[Federal Register Volume 61, Number 76 (Thursday, April 18, 1996)]
[Proposed Rules]
[Pages 17108-17136]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9403]
[[Page 17107]]
_______________________________________________________________________
Part III
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Part 228 et al.
Trading Practices Rules Concerning Securities Offerings; Proposed Rule
Federal Register / Vol. 61, No. 76 / Thursday, April 18, 1996 /
Proposed Rules
[[Page 17108]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 228, 229, 240, and 242
[Release Nos. 33-7282; 34-37094; IC-21883; International Series Release
No. 965; File No. S7-11-96]
RIN 3235-AF54
Trading Practices Rules Concerning Securities Offerings
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules.
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SUMMARY: The Securities and Exchange Commission (``Commission'') today
is publishing for comment a new regulation containing trading practices
rules governing securities offerings. Proposed new Regulation M would
replace Rules 10b-6, 10b-6A, 10b-7, 10b-8, and 10b-21 under the
Securities Exchange Act of 1934. Reflecting the significant
developments and innovations that have occurred in the securities
markets during recent years, the proposed regulation would create a
simpler, more flexible framework to govern the market conduct of
persons with a significant interest in the outcome of an offering. The
proposals are designed to reduce regulatory burdens on issuers,
underwriters, and other offering participants by focusing restrictions
on potentially manipulative conduct in connection with the pricing of
an offering, while retaining core investor safeguards.
DATES: The comment period will expire on June 17, 1996.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Comments also may be submitted
electronically at the following E-mail address: rule [email protected].
All comment letters should refer to File No. S7-11-96; this file number
should be included on the subject line if E-mail is used. Comments
letters received will be available for public inspection and copying at
the Commission's Public Reference Room, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Electronically submitted comment letters will
be posted on the Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Any of the following attorneys in the
Office of Risk Management and Control, Division of Market Regulation,
Securities and Exchange Commission, 450 Fifth Street, N.W., Mail Stop
5-1, Washington, D.C. 20549, at 202-942-0772: Nancy J. Sanow, M. Blair
Corkran, K. Susan Grafton, Carlene S. Kim, Heidi E. Pilpel, Barbara J.
Endres, John S. Markle, Lauren C. Mullen, Mark R. Pacioni, Alan J.
Reed, or Marc J. Hertzberg.
SUPPLEMENTARY INFORMATION: The Commission is proposing for comment new
Regulation M, which would be adopted under various provisions of the
Securities Act of 1933 (``Securities Act''),1 the Securities
Exchange Act of 1934 (``Exchange Act''),2 and other federal
securities statutes, and would replace Rules 10b-6, 10b-6A, 10b-7, 10b-
8, and 10b-21 (``trading practices rules'').3 Proposed Regulation
M, consisting of six rules, would set forth a new approach to
regulation of securities offerings that reflects the incentives to
affect the price of the offered security during an offering, while
acknowledging the different needs of various categories of offering
participants to conduct ordinary market activities. Regulation M would
contain separate rules for underwriters, prospective underwriters,
participating broker-dealers (``distribution participants''), and their
affiliated purchasers; and for issuers and other persons on whose
behalf a distribution is being made and their affiliated
purchasers.4
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\1\ 15 U.S.C. 77a et seq.
\2\ 15 U.S.C. 78a et seq.
\3\ 17 CFR 240.10b-6, 240.10b-6A, 240.10b-7, 240.10b-8, and
240.10b-21. The proposed rules also would make conforming and
clarifying changes to Items 502(d) and 508 of Regulation S-B and
Regulation S-K, and to Rules 10b-18 and 17a-2 under the Exchange
Act. 17 CFR 228.502(d), 229.502(d), 228.508, 229.508, 240.10b-18,
and 240.17a-2, respectively.
\4\ The term ``distribution participant,'' which is defined in
proposed Rule 100 and discussed further below, has a narrower
meaning than its use in the current trading practices rules.
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The proposed rules would retain the current prophylactic approach
to anti-manipulation regulation as the most effective means of
protecting the integrity of the market during a securities offering.
Regulation M, however, would streamline and simplify the trading
practices rules by, among other things:
Eliminating restrictions on actively-traded securities.
Reducing the period of trading restrictions for many other
securities, and focusing that period on the pricing of the offering.
Eliminating trading restrictions on derivative securities
during a distribution of an underlying security.
Narrowing substantially the restrictions on debt
securities.
Deregulating rights offerings.
Allowing routine dissemination of research reports,
transactions in baskets of securities, exercises of call options, and
transactions complying with Rule 144A under the Securities Act.5
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\5\ 17 CFR 230.144A.
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Creating a de minimis exception for transactions that are
unlikely to have market impact.
Narrowing the scope of persons subject to the rules.
Allowing greater flexibility for issuer plans and odd-lot
programs.
Expanding the scope of Nasdaq passive market making.
Creating a more flexible framework for stabilizing
transactions.
Shortening the regulated period for short sales in
connection with a public offering.
I. Introduction
A. Background
A fundamental goal of the federal securities laws is the prevention
of manipulation. Manipulation impedes the securities markets from
functioning as an independent pricing mechanism, and undermines the
integrity and fairness of those markets. Congress granted broad
rulemaking authority to the Commission to combat manipulative abuses in
whatever form they might take, including anti-fraud, prophylactic, and
general rulemaking authority. In exercising its authority, the
Commission has focused on the market activities of persons
participating in a securities offering. The Commission determined that
securities offerings present special opportunities and incentives for
manipulation, requiring specific regulatory attention. After developing
experience in administering the general anti-fraud and anti-
manipulation provisions of the Exchange Act,6 the Commission in
1955 adopted Rules 10b-6, 10b-7, and 10b-8 to govern the market
activity of persons with an interest in an offering's outcome.7
These rules are intended to protect the integrity of the offering
process by precluding activities that could influence artificially the
market for the offered security.
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\6\ Sections 9(a)(2), 10(b), and 15(c), 15 U.S.C. 78i(a)(2),
78j(b), and 78o(c).
\7\ Securities Exchange Act Release No. 5194 (July 5, 1955), 20
FR 5075.
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The trading practices rules have served their purposes well. Today,
the U.S. capital markets' unparalleled reputation for honesty and
fairness attracts not only domestic issuers, but also an increasing
number of foreign issuers that offer their securities here to gain both
broader market recognition and cost-effective financing. These rules
[[Page 17109]]
contribute to investors' high degree of confidence that the offering
price has not been influenced artificially by the conduct of offering
participants.
Since the adoption of the Commission's trading practices rules over
40 years ago, and the last substantive revisions to Rule 10b-6 in the
1980s, the markets and their participants have changed significantly.
Institutional investors, such as mutual funds and pension plans, have
become major ``buy-side'' participants in securities offerings.8
The market sophistication and bargaining power of such investors now
provide important protections against abusive conduct on the ``sell-
side'' of an offering. The secondary markets have become more
transparent and trading volume has increased substantially. Increased
transparency helps investors, analysts, and other market participants
to better observe and evaluate unusual market price movements.
Increased liquidity makes manipulation less cost-effective.
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\8\ As of December 1995, mutual funds controlled more than $2.8
trillion in assets. See Investment Company Institute Press Release
(January 25, 1996).
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Self-regulatory organizations (``SROs'') have developed
sophisticated surveillance technologies to monitor market activity on a
real-time basis. The SROs' ability to surveil trading during a
distribution serves a substantial deterrence function. The ready
availability of transaction audit trails also enhances the Commission's
and the SROs' ability to take appropriate enforcement action. As a
consequence, manipulation of the actively-traded securities of large
issuers has become more costly, and its success more uncertain.
The process of distributing securities also has evolved. Shelf-
registered offerings have become a common method of raising capital in
recent years, and equity shelf offerings are increasing.9 Instead
of engaging in formal stabilization, underwriters now routinely
``oversell'' an offering, which can result in substantial purchasing
activity in the form of short covering transactions after an offering
has been distributed. Today, rights offerings rarely are used as a
financing tool by U.S. issuers.
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\9\ In 1992, equity takedowns from shelf registrations accounted
for 3% of all underwritten offers of additional common stock, while
in 1994, equity takedowns accounted for 16% of the total value of
such underwritten offerings. See also M. Santoli, Block Trades Test
Traditions on Wall Street, Wall St. J., Feb. 9, 1996, at B12B
(``Shelf filings that cover equity have steadily become more common
in recent years, rising 18% to 110 in 1995 after climbing 26% in
1994.'')
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Equity and debt offerings and the secondary markets have become
international in scope. Many issuers' securities now are traded in
financial centers throughout the world, providing issuers with expanded
financing opportunities. U.S. investors are now active participants in
U.S. offerings of foreign issuers. Globalization also has revealed
differing, and at times conflicting, regulatory structures and offering
practices.
These developments have outpaced the current structure of anti-
manipulation regulation of securities offerings and have reduced the
need for broad prophylactic restrictions. Moreover, the Commission has
been advised by market participants that the application of the trading
practices rules in the present environment has become needlessly
complex and involves substantial compliance costs.
B. Concept Release
In April 1994, the Commission published a concept release as part
of a comprehensive reexamination of its anti-manipulation regulation of
securities offerings (``Concept Release'').\10\ The release identified
eight concepts that underlie the trading practices rules and anti-
manipulation regulation generally. The premise underlying these
concepts is that regulation should be limited to those persons,
securities offerings, and market activities that involve a readily
identifiable incentive to manipulate the market during an offering. In
considering the need for a revised regulatory approach, the Commission
requested that commenters focus on two central themes: whether certain
classes of securities, transactions, or investors need the protection
of specific rules; and whether a simpler structure for anti-
manipulation regulation would achieve the goals of providing guidance
to underwriters and their counsel, maintaining price integrity,
establishing effective deterrence and enforcement tools, and promoting
investor confidence. The Commission solicited comment on several
alternative regulatory approaches.
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\10\ Securities Exchange Act Release No. 33924 (April 19, 1994),
59 FR 21681 (``Concept Release'').
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Twenty-two comment letters were received.\11\ All commenters
appeared to accept the fundamental objectives of the trading practices
rules of preventing manipulation during a securities offering and
providing guidance to the underwriting community, principally as
expressed in the exceptions to Rule 10b-6. Many commenters questioned
the need for mechanical and complex proscriptive rules as opposed to a
simpler, more flexible approach to anti-manipulation regulation. Of the
various regulatory alternatives noted in the Concept Release,
commenters addressed three: (1) Retaining the current structure, but
relaxing restrictions; (2) more flexible stabilization regulation; and
(3) safe harbor rules.
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\11\ The comment letters and a summary of those comments which
was prepared by the staff are available for public inspection and
copying in File No. S7-14-94.
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Many commenters proposed revising the current exceptions and adding
new exceptions to the prohibitions of Rule 10b-6. Suggested approaches
varied, but the dominant themes were to: shorten the period of
restrictions; ease the application of the rules in multinational
distributions; allow issuers greater flexibility in conducting dividend
reinvestment and stock purchase plans; and narrow the scope of persons
subject to restrictions.
With respect to multinational distributions, several commenters
stated that extraterritorial application of the trading practices rules
disadvantages U.S. participants, because foreign issuers sometimes will
not engage in U.S. securities distributions that require compliance
with the rules. Some commenters proposed exceptions from the trading
practices rules for ``world-class'' issuers.
With respect to stabilization, commenters stated that the
Commission should create a flexible structure that would allow
underwriters to follow the independent market price for the offered
security. Commenters also suggested that the Commission expand and
adopt prior proposals to accommodate multinational stabilizing
transactions. The commenters were divided, however, on whether the
Commission should regulate transactions in the aftermarket of a
distribution, such as the covering of syndicate short positions and the
enforcing of penalty bids. Representatives of the underwriting industry
argued that no regulation was warranted at this time. Other commenters
asserted that certain aftermarket activity by the underwriting
syndicate, such as enforcing penalty bids, can have a manipulative
impact and can create conflicts of interest for broker-dealers.
Commenters also suggested that the restrictions on ``passive market
making'' in Rule 10b-6A be relaxed. The few commenters who addressed
Rule 10b-8 suggested that underwriters should have greater flexibility
in effecting transactions during rights offerings. Two commenters
stated that Rule 10b-21 was ineffectual because it did not cover
securities that were related to the offered security.
[[Page 17110]]
While directing the majority of their comments to specific
provisions of the trading practices rules, many commenters endorsed
recasting the rules as non-exclusive safe harbors from the anti-
manipulation provisions of the Exchange Act.\12\ In support of this
proposal, they asserted that Rule 10b-6 can have a disproportionate
effect on those offering participants who inadvertently run afoul of
the rule's prohibitions because of ``technical'' violations that do not
affect the offered security's price.
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\12\ The American Bar Association (``ABA'') and the Securities
Industry Association drafted proposed rule texts for the staff's
consideration, which are included in File No. S7-14-94.
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II. Overview of Proposed Regulation M
In light of the comments received and the recommendations of the
Commission's Task Force on Disclosure Simplification, the Commission is
proposing to replace the existing trading practices rules with new
Regulation M, consisting of individual rules covering distinct
categories of offering participants and activities.\13\ The new
regulation would continue to effectuate the goals of the existing
trading practices rules. The Commission, however, recognizes that the
current rules impose unwarranted costs on the capital raising process
because they are overly broad and unnecessarily rigid.
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\13\ See Report of the Task Force on Disclosure Simplification
77-79 (March 1996) (``Task Force Report'').
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The Commission's proposals seek to accomplish several objectives.
The proposed rules are intended to eliminate unnecessary costs and
burdens imposed on offering participants under the current rules. These
impediments would be reduced by relaxing existing restrictions in those
circumstances where either the risk of manipulation appears small or
the costs of the restrictions are disproportionate to the purposes that
they serve. For example, relaxation of restrictions seems particularly
appropriate in cases where the expense of manipulating a security would
be high or where improper trading activity would be easy to detect,
because the risk of manipulation in such situations may be far less
than in other offerings.
The proposed rules also seek to simplify and modernize the trading
practices rules. These goals are accomplished by reorganizing the
structure of the rules, reducing their complexity, and tailoring the
concepts to accommodate contemporary market activities.
Regulation M would contain rules covering the following activities
during a securities offering: (1) Activities by underwriters,
prospective underwriters, brokers, dealers, or other persons who are
participating in a distribution, and their affiliated purchasers (i.e.,
distribution participants); (2) activities by the issuer or selling
securityholder and their affiliated purchasers; (3) Nasdaq passive
market making; (4) stabilization, transactions to cover syndicate short
positions, and penalty bids; and (5) short selling in advance of a
public offering. The general anti-fraud and anti-manipulation
provisions of the federal securities laws, including Section 17(a) of
the Securities Act, and Sections 9(a), 10(b), and 15(c) of the Exchange
Act, and Rule 10b-5 thereunder, would continue to govern all activities
in connection with an offering, whether or not the provisions of
Regulation M applied.
A separate rule would contain definitional provisions. Some of
these definitions are new or revised; many are common to more than one
rule. The Commission has endeavored to use straightforward and precise
language in both the definitions and rule text.
The provisions of Regulation M that are analogous to Rule 10b-6
would be contained in Rules 101 and 102, which would cover distribution
participants, and issuers and selling securityholders, respectively.
Rules 101 and 102 would apply only during a ``restricted period'' that
would commence one or five business days before the day of the pricing
of the offered security and continue until the distribution is over.
The restricted periods would be based on the trading volume of the
offered security, rather than the price per share and public float
criteria used in Rule 10b-6. The restricted periods of Regulation M
would focus more specifically on the time of pricing. In contrast, Rule
10b-6 imposes restrictions during the entire distribution, which can
extend over a lengthy period of time, but excepts certain trading
activities prior to a two or nine business day ``cooling-off period.''
The applicable cooling-off period is keyed off of the commencement of
offers and sales. While Rule 10b-6 is intended to protect the pricing
of an offering, certain distribution methods, particularly in
connection with foreign offerings, can result in the cooling-off
periods commencing after an offering has been priced.
Rule 101 would exclude from its coverage more actively-traded
securities, many investment grade securities, and Rule 144A
transactions. Further, Rule 101 would focus on the security being
distributed and would not cover related derivative securities. It would
permit the routine dissemination of research reports, exercises of
options and other securities, and transactions in baskets of securities
involving the offered security, among other transactions. In addition,
Rule 101 would deal with ``inadvertent'' violations during the
restricted period by excusing de minimis transactions, provided that a
distribution participant had in place policies and procedures
reasonably designed to achieve compliance with the rule. The scope of
persons subject to the proposed rule would be narrowed by recognizing
``information barriers'' between the distribution participant and its
affiliates.
Rule 102 would cover issuers, selling securityholders, and related
persons. Issuers and selling securityholders would be able to engage in
market activities prior to the applicable restricted period. During the
restricted period, Rule 102 would permit bids and purchases of odd-
lots, transactions in connection with issuer plans, and exercises of
options or convertible securities by the issuer's affiliated
purchasers. This rule would not contain an exception for actively-
traded securities. The proposals also would reflect the view that the
safe harbor of Rule 10b-18 under the Exchange Act is not available
during a distribution.14
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\14\ 17 CFR 240.10b-18.
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Proposed Rule 103 would govern Nasdaq passive market making and
replace Rule 10b-6A. The new rule would extend to all Nasdaq securities
and nearly all distributions, and would permit more distribution
participants to engage in passive market making.
Proposed Rule 104 would regulate stabilizing and other activities
related to a distribution. The rule would allow underwriters to
initiate and change stabilizing bids based on the current price in the
principal market (whether U.S. or foreign), as long as the bid did not
exceed the offering price. Rule 104 also would address the fact that
underwriters engage in substantial syndicate-related market activity,
and enforce penalty bids in order to reduce volatility in the market
for the offered security. These activities are analogous to traditional
stabilizing under Rule 10b-7. The proposed rule would require
disclosure and recordkeeping with respect to these aftermarket
activities.
Proposed Rule 105 essentially would recodify Rule 10b-21 governing
short selling in connection with a public offering. To harmonize Rule
105 with the provisions of Rules 101 and 102, the period of Rule 105's
coverage would be narrowed to the five business day
[[Page 17111]]
period before pricing, rather than the period extending from the time
of filing of offering materials to the time when sales may be made.
This release requests comment, however, on the continued need for a
separate rule regulating such short selling.
The Commission believes that separate regulation of rights
offerings, as contained in Rule 10b-8, may no longer be warranted. U.S.
issuers infrequently use rights offerings to raise capital. Even when
they do, purchases of rights generally would not be an efficient way
for a distribution participant to facilitate the offering of the
underlying security. In addition, the Commission believes that many
rights offerings by foreign issuers would fall within the exception for
actively-traded securities contained in Rule 101. Therefore, the
proposals would rescind Rule 10b-8.
The proposed trading practices rules, like the current rules, would
apply to all distribution participants in a multinational offering of
securities, as well as the issuer and any selling securityholders or
affiliated purchasers, if the offering occurs at least in part in the
United States. In connection with the Concept Release, as noted above,
several commenters addressed the application of the trading practices
rules to multinational offerings. Regulation M would not distinguish
between domestic and multinational offerings subject to the
Commission's regulatory jurisdiction. Nevertheless, the proposed rules
respond to the concerns of these commenters. In particular, the
exceptions to Rule 101 for actively-traded securities, and the
exclusion of affiliates of distribution participants where the
distribution participant maintains and enforces certain information-
flow restrictions, should facilitate the ability of issuers and
underwriters to conduct multinational offerings.
Many terms and concepts in Regulation M would have the same meaning
as under the trading practices rules (e.g., the definition of
``distribution''), and current interpretations regarding such terms or
concepts would be relevant to the new rules. Exemptions granted and no-
action positions taken under the current rules no longer would be in
effect under Regulation M because the rules under which they were
issued would be rescinded. Many of these exemptions and no-action
positions, however, are proposed to be codified and, in many cases,
expanded under the new rules. Others no longer would be necessary in
view of the provisions of the new rules. The Commission believes that
the broad scope of these amendments will greatly reduce the need for
the issuance of exemptions from the proposed rules. In reviewing the
proposals, commenters are urged to consider their implications for
existing exemptions, no-action positions, and interpretations.
The new regulatory framework should relieve market participants of
unnecessary burdens and respond effectively to a changing marketplace,
while maintaining essential investor protection. The following sections
of this release describe the individual provisions of Rules 100 through
105 and discuss, where appropriate, how they would differ from current
anti-manipulation regulation and why the Commission is proposing such
changes. Comment is solicited throughout the release regarding specific
aspects of the proposals. In addition to responding to these questions,
commenters are encouraged to state how the proposed rules either would
or would not accomplish the goals of Regulation M.
III. Discussion of Proposed Regulation M and Related Amendments
A. Rule 100--Definitions
Proposed Rule 100 would set forth the definitions that apply to all
of the rules contained in Regulation M. Many of the terms in Rule 100
are defined in the trading practices rules, although the definitions of
some of these terms have been revised to reflect commenters'
suggestions. The Commission also proposes to codify terms that have
been used in interpretations, or are the subject of outstanding
Commission proposals.\15\ Other terms are new, and are integral to the
fundamental changes that are reflected by Regulation M. Individual
definitions are discussed later in this release in connection with the
particular aspects of Regulation M to which they relate.
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\15\ See Securities Exchange Act Release No. 28732 (January 3,
1991), 56 FR 814 (proposing amendments to Rule 10b-7); Securities
Exchange Act Release No. 28733 (January 3, 1991), 56 FR 820
(proposing definitional Rule 3b-10) (collectively, ``1991
Proposals''). These proposals would be withdrawn upon adoption of
Regulation M.
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Q1. Do any of the definitions need to be clarified or modified? Are
there other terms used in Regulation M that should be defined in Rule
100?
B. Rule 101--Activities by Distribution Participants
1. Overview of Rule 101
This proposed rule would include significant similarities to as
well as differences from Rule 10b-6. Rule 101, like Rule 10b-6, would
place restrictions on the activities of distribution participants and
their affiliated purchasers during the distribution period.\16\
However, while Rule 10b-6 applies during the entire distribution
period, which extends from the time the issuer determines to go forward
with the offering until all sales efforts end, the rule contains
exceptions permitting certain transactions until the commencement of
cooling-off periods. In contrast, Rule 101 would apply only during the
period commencing one or five business days immediately preceding
pricing of the offering and ending when sales efforts cease.
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\16\ The definition of ``distribution'' for purposes of Rule 101
would be identical to that contained in Rule 10b-6.
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Both Rule 101 and Rule 10b-6 cover securities that are the subject
of the distribution. Rule 101 would not apply to any security with an
average daily trading volume (``ADTV'') with a value of $1 million or
more, or to any related derivative securities. Rule 101, however, would
apply to transactions in an underlying security (i.e., a ``reference
security'') during a distribution of a derivative security.
Rule 101 and Rule 10b-6 apply to distribution participants and
their affiliated purchasers. For purposes of Rule 101, ``distribution
participant'' would refer to underwriters, prospective underwriters,
brokers, dealers, and other persons who have agreed to participate or
are participating in a distribution. Issuers and selling
securityholders and their affiliated purchasers, which also are covered
by Rule 10b-6, would be subject to proposed Rule 102. The definition of
``affiliated purchaser'' would be narrower than that contained in Rule
10b-6, and would recognize the use of information barriers to separate
distribution participants' corporate financing activities from the
trading operations of their affiliates.
Rule 101 would contain exceptions from its proscriptions for
activity that is necessary to permit the offering to proceed; to limit
adverse effects on the trading market that could result from these
prohibitions; and to allow conduct that is not likely to have a
manipulative impact.
Moreover, the Commission has simplified the language used in Rule
101, and believes that the proposed rule reflects the broader sources
of statutory authority under which Regulation M would be adopted,
including the anti-fraud provisions, the statutory authority to adopt
``means reasonably designed to prevent'' fraud and manipulation, and
the Commission's general rulemaking authority. Rule 101 explicitly
would include a prohibition against inducing
[[Page 17112]]
others to bid for as well as purchase any covered security.
2. Securities Excepted From Rule 101
a. Securities With an ADTV Value of $1,000,000 or More
Commenters on the Concept Release supported the idea of reducing
restrictions on actively-traded foreign and U.S. securities consistent
with the principles of the Commission's 1993 Statement of Policy.\17\
After considering commenters views and the Commission's experience with
the Statement of Policy, the Commission is proposing to exclude from
Rule 101 all securities with a published ADTV value of at least $1
million.18 Thus, proposed paragraph (c)(1) of Rule 101 would
eliminate the requirement of Rule 10b-6 that distribution participants
and their affiliated purchasers restrict market activities in these
securities and related securities. This action would enhance
significantly cross-border capital raising capabilities because, for
many foreign issuers, the trading practices rules have been an
impediment to offering their securities in the United States.
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\17\ See Securities Exchange Act Release No. 33137 (November 3,
1993), 58 FR 60324 (``Statement of Policy''). See also Letter
regarding Exemptions from Rules 10b-6, 10b-7, and 10b-8 During
Distributions of Certain German Securities, Securities Exchange Act
Release No. 33022 (October 6, 1993), 58 FR 53220; Letter regarding
Distributions of Certain French Securities, Securities Exchange Act
Release No. 34176 (June 7, 1994), 59 FR 31274; Letter regarding
Exemptions from Rules 10b-6, 10b-7, and 10b-8 During Distributions
of Certain United Kingdom Securities and Certain Securities Traded
on SEAQ International, Securities Exchange Act Release No. 35234
(January 11, 1995), 60 FR 4644; Letter regarding Exemptions from
Rules 10b-6, 10b-7, and 10b-8 During Distributions of Certain Dutch
Securities, Securities Exchange Act Release No. 36412 (October 19,
1995), 60 FR 55391.
\18\ A $5 million ADTV threshold was used in the Statement of
Policy as well as in the class exemptions issued thereunder to
identify very actively-traded securities. See supra note 17.
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The Commission preliminarily believes that it is reasonable to
remove prophylactic trading restrictions for securities with a minimum
ADTV value of $1 million and to rely on market mechanisms to curb
manipulative activity.\19\ While the price of any security can be
manipulated, the Commission is of the view that, as the value of
trading volume of a security increases, it becomes less likely that a
distribution participant would be able, cost-effectively, to affect the
price of the security. Actively-traded securities generally are
followed widely by the investment community, and aberrations in price
are likely to be observed and corrected quickly. Moreover, virtually
all actively-traded securities are traded on exchanges or other
organized markets with high levels of transparency and
surveillance.\20\
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\19\ See infra Section III.B.3.b. for a discussion of ADTV
generally.
\20\ The Commission expects that SROs will continue to enhance
their systems and procedures to capture improper trading during
distributions.
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If adopted, it is estimated that the $1 million value of ADTV
threshold would remove from Rule 101 equity securities of over 2,000
domestic issuers and a substantial number of foreign securities.\21\
The Commission believes that this threshold will except a large group
of securities as to which the potential for a successful manipulation
is more limited. This will make it easier for both foreign and domestic
issuers to access the U.S. capital markets, and will afford more
opportunities for U.S. investors.
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\21\ Based on transaction information for 1994, approximately
1,051 securities listed on the New York Stock Exchange, Inc.
(``NYSE''), 677 securities quoted on Nasdaq, and 30 securities
listed on the American Stock Exchange, Inc. (``AMEX'') would be
excluded from the rule. In 1994, firm commitment public offerings
were conducted for 268 of these securities. The general increase in
security prices and trading volume since year-end 1994 would
increase the number of securities likely to be excluded from the
proposed rule.
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The proposed exception would not compromise investor protection
because the general anti-fraud and anti-manipulation provisions would
continue to apply to offerings of these securities. Those provisions
would continue to prohibit distribution participants and their
affiliated purchasers from influencing a security's price as a means to
facilitate a distribution.
Q2. Is the exception for actively-traded securities appropriate? Is
the ADTV threshold of $1 million appropriate? Should the threshold be
$5 million or some other level? Commenters suggesting another threshold
should provide reasons to support their views.
Q3. Should transactions by distribution participants in actively-
traded securities be restricted for a brief period (e.g., one or two
hours) prior to pricing? Would such a restricted period be feasible to
implement?
In the case of distributions of certain actively-traded foreign
securities, the Commission has not applied Rule 10b-6 to transactions
in securities markets that have not represented a significant
proportion of activity in the security, i.e., where the trading volume
in a particular jurisdiction accounts for less than 10% of the
aggregate worldwide published trading volume in the security (``non-
significant markets'').\22\ The Commission is not proposing an
exclusion for transactions effected in non-significant markets because
the proposed exception for actively-traded securities would permit
transactions in those securities without restriction. The concept of
non-significant markets, however, may be important if a brief
restricted period were required for actively-traded securities, or for
those offerings of foreign securities that are subject to Rule 101.
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\22\ See supra note 17 (citing class exemptions).
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Q4. Should transactions effected in non-significant markets be
subject to restricted periods? How would non-significant markets be
defined (e.g., would the current test of less than 10% of aggregate
worldwide published trading volume suffice)? Commenters favoring an
exception for transactions in non-significant markets should discuss
the context where the principal market is closed for trading.
Although the Commission is not proposing to include a specific
disclosure or recordkeeping requirement for transactions in these
securities by distribution participants, as contained in exemptions
issued pursuant to the Statement of Policy, the Commission is proposing
amendments to Regulations S-B and S-K that would require disclosure of
syndicate covering transactions and penalty bids that could affect an
offered security's price.\23\
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\23\ See infra Section III.E.5.
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Q5. Should the disclosure requirements referenced in the Statement
of Policy apply to transactions in actively-traded securities excepted
from Rule 101?
b. Investment Grade Nonconvertible Securities
Paragraph (c)(2) of Rule 101 generally would incorporate the
exception contained in Rule 10b-6(a)(4)(xiii), which excepts
nonconvertible debt securities and nonconvertible preferred securities,
if the nonconvertible securities being distributed are rated investment
grade by at least one nationally recognized statistical rating
organization (``NRSRO''). This exception is based on the premise that
these securities are traded on the basis of their yields and credit
ratings, rather than the identity of the particular issuer, are largely
fungible and, therefore, are less likely to be subject to
manipulation.\24\
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\24\ Securities Exchange Release No. 19565 (March 4, 1983), 48
FR 10628, 10631-32 (``Release 34-19565'').
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Q6. Do investment grade asset-backed securities have the same
characteristics, including with respect to trading, as nonconvertible
investment grade debt securities of corporate issuers? Should
investment grade asset-backed securities be excepted from Rule 101?
[[Page 17113]]
Q7. For purposes of Rule 101, should an exception for
nonconvertible investment grade debt or preferred securities be based
on criteria other than a rating by an NRSRO?
c. Exempted Securities
The Commission proposes to exclude from Rule 101 ``exempted
securities,'' as defined in Section 3(a)(12) of the Exchange Act. Rule
10b-6 provides an exception for these exempted securities, and also
specifically excludes securities that are issued, or guaranteed as to
principal and interest, by the International Bank for Reconstruction
and Development (``IBRD''). The Commission believes that the exception
for nonconvertible investment grade debt makes it unnecessary to refer
to securities of the IBRD, or of any other entity, within the
``exempted securities'' exception.
d. Face-Amount Securities or Securities Issued by an Open-End
Management Investment Company or Unit Investment Trust
The Commission proposes to except from Rule 101 face-amount
certificates issued by a face-amount certificate company, or redeemable
securities issued by an open-end management investment company or a
unit investment trust pursuant to paragraph (c)(4) of Rule 101.
Paragraph (d) of Rule 10b-6 contains such an exception.
3. Securities and Activities Covered by the Rule
a. Restricted Periods
In the Concept Release, the Commission requested comment on whether
the Rule 10b-6 cooling-off periods, and the criteria used to determine
such periods, should be revised. Nine commenters addressed these
issues. These commenters supported shortening the cooling-off periods,
asserting that the two and nine business day periods no longer are
justified, especially in light of advances in the SROs' surveillance
systems and enhanced market transparency. A few commenters stated that
the price and public float criteria should be replaced and suggested
tests based on trading volume, market capitalization, or public float.
In Rule 10b-6, a security with a per share price of at least $5.00
and a public float of at least 400,000 shares has a cooling-off period
of two business days, while all other securities are subject to a nine
business day cooling-off period. The Commission adopted these criteria
because a security's public float provided a reasonable indication of
the depth and liquidity of the market for a security; a minimum share
price criterion was appropriate in light of the generally greater
volatility of lower priced stocks; and the criteria were easily
ascertainable.\25\ In addition, a five business day cooling-off period
applies to the exercise of standardized call options that were acquired
after the person became a distribution participant.
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\25\ See Release 34-19565, 48 FR at 10634.
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For securities covered by Rule 101 (i.e., those with a published
ADTV value of less than $1,000,000), the Commission is proposing to
replace the existing cooling-off periods with two shorter restricted
periods:
i. for a security with a published ADTV value equal to or exceeding
$100,000, the restricted period would begin on the later of one
business day prior to the determination of the price of the security to
be distributed, or such time that a person becomes a distribution
participant, and end upon the completion of such person's participation
in the distribution of a security; \26\
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\26\ The term ``business day'' would be defined in Rule 100 as a
24 hour period, determined with reference to the principal market
for the security to be distributed, that includes a complete trading
session for that market.
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ii. for all other securities, the restricted period would begin on
the later of five business days prior to the determination of the price
of the security to be distributed, or such time that a person becomes a
distribution participant, and end upon the completion of such person's
participation in the distribution.
Accordingly, the proposed trading restrictions of Rule 101 focus on
a security's ADTV value, and the period immediately before the offering
is priced. This approach differs from the cooling-off periods under
Rule 10b-6, which are based on the price and public float of a security
and begin prior to the commencement of offers and sales in the
distribution.
The Commission believes that the proposed thresholds effectively
balance maintaining depth and liquidity in the period immediately
preceding pricing and protecting the integrity of the market as an
independent pricing mechanism. Many securities now qualifying for a two
business day cooling-off period and some nine business day securities
would have this period reduced to one business day. For a large number
of securities, the nine business day period would be reduced to five
business days. The applicable period for some securities would increase
from two to five business days.\27\
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\27\ Compared with the cooling-off periods under the current
rule, for 7,477 NYSE, AMEX, and Nasdaq securities, approximately 24%
will not be subject to Rule 101, approximately 56% will have a
shorter restricted period, and approximately 20% will have a longer
restricted period (based on 1994 price and volume information).
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Q8. Would the proposed restricted periods adequately balance the
goal of maintaining market liquidity with the mandate to protect
investors from manipulation? If not, should one hour be used rather
than one business day? Should two or nine business days continue to be
used rather than one and five business days?
In some offerings, there is a lag between the time that the
securities are priced and the commencement of sales. For example, in
certain foreign offerings, the securities are priced, then there is a
subscription period for home-country residents, after which
international offers commence. Similarly, in the case of an exchange
offer or merger, the securities could be priced some time before the
exchange offer or proxy solicitation period commences. In these
offerings, as in other distributions, the Commission believes that the
restricted periods should apply one or five business days prior to the
pricing of the offering and continue until distribution activities
terminate. Thus, there could be a period of time between pricing and
the commencement of offers and sales when market activity by
distribution participants and their affiliated purchasers would be
restricted by Rule 101.
Q9. Are there circumstances when the application of the restricted
periods should be modified? For example, should there be a separate
restricted period in the case of merger transactions or exchange
offers? Commenters should describe situations where they believe that a
restricted period based on pricing may not be feasible.
b. The Use of a Test Based on ADTV
As indicated above, the basis for determining which restricted
period applies to a particular security would be different from the
test used for the cooling-off periods under Rule 10b-6. Various
measurements could be used to provide relatively certain and easily
determinable criteria for applying the appropriate restricted period
(e.g., ADTV value, the security's price, an issuer's public float). For
purposes of Regulation M, the Commission believes that the value of a
security's ADTV is the most appropriate test because it provides a more
accurate indication of
[[Page 17114]]
the depth and liquidity of the trading market for a security than its
price and public float. For example, although an issuer may have a
significant public float, the dollar value of daily trading in its
common stock may be quite low.
The Commission proposes to define ``average daily trading volume''
as the world-wide reported average daily trading volume during the
three full consecutive calendar months immediately preceding either the
date of the filing of the registration statement, or if there is no
registration statement or if the distribution involves a shelf
takedown, three full consecutive calendar months immediately preceding
the pricing. To determine the value of the ADTV, it is proposed that
the ADTV either be multiplied by the security's price (in dollars) as
of the last business day of the most recent month, or calculated by
using the actual price and volume information for each day within the
three month period, if it is available.
Q10. Does the value of a security's ADTV provide the appropriate
standard on which to base the restricted periods? Should a test based
on the issuer's public float be used instead? If so, should the
thresholds be, for example, a $150 million public float for the
actively-traded securities exception; a public float of $25-$150
million for the one business day restricted period; and a public float
of below $25 millon for the five business day restricted period?
Q11. Is information on ADTV readily available to participants in a
distribution?
Q12. Should ADTV be based on a different measuring period, e.g., 12
full calendar months, or a rolling three month (i.e., 90 day) period,
rather than three full calendar months?
c. Derivative Securities
The Concept Release stated the Commission's view that anti-
manipulation regulation of securities offerings ``should be limited to
securities whose prices may significantly affect the market's
evaluation of a security in distribution.'' \28\ Rule 10b-6(a)(4)
applies to: (1) The security being distributed, (2) any security of the
``same class and series'' as that security, and (3) ``any right to
purchase'' any such security. In the case of distributions of a
security that is ``immediately exchangeable for or convertible into''
another security, or that entitles the holder immediately to acquire
another security, Rule 10b-6(b) also prohibits purchases of the other
security.
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\28\ Concept Release, 59 FR at 21688.
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The ``right to purchase'' and ``same class and series'' concepts
appear to be both too broad and too limited. The same class and series
language has been construed broadly to encompass similar securities of
an issuer even though there is no inherent mathematical relationship
between the prices of those securities.29 This has led to some
complicated and not very clearly defined distinctions in applying the
rule to offerings of debt. On the other hand, the right to purchase
concept has been interpreted so as not to reach securities that are not
``immediately'' convertible into each other. These securities, however,
trade with a price relationship to the security in distribution because
their ultimate value is, or in the future may be, determined by the
value of the security into which they are exchangeable or
exercisable.30 The concept also does not encompass a wide variety
of securities that have been developed in recent years whose value is
or will be derived from another security, but that do not give the
holder the right to acquire that security. On the other hand, Rule 10b-
6 applies to transactions in derivative securities, such as options and
warrants, that are exchangeable or exercisable for the security in
distribution, but are not very efficient vehicles to cause a price
effect on the distribution security.
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\29\ See Concept Release, 59 FR at 21688. See also Letter
regarding Gamble-Skogmo, Inc. (January 11, 1974).
\30\ See Release 34-19565, 48 FR at 10634 n.28.
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The Commission is proposing to eliminate these two Rule 10b-6
concepts, and to apply the trading restrictions of Rule 101 to
``covered securities,'' which would include the security in
distribution and ``reference securities.'' A ``reference security''
would be defined in Rule 100 as a security whose price is or will be
used to determine, in whole or in significant part, the price of
another security that is the subject of a distribution.31
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\31\ Examples of securities that are not covered expressly by
Rule 10b-6, but would be covered by Rule 101 as reference
securities, include the underlying common stock during distributions
of ``preferred equity redemption cumulative stocks'' (``PERCS'') and
``equity-linked notes'' (``ELNS'').
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In contrast, derivative securities related to the security in
distribution would not be covered by the rule. The Commission believes
that the manipulative potential of trades in a derivative security for
the purpose of affecting the price of an underlying security is
sufficiently attenuated such that these securities should not be
covered by Regulation M. Thus, for example, bids or purchases of the
underlying common stock (i.e., the reference security) would be
restricted during a distribution of a security exercisable or
exchangeable for, or convertible into, the common stock. On the other
hand, bids or purchases of any exercisable, exchangeable, or
convertible security would not be restricted during a distribution of
the related common stock.
Many securities that under Rule 10b-6 are deemed by interpretation
to be of the same class and series as those distributed, because of the
similarities in their coupon rates, maturity dates, and other
provisions, would not be subject to Rule 101. For example, Rule 101
would not apply to bids for and purchases of nonconvertible debt or
preferred securities of the same issuer that are not identical in their
principal features to the securities being distributed. The Commission
preliminarily believes that the benefit of reducing compliance costs
and maintaining a normal trading market for these other securities
outweighs the possibility that bids for and purchases of such
securities could be used to facilitate a distribution. Rule 101 would
apply, however, to transactions in securities that differ from a
security in distribution only as to the presence or absence of voting
rights.
Q13. Commenters are invited to discuss whether derivative
securities, i.e., those that derive all or part of their value from a
security in distribution, should be covered by Regulation M.
Q14. Is there a more appropriate definition for a ``reference
security?''
Q15. Should a security that could never contribute more than 5% of
the value of another security not be deemed to be a reference security
for that security? If derivative securities are covered by the rule,
are there feasible means to identify securities with a price
relationship to a security in distribution that is sufficiently
attenuated that it should not be covered by the rule? For example,
should a derivative security that derives less than 5% of its value
from a security in distribution be excluded?
4. Distributions
a. Definition of Distribution
In the Concept Release, the Commission sought comment on whether to
continue to define the term ``distribution,'' and if so, whether the
term's definition should continue to be based on the ``magnitude of the
offering'' and the presence of ``special
[[Page 17115]]
selling efforts and selling methods.'' \32\ Commenters did not suggest
any changes to the definition or that it be eliminated from the rule.
Accordingly, the term ``distribution'' for purposes of Regulation M is
proposed to have the same meaning as in Rule 10b-6. The Concept Release
sought comment on whether certain types of offerings, specifically,
mergers and exchange offers, should continue to be deemed
distributions. Few comments, however, were received on this issue.
Thus, the Commission does not propose excluding mergers and exchange
offers from the definition of distribution.\33\
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\32\ A distribution is defined in Rule 10b-6(c)(5) as ``an
offering of securities, whether or not subject to registration under
the Securities Act of 1933, that is distinguished from ordinary
trading transactions by the magnitude of the offering and the
presence of special selling efforts and selling methods.''
\33\ The Commission is of the view that exchange offers and
mergers involving the issuance of securities, and related
shareholder election and valuation periods, should be subject to
Regulation M. See Georgia-Pacific Corporation, SEC Litigation
Release No. 3511, (May 23, 1966). See also Release 34-19565, 48 FR
at 10638 n.61.
Because the Commission is proposing to eliminate the ``right to
purchase'' concept, Rule 10b-6 restrictions on purchases of most
target company securities during an exchange offer or a merger
involving the issuance of securities would be eliminated. Rule 10b-
13 under the Exchange Act, however, would continue to prohibit any
purchases or arrangements to purchase target securities, or a
security immediately convertible into or exchangeable for those
securities, from the time of public announcement until the
expiration of a tender or exchange offer. 17 CFR 240.10b-13.
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Q16. Does the definition of distribution continue to be
appropriate?
b. Shelf Offerings
The Commission believes that it is useful to discuss the proposed
application of Rules 101 and 102 in the particular context of shelf
offerings. In 1983, the Commission permanently adopted Rule 415, which,
among other things, allows issuers and selling shareholders to register
securities for sale on a delayed or continuous basis.\34\ Since the
Commission last addressed this issue, the methods by which shelf
offerings are conducted have changed, and the use of shelf registration
has increased. For example, ``unallocated'' shelf registration
statements that register a substantial amount of securities, but do not
specify the exact amounts of particular types of securities that may be
sold, have become more common. The Commission believes that it is
appropriate to reflect these developments in the treatment of shelf
offerings for purposes of proposed Rules 101 and 102.
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\34\ 17 CFR 230.415. Securities Exchange Act Release No. 20384
(November 17, 1983), 48 FR 52889.
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Under a current Commission interpretation, ``any shelf-registered
offering that constitutes a Rule 10b-6 distribution should be
considered a single distribution for purposes of the rule.'' \35\ This
means that once an issuer, or a selling securityholder that is in a
control relationship with the issuer, determines to proceed with a
shelf registered distribution, each takedown off of the shelf is
subject to Rule 10b-6 irrespective of its individual magnitude.\36\
However, a selling securityholder that is not an affiliated purchaser
of the issuer or of any other selling securityholder is subject to the
restrictions of Rule 10b-6 only with respect to offers or sales of that
individual securityholder's securities.\37\
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\35\ Release 34-19565, 48 FR at 10631. This has been known as
the ``single distribution position.''
\36\ Id. See also Securities Exchange Act Release No. 23611
(September 11, 1986), 51 FR 33242, 33244 (``Release 34-23611'').
\37\ Release 34-23611, 51 FR at 33244.
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In addition, under Rule 10b-6, the Commission has distinguished
between broker-dealers that have arrangements, agreements, or
understandings with issuers to sell all or a portion of the securities
being distributed off the shelf (``continuing agreements''), and those
that do not. If a broker-dealer has a continuing agreement with an
issuer to sell, from time to time, securities registered on the shelf,
it is subject to the full cooling-off period prior to any offer or sale
off the shelf. If a broker-dealer does not have a continuing agreement
with an issuer, and decides to submit a bid in response to an issuer's
solicitation of interest in purchasing its securities for distribution,
the broker-dealer is subject to the applicable cooling-off period from
the time that it decides to submit the bid.\38\ If a broker-dealer
submits an unsolicited bid, it is not deemed to be a participant until
the bid has been accepted or the broker-dealer has reason to believe
that it will be accepted.\39\
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\38\ See Release 34-19565, 48 FR at 10634.
\39\ See id. at 10635. See also infra Section III.B.5.b.
discussing the revised definition of ``prospective underwriter.''
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Rather than applying the single distribution position, the
Commission would take a modified approach regarding the application of
Rule 101 to shelf distributions.\40\ Under the Commission's proposed
approach, rather than considering the entire shelf to be a single
distribution and applying the rule's restricted periods to any offers
or sales off the shelf, each takedown would be examined individually in
order to determine whether such offering constitutes a distribution,
i.e., whether it satisfies the ``magnitude'' and ``special selling
efforts and selling methods'' criteria of a distribution.\41\
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\40\ The Commission's revised interpretation regarding shelf
offerings would apply to distribution participants, issuers, and
selling securityholders, and would modify previous Commission
interpretations regarding shelfs. See Release 34-23611, 51 FR at
33244-45.
\41\ If a distribution participant (e.g., a broker-dealer) has
not entered into a continuing agreement with an issuer or selling
securityholder, and if the sales off the shelf constitute a
distribution, then the distribution participant would be required to
comply with Rule 101 from the later of the applicable restricted
period for the offered security, or the time that such person
becomes a distribution participant. This interpretation reflects the
speed with which sales off a shelf frequently occur.
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A broker-dealer participating in the offering of a shelf tranche
should determine whether it is participating in a ``distribution.'' To
determine the magnitude of the offering for purposes of Rule 101, the
broker-dealer would have to assess the amount of securities that it is,
or foreseeably will be, asked to sell.\42\ The broker-dealer also would
need to analyze the selling efforts and selling methods that it will
use. For example, where a broker-dealer sells shares on behalf of an
issuer or selling securityholder in ordinary trading transactions into
an independent market, i.e., without any special selling efforts, the
broker-dealer is not subject to Rule 10b-6.\43\ Special selling efforts
likely would be involved, however, where a broker-dealer enters into a
sales agency agreement that provides that it will receive unusual
transaction-based compensation for the sales, even if the securities
are sold in ordinary trading transactions. An issuer's identification
in a shelf registration statement of a variety of potential selling
methods that could be used to sell registered securities off a shelf
(some of which would constitute ``special selling efforts''), however,
would not, in itself, require a broker-dealer to consider itself to be
involved in a distribution unless special selling efforts or methods
were used by the broker-dealer in connection with particular sales off
the shelf.\44\
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\42\ If sales off a shelf by an issuer, or by any affiliated
purchaser of the issuer, constitute a distribution of securities,
the issuer and all issuer affiliated purchasers would be subject to
the applicable restricted period of Rule 102. Similarly, if any
shelf securityholder is selling securities off a shelf, and such
sales constitute a distribution, all other shelf securityholders who
are affiliated purchasers of the selling securityholder would be
subject to the applicable restricted period of Rule 102. See Release
34-23611, 51 FR at 33245.
\43\ See Release 34-23611, 51 FR at 33247.
\44\ Cf. Securities Exchange Act Release No. 18528 (March 3,
1982), 47 FR 11482, 11485 (``Release 34-18528''). Under current
interpretation, if a registrant, when disclosing its proposed plan
of distribution, reserves the right to utilize techniques that might
entail selling efforts or compensation of the type normally
associated with a distribution, the Commission deems special selling
efforts and selling methods to be used throughout the shelf offering
for purposes of Rule 10b-6.
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[[Page 17116]]
Q17. Should a broker-dealer that enters into a continuing agreement
regarding sales of all securities or a significant amount of the shares
on the shelf be viewed differently from one whose participation is
limited to a single takedown?
Q18. Are there other issues raised by the application of Rule 101
to shelf offerings that the Commission should address?
5. Persons Subject to the Rule
a. Distribution Participant
The term ``distribution participant'' is proposed to be defined in
Rule 100 as an underwriter, prospective underwriter, broker, dealer, or
other person who has agreed to participate or is participating in the
distribution.
Q19. Does the proposed definition of distribution participant
adequately cover those persons, other than an issuer or selling
securityholder, who have a readily identifiable incentive to manipulate
the market during an offering? 45
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\45\ See Concept Release, 59 FR at 21686.
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b. Prospective Underwriter
Commenters requested that the Commission provide greater certainty
as to when a person becomes a ``prospective underwriter'' for purposes
of Rule 10b-6.46 Commenters were concerned especially with the
application of this definition in the context of shelf-registered
distributions when a broker-dealer has submitted a bid to purchase
shelf-registered securities, but does not know whether the bid will be
accepted by the issuer or selling securityholder. This uncertainty may
exist in those circumstances where bids are submitted to the issuer or
selling securityholder by a number of broker-dealers, or where the
issuer or selling securityholder solicits a bid from a broker-dealer,
but has not indicated an intention to offer shares off the shelf or to
select that particular broker-dealer as an underwriter.
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\46\ Rule 10b-6(c)(2) defines the term as:
A person (i) who has decided to submit a bid to become an
underwriter of securities as to which the issuer or other person on
whose behalf the distribution is to be made, has issued, directly or
indirectly, an invitation for bids, or (ii) who has reached an
understanding, with the issuer or other person on whose behalf a
distribution is to be made, that he will become an underwriter,
whether or not the terms and conditions of the underwriting have
been agreed upon. 17 CFR 240.10b-6(c)(2).
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The Commission believes that the definition of ``prospective
underwriter'' should reflect the principle that anti-manipulation
regulation should apply when there exists an incentive to
manipulate.47 In the Commission's view, a person has an incentive
to manipulate, and thus becomes a prospective underwriter, when such
person knows or reasonably expects that a bid or proposal it has
submitted to the issuer or selling securityholder will be accepted,
whether or not the underwriting's terms and conditions have been agreed
upon. Moreover, a person who has received an invitation to participate
in an offering should be deemed a ``prospective underwriter'' from the
time that the person decides to participate, whether or not that
decision has been communicated to the issuer, selling securityholder,
or managing underwriter.
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\47\ See Concept Release, 59 FR at 21686. See also Release 34-
19565, 48 FR at 10634-10635.
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Accordingly, Rule 100 would define ``prospective underwriter'' as a
person who: (i) has submitted a bid to the issuer or other person on
whose behalf the distribution is to be made, which such person knows or
reasonably expects will be accepted, whether or not the terms and
conditions of the underwriting have been agreed upon; or (ii) has
reached, or reasonably expects to reach, an understanding with the
issuer or selling shareholder, or with the managing underwriter, that
such person will become an underwriter, whether or not the terms and
conditions of such person's participation have been agreed upon.
A broker-dealer would be subject to Rule 101 beginning with the
commencement of the restricted period or such later time as the broker-
dealer becomes an underwriter or prospective underwriter. If the
broker-dealer has a continuing agreement with the issuer or selling
securityholder, such firm would have advance knowledge that the
distribution will take place. Thus, the broker-dealer would be required
to observe the entire restricted period prior to the pricing of the
offered security subject to that agreement. There may be other
scenarios where a broker-dealer does not have a continuing relationship
with an issuer, but would be in a position to have advance knowledge
that a takedown off a shelf will occur and that the broker-dealer will
participate in the distribution. Such broker-dealer also would be
required to observe the entire restricted period. This position
reflects the role that such broker-dealers generally play in advising
issuers and selling shareholders regarding the timing of shelf
offerings.
Q20. Does the proposed definition of prospective underwriter
provide sufficient flexibility and certainty to persons who submit bids
to become underwriters of securities?
c. Affiliated Purchaser
Certain persons who are not themselves distribution participants
have relationships with distribution participants that raise concerns
that they may have incentives to facilitate a distribution through
manipulative means. These persons are referred to in Rule 10b-6 and in
Regulation M as ``affiliated purchasers.'' Both Rule 10b-6 and Rule 100
include within this term: (1) persons who act in concert with a
distribution participant in connection with the acquisition or
distribution of a security that is the subject of a distribution; or
(2) affiliates who control the purchase of such securities by a
distribution participant, or whose purchases are controlled by a
distribution participant, or whose purchases are under common control
with those of a distribution participant.
The Commission believes that Regulation M should reflect the
structural complexity of multi-service financial organizations, the
administrative costs incurred by such entities in complying with Rule
10b-6, and the precedents recognizing information barriers as an
element of exemptions from Rule 10b-6.48 The Commission proposes
that Rule 100 would exclude an affiliate of a distribution participant
from the coverage of Rule 101 if the distribution participant
establishes, maintains, enforces, and reviews at least annually written
policies and procedures to separate its corporate finance activities
conducted in connection with a distribution from the trading operations
of the affiliate (``information barriers'')49 and the affiliate is
a separate and distinct organizational entity from, with no officers
(or persons performing similar functions) or employees (other than
clerical, ministerial, or support
[[Page 17117]]
personnel) in common with, the distribution participant.50
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\48\ See Securities Exchange Act Release No. 36033 (July 31,
1995), 60 FR 40212; Letter regarding CS Holding, [1995] Fed. Sec. L.
Rep. (CCH) para. 77,018 (March 31, 1995) (``CS Holding Letter'').
\49\ The information barriers may be established pursuant to
separate regulatory requirements. See, e.g., 2 NYSE Guide (CCH)
para. 2098 (requiring that information barriers be established that
place substantial limits on access to, and communication of, trading
information, including strategies and positions, between a
specialist organization and an affiliated entity); Broker-Dealer
Policies and Procedures Designed to Segment the Flow and Prevent the
Misuse of Material Nonpublic Information, Report by the Division of
Market Regulation to the Securities and Exchange Commission (March
1990); Broker-Dealer Internal Control Procedures for High Yield
Securities, Report by the Division of Market Regulation to the
Securities and Exchange Commission (October 1993).
\50\ Distribution participants and their affiliates would not be
required to have separate compensation arrangements to qualify for
this exclusion. Cf. Rule 10b-6(c)(6)(i)(D)(2).
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A distribution participant would be required to obtain an
independent review at least annually of its compliance during the
preceding year with the policies and procedures governing its
information barriers, including the operation and any breaches of such
barriers, and to report on the findings of such review to its
management.51 The distribution participant's internal audit group
could perform the review if the group were independent of the corporate
financing and trading departments.52
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\51\ Consistent with Rule 17a-4(b)(4) under the Exchange Act,
registered brokers and dealers would be required to maintain and
preserve the review for a period of not less than three years, the
first two years in an accessible place. 17 CFR 240.17a-4(b)(4).
\52\ See CS Holding Letter, supra note 48.
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Q21. Would this proposed definition appropriately narrow the types
of affiliates that should be deemed ``affiliated purchasers''?
Q22. Is it appropriate to rely on information barriers to exclude
certain affiliates of distribution participants from the restrictions
of Rule 101?
Q23. Can information barriers be established effectively within the
same organizational entity so as to preclude opportunities to
manipulate the price of a security that is the subject of a
distribution?
Q24. Should the independent annual review be conducted by an
external reviewer (such as an accounting firm)?
Q25. The requirement under Rule 10b-6 of no common employees, other
than clerical, ministerial, or support personnel, would be retained;
however, the requirement of separate employee compensation arrangements
would be discontinued. Should the separate employee compensation
requirement be retained? Should shared employees or officers be
permitted?
Q26. How would this definition affect the operations of
distribution participants? Do they now conduct their corporate finance
activities in separate and distinct organizational entities from their
trading operations?
Q27. How would this definition affect investment advisers and other
non-broker-dealer fiduciaries?
Q28. How would this definition affect non-U.S. distribution
participants and their affiliates, including non-U.S. entities that are
permitted to engage in both commercial and investment banking
activities (e.g., universal banks)?
6. Activities Excepted From Rule 101: Paragraph (b)
a. Generally
As with Rule 10b-6, the Commission believes that certain activities
should be excepted from the prohibitions of proposed Rule 101 because
of the need to facilitate orderly distributions of securities, or to
limit potential disruptions in the trading market, or because the
activity has little manipulative potential. The exceptions to Rule 10b-
6 are prefaced with a proviso that such activities are not prohibited
if not ``engaged in for the purpose of creating actual, or apparent,
active trading in or raising the price of any such security.'' The
Commission does not propose to include this proviso in Rule 101 because
it adds an element of complexity that does not appear to be warranted
in light of the new structure of Rule 101. Activities permitted by Rule
101 would remain subject to the general anti-fraud and anti-
manipulation protections of the Securities Act and Exchange Act.
b. Exception 1--Research
Rule 10b-6 and Rule 101 prohibit any person participating in a
distribution from inducing others to purchase securities covered by the
rule. To reflect recent amendments to Securities Act Rule 139,53
and to codify and expand the staff's interpretations regarding
research, Rule 101 would permit written information, opinions, or
recommendations that satisfy Rule 138 or 139 under the Securities Act
to be published or disseminated in the ordinary course of its business
by a distribution participant during the restricted period.54 The
proposed exception is intended to harmonize treatment of research under
Securities Act and Exchange Act rules.
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\53\ Securities Act Release No. 7132 (February 1, 1995), 60 FR
6965.
\54\ 17 CFR 230.138 and 230.139. The Commission's staff has
taken the position that certain research reports are not prohibited
inducements if they are issued by a broker-dealer in the ordinary
course of business and satisfy Rule 138 or Rule 139(b) under the
Securities Act, or satisfy Rule 139(a) and do not contain a
recommendation or earnings forecast more favorable than that
previously disseminated by the firm. See Securities Exchange Act
Release No. 21332 (September 19, 1984), 49 FR 37569, 37572 n.25. The
current interpretive limitations on more favorable earnings
forecasts or recommendations in research reports would not be
included in exception 1.
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Although research distributed in the ordinary course of business
that complies with Rule 138 or 139 would be excepted from Rule 101,
research transmitted by sales personnel to customers who normally would
not receive it in the ordinary course of business can constitute a
solicitation to purchase.55 This directed research, or execution
of orders resulting from directed research, would not be permissible
during the Rule 101 restricted period.
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\55\ Distribution participants also must consider the broker-
dealer registration requirements of Section 15(a) of the Exchange
Act and the rules thereunder in connection with continuous
distributions of research reports to investors. 15 U.S.C. 78o(a).
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Q29. Should the circulation of offering materials and other
publications outside of the United States be excepted from Rule 101, as
some commenters have suggested?
c. Exception 2--Transactions Complying With Certain Other Rules
Rule 101 would provide an exception for transactions complying with
Rules 103 or 104 of Regulation M (governing passive market making and
stabilization). This proposed exception incorporates paragraphs
(a)(4)(xiv) and (a)(4)(viii), respectively, of Rule 10b-6.
d. Exception 3--Odd-Lot Transactions
The Commission proposes to expand the exception for odd-lot
transactions contained in Rule 10b-6(a)(4) to permit distribution
participants to bid for and purchase odd-lots during the restricted
period.
e. Exception 4--Exercises of Securities
The Commission proposes an exception to permit the exercise of call
options and other securities to acquire a covered security. Many
securities having associated standardized options would not be subject
to Rule 101 because of the proposed exception for actively-traded
securities, and other securities underlying standardized call options
generally would be subject to the proposed one business day cooling-off
period. These changes, coupled with the unpredictability of the timing
or the extent of any purchases by parties who are exercised against,
would reduce significantly the likelihood that the exercise of call
options would be used to facilitate a distribution. Therefore, the
Commission proposes to eliminate the five business day cooling-off
period contained in Rule 10b-6 for the exercise of standardized call
options. Under proposed exception 4, distribution participants would be
permitted to exercise call options during the restricted period,
regardless of when the options were acquired.
The Commission also proposes to except exercises of options or
warrants, rights received in connection with a rights offering, or
rights or conversion privileges set forth in the instrument
[[Page 17118]]
governing a security to acquire any security directly from an issuer.
This would include exercises by distribution participants of rights
acquired during a distribution through rights. Consistent with
exception (vii) of Rule 10b-6, this provision of Rule 101 is intended
to permit exercises or conversions of securities that do not entail any
significant market impact or manipulative potential, and thus do not
involve the concerns at which the anti-manipulation regulation of
securities distributions is directed.
Q30. Would any activity permitted by this exception raise
manipulative concerns because of a significant market impact?
f. Exception 5--Unsolicited Brokerage Transactions
The Commission proposes to include in Rule 101 the exception for
brokerage transactions not involving solicitation of the customer's
order that is contained in Rule 10b-6(a)(4)(v)(A).
g. Exception 6--Basket Transactions
Commenters recommended that the Commission adopt some form of
relief for transactions effected as part of a basket strategy if the
basket is not used for manipulation. Basket trading involves
contemporaneous transactions in groups of securities that often are
related to a standardized index. The Commission has granted Rule 10b-6
relief for standardized basket transactions subject to certain
conditions, including those relating to the number of securities to be
purchased, the weighting of the distribution security in the basket,
and the timing of the basket transaction.56 Several commenters
supported expanding and streamlining the treatment of basket
transactions in view of the increasing importance of such transactions
to institutional investors, and the need of broker-dealers to provide
liquidity to these investors.
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\56\ See Letter regarding Basket Trading During Distributions,
[1991] Fed. Sec. L. Rep. (CCH) para. 79,752 (August 6, 1991).
---------------------------------------------------------------------------
The Commission is proposing to include an exception for purchases
of covered securities made in connection with a basket transaction.
This exception would be available with respect to both index-related
baskets and baskets unrelated to any standardized index.57
Proposed paragraph (b)(6) of Rule 101 would apply to transactions in
covered securities when: (1) the aggregate dollar value of any bids or
purchases of the security in distribution constitutes 5% or less of the
total dollar value of the basket being purchased; and (2) the basket
contains at least 20 stocks. The basket transaction also would have to
be a bona fide transaction effected in the ordinary course of business
(i.e., the decision to include the security in distribution in the
basket must be independent of the existence of the distribution). The
5% and 20 stock criteria are intended to provide an objective
indication of the bona fide nature of a basket transaction and to limit
the exception to those basket transactions where the security in
distribution represents a small portion of the basket, such that use of
the basket transaction to facilitate a distribution would not be
economical. These criteria also would provide flexibility for basket
transactions.
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\57\ As a practical matter, a high percentage of the securities
involved in basket transactions would be covered by the proposed
exception for actively-traded securities.
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The exception also would permit bids and purchases for the purpose
of adjusting an existing basket position related to a standardized
index when made in the ordinary course of business to the extent
necessary to reflect a change in the composition of the index. For
example, a basket could be adjusted to reflect substitutions of
securities in a standardized index.
Q31. In view of the exception for actively-traded securities, is
this exception necessary?
Q32. Should the exception be unavailable in the last hour of
trading before the pricing of an offering because basket transactions
can involve significant amounts of stock and may have an impact on the
security's price? If a last-hour restriction were imposed in this
exception, would a further relaxation of the 5% and 20 stock parameters
be justified?
h. Exception 7--De Minimis Transactions
Several commenters cited the consequences of ``insignificant''
violations of Rule 10b-6 by a distribution participant, particularly
bids for, or small trades in, covered securities effected during the
cooling-off period. These violations have resulted in the distribution
participant dropping out of an underwriting syndicate, or the
postponement of the offering.
In the past, at a distribution participant's request, the
Commission's staff has taken informal no-action positions with regard
to the occurrence of such violations in cases where the transactions
were represented to be inadvertent and appeared to have had no market
impact. Frequently, these transgressions occurred because of a failure
to follow policies and procedures established by the firm to comply
with Rule 10b-6. Based on the inadvertent nature of many of these
violations and the lack of market impact, coupled with the impact of
such violations on distribution participants and offerings, some
commenters recommended that the Commission consider a safe harbor
approach for such activity that was not undertaken with a manipulative
purpose.
To address these concerns, the Commission is proposing an exception
to Rule 101 for certain de minimis transactions. A de minimis
transaction would be defined as a bid that was not accepted, or one or
more purchases that in the aggregate total less than 1% of the
security's ADTV. Because this proposed exception is intended to cover
``inadvertent'' violations, and not bids or purchases wilfully made in
violation of the rule, it would be available only when the firm had
established and enforced policies and procedures reasonably designed to
achieve compliance with Rule 101. Inadvertence also would be evidenced
by prompt cessation of the activity upon its discovery.58
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\58\ A firm's reliance on this exception on repeated occasions
would raise questions about the adequacy and effectiveness of the
firm's procedures. Therefore, upon the occurrence of any violation,
a broker-dealer would be expected to review its policies and
procedures and modify them as appropriate to prevent future
violations.
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Q33. Would this exception address the problems experienced with
respect to ``inadvertent'' violations under Rule 10b-6?
Q34. Is 1% of the security's ADTV the appropriate level to be
considered de minimis?
Q35. Would an alternative exception containing the 1% ADTV
threshold, but permitting bids and purchases whether or not in
violation of procedures, be preferable? In view of the increased
latitude that would be provided by this alternative, the Commission
believes that it may be necessary to make the exception unavailable for
transactions effected during the last hour of trading prior to pricing
the offering.
i. Exception 8--Transactions in Connection with the Distribution
A variety of transfers, allocations, and reallocations of
securities are necessary in the course of conducting a distribution.
These transactions should not be effected in a manner that may affect
the price of, or give an appearance of trading activity in, covered
securities. The Commission proposes exception 8 to permit non-publicly
reported transactions among distribution participants to allocate and
reallocate
[[Page 17119]]
securities among syndicate members in connection with a distribution,
and non-publicly reported purchases of securities from the issuer or
selling securityholders necessary to conduct the distribution.
Exception 8 is consistent with the objective of exception (i) of Rule
10b-6, which permits transactions in connection with a distribution
that are effected otherwise than on a securities exchange with the
issuer or other person or persons on whose behalf such distribution is
being made, or among underwriters, prospective underwriters, brokers,
dealers, or other persons who have agreed to participate or are
participating in such distribution. It reflects, however, the fact that
many over-the-counter (``OTC'') transactions today are as transparent
as exchange transactions. Therefore, the proposed exception would apply
only to transactions among distribution participants, issuers, or
selling securityholders that are effected otherwise than on or through
the facilities of a securities exchange or an inter-dealer quotation
system (e.g., Nasdaq). Exception 8 also would permit offers and sales
of, and the solicitation of offers to buy, the securities being
distributed, including securities acquired in stabilizing transactions,
which are permitted under exception (vi) of Rule 10b-6.
j. Exception 9--Distributions of Rule 144A Securities
Several commenters recommended expanding Rule 10b-6(i) which
excepts distributions of Rule 144A-eligible foreign securities if the
securities are sold solely to qualified institutional buyers (``QIBs'')
in transactions exempt from registration under the Securities Act
(``Rule 144A distributions'').59 After considering the comments
received, the Commission proposes to expand this exception in proposed
Rule 101 to include Rule 144A distributions of domestic issuers'
securities. In light of the characteristics of transactions involving
Rule 144A securities (e.g., eligible securities are not listed on a
U.S. exchange or quoted on Nasdaq, and Rule 144A transactions are
limited to QIBs), the Commission has determined not to distinguish
between Rule 144A distributions of foreign and domestic securities. The
exception also would apply to a distribution of Rule 144A-eligible
securities to non-U.S. persons, within the meaning of paragraphs (o)(2)
and (o)(7) of Regulation S under the Securities Act, that is made
concurrently with a Rule 144A distribution to QIBs.60
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\59\ See 17 CFR 230.144A.
\60\ 17 CFR 230.902(o)(2) and 230.902(o)(7). This would codify
the position taken in Letter regarding Regulation S Transactions
during Distributions of Foreign Securities to Qualified
Institutional Buyers, [1993-1994] Fed. Sec. L. Rep. (CCH) para.
76,851 (February 22, 1994), as modified by Letter regarding
Regulation S Transactions during Distributions of Foreign Securities
to Qualified Institutional Buyers (March 9, 1995).
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The Commission notes that an exception from proposed Rule 101 based
on the category of persons to whom the securities are distributed may
be viewed as a departure from the anti-manipulation purposes of
Regulation M, because no class of investors, including large
institutions, is immune to injury from securities fraud or
manipulation.61 However, based on the ability of QIBs to obtain,
consider, and analyze market information, the Commission believes that
it may be appropriate to reduce the scope of Rule 101's prophylactic
protections for such market participants. Although some commenters
recommended expanding the exception to include offerings of Rule 144A-
eligible securities to institutional accredited investors in addition
to QIBs, the Commission is not adopting that recommendation because it
encompasses a much broader category of investors, all of whom may not
have comparable characteristics.
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\61\ Cf. BT Securities Corporation, Securities Exchange Act
Release No. 35136 (December 22, 1994); In re Scientific Control
Corp. Sec. Litig., 71 F.R.D. 491, 512 (S.D.N.Y. 1976) (both
sophisticated and unsophisticated investors are entitled to
protection from the disclosure and anti-fraud provisions of the
securities laws).
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Q36. Is it appropriate to except certain distributions of
securities from Rule 101 based in part on the class of persons to whom
the securities are offered (e.g., QIBs)?
Q37. In light of the new exception for actively-traded securities,
which will except many distributions of Rule 144A-eligible foreign
securities from the rule, does an exception expressly covering Rule
144A distributions continue to be necessary or appropriate?
Q38. Do QIBs favor this exception and agree with its rationale?
7. Rule 10b-6 Exceptions That Are Not Included in Proposed Rule 101
a. Unsolicited Privately Negotiated Purchases
Rule 10b-6(a)(4)(ii) permits unsolicited privately negotiated
purchases, each involving at least a block of securities, that are not
effected from or through a broker or dealer. This exception was adopted
in response to industry concerns regarding the need to permit issuers
and distribution participants to purchase blocks of securities
``overhanging'' the market during a distribution.\62\
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\62\ In 1983, the Commission deleted the requirement that
transactions effected in reliance on the exception not be made on an
exchange in recognition of the fact that both third market and
exchange transactions in reported securities are reported to the
consolidated transaction reporting system (``consolidated system'').
Release 34-19565, 48 FR at 10634. See also Release 34-18528, 47 FR
at 11489.
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The staff's experience is that this provision is very seldom
utilized, and does not appear to be necessary to facilitate orderly
distributions. Therefore, and in light of the shortened restricted
periods and the proposed exception for unsolicited brokerage
transactions, the Commission is not proposing an exception from the
rule for privately negotiated, unsolicited purchases of securities.
Q39. Does an exception for unsolicited privately negotiated
purchases continue to be necessary? If so, should there be any
requirements as to the size of the purchases (e.g., a block) or whether
the purchases were unsolicited? Should such an exception be available
for purchases by a broker-dealer?
b. Sinking Fund Obligations
Rule 10b-6(a)(4)(iii) provides an exception to permit an issuer to
satisfy its mandatory sinking fund obligations that become due within
12 months from the date of purchase (i.e., those that are current).\63\
The Commission is of the view that this exception no longer appears to
be necessary and thus does not propose to include within Rule 101 an
exception for purchases to satisfy sinking fund or similar obligations.
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\63\ A sinking fund is a capital reserve set aside annually from
current earnings to provide funds to retire a particular bond issue
or debt security, in whole or in part, prior to the security's
maturity date. See Release 34-18528, 47 FR at 11490 n.44.
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Q40. Is there any reason to retain this exception?
c. Rights Offerings
The Commission is of the view that Rule 10b-8 contains overly rigid
and complex restrictions on purchases of rights and, unlike the other
trading practices rules, regulates sales of the offered security. These
restrictions may no longer be necessary. Rights offerings today
generally are conducted in a manner designed not to trigger Rule 10b-
8's restrictions on purchases of rights. The Commission proposes to
rescind Rule 10b-8 to conform with Regulation M's treatment of
derivative securities. Therefore, bids and purchases of rights would
not be covered by Rule 101. Bids and
[[Page 17120]]
purchases of the security that is the subject of the rights offering,
however, would be restricted by Rule 101.
Q41. Should the Commission continue to regulate rights offerings
through a separate rule?
Q42. Recently, a number of closed-end funds have conducted rights
offerings. Do rights offerings by closed-end funds present any special
manipulative concerns that should be addressed by Regulation M?
8. Exemptive Authority
The Commission proposes to include within Rule 101 the authority to
grant exemptions from Rule 101. This provision is similar to paragraph
(j) of Rule 10b-6.
C. Rule 102--Activities by Issuers and Selling Securityholders
1. Generally
The Commission is proposing new Rule 102, which would govern the
activities of issuers, selling securityholders (i.e., any person other
than an issuer on whose behalf a distribution is being made), and their
affiliated purchasers in connection with a distribution of securities.
Rule 102 would make it unlawful for such persons to bid for, purchase,
or to attempt to induce any person to bid for or purchase any security
that is the subject of such distribution and any reference security for
such security during the applicable restricted period.
Q43. Commenters should discuss whether an exception from the
definition of ``affiliated purchaser'' should be available to
affiliates of an issuer or selling securityholder who establishes,
maintains, and enforces written policies and procedures regarding
information barriers in compliance with Rule 100. Under what
circumstances would issuers or selling securityholders establish
information barriers?
Q44. Should the rule provide more guidance as to how the
``affiliated purchaser'' concept would apply where a distribution
participant (subject to Rule 101) is an affiliate of an issuer or
selling securityholder?
2. Excepted Securities
An issuer or selling shareholder may have a substantial incentive
to raise improperly the price of offered securities. Also, issuer and
shareholder transactions are not as readily identifiable from a
surveillance perspective as those of distribution participants. Thus,
the Commission preliminarily believes that it may not be appropriate to
extend the exception for actively-traded securities, or the exception
for investment grade debt and investment grade preferred securities
provided in Rule 101, to issuers, selling securityholders, or their
affiliated purchasers.
The Commission does propose, however, to provide an exception from
Rule 102 for ``exempted securities,'' as defined in Section 3(a)(12) of
the Exchange Act, and face-amount securities or securities issued by an
open-end management investment company or unit investment trust.
Q45. Should issuers be provided with an exception for actively-
traded securities? If so, are any new procedures necessary to assist
the exchanges or the NASD with surveillance of issuer transactions in
such securities?
Q46. Do issuers, selling securityholders, or their affiliated
purchasers rely on the exception for investment grade debt securities
in Rule 10b-6? If so, under what circumstances?
3. Excepted Activities
a. Generally
The Commission is proposing fewer exceptions from the restrictions
of Rule 102 than it is proposing in connection with Rule 101. Rule 102
differs from Rule 101 because of the view that issuers and selling
securityholders have a direct and immediate stake in the proceeds of
offerings, and do not engage in the same types of market activities as
broker-dealers. Moreover, SRO surveillance mechanisms can detect more
quickly, i.e., on a real-time basis, the market activities of their
member firms that are distribution participants, while transactions by
issuers and their affiliated purchasers are not as readily
identifiable.
b. Exception 1--Odd-Lot Transactions
As with Rule 101, the Commission proposes to except from Rule 102
bids for or purchases of securities in odd lots. Among other things,
paragraph (b)(1) would permit issuers to conduct odd-lot tender offers
during the restricted period.
c. Exception 2--Transactions Complying With Rule 23c-3 of the
Investment Company Act of 1940
Paragraph (b)(2) of Rule 102 would provide an exception for
repurchases of equity securities pursuant to Rule 23c-3 under the
Investment Company Act of 1940.\64\
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\64\ Rule 23c-3 under the Investment Company Act of 1940, 17 CFR
270.23c-3, permits periodic repurchases of common stock by issuers
that are registered closed-end investment companies as well as
business development companies.
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d. Exception 3--Exercises of Securities
The Commission proposes to except from Rule 102 exercises of call
options and other securities and exercises of any right or conversion
privilege set forth in the instrument governing a security, which
provides for purchasing a security directly from the issuer, including
rights issued in a rights offering. This provision is intended to
permit affiliated purchasers of issuers to exercise rights in
connection with convertible, exchangeable, or exercisable securities,
including options received in connection with employee benefit plans.
e. Exception 4--Transactions in Connection With the Distribution
Rule 102 would provide an exception for offers to sell or the
solicitation of offers to buy the securities being distributed. This
exception, which comports with Rule 10b-6(a)(4)(vi), would permit an
issuer or selling securityholder to conduct the offering on its own
behalf.
Q47. What is the impact on issuers of not providing for other
transactional exceptions, such as the exception for unsolicited
privately negotiated purchases or stabilizing transactions? Do issuers
or selling securityholders rely on other exceptions in Rule 10b-6? If
so, how often and for what purpose? Persons urging additional
exceptions for issuers should provide reasons why they are warranted.
4. Plans
The Concept Release solicited comment on whether issuer plans
should be distinguished from other types of distributions of
securities, and whether plans should be distinguished based on the
nature of the participants, e.g., when the plan is available only to
certain groups having a relationship to the issuer. Rule 10b-6(e)
excludes from the rule's coverage any distribution of securities by an
issuer or a subsidiary of the issuer to employees or securityholders of
the issuer or its subsidiaries, or to a trustee or other person
acquiring such securities for the account of such employees or
securityholders pursuant to a ``plan,'' as defined in Rule 10b-
6(c)(4).\65\
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\65\ ``Plan'' is defined as ``any bonus, profit-sharing,
pension, retirement, thrift, savings, incentive, stock purchase,
stock ownership, stock appreciation, stock option, dividend
reinvestment or similar plan for employees or shareholders of an
issuer or its subsidiaries.'' (emphasis supplied).
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Many issuers, however, no longer limit participation in their plans
to securityholders or employees. Issuers have extended plan
participation to, among others, retirees, outside directors,
[[Page 17121]]
agents, consultants, suppliers, franchisees, independent contractors,
and family members of such persons, as well as credit card holders and
other customers. Moreover, some plans permit prospective investors to
participate by making an initial cash payment, rather than requiring
prior share ownership. Issuer plans that allow participation by persons
other than their employees or securityholders, or those of their
subsidiaries, do not qualify for the exception.
The Division of Market Regulation, acting pursuant to delegated
authority, in 1994 granted a class exemption from Rule 10b-6 that
facilitates investors' access to plans by permitting investors to
obtain their first share of an issuer's securities directly from the
issuer, and expands the availability of these programs to persons other
than the issuer's employees and securityholders.\66\ Many issuers have
relied on this exemption in implementing dividend reinvestment and
stock purchase plans. The staff also recently has provided no-action
relief from Rule 10b-6 for securities purchase and sale service
programs offered by bank-registered transfer agents.\67\ These actions
appear to have addressed most of the concerns of the ten commenters who
discussed plans. Therefore, the Commission proposes to simplify the
treatment of plans under Rule 102 by codifying this relief and further
reducing the restrictions on plan transactions.
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\66\ See Securities Exchange Act Release No. 35041 (December 1,
1994), 59 FR 63393 (``1994 STA Letter''), as modified by Letter
Regarding Dividend Reinvestment and Stock Purchase Plans, [1995]
Fed. Sec. L. Rep. (CCH) para. 77,110 (May 12, 1995). The 1994 STA
Letter also provided the staff's views on Sections 15(a) and 17A of
the Exchange Act, 15 U.S.C. 78o(a) and 78q-1, respectively.
\67\ See Letter Regarding First Chicago Trust Company of New
York, [1994] Fed. Sec. L. Rep. (CCH) para. 76,939 (December 1,
1994); Letter Regarding Bank-Sponsored Investor Services Programs,
[1995] Fed. Sec. L. Rep. (CCH) para. 77,122 (September 14, 1995)
(``Bank-Sponsored Programs Letter''). These letters also took no-
action positions with regard to Section 5 of the Securities Act, and
Sections 13(e), 14(d), and 14(e) of, and Rule 10b-13 under, the
Exchange Act, 15 U.S.C. 77e, 78m(e), 78n(d), and 78n(e), and, in the
case of the Bank-Sponsored Programs Letter, Section 15(a) of the
Exchange Act.
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For purposes of Rule 102, plans would be divided into three
different groups: (1) plans that are available only to employees and
shareholders; (2) plans that are available to persons other than
employees and shareholders where securities for the plan are purchased
from a source other than the issuer or an affiliated purchaser, i.e.,
in the open market or in privately negotiated transactions, by an agent
independent of the issuer; and (3) plans that are available to persons
other than employees and shareholders where securities for the plan are
purchased directly from the issuer or an affiliated purchaser (``direct
issuance plans'').68
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\68\ As provided by paragraph (g) of Rule 10b-6, the Commission
proposes to exclude from Rule 102 any bids or purchases of a
security made or effected by or for a plan by an ``agent independent
of the issuer.'' See infra note 70 (discussing the definition of
``agent independent of the issuer'').
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The Commission proposes to exclude from Rule 102 any distribution
pursuant to a plan by or on behalf of an issuer or a subsidiary of an
issuer, when such distribution is made solely to employees or
shareholders of the issuer or its subsidiaries, or to a trustee or
other person acquiring such securities for the accounts of such person.
This provision remains essentially unchanged from Rule 10b-6(e). For
purposes of this exception, however, the term ``employee'' would have
the same meaning as contained in Form S-8 of the Securities Act
relating to employee benefit plans.69 Thus, distributions by plans
that allow directors, general partners, insurance agents, former
employees, consultants, and certain advisors to participate in their
plans are proposed to be excepted from Rule 102. This reflects the view
that persons that are not employees of an issuer or a subsidiary of an
issuer may have a relationship with an issuer that is sufficiently
similar to that of an employee such that it is appropriate to treat
such persons in the same manner as employees for purposes of this
exception. Further, this will provide consistency between the
Securities Act and the Exchange Act regarding the types of issuer
sponsored programs that are considered to be plans.
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\69\ 17 CFR 239.16b. The definition of plan would be expanded to
include plans within the meaning of paragraph (c)(4) of Rule 10b-6
as well as dividend or interest reinvestment plans or employee
benefit plans, as defined in Rule 405 of Regulation C. 17 CFR
230.405.
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Second, the Commission proposes to except all distributions
involving plans that include persons other than employees or
shareholders where purchases for the plan are made from sources other
than the issuer or an affiliated purchaser (i.e., in the open market or
in privately negotiated transactions) by an agent independent of the
issuer. The Commission believes that when an agent independent of the
issuer effects plan transactions, the issuer's opportunity to engage in
improper conduct is reduced greatly. The Commission proposes to include
the definition of ``agent independent of the issuer'' in Rule 100,
rather than referring to the definition of that term presently in Rule
10b-18(a)(6) under the Exchange Act. 70 Except with respect to the
issuer's ability to change its determination once every three months
regarding the source of shares to fund a plan, an agent would not be
considered independent if the issuer directs the agent as to the source
of shares, or the timing of purchases of shares (e.g., a requirement
that shares to fund the plan must be purchased on the plan's investment
date). The issuer, however, may establish general conditions for the
operation of the plan, including, for example, requirements with
respect to the return of uninvested funds to plan participants, and
requirements that optional cash payments be invested within 35 days of
receipt.71
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\70\ 17 CFR 240.10b-18(a)(6). The definition of ``agent
independent of the issuer'' would be substantially the same as under
paragraph (a)(6) of Rule 10b-18. It also is proposed that Rule 10b-
18 be amended to refer to the definition in proposed Rule 100.
\71\ See 1994 STA Letter, supra note 66 (modifying Letter
regarding Lucky Stores Inc., [1974-1975] Fed. Sec. L. Rep. (CCH)
para. 79,903 (June 5, 1974)).
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Third, the Commission proposes that a direct issuance plan (i.e., a
plan that is open to persons other than employees or securityholders,
and where shares are purchased from the issuer or an affiliated
purchaser) would be subject to Rule 102 when offers and sales of
securities pursuant to the plan constitute a ``distribution'' within
the meaning of Rule 100. Thus, the ``magnitude'' and ``special selling
efforts and selling methods'' tests would be applied to offers and
sales under such plan to determine whether a distribution exists. In
determining the magnitude of an offering of plan shares, an issuer
would need to consider the amount of securities it distributes through
the plan directly and indirectly (e.g., by broker-dealers who obtain
securities from the issuer as participants in a plan by virtue of being
securityholders and then distribute the shares to the public). In
determining whether special selling efforts or selling methods are
involved, for purposes of a plan, selling efforts consistent with the
solicitation activities permitted in the 1994 STA Letter would be
presumed not to involve special selling efforts and selling methods for
purposes of determining the existence of a distribution. The treatment
of direct issuance plans under Regulation M recognizes that these plans
potentially can be capital raising transactions analogous to the types
distributions that historically have been subject to Rule 10b-6.
These proposed changes are intended to reduce significantly and, in
most cases, eliminate the rule's application to
[[Page 17122]]
issuer plans. Of course, issuers that employ their plans for
manipulative purposes would continue to be subject to the anti-fraud
and anti-manipulation provisions of the federal securities laws.72
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\72\ In addition, to avoid broker-dealer registration under
Section 15(a) of the Exchange Act, an issuer operating a plan must
limit its activities in accordance with the conditions set forth in
the 1994 STA Letter. For example, the issuer may perform only purely
clerical and ministerial functions, including forwarding cash and
securities to an independent broker-dealer or bank, in connection
with the plan.
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Q48. Do these proposals strike the appropriate balance? Are any
manipulative incentives raised by plan distributions?
Q49. Is it appropriate to distinguish plans available only to
employees and securityholders from other plans for purposes of this
rule? Is it appropriate to distinguish direct issuance plans from other
plans for purposes of this rule?
5. Exemptive Authority
The Commission proposes to include within Rule 101 the authority to
grant exemptions from Rule 101. This provision is similar to paragraph
(j) of Rule 10b-6.
6. Rule 10b-18
Rule 10b-18 provides that the issuer and its affiliated purchasers
will not incur liability under the anti-manipulation provisions of
Sections 9(a)(2) or 10(b) of the Exchange Act or Rule 10b-5 thereunder,
if purchases of the issuer's common stock are effected in compliance
with the conditions contained in that rule relating to the time, price,
volume, and manner of purchases of the issuer's common stock.73
The Commission does not believe that a safe harbor should be available
in circumstances that raise reasonably identifiable manipulative
incentives. Accordingly, in light of the special incentives that an
issuer and its affiliated purchasers may have in facilitating sales of
the issuer's securities that are the subject of a distribution, the
Commission is proposing to revise the definition of a ``Rule 10b-18
purchase'' to clarify that the safe harbor is not available during a
distribution of the issuer's common stock that is subject to Rule 102,
or during a distribution for which such stock is a reference
security.74 Under the proposals, the Rule 10b-18 safe harbor would
be unavailable during the entire course of the distribution, and not
only during the applicable restricted period. The proposed amendment
would codify an informal staff interpretation and more clearly define
the parameters of the Rule 10b-18 safe harbor.
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\73\ 17 CFR 240.10b-18.
\74\ See 17 CFR 240.10b-18(a)(3). The Commission notes that
although the Rule 10b-18 safe harbor would not be available, this
does not mean that such purchases necessarily would violate Sections
9(a)(2) or 10(b), or Rule 10b-5.
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As noted earlier in the discussion of the treatment of shelf
offerings as distributions for purposes of Regulation M, the Commission
is of the view that generally each takedown off a shelf should be
examined individually to determine whether it constitutes a
distribution for purposes of Rule 100. Accordingly, if the issuer
determines to go forward with a distribution of common stock pursuant
to a shelf registration statement, the Rule 10b-18 safe harbor would be
unavailable from the time of that determination until sales pursuant to
the takedown are completed.
Q50. Will the proposed revision to the definition of ``Rule 10b-18
purchase'' have any significant impact on issuers' repurchase programs?
Commenters that believe that there will be an impact should describe
how such programs will be affected.
D. Rule 103--Passive Market Making
1. Discussion of Rule 103
Proposed Rule 103 would replace Rule 10b-6A, which was adopted in
1993.75 Rule 103 would permit ``passive market making'' in
connection with the distribution of securities quoted on Nasdaq during
the restricted periods of Regulation M, when proposed Rule 101
otherwise would prohibit such transactions. The purpose of the proposed
rule (and Rule 10b-6A) is to alleviate special liquidity problems that
may exist in the Nasdaq market during the restricted period, when
distribution participants or their affiliates that are Nasdaq market
makers otherwise must withdraw from the market. In general, exchange-
traded securities are not similarly affected because independent
specialists are assigned to provide depth and liquidity in listed
securities.
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\75\ Securities Exchange Act Release No. 32117 (April 8, 1993),
58 FR 19598 (``Release 34-32117'').
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Rule 103 would incorporate many provisions of Rule 10b-6A. Rule 103
generally would limit a passive market maker's bids and purchases to
the highest current independent bid, i.e., a bid of a Nasdaq market
maker that is not participating in the distribution. Additionally, the
rule would limit the amount of purchases that each passive market maker
could make and the displayed size of the bid, and contain requirements
relating to identification, notification, and disclosure of passive
market making.
Several commenters and others experienced with Rule 10b-6A have
suggested allowing Nasdaq market making in a greater number of contexts
than is permitted under the current criteria. Rule 10b-6A defines an
``eligible security'' as a Nasdaq security that: (1) is the subject of
a firm commitment, fixed price offering registered under the Securities
Act or is a related security; (2) has a minimum price of $5.00 per
share and a minimum public float of 400,000 shares; and (3) has Nasdaq
market makers that are underwriters or prospective underwriters, or
affiliated purchasers of underwriters or prospective underwriters, that
account for at least 30% of the total trading volume in such
security.76 These eligibility criteria were designed to limit the
availability of passive market making to those firm commitment
offerings of securities qualifying for the two business day cooling-off
period of Rule 10b-6, when the restrictions of that rule otherwise
would have reduced market making capacity significantly.
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\76\ See 17 CFR 240.10b-6A(b)(3).
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The Commission believes that eliminating the rule's eligibility
criteria, thereby permitting passive market making in a greater number
of contexts, is consistent with the purposes of Regulation M. Rule 103
would eliminate almost all of the eligibility criteria contained in
Rule 10b-6A(b)(3). The Commission no longer considers it necessary to
restrict passive market making to the class of offerings where the
potential liquidity loss may be substantial. Under the proposals,
however, best efforts and at the market offerings would remain
ineligible for passive market making.77
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\77\ The Commission previously has noted that the NASD
surveillance system does not easily accommodate at the market
offerings. Release 34-32117, 58 FR at 19600. The Commission notes
that the NASD's surveillance of passive market making is an
essential consideration in the proposal to expand the contexts in
which passive market making would be permitted.
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Rule 103 also would extend the period when passive market making is
permitted, and increase the number of eligible securities. Rule 10b-6A
restricts passive market making to the two business day cooling-off
period, and prohibits passive market making upon the commencement of
offers and sales or when stabilization commences. The new rule would
permit passive market making throughout the applicable restricted
period, but would continue to prohibit passive market making when
stabilization is being conducted. Under the proposals, all Nasdaq
securities would qualify for passive market
[[Page 17123]]
making. The rule also would permit passive market making in Nasdaq
reference securities (e.g., the underlying common stock during a
distribution of a convertible security).
In addition, passive market makers could bid for one round lot of
securities if their initial or remaining net purchasing capacity is
between one and 99 shares. This provision would permit more syndicate
members to be passive market makers and also would respond to
commenters who suggested greater flexibility for passive market making.
To provide flexibility in the operation of passive market making, a
market maker is not required to lower its quotation to reflect lower
independent bids until it purchases an amount equal to five times the
maximum order size for the particular security, as provided for under
the NASD's rules for the Small Order Execution System (``SOES''). In
order to account for possible changes to Nasdaq operations, the
Commission proposes to allow a passive market maker to purchase an
amount that equals or exceeds two times the minimum quotation size for
the security as determined by the NASD, before it is required to lower
its quotations to reflect lowered independent bids.78 Moreover,
passive market makers facilitating the execution of customer orders
would be able to make bids or purchases at a price above the
independent price where necessary to comply with any Commission or NASD
rule relating to the execution of customer orders.79
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\78\ See, e.g., Securities Exchange Act Release No. 36548
(December 1, 1995), 60 FR 63092.
\79\ See Letter regarding Obligations of Passive Market Makers
that Hold Customer Limit Orders, [1995] Fed. Sec. L. Rep. (CCH)
para. 77,040 (July 19, 1995).
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Q51. Are the proposals to delete the requirements of the definition
of ``eligible security'' in Rule 10b-6A appropriate? Is it appropriate
to extend passive market making to Nasdaq securities with an ADTV value
under $100,000?
Q52. Would the provision permitting passive market making for at
least one round lot of a security assist Nasdaq market makers whose
trading volumes are insufficient to qualify for passive market making?
Is some other minimum purchase limitation appropriate, e.g., two round
lots or five round lots?
2. Postponement of Further Changes
The Commission is not proposing to make other revisions to passive
market making regulation at this time because proposed Rule 101 would
eliminate the need for passive market making for many actively-traded
Nasdaq securities and would allow passive market making in many more
contexts than permitted currently. Moreover, the Commission is aware
that there have been a significant number of failures to comply with
basic requirements of passive market making (i.e., bid and purchase
prices have exceeded the highest independent bid, and purchases have
exceeded the rule's net purchase limitation). These incidents, along
with the expansion of passive market making to cover more offerings and
securities, suggest that it would be appropriate for the Commission to
continue to monitor passive market making before proposing further
changes. The Commission, however, intends to review passive market
making under Rule 103, if adopted, and will consider other appropriate
modifications.
Q53. In view of the compliance difficulties associated with Rule
10b-6A, are there any structural changes that could help to eliminate
these problems, other than revisions to the rule's price and volume
limitations?
Q54. Net purchases by a passive market maker are limited to 30% of
its Nasdaq ADTV. Is this 30% Nasdaq ADTV limitation adequate to allow
passive market making, particularly in light of the elimination of the
provisions for SOES transactions, or should this threshold be revised,
e.g., by permitting net purchases of 50% of a market maker's Nasdaq
ADTV?
E. Rule 104--Stabilization and Other Syndicate Activities
1. Background
The Commission is proposing new Rule 104 to govern stabilization.
It would create a more flexible framework for managing the distribution
process and eliminate much of the complexity in the operation of Rule
10b-7.80 The Commission believes that stabilization should
continue to be regulated because it is market activity during an
offering that is intended to influence a security's price.81
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\80\ In addition to comments responding to the Concept Release,
the proposed new rule is based on comments received in response to
the 1991 Proposals. See supra note 15. The 1991 Proposals chiefly
were intended to accommodate the increasing internationalization of
securities markets and would be superseded by Regulation M.
Therefore, they would be withdrawn if Regulation M is adopted.
\81\ See Section 9(a)(6) of the Exchange Act, 15 U.S.C.
78i(a)(6); Concept Release, 59 FR at 21689. See also the
Commission's 1940 policy statement on stabilizing, Securities
Exchange Act Release No. 2446 (March 18, 1940).
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Rule 104 would reflect the significant changes that have occurred
in underwriting methods since Rule 10b-7 was adopted. For example,
underwriters have developed highly effective means of quickly placing
and controlling an offering through the book-building and allocation
processes. Stabilization pursuant to Rule 10b-7 has become less common,
perhaps in part because of the rule's limitations on increasing
stabilizing bids, but also because of the development of efficient
distribution methods and underwriters' concern that stabilization may
indicate that an offering is progressing poorly. Nevertheless,
underwriters continue to disclose in prospectuses that they reserve the
right to stabilize an offering, and stabilization remains an important
option in domestic and foreign contexts.
In their responses to the Concept Release, commenters recognized
the importance of regulating stabilization, but were critical of Rule
10b-7's price restrictions, which prevent underwriters from adjusting
stabilizing bids to reflect fluctuating markets and currency changes,
and of the rule's reliance on U.S. markets to govern permissible
stabilizing prices. Rule 104 reflects a fundamental shift from Rule
10b-7's structure, while codifying exemptive and no-action relief
issued by the Commission and its staff within the last decade,
particularly with respect to cross-border transactions.
2. Stabilizing Levels
The most significant proposed changes from Rule 10b-7 pertain to
permissible stabilizing price levels. The Commission believes that
these changes would afford greater flexibility to underwriters, which
is especially important in the context of multinational securities
offerings. Under Rule 10b-7, an underwriter generally must set its
stabilizing bid based on the independent market price for the security,
and cannot change that bid except in limited circumstances. In
principal markets that are exchanges, initiation of stabilizing bids is
limited by last sale prices. In other markets, independent bids are the
reference price.
Rule 104 would allow persons effecting stabilizing transactions to
establish a stabilizing bid with reference to prices in the principal
market for the security, wherever located,82 and then to maintain,
reduce, or raise that bid to follow the independent market, as long as
the bid does not exceed the highest
[[Page 17124]]
independent bid and in no case exceeds the offering price of the
security.83 These provisions would provide significant flexibility
to stabilization regulation, because they effectively would permit the
stabilizing bid to follow the independent market for the security,
limited by the offering price.
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\82\ A U.S. market that is not the principal market would no
longer control stabilizing price levels. The reference prices in the
principal market must be reported pursuant to Rule 11Aa3-1 under the
Exchange Act, 17 CFR 240.11Aa3-1, or be reported to a foreign
financial regulatory authority as defined in Section 3(a)(52) of the
Exchange Act, 15 U.S.C. 78c(a)(52).
\83\ Rule 100 would define ``independent bid'' as a bid by a
person who is not a distribution participant, issuer, selling
securityholder, or affiliated purchaser.
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When the principal market is open, stabilizing price levels would
be determined by the stabilizing bid in that market, and if there is no
stabilizing bid, by the highest independent bid price in that market.
If the principal market is closed and stabilizing has not been
initiated in any market, no stabilizing could be effected at a price in
excess of the lower of: (1) The price at which stabilizing could have
been effected in the principal market at the close thereof; or (2) the
most current reported price at which transactions in the offered
security have been effected on any exchange or inter-dealer quotation
system after the close of the principal market. After the opening of
quotations or trading in the market where stabilizing will be effected,
stabilizing could not be effected at a price higher than the highest
independent bid price for such security reported in that market at the
time such stabilizing is effected. Where an independent market for the
offered security does not exists, stabilizing would be limited only by
the offering price. Rule 104 also provides for adjustments to the
stabilizing bid when the security being stabilized goes ex-dividend,
ex-rights, or ex-distribution, or is expressed in a currency other than
the currency of the principal market and there are changes in the
exchange rate between the two currencies.84
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\84\ Rule 100 would define ``current exchange rate'' as the
current rate of exchange between two currencies, which is obtained
from at least one independent entity that provides foreign exchange
quotations and information in the ordinary course of its business.
Rule 104(g)(5) would retain Rule 10b-7's provisions that any
stabilizing price that otherwise meets the requirements of the rule
need not be adjusted to reflect special prices available to any
group or class of persons (including employees or holders of
warrants or rights). See 17 CFR 240.10b-7 (h), (i), (j)(5), and
(j)(7).
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Q55. Do the provisions regarding stabilizing price levels create an
effective framework to govern stabilizing transactions? Do the
provisions regarding stabilizing price levels present any manipulative
concerns?
3. Other Provisions Relating to Stabilization
As under Rule 10b-7, Rule 104 would provide that no person may
effect either alone or with others any stabilizing transaction to
facilitate an offering of any security in contravention of its
provisions.85 The term ``stabilizing'' would be defined in Rule
100 as the placing of any bid, or the effecting of any purchase, for
the purpose of pegging, fixing, or otherwise maintaining the price of a
security. Rule 104 would retain provisions governing priority of
independent bids, control and purpose of stabilizing, stabilizing at
prices resulting from unlawful activity, and the prohibition of
stabilization in ``at the market'' offerings. The Commission proposes
to eliminate the distinction in Rule 10b-7 between exchange-traded and
OTC securities.
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\85\ Unlike proposed Rules 101 and 102, which would apply to a
``distribution,'' Rule 104 would govern stabilizing to facilitate an
``offering,'' a term that is broader in scope.
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Rule 104 would retain the exclusion for ``excepted securities.''
The Commission also proposes to expand the exception in Rule 10b-7 for
distributions of Rule 144A-eligible foreign securities made solely to
QIBs in exempt transactions. Rule 104 would except all distributions of
Rule 144A-eligible securities to QIBs, and sales of Rule 144-eligible
securities to non-U.S. persons, within the meaning of Regulation S
under the Securities Act, that are made concurrently with Rule 144A
distributions to QIBs. This responds to commenters who argued that as a
matter of consistency, the exception for Rule 144A-eligible securities
should be extended to the domestic context.
Rule 104 would eliminate the provision pertaining to limitation of
liability. The Commission believes that lead managers now exert
considerably more control over stabilizing transactions than when Rule
10b-7 was adopted, and that a provision regarding vicarious liability
arising out of stabilizing transactions by syndicate members no longer
appears necessary.
Q56. Does Rule 104 cover all situations where underwriters believe
that stabilizing would be appropriate to facilitate an offering? Would
the rule's greater flexibility result in stabilizing by underwriters in
a greater number of instances?
Q57. In addition to ``at the market'' offerings, are there other
categories of offerings (e.g., best efforts) or securities (e.g., penny
stocks) for which stabilizing is not appropriate? Should issuers be
permitted to stabilize and, if so, under what circumstances?
Q58. Is it appropriate to except from an anti-manipulation
provision stabilization of offerings of Rule 144A-eligible securities?
Q59. Should the Commission retain the provision in Rule 10b-7(m)
regarding limitation of liability? What purpose does this paragraph
serve? If it should be retained, should it be in the same form as the
current provision?
4. Aftermarket Activities
An underwriter's interest in the success of an offering does not
necessarily end with the completion of the sales efforts and
termination of formal stabilizing activities, but can extend into the
``aftermarket'' trading in the distributed security (in general, the
period immediately following the termination of formal syndicate
activity--the so-called ``breaking of the syndicate''). Aftermarket
participation may be an expected part of the underwriting services
provided to an issuer, and the anticipated quality of such services can
influence the issuer's selection of a managing underwriter.
Underwriters also have an incentive to provide ``support'' in the
aftermarket to counterbalance pressure on the security's price from
``flipping'' and other selling activity that could adversely affect the
investors who have purchased in the offering. In addition, the managing
underwriter often purchases shares in the aftermarket period to cover a
syndicate short position.86 Accordingly, the point in time when
underwriters no longer have the purpose to ``facilitate an offering''
cannot be identified with precision.
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\86\ Underwriters frequently receive an overallotment option
(commonly referred to as the ``Green Shoe'' option), which is the
right, but not the obligation, to purchase securities from the
issuer in addition to those initially underwritten by the syndicate,
which may constitute up to 15% of the initial underwritten amount.
Because the overallotment option may be insufficient to cover the
entire syndicate short position, that portion in excess of the
overallotment option must be covered through purchases in the
secondary market.
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Furthermore, in initial public offerings the agreement among
underwriters may contain a provision authorizing the managing
underwriter to invoke a ``penalty bid.'' This is a contractual
agreement permitting the managing underwriter to reclaim the selling
concession accruing to a syndicate participant with respect to shares
that the managing underwriter purchases in the aftermarket to cover the
syndicate short position.87 One of
[[Page 17125]]
the primary objectives of a penalty bid is to encourage syndicate
participants to sell the securities to those persons who intend to hold
them rather than to engage in short-term profit-taking, i.e., to combat
flipping. Enforcement of penalty bids typically continues for as long
as 30 days.
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\87\ Penalty bids are governed by Schedule D of the NASD's By-
Laws, Part V, Section 3, NASD Manual (CCH) para. 1820.
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The Commission believes that the aftermarket activities described
above are not uncommon and may act to support the price of the offered
security in the aftermarket.88 Commenters, however, were divided
concerning whether regulation should be extended to cover such
activities. Therefore, the Commission at this time is not proposing to
extend the price limitations of Rule 104 to cover aftermarket
activities. Instead, as described in the following section, the
Commission is proposing to require disclosure of syndicate covering and
penalty bid activities, and that underwriters keep records of such
activities. Disclosure of these aftermarket activities would serve to
apprise regulators of their possible market effects, while the
recordkeeping requirements would assist the Commission in monitoring
aftermarket practices and in assessing whether further regulation is
warranted.
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\88\ See J. Shayne & L. Soderquist, Inefficiency in the Market
for Initial Public Offerings, 48 Vand. L. Rev. 965, 983-84 (May
1995).
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5. Disclosure and Recordkeeping
The Commission proposes to require more specific disclosure of
stabilization, syndicate covering transactions,89 and penalty bids
90 in order to make disclosure of these activities more
meaningful.
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\89\ Rule 100 would define ``syndicate covering transaction'' as
the placing of any bid or the effecting of any purchase on behalf of
the sole distributor or the underwriting syndicate or group to
reduce a syndicate short position.
\90\ Rule 100 would define ``penalty bid'' to mean an
arrangement that permits the managing underwriter to reclaim a
selling concession otherwise accruing to a syndicate member in
connection with an offering when the securities originally sold by
the syndicate member are purchased in syndicate covering
transactions.
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Like Rule 10b-7, paragraph (h) of Rule 104 would require any person
who places or transmits a bid that such person knows is for the purpose
of stabilizing the price of any security to notify the market on which
the transaction is effected, and to disclose the purpose of such
transaction to the person to whom the bid is placed or is transmitted
(e.g., the specialist or the executing broker-dealer). The NASD
requires persons intending to initiate stabilization to provide it with
prior notification.91 Stabilizing bids are then identified by a
symbol on the Nasdaq quotation display. In this way, the person engaged
in stabilization satisfies the requirement to inform the market and the
recipients of the purpose of a bid by notifying the NASD. The
exchanges, however, do not have this procedure. To fulfill the proposed
requirements for stabilizing transactions on an exchange, underwriters
would have to notify the exchange and provide disclosure separately to
recipients of the bid. In the Commission's view, contemporaneous
disclosure of the fact that stabilizing is occurring is beneficial to
the market and its participants.
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\91\ See Schedule D of the NASD's By-laws, Part V, Section 3(c),
NASD Manual (CCH) para. 1820.
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Rule 104 also would require any person effecting a syndicate
covering transaction, or placing or transmitting a penalty bid, to
disclose that fact to the SRO that has direct oversight authority over
the market on which the syndicate covering transaction is effected, or
the penalty bid is placed. This information would be helpful to the
exchanges and Nasdaq in carrying out their surveillance
responsibilities.
The stabilizing legend required by Rule 10b-7(k), and Item 502(d)
of Regulations S-B and S-K,92 would be replaced by a brief legend
identifying activity that may affect the offered security's price and
directing investors to a discussion in the ``plan of distribution''
section of the prospectus. Item 508 of Regulations S-B and S-K,93
governing the plan of distribution disclosure, would be revised to
require a brief description of any prospective stabilizing and
aftermarket activities, including syndicate covering transactions and
the imposition of a penalty bid, and their potential effects on the
market price. The objective of these proposals is to augment the
language found in the stabilizing legend with more meaningful
information regarding stabilizing and related activities.94
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\92\ See 17 CFR 228.502(d) and 229.502(d).
\93\ See 17 CFR 228.508 and 229.508.
\94\ Once a ``plain English'' prospectus is implemented, a
stabilizing legend may no longer be required on the inside front
cover of the prospectus. See Task Force Report at 17-18, supra note
13.
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Q60. Is regulation of aftermarket transactions warranted? For
example, should syndicate covering transactions be subject to the price
level restrictions of Rule 104? Should penalty bids be prohibited as
some commenters have suggested?
Q61. Would there be any difficulty in disclosing to the SRO the
fact that syndicate covering transactions are occurring or that a
penalty bid is in place?
Proposed amendments to Rule 17a-2 under the Exchange Act would
require managing underwriters to keep records of syndicate covering
transactions and penalty bids, in addition to stabilizing information.
Records would reflect the name and class of securities, and the price,
the date, and the time for each syndicate covering transaction. The
records also would reflect the dates that any penalty bid was in
effect, information relating to transactions against which penalty bids
were assessed, and the date the bid was terminated. The information
would be required to be maintained in a separate file, for a period of
three years, the first two years in an easily accessible place. The
Commission believes that this recordkeeping requirement will impose
little, if any, additional burden on underwriters, because underwriters
already are required to keep detailed syndicate account records.95
Records of such transactions would provide the Commission with an
empirical basis for determining whether additional regulation is
warranted.
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\95\ See NASD Rules of Fair Practice, Art. III, Sec. 21, NASD
Manual (CCH) para. 2171. See also NASD Rules of Fair Practice, Art.
III, Sec. 44, NASD Manual (CCH) para. 2200D.
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In addition to registered offerings for which a registration
statement or a Form 1-A 96 is filed, Rule 17a-2 applies to any
other offering if the total proceeds exceed $1,500,000. This threshold
is proposed to be increased to $5,000,000 in Rule 17a-2. The Commission
believes that raising this threshold would make the rule less
burdensome for smaller offerings, and would be consistent with other
Securities Act and Exchange Act initiatives.97
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\96\ 17 CFR 249.1a.
\97\ See, e.g., Securities Exchange Act Release No. 35895 (June
27, 1995), 60 FR 35642.
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Q62. Is the expansion of Rule 17a-2 to include recordkeeping of
syndicate covering transactions and penalty bids appropriate and what,
if any, burdens would be imposed by these new requirements?
Q63. Should offerings with proceeds of $5,000,000 or less be exempt
from Rule 17a-2?
F. Rule 105--Short Sales In Connection With An Offering
The Commission adopted Rule 10b-21 in 1988 to address the practice
of manipulative short sales prior to a public offering by short sellers
who cover their short positions by purchasing securities in the
offering. Manipulative short sales could result in a lower offering
price, and thus reduce
[[Page 17126]]
proceeds to the issuer. Rule 10b-21 addresses this practice by
prohibiting the covering from the offering of any short sales made
during the period beginning at the time a registration statement or
Form 1-A is filed and ending at the time that sales may be made
pursuant to the registration statement or Form 1-A.
The Commission is proposing Rule 105 to replace Rule 10b-21. Rule
105, like Rule 10b-21, is designed to prevent short sales from being
covered with securities obtained from an underwriter, broker, or dealer
who is participating in the offering. Rule 105 would differ from Rule
10b-21 because it would cover only those short sales effected in the
period commencing five business days prior to the pricing of an
offering and ending with such pricing. Reducing the period of the
rule's applicability is consistent with the structure of Rules 101 and
102, which provide for shorter restricted periods, and reflects the
Commission's belief that such period should be sufficient to dissipate
the effects of any manipulative short selling on the price of the
offered security.
Commenters expressed divided views on the efficacy of Rule 10b-21.
Some believe that the rule impedes legitimate short selling activity.
Others maintain that the rule would be more effective if it also
covered activity in derivative securities. Since the adoption of Rule
10b-21, several additional regulatory measures have been implemented
that may lessen the effects of short selling in connection with an
offering. These initiatives, which include permitting passive market
making during offerings of Nasdaq securities and implementing a short
sale rule for the Nasdaq market,98 may reduce the need for Rule
105. Short selling to depress an offering price would continue to be
covered by the general anti-manipulation provisions of the Securities
Act and the Exchange Act.
---------------------------------------------------------------------------
\98\ NASD Rules of Fair Practice, Art. III, Sec. 48, NASD Manual
(CCH) para. 2200H.
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Q64. Does a special regulation dealing with short selling in
connection with an offering continue to be necessary or appropriate?
Q65. Should the prohibitions of Rule 105 extend to short sales of
derivative securities? Commenters should discuss how this proposal
would be consistent with Rule 101, which would not cover bids or
purchases of derivative securities.
Q66. Would the five business day restricted period present
compliance difficulties?
Q67. Should the restricted period of Rule 105 parallel the one or
five business day restricted periods of Rule 101, which depend on the
security's ADTV?
Q68. Should offerings of actively-traded securities (i.e.,
securities having an ADTV value of at least $1 million) be excluded
from Rule 105, as in Rule 101?
IV. Safe Harbor Alternative
Many commenters endorsed recasting the rules as non-exclusive safe
harbors from the statutory anti-manipulation provisions of the Exchange
Act.99 They argued that Rule 10b-6 can have a disproportionate
impact on those distribution participants and affiliated purchasers who
inadvertently run afoul of the rule's prohibitions but do not affect
the offered security's price.
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\99\ Commenters cited Rule 10b-18 as a relevant example of a
safe harbor provision. See supra Section III.C.6. discussing Rule
10b-18.
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The Commission believes that a prophylactic approach to market
activities of persons interested in a distribution continues to serve
an important role in maintaining the integrity of the capital markets.
In the Commission's view, the framework of proposed Regulation M
preserves the Commission's strong interest in protecting investors from
manipulated offerings, while providing flexibility, clarity, and
guidance to offering participants.
The Commission has stated that the ``exceptions [to Rule 10b-6] are
not, and never have been, safe harbors,'' and that a lack of improper
motive when relying on the rule's exceptions always has been
required.100 A safe harbor from manipulation charges is
inappropriate in contexts where it is reasonable to infer that
manipulative incentives are present, such as during securities
distributions. Also, requiring the Commission to demonstrate the
existence of a purpose on the part of persons engaged in any market
activity, for example, to ``facilitate the distribution'' of an offered
security,101 would conflict with the goal of precluding improper
market activity prior to pricing of offerings. The inclusion of a
``purpose'' element effectively would make enforcement of such a
provision an after-the-fact remedy that would in many respects overlap
Rule 10b-5. Moreover, it is likely that safe harbor rules would be
inappropriate for some securities offerings, such as those involving
penny stocks, and may be inconsistent with the Commission's express
statutory authority to promulgate rules governing the ``pegging,
fixing, or stabilizing'' of the price of certain securities.102
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\100\ See Securities Exchange Act Release No. 24003 (January 16,
1987), 52 FR 2994, 2998.
\101\ This is a component of the ABA draft proposal.
\102\ See Section 9(a)(6) of the Exchange Act.
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It is important to note, moreover, that commenters advocated a safe
harbor approach in the context of the current rules. As proposed,
several categories of offerings, persons, and activities that are
subject to the trading practices rules would not be subject to the
prophylactic prohibitions of Regulation M. In addition, the new rules
would create a more flexible framework for conducting market activities
during distributions. The proposed exception for de minimis violations
would address the concerns commenters had regarding the impact of Rule
10b-6 on those persons who inadvertently violated the rule through
nominal purchases, or unaccepted bids.
Although the Commission does not favor a safe harbor approach,
commenters may wish to present arguments supporting a safe harbor
framework and to submit draft rule text. Commenters are urged to
provide careful analyses of how a safe harbor approach would be
utilized and what kinds of transactions would be permitted under a safe
harbor. Would safe harbor rules be appropriate in all contexts and, if
not, would it be confusing to have a set of safe harbor and
prophylactic rules governing substantially similar conduct?
The Commission also requests comment as to whether a safe harbor
approach to anti-manipulation regulation would diminish the investor
protection goals of the Exchange Act. How would the balance between the
capital-raising role of securities offerings and the Commission's
investor protection mandate be affected if a safe harbor were extended
to the general anti-manipulation provisions?
Support for the safe harbor approach also appears to stem from
concerns regarding application of the general anti-manipulation
provisions to conduct that would be permitted under the trading
practices rules. The Commission requests comment on alternatives to a
safe harbor approach that might address uncertainty regarding the reach
of the general anti-manipulation provisions in circumstances where the
conduct in question otherwise would be permitted under Regulation M.
For example, should conduct in compliance with Regulation M be presumed
not to violate the general anti-manipulation provisions, subject, of
course, to rebuttal?
V. General Request for Comments
Any interested person wishing to submit written comments on any
aspect
[[Page 17127]]
of the proposed rules discussed in this release, as well as on other
matters that might have an impact on the proposals contained herein, is
requested to do so. In addition to the comments solicited above,
commenters are urged to provide their views on the overall structure of
proposed Regulation M and whether the format and the rules contained
herein provide a beneficial alternative to the trading practices rules.
Commenters are encouraged to submit proposed rule text and data
together with their written comments. Comments should be submitted in
triplicate to Jonathan G. Katz, Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and should
refer to file number S7-11-96. Comments also may be submitted
electronically at the following E-mail address: [email protected].,
and should include the file number on the subject line of the E-mail.
VI. Costs and Benefits of the Proposed Amendments and Their Effects on
Competition
To assist the Commission in its evaluation of the costs and
benefits that may result from the proposed new rules, commenters are
requested to provide analyses and data relating to costs and benefits
associated with any of the proposals herein. The Commission
preliminarily believes that compliance burdens generally will be
reduced by the proposed changes. The proposals would reduce
significantly trading restrictions on issuers, underwriters, and others
with an interest in an offering from those currently in effect and,
therefore, should reduce the costs of raising capital.
In addition, Section 23(a)(2) of the Exchange Act requires the
Commission, in adopting rules under the Exchange Act, to consider the
anti-competitive effects of such rules, if any, and to balance any
impact against the regulatory benefits gained in terms of furthering
the purposes of the Exchange Act.103 The Commission preliminarily
has considered the proposed rules in light of the standards cited in
Section 23(a)(2) and believes preliminarily that, if adopted, they
would not likely impose any significant burden on competition not
necessary or appropriate in furtherance of the Exchange Act. Indeed,
the Commission believes that Regulation M may enhance the posture of
U.S. underwriters in relation to foreign broker-dealers in competing
for underwriting business in cross-border distributions. The Commission
solicits commenters' views regarding the effects of the proposed rules
on competition.
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\103\ See 15 U.S.C. 78w(a)(2).
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VII. Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``IRFA''), in accordance with the provisions of the
Regulatory Flexibility Act,104 regarding the rules contained in
proposed Regulation M and the proposed amendments to Rules 10b-18 and
17a-2 under the Exchange Act and Items 502(d) and 508 of Regulations S-
B and S-K.
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\104\ 5 U.S.C. 603.
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As discussed more fully in the analysis, some of the issuers and
broker-dealers that Regulation M would affect are small entities, as
defined by the Commission's rules. In general, Regulation M overall
would decrease costs for issuers and broker-dealers participating in an
offering, including small businesses.
The analysis discusses the types of possible alternative proposals
that the Commission has considered. These include, among others, the
establishment of differing compliance or reporting requirements or
timetables that take into account the resources available to small
entities, and whether such entities could be exempted from any of the
proposed rules, or any part thereof. Because small entities will
benefit from the less restrictive nature of Regulation M, the
Commission does not believe that any of the alternatives are preferable
to the rules as proposed. Small issuers will benefit from the changes
to the eligibility criteria for Nasdaq passive market making and small
broker-dealers will benefit from the 100 share minimum net purchasing
capacity provided for all passive market makers. The Commission
believes that Regulation M balances the objective of a simplified,
streamlined, more flexible regulation with its statutory mandate of
investor protection in a manner more appropriate than other
alternatives.
In the IRFA, the Commission encourages the submission of written
comments with respect to any aspect of the IRFA. Those comments should
specify costs of compliance with the new rules, and suggest
alternatives that would accomplish the objectives of modernizing and
streamlining the Commission's trading practices rules.
A copy of the IRFA may be obtained from the Office of Risk
Management and Control, Division of Market Regulation, Securities and
Exchange Commission, 450 Fifth Street, N.W., Mail Stop 5-1, Washington,
D.C. 20549, (202) 942-0772.
VIII. Paperwork Reduction Act
Certain provisions of proposed Regulation M contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995,105 and the Commission has submitted them to
the Office of Management and Budget for review in accordance with 44
U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection of
information is: ``Proposed Regulation M.''
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\105\ 44 U.S.C. 3501 et seq.
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A. Collection of Information Under Regulation M
Proposed Regulation M would require information collection in two
general areas. First, various provisions of Regulation M would require
persons participating in a distribution to collect certain information
to comply with, or to take advantage of certain exceptions under, Rules
101 or 102 or to comply with Rule 103. Second, Rule 104 and related
amendments would require disclosure and recordkeeping of persons
engaged in stabilization and certain aftermarket activities.
1. Rules 101, 102, and 103
Rules 101 and 102 would require the ADTV to be calculated using the
three full consecutive calendar months preceding the filing of the
registration statement (or preceding pricing if there is no
registration statement or a shelf distribution is involved) to
determine which restricted period applies, or whether the security is
excepted from the rule. Because the de minimis exception to Rule 101 is
available for purchases of up to one percent of the security's ADTV,
the ADTV calculation also may be made by a distribution participant
seeking to take advantage of this exception. To determine which
restricted period must be used, or to rely on the actively-traded
securities exception or de minimis exception, a distribution
participant would need to examine publicly available market data to
calculate the ADTV. The Commission believes that the syndicate manager
would advise other distribution participants of the ADTV of the
particular security being distributed. Additionally, the Commission has
requested comment on whether prospectus disclosure is necessary to
inform investors about the potential market activities of persons
relying on the actively-traded securities exception from Rule 101.
Rule 102 would require issuers and selling securityholders to
calculate the security's ADTV to determine the appropriate restricted
period. In this
[[Page 17128]]
case, the Commission believes that the syndicate manager would provide
the security's ADTV to the issuer or selling securityholders. In a
small number of self-underwritten offerings, issuers may calculate the
ADTV. Rule 103 would employ the notion of ``Nasdaq ADTV,'' which is
defined as the average daily trading volume of the security accounted
for by a particular market maker, as obtained from the NASD. As the
owner and operator of Nasdaq, the NASD has access to this information,
and now provides that information to the syndicate manager.
The proposed definition of affiliated purchaser in Regulation M
reflects the increasingly complex structure of financial and other
conglomerates by recognizing the structural separations and information
barriers between distribution participants and their affiliates.
Regulation M would provide an exception to the proposed definition of
affiliated purchaser where certain information barriers exist. This
exception would require the participant to establish, maintain, and
enforce written policies and procedures to segregate the flow of
information between itself and its affiliates. A distribution
participant relying on this exception also would be required to obtain
an independent assessment of the operation of its policies and
procedures governing its information barriers during any calendar year
in which it participates in a distribution.
Rule 101 would provide an exception for de minimis violations
during the restricted period. This provision would except purchases of
less than one percent of the ADTV of the security in distribution.
However, this provision is only available where the person making such
bid or purchase subject to the exception has established, maintains,
and enforces written policies and procedures reasonably designed to
achieve compliance with the other provisions of Rule 101.
Rule 103 would require passive market makers to notify the NASD in
writing that it intends to conduct passive market making. Rule 103 also
would require the disclosure required pursuant to Items 502 and 508 of
Regulations S-B and S-K with respect to the intended passive market
making activities. This disclosure is required under Rule 10b-6A.
Because Rule 103 extends the availability of passive market making to
offerings of securities that previously were ineligible, it potentially
would increase the number of respondents submitting such information
for passive market making purposes.
2. Rule 104
Proposed Rule 104 would require disclosure of stabilizing
activities in the offering materials and would expand information
collection with respect to certain aftermarket activities. In addition,
Rule 104 would require any person who places or transmits a bid that
such person knows is for the purpose of either stabilizing the price of
any security to disclose the purpose of such transaction to the market.
Any person placing or transmitting a stabilizing bid also would be
required to disclose the bid's purposes to the person to whom the bid
is placed or transmitted. In the case of syndicate covering
transactions and penalty bids, disclosure must be made to the
appropriate SRO. Proposed revisions to Rule 17a-2 under the Exchange
Act would require underwriters to keep records of syndicate covering
transactions and penalty bids, in addition to stabilizing information.
The stabilizing legend required by paragraph (k) of Rule 10-b7, and
Item 502(d) of Regulations S-B and S-K would be replaced by a short
legend briefly indicating, in plain language, the transactions that may
affect the offered security's price and directing investors to a
further discussion of these transactions in the ``plan of
distribution'' section of the prospectus. Furthermore, Item 508 of
Regulations S-B and S-K governing the plan of distribution disclosure,
would be revised to require a brief description of any prospective
stabilizing and aftermarket activities, including syndicate covering
transactions and the imposition of a penalty bid, and their potential
effects on the marketplace. Although these proposed amendments are
directed to Items 502(d) and 508 of Regulations S-B and S-K, the actual
paperwork burden results from preparing the Commission forms that
reference these items, such as Forms S-1, S-2, and S-3 under the
Securities Act.106
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\106\ 17 CFR 239.11, 239.12, and 239.13, respectively.
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B. Proposed Use of the Information
The information collected pursuant to proposed Regulation M would
be used by the Commission, SROs, or investors. The information required
pursuant to Rule 17a-2, however, would be maintained solely in the
syndicate managers' records, to which the Commission would have access
upon request. The Commission would not regularly receive any of the
information described above, other than through the filing of
registration statements that contain the information in Items 502(d)
and 508 of Regulations S-B and S-K.
The notice provided to the NASD pursuant to proposed Rule 103 would
serve to alert the NASD that members of the underwriting syndicate may
engage in passive market making. Reporting passive market making
purchases to the NASD would further assist in its surveillance of
passive market making, which is an integral component of passive market
making. The Commission would not receive copies of the notices provided
to the NASD. Disclosure in the prospectus that the underwriters may
engage in passive market making would alert the investors of such
potential activity to assist in their investment decisions.
Notifying the market of stabilizing bids, and the SRO of syndicate
covering transactions or penalty bids, would provide the market or SRO
with information on transactions that may affect the price of the
security.
The Commission would use records required pursuant to Rules 104 and
related Rule 17a-2 in examinations or investigations of underwriting
activities, and for general regulatory oversight. This information may
be requested or reviewed by the Commission in connection with its
regulatory and enforcement responsibilities. Investors would use the
disclosure required in Rule 104 and Items 502(d) and 508 of Regulations
S-B and S-K to evaluate a security for investment purposes in light of
possible stabilizing and related activities.
C. Respondents
The exclusion from the coverage of Rule 101 for certain affiliates
of a distribution participant, when information barriers are
established, may be used by every distribution participant. The
Commission does not have information on the number of broker-dealers
who participate in distributions or on the number of such broker-
dealers who have affiliates and would seek to take advantage of this
exception. The Commission estimates that the number of respondents in
this category would be 100.
The exclusion available for de minimis violations of Rule 101 would
be available to all distribution participants that maintain a written
policy for compliance with Regulation M. The Commission does not have
information on the number of broker-dealers who participate in
distributions. The Commission estimates that the number of respondents
in this category would be 100. To use the actively-traded securities
exception or to calculate the restricted periods under Rules 101 and
[[Page 17129]]
102, or to engage in aftermarket activities under Rule 104, the
Commission believes that the syndicate manager of each relevant
offering would collect the required information. Over the past five
years, there have been an average of 522 firm commitment offerings per
year. In addition, the Commission believes that in approximately 50
self-underwritten offerings per year the issuer would calculate the
ADTV.
D. Total Annual Reporting and Recordkeeping Burden
1. Restricted Periods
For each of the estimated 522 firm commitment, public offerings per
year, the Commission believes it would take approximately one hour for
the managing underwriter to calculate the ADTV, determine the
applicable restricted period, and inform other distribution
participants, if any. Approximately 522 hours would be required
annually for these calculations. In addition, approximately 50 hours
would be required annually for issuers to calculate the ADTV for self-
underwritten offerings. In many circumstances, however, the collection
of information would be unnecessary because satisfaction of the
condition would be self-evident (i.e., the ADTV would be extremely high
or extremely low).
2. Information Barriers
The Commission estimates that approximately 100 broker-dealers that
act as distribution participants in offerings covered by Regulation M
may seek to except the activities of an affiliate from the regulations.
The Commission estimates that the written policy required for the
exemption would take approximately 40 hours to draft and implement. The
Commission estimates that the annual audit would take approximately 10
hours. Approximately 4,000 hours would be required by this exemption in
the first year and approximately 1,000 hours in each subsequent year.
The Commission believes, however, that this policy creating the
information barrier would be subsumed under the policies and procedures
already put in place by broker-dealers participating in offerings for
the purpose of complying with other federal and state securities laws.
3. De Minimis Exception
The Commission estimates that approximately 975 broker-dealers
annually will act as distribution participants in offerings covered by
Regulation M. The Commission estimates that the written policy required
for the de minimis exception would take approximately 40 hours to draft
and implement. Approximately 39,000 hours would be required by this
exemption in the first year.
4. Rule 103
In every firm commitment offering of Nasdaq securities, the
underwriters may seek to engage in passive market making. In 1995, 155
Nasdaq offerings involved passive market making pursuant to Rule 10b-
6A. The managing underwriter would inform the NASD, receive the data,
and inform the syndicate members of their passive market making status.
The Commission estimates that the written notice required to be
provided to the NASD would involve one hour of preparation. Rule 103,
however, makes the passive market making exemption available for a
greater number of transactions. There were a total of 375 secondary
offerings of Nasdaq securities in 1995, most of which, but not all of
which, could have used passive market making under proposed Rule 103.
Assuming 375 is a reasonable number of offerings in a typical year and
assuming that passive market making would be available under Rule 103
for all of these offerings, the Commission estimates that the total
burden of Rule 103 would be 375 hours.
5. Stabilizing and Aftermarket Activities
a. Disclosure of Stabilizing Bids to the Market
The Commission does not have a reasonable basis upon which to estimate
how frequently this disclosure will be required because stabilizing
bids rarely occur. In all instances where such disclosure would be
required, the Commission estimates that it would require 15 minutes.
b. Notice of Penalty Bid
The Commission estimates that disclosing penalty bids would require
six minutes per offering. Using 522 offerings, as discussed above, this
disclosure would require an estimated 52 hours over the course of a
year.
6. Rule 17a-2
The Commission estimates that creating and maintaining records
pursuant to this rule would require five hours per offering. Because
most of the records required pursuant to this rule already are retained
as a matter of practice, the Commission believes that its time estimate
should not impose burdens much greater than already exist with respect
to Rule 17a-2. Using 522 offerings, as discussed above, this
recordkeeping would require an estimated 2,610 hours over the course of
a year.
7. Items 502 and 508
The Commission estimates that the disclosure required by the
changes to Items 502(d) and 508 of Regulations S-B and S-K would
require 30 minutes per firm commitment offering. The Commission expects
that this burden will be reduced significantly as respondents become
more familiar with the disclosure. If the respondents using Forms S-1,
S-2, S-3, S-11, SB-1, SB-2, F-1, F-2, and F-3, which incorporate the
disclosure required by Items 502(d) and 508, each conducted a firm
commitment offering, disclosing this information would require an
estimated 2,391 hours per year.
E. General Information About the Collection of Information
Any collection of information under Regulation M would be a
voluntary action to avoid the otherwise prophylactic measures of the
rules thereunder. Only Rule 17a-2 imposes a three-year retention period
on the collected information. None of the other rules prescribe
retention periods. In general, the information collected pursuant to
Regulation M would be held by the respondent. The Commission would only
gain possession of the information upon its request. Any information
collected pursuant to Regulation M would not be confidential and would
be publicly available from sources other than the respondent.
F. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
(i) evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information shall have practical utility;
(ii) evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information;
(iii) enhance the quality, utility, and clarity of the information
to be collected; and
(iv) minimize the burden of collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms for information technology.
Persons desiring to submit comments on the collection of
information requirements should direct them to the Office of Management
and Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
D.C. 20503, and
[[Page 17130]]
should also send a copy of their comments to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and refer to File No. S7-11-96. OMB is required
to make a decision concerning the collections of information between 30
and 60 days after publication of this release in the Federal Register,
so a comment to OMB is best assured of having its full effect if OMB
receives it within 30 days of this publication.
IX. Statutory Basis and Text of Proposed Rules and Amendments
The proposed amendments to Rules 10b-6, 10b-6A, 10b-7, 10b-8, 10b-
18, 10b-21, and 17a-2 would be adopted under the Exchange Act, 15
U.S.C. 78a et seq., and particularly Sections 2, 3, 9(a)(6), 10(a),
10(b), 13(e), 15(c), 17(a), and 23(a), 15 U.S.C. 78b, 78c, 78i(a)(6),
78j(a), 78j(b), 78m(e), 78o(c), 78q(a), and 78w(a). The proposed
amendments to Items 502(d) and 508 of Regulations S-B and S-K would be
adopted under the Securities Act, 15 U.S.C. 77a et seq., particularly
Sections 6, 7, 8, 10, and 19(a), 15 U.S.C. 77f, 77g, 77h, 77j, and
77s(a); the Exchange Act, 15 U.S.C. 78a et seq., particularly Sections
3, 4, 10, 12, 13, 14, 15, 16, and 23, 15 U.S.C. 78c, 78d, 78j, 78l,
78m, 78n, 78o, 78p, and 78w; and the Investment Company Act of 1940, 15
U.S.C. 80a-1 et seq., particularly Sections 8 and 38(a), 15 U.S.C. 80a-
8 and 80a-37(a). Regulation M would be adopted under the Securities
Act, 15 U.S.C. 77a et seq., particularly Sections 7, 17(a), 19(a), 15
U.S.C. 77g, 77q(a), and 77s(a); the Exchange Act, 15 U.S.C. 78a et
seq., particularly Sections 2, 3, 9(a), 10, 11A(c), 12, 13, 14, 15(c),
15(g), 17(a), 23(a), and 30, 15 U.S.C. 78b, 78c, 78i(a), 78j, 78k-1(c),
78l, 78m, 78n, 78o(c), 78o(g), 78q(a), 78w(a), and 78dd-1; and the
Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq., particularly
Sections 23, 30, and 38, 15 U.S.C. 80a-23, 80a-29, and 80a-37.
List of Subjects
17 CFR Part 228
Reporting and recordkeeping requirements, Securities, Small
businesses.
17 CFR Part 229
Reporting and recordkeeping requirements, Securities.
17 CFR Part 240
Broker-dealers, Confidential business information, Fraud, Issuers,
Reporting and recordkeeping requirements, Securities.
17 CFR Part 242
Broker-dealers, Fraud, Issuers, Reporting and recordkeeping
requirements, Securities.
For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is proposed to be amended as follows:
PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS
1. The authority citation for part 228 continues to read as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss,
78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 80b-
11, unless otherwise noted.
2. Section 228.502 is amended by revising the introductory text of
paragraph (d)(1) and paragraph (d)(1)(i) to read as follows:
Sec. 228.502 (Item 502) Inside front and outside back cover pages of
prospectus.
* * * * *
(d)(1) Stabilizing and other transactions. (i) Include the
following statement, if true, subject to appropriate modification where
circumstances require.
Certain persons participating in this offering may engage in
transactions that stabilize, maintain, or otherwise affect the price
of (identify securities), including (list types of transactions).
For a description of these activities, see ``Plan of Distribution.''
* * * * *
3. Section 228.508 is amended by adding paragraph (j) to read as
follows:
Sec. 228.508 (Item 508) Plan of distribution.
* * * * *
(j) Stabilizing and other transactions. If the underwriters or any
selling group members intend to engage in stabilizing, syndicate short
covering transactions, penalty bids, or any other transaction during
the offering that may stabilize, maintain, or otherwise affect the
offered security's price, indicate such intention and briefly describe
such transaction(s).
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
4. The authority citation for part 229 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn,
77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e, 79n,
79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted.
* * * * *
5. Section 229.502 is amended by revising the introductory text of
paragraph (d)(1) and paragraph (d)(1)(i) to read as follows:
Sec. 229.502 (Item 502) Inside front and outside back cover pages of
prospectus.
* * * * *
(d)(1) Stabilizing and other transactions. (i) Include the
following statement, if true, subject to appropriate modification where
circumstances require.
Certain persons participating in this offering may engage in
transactions that stabilize, maintain, or otherwise affect the price
of (identify securities), including (list types of transactions).
For a description of these activities, see ``Plan of Distribution.''
* * * * *
6. Section 229.508 is amended by adding paragraph (l) to read as
follows:
Sec. 229.508 (Item 508) Plan of distribution.
* * * * *
(l) Stabilizing and other transactions. If the underwriters or any
selling group members intend to engage in stabilizing, syndicate short
covering transactions, penalty bids, or any other transaction during
the offering that may stabilize, maintain, or otherwise affect the
security's price, indicate such intention and briefly describe such
transaction(s).
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
7. The authority citation for part 240 is amended by removing the
subauthorities for ``Section 240.10b-6'' and ``Section 240.10b-21'' and
the general authority continues to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
8. Section 240.10b-6 is removed and reserved.
9. Section 240.10b-6A is removed.
10. Sections 240.10b-7 and 240.10b-8 are removed and reserved.
11. Section 240.10b-18 is amended by redesignating paragraphs
(a)(3)(i) through (a)(3)(vi) as paragraphs (a)(3)(ii) through
(a)(3)(vii), and by adding paragraph (a)(3)(i) and revising paragraphs
(a)(5) and (a)(6) to read as follows:
Sec. 240.10b-18 Purchases of certain equity securities by the issuer
and others.
(a) * * *
[[Page 17131]]
(3) * * *
(i) Effected during a distribution (as defined in Sec. 242.100 of
this chapter) of such stock, or a distribution for which such stock is
a reference security, by the issuer or any of its affiliated
purchasers;
* * * * *
(5) The term plan has the meaning contained in Sec. 242.100 of this
chapter;
(6) The term agent independent of the issuer has the meaning
contained in Sec. 242.100 of this chapter;
* * * * *
12. Section 240.10b-21 is removed and reserved.
13. Section 240.17a-2 is amended by revising paragraph (a), the
introductory text of paragraph (b), paragraph (b)(1), the introductory
text of paragraph (c), and paragraphs (c)(1) and (d) to read as
follows:
Sec. 240.17a-2 Recordkeeping requirements relating to stabilizing
activities.
(a) Scope of section. This section shall apply to any person who
effects any purchase of a security for the purpose of, or who
participates in a syndicate or group that engages in, ``stabilizing,''
as defined in Sec. 242.100 of this chapter, the price of any security
to facilitate an offering of any security (other than an ``exempted
security,'' as hereinafter defined); or effects a purchase that is a
``syndicate covering transaction,'' as defined in Sec. 242.100 of this
chapter; or places or transmits a ``penalty bid,'' as defined in
Sec. 242.100 of this chapter:
(1) With respect to which a registration statement has been, or is
to be, filed pursuant to the Securities Act of 1933 (15 U.S.C. 77a et
seq.);
(2) Which is being, or is to be, offered pursuant to an exemption
from registration under Regulation A (Secs. 230.251 through 230.263 of
this chapter) adopted under the Securities Act of 1933 (15 U.S.C. 77a
et seq.); or
(3) Which is being, or is to be, otherwise offered, if the
aggregate offering price of the securities being offered exceeds
$5,000,000.
(b) Definitions. For purposes of this section, the following
definitions shall apply:
(1) The term manager shall mean the person stabilizing or effecting
syndicate covering transactions or placing or transmitting a penalty
bid for his sole account or for the account of a syndicate or group in
which he is a participant, and who, by contract or otherwise, deals
with the issuer, organizes the selling effort, receives some benefit
from the underwriting that is not shared by other underwriters, or
represents any other underwriters in such matters as maintaining the
records of the distribution and arranging for allotments of the
securities offered.
* * * * *
(c) Records relating to stabilizing, syndicate covering
transactions, and penalty bids required to be maintained by manager.
Any person subject to this section who acts as a manager and stabilizes
or effects syndicate covering transactions or places or transmits a
penalty bid shall:
(1) Promptly record and maintain in a separate file, for a period
of not less than three years, the first two years in an accessible
place, the following information:
(i) The name and class of any security stabilized or any security
in which syndicate covering transactions have been effected or a
penalty bid has been invoked;
(ii) The price, the date, and the time at which each stabilizing
purchase or syndicate covering transaction was effected by the manager
or by any participant in the syndicate or group;
(iii) The names and the addresses of the members of the syndicate
or group;
(iv) Their respective commitments, or, in the case of a standby or
contingent underwriting, the percentage participation of each member of
the syndicate or group therein; and
(v) The dates when any penalty bid was in effect and the
transactions against which any penalties were assessed.
* * * * *
(d) Notification to manager. Any person who has a participation in
a syndicate account but who is not a manager of such account, and who
effects one or more stabilizing purchases or syndicate covering
transactions for his sole account or for the account of a syndicate or
group, shall within three business days following such purchase notify
the manager of the price, date, and time at which such stabilizing
purchase or syndicate covering transaction was effected, and shall in
addition notify the manager of the date and time when such stabilizing
purchase or syndicate covering transaction was terminated. The manager
shall maintain such notifications in a separate file, for a period of
not less that three years, the first two years in an easily accessible
place.
14. Part 242 is added to read as follows:
PART 242--REGULATION M
Sec.
242.100 Definitions.
242.101 Activities by distribution participants.
242.102 Activities by issuers or selling securityholders during a
distribution.
242.103 Nasdaq passive market making.
242.104 Stabilizing and other activities in connection with an
offering.
242.105 Short selling in connection with a public offering.
Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78i(a), 78j,
78k-1(c), 78l, 78m, 78n, 78o(c), 78o(g), 78q(a), 78q(h), 78w(a),
78dd-1, 80a-23, 80a-29, 80a-37.
Sec. 242.100 Definitions.
For purposes of this section, the following definitions shall
apply:
Affiliated purchaser means:
(1) A person acting, directly or indirectly, in concert with a
distribution participant, issuer, or selling securityholder in
connection with the acquisition or distribution of any covered
security; or
(2) An affiliate who, directly or indirectly, controls the
purchases of such securities by a distribution participant, issuer, or
selling securityholder, whose purchases are controlled by any such
person, or whose purchases are under common control with any such
person; or
(3) An affiliate of a distribution participant, issuer, or selling
securityholder who regularly purchases securities for its own account
or for the account of others, or who recommends or exercises investment
discretion with respect to the purchase or sale of securities;
Provided, however, That this paragraph (3) shall not apply to an
affiliate of a distribution participant where the following conditions
are satisfied:
(i) The affiliate is a separate and distinct organizational entity
from the distribution participant, with no officers (or persons
performing similar functions) or employees (other than clerical,
ministerial, or support personnel) in common with the distribution
participant;
(ii) The affiliate's bids for, purchases of, and inducements to
purchase the securities subject to this section are made in the
ordinary course of its business; and
(iii) The distribution participant:
(A) Establishes, maintains, and enforces written policies and
procedures to segregate the flow of information between itself and its
affiliates that might result in activity prohibited by Sec. 242.101(a);
and
(B) Obtains an independent assessment of the operation of such
policies and procedures during any calendar year in which it
participates in a distribution.
Agent independent of the issuer means a trustee or other person who
is independent of the issuer. The agent
[[Page 17132]]
shall be deemed to be independent of the issuer only if:
(1) The agent is not an affiliate of the issuer; and
(2) Neither the issuer nor any affiliate of the issuer exercises
any direct or indirect control or influence over the times when, or the
prices at which, the independent agent may purchase the issuer's
securities for the plan, the amounts of the securities to be purchased,
the manner in which the securities are to be purchased, or the
selection of a broker or dealer (other than the independent agent
itself) through which purchases may be executed; Provided, however,
That the issuer or its affiliate will not be deemed to have such
control or influence solely because it revises not more than once in
any three-month period the basis for determining the amount of its
contributions to the plan or the basis for determining the frequency of
its allocations to the plan, or any formula specified in the plan that
determines the amount of securities to be purchased by the agent.
At the market offering means an offering of securities at other
than a fixed price.
Average daily trading volume means the world-wide reported average
daily trading volume during the three full consecutive calendar months
immediately preceding the filing of the registration statement or, if
there is no registration statement or if the distribution involves the
sale of securities on a delayed basis pursuant to Sec. 230.415 of this
chapter, three full consecutive calendar months immediately preceding
the pricing. The value of average daily trading volume means the
average trading volume multiplied by the security's price in U.S.
dollars as of the last day of the most recent month.
Business day refers to a twenty-four hour period determined with
reference to the principal market for the securities to be distributed,
and that includes a complete trading session for that market.
Completion of participation in a distribution. A person shall be
deemed to have completed its participation in a distribution as
follows:
(1)(i) An issuer, when the distribution is completed; and
(ii) An underwriter, when such person's participation has been
distributed, including all other securities of the same class acquired
in connection with the distribution, and any stabilization arrangements
and trading restrictions with respect to such distribution of which the
person is a party have been terminated; Provided, however, That an
underwriter's participation will not be deemed to have been completed
if it exercises an overallotment option that exceeds the net syndicate
short position; and
(iii) Any other person, when such person's participation has been
distributed.
(2) A person shall be deemed to have distributed securities
acquired by such person for investment.
Covered security means any security that is the subject of a
distribution, or any reference security.
Current exchange rate means the current rate of exchange between
two currencies, which is obtained from at least one independent entity
that provides foreign exchange quotations and information in the
ordinary course of its business.
Distribution means an offering of securities, whether or not
subject to registration under the Securities Act, that is distinguished
from ordinary trading transactions by the magnitude of the offering and
the presence of special selling efforts and selling methods.
Distribution participant means an underwriter, prospective
underwriter, broker, dealer, or other person who has agreed to
participate or is participating in a distribution.
Eligible security means a Nasdaq security that is the subject of a
distribution, other than an at the market offering or conducted other
than on a best efforts basis, or is the reference security for such
security.
Exchange Act means the Securities Exchange Act of 1934 (15 U.S.C.
78a et seq.).
Independent bid means a bid by a person who is not a distribution
participant, issuer, selling securityholder, or affiliated purchaser.
NASD means the National Association of Securities Dealers, Inc.
Nasdaq means the Nasdaq system as defined in Sec. 240.11Ac1-2(a)(3)
of this chapter.
Nasdaq ADTV means the average daily trading volume in an eligible
security during the reference period, as obtained from the NASD.
Nasdaq security means a security that is authorized for quotation
on Nasdaq, and such authorization is not suspended, terminated, or
prohibited.
Net purchases means the amount by which a passive market maker's
purchases exceed its sales.
Passive market maker means a market maker that effects transactions
in accordance with the provisions of Sec. 242.103(b).
Penalty bid means an arrangement that permits the managing
underwriter to reclaim a selling concession otherwise accruing to a
syndicate member in connection with an offering when the securities
originally sold by the syndicate member are purchased in syndicate
covering transactions.
Plan consists of any bonus, profit-sharing, pension, retirement,
thrift, savings, incentive, stock purchase, stock option, stock
ownership, stock appreciation, dividend reinvestment, or similar plan
of an issuer or its subsidiaries; or any dividend or interest
reinvestment plan or employee benefit plan as defined in Sec. 230.405
of this chapter. For purposes of this paragraph and Sec. 242.102(c)
only, the term ``employee'' has the meaning contained in Form S-8
(Sec. 239.16b of this chapter) relating to employee benefit plans.
Principal market means the single securities market with the
largest aggregate reported trading volume for the class of securities
in the shorter period of the preceding twelve full consecutive calendar
months or the period since the issuer's incorporation. For the purpose
of determining the aggregate trading volume in a security, the trading
volume of depositary shares representing such security shall be
included, and shall be multiplied by the multiple or fraction of the
security represented by the depositary share. For purposes of this
paragraph, depositary share means a security, evidenced by a depositary
receipt, that represents another security, or a multiple or fraction
thereof, deposited with a depositary. For purposes of this paragraph,
reported refers to prices of securities that are reported pursuant to
Sec. 240.11Aa3-1 of this chapter or that are reported to a foreign
financial regulatory authority as defined in section 3(a)(52) of the
Exchange Act (15 U.S.C. 78c(a)(52)).
Prospective underwriter means a person:
(1) Who has submitted a bid to the issuer or other person on whose
behalf the distribution is to be made, and knows or reasonably expects
that such bid will be accepted, whether or not the terms and conditions
of the underwriting have been agreed upon; or
(2) Who has reached, or reasonably expects to reach, an
understanding with the issuer, selling securityholder, or managing
underwriter that such person will become an underwriter, whether or not
the terms and conditions of the underwriting have been agreed upon.
Reference period means the three full consecutive calendar months
immediately preceding the filing of the registration statement or, if
there is no registration statement or if the distribution involves the
sale of securities on a delayed basis pursuant to
[[Page 17133]]
Sec. 230.415 of this chapter, three full consecutive calendar months
preceding the pricing.
Reference security means a security whose price is, or may in the
future be, used to determine, in whole or in significant part, the
value of a security that is the subject of a distribution.
Restricted period means the period beginning:
(1) For any security with an ADTV value of $100,000 or more, on the
later of one business day prior to the determination of the price of
the security to be distributed or such time that a person becomes a
distribution participant, and ending upon the completion of such
person's participation in the distribution; or
(2) For all other securities, on the later of five business days
prior to the determination of the price of the securities to be
distributed or such time that a person becomes a distribution
participant, and ending upon the completion of such person's
participation in the distribution.
Securities Act means the Securities Act of 1933 (15 U.S.C. 77a et
seq.).
Selling securityholder means any person on whose behalf a
distribution is made, other than the issuer.
Stabilizing means the placing of any bid, or the effecting of any
purchase, for the purpose of pegging, fixing, or maintaining the price
of a security.
Syndicate covering transaction means the placing of any bid or the
effecting of any purchase on behalf of the sole distributor or the
underwriting syndicate or group to reduce a syndicate short position.
30% ADTV Limit means 30 percent of the market maker's Nasdaq ADTV.
Transaction means a bid or a purchase.
Underwriter means a person who has agreed with an issuer or selling
securityholder:
(1) To purchase securities for distribution; or
(2) To distribute securities for or on behalf of such issuer or
selling securityholder; or
(3) To manage or supervise a distribution of securities for or on
behalf of such issuer or selling securityholder.
Sec. 242.101 Activities by distribution participants.
(a) Unlawful Activity. In connection with a distribution of
securities, it shall be unlawful for a distribution participant or an
affiliated purchaser of such person, directly or indirectly, to bid
for, purchase, or to attempt to induce any person to bid for or
purchase a covered security during the applicable restricted period.
(b) Excepted Activity. The following activities shall not be
prohibited by paragraph (a) of this section:
(1) Research. The publication or dissemination, in the ordinary
course of business, of any information, opinion, or recommendation, if
the conditions of Secs. 230.138 or 230.139 of this chapter are met; or
(2) Transactions complying with certain other sections.
Transactions complying with Secs. 242.103 or 242.104; or
(3) Odd-lot transactions. Transactions in odd-lots; or
(4) Exercises of securities. The exercise of any option or warrant,
any right received in connection with a rights offering, or any right
or conversion privilege set forth in the instrument governing a
security to acquire any security directly from the issuer; or
(5) Unsolicited brokerage. Unsolicited brokerage transactions; or
(6) Basket transactions. (i) Transactions in connection with a
basket of securities in which the security that is the subject of the
distribution does not comprise more than five percent of the value of
the basket purchased and such basket contains a minimum of 20
securities; or
(ii) Adjustments to such a basket in the normal course of business
as a result of a change in the composition of the components of a
standardized index; or
(7) De minimis transactions. Purchases of less than one percent of
the average daily trading volume of the security, or unaccepted bids;
Provided, however, That the person making such bid or purchase has
established, maintains, and enforces written policies and procedures
reasonably designed to achieve compliance with the other provisions of
this section; or
(8) Transactions in connection with the distribution. (i)
Transactions among distribution participants in connection with the
distribution, or purchases of securities from an issuer or selling
securityholder necessary to conduct the distribution, effected
otherwise than on a securities exchange or through an inter-dealer
quotation system; and
(ii) Offers to sell or the solicitation of offers to buy the
securities being distributed (including securities acquired in
stabilizing), or securities offered as principal by the person making
such offer to sell or solicitation of offers to buy; or
(9) Distributions of 144A securities. Transactions in securities
eligible for resale under Sec. 230.144A(d)(3) of this chapter, if:
(i) Such securities are offered or sold in the United States solely
to qualified institutional buyers, as defined in Sec. 230.144A(a)(1) of
this chapter, or to offerees or purchasers that the seller and any
person acting on behalf of the seller reasonably believes are qualified
institutional buyers, in a transaction exempt from registration under
section 4(2) of the Securities Act (15 U.S.C. 77d(2)) or Secs. 230.144A
or 230.501 through 230.508 of this chapter; or
(ii) During a distribution qualifying under paragraph (b)(9)(i) of
this section, such securities are offered or sold concurrently to
persons not deemed to be ``U.S. persons'' for purposes of
Secs. 230.902(o)(2) or 230.902(o)(7) of this chapter.
(c) Excepted Securities. The provisions of this section shall not
apply to any of the following securities:
(1) Actively-traded securities. Securities with an ADTV value of at
least $1 million; or
(2) Investment grade nonconvertible securities. Nonconvertible debt
securities or nonconvertible preferred securities; Provided, however,
That at least one nationally recognized statistical rating
organization, as that term is used in Sec. 240.15c3-1 of this chapter,
has rated the nonconvertible securities being distributed in one of its
generic rating categories that signifies investment grade; or
(3) Exempted securities. ``Exempted securities'' as defined in
section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12)); or
(4) Face-amount securities or securities issued by an open-end
management investment company or unit investment trust. Face-amount
certificates issued by a face-amount certificate company, or redeemable
securities issued by an open-end management investment company or a
unit investment trust. Any terms used in this paragraph (c)(4) that are
defined in the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.)
shall have the meanings specified in such Act.
(d) Exemptive Authority. Upon written application or upon its own
motion, the Commission may grant an exemption from the provisions of
this section to any transaction or transactions, either unconditionally
or on specified terms and conditions.
Sec. 242.102 Activities by issuers and selling securityholders during
a distribution.
(a) Unlawful Activity. In connection with a distribution of
securities, it shall be unlawful for an issuer, selling securityholder,
or an affiliated purchaser of such person, directly or indirectly, to
bid for, purchase, or to attempt to induce any person to bid for
[[Page 17134]]
or purchase a covered security during the applicable restricted period.
(b) Excepted Activity. The following activities shall not be
prohibited by paragraph (a) of this section:
(1) Odd-lot transactions. Transactions in odd-lots; or
(2) Transactions complying with Sec. 270.23c-3. Transactions
complying with Sec. 270.23c-3 of this chapter; or
(3) Exercises of securities. The exercise of any option or warrant,
any right received in connection with a rights offering, or any right
or conversion privilege set forth in the instrument governing a
security to acquire any security directly from the issuer; or
(4) Transactions in connection with the distribution. Offers to
sell or the solicitation of offers to buy the securities being
distributed.
(c) Plans. (1) Paragraph (a) of this section shall not apply to
distributions of securities by or on behalf of an issuer or a
subsidiary of an issuer pursuant to a plan, which are made:
(i) Solely to employees or securityholders of the issuer or its
subsidiaries, or to a trustee or other person acquiring such securities
for the accounts of such persons; or
(ii) To persons other than employees or securityholders, if bids
for or purchasers of securities pursuant to such plan are effected
solely by an agent independent of the issuer and the securities are
from a source other than the issuer.
(2) Bids or purchases of any security made or effected by or for a
plan shall be deemed to be a purchase by the issuer unless the bid is
made, or the purchase is effected, by an agent independent of the
issuer.
(d) Excepted Securities. The provisions of this section shall not
apply to any of the following securities:
(1) Exempted securities. ``Exempted securities'' as defined in
section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12)); or
(2) Face-amount securities or securities issued by an open-end
management investment company or unit investment trust. Face-amount
certificates issued by a face-amount certificate company, or redeemable
securities issued by an open-end management investment company or a
unit investment trust. Any terms used in this paragraph (d)(2) that are
defined in the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.)
shall have the meanings specified in such Act.
(e) Exemptive Authority. Upon written application or upon its own
motion, the Commission may grant an exemption from the provisions of
this section to any transaction or transactions, either unconditionally
or on specified terms and conditions.
Sec. 242.103 Nasdaq passive market making.
(a) Scope of Section. This section permits broker-dealers to engage
in market making transactions in eligible securities without being in
violation of the provisions of Sec. 242.101, except when a stabilizing
bid for such security is in effect pursuant to Sec. 242.104.
(b) Conditions to be Met.
(1) General limitations. A passive market maker must effect all
transactions in the capacity of a registered market maker on Nasdaq.
Except as provided below, a passive market maker shall not display a
bid for or purchase an eligible security at a price that exceeds the
highest independent bid for the eligible security at the time of the
transaction; Provided, however, That a passive market maker may
purchase an eligible security at a price that exceeds the highest
independent bid for such security at the time of the transaction to
comply with a rule promulgated by the Commission or NASD governing the
execution of customer orders.
(2) Requirement to lower the bid. If all independent bids for an
eligible security are lowered below the passive market maker's bid, the
passive market maker must lower its bid to a level not higher than the
then highest independent bid; Provided, however, That a passive market
maker may continue to maintain a bid and effect purchases at its bid at
a price exceeding the then highest independent bid until the passive
market maker purchases an amount of the eligible security that equals
or, through the purchase of all securities that are part a single
order, exceeds two times the minimum quotation size for the security,
as determined by NASD rules.
(3) Purchase limitation. On each day, a passive market maker's net
purchases shall not exceed its 30% ADTV Limit; Provided, however, That
a passive market maker may purchase all of the securities that are part
of a single order that, when executed, results in its 30% ADTV Limit
being equalled or exceeded. If a passive market maker's net purchases
equal or exceed its 30% ADTV Limit, it shall immediately withdraw its
quotations from Nasdaq, and it may not effect any transaction in the
eligible security for the remainder of that day, irrespective of any
additional sales during that day, unless otherwise permitted by
Sec. 242.101.
(4) Limitation on displayed size. At all times, the passive market
maker's displayed bid size may not exceed the smaller of the minimum
quotation size for the eligible security, or the passive market maker's
remaining purchasing capacity under this paragraph (b)(4); Provided,
however, That a passive market maker whose purchasing capacity at any
time is between one and 99 shares may display a bid size of 100 shares.
(5) Identification of a passive market making bid. The bid
displayed by a passive market maker shall be designated as such.
(6) Notification and reporting to the NASD. A passive market maker
shall notify the NASD in writing in advance of its intention to engage
in passive market making. A passive market maker shall submit to the
NASD information regarding passive market making purchases in such form
as the NASD shall prescribe.
(7) Prospectus disclosure. The prospectus for any registered
offering in which any passive market maker intends to effect
transactions in any eligible security shall contain the information
required in Secs. 228.502, 228.508, 229.502, and 229.508 of this
chapter.
(c) Transactions at Prices Resulting from Unlawful Activity. No
transaction shall be made at a price that the passive market maker
knows or has reason to know is the result of activity that is
fraudulent, manipulative, or deceptive under the Securities Act, the
Exchange Act, or any rule or regulation thereunder.
Sec. 242.104 Stabilizing and other activities in connection with an
offering.
(a) Unlawful Activity. It shall be unlawful for any person,
directly or indirectly, to effect any stabilizing transaction or any
syndicate covering transaction or to place or transmit a penalty bid in
connection with an offering of any security, in contravention of the
provisions of this section.
(b) Purpose. No stabilizing transaction shall be made except for
the purpose of preventing or retarding a decline in the market price of
a security.
(c) Priority. To the extent permitted or required by the market
where stabilizing occurs, any person stabilizing shall grant priority
to any independent bid at the same price irrespective of the size of
such independent bid at the time that it is entered.
[[Page 17135]]
(d) Control of Stabilizing. No sole distributor or syndicate or
group stabilizing the price of a security or any member or members of
such syndicate or group shall maintain more than one stabilizing bid in
any one market at the same price at the same time.
(e) Stabilizing at Prices Resulting from Unlawful Activity. No
stabilizing shall be effected at a price that the person stabilizing
knows or has reason to know is in contravention of this section, or is
the result of activity that is fraudulent, manipulative, or deceptive
under the Securities Act, the Exchange Act, or any rule or regulation
thereunder.
(f) Stabilizing Prohibited in at the Market Offerings. No person
shall stabilize any at the market offering.
(g) Stabilizing Levels.
(1) No stabilizing above offering price. No stabilizing shall be
effected in a security at a price above the offering price. If
stabilizing is effected before the initial public offering price is
determined, and such offering price is higher than the stabilizing bid
or purchase price, then stabilizing may be resumed after determination
of the public offering price at the price at which stabilizing could
then be effected.
(2) Stabilizing when the principal market is open. Except as
limited by the other provisions of this paragraph (g), no stabilizing
shall be effected in any market at a price higher than the stabilizing
bid in the principal market for the security, or, if there is no
stabilizing bid in the principal market, the highest independent bid
for the security in its principal market.
(3) Stabilizing when the principal market is closed. Except as
limited by the other provisions of this paragraph (g), before the
opening of quotations for the security in the market where stabilizing
will be effected, no stabilizing shall be effected at a price in excess
of the lower of:
(i) The price at which stabilizing could have been effected at the
close of the principal market; or
(ii) The most current reported price at which independent
transactions in the offered security have been effected in any market
after the close of the principal market. After the opening of
quotations in the market where stabilizing will be effected, no
stabilizing shall be effected at a price higher than the highest
independent bid for such security in that market.
(4) Adjustments to stabilizing price. (i) A stabilizing bid may be
increased to a price no higher than the price at which stabilizing
could then be lawfully initiated. A stabilizing bid that is lawful
under this section when initiated may be maintained continuously or
reduced irrespective of changes in the independent bid of the security.
(ii) If a security goes ex-dividend, ex-rights, or ex-distribution,
the price at which such security is being stabilized shall be reduced
by an amount equal to the value of the dividend, right, or
distribution. If a stabilizing bid is expressed in a currency other
than the currency of the principal market for the security, such bid
may be initiated, maintained, or adjusted to reflect the current
exchange rate. If, in entering, maintaining, or adjusting a bid
pursuant to this paragraph (g)(4), the adjusted bid would be at or
below the midpoint between two trading differentials, such stabilizing
bid shall be adjusted downward to the lower differential.
(5) Special prices. Any stabilizing price that otherwise meets the
requirements of this section need not be adjusted to reflect special
prices available to any group or class of persons (including employees
or holders of warrants or rights).
(h) Disclosure and Notification. (1) Any person placing or
transmitting a bid that such person knows is for the purpose of
stabilizing the price of any security shall provide prior notice of
such transaction to the market on which such transaction is effected,
and disclose the purpose of such transaction to the person with whom
the bid is placed or is transmitted.
(2) Any person effecting a syndicate covering transaction or
placing or transmitting a penalty bid shall provide prior notice of
such syndicate covering transaction or penalty bid to the self-
regulatory organization with direct authority over the market on which
such syndicate covering transaction is effected or such penalty bid is
placed or transmitted.
(3) Any person subject to this section who sells to, or purchases
for the account of, any person any security where the price of such
security may be or has been stabilized or where a syndicate covering
transaction may be or has been effected for such security or where a
penalty bid may be or has been in effect, shall give the purchaser at
or before the completion of the transaction, a prospectus, offering
circular, confirmation, or other writing containing a statement similar
to that comprising the statement provided for in Item 502(d) of
Regulation S-B (Sec. 228.502(d) of this chapter) or Item 502(d) of
Regulation S-K (Sec. 229.502(d) of this chapter).
(i) Recordkeeping Requirements. A person subject to this section
shall keep the information and make the notification required by
Sec. 240.17a-2 of this chapter.
(j) Excepted Securities. The provisions of this section shall not
apply to any of the following securities:
(1) Exempted securities. ``Exempted securities,'' as defined in
section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12)); or
(2) Rule 144A eligible securities. Any distribution of securities
eligible for resale under Sec. 230.144A(d)(3) of this chapter, if:
(i) Such securities are offered or sold in the United States solely
to qualified institutional buyers, as defined in Sec. 230.144A(a)(1) of
this chapter, or to offerees or purchasers that the seller and any
person acting on behalf of the seller reasonably believes are qualified
institutional buyers, in a transaction exempt from registration under
section 4(2) of the Securities Act (15 U.S.C. 77d(2)) or Secs. 230.144A
or 230.501 through 230.508 of this chapter; or
(ii) During a distribution qualifying under paragraph (j)(2)(i) of
this section, such securities are offered or sold concurrently to
persons not deemed to be ``U.S. persons'' for purposes of
Secs. 230.902(o)(2) or 230.902(o)(7) of this chapter.
(k) Exemptive Authority. Upon written application or upon its own
motion, the Commission may grant an exemption from the provisions of
this section to any transaction or transactions, either unconditionally
or on specified terms and conditions.
Sec. 242.105 Short selling in connection with a public offering.
(a) Unlawful Activity. In connection with a distribution of
securities offered for cash (``offered securities'') pursuant to a
registration statement or a notification on Form 1-A (Sec. 239.90 of
this chapter) filed under the Securities Act, it shall be unlawful for
any person to cover a short sale with offered securities purchased from
an underwriter or broker or dealer participating in the offering, if
such short sale occurred during the shorter of:
(1) The period beginning five business days before the pricing of
the offered securities and ending with the pricing; or
(2) The period beginning with such filing and ending with the
pricing.
[[Page 17136]]
(b) Excepted Offerings. This section shall not apply to offerings
filed under Sec. 230.415 of this chapter or to offerings that will not
be conducted on a firm commitment basis.
(c) Exemptive Authority. Upon written application or upon its own
motion, the Commission may grant an exemption from the provisions of
this section to any transaction or transactions, either unconditionally
or on specified terms and conditions.
Dated: April 11, 1996.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-9403 Filed 4-17-96; 8:45 am]
BILLING CODE 8010-01-P