Wednesday, May 23, 2012

NYSE Panel Urges Reform of Proxy Distribution Fee Structure; Proposal to SEC Expected

The NYSE Proxy Fee Advisory Committee has filed a report recommending changes to the fees paid by public companies to banks and brokers for the distribution of proxy materials to shareholders who hold their stock in street name.  Composed of issuers, broker dealers and investors, the PFAC was formed in September 2010 to review the existing proxy distribution fee structure and make recommendations for change. The NYSE will initiate discussions regarding the PFAC's recommendations with the SEC, after which the NYSE expects to submit a rule change proposal to the SEC reflecting the outcome of these discussions.
The goals of the Committee have been to support the current proxy distribution system, including continued support for the elimination of mailings; to facilitate active voting participation by retail beneficial owners; improve transparency of the fee structure and ensure that fees are as fair as possible and aligned with the work involved. Overall, the Committee urges the streamlining of proxy fees and making them more transparent to issuers.
Proxy distribution fees have been part of the NYSE's rules since 1937, and have been reviewed and changed periodically over that time, said Scott Cutler, Co-Head of U.S. Listings and Cash Execution and member of the Committee.  The NYSE has long operated under the assumption that these fees should represent a consensus view of the issuers and the broker-dealers involved. 
Specifically, the Committee recommends streamlining into three basic proxy fee categories: a nominee fee, a basic processing fee and a preference management fee. This is designed to increase transparency. The Committee seeks a gradual tiering of the basic processing fee to smooth the cliff effect that occurs between large and small issuers.  

The Committee also recommends reducing the preference management fees for managed accounts to half the normal rate, and eliminating processing fees for managed account positions of five shares or less. The processing fees for special meetings and contests would be modestly increased.

The Committee seeks to reduce by half the fee for annual meeting reminder notices, to support improved shareholder communication. The Notice & Access fees would be subjected to the proxy fee rules.

The PFAC also urged the NYSE to discuss the proposal to create an investor mailbox as a possible means to increase voting participation by retail shareholders with additional industry representatives so it can be determined whether the proposed "success fee" is at an appropriate level.  Finally, the Committee asks the NYSE to create an ongoing process to review proxy fees and services more frequently going forward.

It should be noted that the Committee's fee recommendations do not attempt to take into account potential changes to SEC rules that are discussed in the 2010 SEC Concept Release on the U.S. Proxy System, which has come to be known as the “Proxy Plumbing Release”.

Among the many issues discussed in the Release are proxy distribution fees, and the SEC said that it appears to be an appropriate time for SROs to review their existing fee schedules to determine whether they continue to be reasonably related to the actual costs of proxy solicitation.

SEC rules require brokerdealers and banks to distribute proxy material to beneficial owners, but the obligation is conditioned on their being assured of reimbursement of their reasonable expenses. The SEC has relied on stock exchange rules to specify the reimbursement rates, and it has been the NYSE rules that have established the standard used in the industry.

The Proxy Plumbing Release notes that it is a relatively simple process for an issuer to send proxy materials to registered owners of its securities because their names and addresses are listed in the issuer’s records, but the process of distributing proxy materials to beneficial owners is more complicated. Securities intermediaries such as banks and brokers hold securities for their customers, and there can be multiple layers of intermediaries for just one beneficial owner, presenting challenges in the distribution of proxy material.