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Federal Register / Vol. 86, No. 158 / Thursday, August 19, 2021 / Notices
lotter on DSK11XQN23PROD with NOTICES1

the recent broker practice of gifting small amounts of securities to retail brokerage clients as a promotional measure has caused significant increases in proxy costs for some issuers, and expressed the view that the proposal would alleviate much of the cost impact to issuers from this broker practice, particularly for accounts defaulted to e-delivery.45 Two commenters are issuers that stated that they experienced dramatic increases in proxy distribution costs for the 2020
proxy season, which they both attributed to the inclusion of their shares in a retail brokers promotional free share program.46 Both commenters asserted that the issuer should not bear the proxy distribution costs that arise due to their shares being included in such a broker promotional program.47
Kim Warnica, Senior Vice President, General Counsel and Secretary, Marathon Oil Corporation, dated April 27, 2021 Marathon Letter; Patrick J.
McEnany, Chairman and CEO, Catalyst Pharmaceuticals, Inc., dated June 9, 2021 Catalyst Letter. An additional commenter appears to suggest that member organizations should be reimbursed in certain circumstances that are not covered by the proposal or the rules the proposal is amending. See letter from David, dated June 14, 2021.
45 See First Computershare Letter at 23. This commenter also stated that while it understood that the accounts that receive such gifted securities generally are set for electronic communications, as a technical matter, if a street-name holder of gifted securities receives hardcopy proxy communications rather than electronic delivery, the issuer will still bear increased costs from printing the materials to be disseminated by the broker. See id. Even if an issuer bears increased printing costs due to its shares being included in a broker promotional program, as discussed below, the Commission believes that the proposal is consistent with the Act because, among other things, the proposed rules prohibition against imposing fees on issuers would result in a more equitable and not unfairly discriminatory reallocation to brokers of significant costs typically associated with the distribution of proxies and other materials in the circumstances addressed by the proposal.
46 See Marathon Letter at 12; Catalyst Letter at 2. One of these commenters stated that its 2020
proxy distribution bill was 2,402 percent higher than the 2019 bill, representing distribution to 3,051 percent more stockholders in 2020 than in 2019. See Marathon Letter at 1. The commenter noted that as of its 2020 stockholder meeting date, 80 percent of the stockholders that held the commenters shares through accounts at the particular retail broker held five shares or less. See id. The commenter believes that, for the vast majority of the accounts holding fewer than five shares, the shares were chosen by that retail broker, not the beneficial owners. See id. at 2. Similarly, the other issuer commenter stated that the number of holders of its common shares who hold their shares through that retail broker increased by more than 2,057 percent from 2019 to 2020, and its proxy distribution bill from the distribution platform that services that retail broker grew 1,779 percent from 2019 to 2020 from approximately $12,500 to approximately $234,000. See Catalyst Letter at 1
2. The commenter believes the increase in both shareholders and costs is directly attributable to the retail broker and its promotional activities. See id.
at 2.
47 See Marathon Letter at 2; Catalyst Letter at 2.

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Another commenter stated that the promotions the proposed rule change is designed to address provide commercial benefits to broker-dealers without providing any parallel benefits to public companies.48
The Commission believes that the proposal as modified is consistent with Sections 6b4 and 6b5 of the Act, as well as Rule 14b1. The proposed rule would appropriately reallocate from an issuer to a broker the fee-related expense of distributing proxy and other materials to beneficial owners in the limited circumstance where the beneficial owners account contains only shares or units of the issuers securities that were transferred to the beneficial owner by the broker at no cost.49 This circumstance would appear to arise typically due to a broker promotional program that, as stated by the Exchange, the broker chooses to engage in because it believes it will result in a commercial benefit to the broker and, as noted by one commenter,50 provides commercial benefits to the broker without providing any parallel benefits to the issuer.51 The Commission therefore believes that the proposal is reasonably designed to result in a more equitable and not unfairly discriminatory allocation of the costs of the distribution of proxy and other materials, consistent with Sections 6b4 and 6b5 of the Act.
The Commission also believes that the proposal is consistent with the Section 6b5 goal of protecting investors and the public interest, and is consistent with Rule 14b1, because the cost reallocation effectuated by the proposal would not diminish brokers obligations to distribute issuer materials to accounts in which securities are held in street name, including accounts covered by the proposal, i.e., that contain only shares or units of the securities involved that were transferred to the account holder by the member organization at no cost. Moreover, this cost reallocation 48 See
Coalition Letter at 5 n.14.
supra note 25 and accompanying text.
50 See Coalition Letter at 5 n.14. See also Catalyst Letter at 2.
51 One commenter stated that, if, after receiving gifted shares, an investor subsequently chooses to increase its share ownership and makes an investment decision to buy additional shares, it would be appropriate to shift the cost of proxy distribution back to the issuer. See Marathon Letter at 2. As stated above, the Exchanges proposal would affect accounts that only include shares that were transferred to the account holder by the broker at no cost, and accordingly, if a street name investor were to be induced to purchase or otherwise acquire any additional shares of the issuer as a result of being gifted shares by a broker, the issuer would then bear the proxy distribution costs for that investors account. See supra note 25 and accompanying text.
49 See
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does not preclude the broker from receiving assurance of reimbursement of its reasonable expenses, both direct and indirect, consistent with Rule 14b 1. In previously approving, in 2013, an Exchange proposal that, among other things, eliminated fees for distributing issuer materials to managed accounts with five or fewer shares of the issuers securities, the Commission acknowledged that any general rule setting forth an industry-wide fee schedule for the reimbursement of reasonable broker-dealer expenses necessarily will not precisely reimburse the actual expenses incurred by individual firms.52 Here, a broker with accounts covered by the proposal may not receive precise reimbursement for its expenses incurred for a distribution pertaining to the issuer whose shares it gave away at no cost, but the broker would continue to be reasonably reimbursed for its expenses, both direct and indirect, in the aggregate.53 The proposal would not eliminate a brokers ability to charge reimbursement fees for distributing an issuers materials to accounts that hold any shares or units of the issuers securities that the beneficial owner purchased or acquired in any way other than from the broker at no cost. Nor would the proposal affect the brokers ability to charge reimbursement fees for distributing materials on behalf of issuers whose shares it did not give away at no cost.
Any shortfall in precise reimbursement of expenses experienced by the broker because of the proposal would be confined to fee-related expenses attributable to distributing an issuers materials to beneficial owners that receive those materials solely due to the brokers own promotional efforts.
Based on the foregoing, the Commission finds that the proposed rule change, as amended, is consistent with the Act and the rules and regulations thereunder.
52 See Rule 451, Supplementary Material .90;
2013 Approval Order, supra note 11, 78 FR at 63546
stating that this rule with respect to managed accounts was designed to provide reasonable reimbursement of the overall expenses of brokerdealers in the aggregate, and the extent of reimbursement of any individual firm would vary depending on the specifics of its account population. One commenter analogized the scenario presented by this proposal to the Exchanges prior proposal to eliminate fees for distributing issuer materials to managed accounts with five or fewer shares of the issuers securities.
See Marathon Letter at 2.
53 As clarified in Amendment No. 3, supra note 10, issuers must reimburse brokers for any non-feerelated expensesi.e., any actual, out-of-pocket postage, envelope, and communication expenses incurred in receiving voting returns notwithstanding the proposed rule.

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