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95-45 SEC Approves Amendments To NASD Interpretation Of Forwarding Of Proxy And Other Materials Under Article III, Section 1 Of The Rules Of Fair Practice

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Executive Summary

On May 5, 1995, the Securities and Exchange Commission (SEC) approved amendments to the Interpretation of the Board of Governors—Forwarding of Proxy and Other Materials under Article III, Section 1 of the NASD® Rules of Fair Practice1 (Interpretation). The amendments allow a beneficial owner of stock to designate a registered investment adviser to vote and receive proxy and related issuer material in lieu of the beneficial owner, and to allow certain investment managers of ERISA2 plans to vote proxies. The rule change took effect May 5, 1995.

Background And Description

The NASD Rules of Fair Practice currently do not permit a beneficial owner of stock to designate a registered investment adviser to vote proxies and receive proxy and related material in lieu of the beneficial owner, except as permitted under rules of a national securities exchange to which the NASD member that is the holder of record also belongs. The New York Stock Exchange, Inc. (NYSE) recently amended its rules to allow a beneficial owner of stock to designate a registered investment adviser to vote proxies and receive proxy and related issuer material in lieu of the beneficial owner. Upon review, the NASD has added similar provisions to the Interpretation. The NASD believes that providing owners with the right to make this type of designation benefits investors, and that uniformity between NASD rules and NYSE rules on this subject is appropriate.

Designated Registered Investment Advisers

The amendments allow the beneficial owner of any issuer's stock to inform an NASD member that the beneficial owner has authorized a designated registered investment adviser to receive and vote proxies and to receive related issuer material in lieu of the beneficial owner.

The amendments provide that a "designated investment adviser" is a person registered under the Investment Advisers Act of 1940 who exercises investment discretion pursuant to an advisory contract for the beneficial owner and has been designated in writing by the beneficial owner to receive and vote the proxy, and to receive annual reports and other material sent to stock holders. The beneficial owner's written designation to the member has to be signed by the beneficial owner; be addressed to the member; and include the name of the designated investment adviser. The beneficial owner has an unqualified right at any time to rescind designation of the investment adviser to receive materials and to vote proxies. The rescission has to be in writing and submitted to the member.

The amendments require that a member who receives a written designation from a beneficial owner must ensure that the beneficial owner's designated investment adviser is registered under the Investment Advisers Act of 1940; is exercising investment discretion pursuant to an advisory contract for the beneficial owner; and is designated in writing by the beneficial owner to receive and vote proxies for stock that is in the possession of the member. Members will be required to keep records substantiating this information.3

ERISA Investment Managers

The amendments provide that any member designated by a named ERISA plan fiduciary as the investment manager of stock held as assets of the ERISA plan may vote the proxies according to the ERISA plan fiduciary responsibilities, if the ERISA plan expressly grants discretion to the investment manager to manage, acquire, or dispose of any plan asset, and has not expressly reserved the proxy voting right for the named ERISA plan fiduciary.

Questions regarding this Notice may be directed to John H. Pilcher, Assistant General Counsel, Office of General Counsel, at (202) 728-8287.


1 SEC Release No. 34-35681 (5/5/95); 60 F.R. 25749 (5/12/95).

2 See, Employee Retirement Income Security Act of 1974.

3 The NYSE has imposed similar requirements on NYSE members. [See, NYSE Information Memo No. 94-41 (September 7, 1994)].


Text Of Amendments To Interpretation

(Note: New text is underlined; deletions are bracketed.)

NASD Rules of Fair Practice Business Conduct of Members

Article III, Section 1

Interpretation of the Board of Governors—Forwarding of Proxy and Other Materials

Introduction

A member has an inherent duty in carrying out high standards of commercial honor and just and equitable principles of trade to forward (i) all proxy material which is properly furnished to it by the issuer of the securities or a stockholder of such issuer, to each beneficial owner (or the beneficial owner's designated investment adviser) of shares of that issue which are held by the member for the beneficial owner thereof and (ii) all annual reports, information statements and other material sent to stockholders, which are properly furnished to it by the issuer of the securities to each beneficial owner (or the beneficial owner's designated investment adviser) of shares of that issue which are held by the member for the beneficial owner thereof. For the assistance and guidance of members in meeting their responsibilities, the Board of Governors has promulgated this interpretation. The provisions hereof shall be followed by all members and failure to do so shall constitute conduct inconsistent with high standards of commercial honor and just and equitable principles of trade in violation of Article III, Section 1 of the Rules of Fair Practice of the Association.

Interpretation

Sec. 1. No member shall give a proxy to vote stock which is registered in its name, except as required or permitted under the provisions of Section 2 or 3 hereof, unless such member is the beneficial owner of such stock.
Sec. 2. Whenever an issuer or stockholder of such issuer soliciting proxies shall timely furnish to a member:
(a)[1] sufficient copies of all soliciting material which such person is sending to registered holders, and
(b)[2] satisfactory assurance that he will reimburse such member for all out-of-pocket expenses, including reasonable clerical expenses incurred by such member in connection with such solicitation, such member shall transmit promptly to each beneficial owner (or the beneficial owner's designated investment adviser) of stock of such issuer which is in its possession or control and registered in a name other than the name of the beneficial owner of all such material furnished. Such material shall include a signed proxy indicating the number of shares held for such beneficial owner and bearing a symbol identifying the proxy with proxy records maintained by the member, and a letter informing the beneficial owner (or the beneficial owner's designated investment adviser) of the time limit and necessity for completing the proxy form and forwarding it to the person soliciting proxies prior to the expiration of the time limit in order for the shares to be represented at the meeting. A member shall furnish a copy of the symbols to the person soliciting the proxies and shall also retain a copy thereof pursuant to the provisions of Rule 17a-4 of the General Rules and Regulations under the Securities Exchange Act of 1934, 17 C.F.R. 240.17a-4. Notwithstanding the provisions of this section, a member may give a proxy to vote any stock pursuant to the rules of any national securities exchange to which the member is also responsible provided that the records of the member clearly indicate which procedure it is following.

This section shall not apply to beneficial owners residing outside of the United States of America though members may voluntarily comply with the provisions hereof in respect to such persons if they so desire.

Sec. 3. A member may give a proxy to vote any stock registered in its name if such member holds such stock as executor, administrator, guardian, trustee, or in a similar representative or fiduciary capacity with authority to vote.

A member which has in its possession or within its control stock registered in the name of another member and which desires to transmit signed proxies pursuant to the provisions of Section 2, shall obtain the requisite number of signed proxies from such holder of record.

Notwithstanding the foregoing,
(a) any member designated by a named ERISA Plan fiduciary as the investment manager of stock held as assets of the ERISA Plan may vote the proxies in accordance with the ERISA Plan fiduciary responsibilities if the ERISA Plan expressly grants discretion to the investment manager to manage, acquire, or dispose of any plan asset and has not expressly reserved the proxy voting right for the named ERISA Plan fiduciary; and
(b) any person registered as an investment adviser under the Investment Advisers Act of 1940 who exercises investment discretion pursuant to an advisory contract for the beneficial owner and has been designated in writing by the beneficial owner to vote the proxies for stock which is in the possession or control of the member, may vote such proxies.
Sec. 4. A member when so requested by an issuer and upon being furnished with:
(a)[1] sufficient copies of annual reports, information statements or other material sent to stockholders, and
(b)[2] satisfactory assurance that it will be reimbursed by such issuer for all out-of-pocket expenses, including reasonable clerical expenses, shall transmit promptly to each beneficial owner (or the beneficial owner's designated investment adviser) of stock of such issuer which is in its possession and control and registered in a name other than the name of the beneficial owner of all such material furnished.

This section shall not apply to beneficial owners residing outside of the United States of America though members may voluntarily comply with the provisions hereof in respect to such persons if they so desire.

Sec. 5. For purposes of this Interpretation, the term "designated investment adviser" is a person registered under the Investment Advisers Act of 1940 who exercises investment discretion pursuant to an advisory contract for the beneficial owner and is designated in writing by the beneficial owner to receive proxy and related materials and vote the proxy, and to receive annual reports and other material sent to stock holders. The written designation must be signed by the beneficial owner; be addressed to the member; and include the name of the designated investment adviser. Members who receive such a written designation from a beneficial owner must ensure that the designated investment adviser is registered with the SEC pursuant to the Investment Advisers Act of 1940 and that the investment adviser is exercising investment discretion over the customer's account pursuant to an advisory contract to vote proxies and/or to receive proxy soliciting material, annual reports and other material. Members must keep records substantiating this information. Beneficial owners have an unqualified right at any time to rescind designation of the investment adviser to receive materials and to vote proxies. The rescission must be in writing and submitted to the member.

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