Self-Regulatory Organizations; New York Stock Exchange, Inc.; Order Granting Approval to Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 1 to Proposed Rule Change Relating to a One-Year Pilot Program for Transmission of Proxy and Other Shareholder Communication

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38406; File No. SR-NYSE-96-36]

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

Order Granting Approval to Proposed Rule Change and Notice of Filing

and Order Granting Accelerated Approval to Amendment No. 1 to Proposed

Rule Change Relating to a One-Year Pilot Program for Transmission of

Proxy and Other Shareholder Communication

March 14, 1997.

I. Introduction

On December 6, 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 to amend NYSE Rules 451 and 465,

which establish guidelines for the reimbursement of expenses by issuers

to NYSE member organizations for the processing of proxy materials and

other issuer communications to security holders whose securities are

held in street name.

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

\2\ 17 CFR 240.19b-4.

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The proposed rule change was published for comment in Securities

Exchange Act Release No. 38058 (Dec. 18, 1996), 61 FR 68082 (Dec. 26,

1996). Thirty-nine comment letters were received on the proposal, which

include a letter submitted by the NYSE in response to the Commission's

request for comment.\3\ On March 7, 1997, the NYSE submitted Amendment

No. 1 to the proposed rule change.\4\ This order approves, on a one-

year pilot basis, the proposed rule change, as amended, and Amendment

No. 1 on an accelerated basis.

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\3\ See letter from James E. Buck, Senior Vice President and

Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, dated February

10, 1997 (``NYSE Letter'').

\4\ See letter from James E. Buck, Senior Vice President and

Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, dated March 5,

1997. In Amendment No. 1, the NYSE changes the proposal to a one-

year pilot and represents that, following the 1997 proxy season, a

certified public accounting firm will audit the results of the pilot

period. The NYSE states that the independent accountant will report

to the Commission and the NYSE no later than October 31, 1997. As

discussed below, the independent accounting firm must conduct an

audit of the results of operations of ADP Investor Communication

Services, the division of Automatic Data Processing, Inc. (``ADP'')

that performs proxy intermediary services for approximately 200 NYSE

member firms.

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II. Background

NYSE member organizations holding securities in street name solicit

proxies and deliver communications to and from beneficial owners of

securities on behalf of issuers.\5\ For this service, issuers reimburse

member organizations for out-of-pocket, reasonable clerical, postage

and other expenses incurred for a particular distribution. NYSE Rules

451 and 465 provide guidelines for the reimbursement of these expenses.

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\5\ Street ownership encompasses shares purchased through a

broker or bank (referred to as a nominee). The shares are then

registered in the name of that nominee, or in the nominee name of a

depository such as The Depository Trust Company (``DTC''). According

to a recent NYSE analysis, on average, approximately 70 to 80

percent of all outstanding shares are held in street name.

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Since the late 1960's, NYSE member firms increasingly have used an

outside contractor for these types of services

[[Page 13923]]

rather than handling proxy processing internally. For example, a firm

would contract with a division of Automatic Data Processing, Inc.

(``ADP''), ADP Investor Communication Services, the only intermediary

offering these services to broker-dealers, for the solicitation of

proxy voting instructions and the distribution of reports to

shareholders.\6\

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\6\ The identity of the soliciting broker remains on all

communications.

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In submitting this rule proposal, the Exchange explains that there

have been changes in the market since the last review of the

reimbursement guidelines in 1986 that prompt the Exchange to reevaluate

its current fee reimbursement schedule. First, the Exchange believes

that proxy solicitation and report distributions costs have increased

since 1986, in large part, because of the general cost increases in the

economy. For example, the Exchange notes that the cost of postage has

doubled since 1979. The Exchange believes that the brokers pass these

costs through to the issuers, directly or through ADP.

Second, the Exchange believes that the aggregate costs also have

increased for issuers because there has been a substantial increase in

the number of beneficial owners, a result of the increased

participation of individual investors in the securities market. The

Exchange further notes that the percentage of holdings of securities

through institutional investors, mutual funds, pension and savings

plans also has increased.\7\

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\7\ According to the Exchange, these institutions have an

obligation, or, in some cases, a statutory duty, to vote the shares

being held and that institutions have developed mechanisms to vote

their shares in conformity with their own internal policies and

governing regulations. The Exchange believes that many institutional

investors have difficulty voting on a timely basis during the spring

proxy season where over 40% of all annual meetings occur within a

few weeks and some large institutions vote close to the meeting

date, particularly during the proxy season because of the increase

in paperwork.

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Third, the Exchange believes that, in addition to the changing

stock ownership patterns, stock holdings continue to migrate from

registered to street or nominee ownership.\8\ Currently, street name

holdings are concentrated with approximately 1,000 nominees, and the

Exchange believes that an efficient infrastructure is necessary to

coordinate these nominees and their customers and that service bureaus,

as agents of nominees, should build and maintain such systems.

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\8\ ``Nominees'' are those names that appear on either the list

of record shareholders or on an omnibus proxy sent to the issuer on

the record date by a depository, but who are, in fact, acting for

someone else. In practice, they are self-clearing brokers, banks, or

other financial institutions participating in DTC or some other

depository.

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Finally, the Exchange notes that there have been significant

technological advances in the corporate governance process. For

example, nominees and their agents have developed communication systems

for obtaining shareholder votes electronically rather than through a

physical proxy. To accommodate this development, the Exchange amended

its rules to permit telephone voting. The Exchange is concerned,

however, that the current fee structure does not recognize the value

that some of these systems provide to issuers in reducing the costs of

coordination and solicitation. Despite the progress that has been made

in the distribution and proxy solicitation process, the Exchange states

that the issuers often express their belief that mailing fees are

unnecessarily high and that the procedures are not responsive to the

needs of the issuers.

In proposing a revised fee reimbursement structure, the Exchange

believes that the current fee structure does not provide incentives for

nominees and other intermediaries to use the most current and efficient

technology. The Exchange believes that without financial incentives, it

is unlikely that new cost-reducing technology will be implemented. The

Exchange also believes that the current fee structure ignores the

economies of scale and costs of coordinating multiple nominees and the

value that consolidating material distribution and voting collection

provides to issuers.\9\

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\9\ These services, which are not expressly required by any

regulation, include: (i) Sending a single search card for multiple

nominees; (ii) coordinating multiple nominees to generate a single

material request for each issuer; (iii) delivering material to a

single place for multiple nominees; (iv) sorting bulk mail across

multiple nominees for maximum discounts; (v) daily reporting of

votes for multiple broker and bank nominees; and (vi) consolidating

multiple nominees into a single invoice. As discussed infra note

111, however, the NYSE has indicated that the voting-related

services described in the preceding textual paragraph--electronic

and telephonic voting services now offered by member firms and/or

ADP acting as their agent--will not be covered by the new fee

structure.

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III. Description of Proposal

The Exchange proposes to reduce the suggested rate of reimbursement

from $.60 or $.70 to $.55 for each set of proxy materials, i.e., proxy

statement, form of proxy and annual report, when mailed as a unit. The

Exchange proposes to eliminate the current distinction between

proposals that require beneficial owner instructions and those that do

not. The Exchange believes that this change will produce substantial

savings for all issuers.

The Exchange also proposes to reduce the rate for mailing other

reports from $.20 to $.15. The rate of reminder notices would remain at

$.40 unless a proxy fight is involved. The Exchange proposes to

eliminate the special fee of $.60 for mailing only to shareholders who

have not voted.

For mailings involving proxy fights, the Exchange proposes to

include a new fee of $1.00 for each set of proxy materials mailed. The

Exchange believes that proxy contests require significant efforts by

all participants in the proxy process and can occur under difficult

circumstances.

The Exchange also proposes to implement a new $20 fee per nominee

(applicable to each proxy solicitation) to compensate an intermediary

for coordinating a series of functions across a multitude of nominees.

These services include:

Searches: Rule 14a-13 under the Act requires an issuer to

inquire of each record holder to determine the number of beneficial

owners holding shares through nominees. Issuers would only incur the

expense of performing one ``search'' for all the nominees if an

intermediary coordinates multiple nominees.

Search responses: Nominees must respond to an issuer's

search request within seven business days of receipt. An intermediary

can consolidate responses where there are multiple levels of entities

and save administrative expenses for issuers.

Delivering materials: Providing material to hundreds of

nominees requires an issuer to sort and ship a parcel to each nominee.

An intermediary can reduce the cost to issuers if it can make one

material delivery for hundreds of nominees.

Use of bulk mail: If intermediaries combine nominees,

issuers could qualify for bulk discounts.

Preliminary voting information: To help issuers determine

whether they have a quorum, many brokers currently report a

discretionary vote 10 or 15 days before a meeting in accordance with

NYSE Rule 451(b)(1), and again at the time of the meeting. For example,

ADP sends daily consolidated vote reports 15 or 10 days before a

meeting, and then every business day until the night before the

meeting. Issuers may save certain expenses if issuers obtain the vote

from a single source for hundreds of nominees.

The Exchange believes that the coordination fee is consistent with

current Exchange rules that authorize the payment of a coordination fee

for agents that coordinate providing information regarding non-

objecting

[[Page 13924]]

beneficial owners (``NOBOs'').\10\ The Exchange estimates that the

smallest 4,000 U.S. issuers would pay, on average, an intermediary

nominee coordination fee of $800, which partially would be offset by

the lower basic rate and lower expenses.

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\10\ See NYSE Rule 451.92.

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The Exchange also proposes to clarify the policy with respect to

out-of-pocket expenses by providing for reimbursement only of actual

costs, such as outgoing postage (plus third class sorting fee),

envelopes and business reply envelopes, and custom printing of

envelopes and ballots. The exchange proposes that the business reply

postage would be billed at the Business Mailing Accounting System

(``BRMAS'') rate. The Exchange believes that additional savings are

possible by sorting mail to obtain postal discounts as well as through

other efforts undertaken by nominees or their agents to reduce issuers'

postage expenses, which could be shared between the issuer and the

processor.

The Exchange also is proposing a new incentive fee to compensate

member organizations and/or intermediaries for eliminating the need to

send materials in paper form. The Exchange believes that this fee will

encourage member organizations to apply technology to sort materials so

that multiple proxy instruction forms are included in a single envelope

with a single set of materials to be mailed to the same household. The

Exchange is encouraging ``householding,'' whereby the member firm or

intermediary could earn the paper elimination fee by distributing

multiple proxy instruction forms electronically or by distributing all

material to a household electronically. Therefore, the Exchange is

proposing a fee of $.50 ($.10 for a quarterly report) for each set of

material that is not mailed.

Finally, the Exchange clarifies the manner in which the fees are

collected. The Exchange notes that ADP is the agent for many of the

brokerage firms that are Exchange members, and that these firms

subcontract the data processing functions of the proxy solicitation

process to ADP but retain all the obligations to comply with the

relevant Exchange rules as well as the Commission's proxy rules (e.g.,

Rule 14b-1). ADP has developed a ``single invoice'' procedure for all

brokers with whom they have subcontracted to avoid issuers having to

pay multiple brokers. Under this procedure, ADP bills issuers on behalf

of brokers and banks and remits to their clients the amounts specified

in their contracts, which the firms will retain to cover their own

costs. The Exchange believes that this billing procedure does not

affect issuer costs. If the broker billed issuers directly, the issuers

would pay the same amount but to several brokers rather than to a

central data processor. The Exchange believes that there is no economic

difference in the brokerage firms retaining part of the costs paid by

the issuers or such firms receiving the same amount paid by ADP through

the single invoice system and that issuers benefit from this procedure

because they are able to pay a single processor rather than multiple

brokerage firms.

The Exchange proposes the new fee structure for a one-year pilot

term. Following the 1997 proxy season, the NYSE proposes that a

certified public accounting firm audit the results of the pilot period

by examining the costs and experiences of the issuers, NYSE member

organizations and intermediaries during the pilot. The Commission

expects this audit to encompass ADP's results of operations for the

one-year pilot period. The independent accountant will present a

written report detailing the methodology and results of its audit to

the Commission and the NYSE, respectively, no later than October 31,

1997 so that appropriate changes, if necessary, may be made for a

second pilot.

IV. Summary of Comments

The Commission received a total of 38 comment letters on the NYSE's

proposal.\11\ The NYSE also submitted a letter in response to the

comments requested by the Commission.\12\ A substantial majority of the

letters

[[Page 13925]]

support the proposal, \13\ although several commenters do not support

the proposal.\14\ Some commenters support the proposal overall, but

express concern about one or two aspects of the proposal.\15\

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\11\ See letters from William A. Bowen, Vice-President, Finance,

AAON, Inc., to Margaret H. McFarland, Deputy Secretary, SEC, dated

January 30, 1997 (``AAON Letter''); John D. Quinn, Vice President,

A.G. Edwards & Sons, Inc., to Margaret H. McFarland, Deputy

Secretary, SEC, dated February 5, 1997 (``A.G. Edwards Letter'');

Patricia A. Bell, Second Vice President, Shareholder Services, AFLAC

Incorporated, to Secretary, SEC, dated February 6, 1997 (``AFLAC

Letter''); Sarah A. Miller, Senior Government Relations Counsel,

Trust and Securities, American Bankers Association, to Jonathan G.

Katz, Secretary, SEC, dated February 21, 1997 (``ABA Letter''); Sari

L. Macrie, Vice President, Investor Relations Ameritech, to

Secretary, SEC, dated January 31, 1997 (``Ameritech Letter''); Brian

T. Borders, President, Association of Publicly Traded Companies, to

Jonathan G. Katz, Secretary, SEC, dated February 10, 1997 (``APTC

Letter''); Carol A. Gasson, Senior Financial Analyst, Apollo Group,

Inc., to Margaret H. McFarland, SEC, dated January 15, 1997

(``Apollo Letter''); Carl T. Hagberg, Cart T. Hagberg and

Associates, to Secretary, dated February 11, 1997 (``Hagberg

Letter''); John Finegan, Chief Financial Officer, Cornerstone

Imaging, Inc., to Richard Grasso, Chairman and Chief Executive

Officer, NYSE, dated September 11, 1996 (``Cornerstone Letter'');

James T. Huffman, President, Credo Petroleum Corporation, to

Secretary, SEC, dated February 7, 1997 (``Credo Letter''); Gordon G.

Garney, President, Corporate Transfer Agents Association, Inc. to

Secretary, SEC, dated February 3, 1997 (``CTA Letter''); Thomas E.

Ross, Manager, Shareholder Relations Department, DQE, to Secretary,

SEC, dated February 5, 1997 (``DQE Letter''); H. John Sauer III,

Principal/Operations, Edward Jones, to SEC, dated January 15, 1997

(``Edward Jones Letter''); Glynn E. Williams, Jr., Vice President,

Finance, Goodrich Petroleum Corporation, to Margaret McFarland,

Deputy Secretary, SEC, dated January 17, 1997 (``Goodrich Letter'');

James P. Owens, V.P. Finance, Gradco (USA) Inc., to Margaret

McFarland, Deputy Secretary, SEC, dated January 14, 1997 (``Gradco

Letter''); David S. Ruksznis, Director, Shareholder Operations and

Securities Services, GTE Service Corporation, to SEC, dated February

3, 1997 (``GTE Letter''); James R. Klucharits, Controller, Isomedix

Inc., to Secretary, SEC, dated January 15, 1997 (``Isomedix

Letter''); Rene Vanguestaine, Managing Director, JP Morgan, to

Jonathan G. Katz, Secretary, SEC, dated February 14, 1997 (``JP

Morgan Letter''); Nancie W. LaDuke, Vice President, Secretary, Kmart

Corporation, to SEC, dated February 6, 1997 (``Kmart Letter'');

Robert Donovan, Senior Vice President, Legg Mason Wood Walker,

Incorporated, to Secretary, SEC, dated January 31, 1997 (``Legg

Mason Letter''); Sophia G. Vergas, Assistant Secretary, The Liberty

Corporation, to Secretary, SEC, dated February 6, 1997 (``Liberty

Letter''); Rhonda Anderson, Director, Corporate Secretary's

Department, Lucent Technologies, to Secretary, SEC, dated February

10, 1997 (``Lucent Letter''); Martin J. McDermott, Senior Assistant

Secretary, Merck & Co., Inc., to Jonathan G. Katz, Secretary, SEC,

dated February 11, 1997 (``Merck Letter''); Gordon G. Garney, Senior

Assistant Secretary, Mobil Corporation, to Secretary, SEC, dated

February 6, 1997 (``Mobil Letter); John T. Wall, Executive Vice

President, The Nasdaq Stock Market, Inc., to Jonathan G. Katz,

Secretary, SEC, dated March 13, 1997 (``Nasdaq Letter''); Kathryn G.

Casparian, Managing Director, Oppenheimer & Co., Inc., to SEC, dated

January 29, 1997 (``Oppenheimer Letter''); John Howell Bullion,

Chief Executive Officer, Orphan Medical, to Secretary, SEC, dated

January 14, 1997 (``Orphan Medical Letter''); Nancy R. Kyle,

Director, Investor Relations, PepBoys, to Secretary, SEC, dated

February 7, 1997 (``PepBoys Letter''); Faye Widenmann, Vice

President, Corporate Relations & Administration and Secretary,

Pinnacle West Capital Corporation, to Jonathan G. Katz, Secretary,

SEC, dated February 5, 1997 (``Pinnacle West Letter''); Patrick J.

Callans, Corporate Counsel, Price Costco, Secretary, SEC, dated

February 11, 1997 (``Price Costco Letter''); Donna Dabney, Secretary

and Assistant General Counsel, Reynolds Metals Company, to Jonathan

G. Katz, Secretary, SEC, dated February 7, 1997 (``Reynolds Metals

Letter''); Donald D. Kittell, Executive Vice President, Securities

Industry Association, to Jonathan G. Katz, Secretary, SEC, dated

February 10, 1997 (``SIA Letter''); Jerome J. Clair, Senior Vice

President, Smith Barney, to Margaret H. McFarland, Deputy Secretary,

SEC, dated February 5, 1997 (``Smith Barney Letter''); George M.

Holston, Assistant General Manager and Assistant Secretary, Texaco

Inc., to Jonathan G. Katz, Secretary, SEC, dated February 6, 1997

(``Texaco Letter''); Robert J. Agnich, Senior Vice President,

Secretary and General Counsel, Texas Instruments Incorporated, to

Secretary, SEC, dated January 31, 1997 (``Texas Instruments

Letter''); James T. Anderson, Vice President and Treasurer, US West,

to Arthur Levitt, Chairman, SEC, dated February 5, 1997 (``US West

Letter''); Jennifer LaGrow, Manager, Shareholder Services, the Walt

Disney Company, to Secretary, SEC, dated January 17, 1997 (``Walt

Disney Letter''); John W. Hetherington, Vice President and Corporate

Secretary, Westvaco, to Secretary, SEC, dated February 7, 1997

(``Westvaco Letter'').

\12\ See NYSE Letter, supra note 3.

\13\ See AAON Letter, A.G. Edwards Letter, ABA Letter, Ameritech

Letter, Apollo Letter, Cornerstone Letter, CTA Letter, Edward Jones

Letter, Goodrich Letter, Gradco Letter, GTE Letter, Isomedix Letter,

Kmart Letter, Legg Mason Letter, Liberty Letter, Merck Letter, Mobil

Letter, Oppenheimer Letter, Orphan Medical Letter, PepBoys Letter,

Price Costco Letter, Smith Barney Letter, Texaco Letter, Texas

Instruments Letter, US West Letter, Walt Disney Letter, Westvaco

Letter, supra note 11. See also APTC Letter (not opposing proposal

as pilot program and recognizing it as a necessary first step toward

improving upon the effectiveness and the efficiency of the overall

issuer/shareholder communication system), SIA Letter (supporting the

reimbursement fees, nominee fee and householding fee because they

are the result of open and extensive negotiations between issuer

representatives and broker dealers that process independently and

through an intermediary), supra note 11.

\14\ See Credo Letter, Hagberg Letter, Pinnacle West Letter,

supra note 11.

\15\ See e.g., ABA Letter, APTC Letter, Lucent Letter, supra

note 11.

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Most of the commenters express general support for the NYSE's

proposed rule change. Many commenters believe that the proposal would

provide incentives to the industry to continue to explore and develop

new technologies that would help issuers achieve greater economies

while improving communications with the shareholders.\16\ Several

commenters believe that the proposed rule change should improve the

timeliness, accuracy and participation rate of proxy tabulation for the

issuer.\17\ Two commenters believe that the application of advanced

technology will result in decreased costs to all corporate issuers,

both large and small, and better service for all investors.\18\

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\16\ See Apollo Letter, Cornerstone Letter, Goodrich Letter,

Isomedix Letter, see also Edward Jones Letter, Gradco Letter, Nasdaq

Letter, PepBoys Letter, supra note 11.

\17\ See Apollo Letter, Cornerstone Letter, Goodrich Letter,

Isomedix Letter, supra note 11.

\18\ See Orphan Medical Letter, Walt Disney Letter, supra note

11. Several commenters note a related issue of late proxy voting by

pension funds and institutions that arises with the application of

new technology in the proxy voting process. These commenters explain

that these funds and institutions have used advancements in

technology to vote later than before the introduction of these

services. See Mobil Letter, Pinnacle West Letter, US West Letter,

supra note 11.

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Moreover, several commenters argue that the proposed fees are fair

and equitable to all parties.\19\ One commenter believes that, although

the proposed fee structure represents a departure from the original

concept of ``reimbursement,'' the proposed fee structure represents a

step in the right direction to establish fees that are truly more

representative of actual costs.\20\ Two commenters support the proposed

fee structure although the new fee structure may increase its fees.\21\

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\19\ See Orphan Medical Letter, Walt Disney Letter, supra note

11; see also Legg Mason Letter, supra note 11.

\20\ See Texaco Letter, supra note 11.

\21\ See Liberty Letter, PepBoys Letter, supra note 11.

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One commenter also believes that the proposed fee structure is

consistent with the obligations of issuers to reimburse brokers for

processing proxy and other materials.\22\ In its comment letter, the

NYSE reiterates that the proposed fee structure is consistent with the

obligations of issuers to reimburse brokers for processing proxy and

other materials.\23\ The NYSE explains that the proposed fees resulted

from consultations with listed companies, member firms and other

industry organizations involved in the proxy solicitation process and

that the proposal contains compromises intended to address the

interests and concerns of all participants.\24\

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\22\ See Smith Barney Letter, supra note 11.

\23\ NYSE Letter, supra note 3.

\24\ See NYSE Letter, supra note 3. One commenter agrees with

the NYSE that the current fee structure does not recognize the value

that service bureaus, such as ADP, provide through their coordinated

system of distribution and proxy solicitation and that the proposal

would recognize the services provided and upon which many member

firms rely. This commenter believes that without an incentive to

invest in enhanced technology, service bureaus could not effectively

build the infrastructure necessary to support sophisticated

applications. See Oppenheimer Letter, supra note 11. Another

commenter notes that ADP offers services that small issuers use and

appreciate although small issuers do not utilize certain

sophisticated services because many shareholders lack the equipment

and/or sophistication to take advantage of modern technology. See

Liberty Letter, supra note 11.

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Several commenters express general concern about the proposed fee

structure. Several commenters question why costs to distribute proxy

materials to street accounts remain significantly higher than to

registered owners.\25\ One commenter also argues that advancing

technology should reduce, not increase, servicing costs, and that the

increasing level of beneficial ownership should reduce, not increase,

per unit servicing costs.\26\ Moreover, this commenter believes that

the brokerage houses should pay the majority of the servicing cost of

beneficial ownership because they encourage and derive the major

benefit from beneficial ownership.\27\

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\25\ See Pinnacle West Letter and US West Letter, supra note 11.

\26\ See Credo Letter, supra note 11.

\27\ See Credo Letter, supra note 11.

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One commenter argues that at least one study shows that the

proposed fee structure will increase proxy mailing costs from 20% to

30%, with no recognizable offsetting benefit.\28\ Another commenter

notes that the proposal would increase its costs by over 450%.\29\ One

commenter argues that the proposed fees are higher than what an issuer

would pay in a ``free market environment.''\30\

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\28\ See Pinnacle West Letter, supra note 11.

\29\ See Credo Letter, supra note 11.

\30\ See Hagberg Letter, supra note 11.

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One commenter believes that the NYSE should ensure that the proxy

fees offer only reimbursement of costs to the nominees.\31\ This

commenter believes that the nominees have some obligation to enhance

and improve the proxy process, whether they perform the proxy

solicitation process in house or through an intermediary.\32\ The

commenter argues that the NYSE should encourage the free market to

develop and implement new technologies by allowing individual issuers

to choose whether to take advantage of a new process or procedure and

to make their own decisions based on internal cost/benefit

analysis.\33\

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\31\ See DQE Letter, supra note 11.

\32\ See DQE Letter, supra note 11.

\33\ See DQE Letter, supra note 11.

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Several commenters address specific aspects of the NYSE's rule

proposal. Two commenters support the reduction of the suggested rate of

reimbursement to $.55 for each set of proxy materials when mailed as a

unit.\34\ Specifically, one commenter notes that the reduced rate would

still be sufficient for the broker-dealers to handle all of the

functions relating to proxy materials.\35\ Another commenter, however,

is not convinced that $.55 is the right number for enclosing and

tabulating proxy materials and notes that it pays a much lower fee to

vendors for its registered accounts.\36\

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\34\ See CTA Letter, Mobil Letter, supra note 11.

\35\ See CTA Letter, supra note 11.

\36\ See Lucent Letter, supra note 11.

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Several commenters endorse the recommendation that actual cost for

all out-of-pocket expenses be passed along to the issuers and that

issuers share in postage discounts.\37\ One commenter believes that all

out-of-pocket expenses should be passed along to the issuers at

cost.\38\ One commenter suggests that all postal discounts should be

passed on to the issuers.\39\ Another commenter suggests that there be

an annual review of out-of-pocket expenses.\40\

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\37\ See AAON Letter, Ameritech Letter, Apollo Letter,

Cornerstone Letter, Goodrich Letter, Isomedix Letter, supra note 11.

\38\ See US West Letter, supra note 11.

\39\ See DQE Letter, supra note 11.

\40\ See AFLAC Letter, supra note 11.

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Several commenters specifically address the proposed $.50 incentive

fee.

[[Page 13926]]

One commenter supports this fee because it would not only help to

reduce further the proxy fee, postage, and printing costs for the

annual report and proxy statement but also reduce stockholder

frustration caused by multiple mailings.\41\ Another commenter believes

that the proposal would provide an incentive for the elimination of

duplicate mailings.\42\ One commenter believes that the

``householding'' incentive fee will result in net savings to the

company.\43\ This commenter believes that the fee should be structured

so that mailing list reductions are quantified prior to the print date

for annual reports and other proxy materials to maximize the potential

savings to issuers.\44\

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\41\ See Texas instruments Letter, supra note 11.

\42\ See Westvaco Letter, supra note 11.

\43\ See Reynolds Metal Letter, supra note 11.

\44\ See Reynolds Metal Letter, supra note 11.

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One commenter, however, questions how issuers would determine the

savings realized by using the householding process and whether

householding would cause a further delaying getting the vote to the

issuer.\45\ Another commenter argues that the NYSE should require that

all recordkeepers minimize the number of duplicate mailings or should

ensure that any consolidation fee permitted is based on direct cost

savings to issuers, payable only in the first year of savings, and

shared between the issuers and the intermediary.\46\

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\45\ See Pinnacle West Letter, supra note 11.

\46\ See DQE Letter, supra note 11.

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One commenter believes that the paper and postage elimination fees

are significantly higher than what most transfer agents charge for

these same services and that it would be appropriate to pass these

charges on to issuers only if the fees are market driven and comparable

to what other companies in the marketplace are charging for similar

activity.\47\ Another commenter believes that any fee paid to a broker

for assistance in eliminating duplicate mailings should be based on

actual reasonable costs incurred by the broker.\48\ One commenter also

notes that the proposed incentive fee would increase fees for foreign

issuers with a relatively small U.S. float.\49\

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\47\ See US West Letter, supra note 11. This commenter also

disagrees with the NYSE's contention that it is impracticable to

develop reimbursement guidelines that vary based on the size of

one's mailing because this method is standard procedure in a number

of industries.

\48\ See GTE Letter, supra note 11.

\49\ See JP Morgan Letter, supra note 11. This commenter argues

that the NYSE should amend its rules to exempt non-U.S. issuers from

NYSE's proxy requirements.

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

Several commenters address the $20 per nominee fee. One commenter

believes that the per nominee fee is fair compensation for the services

of an intermediary and would provide the proper incentives to focus on

technology initiatives that will save the issuer community additional

money in the long term.\50\ In its comment letter, the NYSE further

explains that the nominee coordination fee represents reimbursement for

coordination costs incurred by ADP and that the fee is a reasonable

attempt to provide compensation for new services being offered under

the current proxy solicitation process.\51\ Moreover, the NYSE believes

that coordination of nominees reduces costs for issuers.\52\

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

\50\ See Legg Mason Letter, supra note 11.

\51\ See NYSE Letter, supra note 3. The Commission notes, again,

that the NYSE has indicated that the costs of electronic and/or

telephonic voting will not be passed through to issuers under the

new fee structure. See supra note 9; infra note 111.

\52\ See NYSE Letter, supra note 3.

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

Two commenters request a description of services included in the

$20 per nominee fee.\53\ Specifically, one commenter believes that such

a breakdown would help the issuers determine if the amounts charged for

the fees are justified and comparable to free-market costs.\54\ Another

commenter believes that the $20 nominee fee should be followed by

establishing new rules to govern the various services handled by

intermediaries.\55\ Two commenters express concern about the impact of

the proposed new nominee fee on small issuers.\56\ Specifically, one

commenter suggests that the NYSE and the Commission review the market

data during the pilot period to ensure that small issuers are not being

disadvantaged unfairly under the proposed fee structure.\57\

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

\53\ See AFLAC Letter, CTA Letter, supra note 11.

\54\ See CTA Letter, supra note 11.

\55\ See Mobil Letter, supra note 11.

\56\ See ABA Letter and Nasdaq Letter, supra note 11.

\57\ See ABA Letter, supra note 11.

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

Several commenters object to the $20 nominee fee because it would

increase the costs of transmitting proxy materials even though no new

or additional services would be provided.\58\ One commenter notes that

the proposed structure unduly penalizes smaller companies that do not

have large institutional share concentrations but have numerous

nominees who represent only a few beneficial owners.\59\ One commenter

suggests that a progressive nominee service fee based on the number of

shareholder accounts would be more equitable.\60\ Another commenter

argues that before a per nominee fee can be considered, there must be

an independent way to confirm the number of nominees associated with an

issuer.\61\

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

\58\ See DOE Letter, Reynolds Metal Letter and Pinnacle West

Letter, supra note 11.

\59\ See Credo Letter, supra note 11.

One commenter expresses concern that the proposed nominee fee

would increase fees for foreign issuers with relatively small U.S.

float. See JP Morgan Letter, supra note 11. This commenter argues

that the NYSE should amend its rules to exempt non-U.S. issuers from

NYSE's proxy requirements.

\60\ See Reynolds Metal Letter, supra note 11.

\61\ See DOE Letter, supra note 11.

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

Several commenters address the Commission's request for comment on

what should be deemed as ``reasonable expenses'' under the Commission's

proxy rules. Some commenters believe that reasonable expenses should

include an intermediary's cost to coordinate an issuer's proxy mailing

to multiple nominees and the expenses of operating an electronic proxy

voting system.\62\ One commenter, however, believes that only member

organizations or intermediaries that perform extra functions relating

to coordinating the mailing and voting of proxy material to multiple

nominee accounts should be entitled to receive fair and reasonable

compensation for their associated efforts.\63\ Another commenter

believes that the ``[c]osts to develop and operate an electronic proxy

voting system, which appears to be designed primarily to facilitate ADP

and the institutions and not the industry as whole, should not be

passed along to issuers.'' \64\ One commenter believes the definition

of reasonable expenses should include actual out-of-pocket expenses and

not represent a profit item for the broker-dealers, banks and

nominees.\65\

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

\62\ See CTA Letter, Mobil Letter, Smith Barney Letter, US West

Letter (commenting only on coordinating an issuer's proxy mailing to

multiple nominees), supra note 11.

\63\ See Texaco Letter, supra note 11.

\64\ See US West Letter, supra note 11.

\65\ See Mobil Letter, supra note 11.

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

With respect to the Commission's request for comment on whether the

determination of ``reasonableness'' should vary with the size of the

issuer, one commenter believes that the determination of reasonableness

should not vary based on issuer size or any other criteria.\66\ Two

commenters support varying reasonable fees with the size of the

issuer.\67\ Specifically, one believes that a tiered pricing structure

that properly recognizes the true

[[Page 13927]]

economies of scale would be appropriate.\68\

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

\66\ See Smith Barney Letter, supra note 11.

\67\ See Hagberg Letter, Lucent Letter, supra note 11.

\68\ See Hagberg Letter, supra note 11.

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

In its comment letter, the NYSE explains that the NYSE Committee on

Shareholder Communications has not been able to reach a consensus on

tiering because of the different service requirements of companies of

different sizes.\69\ To illustrate, the NYSE explains that, although

large issuers may believe that they subsidize smaller issuers, larger

issuers drive more of the cost of infrastructure such as vote

processing.\70\

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

\69\ See NYSE Letter, supra note 3.

\70\ See NYSE Letter, supra note 3.

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

Several commenters address whether the reasonableness determination

should take into account any fee sharing arrangements between an

intermediary and its broker-dealer clients. Several commenters argue

that reasonable expenses should not include reimbursement to subsidize

revenue sharing or a rebate system.\71\ Moreover, several of these

commenters believe that revenue sharing and rebates artificially

inflate expenses charged to issuers and create an unnecessary barrier

to entry for competition in the business.\72\ One commenter argues that

the rebates available only to a single, dominant provider have made it

impossible for new providers who might otherwise be able to offer lower

fees or money saving technologies to enter the business.\73\

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

\71\ See CTA Letter, GTE Letter, Lucent Letter, Mobil Letter,

Smith Barney Letter, US West Letter, supra note 11.

\72\ See CTA Letter, GTE Letter, Mobil Letter, US West Letter,

supra note 11.

\73\ See Hagberg Letter, supra note 11.

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

Another commenter states that issuers have no way of knowing how

much of their fees are actually being rebated to member organizations

and that rebates should be only made to cover a broker's actual

costs.\74\ One commenter questions why revenue sharing occurs.\75\

Another commenter believes that the rebate process should be fully

investigated to determine if it is in the best interests of the capital

markets and is consistent with the goal of free and fair

competition.\76\

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

\74\ See Texaco Letter, supra note 11.

\75\ See AFLAC Letter, supra note 11.

\76\ See DOE Letter, supra note 11.

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

One commenter explicitly supports the fee sharing arrangement

between broker-dealers and intermediaries as appropriate within the fee

structure.\77\ This commenter notes that when a broker-dealer

outsources to an intermediary, it does not typically outsource 100% of

the activities covered by the fees.\78\ The commenter believes that the

amount of the fee sharing should be determined by negotiation between

each broker-dealer and its intermediary.\79\

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

\77\ See SIA Letter, supra note 11.

\78\ See SIA Letter, supra note 11.

\79\ See SIA Letter, supra note 11.

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

A few broker-dealer commenters also explain that nominee does not

eliminate all costs by outsourcing their proxy mailings.\80\ These

commenters note certain costs that nominees must bear as it: (1)

Continues to maintain proxy personnel in its office to answer broker

and customer questions as well as to handle the operational aspects of

balancing positions and voting totals; (2) transmits data each day to

and from ADP; (3) writes and maintains programs to support and enhance

the transmission and continue to do so; and (4) has other overhead and

administrative costs.\81\ The NYSE agrees with these commenters that

broker-dealers continue to incur some costs in the proxy solicitation

process and that it would be reasonable that the fees issuers pay be

split between the intermediary and the broker-dealer.\82\ During the

pilot, such costs would be identified more fully and assessed by the

independent accounting firm.

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

\80\ See A.G. Edwards Letter, Legg Mason Letter, Oppenheimer

Letter, supra note 11.

\81\ See A.G. Edwards Letter, Legg Mason Letter, supra note 11.

\82\ See NYSE Letter, supra note 3.

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

Several commenters support the formation of an industry committee

to evaluate the effectiveness of the proposal during the pilot

period.\83\ Moreover, one commenter suggests that unresolved issues can

be addressed by an industry committee during the pilot period.\84\ One

commenter suggests that if a pilot program is implemented, the

intermediary should be required to send two invoices to customers over

the pilot period, with one under the old billing arrangement and one

under the new.\85\

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

\83\ See Apollo Letter, Cornerstone Letter, Goodrich Letter, GTE

Letter, Isomedix Letter, supra note 11.

\84\ See CTA Letter, supra note 11.

\85\ See DQE Letter, supra note 11.

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

Several commenters address the issue of whether an independent

audit during the pilot period would be helpful in assessing the

reasonableness of the costs passed through to issuers. Most of these

commenters support an independent audit.\86\ One commenter suggests

that to be truly meaningful, the independent audit should include all

reasonable costs incurred by the issuers, broker-dealers, ADP, and

nominees in mailing proxy material to beneficial holders and the

processing of votes back to the issuer's vote tabulator.\87\ Another

commenter believes that auditing of actual cost of material such as

envelopes will lead to even more savings and make it easier for

stockholders to register their votes.\88\ Two commenters suggest that

profit sharing arrangements should be audited to determine the

reasonableness of these costs.\89\

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

\86\ See CTA Letter, Lucent Letter, Mobil Letter, Orphan Medical

Letter, Reynolds Metal Letter, Texaco Letter, US West Letter, Walt

Disney Letter, supra note 11.

\87\ See CTA Letter, supra note 11.

\88\ See Texas Instruments Letter, supra note 11.

\89\ See Mobil Letter, Texaco Letter, supra note 11.

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

Other commenters believe that the expense of an independent audit

is not necessary.\90\ Specifically, one commenter believes that there

should be some definite reason to believe that an independent audit is

worth the expense.\91\ The NYSE also believes that, although an audit

would be useful in determining whether member firms and intermediaries

accurately implemented the new fees and for some elements of the costs

to be tested in an audit, an audit would not be useful to determine the

``right'' fee.\92\

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

\90\ See A.G. Edwards Letter, Legg Mason Letter, Smith Barney

Letter, supra note 11.

\91\ See A.G. Edwards Letter, supra note 11.

\92\ See NYSE Letter, supra note 3.

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

With regard to the Commission's request for comment on whether the

proposed NYSE nominee fee and incentive fee should be deemed to apply

to reimbursement by non-NYSE issuers to NYSE member firms, two

commenters believe that the new fee structure should apply to all

issuers and not be limited to NYSE listed companies.\93\ Specifically,

one believes that these fees should apply to all issuers because the

covered activities are the same for all issuers, regardless of the

listing.\94\ Two commenters argue that the fees should apply to all

domestic corporations when dealing with NYSE members.\95\ The NYSE

agrees with these commenters in that limiting fees to NYSE issuers

would result in confusion and an increase of expenditure of scarce

resources to duplicate efforts.\96\

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

\93\ See SIA Letter, Smith Barney Letter, supra note 11.

\94\ See SIA Letter, supra note 11.

\95\ See A.G. Edwards Letter, Legg Mason Letter, supra note 11.

\96\ See NYSE Letter, supra note 3.

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

One commenter, however, believes that the proposed NYSE nominee fee

and incentive fees should not necessarily apply to non-NYSE issuers

because the non-NYSE issuers should be permitted to negotiate lower

proxy fees from other stock exchanges.\97\

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

\97\ See Texaco Letter, supra note 11.

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

V. Discussion

The Commission finds that the proposed rule change is consistent

with

[[Page 13928]]

the requirements of the Act and the rules and regulations thereunder

applicable to a national securities exchange, and, in particular, with

the requirements of Section 6(b).\98\ Section 6(b)(4) requires that

exchange rules provide for the equitable allocation of reasonable dues,

fees, and other charges among its members and issuers and other persons

using the facilities of an exchange.\99\ Section 6(b)(5) requires,

among other things, that exchange rules promote just and equitable

principles of trade and that they are not designed to permit unfair

discrimination between issuers, brokers or dealers.\100\ Section

6(b)(8) prohibits any exchange rule from imposing any burden on

competition that is not necessary or appropriate in furtherance of the

purposes of the Act.\101\ Based on the record adduced by the NYSE, the

Commission believes that the fees under the proposed reimbursement

schedule are reasonable and fairly allocated, do not discriminate among

issuers, and do not impose any unnecessary burdens on competition. The

Commission will re-evaluate this preliminary determination in light of

the results of the pilot program and the independent accounting firm's

report.

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

\98\ 15 U.S.C. 78f(b).

\99\ 15 U.S.C. 78f(b)(4).

\100\ In approving these rules, the Commission has considered

the proposed rule's impact on efficiency, competition, and capital

formation. 15 U.S.C. 78c(f).

\101\ 15 U.S.C. 78f(b)(8).

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

The Commission believes that the NYSE's proposal to amend the

suggested rate of reimbursement for the distribution of materials and

to impose certain incentive and nominee fees are consistent with the

Act because the proposal reflects changes in the market, such as

advances in technology and increases in distribution costs, and changes

in the corporate governance process since the last update of the fee

reimbursement schedule in 1986. The Commission also believes that the

proposed fee reimbursement structure should promote the application of

advanced technology to the shareholder communication process and is a

reasonable accommodation of the interests of various market

participants involved in the proxy solicitation process. A majority of

the commenters also support the proposal, believing that it would

provide the industry with incentives to continue to develop new

technologies that would help issuers reduce costs while improving

communications with shareholders.

Moreover, the proposal also reduces the basic rates of

reimbursement for the first time since the adoption of the rules. The

proposal reduces the fees for mailing each set of proxy materials from

$.60 or $.70 to $.55 and reduces the rate for mailing other reports

from $.20 to $.15. The Commission believes that these reductions should

produce substantial savings for issuers.

The NYSE has examined the cost increases of its issuers under the

proposed fee structure and believes that, in general, most of the

issuers would receive a cost reduction with this proposal. There may be

some increases for small issuers, but the new nominee cost may be

partially offset by the lower basic rates and lower expenses. Moreover,

there may be other costs savings, particularly ``out-of-pocket

savings,'' and the new incentive fees may result in fewer mailings,

decreasing printing and mailing costs.\102\

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

\102\ The NYSE conducted an analysis of the proposed fee

reimbursement structure on several small issuers based on the

figures from the 1996 proxy season. For example, for one small

issuer, although the proxy costs under the proposed fee structure

would increase by $2,766, this issuer could realize savings in the

range of $630 to $2,520 by suppressing proxy mailings by

householding, which could offset the increase in proxy costs.

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

The Commission believes that the new reimbursement schedule is the

result of the NYSE's careful balancing of interests of issuers and

broker-dealers. The Commission has, nevertheless, determined to approve

the NYSE's proposed fee structure on a one-year pilot basis to allow

the Exchange and the Commission to review the progress and effect of

the fee structure. The Commission believes that the experience with the

proposed fee structure during the one-year pilot period would be

valuable to the NYSE and to the Commission in determining whether any

modifications are necessary. The Commission notes that the NYSE has

committed to an independent audit, at the conclusion of the 1997 proxy

season, of the new fee structure to assess the reasonableness of the

costs passed through to issuers with a report of the findings made to

the Commission.\103\

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

\103\ Although several commenters support the formation of an

industry committee to evaluate the proposal over the pilot period,

the Commission believes that an independent audit would better

alleviate concerns of market participants with varying interests

regarding the reasonableness of the proposed fee structure in

relation to the services provided.

The NYSE has represented to the Commission that the report of

the independent accountant will be provided to the Commission and

the NYSE no later than October 31, 1997. The Commission will review

the report to determine whether any change would be appropriate for

the 1998 proxy season.

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

A. Commenters' Concerns

AS discussed above, the NYSE is proposing to adopt two new fees for

the first time--the nominee fee and the automation incentive fee. These

fees are different from the other mailing reimbursement fees set forth

in the NYSE rules in that they are related costs other than actual

mailing costs. As a result, several commenters express specific concern

about these fees.

Several commenters also express general concern that the proposed

fee structure may increase costs to issuers. The Commission believes

that, although in certain instances costs to issuers may increase under

the proposed fee structure, the reduction of mailing fees and the

design of the structure to encourage savings in the long term should be

beneficial to all market participants.

One commenter argues that the proposed fees are higher than what an

issuer would pay in a ``free market'' environment.\104\ The Commission

notes that, in adopting the direct shareholder communications rules, it

left the determination of reasonable costs to the self-regulatory

organizations (``SROs'') because, as representatives of both issuers

and brokers, the SROs were deemed to be in the best position to make a

fair evaluation and allocation of the costs associated with the

distribution of shareholder materials. The Commission believes that, at

this time, it is appropriate for the NYSE to propose the amount for

each fee in the fee reimbursement structure, with the Commission

reviewing the fee schedule to ensure its compliance with the standards

of the Act. As discussed below, however, the Commission encourages the

NYSE and the issuer and broker-dealer communities to initiate dialogue

so that competition may play a greater role in this process.

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

\104\ See Hagbert Letter, supra note 11.

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

Another commenter argues that NYSE's fee schedule should offer only

reimbursement of costs to the nominees and that the NYSE should

encourage a free market to develop and implement new technologies by

allowing individual issuers to choose whether to take advantage of a

new process or procedure.\105\ The Commission believes, however, that

because the current fee schedule only provides for reimbursement of

costs, service providers do not have any incentive to develop and

implement new technologies. As discussed in more detail below, the

Commission believes that certain incentive fees are necessary to

encourage these service providers to develop cost effective methods of

distributing shareholder materials.

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

\105\ See DQE Letter, supra note 11.

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[[Page 13929]]

1. Nominee Fee

As discussed above, the NYSE proposes a new $10 nominee fee for

intermediaries that provide coordination for a series of functions

across a multitude of nominees. Several commenters object to the

nominee fee because it may increase costs to smaller issuers. The NYSE

represents that the fee is intended to be reimbursement for

coordination costs incurred by intermediaries and that the fee is a

reasonable attempt to provide compensation for services that are being

currently offered. Moreover, the NYSE believes that coordination by

nominees should reduce costs for issuers.

The Commission has considered the NYSE's representations as to the

effect of the new ``nominee fee'' of $20 per nominee for their

potential impact on issuers. The Commission recognizes that, although

these fees may have a greater impact on small issuers than large and

mid-sized issuers, the combined effect of the reduced rates of

reimbursement for mailing proxy and other materials along with the

imposition of these new fees could result in greater benefit to all

issuers in general, depending, of course, on the results of the pilot.

Based on the information provided by the NYSE and the supportive

comment letters, the Commission believes--subject, again, to the

results of the pilot--that the nominee fee would appear to constitute

reasonable compensation for the services provided by an intermediary

that could produce savings for issuers in the long term. The Exchange

estimates that the smallest U.S. issuers would pay, on average, an

intermediary nominee fee of $800. This is a relatively small sum and is

designed to compensate for the services provided by the intermediary.

The Commission also believes that the new fees will provide

incentives for intermediaries to develop technologically innovative

ways to communicate with issuers and to lower costs overall. Although

these fees may have relatively greater impact on small issuers, the new

fee structure reflects economies of scale and may more accurately

reflect the actual distribution and proxy solicitation costs. Moreover,

the Commission believes that these fees, by encouraging the use of

technology for shareholder communications, could help to promote

further improvement of the corporate governance process.

Commenters also express concern about whether any new or additional

services are being provided by an intermediary for the $20 nominee fee

and ask, in any case, whether such services are being provided at free-

market cost. First, the Commission notes that the NYSE has provided a

list of coordinating functions that would qualify a nominee for the

reimbursement of the $20 fee. Any intermediary that coordinates these

functions for multiple nominees would be entitled to the fee. Although

ADP is the only intermediary currently offering these services to

broker-dealers, there is nothing in the NYSE proposal that would

restrict the payment of this fee to another entity providing similar

services and thus the rule is not anti-competitive in application.

Second, the Commission notes that an intermediary coordinating

multiple nominees could result in reduced costs to issuers in printing,

posting and administrative costs.\106\ Although this has not been

quantified specifically by the NYSE in its rule proposal, during the

one-year pilot, the Exchange and the Commission can review the results

of the pilot program, including but not limited to the independent

accounting firm's report, to ensure that no issuers are unfairly

disadvantaged under the proposed fee structure, and that the nominee

fee is a reasonable expense incurred to distribute proxy and other

shareholder material. At the conclusion of the pilot, if necessary, the

Exchange can propose further modifications to the fee structure to

avoid any unintended adverse effects.

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

\106\ See NYSE Letter, supra note 3.

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

2. Automation Incentive Fee

The NYSE proposes a new incentive fee to compensate member

organizations for eliminating materials in paper form (i.e., additional

fee of $.50 ($.10 for a quarterly report) for each set of material that

is not mailed). One commenter believes that incentive fees should be

based on actual reasonable costs incurred by the broker for eliminating

duplicate mailings.\107\ Another believes that the incentive fees

should be passed on to issuers only if the fees are market driven and

comparable to what other companies in the marketplace are charging for

similar activity.\108\

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

\107\ See GTE Letter, supra note 11.

\108\ See US West Letter, supra note 11.

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

The Exchange has represented to the Commission that the

householding fee is intended to encourage members firms to apply

technology to distribute materials electronically. The Commission

believes that, if the incentive fee only reimburses the cost of

eliminating the duplicate mailings, nominees would have no incentive to

provide these services because nominees would be reimbursed for their

costs regardless of whether they provide these types of services.

Moreover, the Commission notes that the fee would produce the

unquantifiable benefit of reducing shareholder frustration and

confusion by eliminating duplicate mailings to shareholders.

One commenter expresses concern that the proposed incentive fee as

well as the nominee fee would increase fees for foreign issuers with a

relatively small U.S. float and argues that the NYSE should amend its

rules to exempt non-U.S. issuers from NYSE's proxy requirements.\109\

The Exchange states, and the Commission agrees, that in this context

there are no compelling reasons to treat non-U.S. issuers and U.S.

companies differently. Although non-U.S. issuers are exempt from most

of the Commission's proxy rules pursuant to Rule 3a12-3 under the Act,

non-U.S. issuers generally do provide U.S. shareholders with proxy and

related information and seek votes of their U.S. holders. The Exchange,

therefore, states that broker-dealers and other intermediaries face the

same reimbursement issues with non-U.S. companies as they do with U.S.

companies.

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

\109\ See JP Morgan Letter, supra note 11.

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

Finally, the Commission notes that the independent audit should

help to assess whether the householding incentive fee has had the

intended effect of eliminating duplicate mailings and is providing cost

savings to issuers.

B. Reasonableness Determination

The Commission also requested comments on what should be deemed

``reasonable expenses'' within the meaning of the Commission's proxy

rules. As summarized above, the Commission received a variety of

responses to this issue. Among them are that reasonable expenses should

include an intermediary's cost to coordinate an issuer's proxy mailing

to multiple nominees,\110\ an intermediary's expense of operating an

electronic proxy voting system,\111\ and actual out-of-pocket expenses

that do not represent a profit

[[Page 13930]]

item for the broker-dealers, banks and nominees.\112\

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

\110\ See Mobil Letter, Smith Barney Letter, US West Letter,

supra note 11.

\111\ See Mobil Letter, Smith Barney Letter, supra note 11.

Another commenter believes that the costs to develop and operate

an electronic proxy voting system should not be passed along to

issuers because the electronic system appears to be designed

primarily to facilitate ADP and the institutions. See US West

Letter, supra note 11. See also supra note 64 and accompanying text.

In response, the NYSE states that it has not been led to believe

that the fees should cover such a system and, therefore, such costs

are not included in the proposal. See NYSE Letter, supra note 3. See

also supra notes 9 and 51.

\112\ See Mobil Letter, supra note 11.

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

Finally, in response to the issue of fee sharing arrangements

between brokers and intermediaries, several commenters believe that

reasonable expenses should not include such arrangements because

revenue sharing and rebates artificially inflate expenses charged to

issuers and create an unnecessary barrier to entry for competition in

the business.\113\ At least one commenter, however, believes that fee

sharing arrangements are appropriate because when a broker-dealer

outsources to an intermediary, it does not typically outsource 100% of

the activities covered by the fees.\114\

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

\113\ See CTA Letter, GTE Letter, Mobil Letter, US West Letter,

supra note 11.

\114\ See SIA Letter, supra note 11. The NYSE also agrees

Several broker-dealer commenters also explain that a nominee

does not eliminate all costs by outsourcing their proxy mailings.

See supra note 80 and accompanying text. The NYSE also agrees with

these commenters. See NYSE Letter, supra note 3.

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

Although the Commission has carefully considered these comments

regarding ``reasonable expenses,'' it has reached no final resolution

of the issues noted by commenters. Rule 14a-13(a)(5) requires issuers

to reimburse broker-dealers, banks, and other nominees for the

reasonable expenses they incur in mailing proxy soliciting materials

and annual reports to beneficial holders of such issuers' voting

securities. As noted by the NYSE, the fee structure that surrounded the

development of the reimbursement of such fees was devised prior to the

use of intermediaries by many broker-dealers. In addition, the current

fee structure does not recognize the benefits from enabling more

shareholder communications to be received through the technological

advances made over the past decade. The one-year pilot and the audit

that will cover the results of ADP's operations for this period should

provide the NYSE and the Commission with the information necessary to

determine whether the fee structure needs to be further revised. The

Commission will continue to consider the comments during the one-year

pilot period and reevaluate these comments before approving a permanent

fee schedule.

Finally, with regard to whether the proposed NYSE nominee fee and

incentive fee should be deemed to apply to reimbursement by non-NYSE

issuers to NYSE firms, the Commission believes that it is preferable

that the new fees apply to reimbursement by NYSE issuers to NYSE member

firms. At the same time, as the NYSE has noted, member firms, non-

member firms and banks historically have used the NYSE guidelines for

all mailings, which provide uniformity in the industry. The Commission,

however, believes that the reimbursement structure apply to member

firms and not to issuers and Section 19(b) does not provide the NYSE

with the authority to enforce the reimbursement of these fees on

issuers that are not listed on the NYSE and do not use its facilities.

This approach is consistent with Section 6(b)(4) of the Act, which

allows an exchange to adopt equitable fees for its members, issuers,

and other persons using its facilities.

In determining to approve the NYSE's proposal for a one-year pilot

period, the Commission has had to assess whether the proposal provides

for the equitable allocation of fees among issuers consistent with

Section 6(b)(4) of the Act, as well as ensure that it is consistent

with Sections 6(b)(5) and 6(b)(8) of the Act by not unfairly

discriminating among issuers and imposing a burden on competition that

is not necessary under the Act.

As noted above, the proposal has raised a number of concerns about

whether the effect of the new fee structure would unduly increase the

costs to small issuers and whether both the nominee and householding

incentive fees are related to the reasonable expenses of mailing proxy

soliciting materials. Although the Commission recognizes that the

quantitative material submitted by NYSE to support its proposal is not

conclusive on this issue, we believe that that NYSE has made a

reasonable case that the fee changes taken together could have a

beneficial effect on the costs for mailing proxy material for many

issuers. Moreover, to the extent that the nominee fee and household

incentive fee encourage the use of new technologies for the electronic

distribution of proxy materials, overall mailing costs of issuers could

be reduced. As a result, although the Commission recognizes that some

issuers may, in the short run, experience an increase in costs, on

balance, the Commission believes that the overall effect of the changes

may be positive and provide some cost savings.

In conclusion, the Commission believes that the proposal to amend

the suggested rate of reimbursement for the distribution of materials

and to impose certain new fees is consistent with the Section 6(b)(4)

requirement that exchange rules provide for the equitable allocation of

fees among its members and issuers. The proposed fee structure appears

to provide for reasonable fees and does not appear to discriminate

between issuers, brokers or dealers in contravention of Section

6(b)(5). Moreover, the Commission believes that the proposed

reimbursement schedule does not impose any burden on competition that

is not necessary or appropriate in furtherance of the purposes of the

Act as required by Section 6(b)(8).

The pilot period and independent audit should help the Commission

assess whether the potential benefits of the fee structure change do,

in fact, have a positive effect overall on the proxy fee reimbursement

structure. Indeed, during this period, the Commission encourages the

Exchange, issuers, and member firms to consider a long term solution to

determining reasonable expenses in connection with broker-dealers'

mailing of proxy soliciting materials and annual reports to beneficial

holders. In doing so, the Commission notes that in adopting the direct

shareholder communications rules in the early 1980s the Commission left

the determination of reasonable costs to the SROs, because they were

deemed to be in the best position to make fair evaluation and

allocations of costs associated with these rules. The Commission

believes that ultimately market competition should determine

``reasonable expenses'' and recommends that issuers, broker-dealers and

the NYSE develop an approach that may foster competition in this area.

Rather than having the rates of reimbursement set by the SROs, the

Commission suggests that the NYSE and other SROs explore whether

reimbursement can be set by market forces, and whether this would

provide a more efficient, competitive, and fair process than SRO

standards.

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

the proposed rule change prior to the thirtieth day after the date of

publication of notice of filing thereof. This amendment merely changes

the length of the pilot from three years to one year. Based on the

above, the Commission finds that there is good cause, consistent with

Section 6(b)(5) of the Act, to accelerate approval of Amendment No. 1.

VI. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning Amendment No. 1. 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 rule

[[Page 13931]]

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 inspection and copying at the Commission's Public

Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549.

Copies of such filing will also be available for inspection and copying

at the principal office of the Exchange. All submissions should refer

to File No. SR-NYSE-96-36 and should be submitted by April 14, 1997.

VII. Conclusion

For the foregoing reasons, 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 national securities

exchange and, in particular, the requirements of Sections 6(b)(4),

6(b)(5), and 6(b)(8) and the rules and regulations thereunder.

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

Act,\115\ that the proposed rule change (SR-NYSE-96-36) is approved on

a pilot basis ending May 13, 1998.

\115\ 15 U.S.C. 78s(b)(2).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\116\

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\116\ 17 CFR 200.30-3(a)(12).

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Jonathan G. Katz,

Secretary.

[FR Doc. 97-7280 Filed 3-21-97; 8:45 am]

BILLING CODE 8010-01-M