[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]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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
