SEC Request for Comment on NYSE Proposal Regarding Proxy Distribution Fees; 2/28 Conference Call
[27049]
February 25, 2013
TO: CLOSED-END INVESTMENT COMPANY COMMITTEE No. 6-13SEC RULES COMMITTEE No. 11-13
SMALL FUNDS COMMITTEE No. 5-13 RE: SEC REQUEST FOR COMMENT ON NYSE PROPOSAL REGARDING PROXY DISTRIBUTION FEES; 2/28 CONFERENCE CALL
As you may recall, last year an advisory committee (Proxy Fee Advisory Committee, or “PFAC”) formed by the New York Stock Exchange (“NYSE”) issued a report (“PFAC Report”) recommending changes to the structure for fees that issuers pay to banks and broker-dealers for the distribution of proxy materials to shareholders who invest in “street name.” [1] Earlier this month, the NYSE filed a proposed rule change with the Securities and Exchange Commission (“SEC”) that would codify most of the PFAC’s recommendations and make other revisions. The SEC has issued a release seeking comments on the proposed rule change. [2] The Release is summarized below.
Comments are due by March 15th. ICI will hold a conference call on Thursday, February 28th at 2:30 p.m. Eastern time to discuss a possible comment letter on the proposed rule change. If you would like to participate on the call, please email Pat Dickerson at pdickerson@ici.org to obtain the dial-in information. If you are unable to participate on the call but would like to provide comments, please contact Frances Stadler at frances@ici.org as soon as possible but no later than March 4th.
Background
Like the PFAC Report, the Release provides background information about the proxy distribution system and discusses the genesis of the PFAC. Among other things, the Release mentions that the NYSE “has been mindful for several years that a further review of the proxy rules would be useful,” but when it became aware that the SEC was preparing a study of proxy-related issues, decided to await the publication of the SEC’s 2010 concept release on the U.S. proxy system [3] before proceeding with a formal review.
The Release notes that SEC rules require broker-dealers and banks (“nominees”) to distribute proxy material to beneficial owners, but that this obligation is conditioned on nominees’ being assured of reimbursement of their reasonable expenses. It explains that since 1937, NYSE rules have established the reimbursement rates for this purpose. [4] It states that “for at least the last 30 years, the NYSE has dealt with this issue by convening advisory panels of industry participants—brokers, issuers, and investors—to advise on what should be considered ‘fair and reasonable rates of reimbursement,’ and then subjecting the proposals to review and approval by the SEC.” [5]
The Release refers to third party service providers that coordinate the distributions for multiple nominees as “intermediaries.” It notes that a single intermediary, Broadridge Financial Solutions, Inc. (“Broadridge”), currently handles almost all proxy processing in the U.S.
Analysis and Recommendations
The NYSE’s proposed changes are described below. Except as otherwise noted, the proposed changes track the recommendations made by the PFAC.
Basic Fees
The Release explains that this category includes both a per-nominee fee and two separate account fees (a basic processing fee and an “intermediary unit fee”). The NYSE proposes to increase the basic per-nominee fee from $20 to $22 and to specify that it applies only to nominees with at least one account holding the issuer’s stock. [6]
For per-account fees, the NYSE proposes a tiered approach that will eliminate the “cliff effect” of the current pricing schedule and better reflect economies of scale. The Release states that in addition to being tiered, the proposed basic processing fee and intermediary unit fee “would be increased slightly to better align fees and work effort, to reflect increased sophistication in proxy distribution processing, and to reflect the impact of inflation since the fees were last adjusted.” [7] The current fee structure (50 cents per account for issuers with fewer than 200,000 street name positions and 45 cents per account for issuers with 200,000 or more street name positions) would be changed to provide five different tiers ranging from a maximum of 64 cents for issuers with up to 10,000 street name positions down to 39 cents for issuers with more than 500,000 street name positions.
Incentive (Preference Management) Fees
Under current rules, an incentive fee (25 cents per account for issuers with 200,000 or more street name positions and 50 cents per account for issuers with fewer than 200,000 street name positions) applies whenever the need to mail materials in paper to an account has been eliminated. The Release notes that in addition to considering what the per-account fee should be, the PFAC examined the “evergreen” nature of the fee (i.e., whether it is appropriate to charge an incentive fee on an ongoing basis, not only in the year when electronic delivery is elected). The PFAC determined that “a significant amount of the work involved was in ‘maintaining’ and ‘managing’ the preferences attached to each account position regarding distribution, both for householding and eliminating paper delivery entirely.” [8] The PFAC also determined that calling the fee an “incentive fee” was part of the problem and recommended changing the name of the fee to “preference management fee.” The NYSE proposes that the preference management fee not be tiered and that the specific amount of the fee be changed to 32 cents per position affected (16 cents for positions in managed accounts).
Notice and Access Fees
The Release notes that, based on the recommendation of the NYSE’s Proxy Working Group in 2007, the NYSE initially chose not to apply its rules on proxy distribution fees to the SEC’s “e-proxy” system (“Notice and Access”). It states that the PFAC concluded that Notice and Access fees should now be regulated. The Release explains that Broadridge currently applies its Notice and Access fees to all accounts with a position in an issuer’s stock, even though mailings to some of those are already suppressed. At the PFAC’s request, Broadridge prepared estimates of how a Notice and Access fee that applied only to accounts actually receiving a notice would impact issuers. [9] The PFAC found that each of the two models prepared by Broadridge (a flat fee and a tiered model) would have a disproportionate impact on certain issuers that could discourage issuers from using Notice and Access. Although there continued to be some support for only applying Notice and Access fees to accounts receiving notices, a majority of members of the PFAC decided that for now “simply bringing notice and access under the regulatory tent with the current rate schedule would be the better approach, and would be consistent with the principle of avoiding large and unanticipated consequences from a fee change.” [10] Thus, the NYSE proposes to codify Broadridge’s current Notice and Access fee schedule. [11]
Other Fees
Reminder Mailings. The NYSE proposes to reduce fees for sending reminder mailings about annual meetings by half, from 40 cents to 20 cents per position.
Special Meetings. [12] The NYSE proposes to increase the intermediary fee for special meetings by 5 cents per position to acknowledge the additional work required of the intermediary for these meetings.
Contested Meetings. The NYSE proposes to increase the intermediary fee for contested meetings to a flat 25 cents per position, with a minimum fee of $5,000 per soliciting entity. (There is currently a $1.00 per position processing fee and no intermediary unit fee for contested meetings.)
NOBO Fees. The Release states that since 1986, the NYSE’s rules have provided for fees which issuers must pay to brokers and their intermediaries for obtaining a list of the non-objecting beneficial owners (“NOBOs”) owning the issuer’s stock. [13] The Release notes that it is customary for brokers, through their intermediary, to require that issuers take, and pay for, a list of all NOBOs, even if the issuer might want to limit its communication to NOBOs having a certain number of shares, or those that have not yet voted on a solicitation. The NYSE proposes to revise its rule to specify that issuers can stratify record date requests to eliminate positions above or below a certain level, or those that have already voted. The Release states, however, that if the result of this change is a significant reduction in proxy fee revenues, it may be appropriate to promptly revisit the amount of the fee or how it is applied.
Enhanced Broker’s Internet Platform
The Release discusses a service referred to in the SEC’s Proxy System Concept Release as “enhanced brokers’ internet platforms,” or “EBIP.” [14] The Release indicates that the PFAC was supportive in concept of a program of this type that would enhance retail shareholder participation in proxy voting (e.g., by providing notices of upcoming corporate votes or allowing investors to access proxy materials and voting forms through their broker’s website) while being structured to impose a fee only on issuers that benefit from the program. [15] The Release states that in response to the PFAC’s request, Broadridge developed a proposed “success fee” approach in consultation with a Subcommittee of its Independent Steering Committee. Under this approach, an issuer would pay a broker having street name accounts in that issuer a one-time 99 cent fee for each new full package recipient that converts to e-delivery following the broker’s installation of an investor mailbox. The Release says that the PFAC received the detailed proposal too late to carefully consider whether 99 cents was the appropriate fee level.
The Release describes the NYSE’s further discussions of the proposal with a variety of industry participants following the release of the PFAC Report. Based on its findings, the NYSE proposes to implement for a five-year period a one-time “success fee” of 99 cents for each new account that elects, and each full package recipient among a brokerage firm’s accounts that converts to, electronic delivery while having access to an EBIP. To qualify, an EBIP must provide notices of upcoming corporate votes, including record and meeting dates for shareholder meetings, and the ability to access proxy materials and a voting instruction form, and cast the vote, through the investor’s account page on the firm’s website without an additional log-in.
Other Issues
Cost Recovery Payments
The Release states that the PFAC “was mindful of the questions that have been raised about the ‘cost recovery payments’ that are made by Broadridge to certain of its broker-dealer customers” and that the PFAC “was persuaded that the existence of these payments is not any indicator of unfairness or impropriety.” [16] It explains that different brokerage firms have different proxy distribution costs, that Broadridge’s cost to provide service differs from firm to firm, and that some firms are able to negotiate better rates from Broadridge. The Release indicates that to supplement the PFAC’s analysis, at the NYSE’s request, SIFMA sought to obtain from its members additional information about the costs of proxy processing. Noting certain difficulties associated with obtaining the data, the Release states that SIFMA conducted a “representative study” (described further in the Release) the findings of which it believes support the view that proxy fees are reasonably in line with the costs nominees incur. [17]
Mutual Funds
Like the PFAC Report, the Release states that while the PFAC was formed with public operating companies in mind, NYSE proxy fees also are used in the context of distributions to street name holders of mutual fund shares. The Release notes that mutual funds are not required to hold annual meetings each year, and that utilization of Notice and Access is less widespread among mutual funds than operating companies. It further explains that, due to the requirement to distribute annual and semi-annual shareholder reports each year, mutual funds pay “interim report fees” much more frequently than operating companies do. [18] The PFAC’s overall recommendations did not include any changes to interim report fees, and the NYSE does not propose changes to those fees at this time.
The Release observes that “[t]he PFAC’s recommended changes should have a relatively modest impact on mutual funds.” It indicates that informal conversations with mutual fund representatives suggested that there are fee issues that mutual funds would like to discuss. Therefore, as the PFAC recommended, the NYSE “with industry participation, is reviewing the fees provided in the NYSE rules as they impact mutual funds, to determine whether additional changes are appropriate. [19] The Release states that any recommendations for rule changes that emerge from this examination would be the subject of a separate rule filing.
Future Review of Proxy Fees
The Release mentions that the NYSE will evaluate, in the light of future discussions on how proxy fees should be regulated, the PFAC’s recommendations: (1) that the NYSE involve a participant group similar to the PFAC in an essentially ongoing vetting process developments and associated costs; and (2) that this group also could undertake a more comprehensive review periodically (e.g., every three years) to ensure that proxy fees are evaluated in light of new regulations or process innovations.
Frances M. Stadler
Senior Counsel - Securities Regulation
endnotes
[1] See ICI Memorandum No. 26208 (May 30, 2012). The PFAC Report is available at https://usequities.nyx.com/sites/usequities.nyx.com/files/final_pfac_report.pdf.
[2] Securities and Exchange Commission, Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change Amending NYSE Rules 451 and 465, and the Related Provisions of Section 402.10 of the NYSE Listed Company Manual, Which Provide a Schedule for the Reimbursement of Expenses by Issuers to NYSE Member Organizations for the Processing of Proxy Materials and Other Issuer Communications Provided to Investors Holding Securities in Street Name and to Establish a Five-Year Fee for the Development of an Enhanced Brokers Internet Platform, SEC Release No. 34-68936 (Feb. 15, 2013), 78 Fed. Reg. 12381 (Feb. 22, 2013) (“Release”), available at http://www.sec.gov/rules/sro/nyse/2013/34-68936.pdf.
[3] SEC Release No. 34-62495 (July 14, 2010), 75 Fed. Reg. 42982 (July 22, 2010) (“SEC Proxy System Concept Release”).
[4] The Release notes that the NYSE “. . . would welcome a movement away from using [self-regulatory organization] rule to set the default proxy distribution fees.” Release at n. 14.
[5] Id. at 9 (footnote omitted).
[6] The Release indicates that due to changes in the issuer population between the 2011 and 2012 proxy seasons (information that became available after publication of the PFAC Report), it became necessary to reduce certain of the PFAC-proposed fees to keep the overall financial impact of the proposed changes at approximately the same level as proposed in the PFAC Report. For this reason, the NYSE eliminated a charge the PFAC had recommended of 50 cents per nominee for those solicited who indicate no holdings of the stock involved. In addition, the basic processing fees are reduced somewhat from those set forth in the PFAC Report. Id. at 12-13.
[7] Id. at 15.
[8] Id. at 19.
[9] Based on the general satisfaction expressed by issuers represented on the PFAC with the overall cost of Notice and Access, the PFAC suggested that the fee be designed to net a similar amount of revenue for Broadridge as under the current fee structure.
[10] Release at 30.
[11] The NYSE proposes to eliminate a minimum fee of $1500 for issuers whose shares are held by up to 10,000 accounts.
[12] The Release states that a “special meeting” will be defined as a meeting other than one for the election of directors.
[13] The Release indicates that the rule specifies a fee of 6.5 cents per name. The rule also states that where there is an agent processing this data for the broker, the issuer will be expected to pay the reasonable expenses of the agent, but it does not specify what that amount would be. According to the Release, the NYSE understands that Broadridge has long charged a tiered amount per name: 10 cents per name for the first 10,000 names; 5 cents per name for 10,001 to 100,000 names; and 4 cents per name for amounts above that. In addition, there is a $100 minimum per requested list.
[14] The Release notes that Broadridge calls this service “Investor Mailbox.”
[15] The Release notes that in discussions with interested parties, “representatives of mutual funds did not value the proposal to the extent that other issuer representatives did. They doubted that fund investors would be as actively involved with a broker’s EBIP as would an investor in individual equities, and thus doubted they would see a meaningful increase in retail proxy voting as a result of a broker’s offering of an EBIP to account holders.” Release at 42.
[16] Id. at 44.
[17] Id. at 45-46.
[18] These fees have two components: 15 cents for basic processing and a 10 cent incentive fee.
[19] ICI is participating in this project.