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At the end of 2020, the NYSE lodged two important rule change filings with the SEC relating to proxy reimbursement fees payable by issuers to brokers. These are notable because they are the first changes to proxy reimbursement fees since 2013. While this is directly relevant to NYSE-listed companies, the NYSE's policy on proxy fees is influential across the market and therefore these changes may be of interest to all U.S.-listed companies.
If your company is listed on the NYSE, here is the information you need to know.
1. BROKER GIFTED SHARES
Synopsis: The first filing, SR-NYSE-2020-98, will prevent brokers from claiming reimbursement fees for soliciting proxies from and distributing materials to beneficial owners from issuers in certain specific circumstances, where customers have been ‘gifted' securities.
Context: Recently, some brokers have developed a practice of transferring a small number of securities to retail brokerage customers without charge, as a commercial incentive, e.g. at account opening or for referring a customer to the broker. This practice has resulted in some issuers experiencing a significant increase in the number of beneficial owners with very small positions, and as the rules require proxy reimbursement fees for all soliciting proxies from all beneficial owners, issuer costs have increased correspondingly.
What this means: The rule change will prevent the broker from charging issuers for proxy reimbursement fees related to beneficial owners whose entire positions in a security are gifted in this manner. Instead, brokers will have to bear the direct cost of proxy distribution and solicitation for such customers.
Our view: This is a positive development for issuers. We know from conversations with clients that this small, but important, change will be welcomed by some. In our view there is more to do to modernize the NYSE fee schedule to make it fair and equitable for the years ahead.
2. TRANSFERRING PROXY FEE SETTING TO FINRA
Synopsis: The second rule change filing, SR-NYSE-2020-96, will remove the NYSE from the fee-setting process entirely and transfer this role to the Financial Industry Regulatory Authority Inc. (FINRA), if adopted.
Context: For some time, the NYSE has informally indicated that it does not want to set fees for services between its key customers. Therefore, it is not surprising the NYSE seeks to step away from determining the fees payable for proxy reimbursements.
All NYSE member organizations (brokers) are members of FINRA, as are brokers that are not NYSE members but who also hold securities on behalf of street name holders. FINRA currently has largely equivalent rules to the NYSE in respect of proxy reimbursement fees. On this basis, the NYSE believes that FINRA is better positioned centrally to manage the fee-setting going forward.
Our view: This is a substantive policy change to the proxy fees process. While we fully appreciate the NYSE's interest and rationale, we are surprised by the timing of this proposed change now, amidst substantive industry discussions regarding broader proxy system changes. Computershare has made a submission to the SEC on the transfer of fee-setting to FINRA, highlighting our concerns with this proposal, particularly as the U.S. is in the midst of industry discussions on proxy reform.
The SEC requested that industry stakeholders establish a number of theme-specific proxy reform Working Groups, including a workstream on fees which commenced in 2019 An important topic of discussion for this working group is potential reform to allow issuers choice in putting street-name investor communications out to commercial tender, which could render the current mandated fee structure obsolete. The NYSE has played a longstanding, central role in this industry dialogue, given its representation of both issuers and brokers. We continue to believe its leadership will be critical to any transition to new arrangements.
In our response, we also question whether FINRA, as the body specifically responsible for brokers, is the appropriate body to intermediate between brokers and issuers in setting the proxy reimbursement fees.In a response by FINRA submitted to the SEC on January 11, 2021, the organization states that NYSE staff did not consult with or alert them that it intended to file this proposed rule amendment, and FINRA objected to the proposed change.
Next steps: We will continue to monitor this rule filing for the SEC's formal response. We also continue to represent our clients' interests regarding proxy fees and the broader U.S. proxy system through the SEC-initiated Working Groups.
If you have any questions, or wish to discuss your view, please contact Claire Corney, Senior Managing Director, Regulatory & Market Initiatives or your Relationship Manager.