Self-Regulatory Organizations; New York Stock Exchange, Inc.; Order Granting Approval to Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 1 Relating to Voting of Proxies by Member Firms for Holders of Auction Rate Preferred Securities

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37015; File No. SR-NYSE-96-02]

Self-Regulatory Organizations; New York Stock Exchange, Inc.;

Order Granting Approval to Proposed Rule Change and Notice of Filing

and Order Granting Accelerated Approval of Amendment No. 1 Relating to

Voting of Proxies by Member Firms for Holders of Auction Rate Preferred

Securities

March 22, 1996.

I. Introduction

On February 1, 1996, the New York Stock Exchange, Inc. (``NYSE'' or

``Exchange'') submitted to the Securities and Exchange Commission

(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4

thereunder,\2\ a proposed rule change that would allow the Exchange's

member firms, under certain conditions, to vote the shares of auction

rate preferred securities \3\ that they hold on behalf of their

customers, notwithstanding the failure of the beneficial holders to

provide instructions regarding the voting of such shares.

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

\2\ 17 CFR 240.19b-4.

\3\ The proposed rule change defines an auction rate preferred

security as a preferred security pursuant to which the dividend rate

is established periodically by auction or remarketing at specified

reset periods.

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

The proposed rule change was published for comment in Securities

Exchange Act Release No. 36813 (February 6, 1996), 61 FR 5592 (February

13, 1996). One comment letter was received on the proposal.\4\ The NYSE

filed Amendment No. 1 with the Commission on March 18, 1996.\5\ This

order approves the proposal, including Amendment No. 1 on an

accelerated basis.

\4\ See Letter from Dorothy M. Donohue, Assistant Counsel,

Investment Company Institute, to Jonathan G. Katz, Secretary, SEC,

dated March 5, 1996.

\5\ Amendment No. 1 made clarifying changes to the text of the

rule proposal. See Letter dated March 13, 1996, from James E. Buck,

Senior Vice President and Secretary, NYSE, to Glen Barrentine, Team

Leader, SEC.

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

II. Description

Auction rate preferred securities are preferred securities with

dividend rates that are established periodically by auction or

remarketing at specified reset periods. At the auction date, which

typically runs every seven days but in some instances can be one to

five years, the investors receive their entire investment along with

accrued dividends, and may, if they so chose, participate in the

repurchase of shares at

[[Page 14184]]

the new dividend rate for the ensuing rate period.

Because of the short-term nature of these securities, auction rate

preferred shareholders generally have little economic interest in the

performance of the issuer and its governance structure. As a result,

the Exchange has represented that corporate issuers of these securities

often find it difficult to obtain a quorum of auction rate preferred

shareholders when such a requirement exists. Such failure blocks the

approval of matters that require such a quorum.

The proposed rule change would allow member firms to vote the

shares of auction rate preferred securities with auction reset periods

of less than one year, on non-routine items,\6\ in proportion to those

votes cast by beneficial holders of each class of such securities (or

of each series where an item must be voted upon separately by each

series), as long as:

\6\ Voting by member firms on routine items is governed by NYSE

Rule 452.10, which allows member firms to vote without customer

instructions on routine items, provided that the member has

transmitted proxy soliciting material to the beneficial owner in

accordance with NYSE Rule 451 and the member has not received voting

instructions from the beneficial owner by the date specified in the

statement accompanying such material.

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

(i) The issuer has transmitted proxy soliciting material to the

beneficial owner or its designee;\7\

\7\ The transmittal of proxy soliciting material to the

beneficial owner must be undertaken in accordance with NYSE Rule

451.

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

(ii) It has not received voting instructions from the beneficial

owner or its designee within the time period specified in the proxy

material;

(iii) At least 30% of the outstanding shares of the same class or

series (where a series vote is required) has been voted by preferred

security holders;

(iv) Less than 10% of the outstanding shares of the same class or

series (where a series vote is required) has been voted by preferred

security holders against the proposal;\8\

\8\ Because the 10% threshold is based upon the outstanding

shares of a class or series rather than the shares actually voted,

the proportion of negative votes among the shares actually voted is

likely to be significantly higher than the 10% threshold. For

example, where only 30% of the outstanding shares of a class vote, a

negative vote of at least 33% of the shares of such class that

actually vote would be necessary to exceed the 10% threshold.

However, even a situation where the proportion of negative votes

approached the 10% threshold, the measure will have been approved by

a substantial majority of the outstanding shares voting.

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

(v) For any proposal as to which both the common and the preferred

holders vote as a single class, proportional voting would not be

allowed unless common shareholders have also approved the item;

(vi) A majority of the independent directors of the issuer's board

of directors have approved the item; and

(vii) Adequate disclosure of proportional voting has been provided.

The proposed rule change will insert a new Rule 452.12 into the

Exchange's Rules of the Board of Governors as well as an identical

Paragraph 402.08(C) into the Exchange's Listed Company Manual.\9\

\9\ The proposed rule change also renumbers existing Exchange

Rules 452.12 through 452.16 without change to Rules 452.13 through

452.17 and Listed Company Manual Paragraphs 402.08 (C) through (G)

without change to 402.08 (D) through (H).

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

III. Summary of Comments

The Commission received one comment letter from the Investment

Company Institute (the ``Comment Letter'').\10\ The Comment Letter

supported the proposed amendment and urged the Commission to approve it

promptly. It did note its belief, however, that the term ``issue,'' as

used in conditions (3) and (4) of the proposed rule, was ambiguous.\11\

The Comment Letter stated its understanding that the term ``issue'' was

intended to refer to all of the outstanding preferred shares of an

issuer rather than the separate series of the issuer's preferred shares

and recommended that it be defined in the proposed rules in such manner

or that such understanding be reflected in the Commission's release

adopting the proposed amendment.

\10\ See letter from Dorothy M. Donohue, Assistant Counsel,

Investment Company Institute, to Jonathan G. Katz, Secretary, SEC,

dated March 5, 1996 (``Comment Letter'').

\11\ These provisions set forth conditions that must be

satisfied before a member organization may vote auction rate

preferred securities and, as originally proposed, required that at

least 30% of the outstanding issue be voted by beneficial holders

and that less than 10% of the issue voted against the proposal.

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

In response, the NYSE submitted Amendment No. 1 amending conditions

(3) and (4) of the proposed rules. These provisions set forth

conditions that must be satisfied before a member organization may vote

auction rate preferred securities. As proposed to be amended by

Amendment No. 1, these provisions would prohibit a member firm from

voting the shares of auction rate preferred securities that it held on

behalf of its customers unless at lest 30% of the outstanding shares of

each class or each series, where a series vote is required, vote and

less than 10% of each such class or series vote against the proposal.

IV. Discussion

After careful consideration, the Commission finds that the proposed

rule change is consistent with the requirements of the Act and the

rules and regulations thereunder applicable to a Commission believes

the proposal is consistent with the Section 6(b)(5) requirements that

the rules of an exchange be designed to promote just and equitable

principles of trade, to prevent fraudulent and manipulative acts, and,

in general, to protect investors and the public.

The Commission has reviewed carefully the Exchange's proposal to

amend its rules to allow member firms, under very limited conditions,

to vote on non-routine matters the auction rate preferred securities

that they hold on behalf of their customers, notwithstanding the

failure of the beneficial holders to provide instructions regarding the

voting of such shares. The Commission believes that such proposal

adequately addresses the particular needs of issuers of such securities

to be able to obtain a quorum of preferred shareholders, while, at the

same time, protecting the rights of the holders of such shares.

Under the Exchange's proposal, member firms would be allowed to

vote auction rate preferred securities that are held on behalf of their

customers in proportion to the voting instructions received from

holders of the same class (or of the same series where the item must be

voted upon separately by each series) only under very limited

circumstances. These circumstances would include a condition that the

securities must have reset periods of one year or less, which serves to

limit this provision to those securities that, because of their short-

term nature, leave shareholders with little economic interest in the

performance of the issuer. Further, the issuer must have transmitted

proxy those securities that, because of their short-term nature, leave

shareholders with little economic interest in the performance of the

issuer. Further, the issuer must have transmitted proxy soliciting

material to the beneficial owner or its designee in accordance with

NYSE Rule 451. This condition ensures that beneficial holders will

continue to have the choice of voting their shares if they so desire

and the information necessary to allow them to make an informed voting

decision.\13\ The shareholder also must receive adequate disclosure of

the member firm's ability to vote such

[[Page 14185]]

shares in the absence of the beneficial holder exercising such right.

\13\ Of course, where the beneficial shareholder actually does

vote his or her shares, the proposed rules would prohibit the member

firm from proportionally voting such shares.

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

Moreover, under the proposal a member firm's right to vote such

shares would be limited to proposals that have received the vote of at

least 30% of the outstanding shares of each class or series (where a

series vote is required) of the auction rate preferred shares. This

will ensure that the member firm's proportional vote mirrors the vote

of a significant portion of the total outstanding auction rate

preferred shares. In addition, the member firm would be prohibited from

voting where 10% or more of the outstanding shares of the same class or

series (where a series vote is required) voted against the proposal

and, in the case of a proposal that requires both the common and the

preferred holders to vote as a single class, where the proposal does

not receive the separate approval of the common shareholders.\14\ These

provisions effectively limit the member firm's proportional vote to

matters that are strongly supported by those auction rate preferred

holders who do vote and, where necessary, approved by the common

shareholders. Finally, to further ensure fairness, the member firm may

only vote on matters that have been approved by a majority of an

issuer's independent directors.

\14\ As to any proposal that requires the common and preferred

holders to vote as a single class, the above provisions, if read in

combination, could be understood as conditioning the member firm's

right to vote on the requirement that less than 10% of the

outstanding shares of such combined class not vote against the

proposal. The Exchange has informed the Commission, however, that it

would interpret the 10% threshold as applying only to the

outstanding preferred shares such that a member would not be

prohibited from voting if 10% or more of the outstanding shares of a

combined class of common and preferred voted against the proposal so

long as less than 10% of the preferred shares did not vote against

the proposal. The Exchange has further represented that it intends

to notify its members of this interpretation though an

Interpretation Memo. Telephone conversation between John Longobardi,

Managing Director, NYSE, and Glen Barrentine, SEC, dated March 21,

1996.

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

The Commission believes that these conditions protect the rights of

the holders of auction rate preferred securities by sufficiently

limiting the right of member firms to vote, on non-routine items, the

shares of such securities that they hold on behalf of their customers.

At the same time, the Exchange's proposal should meet its objective of

assisting issuers in obtaining approval of matters that are

overwhelmingly supported by auction rate preferred shareholders who do

vote.

Moreover, the Commission believes that the amended language adopted

by the Exchange with regard to subsections (iii) and (iv) of the

proposed rule change is preferable to the alternative offered in the

Comment Letter. The Exchange's approach, which applies the 30% and 10%

thresholds to the same class or series (where a series vote is

required) instead of to all of the outstanding preferred shares, offers

greater protection to the voting interests of holders of each class or

series, as applicable.

The Commission finds good cause for approving Amendment No. 1 prior

to the thirtieth day after the date of publication of notice thereof in

the Federal Register. Amendment No. 1 made clarifying, technical

changes to the text of the rule, and did not propose new substantive

provisions to the proposed rule change. Accordingly, the Commission

believes that consistent with Section 19(b)(2), good cause exists to

accelerate approval of Amendment No. 1.

V. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning Amendment No. 1 to the proposed rule change.

Persons making written submissions should file six copies thereof with

the Secretary, Securities and Exchange Commission, 450 Fifth Street,

N.W., Washington, D.C. 20549. Copies of the submission, all subsequent

amendments, all written statements with respect to the proposed rules

change that are filed with the Commission, and all written

communications relating to Amendment No. 1 between the Commission and

any persons, other than those that may be withheld from the public in

for inspection and copying in the Commission's Public Reference

Section, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such

filing will also be available at the principal office of the NYSE. All

submissions should refer to File No. SR-NYSE-96-02 and should be

submitted by April 19, 1996.

VI. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the

Act,\15\ that the proposed rule change (SR-NYSE-96-02), as amended, is

approved.

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

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

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\16\

\16\ 17 CFR 200.30-3(a)(12).

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

Jonathan G. Katz,

Secretary.

[FR Doc. 96-7643 Filed 3-29-96; 8:45 am]

BILLING CODE 8010-01-M