum fee that Broadridge currently charges issuers that are held 
by 10,000 accounts or less and elect notice and access. The Exchange 
states that, in its view, such a minimal charge could be unfairly 
high on a small issuer billed by several intermediaries. Id.
---------------------------------------------------------------------------

    Specifically, for issuers that elect to utilize the notice and 
access method of proxy distribution, the Exchange has proposed an 
incremental fee based on all nominee accounts through which the 
issuer's securities are beneficially owned, as follows:
     $0.25 for each account up to 10,000 accounts;
     $0.20 for each account over 10,000 accounts, up to 100,000 
accounts;
     $0.15 for each account over 100,000 accounts, up to 
200,000 accounts;
     $0.10 for each account over 200,000 accounts, up to 
500,000 accounts;
     $0.05 for each account over 500,000 accounts.\101\
---------------------------------------------------------------------------

    \101\ See proposed Rule 451.90(5).

The Exchange has also proposed to clarify that, under this schedule, 
every

[[Page 63536]]

issuer would pay the tier one rate for the first 10,000 accounts, or 
portion thereof, with decreasing rates applicable only to the 
incremental additional accounts in the additional tiers.\102\ The 
Exchange has further proposed that follow-up notices would not incur an 
incremental fee for notice and access, and that no incremental fee 
would be imposed for fulfillment transactions (i.e., a full pack of 
proxy materials sent to a notice recipient at the recipient's request), 
although out of pocket costs such as postage would be passed on as in 
ordinary proxy distributions.\103\
---------------------------------------------------------------------------

    \102\ Id.
    \103\ Id.
---------------------------------------------------------------------------

E. Enhanced Brokers' Internet Platform Fee

    In the Proxy Concept Release, the Commission solicited views on 
whether retail investors might be encouraged to vote if they received 
notices of upcoming corporate votes, and had the ability to access 
proxy materials and vote, through their own broker's Web site--a 
service that the Commission referred to as enhanced brokers' internet 
platforms (``EBIP'').\104\ According to the Exchange, Broadridge 
discussed with the PFAC a similar service that it offers, and 
maintained that while some brokerage firms have already implemented 
services like the EBIP, it appeared likely that some financial 
incentive would be necessary to achieve widespread adoption.\105\
---------------------------------------------------------------------------

    \104\ See Notice, 78 FR 12391; see also Proxy Concept Release, 
75 FR 43003. This is in contrast to the current situation in which, 
for most brokers, a beneficial owner must go to a separate Web site 
in order to view proxy materials and vote.
    \105\ See Notice, 78 FR 12391.
---------------------------------------------------------------------------

    Accordingly, the Exchange has proposed, for a five-year test 
period, a one-time, supplemental fee of $0.99 for each new account that 
elects, and each full package recipient among a brokerage firm's 
accounts that converts to, electronic delivery while having access to 
an EBIP.\106\ According to the Exchange, this fee is intended to 
persuade firms to develop and encourage the use of EBIPs by their 
customers.\107\ To qualify for the fee, an EBIP would have to provide 
notices of upcoming corporate votes, including record and meeting dates 
for shareholder meetings, and the ability to access proxy materials and 
a voting instruction form, and cast the vote, through the investor's 
account page on the firm's Web site without an additional log-in.\108\ 
This fee would not apply to electronic delivery consents captured by 
issuers, positions held in Managed Accounts, or accounts voted by 
investment managers using electronic voting platforms.\109\ This fee 
also would not be triggered by accounts that receive a notice pursuant 
to notice and access or accounts to which mailing is suppressed by 
householding.\110\
---------------------------------------------------------------------------

    \106\ See proposed Rule 451.90(7). As a one-time fee, NYSE 
member organizations could bill an issuer only once for each account 
covered by the rule. Id. Billing for the fee would be separately 
indicated on the issuer's invoice and would await the next proxy or 
consent solicitation by the issuer that follows the triggering of 
the fee by an eligible account's electronic delivery election. Id.
    \107\ See Notice, 78 FR 12393.
    \108\ See proposed Rule 451.90(7).
    \109\ Id. In addition, the Commission notes that the EBIP fee 
does not apply to accounts that converted to electronic delivery 
prior to the approval of the EBIP fee in this order.
    \110\ Id.
---------------------------------------------------------------------------

    The Exchange has proposed to require NYSE member organizations with 
a qualifying EBIP to provide notice thereof to the Exchange, including 
the date such EBIP became operational, and any limitations on the 
availability of the EBIP to its customers.\111\ The Exchange has also 
noted in the proposed rule that records of conversions to electronic 
delivery by accounts with access to an EBIP, marketing efforts to 
encourage account holders to use the EBIP, and the proportion of non-
institutional accounts that vote proxies after being provided access to 
an EBIP must be maintained for the purpose of reporting such records to 
the NYSE when requested.\112\
---------------------------------------------------------------------------

    \111\ Id.
    \112\ Id.
---------------------------------------------------------------------------

    The Exchange states that the EBIP fee would be available to firms 
that already have EBIP facilities, as even a firm that already has an 
EBIP can be incented to engage in marketing efforts to persuade its 
account holders to utilize the EBIP.\113\ Further, the Exchange states 
that the fee would be triggered when a new account elects e-delivery 
immediately (and has access to an EBIP), except for accounts subject to 
notice and access or householding.\114\ However, the Exchange 
represents that a firm making the EBIP available to only a limited 
segment of its account holders could not earn the EBIP fee from an e-
delivery election by an account not within the segment having access to 
the EBIP.\115\
---------------------------------------------------------------------------

    \113\ See Notice, 78 FR 12392.
    \114\ Id.
    \115\ Id.
---------------------------------------------------------------------------

    The Exchange represents that a study of the impact of the program 
would be conducted after three years.\116\
---------------------------------------------------------------------------

    \116\ Id.
---------------------------------------------------------------------------

F. Fee for Providing Beneficial Ownership Information

    As noted by the Exchange, since 1986 NYSE rules have provided for 
fees which issuers must pay to brokers and their intermediaries for 
obtaining a list of the non-objecting beneficial owners holding the 
issuer's stock.\117\ Such a list is commonly referred to as a NOBO 
list, and the fees are charged per name in the NOBO list.\118\ 
Currently, Rule 451.92 sets forth a $0.065 fee per NOBO name provided 
to the requesting issuer, but where the NOBO list is not furnished 
directly to the issuer by the member organization, and is instead 
furnished through an agent of the member organization, the current rule 
does not specify a fee--rather, it says only that the issuer will be 
expected to pay the reasonable expenses of the agent in providing such 
information.\119\ The Exchange states that it understands that 
Broadridge, acting as such an agent, charges a $100 minimum fee per 
requested NOBO list, as well as a tiered per-name fee of: $0.10 per 
name for the first 10,000 names; $0.05 per name from 10,001 to 100,000 
names, and $0.04 per each name above 100,000.\120\ The Exchange has 
proposed to adopt and codify Broadridge's minimum and tiered per-name 
fees into its rules, and to delete its existing language that allows 
payment of the ``reasonable expenses of the agent.'' \121\
---------------------------------------------------------------------------

    \117\ Id. at 12390; see also Rule 451.92.
    \118\ See Notice, 78 FR 12390.
    \119\ See Rule 451.92.
    \120\ See Notice, 78 FR 12390.
    \121\ See proposed Rule 451.92; see also Notice, 78 FR 12391.
---------------------------------------------------------------------------

    The Exchange also notes that it has been customary for brokers, 
through their intermediary, to require that issuers desiring a NOBO 
list take (and pay for) a list of all shareholders who are NOBOs, even 
in circumstances where an issuer would consider it more cost-effective 
to limit its communication to NOBOs having more than a certain number 
of shares, or to those that have not yet voted on a solicitation.\122\ 
The Exchange has proposed to depart from this practice, so that when an 
issuer requests beneficial ownership information as of a date which is 
the record date for an annual or special meeting or a solicitation of 
written shareholder consent, the issuer may ask to eliminate names 
holding more or less than a specified number of shares, or names of 
shareholders that have already voted, and the issuer may not be charged 
a fee for the NOBO names so eliminated--a process commonly referred to 
as ``stratification.'' \123\ For all other requested lists, however, 
the issuer would be required to take and pay for complete lists.\124\
---------------------------------------------------------------------------

    \122\ See Notice, 78 FR 12390-91.
    \123\ See proposed Rule 451.92.
    \124\ Id.; see also Notice, 78 FR 12391.

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

[[Page 63537]]

IV. Summary of Comment Letters and the Exchange's Responses

    As noted above, the Commission received a total of 44 comment 
letters concerning the Exchange's proposal,\125\ as well as four 
supplemental submissions from the NYSE.\126\ Fourteen commenters 
expressed general support for the proposed rule change,\127\ and other 
commenters supported certain aspects of the proposed rule change. 
Generally, six commenters believed that the proposal would improve 
transparency of the proxy fee structure; \128\ five believed that the 
proposal eliminates the ``cliff'' pricing schedule, in favor of a more 
rational tiered system; \129\ two expressly supported the Exchange's 
approach to charges for managed accounts; \130\ one stated that the 
elimination of fees for fractional share positions would eliminate 
exposure that issuers face from unanticipated increases in the number 
of street name accounts on a yearly basis; \131\ twelve believed that 
the proposed EBIP fees would reduce costs, enhance efficiency and/or 
lead to more retail shareholder participation; \132\ one believed that 
providing additional incentives for integration of a customer's 
documents in EBIPs would provide a benefit to investors; \133\ and six 
supported the stratification of NOBO lists.\134\ One commenter also 
believed that failure to approve the proposal would keep in place a fee 
structure that is less transparent and less connected to the current 
work and costs associated with proxy processing.\135\
---------------------------------------------------------------------------

    \125\ See supra notes 4, 6, 9 and 13.
    \126\ See supra notes 7, 10, 12 and 13. As previously noted, 
NYSE Letter responded to the comments submitted in response to the 
Notice, NYSE Letter II responded to the Order Instituting 
Proceedings, NYSE Letter III provided additional cost information 
from Broadridge, and NYSE Letter IV responded to FOLIOfn Letter and 
FOLIOfn Letter II.
    \127\ See Steering Committee Letter, SCSGP Letter, iStar Letter, 
SCC Letter, Perficient Letter, Gartner Letter, CCMC Letter, 
Broadridge Letter, Darling Letter, ABC Letter, SIFMA Letter, Zumbox 
Letter, INVeSHARE Letter, Washington Letter; see also Schumer Letter 
(strongly supporting success fee to ``encourage the use of enhanced 
brokers' internet platforms'').
    \128\ See Steering Committee Letter, SCSGP Letter, SCC Letter, 
Broadridge Letter, NIRI Letter, Washington Letter.
    \129\ See SCSGP Letter, ABC Letter, Broadridge Letter, BNY 
Letter, SCC Letter.
    \130\ See SCSGP Letter, INVeSHARE Letter.
    \131\ See Broadridge Letter.
    \132\ See Steering Committee Letter, SCSGP Letter, iStar Letter, 
SCC Letter, Perficient Letter, CCMC Letter, Broadridge Letter, 
Darling Letter, ABC Letter, SIFMA Letter, NIRI Letter, Schumer 
Letter.
    \133\ See Zumbox Letter.
    \134\ See ABC Letter, Broadridge Letter, NIRI Letter, SCC 
Letter, ICI Letter, ICI Letter II, SCSGP Letter.
    \135\ See Washington Letter.
---------------------------------------------------------------------------

    Other commenters raised concerns regarding the proposal. Generally, 
twelve commenters expressed concern about the lack of an independent 
third-party review of actual costs in the proxy distribution process; 
\136\ five expressed concern with the lack of a thorough cost/benefit 
analysis of the proposed rule change; \137\ four believed that the 
processing and intermediary unit fees do not allocate fees equitably 
between large and small issuers; \138\ seven questioned the fairness of 
the proposed fee schedule; \139\ four believed that the structure and 
level of the proposed proxy fees place a burden on competition; \140\ 
nine expressed concern about the incentive structure for developing 
EBIPs; \141\ four raised concerns regarding the five share limit for 
fees for processing shares held through managed accounts; \142\ three 
believed the stratified NOBO lists should be made available outside of 
a record date; \143\ two expressed concern about the impact of the 
proposal on mutual funds in particular; \144\ and one believed that the 
rule proposal is inconsistent with and violates Regulation 14A of the 
Act, including specifically Rules 14a-13, 14b-1 and 14b-2.\145\ These 
issues, and the Exchange's response, are discussed below.\146\
---------------------------------------------------------------------------

    \136\ See STA Letter, STA Letter II, STA Letter III, SSA Letter, 
Schafer Letter, Lovatt Letter, SCC Letter, IBC Letter, NIRI Letter, 
ICI Letter, ICI Letter II, BNY Letter, OTC Letter, CtW Letter II, 
AFL-CIO Letter; see also AST Letter. In addition, one commenter 
questioned whether the fee structure used by Broadridge should be 
subject to an independent audit. See CtW Letter.
    \137\ See STA Letter, STA Letter II, SSA Letter, Schafer Letter, 
Lovatt Letter, IBC Letter.
    \138\ See STA Letter II, Schafer Letter, Lovatt Letter, IBC 
Letter.
    \139\ See STA Letter II, Schafer Letter, Lovatt Letter, IBC 
Letter, BNY Letter, ICI Letter, CtW Letter.
    \140\ See SSA Letter, IBC Letter, Schafer Letter, Lovatt Letter.
    \141\ See Harrington Letter, ICC Letter, Sharegate Letter, CG 
Letter, CII Letter, Zumbox Letter, CtW Letter, CtW Letter II, AFSCME 
Letter, AFL-CIO Letter.
    \142\ See Broadridge Letter, SIFMA Letter, FOLIOfn Letter, 
FOLIOfn Letter II, Angel Letter.
    \143\ See SCSGP Letter, Broadridge Letter, BNY Letter.
    \144\ See ICI Letter, AST Letter.
    \145\ See FOLIOfn Letter.
    \146\ The Commission also received comments regarding 
Broadridge's decision to end its practice of disclosing voting 
tallies to shareholder proponents of shareholder proposals (see CII 
Letter II, Schumer Letter, AFSCME Letter, AFL-CIO Letter), 
establishing a performance based proxy fee structure (see Angel 
Letter), and Voting Instruction Forms applied to EBIPs (see CII 
Letter, Angel Letter; see also infra note 307 and accompanying text 
for discussion of Voting Instruction Forms). The Commission notes 
that these issues are beyond the subject of this proposed rule 
change by the NYSE. In addition, the Commission received a comment 
regarding the effective date for the proposed rules (see SIFMA 
Letter) and comments regarding the propriety of assigning the task 
of proxy regulation to the NYSE (see FOLIOfn Letter, Angel Letter). 
In its initial response letter, the Exchange stated its belief that 
a lengthy period before effectiveness of the proposed fee structure 
would appear to be unnecessary given that invoicing of proxy fees is 
typically handled by the intermediary rather than the broker-dealer 
and given that Broadridge stated in its comment letter that it is 
prepared to implement the new fee structure soon after approval. See 
NYSE Letter; see also Broadridge Letter. Further, subsequent to the 
Exchange's initial response letter, Broadridge stated that it ``is 
committed to implementing the new [fee] structure within a short 
time of its approval.'' See Broadridge Material. With regard to the 
comment that the Commission has assigned the task of proxy 
regulation to the NYSE, although the NYSE participates in some 
aspects of regulating the proxy process, the Commission has engaged 
in and overseen numerous rulemakings and overseen and reviewed SRO 
proposed rules relating to the proxy process.
---------------------------------------------------------------------------

A. Independent Third-Party Review of Proxy Costs

    Four commenters that expressed general support for the proposal 
commented on the issue of whether an independent third-party audit of 
proxy costs should be conducted.\147\ One commenter noted that while 
``an independent third party may be desirable, the PFAC made a 
determination that `utility rate making' which could be independently 
audited would not work for proxy fees.'' \148\ Another commenter 
believed that determining the cost of proxy processing services based 
on utility style ``cost-of-service'' calculations would be very 
difficult as a practical matter.\149\ Yet another commenter stated that 
while an independent review ``is often attractive in the abstract, the 
regulatory landscape is laden with examples where the costs of such 
reviews outweigh the benefits.'' \150\ Finally, one commenter stated 
that an independent review is not necessary because the PFAC is an 
independent committee with representatives from all parties.\151\
---------------------------------------------------------------------------

    \147\ See Broadridge Letter, ABC Letter, INVeSHARE Letter, Angel 
Letter.
    \148\ See Broadridge Letter.
    \149\ See Angel Letter.
    \150\ See ABC Letter.
    \151\ See INVeSHARE Letter.
---------------------------------------------------------------------------

    However, several commenters stated that the NYSE should engage an 
independent third party to evaluate the structure and level of fees 
being paid for proxy distribution, as recommended by the NYSE Proxy 
Working Group in 2006.\152\ Two commenters argued that an independent 
third-party audit is the best way to evaluate whether the fees are 
reimbursed fairly, equitably and

[[Page 63538]]

objectively, and would eliminate the vested interests of those involved 
in the process.\153\ Three other commenters believed the Commission 
should not approve the proposed rule change until the audit has been 
commissioned and completed,\154\ while two others suggested that the 
Commission approve the proposal, but require an independent third-party 
review as part of an ongoing process.\155\ One commenter believed that, 
without a third-party audit, many issuers would continue to question 
the validity of proxy fees.\156\ Another commenter noted that there was 
no independent verification of the data on the Securities Industry and 
Financial Markets Association (``SIFMA'') study related to the costs of 
proxy processing,\157\ and yet another believed that the PFAC did not 
have access to the information necessary to determine whether 
particular fees were reasonable.\158\ Finally, one commenter expressed 
the view that a comprehensive assessment of the NYSE proposal's net 
impact on proxy distribution costs for all issuers, including mutual 
funds, would require further analysis.\159\
---------------------------------------------------------------------------

    \152\ See STA Letter, STA Letter II, SSA Letter, Schafer Letter, 
Lovatt Letter, NIRI Letter, SCC Letter, IBC Letter, ICI Letter, ICI 
Letter II, OTC Letter, CtW Letter II; see also AST Letter, FOLIOfn 
Letter.
    \153\ See NIRI Letter, ICI Letter.
    \154\ See STA Letter, STA Letter II, IBC Letter, AFL-CIO Letter; 
see also OTC Letter (stating the mere fact that much of the data 
supplied to the PFAC for its analysis of the proposed rule change 
came exclusively from Broadridge without an independent review and 
without additional sources discredits the results of the PFAC's 
research).
    \155\ See SCC Letter, SCSGP Letter.
    \156\ See NIRI Letter.
    \157\ See BNY Letter.
    \158\ See AFSCME Letter.
    \159\ See AST Letter, AST Letter II.
---------------------------------------------------------------------------

    In its initial response, the Exchange stated that the PFAC 
determined that an independent review of proxy costs was 
unnecessary.\160\ The Exchange noted that the PFAC itself was an 
independent body and that it reviewed audited financial information on 
Broadridge, segment information provided by Broadridge on its Web site, 
and several independent analyst reports on Broadridge that gave the 
PFAC comfort that the existing fees were not providing Broadridge with 
excessive margin on its activities.\161\ Further, the Exchange stated 
that the NYSE proxy fees have been revised a number of times over the 
years without an independent review of proxy costs.\162\ The Exchange 
stated that there is no requirement that an independent third-party 
review be conducted, and that such a review was conducted only in the 
context of significant rule changes developed in the late 1990s.\163\ 
The Exchange also stated that ``given the availability of audited 
financials on Broadridge and the SIFMA survey of costs at 
representative brokerage firms undertaken at the NYSE's request, 
arguably the proposed fee changes have been based on information 
comparable to that used in the independent studies conducted in the 
late 1990s.'' \164\
---------------------------------------------------------------------------

    \160\ See NYSE Letter.
    \161\ Id. See also Washington Letter (stating that the PFAC 
``conducted an independent evaluation of how the underlying work and 
expenses have evolved (including a detailed analysis of the 
categories of work currently performed by Broadridge, the costs 
incurred by Broadridge and by bankers and brokers, and independent 
investment analyst reports regarding Broadridge's margins).'').
    \162\ Id. The Exchange also recognized, as noted by several 
commenters, that the Proxy Working Group formed in 2006 recommended 
that the NYSE engage an independent third party to analyze the 
reasonableness of the proxy fees and to commission an audit of 
Broadridge's costs and revenues for proxy mailing, but the Exchange 
pointed out that that Proxy Working Group did not renew its call for 
such independent analysis at the time an addendum to the group's 
report was published in 2007. See STA II Letter, NIRI Letter, SCC 
Letter, IBC Letter, BNY Letter, NYSE Letter.
    \163\ Id.
    \164\ Id. The Exchange also asserted that ``throughout the 
history of the NYSE proxy fees, negotiation among the members of a 
committee of issuers and brokers, supplemented by the comment 
process which accompanies a rule filing with the SEC, has been an 
effective method for reaching a workable consensus on what 
constitutes `reasonable reimbursement.' '' Id.
---------------------------------------------------------------------------

    In a supplemental response, the Exchange explained that the costs 
of the proxy distribution process have not typically been segregated 
from other costs incurred at firms and intermediaries.\165\ The 
Exchange stated that the PFAC learned from conversations with various 
brokerage firms and intermediaries, including Broadridge, that there is 
no common methodology for tracking proxy distribution costs, ``nor do 
these entities segregate these costs from the cost of other similar 
processing activities that are not reimbursable by issuers.'' \166\ The 
Exchange explained that this is why the ``PFAC and the Exchange `judged 
that it would likely be impossible and certainly not cost effective, to 
engage an auditing firm to review industry data for purposes of the 
Committee's work.' '' \167\ The Exchange reiterated that the PFAC 
requested that Broadridge provide it non-public financial data, but 
Broadridge declined.\168\ However, the Exchange stressed that the 
``PFAC did study available materials that allowed it to conclude that 
the fees it proposed did constitute a reasonable reimbursement of the 
industry's costs for proxy distribution to street name accounts.'' 
\169\
---------------------------------------------------------------------------

    \165\ See NYSE Letter II.
    \166\ Id.
    \167\ Id. (quoting Notice).
    \168\ Id.
    \169\ Id.
---------------------------------------------------------------------------

    The Exchange also stated that the PFAC accepted that it was 
appropriate for Broadridge to make a reasonable profit.\170\ In this 
context, the Exchange noted that, based on public information showing 
Broadridge's pre-tax margin on its Investment Communication Solutions 
Segment, Broadridge's margin was consistent with, and in most cases was 
significantly lower than, ``other firms in comparable businesses, such 
as transaction processing firms (e.g., Visa), financial processing 
firms (e.g., Fiserv), other processing firms (e.g., MSCI) and 
securities industry infrastructure firms (e.g., Computershare).'' \171\ 
The Exchange stated that the ``PFAC found this credible evidence that 
the profit being earned by Broadridge on this business segment was 
reasonable.'' \172\
---------------------------------------------------------------------------

    \170\ Id.
    \171\ Id.
    \172\ Id.
---------------------------------------------------------------------------

    In response to concerns that the PFAC relied substantially on the 
limited information provided by Broadridge, the Exchange noted that the 
PFAC requested that Broadridge provide it non-public financial data, 
but Broadridge declined.\173\ However, the Exchange explained that 
``Broadridge was otherwise forthcoming with the PFAC and described at 
length their processes, and provided the PFAC with the detailed task 
list that was included with the Exchange's rule filing as an appendix 
to the SIFMA survey.'' \174\ In addition, the Exchange noted that the 
PFAC met with a number of other industry participants to discuss the 
proxy processing business.\175\
---------------------------------------------------------------------------

    \173\ Id., see also supra note 161.
    \174\ See NYSE Letter II. In particular, the Exchange stated 
that the ``PFAC requested that Broadridge run tests of various 
proposals, so that the PFAC could analyze and compare in some detail 
how different fee structures would impact the issuer population, 
assisting the PFAC in determining to its satisfaction that its 
proposals fairly allocated the fees among different size issuers.'' 
Id.
    \175\ These market participants included Mediant Communications, 
Bank of America Merrill Lynch, Citibank, Morgan Stanley Smith 
Barney, Fidelity's National Financial and Curian Capital. Id.
---------------------------------------------------------------------------

    The Exchange also provided additional information from Broadridge 
about the costs involved in providing proxy and report distribution 
services.\176\ Among other things, Broadridge represented that the 
``proposed fee structure results in a high degree of alignment between 
the overall fees paid and the reasonable costs of the services 
provided.'' \177\ Broadridge estimated that the work associated with 
the basic processing fee, nominee coordination and intermediary unit 
fee and preference management fee would

[[Page 63539]]

be 56.7%, 26% and 17.5% of total work effort, respectively, and that if 
the proposed fees had been in place in fiscal year 2012, such fees 
would have represented 55.4%, 27% and 18.9% of total fees paid, 
respectively. Accordingly, in Broadridge's estimation, there is a high 
degree of alignment between costs and services.\178\
---------------------------------------------------------------------------

    \176\ See supra note 12.
    \177\ See NYSE Letter III.
    \178\ See NYSE Letter III. See also further summary of 
Broadridge Material in subpart D, Fairness of the Fee Proposals, 
infra.
---------------------------------------------------------------------------

B. Cost/Benefit Analysis of the Proxy Fee Proposals

    Several commenters stated that the NYSE failed to undertake an 
analysis of the costs and benefits of the fee proposal, using the same 
degree of rigor applicable to SEC rule changes.\179\ Two commenters 
stated that until an objective and comprehensive cost-benefit analysis 
can be developed, the SEC should disapprove this rule filing.\180\
---------------------------------------------------------------------------

    \179\ See STA Letter, STA Letter II, Schafer Letter, Lovatt 
Letter, IBC Letter.
    \180\ See STA Letter, STA Letter II, IBC Letter.
---------------------------------------------------------------------------

    The Exchange responded by noting that no such cost-benefit analysis 
is required by the relevant statute or SEC rules.\181\ However, the 
Exchange also noted that ``the essence of the PFAC process was a 
negotiation among parties with often divergent interests seeking an 
outcome which to each was a balance of the costs and benefits 
involved.'' \182\
---------------------------------------------------------------------------

    \181\ See NYSE Letter. See infra Section V, Discussion and 
Commission Findings, for a discussion of the likely economic impact 
that the Commission considered in this context.
    \182\ Id. The Exchange also cited the PFAC's conclusions 
regarding Managed Accounts as an example of the PFAC's cost-benefit 
analysis. Id.
---------------------------------------------------------------------------

C. Equitable Allocation of Processing and Intermediary Unit Fees 
Between Large and Small Issuers

    Several commenters stated that the proposed processing and 
intermediary fees do not allocate fees equitably between large and 
small issuers.\183\ Moreover, two commenters believed that these fees 
should not be charged at the same level for beneficial owners who are 
not receiving an actual proxy package.\184\ These commenters also 
stated that such fees fall disproportionately on smaller issuers, 
especially those with less than 300,000 beneficial owner 
positions.\185\ They further stated that it was not fair for smaller 
issuers to be subject to more than a 20% increase in their proxy fees, 
while an issuer with 1,000,000 beneficial owners would have a decrease 
in processing and intermediary unit fees.\186\
---------------------------------------------------------------------------

    \183\ See STA Letter II, IBC Letter, Schafer Letter, Lovatt 
Letter.
    \184\ See STA Letter II, IBC Letter.
    \185\ See STA Letter II, IBC Letter; see also OTC Letter.
    \186\ See STA Letter II, IBC Letter. These commenters concluded 
that even ``after accounting for economies of scale, the processing 
and intermediary unit fees proposed by the NYSE are not equitably 
allocated between large and small issuers, in light of the fact that 
there is no substantive justification for why smaller issuers with 
less than 300,000 beneficial owners should be bearing such a 
significantly large burden under the proposed fee schedule.''
---------------------------------------------------------------------------

    The Commission also raised concerns in the Order Instituting 
Proceedings regarding the proposed tiered fees, noting that while the 
proposed tiered structures appeared to be an incremental improvement 
over the status quo, the Exchange had not clearly explained why the 
particular tiers or rates within each tier were chosen, nor had the 
Exchange provided evidence that either the Exchange or PFAC had 
``conducted a meaningful review of the economies of scale present in 
the proxy processing business, or the overall costs associated 
therewith.'' \187\ In response, the Exchange stated that the PFAC 
requested and reviewed numerous pricing scenarios from Broadridge to 
ensure that small issuers were not unduly impacted under the 
proposal.\188\ The Exchange explained that ``the PFAC wished to develop 
a more equitable tiering arrangement, in which fees would decline not 
for all accounts with issuers of a certain size, but where the same 
price would apply to the first tier in all companies, a reduced price 
to the second tier in all companies, and so on.'' \189\ According to 
the Exchange, the PFAC considered and analyzed a number of scenarios 
and determined that the proposed tiered arrangement was the most 
effective in removing the distortions of the current fee structure, 
which has a pricing ``cliff'' in that it applies a lower fee to all 
accounts with issuers of a certain size.\190\ The Exchange also noted 
that ``[a]s a final check regarding the propriety of the proposed 
tiers, the PFAC had secured from Broadridge the estimate that overall 
under the current fees issuers with 100,000 or fewer accounts paid 
approximately 38% of proxy processing fees, issuers owned by more than 
100,000 up to 500,000 accounts paid approximately 30% of such fees, and 
issuers owned by more than 500,000 accounts paid approximately 32% of 
the fees.'' \191\ The Exchange stated that estimates of the impact of 
the proposed fees were that ``such proportions would continue, which 
the PFAC considered to be consistent with its goals and to represent a 
fair allocation among the issuer population.'' \192\
---------------------------------------------------------------------------

    \187\ Order Instituting Proceedings, 78 FR 32522.
    \188\ See NYSE Letter II. See also Washington Letter (stating 
that the PFAC `` `reality tested' the fee structure to assess 
whether there would be unintended consequences of significantly 
changing fees for categories of users.'').
    \189\ Id.
    \190\ Id.
    \191\ Id.
    \192\ Id.
---------------------------------------------------------------------------

D. Fairness of the Fee Proposals

    Six commenters believed that the proposal would improve 
transparency of the proxy fee structure so that it is clearer to 
issuers what services they are paying for and that the fees are 
consistent with the type and amount of work involved.\193\ In addition, 
six commenters believed that the proposal is an improvement that helps 
eliminate the ``cliff'' pricing schedule.\194\
---------------------------------------------------------------------------

    \193\ See Steering Committee Letter, SCSGP Letter, SCC Letter, 
Broadridge Letter, NIRI Letter, Washington Letter.
    \194\ See SCSGP Letter, ABC Letter, Broadridge Letter, BNY 
Letter, SCC Letter, INVeSHARE Letter.
---------------------------------------------------------------------------

    However, several commenters raised concerns about the possibility 
that issuers may be paying more than would constitute ``reasonable'' 
reimbursement for actual costs.\195\ As a result, several commenters 
stated that the fee proposal favors the interests of broker-dealers and 
discriminates against issuers.\196\ One commenter noted that a 2011 
survey of transfer agent pricing compared to the NYSE proxy fee 
schedule concluded that market-based proxy fees for registered 
shareholders were more than 40% less than the proxy fees being charged 
to provide the same services to beneficial owners.\197\ This commenter 
also noted that the same study found that all transfer agents 
participating in the survey charged processing and suppression fees 
that were significantly less than the fees being charged by broker-
dealers under the current NYSE proxy fee schedule.\198\ This commenter 
concluded that the NYSE proxy fee schedule, as proposed, does not 
satisfy the requirements of Section 6(b)(5) of the Act because the 
proposed fees are ``not based on actual costs incurred and exceed 
similar charges under competitive pricing and through other broker-
dealer utilities operating on an at-cost basis.'' \199\ Another 
commenter also disputed the NYSE's assertion that market forces 
currently shape the fees issuers are required to pay for proxy 
distribution, and believed a fuller explanation of how the proposed 
fees represent reimbursement for actual costs

[[Page 63540]]

is necessary to ensure compliance with statutory requirements.\200\
---------------------------------------------------------------------------

    \195\ See STA Letter, STA Letter II, Schafer Letter, Lovatt 
Letter, IBC Letter, BNY Letter, ICI Letter.
    \196\ See STA Letter II, IBC Letter, Schafer Letter, Lovatt 
Letter, OTC Letter.
    \197\ See STA Letter II.
    \198\ Id.
    \199\ Id.
    \200\ See AFSCME Letter.
---------------------------------------------------------------------------

    In response to concerns regarding the fairness of the proposed rule 
change, the Exchange, through the Broadridge Material, took the 
position that the proposal improves the overall fairness and 
reasonableness of the fee allocation by considering a number of 
factors, such as an issuer's size and the characteristics of an 
issuer's shareholder base.\201\ The Broadridge Material expressed the 
view that, under the current fee structure, fees paid for processing 
the largest issuers and jobs subsidize the fees paid for processing 
smaller issuers and jobs, and that the ``subsidy of smaller firms by 
larger firms is narrowed, but not eliminated, by the proposed fee 
structure.'' \202\ Furthermore, according to the Broadridge Material, 
``in comparison to the current, `one-size-fits-all' fee structure, the 
proposed fee structure better recognizes economies of scale for issuers 
of different sizes, as measured by their number of beneficial 
shareholders.'' \203\
---------------------------------------------------------------------------

    \201\ See NYSE Letter III.
    \202\ Id.
    \203\ Id.
---------------------------------------------------------------------------

    The Exchange, through the Broadridge Material, also represented 
that the ``proposed fees are lower than current fees, they provide 
greater total savings, and they contain measures and incentives to 
improve retail participation.'' \204\ In particular, the Broadridge 
Material stated that issuers would have saved an estimated 4%-6% on 
average if the proposal had been in effect for 2012,\205\ and expressed 
the view that the incentive fee structure would help continue to drive 
additional reductions in printing and postage costs.\206\
---------------------------------------------------------------------------

    \204\ Id. See also Washington Letter.
    \205\ Id. The Broadridge Material indicated that this figure is 
based on an analysis of ``all of the invoices Broadridge processed 
on behalf of its clients, using the proposed fees in place of the 
current fees, as charged, for U.S. equity proxy meetings.''
    \206\ Id. The Broadridge Material also stated that the ``total 
cost to issuers (fees, printing and postage) is lower by several 
hundred million dollars each year than it was at the time of the 
last fee review in 2002,'' and represented that in ``each of the 
past six years, the estimated annual savings not only exceeded the 
incentive fees paid out but all fees issuers paid.'' The Broadridge 
Material further expressed the view that the preference management 
fee and one-time EBIP incentive fee will ``drive investments in 
technology, and systems development by Broadridge and its clients--
resulting in greater use of technology--with large and growing 
savings to issuers, and greater conveniences to shareholders in 
accessing proxy information and voting their shares.''
---------------------------------------------------------------------------

    In addition, the Broadridge Material cited a study indicating that 
the regulated fees issuers pay for delivering a proxy to a beneficial 
shareholder (e.g., through Broadridge) were lower on average than 
unregulated fees issuers pay for delivering a proxy to a registered 
shareholder, as well as a supplemental review performed by Broadridge 
that confirmed that conclusion.\207\
---------------------------------------------------------------------------

    \207\ Id. In addition, Broadridge stated that it compared the 
invoices for the registered shareholder processing services it 
performed on behalf of issuers in fiscal year 2012 to NYSE's 
proposed fees and the results showed that for ``over 80% of issuers 
and meetings, the proposed regulated fee issuers pay for delivering 
a proxy to a beneficial shareholder would be lower than the 
unregulated fee issuers pay for delivering a proxy to a registered 
shareholder.''
---------------------------------------------------------------------------

    Finally, the Broadridge Material highlighted its major systems 
enhancements in recent years, and noted that its IT infrastructure, 
development and labor costs have risen by 8.4%, 15.4% and 8.1%, 
respectively, on a compound annual basis, over the past six years, 
while NYSE's regulated fees have not changed.\208\
---------------------------------------------------------------------------

    \208\ Id. The Broadridge Material described how costs had been 
impacted by ``inflation, processing volumes, market activity, 
regulatory requirements and the evolution of technology, and 
highlighted the significant growth (116%) in the lines of computer 
code necessary to process communications from 2002 to 2011. In 
addition, Broadridge stated that as a result of these costs, and 
flat to declining volumes and fee revenues, profit margins at 
Broadridge's Investor Communications Services business group are at 
the low end of the processing services industry, on after-tax basis 
ranging from 9% to 11%.
---------------------------------------------------------------------------

    Below is a more detailed summary of the comments regarding the 
significant fees on the NYSE schedule, as proposed in the rule filing.
1. Preference Management Fee
    Several commenters raised concerns regarding the change of the 
paper and postage elimination fee into a preference management fee, 
which is assessed for all accounts for which a mailing is 
suppressed.\209\ These commenters also highlighted the lack of any 
detailed analysis about the cost of the work involved for the fee.\210\ 
In addition, these commenters questioned the appropriateness of the 
``evergreen'' nature of the fees, which currently are charged not only 
in the year in which the electronic delivery is elected but also in 
each year thereafter.\211\ One commenter stated that if ``Broadridge is 
paid to `keep track' of a shareholder preference regarding householding 
or electronic delivery, it should not also be permitted to charge a 
basic processing fee and an intermediary unit fee for accounts that are 
suppressed.'' \212\ Another commenter stated that the preference 
management fee has ``no apparent connection to the amount of effort 
involved in recording the beneficial owner's preference on the broker's 
system nor that involved in the suppression of mailing.'' \213\ 
Furthermore, one commenter questioned why the tiered system was 
appropriate for the ``basic processing fee'' and ``supplemental fees,'' 
and not for the preference management fee.\214\
---------------------------------------------------------------------------

    \209\ See STA Letter II, BNY Letter, ICI Letter, AFSCME Letter.
    \210\ Id.
    \211\ See STA Letter II, BNY Letter, ICI Letter, AFSCME Letter.
    \212\ See STA Letter II.
    \213\ See BNY Letter.
    \214\ See OTC Letter.
---------------------------------------------------------------------------

    In its first response letter, the Exchange referred to its 
discussion in its rule filing of the appropriateness of charging the 
preference management fee every year, and noted that, following the 
SEC's review of the proxy fees put in place in 1997, the every-year 
approach was maintained by an independent proxy review committee.\215\ 
In its second letter, in response to concerns raised in the Order 
Instituting Proceedings that the Exchange had not clearly explained why 
a tiered approach would be inappropriate for the preference management 
fee,\216\ the Exchange stated that a tiered approach was not 
appropriate because preference management processing ``appeared to have 
fewer economies of scale than the other processing activities.'' \217\ 
The Exchange also noted that the PFAC asked Broadridge ``to model a 
tiered approach for preference management fees, but determined that it 
was too complex, especially in light of the fact that the basic 
processing fees were being tiered.'' \218\ The Exchange also 
represented that the work effort associated with both the basic 
processing fee and intermediary unit fee are separate and in addition 
to the activities supporting the preference management fee.\219\
---------------------------------------------------------------------------

    \215\ See NYSE Letter.
    \216\ See Order Instituting Proceedings, 78 FR 32522.
    \217\ See NYSE Letter II. The NYSE stated that performance 
management fees have low set-up costs, as opposed to the basic 
processing fee, which has certain set-up costs irrespective of the 
size of the job. In addition, the Exchange noted that the PFAC 
determined to distinguish between managed accounts and other 
accounts in terms of the amount of the preference management fee.
    \218\ Id.
    \219\ See NYSE Letter III.
---------------------------------------------------------------------------

2. Separately Managed and Wrap Accounts \220\
---------------------------------------------------------------------------

    \220\ See infra subpart E, Minimum Share Threshold for Managed 
Accounts.
---------------------------------------------------------------------------

    One commenter fully supported the reduction of the separately 
managed account fees \221\ and another believed that the Exchange has 
taken a fair and

[[Page 63541]]

reasonable approach with respect to charges for managed accounts by 
cutting the preference management fee in half for positions in managed 
accounts and eliminating the fee altogether for any position under five 
shares.\222\ Several other commenters, however, expressed concern 
regarding the proxy fees for separately managed accounts, including 
wrap accounts.\223\ One commenter highlighted the lack of detailed 
analysis for why the managed account fees should remain an issuer 
expense.\224\ Three commenters questioned the validity of the amount of 
work involved in managing a separately managed account.\225\ One 
commenter expressed uncertainty ``on the value or need to track 
accounts where there is no need or expectation to deliver proxy 
materials, since these accounts are voted by a single manager.'' \226\ 
Another commenter expressed concern that ``private, nonpublic 
information is being sent to the broker-dealer's service provider when 
the broker-dealer should be the entity eliminating the accounts for 
proxy distribution. With today's technology, the broker-dealer would 
easily be able to extract only the accounts which truly should receive 
proxy materials.'' \227\ Yet another commenter concluded that a fee 
prohibition should apply when a beneficial owner has instructed an 
investment adviser to receive issuer proxy materials and vote his or 
her proxies in lieu of the beneficial owner.\228\
---------------------------------------------------------------------------

    \221\ See INVeSHARE Letter.
    \222\ See SCSGP Letter.
    \223\ See STA Letter II, SSA Letter, BNY Letter.
    \224\ See STA Letter II. This commenter stated that the 
``documentation and data processing for both wrap fee accounts and 
separately managed accounts are standardized within a broker-
dealer's accounting platform.'' See also AFSCME Letter (noting that 
the proposal ``does not explain why issuers should reimburse 
indefinitely fees associated with not sending materials to a 
beneficial owner . . . because those owners have delegated their 
voting rights to an investment manager.'').
    \225\ See STA Letter II, BNY Letter, FOLIOfn Letter.
    \226\ See BNY Letter.
    \227\ See SSA Letter.
    \228\ See STA Letter II.
---------------------------------------------------------------------------

    In its first and fourth response letter, the Exchange referred to 
the discussion in its rule filing of the issue of the appropriateness 
of applying the preference management fee to managed accounts.\229\ In 
its second letter, in response to concerns raised in the Order 
Instituting Proceedings that the Exchange had not provided a rationale 
for treating managed accounts differently only with respect to 
preference management fees,\230\ the Exchange explained that the PFAC 
discussion focused on the preference management fee because the 
suppression of paper delivery for a managed account ``appeared to be 
more a consequence of the nature of the account than an effort made to 
suppress paper delivery.'' \231\
---------------------------------------------------------------------------

    \229\ See NYSE Letter, NYSE Letter IV. According to the 
Exchange, there is ``processing work to track and maintain the 
voting and distribution elections made by the beneficial owners of 
the stock positions in the managed account.'' See Notice, 78 FR 
12387.
    \230\ See Order Instituting Proceedings, 78 FR 32522-23.
    \231\ See NYSE Letter II.
---------------------------------------------------------------------------

3. Nominee and Coordination Fees
    One commenter stated that the proposed increase in the nominee 
coordination fee would be 10%, from $20 to $22 for each nominee holding 
at least one share of an issuer's stock.\232\ This commenter noted that 
the fee appeared to be significantly higher than similar fees charged 
by the Depository Trust Company (``DTC'') and the National Securities 
Clearing Corporation (``NSCC''), two broker-dealer utilities that work 
on an at-cost basis.\233\ This commenter stated that without 
independent confirmation of the actual cost of sending electronic 
search requests to nominees and processing the responses, ``it is hard 
to justify a 10% increase in this fee, especially when the cost of 
sending electronic requests, messages, and beneficial owner account 
information is significantly less expensive when conducted through the 
DTC and/or NSCC processing systems.'' \234\
---------------------------------------------------------------------------

    \232\ See STA Letter II.
    \233\ Id.
    \234\ Id. The Commission notes that the Exchange stated in the 
Notice that the nominee coordination fee has declined by 
approximately 29% on an inflation-adjusted basis since it was first 
introduced in 1997. See Notice, 78 FR 12384.
---------------------------------------------------------------------------

4. Notice and Access Fees
    Two commenters stated that there needs to be an independent review 
of the actual costs incurred for notice and access fees to reflect a 
rate of reasonable reimbursement.\235\ Another commenter stated that 
the proposal does not provide information sufficient to analyze in 
detail the cost basis for notice and access fees.\236\ One commenter 
noted that the proposal would generally codify Broadridge's current 
notice and access fees.\237\ This commenter stated that ``even if the 
Commission determines that it is appropriate for such a fee to be 
charged, it is not reasonable for the fee to apply to all accounts, 
even those which receive the full set of proxy materials.'' \238\ One 
commenter reiterated that the ``lack of an independent audit hampers 
the ability of issuers to know what costs are incurred, and why these 
fees are needed to handle a much lower level of mail processing, i.e., 
the mailing of one piece instead of a four-piece proxy package.'' \239\
---------------------------------------------------------------------------

    \235\ See STA Letter II, ICI Letter.
    \236\ See AST Letter.
    \237\ See ICI Letter.
    \238\ Id.
    \239\ See STA Letter II.
---------------------------------------------------------------------------

    In its initial response letter, the Exchange referred to the 
discussion in its rule filing of notice and access fees, but emphasized 
that the PFAC members were satisfied with the overall level of notice 
and access costs.\240\ The Exchange represented that the only question 
was whether Broadridge's approach with respect to those costs made 
sense and, after reviewing alternative approaches, the PFAC came to a 
consensus that Broadridge's approach was best.\241\
---------------------------------------------------------------------------

    \240\ See NYSE Letter.
    \241\ Id.
---------------------------------------------------------------------------

    In addition, the NYSE explained, through the Broadridge Material, 
that notice and access requires ``incremental software and maintenance, 
additional processing of an issuer's shareholder position file, 
printing of the Notice . . ., establishment of a new production line 
for Notice processing, and management of inventory to timely fulfill 
shareholder requests for hard copies of proxy materials.'' \242\ In 
addition, the Broadridge Material stated that every notice and access 
request ``makes different demands on three production streams, i.e., 
for processing mailed Notices, for processing full sets and for 
processing electronic deliveries.'' \243\ Thus, according to the 
Exchange, ``each and every issuer that chooses to use [notice and 
access] places additional demands on proxy systems and servicing 
costs.'' \244\
---------------------------------------------------------------------------

    \242\ See NYSE Letter III. In addition, the Exchange, through 
the Broadridge Material, represented that every notice and access 
request ``makes different demands on three production streams, i.e., 
for processing mailed Notices, for processing full sets and for 
processing electronic deliveries.''
    \243\ Id.
    \244\ Id.
---------------------------------------------------------------------------

5. NOBO List Fees and Stratification
    One commenter stated that the current NOBO list fees far exceed 
what should be considered reasonable and deserves further 
scrutiny.\245\ This commenter noted that the proposed fee schedule 
codifies the fee that Broadridge historically has charged for issuers 
to obtain a list of NOBOs.\246\ This commenter also raised concerns 
about the level of fees charged given the relatively uncomplicated 
nature of the work involved and the possibility that

[[Page 63542]]

issuers may be paying twice for the same information.\247\
---------------------------------------------------------------------------

    \245\ See ICI Letter.
    \246\ Id.
    \247\ Id.
---------------------------------------------------------------------------

    Six commenters, however, supported the stratification of NOBO 
lists.\248\ Three commenters believed that the proposal to provide 
stratified NOBO lists would reduce issuers' costs in communicating with 
shareholders.\249\ Another commenter believed that stratified NOBO 
lists would enhance retail voter participation, as well as help issuers 
communicate with their shareholders at proxy time.\250\
---------------------------------------------------------------------------

    \248\ See ABC Letter, Broadridge Letter, NIRI Letter, SCC 
Letter, ICI Letter, ICI Letter II, SCSGP Letter.
    \249\ See ABC Letter, Broadridge Letter, NIRI Letter.
    \250\ See SCSGP Letter.
---------------------------------------------------------------------------

    Four commenters believed that the stratified NOBO lists should be 
made available outside of a record date.\251\ One commenter noted its 
disappointment that an issuer could not request a stratified NOBO list 
outside of a record date, ``especially at a time when issuers have a 
greater need to communicate more frequently with their shareholders, 
and especially their street name holders.'' \252\ Another commenter 
stated that the justification used by the NYSE for limiting 
stratification ``is the impact such a change would have on the proxy 
system, which appears to be the impact this would have on the vendor 
(Broadridge) that provides this information,'' \253\ and took the 
position that any potential negative impact on the vendor is not 
sufficient justification to restrict potential benefits to 
issuers.\254\ One commenter, however, believed that if the proposal 
were expanded to include requests for stratified lists at any time of 
the year, there would be an imbalance between fees and the work 
involved.\255\ This commenter recommended that the Commission and the 
NYSE monitor developments with respect to NOBO lists for the first year 
of the new fees and, at the end of the first year, adjust the rule if 
necessary.\256\
---------------------------------------------------------------------------

    \251\ See SCSGP Letter, STA Letter II, BNY Letter, NIRI Letter.
    \252\ See STA Letter II. This commenter also stated that 
``issuers find it more cost-effective to order a subset of the NOBO 
list, segmented by whether or not a beneficial owner already voted 
on a solicitation, or stratified by a minimum threshold of shares 
held.''
    \253\ See BNY Letter.
    \254\ Id.
    \255\ See Broadridge Letter.
    \256\ See Broadridge Letter.
---------------------------------------------------------------------------

    The Exchange stated in its first response letter that it believes 
that there is a rational basis to distinguish between record date lists 
and other lists, and that it is concerned about the potential impact of 
the proposed NOBO list fee change on overall proxy fee revenues 
available to reimburse brokers for their costs.\257\ The Exchange added 
that issuer and broker experience with the new rule would inform 
whether future changes are desirable.\258\
---------------------------------------------------------------------------

    \257\ See NYSE Letter.
    \258\ Id.
---------------------------------------------------------------------------

E. Minimum Share Threshold for Managed Accounts

    One commenter, who stated that it has been adversely affected by 
fees attributable to managed accounts that hold fractional shares of 
its own stock, expressed full support for the proposal.\259\ In 
addition, one commenter stated that the removal of fees for fractional 
share positions would help eliminate exposure some issuers have to 
large, unanticipated increases in the number of street name accounts 
from one year to the next.\260\ This commenter estimated that this 
amendment would save issuers approximately $3.6 million over a period 
of twelve months.\261\
---------------------------------------------------------------------------

    \259\ See Gartner Letter.
    \260\ See Broadridge Letter.
    \261\ Id.
---------------------------------------------------------------------------

    However, four commenters raised concerns regarding the five-share 
limit for fees for processing shares held through managed 
accounts.\262\ One commenter stated that the rules for reimbursement 
should be based on actual (or a reasoned estimate of) proxy processing 
costs rather than on arbitrarily fixed thresholds.\263\ Two commenters 
stated that the proposal lacked a detailed analysis concerning the 
basis for selecting any particular threshold.\264\ Two commenters 
stated that the work required to process proxy distribution to managed 
accounts is the same, regardless of the number of shares held,\265\ and 
one commenter stated the proposed approach has the potential to create 
an imbalance between the fees and the amount of work involved.\266\ 
Instead of drawing the line at five shares, one commenter believed that 
issuers should not be required to reimburse brokers for processing 
managed accounts that have less than one whole share.\267\ Another 
commenter believed that the same fees should apply regardless of how 
many shares--or fractions of shares--a shareholder owns if the account 
holder retains voting rights and thus receives the voting materials, 
rather than delegating voting rights to a manager.\268\ In addition, 
one commenter suggested a per distribution fee that equals the average 
cost for all distributions actually made regardless of the number of 
shares held in a managed account.\269\
---------------------------------------------------------------------------

    \262\ See Broadridge Letter, SIFMA Letter, AST Letter, FOLIOfn 
Letter, FOLIOfn Letter II.
    \263\ See SIFMA Letter.
    \264\ See AST Letter, FOLIOfn Letter.
    \265\ See Broadridge Letter, SIFMA Letter.
    \266\ See Broadridge Letter.
    \267\ Id.
    \268\ See Angel Letter; see also FOLIOfn Letter II (stating that 
the costs for distribution to an account that holds three shares in 
a security is identical to the costs for distribution to an account 
that holds thirty or more shares).
    \269\ See FOLIOfn Letter II.
---------------------------------------------------------------------------

    Furthermore, this commenter took the position that the proposal 
effectively disenfranchises shareholders who hold five or fewer shares 
in a security in a managed account because it would provide no 
reimbursement of costs for distribution of proxy materials to those 
shareholders.\270\
---------------------------------------------------------------------------

    \270\ See FOLIOfn Letter. This commenter stated further that 
``although the argument is that no disenfranchisement occurs because 
firms would still be required to distribute materials to all 
shareholders, even though distribution to some would not be 
compensated, the result is that smaller investors are materially 
disfavored.''
---------------------------------------------------------------------------

    In the Order Instituting Proceedings, the Commission expressed 
concerns that the Exchange had not provided a clear explanation as to 
why the five-share threshold for charging proxy fees for managed 
accounts was chosen.\271\ In its second response letter, the Exchange 
reiterated that ``the PFAC was concerned with the proliferation of 
managed accounts containing a very small number of an issuer's shares'' 
and that ``[t]he basic question was at what point did the benefit to an 
issuer in terms of shares voted become so minimal as to justify 
charging the issuer nothing for processing the account.'' \272\ 
According to the Exchange, the PFAC considered setting the minimum 
share threshold for managed accounts at various points from a 
fractional share to 5, 10, 15, 20 and 25 shares, and obtained estimates 
of the economic impact of each of those, but ultimately reached 
consensus at the five share threshold.\273\ The Exchange stated that 
``the estimated impact on aggregate proxy fees was considered 
relatively modest (approximately $4.2 million), and it seemed clear 
that the voting benefit of five shares or less was limited, [t]o say 
the least.'' \274\
---------------------------------------------------------------------------

    \271\ See Order Instituting Proceedings, 78 FR 32522.
    \272\ See NYSE Letter II.
    \273\ Id.
    \274\ Id.
---------------------------------------------------------------------------

    In its fourth response letter, the Exchange emphasized that the 
schedule of proxy fees is appropriately based on overall industry 
costs, not the costs of any individual firm.\275\ The Exchange also 
referred to its discussion in its rule filing of the reimbursement of 
brokers

[[Page 63543]]

for their reasonable expenses, and stated that by providing 
``reimbursement of the reasonable overall expenses of brokers/banks in 
the aggregate, the fees as proposed are consistent with the Exchange 
Act Rules 14b-1 and 14b-2, and are consistent in this respect with the 
fees approved by the SEC in prior proxy fee rule filings over the 
years.'' \276\ In addition, the Exchange asserted that the ``average'' 
reimbursement approach suggested by one commenter is outdated and might 
benefit one particular firm, but it would not remedy the anomalous fee 
impact experienced by issuers resulting from the growth of low minimum 
investment managed accounts or encourage efforts to eliminate paper 
distribution.\277\
---------------------------------------------------------------------------

    \275\ Id.
    \276\ Id.
    \277\ Id.
---------------------------------------------------------------------------

F. Burden on Competition

    Several commenters stated that the structure and level of the 
proposed NYSE proxy fees place a burden on competition.\278\ Five 
commenters stated that the NYSE rule filing does not adequately address 
the contract arrangements between broker-dealers and Broadridge.\279\ 
In particular, two commenters expressed the view that the rule filing 
does not adequately address the rebates being provided by Broadridge to 
broker-dealers as a result of excess profits generated by the NYSE 
proxy fee schedule, which they believe create a burden on competition 
that is not necessary or appropriate,\280\ while another commenter 
believed that the most significant burden to competition is the 
business practice of the primary provider of services in the proxy fee 
market and not the fee structure.\281\ Two commenters believed that the 
SEC should ``disapprove the rule filing on the basis that the excess 
profits being generated are creating a burden on competition, as the 
dominant service provider in this area is able to use these excess 
profits to subsidize its ability to successfully encroach on the proxy 
servicing business of transfer agents.'' \282\ One commenter stated, 
however, that although there is one dominant intermediary on the street 
side, brokers remain free to contract with any entity that can fulfill 
proxy process services to their clients or can provide those services 
themselves.'' \283\
---------------------------------------------------------------------------

    \278\ See STA Letter II, IBC Letter, SSA Letter, Lovatt Letter, 
Schafer Letter.
    \279\ See STA Letter II, IBC Letter, SSA Letter, BNY Letter, CtW 
Letter II; see also AFSCME Letter (stating that the Commission 
should fully explore the conflicts of interest involving Broadridge 
and provide any guidance it deems appropriate before approving the 
proxy fee proposal).
    \280\ See STA Letter II, STA Letter III, IBC Letter. One of 
these commenters stated that there should be an examination of the 
rebates being provided to ensure that they do not come at the 
issuer's expense. See STA Letter II. This commenter also noted that 
this issue was previously raised by the Proxy Working Group in 2006 
and the Proxy Concept Release, and expressed the view that the PFAC 
did not address this issue in any meaningful way. Id. See infra 
Section V, Discussion and Commission Findings, for a discussion of 
the likely economic impact that the Commission considered in this 
context.
    \281\ See INVeSHARE Letter.
    \282\ See STA Letter II, IBC Letter.
    \283\ See ABC Letter.
---------------------------------------------------------------------------

    In its first response letter, the Exchange referred to the 
discussion in its rule filing and the PFAC report of the payments made 
by Broadridge to certain of its broker-dealer clients pursuant to their 
contractual arrangements, but reiterated that ``the existence of these 
cost recovery payments is a completely rational result of the fact that 
the fees are `one size' but have to `fit all,' so that the firms with 
large volumes can be served at a lower unit cost, while those with 
smaller volumes have a higher unit cost to Broadridge.'' \284\ The 
Exchange suggested that, contrary to one commenter's contention that 
the rebates reflect excess profits,\285\ the rebates ``may also be 
viewed as a demonstration that market forces are directing the `excess' 
to firms that can be serviced by Broadridge for a lower unit price but 
have themselves greater internal street name proxy administration 
costs, given their larger number of accounts.'' \286\
---------------------------------------------------------------------------

    \284\ See NYSE Letter.
    \285\ See STA II Letter.
    \286\ See NYSE Letter.
---------------------------------------------------------------------------

    In its second letter, in response to concerns raised in the Order 
Instituting Proceedings that Broadridge's rebate arrangements may 
result in an unnecessary or inappropriate burden on competition,\287\ 
the Exchange noted that, according to Broadridge approximately 200 of 
its 900 bank/broker clients receive ``cost recovery'' payments.\288\ 
The Exchange noted that ``all firms have to incur at least some costs 
related to proxy distribution beyond the cost of retaining 
Broadridge,'' and took the position that those larger clients who 
receive cost recovery payments ``are most likely to have more 
sophisticated operations and greater costs.'' \289\ In addition, the 
Exchange referred to a survey conducted by SIFMA that, according to the 
Exchange, ``demonstrated that on an industry basis, brokerage firms are 
not receiving reimbursement in excess of the costs they expend.'' \290\ 
On this point, the Exchange referred to SIFMA's extended description of 
the proxy distribution activities undertaken by broker-dealers, beyond 
what is outsourced to third-party service providers like 
Broadridge.\291\ In particular, the SIFMA description outlined major 
categories of activities broker-dealers engage in to support proxy 
services, including: (i) Preference management, (ii) data 
infrastructure, (iii) oversight and supervision, (iv) client service, 
and (v) record retention.\292\
---------------------------------------------------------------------------

    \287\ See Order Instituting Proceedings, 78 FR 32523-24.
    \288\ See NYSE Letter II.
    \289\ Id.
    \290\ Id.
    \291\ See NYSE Letter III.
    \292\ Id.
---------------------------------------------------------------------------

G. Enhanced Broker Internet Platforms

    Twelve commenters expressed general support for the proposed EBIP 
incentive fee, noting that it would reduce costs, enhance efficiency 
and/or lead to more retail shareholder participation.\293\ Two of these 
commenters believed that the proposed success fee would increase the 
availability of EBIPs and potentially spur innovation in such 
platforms.\294\ Two additional commenters that supported the proposed 
fee believed that it would result in higher retail shareholder 
engagement.\295\
---------------------------------------------------------------------------

    \293\ See Perficient Letter, SIFMA Letter, ABC Letter, CCMC 
Letter, Broadridge Letter, Darling Letter, SCSGP Letter, iStar 
Letter, Steering Committee Letter, SCC Letter, INVeSHARE Letter, 
Schumer Letter.
    \294\ See SIFMA Letter, ABC Letter.
    \295\ See NIRI Letter, Schumer Letter.
---------------------------------------------------------------------------

    Six commenters believed that the incentive structure for developing 
EBIPs could be further improved.\296\ Three commenters expressed 
concern that the incentives provided to brokers for developing EBIPs do 
not extend to other more open platforms, such as ProxyDemocracy.org, 
Sharegate.com or other Web sites.\297\ Two commenters stated that these 
and other entities should be afforded at least the same incentives as 
brokers.\298\ These commenters also argued that EBIPs offer no real 
benefit to retail shareowners over e-delivery.\299\ Several commenters 
expressed concern that brokers who set up EBIPs could be incentivized 
to create default voting mechanisms that essentially replicate 
uninformed ``broker voting,'' \300\ or that the design of EBIPs 
otherwise could be unfair or biased.\301\ Two commenters were of the 
view that the EBIP proposal addresses the needs

[[Page 63544]]

of issuers, brokers and Broadridge, rather than shareholders.\302\ One 
commenter noted that the ``99 cent fee level was not based on any 
survey of brokers, or on the anticipated impact of any particular level 
of success fee on individual broker decisions to implement EBIPs.'' 
\303\ One commenter requested that the Commission include investment 
advisors and beneficial owners in developing the incentive plan for 
EBIPs.\304\ Two commenters recommended that the proposed rule change be 
delayed and amended to encourage an open form of client directed 
voting.\305\ Another commenter recommended an approach to EBIPs that 
provides revenue streams to companies who prove they can provide a 
superior service to the investor customer.\306\
---------------------------------------------------------------------------

    \296\ See Harrington Letter, ICC Letter, Sharegate Letter, CG 
Letter, CII Letter, Zumbox Letter.
    \297\ See ICC Letter, Harrington Letter, CG Letter.
    \298\ See ICC Letter, CG Letter.
    \299\ Id.
    \300\ See ICC Letter, Harrington Letter, CG Letter; see also CtW 
Letter II.
    \301\ See AFSCME Letter, CtW Letter II, AFL-CIO Letter.
    \302\ See ICC Letter, CG Letter.
    \303\ See SIFMA Letter. This commenter also suggested that the 
rules for brokers' eligibility to receive a success fee be drafted 
to provide bright lines so that brokers are not compelled to conduct 
extensive analysis to determine how the fee might apply in their 
individual circumstances.
    \304\ See Harrington Letter.
    \305\ See ICC Letter, CG Letter; see also Angel Letter (stating 
that client directed voting will help increase shareholder 
participation).
    \306\ See Sharegate Letter.
---------------------------------------------------------------------------

    One commenter requested that the Commission consider issues 
regarding Voting Instruction Forms (``VIFs'') and EBIPs before 
finalizing the proposed rule change.\307\ However, another commenter 
believed it is premature to regulate these details of EBIPs, and that 
experimentation with different types of platforms should be 
permitted.\308\ Yet another commenter believed that providing 
additional incentives for integration of a customer's documents within 
one brokerage Web site would provide a stronger benefit to 
investors.\309\ One commenter questioned whether the proposal 
improperly encourages the adoption of Internet voting procedures such 
as EBIP that, according to the commenter, shift control of the voting 
process to brokers and corporate managers.\310\ This commenter also 
questioned whether the proposal would ensure proper Commission 
oversight of the preparation of clear, informative and balanced VIFs, 
and whether it would enable the creation of open rather than 
proprietary client directed voting systems.\311\
---------------------------------------------------------------------------

    \307\ See CII Letter. Specifically, this commenter requested 
that the Commission consider (1) whether VIFs, including those 
distributed to beneficial shareowners by EBIPs, should be subject to 
the same degree of Commission oversight as proxy ballots; (2) 
whether EBIPs that distribute VIFs to beneficial shareowners should 
be prohibited from presenting voting options in a manner that 
unfairly tilts votes in favor of management recommendations; (3) 
whether VIFs, including those distributed to beneficial shareowners 
by EBIPs, should be prohibited from describing proxy ballot items 
using wording, headings, or fonts that differ from those used on the 
related proxy card; and (4) whether VIFs, including those 
distributed to beneficial shareowners by EBIPs, should not be 
permitted to tally unmarked shareowner votes in favor of 
management's recommendations when the underlying voting items are 
otherwise ineligible for discretionary voting by brokers. The 
Commission notes that these comments are beyond the subject of this 
proposed rule change by the NYSE.
    \308\ See Angel Letter.
    \309\ See Zumbox Letter.
    \310\ See CtW Letter, CtW Letter II.
    \311\ Id.
---------------------------------------------------------------------------

    One commenter believed that the proposed EBIP fee is inequitable 
because it does not apply to accounts that already have converted to 
electronic delivery while having access to an EBIP,\312\ and another 
commenter believed the incentive fees for EBIPs should apply to all 
EBIPs, not just new ones.\313\ However, another commenter urged the 
Commission not to adopt an incentive fee for the development of EBIPs 
``without evidence that such an incentive is necessary'' and noted that 
no evidence is presented that the PFAC obtained any data in support of 
the proposed financial incentive.\314\
---------------------------------------------------------------------------

    \312\ See FOLIOfn Letter.
    \313\ See Angel Letter.
    \314\ See AFSCME Letter.
---------------------------------------------------------------------------

    The Exchange, in its initial response letter, noted that it 
proposed the EBIP incentive fee because it was supported by the PFAC 
and issuer representatives.\315\ The Exchange expressed no opinion as 
to whether EBIPs would be used to facilitate client directed voting, as 
this was not an issue discussed with the PFAC.\316\ The Exchange noted 
one commenter's concerns regarding the VIF used to obtain voting 
instructions from street name shareholders,\317\ but stated that these 
concerns similarly were not discussed with the PFAC or in follow up 
EBIP discussions.\318\ With respect to concerns about firms that have 
already instituted EBIPs, the Exchange referred to a related discussion 
in its rule filing, and noted that the proposed fee is premised on the 
expectation that investors who are provided EBIP will be more likely to 
elect to switch to e-delivery, with the attendant significant savings 
to issuers in paper and postage.\319\
---------------------------------------------------------------------------

    \315\ See NYSE Letter.
    \316\ Id.
    \317\ See CII Letter.
    \318\ See NYSE Letter.
    \319\ See NYSE Letter IV.
---------------------------------------------------------------------------

H. Impact on Mutual Funds

    Two commenters took the position that there should be further 
analysis of the impact the proposed rule change would have on proxy 
distribution fees paid by mutual funds and, in particular, the open-end 
funds that hold special meetings each year.\320\ One of these 
commenters stated that the proposal could result in a significant fee 
increase in combined processing and intermediary unit fees for many 
mutual funds.\321\ This commenter also stated that the ``net impact of 
the proposed changes will vary widely due to the complexity of a 
proposed fee structure that raises combined processing and intermediary 
costs for many funds (and especially funds conducting special meetings 
without the election of directors/trustees), while also reducing 
certain costs associated with `managed accounts.' '' \322\ This 
commenter noted that there was insufficient information to determine 
the cost basis and impact of the fee changes, including the extent to 
which related cost reductions could mitigate the impact of higher 
combined processing and intermediary unit fees.\323\
---------------------------------------------------------------------------

    \320\ See ICI Letter, AST Letter.
    \321\ See AST Letter.
    \322\ See AST Letter.
    \323\ See AST Letter.
---------------------------------------------------------------------------

    In its first response letter, the Exchange expressed the view that 
these two commenters \324\ had premised their comments on a 
misunderstanding of the meaning of a ``special meeting.'' \325\ 
According to the Exchange, such misunderstanding may have impacted the 
proxy fee analysis performed by the other commenter.\326\ One commenter 
responded that ``the [Exchange's] response did not change (or 
specifically address) our view that there is a need for additional 
analysis of the proxy distribution fees paid by funds.'' \327\
---------------------------------------------------------------------------

    \324\ See, e.g., ICI Letter.
    \325\ See NYSE Letter.
    \326\ Id., see also AST Letter. With respect to that analysis, 
the Exchange asserts that it is not clear how many issuers were 
included, and that the experiences of particular issuers will 
differ. See NYSE Letter. The Exchange also noted that that analysis 
clearly states that it looks only at the basic processing and 
intermediary fees, and only at the fees applicable to special 
meetings. Id. In addition, the Commission notes that the Exchange 
has stated that the increased special meeting fees reflect the 
additional work required of the intermediary for these meetings, 
such as faster turnaround and more frequent vote tabulation, 
analytics and reporting because of the need for approval and 
concerns about quorum. See Notice, 78 FR 12390.
    \327\ See ICI Letter II. The commenter acknowledged its 
inclusion in the Exchange's Mutual Fund Proxy Fee Review group, 
which, according to the commenter, has been focusing on the 
``interim fees'' associated with the distribution of annual and 
semi-annual reports to fund shareholders. See ICI Letter.
---------------------------------------------------------------------------

V. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations

[[Page 63545]]

thereunder applicable to a national securities exchange.\328\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(4) of the Act,\329\ 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; \330\ Section 6(b)(5) of the 
Act,\331\ which requires that the rules of an exchange be designed, 
among other things, 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 not be designed to permit unfair discrimination 
between customers, issuers, brokers or dealers; and Section 6(b)(8) of 
the Act,\332\ which prohibits any exchange rule from imposing any 
burden on competition that is not necessary or appropriate in 
furtherance of the Act.
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    \328\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f). We address comments 
about the potential competitive impact of the proposed rule change 
below.
    \329\ 15 U.S.C. 78f(b)(4).
    \330\ Relatedly, SEC Rules 14b-1 and 14b-2 condition broker-
dealer's and bank's obligation to forward issuer proxy materials to 
beneficial owners on the issuer's assurance that it will reimburse 
the broker-dealer's or bank's reasonable expenses, both direct and 
indirect, incurred in connection with performing that obligation. 
See 17 CFR 240.14b-1 and 17 CFR 240.14b-2.
    \331\ 15 U.S.C. 78f(b)(5).
    \332\ 15 U.S.C. 78f(b)(8).
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    The Exchange's proposal has presented a number of complex and 
controversial issues, and generated substantial comment, both for and 
against. The Commission's Order Instituting Proceedings identified 
several areas where questions were raised as to whether the Exchange's 
proposal was consistent with the requirements of the Act, including 
those relating to the reasonableness of fees and their equitable 
allocation, unfair discrimination, and unnecessary burdens on 
competition. After carefully considering the proposal, the comment 
letters received and NYSE's responses, the Commission finds that, on 
balance, the proposal is consistent with the Act and therefore must be 
approved.\333\
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    \333\ 15 U.S.C. 78s(b)(2)(C)(i).
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    The Commission recognizes that some commenters did not support 
certain aspects of the proposed rule change. The Commission, however, 
must approve a proposed rule change if it finds that the proposed rule 
change is consistent with the requirements of the Act and the 
applicable rules and regulations thereunder. NYSE responded to the 
comments received and the issues identified in the Order Instituting 
Proceedings, and no comments otherwise convinced us that the proposed 
rule change was not consistent with the Act and the applicable rules 
and regulations thereunder. As more fully discussed below, the 
Commission believes that, overall, the proposed rule change will 
improve the way proxy distribution and related expenses are allocated. 
The Exchange has proposed to amend its rules that provide a schedule of 
``fair and reasonable'' rates of reimbursement by issuers to NYSE 
member organizations for expenses in connection with the processing of 
proxy materials and other issuer communications provided to investors 
holding securities in street name. The Exchange's proposal relies 
substantially on the recommendations of the PFAC, an advisory committee 
composed of representatives of issuers, broker-dealers and investors. 
The PFAC's recommendations, according to the Exchange, were intended to 
serve several goals, including supporting the current proxy 
distribution system given that it provides a reliable and accurate 
process for distributing proxies to street name stockholders; \334\ 
encouraging and facilitating retail investor voting; improving the 
transparency of the fee structure; and ensuring that the fees are as 
fair as possible.\335\
---------------------------------------------------------------------------

    \334\ See Proxy Concept Release, supra note 24.
    \335\ See Notice, 78 FR 12384.
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    In the Order Instituting Proceedings, the Commission acknowledged 
that aspects of the Exchange's proposal appear designed to make 
incremental improvements to the existing fee structure.\336\ 
Nevertheless, the Commission believed significant questions existed as 
to whether the Exchange had provided adequate justification for 
material aspects of its proposal such that the Commission could make a 
determination that the proposal is consistent with the Act.\337\
---------------------------------------------------------------------------

    \336\ See Order Instituting Proceedings, 78 FR 32521-22.
    \337\ Id. at 32522.
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    Specifically, in the Order Instituting Proceedings, the Commission 
questioned the rigor with which the PFAC and the Exchange reviewed the 
costs associated with proxy processing in developing its 
recommendations, and noted the PFAC's reliance on publicly available 
financial information about Broadridge that did not break out the proxy 
distribution business as a standalone segment, as well as related 
analyst reports.\338\ In addition, several commenters fundamentally 
questioned the basis for the proposed fee schedule, and believed the 
Exchange should first engage an independent third party to audit the 
actual costs incurred in proxy distribution activities.\339\ In the 
Order Instituting Proceedings, the Commission concluded that neither 
the Exchange nor the PFAC had articulated a sufficient analysis of 
Broadridge's costs of providing proxy processing services, so that the 
Commission lacked a sufficient basis on which to assess whether the 
incremental changes proposed to the existing fee structure were 
consistent with the statutory standard.\340\
---------------------------------------------------------------------------

    \338\ Id.
    \339\ See Section IV.A, supra.
    \340\ See Order Instituting Proceedings, 78 FR 32523.
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    In response, the Exchange explained that, today, there is no common 
methodology for tracking the costs incurred in the proxy distribution 
process, and that they typically have not been segregated from other 
related costs either at broker-dealers or at intermediaries such as 
Broadridge.\341\ The Exchange reiterated the information that led it to 
conclude that the proposed fees overall were reasonable, including the 
fact that the profit margins on Broadridge's broader business segment 
were consistent with the margins of firms in comparable 
businesses.\342\ In addition, the Exchange cited a recent analysis by 
Broadridge indicating that the fees issuers pay for delivering proxies 
to registered shareholders, which are not governed by NYSE rule, 
generally are higher than the proposed fees for delivering proxies to 
beneficial shareholders.\343\ The Exchange also provided supplemental 
information from Broadridge about the higher technology costs it 
incurred as the delivery of proxies became increasingly electronic, and 
detailed Broadridge's major technology investments over the past 
decade.\344\ In this regard, the Commission recognizes the difficulties 
associated with attempts to assign substantial fixed costs, such as 
those incurred in building and maintaining technological 
infrastructure, to specific functions or activities. Finally, the 
Exchange stressed that the proposal was expected to lower overall proxy

[[Page 63546]]

distribution fees by at least 4%.\345\ After reviewing the comments and 
the Exchange's responses, we conclude that the Exchange has adequately 
addressed these issues, and we find that the incremental changes 
proposed to the existing fee structure are consistent with applicable 
statutory and regulatory requirements.
---------------------------------------------------------------------------

    \341\ See NYSE Letter II.
    \342\ See notes 170-172, supra and accompanying text and NYSE 
Letter III.
    \343\ See note 207, supra and accompanying text and NYSE Letter 
III.
    \344\ See note 208, supra and accompanying text and NYSE Letter 
III.
    \345\ See NYSE Letter III.
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    In the Order Instituting Proceedings, the Commission also 
questioned the rigor with which the PFAC and the Exchange analyzed the 
individual components of the proposed fees to assure they met the 
statutory standards.\346\ For example, with respect to the basic 
processing and supplemental fees, the Exchange proposed to introduce a 
new five-tiered rate structure, with incrementally lower fees for 
issuers with larger numbers of beneficial owner accounts. Although the 
Commission acknowledged the Exchange's desire to better reflect the 
economies of scale in processing issuers with a larger number of 
accounts, the Commission expressed concern, among other things, that 
the Exchange had not explained why the particular five tiers were 
chosen, or conducted a meaningful review of the economies of scale 
present in the proxy processing business.\347\
---------------------------------------------------------------------------

    \346\ See Order Instituting Proceedings, 78 FR 32522-23.
    \347\ Id. at 32522.
---------------------------------------------------------------------------

    In response, the Exchange stressed that there were significant 
fixed ``set-up'' costs associated with each proxy distribution job, and 
provided an estimate from Broadridge that such fixed costs 
conservatively represent 25%, and for some functions as much as 50-60%, 
of total costs.\348\ According to the Exchange, the proposed fee 
schedule does not fully reflect the benefits of economies of scale when 
providing services to large issuers but, sensitive to the potential 
impact of proxy distribution fees on small issuers, the PFAC determined 
it was equitable to continue a structure where there was some 
subsidization of smaller issuers by larger ones.\349\ The Exchange also 
noted that, in assessing the fairness of the proposal, the PFAC 
considered that the overall percentage of proxy processing fees borne 
by small, medium, and large issuers would remain roughly the same under 
the new fee schedule.\350\ Finally, as noted above, the Exchange 
provided supplemental information indicating that, in Broadridge's 
judgment, there was a high degree of alignment between the proposed 
fees and the required ``work efforts'' to provide the corresponding 
service (e.g., basic processing is estimated to require 56.7% of the 
work effort and would represent approximately 55.4% of the proposed 
fees).\351\ We find that the Exchange's responses adequately address 
our concerns about the individual components of the proposed fees and 
demonstrate that they are consistent with the Act and relevant rules 
and regulations thereunder.
---------------------------------------------------------------------------

    \348\ See NYSE Letter III.
    \349\ See NYSE Letter II.
    \350\ Id.
    \351\ See NYSE Letter III.
---------------------------------------------------------------------------

    With respect to the preference management fee, which currently is 
characterized as an ``incentive'' fee for eliminating paper mailings, 
the Commission raised questions in the Order Instituting Proceedings as 
to the nature of the ongoing work that would justify such a fee, and 
the rationale for eliminating the existing tiered rate structure.\352\ 
The Exchange's response adequately addressed these concerns. The 
Exchange explained that ``preference management'' required confirmation 
of each preference record on a daily basis.\353\ According to the 
Exchange, these ongoing tasks were largely a variable cost, and 
appeared to have fewer economies of scale than other processing 
activities.\354\ The Exchange also provided Broadridge's assessment 
that its work effort associated with preference management activities 
(17.5%) is highly aligned with the proportion of preference management 
fees (18.9%).\355\
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    \352\ See Order Instituting Proceedings, 78 FR 32522.
    \353\ See NYSE Letter.
    \354\ See NYSE Letter II.
    \355\ See NYSE Letter III.
---------------------------------------------------------------------------

    In the Order Instituting Proceedings, the Commission also raised 
questions as to the rationale for generally charging managed accounts 
one-half the rate of other accounts for the preference management fee, 
and for charging managed accounts with five or fewer shares no 
fees.\356\ We find that the Exchange's further responses adequately 
articulate the rationale for this proposed change. The Exchange noted 
that managed accounts generate approximately half of all preference 
management fees,\357\ and indicated that it was equitable for issuers 
and broker-dealers, in effect, to share the cost of ongoing preference 
management services, because managed accounts benefit broker-dealers by 
allowing them to gather assets and generate fee income.\358\ The 
Exchange also noted the proliferation of low minimum investment managed 
accounts,\359\ and indicated that, for very small managed account 
positions, it was equitable for there to be no fee given the minimal 
benefit to an issuer of the number of shares voted from these 
accounts.\360\ The Exchange stressed that its rule is designed to 
provide reasonable reimbursement of the overall expenses of broker-
dealers in the aggregate, and the extent of reimbursement of any 
individual firm would vary depending on the specifics of its account 
population.\361\
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    \356\ See Order Instituting Proceedings, 78 FR 32522-23.
    \357\ See NYSE Letter IV.
    \358\ See NYSE Letter II.
    \359\ See NYSE Letter IV.
    \360\ See NYSE Letter II.
    \361\ See NYSE Letter IV.
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    According to the Exchange, the PFAC--representing issuers, broker-
dealers and investors--examined several possible thresholds, but 
reached consensus at the five-share level.\362\ The Commission 
acknowledges that any general rule setting forth an industry-wide fee 
schedule for the reimbursement of reasonable broker-dealer expenses 
necessarily will not precisely reimburse the actual expenses incurred 
by individual firms. Broker-dealers nevertheless must comply with their 
obligations pursuant to Rules 14b-1 and 14b-2 under the Act if provided 
assurance of reimbursement of reasonable expenses as provided in NYSE 
Rules 451 and 465 and the related material.\363\
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    \362\ See NYSE Letter II.
    \363\ Issuers must likewise nevertheless comply with their 
obligations under Rule 14a-13; the Commission does not view the rule 
change as inconsistent with or violating Regulation 14A. 
Accordingly, the Commission does not believe the NYSE proposal could 
effectively ``disenfranchise'' shareholders, as alleged by one 
commenter. See FOLIOfn Letter.
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    With respect to the notice and access fees, the Commission 
expressed concern in the Order Instituting Proceedings that the 
proposal essentially would codify Broadridge's existing fee 
schedule.\364\ The Exchange responded to this concern by providing 
supplemental information from Broadridge detailing the work effort 
associated with notice and access services.\365\ The Exchange 
previously had represented that there was general satisfaction with the 
current Broadridge notice and access fees, and although the PFAC had 
explored alternatives, none were more attractive.
---------------------------------------------------------------------------

    \364\ See Order Instituting Proceedings, 78 FR 32523.
    \365\ See NYSE Letter III.
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    Finally, in the Order Instituting Proceedings, the Commission 
expressed concern regarding the practice by Broadridge of rebating a 
portion of the fees paid by issuers for proxy processing to its larger 
broker-dealer clients, and questioned why these savings were not

[[Page 63547]]

passed on to issuers.\366\ Several commenters also were of the view 
that this practice placed an unnecessary burden on competition. In 
considering the impact on competition of these rebate practices, the 
Commission took into account the Exchange's representations that 
broker-dealers incur some costs related to proxy distribution beyond 
the cost of retaining Broadridge, and that, given the economies of 
scale associated with Broadridge's services, Broadridge can afford to 
make ``cost recovery'' payments to larger broker-dealers to reimburse 
them for some proxy distribution costs not outsourced to 
Broadridge.\367\ Accordingly, these rebate arrangements may in fact 
appropriately reimburse broker-dealers for reasonable expenses incurred 
in connection with proxy distribution, and not represent an 
inappropriate competitive action. The Commission also considered the 
Exchange's representation that the proposal was expected to lower 
overall proxy distribution fees by at least 4%, in which case the 
proposal would not use Broadridge's competitive position to adversely 
affect, on average, the prices paid by issuers. We conclude the 
Exchange has adequately demonstrated that to the extent the proposed 
rule change allows rebate practices to continue, that does not place an 
unnecessary burden on competition in contravention of relevant 
statutory and regulatory requirements.
---------------------------------------------------------------------------

    \366\ See Order Instituting Proceedings, 78 FR 32523.
    \367\ See NYSE Letter III. NYSE supported its representations 
with a description prepared by SIFMA of these additional proxy 
distribution costs.
---------------------------------------------------------------------------

    The Commission recognizes, as it did in the Order Instituting 
Proceedings, that the Exchange's proposal appears designed to make 
incremental improvements to the existing fee structure. For example, as 
noted above, the proposed five-tiered rate structure for the basic 
processing and supplemental fees arguably would more equitably allocate 
such fees among issuers by better reflecting the economies of scale in 
proxy processing. The proposal also would incrementally apply the rates 
in higher tiers, so as to avoid the rate ``cliff'' that currently 
exists with the supplemental fee tiers.
    In addition, the proposal would appear to impose fees more 
equitably on managed accounts, where voting often is delegated by the 
beneficial shareholder to the investment manager and the positions held 
frequently are small. Specifically, the proposal would charge managed 
accounts one-half the rate of non-managed accounts for the preference 
management fee, and no fee for managed accounts with five or fewer 
shares. In addition, the proposal would provide the same treatment to 
wrap accounts and other managed accounts, ending the current disparate 
practice of charging no fees to managed accounts labeled as wrap 
accounts, but full fees to other managed accounts.
    Finally, the proposal would, for a five-year test period, provide 
an EBIP incentive fee to encourage broker-dealers to offer customers 
the ability, among other things, to access proxy materials and vote 
through the broker-dealers' Web sites.\368\ Commenters expressed the 
view that the availability of EBIPs would re-engage individual 
shareholders and encourage retail voting in corporate elections, which 
the Commission believes would further the protection of investors and 
the public interest.\369\
---------------------------------------------------------------------------

    \368\ See supra notes 106, 108, 109, 110 and accompanying text 
for a description of the EBIP fee.
    \369\ See Section IV.G, supra.
---------------------------------------------------------------------------

    In sum, and as discussed in detail above, the Exchange has proposed 
a variety of revisions to its schedule of reasonable rates of 
reimbursement by issuers for the processing of proxy materials and 
other issuer communications provided to beneficial holders, including 
with respect to the basic, supplemental, preference management, notice 
and access, NOBO list, and EBIP incentive fees. The Commission views 
the proposed rule change as an overall package of changes and fees that 
is, on balance, an improvement to the NYSE's existing reimbursement 
rate structure. The proposed rule change reflects the consensus 
recommendation of the PFAC, which is composed of representatives of 
issuers, broker-dealers and investors, key constituencies impacted by 
the proposal. In the Order Instituting Proceedings, the Commission 
questioned the rigor with which the PFAC and the Exchange reviewed the 
costs associated with proxy processing in developing its 
recommendations, and analyzed the individual components of the proposed 
fees to assure they met the statutory standards. The Exchange responded 
by providing the additional explanation and supplemental information 
described above, including responses to specific comments on the 
individual components of the proposal. The Commission believes the 
Exchange has addressed the questions raised in the Order Instituting 
Proceedings sufficiently to allow the Commission, on balance, to find 
that the proposal is consistent with the Act. In approving the 
proposal, the Commission notes that the proxy system need not be 
reformed in a single step, and the Commission welcomes improvements to 
the current system, even incremental ones. In this regard, the 
Commission emphasizes that it continues to review the issues raised in 
the Proxy Concept Release, including ways to encourage competition in 
the proxy distribution process, so that more reliance can be placed on 
market forces to determine reasonable rates of reimbursement.

VI. Conclusion

    For the foregoing reasons, the Commission believes that the 
proposed rule change is consistent with the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\370\ that the proposed rule change (SR-NYSE-2013-07) be, and it 
hereby is, approved.
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    \370\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\371\
---------------------------------------------------------------------------

    \371\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24920 Filed 10-23-13; 8:45 am]
BILLING CODE 8011-01-P

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