Jonathan G. Katz
Securities Exchange Commission
450 5th Street, NW
Washington, DC 20549
Re: Proxy Fees (Release No. 34-41549; File No. SR-NYSE-99-21)
Dear Mr. Katz:
The Association is pleased to comment on the proposed revision of rules governing the reimbursement of expenses for delivery of proxy materials to street name shareholders. (hereinafter "Amendment 1"). Our support for Amendment 1 is conditional. For the reasons stated below, we believe the Commission should focus on the question of whether the level of service and reliability in the proxy process will be diminished by reducing the fees as Amendment 1 proposes. Should the SEC conclude that there is a substantial risk of degradation in service and reliability, we urge the Commission to re-consider its rejection the Exchange Submission of February 6, 1999 (SR-NYSE-98-05) (the "February Proposal").
The Association and its Board members have participated in the effort to improve the proxy delivery system for more than three years. APTC has represented its members and the larger group of small cap and mid cap public companies on the New York Stock Exchange Proxy Working Group ("the Working Group").
Each NYSE submission has been the result of extensive negotiations involving representatives of all the most interested parties to the proxy fee reimbursement transaction. Through these negotiations, two clear priorities have emerged for all issuers. Issuers value reliability of delivery and vote tabulation. They also value the opportunity to reduce total cost. On the other hand, cutting intermediary fees further is not a high priority.
This Working Group process resulted in the NYSE's February Proposal, SR-NYSE-98-05. The February Proposal fee structure provided the assurance of the current high level of reliable service. With the exception of a five-cent reduction in the unit fee, it was the same fee structure under which substantial improvement in the reliability, and significant reduction in issuers' total costs were realized during the 1998 and 1999 proxy seasons. A strong consensus among issuers supported this proposal.
After the February Proposal, the Commission suggested that fees needed to be further reduced based on the SEC staff analysis of the profitability of the proxy intermediary business. The Amendment 1 fee structure was supported by issuer representatives on the Working Group based on the hope that concessions by broker dealer participants in the proxy intermediary business would allow ADP BSC, the primary provider of such services, to continue to provide current levels of service and reliability. It now appears that those concessions are not forthcoming. Therefore, our support of Amendment 1 must be conditional.
APTC is particularly sensitive to the needs of small cap issuers. Throughout the development of the various new fee structures and pilot programs, the Association has supported the NYSE proposals despite an increase in the proxy reimbursement fees that smaller issuers pay. We have done so because it is not the fee paid to the intermediary, but the total proxy process cost to the issuer that matters. Achieving quorum for annual meetings is the basic goal of the entire proxy process for smaller issuers with routine meetings. Failure to reach quorum causes a substantial cost, and even the threat of such a failure will cause issuers to undertake extraordinary and costly efforts. Therefore, reliability is an important element of cost.
Throughout discussions of the fee structure, the Association has found, and studies have shown, that issuers approved of the current service and fees. They were also pleased with the improved reliability of proxy delivery and vote return. Issuers have made good use of the opportunity to better manage the proxy process and reduce the total cost through reductions in expenses like paper and postage.
From the outset of discussions with the New York Stock Exchange regarding a new fee structure, APTC and other issuer representatives have benefited from a candid and forthright working relationship with the senior managers of ADP BSC. Their cooperation in developing a new approach to the proxy process has resulted in reduced costs to issuers and improved proxy delivery for investors. As a provider of essential service to issuers, ADP's incentive to continue its current commitment to providing these services is important for issuers.
Therefore, the comment letter of ADP, submitted on August 26, 1999, which opposes Amendment 1 is a matter of significant concern. The ADP letter serves to heighten the Association's concern that the lower fees may be a poor bargain for issuers.
The Lexicon Inc. study, submitted by ADP disputes the SEC staff's economic analysis upon which Amendment 1 is based. Serious additional study by the Commission is certainly warranted. Moreover, the Lexicon study, like ADP's letter suggests that the fundamental issuer goal of changes in the proxy fee structure will be undermined by implementation of the fee structure proposed in Amendment 1.
Therefore, while the Association appreciates the care with which the Exchange has evaluated the issues underlying submission of Amendment 1, we must urge the Commission to re-evaluate Amendment 1's economic base.
The concerns of issuers are that the current high level of reliability and service be maintained for issuers and shareholders. We support a fee structure that promotes these basic and practical concerns. Therefore, we urge the Commission to study the Lexicon report's critique of the staff's analysis. We also urge the Commission to err on the side of service, reliability and the opportunity for issuers to further cut total cost. However, if these goals can be achieved under Amendment 1, we support it.
For the Board,
Robert S. Merritt /s/ Brian T. Borders /s/