[Federal Register: April 6, 2006 (Volume 71, Number 66)]
[Notices]
[Page 17532-17534]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06ap06-111]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53578; File No. SR-NASD-2005-073]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Granting Approval of a Proposed Rule Change and
Amendment Nos. 1 and 2 Thereto and Notice of Filing and Order Granting
Accelerated Approval of Amendment No. 3 Thereto Relating to Rule
4350(e) To Amend the Annual Shareholder Meeting Requirement
March 30, 2006.
On June 6, 2005, the National Association of Securities Dealers,
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc.
(``Nasdaq''), filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend NASD Rule 4350 in order to change its
annual shareholder meeting requirement. On December 5, 2005, Nasdaq
filed Amendment No. 1 to the proposed rule change.\3\ On December 9,
2005, Nasdaq filed Amendment No. 2 to the proposed rule change.\4\ The
proposed rule change, as amended, was published for comment in the
Federal Register on December 28, 2005.\5\ No comments were received
regarding the proposal. On March 16, 2006, Nasdaq filed Amendment No. 3
to the proposed rule change.\6\ This order approves the proposed rule
change, as amended, publishes notice of Amendment No. 3 to the proposed
rule change, and grants accelerated approval to Amendment No. 3.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 3 In Amendment No. 1, Nasdaq revised the proposed rule text
and corresponding description of the proposal in its Form 19b-4.
Amendment No. 1 replaced Nasdaq's original filing in its entirety.
\4\ In Amendment No. 2, Nasdaq made clarifying changes to the
proposed rule text of IM-4350-8 with respect to certain issuers
still subject to the annual shareholder meeting requirement under
NASD Rule 4350(e).
\5\ See Securities Exchange Act Release No. 52985 (December 20,
2005), 70 FR 76895.
\6\ In Amendment No. 3, Nasdaq made further clarifying changes
to the proposed rule text of IM-4350-8 to state that at the annual
shareholder meeting, shareholders must be afforded the opportunity
to discuss company affairs with management and, if required by the
issuer's governing documents, to elect directors.
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I. Description of the Proposed Rule Change
NASD Rule 4350(e) currently requires all Nasdaq issuers to hold an
annual meeting of shareholders and to provide notice of such meeting to
Nasdaq. Nasdaq recognizes the significance of annual shareholder
meetings because they allow the equity owners of a company--typically
its common stockholders--the opportunity to elect directors and meet
with management to discuss company affairs.
Nasdaq, however, believes that the annual shareholder meeting
requirement is not necessary for, or applicable to, an issuer with
respect to certain types of its listed securities because the holders
of those securities do not directly participate as equity holders and
do not vote in the election of directors. Specifically, Nasdaq makes
reference to securities listed pursuant to NASD Rule 4420(f)
(Quantitative Designation Criteria, Other Securities), which allows for
the listing of securities that possess attributes or features of more
than one category of security.\7\ Nasdaq believes that these securities
typically are not an issuer's primary equity security, and their
holders have only limited economic interests and other rights.
Nasdaq also believes that Portfolio Depository Receipts (listed
pursuant to NASD Rule 4420(i)) and Index Fund Shares (listed pursuant
to NASD Rule 4420(j)), which are securities issued by unit investment
trusts and open-end management investment companies, respectively, that
are organized as exchange-traded funds, should not be required to hold
an annual shareholder meeting. According to Nasdaq, these exchange-
traded funds are generally passive investment vehicles that seek to
match the performance of an index and must obtain an exemptive order
from the Commission before they offer securities. As a result, Nasdaq
notes that the operations of the issuers of these securities are
circumscribed by numerous representations and conditions of the
applicable orders, and that the issuers of these securities do not
typically experience the need for operational or other changes
requiring a shareholder vote, and, by extension, a shareholder meeting.
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\7\ Securities currently listed under Rule 4420(f) include: (i)
Trust Preferred Securities, the payments on which are linked to the
performance of another security; (ii) Index Linked Notes, the
payments on which are linked to the performance of an underlying
index; and (iii) Contingent Value Rights, the performance of which
are tied to the performance of another security, a particular
division of the company, or the occurrence of a certain event.
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Finally, Nasdaq would exclude from its annual shareholder meeting
requirement those issuers listing Trust Issued Receipts (listed
pursuant to NASD Rule 4420(l)), which are securities issued by a trust
that holds,
[[Page 17533]]
but does not manage, specific securities on behalf of the investors in
the trust. Nasdaq notes that these trusts do not hold shareholder (or
unitholder) meetings because the trusts have no boards of directors and
essentially serve only as conduits for the investors' indirect
investments in the underlying securities of the trusts.
For the foregoing reasons, Nasdaq proposes to amend NASD Rule
4350(e) such that the requirement to hold an annual shareholder meeting
would be applicable only to those Nasdaq issuers as a result of listing
voting and non-voting common stock and voting preferred stock, and
their respective equivalents. Under the proposal, issuers of securities
listed under NASD Rules 4420(f), 4420(i), 4420(j), and 4420(l) would
specifically be excluded from the annual meeting requirement in
proposed IM-4350-8. The proposal makes clear, however, that issuers of
such securities are still required to hold an annual shareholder
meeting with respect to the listing of common stock or voting preferred
stock, or their equivalents.\8\ By clearly identifying those issuers
that will be subject to the annual shareholder meeting requirement,
Nasdaq believes that NASD Rule 4350(e) will be more transparent.
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\8\ Proposed IM-4350-8 provides that the requirement to hold an
annual shareholder meeting would not be applicable as a result of an
issuer listing the following types of securities: ``securities
listed pursuant to Rule 4420(f) (such as Trust Preferred Securities
and Contingent Value Rights), unless the listed security is a common
stock or voting preferred stock equivalent (e.g., a callable common
stock); Portfolio Depository Receipts listed pursuant to Rule
4420(i); Index Fund Shares listed pursuant to Rule 4420(j); and
Trust Issued Receipts listed pursuant to Rule 4420(l).
Notwithstanding, if the issuer also lists common stock or voting
preferred stock, or their equivalent, the issuer must still hold an
annual meeting for the holders of that common stock or voting
preferred stock, or their equivalent.'' See Securities Exchange Act
Release No. 52985 (December 20, 2005), 70 FR 76895, 76896.
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In addition, NASD Rule 4350(e) currently requires all Nasdaq
issuers to provide notice of their annual shareholder meetings to
Nasdaq. In practice, however, Nasdaq states that it does not rely on
this notification to monitor compliance with the annual shareholder
meeting requirement. Instead, Nasdaq represents that its staff reviews
proxy statements (and, in the case of issuers that do not file proxy
statements, other Commission filings) to determine compliance. For
these reasons, Nasdaq proposes to further amend NASD Rule 4350(e) to
eliminate the notification requirement.
Finally, while NASD Rule 4350(e) currently does not provide a
deadline for holding the annual shareholder meeting, Nasdaq proposes
that the annual shareholder meeting must be held within one year of the
end of the issuer's fiscal year.\9\ At each such meeting, shareholders
must be afforded the opportunity to discuss company affairs with
management and, if required by the issuer's governing documents, to
elect directors. Nasdaq believes that codifying this time frame would
provide additional transparency to the annual shareholder meeting
requirement.
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\9\ See infra note 14.
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II. Discussion and Commission Findings
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities association \10\ and, in
particular, the requirements of Section 15A(b)(6) of the Act \11\ and
the rules and regulations thereunder. Specifically, the Commission
finds that the proposal to amend the annual shareholder meeting
requirement is consistent with Section 15A(b)(6) of the Act because it
is designed to promote just and equitable principles of trade, to
remove impediments to a free and open market and a national market
system, and, in general, to protect investors and the public interest,
and is not designed to permit unfair discrimination between issuers.
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\10\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\11\ 15 U.S.C. 78o-3(b)(6).
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A. Applicability of the Annual Shareholder Meeting Requirement
The proposal sets forth which Nasdaq issuers are required to hold
annual shareholder meetings and excludes from the annual shareholder
meeting requirement issuers listing certain types of securities with
respect to which the shareholders typically have a limited
interest.\12\ The Commission notes that Nasdaq's proposed annual
shareholder meeting requirement remains subject to any applicable state
and federal securities laws that relate to such annual meetings; as a
result, an issuer that lists one or more of the types of securities set
forth in proposed IM-4350-8 may still be required to hold annual
shareholder meetings in accordance with such state and federal
securities laws. In addition, the Commission notes that issuers of
Nasdaq-listed securities, including the types of securities set forth
in proposed IM-4350-8, remain subject to state and federal securities
laws that may require other types of shareholder meetings, such as
special meetings of shareholders. For example, exchange-traded funds
are registered under, and remain subject to, the Investment Company Act
of 1940 (``Investment Company Act''), which imposes various
shareholder-voting requirements that may be applicable to such
funds.\13\
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\12\ For example, as noted above, shareholders of some of these
securities have a limited economic interest in the issuer and do not
even vote for a board of directors.
\13\ See e.g., Section 16 of the Investment Company Act, which
requires, among others, an investment company's initial board of
directors to be elected by the shareholders at an annual or special
meeting. 15 U.S.C. 80a-16(a).
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The proposal also clarifies that, under the NASD rules, the right
not to hold an annual shareholder meeting, as set forth in proposed IM-
4350-8, applies only with respect to the particular securities
specified in proposed IM-4350-8. Thus, although the proposed rule
change excludes a particular Nasdaq issuer from holding an annual
shareholder meeting with respect to, and as a result of listing, the
specific type of security specified in proposed IM-4350-8, if such
issuer also lists other common stock or voting preferred-stock, or
their equivalent, such issuer must nevertheless hold an annual meeting
for the holders of that common stock or voting preferred-stock, or
their equivalent, under the proposal. In addition, proposed IM-4350-8
makes clear that issuers listing securities under NASD Rule 4420(f)
(Other Securities), which allows for the listing of Trust Preferred
Securities, Index Linked Notes, and Contingent Value Rights, among
others, will still be subject to the annual shareholder meeting
requirement, irrespective of whether such securities are listed under
NASD Rule 4420(f), if such securities have the attributes of common
stock or voting preferred stock, or their equivalents.
Given the limited rights and other interests of the holders of
those securities specified in proposed IM-4350-8 and the applicability
of federal and state securities laws that govern shareholder meetings,
the Commission believes that the proposed rule change reasonably sets
forth the scope of the annual shareholder meeting requirement and will
ensure that the appropriate Nasdaq-listed companies are required to
hold annual shareholder meetings under NASD rules, for the benefit of
investors and the public interest.
[[Page 17534]]
B. Notification of the Annual Shareholder Meeting
With respect to Nasdaq's proposal to eliminate the notice
requirement in NASD Rule 4350(e), the Commission believes that, because
Nasdaq's practice to monitor the annual shareholder meeting requirement
involves the review of proxy statements and other Commission filings,
the current notification requirement is redundant and its elimination
from NASD Rule 4350(e) would be reasonable. Of course, Nasdaq will
still be required to ensure compliance with the annual shareholder
meeting requirement and is simply eliminating a notification
requirement which Nasdaq claims is not necessary. The proposed change
would be consistent with Section 15A(b)(6) of the Act because the
elimination of a redundancy and an unnecessary obligation of Nasdaq
issuers removes impediments to the mechanism of a free and open market
and a national market system, while continuing to ensure the protection
of investors and the public interest.
C. Timing of the Annual Shareholder Meeting
Finally, the provision concerning the holding of an annual meeting
is being amended to require that the annual meeting must be held within
one year after the end of the fiscal year. The Commission believes that
such proposed change reasonably establishes a time frame to the annual
shareholder meeting requirement that is consistent with the Act, and in
particular, Section 15A(b)(6) thereof. The Commission notes that this
change makes explicit that the annual meeting must be held within a
year of the fiscal year-end of the company.\14\ In addition, the
Commission notes that the date a company holds its annual meeting must
be consistent with state law. The Commission also notes that the
provision requires those issuers that must hold an annual shareholder
meeting under NASD Rule 4350(e) to hold such meetings within a certain
time frame, for the benefit of the security holders, the investors, and
the public interest, consistent with Section 15A(b)(6) of the Act.\15\
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\14\ The proposed rule text of IM-4350-8 also states that for a
new listing that was not previously subject to a requirement to hold
an annual meeting, the company is required to hold its first meeting
within one year after its first fiscal year-end following such
listing.
\15\ 15 U.S.C. 78o-3(b)(6).
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III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 3, including whether Amendment No. 3
is consistent with the Act. Comments may be submitted by any of the
following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File No. SR-NASD-2005-073 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090. All submissions should refer to
File Number SR-NASD-2005-073. This file number should be included on
the subject line if e-mail is used. To help the Commission process and
review your comments more efficiently, please use only one method. The
Commission will post all comments on the Commission's Internet Web site
(http://www.sec.gov/rules/sro.shtml). Copies of the submission, all
subsequent amendments, all written statements with respect to the
proposed rule change that are filed with the Commission, and all
written communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for inspection and copying in the Commission's Public
Reference Room. Copies of such filing also will be available for
inspection and copying at the principal office of the NASD. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NASD-2005-073 and should be
submitted on or before April 27, 2006.
IV. Accelerated Approval of Amendment No. 3
Pursuant to Section 19(b)(2) of the Act,\16\ the Commission may not
approve any proposed rule change, or amendment thereto, prior to the
30th day after the date of publication of notice of the filing thereof,
unless the Commission finds good cause for so doing and publishes its
reasons for so finding. The Commission hereby finds good cause for
approving Amendment No. 3 to the proposal, prior to the 30th day after
publishing notice of Amendment No. 3 in the Federal Register. The
revisions made to the proposal in Amendment No. 3 are typographical
changes intended to clarify that at the annual shareholder meeting
shareholders must be afforded the opportunity to discuss company
affairs with management. In addition, if required by the issuer's
governing documents, shareholders must be afforded the opportunity to
elect directors. This was the intent of the provision as originally
proposed. The Commission believes that accelerating Amendment No. 3 is
appropriate because these revisions are clarifying and do not raise new
regulatory issues. Accordingly, pursuant to Section 19(b)(2) of the
Act,\17\ the Commission finds good cause to approve Amendment No. 3
prior to the thirtieth day after notice of the Amendment is published
in the Federal Register.
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\16\ 15 U.S.C. 78s(b)(2).
\17\ Id.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change (File No. SR-NASD-2005-073), as
amended, is approved, and Amendment No. 3 to the proposed rule change
is hereby granted accelerated approval.
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\18\ Id.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-5033 Filed 4-5-06; 8:45 am]
BILLING CODE 8010-01-P