
[Federal Register Volume 78, Number 36 (Friday, February 22, 2013)]
[Notices]
[Pages 12381-12397]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04092]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68936; File No. SR-NYSE-2013-07]


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

February 15, 2013.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the

[[Page 12382]]

``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that, 
on February 1, 2013, New York Stock Exchange LLC (``NYSE'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend 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. The text of the proposed rule change is available on the 
Exchange's Web site at www.nyse.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Proxy distribution fees have been part of the New York Stock 
Exchange's rules for many years, and have been reviewed and changed 
periodically over that time. The Exchange has long operated under the 
assumption that these fees should represent a consensus view of the 
issuers and the broker-dealers involved. In September 2010 the Exchange 
formed the Proxy Fee Advisory Committee (``PFAC'' or the ``Committee'') 
to review the existing fee structure and make such recommendations for 
change as the PFAC believed appropriate.
BACKGROUND
    The Exchange has been mindful for several years that a further 
review of the proxy fee rules would be useful. The Exchange's Proxy 
Working Group in 2007 noted a variety of fee-related issues, and the 
Exchange was aware of concerns expressed by various parties with an 
interest in the proxy distribution process. However, when the Exchange 
became aware that the Securities and Exchange Commission (``SEC'') was 
preparing a study of proxy-related issues, it judged it advisable to 
await the SEC's publication prior to initiating a formal review of the 
fees.
    On July 14, 2010 the Securities and Exchange Commission issued its 
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 that 
Release were proxy distribution fees, and the SEC stated 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.''\4\
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    \4\ SEC Release No. 34-62495; File No. S7-14-10, 75 Fed. Reg. 
42982 (July 22, 2010) at text following note 138.
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    As the SEC explained in the Proxy Plumbing Release,

    ``There are two types of security holders in the U.S.--
registered owners and beneficial owners.
* * * * *
    Registered owners (also known as `record holders') have a direct 
relationship with the issuer because their ownership of shares is 
listed on the records maintained by the issuer or its transfer 
agent.
* * * * *
    The vast majority of investors in shares issued by U.S. 
companies today are beneficial owners, which means that they hold 
their securities in book-entry form through a securities 
intermediary, such as a broker-dealer or bank. This is often 
referred to as owning in `street name.' A beneficial owner does not 
own the securities directly. Instead, as a customer of the 
securities intermediary, the beneficial owner has an entitlement to 
the rights associated with ownership of the securities.\5\''
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    \5\ Id. at text accompanying notes 23 to 31; footnotes omitted.

    As further noted in the Proxy Plumbing Release, SEC rules require 
broker-dealers and banks to distribute proxy material to beneficial 
owners, but the obligation is conditioned on their being asured [sic] 
of reimbursement of their reasonable expenses. The SEC has relied on 
stock exchange rules to specify the reimbursement rates,\6\ and it has 
been the rules of the NYSE that have established the standard used in 
the industry.
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    \6\ Id. at text accompanying notes 104-105. Note that although 
the rules of NYSE or any other exchange or FINRA apply only to 
members, who are all broker-dealers, the SEC has indicted [sic] that 
the fees provided in these self-regulatory organization rules should 
also be considered as appropriate reimbursement to banks for their 
distribution of proxy materials to their customers who are 
beneficial owners. See SEC Rule 14b-2(c)(3), and discussion in the 
SEC's 1986 adopting release, No. 33-15435 [sic], at text 
accompanying note 52. For this reason, when discussing proxy fees 
herein, we will at times refer to both banks and brokers, 
notwithstanding that NYSE rules do not apply to any entity not a 
member of the NYSE.
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    Since the 1980's, street name shareholding has proliferated, with 
estimates today that over 80% of publicly held securities are in street 
name.\7\ Over this time, banks and brokers have increasingly turned to 
third party service providers to coordinate most aspects of this 
process, from coordinating the beneficial owner search to arranging the 
delivery of proxy materials to the beneficial owners. In the lexicon of 
proxy distribution, the banks and brokers are referred to as 
``nominees'', and the third party service providers that coordinate the 
distributions for multiple nominees are referred to as 
``intermediaries''. At the present time, almost all proxy processing in 
the U.S. is handled by a single intermediary, Broadridge Financial 
Solutions, Inc. (``Broadridge'').\8\ Broadridge reported that during 
the year ended April 30, 2012 it processed over 12,000 proxy 
distribution jobs involving over 638 billion shares.\9\ Broadridge has 
estimated that in recent years it handles distributions to some 90 
million beneficial owners with accounts at over 900 custodian banks and 
brokers.\10\
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    \7\ See, e.g., Briefing Paper for 2007 SEC Roundtable on Proxy 
Voting Mechanics, available at www.sec.gov/spotlight/proxyprocess/proxyvotingbrief.htm.
    \8\ Other intermediaries competing with Broadridge are Proxy 
Trust (focuses on nominees that are trust companies), Mediant 
Communications and Inveshare, but their market share is relatively 
small. The Exchange is aware of one broker-dealer, FOLIOfn 
Investments, Inc., that provides proxy distribution to its accounts 
itself, without using the services of an intermediary.
    \9\ Broadridge 2012 Proxy Season Key Statistics & Performance 
Rating, available at www.broadridge.com/Content.aspx?DocID-1498. The 
Commission notes the link is http://media.broadridge.com/documents/Broadridge_2012_Proxy_Season_Stats_Presentation.pdf.
    \10\ Comment letter on Proxy Plumbing Release from Charles V. 
Callan, Broadridge, October 14, 2010.
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    Based on information from Broadridge, the PFAC estimated that

[[Page 12383]]

issuers spend approximately $200 million in aggregate on fees for proxy 
distribution to street name shareholders during a year. This does not 
count the amounts spent on printing and postage for those street name 
distributions that are not made electronically--the PFAC observed that 
those costs are typically estimated to be more than double the amount 
spent on proxy fees, demonstrating why efforts to suppress physical 
mailings are so important from a cost perspective. The cost incurred by 
any given issuer varies widely depending on how broadly its stock is 
held, and the extent to which physical mailings to its shareholders 
have been eliminated. Again based on information from Broadridge, among 
the issuers represented on the PFAC, the smallest spent some $8,500 on 
proxy fees in the most recent (2012) proxy season, while the largest 
spent approximately $1.1 million. Among another representative group of 
issuers used by the PFAC for study purposes, the smallest paid 
approximately $10,000 in proxy fees this year, while the largest spent 
approximately $2 million. Overall Broadridge estimated that in its most 
recent fiscal year issuers owned by 100,000 or fewer street name 
accounts paid approximately 38% of all street name fees, issuers owned 
by 100,001 to 500,000 accounts paid approximately 30% of such fees, 
with 32% paid by issuers owned by more than 500,000 street name 
accounts.
    Since 1937 the NYSE has specified the level of reimbursement which, 
if provided to the member broker-dealers, would obligate them to effect 
the distribution of proxy materials to street name holders, and those 
rates have been revised periodically since then. The last, and most 
far-reaching, revision was finalized in 2002. It was the culmination of 
a multi-year, multi-task force effort that began in 1995, and attempted 
to both recognize and encourage significant changes in computer 
technology that permitted more efficient, and increasingly paperless, 
distribution of proxy material.
    The proxy distribution fees that emerged from that effort and 
remain in effect include:

     A basic processing fee of 40 cents for each account 
beneficially owning shares in the issuer that is distributing proxy 
material.
     A flat nominee fee of $20 per nominee served by an 
intermediary.\11\
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    \11\ As noted above, a ``nominee'' is a bank or broker in which 
a beneficial owner has an account, and an ``intermediary'' is a 
third party that coordinates proxy distributions for multiple 
nominees.
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     An additional fee to compensate the intermediary based 
on the number of accounts at nominees served by the intermediary 
that beneficially own shares in the issuer.
     5 cents per account for issuers owned by 200,000 or 
more street name accounts.
     10 cents per account for issuers owned by fewer than 
200,000 street name accounts.
     An incentive fee that applies whenever the need to mail 
materials in paper format to an account has been eliminated.
     25 cents per account for issuers owned by 200,000 or 
more street name accounts.
     50 cents per account for issuers owned by fewer than 
200,000 street name accounts.\12\

    \12\ The incentive fee is in addition to the other fees, so that 
even if a paper mailing is suppressed, the basic processing fee and 
all the intermediary fees still apply. This is explained in the 
SEC's Proxy Plumbing Release (see note 4, supra) at footnote 120. 
Suppression of mailing eliminates the postage costs for the issuer, 
but not these processing-related fees. The rules proposed in this 
filing will rename ``incentive fees'' as ``preference management 
fees,'' but the concept remains the same as today and the preference 
management fees are in addition to, and not in lieu of, the other 
processing and intermediary fees.
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    The creation of a nominee fee, of an incentive fee for mailing 
suppression, and of fee differentiation between large and small issuers 
to recognize the economies of scale available in serving the former, 
are all elements that emerged from the review process that began in 
1995 and culminated in 2002.\13\
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    \13\ For many years the NYSE proxy fee rules subjected all 
issuers to the same rates. However, when the last changes were 
approved in 2002, the rules began to differentiate between ``Large 
Issuers'' and ``Small Issuers.'' This was because it was determined 
that economies of scale existed for many of the tasks of processing 
material for distribution, and for collecting voting instructions. 
Those analyzing the situation at that time found that the actual 
cost of proxy distribution incurred with respect to large issuers 
was lower than the specified fees, whereas the actual cost for 
handling small issuers far exceeded the fees provided in the NYSE 
rules. SEC Release 34-45644 (SR-NYSE-2001-53, March 25, 2002).
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    The proxy fees were also the subject of a partial review in the 
middle of this last decade, although no change was made at that time. A 
Proxy Working Group (``PWG'') was created by the NYSE in 2005, composed 
of a diverse group of individuals from issuers, broker-dealers, the 
legal community and investors. It focused on several different aspects 
of the proxy process, particularly the NYSE rules on when brokers may 
vote shares for which no voting instructions were received from the 
beneficial owner. However, the PWG also looked at whether the NYSE 
rules on proxy distribution fees should be made applicable to the SEC's 
then new ``e-proxy'' system (today referred to as ``notice and 
access''), and concluded that as an initial matter, they should not. In 
part, the PWG believed it was appropriate to allow some time during 
which market forces might create a consensus regarding the appropriate 
kind and level of fees under the new e-proxy rules.
    The PWG Reports are referenced in the Concept Release, and the 
general concerns over proxy distribution fees that were voiced to the 
PWG are similar to those outlined in the Concept Release.\14\
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    \14\ It is important to understand that some of the concerns 
expressed about the proxy distribution process are not within the 
purview of the Exchange to address. Issues have been raised as to 
whether beneficial owners should continue to be able to be Objecting 
Beneficial Owners, or OBOs, and whether there should be a central 
data aggregator for beneficial owner information that would enable 
issuers to distribute proxy materials directly to beneficial owners 
rather than through the bank and broker nominees. However, today's 
distribution regimen is established by the securities laws and the 
SEC, and the Exchange does not have the power to alter it.
    The Exchange notes also that, in its comment letter on the Proxy 
Plumbing Release, the Exchange stated that it would welcome a 
movement away from utilizing SRO rules to set the default proxy 
distribution fees. While NYSE has had a long history as an innovator 
and important source of rules for the U.S. proxy process, the SEC 
has long since taken over the field as the source of regulation for 
that process. The Exchange believes that the much reduced role of 
exchanges in proxy regulation means that they may no longer be the 
best source of rulemaking in the proxy fee area.
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    The Exchange brought together the Proxy Fee Advisory Committee 
composed of representatives of issuers, broker dealers and investors to 
review the current rules and how they are applied, and the Committee 
met with a wide variety of participants in the proxy process to gather 
information on what is necessary to efficiently and effectively 
distribute proxy material to street name shareholders and collect their 
votes. The Committee began its work in October, 2010, and provided its 
Report and recommendations to the NYSE on May 16, 2012. The Committee's 
Report may be found at https://usequities.nyx.com/sites/usequities.nyx.com/files/final_pfac_report.pdf.\15\
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    \15\ The members of the Committee are listed in its Report.
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Analysis and Recommendations
    As noted above, the obligation of brokers and banks to distribute 
proxy material to beneficial owners is conditioned on their being 
assured of reimbursement of their reasonable expenses, and the SEC 
relies on exchange rules to specify those reimbursement rates. NYSE 
Rule 451 states that ``The Exchange has approved the following as fair 
and reasonable rates of reimbursement of member organizations for all 
out-of-pocket expenses, including reasonable clerical expenses, 
incurred in connection with proxy solicitations pursuant to Rule 451 
and in mailing interim reports or other

[[Page 12384]]

material pursuant to Rule 465.'' As the Committee noted in its report, 
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.\16\
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    \16\ See, for example, SEC Release No. 34-45644, March 25, 2002 
(SR-NYSE-2001-53); SEC Release No. 34-38406, March 24, 1997 (SR-
NYSE-96-36); and SEC Release No. 34-21900, March 28, 1985 (SR-NYSE-
85-2).
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    Although the NYSE rules speak in terms of reimbursing brokers for 
their reasonable expenses, it appears self-evident that this was never 
feasible on an individual brokerage firm basis given that the rules 
provided one price to be used by a multiplicity of firms providing 
services, each with presumably different costs. That issue continued 
even after services were almost all centralized in one outsourced 
service provider, Broadridge. This is so because each firm continued to 
have some workload of its own, and each firm negotiated its own, arms-
length agreement with Broadridge, and so had outsourcing costs that 
differed from firm to firm. In addition, the introduction of incentive 
fees in the late 1990s established that ``fair and reasonable rates of 
reimbursement'' encompassed rates that were not associated with a 
specified level of costs, but rather were considered adequate to 
encourage the development of systems that would lead to the elimination 
of physical delivery.
    Given this state of facts, the Committee took the view that the 
NYSE proxy fee rules do not lend themselves to ``utility rate-making,'' 
where the specific costs of a process are analyzed and rates revised 
periodically to permit a specified ``rate of return.''
    However, the Committee did what it could to engage in a review that 
would in certain ways approximate such a process. It looked first at 
publicly available financial information on Broadridge, which is a 
public SEC-reporting company. Unfortunately for this analytical 
purpose, Broadridge has several business lines other than street name 
proxy distribution, and it does not isolate costs and revenues from the 
street name proxy distribution business in any of its publicly reported 
numbers. There were several analyst reports available on Broadridge 
that discussed the segment in which Broadridge includes this activity, 
which Broadridge refers to as its Investor Communications Solutions 
segment, or ICS.\17\ Broadridge has reported flat to declining margin 
in this segment over the last four years, from 16% in fiscal 2008 to 
14.9% for fiscal 2012.
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    \17\ Broadridge's ICS revenues combine the street name and 
registered proxy businesses. This also includes both U.S. and non-
U.S. public companies, but we assume that the non-U.S. company 
income is a relatively small part of the whole. Broadridge 
separately reports its fee revenue from mutual fund proxy statement 
and report distribution.
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    The Committee also took note of the fact that since the fees were 
last changed in 2002, there has been an effective decline in the fees 
of approximately 20%, given the impact of inflation. Indeed, the 
nominee coordination fee dates from 1997, and so has been eroded 
approximately 29% by inflation since that time.\18\ Broadridge pointed 
out to the PFAC that while the fees paid to nominees for proxy 
distribution have remained unchanged, other costs incurred by various 
entities in activities related to proxy distribution have increased by 
various amounts over approximately the same period--bulk rate postage 
by an estimated 38%, printing costs 12%, electricity 60%, and overall 
IT expenditures by financial services entities, 59%.\19\
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    \18\ Based on the Bureau of Labor Statistics Consumer Price 
Index All Urban Consumers (CPI-U), U.S. city average, all items, 
1982-84=100, annual average figures for 2011 (224.939), 2002 (179.9) 
and 1997 (160.5). Available at ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt.
    \19\ Data cited by Broadridge in support of these figures are: 
For postage--Effective 6/30/02: standard A ``bulk'' flat @$0.552; 
first class letter @$0.37. Effective 4/17/11: standard A ``bulk'' 
flat @$0.761 and first class letter @$0.44. For printing--NIRI 
biennial surveys; median cost @$4.32 (2004) and $4.82 (2010). For 
electricity--Bureau of Labor Statistics, Consumer Price Index--
Average Price Data, New York-Northern New Jersey-Long Island, NY-NJ-
CT-PA, Electricity per KWH, 2002 to 2011. For overall IT 
expenditures--Gartner Group, ``Financial Services Market Regains 
Momentum: Forecast Through 2006'', February 2003. Gartner Group, 
``Forecast: Enterprise IT Spending for the Banking and Securities 
Market, Worldwide, 2009-2015, 3Q11 Update, October 2011.
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    After fact gathering and analysis, the Committee focused on a set 
of recommendations intended to serve several basic goals:

     To support the current proxy distribution system, given 
that it provides a reliable, accurate and secure process for 
distributing proxy materials to street name stockholders. It is also 
important that the fee structure continues to encourage cost savings 
through reducing printing, postage and physical handling of proxy 
materials.
     To encourage and facilitate active voting participation 
by retail street name shareholders.
     To improve the transparency of the fee structure, so 
that it is not only clearer to issuers what services they are paying 
for, but also that fees are consistent with the type and amount of 
work involved. Updating the terminology used in the rule will be a 
part of this effort. For example, ``incentive fees'' will be called 
``preference management fees,'' to better describe the work 
involved. It is also important for transparency that the rules be 
structured to avoid undue complexity.
     To ensure the fees are as fair as possible, reflecting 
to the extent possible both economies of scale in processing, and 
sensitivity to who (issuer or broker) benefits from the processing 
being paid for. In the course of its review the Committee addressed 
several of the issues that were singled out in the SEC's Proxy 
Plumbing Concept Release, notably the fees charged in connection 
with managed accounts, and the fees charged for utilizing notice and 
access.

    The changes proposed herein reduce some fees and increase others, 
and Broadridge estimated for the PFAC that overall fees paid by issuers 
will decrease by approximately four percent. The Committee also focused 
on whether the new recommended fees appear to be aligned with the work 
effort to which the fees relate. At the Committee's request, Broadridge 
analyzed the work effort across the several tasks involved in proxy 
distribution. The Committee observed that this analysis confirmed that 
fees and work effort appeared to be roughly in line.
    The following is an outline description of the various 
recommendations and the rationale for the changes proposed.

Basic Fees

    This category includes both a per-nominee fee and two separate per-
account fees.
    Nominee Fee: The nominee fee is currently $20 per nominee (bank or 
broker) served by an intermediary (e.g., Broadridge). As noted earlier, 
this $20 fee has not changed since its implementation in 1997, and has 
been eroded by some 29% by inflation since that time. In addition, 
while not required under the current rule, it has been Broadridge's 
longstanding practice to only charge this amount for a nominee that 
responds to a search request with an indication that it does have at 
least one account holding the issuer's stock. This is so 
notwithstanding that for each meeting or distribution Broadridge makes 
inquiry of all nominees whether they hold any of the particular 
security involved. Broadridge notes that while they serve some 900 
nominees, the average issuer is held by approximately 100 nominees.
    In order to compensate for the impact of inflation and to better 
align this fee with what the PFAC understood to be the work involved, 
it is recommended that the basic per-nominee fee be increased to $22, 
but that the rule

[[Page 12385]]

specify that it applies only to nominees with at least one account 
holding the issuer's stock.
    The PFAC Report had recommended that the rule also provide for a 
charge of 50 cents per nominee for those solicited who indicated no 
holdings of the stock involved, with a cap of $100 for the smallest 
issuers. Subsequent to publication of the PFAC Report, figures from the 
2012 proxy season became available from Broadridge. Given changes to 
the issuer population between 2011 and 2012 seasons 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. Accordingly, the additional 50 
cents charge for each nominee reporting zero positions has been 
eliminated. In addition, the basic processing fees are reduced somewhat 
from those proposed in the PFAC Report.
    Per-account Fees: The two separate per-account fees are the basic 
processing fee, and the ``intermediary unit fee'', which is, in 
addition to the nominee fee described above, intended as compensation 
to the intermediary for its work in coordinating among multiple 
nominees.
    As did its predecessor Committee in the 1990's, the PFAC believed 
that economies of scale exist when handling distributions for more 
widely held issuers. While the current fees attempt to reflect this in 
the intermediary unit fee, they do not in the basic processing fee, and 
the PFAC believed both fees should be structured to recognize the 
existence of economies of scale.
    However, the PFAC was also concerned with the way the current fees 
approach this issue, with a simple binary distinction between Large and 
Small Issuers, where the Large Issuer pays a reduced rate on all 
accounts holding its securities, not just those over a specified 
number. This ``cliff'' pricing schedule means that there can be a 
significant difference in the overall price paid by issuers held by 
199,000 street name accounts versus those held by 201,000 accounts. 
Furthermore, companies that are close to this line may find themselves 
on different sides of it from one year to the next, creating 
undesirable volatility in the prices paid for proxy distribution from 
year to year.
    It is primarily for this reason that the Committee recommended 
moving away from the binary Large/Small Issuer distinction, and 
utilizing a group of five true tiers for the basic per-account fees. In 
this way, every issuer will pay the tier one rate for the first 10,000 
accounts, for example, with decreasing rates calculated only on 
additional accounts in the additional tiers. Modest changes in 
shareholder population will no longer have the possibility of producing 
material changes in overall costs, and the sliding scale of rates will 
better approximate the sliding impact of economies of scale. The 
creation of true tiers in the pricing schedule will continue to 
recognize the existence of economies of scale in processing 
distributions for issuers with numerous accounts holding their 
securities in street name, but do it in a way that is more nuanced and 
thus fairer to all than the current approach.\20\
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    \20\ We note that even under the current ``Large/Small issuer'' 
distinction, a question has been raised whether brokers that do not 
use an intermediary, or that use an intermediary other than 
Broadridge, are entitled to bill at the ``Small issuer'' rate when 
they serve fewer than 200,000 accounts holding the issuer's stock, 
even though the issuer is held by far more than 200,000 accounts 
when all street name accounts at all nominees are considered. Given 
that the rates are based on the cost effectiveness of serving large 
numbers of accounts, logically the rate applied should be based on 
the number of accounts served by the particular intermediary (or 
nominee, if it does not use an intermediary). Because Broadridge 
serves such a large portion of the whole, the impact of allowing the 
smaller providers to bill at the higher rates is minimal, both 
overall and for any given issuer. For this reason the Committee was 
content to have the rules interpreted in this fashion. The Committee 
noted that this would bear re-examination if the processing task 
should come to be spread more evenly among a number of 
intermediaries.
     Accordingly, the fee charged a particular issuer by an 
intermediary (or a nominee not using an intermediary) will depend on 
the number of accounts holding shares in that issuer that are served 
by the intermediary (or nominee) involved. For example, an issuer 
with a large number of beneficial shareholders might pay charges to 
Broadridge that reflect the progressive application of the rates in 
all five tiers, while its invoice from another intermediary serving 
a comparatively small number of accounts might charge for all those 
accounts at the tier one rate.
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    The tiers and the pricing for each tier were organized in a way 
that is intended to spread the fees as fairly as possible across the 
spectrum of issuers, and to spread the fees among issuers in three size 
ranges similar to that which pertains under the current fee rule, which 
is described above. In determining the fees applicable to each tier, 
however, the Committee was sensitive to the fact that an attempt to 
fully reflect the economies of scale would result in excessive 
increases in the rates paid by the smallest issuers, and the Committee 
considered such an outcome inappropriate. Indeed, it was an operating 
principle for the Committee that it wished to avoid recommendations 
that would generate large and potentially dislocating changes in the 
fees or in the impact of the fees on broad categories of brokers or 
issuers.
    In addition to being tiered to better reflect economies of scale in 
processing issuers with a larger number of accounts, both the basic 
processing fee and the 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. Especially 
relevant to the intermediary unit fee, the work of the intermediary has 
been enhanced over time, responding to the needs of all participants--
issuers, banks and brokers, and investors--in addition to responding to 
changing regulatory requests.\21\
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    \21\ An example is the work required to accommodate the four 
voting choices necessitated by the Dodd-Frank requirements for say-
when-on-pay votes. See SEC Release No. 33-9178, January 25, 2011, at 
text accompanying note 127, and Broadridge's November 19, 2010 
comment letter on the related proposing release, available at http://www.sec.gov/comments/s7-31-10/s73110-55.pdf. Another example is the 
significant work already done on end-to-end vote confirmation. See 
descriptions in Report of Roundtable on Proxy Governance: 
Recommendations for Providing End-to-End Vote Confirmation, 
available at http://www.sec.gov/comments/s7-14-10/s71410-300.pdf. 
See also description in Broadridge's October 6, 2010 comment letter 
on the Proxy Plumbing Release, available at http://www.sec.gov/comments/s7-14-10/s71410-62.pdf.
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    While the rules will continue to differentiate between these two 
types of per-account processing fees, the Committee recommended that 
issuers be invoiced in a way that combines these two per-account 
processing fees for ease of understanding. The increases to these 
processing fees are estimated to add approximately $9-10 million to 
overall proxy distribution fees, although that should be considered in 
connection with the estimated $15 million reduction in fees associated 
with the proposal to charge preference management fees related to 
managed accounts at half the regular rate, which is discussed below.
    The new proposed basic processing and intermediary unit fees are as 
follows:
    (a) Definitions: For purposes of this rule
    (i) The term ``nominee'' shall mean a broker or bank subject to SEC 
Rule 14b-1 or 14b-2, respectively.
    (ii) The term ``intermediary'' shall mean a proxy service provider 
that coordinates the distribution of proxy or other materials for 
multiple nominees.
    (b) (i) For each set of proxy material, i.e., proxy statement, form 
of proxy and annual report when processed as a unit, a Processing Unit 
Fee based on the following schedule according to the number of nominee 
accounts through

[[Page 12386]]

which the issuer's securities are beneficially owned:
    50 cents for each account up to 10,000 accounts;
    47 cents for each account above 10,000 accounts, up to 100,000 
accounts;
    39 cents for each account above 100,000 accounts, up to 300,000 
accounts;
    34 cents for each account above 300,000 accounts, up to 500,000 
accounts;
    32 cents for each account above 500,000 accounts.

    To clarify, under this schedule, every issuer will pay the tier one 
rate for the first 10,000 accounts, or portion thereof, with decreasing 
rates applicable only on additional accounts in the additional tiers. 
References in this Rule 451 to the number of accounts means the number 
of accounts in the issuer at any nominee that is providing distribution 
services without the services of an intermediary, or when an 
intermediary is involved, the aggregate number of nominee accounts with 
beneficial ownership in the issuer served by the intermediary.
    (ii) In the case of a meeting for which an opposition proxy has 
been furnished to security holders, the Processing Unit Fee shall be 
$1.00 per account, in lieu of the fees in the above schedule.
    (c) The following are supplemental fees for intermediaries:
    (i) $22.00 for each nominee served by the intermediary that has at 
least one account beneficially owning shares in the issuer;
    (ii) an Intermediary Unit Fee for each set of proxy material, based 
on the following schedule according to the number of nominee accounts 
through which the issuer's securities are beneficially owned:
    14 cents for each account up to 10,000 accounts;
    13 cents for each account above 10,000 accounts, up to 100,000 
accounts;
    11 cents for each account above 100,000 accounts, up to 300,000 
accounts;
    9 cents for each account above 300,000 accounts, up to 500,000 
accounts;
    7 cents for each account above 500,000 accounts.
    To clarify, under this schedule, every issuer will pay the tier one 
rate for the first 10,000 accounts, or portion thereof, with decreasing 
rates applicable only on additional accounts in the additional tiers.
    (iii) For special meetings, the Intermediary Unit Fee shall be 
based on the following schedule, in lieu of the fees described in (ii) 
above:
    19 cents for each account up to 10,000 accounts;
    18 cents for each account above 10,000 accounts, up to 100,000 
accounts;
    16 cents for each account above 100,000 accounts, up to 300,000 
accounts;
    14 cents for each account above 300,000 accounts, up to 500,000 
accounts;
    12 cents for each account above 500,000 accounts.
    To clarify, under this schedule, every issuer will pay the tier one 
rate for the first 10,000 accounts, or portion thereof, with decreasing 
rates applicable only on additional accounts in the additional tiers. 
For purposes of this subsection (iii), a special meeting is a meeting 
other than the issuer's meeting for the election of directors.
    (iv) In the case of a meeting for which an opposition proxy has 
been furnished to security holders, the Intermediary Unit Fee shall be 
25 cents per account, with a minimum fee of $5,000.00 per soliciting 
entity, in lieu of the fees described in (ii) or (iii) above, as the 
case may be. Where there are separate solicitations by management and 
an opponent, the opponent is to be separately billed for the costs of 
its solicitation.

Incentive (Preference Management) Fees

    The incentive fees generally appear to have been quite worthwhile 
for the issuers who pay the proxy distribution fees.\22\ Broadridge 
reports that the percent of mailings eliminated has grown steadily 
since incentive fees were first instituted in 1998, reaching 60% of all 
accounts processed in the 2012 proxy season.\23\ In contrast, only 8% 
of mailings were eliminated in 1998, growing to 27% for the 2002 
season.\24\ Broadridge estimates that corporate issuers saved over $522 
million in postage and printing costs in the 2012 season.\25\
---------------------------------------------------------------------------

    \22\ As noted in footnote 12 above, these fees, both currently 
and as proposed to be amended, are in addition to, and not in lieu 
of, the other proxy distribution fees.
    \23\ Broadridge 2012 Proxy Season Key Statistics & Performance 
Rating, available at www.broadridge.com/Content.aspx?DocID=1498. The 
Commission notes the link is http://media.broadridge.com/documents/Broadridge_2012_Proxy_Season_Stats_Presentation.pdf.
    \24\ Estimates provided by Broadridge to the Committee.
    \25\ See report cited in note 23, supra.
---------------------------------------------------------------------------

    In addition to considering what the amount of this fee should be, 
the Committee examined two specific issues that have engendered comment 
regarding how the incentive fee has been applied.
    The first is the ``evergreen'' nature of the fee. As noted in the 
SEC's Proxy Plumbing Release, questions have been raised as to whether 
it is appropriate to charge an incentive fee not only in the year when 
electronic delivery is first elected, but also in each year thereafter. 
In its Proxy Plumbing Release the SEC posits that ``the continuing role 
of the securities intermediary, or its agent, in eliminating these 
paper mailings is limited to keeping track of the shareholder's 
election.'' \26\
---------------------------------------------------------------------------

    \26\ Proxy Plumbing Release at text accompanying note 134.
---------------------------------------------------------------------------

    In discussing this issue with brokerage firms and with Broadridge, 
the Committee was persuaded that there was in fact significant 
processing work involved in ``keeping track of the shareholder's 
election,'' especially given that the shareholder is entitled to change 
that election from time to time. Although few do change their election, 
data processing has to look at each position relative to each meeting 
or distribution event to determine how the ``switch'' should be set. 
Data management requires ongoing technology support, services and 
maintenance, and is a significant part of the total cost of eliminating 
paper proxy materials. Even if there is some additional effort involved 
in the year an election is actually made (or changed), the Committee 
did not find a simple, rational way to construct different prices for 
``change'' versus ``maintenance'' of elections.\27\
---------------------------------------------------------------------------

    \27\ For example, a choice to eliminate mailings is often made 
by an investor for a number of different holdings in the account. 
How to fairly apportion a front-loaded fee among different issuers, 
who may have different numbers or types of distributions in the year 
the election is made, was one of the challenges presented. And 
clearly, a change to a one-time fee would radically impact the 
overall revenue produced by the proxy fees, presumably requiring at 
least some compensating increases to the ``one-time'' fee or to 
other proxy fees.
---------------------------------------------------------------------------

    The Committee found that a significant part of the work involved 
was in ``maintaining'' or ``managing'' the preferences attached to each 
account position regarding distribution, both for householding and 
eliminating paper delivery entirely. Thus the name used for the fee 
under the current rules--``incentive fee''--was part of the problem, 
since it implied that the work was finished once an election had been 
made. This is why the Committee believes that transparency and 
understanding will be served by identifying this kind of fee as a 
``preference management'' fee.
    The other issue to which the Committee devoted considerable time is 
how this fee is applied to positions that are part of managed accounts. 
At least

[[Page 12387]]

in recent years this appears to be the most contentious of all the 
issues raised by those critical of the current fees.\28\
---------------------------------------------------------------------------

    \28\ Proxy Plumbing Release at text accompanying note 135. See 
also STA/SSA Petition to the SEC re Managed Account Fees, March 12, 
2012, www.stai.org/pdfs/2012-03-12-sta-ssa-joint-letter.pdf.
---------------------------------------------------------------------------

    While, as noted above, mailing eliminations have steadily increased 
since the incentive fees were implemented, eliminations resulting from 
elections made by investors holding an issuer's securities through 
managed accounts have consistently represented a significant portion of 
the whole. Figures supplied by Broadridge indicate that managed 
accounts have accounted for about 60% of eliminations for most years 
since 2002, falling a bit after 2008 to be some 49% of all eliminations 
in 2012.\29\
---------------------------------------------------------------------------

    \29\ Based on information supplied by Broadridge, the most 
steadily growing category of eliminations over the years has been 
consents to electronic delivery.
---------------------------------------------------------------------------

    Eliminations in the managed account context occur not because an 
investor has consented to have distributions come to him or her 
electronically, but because the investor has elected to delegate the 
voting of shares (and typically, the receipt of materials) to a broker 
or investment manager, and the broker or manager quite naturally 
prefers to manage the process electronically rather than by receiving 
multiple paper proxy statements and voting instructions. That the 
investor makes this election is often described as a rational result of 
the fact that in a managed account the investments are selected by the 
manager rather than the investor, and the investor looks to the manager 
not only to know whether or when to buy or sell a stock, but how to 
vote the shares as well.\30\
---------------------------------------------------------------------------

    \30\ See, for example, discussion in SEC Release No. 34-34596, 
August 31, 1994, approving NYSE rule change allowing delivery of 
proxy material to investment advisers that have been delegated the 
authority to vote securities in the account.
---------------------------------------------------------------------------

    Here the fact that the fee has been described as an ``incentive'' 
fee has probably impacted the view on whether application of the fee in 
this context is appropriate. Once the investor determines to open a 
managed account, the incentive to delegate voting flows naturally from 
the nature of the account, rather than from any specific effort made by 
an intermediary or its agent.
    However, the maintenance of the preference is as necessary here as 
it is in any other election, such as consent to e-delivery. SEC rules 
applicable to managed accounts require that each beneficial owner be 
treated as the individual owner of the shares attributed to his or her 
account, and that includes having the ability to elect to vote those 
shares and receive proxy materials.\31\ Accordingly, each beneficial 
owner's election must be tracked--just as is the case with an investor 
in a non-managed account.
---------------------------------------------------------------------------

    \31\ Investment Company Act Rule 3a-4(a)(5)(ii).
---------------------------------------------------------------------------

    As a general matter then, the elimination of preference management 
fees for all managed accounts appeared unreasonable. However, the 
Committee did conclude that making some distinctions between managed 
accounts and non-managed accounts for fee purposes was appropriate.
    Literature on managed accounts indicates they are intended to offer 
professional portfolio management services with more investment, tax 
management and fee customization than is available in comingled 
products such as mutual funds. They have existed since at least the 
1970s, and have been growing significantly as an investment style since 
at least the early 1990s.\32\ They are a product class that is 
followed, studied, analyzed broadly and popularized by many different 
brokerage firms and investment advisors.\33\
---------------------------------------------------------------------------

    \32\ See ``The History of Separately Managed Accounts,'' 
www.mminst.org/archive/multimedia/Timeline.pdf. The Commission notes 
the link is http://www.moneyinstitute.com/downloads/2008/02/connections-mmi_5-01-07-1.pdf.
    \33\ See, for example, ``Understanding Separately Managed 
Accounts,'' Madison Investment Advisors, Inc., 
www.concordinvestment.com/docs/SMA.pdf.
---------------------------------------------------------------------------

    Their increasing popularity demonstrates that the managed account 
is a product that offers significant advantages both to investors, and 
to the brokerage firms offering this kind of account.
    At the same time, it seems clear that issuers also reap some 
benefit from inclusion in managed account portfolios. Most obviously, 
of course, the issuer benefits from the added investment in the 
company's stock. In addition, the fact that almost all managed account 
investors delegate voting to the investment manager results in those 
stocks being voted at a rate far higher than is stock that is held in 
ordinary retail accounts. This simplifies obtaining a quorum for 
stockholder meetings, reducing proxy solicitation expenses.
    Interestingly, then, this is the one source of mailing eliminations 
that is a benefit to both the issuer and the brokerage firm--in 
contrast to ordinary consents to e-delivery or householding, which 
appear to benefit only the issuer.
    It is this unique attribute of the managed account that suggested 
to the Committee that it would be most fair, and most reasonable, for 
issuers and brokers to share the cost of the admittedly real processing 
work that is done to track and maintain the voting and distribution 
elections made by the beneficial owners of the stock positions in the 
managed account. It is for this reason that the Committee recommended 
and the Exchange is proposing that preference management fees for 
managed accounts be charged to issuers at a rate that is half that of 
other preference management fees.
    Beyond this, however, there is another phenomenon that has emerged 
from the trend towards managed accounts that the Committee believed 
must be addressed--and this is the proliferation of accounts containing 
a very small number of an issuer's shares that can be found when a 
managed account is offered with a relatively low investment minimum.
    Most managed accounts are targeted to wealthy investors, with 
minimum investment requirements of at least $100,000, up to $1 million 
or more for certain of these accounts. However, as managed accounts 
became increasingly popular, and data processing became more 
sophisticated, some firms have found it feasible, and presumably 
profitable, to offer a managed account product to a class of investor 
with a more modest amount of money to invest. Obviously, if you spread, 
say, $25,000 over a large portfolio of investments, some of those 
positions, especially holdings in the companies with modest weightings 
in the portfolio, will contain relatively few shares, or even 
fractional share positions. In recent years firms with offerings of 
this nature have become more popular, with the result that some issuers 
have noted significant increases in the incentive fees attributable to 
firms with very small aggregate holdings of their shares.
    The Exchange understands that this kind of issue had in fact been 
considered in the mid-1990s when the incentive fees were being 
formulated. While the managed account product was not as widespread as 
it is today, one firm did market a managed account product with a 
relatively low minimum investment which the firm called a ``Wrap 
Account''. It was the tendency of these accounts to have many very 
small, even fractional share positions that led to the practice 
followed by Broadridge to process ``Wrap Account'' positions without 
any charge--either for basic processing or incentive fees. However, 
Broadridge relied on its client firms to specify whether or not an 
account should be treated as a ``Wrap Account'' for this purpose, and 
positions in small minimum investment managed accounts which were not 
marketed with that

[[Page 12388]]

appellation were subjected to ordinary fees, including incentive fees. 
This has produced the anomalous results, and issuer concerns, described 
above.
    In the view of the Committee, the question was what is fair and 
reasonable in this context. The Committee noted one issuer that 
reportedly found its total number of investor accounts more than 
doubled when it was included in the portfolios managed by one of these 
firms offering low-minimum investment accounts. This was despite the 
fact that these additional accounts held in the aggregate only .017% of 
the issuer's outstanding stock--an amount of stock that was in the 
aggregate less than one share for each account at the firm. 
Nonetheless, because of the incentive fees charged for these tiny stock 
positions, the issuer's total bill for street name proxy distribution 
more than doubled.
    Clearly in such a situation the benefits of increased stock 
ownership and increased voting participation were as a practical matter 
nonexistent for the issuer, while the added expense on a relative basis 
was extraordinary.
    Accordingly, the Committee considered it most appropriate to 
preclude the charging of proxy processing fees for managed accounts 
holding very small numbers of shares in the issuer involved.
    To determine where to set the limit, the Committee first looked at 
information supplied by Broadridge showing that among managed account 
positions between 1 and 500 shares (89% of all managed account 
positions), the average position size was 91 shares, and the median 
position size was approximately 50 shares.
    While the benefit to an issuer is obviously on a continuum--more 
for larger holders, less for smaller holders--the Committee looked for 
an appropriate break point. Because one of its goals was to avoid 
severe impacts on proxy distribution in the U.S., the Committee looked 
at the estimated financial impact of eliminating proxy fees for managed 
accounts holding less than a certain number of shares. Based on 
information supplied by Broadridge from the 2011 proxy season, the 
overall impact varied from approximately $2.6 million at the fractional 
(less than one) share level, up to approximately $16 million if the 
proscription applied to accounts holding 25 shares or less.
    After due consideration, the Committee determined that managed 
account holdings of five shares or less was an appropriate level at 
which to draw the line. The overall impact on proxy revenue was modest 
(approximately $4.2 million), and the benefit to issuers of holdings of 
five or fewer shares in a managed account is limited.\34\ Put another 
way, the Committee was comfortable with the position that, given the 
relative benefit/burden on issuers and brokerage firms, it is not 
reasonable to make issuers reimburse the cost of proxy distribution to 
managed accounts holding five shares or less.\35\
---------------------------------------------------------------------------

    \34\ Five shares or less will also represent a very modest 
monetary investment in almost any public company, with the exception 
of a stock with an extraordinarily high price, such as Berkshire 
Hathaway A.
    \35\ Estimates supplied by Broadridge also demonstrated that a 
model that included this proscription would reduce by some 42% the 
fees paid by the issuer whose fees had doubled when it entered the 
portfolios of the low minimum investment managed account provider 
described above. This suggests that this level is appropriate to 
address the unacceptable impact produced by low minimum investment 
managed accounts.
---------------------------------------------------------------------------

    As a natural corollary to the proscription against fees relative to 
very small holdings in managed accounts, no fee distinction will be 
based on whether or not a managed account is referred to as a ``wrap 
account.''
    The Exchange appreciates that it will be necessary to provide a 
definition of ``managed account'' in the rules so that the fees can be 
applied appropriately. Unfortunately, the term is not comprehensively 
defined for any other purpose in SEC rules. The Exchange believes that 
for purposes of the fee provisions, it would be appropriate to define a 
``managed account'' as an account at a nominee which is invested in a 
portfolio of securities selected by a professional advisor, and for 
which the account holder is charged a separate asset-based fee for a 
range of services which may include ongoing advice, custody and 
execution services. The advisor can be either employed by or affiliated 
with the nominee, or a separate investment advisor contracted for the 
purpose of selecting investment portfolios for the managed account. 
Requiring that investments or changes to the account be approved by the 
client would not preclude an account from being a ``managed account'' 
for this purpose, nor would the fact that commissions or transaction-
based charges are imposed in addition to the asset-based fee.
    Having addressed the ``evergreen'' and managed account issues, the 
Committee focused on the amount of the preference management fee, and 
whether it should be tiered among issuers based on their size.
    The current incentive fee differentiates between Large Issuers and 
Small Issuers. As described above in the discussion of the basic per-
account fees, the Committee did not favor this ``cliff'' 
differentiation. In the case of the preference management fee, the 
Committee determined not to tier the fee according to the size of the 
issuer. This conclusion was based on two other core principles that the 
Committee used to guide its work. One is a desire to improve 
transparency and understanding by avoiding unnecessary complexity. 
Having tiered the basic processing/intermediary fees, it appeared 
overly complex to have additional tiers for the preference management 
fee. Another principle was the desire to align the fees with the work 
done. The Committee was of the view that the processing involved in 
managing preferences was less susceptible to economies of scale by size 
of issuer because it is, of necessity, an account by account task, 
requiring the tracking of the different (and sometimes changing) 
preferences of street name shareholders across all their company 
holdings.
    The new preference management fee recommended by the Committee is 
32 cents per position affected (16 cents for positions in managed 
accounts). The 32 cents rate would be a reduction for companies that 
have been characterized under current rules as Small Issuers, and an 
increase for those that have been categorized as Large Issuers, but the 
fee as applied would result in an overall savings to issuers taken as a 
whole.
    As discussed earlier, inflation has effectively eroded the existing 
proxy fees over the last decade and more since they were implemented or 
last changed. However, the Committee observed that the impact of 
inflation on Broadridge's overall proxy distribution revenue has been 
mitigated by the increased revenue it has obtained from incentive fees. 
Issuers have saved money on a net basis since the elimination of 
mailings has reduced postage and printing costs by far more than it has 
increased incentive fees, but this increased revenue stream to 
Broadridge has countered to some extent the impact of inflation on the 
basic processing fee. This is why the Committee saw fit to offset its 
recommended reduction in managed account preference management fees by 
increases to the basic processing and intermediary fees.
    The Exchange notes that there is also a small incentive (preference 
management) fee (10 cents per account) for ``interim'' distributions. 
The PFAC did not propose to alter this fee as it is applied to managed 
accounts, except, of course, for the fact that it will not apply to 
managed accounts holding five shares or less.

[[Page 12389]]

Notice and Access Fees

    As described above, based on the recommendations of its Proxy 
Working Group in 2007, the NYSE initially elected to leave fees for 
notice and access unregulated.\36\
---------------------------------------------------------------------------

    \36\ The PWG's Report states: ``The majority of the Proxy 
Working Group came to this conclusion after considering several 
factors. First, the Working Group decided that in light of the 
novelty of the [e-proxy] system, as well as the fact that the system 
was still optional and had not been implemented by many issuers, 
that market forces should be allowed to determine the appropriate 
pricing structure for this system. The Working Group was also aware 
of the role of Broadridge in this system, but concluded that at this 
stage it was reasonable to allow the participants in the current 
system, including Broadridge, the brokers and issuers, to negotiate 
a fee structure for mailings and other matters associated with the 
new e-proxy rules.'' August 27, 2007 Addendum to the Report and 
Recommendations of the Proxy Working Group to the New York Stock 
Exchange dated June 5, 2006, at 8.
---------------------------------------------------------------------------

    The PFAC found that from an overall financial point of view, the 
notice and access system has been a great success. (Concerns have been 
expressed that there may be a decrease in retail voting participation 
when issuers use notice and access,\37\ but that is unrelated to the 
fees involved.) Broadridge estimates that in the most recent proxy 
season issuers in the aggregate saved $241 million, net of fees, 
through the use of notice and access, an amount that is actually more 
than the total fees paid annually by all issuers for annual meeting 
street name proxy processing. The Committee understood that issuers of 
all sizes have adopted notice and access, and that the re-use of notice 
and access by adopting issuers is close to 100%.
---------------------------------------------------------------------------

    \37\ See Proxy Plumbing Release at text accompanying notes 196-
197.
---------------------------------------------------------------------------

    The first decision for the Committee was whether notice and access 
fees should remain unregulated as they are today. It was noted that an 
unregulated system is more flexible and can respond quickly to changes 
in technology and investor behavior, whereas change and new investment 
could be delayed when fees are regulated and more difficult to change. 
However, issuers were concerned about leaving notice and access 
vulnerable to fee increases without regulatory oversight, especially in 
a context where other fees were changing, and in some cases being 
reduced. Accordingly the Committee concluded that notice and access 
fees should now be regulated. More difficult was the question of what 
those regulated fees should be.
    The present charges imposed by Broadridge for use of notice and 
access were not the subject of the formal rule-setting process, but 
they were the product of market forces, as intended by the Proxy 
Working Group. Broadridge indicates that when the notice and access 
alternative was introduced, they had to build and maintain the 
necessary functionality regardless of issuer adoption, but also 
realized that they had to put forth a fee schedule that would provide 
issuers with predictable costs that were at a level that would 
encourage them to use (or at least not dissuade them from using) notice 
and access. Based on the most recent statistics from Broadridge, 69% of 
all account positions are in issuers using notice and access, notice 
and access is used by issuers of all sizes, and issuers realize 
substantial savings through the use of notice and access, with an 
aggregate $282 million in savings estimated for the most recent fiscal 
year.\38\
---------------------------------------------------------------------------

    \38\ See http://www.broadridge.com/Content.aspx?DocID=1441, at 
slide 3. The Commission notes the link is http://
media.broadridge.com/documents/
Broadridge+Notice+Access+Statistical+Overview+Presentation+2012.pdf.
---------------------------------------------------------------------------

    In fact, among issuers represented on the Committee there was 
general satisfaction with the overall cost of notice and access. At the 
same time there was concern with the way Broadridge has structured its 
notice and access fees. Broadridge charges notice and access fees for 
all accounts holding an issuer's shares, even though mailings to some 
of those accounts are already suppressed by e-delivery, householding, 
etc. Indeed, when an issuer stratifies its approach, electing to 
utilize notice and access only for account holdings below a certain 
size, for example, Broadridge still applies its notice and access fees 
to all accounts beneficially holding that issuer's stock. Broadridge 
explains that from a processing point of view they have to identify 
each account as subject to notice and access or not, justifying the 
application of a fee to all accounts once an issuer determines to use 
notice and access. Nonetheless, some issuers have a concern that under 
this approach they are being charged for something they are not 
receiving.
    Given the general satisfaction with the overall level of notice and 
access fees, Broadridge was asked to suggest an alternative approach 
that would net Broadridge a similar amount of fee revenue from notice 
and access but avoid the application of a fee to all accounts. In 
response, Broadridge suggested that it could apply a preference 
management fee to each account that was in fact subjected to notice and 
access, but no fee to those accounts that were not. In this way, notice 
and access would be treated as simply another mailing elimination 
factor, like e-delivery or householding.
    This was attractive to the Committee from a design point of view, 
and at the Committee's request Broadridge prepared estimates of how 
such a notice and access fee would impact issuers. Two models were 
prepared, one utilizing a flat preference management fee, and the other 
using a tiered model, but in each case applied only to those accounts 
receiving a notice.
    The impact analysis showed that either of those options had a 
disproportionate impact on certain issuers (doubling notice and access 
fees in some cases), and the Committee was concerned this could 
discourage issuers from using notice and access, or incent them to 
stratify rather than applying notice and access to all holders.
    Accordingly, the majority of Committee members decided that, while 
perhaps not ideal, 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.\39\
---------------------------------------------------------------------------

    \39\ The Committee also understood that fewer users of notice 
and access are now electing to stratify.
---------------------------------------------------------------------------

    The Committee noted that if future developments in proxy regulation 
or use of notice and access suggested that further change in the fees 
was appropriate, the issue of notice and access fees could be 
reconsidered by the industry.
    The Exchange notes that one aspect of the current Broadridge fees 
merits some adjustment. For issuers held by up to 10,000 accounts there 
is a minimum fee of $1500. If a small issuer using notice and access 
were billed by several intermediaries on this basis, the aggregate 
minimum charge would be unfairly high, in the Exchange's view. 
Accordingly, in the notice and access fee as proposed, the first tier 
of incremental notice and access fees will be 25 cents/account, without 
a minimum charge.
    A note on terminology. In its current price list for notice and 
access, Broadridge uses the term ``position'' to refer to an account 
beneficially owning shares in an issuer. The PFAC, in its Report and in 
the fee proposals contained therein, used the same terminology 
throughout the proposed amendments. In subsequent discussions, however, 
the SEC staff expressed a preference for the term ``account'' rather 
than ``position.'' Accordingly, the Exchange has adjusted the 
terminology used in this proposal. The intent and meaning, however, is 
the same as in the PFAC Report.

[[Page 12390]]

    The notice and access fees, as proposed to be codified, would be as 
follows:
    When an issuer elects to utilize Notice and Access for a proxy 
distribution, there is an incremental fee based on all nominee accounts 
through which the issuer's securities are beneficially owned as 
follows:

    25 cents for each account up to 10,000 accounts;
    20 cents for each account over 10,000 accounts, up to 100,000 
accounts;
    15 cents for each account over 100,000 accounts, up to 200,000 
accounts;
    10 cents for each account over 200,000 accounts, up to 500,000 
accounts;
    5 cents for each account over 500,000 accounts.

    To clarify, under this schedule, every issuer will pay the tier one 
rate for the first 10,000 accounts, or portion thereof, with decreasing 
rates applicable only on additional accounts in the additional tiers.
    Follow up notices will not incur an incremental fee for Notice and 
Access.
    No incremental fee will be imposed for fulfillment transactions 
(i.e., a full package sent to a notice recipient at the recipient's 
request), although out of pocket costs such as postage will be passed 
on as in ordinary distributions.

Other Fees

    Reminder mailings: The reminder mailing fee for annual equity 
meetings is recommended to be reduced by half. Issuers have a choice 
whether or not to use reminder mailings, and their choice might in some 
cases be influenced by cost considerations. The reduced fee may induce 
more issuers to use reminder mailings, which could increase investor 
participation, particularly among retail investors.
    Special meetings: The intermediary fee for special equity meetings 
would be increased by 5 cents per account in each tier. This 
acknowledges the additional work required of the intermediary for these 
meetings. Special meetings occur in an unpredictable pattern, yet the 
capacity and ability to respond to these meetings must be maintained. 
Issuers conducting special meetings can be characterized as using the 
capacity of the system maintained for annual meetings without incurring 
any additional fee. Special meetings often require faster turnaround 
and more frequent vote tabulation, analytics and reporting because of 
the need for approval and concerns about quorum. The PFAC believed that 
it is only fair for issuers to pay for any unique services that they 
require. A special meeting will be defined as a meeting other than one 
for the election of directors.
    Contested meetings: In the 1990s a higher processing fee was 
created for contested meetings, reflecting the additional work involved 
in those events. It is now proposed that for contests the intermediary 
fee be increased as well, to a flat 25 cents per account, with a 
minimum fee of $5,000 per soliciting entity. Contests present similar 
issues to those described above for specials meetings, although 
generally at a more intense level. Parties are provided with enhanced 
turnaround time between receipt of materials and distribution to 
shareholders, and requirements of ballot customization, vote 
tabulations and reporting are more demanding, involving more stringent 
audit controls, more voting analytics, multiple daily reporting and the 
need to deal with a generally higher level of votes returned by fax.

Accounts containing only fractional shares

    Subsequent to the PFAC Report, in conversation with Broadridge it 
was determined that it would be desirable to eliminate both processing 
and preference management fees for all accounts containing less than 
one share of an issuer's stock. Making this change for accounts outside 
the managed account context (charges for holdings of less than one 
share in managed accounts are already eliminated by the rule regarding 
managed account positions of five shares or less) would have a very 
modest impact on overall annual proxy fees (approximately $500,000), 
and would eliminate a charge that has been a source of issuer 
complaints to Broadridge.

Methodology used in formulating the amended rule text

    The following is an explanation of the approach the Exchange has 
taken to the presentation of the amended rules set forth in Exhibit 5. 
The amendment eliminates duplication found in the existing rules (for 
example, multiple references to the fee for delivery of annual reports 
separately from proxy material, now contained in the section regarding 
charges for interim reports and other distributions, and multiple 
references to the reimbursement for postage, envelopes, and 
communications expenses relative to voting returns, now contained in 
the first paragraph of section .90). It also eliminates the now 
unnecessary references to the effective dates of various changes made 
in the past, as well as obsolete rule language describing the amount of 
a surcharge that was temporarily applicable in the mid 1980's. In 
addition, the same proxy fees were presented multiple times in 
different rules (Rule 451, Rule 465 and Section 402.01 of the NYSE 
Listed Company Manual). To clarify matters, Rule 465 will now simply 
cross-reference to Rule 451, and the Listed Company Manual will now use 
the same text as Rule 451.
    In addition, in the rules several references to ``mailings'' have 
been eliminated, given that the processing fees apply even where 
physical mailings are suppressed. In addition, several very minor 
minimum fees of $5 or less were simply eliminated as irrelevant to the 
overall fees imposed or collected.

Additional Matters Addressed in these Proposals

    NOBO fees: Since 1986 NYSE rules have provided for fees which 
issuers must pay to brokers and their intermediaries for obtaining a 
list of the non-objecting beneficial owners holding the issuer's stock. 
Such a list is commonly referred to as a NOBO list, and the fees are 
charged per name in the NOBO list.
    Interestingly, while the rule has always specified the amount of 
the basic fee--6.5 cents per name--it states that where there is an 
agent processing this data for the broker, the issuer will also be 
expected to pay the reasonable expenses of the agent, but without 
specifying what that amount would be. It is our understanding that 
Broadridge has long charged a tiered amount per name in the NOBO list, 
namely 10 cents per name for the first 10,000 names in the NOBO list, 5 
cents per name from 10,001 to 100,000 names, and 4 cents per name above 
that. There is also a $100 minimum per requested list.
    The Proxy Plumbing Release contains a discussion of the concern 
that existing proxy regulations--particularly the fact that beneficial 
owners can hide their identity from an issuer in which they own stock--
impedes an issuer's ability to effectively communicate with its 
shareholders. As noted in the PFAC Report, these issues are generally 
beyond the purview of NYSE rules.
    There is one respect in which the PFAC thought that it might have a 
modest beneficial effect on the costs of communicating with 
shareholders, and this involves the way that the NYSE rule on NOBO list 
fees has been applied in practice.
    Although the NYSE rule is silent on this issue, it has been 
customary for brokers, through their intermediary, to require that 
issuers desiring a NOBO list take (and pay for) a list of all holders 
who are NOBOs, even in circumstances where an issuer would consider it 
more cost-effective to limit its communication

[[Page 12391]]

to NOBOs having more than a certain number of shares, or to those that 
have not yet voted on a solicitation.
    In an attempt to provide some modest cost relief to issuers seeking 
to communicate with NOBOs, the PFAC recommended that the NYSE rules 
should specify that issuers be allowed to request a stratified NOBO 
list when the request is made in connection with an annual or special 
meeting of shareholders. The PFAC also considered it appropriate to 
limit such stratification to requests based on the number of shares 
held or whether the investor has or has not already voted a proxy, 
rather than some other characteristic or affiliation (such as 
geographic location or brokerage firm holding the account, etc.).
    The PFAC noted that it limited its recommendation to record date 
lists because such lists are more likely to be used by issuers for 
communications with shareholders about voting at the meeting, a type of 
shareholder communication which the PFAC said was most deserving of 
facilitation. The NYSE notes that there is also a cost-related reason 
to so limit the proposal.
    In connection with every shareholder action for which a record date 
is established, brokers and their intermediaries must engage in the 
work necessary to create the list of record date beneficial 
shareholders, and it is the NYSE's understanding that in such process 
it is also determined which holders are NOBOs and which holders are 
OBOs. Accordingly, if an issuer later asks for a NOBO list as of that 
record date, the compilation work has effectively already been done. It 
is true that some additional processing would be required to eliminate 
the names that hold more or less than a specified number of shares, or 
who have already voted, but the NYSE assumes that this additional 
processing is relatively minimal compared with the cost of maintaining 
and constructing the original list.
    Broadridge estimated that issuers spent some $6.7 million in 
calendar 2011 on NOBO lists, with some $4.7 million of that related to 
record date requests. These amounts are inclusive of both the broker 
fee of 6.5 cents per name specified in the NYSE rule, and the 
intermediary fee authorized but not specified in the rule. What is more 
difficult to estimate is the impact of specifying in the rule that 
issuers can stratify their NOBO list requests and avoid paying for 
those names eliminated in the stratification. We cannot know how many 
issuers would in fact stratify NOBO lists, and at what level, nor do we 
know the extent to which the cost reduction would increase the number 
of record date NOBO lists requested. Broadridge has estimated that if 
permitted to stratify, issuers would typically eliminate all names 
below the 1000 share level, and that doing so would eliminate some 85% 
of the names in the lists, and hence overall some 85% of the revenue 
from these NOBO list fees. However, this is speculation at this point, 
and is not offset by any estimation (admittedly also speculative) that 
use of NOBO lists would increase. In addition, Broadridge's argument 
suggests that they believe that issuers are currently having to pay for 
a list that they consider to be 85% irrelevant, which itself would seem 
to call into question whether the current approach is reasonable.
    Accordingly, the NYSE proposes to revise the 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. It 
recognizes, however, that should this change reduce proxy fee revenues 
significantly, it may be appropriate, for the health of the overall 
system, to promptly revisit the amount of this fee or how it is 
applied. This codification will also confirm that for all other 
requested lists, the issuers will be required to take and pay for 
complete lists, consistent with the practice that has been historically 
followed for all requested lists. This will provide transparency that 
has previously been lacking in this rule.
    The fact that the rule does not currently specify the amount of the 
intermediary fee makes it difficult to apply this approach to 
stratification effectively, since the intermediary could simply raise 
the per-name amount charged for stratified lists to compensate. This is 
similar to the concern which the PFAC had with respect to the Notice 
and Access fees, which led to the PFAC recommendation to codify those 
fees at the level currently charged by Broadridge. Accordingly, the 
NYSE proposes to codify in the rule the intermediary fee which has 
historically been charged by Broadridge for NOBO lists, with the 
understanding that these per-name amounts also may not be charged for 
names eliminated in permitted stratifications.

Enhanced Broker's Internet Platform

    In its Proxy Plumbing Release the SEC discussed whether retail 
investors might be encouraged to vote if they received notices of 
upcoming corporate votes, and had the ability to access proxy materials 
and vote, through their own broker's web site--something the Release 
referred to as enhanced brokers' internet platforms (``EBIP'').
    In the course of the review of proxy fees by the PFAC, Broadridge 
discussed with PFAC representatives a service of this type that they 
call ``Investor Mailbox''. Broadridge maintained that while some 
brokerage firms have already implemented such ``mailboxes'', it 
appeared likely that some financial incentive would be necessary to 
achieve widespread adoption, given the competing demands at firms for 
development resources.
    The PFAC was supportive in concept of a program that would enhance 
retail shareholder participation in proxy voting while being structured 
to impose a fee only on issuers that actually benefit from the program. 
Broadridge brought forward a proposal to the PFAC that was developed in 
consultation with Broadridge's Independent Steering Committee, which 
established for the purpose a Subcommittee consisting of issuers, 
brokers and outside experts. It is a ``success fee'' approach, payable 
only out of actual savings realized by an issuer. Specifically, issuers 
would pay each broker who has beneficial owner accounts with shares in 
that issuer a one-time 99-cent fee for each full package recipient 
among those accounts that converts to e-delivery while having access to 
an investor mailbox. The arrangement was proposed to be limited to a 
three-year pilot period. The rationale is that the savings to the 
typical issuer from the elimination of even one full-package mailing 
would be significantly greater than the one-time 99-cent fee paid.\40\
---------------------------------------------------------------------------

    \40\ Although the proposal was brought forward by Broadridge, an 
EBIP may be implemented by a firm either with or without the 
assistance of any third party.
---------------------------------------------------------------------------

    The PFAC was supportive of the EBIP fee proposal; however the 
detailed proposal was brought forward after the PFAC had largely 
concluded its deliberations, and the PFAC did not have an opportunity 
to carefully consider whether 99 cents was the appropriate level at 
which to set the fee. Accordingly, the PFAC recommended that the NYSE 
discuss the proposal with additional industry representatives, and 
propose to the SEC an EBIP fee in an amount that it determined most 
appropriate.
    Following the issuance of the PFAC Report, the Exchange engaged in 
discussions with a variety of industry participants regarding EBIPs and 
the ``success fee'' proposal. Although no one had firm data or support 
for definitive conclusions, there appeared to be a consensus view that 
an EBIP

[[Page 12392]]

could help to generate greater proxy voting participation by retail 
holders.
    SIFMA stated its view that ``streamlining the investor voting 
process and providing easy access to proxy materials would encourage a 
greater percentage of retail customers to exercise their right to vote 
. . . .'' SIFMA added that this ``is a logical means to reverse 
declining retail shareholder participation in proxy voting over the 
past five years.'' \41\
---------------------------------------------------------------------------

    \41\ Letter dated November 29, 2012 from Thomas Price, Managing 
Director, SIFMA, to Scott Cutler, EVP & Head of Global Listings, 
NYSE Euronext.
---------------------------------------------------------------------------

    The Society of Corporate Secretaries & Governance Professionals has 
also written the NYSE to express its strong support for the EBIP 
success fee proposal. ``We believe that broker's Web sites, which 
individual shareholders increasingly look to as `one-stop shopping' 
portals for their investment needs, offer the best and most readily 
available hope for re-engaging individual shareholders in the voting 
process.'' \42\ The Society cited an analysis by Broadridge of a 
brokerage firm's experience during the past proxy season. The firm's 
clients made 317,669 unique visits to the online investor mailbox and 
cast 247,067 votes. This is contrasted with Broadridge's observations 
that among all retail holders in the 12 months ended June 30, 2012, the 
voting rate was 4.7% for mailed notices and 10.2% for e-deliveries.
---------------------------------------------------------------------------

    \42\ Letter dated October 9, 2012 from Kenneth Bertsch, 
President and CEO, Society of Corporate Secretaries & Governance 
Professionals, to Scott, [sic] Cutler, EVP & Head of Global 
Listings, NYSE Euronext.
---------------------------------------------------------------------------

    The National Association of Corporate Directors has similarly 
expressed its support, noting that ``broker's Web sites seemingly offer 
an efficient and effective way for re-engaging individual 
shareholders.'' \43\ In addition, the National Investor Relations 
Institute has expressed its support for EBIP in conversation with NYSE 
staff, and we understand that the American Business Conference and the 
Center for Capital Markets Competitiveness have expressed their support 
as well in letters to the SEC.
---------------------------------------------------------------------------

    \43\ Letter dated November 15, 2012 from Ken Daly, President & 
CEO, National Association of Corporate Directors, to Scott Cutler, 
EVP & Head of Global Listings, NYSE Euronext.
---------------------------------------------------------------------------

    Representatives from brokerage firms generally thought that having 
an EBIP fee may help persuade their firm to move ahead with an EBIP, 
with the caveat that firm administrators are faced with difficult 
decisions regarding the allocation of limited resources. Several noted 
that there does not seem to be an actual demand for this from 
investors, and that resources are often consumed by developments that 
are required by regulation. It was also noted, however, that a success 
fee might persuade brokers not only to implement an EBIP where none was 
previously available, but also to promote use of the EBIP among its 
customer population. In its letter to the NYSE, SIFMA said that while 
they have no statistical data to support it, their members ``strongly 
believe that by providing a success fee incentive, broker dealers will 
have a meaningful impetus to invest in techniques to allow their 
customers to vote on proxy matters directly from their brokerage 
account.'' SIFMA described information from one of its members with an 
EBIP that the e-delivery adoption rate among its account holders 
increased from under 10% to over 39% in just a few years, and that 
along with creating a positive client experience the firm has seen real 
cost savings while continuing its efforts to promote an eco-friendly 
business environment.
    The NYSE was not provided any specific cost analysis regarding the 
amount of the proposed EBIP fee. It is impossible to know at this point 
what it would cost a firm to implement an EBIP--it appears self-evident 
that it would differ from firm to firm. The NYSE does understand that 
the Broadridge committee that developed the proposal did vet both 
higher and lower amounts than 99 cents, finding that issuer 
representatives were not comfortable with a fee much higher than 99 
cents, while brokers felt that a lower fee would not provide a real 
incentive.
    Discussions with industry participants also surfaced some issues 
that had not been previously addressed. It was noted that the proposed 
length of the program--three years--might not give sufficient time for 
brokerage firms to plan for and implement a program in time to take 
advantage of the new fee. By the latter part of 2012 the development 
program for 2013 is often set, so that firms without existing 
facilities might not be able to implement an EBIP before late 2014 at 
best, leaving perhaps only one proxy season during which the fee would 
be applicable. Given that this would dilute the value of the fee to the 
brokerage firms, the firms preferred a five-year rather than a three-
year term.
    Issuer representatives understood and agreed that a five-year 
program was sensible, but were concerned that characterizing the 
program as a ``pilot'' suggested that it was something that was 
contemplated to be made permanent, which was not their view. 
Accordingly, the fee will be proposed for a five-year period, but will 
not be described as a ``pilot''.
    There was discussion of whether the fee could be earned by firms 
that already had EBIP facilities, or who made EBIPs available only to a 
segment of their account population (such as private clients, for 
example). The consensus appeared to be that there was value in making 
the fee available in all these circumstances, as even a firm that 
already has an EBIP can be incented to engage in marketing efforts to 
persuade its account holders to utilize the EBIP. It was recognized, 
however, that a firm making an EBIP available to only a limited segment 
of its account holders could not earn the success fee from an e-
delivery election by an account that was not within the segment having 
access to the EBIP.
    Notwithstanding the consensus to implement the fee for a five-year 
period, it was considered useful to study the impact of the program 
after three years, to determine how many firms had implemented an EBIP 
or were in the process of doing so, and what firms had experienced in 
terms of conversions to e-delivery and retail voting participation 
among account populations with access to an EBIP. SIFMA indicated a 
willingness to assist the NYSE is [sic] coordinating the effort to 
obtain such information from its member firms. Issuers felt strongly 
that brokers should keep track of conversions and be prepared to report 
on the success of the EBIP program as well as any marketing efforts 
undertaken by the brokers to encourage utilization of an EBIP by 
investors.
    It was also clarified that accounts receiving a notice pursuant to 
the use of notice and access by the issuer, and accounts to which 
mailing is suppressed by householding, will not trigger the EBIP fee.
    There was also discussion of whether the fee should be triggered 
when a new account elects e-delivery immediately, since this does not 
involve a ``conversion'' to e-delivery. Given that it is impossible to 
know whether the availability of an EBIP influenced the decision, and 
that absent the election the alternative would be full package 
delivery, it appeared appropriate to apply the fee, except for accounts 
subject to notice and access or householding as described above.
    Finally, there was discussion of when the fee should be assessed. 
There appeared to be consensus that the one-time fee should be invoiced 
in connection with the next proxy or consent solicitation by the 
particular issuer following the triggering of the fee. It was noted 
that a mere report

[[Page 12393]]

distribution without a meeting would not be an appropriate time for 
such an invoice.
    The NYSE notes that in its discussions with interested parties 
regarding an EBIP fee, 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. Of 
course, the relative utility of the EBIP to different holders is 
difficult to quantify at this stage, and differentiating among issuers 
for imposition of the fee would add complexity to the proposal.
    The Exchange has drafted rule text that would implement a one-time 
``success fee'' for a limited five-year period. As noted in the PFAC 
Report, this fee would not apply to certain conversions to e-delivery 
that can be attributed to factors other than implementation of an EBIP. 
Specifically, it would not apply to electronic delivery consents 
captured by issuers (for example, through an open-enrollment program), 
nor to positions held in managed accounts \44\ nor to accounts voted by 
investment managers using electronic voting platforms, such as Proxy 
Edge. For the avoidance of doubt, the NYSE notes that this one-time 
success fee is in addition to, and not in lieu of, the preference 
management fee that applies when a mailing is suppressed by, inter 
alia, an account's consent to receive electronic delivery.
---------------------------------------------------------------------------

    \44\ The term ``managed account'' will be used as defined in the 
rule regarding preference management fees. See discussion above.
---------------------------------------------------------------------------

    To qualify for the ``success fee'', 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 Web site without an additional log-in. Any 
brokerage firm that has or implements a qualifying EBIP must provide 
notice thereof to the Exchange, including the date such EBIP became 
operational, and if limited in availability to only certain of the 
firms accounts, the details thereof.
    As discussed above, some firms already provide account holders with 
notices of upcoming votes and the ability to view proxy-related 
material and to vote their proxies on-line. The Exchange believes that 
this is an important element of improving the account holder's 
experience, and it applauds those firms that have taken this step in 
the absence of any kind of specific EBIP fee. While this EBIP success 
fee proposal was brought forward in the course of the PFAC examination 
of proxy fees generally, it is functionally different from the existing 
fees that are intended to reimburse banks and brokers for the 
reasonable costs of delivering proxy materials to beneficial owners, 
and its proposal by the NYSE is not a suggestion that all firms are 
entitled to reimbursement for the costs of providing an EBIP facility. 
Rather, it is an additional, limited duration, one-time fee that is 
intended to persuade firms to develop and encourage the use of EBIPs by 
their customers, providing a benefit to investors and to corporate 
governance generally, while being funded by only a small portion of the 
amounts a typical issuer will save from one account holder switching 
from full-package physical to electronic delivery of proxy materials.

Other Issues

Cost Recovery Payments

    The Committee 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. The Committee was persuaded 
that the existence of these payments is not any indicator of unfairness 
or impropriety. Firms have to maintain internal data systems that are 
involved in the proxy distribution process, but firms differ in the 
make-up and size of their beneficial owner populations, and 
consequently in the size of the proxy distribution effort they are 
required to undertake beyond that which is outsourced to Broadridge. By 
the same token, differences in economies of scale mean that 
Broadridge's cost to provide service differs from firm to firm. Again, 
the fact that the fees are fixed at ``one size'' that has to ``fit 
all,'' means that even if on an overall basis the fee revenue is 
appropriate given overall distribution expenses, there will be 
``winners and losers'' along the spectrum. And since Broadridge and the 
various firms negotiate at arm's length over the price to be paid by 
the firm to Broadridge, it is rational that the set prices may leave 
some room for the largest firms to negotiate a better rate from 
Broadridge, and therefore find themselves in a situation where they are 
able to obtain a payment from Broadridge out of the proxy fees 
collected by Broadridge from issuers at the specified rate. At the 
other end of the spectrum, of course, the amount charged to the 
brokerage firm by Broadridge would exceed the proxy fees collected from 
the issuers.
    To supplement the Committee's analysis, at the Exchange's request 
SIFMA sought to obtain from its members additional information relating 
to the costs of proxy processing.
    In reporting to the Exchange on its efforts, SIFMA noted the 
difficulties in obtaining data on this subject: ``Broker-dealer proxy 
economics vary greatly among firms, by size, client mix, product mix, 
service level, degree of automated services and/or personal service, 
and geographic location. Each firm, moreover, must develop an objective 
means to collect and organize the data, insofar as firms typically do 
not have cost accounting systems that separately report the costs of 
proxy activity. This activity often involves estimates and allocations 
from a number of departments and functions within a firm, including 
operations, information technology, finance, audit, legal and client 
services.'' \45\
---------------------------------------------------------------------------

    \45\ Letter dated May 30, 2012 from Thomas Price, Managing 
Director, SIFMA, to Judy McLevey, Vice President, NYSE Euronext, p. 
2-3.
---------------------------------------------------------------------------

    Given these issues, as well as the logistics of attempting to 
obtain information from large numbers of firms, SIFMA conducted a 
representative survey. While recognizing the limitations of the 
approach, SIFMA was able to say that the findings from the survey 
``support our view that proxy fees are reasonably in line with costs'' 
incurred by nominees.\46\
---------------------------------------------------------------------------

    \46\ Id. at p. 3.
---------------------------------------------------------------------------

    SIFMA's approach was to obtain cost information from a sample of 15 
firms, covering six size tiers based on number of equity (i.e., 
account) positions processed.\47\ Based on cost data collected from the 
surveyed firms, as well as information from Broadridge on the aggregate 
amount invoiced to its client firms for proxy processing services, 
SIFMA projected a figure for aggregate costs over a total of 855 banks 
and brokers, in a range from $136 million to $153 million annually. By 
comparison, Broadridge reported that total proxy processing fees 
collected from issuers for the fiscal year ending June 30, 2011 were 
approximately $143 million, not including proxy fees (nominee fee and 
intermediary unit fee) specifically intended to compensate 
intermediaries such as Broadridge. SIFMA believes that this result is

[[Page 12394]]

evidence that proxy fees are reasonably in line with costs incurred by 
brokers and other nominees.
---------------------------------------------------------------------------

    \47\ Data was requested from ten SIFMA member firms of varying 
sizes, and through Broadridge SIFMA obtained data from five 
additional non-SIFMA firms for the two lowest tiers, so that each 
tier would include two or three firms.
---------------------------------------------------------------------------

    SIFMA observed that the range of costs reported by firms in each 
tier varied significantly, with the greatest variation in the lowest 
tiers, noting that the differences may be due to different business 
models and cost structures, as well as to different methodologies of 
estimating or allocating costs associated with proxy processing. SIFMA 
also observed that the survey indicated that most firms report costs 
which exceed proxy reimbursement payments, although overall industry-
wide costs appeared to be generally in line with overall payments by 
issuers.

Additional Matters Which May Be Addressed in Subsequent Rule Filings

    There were two other PFAC recommendations which required additional 
work by the Exchange.
    Mutual Funds: Proxy fees tend to be discussed with respect to 
business corporations--those that have annual meetings and thus deal 
with proxy solicitations at least once each year. The PFAC was formed 
with this kind of issuer in mind, and that is reflected in the 
backgrounds of the members who served on the Committee.
    However, the NYSE proxy fees are used in the context of 
distributions to street name holders of mutual fund shares as well. But 
the fee picture for mutual funds is somewhat different. Mutual funds 
typically do not have to elect directors every year, and for this 
reason tend not to have shareholder meetings every year. While mutual 
funds can be found in managed accounts, their inclusion is not 
necessarily as widespread as with operating companies. While some 
mutual funds may utilize notice and access for the meetings they do 
have, it is less common among mutual funds than operating companies. 
But every mutual fund is required to distribute each year both an 
annual and a semi-annual report to its shareholders, and so mutual 
funds pay the interim report fee (15 cents basic processing; 10 cents 
incentive fee) much more frequently than operating companies do.
    Representatives of the Committee spoke to representatives of 
selected mutual funds for their views on the current proxy fees, and 
these informal conversations suggested that there are fee issues that 
mutual funds would like to discuss. The PFAC's recommended changes 
should have a relatively modest impact on mutual funds, and the PFAC 
did not recommend changes to the interim report fees, which are the 
ones most applicable to mutual funds.
    As recommended by the Committee, the Exchange, with industry 
participation, is reviewing the fees provided in the NYSE rules as they 
impact mutual funds, to determine whether additional changes are 
appropriate. Any recommendations for rule changes that emerge from this 
examination would be the subject of a separate rule filing by the 
Exchange.
    Future Review of Proxy Fees: While the NYSE rules do not prescribe 
how frequently the fees should be reviewed, the Committee believed that 
it would be wise for the NYSE to involve a participant group similar to 
the PFAC in an essentially ongoing vetting of process developments and 
associated costs. The Committee suggested that this group could also 
undertake a more comprehensive review periodically, perhaps every three 
years, thereby ensuring that fees are evaluated in step with new 
regulations and/or process innovations in the proxy area.
    The Exchange will evaluate this issue in the light of future 
discussions on how proxy fees should be regulated, and will bring 
forward any necessary rule changes in a separate rule filing.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act'') 
generally.\48\ Section 6(b)(4) \49\ 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. Section 6(b)(5) \50\ 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. Section 6(b)(8) \51\ prohibits any 
exchange rule from imposing any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78f(b).
    \49\ 15 U.S.C. 78f(b)(4).
    \50\ 15 U.S.C. 78f(b)(5).
    \51\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change is consistent with 
Section 6(b)(4) because it represents an equitable allocation of the 
reasonable costs of proxy solicitation and similar expenses between and 
among issuers and brokers.\52\ The PFAC included among its members a 
cross-section of both the issuer and broker communities and its mandate 
was to determine how to equitably address the standard that calls for 
issuers to reimburse the reasonable costs incurred by banks and brokers 
in distributing public company proxies and related material. The 
Committee agreed unanimously that the proposed fees were reasonable in 
light of the information the Committee had gathered about the costs 
incurred by brokers. The Exchange notes that, given the different sizes 
and cost structures of the various brokers, it is impossible to set 
fees that are tied directly to the individual broker's costs.\53\ 
Accordingly, the Committee sought to achieve the best possible 
understanding of the overall costs of today's proxy processing and 
propose updated fees on that basis. Most banks and brokers have elected 
to outsource many of the related proxy distribution functions to a 
third-party intermediary, and they have negotiated individual contracts 
with the intermediary to do so. However, banks and brokers have 
processes and costs beyond those covered under the agreements with the 
intermediary, and the Committee became comfortable with the 
reasonableness of the overall fees when considered in light of the 
overall costs involved. The Exchange notes that where, in the case of 
managed accounts, the fees paid by issuers appeared to be unreasonable, 
the Committee proposed and the Exchange included in its proposed 
amendment, limitations on fees payable in relation to shares held in 
managed accounts. For the foregoing reasons, the Exchange also believes 
that the proposal is consistent with the requirements of SEC Rule 14b-
1(c)(2) concerning the reimbursement of a broker's reasonable expenses 
incurred in connection with forwarding proxy and other material to 
beneficial owners of an issuer's securities.
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    \52\ The Exchange notes that the rules in this proposal do not 
involve dues, fees or other charges paid to the Exchange. Rather 
these Exchange rules are part of a statutory scheme in which self-
regulatory organizations are used to facilitate a requirement under 
SEC Rules 14b-1 and 14b-2 that brokers and banks distribute proxy 
material so long as their reasonable costs are covered by the 
issuers whose material they are distributing. Nonetheless, to the 
extent a Section 6(b)(4) analysis is appropriate, the Exchange has 
included one herein.
    \53\ See discussion at text following note 16, supra.
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    The proposal to codify the existing Broadridge charges for notice 
and access followed careful consideration by the Committee and 
reflected their view that the existing fees were shaped in part by 
market forces and were on an overall basis at an acceptable level. The 
Committee believed it important to codify these fees so that subsequent 
changes would be subject to the rule change process, and that codifying 
the current fees was a better approach than moving to any of the 
alternative pricing

[[Page 12395]]

models that the Committee considered.\54\
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    \54\ See discussion at text accompanying notes 36-39, supra.
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    The Exchange notes that the proposal which will codify the charges 
imposed by intermediaries for NOBO lists, together with the 
specification that issuers shall not be charged for names eliminated in 
certain circumstances, is an attempt to balance the reasonable needs of 
issuers and nominees in this context. The utility and economic impact 
of this proposal is speculative at this point, which is why the 
Exchange has undertaken to monitor its impact and take remedial action 
if needed.
    The ``success fee'' proposal related to EBIPs is different in 
character from other fees in this area, because it is temporary, it is 
a ``one-time'' fee, and most notably because it is intended not as a 
reimbursement of costs, but rather is put forward with the hope that it 
will encourage the implementation and use of EBIPs, which in turn are 
hoped to increase participation in corporate governance by non-
institutional investors. However, in common with the other proposals 
here, the Exchange believes that it does represent an equitable 
allocation of costs between issuers and nominees, whereby issuers 
should pay a fee which is less than the expected economic benefit that 
will accrue to them from the additional suppression of a paper mailing, 
while brokers will obtain some additional revenue which will hopefully 
encourage them to provide this meaningful benefit to their account 
holders.
    The Exchange believes that the proposed amendment represents a 
reasonable allocation of fees among issuers as required by Section 
6(b)(4) and is not designed to permit unfair discrimination within the 
meaning of Section 6(b)(5), as all issuers are subject to the same fee 
schedule and the Committee thoroughly examined the impact of the 
current fee structure on different categories of issuers. As a 
consequence, the Exchange's proposal: (i) Limits the disparate impact 
of fees on issuers whose shares are held in managed accounts; and (ii) 
modifies the approach of charging 5 cents per account for issuers 
beneficially owned by 200,000 or more accounts and 10 cents per account 
for issuers beneficially owned by fewer than 200,000 accounts, by 
putting in place a tiering approach that will avoid the anomalous 
effects of the current ``cliff'' pricing on issuers whose numbers of 
street name accounts are slightly higher or lower than 200,000.
    As described above,\55\ the tiers and the pricing for each tier 
were intended to spread the fees as fairly as possible across the 
spectrum of issuers. However, the Committee also avoided fully 
reflecting economies of scale in the tier prices, to avoid what it 
believed would be an excessive increase in the fees paid by the 
smallest issuers.
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    \55\ See discussion above.
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    The Exchange believes that the proposed amendment does not impose 
any unnecessary burden on competition within the meaning of Section 
6(b)(8). Under the SEC's proxy rules, issuers are unable to make 
distributions themselves to ``street name'' account holders, but must 
instead rely on the brokers that are record holders to make those 
distributions. In considering revisions to the fees, the PFAC and the 
Exchange, working within current SEC rules, were careful not to create 
either any barriers to brokers being able to make their own 
distributions without an intermediary or any impediments to other 
intermediaries being able enter the market. For some time now a single 
intermediary has come to have a predominant role in the distribution of 
proxy material. Nonetheless, the Committee believed that the current 
structure has produced a proxy distribution system which is generally 
viewed as reliable and effective, as well as being a system which has 
reduced costs to issuers through technological advances made possible 
by economies of scale and, particularly, by the elimination of a large 
number of mailings. For the foregoing reasons, the Exchange believes 
that its proposed fee schedule does not place any unnecessary burden on 
competition.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that Rules 451 and 465 as amended by the 
proposed amendments do not impose any burdens on competition. Under the 
SEC's proxy rules, issuers are unable to make distributions themselves 
to ``street name'' account holders, but must instead rely on the 
brokers that are record holders to make those distributions. SEC Rule 
14b-1(c)(2) provides that a broker is required to forward proxy and 
other material to beneficial owners of an issuer's securities only if 
the issuer reimburses it for its reasonable expenses incurred in 
connection with these distributions. Consequently, in revising the fees 
set forth in Rules 451 and 465, the PFAC and the Exchange intended to 
establish fees which represented a reasonable level of reimbursement 
and the Exchange believes that the proposed amendments are successful 
in this regard. As the Exchange was limited to establishing fees that 
reflected a reasonable expense reimbursement level, it would not have 
been possible for the Exchange to propose amended fees with the 
intention or the effect of providing a competitive advantage to any 
particular broker or existing intermediary or creating any barriers to 
entry for potential new intermediaries. For some time now a single 
intermediary has come to have a predominant role in the distribution of 
proxy material. Nonetheless, the Committee believed that the current 
structure has produced a proxy distribution system which is generally 
viewed as reliable and effective, as well as being a system which has 
reduced costs to issuers through technological advances made possible 
by economies of scale and, particularly, by the elimination of a large 
number of mailings. The Exchange does not believe that the predominance 
of this existing single intermediary results from the level of the 
existing fees or that the proposed amended fees will change its 
competitive position or create any additional barriers to entry for 
potential new intermediaries. Moreover, brokers have the ultimate 
choice to use an intermediary of their choice, or perform the work the 
work [sic] themselves. Competitors are also free to establish 
relationships with brokers, and the proposed fees would not operate as 
a barrier to entry.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change. The Exchange has neither solicited nor received 
written comments on the proposed rule change. The Exchange did receive 
a letter from SIFMA, dated May 30, 2012, in response to the publication 
of the PFAC Report on May 16, 2012. The letter noted the Committee 
proposal to eliminate proxy fees with respect to positions of five 
shares or less in managed accounts. It stated that because there are 
proxy processing costs associated with such accounts, SIFMA did not 
support the establishment of a threshold that would eliminate 
reimbursement for such costs.
    The Securities Transfer Association (``STA'') provided the Exchange 
with a copy of an analysis it did of the proposed proxy fee schedule 
contained in the PFAC Report. This analysis was publicized by the STA 
on July 11, 2012,

[[Page 12396]]

and may be found on the STA's Web site at www.stai.org.
    The STA states that it analyzed 33 public company invoices for 
proxy distribution services, applying the PFAC proposed fee schedule. 
The STA claims that the 33 issuers would experience, on average, a 
7.43% increase in proxy distribution costs under the proposed schedule. 
The STA also claims that membership of the PFAC was over-representative 
of financial services companies, notes disappointment that the PFAC did 
not use an independent third party to analyze data provided by 
Broadridge and conduct an independent cost analysis, and also notes 
disappointment that the PFAC did not recommend the elimination of all 
proxy fees for positions held in managed accounts.
    The STA analysis does not explain how STA arrived at the 7.43% 
number. The STA also does not identify the 33 issuers surveyed. The 
Exchange has noted that the experience of any individual issuer under 
the proposed fee schedule will vary depending on its circumstances. 
Furthermore, the estimate contained in both the PFAC Report and in this 
rule filing that there would be an approximate 4% overall decrease in 
fees paid by issuers under the proposed schedule is one that looks at 
fees paid by a universe of some 8,000 issuers whose proxy material 
distributions to street name holders are processed by Broadridge. We 
can only assume that the STA group of 33 issuers is not adequately 
representative of all the issuers in the proxy distribution universe. 
We do note that the three size tiers represented in the STA sample are 
not in fact representative of the overall population.\56\
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    \56\ The STA notes that one-third of their sample are issuers 
with between 110 and 10,000 street name positions, 42% of their 
sample issuers have between 10,000 and 200,000 positions, and 24% 
have between 200,000 and 2.4 million positions. In contrast, among 
the 8,000 issuers processed by Broadridge, the numbers falling in 
each of those size categories are 75% (with only 5% of the aggregate 
positions), 22% (with 38% of the aggregate positions) and 2% (with 
57% of the aggregate positions).
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    The STA's analysis of the make-up of the PFAC is flawed. The 
Committee was created to represent the views of issuers, brokers and 
investors, given their disparate interests in the fees, which are paid 
by the issuers to the banks and brokers. The Committee members 
affiliated with REITs, for example, while classified by the STA as in 
the financial services sector, represent the issuer side in this 
dichotomy. The mutual fund company on the PFAC was intended to 
represent the interest of investors in the proxy process. Only two of 
the PFAC representatives were with companies containing broker-dealers 
with a public customer business.
    The Committee and the Exchange have explained that the proxy fees 
do not lend themselves to ``utility rate making'' in which costs are 
accounted for in a uniform and specified way and subject to audit 
regarding whether the provider is obtaining a permitted rate of return. 
The costs involved are incurred by a large number of brokerage firms, 
who record their costs in different ways. The Committee and the 
Exchange judged that it would likely be impossible and certainly not 
cost effective, to engage an auditing firm to review industry data for 
purposes of the Committee's work. Both believe that the result produced 
by the diligent work of the multi-constituent Committee is an 
appropriate way to update the schedule of fees which serves the SEC 
mandate that the reasonable costs of brokers in distributing proxy 
materials be reimbursed by the issuers involved.
    As noted earlier, the proper treatment of managed accounts in the 
proxy fee context has been a focus of STA comments. The PFAC view was 
that there should be a sharing of costs in this area, given that 
managed accounts, at least those above 5 shares or less, benefitted 
both issuers and brokers. The Exchange notes that the PFAC proposal 
regarding managed accounts has not satisfied either SIFMA or the STA, 
which may be an indication that it is a suitable compromise.
    As also noted earlier, the PFAC wished to avoid recommendations 
that would generate large and potentially dislocating changes in the 
fees. It was also important to the PFAC that the fees continue to 
support reliable, accurate and secure proxy distribution process. 
Eliminating virtually all charges for managed account positions, as 
urged by the STA, would have a very significant impact on proxy fees, 
and presumably would require additional very significant increases in 
the basic processing fees to continue to support the proxy distribution 
process. That was not an approach favored by the PFAC.
    The Exchange also received several letters expressing support for 
the EBIP success fee. Those letters are described in the EBIP 
discussion above.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2013-07 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2013-07. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make

[[Page 12397]]

available publicly. All submissions should refer to File Number SR-
NYSE-2013-07 and should be submitted on or before March 15, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\57\
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    \57\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-04092 Filed 2-21-13; 8:45 am]
BILLING CODE 8011-01-P


