February 4, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20547
Re: File No. SR-NYSE-2001-53
As a 40-year student of, and a frequent "commenter" on the proxy distribution, voting and tabulation processes; and as someone who has served as an Independent Inspector of Election at well over 300 annual and special meetings of shareholders (and who continues to do so) and as an individual investor in approximately 70 US and foreign companies, I wish to offer comments and suggestions on the above- captioned release.
Although the modest rollback of proxy distribution fees that is proposed by the NYSE is better than no relief, and must of course be approved at this time, given its release in the "eleventh-hour" before the Spring 2002 proxy season, the economic "rationale" that underlies the NYSE's new guidelines is seriously deficient in a number or respects:
- It fails to benchmark the proposed reimbursement guidelines against market-based rates for essentially identical services, such as imprinting, enclosing, mailing and mechanical tabulation. All of these, it should be noted, are essentially commodity-like services, highly sensitive to economies of scale and widely available elsewhere at rates, as numerous commenters have pointed out over the years, that are still significantly lower than those that are being proposed.
- It establishes a definition of "Large" and "Small issuers" that is totally arbitrary, and that bears no real relationship to the point at which economies of scale come into play in the enclosing and mailing businesses.
- It fails to address the very significant amounts that the current provider is taking into income indirectly, by unilaterally laying claim to and retaining one-half of the savings in postage that arise from routine bar-coding and sorting procedures.
- It fails to address the need for a "sunset provision" regarding the so-called "incentive fees" for eliminating mailings. Here, it should be noted, most of the work involved is done once - or done automatically, with computer programs. Further, the brokers, banks and other custodians who currently share in these incentive fees, reap significant benefits themselves from combined and/or eliminated mailings of paper materials to their customers.
- It cites a letter from The Association of Publicly Traded Companies, asserting that "the Pilot Program provided a $235 million reduction in costs in 2001 from mail suppressions" - an assertion that I believe was not, nor will it prove to be, supported by hard economic facts.
Accordingly, to properly fulfill their mandate ("to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information...and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market...and, in general, to protect the public interest,") both the SEC and the NYSE must, in my opinion, gear-up to do a more thorough, a more rigorous and a more forward-looking review of the entire process than has been done to date. Specifically:
- The SEC should formally reconstitute the "Proxy Voting Review Committee," which, it should be noted, was an ad-hoc group, with no official standing, and place it officially under the aegis of the NYSE.
- The reconstituted committee should be given a mandate to examine the fee structure in light of economic and competitive realities. (In terms, for example, of market-based rates for comparable services and in terms of the various benefits that all parties to the system derive from the automation and centralization that ADP currently provides.) The committee should also be instructed to examine "incentive fees" - not just in terms of their size and duration, but in terms of their actual ability to incent desired behaviors. It should also be directed to look at charges that are normally treated as out-of-pocket expenses, reimbursable at cost, like postage expense and the cost associated with telephonic voting.
- The composition of the committee must also be greatly improved - to add more issuers - and more people who understand the `technical and mechanical aspects' of the current system. Five of the nine voting members of the "Proxy Voting Review Committee" are direct beneficiaries of the current reimbursement system. (The SIA, whose members share in cash "rebates" from ADP, three representatives of institutional investors, who benefit from highly automated voting systems that were - and perhaps still are - subsidized by issuer-paid fees, and ADP itself, which, by the way, appears to have handpicked the committee members.) Only one of the nine voting members was an issuer of securities: one out of the 8500 that actually pay the bills. The ASCS, with over 2000 issuers as members, had no vote, while APTC, whose 75-odd members are hardly representative of the issuer universe, was given a vote.
- Most important of all in my view, a reconstituted committee must be charged with developing a way to open up the current system to competition. ADP itself, it should be noted, admits that competition is inevitable, says it would welcome competition and, in my view, would continue to thrive - and to excel - in a more competitive environment.
I am enclosing as Exhibit I a letter I wrote to the NYSE on this subject in 1996, outlining a very simple way to open the system to competition while, at the same time, greatly improving the integrity and the auditability of the proxy voting, tabulating and reporting processes.
As always, I will be happy to expand on these comments in detail and to answer any questions the staff may have.
Carl T. Hagberg