January 14, 2000
By E-Mail and Overnight Delivery
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Re: Delivery of Proxy and Information Statements to Households
Dear Mr. Katz:
Charles Schwab & Co., Inc. ("Schwab") is pleased to comment on the Securities and Exchange Commission's proposed amendments to the proxy rules under the Securities Exchange Act of 1934 to permit the householding of proxy and information statements (the "Proposed Amendments").1
Schwab serves over 6.4 million active accounts with approximately $700 billion in customer assets. Schwab makes its services available through several distribution channels, including its Schwab Institutional channel, which enables the clients of approximately 5,600 independent investment advisers to gain access to Schwab's products and services. Schwab maintains the Mutual Fund Marketplace®, through which Schwab's customers have access to over 3,000 non-proprietary mutual funds. Schwab's affiliate, Charles Schwab Investment Management, Inc., also has approximately $108 billion in assets under management in 40 proprietary mutual funds.
As the Commission notes in the Proposing Release, "[t]he distribution of multiple copies of the same document to shareholders who share the same address often inundates shareholders with unwanted mail and causes companies to incur higher printing and mailing costs."2 This observation is consistent with Schwab's own experience with retail and mutual fund customers, as many customers have complained that receiving multiple copies of regulatory documents is unnecessary and wasteful. To better serve our customers, and to reduce the proxy printing and mailing costs that are ultimately borne by shareholders, Schwab strongly supports the extension of householding to permit issuers and intermediaries to household proxy materials. Indeed, we estimate that if Schwab's proprietary fund family were allowed to household a hypothetical proxy statement, fund shareholders could save approximately $862,000, or 16% of total expenses, in printing, packaging and mailing expenses for a shareholder meeting.
While we generally support the Commission's proposal to permit the householding of proxy materials, we do have some specific recommendations for improving the effectiveness of householding, which are set forth below. In particular, we believe that intermediaries should have the ability to household on their own initiative, and that the Proposed Amendments should provide flexibility to enable intermediaries to household as efficiently as possible. We also believe that the Proposed Amendments should not apply to the delivery of proxy materials to investment advisers. In addition, it is our view that the householding of proxy materials should be subject to the same requirements as the householding of prospectuses and shareholder reports,3 and have suggested several modifications to the Proposed Amendments that we believe would promote operational efficiency and cost savings without compromising investor protection. Finally, we believe that the Commission should work with the states to make clear that the householding rules apply to shareholder meeting notices delivered pursuant to state law.
Householding by Intermediaries
The Proposing Release seeks comment on whether intermediaries should be able to rely on the Proposed Amendments and household proxy materials to beneficial owners, and what limits, if any, should be placed on this ability. Specifically, the Proposing Release asks if intermediaries should only be allowed to household with the consent of the issuer, or only if the issuer also households to its record shareholders. The Proposing Release also asks if shareholders should be able to selectively choose householding based on the issuer. Comment is also sought on whether reimbursement of an intermediary's expenses in performing these delivery obligations should only occur if the intermediary households with the issuer's consent, and if the "paper and postage elimination fee" that intermediaries may charge under NYSE rules for delivery of proxy materials should be a one-time charge or a recurring fee. Finally, the Proposing Release seeks comment on whether the Proposed Rules should permit householding where beneficial owners and record owners share the same address.
As a broker-dealer that holds shares on behalf of its customers, Schwab believes that its customers should have the ability to participate in the benefit of householding, and that the Proposed Amendments should apply to intermediaries. Indeed, given that most securities positions are held in street, rather than in registered name, the greatest efficiencies arising from householding would occur for shareholders whose shares are held by an intermediary. Nevertheless, developing and maintaining the capability to household for Schwab's customers would require significant modifications to our current systems, and achieving operational efficiency to household would require a flexible set of householding rules. As described below, we believe that the limits suggested in the Proposing Release would unnecessarily restrict our ability to household, and reduce, if not eliminate, the benefit of householding to our customers.
For example, having to build additional functionality to track whether the issuer is also householding its record shareholders, and having to limit our ability to household only to situations where the issuer consents, would add unnecessary complexity and expense. In addition, based on our experience, customers would not be interested in the ability to choose householding based on a particular issuer, as they express frustration with receiving duplicative materials regardless of the issuer. Indeed, providing this alternative could confuse customers, and the additional expense would likely not result in additional investor benefit or protection.4 Moreover, given the costs associated with the development and maintenance of these systems, we believe that reimbursement of the expenses incurred is appropriate irrespective of an issuer's consent, and that the paper and postage elimination fee should be a recurring fee to compensate for costs associated with maintaining and enhancing these systems. Finally, we do not support the proposal to permit householding where beneficial and record shareholders share the same address. Householding on this basis would mean that multiple proxy cards would be sent in the same envelope, although each card might be required to be voted differently, (i.e., through an intermediary and directly through the issuer).5 This could lead to significant customer confusion and would require significant systems modifications at additional expense.6 For all these reasons, we believe that placing such restrictions on an intermediary's ability to household would surely increase costs and reduce the benefits of householding, and that the Proposed Amendments should provide the greatest possible flexibility to permit intermediaries to effectively household to their customers.
Delivery of Proxy Materials to Investment Advisers
The Proposing Release asks whether companies and intermediaries should be able to household proxy materials to investment advisers without having to rely on the Proposed Amendments. As the Commission points out, SRO rules permit beneficial owners to designate a registered investment adviser to receive proxy materials and vote proxies on their behalf, and under these circumstances it is unlikely that a single investment adviser making the voting decision would need more than one copy of the proxy materials.
We agree with the Commission's view that the delivery of multiple proxy materials to an investment adviser is unnecessary, and believe that companies and intermediaries should have the ability to "consolidate" proxy materials to investment advisers without having to rely on the Proposed Amendments. The Proposed Amendments are designed to offer the advantages of householding to two or more shareholders sharing the same address, while protecting those shareholders within a household that wish to receive their own materials. These concerns are not present in the case of an investment adviser that has obtained permission from its clients to vote shares on their behalf. Accordingly, we strongly urge the Commission not to extend the Proposed Amendments to the delivery of proxy materials to investment advisers.7
The Proposed Amendments Should Be Consistent with the Rule 154 Amendments
As the Commission points out in the Proposing Release, the purpose of the Proposed Amendments is to "allow companies and intermediaries to household proxy and information statements . . . in the same manner that, upon effectiveness of the [Rule 154 Amendments], will be permissible for prospectuses and annual reports. . . ." 8 To promote efficiency and reduce confusion in these two sets of similar rules, we strongly encourage the Commission to conform the provisions of both rules.
Specifically, the Rule 154 Amendments allow prospectuses and shareholder reports to be householded by "implied consent" if, among other things, the issuer provides for a sixty day notice period for the shareholder to object to the householding of these documents. In contrast, the Proposed Amendments would require a ninety day notice period for shareholders to object to the householding of proxy and information statements. Shareholders might be confused by the different notice requirements, and we would need to modify our systems to distinguish between these two timeframes, which would result in additional expense and unnecessary complexity. For these reasons, we urge the Commission to change the notice period in the Proposed Amendments to sixty days.
In addition, the Proposed Amendments would require a company or intermediary to send shareholders a separate written notice to communicate the intention of the company or intermediary to household, and to deliver this notice separately from other communications. The Rule 154 Amendments, by contrast, require only that a separate written statement be sent to shareholders, and permit this statement to be included with other materials. We agree that it is important to call a customer's attention to householding, but believe that a separate notice describing householding would provide adequate notice. In contrast, we believe that a separate mailing requirement would add great expense without any apparent benefit. We therefore recommend that the Commission eliminate this separate mailing requirement and instead require that the notice be in the form of a separate written statement, consistent with the Rule 154 Amendments.
Finally, the Proposed Amendments would require companies to undertake in the proxy or information statement to deliver promptly upon request a separate copy of the annual report, proxy statement or information statement to a shareholder at a householded address. While we believe that shareholders should be able to get additional copies of householded documents upon request, it is our view that mandating that the undertaking be in the proxy or information statement only is unnecessarily restrictive. We therefore urge the Commission to remove the reference to the proxy or information statement as the only appropriate locations for the undertaking.
State Law Requirements Concerning Notice of Meeting
In the Proposing Release, the Commission refers to the fact that some states require companies to provide written notice of a meeting to each shareholder, and states that it is "unclear whether a householded proxy statement that includes the meeting notice would satisfy state law requirements that companies deliver a notice to each shareholder."9 To fully realize the efficiencies of householding, and to respond to customer frustration about receiving multiple materials, we believe that notices under state law should also be able to be householded, or at a minimum, sent under the same cover as the householded proxy material. We urge the Commission to work with state securities regulators and with the North American Securities Administrators Association to make clear that the householding rules apply to these notices.
We appreciate the opportunity to comment on the Proposing Release. If you have any questions or would like to discuss the comments in this letter, please do not hesitate to give me a call at (415) 636-1448.
Very truly yours,
Alison E. Baur
Vice President and
Senior Corporate Counsel
cc: David B. H. Martin
Division of Corporation Finance
U.S. Securities and Exchange Commission
Paul F. Roye
Division of Investment Management
U.S. Securities and Exchange Commission
Elizabeth M. Murphy
Division of Corporation Finance
U.S. Securities and Exchange Commission
1 SEC Release Nos. 33-7767, 34-42102, IC-24124 (November 4, 1999) ("Proposing Release").
2 Proposing Release at 3.
3 On the same day it issued the Proposing Release, the SEC adopted rule amendments to permit the householding of prospectuses and shareholder reports. SEC Release Nos. 33-7766, 34-42101, IC-24123 (November 4, 1999) (the "Rule 154 Amendments").
4 We also note that shareholders can always request additional materials or revoke their consent to householding altogether.
5 For example, two members of a household could each own shares of a company as a record owner, and also as a beneficial owner through an intermediary. Under this proposal, these investors would get one set of householded proxy materials with four proxy cards, two of which would need to be voted through the intermediary, and two of which would need to be voted directly through the issuer.
6 We also note that an intermediary is currently required to maintain systems that differentiate between objecting beneficial shareholders ("OBOs") and non-objecting beneficial owners ("NOBOs"), so that the intermediary can produce a list of NOBOs to certain issuers upon request. This proposal would require an intermediary to greatly modify its systems to distinguish between households with OBOs and households with NOBOs, and to interface with an issuer's corresponding systems to avoid sending duplicate proxy materials to a single shareholder. This would result in greater complexity and expense with little additional benefit.
7 Schwab supports the recommendations on this point made by the Investment Company Institute (the "Institute") in its comment letter regarding the Proposed Amendments. In addition, Schwab supports the Institute's recommendations relating to the proposed extension of Rule 154 to permit the householding of prospectuses required to be delivered in connection with business combination transactions, exchange offers and reclassifications of securities.
8 Proposing Release at 3.
9 Proposing Release at 9 (emphasis in original).