Document ID: SEC-2006-0448-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-04-06T04:00Z

[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