[Federal Register Volume 62, Number 2 (Friday, January 3, 1997)]
[Rules and Regulations]
[Pages 520-550]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1]
[[Page 519]]
_______________________________________________________________________
Part III
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Part 200, et al.
Anti-manipulation Rules Concerning Securities Offerings; Final Rule
Federal Register / Vol. 62, No. 2 / Friday, January 3, 1997 / Rules
and Regulations
[[Page 520]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 228, 229, 230, 240, and 242
[Release Nos. 33-7375; 34-38067; IC-22412; International Series Release
No. 1039; File No. S7-11-96]
RIN 3235-AF54
Anti-manipulation Rules Concerning Securities Offerings
AGENCY: Securities and Exchange Commission.
ACTION: Final rules.
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SUMMARY: The Commission is adopting new Regulation M governing the
activities of underwriters, issuers, selling security holders, and
others in connection with offerings of securities. Regulation M is
intended to preclude manipulative conduct by persons with an interest
in the outcome of an offering. Regulation M significantly eases
regulatory burdens on offering participants by eliminating the trading
restrictions for underwriters of actively-traded securities; reducing
the scope of coverage for other securities; reducing restrictions on
issuer plans; providing a more flexible framework for stabilizing
transactions; and deregulating rights offerings. Consisting of five new
rules, plus a new definitional rule, Regulation M replaces Rules 10b-6,
10b-6A, 10b-7, 10b-8, and 10b-21 (``trading practices rules'') under
the Securities Exchange Act of 1934 (``Exchange Act''), which are being
rescinded. In addition, related amendments are being made to Items
502(d) and 508 of Regulations S-B and S-K, and to Rules 10b-18 and 17a-
2 under the Exchange Act. Conforming changes to various rules under the
Securities Act of 1933 (``Securities Act'') and the Exchange Act are
being made to reflect the repeal of the trading practices rules and the
adoption of Regulation M.
EFFECTIVE DATE: March 4, 1997. The requirement of Sec. 242.104(i) and
the amendments to Sec. 240.17a-2 are effective on April 1, 1997.
FOR FURTHER INFORMATION CONTACT: Any of the following attorneys in the
Office of Risk Management and Control, Division of Market Regulation,
Securities and Exchange Commission, 450 Fifth Street, N.W., Mail Stop
5-1, Washington, D.C. 20549, at 202-942-0772: Nancy J. Sanow, M. Blair
Corkran, Carlene S. Kim, Heidi E. Pilpel, Barbara J. Endres, Irene A.
Halpin, Marc J. Hertzberg, Denise M. Landers, Lauren C. Mullen, Mark R.
Pacioni, Alan J. Reed, or Margaret A. Smith.
SUPPLEMENTARY INFORMATION:
I. Introduction and Summary of New Regulation M
A fundamental goal of the federal securities laws is the prevention
of manipulation. Manipulation impedes the securities markets from
functioning as independent pricing mechanisms, and undermines the
integrity and fairness of those markets. Congress granted the
Commission broad rulemaking authority to combat manipulative abuses in
whatever form they might take. In exercising its authority, the
Commission has focused on the market activities of persons
participating in a securities offering, and determined that securities
offerings present special opportunities and incentives for manipulation
that require specific regulatory attention.
On April 11, 1996, the Commission published for comment a release
(``Proposing Release'') proposing Regulation M, and Rules 100 through
105 thereunder, to govern the activities of issuers, underwriters, and
other persons participating in a securities offering,1 and to
replace Rules 10b-6, 10b-6A, 10b-7, 10b-8, and 10b-21 2 under the
Exchange Act.3 The Commission received 39 comment letters from 36
commenters in response to the Proposing Release.4 The commenters
generally expressed strong support for proposed Regulation M, although
several expressed concerns with specific provisions, and some suggested
alternative approaches for addressing particular issues. The Commission
is adopting Regulation M substantially as proposed, but with some
modifications to clarify provisions or to reflect commenters' views.
The new regulation represents the most significant changes to the
Commission's anti-manipulation regulation of securities offerings since
the adoption of the trading practices rules over 40 years ago.5
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\1\ Securities Exchange Act Release No. 37094 (April 11, 1996),
61 FR 17108.
\2\ 17 CFR 240.10b-6, 240.10b-6A, 240.10b-7, 240.10b-8, and
240.10b-21.
\3\ 15 U.S.C. 78a et seq.
\4\ A summary of comments has been prepared by the staff of the
Division of Market Regulation. The summary is included, along with
the comment letters, in Public File No. S7-11-96, which is available
for inspection and copying in the Commission's Public Reference
Room, 450 Fifth Street, N.W., Washington, D.C. 20549.
\5\ See Securities Exchange Act Release No. 5194 (July 5, 1955),
20 FR 5075.
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Regulation M is the culmination of a comprehensive review by the
Commission of its anti-manipulation regulation of securities
offerings.6 This review was prompted by ongoing developments and
innovations in the securities industry, including: increasing
institutionalization of the markets, advances in technology and
communications media, enhanced surveillance capabilities, continuing
globalization of the securities markets, and new offering techniques.
These developments have outpaced the existing structure of anti-
manipulation regulation of securities offerings and reduced the need
for broad prophylactic restrictions. Moreover, the Commission was
informed by market participants that the application of the trading
practices rules had become needlessly complex and involved substantial
compliance costs.
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\6\ See Securities Exchange Act Release No. 33924 (April 19,
1994), 59 FR 21681 (``Concept Release'').
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Regulation M exemplifies the Commission's efforts to relax
restrictions in cases where either the risk of manipulation is small or
the costs of the restrictions are disproportionate to the purposes they
serve. The new regulation continues the anti-manipulation objectives of
the trading practices rules, but reflects developments in the
securities industry, allows greater flexibility for market participants
to engage in activities that enhance competition in the marketplace,
and incorporates the recommendations of the Commission's Task Force on
Disclosure Simplification for a more streamlined approach to regulating
manipulative conduct during offerings.7 Three of the principal
elements that underlie the Commission's decision to provide greater
flexibility for market activities during offerings are: securities
market transparency, surveillance capabilities of the self-regulatory
organizations (``SROs''), and continuing application of the general
anti-fraud and anti-manipulation provisions of the federal securities
laws, including Section 17(a) of the Securities Act, and Sections 9(a),
10(b), and 15(c) of the Exchange Act, and Rules 10b-5 and 15c1-2
thereunder,8 to all activities in connection with an offering,
whether or not the provisions of Regulation M apply.9 Like the
former trading practices rules, Regulation M proscribes certain
activities that offering participants could use to manipulate the price
of an offered security. Although some
[[Page 521]]
commenters requested that the rules under Regulation M be formulated as
non-exclusive safe harbors from the anti-manipulation provisions of the
Exchange Act, the Commission continues to believe that a prophylactic
approach to anti-manipulation regulation is the most effective means to
protect the integrity of the offering process by precluding activities
that could influence artificially the market for the offered security.
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\7\ Report of the Task Force on Disclosure Simplification, 77-79
(March 1996) (``Task Force Report'').
\8\ 15 U.S.C. 77q(a); 15 U.S.C. 78i(a), 78j(b), and 78o(c); and
17 CFR 240.10b-5 and 240.15c1-2.
\9\ See Proposing Release, 61 FR at 17109. Similarly, Regulation
M and the interpretations thereof do not affect the application of
the registration and prospectus delivery requirements of the
Securities Act to offers and sales of securities.
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Regulation M contains six rules covering the following activities
during a securities offering: (1) activities by underwriters or other
persons who are participating in a distribution (i.e., distribution
participants) and their affiliated purchasers; (2) activities by the
issuer or selling security holder and their affiliated purchasers; (3)
Nasdaq passive market making; (4) stabilization, transactions to cover
syndicate short positions, and penalty bids; and (5) short selling in
advance of a public offering.10 A separate rule under Regulation
M, Rule 100, contains definitional provisions. Some of these
definitions are new or revised; many are common to more than one rule.
The Commission has endeavored to use straightforward and precise
language in both the definitions and rule text.
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\10\ Regulation M is adopted under the Securities Act,
particularly Sections 7, 17(a), and 19(a), 15 U.S.C. 77g, 77q(a),
and 77s(a); the Exchange Act, particularly Sections 2, 3, 9(a), 10,
11A(c), 12, 13, 14, 15(c), 15(g), 17(a), 23(a), and 30, 15 U.S.C.
78b, 78c, 78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(c), 78o(g),
78q(a), 78w(a), and 78dd; and the Investment Company Act of 1940
(``Investment Company Act''), 15 U.S.C. 80a-1 et seq., particularly
Sections 23, 30, and 38, 15 U.S.C. 80a-23, 80a-29, and 80a-37.
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The provisions of Regulation M that are analogous to Rule 10b-6 are
contained in Rules 101 and 102, which cover distribution participants,
and issuers and selling security holders, respectively. Rules 101 and
102 apply only during a ``restricted period'' that commences one or
five business days before the day of the pricing of the offered
security and continues until the distribution is over. The restricted
periods are based on the trading volume value of the offered security
and the public float value of the issuer, rather than the price per
share and public float criteria used in Rule 10b-6, and generally are
of a shorter duration than the cooling-off periods under Rule 10b-6.
Furthermore, the restricted periods of Regulation M focus on the time
of pricing. In contrast, Rule 10b-6 imposed restrictions during the
entire distribution, which could extend over a lengthy period of time,
but excepted certain trading activities prior to a two or nine business
day ``cooling-off period.'' The applicable cooling-off period was keyed
off the commencement of offers or sales. While Rule 10b-6 was designed
to protect the pricing of an offering, certain distribution methods,
particularly in connection with foreign offerings, could result in the
cooling-off periods commencing after an offering had been priced.
Rule 101 excludes from its coverage more actively-traded
securities, nonconvertible and asset backed securities rated investment
grade, and Rule 144A transactions. Restrictions on transactions in
outstanding debt securities during a distribution of a debt security
are narrowed substantially. Further, Rule 101 focuses on the security
being distributed and does not cover bids for and purchases of related
derivative securities. It permits, among other things, the routine
dissemination of research reports, exercises of options and other
securities, and transactions in baskets of securities involving the
offered security. Also, bids for and purchases of rights during rights
offerings are deregulated. Rule 101 deals with ``inadvertent''
violations during the restricted period by excusing de minimis
transactions, provided that a distribution participant had in place
written policies and procedures reasonably designed to achieve
compliance with the regulation. Moreover, the scope of persons subject
to Rule 101 is narrowed by recognizing ``information barriers'' between
the distribution participant and its affiliates.
Rule 102 covers issuers, selling security holders, and related
persons. The rule allows issuers and selling security holders to engage
in market activities prior to the applicable restricted period. It also
gives issuers greater flexibility in conducting their dividend
reinvestment and stock purchase plans and odd-lot repurchase programs.
During the restricted period, Rule 102 permits bids and purchases of
odd-lots, transactions in connection with issuer plans, and exercises
of options or convertible securities by the issuer's affiliated
purchasers, and transactions in commodity pool or limited partnership
interests during distributions of those securities. The rule contains a
limited exception for actively-traded ``reference securities.''
Rule 103 replaces Rule 10b-6A and expands the scope of Nasdaq
passive market making. The rule covers all Nasdaq securities and nearly
all distributions, and permits more distribution participants to engage
in passive market making.
Rule 104, which replaces Rule 10b-7, regulates stabilizing and
other activities related to a distribution. The rule provides a more
flexible framework for stabilizing transactions than Rule 10b-7. Rule
104 allows underwriters to initiate and change stabilizing bids based
on the current price in the principal market (whether U.S. or foreign),
as long as the bid does not exceed the offering price. Also, by
providing for greater disclosure and recordkeeping of transactions that
can influence market prices immediately following an offering, Rule 104
addresses the fact that underwriters now engage in substantial
syndicate-related market activity, and enforce penalty bids in order to
reduce volatility in the market for the offered security.
Rule 105 recodifies Rule 10b-21 governing short selling in
connection with a public offering. To harmonize Rule 105 with the
provisions of Rules 101 and 102, the period of Rule 105's coverage is
narrowed to the five business day period before pricing, rather than
the period extending from the time of filing of offering materials to
the time when sales may be made.
The Commission believes that separate regulation of rights
offerings, as contained in Rule 10b-8, no longer is warranted. Many
rights offerings, especially by foreign issuers, involve securities
that fall within the exception for actively-traded securities contained
in Rule 101. Even for less actively-traded securities, purchases of
rights generally are not an efficient way for a distribution
participant to facilitate an offering of the underlying security.
Therefore, the Commission has decided to rescind Rule 10b-8.
The new regulatory framework relieves market participants of
unnecessary burdens and responds effectively to a changing marketplace,
while maintaining essential investor protection. The following sections
of this release describe the individual provisions of Regulation M and
associated rule changes and discuss, where appropriate, how they differ
from the rules as proposed and from the former trading practices rules,
as well as reasons for these changes.
II. Discussion of Regulation M and Related Amendments
A. Rule 100--Definitions
Rule 100 sets forth the definitions applicable to all of the rules
under Regulation M. Most of the definitions are adopted as proposed;
some definitions are revised to respond to commenters' suggestions or
to add clarity to the rules. Many of these definitions are discussed
later in this release in conjunction with the specific
[[Page 522]]
provisions of Regulation M to which they relate.11
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\11\ In this release, terms defined in Rule 100 appear in
italics when discussed for the first time.
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B. Rule 101--Activities by Distribution Participants
1. Generally
Rule 101 governs the activities of persons participating in
distributions of securities, other than issuers or selling security
holders, and their affiliated purchasers. The distribution participants
subject to Rule 101 will typically be financial intermediaries that
routinely engage in market transactions for their own accounts or for
customers as part of their businesses.
In general, Rule 101 prohibits distribution participants and their
affiliated purchasers from bidding for, purchasing, or attempting to
induce any person to bid for or purchase, a covered security during a
specified period (restricted period). As with Rule 10b-6(c)(5), a
distribution of securities under Regulation M is distinguished from
ordinary trading transactions by the ``magnitude of the offering'' and
the presence of ``special selling efforts and selling methods.''
12 The restricted period for a particular distribution commences
one or five business days before the day of the pricing of the offered
security and continues until the distribution is over.13
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\12\ Rule 100 defines distribution as ``an offering of
securities, whether or not subject to registration under the
Securities Act, that is distinguished from ordinary trading
transactions by the magnitude of the offering and the presence of
special selling efforts and selling methods.''
\13\ Many of the terms and concepts discussed with respect to
Rule 101 also are relevant to Rule 102, which proscribes activities
by issuers and selling security holders and their affiliated
purchasers.
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Even during the restricted period, Rule 101 permits distribution
participants and their affiliated purchasers to engage in a variety of
activities, including the following: the routine dissemination of
research reports; exercises of options and other securities, including
rights received in connection with a rights offering; transactions in
baskets of securities involving an offered security; and certain
transactions involving Rule 144A securities of foreign and domestic
issuers. Rule 101 also excepts de minimis transactions that would
otherwise violate the rule: bids that are not accepted, and one or more
purchases that in the aggregate over the restricted period total less
than 2% of the security's average daily trading volume, provided that
the person making the unaccepted bids or purchases has maintained and
enforced written policies and procedures designed to achieve compliance
with the rule.
2. Persons Subject to Rule 101
a. Distribution Participant
A distribution participant is defined in Rule 100 as an
underwriter, prospective underwriter, broker, dealer, or other person
who has agreed to participate or is participating in a distribution.
The Commission is adopting the definition as proposed.
Several commenters expressed concern that a distribution
participant affiliated with an issuer or selling security holder (e.g.,
an underwriter that is affiliated with an issuer) would be subject to
the more restrictive provisions of Rule 102, rather than those of Rule
101, which they claimed could result in unwarranted adverse business
and market consequences.14 They recommended that such distribution
participants be permitted to rely on the provisions of Rule 101. Other
commenters recommended that any financial services affiliate of an
issuer or selling security holder, whether or not it is acting as a
distribution participant in connection with the distribution, should
have the benefit of the additional exceptions available under Rule 101.
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\14\ See infra Section II.C., discussing Rule 102.
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After considering the commenters' views, the Commission has added a
proviso to paragraph (a) of Rules 101 and 102, specifying that any
affiliated purchaser of an issuer or selling security holder that also
is acting as a distribution participant may comply with the provisions
of Rule 101, rather than Rule 102, provided that such affiliated
purchaser is not itself the issuer or selling security holder.15
Thus, during a distribution, an underwriter affiliated with the issuer
will be able to comply with the provisions of Rule 101. The Commission
is making this revision based upon its experience with Rule 10b-6, and
the fact that underwriters affiliated with the issuer are often
important market participants that are subject to SRO surveillance.
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\15\ The exception for actively-traded securities is not
available for securities that are issued by a distribution
participant or an affiliate of the distribution participant. See
infra Sections II.C.2. and II.C.5.
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b. Prospective Underwriter
A prospective underwriter is defined as a person: who has submitted
a bid to an issuer or selling security holder, and knows or is
reasonably certain that such bid will be accepted, whether or not the
terms and conditions of the underwriting have been agreed upon; or who
has reached, or is reasonably certain to reach, an understanding with
an issuer, selling security holder, or managing underwriter that such
person will become an underwriter, whether or not the terms and
conditions of the underwriting have been agreed upon.16 The
definition differs from the proposal in that the phrase ``is reasonably
certain'' replaces ``reasonably expects.'' Several commenters requested
that the proposed definition provide greater certainty as to when a
person becomes a prospective underwriter. They believed that, as a
practical matter, it may be difficult or even impossible for a broker-
dealer to know when it ``reasonably expects'' to have its bid accepted
or to reach an understanding with an issuer. Although the definition as
adopted does not provide a bright line test, the practical effect
should be to reduce the circumstances in which a broker-dealer will be
a prospective underwriter. The definition reflects the Commission's
view that there is frequently some point prior to when a bid actually
has been accepted, or a broker-dealer has been told that it will be an
underwriter, when it is reasonably certain that such person will be an
underwriter, and that the incentive to facilitate the distribution is
present at that point.
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\16\ If a broker-dealer has entered into a continuing agreement
with an issuer or selling security holder regarding takedowns of
securities off a shelf, such agreement typically would make the
broker-dealer reasonably certain that it would participate in a
distribution off the shelf.
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c. Completion of Participation in the Distribution
Under Regulation M, a person determines when its completion of
participation in the distribution occurs based on the person's role in
the distribution. An underwriter is deemed to have completed its
participation in a distribution when its participation has been
distributed, including all other securities of the same class that are
acquired in connection with the distribution, and after any
stabilization arrangements and trading restrictions in connection with
the distribution have been terminated.
The definition contains a proviso that an underwriter's
participation is not deemed to be completed, however, if a syndicate
overallotment option is exercised in an amount that exceeds the net
syndicate short position at the time of such exercise.17 This
proviso comports with a provision of Rule 10b-6 and is intended to
assure that the underwriter's selling efforts in
[[Page 523]]
connection with the distribution have in fact ceased before trading
prohibitions are lifted. Consistent with Rule 10b-6 interpretation, if
an overallotment option is exercised for an amount of securities that
exceeds the net syndicate short position (i.e., taking into account
shares purchased in stabilizing or syndicate short covering
transactions), the distribution will not be deemed completed and
purchases made prior to the exercise of the option would constitute a
violation of Regulation M.18 Any other distribution participant
will have completed its participation when its allotment has been
distributed.19 Several commenters asked the Commission to clarify
that securities acquired for investment by persons participating in a
distribution would be considered to be distributed. Consistent with an
interpretation of Rule 10b-6, securities acquired in a distribution for
investment purposes by anyone participating in the distribution, or any
affiliated purchaser, are considered to be distributed.20
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\17\ See Letter regarding Overallotment Options (November 27,
1996), 1996 SEC No-Act. LEXIS 868.
\18\ See Securities Exchange Act Release No. 19565 (March 4,
1983), 48 FR 10628, 10640 (``Release 34-19565'').
\19\ See infra Section II.C.2.a., discussing the definition of
completion of participation in the distribution as it relates to
issuers and selling security holders.
\20\ The definition of completion of participation in the
distribution codifies the approach taken by the staff in Letter
regarding VLI Corporation, [1982-1983] Fed. Sec. L. Rep. (CCH) para.
77,625 (October 17, 1983) (``VLI Letter'').
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d. Affiliated Purchaser
The Commission proposed to define affiliated purchaser for Rules
101 and 102 as: (1) a person acting in concert with a distribution
participant, issuer, or selling security holder in connection with the
acquisition or distribution of a covered security; (2) an affiliate who
controls the purchase of such securities by a distribution participant,
issuer, or selling security holder, or whose purchases are controlled
by such persons, or whose purchases are under common control with those
of such persons; or (3) an affiliate of a distribution participant,
issuer, or selling security holder who regularly purchases securities
for its own account or for the account of others, or who recommends or
exercises investment discretion with respect to the purchase or sale of
securities (``financial services affiliates'').
The Commission proposed excluding a financial services affiliate of
a distribution participant, but not that of an issuer or selling
security holder, from the definition if: (1) the affiliate was a
separate and distinct organizational entity from, having no officers or
employees in common with, the distribution participant; (2) the
affiliate's bids for, purchases of, and inducements to purchase
securities in distribution were made in the ordinary course of its
business; and (3) the distribution participant maintained and enforced
written policies and procedures designed to segregate the flow of
information between the distribution participant and its affiliates
(``information barriers''), and obtained an annual independent
assessment of the operation of its information barriers.
Although commenters generally supported the Commission's efforts to
revise the affiliated purchaser definition, several recommended that
financial services affiliates of issuers and selling security holders
also be excluded from this definition. Moreover, many commenters stated
that precluding common officers and employees and requiring that the
distribution participant and affiliate be separate and distinct
organizational entities would prevent a large number of multi-service
financial institutions from relying on this exception. Noting that
large financial services providers frequently have at least some
officers or employees with overlapping responsibilities, many
commenters argued that the presence of common officers or employees
should not preclude an affiliate from availing itself of the exclusion
where the affiliate's purchases are made in the ordinary course of its
business and the distribution participant has maintained and enforces
appropriate information barriers.
The Commission is adopting the first two prongs of the definition
substantially as proposed.21 In response to several commenters'
concerns, the Commission has determined to modify the third prong of
the definition. As adopted, the exclusion is available to affiliates of
distribution participants, issuers, and selling security holders.
Moreover, the condition prohibiting common officers (or persons
performing similar functions) or employees (other than clerical,
ministerial, or support personnel) has been narrowed to preclude
commonality only with respect to those officers or employees that
direct, effect, or recommend transactions in securities.22
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\21\ None of the commenters objected to the substance of the
first two prongs of the proposed definition, although several
commenters believed that these provisions would be sufficient to
capture any affiliate with both the means and the incentive to
manipulate. As adopted, the first prong of the definition remains
unchanged, and the only modification to the second prong is the
addition of language providing that an ``affiliate'' may be a
separately identifiable department or division of a distribution
participant, issuer, or selling security holder.
\22\ The Commission believes that this modification will resolve
substantially commenters' concerns that sharing one or more senior
executives with a distribution participant, issuer, or selling
security holder would preclude an affiliate from availing itself of
the exclusion. For example, the requirement would not preclude
common executives charged with risk management, compliance, or
general oversight responsibilities.
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A number of commenters argued that information barriers would not
deter manipulative activity because general information regarding a
distribution is public. The Commission nevertheless is of the view that
information barriers can serve to restrict the flow of non-public
information that might inappropriately influence an affiliate's
transactions in covered securities. For example, appropriate
information barriers would prevent the communication of the details of
pricing discussions with the issuer and prospective purchasers, or
knowledge as to the demand for the offering.
As adopted, the information barrier requirements specify that the
distribution participant, issuer, or selling security holder must
maintain and enforce written policies and procedures to prevent the
flow of information to or from the affiliate that might result in a
violation of Rules 101, 102, or 104 of Regulation M,23 and obtain
an annual, independent review of the operation of its information
barriers. As noted in the Proposing Release, an internal audit group
may perform the review if such group is independent of the distribution
participant, issuer, or selling security holder's corporate financing,
trading, and advisory departments.24
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\23\ The Commission notes that this provision does not require
the affiliate to maintain and enforce such information barriers.
\24\ Proposing Release, 61 FR at 17117. Several commenters
requested that the proposed exclusion clarify that an internal audit
group may perform the review.
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The Commission has determined to eliminate the requirement that the
affiliate be a separate and distinct organizational entity from the
distribution participant, issuer, or selling security holder in the
sense of requiring a separate legal entity, because such a condition
could result in elevating form over substance. Moreover, in response to
comments regarding the growth and complexity of multi-service financial
institutions, language providing that an ``affiliate'' may be a
separately identifiable department or division of a distribution
participant, issuer, or selling security holder has been added to the
second and third prongs of the definition. These changes broaden the
scope of financial
[[Page 524]]
services affiliates that may be eligible for the exclusion.
The Commission believes, however, that affiliates should be
restricted from engaging in certain types of activities that present
the greatest potential for manipulation during the course of a
distribution. As adopted, the definition provides that any affiliate
that, during the applicable restricted period, acts as a market maker
(other than as a specialist in compliance with the rules of a national
securities exchange), or engages, as a broker or a dealer, in solicited
transactions or proprietary trading activities, in covered securities
is an affiliated purchaser. An affiliate (whether an internal unit or a
separate legal entity) engaged in these activities is not eligible for
the exclusion to the affiliated purchaser definition.25 In
contrast, an affiliate acting as an investment company or investment
adviser, or in some other non-broker-dealer capacity, would be eligible
for the exclusion.26
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\25\ This means, for example, that a broker-dealer that does not
make a market in a covered security, or that ceases market maker
activity in covered securities during the applicable restricted
period, would not fall within the definition of affiliated
purchaser. Accordingly, an issuer affiliate that engages only in
unsolicited brokerage transactions in covered securities would not
fall within the definition.
\26\ For example, a trustee or other pension plan administrator
may avail itself of the exclusion, provided such entity satisfies
the remaining conditions of the exclusion.
A multi-service financial institution may engage in both
investment advisory services and trading activities. To the extent
that the institution's investment advisory services are performed by
a separately identifiable department, with no officers or employees
that direct, effect, or recommend transactions in securities in
common with the trading department, then the investment advisory
department may avail itself of the exclusion, provided the remaining
conditions of the definition are satisfied. If the same individuals
provide investment advisory services and engage in trading
activities for the institution, however, it would be difficult, if
not impossible, to attribute those functions to ``separately
identifiable'' departments. Similarly, where the same individuals
direct, effect, or recommend securities transactions for two
separately organized affiliates, one providing investment advisory
services and the other engaging in solicited activities, such
persons could not avail themselves of the exclusion by simply
attributing their solicited transactions to their investment
advisory role.
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The Commission believes that these modifications to the definition
of affiliated purchaser will resolve many of the commenters' concerns
and avoid unnecessary burdens on multi-service financial organizations
with affiliates engaged in financial advisory and other
services.27
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\27\ The variety and complexity of organizational structures
means that Regulation M may apply to some affiliates that it may be
appropriate to exclude. In such cases, the Commission, through the
Division of Market Regulation, will entertain exemption requests.
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3. Securities Subject to Rule 101
The Commission proposed applying the trading restrictions of Rule
101 to covered securities, which would include the security that is the
subject of a distribution (subject security) and reference securities.
The Commission is adopting the definition of covered security as
proposed, but at the suggestion of some commenters has revised the
definition of reference security to describe more specifically the
situations when the term applies. The term reference security is
defined as a security into which a subject security may be converted,
exchanged, or exercised, or which, under the terms of the subject
security, may in whole or in significant part determine the value of
the subject security.
Several commenters supported the proposed definitions. In general,
these commenters believed that the proposed coverage of securities
represented a significant improvement from the approach under Rule 10b-
6, which extended trading restrictions to any security of the ``same
class and series'' as the security being distributed and any ``right to
purchase'' such security.\28\ One commenter additionally noted that the
elimination of the same class and series analysis would ease greatly
the task of identifying securities that are subject to trading
restrictions during debt offerings. Other commenters indicated
uncertainty regarding the applicability of Regulation M to debt
offerings and requested clarification on the coverage of debt
securities that are ``identical in principal features.''
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\28\ See Proposing Release, text accompanying notes 29 and 30,
61 FR 17114.
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The elimination of the same class and series concept will reduce
significantly the application of trading restrictions to nonconvertible
debt securities that are not rated investment grade.\29\ Bids for and
purchases of outstanding nonconvertible debt securities are not
restricted unless the security being purchased is identical in all of
its terms to the security being distributed. For example, Rule 101 does
not apply to a security if there is a single basis point difference in
coupon rates or a single day's difference in maturity dates, as
compared to the security in distribution.\30\ In the rare situations in
which Rule 101 will apply to outstanding debt, the restricted period
will generally be five business days.
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\29\ Nonconvertible debt and certain other securities that are
rated investment grade are excluded from Rule 101. See infra Section
II.B.6.b.
\30\ In a distribution of equity securities, however,
outstanding classes of securities that differ only in voting rights
from the distributed security will be deemed to be the same security
for purposes of Regulation M.
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In addition, derivative securities (i.e., those that derive all or
part of their value from a security being distributed) are not subject
to the trading prohibition of Rule 101. Thus, for example, bids for or
purchases of options, warrants, rights, convertible securities, or
equity-linked securities are not restricted during a distribution of
the related common stock because, while they derive their value from
the security being distributed, they do not by their terms affect the
value of the security in distribution. The National Association of
Securities Dealers, Inc. (``NASD'') expressed concern about permitting
bids for and purchases of derivative securities in the case of a
distribution of an underlying security, because trading in derivative
securities can have a significant impact on the underlying
security.\31\ The NASD recommended that the Commission consider
limiting the exclusion to those derivative securities that are not
likely to present manipulative risk, such as ``out-of-the-money''
options. The Commission recognizes that derivative securities, even
those that are out-of-the-money, can be used to manipulate the price of
an underlying security through inducing arbitrage and other
transactions involving the underlying security. It is the Commission's
intention, however, to focus trading restrictions on those securities
that present the greatest manipulative potential. Moreover, any attempt
to manipulate a security in distribution by transactions involving
derivative securities will continue to be addressed by the general
anti-manipulation provisions, including Sections 9(a)(2) and 10(b) of,
and Rule 10b-5 under, the Exchange Act.
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\31\ See Letter from Mary L. Schapiro, President, NASD
Regulation, Inc. and Alfred R. Berkeley, III, President, Nasdaq, to
Jonathan G. Katz, Secretary, SEC (July 23, 1996) (``NASD Comment
Letter'').
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Regulation M does apply to reference securities, such as common
stock underlying an exercisable, exchangeable, or convertible security
that is being distributed. The Commission believes that transactions in
reference securities can have a direct and substantial effect on the
pricing and terms of the security in distribution.
The definition of reference security also encompasses a security
underlying an instrument, such as an equity-linked security, that does
not give the holder the right to acquire the security, but whose value
is or may be derived from such security.\32\ A security will be a
[[Page 525]]
reference security only when it, or an index of which it is a
component, is referred to in the terms of a subject security. A
security of the same or similar issuer will not be deemed a reference
security merely because its price is used as a factor in determining
the offering price of a security in distribution.
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\32\ Rule 10b-6 by its terms did not apply to the underlying
security in these circumstances. The Commission believes, however,
that Regulation M should apply to a security whenever it has a price
relationship to a subject security as a result of the terms of that
security.
In some cases, a reference security may have an extremely
attenuated relationship to the security in distribution. While the
Commission does not believe that a specific percentage test is a
workable means to identify these cases, the staff will provide
appropriate guidance in response to specific inquiries.
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Commenters sought clarification concerning whether an issuer or
distribution participant would be permitted to write a put or maintain
a ``short put'' position during a distribution of an underlying
security.\33\ Transactions in derivative securities, including put
options, are not subject to Rule 101 during an offering of the
underlying security. In addition, maintaining a short put position is
not deemed to be a continuing bid for the underlying security for
purposes of Regulation M.
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\33\ Cf. Letter regarding The Chicago Board Options Exchange,
[1990-1991] Fed. Sec. L. Rep. (CCH) para. 79,665 (February 22,
1991).
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4. Restricted Periods of Rule 101
a. Duration. As discussed below, the Commission is adopting the
exclusion from Rule 101 for actively-traded securities.\34\ This
provision removes from Rule 101 securities with an ADTV value of at
least $1 million where the issuer's common equity securities have a
public float value of at least $150 million. For the remaining
securities, Rule 101 restricts transactions by distribution
participants in covered securities, unless an exception applies, for
the following periods:
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\34\ See infra Section II.B.6.a., discussing the actively-traded
securities exception, which excludes from Rule 101 securities having
an ADTV value of at least $1 million and whose issuer's common
equity securities have a public float value of at least $150
million.
in a distribution of a security with an average daily
trading volume (ADTV) value of at least $100,000, whose issuer has
outstanding common equity securities having a public float value of
at least $25 million, the restricted period begins on the later of
one business day prior to the date on which the subject security's
price is determined or the date on which the person becomes a
distribution participant, and ends upon that person's completion of
participation in the distribution; and
in a distribution of any other security, the restricted
period begins on the later of five business days prior to the date
on which the subject security's price is determined or the date on
which the person becomes a distribution participant, and ends upon
that person's completion of participation in the distribution.
The Commission proposed that the restricted periods for an offering
would begin one or five business days prior to the pricing of the
offering, depending upon the security's ADTV value alone.\35\ In
addition, rather than using the date of commencement of offers or sales
as a reference, the Commission proposed to determine the restricted
period with reference to the date on which the offering is priced.
Commenters generally supported shortening the restricted periods, and
favored the one and five business days periods keyed off the offering's
pricing.
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\35\ Proposing Release, 61 FR at 17113.
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The Commission believes that the ADTV standard is most relevant for
determining which securities are more difficult to manipulate.
Nevertheless, the use of a trading volume standard alone could skew the
application of Rule 101 based on short-term, aberrational increases in
trading volume. To prevent this result, the Commission has added a
public float component to the test for determining the applicable
restricted period.\36\ The public float component is intended to
capture within Rule 101 those securities that experience unusual
trading volume relative to their public float value. While the use of a
two-part test requires distribution participants to make an additional
calculation, the Commission believes that the combination of these
components better identifies securities that are more likely to be
resistant to manipulation.
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\36\ The Commission has determined that using a public float
value component alone would not differentiate securities
sufficiently with respect to the likelihood of manipulation because
of the wide variations in ADTV value for securities with similar
public float value.
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Rule 10b-6 contained restrictions that principally applied during a
two or nine day ``cooling-off period.'' Many securities that had a two
day cooling-off period under Rule 10b-6 will now have a one day
restricted period under Regulation M, or will be free from the
restrictions of Rule 101 because they are actively-traded
securities.\37\ Even some nine day securities under Rule 10b-6 will now
have a one day restricted period under Regulation M.\38\ Approximately
one-quarter of the securities that qualified for a two day cooling-off
period under Rule 10b-6 are now subject to a five day restricted period
because of the different criteria used in Regulation M and Rule 10b-6
for distinguishing securities. While the restricted periods under
Regulation M are increased for some securities, other provisions of
Regulation M, such as Rule 103 (permitting passive market making for
all Nasdaq securities), will address liquidity concerns with respect to
many of these securities.
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\37\ Based on 1995 volume and price data analyzed by the
Commission's Office of Economic Analysis (``OEA''), the Commission
estimates that 6,156 securities (out of a total of 7,822 securities
listed on the New York Stock Exchange, Inc. (``NYSE''), the American
Stock Exchange, Inc. (``Amex''), and (Nasdaq) were subject to a two
day cooling-off period under Rule 10b-6. Under Regulation M, of
those securities approximately 1,901, or 30.9%, are excluded from
the rule; 2,693, or 43.7%, are subject to a one day restricted
period; and 1,562, or 25.4%, are subject to a five day restricted
period.
\38\ Based on 1995 volume and price data analyzed by OEA, the
Commission estimates that 1,666 securities (out of a total of 7,822
NYSE, Amex, and Nasdaq-listed securities) were subject to a nine day
cooling-off period under Rule 10b-6. Under Regulation M, of those
securities, 11, or 0.7%, are excluded from the rule; 278, or 16.7%,
are subject to a one day restricted period; and 1,377, or 82.6%, are
subject to a five-day restricted period.
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b. Calculation of ADTV and Public Float Value.
The ADTV of a covered security is defined on the basis of reported
worldwide average daily trading volume during a specified period prior
to the filing of the registration statement or prior to the pricing of
the offering, depending on the circumstances. Some commenters
questioned whether ADTV can be measured uniformly across markets. The
NYSE and the Amex requested that the Commission adopt different
standards for determining trading volume on auction and dealer
markets.\39\ These exchanges asserted that the Commission's reliance on
reported trading volume to determine this exclusion's availability is
discriminatory and anti-competitive, because such a standard allegedly
favors dealer markets where dealer interpositioning increases volume as
compared with auction markets. The Commission does not believe that it
is necessary or appropriate to make distinctions based on the type of
market on which the security is traded.\40\ The Commission proposed a
three-month calendar period for calculating ADTV. The NASD recommended
a rolling 60 day period, calculated as of a date within 10 business
days prior to pricing, for determining ADTV.\41\ Commenters also
requested guidance regarding what
[[Page 526]]
information sources may be used to calculate ADTV, and suggested that
the Commission designate the types of information that are acceptable
for determining ADTV.
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\39\ Letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC (May 31, 1996);
Letter from James F. Duffy, Executive Vice President and General
Counsel, Amex, to Jonathan G. Katz, Secretary, SEC (June 25, 1996).
\40\ See infra Section IV., discussing in greater detail the
anti-competitive concerns raised by the NYSE and the Amex.
\41\ See NASD Comment Letter, at p. 3.
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The Commission believes that, with the addition of a test based on
public float value that will tend to correct for volume aberrations, a
60 day rolling period provides a sufficient length of time to measure
the trading volume of a security. Therefore, the rule permits
distribution participants to use a two calendar month or a 60 day
rolling period. The 60 day rolling period for calculating ADTV must end
within 10 calendar days of the filing of a registration statement, or,
if there is no registration statement or if the distribution is a shelf
distribution, within 10 calendar days of the offering's pricing. The 10
day period will allow distribution participants in any type of
distribution sufficient time to conform to the applicable restricted
period. The Commission has decided not to designate acceptable
information sources for determining ADTV; rather, a distribution
participant should have flexibility in determining a security's ADTV
value from information that is publicly available, if such participant
has a reasonable basis for believing that the information is
reliable.\42\ Furthermore, in calculating the dollar value of ADTV, any
reasonable and verifiable method may be used. For example, it may be
derived from multiplying the number of shares by the price in each
trade, or from multiplying each day's total volume of shares by the
closing price on that day.
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\42\ Cf. Securities Exchange Act Release No. 27247 (September
14, 1989), 54 FR 39194, 39197-98 (discussing the standard under Rule
15c2-11 under the Exchange Act, 17 CFR 240.15c2-11, for a broker-
dealer to have a reasonable basis that certain information is true
and accurate). For instance, a distribution participant may rely on
trading volume as reported by an SRO or comparable entity, or any
other source believed to be reliable. Electronic information systems
that provide information regarding securities in markets around the
world could provide an easy means to determine worldwide trading
volume in a particular security.
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As for public float value, the Commission is adopting a definition
that reflects its usage in Form 10-K (i.e., the aggregate amount of
common equity securities held by non-affiliates).\43\ For example, for
reporting issuers the public float value should be taken from the
issuer's most recent Form 10-K or based upon more recent information
made available by the issuer.
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\43\ 17 CFR 249.310. See also Securities Act Release No. 7326
(August 30, 1996), 61 FR 47706 (proposing the expansion of short-
form registration to include companies with non-voting common
equity). Form 20-F (17 CFR 249.220f), the annual report form used by
foreign private issuers under the Exchange Act, does not require
disclosure of public float information. Nonetheless, the public
float value of such issuer should be determined in the same manner
as provided in Form 10-K.
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5. Offerings Subject to Rule 101
a. Generally. The provisions of Rule 101 apply in connection with a
distribution of securities.\44\ The same types of offerings or other
transactions that satisfied the distribution criteria under Rule 10b-6
(i.e., the magnitude of the offering/selling efforts test) also are
subject to Rule 101. These include public offerings, private
placements, shelf offerings, mergers and other acquisitions, exchange
offers, forced conversions of securities, warrant solicitations, and
at-the-market offerings.
---------------------------------------------------------------------------
\44\ See supra Section II.B.1., discussing the definition of
distribution.
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b. Shelf Offerings. The Commission is modifying its approach to
shelf-registered distributions by replacing the ``single distribution
position'' taken under Rule 10b-6.\45\ Under Regulation M, each
takedown off a shelf is to be individually examined to determine
whether such offering constitutes a distribution (i.e., whether it
satisfies the ``magnitude'' of the offering and ``special selling
efforts and selling methods'' criteria of a distribution). Under prior
Commission interpretation, if the aggregate amount of securities
registered on a shelf constituted a Rule 10b-6 distribution, each
takedown was deemed to be part of that single distribution for purposes
of the rule, regardless of its individual magnitude.\46\
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\45\ See Release 34-19565, 48 FR at 10631.
\46\ See Proposing Release, 61 FR at 17115, and Release 34-
19565, 48 FR at 10631. See also Securities Exchange Act Release No.
23611 (September 11, 1986), 51 FR 33242, 33244 (``Release 34-
23611'').
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The Commission's modified approach means that a broker-dealer
participating in a takedown off a shelf must determine whether it is
participating in a distribution.\47\ In those situations where a
broker-dealer sells shares on behalf of an issuer or selling security
holder in ordinary trading transactions into an independent market
(i.e., without any special selling efforts) the offering will not be
considered a distribution and the broker-dealer will not be subject to
Rule 101.\48\ A broker-dealer likely would be subject to Rule 101,
however, if it enters into a sales agency agreement that provides for
unusual transaction-based compensation for the sales, even if the
securities are sold in ordinary trading transactions.
---------------------------------------------------------------------------
\47\ An issuer's description in a shelf registration statement
of a variety of potential selling methods will not cause, by itself,
any sales off the shelf to be treated as a distribution, unless the
broker-dealer in fact uses special selling efforts or selling
methods in connection with particular sales off the shelf, and the
sales are of a magnitude sufficient to demonstrate the existence of
a distribution. Cf. Securities Exchange Act Release No. 18528 (March
3, 1982), 47 FR 11482, 11485.
\48\ This approach assumes that the broker-dealer is disposing
of shares in ordinary trading transactions into an independent
market (i.e., one not dominated or controlled by the broker-dealer,
and where the price is not manipulated by the broker-dealer or
others acting in concert with the broker-dealer). Release 34-23611,
51 FR at 33247.
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c. Mergers, Acquisitions, and Exchange Offers. Many commenters
questioned the application of Rule 101's restricted periods to mergers,
acquisitions, and exchange offers. These commenters noted that during
merger distributions subject to Rule 10b-6, trading restrictions were
imposed during the applicable two or nine day period prior to the
mailing of proxy solicitation materials and for the duration of the
proxy solicitation.\49\ Similarly, the Commission also considered the
commencement of any valuation period or any election period as the
equivalent of the ``commencement of offers or sales,'' requiring bids
and purchases to cease during the applicable two or nine day period and
for the duration of the valuation or election period.\50\ Several
commenters stated that by requiring the restricted period to commence
one or five days prior to pricing, it is possible that the restricted
period for a merger distribution could begin several months prior to
the mailing of the proxy materials. These commenters noted that in such
situations the restricted period could be much lengthier under
Regulation M, as compared to the practice under Rule 10b-6.
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\49\ See Release 34-19565, 48 FR at 10638-39.
\50\ Id. at 10639.
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The Commission believes that mergers, acquisitions, and exchange
offers involve distributions in which interested persons have
considerable incentive to manipulate. The Commission agrees with the
commenters that the Regulation M restricted periods should reflect the
characteristics of these types of distributions. Accordingly, as
adopted the restrictions of Regulation M begin on the day when proxy
solicitation or offering materials first are disseminated to security
holders and end with the completion of the distribution (i.e., the time
of the shareholder vote or the expiration of the exchange offer).\51\
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\51\ In addition, Rule 10b-13 under the Exchange Act continues
to prohibit any purchases or arrangements to purchase securities
that are the subject of an exchange offer, or a security immediately
convertible into or exchangeable for those securities, from the time
of public announcement until the expiration of the exchange offer.
17 CFR 240.10b-13.
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[[Page 527]]
Consistent with an interpretation under Rule 10b-6, a restricted
period also will apply during any period where the market price of the
offered security will be a factor in determining the consideration to
be paid pursuant to a merger, acquisition, or exchange offer. Thus,
activity proscribed by Rules 101 and 102 must cease one or five
business days before the commencement of any valuation period and for
the duration of such period.\52\
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\52\ Release 34-19565, 48 FR at 10639.
---------------------------------------------------------------------------
d. At-the-market Offerings. In an at-the-market offering, sales
prices are established during the course of the offering based upon
market conditions at the time of individual sales.\53\ Accordingly, the
restricted period for such an offering would commence one or five
business days before the pricing of each sale and continue until the
person's participation in the distribution is completed. In practice,
the application of Rule 101 will essentially be the same as in the case
of a fixed price offering, where one price is established for the
entire distribution, because the activities of distribution
participants are restricted during the entire course of offers and
sales, whether the securities are sold at fixed or varying prices.
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\53\ The term at-the-market offering is defined as an offering
of securities at other than a fixed price.
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6. Securities Excepted from Rule 101
a. Exception for Actively-traded Securities. The Commission
proposed excluding from Rule 101 all securities with a published ADTV
value of at least $1 million, and requested comment on whether another
test, such as a public float test, should be used to determine which
securities should be excluded from the rule. Commenters supported an
exclusion for actively-traded securities, with two commenters
suggesting a lower threshold and one recommending a threshold of $10
million. The Commission is adopting an exception for those securities
that have an ADTV value of at least $1 million that are issued by an
issuer whose common equity securities have a public float value of at
least $150 million.
The Commission continues to believe that an exclusion for actively-
traded securities is appropriate. The costs of manipulating such
securities generally are high. In addition, because actively-traded
securities are widely followed by the investment community, aberrations
in price are more likely to be discovered and quickly corrected.
Moreover, actively-traded securities are generally traded on exchanges
or other organized markets with high levels of transparency and
surveillance.
The reasons for incorporating a dual ADTV value/public float value
test for the restricted periods similarly apply to determining whether
securities qualify for the actively-traded securities exception.\54\
The Commission selected $150 million for the public float value test
because it believes that the securities of issuers with a public float
value at or above this threshold, and that also have an ADTV value of
at least $1 million, have a sufficient market presence to make them
less likely to be manipulated. As discussed above, the $150 million
public float value test is intended in part to exclude issuers from the
actively-traded securities exception where a high trading volume level
is an aberration.
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\54\ For example, the Commission considered using the $75
million public float value measure included in the eligibility
criteria for Forms S-3 and F-3 under the Securities Act. However,
the Commission adopted that threshold for different reasons, i.e.,
information regarding companies with a public float value of at
least $75 million is efficiently assimilated by the market because
they are likely to be followed by multiple analysts. See Securities
Act Release No. 7053 (April 19, 1994), 59 FR 21644; Securities Act
Release No. 7029 (November 3, 1993), 58 FR 60307. Therefore, it was
appropriate to permit incorporation of Exchange Act filings in
registration statements filed by such issuers.
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The combined minimums of $1 million ADTV value for the securities
and $150 million public float value removes from Rule 101 the equity
securities of approximately 1,900 domestic issuers, as well as those of
a substantial number of foreign issuers.\55\ The Commission estimates
that the addition of a public float test reduces by approximately 9%
the number of domestic issuers whose common stock would be excepted
from Rule 101 based solely on an ADTV test.\56\
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\55\ Based on transaction information for 1995 analyzed by OEA,
approximately 1,106 securities listed on the NYSE, 770 securities
quoted on Nasdaq, and 36 securities listed on the Amex would be
excluded from Rule 101. The general increase in security prices and
trading volume since year-end 1995 likely will increase the number
of securities satisfying the ADTV minimum.
\56\ Based on 1995 volume and price data analyzed by OEA, 2,103
securities have an ADTV value of at least $1 million; 1,912
securities have an ADTV value of at least $1 million and a market
capitalization of at least $150 million.
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b. Investment Grade Securities. The Commission is adopting an
exception to Rule 101 for nonconvertible debt securities,
nonconvertible preferred securities, and asset-backed securities,
provided that the security being distributed is rated investment grade
by at least one nationally recognized statistical rating
organization.\57\ The Proposing Release recommended excepting
investment grade nonconvertible debt and preferred securities and noted
that the comparable Rule 10b-6 exception was based on the premise that
these securities are traded on the basis of their yields and credit
ratings, are largely fungible and, therefore, are less likely to be
subject to manipulation. The Commission solicited comment on whether
investment grade asset-backed securities have the same characteristics
with respect to trading as nonconvertible investment grade debt of
corporate issuers, and whether such securities should be excepted from
the rule.
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\57\ The term nationally recognized statistical rating
organization in paragraph (c)(2) of Rule 101 has the same meaning as
that term is used in 17 CFR 240.15c3-1(c)(2)(vi).
---------------------------------------------------------------------------
Several commenters stated that investment grade asset-backed
securities should be excepted from Rule 101 because they are the
functional equivalent of investment grade debt. One commenter suggested
using the definition of asset-backed security contained in the
Instruction to Form S-3 for purposes of Rule 101. Another commenter,
although not proposing a definition of asset-backed security,
recommended an exception for investment grade asset-backed securities
backed by a fixed pool of receivables.
Asset-backed securities are excluded from Rule 101 because such
securities trade primarily on the basis of yield and credit rating. The
principal focus of investors in the asset-backed securities market is
on the structure of a class of securities and the nature of the assets
pooled to serve as collateral for those securities, rather than the
identity of a particular issuer. Investment grade asset-backed
securities also are similar to investment grade nonconvertible debt and
preferred securities. Therefore, Rule 101 excepts securities that are
``primarily serviced by the cashflows of a discrete pool of receivables
or other financial assets, either fixed or revolving, that by their
terms convert into cash within a finite time period plus any rights or
other assets designed to assure the servicing or timely distribution of
proceeds to the security holders'' 58 and that are rated
investment grade.
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\58\ This definition is identical to the definition of asset-
backed security contained in General Instruction I.B.5. to Form S-3,
17 CFR 239.13(b).
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A few commenters also proposed that an even broader exception for
debt and preferred securities be adopted, suggesting that high-yield
debt securities be excepted from Rule 101 when those securities satisfy
certain criteria. One commenter proposed that all debt be excluded from
coverage of
[[Page 528]]
Rule 101. The Commission believes that, as a practical matter, Rule 101
and Rule 102 will have very limited impact on debt securities, except
for the rare situations where selling efforts continue over a period of
time.59 In those circumstances, where the incentive to manipulate
can escalate, the Commission believes that the application of
Regulation M is appropriate.
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\59\ See supra Section II.B.3., discussing covered securities.
---------------------------------------------------------------------------
c. Exempted Securities. The Commission is adopting the proposed
exception to Rule 101 for ``exempted securities'' as defined in Section
3(a)(12) of the Exchange Act.60 Transactions in these securities
are not restricted by Rule 101. This exception is similar to a
provision contained in Rule 10b-6.
---------------------------------------------------------------------------
\60\ 15 U.S.C. 78c(a)(12).
---------------------------------------------------------------------------
d. Face-amount Certificates or Securities Issued by an Open-end
Management Investment Company or Unit Investment Trust. The exception
to Rule 101 for face-amount certificates issued by a face-amount
certificate company, or redeemable securities issued by an open-end
management investment company or a unit investment trust, is adopted as
proposed. Transactions in these securities are not covered by Rule 101.
An identical provision existed in Rule 10b-6.
17. Activities Excepted from Rule 101
a. Exception 1--Research. The Commission is adopting exception 1 to
Rule 101, which permits the publication or dissemination of any
information, opinion, or recommendation relating to a covered security
if the conditions of either Rule 138 or Rule 139 under the Securities
Act are satisfied.\61\ This exception more closely aligns Rule 101 with
the Securities Act rules governing permissible research activities by
broker-dealers participating in offerings of securities.62
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\61\ 17 CFR 230.138, 230.139.
\62\ Exception 1 differs from a previous staff position that
certain research reports were not prohibited inducements to purchase
if such research was issued by a broker-dealer in the ordinary
course of business, and satisfied either Rule 138 or Rule 139(b), or
satisfied Rule 139(a) and did not contain a recommendation or
earnings forecast more favorable than that previously disseminated
by the firm. Securities Exchange Act Release No. 21332 (September
19, 1984), 49 FR 37569, 37572 n.25.
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As proposed, the exception required the research to be published or
disseminated ``in the ordinary course of business.'' Several commenters
found this phrase to be confusing because Rule 138 requires that
research be published or distributed in the ``regular course of
business,'' 63 and Rule 139 requires that information, opinions,
or recommendations be contained in a publication that is distributed
with ``reasonable regularity in the normal course of business.''
64 The Commission has deleted as redundant the phrase ``in the
ordinary course of business'' from exception 1.
---------------------------------------------------------------------------
\63\ 17 CFR 230.138 (a) and (b).
\64\ 17 CFR 230.139(b)(1)(i).
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Commenters also were uncertain about the application of this
exception to electronically disseminated research. The Commission
believes that if a distribution participant, in the normal course of
its business, provides research reports to independent research
services that make such reports available to their subscribers
electronically, whether or not the subscribers are customers of or have
previously received research from the broker-dealer, such research is
excepted from Rule 101. 65 Similarly, a distribution participant
may update its mailing list (i.e., new persons may be added) where it
is intended that they receive all future research sent to others on the
list, and not just the research related to the security in
distribution.
---------------------------------------------------------------------------
\65\ Also, a broker-dealer may deliver research reports to its
customers via electronic means as a substitute for paper delivery.
See Securities Exchange Act Release No. 37182 (May 9, 1996), 61 FR
24644.
---------------------------------------------------------------------------
Some commenters inquired whether the exception would be available
to unregistered offerings, because Rules 138 and 139 pertain to the
dissemination of research during registered offerings. In the
Commission's view, for purposes of Rule 101, exception 1 is available
during distributions that are not registered under the Securities Act,
as long as the conditions of either Rule 138 or Rule 139 are satisfied,
other than those pertaining to the filing of a registration statement.
A few commenters further recommended that research disseminated outside
of the United States during a global offering be excepted from Rule
101's coverage, if such research is disseminated in conformity with
local rule or custom. The Commission has determined that the conditions
of Rules 138 and 139 (other than registration) define the appropriate
parameters for research activities involving securities distributed in
the United States because research activities outside the United States
in connection with a distribution subject to the rule could be used to
facilitate the distribution in the United States. The Commission notes,
however, that many of the securities distributed in global offerings
will be subject to the rule's actively-traded securities exception and,
therefore, not subject to Rule 101's provisions. 66
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\66\ Nevertheless, there may be other circumstances in which the
dissemination of research that does not meet the conditions of Rules
138 or 139 outside the United States may be appropriate during a
global offering. The staff will provide guidance on a case-by-case
basis.
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b. Exception 2--Transactions Complying with Certain Other Sections.
Exception 2, which allows passive market making transactions and
stabilizing transactions complying with Rules 103 or 104, respectively,
is adopted as proposed.
c. Exception 3--Odd-Lot Transactions. Exception 3, permitting
distribution participants to bid for or purchase odd-lots during the
restricted period, is adopted as proposed. Accordingly, a distribution
participant may purchase odd-lots during a distribution. Among other
things, this exception permits distribution participants to engage in
activities in connection with issuer odd-lot tender offers conducted
pursuant to Rule 13e-4(h)(5) under the Exchange Act, including
effecting purchases necessary to permit odd-lot holders to ``round-up''
their holdings to 100 shares.
d. Exception 4--Exercises of Securities. Exception 4 permits
distribution participants to exercise any option, warrant, right, or
any conversion privileges set forth in the instrument governing a
security. This exception does not distinguish call options acquired
before the person became a distribution participant from those acquired
afterwards. In addition, the exception covers exercises of non-
standardized call options.
Supporters of this exception noted that option exercises do not
involve significant manipulative potential because of the
unpredictability of the timing and the extent of purchases by persons
writing call options. As noted earlier, the NASD expressed more general
concerns about Regulation M's limited coverage of derivative
securities.67 The Commission believes that exercises or
conversions of derivative securities generally have an uncertain and
attenuated manipulative potential and, for that reason, has adopted the
exception as proposed.68
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\67\ See supra text accompanying note 31.
\68\ The Commission cautions that in connection with exercises
of non-standardized options and other securities that are privately
negotiated between the parties, there may be circumstances when the
exercise of a call option, for example, could be made for the
purpose of requiring the other party to acquire the security. In
such a case, the purchase by the party exercised against may be
deemed to be a purchase by the exercising party.
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In light of the treatment of derivative securities under Regulation
M, the Commission is rescinding Rule 10b-8,
[[Page 529]]
which pertained to distributions through rights. This rule contained
overly rigid and complex restrictions on purchases of rights and
regulated sales of offered securities. Bids for and purchases of rights
are not subject to Rules 101 and 102, although bids for and purchases
of a security that is the subject of a rights distribution are
restricted by these rules.
e. Exception 5--Unsolicited Transactions. The Commission is
adopting an exception to Rule 101 for unsolicited brokerage
transactions, and for certain unsolicited purchases as principal. This
exception incorporates the provision contained in exception (xi)(D) to
Rule 10b-6 for unsolicited principal transactions, and, similar to
exception (ii) to Rule 10b-6, permits unsolicited purchases that are
not effected from or through a broker or dealer, on a securities
exchange, or through an inter-dealer quotation system or electronic
communications network (``ECN'') as defined in Rule 11Ac1-1(a)(8) under
the Exchange Act.69
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\69\ 17 CFR 240.11Ac1-1(a)(8). See Securities Exchange Act
Release No. 37619A (September 6, 1996), 61 FR 48289 (``Release 34-
37619A''), for a discussion of ECNs. A purchase in response to an
order or quote displayed on an ECN would not constitute an
unsolicited transaction.
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This exception places no restrictions on distribution participants
effecting unsolicited brokerage transactions during a distribution.
70 In addition, unsolicited purchases as principal are also
unrestricted. Although the Commission did not propose an exception to
Rule 101 for unsolicited principal purchases, many commenters asserted
that exception (ii) to Rule 10b-6 pertaining to such purchases was, in
fact, widely used. The Rule 101 exception for unsolicited purchases
differs from the analogous Rule 10b-6 exception, however, because it
does not require that purchases be of ``block'' size.\71\
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\70\ This exception incorporates the provisions of Rule 10b-
6(a)(5)(B). In addition, consistent with an interpretation under
Rule 10b-6, a broker-dealer who receives an unsolicited order to
sell may solicit purchasers in executing the transaction as broker
for the seller.
\71\ Also, the exception as adopted does not incorporate the
phrase ``privately negotiated'' because it is unnecessary in light
of the other terms of the exception.
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Furthermore, the exception applies to purchases effected otherwise
than through a broker-dealer, on a securities exchange, or through an
inter-dealer quotation system or ECN, because those purchases are less
likely to be used to influence the price of a security that is the
subject of a distribution. This clause of the exception permits
distribution participants and affiliated purchasers to purchase covered
securities from persons, other than broker-dealers, who were not
solicited by the distribution participant or its affiliated purchasers
and precludes purchases through an exchange, Nasdaq, or alternative
trading system.
This exception reflects the view that unsolicited purchases,
regardless of their size, generally do not raise the concerns at which
Rule 101 is directed when those purchases are not effected through
market mechanisms. In such circumstances, those purchases are less
likely to affect the offered security's price.
f. Exception 6--Basket Transactions. Exception 6 relates to
purchases of covered securities made in connection with basket
transactions. This exception permits transactions in covered securities
when the aggregate dollar value of any bids for or purchases of a
covered security constitutes 5% or less of the total dollar value of
the basket being purchased, and the basket contains at least 20 stocks.
The exception is available with respect to both index-related
baskets and customized baskets. To qualify for the exception, the
basket transaction must be a bona fide transaction effected in the
ordinary course of business (i.e., the decision to include the security
in distribution in the basket must be independent of the existence of
the distribution).\72\ The exception also permits bids and purchases
for the purpose of adjusting an existing basket position related to a
standardized index when made in the ordinary course of business to the
extent necessary to reflect a change in the composition of the index.
For example, a basket could be adjusted to reflect substitutions of
securities in a standardized index.
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\72\ Proposing Release, 61 FR at 17118.
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While supporting the flexibility of the basket transaction
exception, some commenters suggested alternatives, including using
either a single percentage test of 5% or 10%, or a 10%/10 stock or 10%/
15 stock standard. The Commission believes that the majority of stocks
contained in baskets will be excepted under the actively-traded
securities exception and that the 5%/20 stock standard allows trading
in most basket transactions while ensuring that such transactions are
not easily used to influence the price of a security. The Commission is
concerned that, given the possibility that a distribution participant
could time its basket transactions for maximum price effect, a less
rigorous standard could lead to abuse. Further, the inclusion of the 20
stock criterion provides an objective indication of the bona fide
nature of the basket transaction.
Commenters also stated that this exception should allow for
rebalancing any customized basket covered by the exception, or for
rebalancing in a covered security that is consistent with rebalancing
activity in other stocks contained in the basket. In the Commission's
view, allowing distribution participants to make adjustments in
customized baskets may give a distribution participant the means to
effect significant transactions in covered securities (e.g., by
deciding to include a security in distribution in a basket without a
reason independent of the distribution), thereby raising manipulative
concerns. Accordingly, the Commission is not permitting adjustments to
rebalance customized baskets, unless the adjustments themselves qualify
under the 5%/20 stock test.
g. Exception 7--De Minimis Transactions. The Commission is adopting
exception 7 for de minimis transactions. As proposed, the exception
applied to unaccepted bids and aggregate purchases of 1% of a
security's ADTV. Several commenters stated that a 1% level was too
limited to be useful. For this reason, a few commenters proposed
raising the de minimis threshold to 5% of the security's ADTV.
Commenters also requested clarification that the de minimis test could
be applied to more than one transaction. In addition, some commenters
suggested that any bid or purchase not exceeding a de minimis amount
should be eligible for the exception.
Because the Commission believes that an exception for small,
inadvertent transactions lacking market impact is appropriate, it is
adopting an exception for de minimis transactions. The purchasing level
has been increased to 2% to give distribution participants greater
margin for error, while retaining the exception's de minimis nature.
Unaccepted bids, and purchases during the restricted period that in the
aggregate do not exceed 2% of the ADTV of the security in distribution,
are excepted from the rule, if the person has maintained and enforces
written policies and procedures reasonably designed to achieve
compliance with the rule. Once inadvertent transaction(s) are
discovered, subsequent transaction(s) would not be covered by this
exception. Also, this de minimis exception does not apply to Nasdaq
passive market making transactions.
Commenters recommended that the exception be extended to include
solicited brokerage transactions and
[[Page 530]]
bids that are accepted, but that do not result in a purchase because
the trade is broken. The Commission clarifies that the exception is
available to transactions resulting from solicited brokerage provided
that the conditions of the exception are satisfied. However, any
purchase, even if the trade subsequently is broken, must be considered
a purchase for purposes of this exception.
One commenter asserted that the proviso requiring written policies
and procedures is unnecessary. This requirement is adopted as proposed,
however, because the Commission believes that the presence of
compliance procedures buttresses the inadvertent character of excepted
de minimis transactions. The Commission notes that repeated reliance on
the exception would raise questions about the adequacy and
effectiveness of a firm's procedures. Therefore, upon the occurrence of
any violation, a broker-dealer is expected to review its policies and
procedures and modify them as appropriate.
h. Exception 8--Transactions in Connection with a Distribution. The
Commission is adopting the exception for transactions in connection
with a distribution substantially as proposed. Exception 8 permits
transactions among distribution participants in connection with the
distribution and purchases from an issuer or selling security holder in
connection with the distribution that are not effected on a securities
exchange or through an inter-dealer quotation system, or through an
ECN. Based on commenters' views, the portion of the proposed exception
relating to offers to sell or the solicitation of offers to buy the
securities being distributed or offered as principal is now contained
in exception 9.\73\
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\73\ A distribution participant relying on this exception must
be prepared to sell the securities if the offer is accepted.
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i. Exception 9--Offers to Sell or the Solicitation of Offers to
Buy. The Commission is adopting the exception for offers to sell or the
solicitation of offers to buy the securities being distributed
(including securities acquired in stabilizing), or securities offered
as principal by the person making such offer or solicitation.
j. Exception 10--Transactions in Rule 144A Securities. The
Commission is adopting the exception for transactions in securities
eligible for resale under Rule 144A(d)(3) (``Rule 144A securities'')
substantially as proposed.\74\ As adopted, the exception permits
transactions in Rule 144A securities during a distribution of such
securities, provided that sales of such securities within the United
States are made solely to: qualified institutional buyers (``QIBs''),
or persons reasonably believed to be QIBs, in transactions exempt from
registration under the Securities Act (``Rule 144A distributions''); or
persons not deemed to be ``U.S. persons'' for purposes of Rule
902(o)(2) or (o)(7) of Regulation S under the Securities Act, during a
concurrent Rule 144A distribution to QIBs.\75\ The exception covers
both the Rule 144A security being distributed and any reference
security.
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\74\ See 17 CFR 230.144A(d)(3).
\75\ 17 CFR 230.902(o)(2) and (o)(7). This follows the position
taken under Rule 10b-6 in Letter regarding Regulation S Transactions
during Distributions of Foreign Securities to Qualified
Institutional Buyers, [1993-1994] Fed. Sec. L. Rep. (CCH) para.
76,851 (February 22, 1994), as modified by Letter regarding
Regulation S Transactions during Distributions of Foreign Securities
to Qualified Institutional Buyers (March 9, 1995).
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In the Proposing Release, the Commission noted that an exception
based on the categories of persons to whom the securities are
distributed may be viewed as a departure from the anti-manipulation
approach of Regulation M, because no class of investors, including
large institutions, is immune to injury from securities fraud or
manipulation.\76\ Nevertheless, the Commission considers it appropriate
to reduce the scope of Rule 101's prophylactic protections in the case
of QIBs, because QIBs have considerable ability to obtain, consider,
and analyze market information, and the Commission is not aware of
complaints of manipulation in this context.\77\ Moreover, in light of
the characteristics of Rule 144A securities (e.g., eligible securities
are not listed on a U.S. exchange or quoted on Nasdaq), the exception
does not distinguish between Rule 144A distributions to QIBs of foreign
and domestic securities.\78\
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\76\ Proposing Release, 61 FR at 17119 n.61.
\77\ The Commission wishes to emphasize that QIBs will continue
to be protected by the general anti-manipulation and anti-fraud
provisions, including Section 17(a) of the Securities Act, and
Sections 9(a) and 10(b) of the Exchange Act, and Rule 10b-5
thereunder.
\78\ See Proposing Release, 61 FR at 17119.
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Several commenters recommended broadening the proposed exception to
include contemporaneous sales within the United States to certain
institutional accredited investors. Some of these commenters suggested
that the exception permit sales to institutional accredited investors
where sales to QIBs exceeded a certain percentage of the total
distribution.\79\ The Commission is not adopting these recommendations
because institutional accredited investors encompass a much broader
category of persons, a large segment of which do not have
characteristics comparable to those of QIBs which underlie this
exception.
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\79\ The percentages recommended by commenters ranged from 50%
to 80%.
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8. Exemptive Authority
The Commission proposed to include within Rule 101 a provision
permitting the Commission to exempt any transaction or transactions
from the rule on a case-by-case basis. Two commenters recommended that
the exemptive authority provision be expanded to permit exemptions for
securities or classes of securities. To increase flexibility in the
exemption process, the Commission is adopting this suggested addition.
An exemption may be granted either unconditionally or on specified
terms and conditions.\80\
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\80\ The Commission is revising its Rules of Practice and
Investigations to provide that exemptions may be granted by
designated persons in the Division of Market Regulation pursuant to
authority delegated by the Commission. See 17 CFR 200.30-3 of this
chapter, as amended. Rules 102, 104, and 105 include similar
provisions authorizing the Commission to grant exemptions from those
rules, and this authority also will be delegated to designated
persons in the Division of Market Regulation.
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C. Rule 102--Activities by Issuers and Selling Security Holders
1. Generally
Rule 102 covers certain activities of issuers and selling security
holders, and their affiliated purchasers, during a distribution of
securities. Rule 102 is similar in format to Rule 101: issuers and
selling security holders, and their affiliated purchasers, must refrain
from bidding for, purchasing, or attempting to induce any person to bid
for or purchase a covered security during the applicable restricted
period, unless an exception permits the activity.
Rule 102 contains fewer exceptions than Rule 101 because issuers
and selling security holders have the greatest interest in an
offering's outcome and generally do not have the same market access
needs as underwriters. The exceptions in Rule 102 permit: transactions
in nonconvertible investment grade securities and transactions during
Rule 144A distributions; exercises of options and other securities,
including rights; and odd-lot transactions and associated round-up
transactions during an issuer odd-lot tender offer. Closed-end
investment companies that engage in continuous offerings of securities
also may conduct certain tender offers for those securities during such
distributions. There is no general exception for actively-traded
securities, although a limited exception is included
[[Page 531]]
for certain actively-traded reference securities.
Furthermore, most transactions in connection with dividend
reinvestment and stock purchase plans are excluded from Rule 102. Only
plan distributions involving securities obtained directly from the
issuer are subject to Rule 102. Several commenters asked that the
Commission further explain the treatment of plans under Rule 102. This
release provides guidance on the types of plan activities that may be
engaged in without constituting special selling efforts and selling
methods within the meaning of the definition of distribution, and
clarifies that certain dividend reinvestment and stock purchase plans
offered by bank-registered transfer agents and registered broker-
dealers qualify for the plan exception.
2. Persons Subject to Rule 102
a. Generally. Rule 102 applies to issuers, selling security
holders, and their affiliated purchasers. Several commenters sought
clarification as to whether an issuer's transactions in a covered
security would be restricted during a distribution effected solely by
or on behalf of a selling security holder not affiliated with the
issuer. The Commission does not intend to limit an issuer's activities
during a distribution effected solely by or on behalf of a selling
security holder if the issuer is not an affiliated purchaser of the
selling security holder, and has modified paragraph (a) of Rule 102
accordingly.\81\ An issuer will be deemed to have completed its
participation in a distribution when the entire distribution is
completed.82
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\81\ The interpretations contained in Release 34-23611 regarding
shelf distributions by selling security holders will continue to
have relevance. See infra Section II.C.4.b.
\82\ Cf. supra Section II.B.2.c., discussing when distribution
participants are considered to complete their participation in a
distribution. See also the definition of ``completion of
participation in a distribution.''
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b. Affiliated Purchaser. As discussed earlier, several commenters
recommended excepting financial services affiliates of issuers and
selling security holders from the definition of ``affiliated
purchaser.'' 83 As adopted, the definition of affiliated purchaser
excludes financial services affiliates of an issuer or selling security
holder if the issuer or selling security holder maintains and enforces
information barriers between itself and such affiliates. In addition, a
proviso has been added to paragraph (a) of Rule 102 that provides that
any affiliated purchaser of an issuer or selling security holder that
is acting as a distribution participant may comply with Rule 101,
rather than Rule 102.84 This accommodates the ordinary market
activities of broker-dealers and other financial institutions
participating in a distribution because they are subject to SRO
surveillance.
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\83\ See supra Section II.B.2.d.
\84\ The proviso to Rule 101 specifies that, where a
distribution participant or an affiliated purchaser of a
distribution participant is itself the issuer or selling security
holder, Rule 102 applies. See supra Section II.B.2.a.
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3. Securities Subject to Rule 102
The restrictions of Rule 102 apply to covered securities in the
same manner as Rule 101.85 Thus, persons subject to Rule 102 are
precluded during the restricted period from bidding for or purchasing
the subject security or any reference security.
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\85\ See supra Section II.B.3.
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4. Offerings Subject to Rule 102
a. Generally. As with Rule 101, Rule 102 applies only when there is
a distribution of securities.86
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\86\ See supra Section II.B.5., discussing the types of
offerings and other transactions that are subject to Rule 101.
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b. Shelf Offerings. In the case of an offering of securities
pursuant to a shelf registration statement, the Commission will apply
Regulation M in a manner consistent with interpretations under Rule
10b-6 regarding the restrictions on issuers and selling security
holders during shelf offerings.\87\ Thus, an issuer and all of its
affiliated purchasers are subject to the applicable restricted period
of Rule 102 when sales off a shelf by an issuer, or by any affiliated
purchaser, constitute a distribution of securities. Similarly, when a
selling security holder sells off the shelf and such sales constitute a
distribution, all other shelf security holders who are affiliated
purchasers of the selling security holder are subject to the applicable
restricted period of Rule 102.
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\87\ See Release 34-23611, 51 FR at 33242.
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5. Securities Excepted from Rule 102
a. Actively-traded Reference Securities. Many commenters maintained
that issuers, selling security holders, and their affiliated purchasers
should have the benefit of an actively-traded securities exception
similar to that in Rule 101. The Commission believes that persons
subject to Rule 102 should not be able to trade in their securities,
whether or not they are actively traded. The Commission's view is based
on issuers' and selling security holders' stake in the proceeds of the
offering, and their generally lesser need to engage in securities
transactions.
Certain commenters noted that, as proposed, Regulation M would have
prevented an issuer of equity-linked securities, or its affiliated
purchasers, from engaging in hedging activity in the associated
reference security, even when that security was actively traded.
According to these commenters, the ability to conduct such hedging
activity immediately prior to the pricing of an equity-linked security
is critical to the structure of such distributions.
In response to these comments, the Commission has determined to
provide a limited exception from Rule 102 for actively-traded reference
securities that are not issued by the issuer of the security in
distribution, or by any affiliate of the issuer. This exception permits
the type of hedging activity that was not previously subject to Rule
10b-6. Thus, the issuer of an equity linked security, or a security
holder selling an equity-linked security, can purchase in a hedging
transaction an actively-traded reference security issued by an
unaffiliated entity. However, the issuer or selling security holder of
an equity-linked security is prohibited from purchasing any reference
security for which it, or any of its affiliates, is the issuer. Of
course, the general anti-fraud and anti-manipulation provisions of the
federal securities laws are applicable to any transactions associated
with distributions of equity-linked securities.
b. Other Excepted Securities. The Commission is adopting as
proposed the exceptions in Rule 102 for ``exempted securities'' as
defined in Section 3(a)(12) of the Exchange Act, and face-amount
certificates or securities issued by an open-end management investment
company or unit investment trust. In addition, the Commission has
determined to include in Rule 102 an exception for investment grade
nonconvertible debt, nonconvertible preferred securities, and asset-
backed securities, based on commenters' views and the rationales
indicated above for an identical exception to Rule 101.88
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\88\ See supra Section II.B.6.c.
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6. Activities Excepted from Rule 102
a. Exception 1--Odd-Lot Transactions. Rule 102 contains an
exception for odd-lot transactions, which permits issuer odd-lot tender
offers. This exception, which is identical to exception 3 to Rule 101,
will provide greater flexibility to issuers conducting odd-lot tender
offers during a distribution.89 Moreover, as modified from the
proposal, this exception permits an issuer conducting an odd-lot tender
offer to engage in transactions
[[Page 532]]
necessary to enable shareholders to round-up their holdings to 100
shares.90
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\89\ See supra Section II.B.7.c.
\90\ Today, the Commission also is adopting an amendment to Rule
13e-4(h)(5) to permit issuers to conduct odd-lot offers, including
continuous, periodic, or extended odd-lot offers, for their equity
securities without establishing a record date of ownership for
shareholder eligibility to participate in the offer. Securities
Exchange Act Release No. 38068 (December 20, 1996).
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b. Exception 2--Transactions by Closed-end Investment Companies.
Exception 2, as it relates to transactions complying with Rule 23c-3
under the Investment Company Act,91 is adopted as proposed.
Accordingly, repurchases by closed-end investment companies that are
conducted in compliance with Rule 23c-3 will not violate Rule 102.
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\91\ 17 CFR 270.23c-3.
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Unlike so-called ``interval'' funds, which buy back their
securities pursuant to Rule 23c-3, other closed-end funds are more
circumscribed as to their repurchases.92 Many of these closed-end
funds advise investors in their prospectuses that investments in the
funds should be considered illiquid, particularly as the fund does not
intend to seek a public trading market for its securities. To provide
their investors with an opportunity to sell their securities, these
funds often disclose that they may consider conducting periodic tender
offers to repurchase all or a portion of their outstanding securities
at the then current net asset value. A few commenters raised issues
about the continuation of Rule 10b-6 exemptions granted to those
closed-end funds that conduct periodic tender offers for their
securities pursuant to Rule 13e-4 under the Exchange Act,93 when
the funds are engaged in continuous offerings pursuant to Rule 415
under the Securities Act.94
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\92\ Cf. 15 U.S.C. 80a-23(c).
\93\ 17 CFR 240.13e-4.
\94\ 17 CFR 230.415. See, e.g., Letter regarding Brazilian
Investment Fund, Inc., [1993] Fed. Sec. L. Rep. (CCH) para. 76,712
(August 6, 1993).
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Exception 2 is available to a registered closed-end investment
company that engages in a continuous offering of its securities
pursuant to Rule 415 and repurchases, at net asset value, securities of
the same class in a tender offer conducted pursuant to Rule 13e-4,
provided that there is no widely available alternative transaction
mechanism for its securities (i.e., the securities are not traded on a
securities exchange or through an inter-dealer quotation system or
ECN). This exception accommodates those closed-end funds that currently
have Rule 10b-6 exemptions, and benefits additional closed-end funds
with similar distribution and repurchase features, because they will
not need to seek exemptive relief under Regulation M.
c. Exception 3--Redemptions by Commodity Pools or Limited
Partnerships. The Commission is incorporating exception 3 to permit
redemptions by commodity pools or limited partnerships that are
effected at a price based on the securities' net asset value in
accordance with the terms and conditions of the governing instruments,
as long as the securities are not traded on an exchange, or through an
inter-dealer quotation system or ECN. This exception is being adopted
in response to commenter concerns, and permits commodity pools and
limited partnerships to effect redemptions of their securities without
seeking exemptive relief under Regulation M. Redemptions of such
securities pursuant to their governing instruments at a price based on
net asset value are unlikely to raise manipulative concerns.
d. Exception 4--Exercises of Securities. The Commission is adopting
exception 4 relating to the exercises of call options and other
securities as proposed. This exception is identical to exception 4 to
Rule 101, and permits the exercise of rights in connection with
convertible, exchangeable, or exercisable securities, including options
received in connection with employee benefit plans.
e. Exception 5--Transactions in Connection with the Distribution.
Exception 5 is adopted as proposed. This exception permits offers to
sell and the solicitation of offers to buy the securities being
distributed, and enables an issuer or selling security holder to
conduct an offering on its own behalf.95
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\95\ Regulation M does not preclude affiliates of an issuer
(e.g., officers or directors) from purchasing securities in the
offering. See also supra Section II.C.2.a., regarding a person's
completion of participation in the distribution.
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f. Exception 6--Unsolicited Purchases
In the Proposing Release, the Commission solicited comment on an
exception similar to that contained in Rule 10b-6 for unsolicited
privately negotiated purchases. This exception from Rule 102 is
identical to the unsolicited purchases exception from Rule 101.96
---------------------------------------------------------------------------
\96\ See supra Section II.B.7.e., discussing exception 5 to Rule
101.
---------------------------------------------------------------------------
g. Exception 7--Transactions in Rule 144A Securities
Based on commenters' views and the basis discussed above for
excepting transactions in Rule 144A securities from Rule 101, the
Commission has determined to include an identical exception in Rule
102.
7. Plans
a. Generally
The Commission is adopting the dividend (or interest) reinvestment
and stock purchase plan provisions of Rule 102 substantially as
proposed.97 The treatment of plans under Regulation M reflects a
continuation of the Commission's efforts to facilitate the use of plans
as an alternative means for investors to purchase and sell securities,
while maintaining essential investor protections.98
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\97\ The term plan is defined in Rule 100 as any bonus, profit-
sharing, pension, retirement, thrift, savings, incentive, stock
purchase, stock option, stock ownership, stock appreciation,
dividend reinvestment, or similar plan; or any dividend or interest
reinvestment plan or employee benefit plan as defined in 17 CFR
230.405.
\98\ See, e.g., Securities Exchange Act Release No. 35041
(December 1, 1994), 59 FR 63393 (``1994 STA Letter''), as modified
by Letter regarding Dividend Reinvestment and Stock Purchase Plans,
[1995] Fed. Sec. L. Rep. (CCH) para. 77,110 (May 12, 1995); Letter
regarding First Chicago Trust Company of New York, [1994] Fed. Sec.
L. Rep. (CCH) para. 76,939 (December 1, 1994) (``First Chicago
Letter''); Letter regarding Bank-Sponsored Investor Services
Programs, [1995] Fed. Sec. L. Rep. (CCH) para. 77,122 (September 14,
1995) (``Bank Sponsored Programs Letter'') (collectively, ``Plan
Letters'').
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Paragraph (c)(1) of Rule 102 excepts most distributions of
securities pursuant to plans.99 The Commission has modified the
introductory text of this paragraph to clarify that this exception
includes plans operated by registered bank transfer agents or
registered broker-dealers (``investor services plans''), as well as
those plans operated by or on behalf of an issuer.100
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\99\ Of course, where an issuer plan does not involve a
distribution (because there is insufficient magnitude, or because
special selling efforts and selling methods are not used to sell the
securities), Rules 101 and 102 do not apply.
\100\ Although Regulation M supersedes the Plan Letters as they
relate to Rule 10b-6, the staff positions taken in the Plan Letters
on the application of other securities law provisions (i.e., Section
5 of the Securities Act, 15 U.S.C. 77e, and Sections 13(e), 14(d),
14(e), 15(a), and 17A of, and Rule 10b-13 under, the Exchange Act,
15 U.S.C. 78m(e), 78n(d), 78n(e), and 17 CFR 240.10b-13,
respectively) remain in effect.
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The rule divides plans into three categories: (1) plans that are
available only to employees and shareholders (``employee-shareholder
plans''); (2) plans, including investor services plans, that are
available to persons other than, or in addition to, employees and
shareholders, where securities for the plan are purchased from a source
other than the issuer or an affiliated purchaser of the issuer (i.e.,
in the open market or in privately negotiated transactions) by an agent
independent of the issuer (``open market plans''); and (3) plans that
are available to persons other than, or in addition to, employees and
shareholders where securities for the
[[Page 533]]
plan are purchased directly from the issuer or an affiliated purchaser
of the issuer (``direct issuance plans'').
b. Employee-shareholder Plans
Rule 102(c)(1)(i) covers employee-shareholder plans, and excludes
any distribution pursuant to a plan by or on behalf of an issuer or a
subsidiary of an issuer, when the distribution is made solely to
employees or shareholders of the issuer or its subsidiaries, or to a
trustee or other person acquiring the securities for the accounts of
such persons. This means that Rule 102 imposes no restrictions on
transactions in the subject securities by the issuer or its affiliated
purchasers during employee-shareholder plan distributions.101 The
scope of eligible employees, and therefore the scope of the exception,
is broader under this provision than under Rule 10b-6.
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\101\ However, such activity may be subject to Rule 102 if the
issuer is engaged in another distribution, and the transactions for
the plan are attributable to the issuer. Rule 102 provides that plan
transactions will not be attributable to the issuer if they are
effected by an agent independent of the issuer.
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c. Open Market Plans
Rule 102(c)(1)(ii) excepts from the rule's coverage distributions
involving open market plans, including investor services plans, where
purchases for the plan are made by an agent independent of the issuer
from sources other than the issuer or an affiliated purchaser of the
issuer (i.e., in the open market or in privately negotiated
transactions).
Several commenters suggested revising the definition of agent
independent of the issuer, including permitting the issuer to specify
the broker or dealer who would make purchases for the plan and to
change the source of securities for its plan more than once in any
three month period. The Commission has determined not to make such
changes at this time, because the definition has implications beyond
Regulation M (i.e., it also relates to issuer repurchase programs
conducted pursuant to Rule 10b-18 under the Exchange Act).102
Nevertheless, the Commission will examine this definition in connection
with its anticipated review of Rule 10b-18, and will reconsider these
comments in that process.
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\102\ 17 CFR 240.10b-18.
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The definition of agent independent of the issuer specifies, among
other things, that an issuer may not control, directly or indirectly,
the timing of purchases by the agent. The Proposing Release stated that
an agent would not be considered independent if the issuer directs the
timing of purchases of securities by the agent, including a requirement
that securities to fund the plan must be purchased on the plan's
investment date. The release provided, however, that an issuer may
establish general conditions for the operation of its plan, including,
for example, requirements concerning the return of uninvested funds to
plan participants, or requirements that optional cash payments be
invested within 35 days of receipt.103 A number of commenters
requested additional guidance on the timing element for plan purchases.
The Commission notes that, although an issuer may not specify a
particular time for such purchases, the issuer may specify a range of
days for plan purchases based on a particular event (e.g., that plan
purchases will be made within five days of the plan's investment date,
or the stock's dividend date), or may specify that plan purchases will
be made on or as soon as practicable after the plan's investment date,
or the stock's dividend date. Moreover, the plan's agent could be
deemed an agent independent of the issuer for purposes of Rule 102 if
the plan's formula specifies the date, but not the times, of purchases
pursuant to the plan, provided that the plan provisions regarding the
purchase date are not changed more than once in any three-month
period.104
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\103\ Proposing Release, 61 FR at 17121 n.71, citing 1994 STA
Letter (modifying Letter regarding Lucky Stores, Inc., [1974-1975]
Fed. Sec. L. Rep. (CCH) para.79,903 (June 5, 1974)).
\104\ Purchases by an independent agent for a plan can involve a
certain magnitude, frequency, and duration that are known to the
issuer. If an issuer schedules a non-plan distribution to coincide
with such plan purchases, questions may be raised under the general
anti-fraud and anti-manipulation provisions of the federal
securities laws.
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d. Direct Issuance Plans
Distributions pursuant to direct issuance plans (i.e., a plan that
is available to persons other than, or in addition to, employees and
shareholders where the issuer or affiliated purchaser of the issuer
provides the shares for the plan) are not excepted from Rule 102. In
the Commission's view, if the magnitude of securities offered through
such plan, and the selling efforts and selling methods used to
distribute such securities would constitute a distribution as defined
in Rule 100, this type of offering raises the manipulative concerns
underlying Regulation M.105 Because the issuer is receiving the
proceeds of the offering, this kind of plan bears a close resemblance
to a public offering. Consistent with prior interpretations concerning
valuation periods for plans, Rule 102 applies during any valuation
period for a direct issuance plan.
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\105\ Where a plan provides that securities for the plan may be
purchased either in the open market or provided directly by the
issuer, paragraph (c)(1)(ii) is only available when the plan
securities are purchased in the open market. If the plan securities
are obtained directly from the issuer, the plan must be treated as a
direct issuance plan.
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To determine the magnitude of a direct issuance plan, only those
persons to whom plan communications are directed at a particular time
(rather than all current plan participants) should be considered.
Moreover, the Commission will not deem special selling efforts and
selling methods to be present in a direct issuance plan where only one
or a combination of announcements, newspaper advertisements, circulars,
notices, investor fairs, or Internet home pages are used to disseminate
information about the availability of the plan to the public, or the
issuer provides information about the plan to persons with whom the
issuer has a pre-existing, continuing relationship involving the
receipt of written communications by existing means of communication
(e.g., a bill, annual report, or payroll stub).106 The information
contained in such materials distributed by an issuer or its agent may
include no more than the information allowed, nor less than that
required, under Rule 134 under the Securities Act (i.e., ``tombstone
advertisements''): 107 generally, the issuer's name, the issuer's
type of business, the type of security being offered in the direct
issuance plan (i.e., common or preferred stock), the price of the
security or the method of price determination, and information on how
and where a prospectus may be obtained.
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\106\ This includes communications to shareholders, employees,
customers, and other persons with a pre-existing relationship with
the issuer, such as independent contractors, franchisees, and
suppliers. See Securities Exchange Act Release No. 37182 (May 15,
1996), 61 FR 24644, 24650 (providing guidance for use of electronic
media for delivery of information). See also Securities Exchange Act
Release No. 36345 (October 13, 1995), 60 FR 53458.
\107\ 17 CFR 230.134.
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8. Exemptive Authority
Consistent with the expansion of the exemptive authority provision
in Rule 101, the Commission is adopting a provision in Rule 102
pursuant to which it may grant an exemption from Rule 102 to any
transaction or class of transactions, or any security or class of
securities. Such exemptions may be granted either unconditionally or on
specified terms and conditions.
9. Rule 10b-18
Rule 10b-18 under the Exchange Act provides that an issuer and its
affiliated
[[Page 534]]
purchasers will not incur liability under the anti-manipulation
provisions of Section 9(a)(2) of the Exchange Act or Rule 10b-5 under
the Exchange Act, if the issuer purchases common stock in compliance
with the rule's conditions concerning the time, price, volume, and
manner of purchases. 108 The Commission proposed to amend Rule
10b-18 to preclude an issuer from relying on this safe harbor when the
issuer or its affiliated purchasers were engaged in a distribution for
purposes of Rule 102.
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\108\ 17 CFR 240.10b-18.
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The few comments received on this proposal were negative. The
Commission has determined that significant revisions to Rule 10b-18
should be considered in connection with a comprehensive review of Rule
10b-18 to be conducted in the near future. However, the Commission is
adopting an amendment to Rule 10b-18 precluding reliance on the safe
harbor during the Rule 102 restricted period, when the issuer or any
affiliated purchaser is distributing the issuer's common stock or any
other security for which the common stock is a reference
security.109
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\109\ To reflect the use in Rule 10b-18 of the Regulation M
definition of plan, the Commission is adopting technical amendments
to paragraphs (a)(3), (a)(5), and (a)(6) of Rule 10b-18 to change
the term ``issuer plan'' to ``plan.'' In addition, the term agent
independent of the issuer for purposes of Rule 10b-18 is now defined
in Rule 100 of Regulation M. This differs from the proposal which
would have removed the safe harbor during the entire distribution
period.
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D. Rule 103--Passive Market Making
The Commission is adopting Rule 103 to replace Rule 10b-6A. Rule
103 and related exception 2 to Rule 101 permit, in connection with a
distribution of a Nasdaq security, passive market making on Nasdaq
during the restricted period of Rule 101, when market making by
distribution participants otherwise is prohibited. The purpose of Rule
103 is to alleviate special liquidity problems that could exist for a
Nasdaq security in distribution, if distribution participants or their
affiliates who are Nasdaq market makers were required to withdraw as
market makers during the restricted period. Exchange-traded securities
usually do not experience this problem because specialists in most
cases are not affiliated with distribution participants.
Rule 103 retains the core provisions of Rule 10b-6A with respect to
the price levels of bids and purchases that can be made by a Nasdaq
passive market maker. Rule 103 generally limits a passive market
maker's bids and purchases to the highest current independent bid
(i.e., a bid of a Nasdaq market maker who is not participating in the
distribution). The Commission believes that this condition is
fundamental to the concept of passive market making. Additionally, the
rule limits the amount of net purchases that a passive market maker can
make on any day to 30% of its ADTV, although an initial ADTV limit of
200 shares is now available for less active market makers. The 30% ADTV
limitation is designed to prevent an amount of purchasing activity that
could produce the price effects of stabilization, while generally
permitting a level of activity associated with normal market making.
The rule also contains a provision limiting the bid size a passive
market maker may display and requirements relating to notification,
identification, and disclosure of passive market making.
Rule 103 incorporates several new provisions that add significant
flexibility to passive market making and permit this activity in a far
greater number of contexts. The rule eliminates the offering
eligibility criteria that were contained in Rule 10b-6A, except that
best efforts and at-the-market offerings remain ineligible for passive
market making.110 Moreover, all Nasdaq securities qualify for
passive market making, including Nasdaq reference securities. The
requirement that underwriters or prospective underwriters account for
at least 30% of total trading volume is eliminated because the
Commission believes that passive market making could enhance liquidity,
even where the syndicate accounts for a minor portion of normal market
making activity. Rule 103 also permits passive market making throughout
the entire applicable restricted period, rather than requiring that it
cease with the commencement of offers or sales, because passive market
making is now available for many more kinds of distributions, including
those that can extend over a significant period of time. Passive market
making is prohibited, however, when a stabilizing bid pursuant to Rule
104 is in effect.
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\110\ The Commission previously noted that the NASD surveillance
system, with respect to passive market making, does not easily
accommodate at-the-market offerings. Securities Exchange Act Release
No. 32117 (April 14, 1993), 58 FR 19598, 19600 (``Release 34-
32117''). The Commission believes that NASD surveillance is an
essential consideration in expanding the contexts in which passive
market making is permitted.
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The NASD and other commenters proposed either eliminating the 30%
ADTV limitation entirely, or, alternatively, increasing it to at least
50%. Commenters did not provide any empirical evidence or other
objective information supporting a different standard or demonstrating
that the 30% ADTV limitation significantly decreases the liquidity of
securities subject to passive market making. As with Rule 10b-6A, the
30% ADTV limitation is applicable only to net purchases (i.e., total
purchases minus total sales). Accordingly, as long as sufficient sales
are made, there is no limit on total purchases. The Commission
continues to believe that a purchasing limitation is fundamental to the
concept of passive market making, and that the 30% ADTV limitation
permits a normal level of market making activity. In addition, the
Commission believes that the adjustment discussed below allowing all
passive market makers to have an initial ADTV limit of at least 200
shares will enable less active market makers to participate in passive
market making. Of even greater significance is the fact that actively-
traded Nasdaq securities are not subject to the requirements of Rule
103 at all, and nearly all other Nasdaq securities will have shorter
restricted periods. These features of Regulation M should substantially
enhance liquidity for these securities.
As proposed, passive market makers would have been allowed to bid
for one round lot (i.e., 100 shares) if they had an initial or
remaining net purchasing capacity of between one and 99 shares. This
provision was intended to permit less active or smaller market makers
who are syndicate members to be passive market makers. The NASD
supported providing passive market makers with the ability to bid for
and purchase at least 1,000 shares, irrespective of a lower ADTV
limitation. The NASD argued that the ADTV limitations of many market
makers are too small to make passive market making viable for them. The
Commission believes that giving all passive market makers an ADTV limit
of 1,000 shares largely would override the 30% ADTV limitation and
unduly advantage market makers with historically small trading volumes
in the security, who would be able to make net purchases several times
larger than their routine market making activity. As adopted, Rule 103
provides that all passive market makers whose initial ADTV limit is
between 1 and 199 shares are allowed a net purchasing capacity of 200
shares. Rule 103 also permits bids for a round lot if a passive market
maker's remaining net purchasing capacity is between 1 and 99
shares.111
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\111\ For example, a passive market maker whose 30% ADTV
limitation is 743 shares and who made net purchases of 700 shares
can still bid for 100 shares.
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[[Page 535]]
Rule 103 allows passive market makers to make bids or purchases at
a price above the highest independent bid where necessary to comply
with any Commission or NASD rule relating to the execution of customer
orders. For example, a passive market maker acting in accordance with
the new Commission rules regarding order handling obligations is
permitted to display customer bids and to execute customer orders in
compliance with the new rules even if the transactions would otherwise
violate Rule 103.112 In addition, the Commission is retaining its
interpretation regarding the application of passive market making in
the context of NASD members' obligation not to trade ahead of customer
limit orders. When a passive market maker is complying with Commission
or NASD rules governing the handling of customer limit orders, it
cannot initiate any transaction on the sell-side of the market that
would create, directly or indirectly, an obligation to purchase a
covered security at a price above that security's highest independent
bid price.113
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\112\ See Release 34-37619A, 61 FR 48289.
\113\ See NASD Manual, Conduct Rules, IM-2110-2.
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The NASD supported permitting the execution of riskless principal
purchases (other than bids disseminated on Nasdaq) at a price higher
than Rule 103 allows, as long as the passive market maker does not
thereafter adjust its bids above the prevailing highest independent
bid. The Commission believes, however, that market maker purchases
above the highest independent bid (except as specifically permitted)
are not consistent with the rule's passive structure.114
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\114\ Rule 103 permits a passive market maker to continue to bid
and effect purchases at its bid at a price exceeding the then
highest independent bid until the passive market maker purchases an
aggregate amount of the covered security that equals or, through the
purchase of all securities that are part a single order, exceeds the
lesser of two times the minimum quotation size for the security, as
determined by NASD rules, or the passive market maker's remaining
purchasing capacity under paragraph (b)(2) of Rule 103.
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In response to the NASD's comment, the Commission is retaining a
modified version of the interpretation regarding contemporaneous
transactions, which provides that if a passive market maker is involved
in a contemporaneous purchase and sale of a security, the passive
market maker can ``net'' the transactions for purposes of the ADTV
calculation as long as the two transactions are reported within 30
seconds of each other.115
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\115\ See Release 34-32117, 58 FR at 19603. The Commission also
is retaining the interpretations in the Rule 10b-6A adopting release
discussing appropriate interaction with other market makers and
permitting the offset of two customer orders received within 15
minutes of each other without affecting net purchasing capacity.
Release 34-32117, 58 FR at 19602-03.
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The NASD also requested that the de minimis exception in Rule 101
apply to passive market making transactions. The Commission believes
that permitting passive market makers to have the benefit of the de
minimis exception would undermine efforts to achieve more rigorous
compliance with passive market making restrictions. Therefore, the de
minimis exception in Rule 101 does not apply to unaccepted bids or to
purchases made by a passive market maker.
E. Rule 104--Stabilization and Other Syndicate Activities
1. Generally
Rule 104, which replaces Rule 10b-7, governs stabilizing and
certain aftermarket syndicate activities in connection with an
offering, and makes it unlawful for any person to stabilize, to effect
any syndicate covering transaction, or to impose a penalty bid in
contravention of the rule's provisions.116 Rule 104 improves the
regulation of stabilization by creating a more flexible framework for
managing the offering process and eliminating much of the complexity
that characterized Rule 10b-7. The Commission is adopting Rule 104
substantially as proposed, but has added provisions to address issues
raised by commenters and has clarified other provisions. Related
amendments to Exchange Act Rule 17a-2, governing the recordkeeping of
stabilizing and certain post-offering syndicate transactions, and to
Items 502(d) and 508 of Regulations S-B and S-K, governing prospectus
disclosure of these activities, are adopted as proposed.
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\116\ Unlike Rules 101 and 102, which apply to a
``distribution,'' Rule 104 governs stabilizing to facilitate an
``offering,'' a term that is broader in scope. Moreover, there is no
exception to Rule 104 for actively-traded securities.
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The purpose of Rule 104 is to permit underwriters and syndicate
members to conduct stabilizing transactions in compliance with the
rule's pricing and other terms for the purpose of preventing or
retarding a decline in the market price of a security to facilitate an
offering. Although stabilization is price-influencing activity intended
to induce others to purchase the offered security, when appropriately
regulated it is an effective mechanism for fostering an orderly
distribution of securities and promotes the interests of shareholders,
underwriters, and issuers.117 The rule addresses the risk that
stabilization will create a false or misleading appearance with respect
to the trading market for the offered security.118
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\117\ See Section 9(a)(6) of the Exchange Act, 15 U.S.C.
78i(a)(6); Concept Release, 59 FR at 21689. See also Securities
Exchange Act Release No. 2446 (March 18, 1940), 11 FR 10971.
\118\ See Securities Exchange Act Release No. 28732 (January 8,
1991), 59 FR 814, 815 (``Release 34-28732'').
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Rule 104 introduces several major features that are different from
Rule 10b-7: a stabilizing bid may be made with reference to the
principal market for the security, wherever located (rather than
focusing only on U.S. markets); a stabilizing bid may be raised to
match independent bids in the market; and a stabilizing bid that has
not been discontinued may be carried over to another market. Rule 104
also accommodates multinational offerings by permitting stabilizing
bids to be made in the currency of the market where the bid is placed,
and by allowing adjustments to such stabilizing bids to account for
fluctuations in the exchange rates between currencies.
Overall, commenters supported efforts to update and simplify the
Commission's stabilization rule. Commenters favored the new provisions
governing price levels for stabilizing bids, which codify and expand
exemptive and no-action relief issued within the last decade by the
Commission and its staff for stabilizing activities involving cross-
border offerings. Some commenters were critical of the new provisions
requiring disclosure, notification, and recordkeeping of syndicate
covering transactions and penalty bids. The Commission, however,
believes that these offering-related activities can influence
aftermarket prices, and has adopted the provisions as an appropriate
method to monitor these activities.
2. Discussion of Provisions Relating to Stabilization
As adopted, Rule 104 provides that no person, directly or
indirectly, may stabilize, effect any syndicate covering transaction,
or impose a penalty bid in connection with an offering of any security
in contravention of the rule's provisions. The term stabilizing is
defined in Rule 100 as the placing of any bid, or the effecting of any
purchase, for the purpose of pegging, fixing, or otherwise maintaining
the price of a security. Rule 104 prohibits bids or purchases not
necessary to prevent or retard a decline in the security's price, and
forbids stabilizing
[[Page 536]]
for manipulative purposes, at a price resulting from unlawful activity,
or in an at-the-market offering. Priority must be granted to
independent bids regardless of the size of the independent bid, when
the market where the stabilizing takes place permits or requires such
priority. The placing of more than one stabilizing bid in any one
market at the same price at the same time is prohibited. The Commission
is adopting these provisions substantially as proposed.
Rule 104 excludes from its provisions offerings of securities
eligible for resale under Rule 144A by foreign or domestic issuers made
solely to QIBs in transactions exempt under the Securities Act and to
non-U.S. persons under Regulation S that are made concurrently with a
Rule 144A offering.119 As with other transactions excluded from
Regulations M's coverage, stabilization during these Rule 144A
placements will remain subject to the general anti-fraud and anti-
manipulation provisions of the federal securities laws.
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\119\ Identical exceptions are contained in Rules 101 and 102 of
Regulation M.
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The provision in Rule 10b-7(m) pertaining to limitation of
liability is eliminated. Although one commenter favored retention of
this provision, the Commission believes that because lead managers now
exert considerably more control over stabilizing transactions than when
Rule 10b-7 was adopted, the provision is of marginal utility.
3. Stabilizing Levels
Rule 104 provides considerable flexibility to underwriters
effecting stabilizing transactions. Persons stabilizing the price of a
security can initiate a stabilizing bid in any market with reference to
the independent prices in the principal market for the security,
wherever located, and then maintain, reduce, or raise that bid to
follow the independent market, as long as the bid does not exceed
either the stabilizing bid in the principal market (including a
stabilizing bid in effect at the previous close) or the offering price
of the security.120 Commenters favored using the price in the
security's principal market as a basis for initiating a stabilizing bid
when that market was open. One commenter also advocated the ability to
carry over a stabilizing bid from one market to another market,
irrespective of the current independent prices in any market.
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\120\ The term offering price is defined in Rule 100 as the
price at which the security is being distributed.
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Under Rule 104, the appropriate price level for initiating
stabilizing is based on the security's principal market.121
Although the rule as proposed looked to independent bids in the
principal market to establish the permissible stabilizing level, the
final version of Rule 104 permits a stabilizing bid to reference the
last independent transaction price in the principal market. This
modification responds to a commenter's concern that the public offering
price of an exchange-traded security frequently is set at the last
transaction price and, under Rule 10b-7, the security could be
stabilized at that price. The rule covers the two possible scenarios
for initiating stabilizing: initiating stabilizing in any market when
the principal market is open; and initiating stabilizing in any market
when the principal market is closed.
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\121\ Rule 104, as adopted, uses the term ``initiate,'' rather
than the term ``effect,'' to clarify that ``initiating'' a
stabilizing bid means the first stabilizing bid made in connection
with the offering. Once a stabilizing bid has been initiated, it may
be increased, maintained, reduced, or adjusted in accordance with
the provisions of the rule.
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When the principal market is open, the permissible stabilizing
price level in any market always is established with reference to the
last independent transaction price for the security in its principal
market if two conditions are met: the security must have been traded in
the principal market on the day stabilizing is initiated or on the
preceding business day; and the current asked price in the principal
market must be equal to or greater than the last independent
transaction price. If both conditions are not satisfied, stabilizing
may be initiated in any market at a price no higher than the highest
current independent bid in the principal market.
When the principal market is closed, but quotations have opened in
the market where stabilizing will be initiated, Rule 104 provides that
stabilization may be initiated with reference to the lower of: the
price at which stabilizing could have been initiated in the principal
market at its previous close; or the last independent transaction price
in the market where stabilizing is being initiated. The independent
transaction must have occurred that day or on the preceding business
day and the current asked price in that market must be equal to or
greater than the independent transaction price. If these conditions are
not met, stabilizing may only begin at a price no higher than the
highest current independent bid for the security in the market where
the stabilizing is being initiated.
Rule 104 also includes a new provision for initiating a stabilizing
bid in any market immediately before the opening of quotations. In this
case, stabilizing may be initiated with reference to the lower of: the
price at which stabilizing could have been initiated in the principal
market at its previous close; or the most recent price at which an
independent transaction in the offered security has been effected in
any market after the close of the principal market, if the person
stabilizing knows or has reason to know of such transaction.\122\
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\122\ As proposed, the reference price for initiating a
stabilizing bid in any market, including the principal market,
immediately before it opened was the lower of: the price at which
stabilizing could have been effected at the close of the principal
market; or the most current reported price at which independent
transactions in the offered security have been effected in any
market after the close of the principal market. Rule 104
incorporates a knowledge-based standard to avoid imposition of an
undue burden on underwriters to discover the prices of obscure
transactions, whether reported or not.
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Rule 104 includes maximum caps on the stabilizing price level: no
stabilizing bid may be initiated, maintained, or otherwise adjusted in
any market at a price higher than the stabilizing bid in the principal
market or the security's offering price.
Once a stabilizing bid has been initiated in a market, that bid may
be maintained in that market, subject only to the maximum caps. It also
may be carried over into another market, irrespective of intervening
changes in the independent bids or transaction prices for the security.
A stabilizing bid in effect at the market's close may be maintained
between trading sessions and used to establish a stabilizing bid just
prior to the market's opening of quotations on the next day.123 A
stabilizing bid may be maintained without reduction unless it would
exceed the maximum caps. An underwriter may otherwise reduce a
stabilizing bid at its discretion. If a stabilizing bid is discontinued
(i.e., it is not maintained continuously during a trading session or is
not in effect as of the market's close), stabilizing may be resumed
only at a level at which it then could be initiated in the particular
market, without reference to the earlier stabilizing bid.
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\123\ The end of a trading session will not be deemed to
discontinue a stabilizing bid in effect at the close.
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In perhaps the most significant change from Rule 10b-7, Rule 104
allows a stabilizing bid to be increased to the level of the highest
independent bid in the principal market, or, if the principal market is
closed, the highest independent bid in that market at the
[[Page 537]]
previous close, provided such bid price does not exceed the maximum
caps.
Where an independent market for an offered security does not exist,
the maximum stabilizing level is limited only by the offering price.
Stabilization may be conducted before an offering is priced, consistent
with the conditions of Rule 104. After the offering price is
determined, stabilization may be resumed at a price at which
stabilizing then could be initiated.
Rule 104 also provides for adjustments to a stabilizing bid when
the price of the security being stabilized is adjusted for the payment
of dividends, rights, or distributions, or is expressed in a currency
other than the currency of the principal market and there are changes
in the exchange rate between the two currencies. When securities are
being offered as a unit, the component securities shall not be
stabilized at prices that, in the aggregate, are higher than the then
permissible stabilizing price for the unit.
4. Offerings With No U.S. Stabilizing Activities
To further accommodate cross-border transactions, the Commission is
incorporating a new provision, similar to one contained in its 1991
proposing release on stabilizing in the international context,124
that permits stabilizing outside the United States during an offering
in the United States, without complying with Rule 104. The conditions
for this provision are that: there be no stabilization in the United
States; stabilization is not conducted above the U.S. offering price;
and the foreign stabilizing is conducted in a jurisdiction with
comparable regulation of stabilization.\125\ For purposes of this
provision, the Commission recognizes the stabilization regulations of
the U.K. Securities and Investments Board.\126\ The Commission invites
appropriate requests to recognize additional markets as having
comparable stabilization regulations for the purposes of this
provision.
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\124\ Release 34-28732. The proposals contained in Release 34-
28732 are withdrawn, except to the extent they are adopted in Rule
104.
\125\ The Commission by rule, regulation, or order will identify
foreign statutes or regulations that are comparable to Rule 104.
\126\ Chapter III, Part 10 of the Rules of the United Kingdom
Securities and Investments Board.
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5. Disclosure, Notification, and Recordkeeping of Stabilizing
Transactions, Short Covering Transactions, and Penalty Bids
In the Proposing Release, the Commission expressed its view that
syndicate short covering transactions and the imposition of penalty
bids by underwriters are activities that can facilitate an offering in
a manner similar to stabilization. The Commission did not propose to
extend the price conditions of Rule 104 to these aftermarket
activities. Instead, the Commission proposed, and has determined to
adopt, the provisions relating to disclosure, notification, and
recordkeeping of syndicate covering transactions and the imposition of
penalty bids.
Rule 104, like Rule 10b-7, requires any person who enters a bid
that such person knows is for the purpose of stabilizing the price of
any security to notify the market on which the bid is placed, and to
disclose the purpose of such bid to the person to whom the bid is
entered (e.g., the specialist or executing broker-dealer). In the
Commission's view, contemporaneous disclosure of the fact that
stabilizing is occurring is beneficial to the market and its
participants, because it ensures that transactions in a security are
based on all available information. Consistent with this requirement,
the NASD requires market makers intending to initiate stabilization to
provide it with prior notification.127 Stabilizing bids are then
identified by a symbol on the Nasdaq quotation display. In this way,
the person engaged in stabilization satisfies the requirement to inform
the market and the person to whom the bid is made of the stabilizing
purpose of the bid by notifying the NASD. On the exchanges,
underwriters must notify the exchange and must provide disclosure
separately to the recipient of the bid (e.g., the specialist).
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\127\ See NASD Manual, Marketplace Rules, IM-4614.
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Rule 104 also requires any person effecting a syndicate covering
transaction,128 or placing or transmitting a penalty bid,129
to disclose that fact to the SRO that has direct oversight authority
over the principal market in the United States for the security for
which the syndicate covering transaction is effected, or the penalty
bid is imposed. This information will assist the exchanges and the NASD
in carrying out their surveillance responsibilities. Some commenters
asserted that the information regarding aftermarket activities should
be kept confidential to avoid creating the perception of a weak
offering, while a few commenters urged the Commission to facilitate
public dissemination of this information in order to preclude an
unintended manipulative effect, and to prevent the investing public
from unknowingly bearing the cost of these aftermarket activities. The
rule, as adopted, requires disclosure to the SRO but does not require
public disclosure. Should circumstances indicate that such disclosure
is warranted, the Commission may revisit this issue.
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\128\ Rule 100 defines syndicate covering transaction as the
placing of any bid or the effecting of any purchase on behalf of the
sole distributor or the underwriting syndicate or group to reduce a
syndicate short position.
\129\ Rule 100 defines penalty bid to mean an arrangement that
permits the managing underwriter to reclaim a selling concession
otherwise accruing to a syndicate member (or to a selected dealer or
selling group member) in connection with an offering when the
securities originally sold by the syndicate member are purchased in
syndicate covering transactions.
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Under Rule 104, the stabilizing legend required by Rule 10b-7, and
Item 502(d) of Regulations S-B and S-K,130 would be replaced by a
brief legend identifying activity that may affect the offered
security's price and directing investors to a discussion in the ``plan
of distribution'' section of the prospectus. Item 508 of Regulations S-
B and S-K, governing the plan of distribution disclosure, is amended to
require a brief description of any prospective stabilizing and
aftermarket activities, including syndicate covering transactions and
the imposition of a penalty bid, and their potential effects on the
market price.131 The objective of these proposals is to provide
meaningful information to prospective investors regarding stabilizing
and related activities.132
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\130\ See 17 CFR 228.502(d) and 229.502(d).
\131\ See 17 CFR 228.508 and 229.508.
\132\ Once a ``plain English'' prospectus is implemented, a
stabilizing legend would no longer be required on the inside front
cover of the prospectus, although the disclosure required by Item
508 of Regulations S-K and S-B would be retained. See Task Force
Report 17-18.
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In addition to the foregoing disclosure requirements, when a person
subject to Rule 104 conducts transactions in securities and the price
of those securities may be or has been stabilized, that person is
required by paragraph (h)(3) of Rule 104 to send to a purchaser, at or
before the completion of the transaction, a document containing a
statement similar to that required by Item 502(d)(1)(i) of Regulations
S-B and S-K. This disclosure may be made by a document, including a
prospectus, confirmation, or other writing that contains language
indicating that the underwriter may effect stabilizing transactions in
connection with an offering of securities.133 The Commission
proposed, but is not
[[Page 538]]
adopting at this time, that similar disclosure be given to purchasers
of securities subject to aftermarket activities. The Commission intends
to reconsider the need for this disclosure as it continues to review
developments in the aftermarket area.
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\133\ This disclosure requirement is not intended to extend the
prospectus delivery period required by Rule 174 under the Securities
Act. The required disclosure may be made by means other than the
prospectus. 17 CFR 230.174.
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Amendments to Rule 17a-2 under the Exchange Act require managing
underwriters to keep records of syndicate covering transactions and
penalty bids, in addition to stabilizing information. Records must
reflect the name and class of securities, the price, date, and time for
each syndicate covering transaction and whether any penalties were
assessed, the names and addresses of the syndicate group members, and
their respective commitments. The records also must reflect the dates
when any penalty bid was in effect. The information is required to be
maintained in a separate file, or in a separately retrievable format,
for a period of three years, the first two years in an easily
accessible place, consistent with the requirement of Exchange Act Rule
17a-4(f). The required information must be kept for any offering
registered under the Securities Act, conducted pursuant to Regulation A
134 thereunder, or where the aggregate proceeds exceed $5 million.
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\134\ 17 CFR 230.251 et seq.
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While several commenters opposed the disclosure, notification, and
recordkeeping requirements proposed in Rule 104, particularly with
respect to aftermarket activities, the Commission continues to believe
that these provisions are an appropriate and effective means to monitor
developments in aftermarket activities. Nevertheless, the Commission
appreciates commenters' concerns that these provisions may require the
implementation of new internal systems and procedures for underwriters
and syndicate members. To accommodate possible revisions to broker-
dealers' systems and procedures, the Commission has determined to delay
the effectiveness of the recordkeeping requirements pertaining to
syndicate covering transactions and penalty bids contained in Rule 17a-
2 until April 1, 1997. The disclosure and notification requirements,
which are contained in Rule 104 and pertain to stabilizing
transactions, syndicate cover transactions, and penalty bids, will
become effective on the same date as the other provisions of Regulation
M.
F. Rule 105--Short Sales in Connection With an Offering
The Commission is adopting Rule 105 to replace Rule 10b-21. Rule
105, like Rule 10b-21, prohibits certain short sales from being covered
with securities obtained from an underwriter, broker, or dealer who is
participating in an offering. Rule 105 is intended to prevent
manipulative short selling prior to a public offering by short sellers
who cover their short positions by purchasing securities in the
offering, thus largely avoiding exposure to market risk. Such short
sales could result in a lower offering price and reduce an issuer's
proceeds. Rule 105 differs from Rule 10b-21 because it covers only
those short sales effected in the period commencing five business days
prior to the offering's pricing and ending with such pricing, rather
than the potentially much longer period of Rule 10b-21, which commenced
with the filing of a registration statement or Form 1-A.135
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\135\ 17 CFR 239.90.
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In its comment letter, the NASD expressed strong support for Rule
10b-21 and recommended that the current restricted period be retained
because the date of the filing of a registration statement or Form 1-A
can be identified with certainty in advance by potential short sellers.
The NASD also urged that Rule 105 be amended to prohibit expressly a
short seller from ``directly or indirectly'' covering short sales with
securities purchased in a public offering. Another commenter suggested
that the rule would be more effective if it covered transactions in
related options. A third commenter urged that the exception in Rule 105
for shelf-registered offerings be eliminated.
The Commission believes that the application of Rule 105 should be
limited to the period corresponding to the longest restricted period of
Regulation M, which is five business days, and that short sellers
contemplating a covering transaction will be in a position to know if
any of their short sales were made within that five business day
period. If short sales were made during this period, the short seller
cannot cover those short sales with securities purchased in the
offering.
As adopted, Rule 105 does not apply to short sales of derivative
securities, because an extension of the rule's prohibitions to
derivative securities would be inconsistent with the approach of
Regulation M, which is to focus on those securities having the greatest
manipulative potential.136 Additionally, the rule does not
expressly prohibit short sellers from ``directly or indirectly''
covering short sales out of the offering. The Commission decided not to
add the term ``indirectly'' to Rule 10b-21 at the time that rule was
adopted, and no different arguments have been presented that would
alter its decision.137
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\136\ Any manipulative short sales involving derivatives
transactions continue to be addressed by the general anti-
manipulation provisions, including Section 9(a)(2) of and Rule 10b-5
under the Exchange Act.
\137\ See Securities Exchange Act Release No. 26028 (August 25,
1988), 53 FR 33455, 33457.
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Finally, Rule 105 retains the exclusion for shelf-registered
offerings. However, it may be necessary for the Commission to
reevaluate this exclusion if the availability of shelf registration is
further expanded or offerings of shelf-registered equity become more
common-place.
III. Status of Interpretations, Exemptions, No-Action Positions,
Injunctions, and Orders to Cease and Desist
A. Interpretations, Exemptions, and No-action Positions
In the Proposing Release, the Commission sought comment on the
implications for interpretations, exemptions, and no-action positions
under the former trading practices rules in light of the adoption of
Regulation M. Although a few commenters highlighted interpretive
issues, and some specifically requested that certain exemption or no-
action letters remain in effect,138 there was little comment on
the status of interpretations, exemptions, and no-action positions
generally.
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\138\ See, e.g., Letter from Peter Derendinger, General Counsel,
CS Holding (June 24, 1996), to Jonathan G. Katz, Secretary, SEC,
concerning Letter regarding CS Holding, [1995] Fed. Sec. L. Rep.
(CCH) para. 77,018 (March 31, 1995); Letter from Dan Sheridan, Head
of Market Regulation Department, London Stock Exchange (July 23,
1996), to Jonathan G. Katz, Secretary, SEC, concerning Letter
regarding London Stock Exchange, (July 12, 1993) (permitting passive
market making on the London Stock Exchange during a distribution of
securities) (``LSE Letter'').
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Many terms and concepts in Regulation M have the same meaning as
under the former trading practices rules, and interpretations under
those rules regarding such terms or concepts remain relevant to the new
rules. Nevertheless, because the trading practices rules are rescinded
as of the effective date of Regulation M, written exemptions that were
granted and no-action positions taken under those rules no longer will
be in effect as of Regulation M's
[[Page 539]]
effectiveness.139 Many of the exemptions and no-action positions
issued under the trading practices rules have been codified, expanded,
or otherwise made redundant by Regulation M. The Commission expects,
therefore, that the need to continue the relief issued under the
trading practices rules after the effective date of Regulation M will
be very limited. 140 Accordingly, if a recipient or beneficiary of
an exemption or no-action letter issued under the former trading
practices rules believes that the relief granted by such letter
continues to be necessary or appropriate under Regulation M, that
person may wish to contact the Office of Risk Management and Control of
the Commission's Division of Market Regulation, at (202) 942-0772.
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\139\ Regulation M is considered a major rule for purposes of
the Small Business Regulatory Enforcement Fairness Act of 1996, Pub.
L. No. 104-121, Title II, 110 Stat. 857 (1996). Thus, it is subject
to a Congressional disapproval process and will not become effective
until March 4, 1997. The provisions of Rules 10b-6, 10b-6A, 10b-7,
10b-8, and 10b-21 remain in effect until the effective date of their
rescission, which is March 4, 1997. Persons participating in
offerings are subject to the terms of the trading practices rules
until they are rescinded.
\140\ In response to a request from the London Stock Exchange,
the LSE Letter shortly will be modified and reissued under
Regulation M. To the extent that other letters have not been
codified by Regulation M, appropriate requests for relief under
Regulation M will be considered by the Division of Market
Regulation.
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B. Injunctions and Orders to Cease and Desist
The Proposing Release did not address the status of outstanding
injunctions or orders to cease and desist from violating the trading
practices rules. The Commission is of the view that all such
injunctions and orders continue in force and effect, and should be
considered injunctions or orders to cease and desist from violating the
corresponding successor rule or rules under Regulation M. For purposes
of determining the status of an outstanding injunction or order, Rules
101 and 102 are each deemed a successor rule to Rule 10b-6; Rule 103 is
deemed a successor rule to Rule 10b-6A; Rule 104 is deemed a successor
rule to Rule 10b-7; and Rule 105 is deemed a successor rule to Rule
10b-21. Additionally, with respect to Commission cases alleging a
violation of one or more of the trading practices rules, if a court or
administrative law judge determines after the adoption of Regulation M
that a violation of one or more of the trading practices rules occurred
while such rules remained in effect, and an injunction or order to
cease and desist would have been an appropriate remedy at the time such
rules remained in effect, the Commission believes such court or
administrative law judge should issue an injunction or order to cease
and desist from violating the appropriate successor rule or rules under
Regulation M.
IV. Costs and Benefits of the Amendments and Their Effects on
Competition, Efficiency, and Capital Formation
Section 23(a)(2) of the Exchange Act 141 requires the
Commission to consider the anti-competitive effects of any rules it
adopts thereunder, and to balance them against the benefits that
further the purposes of the Act. Furthermore, Section 2 of the
Securities Act 142 and Section 3 of the Exchange Act,143 as
amended by the recently enacted National Securities Markets Improvement
Act of 1996 (``Markets Improvement Act''),144 provide that
whenever the Commission is engaged in rulemaking and is required to
consider or determine whether an action is necessary or appropriate in
the public interest, the Commission also shall consider, in addition to
the protection of investors, whether the action will promote
efficiency, competition, and capital formation.
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\141\ 15 U.S.C. 78w(a)(2).
\142\ 15 U.S.C. 77b.
\143\ 15 U.S.C. 78c.
\144\ Pub. L. No. 104-290, Sec. 106, 110 Stat. 3416 (1996).
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In the Proposing Release, the Commission stated its view that the
rules would not likely impose any significant burden on competition not
necessary or appropriate in furtherance of the Exchange Act.145 In
fact, the Commission stated that Regulation M would reduce
significantly trading restrictions on issuers, underwriters, and others
participating in a distribution and, therefore, should reduce the costs
of raising capital. The Commission also indicated its belief that
Regulation M would enhance the posture of U.S. underwriters in relation
to foreign broker-dealers in competing for underwriting business in
cross-border transactions.
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\145\ See Proposing Release, 61 FR at 17127.
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The NYSE and the Amex argued that use of a trading volume test to
determine which securities qualify for the actively-traded securities
exception and the one or five day restricted period of Regulation M
would have an anti-competitive effect. The NYSE and the Amex believed
that the Commission's use of ADTV is discriminatory and anti-
competitive because the rules make no distinction between dealer
markets, where dealer ``interpositioning'' is alleged to approximately
double the reported volume of shares changing hands between investors,
as compared with auction markets, where buyers and sellers meet
directly and reported volume reflects that direct interaction as a
single reported trade. These commenters asserted that the alleged
``double counting'' would have an anti-competitive effect on the
ability of auction markets to attract new corporate listings, because
it makes it more likely that distribution participants will be subject
to fewer restrictions in dealer markets. The NYSE recommended that if
the Commission determined that ADTV for a dealer market should be
considered as the volume reported by that market, the Commission should
consider the ADTV for auction markets as being twice the volume
reported by those markets. Similarly, the Amex suggested that Nasdaq
reported volume be adjusted downward if a measure based on ADTV is
used.
As stated above, the Commission is of the view that the ADTV test
provides the best measurement of a security's relative susceptibility
to manipulation. Moreover, the public float test described above
provides an additional control to prevent securities from being
categorized based on aberrational levels of trading volume. The public
float test also serves to equalize the treatment of securities traded
under different market structures.
Although the NYSE and the Amex letters contend that the use of a
trading volume standard in Regulation M will have an anti-competitive
effect on their ability to attract corporate listings, they offer no
data or other information demonstrating that the use of a trading
volume concept in other rules, such as Exchange Act Rule 10b-18 or
Securities Act Rule 144,146 has resulted in an issuer deciding not
to list on the NYSE or the Amex.
---------------------------------------------------------------------------
\146\ 17 CFR 230.144.
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The NYSE and the Amex proposals also do not take into account the
complex and evolving nature of both dealer and auction markets, and do
not recommend a workable methodology for making such trading
``comparable.'' The Commission notes that the Nasdaq market has a
substantial and developing auction component,147 and the exchanges
have substantial dealer activity either through block positioning
[[Page 540]]
or specialist dealer activity.148 The NYSE and Amex do not
suggest, however, that there is any need for a reduction in exchange
volume based upon dealer activity.
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\147\ For example, Instinet accounts for a significant
proportion of the reported volume in Nasdaq securities. In addition,
the Commission's recently adopted order handling rules are likely to
lower the level of dealer involvement in Nasdaq order flow. See
Release 34-37619A, 61 FR 48289.
\148\ Specialists, which are the hallmark of auction markets,
have important dealer obligations. They must trade for their own
accounts (i.e., as dealers) in order to maintain fair and orderly
markets. See Exchange Act Rule 11b-1, 17 CFR 240.11b-1; NYSE Rule
104.
In 1995, trading by NYSE members accounted for 19.7% of NYSE
reported share volume (purchases and sales) with specialist activity
accounting for approximately half of this volume. NYSE Fact Book 20;
see generally John F. Gould & Allan W. Kleidon, Market Maker
Activity on Nasdaq: Implications for Trading Volume, 1 Stanford
Journal of Law, Business and Finance 11 (1994).
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The complexity is magnified when the focus is on individual
securities rather than aggregate volume levels for a market. For
example, a portion of trading in exchange-listed securities is effected
in the over-the-counter (``OTC'') market (by dealers) but is reported
in composite exchange volume.149 Moreover, the level of exchange
dealer activity undoubtedly varies from security to security, and the
level of dealer activity for thinly-traded exchange stocks is probably
high. If the approach suggested by the NYSE and the Amex were
implemented, comparability would require an analysis of the dealer
component in OTC and exchange trading and application of appropriate
discounts. These discount calculations for each security also would
need to be constantly updated. The Commission believes that this would
be a cumbersome exercise of little value.
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\149\ See The Nasdaq Stock Market, Inc., The Nasdaq Stock Market
1996 Fact Book & Company Directory 8 (1996) (4.3% of volume in
exchange-listed securities was effected by Nasdaq market makers in
1995).
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After considering carefully the views of the NYSE and the Amex, the
Commission continues to believe that Regulation M will not likely
impose any significant burden on competition not necessary or
appropriate in furtherance of the Exchange Act. As stated above, the
Commission believes that Regulation M is necessary and appropriate in
the public interest because of the changes in securities markets and
the fact that the trading practices rules had become needlessly complex
and imposed substantial compliance costs. Furthermore, by reducing
trading restrictions, Regulation M will promote efficiency and the
competitive position of U.S. underwriters, and enhance the U.S. capital
formation process.
V. Final Regulatory Flexibility Analysis
This following discussion summarizes the Commission's Regulatory
Flexibility Act analysis of Regulation M and the related amendments to
other rules adopted today. A complete copy of the Final Regulatory
Flexibility Act (``FRFA'') is available in Public File No. S7-11-96.
The rules adopted today are intended to streamline and simplify the
Commission's current anti-manipulation regulation of securities
offerings by reducing the regulatory burdens on issuers, underwriters,
and others with a significant interest in a securities offering, while
retaining core investor protections. The new rules replace Rules 10b-6,
10b-6A, 10b-7, 10b-8, and 10b-21.
Regulation M restricts offerings, activities, and persons where
there is a readily identifiable incentive to manipulate the price of an
offered security. The Commission believes that Regulation M reflects
the improved surveillance technology of U.S. self-regulatory
organizations, enhanced market transparency of securities transactions,
increased globalization of securities markets, and changed offering and
syndicate processes that have developed in recent years. The Commission
continues to believe that prophylactic rules provide the most
appropriate framework to achieve the objectives described above.
As stated in the FRFA, the Commission believes that Regulation M
will enhance the ability of small issuers to raise capital. Regulation
M is less restrictive than the structure under the former trading
practices rules. Moreover, the Commission believes that Regulation M
balances the objective of simplified, streamlined, and more flexible
regulation with its statutory mandate of investor protection in a
manner more appropriate than other alternatives.
The Commission requested comment with respect to the Initial
Regulatory Flexibility Analysis (``IRFA'') prepared in conjunction with
the Proposing Release. The Commission did not receive any comments with
respect to the IRFA.
A. Rules 101 and 102
The prohibitions in Rule 10b-6 are contained in two separate rules,
Rules 101 and 102. Each of these rules employ restricted periods based
on the dollar value of the published ADTV of the offered security and
the public float value of its issuer. The restricted periods commence
one or five business days prior to the pricing of the offering and
continue until the distribution is over. The restricted periods cover
the times when manipulative activity is most likely. The most actively-
traded securities (i.e., those securities having a minimum ADTV value
of $1 million and whose issuer meets a $150 million public float test)
are not subject to Rule 101. With respect to the vast majority of
securities distributions, the trading restrictions that existed under
Rule 10b-6 are substantially reduced or eliminated.
Rule 101 does not apply to distributions of Rule 144A securities
made to QIBs in transactions that are exempt under the Securities
Act.150 Transactions in nonconvertible investment grade debt and
preferred securities, and investment-grade asset-backed securities are
not covered by the rule. Derivative securities also are excluded.
Further, Rule 101 permits the routine dissemination of research
reports, the exercise of options and other securities, and transactions
in baskets of securities containing the offered security. Rule 101
excepts inadvertent violations during the restricted period by excusing
de minimis violations, provided that a distribution participant has in
place written policies and procedures reasonably designed to achieve
compliance with Regulation M's provisions. The scope of persons subject
to Rule 101 is narrowed by recognizing information barriers between a
distribution participant and its affiliates.
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\150\ 17 CFR 230.144A.
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Rule 101 applies equally to all distribution participants,
regardless of size. The Commission does not believe that it is
practicable to exempt small entities from Rule 101 because to do so
would be inconsistent with the Commission's statutory mandate to
protect investors.
Rule 102 governs the activities of issuers, selling security
holders, and their affiliated purchasers. This rule does not contain an
exception for actively-traded securities, or many of the other
exceptions in Rule 101, because issuers and selling shareholders
generally are not engaged in the securities business and do not need to
trade securities on their own behalf or for others. Nevertheless,
issuer participants, like underwriting participants, are able to engage
in market activities prior to the beginning of the applicable
restricted period. During the restricted period, Rule 102 permits: odd-
lot transactions; transactions in connection with issuer plans;
exercises of options, warrants, rights, and similar securities;
[[Page 541]]
transactions during Rule 144A distributions; and transactions in
certain nonconvertible securities and asset-backed securities that are
rated investment grade.
Rule 101 permits distribution participants to engage in a greater
range of market activities during a distribution in recognition of
their role as market intermediaries, independent of their function as
underwriters. Because issuer participants do not have such a broad
range of market obligations and have a more direct interest in the
offering's outcome, Rule 102 places more restrictions on their
activities during a distribution.
For many issuers, Regulation M reduces the period of trading
restrictions from nine or two business days to one business day. For
some securities, however, the restricted periods under Rules 101 and
102 may be longer than the cooling-off periods under Rule 10b-6 (i.e.,
five business days as opposed to two business days) because the new
rules' thresholds depend on dollar value of ADTV and of public float,
rather than on the offered security's price and the number of shares
held by nonaffiliates. Some of these issuers may be small entities. The
Commission has determined to base the new rules' thresholds on the
dollar value of the security's ADTV and the issuer's public float value
because the higher the value of trading and public float, the more
costly and more difficult it becomes to affect the security's price.
B. Rule 103
Rule 103 governs Nasdaq passive market making and replaces Rule
10b-6A. By eliminating the eligibility criteria contained in Rule 10b-
6A, Rule 103 applies to all Nasdaq securities and nearly all
distributions, and provides additional flexibility by permitting more
distribution participants to engage in passive market making. The
Commission no longer considers it necessary or appropriate to restrict
passive market making to the narrow class of offerings where the
potential liquidity loss may be substantial (i.e., where syndicate
members account for at least 30% of market making capacity). Rule 103
also allows less active passive market makers who might otherwise not
be able to engage in a passive market making a minimum net purchase
allowance of 200 shares. Some of these passive market makers may be
small broker-dealers.
Rule 103 benefits small issuers and small broker-dealers because it
removes the eligibility criteria of Rule 10b-6A. The eligibility
criteria were designed to limit the availability of passive market
making to those firm commitment, fixed price offerings qualifying for
the two business day cooling-off period of Rule 10b-6 and to those
circumstances where the restrictions otherwise would have reduced
market maker capacity significantly (i.e., where syndicate members
accounted for at least 30% of market maker capacity). By removing the
eligibility criteria, more offerings and more market makers qualify for
passive market making.
C. Rule 104
Rule 104 regulates stabilizing and other activities related to a
distribution and replaces Rule 10b-7. The rule permits underwriters to
follow the independent bid for a security in the principal market,
wherever located. Certain disclosure and recordkeeping requirements are
extended to the aftermarket transactions by distribution participants.
Underwriters frequently engage in aftermarket activities, including
covering syndicate short positions and establishing and enforcing
penalty bids, that are analogous to traditional stabilizing under Rule
10b-7.
The Commission believes that Rule 104 generally concerns syndicate
managers because of their role as stabilizing managers. For the most
part, these syndicate managers are larger broker-dealers. To the extent
small broker-dealers engage in stabilizing activities, Rule 104 applies
to them with the same force as large broker-dealers.
In conjunction with Rule 104, the Commission is adopting amendments
to Items 502(d) and 508 of Regulations S-K and S-B, and Rule 17a-2.
These rules require revised disclosure and recordkeeping requirements
on certain post-distribution activities of underwriters. Rule 104 and
Item 502(d) of Regulations S-K and S-B require disclosure of
stabilizing activities through a new, shorter stabilizing legend in
place of the legend that had been required. In addition, Rule 104 and
Item 508 of Regulations S-K and S-B expand the discussion in the plan
of distribution section of the prospectus to include a ``plain
English'' discussion of any expected stabilizing activities and other
aftermarket activities and their potential effects on the marketplace
with respect to the particular securities offering. Rule 17a-2 is
amended to require the manager of an underwriting syndicate to maintain
records related to syndicate covering transactions and penalty bids.
The Commission believes that the preponderance of the broker-
dealers acting as distribution participants are not small broker-
dealers, and that there is only a relatively small number of small
broker-dealers that act as distribution participants. The Commission
believes, however, that any effect on small entities will be minimal
because the additional disclosure in the offering materials and
notification to regulatory authorities is the responsibility of the
managing underwriter who is unlikely to fall within the small entity
classification because of capital requirements for underwriting. The
same is true of the additional recordkeeping requirements of Rule 17a-
2.
D. Rule 105
Rule 105 recodifies Rule 10b-21 governing short selling in
connection with a public offering. To harmonize Rule 105 with the
provisions of Rules 101 and 102, the period of Rule 105's coverage is
shortened to the five business day period before pricing, rather than
the time extending from the filing of offering materials to the time
when sales may be made. Rule 105 is less restrictive than Rule 10b-21,
and applies equally to all market participants.
VI. Paperwork Reduction Act
As set forth in the Proposing Release,151 Rules 101, 102, 103,
and 104 under Regulation M and the amendments to Rule 17a-2 and to
Items 502(d) and 508 of Regulations S-B and S-K contain collections of
information within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').152 Accordingly, the collection of information
requirements contained in the rules and related amendments were
submitted to the Office of Management and Budget (``OMB'') for review
and were approved by OMB which assigned the following control numbers:
Rule 101, control number 3235-0464; Rule 102, control number 3235-0467;
Rule 103, control number 3235-0466; Rule 104, control number 3235-0465;
Amendments to Rule 17a-2, control number 3235-0201; Amendments to Items
502(d) and 508 of Regulation S-B, control number 3235-0418; and
Amendments to Item 502(d) and 508 of Regulation S-K, control number
3235-0071. The collection of information requirements are in accordance
with Section 3507 of the PRA.153 An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless the agency displays a valid OMB control number.
---------------------------------------------------------------------------
\151\ 61 FR at 17127.
\152\ 44 U.S.C. 3501 et seq.
\153\ 44 U.S.C. 3507.
---------------------------------------------------------------------------
[[Page 542]]
The collections of information under Regulation M and the related
amendments are necessary for covered persons to obtain certain benefits
or to comply with certain requirements. As described in more detail in
the Proposing Release, the collections of information are necessary to
provide the Commission with information regarding syndicate covering
transactions and penalty bids.154 The Commission may review this
information during periodic examinations or with respect to
investigations. Except for the information required to be kept under
Rule 104(i) and Rule 17a-2(c), none of the information required to be
collected or disclosed for PRA purposes will be kept confidential. If
the records required to be kept pursuant to these rules are requested
by and submitted to the Commission, they will be kept confidential to
the extent permitted by statutory and regulatory provisions.
---------------------------------------------------------------------------
\154\ See Proposing Release, 61 FR at 17127-30.
---------------------------------------------------------------------------
Several commenters provided comments regarding the Commission's
estimate of the burdens associated with the recordkeeping requirement
under Rule 104 and the related amendment to Rule 17a-2. Rule 104(i) and
Rule 17a-2(c) require underwriters to keep records of syndicate
covering transactions and penalty bids, in addition to the stabilizing
information required prior to these amendments. The NASD suggested that
the Commission review its estimated time for recordkeeping for
syndicate covering transactions and penalty bids.155 While they
did not challenge specific burden estimates, two other commenters noted
generally that the change in recordkeeping requirements will be more
burdensome than represented by the Commission.156 The Securities
Industry Association asserted that the amendments would require system
changes and retraining for underwriters. None of these commenters,
however, provided specific alternatives to the Commission's estimates.
---------------------------------------------------------------------------
\155\ NASD Comment Letter, supra note 31, at p. 9.
\156\ Comment letter from the Securities Industry Association
(July 16, 1996), at p. 13; Comment letter from J.P. Morgan
Securities Inc., at p. 4.
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After carefully considering these comments, and based upon further
review of the disclosure, notification, and recordkeeping changes
required by Rule 104(h) and the amendment to Rule 17a-2(c), the
Commission is retaining its burden estimates for the recordkeeping
obligation under Rule 104 and the amendment to Rule 17a-2. Thus, the
descriptions and estimated burdens of the collection of information
requirements under Regulation M have not changed, and are set forth in
the Proposing Release.157
---------------------------------------------------------------------------
\157\ See Proposing Release, 61 FR at 17127-30.
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VII. Statutory Basis and Text of Rules and Amendments
Rules 10b-6, 10b-6A, 10b-7, 10b-8, and 10b-21 are removed pursuant
to, and the amendments to Rule 17a-2 are adopted under, the Exchange
Act, 15 U.S.C. 78a et seq., and particularly Sections 2, 3, 9(a)(6),
10(a), 10(b), 13(e), 15(c), 17(a), and 23(a), 15 U.S.C. 78b, 78c,
78i(a)(6), 78j(a), 78j(b), 78m(e), 78o(c), 78q(a), and 78w(a). The
amendments to Items 502(d) and 508 of Regulations S-B and S-K are
adopted under the Securities Act, 15 U.S.C. 77a et seq., particularly
Sections 6, 7, 8, 10, and 19(a), 15 U.S.C. 77f, 77g, 77h, 77j, and
77s(a); the Exchange Act, 15 U.S.C. 78a et seq., particularly Sections
3, 4, 10, 12, 13, 14, 15, 16, and 23, 15 U.S.C. 78c, 78d, 78j, 78l,
78m, 78n, 78o, 78p, and 78w; and the Investment Company Act, 15 U.S.C.
80a-1 et seq., particularly Sections 8 and 38(a), 15 U.S.C. 80a-8 and
80a-37(a). Regulation M is adopted under the Securities Act, 15 U.S.C.
77a et seq., particularly Sections 7, 17(a), 19(a), 15 U.S.C. 77g,
77q(a), and 77s(a); the Exchange Act, 15 U.S.C. 78a et seq.,
particularly Sections 2, 3, 9(a), 10, 11A(c), 12, 13, 14, 15(c), 15(g),
17(a), 23(a), and 30, 15 U.S.C. 78b, 78c, 78i(a), 78j, 78k-1(c), 78l,
78m, 78n, 78o(c), 78o(g), 78q(a), 78w(a), and 78dd-1; and the
Investment Company Act, 15 U.S.C. 80a-1 et seq., particularly Sections
23, 30, and 38, 15 U.S.C. 80a-23, 80a-29, and 80a-37. The necessary
nomenclature amendments to Sections 200.30-3, 230.418, 230.461,
240.11a-1, 240.13e-4, 240.13e-102, and 240.14d-102 of this chapter,
reflecting the removal of Rules 10b-6, 10b-6A, 10b-7, and 10b-8 under
the Exchange Act and the adoption of Regulation M, are adopted pursuant
to the authority cited above with respect to those amendments.
List of Subjects
17 CFR Part 200
Administrative practice and procedure, Authority delegations
(Government agencies), Sunshine Act.
17 CFR Part 228
Reporting and recordkeeping requirements, Securities, Small
businesses.
17 CFR Part 229
Reporting and recordkeeping requirements, Securities.
17 CFR Part 230
Reporting and recordkeeping requirements, Securities.
17 CFR Part 240
Broker-dealers, Fraud, Issuers, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 242
Broker-dealers, Fraud, Issuers, Reporting and recordkeeping
requirements, Securities.
For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is amended as follows:
PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND
REQUESTS
1. The authority citation for part 200 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77s, 78d-1, 78d-2, 78w, 78ll(d), 79t,
77sss, 80a-37, 80b-11, unless otherwise noted.
* * * * *
2. Section 200.30-3 is amended by revising paragraph (a)(6) to read
as follows:
Sec. 200.30-3 Delegation of authority to Director of Division of
Market Regulation.
* * * * *
(a) * * *
(6) Pursuant to Rules 10b-13(d), 14e-4(c), and 15c2-11(h)
(Secs. 240.10b-13(d), 240.14e-4(c), and 240.15c2-11(h) of this
chapter), and Rules 101(d), 102(e), 104(j), and 105(c) of Regulation M
(Secs. 242.101(d), 242.102(e), 242.104(j), and 242.105(c) of this
chapter), to grant requests for exemptions from Rules 10b-13, 14e-4,
and 15c2-11) (Secs. 240.10b-13, 240.14e-4, and 240.15c2-11 of this
chapter), and Rules 101, 102, 104, and 105 of Regulation M
(Secs. 242.101, 242.102, 242.104, and 242.105 of this chapter).
* * * * *
PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS
3. The authority citation for part 228 continues to read as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss,
78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 80b-
11, unless otherwise noted.
4. Section 228.502 is amended by revising the introductory text of
paragraph (d)(1) and paragraph (d)(1)(i) to read as set forth below and
by removing the phrase ``RULE 10b-6A UNDER THE SECURITIES EXCHANGE
[[Page 543]]
ACT OF 1934'' from paragraph (d)(2) and adding, in its place, the
phrase ``RULE 103 OF REGULATION M''.
Sec. 228.502 (Item 502) Inside front and outside back cover pages of
prospectus.
* * * * *
(d)(1) Stabilizing and other transactions. (i) Include the
following statement, if true, subject to appropriate modification where
circumstances require.
Certain persons participating in this offering may engage in
transactions that stabilize, maintain, or otherwise affect the price
of (identify securities), including (list types of transactions).
For a description of these activities, see ``Plan of Distribution.''
* * * * *
5. Section 228.508 is amended by removing the phrase
``Sec. 240.10b-6A of this chapter'' from paragraph (i) and adding, in
its place, the phrase ``Rule 103 of Regulation M (Sec. 242.103 of this
chapter)'' and by adding paragraph (j) to read as follows:
Sec. 228.508 (Item 508) Plan of distribution.
* * * * *
(j) Stabilizing and other transactions. If the underwriter or any
selling group member intends to engage in stabilizing, syndicate short
covering transactions, penalty bids, or any other transaction during
the offering that may stabilize, maintain, or otherwise affect the
offered security's price, indicate such intention and briefly describe
such transaction(s).
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
6. The authority citation for part 229 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn,
77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e, 79n,
79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted.
* * * * *
7. Section 229.502 is amended by revising the introductory text of
paragraph (d)(1) and paragraph (d)(1)(i) to read as set forth below and
by removing the phrases ``Sec. 240.10b-6A of this chapter'' and ``RULE
10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934'' from paragraph
(d)(2) and adding, in their places, the phrases ``Sec. 242.103 of this
chapter'' and ``RULE 103 OF REGULATION M'', respectively.
Sec. 229.502 (Item 502) Inside front and outside back cover pages of
prospectus.
* * * * *
(d)(1) Stabilizing and other transactions. (i) Include the
following statement, if true, subject to appropriate modification where
circumstances require.
Certain persons participating in this offering may engage in
transactions that stabilize, maintain, or otherwise affect the price
of (identify securities), including (list types of transactions).
For a description of these activities, see ``Plan of Distribution.''
* * * * *
8. Section 229.508 is amended by removing the phrase
``Sec. 240.10b-6A of this chapter'' from paragraph (k) and adding, in
its place, the phrase ``Rule 103 of Regulation M (Sec. 242.103 of this
chapter)'' and by adding paragraph (l) to read as follows:
Sec. 229.508 (Item 508) Plan of distribution.
* * * * *
(l) Stabilizing and other transactions. If the underwriter or any
selling group member intends to engage in stabilizing, syndicate short
covering transactions, penalty bids, or any other transaction during
the offering that may stabilize, maintain, or otherwise affect the
security's price, indicate such intention and briefly describe such
transaction(s).
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
9. The authority citation for part 230 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c,
78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-29, 80a-30,
and 80a-37, unless otherwise noted.
* * * * *
Sec. 230.418 [Amended]
10. Section 230.418 is amended by removing the phrase ``offering at
the market, as defined in Rule 10b-7 under the Securities Exchange Act
of 1934 (17 CFR 240.10b-7)'' from paragraph (a)(4) and adding, in its
place, the phrase ``at-the-market offering, as defined in Sec. 242.100
of this chapter''.
Sec. 230.461 [Amended]
11. Section 230.461 is amended by removing the phrase ``Rules 10b-
2, 10b-6, and 10b-7 under the Securities Exchange Act of 1934
(Secs. 240.10b-6 and 10b-7 of this chapter)'' from paragraph (b)(7) and
adding, in its place, the phrase ``Regulation M (Secs. 242.100 through
242.105 of this chapter)''.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
12. The authority citation for part 240 is amended by removing the
subauthorities for ``Section 240.10b-6'' and ``Section 240.10b-21'' and
the general authority continues to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78k, 78k-1, 78l, 78m,
78n, 78o, 78p, 78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-
23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
Sec. 240.10a-1 [Amended]
13. Section 240.10a-1 is amended by removing the cite
``Sec. 240.10b-7'' from the introductory text of paragraph (e)(5) and
paragraphs (e)(6) and (e)(11), and adding, in its place, the phrase
``Sec. 242.104 of this chapter'' and by removing the phrase ``pursuant
to Sec. 240.10-8'' from paragraph (e)(10).
Sec. 240.10b-6 [Removed and Reserved]
14. Section 240.10b-6 is removed and reserved.
Sec. 240.10b-6A [Removed]
15. Section 240.10b-6A is removed.
Secs. 240.10b-7and 240.10b-8 [Removed and Reserved]
16. Sections 240.10b-7 and 240.10b-8 are removed and reserved.
17. Section 240.10b-18 is amended by redesignating paragraphs
(a)(3)(i) through (a)(3)(vi) as paragraphs (a)(3)(ii) through
(a)(3)(vii), and by adding paragraph (a)(3)(i) and revising paragraphs
(a)(5) and (a)(6) to read as follows:
Sec. 240.10b-18 Purchases of certain equity securities by the issuer
and others.
(a) * * *
(3) * * *
(i) Effected during the restricted period specified in Sec. 242.102
of this chapter during a distribution (as defined in Sec. 242.100 of
this chapter) of such common stock, or during a distribution for which
such common stock is a reference security, by the issuer or any of its
affiliated purchasers;
* * * * *
(5) The term plan has the meaning contained in Sec. 242.100 of this
chapter;
(6) The term agent independent of the issuer has the meaning
contained in Sec. 242.100 of this chapter;
* * * * *
Sec. 240.10b-21 [Removed and Reserved]
17. Section 240.10b-21 is removed and reserved.
[[Page 544]]
Sec. 240.11a-1 [Amended]
18. Section 240.11a-1 is amended by removing the phrase
``Sec. 240.10b-7 (Rule 10b-7)'' from paragraph (b)(3) and adding, in
its place, the phrase ``Sec. 242.104 of this chapter''.
Sec. 240.13e-4 [Amended]
19. Section 240.13e-4 is amended by removing the phrase ``an
issuer's plan as that term is defined in Rule 10b-6(c)(4) under the Act
[Sec. 240.10b-6(c)(4)]'' from paragraph (h)(5)(i) and adding, in its
place, the phrase ``a plan as that term is defined in Sec. 242.100 of
this chapter''.
20. Section 240.13e-102 is amended by revising General Instruction
III.C. to Schedule 13E-4F to read as follows:
Sec. 240.13e-102 Schedule 13E-4F. Tender offer statement pursuant to
section 13(e)(1) of the Securities Exchange Act of 1934 and
Sec. 240.13e-4 thereunder.
* * * * *
General Instructions
* * * * *
III. Compliance With the Exchange Act
* * * * *
C. The issuer's attention is directed to Regulation M
(Secs. 242.100 through 242.105 of this chapter), in the case of an
issuer exchange offer, and to Rule 10b-13 under the Exchange Act
(Sec. 240.10b-13), in the case of an issuer cash tender offer or
issuer exchange offer. [See Exchange Act Release No. 29355 (June 21,
1991) containing an exemption from Rule 10b-13.]
* * * * *
21. Section 240.14d-102 is amended by revising General Instruction
III.C. to Schedule 14D-1F to read as follows:
Sec. 240.14d-102 Schedule 14D-1F. Tender offer statement pursuant to
Rule 14d-1(b) under the Securities Exchange Act of 1934.
* * * * *
General Instructions
* * * * *
III. Compliance With the Exchange Act
* * * * *
C. The bidder's attention is directed to Regulation M
(Secs. 242.100 through 242.105 of this chapter) in the case of an
exchange offer, and to Rule 10b-13 under the Exchange Act
(Sec. 240.10b-13) for any exchange or cash tender offer. [See
Exchange Act Release No. 29355 (June 21, 1991) containing an
exemption from Rule 10b-13.]
* * * * *
22. Section 240.17a-2 is amended by revising paragraph (a), the
introductory text of paragraph (b), paragraph (b)(1), the introductory
text of paragraph (c), and paragraphs (c)(1) and (d) to read as
follows:
Sec. 240.17a-2 Recordkeeping requirements relating to stabilizing
activities.
(a) Scope of section. This section shall apply to any person who
effects any purchase of a security subject to Sec. 242.104 of this
chapter for the purpose of, or who participates in a syndicate or group
that engages in, ``stabilizing,'' as defined in Sec. 242.100 of this
chapter, the price of any security; or effects a purchase that is a
``syndicate covering transaction,'' as defined in Sec. 242.100 of this
chapter; or imposes a ``penalty bid,'' as defined in Sec. 242.100 of
this chapter:
(1) With respect to which a registration statement has been, or is
to be, filed pursuant to the Securities Act of 1933 (15 U.S.C. 77a et
seq.); or
(2) Which is being, or is to be, offered pursuant to an exemption
from registration under Regulation A (Secs. 230.251 through 230.263 of
this chapter) adopted under the Securities Act of 1933 (15 U.S.C. 77a
et seq.); or
(3) Which is being, or is to be, otherwise offered, if the
aggregate offering price of the securities being offered exceeds
$5,000,000.
(b) Definitions. For purposes of this section, the following
definitions shall apply:
(1) The term manager shall mean the person stabilizing or effecting
syndicate covering transactions or imposing a penalty bid for its sole
account or for the account of a syndicate or group in which it is a
participant, and who, by contract or otherwise, deals with the issuer,
organizes the selling effort, receives some benefit from the
underwriting that is not shared by other underwriters, or represents
any other underwriters in such matters as maintaining the records of
the distribution and arranging for allotments of the securities
offered.
* * * * *
(c) Records relating to stabilizing, syndicate covering
transactions, and penalty bids required to be maintained by manager.
Any person subject to this section who acts as a manager and stabilizes
or effects syndicate covering transactions or imposes a penalty bid
shall:
(1) Promptly record and maintain the following separately
retrievable information, for a period of not less than three years, the
first two years in an easily accessible place; Provided, however, That
if the information is in a record required to be made pursuant to
Sec. 240.17a-3 or Sec. 240.17a-4, or otherwise preserved, such
information need not be maintained in a separate file if the person can
sort promptly and retrieve the information as if it had been kept in a
separate file as a record made pursuant to, and preserves the
information in accordance with the time periods specified in, this
paragraph (c)(1):
(i) The name and class of any security stabilized or any security
in which syndicate covering transactions have been effected or a
penalty bid has been imposed;
(ii) The price, date, and time at which each stabilizing purchase
or syndicate covering transaction was effected by the manager or by any
participant in the syndicate or group, and whether any penalties were
assessed;
(iii) The names and the addresses of the members of the syndicate
or group;
(iv) Their respective commitments, or, in the case of a standby or
contingent underwriting, the percentage participation of each member of
the syndicate or group therein; and
(v) The dates when any penalty bid was in effect.
* * * * *
(d) Notification to manager. Any person who has a participation in
a syndicate account but who is not a manager of such account, and who
effects one or more stabilizing purchases or syndicate covering
transactions for its sole account or for the account of a syndicate or
group, shall within three business days following such purchase notify
the manager of the price, date, and time at which such stabilizing
purchase or syndicate covering transaction was effected, and shall in
addition notify the manager of the date and time when such stabilizing
purchase or syndicate covering transaction was terminated. The manager
shall maintain such notifications in a separate file, together with the
information required by paragraph (c)(1) of this section, for a period
of not less than three years, the first two years in an easily
accessible place.
23. Part 242 is added to read as follows:
PART 242--REGULATION M
Sec.
242.100 Preliminary note; definitions.
242.101 Activities by distribution participants.
242.102 Activities by issuers and selling security holders during a
distribution.
242.103 Nasdaq passive market making.
242.104 Stabilizing and other activities in connection with an
offering.
242.105 Short selling in connection with a public offering.
Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78i(a), 78j,
78k-1(c), 78l, 78m, 78n, 78o(c), 78o(g), 78q(a), 78q(h), 78w(a),
78dd-1, 80a-23, 80a-29, and 80a-37.
[[Page 545]]
Sec. 242.100 Preliminary note; definitions.
(a) Preliminary note: Any transaction or series of transactions,
whether or not effected pursuant to the provisions of Regulation M
(Secs. 242.100-242.105 of this chapter), remain subject to the
antifraud and antimanipulation provisions of the securities laws,
including, without limitation, Section 17(a) of the Securities Act of
1933 [15 U.S.C. 77q(a)] and Sections 9, 10(b), and 15(c) of the
Securities Exchange Act of 1934 [15 U.S.C. 78i, 78j(b), and 78o(c)].
(b) For purposes of regulation M (Secs. 242.100 through 242.105 of
this chapter) the following definitions shall apply:
ADTV means the worldwide average daily trading volume during the
two full calendar months immediately preceding, or any 60 consecutive
calendar days ending within the 10 calendar days preceding, the filing
of the registration statement; or, if there is no registration
statement or if the distribution involves the sale of securities on a
delayed basis pursuant to Sec. 230.415 of this chapter, two full
calendar months immediately preceding, or any consecutive 60 calendar
days ending within the 10 calendar days preceding, the determination of
the offering price.
Affiliated purchaser means:
(1) A person acting, directly or indirectly, in concert with a
distribution participant, issuer, or selling security holder in
connection with the acquisition or distribution of any covered
security; or
(2) An affiliate, which may be a separately identifiable department
or division of a distribution participant, issuer, or selling security
holder, that, directly or indirectly, controls the purchases of any
covered security by a distribution participant, issuer, or selling
security holder, whose purchases are controlled by any such person, or
whose purchases are under common control with any such person; or
(3) An affiliate, which may be a separately identifiable department
or division of a distribution participant, issuer, or selling security
holder, that regularly purchases securities for its own account or for
the account of others, or that recommends or exercises investment
discretion with respect to the purchase or sale of securities;
Provided, however, That this paragraph (3) shall not apply to such
affiliate if the following conditions are satisfied:
(i) The distribution participant, issuer, or selling security
holder:
(A) Maintains and enforces written policies and procedures
reasonably designed to prevent the flow of information to or from the
affiliate that might result in a violation of Secs. 242.101, 242.102,
and 242.104; and
(B) Obtains an annual, independent assessment of the operation of
such policies and procedures; and
(ii) The affiliate has no officers (or persons performing similar
functions) or employees (other than clerical, ministerial, or support
personnel) in common with the distribution participant, issuer, or
selling security holder that direct, effect, or recommend transactions
in securities; and
(iii) The affiliate does not, during the applicable restricted
period, act as a market maker (other than as a specialist in compliance
with the rules of a national securities exchange), or engage, as a
broker or a dealer, in solicited transactions or proprietary trading,
in covered securities.
Agent independent of the issuer means a trustee or other person who
is independent of the issuer. The agent shall be deemed to be
independent of the issuer only if:
(1) The agent is not an affiliate of the issuer; and
(2) Neither the issuer nor any affiliate of the issuer exercises
any direct or indirect control or influence over the prices or amounts
of the securities to be purchased, the timing of, or the manner in
which, the securities are to be purchased, or the selection of a broker
or dealer (other than the independent agent itself) through which
purchases may be executed; Provided, however, That the issuer or its
affiliate will not be deemed to have such control or influence solely
because it revises not more than once in any three-month period the
basis for determining the amount of its contributions to a plan or the
basis for determining the frequency of its allocations to a plan, or
any formula specified in a plan that determines the amount or timing of
securities to be purchased by the agent.
Asset-backed security has the meaning contained in General
Instruction I.B.5. to Form S-3 (Sec. 239.13 of this chapter).
At-the-market offering means an offering of securities at other
than a fixed price.
Business day means a 24 hour period beginning at midnight that
includes an entire trading session for the security in the principal
market for the security to be distributed.
Completion of participation in a distribution. Securities acquired
in the distribution for investment by any person participating in a
distribution, or any affiliated purchaser of such person, shall be
deemed to be distributed. A person shall be deemed to have completed
its participation in a distribution as follows:
(1) An issuer or selling security holder, when the distribution is
completed;
(2) An underwriter, when such person's participation has been
distributed, including all other securities of the same class that are
acquired in connection with the distribution, and any stabilization
arrangements and trading restrictions in connection with the
distribution have been terminated; Provided, however, That an
underwriter's participation will not be deemed to have been completed
if a syndicate overallotment option is exercised in an amount that
exceeds the net syndicate short position at the time of such exercise;
and
(3) Any other person participating in the distribution, when such
person's participation has been distributed.
Covered security means any security that is the subject of a
distribution, or any reference security.
Current exchange rate means the current rate of exchange between
two currencies, which is obtained from at least one independent entity
that provides or disseminates foreign exchange quotations in the
ordinary course of its business.
Distribution means an offering of securities, whether or not
subject to registration under the Securities Act, that is distinguished
from ordinary trading transactions by the magnitude of the offering and
the presence of special selling efforts and selling methods.
Distribution participant means an underwriter, prospective
underwriter, broker, dealer, or other person who has agreed to
participate or is participating in a distribution.
Electronic communications network has the meaning contained in
Sec. 240.11Ac1-1(a)(8) of this chapter.
Employee has the meaning contained in Form S-8 (Sec. 239.16b of
this chapter) relating to employee benefit plans.
Exchange Act means the Securities Exchange Act of 1934 (15 U.S.C.
78a et seq.).
Independent bid means a bid by a person who is not a distribution
participant, issuer, selling security holder, or affiliated purchaser.
NASD means the National Association of Securities Dealers, Inc. or
any of its subsidiaries.
Nasdaq means the Nasdaq system as defined in Sec. 240.11Ac1-2(a)(3)
of this chapter.
Nasdaq security means a security that is authorized for quotation
on Nasdaq, and such authorization is not suspended, terminated, or
prohibited.
[[Page 546]]
Net purchases means the amount by which a passive market maker's
purchases exceed its sales.
Offering price means the price at which the security is to be or is
being distributed.
Passive market maker means a market maker that effects bids or
purchases in accordance with the provisions of Sec. 242.103.
Penalty bid means an arrangement that permits the managing
underwriter to reclaim a selling concession from a syndicate member in
connection with an offering when the securities originally sold by the
syndicate member are purchased in syndicate covering transactions.
Plan means any bonus, profit-sharing, pension, retirement, thrift,
savings, incentive, stock purchase, stock option, stock ownership,
stock appreciation, dividend reinvestment, or similar plan; or any
dividend or interest reinvestment plan or employee benefit plan as
defined in Sec. 230.405 of this chapter.
Principal market means the single securities market with the
largest aggregate reported trading volume for the class of securities
during the 12 full calendar months immediately preceding the filing of
the registration statement; or, if there is no registration statement
or if the distribution involves the sale of securities on a delayed
basis pursuant to Sec. 230.415 of this chapter, during the 12 full
calendar months immediately preceding the determination of the offering
price. For the purpose of determining the aggregate trading volume in a
security, the trading volume of depositary shares representing such
security shall be included, and shall be multiplied by the multiple or
fraction of the security represented by the depositary share. For
purposes of this paragraph, depositary share means a security,
evidenced by a depositary receipt, that represents another security, or
a multiple or fraction thereof, deposited with a depositary.
Prospective underwriter means a person:
(1) Who has submitted a bid to the issuer or selling security
holder, and who knows or is reasonably certain that such bid will be
accepted, whether or not the terms and conditions of the underwriting
have been agreed upon; or
(2) Who has reached, or is reasonably certain to reach, an
understanding with the issuer or selling security holder, or managing
underwriter that such person will become an underwriter, whether or not
the terms and conditions of the underwriting have been agreed upon.
Public float value shall be determined in the manner set forth on
the front page of Form 10-K (Sec. 249.310 of this chapter), even if the
issuer of such securities is not required to file Form 10-K, relating
to the aggregate market value of common equity securities held by non-
affiliates of the issuer.
Reference period means the two full calendar months immediately
preceding the filing of the registration statement or, if there is no
registration statement or if the distribution involves the sale of
securities on a delayed basis pursuant to Sec. 230.415 of this chapter,
the two full calendar months immediately preceding the determination of
the offering price.
Reference security means a security into which a security that is
the subject of a distribution (``subject security'') may be converted,
exchanged, or exercised or which, under the terms of the subject
security, may in whole or in significant part determine the value of
the subject security.
Restricted period means:
(1) For any security with an ADTV value of $100,000 or more of an
issuer whose common equity securities have a public float value of $25
million or more, the period beginning on the later of one business day
prior to the determination of the offering price or such time that a
person becomes a distribution participant, and ending upon such
person's completion of participation in the distribution; and
(2) For all other securities, the period beginning on the later of
five business days prior to the determination of the offering price or
such time that a person becomes a distribution participant, and ending
upon such person's completion of participation in the distribution.
(3) In the case of a distribution involving a merger, acquisition,
or exchange offer, the period beginning on the day proxy solicitation
or offering materials are first disseminated to security holders, and
ending upon the completion of the distribution.
Securities Act means the Securities Act of 1933 (15 U.S.C. 77a et
seq.).
Selling security holder means any person on whose behalf a
distribution is made, other than an issuer.
Stabilize or stabilizing means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing, or
maintaining the price of a security.
Syndicate covering transaction means the placing of any bid or the
effecting of any purchase on behalf of the sole distributor or the
underwriting syndicate or group to reduce a short position created in
connection with the offering.
30% ADTV limitation means 30 percent of the market maker's ADTV in
a covered security during the reference period, as obtained from the
NASD.
Underwriter means a person who has agreed with an issuer or selling
security holder:
(1) To purchase securities for distribution; or
(2) To distribute securities for or on behalf of such issuer or
selling security holder; or
(3) To manage or supervise a distribution of securities for or on
behalf of such issuer or selling security holder.
Sec. 242.101 Activities by distribution participants.
(a) Unlawful Activity. In connection with a distribution of
securities, it shall be unlawful for a distribution participant or an
affiliated purchaser of such person, directly or indirectly, to bid
for, purchase, or attempt to induce any person to bid for or purchase,
a covered security during the applicable restricted period; Provided,
however, That if a distribution participant or affiliated purchaser is
the issuer or selling security holder of the securities subject to the
distribution, such person shall be subject to the provisions of
Sec. 242.102, rather than this section.
(b) Excepted Activity. The following activities shall not be
prohibited by paragraph (a) of this section:
(1) Research. The publication or dissemination of any information,
opinion, or recommendation, if the conditions of Secs. 230.138 or
230.139 of this chapter are met; or
(2) Transactions complying with certain other sections.
Transactions complying with Secs. 242.103 or 242.104; or
(3) Odd-lot transactions. Transactions in odd-lots; or transactions
to offset odd-lots in connection with an odd-lot tender offer conducted
pursuant to Sec. 240.13e-4(h)(5) of this chapter; or
(4) Exercises of securities. The exercise of any option, warrant,
right, or any conversion privilege set forth in the instrument
governing a security; or
(5) Unsolicited transactions. Unsolicited brokerage transactions;
or unsolicited purchases that are not effected from or through a broker
or dealer, on a securities exchange, or through an inter-dealer
quotation system or electronic communications network; or
(6) Basket transactions. (i) Bids or purchases, in the ordinary
course of business, in connection with a basket of 20 or more
securities in which a covered security does not comprise more than 5%
of the value of the basket purchased; or
(ii) Adjustments to such a basket in the ordinary course of
business as a result of a change in the composition of a standardized
index; or
[[Page 547]]
(7) De minimis transactions. Purchases during the restricted
period, other than by a passive market maker, that total less than 2%
of the ADTV of the security being purchased, or unaccepted bids;
Provided, however, That the person making such bid or purchase has
maintained and enforces written policies and procedures reasonably
designed to achieve compliance with the other provisions of this
section; or
(8) Transactions in connection with a distribution. Transactions
among distribution participants in connection with a distribution, and
purchases of securities from an issuer or selling security holder in
connection with a distribution, that are not effected on a securities
exchange, or through an inter-dealer quotation system or electronic
communications network; or
(9) Offers to sell or the solicitation of offers to buy. Offers to
sell or the solicitation of offers to buy the securities being
distributed (including securities acquired in stabilizing), or
securities offered as principal by the person making such offer or
solicitation; or
(10) Transactions in Rule 144A securities. Transactions in
securities eligible for resale under Sec. 230.144A(d)(3) of this
chapter, or any reference security, if the Rule 144A securities are
offered or sold in the United States solely to:
(i) Qualified institutional buyers, as defined in
Sec. 230.144A(a)(1) of this chapter, or to offerees or purchasers that
the seller and any person acting on behalf of the seller reasonably
believes are qualified institutional buyers, in transactions exempt
from registration under section 4(2) of the Securities Act (15 U.S.C.
77d(2)) or Secs. 230.144A or 230.501 through 230.508 of this chapter;
or
(ii) Persons not deemed to be ``U.S. persons'' for purposes of
Secs. 230.902(o)(2) or 230.902(o)(7) of this chapter, during a
distribution qualifying under paragraph (b)(10)(i) of this section.
(c) Excepted Securities. The provisions of this section shall not
apply to any of the following securities:
(1) Actively-traded securities. Securities that have an ADTV value
of at least $1 million and are issued by an issuer whose common equity
securities have a public float value of at least $150 million;
Provided, however, That such securities are not issued by the
distribution participant or an affiliate of the distribution
participant; or
(2) Investment grade nonconvertible and asset-backed securities.
Nonconvertible debt securities, nonconvertible preferred securities,
and asset-backed securities, that are rated by at least one nationally
recognized statistical rating organization, as that term is used in
Sec. 240.15c3-1 of this chapter, in one of its generic rating
categories that signifies investment grade; or
(3) Exempted securities. ``Exempted securities'' as defined in
section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12)); or
(4) Face-amount certificates or securities issued by an open-end
management investment company or unit investment trust. Face-amount
certificates issued by a face-amount certificate company, or redeemable
securities issued by an open-end management investment company or a
unit investment trust. Any terms used in this paragraph (c)(4) that are
defined in the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.)
shall have the meanings specified in such Act.
(d) Exemptive Authority. Upon written application or upon its own
motion, the Commission may grant an exemption from the provisions of
this section, either unconditionally or on specified terms and
conditions, to any transaction or class of transactions, or to any
security or class of securities.
Sec. 242.102 Activities by issuers and selling security holders during
a distribution.
(a) Unlawful Activity. In connection with a distribution of
securities effected by or on behalf of an issuer or selling security
holder, it shall be unlawful for such person, or any affiliated
purchaser of such person, directly or indirectly, to bid for, purchase,
or attempt to induce any person to bid for or purchase, a covered
security during the applicable restricted period; Except That if an
affiliated purchaser is a distribution participant, such affiliated
purchaser may comply with Sec. 242.101, rather than this section.
(b) Excepted Activity. The following activities shall not be
prohibited by paragraph (a) of this section:
(1) Odd-lot transactions. Transactions in odd-lots, or transactions
to offset odd-lots in connection with an odd-lot tender offer conducted
pursuant to Sec. 240.13e-4(h)(5) of this chapter; or
(2) Transactions by closed-end investment companies. (i)
Transactions complying with Sec. 270.23c-3 of this chapter; or
(ii) Periodic tender offers of securities, at net asset value,
conducted pursuant to Sec. 240.13e-4 of this chapter by a closed-end
investment company that engages in a continuous offering of its
securities pursuant to Sec. 230.415 of this chapter; Provided, however,
That such securities are not traded on a securities exchange or through
an inter-dealer quotation system or electronic communications network;
or
(3) Redemptions by commodity pools or limited partnerships.
Redemptions by commodity pools or limited partnerships, at a price
based on net asset value, which are effected in accordance with the
terms and conditions of the instruments governing the securities;
Provided, however, That such securities are not traded on a securities
exchange, or through an inter-dealer quotation system or electronic
communications network; or
(4) Exercises of securities. The exercise of any option, warrant,
right, or any conversion privilege set forth in the instrument
governing a security; or
(5) Offers to sell or the solicitation of offers to buy. Offers to
sell or the solicitation of offers to buy the securities being
distributed; or
(6) Unsolicited purchases. Unsolicited purchases that are not
effected from or through a broker or dealer, on a securities exchange,
or through an inter-dealer quotation system or electronic
communications network; or
(7) Transactions in Rule 144A securities. Transactions in
securities eligible for resale under Sec. 230.144A(d)(3) of this
chapter, or any reference security, if the Rule 144A securities are
offered or sold in the United States solely to:
(i) Qualified institutional buyers, as defined in
Sec. 230.144A(a)(1) of this chapter, or to offerees or purchasers that
the seller and any person acting on behalf of the seller reasonably
believes are qualified institutional buyers, in transactions exempt
from registration under section 4(2) of the Securities Act (15 U.S.C.
77d(2)) or Secs. 230.144A or 230.501 through 230.508 of this chapter;
or
(ii) Persons not deemed to be ``U.S. persons'' for purposes of
Secs. 230.902(o)(2) or 230.902(o)(7) of this chapter, during a
distribution qualifying under paragraph (b)(6)(i) of this section.
(c) Plans.--(1) Paragraph (a) of this section shall not apply to
distributions of securities pursuant to a plan, which are made:
(i) Solely to employees or security holders of an issuer or its
subsidiaries, or to a trustee or other person acquiring such securities
for the accounts of such persons; or
(ii) To persons other than employees or security holders, if bids
for or purchases of securities pursuant to the plan are effected solely
by an agent independent of the issuer and the securities are from a
source other than
[[Page 548]]
the issuer or an affiliated purchaser of the issuer.
(2) Bids for or purchases of any security made or effected by or
for a plan shall be deemed to be a purchase by the issuer unless the
bid is made, or the purchase is effected, by an agent independent of
the issuer.
(d) Excepted Securities. The provisions of this section shall not
apply to any of the following securities:
(1) Actively-traded reference securities. Reference securities with
an ADTV value of at least $1 million that are issued by an issuer whose
common equity securities have a public float value of at least $150
million; Provided, however, That such securities are not issued by the
issuer, or any affiliate of the issuer, of the security in
distribution.
(2) Investment grade nonconvertible and asset-backed securities.
Nonconvertible debt securities, nonconvertible preferred securities,
and asset-backed securities, that are rated by at least one nationally
recognized statistical rating organization, as that term is used in
Sec. 240.15c3-1 of this chapter, in one of its generic rating
categories that signifies investment grade; or
(3) Exempted securities. ``Exempted securities'' as defined in
section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12)); or
(4) Face-amount certificates or securities issued by an open-end
management investment company or unit investment trust. Face-amount
certificates issued by a face-amount certificate company, or redeemable
securities issued by an open-end management investment company or a
unit investment trust. Any terms used in this paragraph (d)(4) that are
defined in the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.)
shall have the meanings specified in such Act.
(e) Exemptive Authority. Upon written application or upon its own
motion, the Commission may grant an exemption from the provisions of
this section, either unconditionally or on specified terms and
conditions, to any transaction or class of transactions, or to any
security or class of securities.
Sec. 242.103 Nasdaq passive market making.
(a) Scope of Section. This section permits broker-dealers to engage
in market making transactions in covered securities that are Nasdaq
securities without violating the provisions of Sec. 242.101; Except
That this section shall not apply to any security for which a
stabilizing bid subject to Sec. 242.104 is in effect, or during any at-
the-market offering or best efforts offering.
(b) Conditions to be Met.
(1) General limitations. A passive market maker must effect all
transactions in the capacity of a registered market maker on Nasdaq. A
passive market maker shall not bid for or purchase a covered security
at a price that exceeds the highest independent bid for the covered
security at the time of the transaction, except as permitted by
paragraph (b)(3) of this section or required by a rule promulgated by
the Commission or the NASD governing the handling of customer orders.
(2) Purchase limitation. On each day of the restricted period, a
passive market maker's net purchases shall not exceed the greater of
its 30% ADTV limitation or 200 shares (together, ``purchase
limitation''); Provided, however, That a passive market maker may
purchase all of the securities that are part of a single order that,
when executed, results in its purchase limitation being equalled or
exceeded. If a passive market maker's net purchases equal or exceed its
purchase limitation, it shall withdraw promptly its quotations from
Nasdaq. If a passive market maker withdraws its quotations pursuant to
this paragraph, it may not effect any bid or purchase in the covered
security for the remainder of that day, irrespective of any later sales
during that day, unless otherwise permitted by Sec. 242.101.
(3) Requirement to lower the bid. If all independent bids for a
covered security are reduced to a price below the passive market
maker's bid, the passive market maker must lower its bid promptly to a
level not higher than the then highest independent bid; Provided,
however, That a passive market maker may continue to bid and effect
purchases at its bid at a price exceeding the then highest independent
bid until the passive market maker purchases an aggregate amount of the
covered security that equals or, through the purchase of all securities
that are part of a single order, exceeds the lesser of two times the
minimum quotation size for the security, as determined by NASD rules,
or the passive market maker's remaining purchasing capacity under
paragraph (b)(2) of this section.
(4) Limitation on displayed size. At all times, the passive market
maker's displayed bid size may not exceed the lesser of the minimum
quotation size for the covered security, or the passive market maker's
remaining purchasing capacity under paragraph (b)(2) of this section;
Provided, however, That a passive market maker whose purchasing
capacity at any time is between one and 99 shares may display a bid
size of 100 shares.
(5) Identification of a passive market making bid. The bid
displayed by a passive market maker shall be designated as such.
(6) Notification and reporting to the NASD. A passive market maker
shall notify the NASD in advance of its intention to engage in passive
market making, and shall submit to the NASD information regarding
passive market making purchases, in such form as the NASD shall
prescribe.
(7) Prospectus disclosure. The prospectus for any registered
offering in which any passive market maker intends to effect
transactions in any covered security shall contain the information
required in Secs. 228.502, 228.508, 229.502, and 229.508 of this
chapter.
(c) Transactions at Prices Resulting from Unlawful Activity. No
transaction shall be made at a price that the passive market maker
knows or has reason to know is the result of activity that is
fraudulent, manipulative, or deceptive under the securities laws, or
any rule or regulation thereunder.
Sec. 242.104 Stabilizing and other activities in connection with an
offering.
(a) Unlawful Activity. It shall be unlawful for any person,
directly or indirectly, to stabilize, to effect any syndicate covering
transaction, or to impose a penalty bid, in connection with an offering
of any security, in contravention of the provisions of this section. No
stabilizing shall be effected at a price that the person stabilizing
knows or has reason to know is in contravention of this section, or is
the result of activity that is fraudulent, manipulative, or deceptive
under the securities laws, or any rule or regulation thereunder.
(b) Purpose. Stabilizing is prohibited except for the purpose of
preventing or retarding a decline in the market price of a security.
(c) Priority. To the extent permitted or required by the market
where stabilizing occurs, any person stabilizing shall grant priority
to any independent bid at the same price irrespective of the size of
such independent bid at the time that it is entered.
(d) Control of Stabilizing. No sole distributor or syndicate or
group stabilizing the price of a security or any member or members of
such syndicate or group shall maintain more than one stabilizing bid in
any one market at the same price at the same time.
(e) At-the-Market Offerings. Stabilizing is prohibited in an at-
the-market offering.
(f) Stabilizing Levels.--(1) Maximum stabilizing bid.
Notwithstanding the
[[Page 549]]
other provisions of this paragraph (f), no stabilizing shall be made at
a price higher than the lower of the offering price or the stabilizing
bid for the security in the principal market (or, if the principal
market is closed, the stabilizing bid in the principal market at its
previous close).
(2) Initiating stabilizing.--
(i) Initiating stabilizing when the principal market is open. After
the opening of quotations for the security in the principal market,
stabilizing may be initiated in any market at a price no higher than
the last independent transaction price for the security in the
principal market if the security has traded in the principal market on
the day stabilizing is initiated or on the preceding business day and
the current asked price in the principal market is equal to or greater
than the last independent transaction price. If both conditions of the
preceding sentence are not satisfied, stabilizing may be initiated in
any market after the opening of quotations in the principal market at a
price no higher than the highest current independent bid for the
security in the principal market.
(ii) Initiating stabilizing when the principal market is closed.
(A) When the principal market for the security is closed, but
immediately before the opening of quotations for the security in the
market where stabilizing will be initiated, stabilizing may be
initiated at a price no higher than the lower of:
(1) The price at which stabilizing could have been initiated in the
principal market for the security at its previous close; or
(2) The most recent price at which an independent transaction in
the security has been effected in any market since the close of the
principal market, if the person stabilizing knows or has reason to know
of such transaction.
(B) When the principal market for the security is closed, but after
the opening of quotations in the market where stabilizing will be
initiated, stabilizing may be initiated at a price no higher than the
lower of:
(1) The price at which stabilization could have been initiated in
the principal market for the security at its previous close; or
(2) The last independent transaction price for the security in that
market if the security has traded in that market on the day stabilizing
is initiated or on the last preceding business day and the current
asked price in that market is equal to or greater than the last
independent transaction price. If both conditions of the preceding
sentence are not satisfied, under this paragraph (f)(2)(ii)(B)(2),
stabilizing may be initiated at a price no higher than the highest
current independent bid for the security in that market.
(iii) Initiating stabilizing when there is no market for the
security or before the offering price is determined. If no bona fide
market for the security being distributed exists at the time
stabilizing is initiated, no stabilizing shall be initiated at a price
in excess of the offering price. If stabilizing is initiated before the
offering price is determined, then stabilizing may be continued after
determination of the offering price at the price at which stabilizing
then could be initiated.
(3) Maintaining or carrying over a stabilizing bid. A stabilizing
bid initiated pursuant to paragraph (f)(2) of this section, which has
not been discontinued, may be maintained, or carried over into another
market, irrespective of changes in the independent bids or transaction
prices for the security.
(4) Increasing or reducing a stabilizing bid. A stabilizing bid may
be increased to a price no higher than the highest current independent
bid for the security in the principal market if the principal market is
open, or, if the principal market is closed, to a price no higher than
the highest independent bid in the principal market at the previous
close thereof. A stabilizing bid may be reduced, or carried over into
another market at a reduced price, irrespective of changes in the
independent bids or transaction prices for the security. If stabilizing
is discontinued, it shall not be resumed at a price higher than the
price at which stabilizing then could be initiated.
(5) Initiating, maintaining, or adjusting a stabilizing bid to
reflect the current exchange rate. If a stabilizing bid is expressed in
a currency other than the currency of the principal market for the
security, such bid may be initiated, maintained, or adjusted to reflect
the current exchange rate, consistent with the provisions of this
section. If, in initiating, maintaining, or adjusting a stabilizing bid
pursuant to this paragraph (f)(5), the bid would be at or below the
midpoint between two trading differentials, such stabilizing bid shall
be adjusted downward to the lower differential.
(6) Adjustments to stabilizing bid. If a security goes ex-dividend,
ex-rights, or ex-distribution, the stabilizing bid shall be reduced by
an amount equal to the value of the dividend, right, or distribution.
If, in reducing a stabilizing bid pursuant to this paragraph (f)(6),
the bid would be at or below the midpoint between two trading
differentials, such stabilizing bid shall be adjusted downward to the
lower differential.
(7) Stabilizing of components. When two or more securities are
being offered as a unit, the component securities shall not be
stabilized at prices the sum of which exceeds the then permissible
stabilizing price for the unit.
(8) Special prices. Any stabilizing price that otherwise meets the
requirements of this section need not be adjusted to reflect special
prices available to any group or class of persons (including employees
or holders of warrants or rights).
(g) Offerings with no U.S. Stabilizing Activities--
(1) Stabilizing to facilitate an offering of a security in the
United States shall not be deemed to be in violation of this section if
all of the following conditions are satisfied:
(i) No stabilizing is made in the United States;
(ii) Stabilizing outside the United States is made in a
jurisdiction with statutory or regulatory provisions governing
stabilizing that are comparable to the provisions of this section; and
(iii) No stabilizing is made at a price above the offering price in
the United States, except as permitted by paragraph (f)(5) of this
section.
(2) For purposes of this paragraph (g), the Commission by rule,
regulation, or order may determine whether a foreign statute or
regulation is comparable to this section considering, among other
things, whether such foreign statute or regulation: specifies
appropriate purposes for which stabilizing is permitted; provides for
disclosure and control of stabilizing activities; places limitations on
stabilizing levels; requires appropriate recordkeeping; provides other
protections comparable to the provisions of this section; and whether
procedures exist to enable the Commission to obtain information
concerning any foreign stabilizing transactions.
(h) Disclosure and Notification--(1) Any person displaying or
transmitting a bid that such person knows is for the purpose of
stabilizing shall provide prior notice to the market on which such
stabilizing will be effected, and shall disclose its purpose to the
person with whom the bid is entered.
(2) Any person effecting a syndicate covering transaction or
imposing a penalty bid shall provide prior notice to the self-
regulatory organization with direct authority over the principal market
in the United States for the security for which the syndicate covering
transaction is effected or the penalty bid is imposed.
[[Page 550]]
(3) Any person subject to this section who sells to, or purchases
for the account of, any person any security where the price of such
security may be or has been stabilized, shall send to the purchaser at
or before the completion of the transaction, a prospectus, offering
circular, confirmation, or other document containing a statement
similar to that comprising the statement provided for in Item 502(d) of
Regulation S-B (Sec. 228.502(d) of this chapter) or Item 502(d) of
Regulation S-K (Sec. 229.502(d) of this chapter).
(i) Recordkeeping Requirements. A person subject to this section
shall keep the information and make the notification required by
Sec. 240.17a-2 of this chapter.
(j) Excepted Securities. The provisions of this section shall not
apply to:
(1) Exempted Securities. ``Exempted securities,'' as defined in
section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12)); or
(2) Transactions of Rule 144A securities. Transactions in
securities eligible for resale under Sec. 230.144A(d)(3) of this
chapter, if such securities are offered or sold in the United States
solely to:
(i) Qualified institutional buyers, as defined in
Sec. 230.144A(a)(1) of this chapter, or to offerees or purchasers that
the seller and any person acting on behalf of the seller reasonably
believes are qualified institutional buyers, in a transaction exempt
from registration under section 4(2) of the Securities Act (15 U.S.C.
77d(2)) or Secs. 230.144A or 230.501 through 230.508 of this chapter;
or
(ii) Persons not deemed to be ``U.S. persons'' for purposes of
Secs. 230.902(o)(2) or 230.902(o)(7) of this chapter, during a
distribution qualifying under paragraph (j)(1) of this section.
(k) Exemptive Authority. Upon written application or upon its own
motion, the Commission may grant an exemption from the provisions of
this section, either unconditionally or on specified terms and
conditions, to any transaction or class of transactions, or to any
security or class of securities.
Sec. 242.105 Short selling in connection with a public offering.
(a) Unlawful Activity. In connection with an offering of securities
for cash pursuant to a registration statement or a notification on Form
1-A (Sec. 239.90 of this chapter) filed under the Securities Act, it
shall be unlawful for any person to cover a short sale with offered
securities purchased from an underwriter or broker or dealer
participating in the offering, if such short sale occurred during the
shorter of:
(1) The period beginning five business days before the pricing of
the offered securities and ending with such pricing; or
(2) The period beginning with the initial filing of such
registration statement or notification on Form 1-A and ending with the
pricing.
(b) Excepted Offerings. This section shall not apply to offerings
filed under Sec. 230.415 of this chapter or to offerings that are not
conducted on a firm commitment basis.
(c) Exemptive Authority. Upon written application or upon its own
motion, the Commission may grant an exemption from the provisions of
this section, either unconditionally or on specified terms and
conditions, to any transaction or class of transactions, or to any
security or class of securities. By the Commission.
Jonathan G. Katz,
Secretary.
Dated: December 20, 1996
By: Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-1 Filed 1-2-97; 8:45 am]
BILLING CODE 8010-01-P
