SEC Grants Rule Change that Prohibits Certain Reimbursements from Issuers to NYSE Member Organizations

The Securities and Exchange Commission (SEC) announced on August 13, 2021, that it has approved Rule 451A, which in certain circumstances prohibits brokers that are members of the New York Stock Exchange (NYSE) from seeking reimbursement from issuers for forwarding proxy and other materials to beneficial owners.

Access the full SEC announcement.

Key Information about Rule 451A

  • Prohibits brokers that are NYSE members from imposing fees for proxy distributions for nominee accounts that contain only shares or units of securities that were transferred to the account holder by the member organization at no cost.
  • Brokers remain fully obligated to solicit votes from and make distributions on behalf of issuers to all beneficial holders, regardless of the limitations on reimbursements.
  • Does not limit a broker’s right to reimbursement for distributions if any part of the beneficial holder’s position was received by any means other than the member’s transfer without charge.
  • Does not limit the broker’s right to reimbursement unless the broker itself transferred the issuer shares without charge to the account of the beneficial holder.
  • Issuers remain responsible for reimbursing brokers for any actual postage costs, envelope costs and communication expenses (excluding overheads) incurred in receiving vote returns. This is consistent with current practices for managed accounts that contain fewer than 5 shares and accounts containing only fractional shares

Why the NYSE Proposed Rule 451A

The NYSE observed a recent promotional practice in which retail brokers provide customers with a small number of shares with a very low dollar value as a commercial incentive (e.g., upon opening a new account or referring a new customer to the broker).

The NYSE stated that since Rule 451 does not distinguish between beneficial owners that have paid for their shares and those which have received them for free, brokers are required to solicit proxies from these accounts and are entitled to reimbursement of their expenses under NYSE and other self-regulatory organization rules. Some issuers experienced a significant increase in distribution reimbursement expenses solely due to their shares being included in such promotional schemes.

The NYSE believes it is more appropriate for the broker to bear the proxy distribution costs in these circumstances since the broker is realizing the commercial benefit of the promotional activity; hence it proposed Rule 451A.

Are FINRA Member Organizations Affected?

Rule 451A only applies to NYSE member organizations at this time, so FINRA member firms are not affected by this change if they are not also NYSE members. However, Mediant will keep our clients informed if FINRA amends their rules similarly.

In the meantime, we will work with NYSE member brokers and issuers as they adapt to this rule change.