November 18, 2016.
On August 15, 2016, New York Stock Exchange LLC (“NYSE” or the “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) 
and Rule 19b-4 thereunder,
a proposed rule change to adopt maximum fees NYSE member organizations may charge in connection with the distribution of investment company shareholder reports pursuant to any “notice and access” electronic delivery rules adopted by the Commission. The proposed rule change was published for comment in the Federal Register on August 22, 2016.
The Commission received fourteen comment letters on Start Printed Page 85292the proposal.
On October 5, 2016, the Commission extended the time period for Commission action on the proposal to November 20, 2016.
This order approves the proposed rule change.
II. Description of the Proposed Rule Change
Pursuant to NYSE Rule 451, NYSE member organizations that hold securities in street name 
are required to deliver, on behalf of an issuer, proxy and other materials to beneficial owners if they are assured they will receive reasonable reimbursement of expenses for such distributions from the issuer.
For this service, issuers reimburse NYSE member organizations for all out-of-pocket expenses, including reasonable clerical expenses, as well as actual postage costs and other actual costs incurred for a particular distribution.
NYSE Rule 451 establishes the maximum approved rates 
that a member organization can charge an issuer for distribution of proxies and other materials absent prior notification to and consent of the issuer.
Although member organizations may seek reimbursement from an issuer for less than the established rates,
the Commission understands that in practice most issuers are billed at the established rates.
The vast majority of broker-dealers that distribute issuer proxy and other materials to beneficial owners are entitled to reimbursement at the NYSE fee schedule rates because most are NYSE members, and those that are not are members of the Financial Industry Regulatory Authority (“FINRA”), which has similar rules.
Over time, NYSE member organizations increasingly have outsourced their proxy delivery and other distribution obligations to third-party service providers, which are generally called “intermediaries,” rather than handling this processing internally.
In addition to the distribution of proxy materials, the reimbursement rates set forth in NYSE Rule 451 apply to the distribution of annual and semi-annual shareholder reports.
In this regard, the reimbursement rates set forth in Rule 451 apply to the distribution of investment company (“fund”) shareholder reports and other materials to the beneficial owners of fund shares.
For example, as the Exchange noted, a fund pays an interim report fee of 15 cents per account when a broker distributes an annual or semi-annual report to the accounts of shareholders holding its shares as beneficial owners. Funds also pay a preference management fee of 10 cents for every account with respect to which a member organization has eliminated the need to send paper materials.
While NYSE Rule 451 also establishes the fees that member firms can charge issuers for proxy materials distributed
through the notice and access method,
those fees would not apply to the Start Printed Page 85293electronic distribution of investment company shareholder reports. With respect to notice and access distributions of proxy materials, NYSE Rule 451 sets forth an incremental, tiered fee structure based on the number of nominee broker-dealer accounts through which the issuer's securities are beneficially owned.
On May 20, 2015, the Commission proposed new Rule 30e-3 under the Investment Company Act, which, among other things, would permit, but not require, funds to satisfy their annual and semi-annual shareholder report delivery obligations by making shareholder reports available electronically on a Web site.
Funds relying on this provision would be required, among other things, to meet conditions relating to the provision of notice to shareholders of the internet availability of shareholder reports.
B. Proposed Changes to NYSE Rule 451.90(5)
Accordingly, the Exchange has proposed to amend Rule 451.90(5) to specify that the notice and access fees set forth therein for distribution of proxy materials also will be charged with respect to distributions of fund shareholder reports pursuant to any notice and access rules adopted by the Commission in relation to such distributions.
The Exchange noted that the notice and access process under proposed Rule 30e-3 is similar to the existing proxy notice and access process for which the Exchange has already adopted a fee schedule in Rule 451, and thus the Exchange believes that it would be appropriate to apply the existing notice and access fees, with certain modifications, to fund shareholder report distributions, if the Commission ultimately adopts proposed Rule 30e-3.
The Exchange also has proposed to set forth in Rule 451 that the notice and access fee will not be charged for any account with respect to which a fund pays a “preference management fee” in connection with a distribution of fund reports.
As a result, funds would be charged notice and access fees only with respect to accounts that actually receive a notice and access mailing.
In addition, because funds often issue multiple classes of shares, the Exchange believes it is necessary to be clear how the pricing tiers in Rule 451 would be applied to fund shareholder reports.
Specifically, the Exchange has proposed to set forth in Rule 451 that, in calculating the rates at which a fund will be charged notice and access fees for shareholder report distributions, all accounts holding shares of any class of stock of the fund eligible to receive the same report distribution will be aggregated in determining the appropriate pricing tier.
III. Summary of Comments Received
As noted above, the Commission received a total of fourteen comment letters on the Exchange's proposed rule change.
In general, commenters broadly supported the proposed rule change.
Two commenters, however, expressed concern about making a determination on the fees without a final Commission rule in place that permitted notice and access for fund report distributions.
Several commenters took the position that the proposed rates set forth in NYSE's proposal would help realize the cost savings meant to be achieved through notice and access delivery of fund shareholder reports.
Some pointed out that shareholder report delivery is an expense that fund shareholders bear, and asserted that the cost savings would directly benefit fund shareholders.
One commenter also noted that the three changes being proposed by the NYSE would resolve ambiguity in the NYSE's fee schedule as it would apply to notice and access delivery of fund shareholder reports, potentially paving the way for the Commission to move forward with its proposal.
According to this commenter, the NYSE's proposal would ensure significant cost savings for fund shareholders if the Commission were to adopt a notice and access proposal.
This commenter also suggested that, absent NYSE's proposed rule change, these cost savings could be erased.
Similarly, another commenter asserted that, absent adoption of NYSE's proposal, Rule 451 would be applied in a manner that diminished Rule 30e-3 shareholder cost savings, or even increased shareholder costs.
In addition, this commenter was of the view that each element of proposed Rule 451.90(5) was logical and fair.
Another commenter believed that the proposed rule would ensure cost savings under proposed Rule 30e-3 and provide needed explanation on how Rule 451 would apply to electronic delivery of fund shareholder reports.
Two commenters, however, expressed concerns about commenting on the NYSE fee proposal before proposed Rule 30e-3 was finally adopted. One commenter indicated that it could not definitively conclude whether the proposed fee structure was appropriate without a final rule specifying the details of the broker-dealer processing requirements for notice and access delivery.
Another commenter, the largest provider of shareholder communication services, stated that it performed an analysis in order to estimate the costs of a notice and access distribution of fund shareholder reports, but noted that it had to make certain assumptions that could change based on the final requirements of proposed Rule 30e-3.
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Finally, several commenters commented on issues concerning the fees and the Exchange's role in setting those fees that are outside the scope of the Exchange's proposal.
IV. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Exchange Act and rules and regulations thereunder applicable to a national securities exchange.
In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(4) of the Exchange Act,
which requires that an exchange have rules that provide for the equitable allocation of reasonable dues, fees and other charges among its members, issuers and other persons using its facilities; Section 6(b)(5) of the Exchange Act,
which requires that the rules of an exchange be designed, among other things, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest, and not be designed to permit unfair discrimination between customers, issuers, brokers or dealers; and Section 6(b)(8) of the Exchange Act,
which prohibits any exchange rule from imposing a burden on competition that is not necessary or appropriate in furtherance of the Exchange Act.
Under the Exchange's proposal, the reimbursement rates set forth in NYSE Rule 451.90(5), which currently only apply to proxy distributions where the issuer elects to use notice and access, would become applicable to distributions of fund shareholder reports, pursuant to any notice and access rules adopted by the Commission.
Although the Commission has not adopted a notice and access rule, the Commission believes that it is appropriate and consistent with the Exchange Act to have in place rules that set forth the maximum reimbursement rates that funds may be charged for notice and access distributions should the Commission adopt a notice and access rule for fund shareholder reports.
The Commission believes that the application of the currently approved reimbursement rates for notice and access proxy distributions to fund shareholder report distributions, with the proposed amendments described herein, should establish a reasonable and practical reimbursement structure, if notice and access distribution of fund shareholder reports is authorized. In this regard, the Commission notes that the notice and access process for proxy distributions is similar in many respects to the notice and access process for fund shareholder report distributions proposed under Rule 30e-3.
In addition, the approval of the NYSE's fee proposal should facilitate any future Commission consideration of notice and access distributions for fund shareholder reports, by providing clarity on the maximum reimbursement rates for such distributions.
The Commission also believes that it is reasonable and appropriate for proposed Rule 451.90(5) to specify that funds utilizing notice and access will not be charged a notice and access fee for any account with respect to which they are being charged a preference management fee in connection with a distribution of shareholder reports. Today under NYSE Rule 451.90(4), issuers, including funds, are charged a preference management fee for each account for which the need to send materials in paper format through the mails (or by courier service) has been eliminated.
In the context of notice and access distributions of proxy materials under Rule 451.90(5), however, issuers are charged a notice and access fee for all accounts through which the issuer's securities are beneficially owned, with the result that issuers could be charged both preference management fees and notice and access fees with respect to the same account. The Exchange's proposal would eliminate this potential double-charging in the context of fund distributions of shareholder reports, in that the notice and access fee will not be charged for any account for which a preference management fee is already paid due to the elimination of the need for a paper mailing.
The Commission understands that the preference management fee generally is intended to reimburse intermediaries for the processing work and costs involved in keeping track of each account holder's election to eliminate paper mailings.
Accordingly, as the Exchange noted, funds will only pay notice and access fees with respect to accounts that actually receive notice and access mailings.
The Commission believes that this result is consistent with Section 6(b) of the Exchange Act.
In addition, the Commission believes that it is consistent with the Exchange Act for proposed Rule 451.90(5) to clarify that, in determining the appropriate pricing tier for notice and access fees in connection with investment company shareholder report distributions, all accounts holding shares of any share class that is eligible to receive the same report distribution will be aggregated. This clarification should resolve the ambiguity as to whether pricing tiers would be calculated by share class, resulting in potentially higher fees than if the accounts are aggregated as proposed. The Commission further believes this clarification is reasonable because it Start Printed Page 85295recognizes the unique nature of the fund industry in treating distributions with respect to a common group of shareholders as a single distribution for purposes of the fee tiers.
The Commission understands that, in setting the reimbursement rates in Rule 451.90, the Exchange balances the competing interests of issuers who must pay for distributions of shareholder reports and brokers who need assurance of adequate reimbursement for making such distributions on their behalf.
The Commission notes that all commenters broadly supported NYSE's proposal.
As discussed above, two commenters expressed some concern with assessing the details of the NYSE's proposal before a final decision is made on proposed Rule 30e-3. However, given that the Exchange's rule is applicable to the “distribution of investment company shareholder reports pursuant to any `notice and access' rules adopted by the [Commission] in relation to such distributions” as well as the functional similarities between notice and access processing for proxy and investment company report distributions,
the Commission believes, for the reasons discussed above, that it is appropriate at this time to approve substantially similar reimbursement rates, with the proposed amendments described herein, which should establish a reasonable and practical reimbursement structure, if notice and access distribution of investment company shareholder reports is authorized.
For the reasons discussed above, the Commission believes that the proposed rule change is consistent with the Exchange Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act 
that the proposed rule change (SR-NYSE-2016-55) be, and hereby is, approved.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Brent J. Fields,
[FR Doc. 2016-28311 Filed 11-23-16; 8:45 am]
BILLING CODE 8011-01-P