[Federal Register Volume 59, Number 168 (Wednesday, August 31, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-21475]


[[Page Unknown]]

[Federal Register: August 31, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34596; File No. SR-NYSE-93-37]

 

Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving a Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval to Amendment No. 1 to a Proposed Rule 
Change Relating to Amendments to Rules 450 (``Restriction on Giving of 
Proxies''), 451 (``Transmission of Proxy Material''), 452 (``Giving 
Proxies by Member Organizations'') and 465 (``Transmission of Interim 
Reports and Other Material'')

August 25, 1994.

I. Introduction

    On October 22, 1993, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend various exchange rules.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
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    Notice of the proposal appeared in the Federal Register on January 
12, 1994.\3\ On April 22, 1994, the NYSE submitted to the Commission 
Amendment No. 1 to the proposal.\4\ Five comment letters were received 
on the proposal.\5\ This order approves the proposed rule change 
including, on an accelerated basis, Amendment No. 1.
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    \3\Securities Exchange Act Release No. 33437 (January 5, 1994), 
59 FR 1773 (January 12, 1994).
    \4\See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Cheryl Evans Dunfee, Attorney, Commission, dated 
April 21, 1994. Amendment No. 1 to the proposal made certain 
clarifying changes to the text of the proposed amendments to the 
NYSE Rules. In addition, accompanying Amendment No. 1 was a draft 
NYSE Information Memo to members which discusses the substance of 
the amendments to NYSE Rules 450, 451, 452 and 465. The Information 
Memo provides that the written designation of the registered 
investment adviser: be signed by the beneficial owner of securities; 
be addressed to the member organization; include the name of the 
designated investment adviser, and specify that the investment 
adviser is being designated to receive the proxy and related 
materials and vote the proxy. It also requires NYSE member 
organizations to assure themselves that the designated investment 
adviser is registered under the Investment Advisers Act of 1940, and 
that such adviser exercises investment discretion pursuant to an 
advisory contract, and maintains records substantiating this 
information. The Information Memo further specifies that beneficial 
owners of securities have an unqualified right at any time to 
rescind designation of the investment adviser to receive materials 
and to vote proxies. The rescission must be in writing and submitted 
to the member organization. On August 15, 1994, the NYSE submitted a 
revised draft Information Memorandum that added a statement that 
member organizations may wish to provide consolidated proxies and 
related materials to investment advisers designated by beneficial 
owners to exercise voting discretion.
    \5\See letters from: Roger Hertog, President, Sanford C. 
Bernstein & Co., Inc., to Jonathan G. Katz, Secretary, Commission, 
dated January 27, 1994; Coleman Wortham, III, President, Davenport & 
Co. of Virginia, Inc., to Secretary, Commission, dated January 28, 
1994; Kenneth S. Spirer, General Counsel, Merrill Lynch, to Jonathan 
Katz, Secretary, Commission, dated February 1, 1994; Burton M. 
Fendelman, First Vice President, Senior Attorney, Dean Witter 
Reynolds, Inc., to Jonathan Katz, Secretary, Commission, dated 
January 27, 1994; Paul S. Gottlieb, Chairman, Investment Adviser 
Committee, Securities Industry Association, to Jonathan Katz, 
Secretary, Commission, dated February 9, 1994.
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II. Description of the Proposal

    The Exchange is amending several NYSE Rules related to the giving 
of proxies and the transmission of proxy and other related materials. 
Specifically, the NYSE is amending NYSE Rules: 450--Restriction on 
Giving of Proxies; 451--Transmission of Proxy Material; 452--Giving 
Proxies by Member Organization, and 465--Transmission of Interim 
Reports and Other Material.
    The proposed amendments to NYSE Rules 450, 451, 452 and 465 will 
permit investment advisers registered under the Investment Advisers Act 
of 1940 who exercise investment discretion pursuant to an advisory 
contract and who have been designated in writing by the beneficial 
owner, to receive proxy soliciting materials, annual reports and other 
related material and to vote proxies in lieu of the beneficial owners 
of securities. The term investment adviser is defined to include a 
registered broker-dealer (e.g., a member organization).
    Currently, NYSE Rules prohibit a member organization from voting 
proxies, on a discretionary basis, on securities held in its custody, 
unless the securities are beneficially owned by a member organization, 
the beneficial owner has failed to provide the member organization with 
voting instructions and the subject of the vote is non-substantive, or 
the member organization is the investment manager for an ERISA account. 
Currently, NYSE Rules also require transmission of proxy and related 
issuer materials, as well as proxy voting instructions, to each 
beneficial owner of stock held in the member organization's possession 
and control. Rule 451.60 explicitly requires that proxy material be 
sent to a beneficial owner even though such owner has instructed the 
member organization not to do so.\6\
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    \6\See NYSE Rule 451.60--Duty to transmit even when requested 
not to.
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    According to the Exchange, a number of member organizations along 
with the Investment Adviser Committee of the Securities Industry 
Association (``SIA'') informed the Exchange that many of their 
customers who have their accounts managed by investment advisers do not 
want to receive proxy related information and annual reports, or vote 
the proxy. These member organizations have indicated that their 
customers would rather have the professionals, whom they pay to manage 
their accounts, represent their interests relative to the companies in 
which they own stock because the professionals are better qualified. In 
addition, the Exchange states that banks, investment advisers, and 
broker-dealers who are not subject to the Exchange's or similar rules 
may receive proxy material and vote proxies on behalf of their 
customers in accordance with fiduciary obligations set forth by 
contractual arrangement. Accordingly, the Exchange is making the 
following changes to permit beneficial owners to designated investment 
advisers that are registered broker-dealers to receive materials and 
proxies and to vote proxies.
    NYSE Rule 450--Restrictions on Giving of Proxies--currently 
provides that no member organization shall give or authorize the giving 
of a proxy to vote stock registered in its name, or in the name of its 
nominee, except as required or permitted under the provisions of Rule 
452, unless the member organization is the beneficiary owner of the 
stock. The Exchange proposes to add an exception (paragraph (2)) to 
Rule 450,\7\ that would provide that any person registered as an 
investment adviser under the Investment Advisers Act of 1940 who 
exercises investment discretion pursuant to an advisory contract for 
the beneficial owner and who has been designated in writing by the 
beneficial owner to vote the proxies for stock which is in the 
possession or control of the member organization, may vote such proxy.
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    \7\The first exception to Rule 450--paragraph (1)--provides that 
any member organization designated by a named fiduciary as the 
investment manager of stock held as assets of an ERISA Plan that 
expressly grants discretion to the investment manager to manage, 
acquire or dispose of any plan asset and which has not expressly 
reserved the proxy voting right for the named fiduciary may vote the 
proxies in accordance with its ERISA Plan fiduciary 
responsibilities.
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    NYSE Rule 451--Transmission of Proxy Material--generally provides 
that, whenever a person soliciting proxies furnishes a member 
organization copies of all soliciting material which the person is 
sending to registered holders, and satisfactory assurance that he will 
reimburse such member organization for all out-of-pocket expenses 
incurred by such member in connection with such solicitation, such 
member shall transmit to each beneficial owner of stock which is in its 
possession or control, the material furnished. The Exchange is amending 
Rule 451, paragraph (a) to add the requirement that the member 
organization may also transmit the soliciting material to an investment 
adviser registered under the Investment Advisers Act of 1940 who 
exercises investment discretion pursuant to an advisory contract for 
the beneficial owner and has been designated in writing by the 
beneficial owner of such stock (``designated investment adviser'') to 
receive soliciting material in lieu of the beneficial owner.
    The Exchange also is amending Rules 451(b)(1) and (2), which deal 
with what soliciting material the member organization receiving proxy 
information shall transmit and when such transmission shall occur. As 
amended, Rule 451(b)(1) provides that the member organization may 
transmit, with soliciting material, a request for voting instructions 
and a statement to the effect that, if such instructions are not 
received by the tenth day before the meeting, the proxy may be given at 
discretion by the owner of record of the stock, provided that such 
statement may be made only when the proxy soliciting material is 
transmitted to the beneficial owner of the stock or to the beneficial 
owner's designated investment adviser at least fifteen days before the 
meeting. As amended, Rule 451(b)(1) also provides that when the proxy 
soliciting material is transmitted to the beneficial owner of the stock 
or to the beneficial owner's designated investment adviser twenty-five 
days or more before the meeting, the statement accompanying such 
material shall be to the effect that the proxy may be given fifteen 
days before the meeting at the discretion of the owner of the record of 
the stock.
    Rule 451(b)(2), as amended, provides that, instead of the material 
submitted under Rule 451(b)(1), the member organization may transmit 
with the soliciting material a signed proxy indicating the number of 
shares held for the beneficial owner and bearing a symbol identifying 
the proxy records of such member organization, and a letter informing 
the beneficial owner or the beneficial owner's designated investment 
adviser of the necessity for completing the proxy form and forwarding 
it to the person soliciting proxies in order that the shares may be 
represented at the meeting.
    The Exchange also is modifying two Supplementary Material 
provisions to Rule 451. Supplementary Material .10--Annual Reports--is 
being amended to provide that annual reports shall be transmitted to 
beneficial owners or to beneficial owners' designated investment 
advisers under the same conditions as those applying to proxy 
soliciting material under Rule 451 even though it is not proxy 
soliciting material under the proxy rules of the Commission. 
Supplementary Material .60--Duty to transmit even when requested not 
to--currently provides that proxy material must be sent to a beneficial 
owner even though such owner has instructed the member organization not 
to do so. The Exchange is qualifying the provision so that proxy 
material must be sent even though the beneficial owner has instructed 
not to do so, unless the beneficial owner has instructed the member 
organization in writing to send such material to the beneficial owner's 
designated investment adviser.
    The Exchange also is adding provisions for a beneficial owner's 
designated investment adviser to Rule 452--Giving of Proxies by Member 
Organization, Voting procedure without instructions. As amended, the 
Rule provides that a member who has transmitted proxy soliciting 
material to the beneficial owner of stock or to an investment adviser 
registered under the Investment Advisers Act of 1940 who exercises 
investment discretion pursuant to an advisory contract for the 
beneficial owner and has been designated in writing by the beneficial 
owner of such stock (``designated investment adviser'') to receive 
soliciting material in lieu of the beneficial owner and solicited 
voting instructions in accordance with the provisions of Rule 451, and 
who has not received instructions from the beneficial owner or from the 
beneficial owner's designated investment adviser by the date specified 
in the statement accompanying such material, may give or authorize 
giving of a proxy to vote such stock, provided certain enumerated 
conditions are met.
    The Exchange is making two changes to Rule 452 Supplementary 
Material .10--Giving a Proxy To Vote Stock. As amended, paragraphs (1) 
and (2) state that a member organization may give a proxy to vote stock 
provided that: (1) It has transmitted proxy soliciting material to the 
beneficial owner of stock or to the beneficial owner's designated 
investment adviser in accordance with Rule 451 and (2) it has not 
received voting instructions from the beneficial owner or from the 
beneficial owner's designated investment adviser by the date specified 
in the statement accompanying such material. The remaining condition in 
paragraph (3) is unchanged.
    Rule 465--Transmission of Interim Reports and Other Material--
currently provides that a member organization, upon request by a 
company, and when furnished with copies of interim reports of earnings 
or other material sent to stockholders, and satisfactory assurance that 
it will be reimbursed by such company for out-of-pocket expenses , 
shall transmit such reports of material to each beneficial owner of 
stock of such company held by the member organization and registered in 
a name other than the name of the beneficial owner. The Exchange is 
qualifying Rule 465 by adding the following to the end of the Rule: 
``unless the beneficial owner has instructed the member organization in 
writing to transmit such reports or material to a designated investment 
adviser registered under the Investment Advisers Act of 1940 who 
exercises investment discretion pursuant to an advisory contract for 
such beneficial owner.''
    The Exchange states that the proposed rule change will not diminish 
a beneficial owner's rights to receive proxy related materials and to 
vote proxies. Rather, it will give beneficial owners the option to 
designate their investment adviser as the person to receive such 
materials and to vote proxies. The Exchange also believes that the 
changes will enable member organizations to comply with customer 
desires concerning transmission of proxy materials and proxy voting.

III. Discussion of Comments

    The Commission received five comment letters recommending approval 
of this proposal. In its comment letter, Sanford C. Bernstein & Co., 
Inc. (``Sanford'') strongly endorses the NYSE's proposed rule changes 
relating to voting of proxies and transmission of proxy and related 
issuer material.\8\ Sanford states that for many years those clients 
for which it acts as an investment adviser, managing accounts and 
purchasing securities, have requested that it vote proxies and receive 
annual reports and other related materials in connection with the 
securities they own. Sanford asserts that its clients find it 
incomprehensible that they may give Sanford the power to determine the 
securities to be bought and sold but are not able to give them the 
ability to vote their proxies.
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    \8\See letter from Roger Hertog, President, Sanford C. Bernstein 
& Co., Inc., to Jonathan G. Katz, Secretary, Commission, dated 
January 27, 1994.
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    Sanford asserts that when clients open an advisory account they 
often do so in order to obtain the professional money management 
services of the adviser and because they have determined that they do 
not have the time, expertise, or desire to handle their own 
investments, and they often do not want to be responsible for proxy 
voting or to receive voluminous issuer reports. Sanford also asserts 
that such clients have no need for issuer materials since they have 
already determined that the adviser is to have authority to make 
investment decisions. Sanford believes that since such advisory clients 
frequently have little familiarity with or knowledge of specific 
securities, they are often ill equipped to vote proxies from such 
issuers.
    The Sanford letter emphasizes that clients retain investment 
advisers with the expectation that financial management includes the 
expertise to vote proxies and that voting responsibility should be 
placed wherever the client chooses. Finally, Sanford points out that 
the proposed changes to the NYSE Rules will not require a beneficial 
owner to grant authority to vote his proxies but they will merely 
permit such owners to delegate such authority if they so desire. 
Likewise, non-discretionary clients may still vote proxies themselves.
    In its comment letter, Davenport & Co. of Virginia, Inc. 
(``Davenport'') strongly supports the proposed changes.\9\ Davenports 
states that it acts as an investment adviser to over five hundred 
clients and a significant number of its clients have expressed dismay 
over existing proxy mailing and voting regulations. Davenport believes 
that its clients will be best served by permitting investment advisers 
who have custody of and exercise discretion over client accounts the 
opportunity to render the additional service of voting proxies.
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    \9\See letter from Coleman Worthman III, President, Davenport & 
Co. of Virginia, Inc., to Secretary, Commission, dated January 28, 
1994.
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    In its comment letter, Merrill Lynch, Pierce, Fenner & Smith 
(``Merrill Lynch'') supports the proposed changes to the NYSE Rules and 
encourages their approval.\10\ Merrill Lynch states that it believes 
that the proposed amendments appropriately recognize the increased 
utilization of registered investment advisers by its clients and 
appropriately permits its clients to designate the investment adviser 
to vote proxies and receive proxy related issuer materials with respect 
to securities in clients' managed accounts.
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    \10\See letter from Kenneth S. Spirer, General Counsel, Merrill 
Lynch, Pierce, Fenner & Smith, Inc., to Jonathan Katz, Secretary, 
Commission, dated January 27, 1994.
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    In its comment letter, Dean Witter Reynolds, Inc. (``Dean Witter'') 
supports the proposed changes because they benefit its clients as well 
as other NYSE member firms.\11\ Dean Witter also states that when a 
client instructs an investment adviser to act with discretion to 
implement an investment strategy, the client expects that such 
management power includes the expertise to vote proxies. Dean Witter 
states that it has an increased number of managed accounts and it has 
received many requests from clients who wish to be relieved of the 
responsibility of proxy voting and the receipt of voluminous numbers of 
reports by corporate issuers.
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    \11\See letter from Burton M. Fendelman, First Vice President, 
Senior Attorney, Dean Witter Reynolds, Inc., to Jonathan Katz, 
Secretary, Commission, dated January 27, 1994.
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    In its comment letter, the Investment Adviser Committee of the 
Securities Industry Association (``SIA Committee'') strongly supports 
the proposed amendments to certain rules governing the voting of 
proxies as well as the transmission of proxy and issuer related 
materials. The SIA Committee comment letter states that the proposed 
changes to NYSE Rules 450, 451, 452 and 465 resulted from clients of 
member firms expressing their desire to have such firms act on their 
behalf whenever they are designated investment advisers. The SIA 
Committee states that the proposed changes coincide with the growing 
regulatory perspective that an investment adviser's fiduciary 
obligations include the voting of proxies unless otherwise directed by 
the clients.
    The SIA Committee letter concludes that overall, the requested 
relief would enhance the effectiveness of discretionary account 
management and provide a service frequently requested by clients. While 
principles of corporate governance mandate that beneficial owners of 
securities should have relevant information about issuers of those 
securities, this is not necessarily the case when a beneficial owner 
has set up an investment advisory account wherein discretion is given 
to the investment adviser to implement a suitable investment strategy. 
In this instance, virtually all clients give discretion to their 
investment adviser to implement an investment strategy that is suitable 
for, and best reflects, client objectives. The SIA Committee goes on to 
state that when an investment advisory account is set up it is almost 
always the case that the client does not want the burden of receiving 
issuer mailings. Such clients have generally determined that they do 
not have the time, expertise or desire to handle their own investments. 
Similarly, such clients frequently do not want to be recipients of 
voluminous issuer reports that, for a fully diversified account, can be 
described as ``mountainous.''
    The SIA Committee states that clients with investment advisory 
accounts generally do not need to receive issuer mailings or proxy 
materials since it is the adviser that has the authority and obligation 
to decide upon purchases and sales in the account. Clients frequently 
have little or no role in the selection of specific securities in a 
discretionary account and thus, they often have little or no 
familiarity with or knowledge of issuers and will be ill equipped to 
vote provide from such issuers.
    The SIA Committee comment letter also states that NYSE member 
organizations are at a competitive disadvantage with advisers not 
subject to NYSE regulation. The SIA states that investment advisers 
that are not registered as NYSE or National Association of Securities 
Dealers (``NASD'') members are able to enter into agreements with 
discretionary clients to vote the client's securities. According to the 
SIA Committee, clients are seeking to delegate proxy voting with 
increasing frequency and rather than receive voluminous issuer 
material, some potential clients have chosen not to open advisory 
accounts and some existing clients have actually closed investment 
accounts. The SIA Committee concludes that compelling NYSE member firms 
to continue to send such materials to a segment of clients who do not 
need or want them serves no purpose and can only alienate a potential 
client base.
    The SIA Committee concludes by emphasizing that the proposed 
changes would not reduce a client's right either to vote proxies or 
receive issuer materials, but rather would enhance a NYSE member's 
ability to comply with client instructions under specific 
circumstances.

IV. Discussion and Conclusion

    The Commission finds the proposed rule change to be consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange, and, in particular, with 
the requirements of Sections 6(b)(5) of the Act. Section 6(b)(5) of the 
Act provides, inter alias, that the rules of an exchange be designed to 
remove impediments to and perfect the mechanism of a free and open 
market.
    The Commission believes that allowing investors to designate an 
investment adviser to receive proxy and related issuer materials and 
vote their proxies removes impediments to a free and open market. As 
noted by the commenters, investors have been requesting that investment 
advisers be authorized to receive issuer materials and vote proxies for 
the investor. Investors choosing an investment adviser arrangement may 
feel that they do not need to receive issuer information since the 
investment adviser is making investment decisions on the investor's 
behalf. The Commission acknowledges that investors might view the 
receipt of issuers materials and the ability to vote proxies as part of 
the investment adviser's continuing activities in managing customer 
accounts. Furthermore, the Commission acknowledges that some investors, 
in choosing to utilize the services of an investment adviser, are 
indicating that they do not have the knowledge or inclination to review 
complicated issuer or proxy materials or to vote proxies. These 
investors, in particular, may feel frustrated when inundated with 
unwanted issuer materials. Furthermore, the Commission believes that 
the proposed rule change will permit the investment adviser to make 
more expedient, informed investment decisions, thereby facilitating 
securities transactions in accordance with the Act. For these reasons, 
the Commission believes that the proposed rule change appropriately 
gives investors the freedom to choose whether to receive proxy and 
related issuer materials and vote the proxies or to designate an 
investment adviser to perform these functions on their behalf.
    Section 6(b)(5) of the Act also provides that the rules of an 
exchange should protect investors and the public interest. The 
Commission believes that the proposed rule change is consistent with 
the public interest and the protection of investors. The Commission 
notes that the rule change permits investors who wish to receive and 
vote proxies and receive other issuer materials to continue to do so. 
The proposed rule change affords beneficial owners the choice to 
delegate this authority when the beneficial owner has already granted 
discretion in his investment account to an investment adviser. In 
addition, investors will have the authority to rescind designation of 
an investment adviser at any time, and, prior to the effective date of 
such designation, member organizations must provide beneficial owners 
written notice of their right to rescind the designation.
    Finally, the Commission believes the proposed rule change is 
consistent with Section 6(b)(8) of the Act, which requires that the 
rules of an exchange not impose any burden on competition not necessary 
or appropriate in furtherance of the purposes of the Act. The 
Commission believes the proposed rule change should serve to eliminate 
unnecessary burdens on competition in recognition that advisers not 
subject to NYSE rules already are able to vote proxies for their 
clients.
    The Commission finds good cause to accelerate approval of Amendment 
No. 1. Amendment No. 1 made clarifying, technical changes to the text 
of the rule, and did not propose new substantive provisions to the 
proposed rule change.
    It is therefore ordered, pursuant to Section 19(b)(2)\12\ of the 
Act, that the proposed rule chance (SR-NYSE-93-37) is approved, 
including Amendment No. 1 on an accelerated basis.

    \12\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\17 U.S.C. 200.30-3(a)(12) (1992).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-21475 Filed 8-30-94; 8:45 am]
BILLING CODE 8010-01-M