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Federal Register / Vol. 86, No. 161 / Tuesday, August 24, 2021 / Notices
lotter on DSK11XQN23PROD with NOTICES1

does not make such a finding.27 The Commissions Rules of Practice, under Rule 700b3, state that the burden to demonstrate that a proposed rule change is consistent with the Exchange Act and the rules and regulations issued thereunder . . . is on the self-regulatory organization that proposed the rule change and that a mere assertion that the proposed rule change is consistent with those requirements . . . is not sufficient. 28
The description of a proposed rule change, its purpose and operation, its effect, and a legal analysis of its consistency with applicable requirements must all be sufficiently detailed and specific to support an affirmative Commission finding,29 and any failure of an SRO to provide this information may result in the Commission not having a sufficient basis to make an affirmative finding that a proposed rule change is consistent with the Act and the applicable rules and regulations.30 Moreover, unquestioning reliance on an SROs representations in a proposed rule change is not sufficient to justify Commission approval of a proposed rule change.31
For the reasons discussed below, the Commission is disapproving the proposed rule change because the information before the Commission is insufficient to support a finding that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. Specifically, the Commission concludes that it does not have sufficient information to determine that the proposed rule change is consistent with Section 6b5 of the Act and, in particular, the requirements that a national securities exchanges rules be designed to promote just and equitable principles of trade and to protect investors and the public interest, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers.
As an SRO, the Exchange bears the burden to demonstrate that any proposed rule changewhether a proposed new rule, or a proposed elimination of an existing ruleis consistent with the Act.32 As discussed 27 See 15 U.S.C. 78sb2Cii; see also 17 CFR
201.700b3.
28 See 17 CFR 201.700b3.
29 See id.
30 See id.
31 Susquehanna Intl Group, LLP v. Securities and Exchange Commission, 866 F.3d 442, 447 D.C. Cir.
2017.
32 See Rule 700b3, Commission Rules of Practice, 17 CFR 201.700b3.

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above, the Exchange has proposed to delete its long-standing and currently and widely relied-upon provisions setting maximum reimbursement rates, and instead provide that a NYSE
member organization must comply with any schedule of approved charges set forth in the rules of any other national securities exchange or association of which such organization is a member.
This effectively would make the maximum reimbursement rates set forth in FINRA rules the industry standard, and establish FINRA as the lead SRO in this area.33 Accordingly, the Exchange bears the burden to demonstrate that approval of its proposalwhich would result in a FINRA-led regimewould be consistent with the Act.
In the Notice, the Exchange expressed the view that FINRA is in a better position to take the lead in setting maximum reimbursement rates for the distribution of proxy and other issuer materials to beneficial owners because 1 all broker-dealers that hold shares in street name for customers are FINRA
members, while only a subset of them are NYSE members, and 2 a large number of affected issuers are not listed on the Exchange.34 In the Order Instituting Proceedings, the Commission stated that, because NYSE is a primary listing market, it has relationships with issuers as well as broker-dealers, and thus is well-positioned to take into account the views of both major stakeholder groups when reviewing and updating the maximum reimbursement rates.35 The Commission stated that, unlike NYSE, FINRA does not have a relationship with issuers, who ultimately pay the reimbursement rates.36 Further, the Commission stated that the Exchange had not explained why, in the absence of a relationship with this important constituency, FINRA is in a better position than NYSE
to assume the leadership role in this area.37 The Commission also stated that the Exchange had not explained why the fact that all broker-dealers are FINRA members puts FINRA in a materially better position to assume the leadership role in this area, or the significance of the fact that only a subset of impacted issuers are listed on NYSE, and only a subset of impacted brokerdealers are NYSE members, given that NYSE would appear well-positioned to consider the views of both of these constituencies, whereas FINRA would 33 See
supra note 20 and accompanying text.
Notice, supra note 3, 85 FR at 8311920.
35 See Order Instituting Proceedings, supra note 7, 86 FR at 15737.
36 See id.
37 See id.
34 See
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not appear well-positioned to consider issuers views.38
In response to the Order Instituting Proceedings, the Exchange argued that being a listing exchange does not give it a meaningful advantage in the reimbursement rate-setting process because whether such rates are reasonable is necessarily based on the actual costs incurred by brokers, of which issuers have no first-hand knowledge.39 In addition, the Exchange argued that FINRA is uniquely wellpositioned to set reimbursement rates because, as the common regulator for all brokers whose business includes servicing street-name account holders, FINRA can review the actual costs incurred by brokers across the entire industry and their intermediaries.40 The Exchange stated, in this regard, that only a subset of brokers that hold shares on behalf of customers in street name are NYSE members, and the NYSE
members who engage in retail brokerage services primarily consist of larger, more established brokers, whereas FINRAs membership is more diverse, including smaller regional brokers and digital-only brokers that concentrate on serving retail customers.41
A broker bears an obligation to forward proxies and other issuer materials to beneficial owners with street name holdings, but that obligation is conditioned upon the broker receiving assurance from the issuer of reimbursement of the brokers reasonable expenses incurred in connection with performing that obligation.42 Under this framework, brokers and issuers are both inextricably involved in ensuring that beneficial owners with street name holdings receive proxies and other issuer materials.
The Exchanges arguments do not provide a sufficient basis for the Commission to find that the proposed rule change would be consistent with Section 6b5 of the Act because the Exchange has not demonstrated how issuers interests would continue to be adequately considered, and not unfairly discriminated against, in the reimbursement rate-setting process if the Exchange were to relinquish its lead 38 See
id.
letter from John Carey, Senior Director, NYSE, dated April 28, 2021 NYSE Response Letter, at 2.
40 See id. In this context, the Commission understands the Exchanges reference to intermediaries to be a reference to proxy service providers that coordinate the distribution of proxy or other materials for multiple nominees. See Section 1aii of Supplementary Material .90 to Rule 451 defining the term intermediary.
41 See NYSE Response Letter at 2.
42 See 17 CFR 240.14b1.
39 See
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