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U.S. Securities and Exchange Commission

Division of Market Regulation:
Letter to the Securities Industry Association re: Broker-Dealer Mini-Tender Offer Dissemination and Disclosures

July 24, 2001

Agostino Ricci
Lewco Securities Corp.
SIA Corporate Action Division
Mini-Tender Committee Chairperson
34 Exchange Place
Jersey City, N.J. 07311

Re: Broker-Dealer Mini-Tender Offer Dissemination and Disclosures

Dear Mr. Ricci:

We provide this letter in response to discussions with both the Securities Industry Association's legal staff and Corporate Action Division members concerning the role of broker-dealer firms in connection with mini-tender offer dissemination. In the past two and a half years, as mini-tender offers have become prevalent, issues have arisen concerning mini-tender offer information dissemination by broker-dealers. As you are aware, mini-tender offer bidders have often structured these offers to take advantage of security holders. For example, mini-tender offer bidders have (1) inadequately disseminated offering documents to security holders; (2) extended below market value offers; (3) made offers slightly above current market value but extended the offers past the initial expiration date until the market price rose above the tender price; (4) lowered the offering price by fees or distributions received after a particular date; (5) extended offers on a first come, first purchase basis without providing withdrawal rights; (6) extended offers without the financial ability to consummate the offers and structured offers so the bidder gained control of tendered securities without making payment; and (7) offered to exchange liquid securities for illiquid securities. These offers continue to victimize investors.

Broker-dealers that hold customers' securities that are the subject of mini-tender offers have to decide whether to forward mini-tender offer information to such customers and what, if any, disclaimers should accompany this information. In this letter, we discuss our understanding of current broker-dealer practices and potentially problematic mini-tender offer bidder practices, and offer guidance for broker-dealers regarding their dissemination of mini-tender offer information.

Current Broker-Dealer Practices

We are aware that broker-dealers employ a variety of practices to disseminate mini-tender offer information. Some broker-dealers review mini-tender offers prior to making a decision about whether to forward notice of the offers to customers. Some firms provide disclaimer language when they forward mini-tender offer information to customers. Other broker-dealers do not forward any mini-tender offers to customers. We do not suggest that broker-dealers should follow a uniform standard in this regard. Rather, our goal in this letter is to provide guidance for broker-dealers to consider when deciding whether and how to disseminate mini-tender offer information.

Problematic Mini-Tender Offer Practices

Broker-dealers should be alert to the following mini-tender offer bidder practices that potentially victimize investors. A detailed discussion of many of these practices is contained in the interpretive release entitled, Commission Guidance on Mini-Tender Offers and Limited Partnership Tender Offers (the Release).1

A. Inadequate Dissemination

A bidder may violate Section 14(e) of the Securities Exchange Act of 1934 (the Exchange Act) if the bidder does not make reasonable efforts to disseminate material information about the mini-tender offer to security holders. The Commission has stated that there are three methods of adequate dissemination: (1) publishing the mini-tender offering document in a newspaper; (2) publishing a summary of the offering in the newspaper and mailing the complete offering document to security holders; or (3) mailing the offering document to security holders using a security holder list.2 The Release states that it is not adequate bidder dissemination to forward the offering information to the Depository Trust Company or a brokerage firm or to post it on a web site.

B. Inadequate Disclosure of Offer Price

Customers may assume that a mini-tender offer bidder is offering a premium for the targeted security when in fact the offer price may be below current market value. We recognize that there may be circumstances when acceptance of a mini-tender offer may be in a customer's interest because there is an illiquid market for that security. Limited partnership mini-tender offers may sometimes fall into this category. However, there have been numerous mini-tender offers for highly liquid securities that offer a price below current market value.

Bidders might set a mini-tender offer price at, or slightly above, the current market value. However, the bidder may extend the offer beyond the initial expiration date until such time as the market price rises above the mini-tender offer price. If this occurs, a security holder may lose control of his shares while the offer is extended because mini-tender offers generally do not provide withdrawal rights.

Broker-dealers should be alert to mini-tender offers for securities in which trading is halted. The failure to include a current market price in the offering documents is a possible indication that trading is halted. NASD Rule 3340 prohibits effecting transactions in halted securities.3

C. Price Changes

Often, a bidder will specify a mini-tender offer price but provide that transfer fees, distributions, or interest received after a certain date may reduce the mini-tender offer price. Therefore, even if the stated offer price is above the current market value, some customers may not fully appreciate that the actual offer price that will be received, once distributions or other amounts are deducted, may be below the current market value. Also, the market price of a security may rise or decline after the bidder disseminates the offer.

D. First Come, First Purchase/No Withdrawal Rights

The first come, first purchase terms may pressure customers to make hasty, uninformed tender decisions. The failure to provide withdrawal rights leaves shareholders without a means to reconsider their decisions to tender. Moreover, the lack of withdrawal rights means that shareholders lose control of their securities for the duration of the mini-tender offer, including potentially lengthy periods if the mini-tender offer is extended.

E. Inability to Finance the Offer

Customers may assume that a mini-tender offer bidder has the ability to pay for an offer and that the bidder will gain control of tendered shares only if the bidder pays for the shares. However, a bidder may extend a mini-tender offer when he does not have the ability to pay for the shares. The bidder may also structure the offer without using an escrow account or independent receiving agent in order to gain control of the shares before making payment.4 If a mini-tender offer bidder structures an offer so that tendered shares are routed to the bidder's account prior to the bidder making payment, customers may risk tendering their shares without receiving payment.

F. Exchange Offers for Privately Held Companies

A mini-tender offer bidder may offer to purchase publicly traded, liquid securities in exchange for the securities of privately held corporations for which there is no public market. Investors may not be adequately informed that by participating in such an exchange offer, they will receive an illiquid security.

Broker-Dealer Dissemination of Mini-Tender Offer Information

There is no Exchange Act rule that specifically addresses the practice of broker-dealers forwarding mini-tender offer information to their customers. Thus, there is no requirement under the Exchange Act mandating that a broker-dealer forward mini-tender offer information to its customers.5

We support the position set forth in NYSE Information Memo 99-11 that it is a prudent practice for broker-dealers to review a mini-tender offer when making a decision about whether to forward mini-tender offer information. In that process, we suggest broker-dealers consider the problematic bidder practices mentioned above.

Best Practice Guidance

A broker-dealer's principal means for forwarding to customers information about tender offers is the mailing of a notice on the brokerage firm's letterhead. We believe that it is consistent with achieving a high level of investor protection for the broker-dealer to inform its customers of potentially problematic bidder practices. Broker-dealers may perform a disservice to customers if they forward mini-tender offer information to customers without providing information in their notices regarding problematic bidder practices.

Without adequate information, a customer may assume that a mini-tender offer has the same procedural protections that a traditional tender offer provides and that the mini-tender offer price is at a premium above market price. Moreover, customers might assume that a broker-dealer is endorsing a mini-tender offer because the notice is on the firm's letterhead. This concern is heightened if the broker-dealer's notice encourages participation in a mini-tender offer. For example, a statement in a broker-dealer's notice may encourage participation in a mini-tender offer if it instructs customers to act quickly or risk losing a valuable investment opportunity, or if it states that failure to respond to the offer may result in adverse financial consequences.

Some broker-dealers provide information in their notices concerning mini-tender bidder practices. Some notices provide better information than others regarding potentially abusive mini-tender offer bidder practices. Other broker-dealers' notices may not provide any information about bidder practices. Accordingly, we suggest as a best practice that broker-dealers provide customers with information about problematic mini-tender offer bidder practices whenever they forward mini-tender offer information to their customers.6 Specifically, we suggest using the information delineated below to alert customers of potentially abusive mini-tender offer bidder practices.

Mini-Tender Offer Information7

  • Definition

    • Mini-tender offers are offers for less than five percent of a company's equity securities that are not subject to the disclosure and procedural rules that apply to other types of tender offers.

  • Offer Price

    • The person making the mini-tender offer may be offering you a price for your securities that is less than the current market value of your securities. You should check the current market price of your security to help you decide whether this is an offer that you should accept.

    • A mini-tender offer with an above-market value tender price may be extended beyond the initial expiration date. In such a case, the market price may rise above the tender price while the offer is extended. If this occurs, you may tender at a price below what you would have received if you sold your shares in the market. Compare the price you would receive if you tender and the price that you would receive if you sell your shares through your broker-dealer.

  • Price Changes

    • In some mini-tender offers, you may get a lower price than indicated in the offer because deductions are taken from the price for dividend payments, distributions, or other fees. You should determine the "final" tender payment after all deductions are taken before you tender.

  • First Come, First Purchase/No Withdrawal Rights

    • A mini-tender offer may be structured on a first come, first purchase basis, which means that the person making the offer accepts shares in order of receipt. This may place pressure on you to quickly tender your shares in order to be accepted into the mini-tender offer without having solid information about the offer and the person making the offer. Be sure that you understand the terms of a mini-tender offer before tendering your shares. You should obtain a copy of the offering document and read it carefully.

    • A mini-tender offer may not provide withdrawal rights, which means that you are locked into the mini-tender offer once you offer to tender your shares. You cannot change your mind after you tender your shares, even if the offer has not closed. In addition, the bidder can extend the mini-tender offer without giving you the right to withdraw your shares. In the meantime, you lose control over your securities and you may not have received payment.

  • Ability to Finance the Offer

    • The person making the mini-tender offer may receive your tendered shares before he pays you for your shares. Additionally, the person making the mini-tender offer might not have the funds to pay you at all. You could lose your shares without ever being paid. Alternatively, even if you are paid for tendering your shares in a mini-tender offer, the person making the offer could delay making the payment for weeks or months.

  • Exchange Offers

    • You may be asked to tender a security that is publicly traded on an exchange or over-the-counter and in return you will receive a security that is not publicly traded. As such, you may receive shares through a mini-tender offer that you cannot easily sell.

  • Additional Information

    • The target company is required to state its position about the offer by recommending that investors accept or reject the offer.

    • Persons considering the offer should consult with a financial advisor.

    • Compare all your alternatives for selling your securities before tendering your shares in a mini-tender offer.

    • You may obtain additional information about mini-tender offers by visiting the U.S. Securities and Exchange Commission's website at www.sec.gov/investor/pubs/minitend.htm.

This information could be conveyed in various formats. It could be added to a broker-dealer's current notice. We are aware, however, that broker-dealers may have systems limitations in the way that they include information in their notices. Therefore, we suggest two alternative means of conveying the information if it is used in the notice. First, the information could be used with only the mini-tender offer notices that a broker-dealer sends to customers. However, some firms' systems may not distinguish between mini-tender offers and other tender offers. Instead, their systems generate the same notice for all tender offers, including mini-tender offers. If this is the case, the notice could dedicate a section to mini-tender offers. In order to avoid customer confusion, firms could clearly indicate in the notice that not all tender offers are mini-tender offers and customers can refer to the notice's definition of a mini-tender offer and contact their financial advisor to determine whether the offer is a mini-tender offer.

As an alternative, a broker-dealer could mail the Commission's publication, Mini-Tender Offers: Tips for Investors (a copy of which is attached), with its notice rather than incorporating the information delineated above into the notice. This insert could be mailed only with mini-tender offer notices or with all tender offer and mini-tender offer notices that the broker-dealer forwards to customers. If the mailing is done with all tender offers, it would be helpful for firms to indicate that not all tender offers are mini-tender offers. In order to determine if an offer is a mini-tender offer, customers can refer to the publication and contact their financial advisor.

If an on-line broker-dealer sends its tender offer notices to customers via e-mail rather than sending the notice through the mail, that firm could incorporate the above information into its e-mail notice. In addition, on-line broker-dealers could also provide the information again at the time a customer enters tender instructions on-line. It could do so by hyperlinking to the Commission's on-line publication regarding mini-tender offers.

Of course, brokerage firms may formulate their own version of this information. However, we believe that this information describes the types of mini-tender offer bidder practices that potentially disadvantage customers. Brokerage firms might add supplementary information as warranted by mini-tender bidder practices.

Additionally, broker-dealers might also publish information on their websites regarding mini-tender offers and potentially abusive mini-tender offer bidder practices. The website page could incorporate statements from the above-suggested information and be modeled after the mini-tender notice published on the Commission's website. A broker-dealer's website publication should not be employed as an alternative to incorporating the above information into its notice or mailing an insert to customers because it is likely that not all of the target shareholder customers have access to the Internet or will be aware that this important information is on the broker-dealer's website. Brokerage firms could also hyperlink their websites to the Commission's on-line publication, Mini-Tender Offers: Tips for Investors.

We believe that broker-dealers and investors should be alert to the problematic features of some mini-tender offers. We encourage broker-dealers to consider the recommendations in this letter when forwarding mini-tender offer information to customers. We believe that it will assist investors in making better-informed decisions about mini-tender offers.

Should you have any questions, please do not hesitate to contact James Brigagliano, Assistant Director, or Elizabeth Sandoe, Attorney, in the Office of Trading Practices, Division of Market Regulation at (202) 942-0772.


Annette L. Nazareth

cc: Securities Industry Association, Legal
New York Stock Exchange
NASD Regulation



1 Release 34-43069 (July 31, 2000)[65 FR at 46581]. Additional information is also provided in the Commission's online publication entitled, Mini-Tender Offers: Tips for Investors, available at http://www.sec.gov/investor/pubs/minitend.htm.
2 Release 34-43069 (July 31, 2000)[65 FR at 46585].
3 NASD Rule 3340, Prohibition on Transactions During Trading Halts.
4 SEC Sues Jeffrey Leach, Hubert Leach and LMC Assets Corp. for Fraudulent Mini Tender Offers, Litigation Release No. 16807 (November 21, 2000).
5 We are aware that some broker-dealers may forward certain mini-tender offers to their customers because they have concluded that they have a fiduciary duty to do so. We do not express a view on, or address in this letter, the extent of any such fiduciary duties.
6 The NASD also discusses information that its members could provide when they disseminate mini-tender offer materials to their customers. However, additional problematic bidder practices have surfaced since the publication of the NASD's memo. Therefore we believe additional information is warranted. NASD Notice to Members 99-53, NASD Regulation Offers Guidance to Members Forwarding Mini Tender Offers To Their Customers (July 1999).
7 This information is derived from the Commission's on-line publication referenced in footnote one, Mini-Tender Offers: Tips for Investors.


Modified: 07/27/2001