November 4, 1998
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street N.W.
Mail Stop 6-9
Washington D.C. 20549
Re: Release 34-40386 (File No. S7-25-98)
Dear Mr. Katz:
Goldman, Sachs & Co. ("GS"), a broker-dealer registered with the Commission, is pleased to offer the following comment on the proposal to amend Rule 17Ad-14 under the Securities Exchange Act of 1934 ("Exchange Act") to include provisions regarding the processing of reorganization events. GS supports the proposed rule amendment because we believe they are a step in the right direction. Because our firm holds significant securities positions for our customers, we continually look for ways to improve the efficiency in processing reorganizations. The current physical nature of many reorganizations inhibits our ability to serve our clients by increasing the time and cost to processing them.
We offer the following comments to address issues raised in the request for comments:
1) We do not feel that requiring reorganization agents to establish accounts at registered security depositories will be an undue burden. In fact it may improve their ability to process reorganizations.
2) An additional regulatory safeguard that we would like to see added is a requirement that reorganization agents distribute the cash proceeds on a reorganization the same day that they receive it and the security entitlements are distributed by the day after receipt, subject only to the agent's receipt either of a securities entitlement at the agent's account at the depository. Only where physical delivery is mandated by regulations outside the purview of the Commission (e.g., state law) should reorganization agents be permitted to refrain from making the required distribution until receipt of physical certificates. We have found that reorganization agents often unnecessarily delay distributing the cash/security proceeds of a reorganization for multiple days after receipt from the issuer earning income on the proceeds in the interim -- and denying our customers the prompt use of these funds.
3) The proposed list of reorganizations is comprehensive, but the term "reorganization event" should be defined broadly enough to anticipate new types of events that develop in the future.
4) Certain securities may have requirements that a physical delivery be made, however, delivery requirements should be limited to the greatest extent possible to those cases where existing securities must be formally cancelled and retired in accordance with applicable state law as a precondition to payment or delivery of new securities, as the case may be. We suggest that the Commission consider rulemaking under the Trust Indenture Act as necessary to give full effect to the proposals adopted in the proposed rules.
5) We support proposed paragraph (a)(3)(ii) of Rule 17Ad-14, which would prohibit reorganization agents from requiring delivery of certificates earlier than three business days following expiration of the relevant reorganization event. The Commission should clarify, however, that this provision should not be interpreted as to allow reorganization agents to refrain from distributing reorganization proceeds until physical delivery is made.
Three additional concerns/comments we have are as follows
1) Registered security depositories generally have earlier deadlines for submitting instructions than reorganization agents. We urge that depository participants be explicitly permitted (perhaps via depository rules or procedures) to submit instructions directly to the agent at a later time while utilizing the registered security depository to make the book entry delivery.
2) The Commission and the securities depositories should consider the extent to which dual depository eligible securities could be included (for example, securities eligible for deposit in Canadian and U.S. depositories).
3) The amendment should be expanded to include events initiated by the beneficial holder as opposed to the issuer (i.e. ad hoc conversions, warrant exercises, etc.).
Should you have any questions regarding these comments or would like to discuss the proposed rule amendments further, please do not hesitate to contact me at (212) 902-9064.
US Corporate Actions
Goldman, Sachs & Co.