The reason behind the recent proposal of the New York Stock Exchange to limit how much investment companies can pay in closed-end listing fees is not clear, but chances are it's not out of kindness.
In July, the NYSE filed a proposal with the Securities and Exchange Commission to limit the total listing fees for new closed-end funds so that no company would have to pay them more than $1.25 million this year. Most closed-end funds listed on the Exchange are sponsored by one of a number of companies that specialize in the area, such as Morgan Stanley Van Kampen, Nuveen, and Merrill Lynch Asset Mgt., the three companies with the largest number of closed-end funds on the Exchange.
For the remainder of 2001, once a family has paid $1.25 million in listing fees, no additional fees will be charged, and the Exchange will likely soon impose a permanent limit. The minimum original listing fee for closed-end funds this year is $100,000 for funds with up to 10 million shares, $125,000 for funds with up to 24 million shares, and $150,000 for funds with over 24 million shares.
The NYSE maintains that the proposal was triggered by a normal and ongoing review of its fee structure. Some of the other products on the Exchange have a fee cap, and so the Exchange wants to make closed-end funds more in line with those, according to a spokesperson for the NYSE. Exchange management has not completed this review and is not yet ready to put forward a definitive proposal, but it is likely that the $1.25 million cap for this year will soon be enacted, according to the SEC filing.
The proposal has not yet received any widespread attention. Neither Brian Smith, executive director of the Closed-End Fund Association, Thomas Herzfeld, a closed-end fund investment adviser and author on the subject, nor Phillip Goldstein, a closed-end fund shareholder activist, had heard of the proposal. "I really have no idea why they might be proposing to do that," said Goldstein. "This is the first I've heard of it."
One reason could be that the Exchange simply wants or needs to lure investment companies, said Jim Curtis, special counsel in the SEC's division of investment management. "I would think they're doing it because of competition in the marketplace," he said. "The New York Stock Exchange is not the only place to list a closed-end fund. It's still prestigious, but I don't think it is quite as prestigious as it was, say, ten years ago."
The NYSE is trying to maintain it's competitive edge over Nasdaq, particularly because IPOs, a big revenue generator for the exchanges, are way down, said Colleen O'Connor, senior editor of the IPO Report. For the first half of this year, a total of 47 IPOs priced for trading totaling $25.4 billion, according to the IPO Monitor. That is down dramatically from the 239 IPOs in the first half of 2000, which totaled over $65 billion.
As a result, in April, the NYSE announced that, beginning next year, it is cutting its listing charges in half from $500,000 to $250,000, and this new proposal may be an extension of that, according to O'Connor. "With the dearth of IPOs, the Exchanges are doing what they can to attract new business," she said. "I think the NYSE is looking to maintain its position as the big board'."
Under the Securities Exchange Act of 1934, the Exchange is required to "have rules that provide for the equitable allocation of reasonable dues, fees and other charges among its members and issuers," according to the SEC filing. However, the new proposal makes the allocation of fees inequitable, according to Herzfeld.
"I guess what the large sponsors here have initiated is some kind of a proposal to the exchange to give them a volume discount," said Herzfeld. "I'm in favor of anything that lowers expenses to shareholders, but if you take it a bit further, it does put the independently managed funds, which are not part of a big group, at a competitive disadvantage. They'll still have to pay the full listing fee, whereas the fund management companies, which have many funds under their wing, will get a volume discount, which would give their funds a competitive advantage to independently managed funds."
The Investment Company Institute, which Herzfeld maintains should step in to make sure that any discount imposed is equitable, has informed its members about the NYSE action, but will not comment on it because "it's strictly a business decision on the part of the NYSE," according to an ICI spokesperson.
The notion that the Exchange is capping its fees to attract more funds was dismissed by Herzfeld. "How does this attract more?" he said. "It just really gives the big players a discount."