03-6074. 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 ...

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]

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.

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 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]

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.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[11]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

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.

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.

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. 78 o-3.

8.  15 U.S.C. 78 o-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.

10.  15 U.S.C. 78s(b)(2).

11.  17 CFR 200.30-3(a)(12).