June 11, 1996

Dear Mr. Katz:

I am writing to apprise you of recent research that bears on the
proposed new Regulation M (File No. S7-11-96). 

With regard to proposed Rule 105, the June 1996 issue of the
Journal of Finance contains an article co-authored by me entitled
"An Empirical Investigation of Short-Selling Activity Prior to
Seasoned Equity Offerings." Among other things, we find (Table II)
that the most aggressive short selling occurs in the five days
prior to the pricing of the offering. On the other hand, we also
find short interest to be in excess of twice its "normal" level as
far as 18 days in advance of pricing. We also report evidence of a
shift from direct short selling to "synthetic" short selling
through options transactions following the adoption of Rule 10b-21
(Figure 1). In other words, it appears that where listed options
exist, Rule 10b-21 has been circumvented. 

I have also co-authored a paper that is forthcoming in the Journal
of Financial Economics entitled "Price Stabilization as a Bonding
Mechanism in New Equity Issues" that addresses several questions
related to proposed Rule 104. With regard to Q60 (Should penalty
bids be prohibited...?), we provide an economic rationale for the
use of penalty bids in conjunction with price stabilization
provided that the underwriter's stabilization activities are
transparent to the market at large. Our concern here lies not in
the apparent fact that retail investors bear the burden of penalty
bids. We believe that it is economically efficient for underwriters
to favor institutional investors in both the allocation and
stabilization of IPOs.  Our analysis suggests that the cost of the
stabilization efforts will ultimately be borne (on average) by
issuing firms (through the fees they pay underwriters) if the
underwriter's stabilization activities are known to the market. If
this is not the case, it may be possible for the underwriter to
shift the burden of the stabilization effort to secondary market
investors by selling repurchased shares at a premium over their
true value. Presumably, this problem is addressed by the
requirement that an underwriter's stabilizing bid price be
designated as such. If, however, this feature of the market is not
transparent to retail investors, it appears plausible that both the
underwriter and retail investors are unwitting partners to a
manipulative trading practice. Thus, our analysis would support any
effort to promote transparency/disclosure of the stabilization and
penalty bid activities. 

I have provided an earlier draft of this paper to Blair Corkran. We
have also written a non-technical summary of our research on
book-building and stabilization practices entitled "Initial Public
Offerings: Going by the Book" that will appear in the Winter issue
of the Journal of Applied Corporate Finance. I have also provided
Mr. Corkran with a previous draft of this paper.

I would be happy to provide current drafts of any or all of these
papers to interested parties or discuss our findings at greater
length with members of your staff.

William J. Wilhelm, Jr. Associate Professor of Finance
Wallace E. Carroll School of Management
Boston College
Chestnut Hill, MA 02167