Adoption of Amendments to Interpretation of the Board of Governors — Forwarding Of Proxy and Other Materials, Article III, Section 1 of the NASD Rules of Fair Practice Re: Forwarding Proxy Material on the Request of Stockholders
The Securities and Exchange Commission has approved amendments to the Interpretation of the Board of Governors — Forwarding of Proxy and Other Materials, Article III, Section 1 of the NASD Rules of Fair Practice to require NASD members to forward proxy material to beneficial owners at the request of persons other than the issuer (i.e., stockholders). The text of this amendment, which took effect March 16, 1992, follows this Notice.
BACKGROUND AND SUMMARY OF AMENDMENTS
In May 1991, the staff of the Division of Market Regulation of the Securities and Exchange Commission (SEC or the "Commission") requested that the NASD consider amending the Interpretation of the Board of Governors — Forwarding of Proxy and Other Material, Article III, Section 1 of the NASD Rules of Fair Practice (the "Interpretation") to require NASD members to forward proxy material to beneficial owners at the request of persons other than the issuer (i.e., stockholders). Prior to approval of these amendments, the Interpretation required NASD members to forward proxy material to beneficial owners on the request of the issuer, but did not extend the duty to forward on a request by a person who is a stockholder of the issuer.1
On review of the SEC staff request, the NASD determined that a potential exists for disruption in proxy communications in circumstances where a stockholder in possession of the issuer's stockholder list requests NASD members to forward proxy material to beneficial owners. It was noted that only those NASD members that are affiliated with the New York Stock Exchange (NYSE) and the American Stock Exchange (Amex) were required, pursuant to the rules of those exchanges, to forward such proxy material on the request of a "person" other than the issuer of the stock.2
The NASD further noted that the forwarding of such proxy material for a stockholder of the issuer is not currently required under the proxy rules adopted by the Commission in accordance with the Securities Exchange Act of 1934 (the "Act"). Pursuant to Rule 14a-7 of Regulation 14A of the Act, an issuer may choose to give the list of record holders to a stockholder for purposes of proxy solicitation. Pursuant to Rule 14b-l(e)(1) of the Act, registered brokers and dealers are required to forward material to beneficial owners only if a "registrant" provides assurance of reimbursement of reasonable expenses. Under current practice, a registrant normally would not provide to a broker or dealer an assurance of reimbursement for services rendered by a member in forwarding proxy material on the request of a person that is not the issuer. Therefore, a broker's or dealer's duty to forward under Rule 14b-1(e)(1) would not normally exist regarding nonissuer requests to forward proxy material.
The NASD is not aware of an occurrence when proxy material has not been forwarded by NASD members to beneficial owners on the request of a stockholder of an issuer. However, the NASD decided to eliminate the potential for any such disruption in the forwarding of proxy material to beneficial owners. As amended, the Interpretation now provides that NASD members are required to forward proxy material to beneficial owners on the request of either the issuer of the securities or a stockholder of such issuer. Furthermore, a stockholder must provide sufficient copies of all soliciting material and satisfactory assurance of reimbursement to the NASD member before the NASD member is required to forward the stockholder's proxy material.
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Questions concerning this Notice may be directed to Mike Kelly, Nasdaq Company Services, at (202)728-8185.
TEXT OF RULE CHANGE
Rules of Fair Practice Business Conduct of Members
(Note: New language is underlined; deleted language is in brackets.)
Section 1. A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.
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Interpretation of the Board of Governors Forwarding of Proxy and Other Materials Introduction
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Section 2. Whenever an [person] issuer or stockholder of such issuer soliciting proxies shall timely furnish to a member:
This section shall not apply to beneficial owners residing outside of the United States of America though members may voluntarily comply with the provisions hereof in respect to such persons if they so desire.
1 The Interpretation was recently amended to require the forwarding of material other than proxy material on the request of the issuer. SEC Release No. 34-29512 (My 31, 1991); Notice to Members 91-57 (September 1991).
2 NYSE-affiliated members currently must forward proxy material on the request of a "person" pursuant to NYSE Rule 451. Amex-affiliated members currently are required to forward proxy material on the request of a "person" pursuant to Amex Rule 576.