April 7, 1999
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 5th Street, N.W., Stop 6-9
Washington D.C. 20549
Re: File No. S7-30-98
We respectfully submit this letter commenting on certain proposed amendments to the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act") as set forth in Release No's 33-7606A, 34-40632A and IC-23519A, collectively referred to as the "Release".
BancBoston Robertson Stephens Inc., the Section 20 subsidiary of BankBoston N. A., is a leading investment bank focused on growth companies in the technology, life sciences and healthcare, information and business services, industrial growth, media and telecommunications, specialty retail/consumer products, real estate and gaming/lodging industries. The firm has 55 equity and high yield research analysts who cover more than 600 companies. Since its founding in 1978, BRS has raised $52 billion in initial public offerings, follow-ons and convertible offerings. The firm has also assisted in over 300 mergers and acquisitions transactions valued at more than $42 billion.
There are three particular areas of the Release that we find potentially problematic and wish to address:
1. The determination of issuers eligible for registration on Form B;
2. The apparent extension of Securities Act Section 12(a)(2) liability to research reports published during the offering period; and
3. The proposed amendments to Rule 176 which would encourage an underwriter to bring its analysts "over the wall" in order to safely participate in expedited Form B offerings.
1. The Determination of Issuers Eligible for Registration on Form B.
Our reaction to the proposal to permit only "Seasoned Issuers" to avail themselves of the streamlined registration process of Form B is that no dollar threshold of any kind accurately reflects the quality of the issuer or the quality of the information in the public markets in relation to that issuer.
We respectfully submit that the goals of the Commission have always been to ensure that prompt, accurate and relevant information is provided to investors. With this information in hand, an investor must make its own investment decisions.
The fact that a particular security has a high market price or that a large number of investors are trading in and out of that security on any given day may be a measure of an efficient market from the point of view of supply and demand, but it is not in any way an indication that an investor has enough information with which to make an informed investment decision.
In fact, dollar thresholds significantly favor stocks with a high hype level, such as internet stocks, and penalize issuers whose industries are out of favor with securities analysts, such as biotechnology companies. Requiring an internet company to provide less information to investors when raising capital than a biotech company does not serve investors and seems arbitrary.
An issuer's shares may be high priced and actively traded for a variety of reasons, which do not reflect an efficient market, such as false rumors, fraud, arbitrage, ill-informed hype by commentators, etc. An issuer's shares may be low priced or inactively traded for a variety of reasons, which do not reflect an inefficient market. The most obvious of these is a recent drop in share price due to a missed quarter or a shareholder base made up, in large part, by investors who tend to hold shares for their long term value and who do not "flip".
A test that rewards the propagation of information by persons who are under no legal obligation to be truthful, accurate, well informed or even well meaning, and which can directly result in the reduction of information which that issuer must put into the public market, would be a tremendous disservice to both investors and issuers. This would also run completely contrary to the long standing policy of the SEC to concentrate on full, fair and accurate disclosure, while filtering out the "background noise".
For these reasons, we respectfully suggest that Category B issuers be extended to issuers who have filed at least two annual reports and whose securities are trading on the higher-level exchanges such as NYSE, AMEX or Nasdaq-NMS, where a measure of quality control is already imposed. Any issuer that meets these criteria will have an abundance of information in the public marketplace in the form of Exchange Act filings, analyst reports, press releases and press reports. It is our belief that an efficient market is a market where investors are well informed with timely, accurate and relevant information. What an investor does with that information, and information from other sources, does not make the market efficient.
2. The Apparent Extension of Section 12(a)(2) Liability to Research Reports Published During the Offering Period.
It is our understanding from reading the Release that "free writing", as that term is defined in the Release, will generally be subject to filing under new Rule 425 and will be deemed to be a prospectus subject to Section 12(a)(2) liability, whether filed or not. It is also our understanding that research published during the offering period will constitute free writing. Therefore, our interpretation of the Release is that Section 12(a)(2) liability will be extended to research published during the offering period. We believe that the extension of Section 12(a)(2) liability to research reports in this context will result in less, not more, information being distributed to the investing public.
We would like to point out that the Release specifically cites the positive effects of analyst research when it states:
Investors acquire useful information regarding companies from sources other than Commission-mandated disclosure. One such source is analysts' research reports...They digest information from Exchange Act reports and other sources, actively pursue new company information, put all of it into context, and act as conduits in the flow of information by publishing reports explaining the effect of this information to investors.
We would also like to point out that significant liability already exists in this context in the form of Section 10b-5 liability, reputational liability and possibly Section 11 liability. The combination of liability from these existing sources more than adequately serves to deter fraud and reduce the release of information into the public market in an irresponsible manner.
After internal discussions, we have serious reservations about the wisdom of allowing the publication of research reports during the offering period given the significantly increased potential liability. Although we cannot speak for our colleagues in other underwriting firms, we would imagine that, due to the high cost and proliferation of class action lawsuits against underwriters in public offerings, a number of our colleagues would take a similar position.
We respectfully submit that by pursuing a policy where underwriters, due to increased liability concerns, do not disseminate information in the form of analyst reports into the public mix, is precisely the opposite of the intention of the Commission in most of its liberalizing policies reflected elsewhere in the Release. In addition to investors who may be interested in purchasing the securities in the offering, existing investors would be deprived of this valuable information during the offering period. We believe that investors are currently protected by the liability imposed by the existing laws and believe that investors would be harmed by the withdrawal of independent analysis from the market place, which could result if additional liability is imposed under Section 12(a)(2).
3. The Proposed Amendments to Rule 176 Which Would Encourage an Underwriter to Bring its Analysts "Over the Wall" in Order to Safely is Participate in Expedited Form B Offerings.
Our firm is of the belief that expedited Form B offerings will be a useful and popular way to raise funds for certain issuers. We are also encouraged by the Commission's efforts to set forth guidelines that a court could consider as positive factors in these offerings in lawsuits involving Section 11 and Section 12(a)(2) liability. However, we are concerned with the proposed system of "a "one-way" wall between analysts and underwriters of the same firm, whereby information from the analysts who have a "reservoir of information" is available to the underwriters for the purposes of Rule 176".
Bringing the analyst over the wall produces a myriad of problems for the analyst. Firstly, the analyst will know of material nonpublic information before the rest of the public. The analyst would then be under an obligation to either disclose the material nonpublic information to the market (potentially scuttling or delaying the offering) or abstain from recommending the security, which could signal the market that a material nonpublic event was in the works.
Secondly, customers of the firm buy and sell securities based on analyst ratings. During the period the analyst was over the wall, it could not change its rating, even if it learned of materially good or bad information. An analyst or its firm could then be violating its duty to its customers if an
improper rating was maintained because of an analyst's duty to refrain from disclosing material nonpublic information while he was over the wall.
These issues create conflicting duties of loyalty and care which will put a firm in a "Catch 22" position. Decisions will be based on allocations of litigation risk, rather than on complying with the spirit of the securities laws. Although we are grateful for the guidance set forth in Rule 176, we believe that this element will lead to putting the interests of the firm in mitigating potential underwriting liability before its duty of care to its customers, which will, in turn, lead to significant conflicts of interest and less public confidence in analyst credibility.
We would be pleased to discuss any of the issues raised in this letter with members of the Commission at any time. In particular, please contact the undersigned at (415) 676-2511 in connection with any issues raised in this letter or with respect to the Release.
/s/ Allison Bennington
Senior Equities Counsel
555 CALIFORNIA STREET SAN FRANCISCO CA 94104 415-781-9700
INVESTMENT BANKERS MEMBER OF ALL MAJOR EXCHANGES
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