[Federal Register Volume 68, Number 17 (Monday, January 27, 2003)]
[Notices]
[Pages 3915-3917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1755]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47214; File No. SR-NASD-2002-124]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the National Association of 
Securities Dealers, Inc. Relating to Proposed Amendment to Rule 2260 To 
Expand the Definition of ``Designated Investment Adviser'' To Include 
State Registered Investment Advisers for the Purpose of Receiving and 
Voting Proxy Materials on Behalf of Beneficial Owners

January 17, 2003.
    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 September 19, 2002, the National Association of Securities Dealers, 
Inc. (``NASD'') 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 NASD. On January 8, 
2003, the NASD submitted Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Kosha K. Dalal, Assistant General Counsel, 
Regulatory Policy and Oversight, NASD, to Katherine England, 
Assistant Director, Division of Market Regulation, Commission, dated 
January 8, 2003 (``Amendment No. 1''). In Amendment No. 1, the NASD 
proposes to (1) revise the first footnote of proposed NASD rule 2260 
to define the term ``state'' by reference to the Investment Advisers 
Act of 1940, instead of the Securities Exchange Act of 1934, and (2) 
underline the text of two proposed footnotes in proposed NASD rule 
2260 to indicate that they are proposed new text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Conduct rule 2260 to expand the 
definition of ``designated investment adviser'' to include all state 
registered investment advisers.
    Below is the text of the proposed rule change. Proposed new 
language is in italics.
    Rule 2260. Forwarding Proxy and Other Materials.
    (a)-(e) No change.
    (f) For purposes of this rule, the term ``designated investment 
adviser'' is a person registered under the Investment Advisers Act of 
1940 or registered as an investment adviser under the laws of a 
state,\4\ 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 
security holders.
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    \4\ The term ``state'' as used herein shall have the meaning 
given to such term in section 202(a)(19) of the Investment Advisers 
Act of 1940, and as such term may be amended from time to time 
therein.
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    (1) The written designation must be signed by the beneficial owner; 
be addressed to the member; and include the name of the designated 
investment adviser.
    (2) Members who 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 
of 1940 or with a state as an investment adviser under the laws of such 
state,\5\ 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.
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    \5\ Members may verify registration of an investment adviser 
through the use of the Investment Adviser Registration Depository 
(``IARD'') system.
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    (3) Beneficial owners 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.
    (g) 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 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 has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of such statements.

[[Page 3916]]

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

1. Purpose

Rule Modernization

    In July 2001, NASD announced in Notice to Members 01-35 its 
intention to move forward with an initiative designed to ensure that 
NASD rules are as streamlined as possible and impose the least burden 
necessary to accomplish their objectives while achieving investor 
protection. In response to Notice to Members 01-35, some commenters 
asked NASD to review NASD Conduct rule 2260 to consider expanding the 
categories of persons to whom a member may forward proxy and other 
materials.
    Based on the research and analysis of NASD Conduct rule 2260 
conducted by NASD staff and the Economic Advisory Board (``EAB''), 
which was formed by NASD to assist with an economic analysis of certain 
NASD rules, the EAB made a formal recommendation to expand the 
definition of ``designated investment adviser'' in NASD Conduct rule 
2260 to include all state registered investment advisers.

Proposed Expansion

    Currently, NASD Conduct rule 2260 requires members to forward proxy 
material, annual reports, information statements and other material 
sent to security holders to the beneficial owner or the beneficial 
owner's ``designated investment adviser.'' \6\ The rule defines a 
``designated investment adviser'' as a person registered under the 
Investment Advisers Act of 1940 (``Advisers Act'') 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 security holders.
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    \6\ In April 2002, the SEC approved a proposed rule change to 
NASD Conduct rule 2260 making its provisions applicable to non-
municipal debt securities. The rule change became effective on July 
9, 2002. See Securities Exchange Act Release No. 45736 (April 11, 
2002), 67 FR 19291 (April 18, 2002) (SR-NASD-2002-11).
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    NASD Conduct rule 2260 was amended in 1995 to include federally 
registered investment advisers.\7\ However, as a result of the passage 
in 1996 of the National Securities Markets Improvement Act (``NSMIA''), 
certain state registered investment advisers need not be registered 
under the Advisers Act.\8\ NASD Conduct rule 2260 was not updated to 
account for this change. As a result, under the current rule, 
beneficial owners cannot designate state registered investment advisers 
to receive proxy and other materials. The proposed rule change would 
expand the definition of ``designated investment adviser'' to include 
persons registered under the Advisers Act and persons registered by a 
state as an investment adviser.
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    \7\ See Securities Exchange Act Release No. 35681 (May 5, 1995), 
60 FR 25749 (May 15, 1995) (SR-NASD-95-06).
    \8\ National Securities Markets Improvement Act of 1996, Pub.L. 
No. 104-290, 110 Stat. 3416 (1996). The Commission notes that title 
III of NSMIA (a/k/a The Investment Advisers Supervision Coordination 
Act) provides for Commission regulation of advisers with $25 million 
or more of assets under management, and state regulation of advisers 
with less than $25 million of assets under management. The 
Commission also notes that new section 203A(a) of the Advisers Act 
provides that an investment adviser that is regulated or required to 
be regulated as an investment adviser in the state in which it 
maintains its principal office and place of business is prohibited 
from registering with the Commission unless the adviser:
    (i) Has assets under management of not less than $25 million (or 
such higher amount as the Commission may, by rule, deem 
appropriate), or
    (ii) Is an advisor to an investment company registered under the 
Investment Company Act of 1940. 15 U.S.C. 80b-3a.
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    NASD believes that the current exclusion of state registered 
investment advisers serves no valid investor protection purpose. NASD 
Conduct rule 2260 will continue to require that the beneficial owner 
execute a written designation addressed to the member that includes the 
name of the designated investment adviser. The beneficial owner will 
continue to have an unqualified right at anytime to rescind designation 
of the investment adviser to receive materials and to vote proxies. The 
recession must be in writing and submitted to the member.
    The proposed rule change will continue to require that a member 
that receives a written designation from a beneficial owner must ensure 
that the beneficial owner's designated investment adviser is registered 
under the Advisers Act or, for state registered investment advisers, is 
registered as an investment adviser under the laws of the state. A 
member may verify registration of an investment adviser through the use 
of the Investment Adviser Registration Depository (``IARD'') system. 
Under the proposed rule change, members must continue to ensure that 
the designated investment adviser 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 that is in the possession of the members. Members 
also must continue to keep records substantiating this information.
    The Commission notes that the New York Stock Exchange, Inc. has 
filed a similar proposed rule change.\9\
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    \9\ See Exchange Act Release No. 47215 (January 21, 2003).
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\10\ which requires, among 
other things, that NASD'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. NASD believes that the proposed rule change to expand 
the definition of ``designated investment adviser'' in NASD Conduct 
rule 2260 is designed to accomplish these ends by updating NASD Conduct 
rule 2260 to be consistent with the goals of NSMIA and to address an 
inconsistency in the treatment of Federally-registered versus State-
registered investment advisers that does not serve a valid investor 
protection purpose.
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    \10\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD 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, as amended.

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 for this 
proposed rule change. In connection with its rule modernization 
initiative, NASD issued Notice to Members 02-10 (January 2002) that 
surveyed members on a broad range of topics that included subject 
matter related to this rule proposal. However, as NASD views the 
responses received as general survey material, it is not included in 
this filing.

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:

[[Page 3917]]

    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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 in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of NASD. All submissions should refer to File No. SR-
NASD-2002-124 and should be submitted by February 18, 2003.
    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).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-1755 Filed 1-24-03; 8:45 am]
BILLING CODE 8010-01-P