April 27, 1998

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Attention: Mr. Jonathan G. Katz

Secretary

Re: Proposal to Amend Form S-8 and Related Rules -- File No. S7-2-98

Ladies and Gentlemen:

This letter responds to the request of the Securities and Exchange Commission (the "Commission") in Release No. 33-7506 (February 17, 1998) (the "Release") for comments on proposals to amend Form S-8 and related rules under the Securities Act of 1933 and Regulations S-K and S-B to restrict the use of the form for the sale of securities to consultants, and to allow the use of the form for the exercise of stock options by family members of optionees.

These comments have been prepared by members of the Subcommittee on Employee Benefits, Executive Compensation and Section 16 ("Subcommittee") of the Committee on Federal Regulation of Securities ("Committee") of the Section of Business Law ("Section") of the American Bar Association ("ABA"). A draft of this letter was circulated for comment among members of the Subcommittee, the Chairs and Vice Chairs of the other Subcommittees and Task Forces of the Committee, the officers of the Committee, the members of the Advisory Committee of the Committee and the officers of the Section. A substantial majority of those who reviewed the letter in draft form have indicated their general agreement with the views expressed. However, this letter does not represent the official position of the ABA, the Section or the Committee, nor does it necessarily reflect the views of all those who reviewed it.

In general, we believe that the proposals presented in the Release address the two most important issues currently arising under Form S-8. The proposal addressing transferable options is particularly welcome, because it would enable public companies to maximize the incentive value of compensatory stock options with a minimum of administrative burden. We are quite concerned, however, that the proposal to restrict use of Form S-8 by consultants would unduly hinder the use of the Form for legitimate purposes. Topics relating to these two major issues are discussed below in the following order:

I. Use of Form S-8 for Sales to Option Transferees

A. Family Members

B. Charitable Organizations, Family Charities

and Other Entities

C. Consultants and Advisors

D. Indirect Transferees

E. Reload Options

F. Domestic Relations Orders

G. Options Transferred for Value

H. Disclosures Relating to Transferable Options

II. Use of Form S-8 for Consultants

A. Impact of the Proposal in the Release

B. Suggested Alternative

1. Quarterly Disclosure of Aggregate Information about Consultants

2. Requirement to Furnish Additional Information

3. Clarification of Instructions and Definitions

C. Detailed Discussion

1. Information about Consultants

(a) Disclosure of Consultants' Names

(b) Description of Services Performed by Consultants

(c) Disclosure of Number of Securities Issued to Consultants

2. Frequency of Disclosure

3. Checking the Box

4. Percentage of Securities Registrable on Form S-8

5. Definition of Consultants

III. Miscellaneous

A. Effective Date

B. Prospectus Delivery Requirement

C. Defined Terms

D. General Instruction A.1

I. Use of Form S-8 for Sales to Option Transferees

We welcome the Commission's willingness to make Form S-8 available to transferees of compensatory options and urge the Commission to act expeditiously on these changes. Although Form S-3 is usually available and has been used to cover exercises of transferred options, the additional time and expense required for this duplicative filing is wasteful and not justified by any compelling need. As the Release notes, there has been widespread interest in option transfers for estate planning and charitable purposes in recent years, particularly since the 1996 revisions to Rule 16b-3 that removed the requirement that options be nontransferable in order to be eligible for the exemption provided by that rule.

The Release asks a number of questions about the appropriate scope of the use of Form S-8 for transferable options. As discussed in more detail below, we believe that these questions should be answered keeping in mind the basic principle that justifies short-form registration on Form S-8: employee benefit plans have a compensatory purpose. An employee's familiarity with the issuer is important, but only a secondary factor. The pre-existing employment relationship with the issuer serves more as a safeguard against misuse of Form S-8 for capital-raising purposes than as an independent basis for streamlined registration. To enhance the economic benefits of equity-based compensation, we favor the broadest possible scope for Form S-8 that is consistent with preventing its misuse, even if this approach sometimes results in sales under the Form to individuals who do not have an immediate connection with the issuer.

We believe that the Commission should give the issuers authority to define the appropriate scope of transferability of compensatory awards that qualify to use Form S-8. As long as the transferee pays no consideration for the transfer, giving this authority to the issuer presents no risk of abuse. This approach, which permits the Board of Directors of the issuer (or its Compensation Committee or other appropriate plan administrator) to resolve the various issues relating to transferability, is likely to produce less confusion than having the Commission resolve by rules and forms the individual policy and human resource questions of each individual employment situation. This issuer-based approach has the dual advantages of being consistent with the thrust of the Commission's latest major initiatives in the employee plan area, in the context of Rule 16b-3, and avoiding arbitrary limitations that are likely to engender multiple requests for subsequent staff interpretive advice or special relief.

Consistent with these general principles, we suggest that Form S-8 should be available for awards transferred to "family members" as defined by the issuer. This approach would allow issuers to make the determination, for example, whether to include former family members pursuant to domestic relations orders. Each issuer should have the flexibility to set the boundaries of option transferability it considers appropriate within these general parameters to foster its compensatory and incentive purposes with minimal administrative burdens.

If an issuer takes an expansive view within these parameters, the possibility that sales may occasionally be made under Form S-8 to individuals with only an attenuated connection to the issuer should not be cause for concern. Transfers must still have bona fide donative intent. Sales to these donees still serve a broadly compensatory purpose. The requirement that Form S-8 be limited to options that have been transferred without payment of consideration should ensure that the Form will not be misused for capital-raising purposes.

These general considerations are discussed below in more detail.

A. Family Members. We urge the Commission to allow Form S-8 to cover exercises by any transferee of a compensatory option whom the issuer defines as a member of the optionee's family and who receives the securities in a bona fide donative transaction that is not a device to avoid registration. Because of the absence of consideration and the presumed compensatory purpose, a strong case can be made that no family limitation is necessary. This simple approach would avoid many of the interpretive issues bound to result from seeking to circumscribe transferability. Nevertheless, limiting use of the Form to family members ensures that there is some pre-existing relationship with the issuer and thus provides an extra safeguard against use of the Form for raising capital. Any restriction of Form S-8 to transferees meeting a particular regulatory definition of "family member," however, will necessarily require a definition that is arbitrary. The definition contained in Rule 16a-1(e) was clearly designed for a very different purpose relating to the likelihood of access to nonpublic information. Even a new definition that would extend to any person related by blood, marriage or adoption (another common formulation) may be inadequate and perhaps discriminatory in an era when issuers are frequently obliged to accommodate non-traditional families in their employee benefit programs. As long as the options are not being sold or used for capital-raising purposes, and as long as the issuer is satisfied that the compensatory purposes are still being met, the precise nature of the relationship should make no difference for Form S-8 purposes.

B. Charitable Organizations, Family Charities and Other Entities. The Release asks whether the limitation to entities solely owned by family members is too restrictive. We believe it is too restrictive and that the class of donees eligible for coverage under Form S-8 should also include charitable organizations, family charities and other entities primarily owned or controlled by, or maintained primarily for the benefit of, family members and charities.

The reason for including charitable organizations (i.e., public charities such as organizations that are exempt from taxation under Section 501(c)(3) of the Internal Reserve Code) is that facilitating transfers to charities furthers the compensatory purposes of option awards without raising concerns about use of Form S-8 for raising capital. Again, the gratuitous nature of the transfer to the charity provides this assurance.

Other types of entities with charitable purposes should be treated the same way, including private foundations and other entities in which both individuals and charitable organizations have an interest. These entities include specialized types of trusts, such as charitable lead trusts and charitable remainder trusts, and non-profit corporations established by family groups.

Of course, many family entities, such as limited partnerships and limited liability companies, are formed for purposes of investment management and may not involve any charitable interest. While transfers to such entities are frequently used for estate planning purposes, we do not see any policy reason to restrict such "other entities" to those "used for estate planning purposes" and would recommend against imposing such a subjective test. The Form should also make clear that a transfer to a family limited partnership or limited liability company for which the optionee receives an interest in the entity will not be considered a prohibited transfer for value.

We urge the Commission to require only that the entity be primarily (rather than solely) owned or controlled, or maintained primarily for the benefit of, family members and/or charitable organizations. The wide variety of possible structures, many of which provide for remote or contingent interests, requires a more flexible standard than sole ownership and exclusive benefit. Form S-8 should also be available for sales to all these entities upon the exercise of options transferred to them by gift.

C. Consultants and Advisors. In line with the general principles outlined above, there is no reason to prohibit use of Form S-8 by transferees of bona fide consultants and advisors. There may well be situations where an issuer can enhance the compensatory value of options granted to a particular consultant or advisor by permitting transfers to their family members. The issuer should be able to decide upon this structure without constraints arising under Form S-8. The Commission should deal directly with the perceived problems involving the misuse of Form S-8 by purported consultants and advisors, rather than restricting legitimate use of the Form S-8 by transferees of those individuals when they are otherwise permitted to use Form S-8.

D. Indirect Transferees. Form S-8 should be available to cover exercises by indirect transferees so long as each transfer is without payment of consideration. This availability would not lead to any additional "burdensome recordkeeping obligations" because issuers concerned about the recordkeeping would simply not permit subsequent transfers. On the positive side, this availability will relieve issuers who wish to permit further gratuitous transfers from the necessity of using Form S-3, thereby eliminating burdensome dual registration requirements.

E. Reload Options. Form S-8 should also be available for reload options issued directly to a transferee. Although option plans by their terms typically limit the award of options (including reload options) to employees (and consultants and advisors), there may be situations where an issuer decides to authorize issuance of reload options directly to transferees. If the issuer determines that this strategy will enhance the compensatory/incentive purposes of the plan, Form S-8 should not stand in the way.

F. Domestic Relations Orders. To be consistent in allowing issuers to determine the limits on transferability, Form S-8 should be available to transferees pursuant to domestic relations orders so that those issuers who wish to do so may facilitate exercises by such transferees. Although facilitating transfers under these circumstances is unlikely to enhance any compensatory purpose, the initial award was compensatory and the circumstances of the transfer are unlikely to create possibilities for abuse. Domestic relations courts frequently require issuers to cooperate in permitting an employee to exercise an option at the direction and for the benefit of a former spouse, and there appears to be little value in mandating perpetuation of this cumbersome alternative in the face of the economic realities of divorce.

As a technical matter, in the case of a transfer to a spouse or in-laws, a transfer pursuant to a domestic relations order would usually not be a transfer to a "family member" as defined in the proposal, but rather to an "ex-family member." Our recommendation to allow the issuer to define the term "family member" would handle this problem. If the Commission decides to define "family member," however, any such definition should make it clear that, in the case of transfers pursuant to a domestic relations order, "family member" status is determined before the order is issued.

The Release does not define "domestic relations order." It would be useful to make it clear that this term is not limited to particular types of orders, but may include orders from a court, family welfare agency or other authoritative body. Similarly, there is no reason to require that the order be directed to the issuer or the employee benefit plan (as is the case with qualified domestic relations orders under tax-qualified retirement plans). Indeed, it should not be necessary for the domestic relations order to refer to a specific option, but could take the form of an order generally requiring a division of property, including a dissolution agreement approved in accordance with applicable state law requirements.

Of course, issuers should not be required to permit option transfers pursuant to domestic relations orders, even if Form S-8 is available for options so transferred. Although the proposal contains a footnote (number 48) stating that issuers would not have to permit transfers to subsequent transferees, there is no similar clarifying statement specifically with respect to domestic relations orders. To avoid raising an implication to a domestic relations court that transfers pursuant to domestic relations orders must automatically be permitted, the release accompanying the adoption of the final rules should state that issuers would not be required to permit these (or any other) transfers.

G. Options Transferred for Value. The foregoing discussion is premised on the theory that transferees of options transferred without payment of consideration should have free access to Form S-8. We have not yet encountered any situations in which transferees purchase compensatory options from an employee plan recipient for value (excluding interests in partnerships and limited liability companies, as discussed above). At least until issuers have further experience with transferable options, we see no compelling need to permit Form S-8 to be available for issuance of shares to transferees for value.

H. Disclosures Relating to Transferable Options. Since the reason for facilitating registration of sales to option transferees is to enhance the compensatory and incentive purposes of equity-based compensation, we agree with the approach taken in the Release that an executive's transfer of an option does not negate the option's status as compensation to the executive for proxy reporting purposes. We thus agree that both the Summary Compensation Table and the Option/SAR Grants Table should include all options granted to the named executive officers, including those that have subsequently been transferred. Although we believe that the concept of "options granted" so clearly includes subsequently transferred options that the proposed language to this effect is unnecessary, we believe that there is no reason not to include additional language to avoid any doubt.

We do not believe that transferability is a material feature of an option. Over time, it may well become a standard feature of options granted to executives. The applicable disclosure rules should in any case be written to make it as easy as possible for registrants to determine what the rules are. Accordingly, if the Commission believes that transferability is a material feature, we think the Instructions to Item 402(c) should so state.

We believe it would be highly inappropriate to require that actual transfers of options be disclosed. Disclosure of the fact of an option transfer is inconsistent with the view that the compensation derived from the option is attributable to the executive. Moreover, there is no policy reason to require disclosure of the identity, or even the category, of an option transferee, particularly when there is no requirement for similar disclosure of the persons (or charities) to whom an executive has transferred stock or other portions of his/her compensation. Finally, to require disclosure of option transfers would unnecessarily complicate the applicable tables, obfuscating comparability among issuers and introducing a new annual complication for issuers to contend with.

Consistent with our preceding views, we believe that the Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table should include all options that were initially granted to the named executive officers and include the actual exercises when made, without regard to subsequent transfers. Indeed, this approach coincides with the result for Federal income tax purposes -- that the gain resulting upon exercise of an option is taxed to the original optionee. The purpose of this disclosure table is to show shareholders the amount of compensation paid to executives. The fact that the executive has chosen to transfer some of his/her compensation does not negate the fact that, from the corporation's and shareholders' perspective, it was intended as compensation to the executive.

As an additional consideration, since issuers are obliged to keep track of all stock options granted to employees for tax reporting and withholding purposes, requiring disclosure of all outstanding options that were granted to named executive officers would appear to be less of a burden on the issuer than a requirement that it determine and keep separate track of transferred and non-transferred options (or options transferred to particular categories of transferees). Given the various types of entities used to provide benefits to families and charities, it would seem particularly burdensome to require the issuer to determine whether the officer or his/her family continues to benefit from options held by a transferee.

II. Use of Form S-8 by Consultants

A. Impact of the Proposal in the Release. As noted at the outset, we believe the proposals presented in the Release to cure the abuses under Form S-8 offerings to consultants (and advisors) who promote an issuer's securities are more drastic than necessary. Although there may be abuses in this area, we think that the instances are relatively confined and that public disclosure of the extensive information that the Release calls for is not necessary or appropriate. Our principal concern is that the burden of these disclosures would have a serious negative impact on the very businesses that rely most upon equity-based compensation and consultants because of their early stage of capital development and the rapidly changing business environment.

High technology companies use consultants extensively. Consultants and other advisors have come to be a critical resource in the fast-moving technology area, providing an essential alternative to full-time permanent employees for many applications. If disclosure of the names of individual consultants is required as a condition to availability of Form S-8, competitors could obtain the names of particular consultants used by an issuer and seek to hire them away. This disclosure would be a severe deterrent to the use of consultants. Including a specific description of the type of services that the consultant performed would exacerbate this problem. Moreover, the required disclosure of the number of shares issued to each consultant would arm competitors with significant quantitative compensation information, to the detriment of the issuer who hired the consultant. Finally, the proposed requirement that issuers file post-effective amendments to registration statements on Form S-8 each time they grant options to consultants would place heavy burdens on issuers. All of these burdens would fall disproportionately on smaller issuers, who frequently compensate consultants with equity in order to conserve other capital resources.

B. Suggested Alternative. The following discussion outlines an alternative approach that we believe addresses the perceived abuses while minimizing the burdens placed upon issuers. We believe the following new requirements would be sufficient to address the perceived abuses while respecting the competitive and practical concerns mentioned above:

1. Quarterly Disclosure of Aggregate Information about Consultants. Registrants should be required to disclose only the aggregate number of securities sold or options granted to consultants and the aggregate number of consultants to whom securities are issued or granted. Furthermore, the aggregate number of shares issued or covered by options granted to consultants should only need to be disclosed when it first exceeds 1 percent of the issuer's outstanding shares. In no event should the identity of the consultants or a specific description of the services to be rendered be required to be disclosed in a publicly filed document.

The aggregate information referred to above should be called for on a quarterly basis (in Part II of Form 10-Q for the issuer's first three fiscal quarters and in Part II of Form 10-K for the issuer's fourth fiscal quarter), rather than in Form S-8. Disclosure should be required initially for the first quarter when the aggregate number of shares covered by options granted to consultants exceeds 1 percent of the issuer's shares outstanding as of the last day of the quarter and thereafter for any quarter when an additional 1 percent or more has been granted since the prior report. This approach would be analogous to the reporting requirements with respect to the sale of unregistered securities under Item 701 of Regulation S-K.

2. Requirement to Furnish Additional Information. A new provision could be added, perhaps by including an undertaking in Part II of Form S-8, requiring registrants using Form S-8 to provide supplemental information to the Commission about the award of options to consultants promptly upon request under Rule 418. To the extent permitted by applicable laws, this information could be provided on a confidential basis. This information would not be available to the public on EDGAR and could be protected in the same manner as other information submitted to the Commission as confidential business information.

3. Clarification of Instructions and Definitions. As proposed in the Release, the instructions to Form S-8 should be expanded to make it abundantly clear that the Form is not available for issuances of securities to consultants whose services are in connection with either the offer and sale of securities or the promotion of the registrant’s securities.

C. Detailed Discussion. The foregoing measures would provide a direct response to the perceived abuses without risking immediate harm to sectors of the U.S. economy that have been major contributors to economic growth. These suggested measures are discussed in more detail below, together with more specific responses to other questions raised in the Release.

1. Information about Consultants. The Release proposes a new requirement in Form S-8 for disclosure of (1) the name of the consultant, (2) the number of shares to be issued to the consultant, and (3) a specific description of the services that such consultant will provide to the registrant. The proposed new disclosure requirement would be unduly burdensome, in light of the comparatively few instances of serious abuse, and would unfairly penalize issuers that legitimately use consultants in place of regular employees.

(a) Disclosure of Consultants' Names. The disclosure of the names of consultants would place issuers retaining consultants, most particularly high technology companies, at a disadvantage relative to their competitors. In the normal course of bringing products to market, these companies often engage persons in consulting capacities who are leading authorities in their fields, in order to leverage research and development opportunities that might otherwise be unavailable. Competitors would be eager to learn the names of these consultants in order to gain insights into the activities of such companies. Merely knowing that a specific consultant has been engaged by a company may be sufficient to provide otherwise confidential information about an issuer's current projects to a competitor. In the hands of a competitor, this information could also provide valuable insights that would not otherwise be available through any filings with the Commission.

To require issuers to make specific requests to the Commission for confidential treatment of all this information would be both time consuming and wasteful, and there could be no assurance that an individual request would be successful. The Commission's proxy statement disclosure rules generally reflect the view that the names of employees receiving options, other than the top five executive officers, are not material. This information obviously does not have any special value to plan participants who purchase shares under Form S-8. The names of consultants who receive securities are even less material to the public than the names of employees who are not among the most highly compensated executive officers. In the absence of any direct benefit to investors from the new disclosure proposed in the Release, the competitive harm that would result to issuers who use consultants for legitimate business purposes far outweighs the benefit of the disclosures as a deterrent to abuse of the Form S-8 or as an enforcement device.

(b) Description of Services Performed by Consultants. Similarly, it is not necessary to specify the services to be provided by consultants. (The Release notes that generic disclosure, such as specifying only that consultant services would be performed, would not comply with the requirements of the proposal.) The Commission's proposal to "describe specifically the services that each of the persons will provide to the company" would place many high technology companies at a competitive disadvantage for the reasons described above. The particular services rendered by consultants are often highly confidential and may well be the subject of confidentiality agreements between consultants and the issuer. Any benefit to be gained by a more specific description of the consulting services would be outweighed by the intrusiveness of requiring that the services be described. Even where the name of the consultant is not sufficient to reveal the direction of the company's research and development, a description of the services surely could. Describing the services provided would give competitors the ability to engage in activities designed to affect the consultant’s service relationship adversely, including the possibility that a competitor would attempt to hire the consultant itself with the lure of higher equity incentives.

Requiring a description of services, moreover, is unlikely to lead to information that would assist the Commission in identifying those who abuse Form S-8.

Anyone set on abusing Form S-8 for capital raising will hardly be deterred by having to create a false description for the services.

If some description of services is considered necessary, the registrant should be required to provide only a general description of the services sufficient to make it clear that the consultant was in no way engaged in a capital raising or promotional activity, such as "consultant providing software development services" or "consultant providing biotechnology research services." We believe that any perceived abuses would be eliminated if the Commission required the issuer to provide a confidential description of the services performed only upon request. This alternative method of disclosure would provide the Commission with the type of enforcement information that it needs, while respecting the privacy, competitive and practical concerns discussed above.

We do not believe any special certification is necessary in this regard. Responsible issuers are fully aware that by signing Form S-8 they are certifying that all its requirements are met. The addition of a special certification would not add any force to the existing requirements.

(c) Disclosure of Number of Securities Issued to Consultants. It is not necessary to specify the amount of securities issued to particular consultants. The relevant information could easily be provided by simply requiring the issuer to disclose the aggregate number of shares sold or options issued to consultants. We also note that disclosures made in response to Item 15 of Part II of Form S-1 registration statements (which references Item 701 of Regulation S-K) are typically made in the aggregate for related types of sales of unregistered securities. Thus, for example, one might see language such as, "During the last three years, the registrant sold an aggregate of x shares of its common stock to employees and consultants upon the exercise of options under its stock option plan, for aggregate proceeds of $y." We believe that this type of aggregate disclosure is appropriate in the context of the sale of securities to consultants under Form S-8.

The disclosure of the specific amount of securities issued to individual consultants would place many issuers at a competitive disadvantage. As described above, many companies routinely leverage their ability to do research and development by using large numbers of consultants. Disclosing the number of securities issued to individual consultants would disclose confidential information to an issuer’s competitors.

In order to limit the administrative burden resulting from this new requirement, there should be a simple de minimis threshold that must be met in order to trigger the new disclosure. Specifically, no disclosure of sales of securities under a Form S-8 registration statement to consultants should be required in a Form 10-Q or Form 10-K until the total number of shares granted to consultants exceeds 1 percent of the total number of outstanding shares. The 1 percent threshold is similar to the Rule 144 volume limitation, which also is designed to ensure there is no unregistered distribution of securities.

Disclosure should be required initially for the first quarter when the number of shares issued or covered by options granted to consultants exceeds the 1 percent threshold, and thereafter for any quarters when an additional 1 percent or more has been granted since the prior report. This approach would be consistent with the reporting requirements with respect to the sale of unregistered securities under Item 701 of Regulation S-K. This simple de minimis rule is preferable to more elaborate approaches that might involve a public float or market capitalization test.

2. Frequency of Disclosure. The Release indicates that, if the required information is not available at the time the Form S-8 is filed, the information must be included by post-effective amendment filed prior to the sale of stock to the consultant. Since securities are issued to consultants on a frequent basis following the filing of Form S-8 (in high technology companies, securities are often issued on a weekly basis), we believe that the preferable method of disclosure would be in Quarterly Reports on Form 10-Q for the issuer's first three fiscal quarters and in the Annual Report on Form 10-K for the fourth fiscal quarter. We do not believe a post-effective amendment to the Form S-8 should be required since the Form 10-Q is incorporated by reference. Nor do we believe that these issuances are of sufficient market significance to require prompt reporting on Form 8-K. There is precedent for this type of requirement in the existing requirement to report sales of unregistered equity securities during the quarter, as set forth in Item 2(c) of Part II of Form 10-Q and Item 5 of Part II of Form 10-K. Both such items reference Item 701 of Regulation S-K.

3. Checking the Box. Although including a box on the Form S-8 cover page to flag plans that permit offers to consultants is not objectionable, we doubt that this approach will be useful to address the problem of abuse. A large number, probably a majority, of all stock-based plans adopted today include provisions for permissive issuances to consultants. Thus, until awards are actually granted to consultants, the Commission will not be receiving any useful information. The same is true with respect to any proposed expansion of the certification on the signature page. In addition to the fact that we generally disfavor self-incriminating or self-serving certifications, in a great majority of cases securities would not have been issued to consultants at the time the registration statement was filed.

4. Percentage of Securities Registrable on Form S-8. The Release solicits comments as to whether any limit should be placed on the aggregate number of shares that may be sold to consultants pursuant to a registration statement on Form S-8 during an issuer's fiscal year in order to prevent the abuse of Form S-8 to register securities issued in connection with a capital-raising transaction. We do not believe that any such limit is appropriate, and it could be harmful to issuers who rely on legitimate consultants to perform important tasks. It is not possible to develop an adequate formula for "second guessing" the board of directors of a public company with respect to the appropriate number of shares to be issued to consultants. Any limitation on the number of shares issuable to consultants should not be based on a pre-conceived regulatory determination, but rather on a determination by an informed board of directors taking into account the particular facts and circumstances, as well as the state law fiduciary duties of directors to approve an action, such as the issuance of securities to consultants, when such action is in the best interest of the corporation and its shareholders.

Any limitation that might be chosen would of necessity be artificial and arbitrary and would raise various practical problems in its application. Similarly, we do not believe it would be feasible or appropriate for the Commission to attempt to identify specific industries that may utilize Form S-8 for specific purposes. High technology industries, on average, tend to use more consultants than companies in most other industries. However, we do not believe that any limit on the number of shares issued to consultants that are registrable on a Form S-8 should be differentially applied to different types of registrants; any absolute limit would simply need to be set high enough to accommodate the registrants with the largest need for consultants. The Commission has asked for guidance regarding the appropriate magnitude of any such percentage limit. Whether a specific limitation (the Release suggests 10 percent, which is clearly insufficient) would create an adequate pool of securities to compensate consultants for legitimate purposes cannot be determined in a vacuum and will vary from issuer to issuer and from time to time within the same issuer's lifecycle. Because we do not believe that any arbitrary limit is appropriate, we do not suggest a specific number.

5. Definition of Consultants. In general, we believe that clarification of the definition of consultants would be desirable. We also believe that the definition of consultant for purposes of Form S-8 should be consistent with Rule 701. The fact that shares issued under Rule 701 are "restricted securities" does not provide a rationale for making a distinction. Consistency would alleviate the burdens placed on issuers who rely on the broader interpretations under Rule 701 and then find that Form S-8 is not available for sale to the same individuals after going public.

In order to remove the implication that individuals who provide consulting services that have an incidental effect on the market for an issuer's securities are excluded from Form S-8, we believe that only those services that relate "primarily" to the direct or indirect promotion or maintenance of a market for the registrant's securities (in addition to the reference to capital raising) should be prohibited. This approach would make it clear that consulting services focused on promotion of the issuer's products is permissible.

We do not believe that it is desirable to limit the use of Form S-8 to consultants who are natural persons. As the Commission noted in the various interpretive letters under Rule 701 cited in the Release, there are many instances where entities provide to an issuer valuable services that are not capital raising and for which equity compensation may be appropriate. These services effectively substitute for services that would otherwise be performed by an employee. Consultants often provide these services through legal entities that are wholly or substantially owned by the actual service providers. If the rationale for permitting streamlined registration on Form S-8 for employees and their transferees is that the purpose of the sale of securities is compensatory, that rationale applies with equal force to consultants and their firms. As long as availability of the Form is limited to persons or entities that have provided actual services (other than raising capital), there is also a pre-existing relationship with the issuer that provides a safeguard against abuse. The fact that individuals have chosen, for reasons that are in all likelihood completely unrelated to Form S-8, to organize as corporations, partnerships or limited liability companies ought to be irrelevant to the analysis of whether Form S-8 is available to cover securities issued to them. We believe that any entity that is substantially owned by its service providers should be able to avail itself of Form S-8. If, on the other hand, the entity elects to distribute the equity to its employees, we would suggest that Form S-8 should only be available to distributees who are actually involved in the rendering of consulting services to the issuer or other consulting clients.

III. Miscellaneous

A. Effective Date. The Release does not address the question whether the proposed amendments to the transferability rules would be effective with respect to Form S-8 registration statements already on file at the date the amendments take effect. We believe that no policy reason would be served by requiring a new or amended Form S-8 to be filed merely to take advantage of the new transferability provisions. We suggest that the final rule explicitly provide that the changes in the transferability provisions become applicable, as of the effective date of the change, to any then-current Form S-8 Registration Statement. We see no inherent reason that the effective date of the changes in rules regarding consultants should be linked to the effective date for the transferability rules. We also believe that any amendments to Item 402 of Regulation S-K should be adopted prospectively.

B. Prospectus Delivery Requirement. The Release does not include any changes in the prospectus delivery requirements mentioned in Part I of Form S-8. It should be made clear that, although there is no requirement for a transferor to provide a prospectus to a transferee in the context of a transfer of options without consideration, registrants will be required to deliver a prospectus to transferees at or prior to the time of exercise.

C. Defined Terms. At least in some cases, transferees should be included in the definition of "employees." In addition, the reference in the Form to "participants," "participating employees" and the like may need to be modified to include transferees.

The Release includes a proposal to amend Rule 405 (definition of "employee benefit plan") to limit the extent to which consultants can participate in a plan. We believe that a plan should continue to be within the Rule 405 definition irrespective of the services provided by consultants who participate and that a more appropriate approach is to limit the use of Form S-8 by non-qualifying consultants. This approach would avoid disqualification of the entire plan for Form S-8 and the extension of the Form S-8 restriction to any other rules that may use the same defined term.

D. General Instruction A.1. In General Instruction A.1.(a)(3)(i) and (ii) the words "if these [exercises and sales] [transfers] are permitted under the terms of the plan" were substituted for the words "provided that such [exercises and sales] [transfers] are not prohibited under the terms of the plan." The new language implies an obligation to have such permissive language in the plan or other grant agreement adopted by the plan administrator, which we believe would require unnecessary plan amendments or director approvals. The Instruction should be modified to eliminate this implication.

General Instruction A.1 as proposed does not make it clear that Form S-3 resale prospectuses may be used under Form S-8 by transferees. Accordingly, General Instruction A.1(a)(5) should be modified to add the words "and subsequent sale of the securities"so that it reads "The form also is available for the exercise of employee benefit plan options and subsequent sale of the securities . . . ."

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We hope that the Commission will find these comments helpful. Members of the Subcommittee who were involved in the drafting of this letter are available at the Commission's convenience to discuss further any aspect of these comments.

Respectfully submitted,

/s/ JOHN M. LIFTIN

John M. Liftin

Chair, Committee on Federal Regulation of

Securities

/s/ LOUIS RORIMER

Louis Rorimer

Chair, Subcommittee on Employee Benefits,

Executive Compensation and Section 16

/s/ SCOTT P. SPECTOR

Scott P. Spector

Vice Chair, Subcommittee on Employee Benefits,

Executive Compensation and Section 16

Drafting Committee

Gerald S. Backman

Pamela Baker

Robert E. Curley

Keith F. Higgins

Ward B. Hinkle

Linda B. Matarese

Gloria W. Nusbacher

Anne G. Plimpton

Elizabeth W. Powers

Susan P. Serota

Ann Yvonne Walker

Kathleen A. Weigand

cc: Hon. Arthur Levitt

Chairman of the Securities and

Exchange Commission

Hon. Paul R. Carey

Commissioner

Hon. Isaac C. Hunt, Jr.

Commissioner

Hon. Norman S. Johnson

Commissioner

Hon. Laura S. Unger

Commissioner

Brian J. Lane, Esq.

Director of Division of Corporate Finance

Richard H. Walker, Esq.

General Counsel