[Federal Register Volume 67, Number 44 (Wednesday, March 6, 2002)]
[Notices]
[Pages 10245-10248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-5323]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45483; File No. SR-NASD-2002-11]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Amendments to NASD Rule 2260 To Require the Forwarding of Issuer and 
Trustee Communications to Beneficial Holders of Debt Securities

February 27, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 17, 2002, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly-owned 
subsidiary, NASD Regulation, Inc. (``NASD Regulation'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II and III below, which Items have been 
prepared by the NASD. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to amend Rule 2260 of the rules of the 
NASD to require a broker-dealer to make reasonable efforts to forward a 
communication from an issuer or trustee regarding a debt security to 
the beneficial owner of such security. The proposed rule change would 
also clarify IM-2260 (Suggested Rate of Reimbursement) to reflect that, 
in forwarding proxies and other materials, members may not charge for 
envelopes that are provided by the issuer or the trustee, as well as by 
persons soliciting proxies.
    Below is the text of the proposed rule change.\3\ Proposed new 
language is in italics; proposed deletions are in brackets.
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    \3\ In addition to the proposed changes to Rule 2260 set forth 
below, in 1999 the NASD proposed to amend Rule 2260 to allow NASD 
members to give proxies in the absence of written instructions from 
beneficial owners of securities. See SR-NASD-99-63 and Amendment No. 
1 thereto, filed, respectively, on October 21, 1999, and November 
10, 1999. Although the proposed change was published for notice and 
comment, SR-NASD-99-63 remains pending before the Commission. See 
Securities Exchange Act Release No. 42238 (December 15, 1999), 64 FR 
71836 (December 22, 1999) (notice of filing of proposed rule 
change). The rule change proposed herein is based on the current 
text of Rule 2260, rather than on the amendments proposed in SR-
NASD-99-63. The NASD represents that, if necessary, it will amend 
SR-NASD-99-63 to conform the rule text therein to the rule text 
proposed in this rule filing.
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* * * * *
2260.  Forwarding of Proxy and Other Materials
    (a) A member has an inherent duty [in carrying out high standards 
of commercial honor and just and equitable principles of trade] to 
forward promptly certain information regarding a security to the 
beneficial owner (or the beneficial owner's designated investment 
adviser) if the member carries the account in which the security is 
held for the beneficial owner and the security is registered in a name 
other than the name of the beneficial owner.

(1) Equity Securities

    For an equity security, the member must forward:
    (A)[(1)]all proxy material [which] that is properly furnished to 
the member [it] by the issuer of the securities or a stockholder of 
such issuer;[,to each beneficial owner of shares of that issue (or the 
beneficial owner's designated investment adviser) which are held by the 
member for the beneficial owner thereof] and
    (B)[(2)]all annual reports, information statements and other 
materials sent to stockholders[, which] that are properly furnished to 
the member[it] by the issuer of the securities. [to each beneficial 
owner of shares of that issue (or the beneficial owner's designated 
investment adviser) which are held by the member for the beneficial 
owner thereof.]

(2) Debt Securities

    For a debt security other than a municipal security, the member 
must make reasonable efforts to forward any communication, document, or 
collection of documents pertaining to the issue that: (A) was prepared 
by or on behalf of, the issuer, or was prepared by or on behalf of, the 
trustee of the specific issue of the security; and (B) contains 
material information about such issue including, but not limited to, 
notices concerning monetary or technical defaults, financial reports, 
information statements, and material event notices.
    (b) No member shall give a proxy to vote stock [which] that is 
registered in its name, except as required or permitted under the 
provisions of paragraphs (c) or (d) hereof, unless such member is the 
beneficial owner of such stock.

[[Page 10246]]

    (c)--(1) No change.
    (A) sufficient copies of all soliciting material [which] that such 
person is sending to registered holders, and
    (B) satisfactory assurance that he or she will reimburse such 
member for all out-of-pocket expenses, including reasonable clerical 
expenses incurred by such member in connection with such solicitation,

such member shall transmit promptly to each beneficial owner of stock 
of such issuer (or the beneficial owner's designated investment 
adviser) [which] that is in its possession or control and registered in 
a name other than the name of the beneficial owner, all such material 
furnished. Such material shall include a signed proxy indicating the 
number of shares held for such beneficial owner and bearing a symbol 
identifying the proxy with proxy records maintained by the member, and 
a letter informing the beneficial owner (or the beneficial owner's 
designated investment adviser) of the time limit and necessity for 
completing the proxy form and forwarding it to the person soliciting 
proxies prior to the expiration of the time limit in order for the 
shares to be represented at the meeting. A member shall furnish a copy 
of the symbols to the person soliciting the proxies and shall also 
retain a copy thereof pursuant to the provisions of SEC Rule 17a-4 
[under the Act].
    (2) through (3) No change.
    (d)--(1) No change.
    (1) A member [which] that has in its possession or within its 
control stock registered in the name of another member and [which] that 
desires to transmit signed proxies pursuant to the provisions of 
paragraph (c), shall obtain the requisite number of signed proxies from 
such holder of record.
    (3) No change.
    (A) No change.
    (B) any designated investment adviser [person registered as an 
investment adviser under the Investment Advisers Act of 1940 who 
exercises investment discretion pursuant to ad advisory contract for 
the beneficial owner to vote the proxies for stock which is in the 
possession or control of the member,]may vote such proxies.
    (e)--(1) As required in paragraph (a), a[A] member[when so 
requested by an issuer and upon being furnished with:] must forward 
promptly the material set forth in (a)(1), in connection with an equity 
security, or must make reasonable efforts to forward promptly the 
material set forth in (a)(2), in connection with a debt security, 
provided that the member:
    (A) is furnished with sufficient copies of[annual reports, 
information statements or other material sent to stockholders, and] the 
material (e.g., annual reports, information statements or other 
material sent to security holders) by the issuer, stockholder, or 
trustee;
    (B) is requested by the issuer, stockholder, or trustee to forward 
the material to security holders; and,
    (C) receives [(B)]satisfactory assurance that it will be reimbursed 
by such issuer, stockholder, or trustee for all out-of-pocket expenses, 
including reasonable clerical expenses[,].

[shall transmit promptly to each beneficial owner of stock of such 
issuer (or the beneficial owner's designated investment adviser) which 
is in its possession and control and registered in a name other than 
the name of the beneficial owner of all such material furnished.]
    (2) No change.
    (f) For purposes of this Rule, the term ``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 is designated in writing by the 
beneficial owner to receive proxy and related materials and vote the 
proxy, and to receive annual reports and other material sent to 
[stockholders] security holders.
    (1) No change.
    (2) Members [who] that receive such a written designation from a 
beneficial owner must ensure that the designated investment adviser is 
registered with the Commission pursuant to the Investment Advisers Act 
[or] of 1940 and that the investment adviser is exercising investment 
discretion over the customer's account pursuant to an advisory contract 
to vote proxies and/or to receive proxy soliciting material, annual 
reports and other material. Members must keep records substantiating 
this information.
    (3) No change.
    (g) No change.

* For purposes of this Rule, the term ``ERISA'' is an acronym for the 
Employee Retirement Income Security Act of 1974.
IM-2260. Suggested Rates of Reimbursement
    (a) No change.
    (1) Charges for Initial Proxy and/or Annual Report Mailings
    (A) No change.
    (A) 20 cents for each copy, plus postage, for annual reports[, 
which] that are mailed separately from the proxy material pursuant to 
the instruction of the person soliciting proxies.
    (2) No Change.
    (3) No Change.
    (4) No Change.
    (5) No Change.
    (a) Members may charge for envelopes, provided that they are not 
furnished by the issuer, the trustee, or a [the] person soliciting 
proxies.
    (b) No change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD Regulation included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. NASD Regulation has prepared summaries, set 
forth in Sections A, B, and C below, of the most significant aspects of 
such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
a. Introduction
    Rule 2260 currently provides that a member has an inherent duty in 
carrying out high standards of commercial honor and just and equitable 
principles of trade to forward certain information regarding a security 
to the beneficial owner of such security (or the beneficial owner's 
designated investment advisor) if the security is held by the member 
for the beneficial owner, is in the member's possession and control, 
and is registered in a name other than the name of the beneficial 
owner.
    As currently drafted, however, Rule 2260 does not impose an 
obligation on members to forward information relating to debt 
securities to the beneficial owners of such securities. For instance, 
the communications covered by the Rule are limited to proxy material, 
all annual reports, information statements, and ``other material sent 
to stockholders (emphasis added).'' The Rule also limits the member's 
obligation to forward proxy material to each beneficial owner of shares 
of that issue (or the beneficial owner's designated investment adviser) 
for shares that are held by the member for the beneficial owner. NASD 
Regulation believes that the lack of any affirmative requirement on 
broker-dealers to forward information to customers who are

[[Page 10247]]

beneficial owners of debt securities raises customer protection issues.
b. Background
    When the securities industry, with the cooperation of the 
Commission, began to urge owners to hold securities in ``street name,'' 
the transition from paper certificates to electronic record of 
ownership was to be accomplished by providing the beneficial owners of 
securities held in street name with the same rights and privileges as 
an owner holding paper certificates. Using the Depository Trust and 
Clearing Corporation's (``DTCC'') book-entry system for establishing 
ownership results in a chain of records that documents securities 
ownership, but positions as many as three or four ``nominee'' owners 
above the beneficial owner. Through this chain, certain communications 
from issuers, trustees, and others regarding securities, whether or not 
covered explicitly by NASD Rule 2260 or parallel exchange rules,\4\ are 
passed through from nominee to nominee until the communication reaches 
the broker-dealer that holds the securities in street name for its 
customers.
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    \4\ See, e.g., New York Stock Exchange Rule 451 (``Transmission 
of Proxy Material'').
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    The current chain of communication was developed informally over a 
number of years through the efforts of the Commission, the Municipal 
Securities Rulemaking Board (``MSRB''), other federal and state 
regulators, and various industry groups, such as The Bond Market 
Association (``TBMA'') (formerly, the Public Securities Association). 
In May 1998, a working group published certain ``best practices'' 
regarding communications from issuers to beneficial owners of defaulted 
municipal securities.\5\ Industry compliance with the best practices, 
however, is voluntary. NASD Regulation determined to recommend rule 
amendments to address this issue.
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    \5\ See Joint Recommendations for Communicating With the 
Beneficial Owners of Defaulted Securities, (prepared by Working 
Group with representatives from National Association of Bond 
Lawyers, The Bond Market Association, American Bankers Association, 
Government Finance Officers Association, National Association of 
State Auditors, Comptrollers and Treasurers, and National Federation 
of Municipal Analysts) (unpublished report dated May 1998, on file 
with NASD).
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c. Proposed Amendments to NASD Rule 2260
    NASD Regulation believes that the customer protection issues 
arising from the lack of any affirmative requirement on broker-dealers 
to forward information to customers who are beneficial owners of debt 
securities should be remedied. To address the regulatory gap, NASD 
Regulation has developed amendments to Rule 2260 to extend its 
obligations to debt securities.
    The proposed amendments would make Rule 2260 applicable to debt 
securities but do not otherwise materially change the basic principles 
and assumptions of the Rule. The proposed amendment would require 
members to forward information they receive that is ``prepared by or on 
behalf of'' the issuer of the security or the trustee and that contains 
information about such issue including, but not limited to, notices 
concerning monetary or technical defaults, financial reports, 
information statements, and material event notices. However, as is 
currently the case with equity securities, a member's obligation to 
forward the material does not arise unless the member ``receives 
satisfactory assurance'' that it will be reimbursed by such issuer or 
trustee for all out-of pocket expenses, is furnished with the material 
by the issuer or the trustee, and is requested by the issuer or the 
trustee to forward the material.\6\
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    \6\ These conditions in Rule 2260 relating to equity securities 
are similar to those found in NYSE Rules (e.g., 451 and 465), 
providing for forwarding of proxy and other materials.
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    The proposed amendment includes language that, as applied to equity 
securities communications and documentation, is meant to clarify the 
Rule's existing obligations, not to change them. The proposed change 
provides: ``A member has an inherent duty to forward promptly certain 
information regarding a security to the beneficial owner (or the 
beneficial owner's designated investment adviser) if the member carries 
the account in which the security is held for the beneficial owner and 
the security is registered in a name other than the name of the 
beneficial owner (emphasis added).'' The change was made in response to 
concerns that current Rule 2260 does not identify clearly which members 
are responsible for forwarding information to the beneficial holders of 
securities. The amendments intend to make clear that those firms that 
carry customer accounts and are capable of identifying the beneficial 
holders of the accounts are responsible for the member obligations in 
Rule 2260. As a result, the responsibility to forward information 
generally will fall on the clearing firm, provided the clearing firm is 
aware of the identity of the beneficial owners of the accounts. In 
those cases where a clearing firm is not aware of the identity of the 
beneficial owners of the accounts, such as when another firm opens an 
omnibus account with the clearing firm, the firm that opens the omnibus 
account will be the ``carrying firm'' for purposes of the Rule, and 
therefore will be responsible for forwarding the information.
    NASD Regulation also is proposing an amendment to IM-2260 to 
clarify that, in forwarding proxies and other materials, members may 
not charge for envelopes that are provided by the issuer or the 
trustee, as well as by persons soliciting proxies.
2. Statutory Basis
    NASD Regulation believes that the proposed rule change, as amended, 
is consistent with the provisions of Section 15A(b)(6) of the Act,\7\ 
which requires, among other things, that the Association's rules must 
be designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. According to NASD 
Regulation, the proposed rule is designed to provide customer 
protection for all holders of debt securities by establishing an 
affirmative obligation on broker-dealers to forward certain information 
regarding those securities to the beneficial owners.
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    \7\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve the proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

[[Page 10248]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-2002-11 and 
should be submitted by March 27, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-5323 Filed 3-5-02; 8:45 am]
BILLING CODE 8010-01-P