[Federal Register Volume 59, Number 192 (Wednesday, October 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24612]


[[Page Unknown]]

[Federal Register: October 5, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34744; File No. SR-Amex-94-3]

 

Self-Regulatory Organizations; American Stock Exchange, Inc.; 
Order Approving a Proposed Rule Change Relating to Amendments to Rules 
575 (``Giving of Proxies Restricted''), 576 (``Transmission of Proxy 
Material to Customers''), 577 (``Giving Proxies by Member 
Organization'') and 585 (``Transmission of Interim Reports and Other 
Material'')

September 28, 1994.

I. Introduction

    On February 22, 1994, the American Stock Exchange, Inc. (``Amex'' 
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 
governing proxies. On May 26, 1994, the Amex submitted to the 
Commission Amendment No. 1 to the proposed rule change.\3\
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1994).
    \3\See letter from Linda Tarr, Senior Counsel, Amex, to Sandra 
Sciole, Special Counsel, SEC, dated May 25, 1994. Amendment No. 1 
made certain clarifying changes to the proposed rule change.
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    Notice of the proposal appeared in the Federal Register on July 8, 
1994.\4\ No comments were received on the proposal. This order approves 
the proposed rule change as amended.\5\
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    \4\Securities Exchange Act Release No. 34294 (July 1, 1994), 59 
FR 35152 (July 8, 1994).
    \5\On September 27, 1994, the Amex submitted a draft Amex 
Information Circular to members which discusses the substance of the 
amendments to Amex Rules 575, 576, 577 and 585. This draft circular 
is being approved as part of the Amex's proposal herein. The Amex 
Information Circular 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 Amex 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 Amex Information Circular further specifies that 
beneficial owners of securities have an unqualified right at any 
time to rescind designation of the investment adviser to receive 
materials to vote proxies. The rescission must be in writing and 
submitted to the member organization. The draft Amex Information 
Circular also 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.
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II. Description of the Proposal

    The Exchange is amending several Amex Rules related to the giving 
of proxies and the transmission of proxy and other related materials. 
Specifically, the Exchange is amending Amex Rules: 575 (``Giving of 
Proxies Restricted''), 576 (``Transmission of Proxy Material to 
Customers''), 577 (``Giving Proxies by Member Organization''), and 585 
(``Transmission of Interim Reports and Other Material'').
    The amendments to Amex Rules 575, 576, 577 and 585 will permit 
registered investment advisers who exercise investment discretion 
pursuant to an advisory contract, and who have been designated in 
writing by the beneficial owner of the securities, to receive proxy 
materials, annual reports and other related material, and to vote 
proxies in lieu of the beneficial owners. The term investment adviser 
is defined to include a registered broker-dealer (e.g., a member 
organization).\6\
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    \6\This portion of the Amex proposal is substantially similar to 
a proposal recently approved for the NYSE. See Securities Exchange 
Act Release No. 34596 (August 25, 1994), 59 FR 45050 (``NYSE 
Approval Order''). Although no comments were received on the Amex 
proposal, the Commission received five comment letters supporting 
this change of the NYSE.
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    Currently, Exchange 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, or the beneficial owner has failed to provide the member 
organization with voting instructions and the subject of the vote is 
non-substantive. Currently, Exchange rules also require member 
organizations to transmit proxy and related issuer materials, as well 
as requests for voting instructions, to each beneficial owner of stock 
held in the member organization's possession or control. Rule 576.60 
explicitly requires that proxy material be sent to a beneficial owner 
even though such owner has instructed the member organization not to do 
so.\7\
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    \7\See Amex Rule 576.60--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 do not want to receive proxy materials, or vote the proxy. 
These member organizations have indicated that their customers would 
rather have the professionals represent their interests in receiving 
and voting proxies because they are better qualified.
    In addition, the Exchange is amending Rule 575 to conform that Rule 
to a comparable New York Stock Exchange (``NYSE'') Rule which allows a 
member organization, that is designated by a named fiduciary as the 
investment manager of stock held as assets of an ERISA Plan, to vote 
the proxies on the stock in accordance with its ERISA Plan fiduciary 
responsibilities.\8\
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    \8\This NYSE Rule currently states 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 such 
member organization is the beneficial owner of such stock. 
Notwithstanding the foregoing, 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. See NYSE Rule 450, Restriction on 
Giving of Proxies.
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    The Amex believes that it is appropriate to modify these Amex rules 
to conform to NYSE rules because most Amex member firms doing a public 
business are dual members of both the NYSE and Amex, and the rules of 
the two exchanges regarding proxies and voting have historically been 
substantially the same.
    Amex Rule 575 (``Giving of Proxies Restricted'') 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 
577, unless the member organization is the beneficial owner of the 
stock.
    The Exchange proposes to add two exceptions (paragraphs (1) and 
(2)) to Rule 575. Paragraph (1) would provide 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. Paragraph (2) 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 (``designated 
investment adviser'') to vote the proxies for stock which is in the 
possession or control of the member organization, may vote such proxy.
    Amex Rule 576 (``Transmission of Proxy Material to Customers'') 
generally provides that, whenever a person soliciting proxies furnishes 
a member organization copies of all soliciting material for registered 
holders, and provides assurance that he will reimburse such member 
organization for all out-of-pocket expenses incurred 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 576, paragraph (a) to add the requirement 
that the member organization may also transmit the soliciting material 
to a designated investment adviser to receive soliciting material in 
lieu of the beneficial owner.
    The Exchange also is amending Rules 576(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 576(b)(1) provides that the member organization shall 
transmit, with soliciting material, a request for voting instruction 
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 576(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 record of the 
stock.
    Rule 576(b)(2), as amended, provides that, instead of the material 
submitted under Rule 576(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 Commentaries .10 and .60 to Rule 
576. Commentary .10 (``Annual reports to be transmitted'') 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 567 even through it is not proxy 
soliciting material under the proxy rules of the Commission. Commentary 
.60 (``Duty to transmit even when requested not to'') currently 
provides that proxy material must be sent to a beneficial owner even 
through such owner has instructed the member organization not to do so. 
The Exchange is qualifying this provision to permit the beneficial 
owner to instruct 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 577 (``Giving of Proxies by 
member Organization, Voting Procedure Without Instructions''). As 
amended, the Rule provides that a member organization which has 
transmitted proxy soliciting material to the beneficial owner of stock 
or to the beneficial owner's designated investment adviser to receive 
soliciting material in lieu of the beneficial owner and solicited 
voting instructions in accordance with the provisions of Rule 576, 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 the 
giving of a proxy to vote such stock, provided certain enumerated 
conditions are met.
    The Exchange is making two changes to Rule 577, Commentary .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 576, 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 585--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 585 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.''

III. 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 alia, 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 permitting 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 Exchange, 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 
believe that they do not need to receive issuer information since the 
investment adviser and not the investor is making investment decisions 
on their 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 obligations to manage customer 
accounts. Furthermore, the Commission acknowledges that some investors, 
in choosing to utilize the services of an investment adviser, are 
implying 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 be frustrated by being inundated with 
unwanted issuer materials.
    The Commission also 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 their 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 continues to permit investors who wish to 
receive and vote proxies and receive other issuer materials to do so. 
The 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. Despite the 
flexibility provided by the rule, investors will continue to have the 
authority to rescind their designation of an investment adviser at any 
time. We note that prior to the effective date of such designation, 
member organizations must provide beneficial owners written notice of 
their right to rescind the designation.
    The Commission also believes that amending Rule 575 to allow a 
member organization which is the investment manager for an ERISA Plan 
is consistent with the policies embodied in Section 6(b)(5) of the Act 
because the amendment would conform Amex Rule 575 to NYSE Rule 450 
which permits a member organization, that is designated by a named 
fiduciary as the investment manager of stock held as assets of an ERISA 
Plan, to vote the proxies in accordance with the its ERISA Plan 
fiduciary responsibilities. The amendment to Rule 575 should facilitate 
transactions in securities between Amex member firms that are dual 
members of the NYSE and Amex by adopting consistent proxy rules. The 
Commission notes that in voting proxies as a plan fiduciary, an 
investment manager must consider those factors which would affect the 
value of the plan's investment and is prohibited from subordinating the 
interests of participants and beneficiaries in their retirement income 
to unrelated objectives. In addition, the Commission believes that the 
Exchange's amendment should prevent potential conflicts between the 
Exchange rules and ERISA guidelines.\9\
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    \9\In an interpretive letter dated February 23, 1988, the 
Pension and Welfare Benefits Administration (``PWBA'') of the United 
States Department of Labor (``Department'') set forth its view 
regarding proxy voting by fiduciaries of employee retirement plans 
subject to ERISA. In the interpretive letter, the Department stated 
that the fiduciary act of managing plan assets which are shares of 
corporate stock would include the voting of proxies appurtenant to 
those shares of stock. The Department stated its position that, with 
respect to the special issues presented by the facts of the 
particular inquiry set forth in the request for interpretation 
(i.e., a proposal to change the state of incorporation of a 
corporation in which a plan owned shares, and a proposal to rescind 
``poison pill'' arrangements), the decision as to how proxies should 
be voted are fiduciary acts of plan asset management. The Department 
concluded that, to the extent that the plan permits a named 
fiduciary to appoint an investment manager to manage, acquire and 
dispose of plan assets, and the named fiduciary has not expressly 
reserved the voting rights to itself, there would be an ERISA 
violation if, during the duration of such delegation, any person 
other than the investment manager were to make the decision how to 
vote any proxy with respect to shares owned by the plan. See Labor 
Department Letter on Proxy Voting By Plan Fiduciaries, dated 
February 23, 1988, BNA Pension Reporter, February 29, 1988, Vol. 15, 
p. 391.
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    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 Amex rules already are able to vote proxies for their 
clients.
    It is therefore ordered, pursuant to Section 19(b)(2)\10\ of the 
Act, that the proposed rule change (SR-Amex-94-3) be, and hereby is 
approved.

    \10\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.\11\
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    \11\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-24612 Filed 10-4-94; 8:45 a.m.]
BILLING CODE 8010-01-M