Notice To Members 92-17

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

Published Date:

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EXECUTIVE SUMMARY

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

Article III

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

.05 A member has an inherent duty in carrying out high standards of commercial honor and just and equitable principles of trade to forward (i) all proxy material[,] which is properly furnished to it by the issuer of the securities or a stockholder of such issuer, to each beneficial owner of shares of that issue which are held by the member for the beneficial owner thereof and (ii) all annual reports, information statements and other material sent to stockholders, which are properly furnished to it by the issuer of the securities, to each beneficial owner of shares of that issue which are held by the member for the beneficial owner thereof. For the assistance and guidance of members in meeting their responsibilities, the Board of Governors has promulgated this interpretation. The provisions hereof shall be followed by all members and failure to do so shall constitute conduct inconsistent with high standards of commercial honor and just and equitable principles of trade in violation of Article III, Section 1 of the Rules of Fair Practice of the Association.

Interpretation

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Section 2. Whenever an [person] issuer or stockholder of such issuer soliciting proxies shall timely furnish to a member:

(1) sufficient copies of all soliciting material which such person is sending to registered holders, and
(2) satisfactory assurance that he will reimburse such member for all out-of-pocket expenses, including reasonable clerical expenses incurred by such member in connection with such solicitation, such member shall transmit promptly to each beneficial owner of stock of such issuer which is in its possession or control and registered in a name other than the name of the beneficial owner all such material furnished. Such material shall include a signed proxy indicating the number of shares held for such beneficial owner and bearing a symbol identifying the proxy with proxy records maintained by the member, and a letter informing the beneficial owner of the time limit and necessity for completing the proxy form and forwarding it to the person soliciting proxies prior to the expiration of the time limit in order for the shares to be represented at the meeting. A member shall furnish a copy of the symbols to the person soliciting the proxies and shall also retain a copy thereof pursuant to the provisions of Rule 17a-4 of the General Rules and Regulations under the Securities Exchange Act of 1934, 17 C.F.R. 240.17a-4. Notwithstanding the provisions of this section, a member may give a proxy to vote any stock pursuant to the rules of any national securities exchange to which the member is also responsible provided that the records of the member clearly indicate which procedure it is following.

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.