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85-80 Final Rules Regarding the Securities and Exchange Commission's Direct Shareholder Communication Program

TO: All NASD Members

The Securities and Exchange Commission has adopted the amendments proposed in March to its shareholder communications rules. The amendments, which specify the obligations of brokerage firms and issuers, stipulate:

• That issuers who request a list of nonobjecting security holders from one broker must request it from all brokers with customers who beneficially own the issuer's securities.

• That brokerage firms must provide the beneficial-owner lists to issuers as often as they request the information.

• That issuers may send their annual reports directly to beneficial owners if they notify the broker at the time they submit their search cards.

These amendments were proposed after the SEC postponed the effective date of its direct shareholder communications program from January 1, 1985 to January 1, 1986. The postponement, requested by representatives of the securities industry and issuer community, was intended to give the industry time to determine the reasonable costs of compiling the required information and to implement a system that would provide issuers with the beneficial-owner information in an efficient, timely and effective manner.

To cover the start-up costs of providing issuers with the information, the NASD permitted members to assess a $.20 per proxy surcharge for the 1985 annual meeting proxy solicitation. If needed, a second surcharge may be permitted for the 1986 proxy season to finance any remaining start-up costs.

When it authorized the deferral, the Commission agreed to clarify the functions of brokerage firms and issuers to ensure the effective implementation of a system of direct communication. In March 1985, the SEC issued a release on its proposals in this area, which the NASD reprinted in Notice to Members 85-30, dated April 22, 1985. The majority of commentators, who represented the legal and issuer communities and the securities industry, supported the proposals. Accordingly, the Commission adopted the amendments substantially as proposed.

In the release, the SEC recognized the importance of an intermediary to effectively implement its shareholder communications program but did not formally endorse such an intermediary in its rules. Responding to comments on this issue, the Commission has modified the rules to recognize that a brokerage firm may employ an intermediary to act as its designated agent in performing the obligations imposed under the shareholder communications rules.

In addition, the SEC adopted a specified response time in which brokerage firms or their designated intermediary must forward to issuers the list of nonobjecting beneficial owners. The Commission will monitor the program to ensure that it functions properly.

For your convenience, a copy of the SEC's release is enclosed with this notice. The release includes background on the shareholder communications rules and revisions, as well as an overview on implementation.

Any comments or questions regarding this notice should be directed to Thomas P. Mathers of the NASD Communications Group at (202) 728-8267.

Sincerely,

John T. Wall
Executive Vice President
Member and Market Services

Attachment

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-22533; IC-14755; File No. S7-13-85]

Facilitating Shareholder Communications

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

SUMMARY: The Securities and Exchange Commission ("Commission") today announced the adoption of amendments to its shareholder communications rules which govern the process by which registrants communicate with the beneficial owners of securities registered in the name of a broker, dealer or other nominee. The amendments are intended to allow for the most advantageous implementation of the system of direct communication provided under those rules.

EFFECTIVE DATE: New Rule 14a-13 and amended Rules 14b-1 and 14c-7 are effective January 1, 1986.

FOR FURTHER INFORMATION CONTACT:

Prior to the effective date, contact Sarah A. Miller, (202) 272-2589, Office of Disclosure Policy, Division of Corporation Finance, Securities and Exchange Commission 450 Fifth Street, NW., Washington, DC 20549. After the effective date, contact Cecilia D. Blye, (202) 272-2573, Office of Chief Counsel, Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission today announced the adoption of certain rule amendments to Rule 14b-1 1 and 14o-7 2 and the adoption of Rule 14a-13.3

I. Executive Summary

In March 1985, the Commission proposed certain amendments to refine its shareholder communications rules.4

These amendments delineated, in two separate rules, the respective obligations of brokers and registrants. In addition, the proposed amendments provided, among other things, that: (1) If a registrant requests the list of non-objecting security holders, it must request the list from all brokers having customers who are beneficial owners of the registrant's securities; (2) a broker must provide the beneficial owner lists to registrants as often as they request the information, rather than only once a year, and (3) a registrant may mail its annual report to security holders directly to its beneficial owners so long as the registrant notifies the broker at the time it submits a search card or requests beneficial owner information by some other means.5 These amendments resulted from the one-year deferral of the effective date (from January 1, 1985 to January 1, 1986) of Rule 14b-l(c) which was agreed to by representatives of the securities industry and registrant community and authorized by the Commission in August 1984.6The deferral was intended to provide more time for the determination of reasonable costs and the implementation of a system to provide registrants with security holder information in an efficient, timely, and effective manner. At the time it authorized the deferral, the Commission agreed to undertake certain steps to clarify the respective functions of brokers and dealers 7 (hereinafter collectively referred to as "brokers") and registrants to ensure the effective implementation of the system of direct communication.

These proposals generated 41 comment letters.8 Commentators, representing the legal and registrant communities and the securities industry, generally supported the proposals to improve the system of direct communications between registrants and beneficial owners. Accordingly, the Commission is adopting the amendments substantially as proposed.

The proposing release recognized the importance of an intermediary to the effective implementation of the shareholder communications rules. Commentators urged the Commission to recognize explicitly in the rules the role of an intermediary in the shareholder communications system. Also commentators suggested, in response to an inquiry in the proposing release, that the Commission provide for a specified response time in which brokers are to provide registrants with lists of beneficial owners who do not object to disclosure of their names, addresses, and securities positions. In light of these comments, the Commission modified the rules to recognize that a broker may employ an intermediary to act as its designated agent in performing the obligations imposed under the shareholder communications rules and to provide a specified response time in which brokers are to forward to registrants non-objecting beneficial owner lists. Certain other technical clarifying revisions also have been made. The Commission will monitor the workability of its shareholder communications rules to determine whether any further refinements to the rules are necessary and appropriate.

This release discusses the background to the shareholder communications rules and the revisions to those rules. The release also provides an overview regarding implementation of these rules. Persons interested in further information are directed to the text of the amendments and the proposing release.

II. Background

Rule 14b-l was revised substantially in 1983 pursuant to recommendations of the Advisory Committee on Shareholder Communications, contained in its report, Improving Communications Between Issuers and Beneficial Owners of Nominee Held Securities. Paragraph (c) of the rule was adopted to provide a means of direct communication between registrants and their beneficial owners by requiring brokers to provide requesting registrants with the names, addresses, and securities positions of their customers who are beneficial owners of the registrant's securities and who have not objected to such disclosure.9 In August 1984, the Commission deferred the original effective date of paragraph (c) from January 1, 1985 to January 1, 1986. The deferral provided additional time to ensure the most effective implementation of the shareholder communications system.10 Representatives of the securities industry and the registrant community agreed that during this deferral period they would develop and establish both an efficient means of furnishing beneficial owner information to registrants and an appropriate schedule of reimbursement.

In September 1984, the New York Stock Exchange ("the NYSE") appointed the Ad Hoc Committee on Identification of Beneficial Owners. The Ad Hoc Committee, composed of members of both the securities industry and registrant community, was formed to resolve the cost issues and to develop a workable and effective system that would be of maximum use to registrants and not burdensome to brokers. The Ad Hoc Committee now largely has resolved the problems which initially led to the deferral of the effective date of Rule 14b-l(c). The reimbursement of start-up costs issue has been resolved through self-regulatory organization ("SRO") rule changes that permit brokers to assess a $.20 per proxy surcharge for the 1985 annual meeting proxy solicitation. This surcharge, together with an additional surcharge for the next annual meeting proxy solicitation, will fund the start-up costs associated with furnishing the beneficial owner information to registrants. The second surcharge will fund the balance of the costs not funded by the first $.20 surcharge and will be the subject of separate SRO rule changes.11 The other cost issue—determination of reasonable costs for maintaining beneficial owner lists—is being addressed by the Ad Hoc Committee and also will be the subject of a separate SRO rule change.

In August 1985, the Ad Hoc Committee drafted a model letter to aid brokers, in communicating with their customers in order to ascertain whether or not they object to disclosure of their names, addresses, and securities positions. The NYSE forwarded that letter to brokers and to the American Stock Exchange and the National Association of Securities Dealers.

To make the system work and to ensure that registrants find the beneficial owner lists useful and meaningful, the Ad Hoc Committee also determined that an intermediary was necessary. By employing an intermediary to compile and to supply beneficial owner lists, registrants will be assured that the lists are compiled in a standardized manner. Moreover, brokers will be assured that the source of the lists will be kept confidential. In addition, economies of scale will be realized by permitting them to delegate this function to an intermediary which will maximize cost savings while minimizing burdens on brokers. The Ad Hoc Committee requested proposals and selected Independent Election Corporation of America ("IECA") to serve as the intermediary between registrants and brokers in supplying lists of beneficial owners. In this function, IECA will be governed by a user board consisting of registrants, brokers, and other industry representatives.

At the time of the deferral of the effective date of Rule 14b-l(c), the Commission agreed to clarify certain aspects of the shareholder communications rules and to take certain additional steps which are the subject of this release.

While the amendments pertain to brokers, the Commission believes that enactment of legislation authorizing the Commission to regulate the proxy processing activities of banks, associations, and other fiduciary entities will realize the full potential of the shareholder communications rules. On July 22, 1985, the House of Representatives passed, by voice vote, legislation entitled the Shareholder Communications Act of 1985 (H.R. 1603). That legislation has been referred to the Securities Subcommittee of the Senate Committee on Banking, Housing, and Urban Affairs. A companion bill (S. 918) was introduced in the Senate on April 16, 1985.

III. Overview of Shareholder Communications Rules

New Rule 14a-13 sets forth two different procedures relating to registrants' obligations in communicating with their beneficial owners, while amended Rule 14b-l pertains to brokers' obligations in connection with communicating corporate information to beneficial owners. Under the first procedure, registrants are required, pursuant to new Rule 14a-13(a) (formerly Rule 14a-3(d)) to inquire, by means of a search card or otherwise, of their record holders the number of proxies and other proxy soliciting material or annual reports to security holders needed by record holders to forward the material to beneficial owners. The registrant must request this information at least 20 calendar days prior to the record date of the annual meeting and the broker is required, under Rule 14b-l(a), to respond to this request within seven business days of receipt of the request. Upon receipt of the proxy, proxy soliciting material or annual report, the broker is required under Rule 14b-l(b), to forward these materials within five business days of receipt to its customers who are beneficial owners.

Rule 14a-13(b) sets forth the requirements for those registrants who wish to communicate directly with their beneficial owners. If a registrant requests a list of beneficial owners who do not object to disclosure of their names, addresses, and securities positions, it must make that request of all brokers having customers who are beneficial owners of the registrant's securities. Further, a registrant is permitted to request a list of non-objecting beneficial owners more often than once a year and the broker will be required to comply with any such request. These lists would be compiled as of the record date for the registrant's latest annual or special meeting. If no meeting is scheduled and the registrant requests a list of its beneficial owners, that list is to be compiled as of a date to be selected by the registrant that is no less than five business days after the broker receives the request. The broker must forward the beneficial owner information to the registrant no later than five business days after the compilation date of the list, e.g., the record date or other date. For example, if no annual or special meeting is scheduled and the broker receives a registrant's request for the list of beneficial owners on October 15, 1985, the list would be compiled as of a date selected by the registrant that is no earlier than October 22, 1985. The broker, in turn, would be required to forward the beneficial owner list to the registrant by October 29, 1985.

The amendments further provide that, if it chooses, the registrant may mail annual reports directly to non-objecting beneficial owners so long as the registrant notifies the broker when making its initial request for beneficial owner information that the registrant intends to mail the annual report directly to its non-objecting beneficial owners. The registrant would notify the broker of its intention at the time it submits a search card requesting the beneficial owner information. If so notified by the registrant, a broker would have no obligation in connection with that mailing to forward the annual report to non-objecting beneficial owners but would have, of course, the obligation to forward reports to those beneficial owners who objected to the disclosure of their identities.

The amendments also would provide that, without assurances of reimbursement of reasonable expenses associated with satisfying its obligations with respect to communications with beneficial owners, a broker has no obligation to perform its obligations under Rule 14b-l(b) and (c). The registrant has a corresponding obligation to pay a broker's reasonable expenses associated with providing beneficial owner information.

If a broker has designated an agent or intermediary to act on its behalf in performing its obligations under Rule 14b-l(c), the registrant must make its request for a list of non-objecting beneficial owners to that designated agent. If the broker has designated such an agent, the registrant will learn the agent's identity when it submits, pursuant to Rule 14a-13(a), the search card requesting the number of proxy cards, proxy soliciting material, and annual reports needed by the broker to forward to beneficial owners. The broker, in turn, is required, under Rule 14b-l(a), to identify its agent, if one has been designated. After receiving the registrant's request for beneficial owner information, the agent will notify all brokers of the registrant's request. Brokers will supply the intermediary with the information who then will compile the information in a standardized delivery format and forward it to the registrant. Using the above example, the registrant will make its request to the designated agent for a list of non-objecting beneficial owners. If no annual or special meeting is scheduled and the designated agent receives the registrant's request for the list on October 15, 1985, the list would be compiled as of the date selected by the registrant that is no earlier than October 22, 1985. The designated agent would make the request for a list of non-objecting beneficial owners from all brokers. Brokers, in turn/would forward the requested information to the designated agent who would then compile the list and deliver it to the registrant by October 29, 1985.

IV. Discussion

A Use of Intermediary
1. Overall Role
Both the Commission and the Ad Hoc Committee believe that an intermediary is necessary to the effective implementation of the shareholder communications system. The intermediary would receive registrants' requests for beneficial owner information and deliver the beneficial owner information supplied by all brokers to the registrants. The proposing release recognized the intermediary's importance in stating that an intermediary will be employed to compile and to supply beneficial owner lists in order to assure standardized delivery format and client confidentiality of brokers.12 The Commission further noted that economies of scale will be realized by maximizing cost savings while minimizing burdens on brokers by permitting them to delegate this function to an intermediary.13
The intermediary would serve as a central processing agent between brokers and registrants in the transmission of lists of non-objecting beneficial owners.14 In addition, the intermediary would act, on behalf of brokers, in performing all administrative functions required in providing beneficial owner information, including: receiving requests for beneficial owner information from registrants; advising brokers of the record date for a registrant's request; receiving customer lists from brokers; preparing, in a standardized format, lists of non-objecting beneficial owners and billing registrants for fees associated with providing the beneficial owner information.15
Commentators generally endorsed the use of an intermediary. Several commentators, representing registrants as well as the legal and brokerage communities, suggested, however, that the shareholder communications rules be amended to reflect specifically the intermediary's role in the system of direct communications. Because the Commission believes that the use of an intermediary is necessary for the system to work efficiently, particularly to assure both client confidentiality and standardized delivery format, the Commission has revised the rules to reflect that (1) brokers may employ an intermediary to act as agent on their behalf in fulfilling the broker's obligations under the shareholder communications rules, and (2) registrants must make their requests to such intermediary. Obviously, registrants will make the request for a non-objecting beneficial owner list to the intermediary only after, the brokers' response to the search card identifying the intermediary is received. Should a broker later designate a new intermediary to act on its behalf, it would be to the benefit of all concerned parties for the broker to notify the registrant of this fact.
While the Commission envisions that brokers generally will choose to employ an agent to assist them in performing their obligations under these rules, and that the agent employed generally will be the intermediary selected by the Ad Hoc Committee, employing an intermediary is not a condition to complying with the shareholder communications rules. Accordingly, the revised rules recognize that a broker may not wish to employ an intermediary to act on its behalf and that, in such cases, the registrant must make the request directly to the broker. The specific amendments reflecting the intermediary's role are discussed below.
2. Client Confidentiality
Of those commentators who addressed the assurance of the client confidentiality function of the intermediary, securities industry commentators endorsed the concept while three registrant and legal commentators opposed it. By employing an intermediary to excise all information identifying specific brokers, brokers will be assured that registrants will obtain only the names, addresses, and securities positions of its beneficial owners". The two registrant commentators who opposed the broker anonymity function of the intermediary maintained that broker confidentiality might limit the usefulness of the beneficial owner information. The Commission believes, however, that disclosure of the broker's identity would not enhance the system of direct communications and, accordingly, has amended Rule 14b-l(c) by adding a note stating, among other things, that a broker or its agent need only supply the registrant with the names, addresses, and securities positions of non-objecting beneficial owners.
3. Standardized Delivery Format
The proposing release stated that by employing the intermediary to compile and to supply beneficial owner lists, registrants will be assured that the lists are compiled in a standardized manner. Commentators generally endorsed the use of the intermediary to achieve this. Certain commentators, however, suggested that the Commission condition the implementation of the shareholder communications system on specifying a common delivery format. The Commission believes that establishing a mutually acceptable delivery format is best left to the determination of the participants in the shareholder communications system. The Commission would anticipate, however, that any delivery format established would allow registrants flexibility and facilitate corporate communications.
B. 14a-13 Obligations of Registrants in Communicating With Beneficial Owners
1. General.
Proposed Rule 14a-13 consolidated all registrant-related provisions associated with direct shareholder communications, by placing together provisions of Rule 14a-3(d) and the registrant-related provisions of Rule 14b-l(c). As adopted, Rule 14a-13 deals explicitly with solicitations of written consents or authorizations when circumstances warrant separate treatment and to provide that if a special meeting is convened to elect directors in lieu of an annual meeting, an annual report must be furnished to security holders in connection with such meeting. In addition, Rule 14a-13 makes clear that the annual report to security holders is required whether the registrant is soliciting proxies or consents in connection with the annual election of directors and that if it is impracticable for a registrant to make the inquiry for beneficial owner information of the record holder 20 calendar days before the record date of a special meeting then the request must be made as soon as practicable before the record date of such meeting.16
2. Rule 14a-13(a)
Consistent with commentators' suggestions, Rule 14a-13(a)(l) was revised to clarify that the registrant would only need inquire of brokers as to the specific number of copies of the annual report to security holders that ultimately will be distributed by the brokers to beneficial owners pursuant to Rule 14b-l(b). This information would be in addition to the number of copies of the proxy and proxy soliciting material needed to forward to all beneficial owners. To ensure that a registrant knows to whom the request for beneficial owner information is to be made—the broker or its agent—Rule 14a-13(a)(l) was changed to require a registrant to inquire specifically of a broker whether it has designated an agent to act on its behalf and, if so, to ascertain the name and address of that agent. As discussed below, a corresponding change has been made to Rule 14b-l(a). Rule 14a-13(a}(l) also has been changed to clarify that, if it wishes to mail its annual report directly to non-objecting beneficial owners, a registrant has an obligation under Rule 14a-13(c) to notify the broker at the time it makes its inquiry, pursuant to Rule 14a-13(a), that it intends to send copies of its annual report to security holders to non-objecting beneficial owners.
Rule 14a-13(a)(3) has been changed in two respects. First, Rule 14a-13(a)(3} has been revised to clarify that supplying record holders with copies of the proxy, proxy soliciting material, and annual report to security holders and not just the annual report to security holders must be done in a timely manner. Second, commentators expressed concern that Rule 14a-13(a)(3) may be interpreted to require registrants to supply brokers with sufficient copies of the annual report to security holders to mail to all beneficial owners even if the registrant intended to mail the annual reports to security holders directly to its non-objecting beneficial owners. To prevent any such misunderstandings, Rule 14a-13(a)(3) and companion Note 2 have been revised to reflect the possibility that a registrant may mail the annual report to security holders to non-objecting beneficial owners and to " require registrants, in those cases, to supply record holders with only the requisite number of copies for distribution by the broker to objecting beneficial owners.
3. Rule 14a-13(b)
As proposed, Rule 14a-13(b) would have required that a registrant request the list from all brokers having customers who are beneficial owners of the registrant's securities. This requirement was intended to ensure that registrants do not request the security holder lists only from the largest brokers thereby leaving the smaller brokers with no means of recouping expenses associated with maintaining the required information. Commentators generally endorsed the proposal. Of the three commentators who opposed the provision, one commentator suggested that registrants involved in a takeover primarily are interested in holders of large blocks of its securities and should not be required to request non-objecting beneficial owner lists from all brokers.17 The Commission continues to believe that this provision is necessary for the rule to be fair and effective and has adopted the provision as proposed.
With regard to security holder confidentiality, Rule 14a-13(b)(2) states explicitly that a registrant must use the beneficial owner lists exclusively for purposes of corporate communications. The Commission believes that the inclusion of this provision in the rule adequately addresses concerns regarding security holder confidentiality.
The proposing release also addressed the issue of voluntary communications such as quarterly reports.18 Due to the importance of this issue the Commission again encourages registrants in connection with their use of beneficial owner lists voluntarily to forward corporate communications to all beneficial owners either directly or through brokers. Accordingly, the Commission believes it is desirable where registrants use the non-objecting beneficial owner lists to mail such communications directly to non-objecting beneficial owners, that they also deliver to brokers for forwarding a sufficient number of copies of the corporate communication in order not to disadvantage those security holders who object to disclosure of their identities to registrants.19 Further, the Commission believes that even in the case of voluntary communications, the rapid turnover of securities and accompanying non-objecting beneficial owners should be considered in order to avoid the use of outdated non-objecting beneficial owner lists.
Next, consistent with commentators' suggestions, both Rule 14a-13 (b) and (c] were revised to recognize that an intermediary can act as the brokers' agent. Accordingly, when a broker indicates that it has designated an agent, the registrant shall request the beneficial owner list from the agent and reimburse the designated agent for the reasonable expenses 20 associated with providing the beneficial owner information. Thus, the Commission anticipates that, if all brokers have designated the intermediary selected by the Ad Hoc Committee, a registrant will need to make only one request for the non-objecting beneficial owner list to that intermediary to satisfy its obligations under Rule 14a-13(b).
4. Rule 14a-13(c)
Proposed Rule 14a-13(c) would have permitted a registrant21 to mail the annual reports to security holders directly to those non-objecting beneficial owners that have been identified to them. 22 Any registrant choosing to do its own annual report mailing, however, is required, pursuant to paragraph (a), to so inform the broker at the time it made its inquiry for beneficial owner information under paragraph [a]. Commentators overwhelmingly supported the proposal and, accordingly, the Commission adopted this provision substantially as proposed.
The proposing release stated that for reasons of economy, registrants may wish to engage in split mailing, i.e, forwarding the annual report by bulk mail and mailing the proxies and other proxy soliciting material by first class mail. In connection with the use of split mailings, certain registrant commentators addressed the requirement in Rule 14a-3(b) that annual reports must accompany or precede the proxy statement Commentators requested the Commission to provide specific guidance in this area. Due to the variety of geographic source locations for mailing annual reports and proxy soliciting materials of public reporting companies as well as intended destinations of the materials, however, the Commission is unable to specify exact time periods. Registrants who take steps reasonably calculated to guarantee that the annual reports to security holders accompany or precede the proxy statements will be deemed to have complied with Rule 14a-3(b).23
The proposing release also solicited comment as to whether Rule 14a-5 24 should be amended to provide that when annual reports to security holders are mailed separately from proxy material, all proxy statements should disclose the date the mailing of the annual report to security holders was commenced and should contain instructions on how to obtain a copy of that annual report. The majority of those commentators addressing this issue were registrants who overwhelmingly opposed such an amendment to Rule 14a-5. These commentators based their opposition on the grounds that either no useful purpose would be served or that changes in schedule would prevent accurate disclosure of the date of mailing of the annual report. The Commission agrees and, accordingly, has determined not to amend Rule 14a-5 in this manner.
C. 14b-l Obligation of Registered Brokers in Connection With the Prompt Forwarding of Certain Communications to Beneficial Owners
1. General
In response to commentators' suggestions, Rule I4b-1 was revised to allow a broker to employ an intermediary to act on its behalf in performing the broker's obligations under the shareholder communications rules. The provision in Rule 14b-l{a) corresponds to that in Rule 14a-13(a)(l) which requires a broker to respond to a registrant's inquiry as to whether the broker has designated an agent to act on its behalf and, if so, to provide the name and address of that designated agent.
2. Rule 14b-l{c)
Under proposed Rule 14b-l(c), a registrant could request the beneficial owner list whenever it wants such a list and the broker, in response to that request, would provide the list. Specifically, the registrant could request the list to be compiled either as of the registrant's record date for its latest annual or special meeting of security holders or, if the request is not made in connection with a meeting, a date no earlier that ten business days after receipt of the registrant's request. Commentators generally supported the proposal to permit registrants to request the lists as often as they wished. One commentator, however, proposed that a maximum number of requests per registrant per year be established. Because these rules are intended to provide for maximum communication between registrants and their beneficial owners, the Commission is of the view that, at this time, registrants should not have limits imposed on the. number of requests for beneficial owner lists and, accordingly, has not adopted any such limits.
Proposed Rule 14b-l[c] also provided that non-meeting lists of non-objecting beneficial owners would be compiled as of a date no earlier than ten business days after receipt by the broker of the registrant's request. The proposed ten business day time period was based on the Commission's understanding that broker's back office Systems generally do not permit retroactive establishment of beneficial owner lists but, rather, only allow those lists to be established prospectively. Because the securities industry has indicated that this time period should be shortened, the Commission has adopted a five business day time period 25 for non-meeting beneficial owner lists. Such an amendment will facilitate communication between registrants and security holders especially involving those corporate actions when time factors are critical.
Proposed Rule 14b-l(c) was structured to provide that a registrant may designate the compilation date for non-meeting lists. Registrant and legal commentators expressed concern, however, that Rule 14b-1(e) was not sufficiently explicit in empowering the registrant rather than the broker, to designate the compilation date for non-meeting lists. The Commission believes that registrants should be permitted to select the date as of which die non-meeting list Is to speak and, accordingly, has clarified that that is the case. Thus, under the rules a registrant may specify the compilation date for a non-meeting list. That date, however, cannot be any earlier than five business days after the broker receives the registrant's request.
In connection with a broker's obligation to provide beneficial owner lists to a registrant, the Commission requested comment on whether a time limit should be specified within which a broker is to provide the registrant with the requested list. An overwhelming majority of the commentators who responded supported imposing a specified tarn around response time period. These commentators reasoned that a specific time limit was essential to the operation of the shareholder -communication rules and made suggestions for a sufficient time period ranging from five to twenty business days. The Commission agrees that a specified time period is appropriate to ensure that registrants do not receive stale beneficial owner lists that are of little or no value. Accordingly, the Commission has adopted a five business day time period in which brokers are to respond to a registrant's request for non-objecting beneficial owner lists.26 In recognition of the likelihood that a broker may designate an agent to act on its behalf, a note specifying that the time period commences upon receipt by the broker or its designated agent of the registrant's request has been adopted.27
Commentators indicated that generally a broker will need three business days to compile and to transmit the beneficial owner information to the intermediary and the intermediary will require two business days to forward the requested beneficial owner information to the registrant.
3. Rule 14b-l(d)
In addition to recognizing that a broker may designate an agent "to act on its behalf, Rule 14b-l(d), as adopted makes clear that, without assurance by the registrant, or reimbursement of reasonable expenses, both direct and indirect, incurred in connection with performing its obligations under the rule, a broker need not satisfy its obligations under paragraph (b) and (c) of Rule 14b-l. A broker is obligated, under paragraph (a), however, to supply the information requested by the registrant without regard to reimbursement.
D. Rule 14c-7
The Commission received several comments to its proposed amendments to Rule 14c-7 suggesting that Rule 14c-7, governing the distribution of information statements and annual reports to security holders, be amended to conform with Rule 14a-13. The Commission agrees that such amendments would be useful and, accordingly, has amended Rule 14c-7 to conform, to the extent appropriate, with Rule 14a-13.

V. Statutory Basis and Text of Amendments

These amendments are being adopted pursuant to sections 12,14,17 and 23(a) of the Securities Exchange Act of 1934.

List of Subjects in 17 CFR Part 240

Reporting and recordkeeping requirements, Securities.

VI. Text of Amendments

In accordance with the foregoing Title 17, Chapter II of the Code of Federal Regulations is amended as follows:

PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

1. The authority citation for Part 240 is amended by adding the following citation (Citations before * * * indicate general rulemaking authority).
Authority: Sec. 23,48 Stat. 901, as amended; 15 U.S.C. 78w. * * * §§240.14a-3, 14a-13,14b-l and 14c-7 also issued under sections 12,14 and 17,15 U.S.C. 781, 78n and 78g.
§240.14a-3 [Amended]
2 By removing paragraph (d) including Notes 1 and 2 and redesignating paragraphs [e] and (f) as paragraphs (d) and (e) of § 240.14a-3.
3 By adding § 240.14a-13 to read as follows:

§ 240. 14a-13 Obligation of registrants in communicating with beneficial owners.

(a) If the registrant knows that securities of any class entitled to vote at a meeting (or by written consents or authorizations if no meeting is held) with respect to which the registrant intends to solicit proxies, consents or authorizations are held of record by a broker, dealer, bank or voting trustee, or their nominees, the registrant shall:
(1) By first class mail or other equally prompt means: (i) inquire of such record holders: (A) whether other persons are the beneficial owners of such securities and if so, the number of copies of the proxy and other soliciting material necessary to supply such material to beneficial owners: and, in the case of an annual (or special in lieu of the annual) meeting, or written consents in lieu of such meeting, at which directors are to be elected, the number of copies of the annual report to security holders necessary to supply such material to beneficial owners to whom such reports are to be distributed by the broker, dealer, bank, voting trustee or their nominees and not by the registrant; and (B) if the record holder has an obligation under § 240.14b-l(c), whether an agent has been designated to act on its behalf in fulfilling such obligation and, if so, the name and address of such agent; and (ii) indicate to such record holders which are brokers or dealers whether the registrant, pursuant to paragraph (c) of this section, intends to distribute the annual report to security holders to beneficial owners of its securities who have not objected to disclosure of their names, addresses and securities positions,
(2) Make the inquiry at least 20 calendar days prior to the record date of the meeting of security holders, or (i) if such inquiry is impracticable 20 calendar days prior to the record date of a special meeting, as many days before the record date of such meeting as is practicable or (ii) if, consents or authorizations are solicited, and such inquiry is impracticable 20 calendar days before the earliest date on which they may be used to effect corporate action, as many days as is practicable, or (iii) at such later time as the rules of a national securities exchange on which the class of securities in question is listed may permit for good cause shown; and
(3) Shall supply, in a timely manner, the record holders of whom the inquiry is made with additional copies of the proxy, other proxy soliciting material and/or the annual report to security holders, in such quantities, assembled in such form and at such a place, as the record holder may reasonably request in order to address and send one copy of each to each beneficial owner of securities who is to be furnished with such material by the broker, dealer, bank, voting trustee or their nominees. The number of annual reports supplied shall be sufficient to supply those beneficial owners to whom the report is to be distributed by the broker, dealer, bank, voting trustee or their nominees. The registrant shall upon the request of such record holder, pay its reasonable expenses for completing the mailing of such material to record holders to whom the material is sent.
Note 1.—If the registrant's list of security holders indicates that some of its securities are registered in the name of a clearing agency registered pursuant to section 17A of the Act [e.g., "Cede & Co.," nominee for the Depository Trust Company), the registrant shall make appropriate inquiry of the clearing agency and thereafter of the participants in such clearing agency who may hold on behalf of a beneficial owner, and shall comply with the above paragraph with respect to any such participant.
Note 2.—The attention of registrant is called to the fact that brokers and dealers have an obligation pursuant to § 240.14b-l(b) and applicable self-regulatory organization requirements to obtain and forward, within the time periods prescribed therein, (a) proxy soliciting materials to all beneficial owners, and (b) annual reports to security holders, to all beneficial owners unless the registrant has notified the broker or dealer that it has assumed responsibility to mail such material to non-objecting beneficial owners in which case the broker or dealer shall mail such material to objecting beneficial owners.
(b) Any registrant requesting pursuant to § 240.14b-l(c) a list of names, addresses and securities positions of beneficial owners of its securities who have not objected to disclosure of such information shall:
(1) Request such list from all brokers and dealers (through their agents) having customers who are beneficial owners of the registrant's securities;
(2) Use the information so furnished exclusively for purposes of corporate communications; and
(3) Upon the request of such brokers and dealers, through their agents, pay the reasonable expenses, both direct and indirect, of providing beneficial owner information.
Note.—A registrant will be deemed to have satisfied its obligations under paragraph (b) of this section by requesting non-objecting beneficial owner lists from a designated agent acting on behalf of the broker or dealer and paying to that designated agent the reasonable expenses of providing the beneficial owner information.
(c) A registrant, at its option, may mail its annual report to security holders to the beneficial owners whose identifying information is provided by brokers and dealers, through their agents, pursuant to 1240.14b-l(c), provided that such registrant notifies the brokers and dealers, at the time a search card requesting die beneficial owner information in accordance with paragraph (a) of this section is sent that the registrant will mail the annual report to security holders to the beneficial owners so identified.
4 By revising § 24Q.14b-l to read as follows:

§ 240.14b-1 Obligation of registered brokers and dealers in connection with the prompt forwarding of certain communications to beneficial owners.

A broker or dealer registered under section 15 of the Act shall:

(a) Respond no later than seven business days after receipt of an inquiry made in accordance with § 240.14a-13(a) by or on behalf of a registrant soliciting proxies, consents or authorizations by indicating, by means of a search card or otherwise: (1) The approximate number of its customers who are beneficial owners of the registrant's securities that are held off record by the broker, dealer or its nominees;
(2) The number of its customers who are beneficial owners of the registrant's securities who have objected to disclosure of their names, addresses and securities positions if the registrant has indicated, pursuant to % 240.14a-13(a)(1)(ii), that it will distribute the annual report to security holders to beneficial owners of its securities who have not objected to disclosure of their names, addresses and securities positions; and (3) the identity of its designated agent, if any, acting on behalf of the broker or dealer in fulfilling its obligations under paragraph (c) of this section;
(b) Upon receipt of the proxy, other proxy soliciting material, and/or annual reports to security holders, forward such materials to its customers who are beneficial owners of the registrant's securities no later than five business days after the receipt of the proxy material or annual reports; and
(c) Through its agent or directly, provide the registrant, upon the registrant's request, with the names, addresses and securities positions, compiled as of a date specified in the registrants request which may be the registrant's record date for its latest annual or special meeting of security fodders, or, if not in connection with a meeting, another date which is no earlier than five business days after receipt of the registrant's request, of its customers who are beneficial owners of the registrant's securities and who have not objected to disclosure of such information. A broker or dealer, through its agent or directly, will be required to transmit the data to the registrant no later than five business days after the record date or other date specified by the registrant
Note.—Where a broker or dealer employs a designated agent to act on its behalf in performing the obligations imposed on the broker or dealer by paragraph (c) of this section, the five business day time period for forwarding beneficial owner information is calculated from the date the designated agent receives the registrant's request. In complying with the registrant's request for beneficial owner information under paragraph (c) of this section, a broker or dealer need only supply the registrant with the names, addresses and securities positions of non-objecting beneficial owners.
(d) A broker or dealer need not satisfy (1) its obligations under paragraphs (b) and (c) of this section if a registrant does not provide assurance of reimbursement of the broker's or dealer's reasonable expenses, both direct and indirect, incurred in connection with performing the obligations imposed by this section; or (2) its obligation under paragraph (b) of this section to forward annual reports to non-objecting beneficial owners identified by the broker or dealer, through its agent or directly, pursuant to paragraph (c) of this section if the registrant notifies the broker or dealer pursuant to § 24O.14a-13(c) that the registrant will mail the annual report to such non-objecting beneficial owners, identified by the broker or dealer and delivered in a list to the registrant pursuant to paragraph (c) of this section.
5. By revising § 24O.14C-7 to read as follows:

§ 240.14c-7 Providing copies of material for certain beneficial owners.

(a) If the registrant knows that securities of any class entitled to vote at a meeting, or by written authorizations or consents if no meeting is held, are held of record by a broker, dealer, bank or voting trustee, or their nominees, the registrant shall:
(1) By first class mail or other equally prompt means, (i) inquire of such record holders whether other persons are the beneficial owners of such securities and, if so, the number of copies of the information statement necessary to supply such material to beneficial owners and, in the case of an annual {or special in lieu of the annual) meeting, or written consents in lieu of such meeting, at which directors are to be elected, the number of copies of the annual report to security holders, necessary to supply such material to such beneficial owners for whom proxy material has not been and is not to be made available and to whom such reports are to be distributed by the brokers, dealer, bank, voting trustee or their nominees and not by the registrant; and
(2) Indicate to such record holders which are brokers or dealers whether the registrant pursuant to paragraph (c) of this section, intends to distribute the annual report to security holders to beneficial owners of its securities who have not objected to disclosure of their names, addresses and securities positions; and
(3) Supply, in a timely manner, such record holder of whom the inquiry is made with additional copies of the information statement and the annual report to security holders, in such quantities, assembled in such form and at such a place, as the record holder may reasonably request in order to address and send one copy of each to each beneficial owner of securities who is to be furnished with such material by the broker, dealer, bank, voting trustee or their nominees. The number of annual reports supplied shall be sufficient to supply those beneficial owners to whom the report is to be distributed by the broker, dealer, bank, voting trustee or their nominees. The registrant shall, upon the request of such record holder, pay its reasonable expenses for completing the mailing of such material to security holders to whom the material is sent.
Note 1.—If the registrant's list of security holders indicates that some of its securities are registered in the name of a clearing agency registered pursuant to section 17A of the Act [e.g., "Cede & Co.," nominee for the Depository Trust Company), the registrant shall make appropriate inquiry of the clearing agency and thereafter of the participants in * such a clearing agency who may hold on behalf of a beneficial owner, and shall comply with the above rule with respect to any such participant.
Note 2.—The requirement for sending an annual report to security holders of record having the same address will be satisfied by sending at least one report to a holder of record at that address* provided that those holders of record to whom a report is not sent agree thereto in writing. This procedure is not available to registrants, however, where banks, brokers and dealers and other persons hold securities in nominee accounts or "street names" on behalf of beneficial owners, and such persons are not relieved of any obligation to obtain or send such annual report to the beneficial owners.
Note 3.—The attention of registrants is called to the fact that brokers and dealers have an obligation pursuant to applicable self-regulatory organization requirements to obtain and forward, in a timely manner, (a) information statements to all beneficial owners, and (b) when requested by the registrant annual reports to security holders to beneficial owners for whom such brokers and dealers hold securities.
(b) Any registrant requesting a list of names, addresses and securities , positions of beneficial owners of its securities who have not objected to disclosure of such information shall.
(1) Request such list from all brokers and dealers (through their agents) having customers who are beneficial owners of the registrant's securities;
(2) Use the information so furnished exclusively for purposes of corporate communications; and
(3) Upon the request of such brokers and dealers, through their agents, pay the reasonable expenses, both direct and indirect, of providing beneficial owner information.
Note.—A registrant will be deemed to have satisfied its obligations under paragraph (b) of this section by requesting non-objecting beneficial owner lists from a designated agent acting on behalf of the broker or dealer and paying to that designated agent the reasonable expenses of providing the beneficial owner information.
(c) A registrant, at its option, rriay mail its annual report to security holders to the beneficial owners whose identifying information is provided by brokers and dealers, through their agents, provided that such registrant notifies the brokers and dealers in accordance with paragaph (a) of this section that the registrant will mail the annual report to security holders to the beneficial owners so identified.
By the Commission.
October 15, 1985.
Shirley E. Hollis,
Assistant Secretary.
[FR Doc. 85-25107 Filed 10-21-85; 8:45 am]

1 17 CFR 240.14b-l.

2 17 CFR 240.14C-7.

3 17 CFR 240.14a-13.

4 Release No. 34-21901 (March 28, 1985) [50 FR 13612].

5 In addition to the specific rule amendments, the narrative portion of the proposing release addressed, in connection with the discussion on employment of an intermediary (see discussion infra pp. 8,13,15), a fourth issue, namely the confidentiality of the source of the beneficial owner lists. See Release No. 34-21901, supra note 4, 50 FR at 13613.

6 Release No. 34-21339 (September 21, 1984) [49 FR 38096).

7 In its proposing release, the Commission clearly intended to require all record holders within its jurisdiction to come within the direct communication system. Accordingly, the term "broker," which as used in the industry usually includes the term "dealer," was used to denote those securities industry personnel who hold securities in nominee name. Because the terms "broker" and "dealer" are separately defined under the Securities Exchange Act, see sections 3(a) (4) and (5) thereof, the Commission believes it is appropriate to revise the rules to clarify that they apply to both brokers and dealers.

8 The letters of comment, as well as a copy of the summary of the comment letters prepared by the staff, are available for public inspection and copying at the Commission's Public Reference Room (See File No. S7-13-85).

9 Release No. 34-20021 (July 28, 1983) [48 FR 35082].

10 Release No. 34-21339 (September 21, 1984) [49 FR 38098].

11 The $.20 surcharge rule change to the NYSE rules was approved by the Commission on March 28, 1985. Release No. 34-21900 (March 28, 1985) [50 FR 13297]. The Commission approved similar surcharges as part of the rules of the American Stock Exchange and National Association of Securities Dealers. Release No. 34-21915 (April 1, 1985) [50 FR 14069].

12 Release No. 34-21901 supra note 4, at p. 13613.

13 Id

14 It should be noted that a beneficial owner's election to disclose its name, address, and securities position is an election with respect to all registrant's securities in a beneficial owner's account(s) with that broker.

15 See Ad Hoc Committee letter of June 18, 1986 at pages 3-4 Of Exhibit I therein.

16 When the Commission proposed these amendments in Release No. 33-6592 duly 1, 1985) [50 FR 29409], it indicated that these amendments would be adopted at the same time as the shareholder communications proposals were adopted. The comment period for the July proposals closed on September 17, 1985 and, 39 comment letters were received, only one of which addressed these amendments. That comment letter did not oppose the amendments but, rather, suggested clarifications that will be considered as part of the comprehensive review of the proxy rules.

17 In tender offers or proxy contests, there is no current requirement under Rules 14a-7,17 CFR 240.14a-7, and 14d-5,17 CFR 240.14d-5, for a registrant to turn over a non-objecting beneficial owner list to a reguesting security holder. Those rules apply only to lists of record holders and securities position listings of clearing agents. The Commission will consider whether to propose for comment amendments to Rules 14a-7 and 14d-5 which would provide security holders access to lists of non-objecting beneficial owners. Such amendments would provide equal access to these lists and avoid tipping the balance of regulation either in favor of management or in favor of tender offerers or proxy contestants. In the context of tender offers, this change may be consistent with and necessary to effectuate the purposes of the Williams Act. See S. Rep. No. 550, 90th Cong., 1st Sess. 3 (1967), "[t]he bill is designated to require full and fair disclosure for the benefit of investors while at the same time providing the offeror and management equal opportunity to fairly present their case." See also Release No. 33-6022 (February 5, 1979) 44 FR 9956.

18 Release No. 34-21901 supra note 4, at 13614.

19 Two commentators suggested that the rules require registrants who choose to communicate voluntarily with their non-objecting beneficial owners to deliver sufficient copies of the specific communication to brokers for forwarding to objecting beneficial owners. The Commission does not believe such a change is necessary at this time.

20 Determination of the fee received from the registrant for the non-objecting beneficial owner list will be the subject of proposed SRO rules.

21 The shareholder communications rules only apply to those registrants who are subject to the Commission's proxy rules.

22 A few commentators suggested that registrants be permitted to mail proxy cards and proxy soliciting material directly to non-objecting beneficial owners. Consideration of whether to permit registrants to mail proxy soliciting material to non-objecting beneficial owners was not a subject of the Commission's proposal to amend the shareholder communications rules. Further, the Advisory Committee on Shareholder Communications determined not to disrupt the existing system of proxy distribution and voting. See Report on Improving Communications Between Issuers and Beneficial Owners of Nominee Held Securities at pp 54-71.

23 In Ash v. GAFGorp., 723 R2d 1090,1094 [3d Cir. 1983), the Third Circuit held that sending the annual report by third class mail four to five days prior to matting the proxy statement by first class mail "did not reasonably guarantee that shareholders would recieve the annual report at the same time or before the proxy materials. In fact, fte procedures made it Mghy probable that shareholders would receive annual report after they had received the proxy materials."

24 17 CFR 240. 14a-5.

25 Under the shareholder coiranonicBfions rnfes, business day is defined as it is in Rule 14d-lM6). 17 CFR 240.14d-l(b)t6).

26 In its comment letter, fte Ad Hoc Conmrittee, representing members of both the registrant community and securities industry, suggested thai a five business day time period wae feasible.

27 If a broker designates an agent to act on its behalf, the broker will still be under the obligation to comply with Rule I4b-1(c) and. accordingly, receipt by the intermediary of the registrant's request will be deemed to be receipt by the broker.



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