June 30, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attn: Mr. Jonathan G. Katz
Re: The Regulation of Securities Offerings (File No. S7-30-98)
Ladies and Gentlemen:
On behalf of Merrill Lynch & Co., Inc. ("ML&Co.") and its subsidiaries (collectively "Merrill Lynch"), including Merrill Lynch, Pierce, Fenner & Smith Incorporated, we are pleased to submit this letter in response to the Commission's request for comments on The Regulation of Securities Offerings, Release No. 33-7606 (November 3, 1998) as amended by Release 33-7606A (November 13, 1998). We note that we do not attempt to address every detail of this vast proposal. Instead we have focused on the areas of greatest interest and concern to Merrill Lynch.
As we noted in our response to the Securities Act Concept Release in the fall of 1996, Merrill Lynch is intensely interested in the Commission's efforts to modernize the regulatory framework applicable to the origination and distribution of securities. In advising our investment banking clients, we routinely consider this regulatory framework in forming recommendations on how best to access U.S. and global capital markets. This analysis requires an assessment of which markets to access, how quickly a transaction can be completed, what the disclosure documents will contain, how a transaction will be marketed and whether retail as well as institutional investors should be included in the distribution. Underwriter and issuer liability concerns also affect aspects of an offering, impacting underwriting spreads, legal expenses, and the competitive environment.
We also have a strong interest in ensuring that our institutional and retail customers have access to the broadest range of suitable investments in an increasingly global market place, and that customers receive information regarding investment opportunities in a form and manner that suits their needs. We have an internationally recognized global research franchise that is dedicated to providing coverage of a broad spectrum of issuers and products, and therefore want to make sure that the views of our analysts reach our clients with limited interruption. In addition, our Asset Management Group is a major institutional investor in its own right on behalf of our mutual fund families and managed accounts, and therefore has its own informational, liquidity and market access needs to consider.
Finally, ML&Co., as a large public company, is also a major issuer of securities. In light of the capital-intensive nature of our businesses, we raise billions of dollars each year through securities offerings in U.S. and foreign markets to satisfy our funding requirements. We are therefore keenly aware that prompt and accurate disclosure of material information is essential to market liquidity and investor confidence, and we support initiatives that will improve the availability and quality of information in both the primary and secondary markets.
At the outset, we would like to compliment the Commission and its staff on the tremendous commitment and dedication evidenced in this comprehensive proposal. We support the Commission's efforts to streamline the U.S. capital formation process and modernize the federal securities laws. We agree that advances in communications and changes in the capital markets have rendered some long-standing securities law principles outdated and counterproductive. We look forward to continuing to work with the Commission on developing a system that reflects the realities of the information age and appropriately balances the Commission's twin goals of efficient capital formation and investor protection.
However, after careful consideration, it is our view that the Aircraft Carrier falls short of these goals, because it introduces certain regulatory approaches that we believe will have a negative impact on the U.S. capital markets. These proposals will increase costs for issuers, financial intermediaries and investors, cause delays and increase market risk in virtually every type of securities offering, and eliminate highly successful and well established financing methods. These negative effects on the U.S. capital markets do not appear to be balanced by meaningful investor protections.
We believe that these proposals, if adopted, will be perceived as increasing regulation of the U.S. capital markets at a critical time. Global competition for capital has never been more intense. In the wake of currency unification, the European markets provide an increasingly attractive source of capital to a broader category of issuers and for a broader spectrum of financial products. In short, we fear that these proposals may encourage domestic and foreign issuers to turn more often to foreign markets, foreign financial intermediaries and private capital sources for their financing needs. Such a shift to offshore and private markets would in turn adversely affect U.S. investors. They would be unable to take advantage of investment opportunities when they are first offered and would have less information about these investments when they become available in the secondary markets.
In addition, while the Commission has clearly taken pains to draft proposals designed to encourage the free flow of information, it has underestimated the impact of negligence-based Securities Act liabilities on the behavior of market participants. The costs associated with conducting a reasonable investigation of prospectus disclosure are substantial, but we believe they are justified by the need to create a single complete and accurate disclosure record. Under the Aircraft Carrier, however, issuers and underwriters would have to accept negligence-based liability for a vast and hard to identify universe of non-prospectus communications, including research. Market participants will be faced with the choice of creating and implementing a costly new due diligence process for these non-prospectus communications (which will likely have a chilling effect on their value and content) or eliminating them altogether. Because of these concerns, we would not expect to see a significant increase in non-prospectus communications. We also believe that the Commission's approach to liability for research is problematic and may actually reduce the amount of research published during offerings.
II. Prospectus Delivery Proposals.
We find the Commission's proposals on preliminary prospectus and term sheet delivery to be among the most problematic aspects of the Release. The Securities Act has never required that a prospectus be delivered to an investor before his or her investment decision. On the other hand, the investor has never been required to show he or she actually read or relied on the prospectus in order to assert Section 11 or Section 12(a)(2) remedies. In light of the pace of the markets today, the notion that each investor must receive a preliminary prospectus in time to consider it for several days (even if the investor considers a shorter time period adequate) is unworkable. The Commission has not introduced any evidence that investors don't have sufficient information when they buy securities or that they are inadequately protected by current liability provisions. If the staff has concerns in this area, it should monitor marketing practices and address them as necessary rather than making preliminary prospectus delivery the cornerstone of its modernization effort.
We note that the Commission's preliminary prospectus and term sheet delivery proposals simply do not work for many types of transactions not involving an underwritten offering. For example, in a registered transaction on a securities exchange, you would not even know who your purchaser is until it is too late to comply. Transactions requiring market-making prospectuses raise similar issues. The delivery requirements would also be impractical for transactions with investment managers and others acting on behalf of sub-accounts which are often not identified until closer to settlement.
Investor confidence in today's U.S. capital markets rests on two pillars -- access to continuously updated issuer information and accountability for its accuracy. The U.S. markets are characterized by a strong commitment to full and fair disclosure. This commitment is reinforced by vigorous SEC enforcement and civil liabilities that support private claims for disclosure failures. The U.S. markets also have a strong tradition of innovation. Over the years, the Commission has recognized the importance of promoting efficiency in the capital raising process and providing issuers with the means to access the public markets quickly and easily. This approach has reflected an acceptance of the notion that mandated Exchange Act disclosure is rapidly absorbed into the market, digested by market professionals, and broadly disseminated. It also recognizes that disclosure about the details of a security, and the decision whether to convey those details orally or in a preliminary prospectus, is market driven.
Access to information about companies and offerings is better now than it has ever been and will continue to improve. We support the notion that all material company-related information should be available to investors before an investment decision is made. However, we believe that the best way to accomplish that goal is to require issuers to make such information available to investors through Exchange Act filings prior to a securities offering rather than by requiring physical delivery. We believe the SEC should take a meaningful forward-looking approach that encourages the use of new technologies and focuses on increasing the speed of dissemination of information to the markets rather than focusing on delivery of information, in whatever form, to participants in particular transactions. This might be an appropriate area of study for the SEC's recently announced Advisory Committee on Technology.
B. Form A Issuers - 3- and 7-day Requirements
We think the benefits of the preliminary prospectus delivery proposals as they relate to Form A issuers are substantially outweighed by the costs. The Securities Act has never mandated a fixed time period for preliminary prospectus delivery. Oddly, there would seem to be less need for it today, since preliminary prospectuses are available through EDGAR shortly after the registration statement is filed. We believe that the proposed 3- and 7-day preliminary prospectus delivery requirements for offerings on Form A can be expected to have a number of adverse affects, including (i) exclusion of investors who become interested in a deal close to pricing, (ii) reduced demand which may result in lower pricing or poor aftermarket performance, and (iii) creation of a bias toward eliminating or limiting retail participation.
These proposals do not take into account the practical realities of the bookbuilding process. In the course of a typical 7-day marketing period for an IPO or add-on public offering, most of the demand develops in the last couple of days. This is in part due to practical limitations on the buy side. According to Securities Data Co., there have been more than 1,000 equity and equity-linked new issues in each of the last six years. The competition for the attention of the institutional buy side is intense. As a result, the most significant buyers of equities have a very narrow window in which to focus on a transaction. Although lead underwriters make an effort to identify likely participants when the offering is launched, and these participants receive preliminary prospectuses early, it is not uncommon for other institutions to express interest later in the marketing period. Under the proposed rules, these potential investors would have to be turned away due to the arbitrary delivery deadline, or the offering would have to be extended. The latter approach is unlikely, because investors tend to lose interest when an offering is delayed. Either approach could adversely affect the pricing and threaten the success of the offering.
In addition, retail "retention" allocations are often made closer to pricing. Retail syndicate departments typically send copies of the preliminary prospectus to branch offices as soon as it is available. The branches then develop a list of clients that may be interested based on their past investment history. The branches call clients and forward preliminary prospectuses only after the firm's retention allocation has been determined and each office has been provided with its estimated allocation. We are very concerned that these proposals will bias issuers and lead managers towards excluding retail participation altogether. When retail investors are included, the firms involved will be faced with unacceptable alternatives. Firms like Merrill Lynch will have to choose between blanketing the retail system with prospectuses (which is costly, unappealing to issuers, and would likely result in unhappy customers when only a small fraction of the resulting demand is satisfied) or creating a smaller class of "preferred" retail customers that receive preliminary prospectuses in all cases.
We think the 3- and 7-day delivery proposals represent extreme departures from existing norms and will negatively affect IPOs and equity offerings for unseasoned issuers. We continue to oppose regulatory speed bumps in the offering process. These proposals are even worse than speed bumps because they would actually operate to limit the universe of buyers that can participate in an offering and penalize issuers for increasing the size of a deal. Simple adjustments to the approach like a de minimis threshold will not solve this problem because it is impossible to predict how many investors will come in late or the amount of their investments. Late comers have made and will continue to make the difference between successful deals and failed offerings. We believe the Commission should not adopt a system that potentially excludes investors and elevates failure to deliver a preliminary prospectus to a Section 5 violation. We believe that the approach under Rule 15c2-8 is adequate to protect investors in initial public offerings and that the current 48-hour time period is appropriate. If the Commission believes there are areas where abuses are perceived, it should consider a cautious extension of that rule.
C. Form B Issuers - Term Sheet Delivery
Many of the Aircraft Carrier proposals demonstrate the Commission's continued confidence in the integrated disclosure system and stress the importance of Exchange Act disclosures as the primary means of informing investors about a company. For this reason, we believe the Commission's focus on a term sheet delivery requirement for Form B issuers is misplaced. This requirement can only be directed at the security description. In our view, the important features of most debt and equity securities are easily described orally by reference to a handful of commonly understood features such as price, coupon, maturity and call features. A blanket requirement for term sheet or preliminary prospectus delivery is likely to raise costs and increase risks for issuers and underwriters without any corresponding benefit in terms of investor protection.
The proposed term sheet delivery requirement represents a dramatic departure from current shelf offering practice. It introduces an unknown delay, from a couple of hours to a day or more, into offerings that can currently be marketed and sold instantaneously. This delay will expose issuers to undesirable market risk and may result in less favorable pricing or failed offerings because of the inability to access brief market windows. We believe this requirement would add little in the way of investor protection but will be perceived as a major regulatory obstacle to financing and will encourage issuers to look for alternatives to the U.S. public markets. We also believe that the delivery requirement may cause issuers and underwriters to exclude retail investors from many offerings because of the added risk, cost and timing constraints.
This proposal would have a negative impact on the enormous U.S. public market for investment grade debt and medium-term notes. These securities are often highly standardized and can be quickly and easily marketed orally by communicating a handful of deal specific terms. In many cases, medium-term notes are sold based on reverse inquiries where the investor is looking for a note with specific terms from an issuer with a particular credit rating. No benefit would be derived from delaying an offering by requiring delivery of a writing that conveys no new information. The costs to issuers, on the other hand, resulting from this delay could be huge, given the volatility of interest rates and credit spreads and the enormous size of many debt offerings.
Similarly, this proposal would adversely affect offerings of publicly traded common stocks. The terms of the security are not at issue, and the same investors participating in the offering could as easily purchase the securities in the open market. It is difficult to imagine what practical value a term sheet could have for this type of offering. However, the market risk associated with delay could be enormous. The percentage of trading days that the S&P 500 had trading swings of more than 1% has risen from 15% in 1993 to 69% in 1998 and 89.2% in the first 120 days of 1999. Volatility will continue to put pressure on issuers, underwriters and investors to compress execution timetables.
The term sheet delivery requirement could also severely curtail the use of a growing financing technique for issuers and selling shareholders of large liquid stocks - the competitive equity block trade. In these transactions, bids are taken after the market close and the winning bidder is generally informed at 4:30 p.m. or later. The winner bears the market risk on the stock without any pre-marketing, so any delay in the re-offer process is potentially disastrous as buy-side traders and portfolio managers start to leave for the day. Even a one-hour delay could result in the winning bidder taking overnight risk on the stock.
In short, any perceived benefit from a term-sheet delivery requirement is outweighed by the disruptive effect it would have on the U.S. capital markets. The need for a preliminary prospectus or prospectus supplement in complicated convertible instruments and other complex securities or transactions is market driven. More often than not, underwriters need, and investors expect, a preliminary prospectus in order for this type of deal to be successful. We believe the Commission should consider making term sheet delivery permissible, but not mandated, for Form B issuers. This would allow underwriters to provide a written term sheet in situations where investors could benefit from it, without disrupting the timing of the offering.
It has been suggested that the term sheet delivery requirement might be appropriate for new security types on the theory that a preliminary prospectus would be used in any event. We would support that approach only if the universe of products not subject to a delivery requirement was clearly and objectively defined and continuously updated. An ambiguous "novel and unique" comment like the one applied for staff review of shelf takedowns would be unworkable, particularly if a decision not to use a term sheet could be determined in hindsight to be a Section 5 violation. In any event, we believe any such term sheet delivery requirement should be structured as a best efforts obligation like Rule 15c2-8.
D. Final Prospectus Delivery Exemption
We strongly support an exemption for final prospectus delivery, even in cases where no preliminary prospectus is delivered. Although we believe many investors will continue to request prospectuses for their records, we think that compressed settlement cycles and technological changes affecting settlement will continue to put increasing pressure on the requirement that the final prospectus accompany or precede the confirmation of sale. At a minimum, the Commission should de-couple the final prospectus delivery requirement from the confirmation process.
E. Aftermarket Prospectus Delivery
We believe the proposal to extend aftermarket prospectus delivery needs more careful consideration. We do not believe that secondary market investors are negatively affected by existing exemptions from aftermarket prospectus delivery requirements because, in practice, securities litigation settlements don't distinguish between liability under Section 11, 12(a)(2) and 10(b)(5) and generally cover all purchasers of the offered securities through the date the disclosure is corrected. Further, the underwriters' aftermarket activities referred to in the release don't really justify this initiative. The exercise of the green shoe and open-market short covering transactions never involve new sales; instead they are purchases used to cover the underwriters' over-allotment -- extra shares sold at the outset of the offering which have already been confirmed with final prospectuses.
The impact of this proposal goes beyond equalizing remedies for primary and secondary market participants. Since prospectus delivery is required, the proposal would give rise to Section 5 and prospectus liability concerns for research during the aftermarket period. Also, the proposal does not address the question of updating the prospectus, which could result in substantial costs to issuers, especially if they come to market frequently.
F. Repeal of Rule 153
We disagree with the assertion that Rule 153 serves no useful purpose. It is frequently relied on by secondary sellers in non-underwritten transactions and in other situations where restricted or control stock is sold into existing trading markets pursuant to a resale registration statement. The rule should only be repealed if final rules provide that neither preliminary nor final prospectus delivery is required for these transactions. These exemptions should apply to any transaction that is executed in the ordinary course on a national securities exchange or an automated inter-dealer quotation system.
III. Proposals Affecting the Registration Process.
A. Shelf Registration
The Commission solicits comments on whether there is a continued need for the delayed shelf concept under Form B. We believe that the shelf system exhibits continued vitality without compromising investor protection and should be retained. Like the term-sheet delivery requirement and the "inclusive prospectus", the "file and go" approach proposed in the Release would introduce delays into most transactions currently sold off the shelf and would expose issuers, underwriters and investors to volatility and market risk. These delays would have real costs that are not adequately analyzed in the proposing release. Furthermore, these proposals would severely disrupt several important capital-raising techniques to the detriment of large U.S. companies. They would make investment grade debt offerings more difficult and eradicate medium-term note programs, which currently account for nearly half of all investment grade debt issued in the United States. Similarly, equity block trades for issuers of large liquid stocks would become nearly impossible. We do not believe there is a corresponding benefit to investors that justifies this change.
We believe that shelf registration has important advantages over the Form B proposal. Preparing a base prospectus is not an overly burdensome process and it helps to put everything in good order for a rapid offering. Further, all material information concerning the issuer is filed with the Commission so that the prospectus meets all applicable securities law requirements at the times that the issuer accesses the capital markets under the shelf. As mentioned above, the remaining specific terms of a takedown for most securities are easily conveyed orally. Where more complicated securities are offered off the shelf, a preliminary prospectus supplement is often circulated. For these reasons, we do not believe investors would benefit from a requirement to make a filing contemporaneous with the sale. We also believe that elimination of the shelf procedure is inconsistent with the Commission's stated goal of making offering information available to investors sooner rather than later.
We believe the approach taken in the release would encourage last minute due diligence and document preparation, which in turn increases risks to investors and market intermediaries. We believe the ability to draft documentation in advance rather than in the heat of the offering is more consistent with investor protection. For this reason, we believe it is important to maintain the availability of shelf registration procedures which to some extent alleviate the documentation and due diligence risks associated with compressed execution timetables.
If the Commission has concerns about selective disclosure in the context of shelf takedowns, it should consider requiring the issuer to make a short public announcement and perhaps a prompt 8-K filing (containing the press release) if the offering in question is material to the issuer. We note that most issuers of equity securities off the shelf issue make a public announcement after pricing. We see no reason why issuers would be unwilling to do the same for material takedowns of debt and other securities. This would serve to notify the markets of potentially material developments but preserve the issuer's flexibility to quickly access market windows. If this approach is adopted, failure to file should not affect the validity of the offering or trigger a Section 5 violation given the subjectivity of the materiality determination.
We oppose the proposed Form B disqualification for "failure to cooperate in good faith" with the Commission's selective review system for Exchange Act reports. This effectively eliminates the benefits of no review and automatic effectiveness. Under the shelf system, issuers whose Exchange Act filings are the subject of staff review can consider the nature of the comments and decide to go forward with an offering prior to resolving them. Given the risks of subsequent changes to these incorporated documents, this decision is only made upon a careful evaluation of materiality. The proposed Form B disqualification implies the continued possibility of regulatory delay, which increases the attractiveness of private placements and other alternatives to registration.
We also oppose the proposed disqualification for past "abuses" of the federal securities laws by underwriters and issuers. This is a draconian provision that is inadequately related to the reasons underlying short form eligibility. In our opinion, the Commission currently has adequate means to enforce the federal securities laws and this new provision would create an unfair advantage with respect to settlement discussions in litigation or enforcement proceedings.
The Form B disqualification approach is also unworkable because of the drastic consequences of filing on the wrong form. If an issuer believes in good faith that it is eligible for Form B but is later found to have been subject to a disqualifying event, all investors could have potential rescission rights under Section 12(a)(1) of the Securities Act - unrelated to any defect in disclosure or otherwise related to the offering - against not only the issuer, but also against selling underwriters and dealers. This is not a risk that issuers and offering participants should be required to bear, and it is not obvious why such a result is necessary for investor protection.
While we understand the Commission's concern about the role of Rule 401(g) under the Securities Act in light of the proposals to allow effectiveness on demand, we believe Rule 401(g) should be retained because of the importance of a bright line test where Section 5 liability is involved. Retaining Rule 401(g) would not interfere with the Commission's ability to bring an administrative proceeding against an issuer that registers on the incorrect form.
C. Secondary Offerings
We oppose the proposal to eliminate automatic short-form eligibility for secondary offerings. We view this as a major step backwards. There has been an explosion of M&A activity in the past two decades and, to a large extent, the currency of these deals has been stock. The proposed change may negatively affect target companies' willingness to accept stock as consideration, which may in turn negatively affect shareholder value.
Many secondary registration statements are open-ended shelfs for sales effected through stock exchanges where long-form registration would add nothing in terms of investor protection. In addition, this proposal, coupled with the proposal to eliminate Exxon Capital exchange offers, could have a significant adverse impact on high yield offerings for unseasoned issuers, who would have to meet registration rights with a continuously updated long-form prospectus. We therefore urge the Commission to retain automatic short-form eligibility for purely secondary offerings.
D. Exxon Capital/QIB-Only Offerings
The use of private placements pursuant to Rule 144A and a follow-on registered exchange offer under the "Exxon Capital" line of no-action letters has become an important method of raising capital in the United States for high yield issuers and foreign companies. The Rule 144A marketplace has become efficient and cost effective and is dominated by institutional investors and traders. The exchange process has proven extremely effective and there is no evidence of abuse or harm to investors.
Eliminating the benefit of free marketability through registered exchange offers would significantly disrupt an efficient source of financing and force many issuers to choose between the delays associated with full review under Form A and a private placement followed by a traditional resale prospectus. As mentioned above, this proposal is made more onerous for these issuers by the related proposal to eliminate automatic short-form eligibility for secondary offerings.
Moreover, the proposals will affect the liquidity of this market because certain institutions have "baskets" or limits on the aggregate amount of restricted securities they can hold. Private placements that are followed in short order by registered exchange offers address institutional investors' basket limitations while providing speedy access to capital for issuers and pricing on parity with publicly registered deals. In contrast, traditional private offerings followed by evergreen resale shelf registrations are less attractive for investors. Under this approach the investor may use up basket availability while running the risk that it may not be able to sell at the desired time because of a company imposed blackout.
The proposal to permit QIB-only offerings on Form B is an inadequate substitute for Exxon Capital. As proposed, availability of this approach would be limited to seasoned issuers. All others would be relegated to effecting a private placement followed by a shelf registration on Form A. In the last few years, a substantial percentage of high yield offerings utilizing Exxon Capital exchange offers have been made by private companies. These issuers, and the active high yield market that surrounds acquisition financing, would be severely impacted by these proposals. We believe many of these issuers would be forced to consider alternatives to high yield offerings as a result. In light of these factors, Exxon Capital should be preserved.
We think the QIB-only approach in Form B would have great appeal to eligible issuers that could avoid the potential delay associated with staff review as well as the costs associated with the two-step Exxon Capital procedure. However, we cannot endorse it as a substitute for Exxon Capital because it would exclude unseasoned issuers and non-QIB accredited investors that have access to these types of offerings today. Also, the conduit concept referred to in the release threatens the return of the "presumptive underwriter" doctrine which will alarm investors, making these offerings difficult, if not impossible, to sell.
If the Commission wishes to encourage more registered offerings, it should consider adopting the QIB-only approach on a voluntary basis, not as a substitute for Exxon Capital. In doing so, we think the Commission should refine its approach. The conduit concept should be eliminated because it is inconsistent with ordinary trading patterns. Invariably, some investors sell securities back to the lead manager in the days following an offering. A requirement that the securities "come to rest" in the hands of the original purchasers will be unworkable. We also believe the proposal inappropriately blends public and private offering concepts. A restriction on general solicitation seems out of place in a registered transaction subject to purchaser restrictions. Finally, liquidity of QIB-only offerings will be adversely affected by removing dealers and investment advisors from the universe of eligible QIBs. This seems unnecessary and would negatively affect the outcome of these offerings, as many high yield funds are managed by investment advisors.
The Commission also solicits comment generally on whether the definition of QIB should be amended to reflect inflation and increases in market value. We oppose this change and believe it will adversely affect the liquidity of the Rule 144A market. We continue to believe that the exceptional performance of the Rule 144A market justifies lowering the threshold. We have not observed any notable degradation in the quality or sophistication of QIB accounts. As we have stated in past letters, we also believe that the eligible investor categories should be expanded to include those categories of "qualified purchasers" that Congress concluded were sophisticated enough to fend for themselves in offerings of investment companies exempt from registration under the Investment Company Act of 1940.
Finally, irrespective of the Commission's approach on Exxon Capital, we believe the Vitro line of no-action letters should be preserved so that foreign issuers may continue to use Rule 144A as a stepping stone to becoming a U.S. reporting company. We do not believe the elimination of this procedure will encourage an increase in registration by foreign issuers. They are more likely to abandon the U.S. markets altogether.
E. Market-Making Prospectuses
We believe that market-making transactions should be exempt from the registration requirements entirely, as recommended by the SEC's Task Force on Disclosure Simplification in 1996.
As the release itself notes, most buyers have made their investment decisions before contact with the market-maker. Furthermore, market-making activities are undertaken by firms' trading personnel who are walled off from any non-public information about the issuer. Finally, most broker-dealers are prohibited from trading their own equity securities by NYSE Rule 312(g). Accordingly, the market-making prospectuses are generally used only for debt securities, which are affected more by ratings and interest rates than day-to-day corporate events.
F. Foreign Government and Private Issuers
We believe that some of the Commission's proposals will negatively affect the willingness of foreign issuers to access the U.S. capital markets. Foreign markets are becoming increasingly broad and liquid, and we believe that many of the Commission's proposals will increase the regulatory hurdles associated with raising capital in the United States. The Commission also proposes to add a $1 million U.S. ADTV test for Form B eligibility. If the test is limited to U.S. trading volume, it could result in more foreign issuers losing short-form eligibility than U.S. issuers.
We also disagree with the Commission's proposal to accelerate the filing of annual reports on Form 20-F. This would be a significant burden on issuers that must reconcile their financials to U.S. GAAP.
Finally, in keeping with the goal of making more information available to investors, we support the Commission's efforts to simplify the EDGAR filing process so that foreign issuers will be encouraged to submit SEC filings through EDGAR.
G. Asset-Backed Securities
We understand that the Committee on the Federal Regulation of Securities of the Section of Business Law of the American Bar Association ("ABA") will be including in their comment letter Model Rules, Regulations, and Forms for Asset Backed Securities. We have reviewed a draft of these proposals and endorse the views expressed therein. We believe that the ABA has taken a reasonable and practical approach to accomplishing the Commission's stated intention of modifying the current disclosure scheme to recognize the significant differences of asset-backed securities from equity and debt, and the need to eliminate the current approach of addressing issues on a case by case basis, through no-action letters, exemptive orders and interpretive releases.
We further suggest that the Commission address the ability of broker-dealers to publish and distribute research reports in reliance on the research safe harbors provided by the Securities Act in the context of asset-backed offerings without looking to "seasoning" or other standards not meaningful in the asset-backed securities area. ABS issuing vehicles are specifically designed to avoid prior activity or history in order to isolate them from the related credit issues.
ABS market participants often retain third party vendors as trustees and as servicers to prepare and file Exchange Act reports. Accordingly, an issuer's eligibility to file a new shelf registration application (or to designate effectiveness of ABS offerings if an alternative filing system is ultimately adopted) should not be dependent upon the timeliness of these contract service providers in filing the Exchange Act reports for the various trusts.
We further request that the no-action letters that have been provided to various ABS issuers over the years addressing compliance with the Exchange Act's reporting requirements be codified. To encourage issuers not to de-register an ABS securities issuance, we suggest that such information not carry with it Exchange Act liability. Indeed, this information for ABS transactions is routinely processed entirely by intermediaries such as servicers or trustees and is not comparable to information filed by other reporting companies.
IV. Communications During the Offering Process.
A. Bright Lines for Gun Jumping
We support the Commission's efforts to deregulate offers and increase the flow of information to the investing public in connection with the sale of securities. We also support the creation of bright-line rules in this area. The proposed safe harbor in Rule 167 would enable offering participants to conclude definitively that communications that occurred before a specific date will not be considered an illegal offer, an illegal prospectus or a communication subject to negligence-based liability under the securities laws. This is a step in the right direction.
However, we believe the Commission should reconsider the proposed requirement that offering participants take all reasonable steps within their control to prevent "further distribution or republication" of communications originally made before commencement of the offering period is impractical. In most cases, communications, once issued are irretrievable. Legitimate communications issued in the ordinary course should not take on a patina of liability solely because, in this case, the exact same communication is available at a time when the issuer is attempting to raise capital.
We also support the concept reflected in proposed Rule 166, namely that pre-filing offers should be permitted in the context of Form B offerings. However, we believe the current proposal will lead to difficult questions concerning when the "first offer" occurs. Uncertainty under Section 5 often has a chilling effect on issuer communications. It appears that the purpose of defining offering period is primarily to give effect to the Form B filing requirements for free writing. As discussed below, we think the proposed filing requirements for non-prospectus communications during the offering period should be eliminated entirely. With that modification, defining the "offering period" for Form B offerings becomes less critical, provided that the liability issues for research are adequately resolved. Nonetheless, we believe an objective standard like the pricing date should be used as the reference point for the offering period.
B. Inclusive Prospectus-Free Writing
We believe the inclusive prospectus concept is overly broad and would have a major chilling effect on non-prospectus communications during the offering period. It would impose prospectus liability on all offering participants for a host of previously unregulated communications that have not had the due diligence vetting that is traditionally applied to prospectuses.
Because the proposal takes such a broad approach to prospectus liability, it will chill rather than encourage communication during the offering period. Underwriters will not allow information to be included in the prospectus unless they have had an opportunity to perform adequate due diligence on this information. Issuers will be forced to limit the information they disseminate publicly and to police information released by others. Because of concerns about cross liability and the potential for draconian rescission remedies under Section 12(a)(1) for violations of filing requirements, offering participants will likely covenant not to prepare any offering or other written materials during the offering period. Furthermore, issuers will be forced to consult securities lawyers about all manner of public communications and to make difficult subjective determinations about what is offering information, free writing and ordinary business communications. This will be especially burdensome for frequent issuers, who will be forced to examine all communications all of the time. The resulting effect will be to reduce the ability of issuers to quickly access the capital markets and their desire to do so by means of a publicly registered transaction.
In addition, the inclusive prospectus coupled with the proposed filing requirements would greatly expand the materials available for plaintiff's lawyers to sift through. Lawsuits will proliferate; many will concern documents and information that investors did not read or rely on. This would increase litigation costs for issuers when Congress clearly intended to limit them in adopting the National Securities Markets Improvement Act of 1996.
The proposed filing requirements are unworkable, because they would expose offering participants to liability for the conduct of others and cover all communications disseminated during a "look back" period. The effort necessary to inventory, categorize and file offering and free writing materials would be enormous. The implications for road show presentations that have in the past been treated as oral communications are also highly problematic. A requirement that these presentations be filed with the registration statement will either lead to the end of this practice or the equivalent of an oral recitation of the prospectus summary.
If the proposal is adopted in its current form, we expect that issuers and lead managers will prohibit the use of most written materials during securities offerings. In other words, the statutory prospectus would continue to be the only disclosure document and investors would receive no additional information. While we recognize that the Commission hopes to reduce "selective disclosure" by requiring all offering and free writing materials to be filed, we believe the proposal will have the opposite effect, forcing issuers and underwriters to rely more heavily on oral communications with selected institutions in one-on-one meetings and conference calls.
We support the Commission's efforts to loosen restrictions on communications during the offering period, but urge it to take a much more practical approach. Instead of an "inclusive prospectus" concept, the Commission should adopt a "non-exclusive" prospectus concept, providing for pre-effective and, where appropriate, pre-filing relief from Section 5 for all written communications. For the reasons outlined above, these writings should not have to be filed. Instead they should be treated exactly like post-effective free writing. From a liability perspective, they would generally be subject to antifraud liability, and to the extent they met the statutory definition of prospectus, they would also be subject to prospectus liability. We believe this is the best way to reconcile the securities laws with the information age. Any attempt to require that offering participants collect, file and accept prospectus liability on a vast universe of written materials will not have the intended effect of increasing the availability of information.
We support the Commission's efforts to remove regulatory obstacles to the publication of research as evidenced by proposed Rules 165, 166 and 167 and the proposed revisions to Rules 137, 138 and 139. The Commission correctly recognizes the tension that exists between the value placed by market participants on independent and timely securities research and the securities laws provisions that currently motivate investment banks to restrict the availability of research precisely when it is most needed. We support the Commission's goal to permit this valuable information to be made available to investors and to help level the playing field with existing practices in many offshore markets. We acknowledge and appreciate that the Commission has attempted to accommodate our comments on the Concept Release about regulatory limitations on the publication of research. Unfortunately, we believe the benefits of these proposals are severely undermined by the Commission's stated approach to liability for research published during specified offering periods.
The proposals would permit research during offerings in all but very limited circumstances on the basis that it is a legal non-conforming prospectus. Similarly, the proposal specifically removes the references to Section 2(10) in the proposed safe harbors, ostensibly for the same reason. The Commission has apparently concluded that all research issued or available during a defined offering period should be subject to prospectus liability under Section 12(a)(2). While we understand the Commission's investor protection concerns, we believe that imposing a fact-oriented, negligence-based liability standard on research will continue to discourage firms with investment banking and research divisions from permitting research coverage to continue during an offering (or to limit significantly the content of such research). This aspect of the proposals would represent a step backwards because it would specifically provide for a higher liability standard for continuing research that springs into existence whenever the firm assumes an underwriting assignment. In many cases, this liability would be unavoidable because of the impracticality of pulling back research issued during the look-back period. Furthermore, equity research on companies with an active debt shelf would be legal, but subject to nearly continuous prospectus liability.
We acknowledge the Commission's concern that research may be used to inappropriately "hype" an offering. However, we believe that a research analyst's reputation and credibility, and that of his or her firm, is based in substantial part on the ability to express an objective view - over a period of time - on an issuer and the potential performance of a particular security. Indeed, the Release notes that "[w]here analysts are acting independently and objectively, investors gain from the publication of their insights." We would suggest that market forces, such as the importance of an analyst's reputation with investors and a firm's interest in protecting the independence of its research department help to control the risk that research is used as nothing more than a means to "puff" a particular securities transaction. Research reports themselves are required to have a basis that can be substantiated as reasonable and must disclose specified sources of potential bias, as well as other facts that would be material to the investors, including the existence of potential conflicts of interest. We also would like to point out that under NYSE Rule 472, supervisory analysts meeting specified NYSE criteria regarding training, experience and character must approve research reports and confirm the reasonable basis for the opinions expressed therein.
The primary function of research at Merrill Lynch is to provide proprietary analytical information to our brokerage clients and provide a basis for recommendations to institutional and retail customers. The importance of this function can not be overstated, and Merrill Lynch takes pains to maintain the integrity and independence of its research department. The fact that a reporting company that is followed by Merrill Lynch research has decided to access the capital markets with the help of the firm should not transform a research piece from an valuable source of investor information to a substitute statutory prospectus.
A research analyst's views are inherently opinions, not facts. An analyst needs to be free to comment as he or she sees fit, reflecting an enthusiasm or negativity that draws on experience with a market sector, views about the economy, the analyst's own models and assumptions, and other factors external to the factual data regarding the company that is set forth in a prospectus. These views cannot be subject to the same type of sentence by sentence due diligence that is used to verify a prospectus.
We believe the antifraud provisions of the securities laws provide an appropriate liability framework for ordinary course research, whether or not the analyst's firm is participating in a securities offering. Any higher standard would, we believe, undermine the Commission's goal of increasing the availability of research opinions during this critical period. We therefore urge the Commission to expressly exempt research that satisfies one of the safe harbors in Rule 137, 138 or 139 from the definition of prospectus and related liability under Section 12(a)(2). We believe this will substantially increase the amount of ordinary course research available during securities offerings. The publication of research outside of the safe harbors should also be permitted, but firms that publish it would have to accept the risk that such research could be subjected to a higher standard of liability.
B. Comments on Proposed Safe Harbors
The following specific comments on the proposed revisions to the research safe harbors are qualified by the discussion above. We believe all of the safe harbors should specifically exempt qualifying research from the definition of prospectus and related liability under Section 12(a)(2).
We support the Commission's proposal to extend Rule 137 to non-reporting companies with the exceptions proposed and to delete the "regular course of business" condition. However, we suggest that the Commission clarify that non-participating dealers may continue to publish research before, during and after an initial public offering of the issuer's securities without the need to deliver a final prospectus along with the research report. We do not believe that the Commission needs to impose minimum qualifications or other standards given that research analysts are registered with, and subject to standards imposed by, the SROs.
We agree that Rule 138 should be expanded to cover all U.S. reporting issuers and certain foreign private issuers. The basis for this safe harbor is that research reports on debt have little relevance to equity buyers and vice versa. This notion is unaffected by an issuer's reporting history.
We do not support the requirement that the primary market for an issuer's equity securities be a Designated Offshore Securities Market ("DOSM") as defined in Regulation S. We do not think this factor is meaningfully related to the availability of Rule 138. We believe research on foreign private issuers that would satisfy the public float and/or public float plus ADTV thresholds of Form B should be covered by this safe harbor.
We suggest the Commission clarify that the requirement that the research be published and distributed in the ordinary course of business does not contemplate a "track record" on a given issuer's securities but rather that the dealer be in the business of regularly publishing research on debt and equity securities in general. Given that the premise of the rule is that a research report on an issuer's equity securities generally does not induce a reasonable investor to purchase the same issuer's debt securities, we do not believe a "track record" on coverage of the equity securities is meaningful.
We do not support the requirement of prominent disclosure of the underwriters' involvement in the offering especially in light of the practical difficulties of complying with this requirement in advance of the announcement of a transaction, the problems associated with the possible requirement to retroactively apply this disclosure to outstanding reports and the consequence that failure to comply would lead to a violation of Section 5. We believe that the mechanical burden of compliance with this requirement outweighs any benefits especially in light of the premise of Rule 138. In addition, we believe the NYSE rule requiring disclosure of a broker-dealer's participation in recent public offerings should highlight any potential for conflict of interest during the course of announced offerings.
Rule 139 Focused Reports
We support the proposal to allow focused reports in offerings of any type of securities by any size issuer provided the issuer has a one-year reporting history. In addition, we also support the extension of this proposal to specified foreign private and government issuers. We believe this approach to be justified by the level of public information available about these issuers. We would also support the elimination of the "reasonable regularity" test because we believe distribution in the ordinary course through ordinary channels should be sufficient protection. Research that is published on a continuous basis and containing opinions subject to a "reasonable basis" standard should not be re-characterized solely because the analyst's firm is engaged in underwriting securities which are the subject of the research report.
As indicated above, we do not support the requirement of prominent disclosure of the underwriters' involvement in the offering especially in light of the practical difficulties of complying with this requirement and the consequence that failure to comply would lead to a violation of Section 5. We believe that the mechanical burden of compliance with this requirement outweighs any arguable benefits of this requirement.
We acknowledge the Commission's concern about the use of focused research reports in the context of initial registered offerings. We also concur with the Commission's observation that this type of research is commonly available in offshore markets and a disparity exists between the type of information available to investors residing outside the United States and in the United States based on regulatory and liability concerns. As mentioned above, we believe the publication of research outside of the safe harbors should be permitted, but firms that publish it would have to accept the risk that such research could be subjected to a higher standard of liability. However, we do not believe that research published outside the safe harbors should be subject to filing requirements. Research is a valuable proprietary product which firms should be entitled to restrict to customers.
Rule 139 Industry Related Reports
We support the extension of the industry report exemption to all issuers and the deletion of the "no more favorable recommendation" requirement. We also suggest that the Commission revisit the need for the condition that the opinion be given "no materially greater space or prominence" than that given to other securities. We think the requirement to include previously published opinions or recommendations should only be applicable in circumstances where the opinion or recommendation is being changed in connection with the publication of the industry report or substantially at the same time as an offering.
We applaud the clarification of the Rule 144A and Regulation S practice that research published in accordance with Rules 138 and 139 should not be construed as directed selling efforts or a general solicitation which could lead to Section 5 violations. We strongly support the codification of this approach in these rules and note that clarity on this point has already led to the release of research which may otherwise have been viewed as prohibited by the conditions of Rule 144A and Regulation S. We do not believe, however, that a "reasonable regularity" standard should be applied to unregistered offerings if this requirement is removed from Rules 138 and 139 as they apply to registered offerings.
Research and Proxy Solicitation
We support the codification of the Staff's position that publication of research covered by Rules 138 and 139 is permitted in connection with a registered securities offering subject to the proxy rules. Given the disclosure requirements of the proxy rules, we feel this approach should be extended to cash mergers and other transactions that are subject to the proxy rules but involving no registration of securities under the Securities Act. As proposed, the codification of the Merrill Lynch letter would not extend the safe harbor for research to cash mergers because they are not required to be registered. We do not believe the distinction is required for the protection of investors.
VI. Due Diligence and Underwriters' Liability.
The expansion of Rule 176 to include Section 12(a)(2) is a decided improvement. However, consistent with the views expressed in our comment letter on the Securities Act Concept Release, we continue to believe the Commission should provide a safe harbor for underwriters in short form offerings. It is our view that the availability of Rule 176 as a safe harbor will not detract from or negatively affect the quality of an underwriter's due diligence review. Significant business, reputational and risk management concerns will always be a driver for underwriters to conduct due diligence that aids the market in receiving full and fair disclosure.
We do not believe the new guidance in Rule 176 should be limited to offerings that are marketed and priced in fewer than five days or exclude investment grade debt offerings. We believe that the due diligence practices applicable to short form offerings are equally pertinent to investment grade transactions. We are not aware of any material additional due diligence practices that are relevant to such transactions by virtue of the nature of the security or categories of investors which may affect the risk profile or necessary due diligence practice.
We believe that the proposed changes to Rule 176 are similarly relevant to non-expedited offerings. Broadening Rule 176 to such offerings would reflect current due diligence processes in such transactions. There seems to us to be no downside in expanding the coverage. We believe that Rule 176 should acknowledge the realities of the market and expressly provide that the level of due diligence appropriate for a short form offering need not equate to the level of due diligence in an IPO. We think you should explicitly acknowledge this in the Rule.
We do not believe that a report on the issuer's MD&A disclosure or use of a "qualified independent professional" has become an accepted part of due diligence practice. We are not sure that issuers, given existing costs associated with the capital raising process, will be willing to pay for these additional due diligence measures.
VII. Proposals Relating to Exchange Act Disclosure.
A. Risk Factors
The Commission's proposal to require risk factor disclosure in annual and quarterly reports appears, at first, to constitute a simple extension of the requirements under the Securities Act. Particularly in the case of its prospectuses for structured products, ML&Co. includes detailed risk factor information to help investors better understand the effects of economic and market variables on the particular security. In its annual and quarterly reports ML&Co. presently includes a brief, plain English discussion of the context in which our business is conducted and the general factors that may affect the financial markets and our performance. In each case, we have ensured that such disclosure conforms to the SEC's plain English principles.
We do not, however, support the expansion of the risk factor requirement to Exchange Act reports generally. For a well-established company such as ML&Co., with its breadth of products and services and its geographic reach, any such risk factor discussion would be a discourse on the global financial markets. Now more than ever, the average investor has access to a vast amount of information from traditional and Internet sources. Risk factors should only be included to the extent necessary to alert investors to risks particular to the reporting company and then only to the extent required by existing Item 303 (MD&A), which is more than sufficient to ensure that such information is disclosed.
B. Extension of Section 18 Liability
The Commission proposes to extend the applicability of Section 18 of the Exchange Act to Items 1 and 2 of Part I of the 10-Q (i.e., excluding market risk disclosure), which are now presently excluded. Few suits are brought under Section 18 because the plaintiff is required to show that the security was purchased or sold in reliance upon the allegedly false or misleading statement. We believe this change will have little practical effect on the already rigorous diligence of corporate directors and officers and, therefore, do not oppose it.
C. Management Report to Audit Committee
We strongly oppose the proposal to require management to submit to the audit committee, and file with the 10-K, a report describing the procedures followed by the reporting company to ensure compliance with the disclosure obligations under the Exchange Act. There is not a widely adopted set of "best practices" for ensuring that Exchange Act reports comply with the letter and spirit of the regulations. Indeed, the liability exposure under the Exchange Act already ensures that most reporting companies will undertake every effort to develop and implement procedures that have this result - without being exposed to liability based on the nature or description of the procedures themselves. Requiring the disclosure of compliance procedures would likely result in the development of a set of standards deemed "safe" for filing (i.e., boilerplate), but it would not ensure that new or better procedures would be implemented.
D. Proposed Revisions to Form 8-K Requirements
ML&Co. supports the proposal to file unaudited earnings releases on Form 8-K, and has indeed been doing so for some time. However, we believe mandating same day filing would put a burden on issuers without providing a meaningful benefit to investors, as computer access is necessary both to retrieve the EDGAR filing (which is not available on the SEC's website until the next day) and to view real time news releases. In this respect, the widespread use of the Internet has leveled the field significantly for individual and other non-professional investors. We recognize the value of the Internet as a source of information for investors generally, and post our results of operations on our website on the same day of any such release. While same-day 8-K filing may be possible to achieve, the Commission should not impose a requirement shorter than "next business day" given investors' equal access to press release information.
While ML&Co. voluntarily files certain Item 301 information together with its earnings 8-K, we do not support making such filing mandatory. Item 301 requires not only the income statement information but also balance sheet information; for most companies the latter is more burdensome to gather, review and compile. If such information were required to be simultaneously released, many registrants, including ML&Co., would be forced to delay the release of unaudited earnings by several weeks, which would be a net disadvantage to investors. For the reasons discussed elsewhere in this letter, we do not support an acceleration of the filing of the 10-Q and 10-K to 30 and 60 days, respectively, from the end of the relevant fiscal period.
We do not oppose the Commission's proposal to clearly identify events that require an 8-K filing, and indeed believe that any such clarification would ultimately be to the benefit of reporting companies as well as investors. However, in the case of events that are unplanned or unexpected, it would be a disservice to investors to impose on management the requirement to issue a report about the event without allowing management adequate time to assess the event and its consequences. Also, from a purely practical perspective, the filing process makes the same-day target unrealistic.
We support the reduction of the maximum filing deadline from 15 days, and suggest that you consider changing the 8-K filing requirement for all reportable events to the earlier of the business day following issuance of a press release or 5 business days. This will permit reporting companies the opportunity to respond to events while ensuring that all investors receive the information simultaneously.
We do not support the proposed requirement to deliver the Form 8-K to the directors in advance of a filing. As a practical matter, the directors are notified of any event that gives rise to a filing requirement in advance of such filing. However, the preparation of the press release and Form 8-K and the mechanical aspects of releasing and filing such documents, should not be further encumbered by the requirement to deliver drafts to the directors, especially in light of potentially shorter filing periods.
E. Due Dates for Reports
We strongly oppose any acceleration of the due dates for the 10-K and for 10-Qs. We urge the Commission to meet with representative companies in different industries and with varying degrees of product and geographic diversity to develop a better understanding of the burden of building these reports from the bottom up as reporting companies do every quarter. We do not believe that these reports can be prepared with a high degree of accuracy and responsiveness to the disclosure requirements, and be approved by management and the Board, in any less time than is presently permitted.
Not all data collection is automated, and review, testing and analysis of the collected data is a time-consuming process conducted by professionals - not computers. These professionals are already under a great deal of pressure to produce accurate and meaningful reports within the existing filing requirements. The process of collection, review, testing and analysis necessarily must be completed before the written reports and financials are distributed for review to management. Furthermore, the process generally involves a sequential series of reviews by increasingly more senior members of management, until, in the case of the 10-K, the Board of Directors reviews and signs the report, or senior management approves the filing of the 10-Q. These reviews must allow time for evaluation and comment, as well as the time to address such comments. The entire process cannot be completed in the proposed time without reducing the depth of disclosure or requiring companies to significantly increase the staff dedicated to the Exchange Act reporting effort.
F. Signature and Certification Requirements
We are not opposed to the proposed requirement that principal executive officers of the reporting corporation sign quarterly reports on 10-Q, because these individuals are actively involved in the review of quarterly reports. However, we oppose the proposal to require directors to sign Form 10-Q. The preparation of Form 10-Q involves the same rigorous internal review process as the 10-K, yet issuers only have 45 days to file. For this reason, we believe that obtaining signatures from directors in the 10-Q context is unnecessary and burdensome.
We also oppose the proposed new certification requirements that would apply to signatories of Forms 10-K and 10-Q. Currently, board members and senior management review drafts of these forms, but changes may be made up until the day of filing. While major changes would generally be reviewed with senior management and possibly board members, it is generally not the case that they have read the final proof prior to filing. Any other approach would be impractical. We also are concerned that the certification requirements could potentially result in additional personal liability for officers and directors. Officers and directors necessarily rely to a great degree on the corporation's professional staff to perform the functions necessary to produce these reports. We strongly disagree with the Commission's contention that the reports are virtually delegated to staff without management or board oversight. We believe that the potential corporate and personal liability that exists today is a serious inducement for directors and management to exercise a high degree of care in the preparation of periodic reports.
G. Plain English in Exchange Act Reports
In our experience, efforts to comply with the Commission's developing plain English standards have substantially increased the expense associated with registration statement preparation. While we continue to support the "plain English" initiative, we believe it is still too soon in the evolution of this effort to expand the plain English requirements to Exchange Act reports. If the Commission is determined to do so, we respectfully request that any such requirement be voluntary until the Commission publishes a glossary of approved plain English terminology to replace well-accepted financial and other reporting phraseology widely used by most reporting companies.
We share the Commission's vision of a market where more information is available to the investing public around the time of offerings and where regulatory restrictions do not stand in the way of using new communications technologies to their fullest potential. We support the Commission's desire to deregulate offers, permit pre-effective free writing and broaden research safe harbors. We also believe that the Commission's evident willingness to embrace effectiveness on demand, deal decisively with gun jumping and integration issues, and provide exemptions for final prospectus delivery, represent truly positive steps.
However, in our view, the proposed rules should not be adopted in their current form because they raise significant liability issues and will negatively impact the efficiency of the new issue markets. Some of the proposals represent fundamental changes in the way securities offerings are regulated. In view of the fact that these sweeping changes are proposed in the context of an administrative rulemaking proceeding, we urge the Commission to re-propose rules that take into account concerns expressed in this letter and give issuers, investors and financial intermediaries further opportunity to comment. Any such rules should give due consideration to established practices under the securities laws, including shelf registration and Exxon Capital exchange offers. They should also strike a better balance between the desire to encourage the use of non-prospectus communications and the Commission's apparent concerns about the abuse of this new flexibility.
We believe the Commission should continue its open dialogue with issuers, financial intermediaries, investors and other interested parties in an effort to isolate the key ingredients of a forward looking and practical approach to regulating securities offerings in the information age. In this process, we urge the Commission to give appropriate consideration to the importance of efficiency in the capital raising process in light of the increasingly competitive and global nature of the capital markets. We would be glad to be part of this ongoing dialogue and to assist the Commission in whatever way we can.
If you would like to further discuss any aspect of our response, please do not hesitate to contact Carlos Morales (212-449-4367), Richard Alsop (212-449-4385) or Cara Londin (212-449-3727).
Very truly yours,
/s/ Carlos M. Morales
Carlos M. Morales
Senior Vice President, General Counsel
Corporate & Institutional Client Group
cc: Arthur Levitt, Chairman
Paul R. Carey, Commissioner
Isaac C. Hunt, Jr., Commissioner
Norman S. Johnson, Commissioner
Laura S. Unger, Commissioner
Brian J. Lane, Director, Division of Corporation Finance