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85-30 Securities and Exchange Commission Release Announcing Shareholder Communication Proposals

TO: All NASD Members

The Securities and Exchange Commission recently issued proposals designed to clarify the obligations of brokers and issuers under its previously adopted direct communications program. The SEC had earlier mandated a program for issuers' direct communications with beneficial shareowners to go into effect on January 1, 1985.

However, on August 17, 1984, with the full support of its Advisory Committee on Shareholder Communications, the American Society of Corporate Secretaries, the American Bankers Association and the Securities Industry Association, the SEC postponed a startup of the direct communications program until January 1, 1986.

The delayed program would require brokerage firms maintaining nominee accounts to provide issuers with lists of the names, addresses and positions of the beneficial owners of their securities in those accounts. However, only those customers not objecting to disclosure would be on the lists. Issuers would have to request lists from brokers and agree to cover the firms' reasonable costs in providing these lists. The lists may only be used for mailing interim reports and incidental information to beneficial owners.

Under the rule adopted by the SEC, issuers could not use the lists for proxy solicitations.

When it authorized the program delay, the SEC agreed to propose rules clarifying the functions of brokers and issuers and ensuring effective implementation of the program. Among other things, the proposals contained in the attached release would:

  • Require that brokers provide the list to issuers as often as requested rather than only once a year.
  • Require that issuers request the lists from all brokers with customers who are beneficial owners of the issuer's securi ties.
  • Allow issuers to send their annual reports to beneficial owners if they apprise brokers of that fact when sub mitting a search card for beneficial-owner information.

Broker Obligations

The proposals would require brokers to compile the list of beneficial owners whenever an issuer requests it. The rule currently requires brokers to compile the list as of the issuer's record date. If an issuer requests the list without scheduling a meeting, brokers would have to provide the list no later than 10 days after receiving the issuer's request.

Other proposals would excuse brokers from their obligation to provide the list if they do not receive assurances from the issuer of reimbursement for all reasonable expenses incurred in providing the lists. Brokers would also be excused from sending the annual report to beneficial owners if the issuer has notified the brokers that it was sending the annual report to the beneficial owners on the list.

Issuer Obligations

Under the proposals, issuers would have to request the lists from all brokers holding the issuers' securities in nominee accounts. This would prevent issuers from "cherry picking" the large firms, thereby leaving the smaller brokers with no way to recoup the costs of maintaining the required information.

Issuers may, at their option, send their annual report to the beneficial owners identified on the lists they receive from brokers. However, in such instances, the issuers are obligated to notify the brokers at the time a search card is submitted that they will mail the annual report to the beneficial owners on the list.

Reasons for Delay

In delaying its program, the SEC cited three reasons for its action:

  • Costs of implementing the program. The securities industry esti mated that the startup of the direct communications program alone would cost about $26 million. This includes the initial survey to determine which shareholders are willing to allow their positions to be disclosed to issuers. In addition, brokers must, of course, maintain the current system for proxy distribution.
  • Possible breaches of confidentiality. The SEC program requires that nominees furnish information on beneficial owners' positions unless those owners object to such disclosure. Because they feel that broker-dealer nominees might disclose such information by mistake, beneficial owners have suggested that they might move their accounts to banks, which are not subject to the SEC program. Broker-dealers, on the other hand, have suggested that the lists of beneficial shareholders would probably not remain confidential, and thus they would be involuntarily disclosing their customer lists.
  • Limited potential effectiveness. A major problem with the SEC rule is that it does not affect banks. At the beginning of 1985, the shares held by bank nominees accounted for 74.7 percent of the market value of all the equity securities held by the Depository Trust Company. Thus, the SEC program would reach less than a quarter of the beneficial shareholders, and of that quarter, it affects only the holdings of the beneficial owners who did not object to disclosure. According to a limited survey, it appears that the SEC program, if implemented, would not reach more than 15 percent of all beneficial shareowners.

Resolution of Delay

The NYSE's Ad Hoc Committee on Identification of Beneficial Owners, formed in September 1984, has largely resolved the issues of cost and confidentiality. A recent SEC-approved NYSE-rule change recommended by the Ad Hoc Committee permits brokers to assess a $.20 per proxy surcharge for this year's annual meeting proxy solicitation to fund the program's startup costs. A second surcharge to be proposed for next year's proxy solicitation will fund the balance of the costs not covered by the first surcharge. The NASD has likewise adopted similar charges as part of its proxy rules. The Ad Hoc Committee is also addressing the issue of determining the reasonable costs for maintaining beneficial-owner lists. Rule changes in this area will be forthcoming.

To ensure standardization and confidentiality of the resulting lists of beneficial owners, the Ad Hoc Committee has selected the Independent Election Corporation of America (IECA) to serve as the intermediary between issuers and brokers in supplying lists of beneficial owners. A user board consisting of issuers, brokers and other industry representatives will govern the IECA's activities in this area.

Resolving the final reason for delay requires that Congress enact legislation allowing the SEC to regulate the proxy-processing activities of banks, associations and other entities. Legislation designed to accomplish this died in the 98th Congress. On March 20, 1985, Representatives Wirth and Rinaldo introduced in the House of Representatives the Shareholder Communications Act of 1985 (H.R. 1603). Supporters expect to reintroduce similar legislation in the Senate.

Request for Comments on These Proposals

Those of you wishing to comment on these proposals should send your comments, by May 15, 1985, to:

Mr. John Wheeler
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

All comment letters should refer to File Number S7-13-85.

For your convenience, a copy of the SEC's release is enclosed with this notice. Any comments or questions regarding this notice should be directed to Thomas P. Mathers of the NASD's Communications Group at (202) 728-8267.

Sincerely,

Gordon S. Macklin
President

Attachment

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-21901; 40-14438; File No. S7-13-85]

Facilitating Shareholder Communications

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

SUMMARY: The Securities and Exchange Commission ("Commission"} is publishing for comment proposed 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 or other nominee. The proposed amendments are intended to allow for the most advantageous implementation of the system of direct communication provided under those rules

DATE: Comments should be received on or before May 15, 1985.

ADDRESS: Comments should be submitted in triplicate to John Wheeler, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, D.C. 20549. Comment letters should refer to File No. S7-13-85. All comments received will be available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, NW., Washington, D.C. 20549.

FQR FURTHER INFORMATION CONTACT: Sarah A. Miller or JoAnn L. Zuercher, (202) 272-2589, Office of Disclosure Policy, Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission is publishing for comment proposed revisions to Rules 14b-l 1 and 14c-7 2 and a new proposed Rule 14a-13. These proposals are a direct result of the one-year deferral of the effective date (from January 1, 1985 to January 1, 1986) of Rule 14b-l(c) agreed to by industry representatives and authorized by the Commission in August 1984.3 The 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 registrants and to ensure the effective implementation of the system of direct communication. Accordingly, these proposed amendments delineate, in two separate rules, the respective obligations of brokers and registrants. In addition, the proposed amendments would provide, 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 yean and (3) a registrant may mail its annual report to security holders to its beneficial owners so long as the registrant notifies the broker at the time it submits a search card requesting beneficial owner information.

I. 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) was adopted to provide a means of direct communication between registrants and their beneficial owners by requiring brokers to provide registrants upon request with the names, addresses and securities positions of its customers who are beneficial owners of the registrant's securities and who have not objected to such disclosure.4 In August 1984, the Commission deferred the effective date of paragraph (c) until January 1, 1986.5 Representatives from 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 Ad Hoc Committee on Identification of Beneficial Owners was appointed by the New York Stock Exchange (NYSE). The 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 Committee has now largely resolved the problems which initially led to the deferral of the effective date of Rule 14br-l(c). First, the reimbursement of start-up costs issue has been resolved through NYSE rule changes that permit brokers to assess a $.20 per proxy surcharge for the first annual meeting proxy solicitation occurring subsequent to adoption of the NYSE's rule changes. 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 ot a separate NYSE rule change. The $.20 rule change was filed with the Commission in January 1985, published in the Federal Register on February 8, 1985,6 and approved by the Commission on March 28, 1985.7 It is anticipated that other self-regulatory organizations soon will adopt the surcharge as part of their proxy rules. 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 NYSE rule change.

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 maximizing cost savings while minimizing burdens on brokers by permitting them to delegate this function to an intermediary . 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. 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 communication rules and take certain additional steps which are the subject of this release.

Ultimate effectiveness and utility of the shareholder communications rules will require enactment of legislation authorizing the Commission to regulate the proxy processing activities of banks, associations and other entities. During the 98th Congress, legislation, entitled the Shareholder Communications Act of 1984, was introduced in both houses of Congress. The legislation was reported out of the House Energy and Commerce Committee on August 2, 1984. No other action was taken in either the House or Senate with respect to the legislation. On March 20, 1985, Representatives Wirth and Rinaldo introduced in the House of Representatives the Shareholder Communications Act of 1985 (H.R. 1603). It is anticipated that the legislation shortly will be reintroduced in the Senate.

II. Overview of Proposals

Currently, Rule 14a-3(d) requires registrants whose securities are held by beneficial owners to take certain steps to ensure proxy solicitation material is forwarded by brokers to beneficial owners. These steps include requesting, by the use of search cards, the number of proxies and otherproxy soliciting material needed by record holders to forward the material to beneficial owners. The registrant must request this information 20 calendar days prior to the record date of the annual meeting.8 The broker is required to respond to this request within seven business days of receipt of the request.9 Upon receipt of the proxy, proxy soliciting material or annual reports, the broker is required to forward these materials to its customers who are beneficial owners within five business days of receipt.10 Further, brokers are required to provide a requesting registrant with a list of its customers who are non-objecting beneficial owners of the registrant's securities. That list, which is to be compiled as of the registrant's record date for its latest annual meeting, must be provided to registrants only one time per year.

For simplicity, the Commission has set forth the registrant's obligations in proposed Rule 14a-13, and the proposed revisions to Rule 14b-l would pertain only to brokers' obligations in connection with communicating information to beneficial owners. The system, as proposed to be changed, would require that, if the registrant requests a list of beneficial owners who do not object to the disclosure of their identity, it must make the request of all brokers having customers who are beneficial owners of the registrant's securities. Further, a registrant could request the beneficial owner information more often than once a year and the broker would be required to comply with any such request. The lists would be compiled at least as often as the record date for the registrant's latest annual or special meeting. If no meeting is scheduled and the registrant requests a list of beneficial owners from record holders, that list would be compiled as of a date not earlier than ten business days after the broker receives the registrant's request. 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 April 10, 1983, the list would be compiled as of a date no earlier than ten business days later or April 24, 1985. This last requirement is necessitated by the fact that brokers' back office systems do not permit the retroactive establishment of beneficial owner lists, but rather, allow those lists to be established prospectively.

The proposed amendments further provide that, if it chooses, the registrant may mail annual reports directly to 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.

Finally, the proposed amendments would provide that, without assurances of reimbursement of reasonable expenses associated with satisfying its obligations with respect to communications with the beneficial owners, a broker has no obligation to perform its obligations under Rule 14b-1. The registrant would have a corresponding obligation to pay a broker's reasonable expenses associated with providing beneficial owner information.

III. Discussion of Proposals

A. Obligation of registrants in communicating with beneficial owners. Proposed Rule 14a-13, a registrant-related corollary to Rule 14b-l, delineates a registrant's obligations in communicating with its beneficial owners and would work in tandem with present Rule 14b-l.

First, provisions of present Rule 14a-3(d) would be moved to new Rule 14a-13(a) in order to place all of the registrant-related provisions together. Paragraph (d) of Rule 14a-3(d) would become paragraph (a) of proposed Rule 14a-13 and would be amended to require registrants to request and to provide record holders with the number of copies of proxy, proxy soliciting material and annual reports to security holders necessary to supply beneficial owners. These proposed amendments recognize that record holders need not forward the annual report to those non-objecting beneficial owners with whom the registrant intends to communicate directly. Thus, if a registrant has indicated to the record holder that it wishes to communicate directly with non-objecting beneficial owners, then the record holder need only inform the registrant how many copies of the proxy soliciting material and annual reports are needed for forwarding to objecting beneficial owners. Similarly, if a registrant does not indicate that it intends to communicate directly with beneficial owners, the record holder then will inform the registrant of the number of copies needed for all beneficial owners.

Proposed paragraph (b)(l) would require a registrant to request the list of non-objecting beneficial owners from all brokers having customers who are beneficial owners of the registrant's securities. This requirement would 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.

Proposed Rule 14a-13(b)(2) would continue unchanged the statement in present Rule 14b-l(c) regarding a registrant's exclusive use of the beneficial ownership lists for purposes of corporate communications. The Commission believes that this provision adequately addresses the securities industry's concerns regarding the issue of confidentiality. Moreover, the Commission notes that the identity of the individual brokers who provide the information to be compiled in the beneficial owner lists will be kept confidential by the intermediary's excision of all information identifying specific brokers.

In connection with registrants' use of beneficial owner lists for purposes of forwarding to security holders certain other corporate communications such as quarterly reports, the Commission wishes to encourage voluntary communication with security holders. In this regard, the Commission believes it would be desirable that, where registrants use the non-objecting beneficial owner lists to mail such communications directly to non-objecting beneficial owners, 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.

Finally, proposed paragraph (b)(3) would place on the registrant the obligation to pay the reasonable expenses of brokers associated with providing beneficial owner information.

Proposed paragraph (c) would allow registrants to mail directly the annual reports to security holders to those beneficial owners that have been identified to them. Any registrant choosing to do its own annual report mailing, however, would be required to so inform the broker at the time it submitted, pursuant to paragraph (a), a search card to the broker requesting the beneficial owner information, and, further, would have the responsibility of ensuring that the annual report precede the proxy statement.

The Commission is aware 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 this connection, questions have arisen concerning compliance with Rule 14a-3(b) which requires annual reports to accompany or precede the proxy statement.11 The Commission does not wish to discourage the practice of split mailing which will result in savings to the registrant and ultimately redound to the benefit of security holders. Accordingly, compliance with the rule depends upon whether registrants take steps reasonably calculated 12 to guarantee that the annual report to security holders accompanies or precedes the proxy statement.13 In this connection, the Commission solicits specific comment as to whether Rule 14a-5 14 should be amended to provide that when annual reports to security holders are mailed separately from proxy material, all proxy statements shall disclose the date the mailing of the annual report to security holders was commended and shall contain instructions on how to obtain a copy of that annual report.

B. 14b-l Obligation of registered brokers in connection with the prompt forwarding of certain communications to beneficial owners. The Commission proposes to amend Rule 14b-l in several respects. First, as noted above, registrant-related provisions have been moved to proposed Rule 14a-13. Second, proposed revisions to paragraph (c) relate to how often the broker's obligation to provide beneficial owner information to registrants arises. Under the present rule, a broker will be obligated to provide registrants only once a year a list of beneficial owners compiled as of the registrant's record date for its latest annual meeting of security holders.15 As proposed, a registrant could request the beneficial owner list whenever it wants and the broker, in response to that request, would respond to the request. In light of this change, paragraph (c) also would provide, in addition to stating that the list of beneficial owners is to be compiled as of the registrant's record date for its latest annual or special meeting of security holders, that if the request is not made in connection with a meeting, the list is to be compiled as of a date no earlier than ten days after receipt of the registrant's request. In connection with a broker's obligation to provide beneficial owner lists to a registrant, the Commission solicits specific comment on whether a time limit should be specified within which a broker is to provide the registrant with the requested list.

Proposed paragraph (d) contains provisions relieving a broker of his obligations in two instances. The first instance relates to reimbursement. As the rule presently stands, brokers, are neither obligated to forward proxy soliciting material and annual reports to beneficial owners nor to provide registrants with beneficial owner lists without assurances of reimbursement of reasonable expenses. At present, the reimbursement provisions are placed separately in paragraphs (b) and (c). Because all obligations pursuant to the Rule relate to brokers' obligations to aid registrants to communicate with beneficial owners of their securities, the Commission proposes to place the separate reimbursement provisions in one paragraph.16 Accordingly, under proposed paragraph (d)(l). a broker's obligations under this Rule are contingent on assurances of reimbursement from the registrant of all reasonable expenses incurred in connection with the performance of those obligations.

The second instance in which a broker would be relieved of his obligation relates to a broker's duty to deliver annual reports to security holders to beneficial owners. Proposed paragraph (d)(2) would relieve a broker of his obligation to mail the annual report to security holders identified by the broker and delivered in a list to the registrant so long as the registrant notifies the broker at the time it submits a search card, in accordance with Rule 14a-13(a), that it-intends to mail the annual report directly to those beneficial owners whose identity is disclosed.

C. 14c-7 Providing copies of material for certain beneficial owners. The Commission also proposes to amend, in several respects, Rule 14c-7, which governs the forwarding of information statements to security holders. First, obligations imposed by the Rule on the registrant would be separated into separate paragraphs similar to those contained in proposed Rule 14a-13(a). Paragraph (a) involves the registrant's obligation to inquire of record holders the number of copies of the information statement and annual report to security holders needed to forward the material to beneficial owners. Paragraph (b) concerns the registrant's obligation to supply sufficient quantities of the information statement and annual report to security holders. Paragraphs (a) and (b) and note 3 would be amended further to recognize that record holders need not forward material to those non-objecting beneficial owners with whom the registrant intends to communicate directly.

IV. Request for Comments

Any interested persons wishing to submit written comments on the proposed revisions to the shareholder communication rules, as well as on other matters that might have an impact on the proposals contained herein, are requested to do so.

The Commission also requests comment on whether the proposed revisions, if adopted, would have an adverse effect on competition or would impose a burden on competition that is neither necessary nor appropriate in furthering the purposes of the Exchange Act. Comments on this inquiry will be considered by the Commission in complying with its responsibilities under section 23(a)(2) of the Exchange Act.17

V. Statutory Basis and Text of Proposed Amendments

These amendments are being proposed pursuant to section 12,14,17 and 23(a) of the Securities Exchange Act of 1934.l8

List of Subjects in 17 CFR Part 240

Reporting and recordkeeping requirements Securities.

VI. Text of Proposals

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

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

§ 240.14a-3(d) [Amended]

(1) By removing paragraph (d) including Notes 1 and 2 and redesignating paragraphs (e) and (f) as paragraphs (d) and (e) of § 240.14a-3(d).
(2) 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 with respect to which the registrant intends to solicit proxies, consents or authorization 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, inquire of such record' holder 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 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 if such reports are to be distributed by the broker, dealer, bank, voting trustee or their nominees;
(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 such meeting as is practicable or (ii) 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 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 if such report is to be distributed by the broker, dealer, bank, voting trustee or their nominees, in a timely manner, 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 so held and 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, the registrant shall make appropriate inquiry of the agency and thereafter of the participants in such 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 registrants is called to the fact that broker-dealers have an obligation pursuant to § 240.14b-l and applicable self-regulatory requirements to obtain and forward (a) proxy soliciting materials, and (b) when requested by the registrant, annual reports to record holders, to beneficial owners to whom, such brokers hold securities.

(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 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, pay the reasonable expenses, both direct and indirect, of providing 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 holders pursuant to § 240.14b-l(c), provided that such registrant notifies the brokers, at the time a search card requesting the beneficial owner information in compliance 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.
3. By revising § 240.14b-l to read as follows:

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

A broker 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 authorization by indicating, by means of a search card or otherwise, the approximate number of its customers who are beneficial owners of the registrant's securities that are held of record by the broker or its nominees;
(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) Provide the registrant, upon its request, with the names, addresses and securities positions, compiled at least as often as of the registrant's record date for its latest annual or special meeting of security holders, or, if not in connection with a meeting, no earlier than ten 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.
(d) A broker need not satisfy (1) its obligations under this section if a registrant does not provide assurance of reimbursement of the broker's reasonable expenses, both direct and indirect, incurred in connection with performing the obligations imposed by this section section; or (2) its obligation under paragraph (b) of this section to forward annual reports to beneficial owners if a registrant notifies the broker pursuant to § 240.14a-13(c) that the registrant will mail the annual report to non-objecting beneficial owners, identified by the broker and delivered in a list to the registrant pursuant to paragraph (c) of this section.
4. By revising § 240.14c-7 to read as follows:

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

If the registrant knows that securities of any class entitled to vote at a meeting are held of record by a broker, dealer, bank or voting trustee, or their nominees, the registrant shall:

(a) Inquire of such record holder 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 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 if such reports are to be distributed by the brokers, dealer, bank, voting trustee or their nominees; and
(b) Supply such record holder with additional copies of the information statement and the annual report to security holders, if such report is to be distributed by the broker, dealer, bank, voting trustee or their nominees, 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 so held and 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 "Cede & Co.", a nominee for the Depository Trust Company, or in the name of a nominee for any central certificate depository system, a registrant shall make appropriate inquiry of the central depository system and thereafter of the participants in such a system whom may hold on behalf of a beneficial owner, and to comply with the above rule with respect to any such participant.

Note 2.—The requirement for sending and annual report to security holders of record having the same address will be satisfied by sending a 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, broker-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 have an obligation pursuant to § 240.14b-l and applicable self-regulatory requirements to obtain and forward, in a timely manner, (a) information statements, and (b) when requested by the registrant, annual reports to security holders to beneficial owners for whom such brokers hold securities.
(Secs. 3,12,14,15(d), 17, 23(a), 48 Stat. 882, 892, 894, 895, 897, 901; secs. 6, 7, 8,10,19a, 48 Stat. 906, 908; sec. 203(a), 49 Stat. 704; secs. 5, 52 Stat. 1076; sec. 301, 54 Stat. 857; secs. 8, 202, 68 Stat. 685, 686; secs. 3, 4, 5, 6,10, 78 Stat. 565-68, 569, 570-74, 580; sec. 1, 79 Stat. 1051; sees. 1, 2, 3, 82 Stat. 454, 455; sees. 1, 2, 3-5, 28c, 84 Stat. 1435,1497; sec 105(b), 88 Stat. 1503; sees. 8, 9, 10, 11, 14, 18, 89 Stat. 117, 118,119,121,137,155; 15 U.S.C. 77f, 77g, 77h, 77j, 77s(a), 78c, 787, 78l, 78n, 78g, 78w(al)

By the Commission.

Shirley E. Hollis,
Assistant Secretary.

March 28, 1985.

Securities and Exchange Commission

Regulatory Flexibility Act Certification

I, John S.R. Shad, Chairman of the Securities and Exchange Commission, hereby certify, pursuant to 5 U.S.C. 605(b), that proposed Rules 14a-13 and proposed amendments to Rule 14b-l and 14c-7, if promulgated, will not have a significant impact on a substantial number of small entities. The reasons for this certification are as follows: Proposed Rule 14a-13 provides guidance to, and establishes obligations of, registrants who wish to communicate directly with beneficial owners. Proposed Rule 14a-13(a), (present Rule 14a-13(d)), and Rule 14c-7 require a registrant to inquire of its record holders the number of proxies, other proxy soliciting material, or information statements necessary to forward to beneficial owners and to supply its record holders with the appropriate number of copies. This amendment neither increases nor decreases the cost or burden on a small entity registrant associated with complying with these obligations. Compliance with Rule 14a-13 (b) and (c) is voluntary in the sense that only registrants who choose to communicate directly with beneficial owners need comply with the Rule's requirements to request security holder lists from all brokers and to pay the reasonable expenses of brokers associated with providing beneficial owner lists. Accordingly, only those small entities who wish to communicate directly with their beneficial owners need incur the direct costs associated with Rule 14a-13 (b) and (c). Small entity registrants will be required, however, to reimburse brokers for startup costs associated with furnishing the beneficial owner informaiton, at the rate of $.20 per proxy for this year's annual proxy solicitation and at a rate sufficient to cover the remaining start-up costs for next year's annual meeting proxy solicitation.

Rule 14b-l establishes the obligations of brokers in connection with forwarding communications to beneficial owners. Proposed amendments to paragraph (c) would require a broker, at the registrant's request, to compile the list of beneficial owners more often than one time per year. This amendment will impose no additional cost on small entities. Proposed paragraph (d) provides that a broker's performance of obligations imposed by the Rule is contingent on assurances of reimbursement from the registrant of all reasonable expenses incurred in connection with performing the obligations imposed by the Rule. Proposed paragraph (d) which also specifies that a broker has no obligation to mail the annual report to security holders if the registrant notifies the broker that it intends to mail the annual report directly to those beneficial owners whose identity is disclosed to the registrant, will impose no additional cost on small brokers subject to the Rule.

Dated: March 28, 1985.
John S.R. Shad.
Chairman.

[FR Doc. 85-7954 Filed 4-4-85; 8:45 am]

BILLING CODE 8010-01-M


1 17 CFP 240.14b-l

2 17 CFR 240.14c-7.

3 Release No. 34-21339 (September 21, 1984) |49 FR 38096)].

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

5 Release No. 34-21339 (September 21, 1984) {49 FR 38096).

6 Release No. 34-21702 (February 1, 1985) (50 FR 5460].

7 Release No. 34-21900 (March 28, 1985).

8 17 CFR 240.14a-3(d)

9 17 CFR 240.14b-l(a)

10 17 CFR 240.14b-l(b).

11 In Ash v. GAF Corp., 723 F.2d 1090, 1094 (3d Cir. 1983), the Third Circuit held that sending the annual report by third class mail 4 to 5 days prior to mailing the proxy statement by first class mail "did not reasonably guarantee that shareholders would receive the annual report at the same time or before the proxy materials. In fact, the procedure made it highly probable that shareholders would receive the annual report after they had received the proxy materials."

12 The Commission is aware that, depending on the geographic location of specific post offices, the length of time in which it takes bulk mail to reach its intended destination may vary greatly.

13 Registrants who request record holders to engage in split mailing retain responsibility for ensuring compliance with Rule 14a-3(b).

14 17CFR240.14a-5.

15 Release No. 34-20021 duly 23.19831148 FR 35082].

16 In this regard, see discussion on pp. 4-5. supra. concerning the NYSE proposed rule change permitting brokers to fund start-up costs by assessing a surcharge per proxy solicitation.

17 15 U.S.C. 78w(a)(2).

18 15 U.S.C. 79l, 78n. 78g. and 78w(a).



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