NYSE Puts FINRA in Hotseat For Proxy Distribution Fee Oversight

The issue of which self-regulatory authority will take over the job of setting the maximum fees issuers must pay broker-dealers and banks to mail proxy materials to beneficial shareholders has pitted the New York Stock Exchange against the Financial Industry Regulatory Authority. leaving proxy operations managers and corporate secretaries in a lurch.

The NYSE, which has been setting the proxy distribution fee schedule since 1937, last December asked the Securities and Exchange Commission to allow it to pass the buck to FINRA. The problem is that the broker-dealer watchdog doesn’t want to take on the responsibility. FINRA’s rulebook does refer to the maximum fees that issuers can be charged by broker-dealers to corporate issuers for proxy mailings, but its role in setting proxy fees is a formality. The language of FINRA’s rule simply mimics that of the NYSE’s rule. Caught in the middle, the SEC declined to agree to the NYSE’s request for a rule change on the grounds it didn’t make a good enough argument for change. Instead, the SEC extended the period for further industry comment until April 14. The NYSE, argues the US regulatory agency, didn’t explain why FINRA would be more suited for the role of setting proxy distribution fees when it does not represent issuers. Neither did the NYSE explain why representing broker-dealers makes FINRA a better candidate for the job.

Corporations and mutual fund complexes are required to mail proxy materials to beneficial investors — or those holding their accounts in the name of their banks or broker-dealers– the same as they would for registered shareholders– or those holding their accounts in their own names. Corporations don’t know the identities of those shareholders as their accounts are recorded on the books of the US’ central securities depository Depository Trust Company in the names of financial intermediaries. Those financial firms typically outsource their proxy distribution work for beneficial shareholders to either Broadridge Financial or its smaller rival Mediant. Issuers have no say on which firm the banks or broker-dealers select to mail their proxy materials even though they are the ones paying the bills. Corporations or their transfer agents mail proxy materials directly to registered investors. Over 75 percent of shareholders hold their accounts in Street-name.

The NYSE’s desire to pass the buck to FINRA isn’t surprising since the exchange has repeatedly said over the past decade that it wants to relinquish the work of setting proxy mailing fees. However, in responding to the SEC’s request for comment about the NYSE’s proposal. FINRA says it was caught off guard. The NYSE never consulted with FINRA about its requested rule change. Should the SEC decide to approve the NYSE’s wish, FINRA would not only be required to set the fee schedule for proxy mailings, but to also review the fee schedule and potentially modify it. It is doubtful the actual fees would change anytime soon. Proxy distribution fees were last altered in 2013, three years after review by a NYSE-sponsored proxy fee committee. The idea of allowing corporations to communicate directly with beneficial shareholders and to mail them proxy materials directly has been promoted by transfer agents and some issuers for about ten years to no avail. The last time the SEC made any substantive overhaul of the proxy system was in 2020 when it issued new rules to regulate proxy advisory firms.

FINRA argues that the SEC, not FINRA is better suited to handling the proxy fee schedule for one key reason. FINRA’s rules only apply to broker-dealers that are FINRA members. “The SEC has plenary jurisdiction over securities industry participants that have an interest in those matters, including not only broker-dealers but also issuers that list their securities on national securities exchanges and mutual funds and issuers that do not,” writes Marcia Asquith, FINRA’s executive vice president of board and external relations in its January 11 comment letter to the SEC. FINRA reiterated its position in a second letter to the SEC on April 14.

Industry opinion on whether the NYSE or FINRA should have the final say on proxy mailing fees is divided with some using the opportunity to  comment as a way to resurrect the issue of whether the current proxy plumbing system should be overhauled. The only candidates available to handle proxy mailings other than Broadridge or Mediant would be the transfer agents which would have to invest plenty to match Broadridge’s proxy distribution infrastructure. The Investment Company Institute, the Washington, D.C. mutual fund trade group, approves of the NYSE’s plan to relinquish oversight of proxy fees in favor of FINRA. However, the ICI also wants the SEC to allow mutual fund complexes to decide who they wish to mail their proxy materials rather than be “forced” to select the dominant industry player. The mutual fund trade group never named the player, but it is presumed to be Broadridge.

The current proxy mailing fees for fund complexes are far higher for distributing through financial intermediaries than directly to investors, says the ICI. If the SEC doesn’t want to overhaul the broken system, then it should take the next best steps including “creating a fee schedule tailored to fund disclosure delivery obligations, replacing the existing layered fees with simple flat fees that reflect actual costs, using costs for direct-held accounts as a guide; creating a robust regulatory oversight framework; and mandating regular independent review of the rates and vendor billing process,” writes the ICI’s deputy general counsel Dorothy Donahue and senior director Joanne Kane in its January 11 letter to the SEC. The ICI’s views were echoed in letters to the SEC also submitted in January by mutual fund complexes such as Eaton Vance, Dimensional Fund Advisors, MFS Investment Management, Federated Hermes, and Franklin Templeton Investor Services, the transfer agency arm of Franklin Templeton.

The Shareholder Communications Coalition, the Washington, D,C, trade group representing corporate secretaries and investor relations professionals. agrees with the need for reform in the proxy plumbing system, but it is adamant that FINRA should not take over the oversight of proxy fees. “It would be a step in the wrong direction to transfer regulatory oversight of proxy fees — which primarily involve reimbursements to broker-dealers for proxy costs– to the primary regulator of the brokerage industry,” writes Niels Holch, executive director of the Shareholder Communications Coalition in his January 11 letter to the SEC. “The SEC should empower a new Proxy Fee Working Group and reform the proxy processing system and replace it with a more comprehensive framework that permits public companies to choose their own proxy service provider and establish proxy fees based on market forces.”

The Securities Transfer Association, the trade group representing US transfer agents, agrees with the need for more competition in the in the proxy distribution market saying issuers should have more choice in whom they select as their distribution agent. In its letter to the SEC on April 14 the the trade group called on the SEC to suspend the NYSE’s role for setting proxy distribution fees as of January 2022 in favor of the creation of a Proxy Fee Working Group to come up with a new fee schedule. As a temporary rule, says the STA, the SEC should require issuers to pay for 100 percent of the costs of mailing proxy materials to registered shareholders and for financial intermediaries to pay 100 percent of the costs for mailing proxy materials to registered shareholders. “These processing functions are handed today by brokers and banks without reimbursement by issuers. The distribution of proxy materials– especially when sent electronically to beneficial owners– should be treated no differently,” writes Todd May, president of the STA, in his April 14 letter to the SEC. “A temporary regulatory framework where intermediaries are paying directly for proxy processing services will reduce proxy fees within the street name system and result in fee arrangements that approximate what these fees would be in a competitive market.” May is also chief executive of transfer agent EQ, formerly known as Wells Fargo Shareowner Services.

Computershare, the US and world’s largest transfer agent, submitted its own comment letters to the SEC also touting the merits of competition when it comes to issuers mailing proxy materials to beneficial shareholders. However, its proposed remedy differs from the STA’s. In his January 11 letter to the SEC, Computershare’s president of global capital markets Paul Conn writes: “Competing service providers would bid to fulfill issuers’ communication needs at least in relation to a subset of holders where the industry can agree to direct communications (eg NOBO holders). This would enable the market to deliver significant cost savings to issuers where the actual cost of communications (e.g. e-communication) is significantly lower than the maximum reimbursement fees.” Conn goes on to say that in the case of OBOs, the fee could be split between the broker-dealer and investor. NOBOs, short for non-objecting beneficial shareholders, are those who allow financial intermediaries to disclose their names to issuers while OBOs, short for objecting beneficial shareholders, do not. Reflecting specifically on the STA’s April 14 letter to the SEC, Conn says that although Computershare thinks the STA’s recommendation to the STA on proxy reform has merit it should be allowed only on a permanent basis, and only if all other options don’t work. “Implementing such a change even on an interim basis, as the STA recommends, will likely polarize the industry even further and remove the ability to build on recent incremental but positive changes to the system,” he writes in a separate letter to the SEC also dated April 14.

No one believes the SEC will want to oversee proxy distribution fees. Given that FINRA also doesn’t want the job and there is some opposition to its taking over the NYSE’s role, the SEC might be forced to allow the Big Board to keep is role. Even if FINRA reluctantly takes over the task, it is unlikely to address tackle proxy reform. Its constituent broker-dealers don’t want to change the status quo. In its letter to the SEC, the Securities Industry and Financial Markets Association (SIFMA), the Washington, D.C.-based broker-dealer trade group, says that it is not recommending whether the NYSE or FINRA take the lead role in establishing and updating reimbursement rates. However, SIFMA does want the SEC to ensure that whichever organization takes on the job of setting proxy fee distribution rates will not rely on a standard of reasonable expenses, but on a fixed maximum fee schedule. The reason: issuers may have different interpretation of reasonable expenses. “The result could be endless debate and negotiation among numerous issuers, and many brokers, banks, and other parties which would inject significant cost, delay and uncertainty into the process,” writes Thomas Price, managing director of operations for SIFMA in his April 14 letter to the SEC. “This could lead to unintended consequences of broker-dealers being fully reimbursed for such expenses.”