# 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 > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A96-7643 ## Record - **Collection:** Federal Register - **Document type:** Notice - **Published:** March 29, 1996 - **Citation:** 61 FR 14183 ## Text 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A96-7643. Public record. Not legal advice.