[Federal Register Volume 60, Number 92 (Friday, May 12, 1995)]
[Notices]
[Pages 25749-25751]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11772]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35681; File No. SR-NASD-95-06]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
Interpretation of the Board of Governors--Forwarding of Proxy and Other 
Material Under Article III, Section 1 of the NASD Rules of Fair 
Practice

May 5, 1995.
    On March 22, 1995,\1\ the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') a proposed rule 
change pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act''),\2\ and Rule 19b-4 thereunder.\3\ The proposed rule 
change amends its Interpretation of the Board of Governors--Forwarding 
of Proxy and Other Material under Article III, Section 1 of the NASD 
Rules of Fair Practice\4\ (``Interpretation'') to allow a 
[[Page 25750]] beneficial owner to stock to designate a registered 
investment adviser to vote proxies and receive proxy and related issuer 
material in lieu of the beneficial owner, and to allow certain 
investment managers of ERISA Plans\5\ to vote proxies.

    \1\The NASD initially submitted the proposed rule change on 
February 6, 1995. Amendment No. 1, submitted on March 22, 1995, 
replaced the initial submission in its entirety.
    \2\15 U.S.C. 73s(b)(1).
    \3\17 CFR 240.19b-4.
    \4\NASD Manual, Rules of Fair Practice, Art. III, Sec. 1 (CCH) 
2151.05.
    \5\For purposes of this interpretation, the term ``ERISA'' is an 
acronym for the Employee Retirement Income Security Act of 1974.
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    Notice of the proposed rule change, together with the substance of 
the proposal, was provided by issuance of a Commission release 
(Securities Exchange Act Release No. 35533, March 24, 1995) and by 
publication in the Federal Register (60 FR 16521, March 30, 1995). No 
comment letters were received. This order approves the proposed rule 
change.

Designated Registered Investment Advisers

    The Interpretation currently does not permit a beneficial owner of 
stock to designate a registered investment adviser to vote proxies and 
receive proxy and related issuer material in lieu of the beneficial 
owner except as permitted under the rules of any national securities 
exchange to which the NASD member that is the holder of record also 
belongs.\6\ By contrast, the New York Stock Exchange, Inc. (``NYSE'') 
recently amended its rules\7\ to allow a beneficial owner of stock to 
designate a registered investment adviser to vote proxies and receive 
proxy and related issuer material in lieu of the beneficial owner. The 
Commission recognized 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.\8\ 
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 because the investment 
adviser is making investment decisions on the investor's behalf. 
Furthermore, the Commission recognized 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 they receive unwanted issuer 
materials.

    \6\The records of the members must clearly indicate which 
procedure it follows.
    \7\Securities Exchange Act Release No. 34596 (Aug. 25, 1994, 59 
FR 45050 (Aug. 31, 1994).
    \8\Id.
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    The rule change approved today will allow a beneficial owner of any 
issuer's stock to inform any NASD member that is the holder of record 
of that stock that the beneficial owner has authorized a designated 
registered investment adviser to receive and vote proxies and to 
receive related issuer material in lieu of the beneficial owner. The 
rule change will provide beneficial owners with the right to make this 
type of designation whether or not the member holding the beneficial 
owner's securities is also an NYSE member.
    The rule change provides that, for purposes of the Interpretation, 
a ``designated investment adviser'' is a person registered under the 
Investment Advisers Act of 1940 who exercises investment discretion 
pursuant to an advisory contract for the beneficial owner and has been 
designed in writing by the beneficial owner to receive and vote the 
proxy, and to receive annual reports and other material sent to stock 
holders. The beneficial owner would be required to sign a written 
designation to the member; such designation must be addressed to the 
member; and such designation must include the name of the designated 
investment adviser. The beneficial owner would have an unqualified 
right at any time to rescind designation of the investment adviser to 
receive materials and to vote proxies. The rescission would have to be 
in writing and submitted to the member.
    The rule change requires that a member who receives a written 
designation from a beneficial owner ensure that the beneficial owner's 
designated investment adviser is registered under the Investment 
Advisers Act of 1940; is exercising investment discretion pursuant to 
an advisory contract for the beneficial owner; and is designated in 
writing by the beneficial owner to receive and vote proxies for stock 
which is in the possession of the member. Members would be required to 
keep records substantiating this information.

ERISA Investment Managers

    NYSE Rule 450(1)\9\ provides that any NYSE member organization 
designated by a named fiduciary as the investment manager of stock held 
as assets of an ERISA Plan may vote the proxies in accordance with its 
ERISA Plan fiduciary responsibilities if the ERISA Plan expressly 
grants discretion to the investment manager to manage, acquire or 
dispose of any plan asset and has not expressly reserved the proxy 
voting right for the named fiduciary. The rule change approved today 
will conform the Interpretation to NYSE Rule 450(1). The rule change 
permits any member designated by a named ERISA Plan fiduciary as the 
investment manager\10\ of stock held as assets of the ERISA Plan to 
vote the proxies in accordance with ERISA Plan fiduciary 
responsibilities if the ERISA Plan expressly grants discretion to the 
investment manager to manage, acquire, or dispose of any plan asset, 
and has not expressly reserved the proxy voting right for the named 
ERISA Plan fiduciary.

    \9\2 NYSE Guide, Rules of Board, Rule 450 (CCH) 2450.
    \10\ERISA defines the term ``investment manager'' to mean any 
fiduciary (other than a trustee or named fiduciary, as defined in 
Section 1102(a)(2) of Title 29): (A) who has the power to manage, 
acquire, or dispose of any asset of a plan; (B) who is: (i) 
registered as an investment adviser under the Investment Advisers 
Act of 1940; (ii) a bank, as defined in that Act; or (iii) an 
insurance company qualified to perform services described in 
subparagraph (A) under the laws of more than one State; and (C) has 
acknowledged in writing that he is a fiduciary with respect to that 
plan. See 29 U.S.C. 1002(38).
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    The Commission finds that the proposed rule change is consistent 
with the provisions of Section 15A(b)(6) of the Act\11\ in that the 
rule change will benefit investors by: (i) providing investors with the 
ability to designate their registered investment advisers to receive 
and vote their proxies and to receive other material; (ii) providing 
authority to certain investment managers of ERISA Plans to receive and 
vote proxies; and (iii) providing desired uniformity between NASD rules 
and NYSE rules on such proxy procedures.

    \11\15 U.S.C. 78o-3.
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    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 above, the Commission has recognized that investors have been 
requesting that investment advisers be authorized to receive issuer 
materials and vote proxies for the investor. Those investors 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 issuer materials and the ability to vote proxies as part of 
the investment adviser's continuing activities in managing customer 
accounts. The Commission also 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 
[[Page 25751]] complicated issuer or proxy materials or to vote 
proxies. These investors, in particular, may feel frustrated when they 
receive 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.
    The Commission also believes that amending the Interpretation to 
allow a member that is the investment manager for an ERISA Plan to vote 
proxies on behalf of the ERISA Plan is consistent with the policies 
embodied in Section 15A(b)(6) because the amendment would conform the 
Interpretation to NYSE Rule 450(1) and will permit the member to vote 
proxies in accordance with its ERISA Plan fiduciary responsibilities. 
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 
rule change should prevent potential conflicts between NASD rules and 
ERISA guidelines.\12\

    \12\In an interpretive letter dated February 23, 1988, the 
Pension and Welfare Benefits Administration 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 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 decide how to vote any 
proxy with respect to shares owned by the plan. See 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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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act, that File No. SR-NASD-95-06 be, and hereby is, approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-11772 Filed 5-11-95; 8:45 am]
BILLING CODE 8010-01-M