SECURITIES AND EXCHANGE COMMISSION
17 CFR PARTS 200, 228, 229, 230, 240, and 242
Release Nos. 33-7375; 34-38067; IC-22412; International Series
Release No. 1039; File No. S7-11-96
RIN 3235-AF54
Anti-manipulation Rules Concerning Securities Offerings
AGENCY: Securities and Exchange Commission.
ACTION: Final Rules.
SUMMARY: The Commission is adopting new Regulation M governing
the activities of underwriters, issuers, selling security
holders, and others in connection with offerings of securities.
Regulation M is intended to preclude manipulative conduct by
persons with an interest in the outcome of an offering.
Regulation M significantly eases regulatory burdens on offering
participants by eliminating the trading restrictions for
underwriters of actively-traded securities; reducing the scope of
coverage for other securities; reducing restrictions on issuer
plans; providing a more flexible framework for stabilizing
transactions; and deregulating rights offerings. Consisting of
five new rules, plus a new definitional rule, Regulation M
replaces Rules 10b-6, 10b-6A, 10b-7, 10b-8, and 10b-21 ("trading
practices rules") under the Securities Exchange Act of 1934
("Exchange Act"), which are being rescinded. In addition,
related amendments are being made to Items 502(d) and 508 of
Regulations S-B and S-K, and to Rules 10b-18 and 17a-2 under the
Exchange Act. Conforming changes to various rules under the
Securities Act of 1933 ("Securities Act") and the Exchange Act
==========================================START OF PAGE 2======
are being made to reflect the repeal of the trading practices
rules and the adoption of Regulation M.
EFFECTIVE DATE: [Insert date 60 days from the date of
publication in the Federal Register]. The requirement of
242.104(i) and the amendments to 240.17a-2 are effective on
April 1, 1997.
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, Carlene S. Kim, Heidi E.
Pilpel, Barbara J. Endres, Irene A. Halpin, Marc J. Hertzberg,
Denise M. Landers, Lauren C. Mullen, Mark R. Pacioni, Alan J.
Reed, or Margaret A. Smith.
SUPPLEMENTARY INFORMATION:
I. INTRODUCTION AND SUMMARY OF NEW REGULATION M
A fundamental goal of the federal securities laws is the
prevention of manipulation. Manipulation impedes the securities
markets from functioning as independent pricing mechanisms, and
undermines the integrity and fairness of those markets. Congress
granted the Commission broad rulemaking authority to combat
manipulative abuses in whatever form they might take. In
exercising its authority, the Commission has focused on the
market activities of persons participating in a securities
offering, and determined that securities offerings present
special opportunities and incentives for manipulation that
==========================================START OF PAGE 3======
require specific regulatory attention.
On April 11, 1996, the Commission published for comment a
release ("Proposing Release") proposing Regulation M, and Rules
100 through 105 thereunder, to govern the activities of issuers,
underwriters, and other persons participating in a securities
offering, -[1]- and to replace Rules 10b-6, 10b-6A, 10b-7,
10b-8, and 10b-21 -[2]- under the Exchange Act. -[3]-
The Commission received 39 comment letters from 36 commenters in
response to the Proposing Release. -[4]- The commenters
generally expressed strong support for proposed Regulation M,
although several expressed concerns with specific provisions, and
some suggested alternative approaches for addressing particular
issues. The Commission is adopting Regulation M substantially as
proposed, but with some modifications to clarify provisions or to
reflect commenters' views. The new regulation represents the
most significant changes to the Commission's anti-manipulation
regulation of securities offerings since the adoption of the
---------FOOTNOTES----------
-[1]- Securities Exchange Act Release No. 37094 (April
11, 1996), 61 FR 17108.
-[2]- 17 CFR 240.10b-6, 240.10b-6A, 240.10b-7, 240.10b-
8, and 240.10b-21.
-[3]- 15 U.S.C. 78a et seq.
-[4]- A summary of comments has been prepared by the
staff of the Division of Market Regulation. The
summary is included, along with the comment
letters, in Public File No. S7-11-96, which is
available for inspection and copying in the
Commission's Public Reference Room, 450 Fifth
Street, N.W., Washington D.C. 20549.
==========================================START OF PAGE 4======
trading practices rules over 40 years ago. -[5]-
Regulation M is the culmination of a comprehensive review by
the Commission of its anti-manipulation regulation of securities
offerings. -[6]- This review was prompted by ongoing
developments and innovations in the securities industry,
including: increasing institutionalization of the markets,
advances in technology and communications media, enhanced
surveillance capabilities, continuing globalization of the
securities markets, and new offering techniques. These
developments have outpaced the existing structure of anti-
manipulation regulation of securities offerings and reduced the
need for broad prophylactic restrictions. Moreover, the
Commission was informed by market participants that the
application of the trading practices rules had become needlessly
complex and involved substantial compliance costs. Regulation
M exemplifies the Commission's efforts to relax restrictions in
cases where either the risk of manipulation is small or the costs
of the restrictions are disproportionate to the purposes they
serve. The new regulation continues the anti-manipulation
objectives of the trading practices rules, but reflects
developments in the securities industry, allows greater
flexibility for market participants to engage in activities that
enhance competition in the marketplace, and incorporates the
---------FOOTNOTES----------
-[5]- See Securities Exchange Act Release No. 5194 (July
5, 1955), 20 FR 5075.
-[6]- See Securities Exchange Act Release No. 33924
(April 19, 1994), 59 FR 21681 ("Concept Release").
==========================================START OF PAGE 5======
recommendations of the Commission's Task Force on Disclosure
Simplification for a more streamlined approach to regulating
manipulative conduct during offerings. -[7]- Three of the
principal elements that underlie the Commission's decision to
provide greater flexibility for market activities during
offerings are: securities market transparency, surveillance
capabilities of the self-regulatory organizations ("SROs"), and
continuing application of 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 Rules 10b-5 and 15c1-2
thereunder, -[8]- to all activities in connection with an
offering, whether or not the provisions of Regulation M apply.
-[9]- Like the former trading practices rules, Regulation M
proscribes certain activities that offering participants could
use to manipulate the price of an offered security. Although
some commenters requested that the rules under Regulation M be
formulated as non-exclusive safe harbors from the anti-
manipulation provisions of the Exchange Act, the Commission
---------FOOTNOTES----------
-[7]- Report of the Task Force on Disclosure
Simplification 77-79 (March 1996) ("Task Force
Report").
-[8]- 15 U.S.C. 77q(a); 15 U.S.C. 78i(a), 78j(b), and
78o(c); and 17 CFR 240.10b-5 and 240.15c1-2.
-[9]- See Proposing Release, 61 FR at 17109. Similarly,
Regulation M and the interpretations thereof do
not affect the application of the registration and
prospectus delivery requirements of the Securities
Act to offers and sales of securities.
==========================================START OF PAGE 6======
continues to believe that a prophylactic approach to anti-
manipulation regulation is the most effective means to protect
the integrity of the offering process by precluding activities
that could influence artificially the market for the offered
security. Regulation M contains six rules covering the
following activities during a securities offering: (1)
activities by underwriters or other persons who are participating
in a distribution (i.e., distribution participants) and their
affiliated purchasers; (2) activities by the issuer or selling
security holder 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. -[10]- A separate
rule under Regulation M, Rule 100, contains 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 are contained in Rules 101 and 102, which cover
---------FOOTNOTES----------
-[10]- Regulation M is adopted under the Securities Act,
particularly Sections 7, 17(a), and 19(a), 15
U.S.C. 77g, 77q(a), and 77s(a); the Exchange Act,
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; and
the Investment Company Act of 1940 ("Investment
Company Act"), 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.
==========================================START OF PAGE 7======
distribution participants, and issuers and selling security
holders, respectively. Rules 101 and 102 apply only during a
"restricted period" that commences one or five business days
before the day of the pricing of the offered security and
continues until the distribution is over. The restricted periods
are based on the trading volume value of the offered security and
the public float value of the issuer, rather than the price per
share and public float criteria used in Rule 10b-6, and generally
are of a shorter duration than the cooling-off periods under Rule
10b-6. Furthermore, the restricted periods of Regulation M focus
on the time of pricing. In contrast, Rule 10b-6 imposed
restrictions during the entire distribution, which could extend
over a lengthy period of time, but excepted certain trading
activities prior to a two or nine business day "cooling-off
period." The applicable cooling-off period was keyed off the
commencement of offers or sales. While Rule 10b-6 was designed
to protect the pricing of an offering, certain distribution
methods, particularly in connection with foreign offerings, could
result in the cooling-off periods commencing after an offering
had been priced.
Rule 101 excludes from its coverage more actively-traded
securities, nonconvertible and asset backed securities rated
investment grade, and Rule 144A transactions. Restrictions on
transactions in outstanding debt securities during a distribution
of a debt security are narrowed substantially. Further, Rule 101
focuses on the security being distributed and does not cover bids
==========================================START OF PAGE 8======
for and purchases of related derivative securities. It permits,
among other things, the routine dissemination of research
reports, exercises of options and other securities, and
transactions in baskets of securities involving the offered
security. Also, bids for and purchases of rights during rights
offerings are deregulated. Rule 101 deals with "inadvertent"
violations during the restricted period by excusing de minimis
transactions, provided that a distribution participant had in
place written policies and procedures reasonably designed to
achieve compliance with the regulation. Moreover, the scope of
persons subject to Rule 101 is narrowed by recognizing
"information barriers" between the distribution participant and
its affiliates.
Rule 102 covers issuers, selling security holders, and
related persons. The rule allows issuers and selling security
holders to engage in market activities prior to the applicable
restricted period. It also gives issuers greater flexibility in
conducting their dividend reinvestment and stock purchase plans
and odd-lot repurchase programs. During the restricted period,
Rule 102 permits 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, and
transactions in commodity pool or limited partnership interests
during distributions of those securities. The rule contains a
limited exception for actively-traded "reference securities."
Rule 103 replaces Rule 10b-6A and expands the scope of
==========================================START OF PAGE 9======
Nasdaq passive market making. The rule covers all Nasdaq
securities and nearly all distributions, and permits more
distribution participants to engage in passive market making.
Rule 104, which replaces Rule 10b-7, regulates stabilizing
and other activities related to a distribution. The rule
provides a more flexible framework for stabilizing transactions
than Rule 10b-7. Rule 104 allows 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
does not exceed the offering price. Also, by providing for
greater disclosure and recordkeeping of transactions that can
influence market prices immediately following an offering, Rule
104 addresses the fact that underwriters now engage in
substantial syndicate-related market activity, and enforce
penalty bids in order to reduce volatility in the market for the
offered security.
Rule 105 recodifies 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 is narrowed to the five business day period before
pricing, rather than the period extending from the time of filing
of offering materials to the time when sales may be made.
The Commission believes that separate regulation of rights
offerings, as contained in Rule 10b-8, no longer is warranted.
Many rights offerings, especially by foreign issuers, involve
securities that fall within the exception for actively-traded
==========================================START OF PAGE 10======
securities contained in Rule 101. Even for less actively-traded
securities, purchases of rights generally are not an efficient
way for a distribution participant to facilitate an offering of
the underlying security. Therefore, the Commission has decided
to rescind Rule 10b-8.
The new regulatory framework relieves market participants of
unnecessary burdens and responds effectively to a changing
marketplace, while maintaining essential investor protection.
The following sections of this release describe the individual
provisions of Regulation M and associated rule changes and
discuss, where appropriate, how they differ from the rules as
proposed and from the former trading practices rules, as well as
reasons for these changes.
II. DISCUSSION OF REGULATION M AND RELATED AMENDMENTS
A. Rule 100 - Definitions
Rule 100 sets forth the definitions applicable to all of the
rules under Regulation M. Most of the definitions are adopted as
proposed; some definitions are revised to respond to commenters'
suggestions or to add clarity to the rules. Many of these
definitions are discussed later in this release in conjunction
with the specific provisions of Regulation M to which they
relate. -[11]-
B. Rule 101 - Activities by Distribution Participants
1. Generally
---------FOOTNOTES----------
-[11]- In this release, terms defined in Rule 100 appear
in italics when discussed for the first time.
==========================================START OF PAGE 11======
Rule 101 governs the activities of persons participating in
distributions of securities, other than issuers or selling
security holders, and their affiliated purchasers. The
distribution participants subject to Rule 101 will typically be
financial intermediaries that routinely engage in market
transactions for their own accounts or for customers as part of
their businesses.
In general, Rule 101 prohibits distribution participants and
their affiliated purchasers from bidding for, purchasing, or
attempting to induce any person to bid for or purchase, a covered
security during a specified period (restricted period). As with
Rule 10b-6(c)(5), a distribution of securities under Regulation M
is distinguished from ordinary trading transactions by the
"magnitude of the offering" and the presence of "special selling
efforts and selling methods." -[12]- The restricted period
for a particular distribution commences one or five business days
before the day of the pricing of the offered security and
continues until the distribution is over. -[13]-
Even during the restricted period, Rule 101 permits
distribution participants and their affiliated purchasers to
---------FOOTNOTES----------
-[12]- Rule 100 defines distribution as "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."
-[13]- Many of the terms and concepts discussed with
respect to Rule 101 also are relevant to Rule 102,
which proscribes activities by issuers and selling
security holders and their affiliatedpurchasers.
==========================================START OF PAGE 12======
engage in a variety of activities, including the following: the
routine dissemination of research reports; exercises of options
and other securities, including rights received in connection
with a rights offering; transactions in baskets of securities
involving an offered security; and certain transactions involving
Rule 144A securities of foreign and domestic issuers. Rule 101
also excepts de minimis transactions that would otherwise violate
the rule: bids that are not accepted, and one or more purchases
that in the aggregate over the restricted period total less than
2% of the security's average daily trading volume, provided that
the person making the unaccepted bids or purchases has maintained
and enforced written policies and procedures designed to achieve
compliance with the rule.
2. Persons Subject to Rule 101
a. Distribution Participant
A distribution participant is defined in Rule 100 as an
underwriter, prospective underwriter, broker, dealer, or other
person who has agreed to participate or is participating in a
distribution. The Commission is adopting the definition as
proposed.
Several commenters expressed concern that a distribution
participant affiliated with an issuer or selling security holder
(e.g., an underwriter that is affiliated with an issuer) would be
subject to the more restrictive provisions of Rule 102, rather
than those of Rule 101, which they claimed could result in
==========================================START OF PAGE 13======
unwarranted adverse business and market consequences.
-[14]- They recommended that such distribution
participants be permitted to rely on the provisions of Rule 101.
Other commenters recommended that any financial services
affiliate of an issuer or selling security holder, whether or not
it is acting as a distribution participant in connection with the
distribution, should have the benefit of the additional
exceptions available under Rule 101.
After considering the commenters' views, the Commission has
added a proviso to paragraph (a) of Rules 101 and 102, specifying
that any affiliated purchaser of an issuer or selling security
holder that also is acting as a distribution participant may
comply with the provisions of Rule 101, rather than Rule 102,
provided that such affiliated purchaser is not itself the issuer
or selling security holder. -[15]- Thus, during a
distribution, an underwriter affiliated with the issuer will be
able to comply with the provisions of Rule 101. The Commission
is making this revision based upon its experience with Rule 10b-
6, and the fact that underwriters affiliated with the issuer are
often important market participants that are subject to SRO
surveillance.
b. Prospective Underwriter
---------FOOTNOTES----------
-[14]- See infra Section II.C., discussing Rule 102.
-[15]- The exception for actively-traded securities is
not available for securities that are issued by a
distribution participant or an affiliate of the
distribution participant. See infra Sections
II.C.2. and II.C.5.
==========================================START OF PAGE 14======
A prospective underwriter is defined as a person: who has
submitted a bid to an issuer or selling security holder, and
knows or is reasonably certain that such bid will be accepted,
whether or not the terms and conditions of the underwriting have
been agreed upon; or who has reached, or is reasonably certain to
reach, an understanding with an issuer, selling security holder,
or managing underwriter that such person will become an
underwriter, whether or not the terms and conditions of the
underwriting have been agreed upon. -[16]- The definition
differs from the proposal in that the phrase "is reasonably
certain" replaces "reasonably expects." Several commenters
requested that the proposed definition provide greater certainty
as to when a person becomes a prospective underwriter. They
believed that, as a practical matter, it may be difficult or even
impossible for a broker-dealer to know when it "reasonably
expects" to have its bid accepted or to reach an understanding
with an issuer. Although the definition as adopted does not
provide a bright line test, the practical effect should be to
reduce the circumstances in which a broker-dealer will be a
prospective underwriter. The definition reflects the
Commission's view that there is frequently some point prior to
when a bid actually has been accepted, or a broker-dealer has
---------FOOTNOTES----------
-[16]- If a broker-dealer has entered into a continuing
agreement with an issuer or selling security
holder regarding takedowns of securities off a
shelf, such agreement typically would make the
broker-dealer reasonably certain that it would
participate in a distribution off the shelf.
==========================================START OF PAGE 15======
been told that it will be an underwriter, when it is reasonably
certain that such person will be an underwriter, and that the
incentive to facilitate the distribution is present at that
point.
c. Completion of Participation in the
Distribution
Under Regulation M, a person determines when its completion
of participation in the distribution occurs based on the person's
role in the distribution. An underwriter is deemed to have
completed its participation in a distribution when its
participation has been distributed, including all other
securities of the same class that are acquired in connection with
the distribution, and after any stabilization arrangements and
trading restrictions in connection with the distribution have
been terminated.
The definition contains a proviso that an underwriter's
participation is not deemed to be completed, however, if a
syndicate overallotment option is exercised in an amount that
exceeds the net syndicate short position at the time of such
exercise. -[17]- This proviso comports with a provision of
Rule 10b-6 and is intended to assure that the underwriter's
selling efforts in connection with the distribution have in fact
ceased before trading prohibitions are lifted. Consistent with
Rule 10b-6 interpretation, if an overallotment option is
exercised for an amount of securities that exceeds the net
---------FOOTNOTES----------
-[17]- See Letter regarding Overallotment Options
(November 27, 1996), 1996 SEC No-Act. LEXIS 868.
==========================================START OF PAGE 16======
syndicate short position (i.e., taking into account shares
purchased in stabilizing or syndicate short covering
transactions), the distribution will not be deemed completed and
purchases made prior to the exercise of the option would
constitute a violation of Regulation M. -[18]- Any other
distribution participant will have completed its participation
when its allotment has been distributed. -[19]- Several
commenters asked the Commission to clarify that securities
acquired for investment by persons participating in a
distribution would be considered to be distributed. Consistent
with an interpretation of Rule 10b-6, securities acquired in a
distribution for investment purposes by anyone participating in
the distribution, or any affiliated purchaser, are considered to
be distributed. -[20]-
d. Affiliated Purchaser
The Commission proposed to define affiliated purchaser for
Rules 101 and 102 as: (1) a person acting in concert with a
distribution participant, issuer, or selling security holder in
---------FOOTNOTES----------
-[18]- See Securities Exchange Act Release No. 19565
(March 4, 1983), 48 FR 10628, 10640 ("Release 34-
19565").
-[19]- See infra Section II.C.2.a., discussing the
definition of completion of participation in the
distribution as it relates to issuers and selling
security holders.
-[20]- The definition of completion of participation in
the distribution codifies the approach taken by
the staff in Letter regarding VLI Corporation,
[1982-1983] Fed. Sec. L. Rep. (CCH) 77,625
(October 17, 1983) ("VLI Letter").
==========================================START OF PAGE 17======
connection with the acquisition or distribution of a covered
security; (2) an affiliate who controls the purchase of such
securities by a distribution participant, issuer, or selling
security holder, or whose purchases are controlled by such
persons, or whose purchases are under common control with those
of such persons; or (3) an affiliate of a distribution
participant, issuer, or selling security holder 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 ("financial
services affiliates").
The Commission proposed excluding a financial services
affiliate of a distribution participant, but not that of an
issuer or selling security holder, from the definition if: (1)
the affiliate was a separate and distinct organizational entity
from, having no officers or employees in common with, the
distribution participant; (2) the affiliate's bids for, purchases
of, and inducements to purchase securities in distribution were
made in the ordinary course of its business; and (3) the
distribution participant maintained and enforced written policies
and procedures designed to segregate the flow of information
between the distribution participant and its affiliates
("information barriers"), and obtained an annual independent
assessment of the operation of its information barriers.
Although commenters generally supported the Commission's
efforts to revise the affiliated purchaser definition, several
==========================================START OF PAGE 18======
recommended that financial services affiliates of issuers and
selling security holders also be excluded from this definition.
Moreover, many commenters stated that precluding common officers
and employees and requiring that the distribution participant and
affiliate be separate and distinct organizational entities would
prevent a large number of multi-service financial institutions
from relying on this exception. Noting that large financial
services providers frequently have at least some officers or
employees with overlapping responsibilities, many commenters
argued that the presence of common officers or employees should
not preclude an affiliate from availing itself of the exclusion
where the affiliate's purchases are made in the ordinary course
of its business and the distribution participant has maintained
and enforces appropriate information barriers.
The Commission is adopting the first two prongs of the
definition substantially as proposed. -[21]- In response
to several commenters' concerns, the Commission has determined to
modify the third prong of the definition. As adopted, the
exclusion is available to affiliates of distribution
---------FOOTNOTES----------
-[21]- None of the commenters objected to the substance
of the first two prongs of the proposed
definition, although several commenters believed
that these provisions would be sufficient to
capture any affiliate with both the means and the
incentive to manipulate. As adopted, the first
prong of the definition remains unchanged, and the
only modification to the second prong is the
addition of language providing that an "affiliate"
may be a separately identifiable department or
division of a distribution participant, issuer, or
selling security holder.
==========================================START OF PAGE 19======
participants, issuers, and selling security holders. Moreover,
the condition prohibiting common officers (or persons performing
similar functions) or employees (other than clerical,
ministerial, or support personnel) has been narrowed to preclude
commonality only with respect to those officers or employees that
direct, effect, or recommend transactions in securities.
-[22]-
A number of commenters argued that information barriers
would not deter manipulative activity because general information
regarding a distribution is public. The Commission nevertheless
is of the view that information barriers can serve to restrict
the flow of non-public information that might inappropriately
influence an affiliate's transactions in covered securities. For
example, appropriate information barriers would prevent the
communication of the details of pricing discussions with the
issuer and prospective purchasers, or knowledge as to the demand
for the offering.
As adopted, the information barrier requirements specify
that the distribution participant, issuer, or selling security
holder must maintain and enforce written policies and procedures
to prevent the flow of information to or from the affiliate that
---------FOOTNOTES----------
-[22]- The Commission believes that this modification
will resolve substantially commenters' concerns
that sharing one or more senior executives with a
distribution participant, issuer, or selling
security holder would preclude an affiliate from
availing itself of the exclusion. For example,
the requirement would not preclude common
executives charged with risk management,
compliance, or general oversightresponsibilities.
==========================================START OF PAGE 20======
might result in a violation of Rules 101, 102, or 104 of
Regulation M,-[23]- and obtain an annual, independent
review of the operation of its information barriers. As noted in
the Proposing Release, an internal audit group may perform the
review if such group is independent of the distribution
participant, issuer, or selling security holder's corporate
financing, trading, and advisory departments. -[24]-
The Commission has determined to eliminate the requirement
that the affiliate be a separate and distinct organizational
entity from the distribution participant, issuer, or selling
security holder in the sense of requiring a separate legal
entity, because such a condition could result in elevating form
over substance. Moreover, in response to comments regarding the
growth and complexity of multi-service financial institutions,
language providing that an "affiliate" may be a separately
identifiable department or division of a distribution
participant, issuer, or selling security holder has been added to
the second and third prongs of the definition. These changes
broaden the scope of financial services affiliates that may be
eligible for the exclusion.
The Commission believes, however, that affiliates should be
---------FOOTNOTES----------
-[23]- The Commission notes that this provision does not
require the affiliate to maintain and enforce such
information barriers.
-[24]- Proposing Release, 61 FR at 17117. Several
commenters requested that the proposed exclusion
clarify that an internal audit group may perform
the review.
==========================================START OF PAGE 21======
restricted from engaging in certain types of activities that
present the greatest potential for manipulation during the course
of a distribution. As adopted, the definition provides that any
affiliate that, during the applicable restricted period, acts as
a market maker (other than as a specialist in compliance with the
rules of a national securities exchange), or engages, as a broker
or a dealer, in solicited transactions or proprietary trading
activities, in covered securities is an affiliated purchaser. An
affiliate (whether an internal unit or a separate legal entity)
engaged in these activities is not eligible for the exclusion to
the affiliated purchaser definition. -[25]- In contrast,
an affiliate acting as an investment company or investment
adviser, or in some other non-broker-dealer capacity, would be
eligible for the exclusion. -[26]-
---------FOOTNOTES----------
-[25]- This means, for example, that a broker-dealer that
does not make a market in a covered security, or
that ceases market maker activity in covered
securities during the applicable restricted
period, would not fall within the definition of
affiliated purchaser. Accordingly, an issuer
affiliate that engages only in unsolicited
brokerage transactions in covered securities would
not fall within the definition.
-[26]- For example, a trustee or other pension plan
administrator may avail itself of the exclusion,
provided such entity satisfies the remaining
conditions of the exclusion.
A multi-service financial institution may engage in both
investment advisory services and trading activities. To the
extent that the institution's investment advisory services
are performed by a separately identifiable department, with
no officers or employees that direct, effect, or recommend
transactions in securities in common with the trading
department, then the investment advisory department may
(continued...)
==========================================START OF PAGE 22======
The Commission believes that these modifications to the
definition of affiliated purchaser will resolve many of the
commenters' concerns and avoid unnecessary burdens on multi-
service financial organizations with affiliates engaged in
financial advisory and other services. -[27]-
3. Securities Subject to Rule 101
The Commission proposed applying the trading restrictions of
Rule 101 to covered securities, which would include the security
that is the subject of a distribution (subject security) and
reference securities. The Commission is adopting the definition
of covered security as proposed, but at the suggestion of some
commenters has revised the definition of reference security to
describe more specifically the situations when the term applies.
The term reference security is defined as a security into which a
subject security may be converted, exchanged, or exercised, or
---------FOOTNOTES----------
-[26]-(...continued)
avail itself of the exclusion, provided the remaining
conditions of the definition are satisfied. If the same
individuals provide investment advisory services and engage
in trading activities for the institution, however, it would
be difficult, if not impossible, to attribute those
functions to "separately identifiable" departments.
Similarly, where the same individuals direct, effect, or
recommend securities transactions for two separately
organized affiliates, one providing investment advisory
services and the other engaging in solicited activities,
such persons could not avail themselves of the exclusion by
simply attributing their solicited transactions to their
investment advisory role.
-[27]- The variety and complexity of organizational
structures means that Regulation M may apply to
some affiliates that it may be appropriate to
exclude. In such cases, the Commission, through
the Division of Market Regulation, will entertain
exemption requests.
==========================================START OF PAGE 23======
which, under the terms of the subject security, may in whole or
in significant part determine the value of the subject security.
Several commenters supported the proposed definitions. In
general, these commenters believed that the proposed coverage of
securities represented a significant improvement from the
approach under Rule 10b-6, which extended trading restrictions to
any security of the "same class and series" as the security being
distributed and any "right to purchase" such security.
-[28]- One commenter additionally noted that the
elimination of the same class and series analysis would ease
greatly the task of identifying securities that are subject to
trading restrictions during debt offerings. Other commenters
indicated uncertainty regarding the applicability of Regulation M
to debt offerings and requested clarification on the coverage of
debt securities that are "identical in principal features."
The elimination of the same class and series concept will
reduce significantly the application of trading restrictions to
nonconvertible debt securities that are not rated investment
grade. -[29]- Bids for and purchases of outstanding
nonconvertible debt securities are not restricted unless the
security being purchased is identical in all of its terms to the
---------FOOTNOTES----------
-[28]- See Proposing Release, text accompanying notes 29
and 30, 61 FR 17114.
-[29]- Nonconvertible debt and certain other securities
that are rated investment grade are excluded from
Rule 101. See infra Section II.B.6.b.
==========================================START OF PAGE 24======
security being distributed. For example, Rule 101 does not apply
to a security if there is a single basis point difference in
coupon rates or a single day's difference in maturity dates, as
compared to the security in distribution. -[30]- In the
rare situations in which Rule 101 will apply to outstanding debt,
the restricted period will generally be five business days.
In addition, derivative securities (i.e., those that derive
all or part of their value from a security being distributed) are
not subject to the trading prohibition of Rule 101. Thus, for
example, bids for or purchases of options, warrants, rights,
convertible securities, or equity-linked securities are not
restricted during a distribution of the related common stock
because, while they derive their value from the security being
distributed, they do not by their terms affect the value of the
security in distribution. The National Association of Securities
Dealers, Inc. ("NASD") expressed concern about permitting bids
for and purchases of derivative securities in the case of a
distribution of an underlying security, because trading in
derivative securities can have a significant impact on the
underlying security. -[31]- The NASD recommended that the
---------FOOTNOTES----------
-[30]- In a distribution of equity securities, however,
outstanding classes of securities that differ only
in voting rights from the distributed security
will be deemed to be the same security for
purposes of Regulation M.
-[31]- See Letter from Mary L. Schapiro, President, NASD
Regulation, Inc. and Alfred R. Berkeley, III,
President, Nasdaq, to Jonathan G. Katz, Secretary,
SEC (July 23, 1996) ("NASD Comment Letter").
==========================================START OF PAGE 25======
Commission consider limiting the exclusion to those derivative
securities that are not likely to present manipulative risk, such
as "out-of-the-money" options. The Commission recognizes that
derivative securities, even those that are out-of-the-money, can
be used to manipulate the price of an underlying security through
inducing arbitrage and other transactions involving the
underlying security. It is the Commission's intention, however,
to focus trading restrictions on those securities that present
the greatest manipulative potential. Moreover, any attempt to
manipulate a security in distribution by transactions involving
derivative securities will continue to be addressed by the
general anti-manipulation provisions, including Sections 9(a)(2)
and 10(b) of, and Rule 10b-5 under, the Exchange Act.
Regulation M does apply to reference securities, such as
common stock underlying an exercisable, exchangeable, or
convertible security that is being distributed. The Commission
believes that transactions in reference securities can have a
direct and substantial effect on the pricing and terms of the
security in distribution.
The definition of reference security also encompasses a
security underlying an instrument, such as an equity-linked
security, that does not give the holder the right to acquire the
security, but whose value is or may be derived from such
security. -[32]- A security will be a reference security
---------FOOTNOTES----------
-[32]- Rule 10b-6 by its terms did not apply to the
underlying security in these circumstances. The
(continued...)
==========================================START OF PAGE 26======
only when it, or an index of which it is a component, is referred
to in the terms of a subject security. A security of the same or
similar issuer will not be deemed a reference security merely
because its price is used as a factor in determining the offering
price of a security in distribution.
Commenters sought clarification concerning whether an issuer
or distribution participant would be permitted to write a put or
maintain a "short put" position during a distribution of an
underlying security. -[33]- Transactions in derivative
securities, including put options, are not subject to Rule 101
during an offering of the underlying security. In addition,
maintaining a short put position is not deemed to be a continuing
bid for the underlying security for purposes of Regulation M.
4. Restricted Periods of Rule 101
a. Duration
As discussed below, the Commission is adopting the exclusion
---------FOOTNOTES----------
-[32]-(...continued)
Commission believes, however, that Regulation M
should apply to a security whenever it has a price
relationship to a subject security as a result of
the terms of that security.
In some cases, a reference security may have an extremely
attenuated relationship to the security in distribution.
While the Commission does not believe that a specific
percentage test is a workable means to identify these cases,
the staff will provide appropriate guidance in response to
specific inquiries.
-[33]- Cf. Letter regarding The Chicago Board Options
Exchange, [1990-1991] Fed. Sec. L. Rep. (CCH)
79,665 (February 22, 1991).
==========================================START OF PAGE 27======
from Rule 101 for actively-traded securities. -[34]- This
provision removes from Rule 101 securities with an ADTV value of
at least $1 million where the issuer's common equity securities
have a public float value of at least $150 million. For the
remaining securities, Rule 101 restricts transactions by
distribution participants in covered securities, unless an
exception applies, for the following periods:
ù in a distribution of a security with an average daily
trading volume (ADTV) value of at least $100,000, whose
issuer has outstanding common equity securities having
a public float value of at least $25 million, the
restricted period begins on the later of one business
day prior to the date on which the subject security's
price is determined or the date on which the person
becomes a distribution participant, and ends upon that
person's completion of participation in the
distribution; and
ù in a distribution of any other security, the restricted
period begins on the later of five business days prior
to the date on which the subject security's price is
determined or the date on which the person becomes a
distribution participant, and ends upon that person's
completion of participation in the distribution.
The Commission proposed that the restricted periods for an
offering would begin one or five business days prior to the
pricing of the offering, depending upon the security's ADTV value
alone.-[35]- In addition, rather than using the date of
commencement of offers or sales as a reference, the Commission
---------FOOTNOTES----------
-[34]- See infra Section II.B.6.a., discussing the
actively-traded securities exception, which
excludes from Rule 101 securities having an ADTV
value of at least $1 million and whose issuer's
common equity securities have a public float value
of at least $150 million.
-[35]- Proposing Release, 61 FR at 17113.
==========================================START OF PAGE 28======
proposed to determine the restricted period with reference to the
date on which the offering is priced. Commenters generally
supported shortening the restricted periods, and favored the one
and five business days periods keyed off the offering's pricing.
The Commission believes that the ADTV standard is most
relevant for determining which securities are more difficult to
manipulate. Nevertheless, the use of a trading volume standard
alone could skew the application of Rule 101 based on short-term,
aberrational increases in trading volume. To prevent this
result, the Commission has added a public float component to the
test for determining the applicable restricted period.
-[36]- The public float component is intended to capture
within Rule 101 those securities that experience unusual trading
volume relative to their public float value. While the use of a
two-part test requires distribution participants to make an
additional calculation, the Commission believes that the
combination of these components better identifies securities that
are more likely to be resistant to manipulation.
Rule 10b-6 contained restrictions that principally applied
during a two or nine day "cooling-off period." Many securities
that had a two day cooling-off period under Rule 10b-6 will now
---------FOOTNOTES----------
-[36]- The Commission has determined that using a public
float value component alone would not
differentiate securities sufficiently with respect
to the likelihood of manipulation because of the
wide variations in ADTV value for securities with
similar public float value.
==========================================START OF PAGE 29======
have a one day restricted period under Regulation M, or will be
free from the restrictions of Rule 101 because they are actively-
traded securities. -[37]- Even some nine day securities
under Rule 10b-6 will now have a one day restricted period under
Regulation M. -[38]- Approximately one-quarter of the
securities that qualified for a two day cooling-off period under
Rule 10b-6 are now subject to a five day restricted period
because of the different criteria used in Regulation M and Rule
10b-6 for distinguishing securities. While the restricted
periods under Regulation M are increased for some securities,
other provisions of Regulation M, such as Rule 103 (permitting
passive market making for all Nasdaq securities), will address
liquidity concerns with respect to many of these securities.
---------FOOTNOTES----------
-[37]- Based on 1995 volume and price data analyzed by
the Commission's Office of Economic Analysis
("OEA"), the Commission estimates that 6,156
securities (out of a total of 7,822 securities
listed on the New York Stock Exchange, Inc.
("NYSE"), the American Stock Exchange, Inc.
("Amex"), and Nasdaq) were subject to a two day
cooling-off period under Rule 10b-6. Under
Regulation M, of those securities approximately
1,901, or 30.9%, are excluded from the rule;
2,693, or 43.7%, are subject to a one day
restricted period; and 1,562, or 25.4%, are
subject to a five day restricted period.
-[38]- Based on 1995 volume and price data analyzed by
OEA, the Commission estimates that 1,666
securities (out of a total of 7,822 NYSE, Amex,
and Nasdaq-listed securities) were subject to a
nine day cooling-off period under Rule 10b-6.
Under Regulation M, of those securities, 11, or
0.7%, are excluded from the rule; 278, or 16.7%,
are subject to a one day restricted period; and
1,377, or 82.6%, are subject to a five-day
restricted period.
==========================================START OF PAGE 30======
b. Calculation of ADTV and Public Float Value
The ADTV of a covered security is defined on the basis of
reported worldwide average daily trading volume during a
specified period prior to the filing of the registration
statement or prior to the pricing of the offering, depending on
the circumstances. Some commenters questioned whether ADTV can
be measured uniformly across markets. The NYSE and the Amex
requested that the Commission adopt different standards for
determining trading volume on auction and dealer markets.
-[39]- These exchanges asserted that the Commission's
reliance on reported trading volume to determine this exclusion's
availability is discriminatory and anti-competitive, because such
a standard allegedly favors dealer markets where dealer
interpositioning increases volume as compared with auction
markets. The Commission does not believe that it is necessary or
appropriate to make distinctions based on the type of market on
which the security is traded. -[40]- The Commission
proposed a three-month calendar period for calculating ADTV. The
NASD recommended a rolling 60 day period, calculated as of a date
---------FOOTNOTES----------
-[39]- Letter from James E. Buck, Senior Vice President
and Secretary, NYSE, to Jonathan G. Katz,
Secretary, SEC (May 31, 1996); Letter from James
F. Duffy, Executive Vice President and General
Counsel, Amex, to Jonathan G. Katz, Secretary, SEC
(June 25, 1996).
-[40]- See infra Section IV., discussing in greater
detail the anti-competitive concerns raised by the
NYSE and the Amex.
==========================================START OF PAGE 31======
within 10 business days prior to pricing, for determining ADTV.
-[41]- Commenters also requested guidance regarding what
information sources may be used to calculate ADTV, and suggested
that the Commission designate the types of information that are
acceptable for determining ADTV.
The Commission believes that, with the addition of a test
based on public float value that will tend to correct for volume
aberrations, a 60 day rolling period provides a sufficient length
of time to measure the trading volume of a security. Therefore,
the rule permits distribution participants to use a two calendar
month or a 60 day rolling period. The 60 day rolling period for
calculating ADTV must end within 10 calendar days of the filing
of a registration statement, or, if there is no registration
statement or if the distribution is a shelf distribution, within
10 calendar days of the offering's pricing. The 10 day period
will allow distribution participants in any type of distribution
sufficient time to conform to the applicable restricted period.
The Commission has decided not to designate acceptable
information sources for determining ADTV; rather, a distribution
participant should have flexibility in determining a security's
ADTV value from information that is publicly available, if such
participant has a reasonable basis for believing that the
information is reliable.-[42]- Furthermore, in calculating
---------FOOTNOTES----------
-[41]- See NASD Comment Letter, at p. 3.
-[42]- Cf. Securities Exchange Act Release No. 27247
(September 14, 1989), 54 FR 39194, 39197-98
(continued...)
==========================================START OF PAGE 32======
the dollar value of ADTV, any reasonable and verifiable method
may be used. For example, it may be derived from multiplying the
number of shares by the price in each trade, or from multiplying
each day's total volume of shares by the closing price on that
day.
As for public float value, the Commission is adopting a
definition that reflects its usage in Form 10-K (i.e., the
aggregate amount of common equity securities held by non-
affiliates). -[43]- For example, for reporting issuers the
public float value should be taken from the issuer's most recent
Form 10-K or based upon more recent information made available by
the issuer. 5. Offerings Subject to Rule 101
a. Generally
---------FOOTNOTES----------
-[42]-(...continued)
(discussing the standard under Rule 15c2-11 under
the Exchange Act, 17 CFR 240.15c2-11, for a
broker-dealer to have a reasonable basis that
certain information is true and accurate). For
instance, a distribution participant may rely on
trading volume as reported by an SRO or comparable
entity, or any other source believed to be
reliable. Electronic information systems that
provide information regarding securities in
markets around the world could provide an easy
means to determine worldwide trading volume in a
particular security.
-[43]- 17 CFR 249.310. See also Securities Act Release
No. 7326 (August 30, 1996), 61 FR 47706 (proposing
the expansion of short-form registration to
include companies with non-voting common equity).
Form 20-F (17 CFR 249.220f), the annual report
form used by foreign private issuers under the
Exchange Act, does not require disclosure of
public float information. Nonetheless, the public
float value of such issuer should be determined in
the same manner as provided in Form 10-K.
==========================================START OF PAGE 33======
The provisions of Rule 101 apply in connection with a
distribution of securities. -[44]- The same types of
offerings or other transactions that satisfied the distribution
criteria under Rule 10b-6 (i.e., the magnitude of the
offering/selling efforts test) also are subject to Rule 101.
These include public offerings, private placements, shelf
offerings, mergers and other acquisitions, exchange offers,
forced conversions of securities, warrant solicitations, and at-
the-market offerings.
b. Shelf Offerings
The Commission is modifying its approach to shelf-registered
distributions by replacing the "single distribution position"
taken under Rule 10b-6. -[45]- Under Regulation M, each
takedown off a shelf is to be individually examined to determine
whether such offering constitutes a distribution (i.e., whether
it satisfies the "magnitude" of the offering and "special selling
efforts and selling methods" criteria of a distribution). Under
prior Commission interpretation, if the aggregate amount of
securities registered on a shelf constituted a Rule 10b-6
distribution, each takedown was deemed to be part of that single
distribution for purposes of the rule, regardless of its
---------FOOTNOTES----------
-[44]- See supra Section II.B.1., discussing the
definition of distribution.
-[45]- See Release 34-19565, 48 FR at 10631.
==========================================START OF PAGE 34======
individual magnitude. -[46]-
The Commission's modified approach means that a broker-
dealer participating in a takedown off a shelf must determine
whether it is participating in a distribution. -[47]- In
those situations where a broker-dealer sells shares on behalf of
an issuer or selling security holder in ordinary trading
transactions into an independent market (i.e., without any
special selling efforts) the offering will not be considered a
distribution and the broker-dealer will not be subject to Rule
101. -[48]- A broker-dealer likely would be subject to
Rule 101, however, if it enters into a sales agency agreement
that provides for unusual transaction-based compensation for the
sales, even if the securities are sold in ordinary trading
---------FOOTNOTES----------
-[46]- See Proposing Release, 61 FR at 17115, and Release
34-19565, 48 FR at 10631. See also Securities
Exchange Act Release No. 23611 (September 11,
1986), 51 FR 33242, 33244 ("Release 34-23611").
-[47]- An issuer's description in a shelf registration
statement of a variety of potential selling
methods will not cause, by itself, any sales off
the shelf to be treated as a distribution, unless
the broker-dealer in fact uses special selling
efforts or selling methods in connection with
particular sales off the shelf, and the sales are
of a magnitude sufficient to demonstrate the
existence of a distribution. Cf. Securities
Exchange Act Release No. 18528 (March 3, 1982), 47
FR 11482, 11485.
-[48]- This approach assumes that the broker-dealer is
disposing of shares in ordinary trading
transactions into an independent market (i.e., one
not dominated or controlled by the broker-dealer,
and where the price is not manipulated by the
broker-dealer or others acting in concert with the
broker-dealer). Release 34-23611, 51 FR at 33247.
==========================================START OF PAGE 35======
transactions.
c. Mergers, Acquisitions, and Exchange Offers
Many commenters questioned the application of Rule 101's
restricted periods to mergers, acquisitions, and exchange offers.
These commenters noted that during merger distributions subject
to Rule 10b-6, trading restrictions were imposed during the
applicable two or nine day period prior to the mailing of proxy
solicitation materials and for the duration of the proxy
solicitation. -[49]- Similarly, the Commission also
considered the commencement of any valuation period or any
election period as the equivalent of the "commencement of offers
or sales," requiring bids and purchases to cease during the
applicable two or nine day period and for the duration of the
valuation or election period. -[50]- Several commenters
stated that by requiring the restricted period to commence one or
five days prior to pricing, it is possible that the restricted
period for a merger distribution could begin several months prior
to the mailing of the proxy materials. These commenters noted
that in such situations the restricted period could be much
lengthier under Regulation M, as compared to the practice under
Rule 10b-6.
The Commission believes that mergers, acquisitions, and
exchange offers involve distributions in which interested persons
have considerable incentive to manipulate. The Commission agrees
---------FOOTNOTES----------
-[49]- See Release 34-19565, 48 FR at 10638-39.
-[50]- Id. at 10639.
==========================================START OF PAGE 36======
with the commenters that the Regulation M restricted periods
should reflect the characteristics of these types of
distributions. Accordingly, as adopted the restrictions of
Regulation M begin on the day when proxy solicitation or offering
materials first are disseminated to security holders and end with
the completion of the distribution (i.e., the time of the
shareholder vote or the expiration of the exchange offer).
-[51]-
Consistent with an interpretation under Rule 10b-6, a
restricted period also will apply during any period where the
market price of the offered security will be a factor in
determining the consideration to be paid pursuant to a merger,
acquisition, or exchange offer. Thus, activity proscribed by
Rules 101 and 102 must cease one or five business days before the
commencement of any valuation period and for the duration of such
period. -[52]-
d. At-the-market Offerings
In an at-the-market offering, sales prices are established
during the course of the offering based upon market conditions at
---------FOOTNOTES----------
-[51]- In addition, Rule 10b-13 under the Exchange Act
continues to prohibit any purchases or
arrangements to purchase securities that are the
subject of an exchange offer, or a security
immediately convertible into or exchangeable for
those securities, from the time of public
announcement until the expiration of the exchange
offer. 17 CFR 240.10b-13.
-[52]- Release 34-19565, 48 FR at 10639.
==========================================START OF PAGE 37======
the time of individual sales. -[53]- Accordingly, the
restricted period for such an offering would commence one or five
business days before the pricing of each sale and continue until
the person's participation in the distribution is completed. In
practice, the application of Rule 101 will essentially be the
same as in the case of a fixed price offering, where one price is
established for the entire distribution, because the activities
of distribution participants are restricted during the entire
course of offers and sales, whether the securities are sold at
fixed or varying prices.
6. Securities Excepted from Rule 101
a. Exception for Actively-traded Securities
The Commission proposed excluding from Rule 101 all
securities with a published ADTV value of at least $1 million,
and requested comment on whether another test, such as a public
float test, should be used to determine which securities should
be excluded from the rule. Commenters supported an exclusion for
actively-traded securities, with two commenters suggesting a
lower threshold and one recommending a threshold of $10 million.
The Commission is adopting an exception for those securities that
have an ADTV value of at least $1 million that are issued by an
issuer whose common equity securities have a public float value
of at least $150 million.
The Commission continues to believe that an exclusion for
---------FOOTNOTES----------
-[53]- The term at-the-market offering is defined as an
offering of securities at other than a fixed
price.
==========================================START OF PAGE 38======
actively-traded securities is appropriate. The costs of
manipulating such securities generally are high. In addition,
because actively-traded securities are widely followed by the
investment community, aberrations in price are more likely to be
discovered and quickly corrected. Moreover, actively-traded
securities are generally traded on exchanges or other organized
markets with high levels of transparency and surveillance.
The reasons for incorporating a dual ADTV value/public float
value test for the restricted periods similarly apply to
determining whether securities qualify for the actively-traded
securities exception. -[54]- The Commission selected $150
million for the public float value test because it believes that
the securities of issuers with a public float value at or above
this threshold, and that also have an ADTV value of at least $1
million, have a sufficient market presence to make them less
likely to be manipulated. As discussed above, the $150 million
public float value test is intended in part to exclude issuers
from the actively-traded securities exception where a high
---------FOOTNOTES----------
-[54]- For example, the Commission considered using the
$75 million public float value measure included in
the eligibility criteria for Forms S-3 and F-3
under the Securities Act. However, the Commission
adopted that threshold for different reasons,
i.e., information regarding companies with a
public float value of at least $75 million is
efficiently assimilated by the market because they
are likely to be followed by multiple analysts.
See Securities Act Release No. 7053 (April 19,
1994), 59 FR 21644; Securities Act Release No.
7029 (November 3, 1993), 58 FR 60307. Therefore,
it was appropriate to permit incorporation of
Exchange Act filings in registration statements
filed by such issuers.
==========================================START OF PAGE 39======
trading volume level is an aberration.
The combined minimums of $1 million ADTV value for the
securities and $150 million public float value removes from Rule
101 the equity securities of approximately 1,900 domestic
issuers, as well as those of a substantial number of foreign
issuers. -[55]- The Commission estimates that the addition
of a public float test reduces by approximately 9% the number of
domestic issuers whose common stock would be excepted from Rule
101 based solely on an ADTV test. -[56]-
b. Investment Grade Securities
The Commission is adopting an exception to Rule 101 for
nonconvertible debt securities, nonconvertible preferred
securities, and asset-backed securities, provided that the
security being distributed is rated investment grade by at least
one nationally recognized statistical rating organization.
-[57]- The Proposing Release recommended excepting
---------FOOTNOTES----------
-[55]- Based on transaction information for 1995 analyzed
by OEA, approximately 1,106 securities listed on
the NYSE, 770 securities quoted on Nasdaq, and 36
securities listed on the Amex would be excluded
from Rule 101. The general increase in security
prices and trading volume since year-end 1995
likely will increase the number of securities
satisfying the ADTV minimum.
-[56]- Based on 1995 volume and price data analyzed by
OEA, 2,103 securities have an ADTV value of at
least $1 million; 1,912 securities have an ADTV
value of at least $1 million and a market
capitalization of at least $150 million.
-[57]- The term nationally recognized statistical rating
organization in paragraph (c)(2) of Rule 101 has
the same meaning as that term is used in 17 CFR
240.15c3-1(c)(2)(vi).
==========================================START OF PAGE 40======
investment grade nonconvertible debt and preferred securities and
noted that the comparable Rule 10b-6 exception was based on the
premise that these securities are traded on the basis of their
yields and credit ratings, are largely fungible and, therefore,
are less likely to be subject to manipulation. The Commission
solicited comment on whether investment grade asset-backed
securities have the same characteristics with respect to trading
as nonconvertible investment grade debt of corporate issuers, and
whether such securities should be excepted from the rule.
Several commenters stated that investment grade asset-backed
securities should be excepted from Rule 101 because they are the
functional equivalent of investment grade debt. One commenter
suggested using the definition of asset-backed security contained
in the Instruction to Form S-3 for purposes of Rule 101. Another
commenter, although not proposing a definition of asset-backed
security, recommended an exception for investment grade asset-
backed securities backed by a fixed pool of receivables.
Asset-backed securities are excluded from Rule 101 because
such securities trade primarily on the basis of yield and credit
rating. The principal focus of investors in the asset-backed
securities market is on the structure of a class of securities
and the nature of the assets pooled to serve as collateral for
those securities, rather than the identity of a particular
issuer. Investment grade asset-backed securities also are
similar to investment grade nonconvertible debt and preferred
securities. Therefore, Rule 101 excepts securities that are
==========================================START OF PAGE 41======
"primarily serviced by the cashflows of a discrete pool of
receivables or other financial assets, either fixed or revolving,
that by their terms convert into cash within a finite time period
plus any rights or other assets designed to assure the servicing
or timely distribution of proceeds to the security holders"
-[58]- and that are rated investment grade.
A few commenters also proposed that an even broader
exception for debt and preferred securities be adopted,
suggesting that high-yield debt securities be excepted from Rule
101 when those securities satisfy certain criteria. One
commenter proposed that all debt be excluded from coverage of
Rule 101. The Commission believes that, as a practical matter,
Rule 101 and Rule 102 will have very limited impact on debt
securities, except for the rare situations where selling efforts
continue over a period of time.-[59]- In those
circumstances, where the incentive to manipulate can escalate,
the Commission believes that the application of Regulation M is
appropriate.
c. Exempted Securities
The Commission is adopting the proposed exception to Rule
101 for "exempted securities" as defined in Section 3(a)(12) of
---------FOOTNOTES----------
-[58]- This definition is identical to the definition of
asset-backed security contained in General
Instruction I.B.5. to Form S-3, 17 CFR 239.13(b).
-[59]- See supra Section II.B.3., discussing covered
securities.
==========================================START OF PAGE 42======
the Exchange Act. -[60]- Transactions in these securities
are not restricted by Rule 101. This exception is similar to a
provision contained in Rule 10b-6.
d. Face-amount Certificates or Securities Issued
by an Open-end Management Investment Company
or Unit Investment Trust
The exception to Rule 101 for 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, is adopted as proposed. Transactions in
these securities are not covered by Rule 101. An identical
provision existed in Rule 10b-6.
7. Activities Excepted from Rule 101
a. Exception 1 - Research
The Commission is adopting exception 1 to Rule 101, which
permits the publication or dissemination of any information,
opinion, or recommendation relating to a covered security if the
conditions of either Rule 138 or Rule 139 under the Securities
Act are satisfied. -[61]- This exception more closely
aligns Rule 101 with the Securities Act rules governing
permissible research activities by broker-dealers participating
in offerings of securities. -[62]-
---------FOOTNOTES----------
-[60]- 15 U.S.C. 78c(a)(12).
-[61]- 17 CFR 230.138, 230.139.
-[62]- Exception 1 differs from a previous staff position
that certain research reports were not prohibited
inducements to purchase if such research was
issued by a broker-dealer in the ordinary course
(continued...)
==========================================START OF PAGE 43======
As proposed, the exception required the research to be
published or disseminated "in the ordinary course of business."
Several commenters found this phrase to be confusing because Rule
138 requires that research be published or distributed in the
"regular course of business," -[63]- and Rule 139 requires
that information, opinions, or recommendations be contained in a
publication that is distributed with "reasonable regularity in
the normal course of business." -[64]- The Commission has
deleted as redundant the phrase "in the ordinary course of
business" from exception 1.
Commenters also were uncertain about the application of this
exception to electronically disseminated research. The
Commission believes that if a distribution participant, in the
normal course of its business, provides research reports to
independent research services that make such reports available to
their subscribers electronically, whether or not the subscribers
are customers of or have previously received research from the
broker-dealer, such research is excepted from Rule 101.
---------FOOTNOTES----------
-[62]-(...continued)
of business, and satisfied either Rule 138 or Rule
139(b), or satisfied Rule 139(a) and did not
contain a recommendation or earnings forecast more
favorable than that previously disseminated by the
firm. Securities Exchange Act Release No. 21332
(September 19, 1984), 49 FR 37569, 37572 n.25.
-[63]- 17 CFR 230.138(a) and (b).
-[64]- 17 CFR 230.139(b)(1)(i).
==========================================START OF PAGE 44======
-[65]- Similarly, a distribution participant may update
its mailing list (i.e., new persons may be added) where it is
intended that they receive all future research sent to others on
the list, and not just the research related to the security in
distribution.
Some commenters inquired whether the exception would be
available to unregistered offerings, because Rules 138 and 139
pertain to the dissemination of research during registered
offerings. In the Commission's view, for purposes of Rule 101,
exception 1 is available during distributions that are not
registered under the Securities Act, as long as the conditions of
either Rule 138 or Rule 139 are satisfied, other than those
pertaining to the filing of a registration statement. A few
commenters further recommended that research disseminated outside
of the United States during a global offering be excepted from
Rule 101's coverage, if such research is disseminated in
conformity with local rule or custom. The Commission has
determined that the conditions of Rules 138 and 139 (other than
registration) define the appropriate parameters for research
activities involving securities distributed in the United States
because research activities outside the United States in
connection with a distribution subject to the rule could be used
to facilitate the distribution in the United States. The
---------FOOTNOTES----------
-[65]- Also, a broker-dealer may deliver research reports
to its customers via electronic means as a
substitute for paper delivery. See Securities
Exchange Act Release No. 37182 (May 9, 1996), 61
FR 24644.
==========================================START OF PAGE 45======
Commission notes, however, that many of the securities
distributed in global offerings will be subject to the rule's
actively-traded securities exception and, therefore, not subject
to Rule 101's provisions. -[66]-
b. Exception 2 - Transactions Complying with
Certain Other Sections
Exception 2, which allows passive market making transactions
and stabilizing transactions complying with Rules 103 or 104,
respectively, is adopted as proposed.
c. Exception 3 - Odd-Lot Transactions
Exception 3, permitting distribution participants to bid for
or purchase odd-lots during the restricted period, is adopted as
proposed. Accordingly, a distribution participant may purchase
odd-lots during a distribution. Among other things, this
exception permits distribution participants to engage in
activities in connection with issuer odd-lot tender offers
conducted pursuant to Rule 13e-4(h)(5) under the Exchange Act,
including effecting purchases necessary to permit odd-lot holders
to "round-up" their holdings to 100 shares.
d. Exception 4 - Exercises of Securities
Exception 4 permits distribution participants to exercise
any option, warrant, right, or any conversion privileges set
forth in the instrument governing a security. This exception
---------FOOTNOTES----------
-[66]- Nevertheless, there may be other circumstances in
which the dissemination of research that does not
meet the conditions of Rules 138 or 139 outside
the United States may be appropriate during a
global offering. The staff will provide guidance
on a case-by-case basis.
==========================================START OF PAGE 46======
does not distinguish call options acquired before the person
became a distribution participant from those acquired afterwards.
In addition, the exception covers exercises of non-standardized
call options.
Supporters of this exception noted that option exercises do
not involve significant manipulative potential because of the
unpredictability of the timing and the extent of purchases by
persons writing call options. As noted earlier, the NASD
expressed more general concerns about Regulation M's limited
coverage of derivative securities. -[67]- The Commission
believes that exercises or conversions of derivative securities
generally have an uncertain and attenuated manipulative potential
and, for that reason, has adopted the exception as proposed.
-[68]-
In light of the treatment of derivative securities under
Regulation M, the Commission is rescinding Rule 10b-8, which
pertained to distributions through rights. This rule contained
overly rigid and complex restrictions on purchases of rights and
regulated sales of offered securities. Bids for and purchases of
rights are not subject to Rules 101 and 102, although bids for
---------FOOTNOTES----------
-[67]- See supra text accompanying note 31.
-[68]- The Commission cautions that in connection with
exercises of non-standardized options and other
securities that are privately negotiated between
the parties, there may be circumstances when the
exercise of a call option, for example, could be
made for the purpose of requiring the other party
to acquire the security. In such a case, the
purchase by the party exercised against may be
deemed to be a purchase by the exercising party.
==========================================START OF PAGE 47======
and purchases of a security that is the subject of a rights
distribution are restricted by these rules.
e. Exception 5 - Unsolicited Transactions
The Commission is adopting an exception to Rule 101 for
unsolicited brokerage transactions, and for certain unsolicited
purchases as principal. This exception incorporates the
provision contained in exception (xi)(D) to Rule 10b-6 for
unsolicited principal transactions, and, similar to exception
(ii) to Rule 10b-6, permits unsolicited purchases that are not
effected from or through a broker or dealer, on a securities
exchange, or through an inter-dealer quotation system or
electronic communications network
==========================================START OF PAGE 48======
("ECN") as defined in Rule 11Ac1-1(a)(8) under the Exchange
Act. -[69]-
This exception places no restrictions on distribution
participants effecting unsolicited brokerage transactions during
a distribution. -[70]- In addition, unsolicited purchases
as principal are also unrestricted. Although the Commission did
not propose an exception to Rule 101 for unsolicited principal
purchases, many commenters asserted that exception (ii) to Rule
10b-6 pertaining to such purchases was, in fact, widely used.
The Rule 101 exception for unsolicited purchases differs from the
analogous Rule 10b-6 exception, however, because it does not
require that purchases be of "block" size. -[71]-
Furthermore, the exception applies to purchases effected
otherwise than through a broker-dealer, on a securities exchange,
or through an inter-dealer quotation system or ECN, because those
purchases are less likely to be used to influence the price of a
---------FOOTNOTES----------
-[69]- 17 CFR 240.11Ac1-1(a)(8). See Securities Exchange
Act Release No. 37619A (September 6, 1996), 61 FR
48289 ("Release 34-37619A"), for a discussion of
ECNs. A purchase in response to an order or quote
displayed on an ECN would not constitute an
unsolicited transaction.
-[70]- This exception incorporates the provisions of Rule
10b-6(a)(5)(B). In addition, consistent with an
interpretation under Rule 10b-6, a broker-dealer
who receives an unsolicited order to sell may
solicit purchasers in executing the transaction as
broker for the seller.
-[71]- Also, the exception as adopted does not
incorporate the phrase "privately negotiated"
because it is unnecessary in light of the other
terms of the exception.
==========================================START OF PAGE 49======
security that is the subject of a distribution. This clause of
the exception permits distribution participants and affiliated
purchasers to purchase covered securities from persons, other
than broker-dealers, who were not solicited by the distribution
participant or its affiliated purchasers and precludes purchases
through an exchange, Nasdaq, or alternative trading system.
This exception reflects the view that unsolicited purchases,
regardless of their size, generally do not raise the concerns at
which Rule 101 is directed when those purchases are not effected
through market mechanisms. In such circumstances, those
purchases are less likely to affect the offered security's price.
f. Exception 6 - Basket Transactions
Exception 6 relates to purchases of covered securities made
in connection with basket transactions. This exception permits
transactions in covered securities when the aggregate dollar
value of any bids for or purchases of a covered security
constitutes 5% or less of the total dollar value of the basket
being purchased, and the basket contains at least 20 stocks.
The exception is available with respect to both index-
related baskets and customized baskets. To qualify for the
exception, the basket transaction must 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). -[72]-
---------FOOTNOTES----------
-[72]- Proposing Release, 61 FR at 17118.
==========================================START OF PAGE 50======
The exception also permits 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.
While supporting the flexibility of the basket transaction
exception, some commenters suggested alternatives, including
using either a single percentage test of 5% or 10%, or a 10%/10
stock or 10%/15 stock standard. The Commission believes that the
majority of stocks contained in baskets will be excepted under
the actively-traded securities exception and that the 5%/20 stock
standard allows trading in most basket transactions while
ensuring that such transactions are not easily used to influence
the price of a security. The Commission is concerned that, given
the possibility that a distribution participant could time its
basket transactions for maximum price effect, a less rigorous
standard could lead to abuse. Further, the inclusion of the 20
stock criterion provides an objective indication of the bona fide
nature of the basket transaction.
Commenters also stated that this exception should allow for
rebalancing any customized basket covered by the exception, or
for rebalancing in a covered security that is consistent with
rebalancing activity in other stocks contained in the basket. In
the Commission's view, allowing distribution participants to make
adjustments in customized baskets may give a distribution
==========================================START OF PAGE 51======
participant the means to effect significant transactions in
covered securities (e.g., by deciding to include a security in
distribution in a basket without a reason independent of the
distribution), thereby raising manipulative concerns.
Accordingly, the Commission is not permitting adjustments to
rebalance customized baskets, unless the adjustments themselves
qualify under the 5%/20 stock test.
g. Exception 7 - De Minimis Transactions
The Commission is adopting exception 7 for de minimis
transactions. As proposed, the exception applied to unaccepted
bids and aggregate purchases of 1% of a security's ADTV. Several
commenters stated that a 1% level was too limited to be useful.
For this reason, a few commenters proposed raising the de minimis
threshold to 5% of the security's ADTV. Commenters also
requested clarification that the de minimis test could be applied
to more than one transaction. In addition, some commenters
suggested that any bid or purchase not exceeding a de minimis
amount should be eligible for the exception.
Because the Commission believes that an exception for small,
inadvertent transactions lacking market impact is appropriate, it
is adopting an exception for de minimis transactions. The
purchasing level has been increased to 2% to give distribution
participants greater margin for error, while retaining the
exception's de minimis nature. Unaccepted bids, and purchases
during the restricted period that in the aggregate do not exceed
2% of the ADTV of the security in distribution, are excepted from
==========================================START OF PAGE 52======
the rule, if the person has maintained and enforces written
policies and procedures reasonably designed to achieve compliance
with the rule. Once inadvertent transaction(s) are discovered,
subsequent transaction(s) would not be covered by this exception.
Also, this de minimis exception does not apply to Nasdaq passive
market making transactions.
Commenters recommended that the exception be extended to
include solicited brokerage transactions and bids that are
accepted, but that do not result in a purchase because the trade
is broken. The Commission clarifies that the exception is
available to transactions resulting from solicited brokerage
provided that the conditions of the exception are satisfied.
However, any purchase, even if the trade subsequently is broken,
must be considered a purchase for purposes of this exception.
One commenter asserted that the proviso requiring written
policies and procedures is unnecessary. This requirement is
adopted as proposed, however, because the Commission believes
that the presence of compliance procedures buttresses the
inadvertent character of excepted de minimis transactions. The
Commission notes that repeated reliance on the exception would
raise questions about the adequacy and effectiveness of a firm's
procedures. Therefore, upon the occurrence of any violation, a
broker-dealer is expected to review its policies and procedures
and modify them as appropriate.
h. Exception 8 - Transactions in Connection with
a Distribution
The Commission is adopting the exception for transactions in
==========================================START OF PAGE 53======
connection with a distribution substantially as proposed.
Exception 8 permits transactions among distribution participants
in connection with the distribution and purchases from an issuer
or selling security holder in connection with the distribution
that are not effected on a securities exchange or through an
inter-dealer quotation system, or through an ECN. Based on
commenters' views, the portion of the proposed exception relating
to offers to sell or the solicitation of offers to buy the
securities being distributed or offered as principal is now
contained in exception 9. -[73]-
i. Exception 9 - Offers to Sell or the
Solicitation of Offers to Buy
The Commission is adopting the exception for 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
or solicitation.
j. Exception 10 - Transactions in Rule 144A
Securities
The Commission is adopting the exception for transactions in
securities eligible for resale under Rule 144A(d)(3) ("Rule 144A
securities") substantially as proposed. -[74]- As adopted,
the exception permits transactions in Rule 144A securities during
a distribution of such securities, provided that sales of such
---------FOOTNOTES----------
-[73]- A distribution participant relying on this
exception must be prepared to sell the securities
if the offer is accepted.
-[74]- See 17 CFR 230.144A(d)(3).
==========================================START OF PAGE 54======
securities within the United States are made solely to:
qualified institutional buyers ("QIBs"), or persons reasonably
believed to be QIBs, in transactions exempt from registration
under the Securities Act ("Rule 144A distributions"); or persons
not deemed to be "U.S. persons" for purposes of Rule 902(o)(2) or
(o)(7) of Regulation S under the Securities Act, during a
concurrent Rule 144A distribution to QIBs. -[75]- The
exception covers both the Rule 144A security being distributed
and any reference security.
In the Proposing Release, the Commission noted that an
exception based on the categories of persons to whom the
securities are distributed may be viewed as a departure from the
anti-manipulation approach of Regulation M, because no class of
investors, including large institutions, is immune to injury from
securities fraud or manipulation. -[76]- Nevertheless, the
Commission considers it appropriate to reduce the scope of Rule
101's prophylactic protections in the case of QIBs, because QIBs
have considerable ability to obtain, consider, and analyze market
information, and the Commission is not aware of complaints of
---------FOOTNOTES----------
-[75]- 17 CFR 230.902(o)(2) and (o)(7). This follows the
position taken under Rule 10b-6 in Letter
regarding Regulation S Transactions during
Distributions of Foreign Securities to Qualified
Institutional Buyers, [1993-1994] Fed. Sec. L.
Rep. (CCH) 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).
-[76]- Proposing Release, 61 FR at 17119 n.61.
==========================================START OF PAGE 55======
manipulation in this context. -[77]- Moreover, in light of
the characteristics of Rule 144A securities (e.g., eligible
securities are not listed on a U.S. exchange or quoted on
Nasdaq), the exception does not distinguish between Rule 144A
distributions to QIBs of foreign and domestic securities.
-[78]-
Several commenters recommended broadening the proposed
exception to include contemporaneous sales within the United
States to certain institutional accredited investors. Some of
these commenters suggested that the exception permit sales to
institutional accredited investors where sales to QIBs exceeded a
certain percentage of the total distribution. -[79]- The
Commission is not adopting these recommendations because
institutional accredited investors encompass a much broader
category of persons, a large segment of which do not have
characteristics comparable to those of QIBs which underlie this
exception.
8. Exemptive Authority
The Commission proposed to include within Rule 101 a
provision permitting the Commission to exempt any transaction or
---------FOOTNOTES----------
-[77]- The Commission wishes to emphasize that QIBs will
continue to be protected by the general anti-
manipulation and anti-fraud provisions, including
Section 17(a) of the Securities Act, and Sections
9(a) and 10(b) of the Exchange Act, and Rule 10b-5
thereunder.
-[78]- See Proposing Release, 61 FR at 17119.
-[79]- The percentages recommended by commenters ranged
from 50% to 80%.
==========================================START OF PAGE 56======
transactions from the rule on a case-by-case basis. Two
commenters recommended that the exemptive authority provision be
expanded to permit exemptions for securities or classes of
securities. To increase flexibility in the exemption process,
the Commission is adopting this suggested addition. An exemption
may be granted either unconditionally or on specified terms and
conditions. -[80]-
C. Rule 102 - Activities by Issuers and Selling Security
Holders
1. Generally
Rule 102 covers certain activities of issuers and selling
security holders, and their affiliated purchasers, during a
distribution of securities. Rule 102 is similar in format to
Rule 101: issuers and selling security holders, and their
affiliated purchasers, must refrain from bidding for, purchasing,
or attempting to induce any person to bid for or purchase a
covered security during the applicable restricted period, unless
an exception permits the activity.
Rule 102 contains fewer exceptions than Rule 101 because
issuers and selling security holders have the greatest interest
---------FOOTNOTES----------
-[80]- The Commission is revising its Rules of Practice
and Investigations to provide that exemptions may
be granted by designated persons in the Division
of Market Regulation pursuant to authority
delegated by the Commission. See 17 CFR 200.30-3
of this chapter, as amended. Rules 102, 104, and
105 include similar provisions authorizing the
Commission to grant exemptions from those rules,
and this authority also will be delegated to
designated persons in the Division of Market
Regulation.
==========================================START OF PAGE 57======
in an offering's outcome and generally do not have the same
market access needs as underwriters. The exceptions in Rule 102
permit: transactions in nonconvertible investment grade
securities and transactions during Rule 144A distributions;
exercises of options and other securities, including rights; and
odd-lot transactions and associated round-up transactions during
an issuer odd-lot tender offer. Closed-end investment companies
that engage in continuous offerings of securities also may
conduct certain tender offers for those securities during such
distributions. There is no general exception for actively-traded
securities, although a limited exception is included for certain
actively-traded reference securities.
Furthermore, most transactions in connection with dividend
reinvestment and stock purchase plans are excluded from Rule 102.
Only plan distributions involving securities obtained directly
from the issuer are subject to Rule 102. Several commenters
asked that the Commission further explain the treatment of plans
under Rule 102. This release provides guidance on the types of
plan activities that may be engaged in without constituting
special selling efforts and selling methods within the meaning of
the definition of distribution, and clarifies that certain
dividend reinvestment and stock purchase plans offered by bank-
registered transfer agents and registered broker-dealers qualify
for the plan exception.
2. Persons Subject to Rule 102
a. Generally
==========================================START OF PAGE 58======
Rule 102 applies to issuers, selling security holders, and
their affiliated purchasers. Several commenters sought
clarification as to whether an issuer's transactions in a covered
security would be restricted during a distribution effected
solely by or on behalf of a selling security holder not
affiliated with the issuer. The Commission does not intend to
limit an issuer's activities during a distribution effected
solely by or on behalf of a selling security holder if the issuer
is not an affiliated purchaser of the selling security holder,
and has modified paragraph (a) of Rule 102 accordingly.
-[81]- An issuer will be deemed to have completed its
participation in a distribution when the entire distribution is
completed. -[82]-
b. Affiliated Purchaser
As discussed earlier, several commenters recommended
excepting financial services affiliates of issuers and selling
security holders from the definition of "affiliated purchaser."
-[83]- As adopted, the definition of affiliated purchaser
excludes financial services affiliates of an issuer or selling
---------FOOTNOTES----------
-[81]- The interpretations contained in Release 34-23611
regarding shelf distributions by selling security
holders will continue to have relevance. See
infra Section II.C.4.b.
-[82]- Cf. supra Section II.B.2.c., discussing when
distribution participants are considered to
complete their participation in a distribution.
See also the definition of "completion of
participation in a distribution."
-[83]- See supra Section II.B.2.d.
==========================================START OF PAGE 59======
security holder if the issuer or selling security holder
maintains and enforces information barriers between itself and
such affiliates. In addition, a proviso has been added to
paragraph (a) of Rule 102 that provides that any affiliated
purchaser of an issuer or selling security holder that is acting
as a distribution participant may comply with Rule 101, rather
than Rule 102. -[84]- This accommodates the ordinary
market activities of broker-dealers and other financial
institutions participating in a distribution because they are
subject to SRO surveillance.
3. Securities Subject to Rule 102
The restrictions of Rule 102 apply to covered securities in
the same manner as Rule 101. -[85]- Thus, persons subject
to Rule 102 are precluded during the restricted period from
bidding for or purchasing the subject security or any reference
security.
4. Offerings Subject to Rule 102
a. Generally
As with Rule 101, Rule 102 applies only when there is a
distribution of securities. -[86]-
---------FOOTNOTES----------
-[84]- The proviso to Rule 101 specifies that, where a
distribution participant or an affiliated
purchaser of a distribution participant is itself
the issuer or selling security holder, Rule 102
applies. See supra Section II.B.2.a.
-[85]- See supra Section II.B.3.
-[86]- See supra Section II.B.5., discussing the types of
offerings and other transactions that are subject
to Rule 101.
==========================================START OF PAGE 60======
b. Shelf Offerings
In the case of an offering of securities pursuant to a shelf
registration statement, the Commission will apply Regulation M in
a manner consistent with interpretations under Rule 10b-6
regarding the restrictions on issuers and selling security
holders during shelf offerings. -[87]- Thus, an issuer and
all of its affiliated purchasers are subject to the applicable
restricted period of Rule 102 when sales off a shelf by an
issuer, or by any affiliated purchaser, constitute a distribution
of securities. Similarly, when a selling security holder sells
off the shelf and such sales constitute a distribution, all other
shelf security holders who are affiliated purchasers of the
selling security holder are subject to the applicable restricted
period of Rule 102.
5. Securities Excepted from Rule 102
a. Actively-traded Reference Securities
Many commenters maintained that issuers, selling security
holders, and their affiliated purchasers should have the benefit
of an actively-traded securities exception similar to that in
Rule 101. The Commission believes that persons subject to Rule
102 should not be able to trade in their securities, whether or
not they are actively traded. The Commission's view is based on
issuers' and selling security holders' stake in the proceeds of
the offering, and their generally lesser need to engage in
securities transactions.
---------FOOTNOTES----------
-[87]- See Release 34-23611, 51 FR at 33242.
==========================================START OF PAGE 61======
Certain commenters noted that, as proposed, Regulation M
would have prevented an issuer of equity-linked securities, or
its affiliated purchasers, from engaging in hedging activity in
the associated reference security, even when that security was
actively traded. According to these commenters, the ability to
conduct such hedging activity immediately prior to the pricing of
an equity-linked security is critical to the structure of such
distributions. In response to these comments, the Commission
has determined to provide a limited exception from Rule 102 for
actively-traded reference securities that are not issued by the
issuer of the security in distribution, or by any affiliate of
the issuer. This exception permits the type of hedging activity
that was not previously subject to Rule 10b-6. Thus, the issuer
of an equity-linked security, or a security holder selling an
equity-linked security, can purchase in a hedging transaction an
actively-traded reference security issued by an unaffiliated
entity. However, the issuer or selling security holder of an
equity-linked security is prohibited from purchasing any
reference security for which it, or any of its affiliates, is the
issuer. Of course, the general anti-fraud and anti-manipulation
provisions of the federal securities laws are applicable to any
transactions associated with distributions of equity-linked
securities.
b. Other Excepted Securities
The Commission is adopting as proposed the exceptions in
Rule 102 for "exempted securities" as defined in Section 3(a)(12)
==========================================START OF PAGE 62======
of the Exchange Act, and face-amount certificates or securities
issued by an open-end management investment company or unit
investment trust. In addition, the Commission has determined to
include in Rule 102 an exception for investment grade
nonconvertible debt, nonconvertible preferred securities, and
asset-backed securities, based on commenters' views and the
rationales indicated above for an identical exception to Rule
101. -[88]-
6. Activities Excepted from Rule 102
a. Exception 1 - Odd-Lot Transactions
Rule 102 contains an exception for odd-lot transactions,
which permits issuer odd-lot tender offers. This exception,
which is identical to exception 3 to Rule 101, will provide
greater flexibility to issuers conducting odd-lot tender offers
during a distribution. -[89]- Moreover, as modified from
the proposal, this exception permits an issuer conducting an odd-
lot tender offer to engage in transactions necessary to enable
shareholders to round-up their holdings to 100 shares.
-[90]-
---------FOOTNOTES----------
-[88]- See supra Section II.B.6.c.
-[89]- See supra Section II.B.7.c.
-[90]- Today, the Commission also is adopting an
amendment to Rule 13e-4(h)(5) to permit issuers to
conduct odd-lot offers, including continuous,
periodic, or extended odd-lot offers, for their
equity securities without establishing a record
date of ownership for shareholder eligibility to
participate in the offer. Securities Exchange Act
Release No. 38068 (December 20, 1996).
==========================================START OF PAGE 63======
b. Exception 2 - Transactions by Closed-end
Investment Companies
Exception 2, as it relates to transactions complying with
Rule 23c-3 under the Investment Company Act, -[91]- is
adopted as proposed. Accordingly, repurchases by closed-end
investment companies that are conducted in compliance with Rule
23c-3 will not violate Rule 102.
Unlike so-called "interval" funds, which buy back their
securities pursuant to Rule 23c-3, other closed-end funds are
more circumscribed as to their repurchases. -[92]- Many of
these closed-end funds advise investors in their prospectuses
that investments in the funds should be considered illiquid,
particularly as the fund does not intend to seek a public trading
market for its securities. To provide their investors with an
opportunity to sell their securities, these funds often disclose
that they may consider conducting periodic tender offers to
repurchase all or a portion of their outstanding securities at
the then current net asset value. A few commenters raised issues
about the continuation of Rule 10b-6 exemptions granted to those
closed-end funds that conduct periodic tender offers for their
securities pursuant to Rule 13e-4 under the Exchange Act,
-[93]- when the funds are engaged in continuous offerings
---------FOOTNOTES----------
-[91]- 17 CFR 270.23c-3.
-[92]- Cf. 15 U.S.C. 80a-23(c).
-[93]- 17 CFR 240.13e-4.
==========================================START OF PAGE 64======
pursuant to Rule 415 under the Securities Act. -[94]-
Exception 2 is available to a registered closed-end
investment company that engages in a continuous offering of its
securities pursuant to Rule 415 and repurchases, at net asset
value, securities of the same class in a tender offer conducted
pursuant to Rule 13e-4, provided that there is no widely
available alternative transaction mechanism for its securities
(i.e., the securities are not traded on a securities exchange or
through an inter-dealer quotation system or ECN). This exception
accommodates those closed-end funds that currently have Rule 10b-
6 exemptions, and benefits additional closed-end funds with
similar distribution and repurchase features, because they will
not need to seek exemptive relief under Regulation M.
c. Exception 3 - Redemptions by Commodity Pools
or Limited Partnerships
The Commission is incorporating exception 3 to permit
redemptions by commodity pools or limited partnerships that are
effected at a price based on the securities' net asset value in
accordance with the terms and conditions of the governing
instruments, as long as the securities are not traded on an
exchange, or through an inter-dealer quotation system or ECN.
This exception is being adopted in response to commenter
concerns, and permits commodity pools and limited partnerships to
effect redemptions of their securities without seeking exemptive
---------FOOTNOTES----------
-[94]- 17 CFR 230.415. See, e.g., Letter regarding
Brazilian Investment Fund, Inc., [1993] Fed. Sec.
L. Rep. (CCH) 76,712 (August 6, 1993).
==========================================START OF PAGE 65======
relief under Regulation M. Redemptions of such securities
pursuant to their governing instruments at a price based on net
asset value are unlikely to raise manipulative concerns.
d. Exception 4 - Exercises of Securities
The Commission is adopting exception 4 relating to the
exercises of call options and other securities as proposed. This
exception is identical to exception 4 to Rule 101, and permits
the exercise of rights in connection with convertible,
exchangeable, or exercisable securities, including options
received in connection with employee benefit plans.
e. Exception 5 - Transactions in Connection with
the Distribution
Exception 5 is adopted as proposed. This exception permits
offers to sell and the solicitation of offers to buy the
securities being distributed, and enables an issuer or selling
security holder to conduct an offering on its own behalf.
-[95]-
f. Exception 6 - Unsolicited Purchases
In the Proposing Release, the Commission solicited comment
on an exception similar to that contained in Rule 10b-6 for
unsolicited privately negotiated purchases. This exception from
Rule 102 is identical to the unsolicited purchases exception from
---------FOOTNOTES----------
-[95]- Regulation M does not preclude affiliates of an
issuer (e.g., officers or directors) from
purchasing securities in the offering. See also
supra Section II.C.2.a., regarding a person's
completion of participation in the distribution.
==========================================START OF PAGE 66======
Rule 101. -[96]-
g. Exception 7 - Transactions in Rule 144A
Securities
Based on commenters' views and the basis discussed above for
excepting transactions in Rule 144A securities from Rule 101, the
Commission has determined to include an identical exception in
Rule 102.
7. Plans
a. Generally
The Commission is adopting the dividend (or interest)
reinvestment and stock purchase plan provisions of Rule 102
substantially as proposed. -[97]- The treatment of plans
under Regulation M reflects a continuation of the Commission's
efforts to facilitate the use of plans as an alternative means
for investors to purchase and sell securities, while maintaining
essential investor protections. -[98]-
---------FOOTNOTES----------
-[96]- See supra Section II.B.7.e., discussing exception
5 to Rule 101.
-[97]- The term plan is defined in Rule 100 as any bonus,
profit-sharing, pension, retirement, thrift,
savings, incentive, stock purchase, stock option,
stock ownership, stock appreciation, dividend
reinvestment, or similar plan; or any dividend or
interest reinvestment plan or employee benefit
plan as defined in 17 CFR 230.405.
-[98]- See, e.g., 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) 77,110 (May 12, 1995); Letter
regarding First Chicago Trust Company of New York,
[1994] Fed. Sec. L. Rep. (CCH) 76,939 (December
(continued...)
==========================================START OF PAGE 67======
Paragraph (c)(1) of Rule 102 excepts most distributions of
securities pursuant to plans. -[99]- The Commission has
modified the introductory text of this paragraph to clarify that
this exception includes plans operated by registered bank
transfer agents or registered broker-dealers ("investor services
plans"), as well as those plans operated by or on behalf of an
issuer. -[100]-
The rule divides plans into three categories: (1) plans
that are available only to employees and shareholders ("employee-
shareholder plans"); (2) plans, including investor services
plans, that are available to persons other than, or in addition
to, employees and shareholders, where securities for the plan are
purchased from a source other than the issuer or an affiliated
purchaser of the issuer (i.e., in the open market or in privately
---------FOOTNOTES----------
-[98]-(...continued)
1, 1994) ("First Chicago Letter"); Letter
regarding Bank-Sponsored Investor Services
Programs, [1995] Fed. Sec. L. Rep. (CCH) 77,122
(September 14, 1995) ("Bank Sponsored Programs
Letter") (collectively, "Plan Letters").
-[99]- Of course, where an issuer plan does not involve a
distribution (because there is insufficient
magnitude, or because special selling efforts and
selling methods are not used to sell the
securities), Rules 101 and 102 do not apply.
-[100]- Although Regulation M supersedes the Plan Letters
as they relate to Rule 10b-6, the staff positions
taken in the Plan Letters on the application of
other securities law provisions (i.e., Section 5
of the Securities Act, 15 U.S.C. 77e, and Sections
13(e), 14(d), 14(e), 15(a), and 17A of, and Rule
10b-13 under, the Exchange Act, 15 U.S.C. 78m(e),
78n(d), 78n(e), and 17 CFR 240.10b-13,
respectively) remain in effect.
==========================================START OF PAGE 68======
negotiated transactions) by an agent independent of the issuer
("open market plans"); and (3) plans that are available to
persons other than, or in addition to, employees and shareholders
where securities for the plan are purchased directly from the
issuer or an affiliated purchaser of the issuer ("direct issuance
plans").
b. Employee-shareholder Plans
Rule 102(c)(1)(i) covers employee-shareholder plans, and
excludes any distribution pursuant to a plan by or on behalf of
an issuer or a subsidiary of an issuer, when the distribution is
made solely to employees or shareholders of the issuer or its
subsidiaries, or to a trustee or other person acquiring the
securities for the accounts of such persons. This means that
Rule 102 imposes no restrictions on transactions in the subject
securities by the issuer or its affiliated purchasers during
employee-shareholder plan distributions. -[101]- The
scope of eligible employees, and therefore the scope of the
exception, is broader under this provision than under Rule 10b-6.
c. Open Market Plans
Rule 102(c)(1)(ii) excepts from the rule's coverage
distributions involving open market plans, including investor
---------FOOTNOTES----------
-[101]- However, such activity may be subject to Rule 102
if the issuer is engaged in another distribution,
and the transactions for the plan are attributable
to the issuer. Rule 102 provides that plan
transactions will not be attributable to the
issuer if they are effected by an agent
independent of the issuer.
==========================================START OF PAGE 69======
services plans, where purchases for the plan are made by an agent
independent of the issuer from sources other than the issuer or
an affiliated purchaser of the issuer (i.e., in the open market
or in privately negotiated transactions).
Several commenters suggested revising the definition of
agent independent of the issuer, including permitting the issuer
to specify the broker or dealer who would make purchases for the
plan and to change the source of securities for its plan more
than once in any three month period. The Commission has
determined not to make such changes at this time, because the
definition has implications beyond Regulation M (i.e., it also
relates to issuer repurchase programs conducted pursuant to Rule
10b-18 under the Exchange Act). -[102]- Nevertheless, the
Commission will examine this definition in connection with its
anticipated review of Rule 10b-18, and will reconsider these
comments in that process.
The definition of agent independent of the issuer specifies,
among other things, that an issuer may not control, directly or
indirectly, the timing of purchases by the agent. The Proposing
Release stated that an agent would not be considered independent
if the issuer directs the timing of purchases of securities by
the agent, including a requirement that securities to fund the
plan must be purchased on the plan's investment date. The
release provided, however, that an issuer may establish general
conditions for the operation of its plan, including, for example,
---------FOOTNOTES----------
-[102]- 17 CFR 240.10b-18.
==========================================START OF PAGE 70======
requirements concerning the return of uninvested funds to plan
participants, or requirements that optional cash payments be
invested within 35 days of receipt. -[103]- A number of
commenters requested additional guidance on the timing element
for plan purchases. The Commission notes that, although an
issuer may not specify a particular time for such purchases, the
issuer may specify a range of days for plan purchases based on a
particular event (e.g., that plan purchases will be made within
five days of the plan's investment date, or the stock's dividend
date), or may specify that plan purchases will be made on or as
soon as practicable after the plan's investment date, or the
stock's dividend date. Moreover, the plan's agent could be
deemed an agent independent of the issuer for purposes of Rule
102 if the plan's formula specifies the date, but not the times,
of purchases pursuant to the plan, provided that the plan
provisions regarding the purchase date are not changed more than
once in any three-month period. -[104]-
d. Direct Issuance Plans
Distributions pursuant to direct issuance plans (i.e., a
---------FOOTNOTES----------
-[103]- Proposing Release, 61 FR at 17121 n.71, citing
1994 STA Letter (modifying Letter regarding Lucky
Stores, Inc., [1974-1975] Fed. Sec. L. Rep. (CCH)
79,903 (June 5, 1974)).
-[104]- Purchases by an independent agent for a plan can
involve a certain magnitude, frequency, and
duration that are known to the issuer. If an
issuer schedules a non-plan distribution to
coincide with such plan purchases, questions may
be raised under the general anti-fraud and anti-
manipulation provisions of the federal securities
laws.
==========================================START OF PAGE 71======
plan that is available to persons other than, or in addition to,
employees and shareholders where the issuer or affiliated
purchaser of the issuer provides the shares for the plan) are not
excepted from Rule 102. In the Commission's view, if the
magnitude of securities offered through such plan, and the
selling efforts and selling methods used to distribute such
securities would constitute a distribution as defined in Rule
100, this type of offering raises the manipulative concerns
underlying Regulation M. -[105]- Because the issuer is
receiving the proceeds of the offering, this kind of plan bears a
close resemblance to a public offering. Consistent with prior
interpretations concerning valuation periods for plans, Rule 102
applies during any valuation period for a direct issuance plan.
To determine the magnitude of a direct issuance plan, only
those persons to whom plan communications are directed at a
particular time (rather than all current plan participants)
should be considered. Moreover, the Commission will not deem
special selling efforts and selling methods to be present in a
direct issuance plan where only one or a combination of
announcements, newspaper advertisements, circulars, notices,
investor fairs, or Internet home pages are used to disseminate
---------FOOTNOTES----------
-[105]- Where a plan provides that securities for the plan
may be purchased either in the open market or
provided directly by the issuer, paragraph
(c)(1)(ii) is only available when the plan
securities are purchased in the open market. If
the plan securities are obtained directly from the
issuer, the plan must be treated as a direct
issuance plan.
==========================================START OF PAGE 72======
information about the availability of the plan to the public, or
the issuer provides information about the plan to persons with
whom the issuer has a pre-existing, continuing relationship
involving the receipt of written communications by existing means
of communication (e.g., a bill, annual report, or payroll stub).
-[106]- The information contained in such materials
distributed by an issuer or its agent may include no more than
the information allowed, nor less than that required, under Rule
134 under the Securities Act (i.e., "tombstone advertisements"):
-[107]- generally, the issuer's name, the issuer's type
of business, the type of security being offered in the direct
issuance plan (i.e., common or preferred stock), the price of the
security or the method of price determination, and information on
how and where a prospectus may be obtained.
8. Exemptive Authority
Consistent with the expansion of the exemptive authority
provision in Rule 101, the Commission is adopting a provision in
Rule 102 pursuant to which it may grant an exemption from Rule
102 to any transaction or class of transactions, or any security
---------FOOTNOTES----------
-[106]- This includes communications to shareholders,
employees, customers, and other persons with a
pre-existing relationship with the issuer, such as
independent contractors, franchisees, and
suppliers. See Securities Exchange Act Release
No. 37182 (May 15, 1996), 61 FR 24644, 24650
(providing guidance for use of electronic media
for delivery of information). See also Securities
Exchange Act Release No. 36345 (October 13, 1995),
60 FR 53458.
-[107]- 17 CFR 230.134.
==========================================START OF PAGE 73======
or class of securities. Such exemptions may be granted either
unconditionally or on specified terms and conditions.
9. Rule 10b-18
Rule 10b-18 under the Exchange Act provides that an issuer
and its affiliated purchasers will not incur liability under the
anti-manipulation provisions of Section 9(a)(2) of the Exchange
Act or Rule 10b-5 under the Exchange Act, if the issuer purchases
common stock in compliance with the rule's conditions concerning
the time, price, volume, and manner of purchases. -[108]-
The Commission proposed to amend Rule 10b-18 to preclude an
issuer from relying on this safe harbor when the issuer or its
affiliated purchasers were engaged in a distribution for purposes
of Rule 102.
The few comments received on this proposal were negative.
The Commission has determined that significant revisions to Rule
10b-18 should be considered in connection with a comprehensive
review of Rule 10b-18 to be conducted in the near future.
However, the Commission is adopting an amendment to Rule 10b-18
precluding reliance on the safe harbor during the Rule 102
restricted period, when the issuer or any affiliated purchaser is
distributing the issuer's common stock or any other security for
which the common stock is a reference security. -[109]-
---------FOOTNOTES----------
-[108]- 17 CFR 240.10b-18.
-[109]- To reflect the use in Rule 10b-18 of the
Regulation M definition of plan, the Commission is
adopting technical amendments to paragraphs
(a)(3), (a)(5), and (a)(6) of Rule 10b-18 to
(continued...)
==========================================START OF PAGE 74======
D. Rule 103 - Passive Market Making
The Commission is adopting Rule 103 to replace Rule 10b-6A.
Rule 103 and related exception 2 to Rule 101 permit, in
connection with a distribution of a Nasdaq security, passive
market making on Nasdaq during the restricted period of Rule 101,
when market making by distribution participants otherwise is
prohibited. The purpose of Rule 103 is to alleviate special
liquidity problems that could exist for a Nasdaq security in
distribution, if distribution participants or their affiliates
who are Nasdaq market makers were required to withdraw as market
makers during the restricted period. Exchange-traded securities
usually do not experience this problem because specialists in
most cases are not affiliated with distribution participants.
Rule 103 retains the core provisions of Rule 10b-6A with
respect to the price levels of bids and purchases that can be
made by a Nasdaq passive market maker. Rule 103 generally limits
a passive market maker's bids and purchases to the highest
current independent bid (i.e., a bid of a Nasdaq market maker who
is not participating in the distribution). The Commission
believes that this condition is fundamental to the concept of
passive market making. Additionally, the rule limits the amount
of net purchases that a passive market maker can make on any day
---------FOOTNOTES----------
-[109]-(...continued)
change the term "issuer plan" to "plan." In
addition, the term agent independent of the issuer
for purposes of Rule 10b-18 is now defined in Rule
100 of Regulation M. This differs from the
proposal which would have removed the safe harbor
during the entire distribution period.
==========================================START OF PAGE 75======
to 30% of its ADTV, although an initial ADTV limit of 200 shares
is now available for less active market makers. The 30% ADTV
limitation is designed to prevent an amount of purchasing
activity that could produce the price effects of stabilization,
while generally permitting a level of activity associated with
normal market making. The rule also contains a provision
limiting the bid size a passive market maker may display and
requirements relating to notification, identification, and
disclosure of passive market making.
Rule 103 incorporates several new provisions that add
significant flexibility to passive market making and permit this
activity in a far greater number of contexts. The rule
eliminates the offering eligibility criteria that were contained
in Rule 10b-6A, except that best efforts and at-the-market
offerings remain ineligible for passive market making.
-[110]- Moreover, all Nasdaq securities qualify for
passive market making, including Nasdaq reference securities.
The requirement that underwriters or prospective underwriters
account for at least 30% of total trading volume is eliminated
because the Commission believes that passive market making could
enhance liquidity, even where the syndicate accounts for a minor
---------FOOTNOTES----------
-[110]- The Commission previously noted that the NASD
surveillance system, with respect to passive
market making, does not easily accommodate at-the-
market offerings. Securities Exchange Act Release
No. 32117 (April 14, 1993), 58 FR 19598, 19600
("Release 34-32117"). The Commission believes
that NASD surveillance is an essential
consideration in expanding the contexts in which
passive market making is permitted.
==========================================START OF PAGE 76======
portion of normal market making activity. Rule 103 also permits
passive market making throughout the entire applicable restricted
period, rather than requiring that it cease with the commencement
of offers or sales, because passive market making is now
available for many more kinds of distributions, including those
that can extend over a significant period of time. Passive
market making is prohibited, however, when a stabilizing bid
pursuant to Rule 104 is in effect.
The NASD and other commenters proposed either eliminating
the 30% ADTV limitation entirely, or, alternatively, increasing
it to at least 50%. Commenters did not provide any empirical
evidence or other objective information supporting a different
standard or demonstrating that the 30% ADTV limitation
significantly decreases the liquidity of securities subject to
passive market making. As with Rule 10b-6A, the 30% ADTV
limitation is applicable only to net purchases (i.e., total
purchases minus total sales). Accordingly, as long as sufficient
sales are made, there is no limit on total purchases. The
Commission continues to believe that a purchasing limitation is
fundamental to the concept of passive market making, and that the
30% ADTV limitation permits a normal level of market making
activity. In addition, the Commission believes that the
adjustment discussed below allowing all passive market makers to
have an initial ADTV limit of at least 200 shares will enable
less active market makers to participate in passive market
making. Of even greater significance is the fact that actively-
==========================================START OF PAGE 77======
traded Nasdaq securities are not subject to the requirements of
Rule 103 at all, and nearly all other Nasdaq securities will have
shorter restricted periods. These features of Regulation M
should substantially enhance liquidity for these securities.
As proposed, passive market makers would have been allowed
to bid for one round lot (i.e., 100 shares) if they had an
initial or remaining net purchasing capacity of between one and
99 shares. This provision was intended to permit less active or
smaller market makers who are syndicate members to be passive
market makers. The NASD supported providing passive market
makers with the ability to bid for and purchase at least 1,000
shares, irrespective of a lower ADTV limitation. The NASD argued
that the ADTV limitations of many market makers are too small to
make passive market making viable for them. The Commission
believes that giving all passive market makers an ADTV limit of
1,000 shares largely would override the 30% ADTV limitation and
unduly advantage market makers with historically small trading
volumes in the security, who would be able to make net purchases
several times larger than their routine market making activity.
As adopted, Rule 103 provides that all passive market makers
whose initial ADTV limit is between 1 and 199 shares are allowed
a net purchasing capacity of 200 shares. Rule 103 also permits
bids for a round lot if a passive market maker's remaining net
purchasing capacity is between 1 and 99 shares. -[111]-
---------FOOTNOTES----------
-[111]- For example, a passive market maker whose 30% ADTV
limitation is 743 shares and who made net
(continued...)
==========================================START OF PAGE 78======
Rule 103 allows passive market makers to make bids or
purchases at a price above the highest independent bid where
necessary to comply with any Commission or NASD rule relating to
the execution of customer orders. For example, a passive market
maker acting in accordance with the new Commission rules
regarding order handling obligations is permitted to display
customer bids and to execute customer orders in compliance with
the new rules even if the transactions would otherwise violate
Rule 103. -[112]- In addition, the Commission is
retaining its interpretation regarding the application of passive
market making in the context of NASD members' obligation not to
trade ahead of customer limit orders. When a passive market
maker is complying with Commission or NASD rules governing the
handling of customer limit orders, it cannot initiate any
transaction on the sell-side of the market that would create,
directly or indirectly, an obligation to purchase a covered
security at a price above that security's highest independent bid
price. -[113]-
The NASD supported permitting the execution of riskless
principal purchases (other than bids disseminated on Nasdaq) at a
price higher than Rule 103 allows, as long as the passive market
maker does not thereafter adjust its bids above the prevailing
---------FOOTNOTES----------
-[111]-(...continued)
purchases of 700 shares can still bid for 100
shares.
-[112]- See Release 34-37619A, 61 FR 48289.
-[113]- See NASD Manual, Conduct Rules, IM-2110-2.
==========================================START OF PAGE 79======
highest independent bid. The Commission believes, however, that
market maker purchases above the highest independent bid (except
as specifically permitted) are not consistent with the rule's
passive structure. -[114]-
In response to the NASD's comment, the Commission is
retaining a modified version of the interpretation regarding
contemporaneous transactions, which provides that if a passive
market maker is involved in a contemporaneous purchase and sale
of a security, the passive market maker can "net" the
transactions for purposes of the ADTV calculation as long as the
two transactions are reported within 30 seconds of each other.
-[115]-
The NASD also requested that the de minimis exception in
Rule 101 apply to passive market making transactions. The
Commission believes that permitting passive market makers to have
---------FOOTNOTES----------
-[114]- Rule 103 permits a passive market maker to
continue to bid and effect purchases at its bid at
a price exceeding the then highest independent bid
until the passive market maker purchases an
aggregate amount of the covered security that
equals or, through the purchase of all securities
that are part a single order, exceeds the lesser
of two times the minimum quotation size for the
security, as determined by NASD rules, or the
passive market maker's remaining purchasing
capacity under paragraph (b)(2) of Rule 103.
-[115]- See Release 34-32117, 58 FR at 19603. The
Commission also is retaining the interpretations
in the Rule 10b-6A adopting release discussing
appropriate interaction with other market makers
and permitting the offset of two customer orders
received within 15 minutes of each other without
affecting net purchasing capacity. Release 34-
32117, 58 FR at 19602-03.
==========================================START OF PAGE 80======
the benefit of the de minimis exception would undermine efforts
to achieve more rigorous compliance with passive market making
restrictions. Therefore, the de minimis exception in Rule 101
does not apply to unaccepted bids or to purchases made by a
passive market maker.
E. Rule 104 - Stabilization and Other Syndicate Activities
1. Generally
Rule 104, which replaces Rule 10b-7, governs stabilizing and
certain aftermarket syndicate activities in connection with an
offering, and makes it unlawful for any person to stabilize, to
effect any syndicate covering transaction, or to impose a penalty
bid in contravention of the rule's provisions. -[116]-
Rule 104 improves the regulation of stabilization by creating a
more flexible framework for managing the offering process and
eliminating much of the complexity that characterized Rule 10b-7.
The Commission is adopting Rule 104 substantially as proposed,
but has added provisions to address issues raised by commenters
and has clarified other provisions. Related amendments to
Exchange Act Rule 17a-2, governing the recordkeeping of
stabilizing and certain post-offering syndicate transactions, and
to Items 502(d) and 508 of Regulations S-B and S-K, governing
prospectus disclosure of these activities, are adopted as
proposed.
---------FOOTNOTES----------
-[116]- Unlike Rules 101 and 102, which apply to a
"distribution," Rule 104 governs stabilizing to
facilitate an "offering," a term that is broader
in scope. Moreover, there is no exception to Rule
104 for actively-traded securities.
==========================================START OF PAGE 81======
The purpose of Rule 104 is to permit underwriters and
syndicate members to conduct stabilizing transactions in
compliance with the rule's pricing and other terms for the
purpose of preventing or retarding a decline in the market price
of a security to facilitate an offering. Although stabilization
is price-influencing activity intended to induce others to
purchase the offered security, when appropriately regulated it is
an effective mechanism for fostering an orderly distribution of
securities and promotes the interests of shareholders,
underwriters, and issuers. -[117]- The rule addresses the
risk that stabilization will create a false or misleading
appearance with respect to the trading market for the offered
security. -[118]-
Rule 104 introduces several major features that are
different from Rule 10b-7: a stabilizing bid may be made with
reference to the principal market for the security, wherever
located (rather than focusing only on U.S. markets); a
stabilizing bid may be raised to match independent bids in the
market; and a stabilizing bid that has not been discontinued may
be carried over to another market. Rule 104 also accommodates
multinational offerings by permitting stabilizing bids to be made
---------FOOTNOTES----------
-[117]- See Section 9(a)(6) of the Exchange Act, 15 U.S.C.
78i(a)(6); Concept Release, 59 FR at 21689. See
also Securities Exchange Act Release No. 2446
(March 18, 1940), 11 FR 10971.
-[118]- See Securities Exchange Act Release No. 28732
(January 8, 1991), 59 FR 814, 815 ("Release 34-
28732").
==========================================START OF PAGE 82======
in the currency of the market where the bid is placed, and by
allowing adjustments to such stabilizing bids to account for
fluctuations in the exchange rates between currencies.
Overall, commenters supported efforts to update and simplify
the Commission's stabilization rule. Commenters favored the new
provisions governing price levels for stabilizing bids, which
codify and expand exemptive and no-action relief issued within
the last decade by the Commission and its staff for stabilizing
activities involving cross-border offerings. Some commenters
were critical of the new provisions requiring disclosure,
notification, and recordkeeping of syndicate covering
transactions and penalty bids. The Commission, however, believes
that these offering-related activities can influence aftermarket
prices, and has adopted the provisions as an appropriate method
to monitor these activities.
2. Discussion of Provisions Relating to
Stabilization
As adopted, Rule 104 provides that no person, directly or
indirectly, may stabilize, effect any syndicate covering
transaction, or impose a penalty bid in connection with an
offering of any security in contravention of the rule's
provisions. The term stabilizing is 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 prohibits bids or purchases not necessary
to prevent or retard a decline in the security's price, and
==========================================START OF PAGE 83======
forbids stabilizing for manipulative purposes, at a price
resulting from unlawful activity, or in an at-the-market
offering. Priority must be granted to independent bids
regardless of the size of the independent bid, when the market
where the stabilizing takes place permits or requires such
priority. The placing of more than one stabilizing bid in any
one market at the same price at the same time is prohibited. The
Commission is adopting these provisions substantially as
proposed.
Rule 104 excludes from its provisions offerings of
securities eligible for resale under Rule 144A by foreign or
domestic issuers made solely to QIBs in transactions exempt under
the Securities Act and to non-U.S. persons under Regulation S
that are made concurrently with a Rule 144A offering.
-[119]- As with other transactions excluded from
Regulations M's coverage, stabilization during these Rule 144A
placements will remain subject to the general anti-fraud and
anti-manipulation provisions of the federal securities laws.
The provision in Rule 10b-7(m) pertaining to limitation of
liability is eliminated. Although one commenter favored
retention of this provision, the Commission believes that because
lead managers now exert considerably more control over
stabilizing transactions than when Rule 10b-7 was adopted, the
provision is of marginal utility.
---------FOOTNOTES----------
-[119]- Identical exceptions are contained in Rules 101
and 102 of Regulation M.
==========================================START OF PAGE 84======
3. Stabilizing Levels
Rule 104 provides considerable flexibility to underwriters
effecting stabilizing transactions. Persons stabilizing the
price of a security can initiate a stabilizing bid in any market
with reference to the independent prices in the principal market
for the security, wherever located, and then maintain, reduce, or
raise that bid to follow the independent market, as long as the
bid does not exceed either the stabilizing bid in the principal
market (including a stabilizing bid in effect at the previous
close) or the offering price of the security. -[120]-
Commenters favored using the price in the security's principal
market as a basis for initiating a stabilizing bid when that
market was open. One commenter also advocated the ability to
carry over a stabilizing bid from one market to another market,
irrespective of the current independent prices in any market.
Under Rule 104, the appropriate price level for initiating
stabilizing is based on the security's principal market.
-[121]- Although the rule as proposed looked to
independent bids in the principal market to establish the
---------FOOTNOTES----------
-[120]- The term offering price is defined in Rule 100 as
the price at which the security is being
distributed.
-[121]- Rule 104, as adopted, uses the term "initiate,"
rather than the term "effect," to clarify that
"initiating" a stabilizing bid means the first
stabilizing bid made in connection with the
offering. Once a stabilizing bid has been
initiated, it may be increased, maintained,
reduced, or adjusted in accordance with the
provisions of the rule.
==========================================START OF PAGE 85======
permissible stabilizing level, the final version of Rule 104
permits a stabilizing bid to reference the last independent
transaction price in the principal market. This modification
responds to a commenter's concern that the public offering price
of an exchange-traded security frequently is set at the last
transaction price and, under Rule 10b-7, the security could be
stabilized at that price. The rule covers the two possible
scenarios for initiating stabilizing: initiating stabilizing in
any market when the principal market is open; and initiating
stabilizing in any market when the principal market is closed.
When the principal market is open, the permissible
stabilizing price level in any market always is established with
reference to the last independent transaction price for the
security in its principal market if two conditions are met: the
security must have been traded in the principal market on the day
stabilizing is initiated or on the preceding business day; and
the current asked price in the principal market must be equal to
or greater than the last independent transaction price. If both
conditions are not satisfied, stabilizing may be initiated in any
market at a price no higher than the highest current independent
bid in the principal market.
When the principal market is closed, but quotations have
opened in the market where stabilizing will be initiated, Rule
104 provides that stabilization may be initiated with reference
to the lower of: the price at which stabilizing could have been
initiated in the principal market at its previous close; or the
==========================================START OF PAGE 86======
last independent transaction price in the market where
stabilizing is being initiated. The independent transaction must
have occurred that day or on the preceding business day and the
current asked price in that market must be equal to or greater
than the independent transaction price. If these conditions are
not met, stabilizing may only begin at a price no higher than the
highest current independent bid for the security in the market
where the stabilizing is being initiated.
Rule 104 also includes a new provision for initiating a
stabilizing bid in any market immediately before the opening of
quotations. In this case, stabilizing may be initiated with
reference to the lower of: the price at which stabilizing could
have been initiated in the principal market at its previous
close; or the most recent price at which an independent
transaction in the offered security has been effected in any
market after the close of the principal market, if the person
stabilizing knows or has reason to know of such transaction.
-[122]-
Rule 104 includes maximum caps on the stabilizing price
---------FOOTNOTES----------
-[122]- As proposed, the reference price for initiating a
stabilizing bid in any market, including the
principal market, immediately before it opened was
the lower of: the price at which stabilizing
could have been effected at the close of the
principal market; or 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. Rule 104
incorporates a knowledge-based standard to avoid
imposition of an undue burden on underwriters to
discover the prices of obscure transactions,
whether reported or not.
==========================================START OF PAGE 87======
level: no stabilizing bid may be initiated, maintained, or
otherwise adjusted in any market at a price higher than the
stabilizing bid in the principal market or the security's
offering price.
Once a stabilizing bid has been initiated in a market, that
bid may be maintained in that market, subject only to the maximum
caps. It also may be carried over into another market,
irrespective of intervening changes in the independent bids or
transaction prices for the security. A stabilizing bid in effect
at the market's close may be maintained between trading sessions
and used to establish a stabilizing bid just prior to the
market's opening of quotations on the next day. -[123]- A
stabilizing bid may be maintained without reduction unless it
would exceed the maximum caps. An underwriter may otherwise
reduce a stabilizing bid at its discretion. If a stabilizing bid
is discontinued (i.e., it is not maintained continuously during a
trading session or is not in effect as of the market's close),
stabilizing may be resumed only at a level at which it then could
be initiated in the particular market, without reference to the
earlier stabilizing bid.
In perhaps the most significant change from Rule 10b-7, Rule
104 allows a stabilizing bid to be increased to the level of the
highest independent bid in the principal market, or, if the
principal market is closed, the highest independent bid in that
---------FOOTNOTES----------
-[123]- The end of a trading session will not be deemed to
discontinue a stabilizing bid in effect at the
close.
==========================================START OF PAGE 88======
market at the previous close, provided such bid price does not
exceed the maximum caps.
Where an independent market for an offered security does not
exist, the maximum stabilizing level is limited only by the
offering price. Stabilization may be conducted before an
offering is priced, consistent with the conditions of Rule 104.
After the offering price is determined, stabilization may be
resumed at a price at which stabilizing then could be initiated.
Rule 104 also provides for adjustments to a stabilizing bid
when the price of the security being stabilized is adjusted for
the payment of dividends, rights, or distributions, 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. When securities are being offered as a unit, the
component securities shall not be stabilized at prices that, in
the aggregate, are higher than the then permissible stabilizing
price for the unit.
4. Offerings with no U.S. Stabilizing Activities
To further accommodate cross-border transactions, the
Commission is incorporating a new provision, similar to one
contained in its 1991 proposing release on stabilizing in the
international context, -[124]- that permits stabilizing
outside the United States during an offering in the United
States, without complying with Rule 104. The conditions for this
---------FOOTNOTES----------
-[124]- Release 34-28732. The proposals contained in
Release 34-28732 are withdrawn, except to the
extent they are adopted in Rule 104.
==========================================START OF PAGE 89======
provision are that: there be no stabilization in the United
States; stabilization is not conducted above the U.S. offering
price; and the foreign stabilizing is conducted in a jurisdiction
with comparable regulation of stabilization. -[125]- For
purposes of this provision, the Commission recognizes the
stabilization regulations of the U.K. Securities and Investments
Board. -[126]- The Commission invites appropriate
requests to recognize additional markets as having comparable
stabilization regulations for the purposes of this provision.
5. Disclosure, Notification, and Recordkeeping of
Stabilizing Transactions, Short Covering
Transactions, and Penalty Bids
In the Proposing Release, the Commission expressed its view
that syndicate short covering transactions and the imposition of
penalty bids by underwriters are activities that can facilitate
an offering in a manner similar to stabilization. The Commission
did not propose to extend the price conditions of Rule 104 to
these aftermarket activities. Instead, the Commission proposed,
and has determined to adopt, the provisions relating to
disclosure, notification, and recordkeeping of syndicate covering
transactions and the imposition of penalty bids.
Rule 104, like Rule 10b-7, requires any person who enters a
bid that such person knows is for the purpose of stabilizing the
---------FOOTNOTES----------
-[125]- The Commission by rule, regulation, or order will
identify foreign statutes or regulations that are
comparable to Rule 104.
-[126]- Chapter III, Part 10 of the Rules of the United
Kingdom Securities and Investments Board.
==========================================START OF PAGE 90======
price of any security to notify the market on which the bid is
placed, and to disclose the purpose of such bid to the person to
whom the bid is entered (e.g., the specialist or executing
broker-dealer). In the Commission's view, contemporaneous
disclosure of the fact that stabilizing is occurring is
beneficial to the market and its participants, because it ensures
that transactions in a security are based on all available
information. Consistent with this requirement, the NASD requires
market makers intending to initiate stabilization to provide it
with prior notification. -[127]- 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 person to whom the bid
is made of the stabilizing purpose of the bid by notifying the
NASD. On the exchanges, underwriters must notify the exchange
and must provide disclosure separately to the recipient of the
bid (e.g., the specialist).
Rule 104 also requires any person effecting a syndicate
covering transaction, -[128]- or placing or transmitting a
penalty bid, -[129]- to disclose that fact to the SRO that
---------FOOTNOTES----------
-[127]- See NASD Manual, Marketplace Rules, IM-4614.
-[128]- Rule 100 defines 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.
-[129]- Rule 100 defines penalty bid to mean an
arrangement that permits the managing underwriter
(continued...)
==========================================START OF PAGE 91======
has direct oversight authority over the principal market in the
United States for the security for which the syndicate covering
transaction is effected, or the penalty bid is imposed. This
information will assist the exchanges and the NASD in carrying
out their surveillance responsibilities. Some commenters
asserted that the information regarding aftermarket activities
should be kept confidential to avoid creating the perception of a
weak offering, while a few commenters urged the Commission to
facilitate public dissemination of this information in order to
preclude an unintended manipulative effect, and to prevent the
investing public from unknowingly bearing the cost of these
aftermarket activities. The rule, as adopted, requires
disclosure to the SRO but does not require public disclosure.
Should circumstances indicate that such disclosure is warranted,
the Commission may revisit this issue.
Under Rule 104, the stabilizing legend required by Rule 10b-
7, and Item 502(d) of Regulations S-B and S-K, -[130]-
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, governing the
---------FOOTNOTES----------
-[129]-(...continued)
to reclaim a selling concession otherwise accruing
to a syndicate member (or to a selected dealer or
selling group member) in connection with an
offering when the securities originally sold by
the syndicate member are purchased in syndicate
covering transactions.
-[130]- See 17 CFR 228.502(d) and 229.502(d).
==========================================START OF PAGE 92======
plan of distribution disclosure, is amended 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. -[131]- The objective of these proposals is
to provide meaningful information to prospective investors
regarding stabilizing and related activities. -[132]-
In addition to the foregoing disclosure requirements, when a
person subject to Rule 104 conducts transactions in securities
and the price of those securities may be or has been stabilized,
that person is required by paragraph (h)(3) of Rule 104 to send
to a purchaser, at or before the completion of the transaction, a
document containing a statement similar to that required by Item
502(d)(1)(i) of Regulations S-B and S-K. This disclosure may be
made by a document, including a prospectus, confirmation, or
other writing that contains language indicating that the
underwriter may effect stabilizing transactions in connection
with an offering of securities. -[133]- The Commission
---------FOOTNOTES----------
-[131]- See 17 CFR 228.508 and 229.508.
-[132]- Once a "plain English" prospectus is implemented,
a stabilizing legend would no longer be required
on the inside front cover of the prospectus,
although the disclosure required by Item 508 of
Regulations S-K and S-B would be retained. See
Task Force Report 17-18.
-[133]- This disclosure requirement is not intended to
extend the prospectus delivery period required by
Rule 174 under the Securities Act. The required
disclosure may be made by means other than the
prospectus. 17 CFR 230.174.
==========================================START OF PAGE 93======
proposed, but is not adopting at this time, that similar
disclosure be given to purchasers of securities subject to
aftermarket activities. The Commission intends to reconsider the
need for this disclosure as it continues to review developments
in the aftermarket area.
Amendments to Rule 17a-2 under the Exchange Act require
managing underwriters to keep records of syndicate covering
transactions and penalty bids, in addition to stabilizing
information. Records must reflect the name and class of
securities, the price, date, and time for each syndicate covering
transaction and whether any penalties were assessed, the names
and addresses of the syndicate group members, and their
respective commitments. The records also must reflect the dates
when any penalty bid was in effect. The information is required
to be maintained in a separate file, or in a separately
retrievable format, for a period of three years, the first two
years in an easily accessible place, consistent with the
requirement of Exchange Act Rule 17a-4(f). The required
information must be kept for any offering registered under the
Securities Act, conducted pursuant to Regulation A -[134]-
thereunder, or where the aggregate proceeds exceed $5 million.
While several commenters opposed the disclosure,
notification, and recordkeeping requirements proposed in Rule
104, particularly with respect to aftermarket activities, the
Commission continues to believe that these provisions are an
---------FOOTNOTES----------
-[134]- 17 CFR 230.251 et seq.
==========================================START OF PAGE 94======
appropriate and effective means to monitor developments in
aftermarket activities. Nevertheless, the Commission appreciates
commenters' concerns that these provisions may require the
implementation of new internal systems and procedures for
underwriters and syndicate members. To accommodate possible
revisions to broker-dealers' systems and procedures, the
Commission has determined to delay the effectiveness of the
recordkeeping requirements pertaining to syndicate covering
transactions and penalty bids contained in Rule 17a-2 until April
1, 1997. The disclosure and notification requirements, which are
contained in Rule 104 and pertain to stabilizing transactions,
syndicate cover transactions, and penalty bids, will become
effective on the same date as the other provisions of Regulation
M.
F. Rule 105 - Short Sales in Connection with an Offering
The Commission is adopting Rule 105 to replace Rule 10b-21.
Rule 105, like Rule 10b-21, prohibits certain short sales from
being covered with securities obtained from an underwriter,
broker, or dealer who is participating in an offering. Rule 105
is intended to prevent manipulative short selling prior to a
public offering by short sellers who cover their short positions
by purchasing securities in the offering, thus largely avoiding
exposure to market risk. Such short sales could result in a
lower offering price and reduce an issuer's proceeds. Rule 105
differs from Rule 10b-21 because it covers only those short sales
effected in the period commencing five business days prior to the
==========================================START OF PAGE 95======
offering's pricing and ending with such pricing, rather than the
potentially much longer period of Rule 10b-21, which commenced
with the filing of a registration statement or Form 1-A.
-[135]-
In its comment letter, the NASD expressed strong support for
Rule 10b-21 and recommended that the current restricted period be
retained because the date of the filing of a registration
statement or Form 1-A can be identified with certainty in advance
by potential short sellers. The NASD also urged that Rule 105 be
amended to prohibit expressly a short seller from "directly or
indirectly" covering short sales with securities purchased in a
public offering. Another commenter suggested that the rule would
be more effective if it covered transactions in related options.
A third commenter urged that the exception in Rule 105 for shelf-
registered offerings be eliminated.
The Commission believes that the application of Rule 105
should be limited to the period corresponding to the longest
restricted period of Regulation M, which is five business days,
and that short sellers contemplating a covering transaction will
be in a position to know if any of their short sales were made
within that five business day period. If short sales were made
during this period, the short seller cannot cover those short
sales with securities purchased in the offering.
As adopted, Rule 105 does not apply to short sales of
derivative securities, because an extension of the rule's
---------FOOTNOTES----------
-[135]- 17 CFR 239.90.
==========================================START OF PAGE 96======
prohibitions to derivative securities would be inconsistent with
the approach of Regulation M, which is to focus on those
securities having the greatest manipulative potential.
-[136]- Additionally, the rule does not expressly
prohibit short sellers from "directly or indirectly" covering
short sales out of the offering. The Commission decided not to
add the term "indirectly" to Rule 10b-21 at the time that rule
was adopted, and no different arguments have been presented that
would alter its decision. -[137]-
Finally, Rule 105 retains the exclusion for shelf-registered
offerings. However, it may be necessary for the Commission to
reevaluate this exclusion if the availability of shelf
registration is further expanded or offerings of shelf-registered
equity become more common-place.
III. STATUS OF INTERPRETATIONS, EXEMPTIONS, NO-ACTION POSITIONS,
INJUNCTIONS, AND ORDERS TO CEASE AND DESIST
A. Interpretations, Exemptions, and No-action Positions
In the Proposing Release, the Commission sought comment on
the implications for interpretations, exemptions, and no-action
positions under the former trading practices rules in light of
the adoption of Regulation M. Although a few commenters
highlighted interpretive issues, and some specifically requested
---------FOOTNOTES----------
-[136]- Any manipulative short sales involving derivatives
transactions continue to be addressed by the
general anti-manipulation provisions, including
Section 9(a)(2) of and Rule 10b-5 under the
Exchange Act.
-[137]- See Securities Exchange Act Release No. 26028
(August 25, 1988), 53 FR 33455, 33457.
==========================================START OF PAGE 97======
that certain exemption or no-action letters remain in effect,
-[138]- there was little comment on the status of
interpretations, exemptions, and no-action positions generally.
Many terms and concepts in Regulation M have the same
meaning as under the former trading practices rules, and
interpretations under those rules regarding such terms or
concepts remain relevant to the new rules. Nevertheless, because
the trading practices rules are rescinded as of the effective
date of Regulation M, written exemptions that were granted and
no-action positions taken under those rules no longer will be in
effect as of Regulation M's effectiveness. -[139]- Many of
the exemptions and no-action positions issued under the trading
---------FOOTNOTES----------
-[138]- See, e.g., Letter from Peter Derendinger, General
Counsel, CS Holding (June 24, 1996), to Jonathan
G. Katz, Secretary, SEC, concerning Letter
regarding CS Holding, [1995] Fed. Sec. L. Rep.
(CCH) 77,018 (March 31, 1995); Letter from Dan
Sheridan, Head of Market Regulation Department,
London Stock Exchange (July 23, 1996), to Jonathan
G. Katz, Secretary, SEC, concerning Letter
regarding London Stock Exchange, (July 12, 1993)
(permitting passive market making on the London
Stock Exchange during a distribution of
securities) ("LSE Letter").
-[139]- Regulation M is considered a major rule for
purposes of the Small Business Regulatory
Enforcement Fairness Act of 1996, Pub. L. No. 104-
121, Title II, 110 Stat. 857 (1996). Thus, it is
subject to a Congressional disapproval process and
will not become effective until [insert date 60
days from the date of publication in the Federal
Register]. The provisions of Rules 10b-6, 10b-6A,
10b-7, 10b-8, and 10b-21 remain in effect until
the effective date of their rescission, which is
[insert date 60 days from the date of publication
in the Federal Register]. Persons participating
in offerings are subject to the terms of the
trading practices rules until they are rescinded.
==========================================START OF PAGE 98======
practices rules have been codified, expanded, or otherwise made
redundant by Regulation M. The Commission expects, therefore,
that the need to continue the relief issued under the trading
practices rules after the effective date of Regulation M will be
very limited. -[140]- Accordingly, if a recipient or
beneficiary of an exemption or no-action letter issued under the
former trading practices rules believes that the relief granted
by such letter continues to be necessary or appropriate under
Regulation M, that person may wish to contact the Office of Risk
Management and Control of the Commission's Division of Market
Regulation, at (202) 942-0772.
B. Injunctions and Orders to Cease and Desist
The Proposing Release did not address the status of
outstanding injunctions or orders to cease and desist from
violating the trading practices rules. The Commission is of the
view that all such injunctions and orders continue in force and
effect, and should be considered injunctions or orders to cease
and desist from violating the corresponding successor rule or
rules under Regulation M. For purposes of determining the status
of an outstanding injunction or order, Rules 101 and 102 are each
deemed a successor rule to Rule 10b-6; Rule 103 is deemed a
successor rule to Rule 10b-6A; Rule 104 is deemed a successor
---------FOOTNOTES----------
-[140]- In response to a request from the London Stock
Exchange, the LSE Letter shortly will be modified
and reissued under Regulation M. To the extent
that other letters have not been codified by
Regulation M, appropriate requests for relief
under Regulation M will be considered by the
Division of Market Regulation.
==========================================START OF PAGE 99======
rule to Rule 10b-7; and Rule 105 is deemed a successor rule to
Rule 10b-21. Additionally, with respect to Commission cases
alleging a violation of one or more of the trading practices
rules, if a court or administrative law judge determines after
the adoption of Regulation M that a violation of one or more of
the trading practices rules occurred while such rules remained in
effect, and an injunction or order to cease and desist would have
been an appropriate remedy at the time such rules remained in
effect, the Commission believes such court or administrative law
judge should issue an injunction or order to cease and desist
from violating the appropriate successor rule or rules under
Regulation M.
IV. COSTS AND BENEFITS OF THE AMENDMENTS AND THEIR EFFECTS ON
COMPETITION, EFFICIENCY, AND CAPITAL FORMATION
Section 23(a)(2) of the Exchange Act -[141]- requires
the Commission to consider the anti-competitive effects of any
rules it adopts thereunder, and to balance them against the
benefits that further the purposes of the Act. Furthermore,
Section 2 of the Securities Act -[142]- and Section 3 of
the Exchange Act, -[143]- as amended by the recently
enacted National Securities Markets Improvement Act of 1996
("Markets Improvement Act"), -[144]- provide that whenever
---------FOOTNOTES----------
-[141]- 15 U.S.C. 78w(a)(2).
-[142]- 15 U.S.C. 77b.
-[143]- 15 U.S.C. 78c.
-[144]- Pub. L. No. 104-290, 106, 110 Stat. 3416 (1996).
==========================================START OF PAGE 100======
the Commission is engaged in rulemaking and is required to
consider or determine whether an action is necessary or
appropriate in the public interest, the Commission also shall
consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital
formation.
In the Proposing Release, the Commission stated its view
that the rules would not likely impose any significant burden on
competition not necessary or appropriate in furtherance of the
Exchange Act. -[145]- In fact, the Commission stated that
Regulation M would reduce significantly trading restrictions on
issuers, underwriters, and others participating in a distribution
and, therefore, should reduce the costs of raising capital. The
Commission also indicated its belief that Regulation M would
enhance the posture of U.S. underwriters in relation to foreign
broker-dealers in competing for underwriting business in cross-
border transactions.
The NYSE and the Amex argued that use of a trading volume
test to determine which securities qualify for the actively-
traded securities exception and the one or five day restricted
period of Regulation M would have an anti-competitive effect.
The NYSE and the Amex believed that the Commission's use of ADTV
is discriminatory and anti-competitive because the rules make no
distinction between dealer markets, where dealer
"interpositioning" is alleged to approximately double the
---------FOOTNOTES----------
-[145]- See Proposing Release, 61 FR at 17127.
==========================================START OF PAGE 101======
reported volume of shares changing hands between investors, as
compared with auction markets, where buyers and sellers meet
directly and reported volume reflects that direct interaction as
a single reported trade. These commenters asserted that the
alleged "double counting" would have an anti-competitive effect
on the ability of auction markets to attract new corporate
listings, because it makes it more likely that distribution
participants will be subject to fewer restrictions in dealer
markets. The NYSE recommended that if the Commission determined
that ADTV for a dealer market should be considered as the volume
reported by that market, the Commission should consider the ADTV
for auction markets as being twice the volume reported by those
markets. Similarly, the Amex suggested that Nasdaq reported
volume be adjusted downward if a measure based on ADTV is used.
As stated above, the Commission is of the view that the ADTV
test provides the best measurement of a security's relative
susceptibility to manipulation. Moreover, the public float test
described above provides an additional control to prevent
securities from being categorized based on aberrational levels of
trading volume. The public float test also serves to equalize
the treatment of securities traded under different market
structures.
Although the NYSE and the Amex letters contend that the use
of a trading volume standard in Regulation M will have an anti-
competitive effect on their ability to attract corporate
listings, they offer no data or other information demonstrating
==========================================START OF PAGE 102======
that the use of a trading volume concept in other rules, such as
Exchange Act Rule 10b-18 or Securities Act Rule 144,
-[146]- has resulted in an issuer deciding not to list on
the NYSE or the Amex.
The NYSE and the Amex proposals also do not take into
account the complex and evolving nature of both dealer and
auction markets, and do not recommend a workable methodology for
making such trading "comparable." The Commission notes that the
Nasdaq market has a substantial and developing auction component,
-[147]-
and the exchanges have substantial dealer activity either through
block positioning or specialist dealer activity. -[148]-
The NYSE and Amex do not suggest, however, that there is any need
for a reduction in exchange volume based upon dealer activity.
The complexity is magnified when the focus is on individual
---------FOOTNOTES----------
-[146]- 17 CFR 230.144.
-[147]- For example, Instinet accounts for a significant
proportion of the reported volume in Nasdaq
securities. In addition, the Commission's recently
adopted order handling rules are likely to lower
the level of dealer involvement in Nasdaq order
flow. See Release 34-37619A, 61 FR 48289.
-[148]- Specialists, which are the hallmark of auction
markets, have important dealer obligations. They
must trade for their own accounts (i.e., as
dealers) in order to maintain fair and orderly
markets. See Exchange Act Rule 11b-1, 17 CFR
240.11b-1; NYSE Rule 104.
In 1995, trading by NYSE members accounted for 19.7% of NYSE
reported share volume (purchases and sales) with specialist
activity accounting for approximately half of this volume.
NYSE Fact Book 20; see generally John F. Gould & Allan W.
Kleidon, Market Maker Activity on Nasdaq: Implications for
Trading Volume, 1 Stanford Journal of Law, Business and
Finance 11 (1994).
==========================================START OF PAGE 103======
securities rather than aggregate volume levels for a market. For
example, a portion of trading in exchange-listed securities is
effected in the over-the-counter ("OTC") market (by dealers) but
is reported in composite exchange volume. -[149]-
Moreover, the level of exchange dealer activity undoubtedly
varies from security to security, and the level of dealer
activity for thinly-traded exchange stocks is probably high. If
the approach suggested by the NYSE and the Amex were implemented,
comparability would require an analysis of the dealer component
in OTC and exchange trading and application of appropriate
discounts. These discount calculations for each security also
would need to be constantly updated. The Commission believes
that this would be a cumbersome exercise of little value.
After considering carefully the views of the NYSE and the
Amex, the Commission continues to believe that Regulation M will
not likely impose any significant burden on competition not
necessary or appropriate in furtherance of the Exchange Act. As
stated above, the Commission believes that Regulation M is
necessary and appropriate in the public interest because of the
changes in securities markets and the fact that the trading
practices rules had become needlessly complex and imposed
substantial compliance costs. Furthermore, by reducing trading
restrictions, Regulation M will promote efficiency and the
---------FOOTNOTES----------
-[149]- See The Nasdaq Stock Market, Inc., The Nasdaq
Stock Market 1996 Fact Book & Company Directory 8
(1996) (4.3% of volume in exchange-listed
securities was effected by Nasdaq market makers in
1995).
==========================================START OF PAGE 104======
competitive position of U.S. underwriters, and enhance the U.S.
capital formation process.
V. FINAL REGULATORY FLEXIBILITY ANALYSIS
This following discussion summarizes the Commission's
Regulatory Flexibility Act analysis of Regulation M and the
related amendments to other rules adopted today. A complete copy
of the Final Regulatory Flexibility Act ("FRFA") is available in
Public File No. S7-11-96.
The rules adopted today are intended to streamline and
simplify the Commission's current anti-manipulation regulation of
securities offerings by reducing the regulatory burdens on
issuers, underwriters, and others with a significant interest in
a securities offering, while retaining core investor protections.
The new rules replace Rules 10b-6, 10b-6A, 10b-7, 10b-8, and
10b-21.
Regulation M restricts offerings, activities, and persons
where there is a readily identifiable incentive to manipulate the
price of an offered security. The Commission believes that
Regulation M reflects the improved surveillance technology of
U.S. self-regulatory organizations, enhanced market transparency
of securities transactions, increased globalization of securities
markets, and changed offering and syndicate processes that have
developed in recent years. The Commission continues to believe
that prophylactic rules provide the most appropriate framework to
achieve the objectives described above.
As stated in the FRFA, the Commission believes that
==========================================START OF PAGE 105======
Regulation M will enhance the ability of small issuers to raise
capital. Regulation M is less restrictive than the structure
under the former trading practices rules. Moreover, the
Commission believes that Regulation M balances the objective of
simplified, streamlined, and more flexible regulation with its
statutory mandate of investor protection in a manner more
appropriate than other alternatives.
The Commission requested comment with respect to the Initial
Regulatory Flexibility Analysis ("IRFA") prepared in conjunction
with the Proposing Release. The Commission did not receive any
comments with respect to the IRFA.
A. Rules 101 and 102
The prohibitions in Rule 10b-6 are contained in two separate
rules, Rules 101 and 102. Each of these rules employ restricted
periods based on the dollar value of the published ADTV of the
offered security and the public float value of its issuer. The
restricted periods commence one or five business days prior to
the pricing of the offering and continue until the distribution
is over. The restricted periods cover the times when
manipulative activity is most likely. The most actively-traded
securities (i.e., those securities having a minimum ADTV value of
$1 million and whose issuer meets a $150 million public float
test) are not subject to Rule 101. With respect to the vast
majority of securities distributions, the trading restrictions
that existed under Rule 10b-6 are substantially reduced or
eliminated.
==========================================START OF PAGE 106======
Rule 101 does not apply to distributions of Rule 144A
securities made to QIBs in transactions that are exempt under the
Securities Act. -[150]- Transactions in nonconvertible
investment grade debt and preferred securities, and investment-
grade asset-backed securities are not covered by the rule.
Derivative securities also are excluded. Further, Rule 101
permits the routine dissemination of research reports, the
exercise of options and other securities, and transactions in
baskets of securities containing the offered security. Rule 101
excepts inadvertent violations during the restricted period by
excusing de minimis violations, provided that a distribution
participant has in place written policies and procedures
reasonably designed to achieve compliance with Regulation M's
provisions. The scope of persons subject to Rule 101 is narrowed
by recognizing information barriers between a distribution
participant and its affiliates.
Rule 101 applies equally to all distribution participants,
regardless of size. The Commission does not believe that it is
practicable to exempt small entities from Rule 101 because to do
so would be inconsistent with the Commission's statutory mandate
to protect investors.
Rule 102 governs the activities of issuers, selling security
holders, and their affiliated purchasers. This rule does not
contain an exception for actively-traded securities, or many of
the other exceptions in Rule 101, because issuers and selling
---------FOOTNOTES----------
-[150]- 17 CFR 230.144A.
==========================================START OF PAGE 107======
shareholders generally are not engaged in the securities business
and do not need to trade securities on their own behalf or for
others. Nevertheless, issuer participants, like underwriting
participants, are able to engage in market activities prior to
the beginning of the applicable restricted period. During the
restricted period, Rule 102 permits: odd-lot transactions;
transactions in connection with issuer plans; exercises of
options, warrants, rights, and similar securities; transactions
during Rule 144A distributions; and transactions in certain
nonconvertible securities and asset-backed securities that are
rated investment grade.
Rule 101 permits distribution participants to engage in a
greater range of market activities during a distribution in
recognition of their role as market intermediaries, independent
of their function as underwriters. Because issuer participants
do not have such a broad range of market obligations and have a
more direct interest in the offering's outcome, Rule 102 places
more restrictions on their activities during a distribution.
For many issuers, Regulation M reduces the period of trading
restrictions from nine or two business days to one business day.
For some securities, however, the restricted periods under Rules
101 and 102 may be longer than the cooling-off periods under Rule
10b-6 (i.e., five business days as opposed to two business days)
because the new rules' thresholds depend on dollar value of ADTV
and of public float, rather than on the offered security's price
and the number of shares held by nonaffiliates. Some of these
==========================================START OF PAGE 108======
issuers may be small entities. The Commission has determined to
base the new rules' thresholds on the dollar value of the
security's ADTV and the issuer's public float value because the
higher the value of trading and public float, the more costly and
more difficult it becomes to affect the security's price.
B. Rule 103
Rule 103 governs Nasdaq passive market making and replaces
Rule 10b-6A. By eliminating the eligibility criteria contained
in Rule 10b-6A, Rule 103 applies to all Nasdaq securities and
nearly all distributions, and provides additional flexibility by
permitting more distribution participants to engage in passive
market making. The Commission no longer considers it necessary
or appropriate to restrict passive market making to the narrow
class of offerings where the potential liquidity loss may be
substantial (i.e., where syndicate members account for at least
30% of market making capacity). Rule 103 also allows less active
passive market makers who might otherwise not be able to engage
in a passive market making a minimum net purchase allowance of
200 shares. Some of these passive market makers may be small
broker-dealers.
Rule 103 benefits small issuers and small broker-dealers
because it removes the eligibility criteria of Rule 10b-6A. The
eligibility criteria were designed to limit the availability of
passive market making to those firm commitment, fixed price
offerings qualifying for the two business day cooling-off period
of Rule 10b-6 and to those circumstances where the restrictions
==========================================START OF PAGE 109======
otherwise would have reduced market maker capacity significantly
(i.e., where syndicate members accounted for at least 30% of
market maker capacity). By removing the eligibility criteria,
more offerings and more market makers qualify for passive market
making. C. Rule 104
Rule 104 regulates stabilizing and other activities related
to a distribution and replaces Rule 10b-7. The rule permits
underwriters to follow the independent bid for a security in the
principal market, wherever located. Certain disclosure and
recordkeeping requirements are extended to the aftermarket
transactions by distribution participants. Underwriters
frequently engage in aftermarket activities, including covering
syndicate short positions and establishing and enforcing penalty
bids, that are analogous to traditional stabilizing under Rule
10b-7.
The Commission believes that Rule 104 generally concerns
syndicate managers because of their role as stabilizing managers.
For the most part, these syndicate managers are larger broker-
dealers. To the extent small broker-dealers engage in
stabilizing activities, Rule 104 applies to them with the same
force as large broker-dealers.
In conjunction with Rule 104, the Commission is adopting
amendments to Items 502(d) and 508 of Regulations S-K and S-B,
and Rule 17a-2. These rules require revised disclosure and
recordkeeping requirements on certain post-distribution
activities of underwriters. Rule 104 and Item 502(d) of
==========================================START OF PAGE 110======
Regulations S-K and S-B require disclosure of stabilizing
activities through a new, shorter stabilizing legend in place of
the legend that had been required. In addition, Rule 104 and
Item 508 of Regulations S-K and S-B expand the discussion in the
plan of distribution section of the prospectus to include a
"plain English" discussion of any expected stabilizing activities
and other aftermarket activities and their potential effects on
the marketplace with respect to the particular securities
offering. Rule 17a-2 is amended to require the manager of an
underwriting syndicate to maintain records related to syndicate
covering transactions and penalty bids.
The Commission believes that the preponderance of the
broker-dealers acting as distribution participants are not small
broker-dealers, and that there is only a relatively small number
of small broker-dealers that act as distribution participants.
The Commission believes, however, that any effect on small
entities will be minimal because the additional disclosure in the
offering materials and notification to regulatory authorities is
the responsibility of the managing underwriter who is unlikely to
fall within the small entity classification because of capital
requirements for underwriting. The same is true of the
additional recordkeeping requirements of Rule 17a-2.
D. Rule 105
Rule 105 recodifies 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
==========================================START OF PAGE 111======
coverage is shortened to the five business day period before
pricing, rather than the time extending from the filing of
offering materials to the time when sales may be made. Rule 105
is less restrictive than Rule 10b-21, and applies equally to all
market participants.
VI. PAPERWORK REDUCTION ACT
As set forth in the Proposing Release, -[151]- Rules
101, 102, 103, and 104 under Regulation M and the amendments to
Rule 17a-2 and to Items 502(d) and 508 of Regulations S-B and S-K
contain collections of information within the meaning of the
Paperwork Reduction Act of 1995 ("PRA"). -[152]-
Accordingly, the collection of information requirements contained
in the rules and related amendments were submitted to the Office
of Management and Budget ("OMB") for review and were approved by
OMB which assigned the following control numbers: Rule 101,
control number 3235-0464; Rule 102, control number 3235-0467;
Rule 103, control number 3235-0466; Rule 104, control number
3235-0465; Amendments to Rule 17a-2, control number 3235-0201;
Amendments to Items 502(d) and 508 of Regulation S-B, control
number 3235-0418; and Amendments to Item 502(d) and 508 of
Regulation S-K, control number 3235-0071. The collection of
information requirements are in accordance with Section 3507 of
the PRA. -[153]- An agency may not conduct or sponsor,
---------FOOTNOTES----------
-[151]- 61 FR at 17127.
-[152]- 44 U.S.C. 3501 et seq.
-[153]- 44 U.S.C. 3507.
==========================================START OF PAGE 112======
and a person is not required to respond to, a collection of
information unless the agency displays a valid OMB control
number.
The collections of information under Regulation M and the
related amendments are necessary for covered persons to obtain
certain benefits or to comply with certain requirements. As
described in more detail in the Proposing Release, the
collections of information are necessary to provide the
Commission with information regarding syndicate covering
transactions and penalty bids. -[154]- The Commission may
review this information during periodic examinations or with
respect to investigations. Except for the information required
to be kept under Rule 104(i) and Rule 17a-2(c), none of the
information required to be collected or disclosed for PRA
purposes will be kept confidential. If the records required to
be kept pursuant to these rules are requested by and submitted to
the Commission, they will be kept confidential to the extent
permitted by statutory and regulatory provisions.
Several commenters provided comments regarding the
Commission's estimate of the burdens associated with the
recordkeeping requirement under Rule 104 and the related
amendment to Rule 17a-2. Rule 104(i) and Rule 17a-2(c) require
underwriters to keep records of syndicate covering transactions
and penalty bids, in addition to the stabilizing information
required prior to these amendments. The NASD suggested that the
---------FOOTNOTES----------
-[154]- See Proposing Release, 61 FR at 17127-30.
==========================================START OF PAGE 113======
Commission review its estimated time for recordkeeping for
syndicate covering transactions and penalty bids. -[155]-
While they did not challenge specific burden estimates, two other
commenters noted generally that the change in recordkeeping
requirements will be more burdensome than represented by the
Commission. -[156]- The Securities Industry Association
asserted that the amendments would require system changes and
retraining for underwriters. None of these commenters, however,
provided specific alternatives to the Commission's estimates.
After carefully considering these comments, and based upon
further review of the disclosure, notification, and recordkeeping
changes required by Rule 104(h) and the amendment to Rule 17a-
2(c), the Commission is retaining its burden estimates for the
recordkeeping obligation under Rule 104 and the amendment to Rule
17a-2. Thus, the descriptions and estimated burdens of the
collection of information requirements under Regulation M have
not changed, and are set forth in the Proposing Release.
-[157]-
VII. STATUTORY BASIS AND TEXT OF RULES AND AMENDMENTS
Rules 10b-6, 10b-6A, 10b-7, 10b-8, and 10b-21 are removed
pursuant to, and the amendments to Rule 17a-2 are adopted under,
the Exchange Act, 15 U.S.C. 78a et seq., and particularly
---------FOOTNOTES----------
-[155]- NASD Comment Letter, supra note 31, at p. 9.
-[156]- Comment letter from the Securities Industry
Association (July 16, 1996), at p. 13; Comment
letter from J.P. Morgan Securities Inc., at p. 4.
-[157]- See Proposing Release, 61 FR at 17127-30.
==========================================START OF PAGE 114======
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 amendments to Items 502(d) and
508 of Regulations S-B and S-K are 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, 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 is 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, 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. The necessary nomenclature
amendments to Sections 200.30-3, 230.418, 230.461, 240.11a-1,
240.13e-4, 240.13e-102, and 240.14d-102 of this chapter,
reflecting the removal of Rules 10b-6, 10b-6A, 10b-7, and 10b-8
under the Exchange Act and the adoption of Regulation M, are
adopted pursuant to the authority cited above with respect to
those amendments.
List of Subjects
==========================================START OF PAGE 115======
17 CFR Part 200
Administrative practice and procedure, Authority delegations
(Government agencies), Sunshine Act.
17 CFR Part 228
Reporting and recordkeeping requirements, Securities, Small
businesses.
17 CFR Part 229
Reporting and recordkeeping requirements, Securities.
17 CFR Part 230
Reporting and recordkeeping requirements, Securities.
17 CFR Part 240
Broker-dealers, 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 amended as follows:
PART 200 -- ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND
REQUESTS
1. The authority citation for part 200 continues to read,
in part, as follows:
Authority: 15 U.S.C. 77s, 78d-1, 78d-2, 78w, 78ll(d), 79t,
77sss, 80a-37, 80b-11, unless otherwise noted.
* * * * *
2. Section 200.30-3 is amended by revising paragraph
==========================================START OF PAGE 116======
(a)(6) to read as follows:
==========================================START OF PAGE 117======
200.30-3 Delegation of authority to Director of Division of
Market Regulation.
* * * * *
(a) * * *
(6) Pursuant to Rules 10b-13(d), 14e-4(c), and 15c2-11(h)
( 240.10b-13(d), 240.14e-4(c), and 240.15c2-11(h) of this
chapter), and Rules 101(d), 102(e), 104(j), and 105(c) of
Regulation M ( 242.101(d), 242.102(e), 242.104(j), and
242.105(c) of this chapter), to grant requests for exemptions
from Rules 10b-13, 14e-4, and 15c2-11) ( 240.10b-13, 240.14e-4,
and 240.15c2-11 of this chapter), and Rules 101, 102, 104, and
105 of Regulation M ( 242.101, 242.102, 242.104, and 242.105 of
this chapter).
* * * * *
PART 228 -- INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS
ISSUERS
3. 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.
4. Section 228.502 is amended by revising the introductory
text of paragraph (d)(1) and paragraph (d)(1)(i) to read as set
forth below and by removing the phrase "RULE 10b-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934" from paragraph (d)(2) and
==========================================START OF PAGE 118======
adding, in its place, the phrase "RULE 103 OF REGULATION M".
==========================================START OF PAGE 119======
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."
* * * * *
5. Section 228.508 is amended by removing the phrase "
240.10b-6A of this chapter" from paragraph (i) and adding, in its
place, the phrase "Rule 103 of Regulation M" and by adding
paragraph (j) to read as follows:
228.508 (Item 508) Plan of distribution.
* * * * *
(j) Stabilizing and other transactions. If the underwriter
or any selling group member intends 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
==========================================START OF PAGE 120======
6. 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.
* * * * *
7. Section 229.502 is amended by revising the introductory
text of paragraph (d)(1) and paragraph (d)(1)(i) to read as set
forth below and by removing the phrases " 240.10b-6A of this
chapter" and "RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF
1934" from paragraph (d)(2) and adding, in their places, the
phrases " 242.103 of this chapter" and "RULE 103 OF REGULATION
M", respectively.
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."
* * * * *
8. Section 229.508 is amended by removing the phrase "
240.10b-6A of this chapter" from paragraph (k) and adding, in its
==========================================START OF PAGE 121======
place, the phrase "Rule 103 of Regulation M" and by adding
paragraph (l) to read as follows:
229.508 (Item 508) Plan of distribution.
* * * * *
(l) Stabilizing and other transactions. If the underwriter
or any selling group member intends 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 230 -- GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
9. The authority citation for part 230 continues to read,
in part, as follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss,
78c, 78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-29,
80a-30, and 80a-37, unless otherwise noted.
* * * * *
10. Section 230.418 is amended by removing the phrase
"offering at the market, as defined in Rule 10b-7 under the
Securities Exchange Act of 1934 (17 CFR 240.10b-7)" from
paragraph (a)(4) and adding, in its place, the phrase "at-the-
market offering, as defined in 242.100 of this chapter".
11. Section 230.461 is amended by removing the phrase
"Rules 10b-2, 10b-6, and 10b-7 under the Securities Exchange Act
of 1934 ( 240.10b-6 and 10b-7 of this chapter)" from paragraph
(b)(7) and adding, in its place, the phrase "Regulation M (
==========================================START OF PAGE 122======
242.100 through 242.105 of this chapter)".
==========================================START OF PAGE 123======
PART 240 -- GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE
ACT OF 1934
12. 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, 78f, 78i, 78j, 78k, 78k-1, 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.
* * * * *
13. Section 240.10a-1 is amended by removing the cite "
240.10b-7" from the introductory text of paragraph (e)(5) and
paragraphs (e)(6) and (e)(11), and adding, in its place, the
phrase " 242.104 of this chapter" and by removing the phrase
"pursuant to 240.10-8" from paragraph (e)(10).
14. Section 240.10b-6 is removed and reserved.
15. Section 240.10b-6A is removed.
16. Sections 240.10b-7 and 240.10b-8 are removed and
reserved.
17. 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:
==========================================START OF PAGE 124======
240.10b-18 Purchases of certain equity securities by the issuer
and others.
(a) * * *
(3) * * *
(i) Effected during the restricted period specified in
242.102 of this chapter during a distribution (as defined in
242.100 of this chapter) of such common stock, or during a
distribution for which such common stock is a reference security,
by the issuer or any of its affiliated purchasers;
* * * * *
(5) The term plan has the meaning contained in 242.100 of
this chapter;
(6) The term agent independent of the issuer has the
meaning contained in 242.100 of this chapter;
* * * * *
17. Section 240.10b-21 is removed and reserved.
18. Section 240.11a-1 is amended by removing the phrase "
240.10b-7 (Rule 10b-7)" from paragraph (b)(3) and adding, in its
place, the phrase " 242.104 of this chapter".
19. Section 240.13e-4 is amended by removing the phrase "an
issuer's plan as that term is defined in Rule 10b-6(c)(4) under
the Act [ 240.10b-6(c)(4)]" from paragraph (h)(5)(i) and adding,
in its place, the phrase "a plan as that term is defined in
242.100 of this chapter".
20. Section 240.13e-102 is amended by revising General
Instruction III.C. to Schedule 13E-4F to read as follows:
==========================================START OF PAGE 125======
240.13e-102 Schedule 13E-4F. Tender offer statement pursuant
to section 13(e)(1) of the Securities Exchange Act of 1934 and
240.13e-4 thereunder.
* * * * *
General Instructions
* * * * *
III. COMPLIANCE WITH THE EXCHANGE ACT
* * * * *
C. The issuer's attention is directed to Regulation M (
242.100 through 242.105 of this chapter), in the case of an
issuer exchange offer, and to Rule 10b-13 under the Exchange Act
( 240.10b-13), in the case of an issuer cash tender offer or
issuer exchange offer. [See Exchange Act Release No. 29355 (June
21, 1991) containing an exemption from Rule 10b-13.]
* * * * *
21. Section 240.14d-102 is amended by revising General
Instruction III.C. to Schedule 14D-1F to read as follows:
240.14d-102 Schedule 14D-1F. Tender offer statement pursuant
to Rule 14d-1(b) under the Securities Exchange Act of 1934.
* * * * *
GENERAL INSTRUCTIONS
* * * * *
III. COMPLIANCE WITH THE EXCHANGE ACT
* * * * *
C. The bidder's attention is directed to Regulation M (
242.100 through 242.105 of this chapter) in the case of an
exchange offer, and to Rule 10b-13 under the Exchange Act (
240.10b-13) for any exchange or cash tender offer. [See Exchange
==========================================START OF PAGE 126======
Act Release No. 29355 (June 21, 1991) containing an exemption
from Rule 10b-13.]
* * * * *
22. 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:
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 subject to
242.104 of this chapter for the purpose of, or who participates
in a syndicate or group that engages in, "stabilizing," as
defined in 242.100 of this chapter, the price of any security;
or effects a purchase that is a "syndicate covering transaction,"
as defined in 242.100 of this chapter; or imposes a "penalty
bid," as defined in 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.); or
(2) Which is being, or is to be, offered pursuant to an
exemption from registration under Regulation A ( 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.
==========================================START OF PAGE 127======
(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 imposing a penalty
bid for its sole account or for the account of a syndicate or
group in which it 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 imposes a penalty bid shall:
(1) Promptly record and maintain the following separately
retrievable information, for a period of not less than three
years, the first two years in an easily accessible place;
Provided, however, That if the information is in a record
required to be made pursuant to 240.17a-3 or 240.17a-4, or
otherwise preserved, such information need not be maintained in a
separate file if the person can sort promptly and retrieve the
information as if it had been kept in a separate file as a record
made pursuant to, and preserves the information in accordance
==========================================START OF PAGE 128======
with the time periods specified in, this paragraph (c)(1):
(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 imposed;
(ii) The price, date, and time at which each stabilizing
purchase or syndicate covering transaction was effected by the
manager or by any participant in the syndicate or group, and
whether any penalties were assessed;
(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.
* * * * *
(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 its 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, together
==========================================START OF PAGE 129======
with the information required by paragraph (c)(1) of this
section, for a period of not less than three years, the first two
years in an easily accessible place.
23. Part 242 is added to read as follows:
PART 242 -- REGULATION M
Preliminary Note: Any transaction or series of
transactions, whether or not effected pursuant to the provisions
of Regulation M, remain subject to the antifraud and
antimanipulation provisions of the securities laws, including,
without limitation, Section 17(a) of the Securities Act of 1933
[15 U.S.C. 77q(a)] and Sections 9, 10(b), and 15(c) of the
Securities Exchange Act of 1934 [15 U.S.C. 78i, 78j(b), and
78o(c)].
Sec.
242.100 Definitions.
242.101 Activities by distribution participants.
242.102 Activities by issuers and selling security holders
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, and 80a-37.
242.100 Definitions.
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For purposes of this section, the following definitions
shall apply:
ADTV means the worldwide average daily trading volume during
the two full calendar months immediately preceding, or any 60
consecutive calendar days ending within the 10 calendar days
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 230.415 of
this chapter, two full calendar months immediately preceding, or
any consecutive 60 calendar days ending within the 10 calendar
days preceding, the determination of the offering price.
Affiliated purchaser means:
(1) A person acting, directly or indirectly, in concert
with a distribution participant, issuer, or selling security
holder in connection with the acquisition or distribution of any
covered security; or
(2) An affiliate, which may be a separately identifiable
department or division of a distribution participant, issuer, or
selling security holder, that, directly or indirectly, controls
the purchases of any covered security by a distribution
participant, issuer, or selling security holder, whose purchases
are controlled by any such person, or whose purchases are under
common control with any such person; or
(3) An affiliate, which may be a separately identifiable
department or division of a distribution participant, issuer, or
selling security holder, that regularly purchases securities for
==========================================START OF PAGE 131======
its own account or for the account of others, or that recommends
or exercises investment discretion with respect to the purchase
or sale of securities; Provided, however, That this paragraph (3)
shall not apply to such affiliate if the following conditions are
satisfied:
(i) The distribution participant, issuer, or selling
security holder:
(A) Maintains and enforces written policies and procedures
reasonably designed to prevent the flow of information to or from
the affiliate that might result in a violation of 242.101,
242.102, and 242.104; and
(B) Obtains an annual, independent assessment of the
operation of such policies and procedures; and
(ii) The affiliate has no officers (or persons performing
similar functions) or employees (other than clerical,
ministerial, or support personnel) in common with the
distribution participant, issuer, or selling security holder that
direct, effect, or recommend transactions in securities; and
(iii) The affiliate does not, during the applicable
restricted period, act as a market maker (other than as a
specialist in compliance with the rules of a national securities
exchange), or engage, as a broker or a dealer, in solicited
transactions or proprietary trading, in covered securities.
Agent independent of the issuer means a trustee or other
person who is independent of the issuer. The agent shall be
deemed to be independent of the issuer only if:
==========================================START OF PAGE 132======
(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
prices or amounts of the securities to be purchased, the timing
of, or 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 a
plan or the basis for determining the frequency of its
allocations to a plan, or any formula specified in a plan that
determines the amount or timing of securities to be purchased by
the agent.
Asset-backed security has the meaning contained in General
Instruction I.B.5. to Form S-3 ( 239.13 of this chapter).
At-the-market offering means an offering of securities at
other than a fixed price.
Business day means a 24 hour period beginning at midnight
that includes an entire trading session for the security in the
principal market for the security to be distributed.
Completion of participation in a distribution. Securities
acquired in the distribution for investment by any person
participating in a distribution, or any affiliated purchaser of
such person, shall be deemed to be distributed. A person shall
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be deemed to have completed its participation in a distribution
as follows:
(1) An issuer or selling security holder, when the
distribution is completed;
(2) An underwriter, when such person's participation has
been distributed, including all other securities of the same
class that are acquired in connection with the distribution, and
any stabilization arrangements and trading restrictions in
connection with the distribution have been terminated; Provided,
however, That an underwriter's participation will not be deemed
to have been completed if a syndicate overallotment option is
exercised in an amount that exceeds the net syndicate short
position at the time of such exercise; and
(3) Any other person participating in the distribution,
when such person's participation has been distributed.
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 or disseminates foreign exchange
quotations 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.
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Distribution participant means an underwriter, prospective
underwriter, broker, dealer, or other person who has agreed to
participate or is participating in a distribution.
Electronic communications network has the meaning contained
in 240.11Ac1-1(a)(8) of this chapter.
Employee has the meaning contained in Form S-8 ( 239.16b of
this chapter) relating to employee benefit plans.
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 security holder, or
affiliated purchaser.
NASD means the National Association of Securities Dealers,
Inc. or any of its subsidiaries.
Nasdaq means the Nasdaq system as defined in 240.11Ac1-
2(a)(3) of this chapter.
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.
Offering price means the price at which the security is to
be or is being distributed.
Passive market maker means a market maker that effects bids
or purchases in accordance with the provisions of 242.103.
Penalty bid means an arrangement that permits the managing
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underwriter to reclaim a selling concession from a syndicate
member in connection with an offering when the securities
originally sold by the syndicate member are purchased in
syndicate covering transactions.
Plan means any bonus, profit-sharing, pension, retirement,
thrift, savings, incentive, stock purchase, stock option, stock
ownership, stock appreciation, dividend reinvestment, or similar
plan; or any dividend or interest reinvestment plan or employee
benefit plan as defined in 230.405 of this chapter.
Principal market means the single securities market with the
largest aggregate reported trading volume for the class of
securities during the 12 full 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 230.415 of
this chapter, during the 12 full calendar months immediately
preceding the determination of the offering price. 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.
Prospective underwriter means a person:
==========================================START OF PAGE 136======
(1) Who has submitted a bid to the issuer or selling
security holder, and who knows or is reasonably certain 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 is reasonably certain to reach, an
understanding with the issuer or selling security holder, or
managing underwriter that such person will become an underwriter,
whether or not the terms and conditions of the underwriting have
been agreed upon.
Public float value shall be determined in the manner set
forth on the front page of Form 10-K ( 249.310 of this chapter),
even if the issuer of such securities is not required to file
Form 10-K, relating to the aggregate market value of common
equity securities held by non-affiliates of the issuer.
Reference period means the two full 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
230.415 of this chapter, the two full calendar months immediately
preceding the determination of the offering price.
Reference security means a security into which a security
that is the subject of a distribution ("subject security") may be
converted, exchanged, or exercised or which, under the terms of
the subject security, may in whole or in significant part
determine the value of the subject security.
Restricted period means:
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(1) For any security with an ADTV value of $100,000 or more
of an issuer whose common equity securities have a public float
value of $25 million or more, the period beginning on the later
of one business day prior to the determination of the offering
price or such time that a person becomes a distribution
participant, and ending upon such person's completion of
participation in the distribution; and
(2) For all other securities, the period beginning on the
later of five business days prior to the determination of the
offering price or such time that a person becomes a distribution
participant, and ending upon such person's completion of
participation in the distribution.
(3) In the case of a distribution involving a merger,
acquisition, or exchange offer, the period beginning on the day
proxy solicitation or offering materials are first disseminated
to security holders, and ending upon the completion of the
distribution.
Securities Act means the Securities Act of 1933 (15 U.S.C.
77a et seq.).
Selling security holder means any person on whose behalf a
distribution is made, other than an issuer.
Stabilize or 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
==========================================START OF PAGE 138======
distributor or the underwriting syndicate or group to reduce a
short position created in connection with the offering.
30% ADTV limitation means 30 percent of the market maker's
ADTV in a covered security during the reference period, as
obtained from the NASD.
Underwriter means a person who has agreed with an issuer or
selling security holder:
(1) To purchase securities for distribution; or
(2) To distribute securities for or on behalf of such
issuer or selling security holder; or
(3) To manage or supervise a distribution of securities for
or on behalf of such issuer or selling security holder.
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 attempt to induce any
person to bid for or purchase, a covered security during the
applicable restricted period; Provided, however, That if a
distribution participant or affiliated purchaser is the issuer or
selling security holder of the securities subject to the
distribution, such person shall be subject to the provisions of
242.102, rather than this section.
(b) EXCEPTED ACTIVITY. The following activities shall not
be prohibited by paragraph (a) of this section:
(1) Research. The publication or dissemination of any
==========================================START OF PAGE 139======
information, opinion, or recommendation, if the conditions of
230.138 or 230.139 of this chapter are met; or
==========================================START OF PAGE 140======
(2) Transactions complying with certain other sections.
Transactions complying with 242.103 or 242.104; or
(3) Odd-lot transactions. Transactions in odd-lots; or
transactions to offset odd-lots in connection with an odd-lot
tender offer conducted pursuant to 240.13e-4(h)(5) of this
chapter; or
(4) Exercises of securities. The exercise of any option,
warrant, right, or any conversion privilege set forth in the
instrument governing a security; or
(5) Unsolicited transactions. Unsolicited brokerage
transactions; or unsolicited purchases that are not effected from
or through a broker or dealer, on a securities exchange, or
through an inter-dealer quotation system or electronic
communications network; or
(6) Basket transactions. (i) Bids or purchases, in the
ordinary course of business, in connection with a basket of 20 or
more securities in which a covered security does not comprise
more than 5% of the value of the basket purchased; or
(ii) Adjustments to such a basket in the ordinary course of
business as a result of a change in the composition of a
standardized index; or
(7) De minimis transactions. Purchases during the
restricted period, other than by a passive market maker, that
total less than 2% of the ADTV of the security being purchased,
or unaccepted bids; Provided, however, That the person making
such bid or purchase has maintained and enforces written policies
==========================================START OF PAGE 141======
and procedures reasonably designed to achieve compliance with the
other provisions of this section; or
(8) Transactions in connection with a distribution.
Transactions among distribution participants in connection with a
distribution, and purchases of securities from an issuer or
selling security holder in connection with a distribution, that
are not effected on a securities exchange, or through an inter-
dealer quotation system or electronic communications network; or
(9) Offers to sell or the solicitation of offers to buy.
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 or solicitation; or
(10) Transactions in Rule 144A securities. Transactions in
securities eligible for resale under 230.144A(d)(3) of this
chapter, or any reference security, if the Rule 144A securities
are offered or sold in the United States solely to:
(i) Qualified institutional buyers, as defined in
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
transactions exempt from registration under section 4(2) of the
Securities Act (15 U.S.C. 77d(2)) or 230.144A or 230.501
through 230.508 of this chapter; or
(ii) Persons not deemed to be "U.S. persons" for purposes
of 230.902(o)(2) or 230.902(o)(7) of this chapter, during a
==========================================START OF PAGE 142======
distribution qualifying under paragraph (b)(10)(i) of this
section.
(c) EXCEPTED SECURITIES. The provisions of this section
shall not apply to any of the following securities:
(1) Actively-traded securities. Securities that have an
ADTV value of at least $1 million and are issued by an issuer
whose common equity securities have a public float value of at
least $150 million; Provided, however, That such securities are
not issued by the distribution participant or an affiliate of the
distribution participant; or
(2) Investment grade nonconvertible and asset-backed
securities. Nonconvertible debt securities, nonconvertible
preferred securities, and asset-backed securities, that are rated
by at least one nationally recognized statistical rating
organization, as that term is used in 240.15c3-1 of this
chapter, 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 certificates 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
==========================================START OF PAGE 143======
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, either unconditionally or on
specified terms and conditions, to any transaction or class of
transactions, or to any security or class of securities.
242.102 Activities by issuers and selling security holders
during a distribution.
(a) UNLAWFUL ACTIVITY. In connection with a distribution
of securities effected by or on behalf of an issuer or selling
security holder, it shall be unlawful for such person, or any
affiliated purchaser of such person, directly or indirectly, to
bid for, purchase, or attempt to induce any person to bid for or
purchase, a covered security during the applicable restricted
period; Except That if an affiliated purchaser is a distribution
participant, such affiliated purchaser may comply with 242.101,
rather than this section.
(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
transactions to offset odd-lots in connection with an odd-lot
tender offer conducted pursuant to 240.13e-4(h)(5) of this
chapter; or
(2) Transactions by closed-end investment companies. (i)
Transactions complying with 270.23c-3 of this chapter; or
(ii) Periodic tender offers of securities, at net asset
==========================================START OF PAGE 144======
value, conducted pursuant to 240.13e-4 of this chapter by a
closed-end investment company that engages in a continuous
offering of its securities pursuant to 230.415 of this chapter;
Provided, however, That such securities are not traded on a
securities exchange or through an inter-dealer quotation system
or electronic communications network; or
(3) Redemptions by commodity pools or limited partnerships.
Redemptions by commodity pools or limited partnerships, at a
price based on net asset value, which are effected in accordance
with the terms and conditions of the instruments governing the
securities; Provided, however, That such securities are not
traded on a securities exchange, or through an inter-dealer
quotation system or electronic communications network; or
(4) Exercises of securities. The exercise of any option,
warrant, right, or any conversion privilege set forth in the
instrument governing a security; or
(5) Offers to sell or the solicitation of offers to buy.
Offers to sell or the solicitation of offers to buy the
securities being distributed; or
(6) Unsolicited purchases. Unsolicited purchases that are
not effected from or through a broker or dealer, on a securities
exchange, or through an inter-dealer quotation system or
electronic communications network; or
(7) Transactions in Rule 144A securities. Transactions in
securities eligible for resale under 230.144A(d)(3) of this
chapter, or any reference security, if the Rule 144A securities
==========================================START OF PAGE 145======
are offered or sold in the United States solely to:
(i) Qualified institutional buyers, as defined in
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
transactions exempt from registration under section 4(2) of the
Securities Act (15 U.S.C. 77d(2)) or 230.144A or 230.501
through 230.508 of this chapter; or
(ii) Persons not deemed to be "U.S. persons" for purposes
of 230.902(o)(2) or 230.902(o)(7) of this chapter, during a
distribution qualifying under paragraph (b)(6)(i) of this
section.
(c) PLANS.
(1) Paragraph (a) of this section shall not apply to
distributions of securities pursuant to a plan, which are made:
(i) Solely to employees or security holders of an 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 security holders,
if bids for or purchases of securities pursuant to the plan are
effected solely by an agent independent of the issuer and the
securities are from a source other than the issuer or an
affiliated purchaser of the issuer.
(2) Bids for 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
==========================================START OF PAGE 146======
independent of the issuer.
(d) EXCEPTED SECURITIES. The provisions of this section
shall not apply to any of the following securities:
(1) Actively-traded reference securities. Reference
securities with an ADTV value of at least $1 million that are
issued by an issuer whose common equity securities have a public
float value of at least $150 million; Provided, however, That
such securities are not issued by the issuer, or any affiliate of
the issuer, of the security in distribution.
(2) Investment grade nonconvertible and asset-backed
securities. Nonconvertible debt securities, nonconvertible
preferred securities, and asset-backed securities, that are rated
by at least one nationally recognized statistical rating
organization, as that term is used in 240.15c3-1 of this
chapter, 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 certificates 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)(4) that are defined in the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) shall
==========================================START OF PAGE 147======
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, either unconditionally or on
specified terms and conditions, to any transaction or class of
transactions, or to any security or class of securities.
242.103 Nasdaq passive market making.
(a) SCOPE OF SECTION. This section permits broker-dealers
to engage in market making transactions in covered securities
that are Nasdaq securities without violating the provisions of
242.101; Except That this section shall not apply to any security
for which a stabilizing bid subject to 242.104 is in effect, or
during any at-the-market offering or best efforts offering.
(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. A passive market maker shall not bid for or
purchase a covered security at a price that exceeds the highest
independent bid for the covered security at the time of the
transaction, except as permitted by paragraph (b)(3) of this
section or required by a rule promulgated by the Commission or
the NASD governing the handling of customer orders.
(2) Purchase limitation. On each day of the restricted
period, a passive market maker's net purchases shall not exceed
the greater of its 30% ADTV limitation or 200 shares (together,
"purchase limitation"); Provided, however, That a passive market
==========================================START OF PAGE 148======
maker may purchase all of the securities that are part of a
single order that, when executed, results in its purchase
limitation being equalled or exceeded. If a passive market
maker's net purchases equal or exceed its purchase limitation, it
shall withdraw promptly its quotations from Nasdaq. If a passive
market maker withdraws its quotations pursuant to this paragraph,
it may not effect any bid or purchase in the covered security for
the remainder of that day, irrespective of any later sales during
that day, unless otherwise permitted by 242.101.
(3) Requirement to lower the bid. If all independent bids
for a covered security are reduced to a price below the passive
market maker's bid, the passive market maker must lower its bid
promptly to a level not higher than the then highest independent
bid; Provided, however, That a passive market maker may continue
to bid and effect purchases at its bid at a price exceeding the
then highest independent bid until the passive market maker
purchases an aggregate amount of the covered security that equals
or, through the purchase of all securities that are part of a
single order, exceeds the lesser of two times the minimum
quotation size for the security, as determined by NASD rules, or
the passive market maker's remaining purchasing capacity under
paragraph (b)(2) of this section.
(4) Limitation on displayed size. At all times, the
passive market maker's displayed bid size may not exceed the
lesser of the minimum quotation size for the covered security, or
the passive market maker's remaining purchasing capacity under
==========================================START OF PAGE 149======
paragraph (b)(2) of this section; 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 advance of its intention to
engage in passive market making, and 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 covered security shall contain the
information required in 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 laws, or any rule or regulation thereunder.
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 stabilize, to effect any
syndicate covering transaction, or to impose a penalty bid, in
connection with an offering of any security, in contravention of
the provisions of this section. No stabilizing shall be effected
==========================================START OF PAGE 150======
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 laws, or any rule or regulation thereunder.
(b) PURPOSE. Stabilizing is prohibited 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.
(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) AT-THE-MARKET OFFERINGS. Stabilizing is prohibited in
an at-the-market offering.
(f) STABILIZING LEVELS.
(1) Maximum stabilizing bid. Notwithstanding the other
provisions of this paragraph (f), no stabilizing shall be made at
a price higher than the lower of the offering price or the
stabilizing bid for the security in the principal market (or, if
the principal market is closed, the stabilizing bid in the
principal market at its previous close).
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(2) Initiating stabilizing.
(i) Initiating stabilizing when the principal market is
open. After the opening of quotations for the security in the
principal market, stabilizing may be initiated in any market at a
price no higher than the last independent transaction price for
the security in the principal market if the security has traded
in the principal market on the day stabilizing is initiated or on
the preceding business day and the current asked price in the
principal market is equal to or greater than the last independent
transaction price. If both conditions of the preceding sentence
are not satisfied, stabilizing may be initiated in any market
after the opening of quotations in the principal market at a
price no higher than the highest current independent bid for the
security in the principal market.
(ii) Initiating stabilizing when the principal market is
closed.
(A) When the principal market for the security is closed,
but immediately before the opening of quotations for the security
in the market where stabilizing will be initiated, stabilizing
may be initiated at a price no higher than the lower of:
(1) The price at which stabilizing could have been
initiated in the principal market for the security at its
previous close; or
(2) The most recent price at which an independent
transaction in the security has been effected in any market since
the close of the principal market, if the person stabilizing
==========================================START OF PAGE 153======
knows or has reason to know of such transaction.
(B) When the principal market for the security is closed,
but after the opening of quotations in the market where
stabilizing will be initiated, stabilizing may be initiated at a
price no higher than the lower of:
(1) The price at which stabilization could have been
initiated in the principal market for the security at its
previous close; or
(2) The last independent transaction price for the security
in that market if the security has traded in that market on the
day stabilizing is initiated or on the last preceding business
day and the current asked price in that market is equal to or
greater than the last independent transaction price. If both
conditions of the preceding sentence are not satisfied, under
this paragraph (f)(2)(ii)(B)(2), stabilizing may be initiated at
a price no higher than the highest current independent bid for
the security in that market.
(iii) Initiating stabilizing when there is no market for
the security or before the offering price is determined. If no
bona fide market for the security being distributed exists at the
time stabilizing is initiated, no stabilizing shall be initiated
at a price in excess of the offering price. If stabilizing is
initiated before the offering price is determined, then
stabilizing may be continued after determination of the offering
price at the price at which stabilizing then could be initiated.
(3) Maintaining or carrying over a stabilizing bid. A
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stabilizing bid initiated pursuant to paragraph (f)(2) of this
section, which has not been discontinued, may be maintained, or
carried over into another market, irrespective of changes in the
independent bids or transaction prices for the security.
(4) Increasing or reducing a stabilizing bid. A
stabilizing bid may be increased to a price no higher than the
highest current independent bid for the security in the principal
market if the principal market is open, or, if the principal
market is closed, to a price no higher than the highest
independent bid in the principal market at the previous close
thereof. A stabilizing bid may be reduced, or carried over into
another market at a reduced price, irrespective of changes in the
independent bids or transaction prices for the security. If
stabilizing is discontinued, it shall not be resumed at a price
higher than the price at which stabilizing then could be
initiated.
(5) Initiating, maintaining, or adjusting a stabilizing bid
to reflect the current exchange rate. 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, consistent with
the provisions of this section. If, in initiating, maintaining,
or adjusting a stabilizing bid pursuant to this paragraph (f)(5),
the bid would be at or below the midpoint between two trading
differentials, such stabilizing bid shall be adjusted downward to
the lower differential.
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(6) Adjustments to stabilizing bid. If a security goes ex-
dividend, ex-rights, or ex-distribution, the stabilizing bid
shall be reduced by an amount equal to the value of the dividend,
right, or distribution. If, in reducing a stabilizing bid
pursuant to this paragraph (f)(6), the bid would be at or below
the midpoint between two trading differentials, such stabilizing
bid shall be adjusted downward to the lower differential.
(7) Stabilizing of components. When two or more securities
are being offered as a unit, the component securities shall not
be stabilized at prices the sum of which exceeds the then
permissible stabilizing price for the unit.
(8) 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).
(g) OFFERINGS WITH NO U.S. STABILIZING ACTIVITIES.
(1) Stabilizing to facilitate an offering of a security in
the United States shall not be deemed to be in violation of this
section if all of the following conditions are satisfied:
(i) No stabilizing is made in the United States;
(ii) Stabilizing outside the United States is made in a
jurisdiction with statutory or regulatory provisions governing
stabilizing that are comparable to the provisions of this
section; and
(iii) No stabilizing is made at a price above the offering
price in the United States, except as permitted by paragraph
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(f)(5) of this section.
(2) For purposes of this paragraph (g), the Commission by
rule, regulation, or order may determine whether a foreign
statute or regulation is comparable to this section considering,
among other things, whether such foreign statute or regulation:
specifies appropriate purposes for which stabilizing is
permitted; provides for disclosure and control of stabilizing
activities; places limitations on stabilizing levels; requires
appropriate recordkeeping; provides other protections comparable
to the provisions of this section; and whether procedures exist
to enable the Commission to obtain information concerning any
foreign stabilizing transactions.
(h) DISCLOSURE AND NOTIFICATION.
(1) Any person displaying or transmitting a bid that such
person knows is for the purpose of stabilizing shall provide
prior notice to the market on which such stabilizing will be
effected, and shall disclose its purpose to the person with whom
the bid is entered.
(2) Any person effecting a syndicate covering transaction
or imposing a penalty bid shall provide prior notice to the self-
regulatory organization with direct authority over the principal
market in the United States for the security for which the
syndicate covering transaction is effected or the penalty bid is
imposed.
(3) Any person subject to this section who sells to, or
purchases for the account of, any person any security where the
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price of such security may be or has been stabilized, shall send
to the purchaser at or before the completion of the transaction,
a prospectus, offering circular, confirmation, or other document
containing a statement similar to that comprising the statement
provided for in Item 502(d) of Regulation S-B ( 228.502(d) of
this chapter) or Item 502(d) of Regulation S-K ( 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 240.17a-2 of this chapter.
(j) EXCEPTED SECURITIES. The provisions of this section
shall not apply to:
(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) Transactions of Rule 144A securities. Transactions in
securities eligible for resale under 230.144A(d)(3) of this
chapter, if such securities are offered or sold in the United
States solely to:
(i) Qualified institutional buyers, as defined in
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 230.144A or 230.501
through 230.508 of this chapter; or
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(ii) Persons not deemed to be "U.S. persons" for purposes
of 230.902(o)(2) or 230.902(o)(7) of this chapter, during a
distribution qualifying under paragraph (j)(1) of this section.
(k) EXEMPTIVE AUTHORITY. Upon written application or upon
its own motion, the Commission may grant an exemption from the
provisions of this section, either unconditionally or on
specified terms and conditions, to any transaction or class of
transactions, or to any security or class of securities.
242.105 Short selling in connection with a public offering.
(a) UNLAWFUL ACTIVITY. In connection with an offering of
securities for cash pursuant to a registration statement or a
notification on Form 1-A ( 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 such pricing;
or
(2) The period beginning with the initial filing of such
registration statement or notification on Form 1-A and ending
with the pricing.
(b) EXCEPTED OFFERINGS. This section shall not apply to
offerings filed under 230.415 of this chapter or to offerings
that are not conducted on a firm commitment basis.
(c) EXEMPTIVE AUTHORITY. Upon written application or upon
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its own motion, the Commission may grant an exemption from the
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provisions of this section, either unconditionally or on
specified terms and conditions, to any transaction or class of
transactions, or to any security or class of securities.
By the Commission.
Jonathan G. Katz
Secretary
Date: December 20, 1996