[Federal Register Volume 68, Number 49 (Thursday, March 13, 2003)]
[Notices]
[Pages 12120-12121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6074]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47459; File No. SR-NASD-2002-124]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change, as Amended by Amendment No. 1 Thereto, by the National 
Association of Securities Dealers, Inc. Relating to Proposed Amendment 
to NASD Conduct 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

March 6, 2003.
    On September 19, 2002, the National Association of Securities 
Dealers, Inc. (``NASD'') filed with the Securities and Exchange 
Commission (``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 NASD Conduct 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. On 
January 8, 2003, the NASD submitted Amendment No. 1 to the proposed 
rule change.\3\
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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 
proposed to (1) revise the first footnote of proposed NASD Conduct 
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 Conduct Rule 2260 to indicate that they are proposed 
new text.
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    The Commission published the proposed rule change, as amended, for 
comment in the Federal Register on January 27, 2003.\4\ The Commission 
received one comment letter relating to the proposal.\5\ This order 
approves the amended proposal.
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    \4\ See Securities Exchange Act Release No. 47214 (January 17, 
2003), 68 FR 3915.
    \5\ See letter from Christine A. Bruenn, NASSA President and 
Maine Securities Administrator, North American Securities 
Administrators Association, Inc. (``NASAA''), to Jonathan G. Katz, 
Secretary, Commission, dated February 18, 2003. In its comment 
letter, the NASAA expressed support for the proposal. See also infra 
note 9.
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    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.'' 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. The 
NASD represents that when the National Securities Markets Improvement 
Act was passed in 1996, and certain state registered investment 
advisers were no longer required to be registered under the Advisers 
Act, 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 by a 
state as an investment adviser.
    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities association 
\6\ and, in particular, the requirements of section 15A of the Act.\7\ 
The Commission finds that the proposed rule change is consistent with 
section 15A(b)(6) of the Act,\8\ which requires, among other things, 
that the rules of a national securities association be designed to 
promote just and equitable principles of trade and, in general, to 
protect investors and the public interest. The Commission believes that 
amending NASD Conduct Rule 2260 to expand the definition of 
``designated investment adviser'' to include persons registered by a 
state as an investment adviser, would allow for the reasonable

[[Page 12121]]

expectation that all registered advisers, either state or federal, 
subject to due authorization and regulation, be permitted to receive 
and vote proxy materials on their behalf. The Commission also believes 
that this change recognizes, and is consistent with, the regulatory 
scheme set up for the registration of investment advisors under state 
and federal law pursuant to Title III of the National Securities 
Markets Improvement Act of 1996 (the ``Coordination Act'').\9\
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    \6\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78o-3.
    \8\ 15 U.S.C. 78o-3(b)(6).
    \9\ See NASAA Comment Letter, supra note 6. In its comment 
letter, the NASAA stated that while federal and state-registered 
advisers are distinguished based on their levels of assets under 
management, both federal and state-registered advisers generally 
perform similar functions. According to the NASAA, while not all 
clients may want their adviser to vote on their behalf, NASAA 
believes this option should be available to all investors.
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    The rule 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. 
Members must also 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. Nasdaq rules would also require members to 
keep records substantiating this information. These requirements should 
help to ensure that any state registered adviser is acting on behalf of 
the beneficial owner.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-NASD-2002-124), as amended, 
is approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    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. 03-6074 Filed 3-12-03; 8:45 am]
BILLING CODE 8010-01-P