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92-33 Providing of Proxy Voting Advice to Customers

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Corporate Finance
Legal & Compliance
*These are suggested departments only. Others may be appropriate for your firm.

EXECUTIVE SUMMARY

The NASD has received a "No-Action Letter" (letter) from the Division of Corporation Finance of the Securities and Exchange Commission. It provides that a broker/dealer may rely on the provisions of SEC Rule 14a-2(b)(2) to contact a customer and provide proxy voting advice and information on a company's proposals without complying with certain of the proxy rules of the Commission. The text of the NASD's letter requesting clarification of SEC Rule 14a-2(b)(2) and the no-action letter follow this Notice.

BACKGROUND

The NASD is engaged in efforts with the United States Congress, the Securities and Exchange Commission (SEC), and others to protect the rights of security holders involved in merger and acquisition transactions that are commonly referred to as roll-ups. Roll-ups are an area of concern at the present time in the partnership industry as Congress, the SEC, the NASD, and the states move to protect investors from documented abuses that have occurred in previous roll-up transactions.

As part of its efforts to ensure that an investor is provided with accurate information on which to base a decision regarding a proxy vote, the NASD asked the SEC to clarify that broker/dealers may rely on the "safe-harbor provisions" of SEC Rule 14a-2(b)(2) to contact a customer and advise them regarding the merits of a roll-up transaction. The NASD requested the no-action letter because it was unclear under the safe-harbor provisions that a broker/dealer could initiate contact with the customer to provide such information and advice.

The letter states that the anti-fraud provisions of SEC Rule 14a-9 are fully applicable to a broker/dealer that relies on the safe harbor. The letter further provides that a broker/dealer must render financial advice as part of its ordinary course of business and have a business relationship with the customer at the time it is providing the proxy voting advice.

The broker/dealer must also disclose to the customer any significant relationship it has with the issuer and its affiliates or with a shareholder who has a stated position on the matter on which the advice is given. And the broker/dealer must disclose if it has a material interest in the matter to be voted on.

Furthermore, the broker/dealer may not receive special compensation for furnishing the advice from any person other than the customer and may not rely on the safe harbor if the advice is being furnished on behalf of anyone who is actively soliciting proxies or on behalf of a person who is a participant in an election contest subject to SEC Rule 14a-ll.

Once the terms and conditions outlined above have been satisfied, a broker/dealer can contact and advise a customer regarding his or her proxy vote. It should be noted that no amount of disclosure will permit a broker/dealer to rely on the provisions of the safe harbor if it is acting on behalf of a soliciting person such as the issuer or its affiliates, or receiving directly or indirectly any compensation from a soliciting person.

Traditionally, broker/dealers have relied on the provisions of the safe harbor only when a customer has called the broker to ask for advice. In these cases of providing unsolicited advice, the SEC normally has not considered a broker/dealer to be a participant in a proxy solicitation or to be engaged in soliciting activity where the broker/dealer merely responded, whether orally or in writing, to a customer's request for an opinion or recommendation on how to vote. The terms of this letter now make clear that a broker/dealer may initiate contact with customers to provide such proxy voting advice.

Questions regarding this letter may be directed to the Office of the Chief Counsel for the Division of Corporation Finance at (202) 272-2573 or to Charles L. Bennett, Director of the NASD's Corporate Financing Department, at (202) 728-8258 or Shirley H. Weiss, Assistant General Counsel, at (202) 728-8844.

National Association of Securities Dealers, Inc.

1735 K Street, N.W.
Washington, D.C. 20006-1506
(202) 728-8000

May 19, 1992

Ms. Linda C. Quinn
Director, Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Room 3000, Mail Stop 3-1
Washington, D.C. 20549

Re: National Association of Securities Dealers, Inc.

Request for Clarification of SEC Rule 14a-2(b)(2)

Dear Ms. Quinn:

The National Association of Securities Dealers, Inc. ("NASD") requests the Commission's assistance to clarify the regulatory responsibilities of its member firms, and persons associated therewith (collectively "broker/dealers") who, in compliance with the requirements of SEC Rule 14a-2(b)(2), give proxy voting advice which has not been solicited by their customers.

Rule 14a-2(b)(2), which was "designed to remove an impediment to the flow of information to shareholders from professional financial advisors who may be especially familiar with the affairs of issuers," (Release No. 34-16356 (November 23, 1979)), exempts financial advisors who furnish proxy voting advice to persons with whom the advisor has a business relationship from the proxy filing and informational requirements (Rules 14a-3 through 14a-8, and 14a-10 through 14a-14) provided certain conditions are met. In Release No. 34-16104 (August 13, 1979), the Commission explained that "advisors" would normally include financial analysts, investment advisors, and broker/dealers. A "business relationship" would exist if the advisor had previously provided financial advisory services, and the recipient had provided compensation or otherwise consented to receipt of the services.

The NASD believes that the plain meaning of Rule 14a-b(2) creates an exemption for broker/dealers from the informational and filing requirements of Section 14(a) of the Securities Exchange Act of 1934 (the "Act") and Rule 14A thereunder, if they comply with the requirements of SEC Rule 14a-2(b)(2), notwithstanding that their customers have not sought such advice. A significant number of broker/dealers have, however, sought reassurance from the NASD that they are not subject to the proxy informational and filing requirements if they provide proxy voting advice which their customers have not solicited, even if they meet the requirements of Rule 14a-2(b)(2). This issue has become particularly pertinent in connection with roll-up transactions of direct participation programs.

The NASD therefore requests interpretative advice from the Division of Corporation Finance regarding the circumstances under which broker/dealer members of the NASD may give proxy voting advice, whether solicited by customers or not, without becoming subject to the informational and requirements of Section 14(a) of the Act and Rule 14A thereunder.

Should you have any questions regarding this request, please do not hesitate to contact Charles L. Bennett, Director, Corporate Financing Department, at (202) 728-8253, Shirley H. Weiss, Assistant General Counsel, Office of General Counsel, at (202) 728-8844, or the undersigned at (202) 728-8020. I appreciate your attention regarding this issue.

Very truly yours,

Richard G. Ketchum
Executive Vice President
Legal, Regulatory & Market Policy

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

Division of Corporation finance

May 19, 1992

Mr. Richard G. Ketchum
Executive Vice President
Legal, Regulatory & Market Policy
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006-1506

Re: National Association of Securities Dealers, Inc. Incoming letter dated May 19, 1992

Dear Mr. Ketchum:

This responds to your request regarding the applicability of the Commission's proxy rules to proxy voting advice rendered by registered broker-dealers to their customers in the context of a proxy solicitation which seeks securityholder approval of a proposed roll-up transaction. As explained below, broker-dealers providing such advice are exempted from otherwise applicable proxy filing and disclosure requirements, but not from the antifraud provisions of the proxy rules, provided they comply with certain specified conditions that are intended to enable securityholder-customers to assess the reliability and integrity of the advice.

Rule 14a-2(b)(2), promulgated by the Commission under Section 14(a) of the Exchange Act, provides an exemption from the proxy rules other than the antifraud provisions of Rule 14a-9 for a broker-dealer or other person who, subject to certain conditions, furnishes proxy voting advice to another person with whom he or she has a business relationship. Such conditions are as follows:

(1) that the person furnishing proxy voting advice to any securityholder of the issuer, referred to as the "advisor," render financial advice in the ordinary course of business;
(2) the advisor disclose any significant relationship with the issuer, its affiliates, or a securityholder proponent of the matter on which proxy voting advice is given, as well as any material interest of the advisor in that matter;
(3) that the advisor receive no special commission or remuneration for furnishing the voting advice from any person other than the securityholder recipient thereof; and
(4) that the voting advice is not furnished on behalf on any person soliciting proxies, or on behalf of a participant in an election contest subject to Commission Rule 14a-11.

Under the foregoing requirements, a broker-dealer advising customer-securityholders may contact them to provide information and advice regarding their proxy vote in reliance on Rule 14a-2(b)(2) notwithstanding the existence of a significant relationship between the broker-dealer and the issuer or any other person engaged in soliciting proxies, or a material interest of the broker-dealer in the resolution of a proxy voting issuer. The broker-dealer would, however, have to disclose any such relationship or interest when providing proxy voting advice to a securityholder-customer, and also meet the other eligibility standards enumerated in the Rule. No amount of disclosure would allow a broker-dealer to rely on the exemption to furnish proxy voting advice voluntarily to a securityholder customer if he or she is acting on behalf of a person soliciting proxies, or receives compensation related, directly or indirectly, to the furnishing of the advice or the matter subject to the solicitation from such a soliciting person or from any other person who is not the customer-recipient of the advice.

A broker-dealer's need to rely on the Rule 14a-2(b)(2) exemption when rendering proxy voting advice generally arises only when the advice is unsolicited. The Commission normally would not deem a broker-dealer not otherwise a participant in a proxy solicitation to be engaged in soliciting activity triggering application of the Commission's proxy rules where the broker merely responds, whether orally or in writing, to a customer request for an opinion or recommendation on how to vote. Absent evidence to the contrary, the fact that a broker did not affirmatively seek out a customer to offer an opinion or recommendation on the issues submitted to a securityholder vote, but instead expressed a view when asked by a customer, is considered reflective of a lack of intent to solicit a proxy, consent or authorization within the meaning of the Commission's definition of a "solicitation" subject to it's proxy regulation.

I hope this information proves helpful.

Sincerely,

Abigail Arms

Chief Counsel

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