acic AMERICAN COLLEGE OF INVESTMENT COUNSEL
Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, DC 20549
Attn: Mr. Jonathan G. Katz,
RE: File No. S7-30-98
Ladies and Gentlemen:
We submit this letter of comment regarding Commission File No. S7-30-98 in response to the Commission's Notice of Proposed Rulemaking contained in Releases No. 33-7606A; 34-40632A; IC-23519A; and International Series Release No. 1167A (collectively, the "Release").
The American College of Investment Counsel ("we," or "the ACIC") was founded in November 1981 by a group of lawyers from both private practice and financial institutions specializing in major institutional investment financing. Its purpose is to provide a forum for the discussion of relevant legal issues and to provide educational programs on these issues for its members. The ACIC consists of over 400 lawyers in private firms and in the legal departments of insurance companies, pension funds and other institutional investors. The views expressed herein are those of the ACIC and should not be attributed to any institution that employs ACIC members.
The proposed rules set forth in the Release may affect institutional investors, such as our clients, in several ways. First, the rules may affect our clients as buyers of securities. Second, since our clients sometimes sell portfolio securities, the rules may also affect them as resellers of securities.(1)
The clients represented by the members of the ACIC collectively invest hundreds of billions of dollars, directly and indirectly (through pension funds, life insurance products and otherwise), on behalf of, or for the benefit of, individual investors. Consequently, our clients' paramount concern in analyzing the Release is its potential impact on investor protection. In addition, because of the large sums they invest, our clients are also concerned with the orderly and efficient functioning of the securities markets, including particularly the markets for publicly traded securities.
We believe that the Release represents a carefully considered and researched analysis of changes that can benefit investors. It has obviously been a monumental undertaking and we applaud the Commission's continuing efforts to balance the need for investor protection with the desire of market participants to have efficient and attractive securities markets. We think that the Commission has achieved a good balance in a number of the proposals in the Release. In other cases, we believe that some adjustments may be helpful to all concerned. However, we think that our suggested adjustments can be achieved without any significant alteration of the basic regulatory framework established by the Release.
A number of the proposals raised the following general concerns:
Capital-Raising Efforts. Some of the proposed changes in our view may unnecessarily hamper the capital-raising efforts of issuers. This could adversely affect investors by limiting, rather than expanding, the available pool of investments from which to choose.
Information Flow. Other proposed changes might actually curtail, rather than enhance, the flow of information which would be useful to investors making investment decisions. For example, proposals which increase the risk of civil liabilities in respect of statements made in connection with an offering may actually deter participants in the public offering process from providing useful information which today is available to investors.
Market Operation. Other proposed changes, such as those relating to the timing of prospectus delivery, might detract from the fast, efficient operation of the securities markets without a commensurate offsetting benefit to all investors. These proposals might also have the effect of damaging the competitive position of the United States securities markets by, for example, encouraging certain issuers to seek capital offshore.
From the perspective of our clients, an approach that better differentiates among the different types of investors participating in the securities markets, as well as the different types of securities available to investors, would be better suited to achieving an appropriate balance between investor protection and efficient markets. For example, a less burdensome regulatory scheme may be appropriate for offerings to certain types of investors, such as qualified institutional buyers ("QIBs"), as defined in Rule 144A, due to their sophistication and experience in the securities markets.(2) Similarly, different procedures and disclosure requirements may be appropriate for offerings of certain types of securities, such as investment grade non-convertible debt securities, which would not be appropriate for common stock and other offerings.
The following comprise our specific comments on the Release. Our comments address four of the five general categories of proposals outlined in the Release: registration system reforms, easing restrictions on communications, prospectus delivery reforms, and public and private offering flexibility. We are not commenting on the proposals concerning changes in periodic reporting.
Registration System Reforms
We have no comment on the general concept of replacing the current system of registration of securities under the Securities Act of 1933, as amended (the "Securities Act"), including the current forms of registration statements, with those described in the Release. We do, however, observe that the proposed system of new Securities Act registration statement forms (Forms A, B and C) does not appear to address adequately all types of securities transactions and offerings for which they could be used. For example, as noted in the Release, Forms A, B and C do not necessarily appear well suited to offerings of asset-backed securities. We suggest that the Commission consider more specifically tailoring the registration statement forms to address different types of offerings, such as those of asset-backed securities.
We do have several comments on certain specific proposals altering the securities registration process, as set forth below.
Retroactive Invalidation of Use of Registration Statement Forms
We are concerned about the consequences that would result from changes which would permit the Commission to disallow retroactively the use of a particular registration form. If the securities distributed under the registration statement are deemed not to have been registered as a result of the use by the issuer of such form (as when an issuer uses a Form B instead of Form A), several adverse consequences could result:
Limitation on Applicability of Secondary Registration on Form B
We believe that the final rules should clarify the extent to which a Form B offering to QIBs may be invalidated if the QIBs act as "conduits" for a public distribution or the securities do not "come to rest" with the QIBs.(3) We acknowledge the Commission's legitimate concern that the registration of the issuer's sale of securities in a QIB-only offering should not permit QIBs to engage in indirect distributions, the terms of which are not disclosed to the public. However, given the inherent uncertainty surrounding the circumstances which could give rise to application of the "conduit" or "come to rest" limitations, serious doubts may exist among QIBs as to whether the securities they purchase in a QIB-only offering are in fact freely tradeable. This, in turn, may cause QIBs to refrain from purchasing securities in such an offering, thus limiting the benefits of the provision to issuers. Likewise, issuers might be reluctant to engage in such an offering unless they could police resales by QIBs to assure that the registration would not be retroactively invalidated. We believe that the conduit risk is not high in such offerings because dealers(4) and investment advisers would be excluded from the QIBs which may participate. Consequently, it seems likely that such offerings will be limited to QIBs who generally purchase securities for their own investment and who in most cases would be limited or prohibited by other regulations from engaging in practices which might otherwise constitute an indirect distribution of securities.
To address these concerns, we recommend that the Commission specifically provide in the rules which it adopts that securities sold to QIBs in a QIB-only Form B offering will be freely tradeable by purchasing QIBs who are not affiliates of the issuer, without any holding period requirement, unless there is at the time of the Form B offering either a pre-arranged scheme or an actual agreement for the QIB investors to distribute the securities to the public.
Repeal of Exxon Capital and its Progeny
We are concerned that there may be unintended consequences to the proposal to repeal or overrule the position of the staff of the Division of Corporation Finance (the "Staff") regarding so-called A-B exchange offers, as expressed in the Exxon Capital no-action letter and its progeny.(5) We are not aware of any significant abuse of Exxon Capital transactions which would warrant wholesale abandonment of this option, which can be useful for both institutional investors and issuers. Since the proposed reforms to the registration process do not permit many Form A issuers to conduct an offering prior to review of the registration statement, the repeal of Exxon Capital will deprive these issuers of a valuable capital-raising tool. Many of these issuers are non-reporting companies - including many foreign issuers - who use the Exxon Capital procedure to become registered issuers. The alternatives available to such issuers (either a private placement, a Form A offering or a Rule 144A offering followed by either an "evergreen" registration statement or a registered secondary offering) might be more expensive and less flexible than Exxon Capital transactions. The result could be to:
In light of these considerations, we encourage the Commission to consider whether there is an alternative to the repeal of the Exxon Capital process which would preserve the benefits investors might realize from the proposed regulations while avoiding those results that might, in some cases, simply reduce access of U.S. investors to attractive offerings or increase the costs of securities offerings to issuers. A useful approach may be, for example, to loosen the requirements for use of Form B so as to increase its availability to issuers.
Should the Commission ultimately decide to repeal Exxon Capital in its entirety, we suggest that it should provide certainty for those issuers currently relying upon Exxon Capital-type procedures by "grandfathering" offerings in which the registered exchange offer is completed before a specified date. If the Commission does not do this, institutional investors purchasing securities in a private QIB-only offering in which the issuer has promised to provide liquidity through a follow-on registered exchange offer will be denied the liquidity they bargained for in making their private purchases.
Guidance On Underwriter Due Diligence
We have no comment on the Commission's proposals to expand Rule 176 insofar as the proposed amendments apply to investment banking firms acting as contractual underwriters in traditional public offerings. However, we believe that the Commission should consider amending Rule 176 to recognize the important differences between the due diligence role a contractual underwriter should be expected to play in a traditional public offering and the role that an unaffiliated selling security holder, as a mere statutory underwriter, should play in its public resale of securities.
Institutional investors frequently invest in restricted securities in private placement transactions and subsequently decide to resell those securities. Unless the investor can resell such securities under the safe harbor provided by Rule 144, the investor may need to effect the resale through a registered secondary offering. In reselling in such a registered offering, the investor may become a statutory underwriter subject to liabilities under sections 11 and 12 of the Securities Act.
In cases in which the selling security holders have resold their securities in a firm commitment underwritten offering, courts have held that such selling security holders are not underwriters and, accordingly, are not subject to section 11 or section 12 liability.(6) The problem for institutional investors occurs when they resell in an offering which is not underwritten, as when the securities are registered on a shelf registration for resale on a continuous basis from time to time in the future. In such cases, the selling security holders usually sell the securities in ordinary brokers' transactions which are otherwise indistinguishable from secondary sales of securities of the same class which have already come to rest in the hands of the public. Indeed, the sellers seek to profit not from an underwriting discount or selling commission, but from a gain in the value of the security as would be the case in an ordinary trading transaction. In other words, the investor seeks to profit from its investment in the security, not from the distribution itself. It is unclear why special obligations should attach to selling security holders in such circumstances.
In contrast to an offering involving traditional managing underwriters, which would typically put their names (and, consequently, their reputations) on the cover page of the prospectus for investors to see, the only reference to the names of the selling investors is typically in the list of selling security holders required by Item 507 of Regulation S-K. Accordingly, it is reasonable to assume that although a purchaser in a public offering may well consider the reputation of a managing underwriter in purchasing securities in a traditional public offering, such an investor is not similarly depending upon the reputation of a selling security holder. Likewise, in our experience it is highly unusual for an institutional investor to conduct - or even to be trained in how to conduct - the kind of due diligence investigation a managing underwriter conducts in connection with a public offering, and a reasonable investor would not expect the holder to perform such an investigation. Finally, a selling security holder may not have access to all issuer information that it would feel is appropriate in connection with a due diligence investigation. Even if such access is negotiated for and obtained (which is not always possible), issuers are simply not as motivated to assist in a secondary offering.
Accordingly, we recommend that the Commission amend Rule 176(g) to provide that an unaffiliated selling security holder should not be required to conduct a due diligence investigation to establish a defense to liability under section 11 and section 12(a)(2) of the Securities Act. For these purposes, we would suggest that an "unaffiliated" security holder is one that does not have the ability to cause an issuer to file a registration statement but for the existence of a contractual obligation (such as the obligation created by a registration rights agreement).
Easing Restrictions on Communications
Restrictions During the Pre-Filing Period
Form B Issuers. We support the proposed changes which would permit Form B issuers to make oral and written offers before the filing of a registration statement. We believe these proposals should, in principle, increase the flow of timely, useful information to potential investors.
Limited Announcements. We also support the proposed merger of Rule 135 and Rule 135(c) governing announcements of limited offering information.
Communications Safe Harbors. We support the proposed changes to Rule 167, which would provide "bright line" 15-day or 30-day safe harbors for communications by Form B or Form A filers, respectively. However, we question whether a 30-day quiet period is appropriate for all Form A issuers, especially those who are registering offerings subsequent to initial public offerings. A 30-day quiet period may also be too restrictive in the context of secondary offerings. We suggest that consideration be given to a 15-day safe harbor for all registrants or, alternatively, for Form B filers, for seasoned Form A filers and in secondary offerings.
Filing of Free-Writing Materials. We support the proposed requirement to file all offering materials used during the 15-day or 30-day quiet period. This requirement will provide access to such information to all investors, albeit in some cases only after it has been distributed to others. However, we are concerned about the possible effects of the related proposal to make some material filed subject to increased liability under the Securities Act, as opposed to liability only under section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We believe that the proposals for increased Securities Act section 11 liability, at least for issuers, are generally appropriate (for incorporated Exchange Act filings, post-effective prospectus supplements and post-effective amendments) and should in principle add to the protection of investors. We also acknowledge that imposing section 12 liability for oral communications, free writing materials (including roadshow materials and financial projections) and factual business information may help investors by making it easier to bring an action against issuers or underwriters based upon misstatements in or omissions from these materials. On the other hand, we are concerned that increased section 12 liability for the materials mentioned could also inhibit dissemination of these materials.
We ask the Commission to carefully consider whether any additional protection that may result from imposition of section 12 liability would outweigh the potential chilling effect upon dissemination of information in connection with an offering.
Rules 168 and 169. We support the proposed changes in Rules 168 and 169 to exempt forward-looking information and factual business communications from existing communications restrictions. However, we suggest that the Commission consider expanding the class of issuers who can release forward-looking information under Rule 168, so that more registrants would be able to provide forward-looking information within the 30-day period before a registration statement is filed. For example, Rule 168 could be expanded to permit communications by issuers that are subject to reporting requirements under section 13(a) of the Exchange Act and that have released forward-looking information in the ordinary course of business for the six months immediately prior to the offering, rather than for the prior two years.
Restrictions During the Waiting Period
We support changes which permit offering materials other than a section 10 conforming prospectus to be used during the waiting period. Please see our comments in relation to such materials above.
We support changes to Rules 137, 138 and 139 to permit a greater flow of information from broker-dealers and others around the time of an offering. We especially welcome the proposal to expand Rules 137, 138 and 139 to cover Rule 144A/Regulation S offerings. These changes will be particularly helpful in increasing the availability of information concerning smaller issuers and non-reporting foreign issuers.
Prospectus Delivery Reforms
Availability of Information. We generally support proposed changes to eliminate the preliminary or final prospectus delivery requirement in many cases, so long as a preliminary or final prospectus is readily available to investors on a timely basis. However, we believe that any shifting of responsibility for obtaining material information to investors must be accompanied by both assured easy access to the information and an obligation of issuers to provide to investors information concerning material changes from information already made available on a timely basis. We question whether access to the SEC's EDGAR System via the internet (which we understand is intended to be a prime source of final prospectus information) will in fact provide ready access to documents given the volume of use to be expected. There is a similar danger that, in the event underwriters assume the responsibility for making final prospectus information available through their web sites, the information nevertheless may not be readily available to investors if they cannot access the web site because of volume limits. Accordingly, we suggest that the Commission develop objective standards to define how issuers and underwriters may comply with the requirement to make prospectus information available.
Requirement of Delivery Before Investment Decision is Made. We appreciate the Commission's concern that existing regulations do not provide adequate assurance that all investors who need it will have sufficient time to consider prospectus disclosure before committing to make an investment. However, it may not be necessary in the case of Form A issuers to adopt the proposed solution, namely, imposing a "speed bump" by requiring a prospectus to have been delivered to all investors seven or three days before pricing or execution of a subscription agreement.
Form B Registrants
In the case of Form B registrants, we support the proposal for delivery of a securities term sheet by the issuer prior to an investor's investment decision. As a practical matter, our clients have found that it is sometimes difficult to obtain information regarding Form B-eligible issuers in the time available to make an investment decision. A term sheet and a few minutes for review may well be all that is needed, but it is needed prior to the investment decision.
Form A Registrants
The proposed requirement that Form A filers deliver a preliminary prospectus seven or three days before the investment decision is made does, in principle, assure that investors obtain relevant disclosure information prior to making an investment decision. While we support the goal, we are concerned that this significant change from current practice carries with it a number of practical difficulties. At present, issuers generally continue to market an offering up to the time of pricing. If adopted, the proposed requirement will limit participation by investors who, as is often the case now, receive materials within the seven or three-day period before pricing. Registrants and potential investors would be adversely affected by the proposed change when it becomes necessary or desirable to include an additional investor in an offering within the seven or three-day period. Such situations could result in either delays in the pricing of deals, with the attendant risk of changes in market conditions, or unnecessarily excluding investors otherwise interested in participating in the offering. The imposition of the seven or three-day requirement could in some circumstances tip the balance in favor of a non-registered offering or an offering conducted outside the United States. This would limit the pool of investments available to institutional investors which appears unwarranted in light of the lack of a demonstrable need to impose these requirements for their protection.
Furthermore, certain sophisticated investors, including QIBs, may not require the additional protection that would be provided by delivery of a prospectus substantially in advance of the investment decision. The Commission has previously recognized, in adopting Rule 144A and Rule 506, that such investors generally have more than adequate means to fend for themselves. We think this recognition should apply in this context as well.
We also question whether the proposed seven or three-day periods should be applicable to offerings of investment grade non-convertible debt securities. In these offerings, pricing is based principally on the rating of the issue and the indicated "spread" rather than a review of the particulars of the registrant. We question whether a seven or three-day preliminary prospectus delivery requirement would augment investor protection in a market in which investment decisions generally are made on these criteria.
Accordingly, we suggest that the Commission essentially follow the Form B approach with respect to Form A issuers and require delivery of a preliminary prospectus prior to an investment decision, but without specifying a waiting period of a minimum number of days. If any waiting periods are imposed, we recommend that:
Public and Private Offering Flexibility
In general, we support the liberalization of existing rules and positions of the Staff regarding integration of public and private offerings. Accordingly, with the several exceptions noted below, we support the proposed amendments to Rule 152 and Rule 477.
We believe that the proposed amendments to Rule 152 still leave open important integration questions which the Commission may wish to consider whether, and how, to resolve. For example, the proposed amendments do not consider the possibility of side-by-side public and private offerings of the same or different securities and the extent to which such offerings should be integrated. We agree that integration of certain offerings is clearly necessary to enhance investor protection. For example, it might be necessary to integrate several offerings to prevent issuers from abusing the 35 investor limit under Rule 506 by making separate, contemporaneous Rule 506 offerings of the same security to different groups of fewer than 35 investors. However, many instances of side-by-side offerings may present no real likelihood of abuse (for example, contemporaneous section 3(a)(3) and section 4(2) commercial paper offerings). We would encourage the Commission to consider the circumstances under which relief from the integration doctrine might properly be afforded to side-by-side offerings as well as follow-on offerings.
Completed Public Offerings
Generally. We support the proposal to revise Rule 152 to provide that a registered public offering would not be integrated with a previously completed private offering regardless of the length of time which has elapsed. We agree that the private offering should be deemed complete if either the purchase price for the securities has been paid in full or both the purchaser is unconditionally obligated to purchase the securities and the purchase price is fixed.
Application to Convertible Securities and Warrants. We agree with the proposal that, in the case of an offering of convertible securities or warrants, the sale of the underlying security should be deemed completed at the time the sale of the convertible security or warrant is completed. Institutional investors such as our clients frequently invest in privately-placed convertible securities and warrants which are convertible into publicly-traded common stock. Integrating private offerings of convertible securities and warrants with the registration of an offer and sale by the issuer of the underlying securities issuable upon exercise or conversion would inhibit further capital formation by the issuer and provides little, if any, benefit to the public or to future private investors.
Resales of Privately-placed Securities
Generally. We support the proposed revisions to Rule 152 which clarify the circumstances under which an issuer may register the resale of securities originally sold by the issuer in a completed private offering and the circumstances under which such an offering should be deemed complete.
Institutional investors such as our clients frequently invest in privately-placed securities the resale of which is then registered by the issuer. Integrating other private offerings of similar securities with the registration of the resale of those securities could significantly inhibit further capital formation by the issuer, particularly where such resales are to be registered by means of a continuous shelf registration. Furthermore, the proposal reflects the reality of market trends in the area of so-called "PIPE" (Private Investment/Public Equity) and similar transactions now permitted by the Staff.
Resales By Affiliates. We do not support the proposed treatment of resales of privately-placed securities by affiliates. Under the proposals, such resales would not benefit from the integration safe harbor and would, therefore, remain subject to the same uncertainty regarding integration created by the current version of Rule 152. The registration of the privately-placed securities for public resale itself addresses the issue that the affiliates (or those who purchase the securities from them) may be deemed to be underwriters under the Securities Act. The filing of the registration statement, prospectus delivery requirements and section 11 liabilities of underwriters should provide adequate assurance of appropriate disclosure of the affiliation of the selling holder and other relevant factors. There appears to be no reason why the registration of the resale of privately-placed securities should be required to be delayed due to integration concerns merely because the selling holder may be an affiliate.
Furthermore, even if the Commission believes that resales by certain kinds of affiliates (e.g.,long-term controlling shareholders, officers or directors) should raise integration concerns in this context, we believe that an exception is appropriate for institutional investors. In making acquisitions of privately-placed securities with resale registration rights attached, institutional investors in the ordinary course of business are generally purchasing the securities for investment and not with the purpose or intent of influencing control of the issuer. Not infrequently the privately-placed securities are obtained in debt restructurings, or involuntarily as a result of the consummation of an issuer's Bankruptcy Code Chapter 11 plan. In such circumstances, it is usually the investors' goal to liquidate their positions as promptly as possible. Extending the integration safe harbor at least to institutional investor affiliates would help facilitate the restructuring of troubled companies. And, again, the registration process should provide sufficient protection for investors purchasing the resold securities.
Accordingly, we urge the Commission to consider, at a minimum, extending the proposed resale safe harbor of Rule 152 to permit immediate registration of the resale of privately-placed securities by institutional investors who purchased such securities in the ordinary course of business, notwithstanding that the size of the equity position held by the institutional investor might cause it to be treated as an affiliate of the issuer.
Treatment of Abandoned Offerings
Abandoned Private Offerings. We support the liberalization and clarification of the integration rules regarding abandoned offerings, and, accordingly, we support the proposed amendments to Rule 152 describing the circumstances under which a private offering will be deemed to be abandoned (and a subsequent public offering permitted) as a step in the right direction.
Abandoned Public Offerings. We similarly support the proposed amendments to Rule 152 describing the circumstances under which a public offering will be deemed to be abandoned (and a subsequent private offering permitted) as a step in the right direction.
Proposed Amendments to Rule 477. The proposed changes to Rule 477 regarding withdrawal of a registration statement seem appropriate to us in the context of a change from a public to a private offering occasioned by changes in market conditions or an inaccurate forecast by the issuer or underwriter as to the possible economic success of the public offering. However, we believe that the existing provisions of Rule 477 providing for Commission consent to withdrawal of a registration statement provide protection to investors such as our clients in certain circumstances. For example, Rule 477, as currently in effect, may prevent an issuer from dealing with a disclosure dispute with the Staff by completing what was to be a public offering as a private offering without making the disclosure that the Staff requested. We believe that it would be difficult to differentiate by rule between cases where a subsequent private investor might not be concerned about the nature of the dispute (e.g., where the Staff would require the issuer under Commission accounting rules to provide financial information which might be difficult or expensive for the issuer to obtain, but which would not typically be provided in a private offering) from those cases where the private offeree might consider the information quite material (whether or not the issuer's reluctance to change the disclosure in response to a Staff comment is in good faith).
In our view, there are three instances in which automatic withdrawal should not threaten investor protection and should be freely permitted under Rule 477:
However, where the registration statement is withdrawn after the Staff provides comments but before clearance of all material Staff comments, we would propose that withdrawal only be permitted if the issuer undertakes to disclose to private offerees in a subsequent private offering that withdrawal of the registration statement occurred prior to Staff clearance of all comments.
* * * * *
We have one final thought on the tone of the Release. We sense that it reflects a certain amount of dissatisfaction on the part of the Commission with respect to the private placement process. In our view, at least the institutional private placement process has functioned effectively for many, many years for both issuers and investors. As the Commission considers reforms in the future, we suggest that it target specific abuses and not adopt rules whose breadth may adversely affect private placements. It is with that point in mind that we have made some of the specific suggestions outlined above.
Thank you for your attention to our comments. Should you have any questions or should you wish to discuss our comments or views any further with a representative of the ACIC, please feel free to contact me at Hebb & Gitlin, One State Street, Hartford, Connecticut 06103 at 860-240-2757 (firstname.lastname@example.org).
AMERICAN COLLEGE OF INVESTMENT COUNSEL
By: Chester L. Fisher III
Chairman, ACIC Task Force on the Aircraft Carrier Release
ACIC Task Force on the Aircraft Carrier Release:
Chester L. Fisher III (Chairman)
Hebb & Gitlin, P.C.
Yanira I. Baez
Milbank, Tweed, Hadley & McCloy LLP
Allen C. Dick
Allstate Insurance Company
James R. Doty
Baker & Botts, LLP
Edward H. Fleischman
Linklaters & Paines
Meryl J. Gluck
Teachers Insurance and Annuity Association of America
Gary S. Hammersmith
Hebb & Gitlin, P.C.
Douglas W. Jones
Milbank, Tweed, Hadley & McCloy LLP
Evangeline Wyche Tross
The Prudential Insurance Company of America
1. In addition, the rules may affect our clients as issuers of securities. Consistent with the ACIC's mission, we have not addressed how the many proposals set forth in the Release may affect our clients as issuers.
2. See, e.g., Securities Act Release No. 6806 (Oct. 25, 1988).
3. The staff of the Division of Corporation Finance discussed this issue in American Council of Life Insurance (May 10, 1983), and stated that "insurance companies and similar institutional investors generally should not be deemed underwriters under Section 2(11) with regard to the purchase of large amounts of registered securities provided such securities are acquired in the ordinary course of business from the issuer or underwriter of those securities and have no arrangement with any person to participate in the distribution of such securities." We believe that the Release provides an excellent opportunity for the Commission to clarify this standard with a brighter-line test and provide more certainty to institutional investors.
4. Although we take no position on the exclusion of dealers from QIB-only offerings on Form B, we observe that the exclusion may create substantial practical difficulties in an underwritten QIB-only offering. The plan of distribution may contemplate sales by an underwriter, who may engage a selling group. The selling group, in turn, might then wish to sell to QIBs through dealers. This should be permitted, since presumably (as is currently the case in underwritten public offerings) the details of the distribution plan would be disclosed in the prospectus. However, it may be difficult or impossible to distinguish between a dealer who acts as part of a selling group (presumably permitted) from one who acts as a purchaser (not permitted), particularly where a selling group dealer may retain an unsold portion of its allotment.
5. Exxon Capital Holdings Corp. (May 13, 1988). See, e.g., Brown & Wood, LLP (Feb. 7, 1997); Mary Kay Cosmetics, Inc. (June 5, 1991); and Morgan Stanley & Co., Inc. (Mar. 27, 1991).
6. In re Activision Securities Litigation, 621 F. Supp. 415 (N.D. Cal. 1985); McFarland v. Memorex Corp., 493 F. Supp. 631 (N.D. Cal. 1980).