| Release No. 34-24606 Release No. IC-15816 June 18, 1987
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 Table of Contents
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I. Discussion
A. Amendments Deferring Application of Proxy Processing Provisions to Employee Benefit Plan Participants with Securities Held in Nominee Name By a Bank
On November 25, 1986, the Commission adopted new shareholder communications rules and related amendments 7 to effect the Shareholder Communications Act of 1985. 8 The new rules set forth the obligations of banks in connection with forwarding proxy materials to beneficial owners and facilitating registrants direct communications with beneficial owners of securities registered in the banks names. At the time it adopted the new rules, the Commission deferred, until July 1, 1987, the effectiveness of paragraphs (a) through (c) of Rule 14b-2, 9 which set forth the proxy processing obligations of banks and the omnibus proxy system, to give banks sufficient time to establish workable procedures for the implementation of the proxy processing system. Banks obligations with respect to the direct communications system, however, became effective on December 28, 1986.
While the new rules, as adopted, covered employee benefit plan participants, the Commission indicated that it would consider the application of the shareholder communication rules to employee benefit plans in a separate rulemaking proceeding. On March 27, 1987, the Commission issued a release proposing rules excluding, under certain circumstances, employee benefit plan participants from the proxy processing and direct communications systems at the option of the registrant. 10 The release also set forth a number of alternatives under consideration by the Commission, including mandatory exclusion of plan participants from the proxy processing and direct communications systems.
Of the 21 commentators who submitted comment letters on the rule proposals, 11 16 commentators favored mandatory exclusion of plan participants from the proxy processing system either on an automatic across-the-board basis or on satisfaction of the prerequisite that the plan have a system for obtaining and forwarding proxy materials to plan participants. Two commentators favored exclusion at the option of the registrant. One commentator opposed, on recordkeeping grounds, any exclusion of plan participants from the proxy processing system. One commentator, the American Bankers Association ("ABA"), suggested an additional approach to excluding plan participants. This commentator recommended an amendment to the proxy processing provisions that would make registrants solely responsible for ensuring that proxy cards and proxy materials are distributed to participants who hold securities of the registrant in nominee name pursuant to an employee benefit plan that provides for pass-through voting (hereinafter "the ABA approach"). Another commentator, the Department of Labor, stated that it had no objections to the approach suggested by the ABA.
The Commission has determined that the ABA approach should be considered in addition to the proposals made in the March 27, 1987 release. Accordingly, the Commission is publishing today for public comment a further proposal for the treatment of plan participants under the proxy processing rules that reflects the ABA approach. 12
In view of this further rulemaking proceeding, deferring the application of the bank proxy processing provisions to employee benefit plan participants is appropriate to avoid implementation by banks of procedures to include plan participants in the proxy processing system, which may later prove unnecessary. 13 The amendments being adopted today thus defer imposing the proxy processing obligations of banks with respect to employee benefit plan participants, and the corresponding obligations of registrants, by temporarily excluding such beneficial owners from the proxy processing provisions in Rules 14a-13, 14 14b-2(a), (c) and (d) 15 and 14c-7. 16
Registrants and banks should be aware that application of the proxy processing provisions to plan participants is being deferred to afford time for consideration of the full range of approaches for treatment of such beneficial owners. 17 An approach other than mandatory exclusion may be utilized on a permanent basis to achieve the goal of ensuring that voting plan participants, like other security holders, receive proxy materials on a timely basis and in a cost effective manner. 18
In view of its decision to solicit public comment on the ABA approach to exclusion from the proxy processing provisions, the Commission is soliciting further public comment in the proposing release issued today on the treatment of employee benefit plan participants under the direct communications provisions. The direct communications provisions continue, however, to apply to employee benefit plan participants. 19
B. Amendments Extending the Time Period for Execution of an Omnibus Proxy from Three to Five Business Days and Other Technical and Clarifying Amendments
On March 27, 1987, the Commission also issued a companion release proposing an amendment to the shareholder communications rules to extend the time period provided in Rule 14b-2(b) from three to five business days. During that period of time, a bank is required to: (1) execute an omnibus proxy in favor of its respondent banks and forward such proxy to the registrant; and (2) provide notice of that execution to its respondent banks. 20
Nineteen of the 20 commentators that responded to the Commissions request for comment on this proposal either expressly favored, or stated that they did not object to, the extension from three to five business days. 21 Several bank commentators stated that they favored the extension of time because it would ease compliance difficulties due to time constraints in executing omnibus proxies and notifying respondent banks of such execution. Although some other commentators suggested that the extension of time for execution of omnibus proxies by banks was not necessary because banks will know their securities positions as of the record date based on their own accounting systems, these commentators supported the extension because it would alleviate the burdens on compliance by intermediaries during the proxy season. The one commentator that opposed the extension stated that an expanded five business day time frame could increase the actual time frame for execution of omnibus proxies to nine calendar days (considering holidays and weekends). This commentator stated, without further explanation, that this would add to the registrants burden and expressed the view that banks have sufficient lead time prior to the record date to plan their work schedule so that an omnibus proxy could be executed within three business days.
As commentators suggested, the extension from three to five business days should facilitate voting of securities held in nominee name during the proxy season by alleviating burdens on intermediaries. Accordingly, the Commission is adopting the amendment as proposed.
In addition, a definition of employee benefit plan is being adopted as proposed in the March 27, 1987 release relating to employee benefit plans. 22 This definition is the same as that used under the Securities Act of 1933. 23
In the March 27, 1987 companion release, the Commission also proposed certain clarifying and technical changes to the shareholder communications rules. The amendments would clarify that a registrants obligations in connection with respondent banks apply only to those respondent banks that hold the registrants securities on behalf of beneficial owners and that the corresponding obligations of banks would apply only to those banks that hold the registrants securities on behalf of beneficial owners. Additionally, the amendments would make explicit that a registrant must inquire of each record holder whether it holds the registrants securities on behalf of any respondent bank and, if so, the name and address of each such respondent bank. All commentators who provided comment on these proposals supported them. Accordingly, the Commission is adopting the clarifying and technical amendments as proposed. 24
II. Cost--Benefit Analysis
The Commission requested commentators to provide views and data as to the costs and benefits associated with the proposed amendment to the omnibus provision in paragraph (b) of Rule 14b-2. In the proposing release, the Commission noted that, by lengthening the time for execution of omnibus proxies by two business days, it intended to help to ensure the effectiveness of the omnibus proxy approach, an approach that is designed to provide a cost-effective and efficient means to ensure that proxies are executed by the appropriately authorized parties.
Three bank commentators expressed views on the costs associated with the proposed amendment. One of these noted that the extension from three to five business days may be required in order to comply with the rule in a cost effective manner. Another believed the extension would provide a more workable and cost effective process. The third stated that the extension ultimately would allow for better control over staffing expenses and lower costs for customers.
With regard to the deferral of the application of the bank proxy processing provisions to employee benefit plan participants, the deferral is appropriate to avoid implementation by banks of procedures to include plan participants in the proxy processing system, which may later prove unnecessary.
III. Statutory Basis
These amendments are being adopted pursuant to sections 12, 14 and 23(a) of the Exchange Act. 25 The Commission finds it appropriate and with good cause under 5 U.S.C. 553(d) to make the amendments to Rules 14a-1, 14a-13, 14b-1, 14b-2, 14c-1 and 14c-7 effective July 1, 1987, less than 30 days after publication in the Federal Register. The amendments deferring application of the bank proxy processing system to employee benefit plans recognize a temporary exemption. The remainder of the amendments are technical or clarifying in nature.
List of subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities, Banks, Associations.
IV. Text of Amendments
In accordance with the foregoing Title 17, Chapter II of the Code of Federal Regulations is amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934
1. The authority citation for Part 240 continues to read, in part, as follows:
(Citations before * * * indicate general rulemaking authority).
Authority: Sec. 23, 48 Stat. 901, as amended; 15 U.S.C. 78w * * * Sections 240.14a-1, 240.14a-13, 240.14b-1, 240.14b-2, 240.14c-1 and 240.14c-7 also issued under Sections 12, 15 U.S.C. 781, and 14 Pub L. 99-222, 99 Stat. 1737, 15 U.S.C. 78n.
2. By redesignating current paragraphs (b) through (j) as paragraphs (c) through (k) and adding new paragraph (b) to §240.14a-1 to read as follows:
§240.14a-1 Definitions.
* * * * *
(b) Employee benefit plan. For purposes of §§ 240.14a-13, 240.14b-1 and 240.14b-2, the term "employee benefit plan" means any purchase, savings, option, bonus, appreciation, profit sharing, thrift, incentive, pension or similar plan solely for employees, directors, trustees or officers.
* * * * *
3. Paragraphs (a)(1)(i)(B), (a)(1)(ii)(A), (a)(2), Note 1 to paragraph (a) and paragraph (b)(3) of §240.14a-13, published December 9, 1986 (51 FR 44267) to be effective July 1, 1987, are revised and new paragraphs (a)(1)(i)(D) and (d) are added as follows:
§240.14a-13 Obligations of registrants in communicating with beneficial owners.
(a) * * *
(1) * * *
(i) * * *
(A) * * *
(B) in the case of an annual (or special meeting in lieu of the annual) meeting, or written consents in lieu of such meeting, at which directors are to be elected, the number of copies of the annual report to security holders necessary to supply such report to beneficial owners to whom such reports are to be distributed by such record holder or its nominee and not by the registrant;
* * * * *
(D) whether it holds the registrants securities on behalf of any respondent bank and, if so, the name and address of each such respondent bank; and
(ii) * * *
(A) whether the registrant, pursuant to paragraph (c) of this section, intends to distribute the annual report to security holders to beneficial owners of its securities whose names, addresses and securities positions are disclosed pursuant to §240.14b-1(c) and §240.14b-2(e)(2) and (3); and
(B) * * *
(2) Upon receipt of a record holders or respondent banks response indicating, pursuant to §240.14b-2(a)(1), the names and addresses of its respondent banks, within one business day after the date such response is received, make an inquiry of and give notification to each such respondent bank in the same manner required by paragraph (a)(1) of this section;
* * * * *
Note 1.--If the registrants list of security holders indicates that some of its securities are registered in the name of a clearing agency registered pursuant to section 17A of the Act (e.g., "Cede & Co.," nominee for the Depository Trust Company), the registrant shall make appropriate inquiry of the clearing agency and thereafter of the participants in such clearing agency who may hold on behalf of a beneficial owner or respondent bank, and shall comply with the above paragraph with respect to any such participant (see §240.14a-1(h)).
* * * * *
(b) * * *
(1) * * *
(2) * * *
(3) Make such request to the following persons that hold the registrants securities on behalf of beneficial owners: all brokers, dealers, banks, associations and other entities that exercise fiduciary powers;
* * * * *
(d) The inquiry required by paragraphs (a)(1) and (a)(2) of this section shall not cover beneficial owners who are employee benefit plan participants or beneficiaries with respect to securities of the registrant held in nominee name by a bank, association or other entity that exercises fiduciary powers pursuant to such plan.
4. By revising the introductory text of paragraph (a) to §240.14b-1 to read as follows:
§240.14b-1 Obligation of registered brokers and dealers in connection with the prompt forwarding of certain communications to beneficial owners.
* * * * *
(a) Respond, by first class mail or other equally prompt means, directly to the registrant no later than seven business days after the date it receives an inquiry made in accordance with §240.14a-13(a) by indicating, by means of a search card or otherwise: (1) * * *
* * * * *
5. Paragraph (a)(1) and the introductory language to paragraph (b) of §240.14b-2, published December 9, 1986 (51 FR 44267) to be effective July 1, 1987, are revised, paragraph (c)(1)(i)(b) is corrected to read (c)(1)(i)(B), and paragraph (e)(1), the introductory language to paragraph (h) and Note 2 to paragraph (i) are revised and new paragraph (j) is added as follows:
§240.14b-2 Obligation of banks, associations and other entities that exercise fiduciary powers in connection with the prompt forwarding of certain communications to beneficial owners.
* * * * *
(a)(1) Shall respond, by first class mail or other equally prompt means, directly to the registrant no later than one business day after the date it receives an inquiry made in accordance with §240.14a-13(a) by indicating the name and address of each of its respondent banks that holds the registrants securities on behalf of beneficial owners, if any, and
* * * * *
(b) Within five business days after the record date, shall: (1) * * *
* * * * *
(e) Shall: (1) respond, by first class mail or other equally prompt means, directly to the registrant no later than one business day after the date it receives an inquiry made in accordance with §240.14a-13(b)(1) by indicating the name and address of each of its respondent banks that holds the registrants securities on behalf of beneficial owners, if any; (2) * * *
* * * * *
(h) For customer accounts opened on or before December 28, 1986, unless it has made a good faith effort to obtain affirmative consent to disclosure of beneficial owner information pursuant to paragraph (e)(2) of this section, shall provide such information as to beneficial owners who do not object to disclosure of such information. A good faith effort to obtain affirmative consent to disclosure of beneficial owner information shall include, but shall not be limited to, making an inquiry: (1) * * *
* * * * *
Note 2. If more than one person shares voting power or if the instrument creating that voting power provides that such power shall be exercised by different persons depending on the nature of the corporate action involved, all persons entitled to exercise such power shall be deemed beneficial owners; Provided, however, that only one such beneficial owner need be designated among the beneficial owners to receive proxies or requests for voting instructions, other proxy soliciting material and/or annual reports to security holders, if the person so designated assumes the obligation to disseminate, in a timely manner, such materials to the other beneficial owners.
* * * * *
(j) A bank, association or other entity that exercises fiduciary powers shall not (1) include in its response pursuant to paragraph (a) of this section; (2) forward proxy cards or requests for voting instructions, proxy soliciting material or annual reports to security holders pursuant to paragraph (c) of this section to; or (3) comply with any alternative to paragraph (c) of this section approved by the Commission pursuant to paragraph (d) of this section with regard to: beneficial owners who are employee benefit plan participants or beneficiaries with respect to securities held in nominee name pursuant to such plan.
6. By redesignating current paragraphs (b) through (i) as paragraphs (c) through (j) and adding new paragraph (b) to §240.14c-1 to read as follows:
§240.14c-1 Definitions.
* * * * *
(b) Employee benefit plan. For purposes of §240.14c-7, the term "employee benefit plan" means any purchase, savings, option, bonus, appreciation, profit sharing, thrift, incentive, pension or similar plan solely for employees, directors, trustees or officers.
* * * * *
7. Paragraphs (a)(1)(i)(A), Note 1 to paragraph (a), paragraph (b)(3) and paragraph (c) of §240.14c-7, published December 9, 1986 (51 FR 44267) to be effective July 1, 1987, are revised and new paragraphs (a)(1)(i)(C) and (d) are added as follows:
§240.14c-7 Providing copies of material for certain beneficial owners.
* * * * *
(a) * * *
(1) * * *
(i) * * *
(A) whether other persons are the beneficial owners of such securities and, if so, the number of copies of the information statement necessary to supply such material to such beneficial owners;
(B) * * *
(C) whether it holds the registrants securities on behalf of any respondent bank and, if so, the name and address of each such respondent bank; and (ii) * * *
* * * * *
Note 1. If the registrants list of security holders indicates that some of its securities are registered in the name of a clearing agency registered pursuant to section 17A of the Act (e.g., "Cede & Co.," nominee for the Depository Trust Company), the registrant shall make appropriate inquiry of the clearing agency and thereafter of the participants in such clearing agency who may hold on behalf of a beneficial owner or respondent bank, and shall comply with the above paragraph with respect to any such participant (see §240.14c-(h)).
* * * * *
(b) * * *
(1) * * *
(2) * * *
(3) Make such request to the following persons that hold the registrants securities on behalf of beneficial owners: all brokers, dealers, banks, associations and other entities that exercise fiduciary powers;
* * * * *
(c) A registrant, at its option, may mail its annual report to security holders to the beneficial owners whose identifying information is provided by record holders and respondent banks, pursuant to §240.14b-1(c) and §240.14b-2(e)(2) and (3), provided that such registrant notifies the record holders and respondent banks at the time it makes the inquiry required by paragraph (a) of this section that the registrant will mail the annual report to security holders to the beneficial owners so identified.
(d) The inquiry required by paragraphs (a)(1) and (a)(2) of this section shall not cover beneficial owners who are employee benefit plan participants or beneficiaries with respect to securities of the registrant held in nominee name by a bank, association or other entity that exercises fiduciary powers pursuant to such plan.
By the Commission.
117 CFR 240.14a-1.
217 CFR 240.14a-13.
317 CFR 240.14b-1.
417 CFR 240.14b-2.
517 CFR 240.14c-1.
617 CFR 240.14c-7.
7Release No. 34-23847 (November 25, 1986) 51 FR 44267.
8Pub. L. 99-222, 99 Stat. 1737 (1985), amending 15 U.S.C. 78n(b) (1982).
917 CFR 240.14b-2(a) through (c).
10Release No. 34-24274 (March 27, 1987) 52 FR 11083.
11The comment letters are available for public inspection and copying at the Commissions Public Reference Room (see File No. S7-11-87).
12Release No. 34-24607. Like the proposals published in the Commissions March 27, 1987 release, this further proposal will apply to broker and dealer ("broker"), as well as bank, proxy processing provisions.
13The proxy processing obligations of brokers, which have been in place since 1977, Release No. 34-13719 (July 5, 1977) 42 FR 35955, and corresponding registrant obligations, will remain in place with respect to employee benefit plan participants as well as other beneficial owners.
14See Rule 14a-13(d), 17 CFR 240.14a-13(d).
15See Rule 14b-2(j), 17 CFR 240.14b-2(j).
16See Rule 14c-7(d), 17 CFR 240.14c-7(d).
The Commission is not, however, deferring, application of the omnibus proxy system to employee benefit plan participants. The omnibus proxy provision, contained in paragraph (b) of Rule 14b-2, 17 CFR 240.14b-2(b), is being retained to ensure that legal voting authority reaches the specific respondent bank which holds securities on behalf of plan participants.
17Of course, the temporary deferral of the proxy processing provisions does not relieve fiduciaries of their responsibilities under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. 1001, et seq. Under section 404(a)(1)(D) of ERISA, 29 U.S.C. 1104(a)(1)(D), fiduciaries of employee benefit plans are generally obligated to discharge their duties in accordance with the documents and instruments governing the plan insofar as they are consistent with the requirements of ERISA. In this respect, under sections 403 and 404(a) of ERISA, 29 U.S.C. 1103 and 1104(a), every plan fiduciary also has an obligation to discharge his duties for the exclusive benefit, and solely in the interest, of plan participants and beneficiaries. A fiduciary would be required to adhere strictly to these standards in implementing any plan provisions relating to proxy materials. The Department of Labor has indicated that, in the case of a plan which permits participants to direct plan responses to tender offers, plan trustees would be relieved of liability for losses resulting from participants decisions only if, among other things, they assure that participants are provided information necessary to make independent decisions. See letter to John Welch dated April 30, 1984, reprinted in BNA Pens. Rptr., vol. 11, no. 19, at 633 (May 7, 1984). The Department of Labor has informed the staff of the Commission that, in its view, the duties of plan fiduciaries under ERISA with respect to pass-through voting of securities are similar to the duties of plan fiduciaries with respect to pass-through of tender offers as articulated in the Welch letter. Thus, in discharging their duties under ERISA, plan trustees may be obliged to take steps to disseminate materials to participants in addition to any materials required to be distributed under the plan.
18Because the deferral is temporary in nature, banks should consider continuing to retain in their records information concerning employee benefit plans that may relate to the deferred bank proxy processing provisions.
19Effective July 1, 1987, registrants will be required to request lists of beneficial owners names, addresses and securities positions from all brokers and all banks.
20Release No. 34-24275 (March 27, 1987) 52 FR 11089.
21The comment letters are available for public inspection and copying at the Commissions Public Reference Room (See File No. S7-12-87).
22See Rules 14a-(b) and 14c-1(b), 17 CFR 240.14a-1(b) and 14c-1(b). The proposing release issued today solicits comments on an amendment to this definition.
2315 U.S.C. 77a, et seq. See Rule 405, 17 CFR 230.405.
24Minor technical revisions, such as the correction of typographical errors, also are being made.
2515 U.S.C. 781, 78n and 78w(a).
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