| Release No. 34-25631 Release No. IC-16387 April 27, 1988
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 Table of Contents
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I. BACKGROUND AND SUMMARY
On November 25, 1986, the Commission adopted new shareholder communications rules and related amendments 9to effect the Shareholder Communications Act of 1985. 10
The new rules set forth the obligations of banks, associations and other entities that exercise fiduciary powers ("banks") in connection with forwarding proxy material 11to beneficial owners and facilitating registrants 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, 12which 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 bank rules, as adopted, covered employee benefit plan participants, the Commission indicated that it would consider, in a separate rulemaking proceeding, the application of the shareholder communications rules to employee benefit plans with securities held in nominee name by either brokers and dealers ("brokers") or banks. On March 27, 1987, the Commission issued a release proposing rules to exclude, under specified circumstances, employee benefit plan participants from the proxy processing and direct communications provisions at the option of the registrant. 13 Specifically, under the March proposal, the registrant could choose to exclude plan participants with securities held in nominee name pursuant to the plan from the proxy processing system established under the shareholder communications rules, where the plan contained a mechanism for timely dissemination of proxy material to plan participants and action was taken reasonably calculated to assure that plan participants received such materials in accordance with that mechanism. With regard to the direct communications provisions, the proposal provided that a registrant could choose to exclude plan participants from a request for a list of beneficial owners, if the registrant had access, by some means other than the direct communications provisions, to the names and addresses of the plan participants.
In addition, the release set forth a number of alternatives to the proposal. These alternatives included: (1) making one or both of the exclusions mandatory rather than optional; (2) basing automatic or optional exclusion from the shareholder communications rules on satisfaction of both prerequisites; (3) basing automatic or optional exclusion on satisfaction of only one prerequisite; and (4) an automatic across-the-board mandatory exclusion of employee benefit plan participants from all aspects of the proxy processing and direct communications systems.
Twenty-one commentators responded to the Commissions request for comment on the March proposal. 14 Sixteen of these 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 material to plan participants. Two commentators favored an exclusion at the option of the registrant. One commentator opposed, on recordkeeping grounds, any exclusion of plan participants from the proxy processing system. Another commentator, the American Bankers Association ("ABA"), suggested an additional approach to excluding plan participants. The ABA recommended an amendment to the proxy processing provisions that would make registrants solely responsible for ensuring that proxy material is distributed to participants who hold securities of the registrant in nominee name pursuant to an employee benefit plan that provides pass-through voting (the "ABA approach"). Another commentator, the Department of Labor, stated that it had no objections to the ABA approach.
To permit consideration of the ABA approach in addition to the March proposal, the Commission, on June 18, 1987, published for comment another proposal for the treatment of plan participants under the proxy processing rules that reflected the ABA approach. 15 Under the June proposal, beneficial owners who are employee benefit plan participants would be excluded from the proxy processing provisions with respect to securities of a registrant held in nominee name pursuant to the plan, if two prerequisites were satisfied. The first prerequisite would require the registrant to have access to the names and addresses of such participants by some means other than the direct communications provisions. The second prerequisite would require that the registrant not be prohibited by the terms of the plan from communicating directly with such participants. The June proposal did not require that the plan itself contain a mechanism for furnishing proxy material to plan participants. Rather, it included a requirement that registrants cause proxy material to be furnished to plan participants.
With respect to the direct communications provisions, registrants requests for lists of beneficial owners would not cover employee benefit plan participants with securities of that registrant held in nominee name pursuant to the plan. Just as for the proxy processing provisions, the exclusion would be conditioned on registrant access to participant names and addresses, by some means other than the direct communications provisions.
Under the June proposal, registrants would have been required to notify brokers and banks of those plans satisfying the necessary prerequisites. Once such notice was received, a broker or bank would not include plan participants when fulfilling its obligations under either the proxy processing or direct communications systems.
Sixteen commentators addressed the June proposal. 16 Of the 15 commentators that addressed this issue, 12 supported a mandatory exclusion of plan participants from the shareholder communications rules, while two commentators opined that the exclusion should be optional. The Department of Labor stated that it had no objection to adoption of the proposed amendments.
Exclusion of employee benefit plan securities from the shareholder communications rules will result in cost savings to registrants and lessen the administrative burden on brokers and banks. Absent the exclusion, registrants would be required to reimburse brokers and banks for expenses incurred in connection with complying with their obligations with respect to such beneficial owners under the proxy processing and direct communications systems. This would be true even if the registrant has an established system for communicating with such plan participant beneficial owners. In addition, brokers and banks would be required to maintain records regarding plan participants names, addresses and securities positions, if such participants were covered by the shareholder communications rules.
At the same time, when coupled with a requirement that registrants cause proxy materials to be furnished to these plan participants, the exclusion presents little danger that plan participants will be disenfranchised. Accordingly, as proposed in June, the Commission is adopting a mandatory exclusion from the shareholder communications rules. In contrast, securities of companies unaffiliated with the plan sponsor that are held in an employee benefit plan will continue to be subject to the shareholder communications rules.
The amendments adopted today differ from the June proposal in a number of respects. First, the exclusion is effected through a definition of "exempt employee benefit plan securities," while the June proposal structured the exclusion through prerequisites. Second, the notice requirement has been eliminated for plans established by the registrant ("registrant-sponsored plans"). A notice requirement has been retained, however, with regard to plans established by an affiliate of the registrant and holding securities of the registrant ("affiliate-sponsored plans"). Third, while the exclusion from the shareholder communications rules for securities held by registrant-sponsored plans is mandatory, the exclusion for those held by affiliate-sponsored plans is optional.
The Commission also is amending the definition of employee benefit plan applicable to the shareholder communications rules. As proposed in June, the amendment would expand the term to cover plans primarily for employees, but that also include other persons.
Finally, other technical and clarifying amendments, necessitated by the amendments adopted today, have been made. 17
II. DISCUSSION
Under the proxy processing exclusion adopted today, registrants generally will be responsible for providing proxy material to employee benefit plan participants. Brokers and banks generally will have no obligation with regard to either responding to registrants requests for the number of sets of proxy material needed for forwarding to beneficial owners or forwarding such material to these plan participants. Brokers and banks sole obligation will be to sign the proxy card on behalf of the voting plan participant. Getting instructions to brokers and banks on the timing and method of signing the proxy card will be the responsibility of the registrant.
The proxy processing exclusion is only an exclusion in the sense that beneficial owner plan participants generally will not receive proxy material in accordance with the shareholder communications procedures. These plan participants, however, will receive such material directly from the registrant, and in a timely manner. In contrast, the exclusion from the direct communications rules is a total exclusion. No alternate procedure for obtaining the names, addresses and securities positions of plan participants is mandated under these rules. Registrants should note, however, that they may be required under the Employee Retirement Income Security Act ("ERISA") 18to forward directly to plan participants the same shareholder communications they forward to beneficial owners through the direct communications system. 19
A. Proxy Processing Provisions
1. The Exclusion
The amendments exclude from operation of the proxy processing provisions securities of the registrant held by an employee benefit plan established or sponsored by either the same registrant or an affiliate 20of the registrant. 21 Securities of a registrant held by a plan sponsored by the same registrant are automatically excluded, while securities held by a plan sponsored by an affiliate of the registrant are excluded only at the option of the registrant. 22 The registrant is required to furnish proxy material to plan participants excluded (either automatically or at the election of the registrant) from the proxy processing provisions. 23
a. Mandatory-Registrant-Sponsored Employee Benefit Plans
With regard to the mandatory exclusion, the amendments add a proviso to paragraph (a)(2) of Rule 14a-13 specifying that a registrants Rule 14a-13(a)(1) 24and (a)(2) 25search card inquiry shall not cover beneficial owners 26of exempt employee benefit plan securities. The term "exempt employee benefit plan securities" is defined in new paragraph (d) to Rule 14a-1 27to include securities of the registrant held by an employee benefit plan 28established by the same registrant (as well as specified securities held by an affiliate-sponsored plan, which are exempt at the option of the registrant, as discussed below).
All other proxy processing obligations of the registrant are derived from the Rule 14a-13(a) search card inquiry. Accordingly, no other revisions are required to exclude employee benefit plan securities from the proxy processing procedures. Corollary amendments have been made to Rules 14b-1(d)(1) 29and 14b-2(g)(1), 30making it clear that brokers and banks have no obligation under the proxy processing provisions to respond to registrants Rule 14a-13(a) search card inquiries with respect to beneficial owners of exempt employee benefit plan securities or to forward proxy material to such security holders.
The exclusion from the proxy processing provisions does not excuse a bank from executing an omnibus proxy under Rule 14b-2(b) 31in favor of respondent banks with respect to exempt employee benefit plan securities. Although proxy material will not be distributed to beneficial owners of exempt employee benefit plan securities under Commission shareholder communications procedures and, instead, will be distributed directly by the registrant, the omnibus proxy procedure still will be required to ensure that legal voting authority reaches the bank with which plan securities have been deposited. Alternatively, banks may comply with the terms of any Commission-approved alternate procedure to the omnibus proxy under Rule 14b-2(d). 32
New paragraph (d) to Rule 14a-13 33requires that a registrant cause proxy material to be furnished, in a timely manner, to beneficial owners of exempt employee benefit plan securities. 34 Under this provision, a registrant may adopt in-house procedures to perform its obligations under paragraph (d) of Rule 14a-13 or designate an agent, such as the plan administrator or trustee, to perform the service. 35 These amendments are intended to ensure that employee benefit plan participants, like other beneficial owners, receive proxy material in a timely fashion.
Because banks often do not perform recordkeeping functions for employee benefit plans, they may not have access to the names and addresses of plan participants. Thus, these amendments eliminate the need to require, banks to obtain that information and maintain records regarding plan participants that duplicate those of the registrant. Once a determination has been made that securities held by a registrant-sponsored plan are exempt from the shareholder communications rules, a bank, to the extent it maintains such information, would be free to delete plan participant information, insofar as it relates to the exempt securities, from its beneficial owner records.
To permit brokers to delete information from their records regarding whether or not beneficial owners of exempt employee benefit plan securities objected to disclosure of their names, addresses and securities positions to registrants, 36Rule 17a-3(a)(9)(ii) 37has been amended to eliminate the requirement that brokers maintain this information as part of their recordkeeping obligations. 38 This recordkeeping obligation was added as part of the shareholder communications rules. 39 By deleting this requirement as it applies to exempt employee benefit plan securities held by registrant-sponsored plans, the Commission is leaving unchanged what is required under the general broker recordkeeping rules.
b. Optional-Affiliate-Sponsored Employee Benefit Plans
The June proposal generally would have required registrants to exclude employee benefit plan holdings of their securities if the plan was sponsored by an affiliate of the registrant. The exclusion would have been accomplished through the prerequisite that the registrant have access to plan participants names and addresses, which presumably would be the case with regard to most affiliate-sponsored plans. However, because such access cannot be presumed for all affiliate-sponsored plans, the amendments provide for an exclusion at the option of the registrant that will permit registrants to exclude from the proxy processing provisions their securities held by such plans.
If a registrant has access to the names and addresses of participants in an affiliate-sponsored plan, the amendments would permit the registrant to realize the cost savings associated with the exclusion. If, however, the registrant does not have access to the names and addresses of these plan participants, the registrant will be unable to comply with its obligation under the exclusion to forward proxy materials to plan participants and, instead, will comply with its obligations under the proxy processing provisions of the shareholder communications rules.
Specifically, the amendments provide that the term "exempt employee benefit plan securities" includes securities of the registrant held by an employee benefit plan where such plan is established by an affiliate of the registrant and notice regarding the current solicitation has been given pursuant to Rule 240.14a-13(a)(1)(ii)(C). 40 Once all requirements of the definition are satisfied, registrants would be required under Rule 14a-13(d) to cause proxy material to be furnished, in a timely manner, to beneficial owners of these exempt employee benefit plan securities. The corollary amendments made to Rules 14b-1(d)(1) and 14b-2(g)(1) provide that brokers and banks have no obligation under the proxy processing provisions to respond to registrants Rule 14a-13(a)(1) and (a)(2) search card inquiries with respect to beneficial owners of these exempt employee benefit plan securities or to forward proxy material to such security holders. 41
The June proposal provided that brokers and banks would have been aware of excluded affiliate-sponsored plans through the notice requirement. In the absence of a notice provision, brokers and banks might have difficulty ascertaining which employee benefit plan securities are subject to the exclusion. Thus, the definition of exempt employee benefit plan securities provides for a notification procedure that will inform brokers and banks by means of the search card that securities of the registrant held by an affiliate-sponsored plan are not to be included in responding to registrants Rule 14a-13(a)(1) and (a)(2) search cards. New paragraph (a)(1)(ii)(C) of Rule 14a-13 provides that registrants, at their option, may give notice of any affiliate-sponsored plan of the registrant holding securities of the registrant that the registrant elects to treat as exempt employee benefit plan securities. Once such notice is received, a broker or bank will know not to include such beneficial owners in its response to that search card or to forward the forthcoming proxy material to such security holders.
Because the relationship between a registrant and its affiliates may change, the rules have been structured so the notice does not trigger a permanent exclusion from the Commissions proxy processing procedures. Rather, the exclusion only applies to the particular solicitation with respect to which the registrant provided notice through its search card. Accordingly, the definition of exempt employee benefit plan securities refers to notice regarding the current solicitation.
Since the exclusion is optional with respect to securities held by an affiliate-sponsored plan and notice is to be given for every proxy solicitation, the amendments to Rule 17a-3(a)(9)(ii) 42do not permit brokers to exclude from their records beneficial owner information regarding whether such beneficial owners objected to disclosure of their name, address and securities position to registrants. Similarly, because the exclusion is an optional one with regard to affiliate-sponsored plans and information regarding participants in such plans can be requested at any time, banks should not delete affiliate plan participant information from their beneficial owner records.
2. Proposed Access Prerequisite
The June proposal conditioned mandatory exclusion on the registrant having access to the names and addresses of beneficial owners who are employee benefit plan participants, by some means other than the direct communications provisions of paragraph (b) of Rule 14a-13. 43 This access prerequisite was intended to ensure that registrants could obtain the information necessary to forward proxy material to such plan participants in accordance with the obligation proposed to be placed on registrants. For example, registrants could obtain information as to names, addresses and securities positions of plan participants through payroll deductions or a list of plan participants provided by the plan administrator. Commentators generally opposed the access prerequisite as introducing unnecessary lack of definitiveness, stating that plan sponsor registrants always will have access to the names and addresses of plan participants. As proposed, the access requirement also compelled a notice requirement commentators viewed as burden-some. 44
The proposed access prerequisite also was designed to limit the exclusion to participants in employee benefit plans only with respect to their holdings of securities issued by a registrant that is the plan sponsor or an affiliate of the sponsor. Ordinarily, a registrant would not have access to the names and addresses of beneficial owners who are participants in employee benefit plans that it does not sponsor. 45 Under the June proposal, the exclusion would not have been applicable to such securities. Rather, the proxy material would have been furnished to plan participants pursuant to the shareholder communications rules.
The rules, as adopted, address commentators concerns about the access and notice prerequisites by mandating delivery of proxy material to plan participants by the registrant. The mandated delivery requirement is based on the premise that all registrants have or can obtain access to the names and addresses of participants in plans sponsored by them. With respect to affiliate-sponsored plans, the Commission was unable to conclude that all registrants would have access to the names and addresses of such plan participants or that brokers and banks would know which plans are affiliate-sponsored. Therefore, the exclusion was made optional and a notice provision was necessary to effect the exclusion. The registrant, of course, should not give notice regarding affiliate-sponsored plans unless it has access to the information needed to enable it to comply with its obligation to deliver proxy material to the plan participants holding its securities.
In contrast, the definition does not encompass securities held by plans established by parties other than the registrant or its affiliate. With respect to such securities, registrants are required to comply with the proxy processing procedures with respect to plan participant holdings of their securities. Banks and brokers, correspondingly, are required to carry out their proxy processing obligations with respect to such securities.
3. Obtaining Beneficial Owner Information for Plan Participant Holdings
The Commission recognizes that brokers and banks that do not perform participant recordkeeping duties may not necessarily have access to the information necessary to perform their proxy processing obligations regarding securities of the registrant held by either affiliate-sponsored plans (where the registrant has chosen not to trigger the exclusion) or plans sponsored by entities not affiliated with the registrant. Where there is no exclusion from the proxy processing provisions, a broker or bank, in order to satisfy the registrants request for the number of sets of proxy material needed for forwarding to beneficial owners who are plan participants, would have to request such information from the party performing the recordkeeping function (which may be the registrant itself in the case of a non-plan sponsors request). If the broker or bank makes a good faith effort to obtain that information from the recordkeeper and is denied access to that information, in the Commissions view, it need not take further steps to satisfy its obligations under these rules. 46
4. Proposed Prerequisite that Registrants not be Prohibited from Communicating with Plan Participants
The June proposal also contained an additional requirement for mandatory exclusion of plan participants from the proxy processing provisions-that a registrant not be prohibited by the terms of the employee benefit plan from communicating directly with beneficial owners who are employee benefit plan participants. This prerequisite was intended to recognize the possibility that a registrant could be unable to fulfill its obligation to cause proxy material to be furnished to plan participants. Under the proposal, distribution of proxy material, in such a situation, would have been accomplished in the most effective manner through the proxy processing provisions of the shareholder communications rules.
Several commentators addressed this prerequisite and stated that it was unnecessary for the rules to distinguish between plans that meet the prerequisite and plans that do not because, in effect, all plans do meet the prerequisite. Plans generally do not prohibit a registrant from communicating directly with plan participants. Plan confidentiality provisions typically restrict management from learning an employees voting or tender instructions and from gaining access to account records where a tender offeror has purchased any employer stock from the plan pursuant to a hostile tender offer. The latter type of confidentiality provision may, under limited circumstances, prevent the employer only from examining plan records to determine whether any particular employee is still a "beneficial owner" of employer stock in the aftermath of a hostile tender offer. Further, even in the most unlikely event that a plan did contain such a prohibition on communicating directly with participants, the registrant could use a third party such as the plan trustee for distributing proxy materials to plan participants.
5. Proposed Notice Requirement
The June proposal would have required registrants to notify brokers and banks of plans that met the prerequisites for exclusion from the proxy processing provisions. Under the proposed notice provision, the mandatory notice generally would have been given to only one broker or bank-the entity that directly held the registrants securities in nominee name pursuant to an employee benefit plan. If the registrant failed to notify the appropriate broker or bank, it would have been liable for any reasonable costs incurred by the broker or bank in performing its obligations under the proxy processing provisions with regard to such excluded plan participants.
In recognition of some of the difficulties involved in requiring a notice prior to effectiveness of a mandatory exclusion, the Commission specifically stated in the June proposal that it was considering eliminating the notice requirement because of the increased administrative burdens on banks and brokers. With a notice requirement, banks and brokers would have to: (1) determine which registrant/plan sponsors had provided notice and which had not; and (2) make provision in their recordkeeping systems for two categories of plans. In addition, a notice requirement could have the result of converting a mandatory exclusion to an optional one because brokers and banks would not be permitted to exclude securities that otherwise satisfied the requirements unless notice had been furnished by the registrant. Consistent with those concerns and commentators general opposition to a notice requirement, the Commission has deleted the notice requirement from the amendments applicable to the mandatory exclusion. As adopted today, the mandatory exclusion will put all banks and brokers on notice that specific securities held by employee benefit plans are excluded from the proxy processing provisions of the shareholder communications rules.
As discussed above, securities held in affiliate-sponsored plans may be excluded at the option of the registrant. Notice must be given through the search card request in order to trigger the exclusion for such securities with respect to a particular proxy solicitation.
B. Direct Communications Provisions
1. The Exclusion
a. Mandatory-Registrant-Sponsored Employee Benefit Plans
Paragraph (b)(3) of Rule 14a-13 47is amended to provide that a registrants request for a list of beneficial owners shall not cover beneficial owners of exempt employee benefit plan securities. 48 Corollary amendments to Rules 14b-1 and 14b-2 provide that brokers and banks shall not include such information when responding to registrants requests for lists of beneficial owners. 49 This provision is intended to permit registrants to realize cost savings in connection with requesting beneficial owner lists while, at the same time, not requiring brokers and banks that generally do not perform plan recordkeeping duties to develop and maintain such records.
b. Optional-Affiliate-Sponsored Employee Benefit Plans
The optional exclusion regarding registrants requests for beneficial owner information concerning beneficial owners of the registrants securities held by an affiliate-sponsored plan is structured in a similar fashion to the mandatory exclusion from the direct communications provisions. The term "exempt employee benefit plan securities" includes such securities if notice regarding the current request for a list of names, addresses and securities positions of beneficial owners has been given pursuant to Rule 14a-13(b)(3). Notice is to be given at the time the registrant makes its request for a beneficial owner list. Like the notice provision for the proxy processing provisions, the notice is to be given each time a request for beneficial owner information is made.
2. The Proposed Access Prerequisite
The June proposal provided for an access prerequisite similar to that proposed for the proxy processing exclusion. 50 Commentators similarly viewed an explicit access prerequisite as unnecessary because plan sponsor registrants always will have access to plan participants names and addresses. The Commission agrees. Instead of an explicit prerequisite, the rules, as adopted, address the need for access through the definition of exempt employee benefit plan securities, as is done in the proxy processing system.
3. Proposed Notice Requirement
The June proposal provided for a notice requirement for the direct communications system like that proposed for the proxy processing exclusion. For the same reasons the Commission deleted the notice requirement for the proxy processing provisions, the Commission has deleted the notice requirement for the direct communications system, except with respect to the optional exclusion for affiliate-sponsored plans.
C. Other Revisions
1. Amendment to the Definition of Employee Benefit Plan
As proposed in June, amendments to paragraph (b) to Rule 14a-1 51and paragraph (b) to Rule 14c-1 52substitute the term "primarily" for the term "solely" in the definition of employee benefit plan. These definitions previously included only plans solely for employees, directors, trustees or officers. 53 The amended definitions also encompass plans that are primarily for employees but also include other persons, such as consultants.
2. Dividend or Interest Reinvestment Plans
In the June proposal, the Commission requested comment on whether the proposed exclusions from the proxy processing and direct communications provisions should be expanded further to include dividend or interest reinvestment plans. Such plans often allow holders of securities to have their dividends or interest automatically reinvested by the dividend or interest paying agent in additional securities in lieu of cash distribution. Securities purchased under the plan generally are held in nominee name. One commentator on the March proposal stated that a common requirement for such plans is that a participant must hold at least one share of the registrants stock in his own name. According to this commentator, this requirement assures that the name and address of the participant is known to the registrant, despite the fact that the participants ownership of the registrants securities is in nominee name. Accordingly, the Commission solicited comment in connection with the June proposal on whether, in fact, this is a common feature of such plans.
Commentators were divided on whether this was a common feature of dividend or interest reinvestment plans. Two commentators noted that, although the plan may require the participant to be a record holder of at least one share of the registrants stock at the time of enrolling in the plan, some plans do not require the record holder to maintain any shares directly in its name after joining the plan.
Due to the division among commentators regarding common features of these plans and the Commissions desire not to make it more difficult for security holders to exercise their right to vote, the Commission has determined that, at this time, it will not exclude securities held pursuant to a dividend or interest reinvestment plan from the shareholder communications rules. Participants in such plans will continue to receive proxy material and other corporate communications through established shareholder communications systems.
III. Cost-Benefit Analysis
The Commission requested commentators to provide views and data as to the costs and benefits associated with the proposed amendments. In the June release, the Commission noted that the proposal would obligate the registrant to furnish proxy material to beneficial owners whose securities are held in nominee name pursuant to an employee benefit plan, but eliminate both the requirement that record holders and respondent banks distribute proxy material to such plan participants, and the need for record holders and respondent banks to obtain and maintain beneficial owner information regarding such plan participants. In addition, the Commission noted that the proposals would permit further cost savings to registrants in obtaining beneficial owner lists, the charges for which are calculated on a per name basis.
The Commission also noted that additional costs would be incurred in connection with the notice requirement. The notice requirement has been deleted from the amendments as adopted, except for notice with respect to the optional exclusion for affiliate-sponsored plans.
Commentators generally expressed the view that the proposed amendments would decrease costs of complying with the shareholder communications rules for both brokers and banks and registrants.
IV. STATUTORY BASIS AND TEXT OF AMENDMENTS
These amendments are being adopted pursuant to sections 12, 14, 17 and 23(a) of the Securities Exchange Act of 1934. 54
List of Subjects in 17 CFR Part 240.
Reporting and recordkeeping requirements, Securities, Banks, Associations.
V. 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 revising paragraph (b), redesignating current paragraphs (d) through (k) as (e) through (l) and adding new paragraph (d) 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 primarily for employees, directors, trustees or officers.
* * * * *
(d) Exempt employee benefit plan securities. For purposes of §§240.14a-13, 240.14b-1 and 240.14b-2, the term "exempt employee benefit plan securities" means: (1) securities of the registrant held by an employee benefit plan, as defined in paragraph (b) of this section, where such plan is established by the registrant; or (2) if notice regarding the current solicitation has been given pursuant to §240.14a-13(a)(1)(ii)(C) or if notice regarding the current request for a list of names, addresses and securities positions of beneficial owners has been given pursuant to §240.14a-13(b)(3), securities of the registrant held by an employee benefit plan, as defined in paragraph (b) of this section, where such plan is established by an affiliate of the registrant.
* * * * *
3. By revising paragraphs (a)(1)(ii)(A) and (B), paragraph (a)(2), Notes 1 and 2 to paragraph (a), paragraph (b)(3) and paragraph (d) and adding Note 3 to paragraph (a) and new paragraph (a)(1)(ii)(C) to §240.14a-13 to read as follows:
§240.14a-13 Obligation of registrants in communicating with beneficial owners.
(a) * * *
(1) * * *
(1) * * *
(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); (B) the record date; and (C) at the option of the registrant, any employee benefit plan established by an affiliate of the registrant that holds securities of the registrant that the registrant elects to treat as exempt employee benefit plan securities;
(2) Upon receipt of 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; Provided, however, the inquiry required by paragraphs (a)(1) and (a)(2) of this section shall not cover beneficial owners of exempt employee benefit plan securities;
* * * * *
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(i)).
Note 2. -The attention of registrants is called to the fact that each broker, dealer, bank, association and other entity that exercises fiduciary powers has an obligation pursuant to §240.14b-1(b) and §240.14b-2(b) (except as provided therein with respect to exempt employee benefit plan securities held in nominee name) and, with respect to broker and dealers, applicable self-regulatory organization requirements to obtain and forward, within the time periods prescribed therein, (a) proxies (or in lieu thereof requests for voting instructions) and proxy soliciting materials to beneficial owners on whose behalf it holds securities, and (b) annual reports to security holders to beneficial owners on whose behalf it holds securities, unless the registrant has notified the record holder or respondent bank that it has assumed responsibility to mail such material to beneficial owners whose names, addresses and securities positions are disclosed pursuant to §240.14b-1(c) and §240.14b-2(e)(2) and (3).
Note 3. -The attention of registrants is called to the fact that registrants have an obligation, pursuant to paragraph (d) of this section, to cause proxies (or in lieu thereof requests for voting instructions), proxy soliciting material and annual reports to security holders to be furnished, in a timely manner, to beneficial owners of exempt employee benefit plan securities.
(b) * * *
* * * * *
(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; Provided, however, such request shall not cover beneficial owners of exempt employee benefit plan securities as defined in §240.14a-1(d)(1); and, at the option of the registrant, such request may give notice of any employee benefit plan established by an affiliate of the registrant that holds securities of the registrant that the registrant elects to treat as exempt employee benefit plan securities;
* * * * *
(d) If a registrant solicits proxies, consents or authorizations from record holders and respondent banks who hold securities on behalf of beneficial owners, the registrant shall cause proxies (or in lieu thereof requests for voting instructions), proxy soliciting material and annual reports to security holders to be furnished, in a timely manner, to beneficial owners of exempt employee benefit plan securities.
4. By redesignating current paragraph (d) as (e) and adding new paragraph (d) 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.
* * * * *
(d) With regard to beneficial owners of exempt employee benefit plan securities: (1) not include information in its response pursuant to paragraph (a) of this section or forward proxies (or in lieu thereof requests for voting instructions), proxy soliciting material, or annual reports to security holders pursuant to paragraph (b) of this section to such beneficial owners; and (2) not include in its response pursuant to paragraph (c) of this section data concerning such beneficial owners.
* * * * *
5. By revising paragraphs (e)(2)(i) and (f)(1), removing current paragraph (j), redesignating paragraphs (g) through (i) as (h) through (j), adding new paragraph (g) and revising newly redesignated paragraph (h) of §240.14b-2 to read 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.
* * * * *
(e) * * *
(2) * * *
(i) With respect to customer accounts opened on or before December 28, 1986, beneficial owners of the registrants securities on whose behalf it holds securities who have consented affirmatively to disclosure of such information, subject to paragraph (i) of this section; and
* * * * *
(f) * * *: (1) its obligations under paragraphs (b), (c), (e), and (i) of this section if a registrant does not provide assurance of reimbursement of its reasonable expenses, both direct and indirect, incurred in connection with performing the obligations imposed by paragraphs (b), (c), (e) and (i) of this section; or
* * * * *
(g) With regard to beneficial owners of exempt employee benefit plan securities, shall not: (1) include information in its response pursuant to paragraph (a) of this section; forward proxies (or in lieu thereof requests for voting instructions), proxy soliciting material, or annual reports to security holders pursuant to paragraph (c) of this section to such beneficial owners; or comply with any alternative to paragraph (c) of this section approved by the Commission pursuant to paragraph (d) of this section; or
(2) include in its response pursuant to paragraphs (e) and (i) of this section data concerning such beneficial owners.
(h) For purposes of determining the fees which may be charged to registrants pursuant to §240.14a-13(b)(5) and paragraph (f)(1) of this section for performing obligations under paragraphs (b), (c), (e) and (i) of this section, an amount no greater than that permitted to be charged by brokers or dealers for reimbursement of their reasonable expenses, both direct and indirect, incurred in connection with performing the obligations imposed by paragraphs (b) and (c) of §240.14b-1 shall be deemed to be reasonable.
* * * * *
6. By revising paragraph (b), redesignating current paragraphs (d) through (j) as (e) through (k) and adding new paragraph (d) 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 primarily for employees, directors, trustees or officers.
* * * * *
(d) Exempt employee benefit plan securities. For purposes of §240.14c-7, the term "exempt employee benefit plan securities": means: (1) securities of the registrant held by an employee benefit plan, as defined in paragraph (b) of this section, where such plan is established by the registrant; or (2) if notice regarding the current distribution of information statements has been given pursuant to §240.14c-7(a)(1)(ii)(C) or if notice regarding the current request for a list of names, addresses and securities positions of beneficial owners has been given pursuant to §240.14c-7(b)(3), securities of the registrant held by an employee benefit plan, as defined in paragraph (b) of this section, where such plan is established by an affiliate of the registrant.
* * * * *
7. By revising paragraphs (a)(1)(ii)(A) and (B), paragraph (a)(2), Note 3 to paragraph (a), paragraph (b)(3) and paragraph (d) and adding Note 4 to paragraph (a) and new paragraph (a)(1)(ii)(C) to §240.14c-7 to read as follows:
§240.14c-7 Providing copies of material for certain beneficial owners.
(a) * * *
(1) * * *
(i) * * *
(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); (B) the record date; and (C) at the option of the registrant, any employee benefit plan established by an affiliate of the registrant that holds securities of the registrant that the registrant elects to treat as exempt employee benefit plan securities;
(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; Provided, however, the inquiry required by paragraphs (a)(1) and (a)(2) of this section shall not cover beneficial owners of exempt employee benefit plan securities;
* * * * *
Note 3. -The attention of registrants is called to the fact that each broker and dealer has an obligation pursuant to applicable self-regulatory organization requirements to obtain and forward, in a timely manner, (a) information statements to beneficial owners on whose behalf it holds securities, and (b) annual reports to security holders to beneficial owners on whose behalf it holds securities, unless the registrant has notified the broker or dealer that it has assumed responsibility to mail such material to beneficial owners whose names, addresses and securities positions are disclosed pursuant to §240.14b-1(c).
Note 4. -The attention of registrants is called to the fact that registrants have an obligation, pursuant to paragraph (d) of this section, to cause information statements and annual reports to security holders to be furnished, in accordance with §240.14c-2, to beneficial owners of exempt employee benefit plan securities.
(b) * * *
* * * * *
(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; Provided, however, such request shall not cover beneficial owners of exempt employee benefit plan securities as defined in §240.14a-1(d)(1); and, at the option of the registrant, such request may give notice of any employee benefit plan established by an affiliate of the registrant that holds securities of the registrant that the registrant elects to treat as exempt employee benefit plan securities;
* * * * *
(d) If a registrant furnishes information statements to record holders and respondent banks who hold securities on behalf of beneficial owners, the registrant shall cause information statements and annual reports to security holders to be furnished, in accordance with §240.14c-2, to beneficial owners of exempt employee benefit plan securities.
8. By adding the word "and" at the end of paragraph (a)(9)(i) and adding an introductory clause to paragraph (a)(9)(ii) of §240.17a-3 to read as follows:
§240.17a-3 Records to be made by certain exchange members, brokers and dealers.
(a) * * *
(9) * * *
(ii) Except with respect to exempt employee benefit plan securities as defined in §240.14a-1(d), but only to the extent such securities are held by employee benefit plans established by the issuer of the securities,* * *
* * * * *
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.
717 CFR 240.17a-3(a)(9).
815 U.S.C. 78a, et seq.
9Release No. 34-23847 (November 25, 1986) 51 FR 44267.
10Pub. L. No. 99-222, 99 Stat. 1737 (1985), amending 15 U.S.C. 78n(b) (1982).
11The phrase "proxy material" is used in this release to refer collectively to proxy cards or requests for voting instructions, proxy soliciting material and annual reports to security holders.
1217 CFR 240.14b-2(a) through (c).
13Release No. 34-24274 (March 27, 1987) 52 FR 11083 (the "March proposal").
14The comment letters are available for public inspection and copying at the Commissions Public Reference Room (see File No. S7-11-87).
15Release No. 34-24607 (June 18, 1987) 52 FR 23855 (the "June proposal"). Pending further consideration of the manner in which employee benefit plan participants would be treated under the shareholder communications rules, the Commission temporarily deferred imposing on banks an obligation under the shareholder communications rules to distribute proxy material to employee benefit plan participants. Corollary amendments to Rules 14a-13 and 14c-7 temporarily relieved registrants of their corresponding obligations under the shareholder communications rules with respect to such beneficial owners. Release No. 34-24606 (June 18, 1987) 52 FR 23643. The deferral did not apply to employee benefit plans with securities held in nominee name by brokers.
16The comment letters are available for public inspection and copying at the Commissions Public Reference Room (see File No. S7-23-87).
17All proxy rule amendments discussed below also have been made, where appropriate, to Rules 14c-1 and 14c-7, which govern information statements.
1829 U.S.C. 1001, et seq.
19See n. 23 infra.
20The term "affiliate" should be interpreted as defined in Rule 12b-2 17 CFR 240.12b-2.
21The term "registrant" means the issuer of the securities in respect of which proxies are to be solicited. See Rule 14a-1(j) 17 CFR 240.14a-1(j).
22See Section 11.A.1.b. infra for discussion of the optional exclusion for affiliate-sponsored plans.
23Compliance with the provisions of this requirement does not necessarily establish compliance with the fiduciary responsibility provisions of ERISA. Under section 404(a)(1)(D) of ERISA 29 U.S.C. 1104(a)(1)(D), fiduciaries of employee benefit plans generally are required to discharge their duties in accordance with the documents and instruments governing the plan insofar as they are consistent with 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 must discharge his duties for the exclusive benefit, and solely in the interest, of plan participants and beneficiaries. A fiduciary must 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 participant 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 views the duties of plan fiduciaries under ERISA with respect to pass-through voting of securities similar to those 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 the materials required to be distributed under the plan.
2417 CFR 240.14a-13(a)(1).
2517 CFR 240.14a-13(a)(2).
26If voting authority rests with the plan trustee, the trustee is the beneficial owner for purposes of the shareholder communications rules. See Rule 14b-2(i) 17 CFR 240.14b-2(i).
2717 CFR 240.14a-1(d).
28See Section II.C.1 infra for discussion of the revised definition of "employee benefit plan."
2917 CFR 240.14b-1(d)(1).
3017 CFR 240.14b-2(g)(1).
3117 CFR 240.14b-2(b).
3217 CFR 240.14b-2(d).
3317 CFR 240.14a-13(d).
34A new Note 3 to Rule 14a-13(a) directs registrants attention to their obligations under paragraph (d) of Rule 14a-13. In addition, Note 2 to Rule 14a-13(a) has been amended to add a reference to the newly adopted exclusion.
35A registrant that chooses to carry out these obligations through an agent may be liable for the acts or omissions of its agent.
36Brokers are required to collect this information pursuant to their obligations under the direct communications provisions. See Rule 14b-1(c) 17 CFR 240.14b-1(c).
3717 CFR 240.17a-3(a)(9)(ii).
38In both the March and June proposals comment was solicited on whether Rule 17a-3(a)(9) should be amended to permit brokers to delete such information. Data on the costs associated with brokers continuing to request beneficial owner information from plan participants and maintain this information also was requested. No comments on this issue were received.
39Release No. 34-20021 (July 28, 1983) 48 FR 35082.
4017 CFR 240.14a-13(a)(1)(ii)(C).
41As with the mandatory exclusion, the optional exclusion from the proxy processing provisions would not excuse a bank from executing an omnibus proxy under Rule 14b-2(g) in favor of respondent banks with respect to these exempt employee benefit plan securities. See discussion supra Section II.A.1.a.
42See discussion supra Section II.A.1.a.
4317 CFR 240.14a-13(b).
44See discussion at Section II.A.5. infra regarding the proposed notice requirement.
45For example, some plans permit the participants to designate investments in securities other than those issued by the sponsoring registrant.
46Non-plan sponsor registrants also would comply with the direct communications procedures under the shareholder communications rules, while registrants may wish to comply with such procedures regarding affiliate-sponsored plan holdings of its securities, see discussion infra at Section II.B. Broker or bank difficulties, in such cases, in gaining access to the necessary information also would be subject to a good faith effort standard.
4717 CFR 240.14a-13(b)(3).
48See Section II.A.1 supra for discussion of the new definition of exempt employee benefit plan securities.
49Rules 14b-1(d)(2) and 14b-2(g)(2) 17 CFR 240.14b-1(d)(2) and 14b-2(g)(2).
50The March proposal contained a similar access prerequisite for the direct communications exclusion. That exclusion was to be optional on the part of the registrant. The exclusion adopted today, however, is mandatory, except with respect to affiliate-sponsored plans.
5117 CFR 240.14a-1(b).
5217 CFR 240.14c-1(b).
53The amended definitions apply only to the shareholder communications rules and do not modify, in any way, the definitions included in Rules 405 17 CFR 230.405 and 701 17 CFR 230.701 under the Securities Act of 1933 15 U.S.C. 77a, et seq., and Rule 16b-3 17 CFR 240.16b-3 under the Exchange Act.
5415 U.S.C. 781, 78n, 78q and 78w(a).
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