[Federal Register Volume 59, Number 80 (Tuesday, April 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9895]
[[Page Unknown]]
[Federal Register: April 26, 1994]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release Nos. 33-7057; 34-33924; International Series Release No. 657;
File No. S7-14-94]
RIN 3235-AF54
Review of Antimanipulation Regulation of Securities Offerings
AGENCY: Securities and Exchange Commission.
ACTION: Review of regulation; concept release.
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SUMMARY: The Securities and Exchange Commission (``Commission'')
solicits comments on a broad range of issues relating to
antimanipulation regulation of securities offerings under the
Securities Exchange Act of 1934 (``Exchange Act''). In particular, the
Commission is conducting a comprehensive review of Rules 10b-6, 10b-7,
and 10b-8 (``Trading Practices Rules'') under the Exchange Act in light
of significant changes in the securities markets and in distribution
practices in recent years. The Commission requests comment on the
concepts identified in this release and any other issues that
commenters believe are relevant. Following review of public comments,
the Commission will determine whether rulemaking or other action is
appropriate.
DATES: The comment period will expire on August 12, 1994.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street
NW., Washington, DC 20549. All comment letters should refer to File
Number S7-14-94. All comments received will be available for public
inspection and copying in the Commission's Public Reference Room, 450
Fifth Street NW., Washington, DC 20549.
FOR FURTHER INFORMATION CONTACT: The Office of Trading Practices,
Division of Market Regulation, Securities and Exchange Commission, 450
Fifth Street NW., Washington, DC, at (202) 942-0772.
I. Executive Summary
The ability of corporations and other enterprises to finance their
operations is critical to the development of the nation's economy, and
the sale of securities is a principal means for obtaining
capital.1 The Commission has recognized that securities offerings
involve risk and uncertainty, and that the pricing of an offering is
not an exact science.2 From its earliest days, the Commission and
its staff have been called upon to implement the provisions of the
Securities Exchange Act of 1934 (``Exchange Act'')3 to prevent
manipulative activity in the context of securities offerings.4 The
challenge to the Commission in administering the Exchange Act in this
context is ``to determine the extent to which market activities of
participants or persons otherwise interested in the distribution should
be prohibited or permitted.''5
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\1\Securities offerings in 1993 reached a record of
approximately $1.1 trillion, surpassing the previous record set in
1992 of approximately $856 billion. See Siconolfi & Peers, No End in
Sight for Underwriting Boom, Wall St. J., January 3, 1994, at C1.;
Peers, New Issues Set to Hit Record of $1 Trillion, Wall St. J.,
December 10, 1993, at C1.
\2\Securities Exchange Act Release No. 2446 (March 18, 1940) at
10, 11 FR 10971 (``Release 34-2446'').
\3\15 U.S.C. 78a et seq.
\4\The prevention of manipulation is one of the principal goals
of the Exchange Act. See, e.g., section 2(3), 15 U.S.C. 78b(3).
\5\Foshay, Market Activities of Participants in Securities
Distributions, 45 U. Va. L. Rev. 907, 910 (1959) (``Foshay'').
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The Commission's principal antimanipulation provisions that apply
to securities offerings, Rules 10b-6, 10b-7, and 10b-8 (``Trading
Practices Rules'')6 under the Exchange Act, are intended to assure
prospective investors in a securities offering that the offering's
price has not been influenced improperly by persons who have a
significant interest in the success of the offering. Rule 10b-6 is an
antimanipulation rule that is intended to prevent those persons
participating in a distribution of securities from artificially
conditioning the market for the securities in order to facilitate the
distribution, and to protect the integrity of the securities trading
market as an independent pricing mechanism. Rule 10b-7 prevents any
stabilizing bid from being made to facilitate an offering of a security
except for the purpose of preventing or retarding a decline in the open
market price of the security. Rule 10b-8 pertains to distributions of
securities being offered through rights on a pro rata basis to security
holders, and restricts the prices at which rights may be purchased as
well as the prices at which the securities being distributed, or
securities of the same class and series, may be offered or sold.
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\6\17 CFR 240.10b-6, 240.10b-7, and 240.10b-8.
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Since these rules were adopted or last significantly amended, there
have been significant changes in the structure of the markets,
including the expanded role of institutional participants, new kinds of
trading instruments and strategies, enhanced transparency of securities
transactions, expanded surveillance capabilities, globalization of the
markets, and transformation of the capital raising process. Over the
years, the Commission has sought to address the effects of these
developments. Although the Commission has amended the rules several
times, the primary method of adapting the rules to changing
circumstances has been through the exemptive, interpretive, and ``no-
action'' letter processes.
The Commission believes that it would be useful and timely to
examine comprehensively the current regulatory structure and the
concepts that underlie the Trading Practices Rules. The review is not
limited, however, to these provisions, which concentrate on persons
participating in the distribution process. Other persons also may have
incentives to manipulate securities prices at the sensitive time
surrounding an offering. In this Concept Release, the Commission
solicits comment on necessary or appropriate regulation to prevent
manipulation during securities offerings. Rather than proposing
particular changes to the Trading Practices Rules or other provisions
at this time, the Commission is seeking comment on the scope and
direction that antimanipulation regulation should take in the
contemporary context. In addition to providing views pertaining to
revising and simplifying the present regulatory scheme, commenters are
invited to consider alternative approaches for applying
antimanipulation principles to persons who may have an incentive to
influence artificially the market during an offering.
II. The Trading Practices Rules
Protecting investors from manipulated stock prices was one of the
principal goals that prompted the enactment in 1934 of the Exchange
Act. Since shortly after the adoption of the Exchange Act, the
Commission and its staff have dealt with issues involving manipulation
in the context of securities offerings and provided formal and informal
advice regarding the scope of permissible activities during securities
offerings.7 As the Commission has noted, regulation of the market
activities of parties with an interest in the outcome of an offering
presents ``intensely practical problem[s].''8 Among other things,
the staff has provided advice regarding the types of activities engaged
in by participants in a securities distribution that would be viewed as
being undertaken for the purpose of inducing the purchase or sale of
the securities by others, in violation of section 9(a)(2) of the
Exchange Act.9
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\7\For example, in response to formal and informal staff
interpretations, managing underwriters followed the practice of
stopping or tapering off their trading activities when preparations
for the distribution were begun; and participating underwriters
curtailed their trading when the registration statement was first
filed or when they were later invited to participate. Foshay, supra
note 5, at 912.
\8\Release 34-2446, at 1.
\9\See, e.g., Securities Exchange Act Release No. 3056 (October
27, 1941). See also Foshay, supra note 5, at 910.
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The Commission adopted Rules 10b-6, 10b-7, and 10b-8\10\ almost
four decades ago to codify the ``principles which historically have
been applied in considering questions relating to manipulative activity
and stabilization in connection with a distribution.''\11\ These rules
provide guidance to securities professionals by removing uncertainties
regarding the scope of permissible market activities during securities
offerings. They also serve a deterrence function by expressly
prohibiting manipulative behavior during offerings, and promote
investor confidence in the securities markets by lessening the ability
of distribution participants to manipulate the price of an offering
upward to facilitate the offering. Moreover, as with other
antimanipulation provisions, the Trading Practices Rules provide the
Commission with important enforcement tools in bringing actions against
persons that have engaged in manipulative practices during securities
offerings.
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\10\See Appendix A for a discussion of the historical
development of the Trading Practices Rules and an index of
Commission releases relating to these rules.
\11\See Securities Exchange Act Release No. 5040 (May 18, 1954),
19 FR 2986 (``1954 Release''). The transcript of a public Commission
hearing, the extensive comment letters, and the structure and
context of the Trading Practices Rules reflect the substantial
industry participation in that rulemaking process. See Foshay, supra
note 5, at 919.
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III. The Need for Review
The Commission remains committed to the fundamental legal and
policy bases for regulating the activities of participants in a
distribution. Since the adoption of the Trading Practices Rules in 1955
and their most recent comprehensive review in 1983,12 however,
tremendous changes have occurred in the securities markets.13
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\1\2Securities Exchange Act Release No. 19565 (March 4, 1983),
48 FR 10628 (``1983 Release'').
\1\3The Commission's Division of Market Regulation recently
completed a comprehensive review to assess the state of the United
States (``U.S.'') equity markets and to provide guidance for the
development of a national market system. See Securities and Exchange
Commission, Division of Market Regulation, Market 2000: An
Examination of Current Equity Market Developments (1994) (``Market
2000 Report''), Introduction and Executive Summary reprinted at
[1993-1994] Fed. Sec. L. Rep. (CCH) 85,311.
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A. Transformation of the Securities Markets
In the 1950s, trading in the United States securities market was
dominated by activity on the national securities exchanges; little
information was publicly available about trading in the over-the-
counter (``OTC'') market. Today, however, the National Association of
Securities Dealers, Inc.'s (``NASD'') Nasdaq system is one of the
world's largest stock markets, with an average daily trading volume of
263.0 million shares, at an aggregate value in 1993 of $1.35 trillion.
This compares with an average daily trading volume of 264.5 million
shares on the New York Stock Exchange, Inc. (``NYSE''), at an aggregate
value in 1993 of $2.3 trillion.14 Such high levels of trading
volume have produced deeper, more liquid markets.
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\1\4Source: Securities Industry Association.
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Additionally, there has been an enormous growth in communications
and information technology, which has provided industry participants
with enhanced real-time price data and news about securities and their
issuers. These developments have fostered the high level of
transparency (i.e., the dissemination of trade reports and quotation
information is available to all market participants) that generally
characterizes the U.S. equity markets. The availability of quotation
information helps investors to determine when and where to trade, while
transaction reporting provides an indication of the reliability of the
quotations and the quality of transaction execution. A higher degree of
transparency helps investors, analysts, and other market participants
to better observe and evaluate security price movements. During a
distribution, this market transparency provides greater visibility to
transactions in the offered security, enhancing the ability of
investors, regulators, and others to observe unusual price movements.
Improved communications and information technology also has enabled
the exchanges and the NASD to implement sophisticated surveillance
systems to detect trading abuses such as those that the Trading
Practices Rules were designed to prevent. The NASD's surveillance
capabilities were an important consideration when the Commission last
year adopted a new exception to Rule 10b-6, as well as a companion
rule, Rule 10b-6A,15 to permit ``passive market making'' by Nasdaq
market makers.16
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\1\517 CFR 240.10b-6A.
\1\6See Securities Exchange Act Release No. 32177 (April 8,
1993), 58 FR 19598 (``Passive Market Making Release'').
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The financial markets themselves have been transformed by a
proliferation of options and other derivative products.17 Market
participants use these products to hedge investment risks, increase
transaction efficiencies, and profit from market movements.18
Because stocks were the primary equity instruments for trading and
investing at the time the Trading Practices Rules were adopted, it has
been necessary to apply these rules to new products through exemptions
and interpretations.19
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\1\7A derivative product is ``a financial instrument that
derives its value from the performance of other assets, including
securities, rates, or indexes.'' Securities Exchange Act Release No.
32256 (May 4, 1993), 58 FR 27486, 27487 citing Dictionary of Finance
and Investment Terms 107 (3d ed. 1991).
\1\8See, e.g., Securities and Exchange Commission, Division of
Market Regulation, The October 1987 Market Break, 3-1, 3-5 (1988);
Gilberg, Regulation of New Financial Instruments Under the Federal
Securities and Commodities Laws, 39 Vand. L. Rev. 1599, 1600 (1986).
\1\9See, e.g., Letters regarding CXM Baskets (October 15, 1993),
and Basket Trading During Distributions (August 6, 1991), [1991]
Fed. Sec. L. Rep. (CCH) 79,752, both of which granted exemptions
from the Trading Practices Rules for transactions in connection with
certain index-based stock baskets.
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The nature of market participants also has changed by virtue of the
enhanced market role of institutional investors, such as pension funds,
mutual funds, and money managers. In recent years, many individual
investors have shifted their funds into pooled investments at a
phenomenal rate, which has resulted in an enormous concentration of
investment assets in the hands of a relatively small number of market
participants.20 Their economic strength allows large institutions
to exert a significant influence on the structuring and pricing of many
securities offerings. Some have argued that the presence of these large
institutions in securities offerings has transferred the balance of
price-setting power from the underwriters to institutional
purchasers.21 Because of this shift, it is argued that
antimanipulation regulation should focus not only on the ``sell'' side
(e.g., the underwriters), but also on the ``buy'' side.22
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\2\0See, e.g., Market 2000 Report, Study II: Structure of the
U.S. Equity Markets, at II-1 to II-3; Fund Assets Surge Past $2
Trillion Mark, With Banks Reporting Solid Sales Gains, Am. Banker,
February 1, 1994, at 10, discussing report by the Investment Company
Institute that mutual fund assets rose to $2.011 trillion in
December 1993, a 26% gain from 1992.
\2\1At the same time, it should be noted that underwriting
revenue in 1993 was a record $9.1 billion. See Siconolfi, Surge in
Profits From Fees is Likely to Continue in 1994, Wall St.J., January
3, 1994, at A26.
\2\2For example, short sales in anticipation of a secondary
distribution of securities were addressed by the Commission with the
adoption in 1988 of Rule 10b-21, 17 CFR 240.10b-21. See also
Securities Exchange Act Release No. 33702 (March 2, 1994), 59 FR
10984 (``Rule 10b-21 Release'') (permanent adoption of Rule 10b-21).
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The nature of participants in distributions also has changed.
Today, distribution participants often are members of complex
conglomerates, with many affiliated entities in the United States and
abroad. For example, not only have broker-dealers expanded their
traditional lines of business, such as retail firms that have merged
with exchange specialists,23 but banking institutions also have
established broker-dealer units that are permitted to engage in the
underwriting of securities.24 If one member of a financial
conglomerate is a participant in a distribution of securities, all of
the affiliates of that entity potentially are subject to the
proscriptions of Rule 10b-6, irrespective of where they are located or
conduct business.
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\2\3See, e.g., Letter regarding Application of Rules 10b-6 and
10b-13 to Specialists Affiliated with NYSE Member Firms (September
15, 1992), [1992] Fed. Sec. L. Rep. (CCH) 76,279, permitting
certain NYSE specialists affiliated with broker-dealers to continue
to function as specialists while their affiliated broker-dealer
participates in certain mergers or tenders or exchange offers.
\2\4See, e.g., BankAmerica Corp., 79 Fed. Res. Bull. 1163
(1993); J.P. Morgan & Co., 75 Fed. Res. Bull. 192 (1989); Citicorp,
73 Fed. Res. Bull. 473 (1987).
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The securities distribution process itself has experienced
significant developments. Underwriting syndicates, where utilized, tend
to be smaller, and shelf registered offerings have become a standard
method of raising capital. ``Overselling'' of offerings by underwriting
syndicates has become common, resulting in increased aftermarket
covering activity by underwriters, and a decrease in formal
stabilization activity. Also, rights offerings by U.S. issuers may no
longer be as important for capital raising purposes as they were at the
time the Trading Practices Rules were adopted, although recently some
sectors have experienced a surge in such offerings. Rights offerings
continue to be a prevalent form of offering for foreign issuers.25
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\2\5See Gould, ``Rights Offerings'' at the Wrong Time?, N.Y.
Times, November 28, 1993, at F14; Eaton, Rites of Offerings: Not All
They Seem for Closed-end Funds, Barron's, June 14, 1993, at 3.
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Moreover, a global marketplace has unfolded, characterized by a
proliferation of multinational securities offerings. Many foreign
issuers now conduct concurrent offerings of their securities in the
United States and abroad as well as solely in the United States. This
rise in the supply of, and demand for, multinational offerings has
required careful coordination of the interaction of the Trading
Practices Rules with foreign distribution practices and regulatory
requirements.26
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\2\6See, e.g., Letter regarding Distributions of Certain SEAQ
and SEAQ International Securities (July 12, 1993), [1993] Fed. Sec.
L. Rep. (CCH) 76,707.
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B. Commission's Response to Market Developments
The Commission and its staff have responded to these developments
in the markets and distribution techniques through the exemptive, no-
action, interpretive, and rulemaking processes.27 In 1983, the
Commission adopted comprehensive amendments to Rule 10b-6 in response
to changes in the securities markets during the quarter century
following their adoption.28 Among other things, these amendments
codified and clarified staff positions that had been developed to deal
with various transactions on a case-by-case basis.29 Further
refinements to Rule 10b-6 were adopted in 1987 to address certain
issues left open by the Commission during its comprehensive review and
revision of that rule in 1983.30 More recently, the Commission has
issued exemptions to the Trading Practices Rules that recognize the
increasingly global nature of the securities markets31 and
enhanced surveillance capabilities.32 In addition, the staff
maintains its active program of responding to telephone inquiries
requesting guidance on the application of the Trading Practices Rules
and antimanipulation principles during offerings.
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\2\7The Commission is authorized to grant exemptions from the
requirements of the Trading Practices Rules. 17 CFR 240.10b-6(j); 17
CFR 240.10b-7(p); and 17 CFR 240.10b-8(g).
\2\81983 Release. See also Securities Exchange Act Release No.
18528, (March 10, 1982) 47 FR 11482 (``1982 Release'').
\2\9See 1983 Release, 48 FR at 10628.
\3\0See Securities Exchange Act Release No. 24003 (January 16,
1987), 52 FR 2994 (``1987 Release''). See also Securities Exchange
Act Release No. 22510 (October 10, 1985), 50 FR 42716 (``1985
Release'').
\3\1See, e.g., Securities Exchange Act Release No. 33022
(October 6, 1993), 58 FR 53220 (``German Offerings Exemptions''),
granting exemptions for transactions in the securities of certain
German issuers; Securities Exchange Act Release No. 33137 (November
3, 1993), 58 FR 60324 (``Statement of Policy''), inviting requests
for exemptions consistent with the principles of the German
Offerings Exemptions; Securities Exchange Act Release No. 33138
(November 3, 1993), 58 FR 60326 (``Rule 144A Release''), adding
Paragraph (i) to Rule 10b-6 excepting certain offerings made to
``qualified institutional buyers;'' Securities Exchange Act Release
No. 33862 (April 5, 1994), 59 FR 17125 (``Cooling-Off Periods
Release''), clarifying the availability of the cooling-off periods
to foreign securities.
\3\2See, e.g., Passive Market Making Release.
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It continues to be true that the activities relating to
distributions of securities are ``highly technical and complex, and
[are] conducted under limitless varieties of circumstances frequently
requiring the application of instantaneous business judgment.''33
Indeed, the developments discussed above have magnified the challenges
to issuers, distribution participants, and the Commission to apply and
adapt the Exchange Act antimanipulation provisions and their underlying
principles.
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\3\3Foshay, supra note 5, at 919.
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IV. Purpose of This Release
The transaction-driven nature of securities offerings means that
antimanipulation rules cannot address every situation that may arise.
Although the Commission continues to be responsive to the industry's
requests for interpretive guidance and relief from the present
regulations, the considerations discussed above suggest that a
comprehensive reexamination of the rules is warranted. Some securities
industry participants suggest that the Trading Practice Rules can be
simplified. Others argue that the rules are unnecessarily restrictive
and apply to situations where the manipulative potential is highly
attenuated. It has been suggested that alternative regulatory
structures may achieve the underlying legal and policy goals of the
Exchange Act and address the issues raised by market activities
conducted during securities offerings.
Accordingly, the Commission is undertaking this review of
antimanipulation regulation of securities offerings with a view toward
incorporating the above developments and simplifying its regulatory
structure. This release is intended to provide a forum for commenters
to discuss the current structure as well as alternative approaches to
governing trading during distributions. As focus points for analyzing
the pertinent issues, the following sections identify the concepts that
underlie the present regulations and raise a variety of questions on
the implementation of those concepts.
In reviewing the sections below, commenters should consider the
following central themes:
(1) Whether there are classes of investors, securities, or
transactions that do not need the protections of specific rules
governing manipulative conduct during offerings; and
(2) Whether there is a simpler structure for antimanipulation
regulation with regard to offerings that will achieve the identified
goals.34
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\3\4The Commission will continue to rigorously apply the current
antimanipulation provisions during the course of this review.
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Commenters are invited to discuss the issues identified below and
any others that they believe are relevant to the Commission's
consideration of these matters. Following its receipt and review of
comments, the Commission will determine whether rulemaking or other
action is appropriate.
V. Restrictions on Market Activities During Offerings: Rule 10b-6
A. Rule 10b-6 Generally
Rule 10b-6 is an antimanipulation rule that is intended to prevent
those persons participating in a distribution of securities, as defined
in the rule, from artificially conditioning the market for the
securities in order to facilitate the distribution, and to protect the
integrity of the securities trading market as an independent pricing
mechanism.35 Rule 10b-6 accomplishes these goals by prohibiting
these persons from bidding for or purchasing, or inducing others to
purchase the securities being distributed, or any security of the same
class and series as the security being distributed, or any right to
purchase that security until they have completed their participation in
the distribution.
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\3\5See Securities Exchange Act Release No. 31347 (October 29,
1992), 57 FR 49039, 49040.
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Thus, the primary focuses of Rules 10b-6 are: The offerings that
raise manipulative concerns, defined in the rule as ``distributions;''
the persons who are likely to engage in manipulative activity; and the
activities that could be expected to raise or support the security's
price. The rule is grounded on the view that:
A person contemplating or making a distribution has an obvious
incentive to artificially influence the market price of the
securities in order to facilitate the distribution or to increase
its profitability. [The Commission has] accordingly held that where
a person who has a substantial interest in the success of a
distribution takes active steps to increase the price of the
security, a prima facie case of manipulative purpose exists.36
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\3\6Bruns, Nordeman & Co., 40 SEC 652, 660 n.11 (1961) (``Bruns,
Nordeman'').
The rule identifies the participants in an offering who are
presumed to have an incentive to engage in activities for the purpose
of facilitating the distribution; i.e., to induce the purchase of the
offered securities. Various means by which such persons could achieve
this manipulative result are covered in the rule. Bids and purchases,
the most obvious means of influencing market activity, are prohibited
expressly. Rule 10b-6 also broadly proscribes other ``attempt[s] to
induce any person to purchase'' the securities covered by the rule. The
rule then carves out of the general prohibitions a number of activities
that are considered necessary in order to conduct an offering or have
little manipulative potential.37 One commentator has said that
``[i]t is the exceptions and the exemptions which give the rule
viability and feasibility.''38 None of the exceptions is
available, however, if the otherwise permitted activity is ``engaged in
for the purpose of creating actual, or apparent, active trading in or
raising the price of any [covered] security.''39
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\3\7Paragraph (a)(4)(i)-(xiv). The rule as originally adopted
contained 11 exceptions. Three exceptions have been added and one
has been deleted since 1955. Transactions in certain classes of
securities are excepted entirely from the rule. Paragraphs (d), (h),
and (i). The Commission also is authorized to grant exemptions from
the rule's requirements. Paragraph (j).
\3\8Whitney, Rules 10b-6: The Special Study's Rediscovered Rule,
62 Mich. L. Rev. 567, 568 (1964).
\3\9See Paragraph (a)(4) (introductory text).
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This structure and the rule's terminology reflect its direct
lineage to the implementation of the manipulative concepts of Section
9(a)(2) as they had been applied to offerings. The rule also reflects
the Commission's experience in combatting manipulative behavior during
offerings and provides guidelines to the investment banking community
as to what types of market activity generally would not be deemed by
the Commission to be manipulative.
B. Offerings
Concept One: Regulation should be limited to securities offerings
that give rise to a readily identifiable incentive to manipulate the
market.
1. Definition of ``Distribution''
In imposing restrictions on the market activities of persons
participating in a securities offering, the Commission has focused on
``offerings of such a nature or magnitude as to require restrictions
upon purchases by participants in order to prevent manipulative
practices.''40 The Commission has characterized such offerings as
``distributions,''41 and codified a definition of the term in Rule
10b-6: ``[T]he term 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.''42 This ``functional'' definition is intended to provide
a greater degree of guidance on, and certainty to, the types of
offerings that would give rise to an incentive to artificially
condition the market for the offered security. The identification of
these types of situations, however, needed to remain sufficiently
flexible to permit the protections afforded by Rule 10b-6 to evolve
with changes in the practices and methods of offering securities.
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\4\0Bruns, Nordeman, 40 SEC at 660.
\4\1Accordingly, in this context the terms ``offering'' and
``distribution'' are not synonymous. See, e.g., 1982 Release, 47 FR
at 11485. Generally, the term ``offering'' is used to encompass all
methods by which securities are offered and sold to investors. In
Rule 10b-6, the term ``distribution'' is used to identify an
offering that can be presumed to raise an incentive to manipulate
securities prices in order to facilitate the offering. See Bruns,
Nordeman, 40 SEC at 660. This use of the term ``distribution''
should be distinguished from its use in the context of the
Securities Act of 1933 (``Securities Act''), 15 U.S.C. 77a et seq.
Collins Securities Corp., 46 SEC 20, amended, 46 SEC 213 (1975),
rev'd on other grounds, Collins Securities Corp. v. SEC, 562 F.2d
820 (D.C. Cir. 1977). For a discussion of how the Commission has
used the term ``distribution'' under the Securities Act, and
relevant references, see Securities Act Release No. 6806 (October
25, 1988), 53 FR 44016, 44026 n.145 (proposing Rule 144A under the
Securities Act).
\4\2Paragraph (c)(5).
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A ``distribution'' must have two elements: ``Magnitude'' and
``special selling efforts and selling methods.''43 Factors
relevant to the magnitude element are: the number of shares to be
registered for sale by the issuer, and the percentage of the
outstanding shares, public float, and trading volume that those shares
represent.44 The Commission has indicated that providing greater
than normal sales compensation arrangements pertaining to the
distribution of a security,45 delivering a sales document, such as
a prospectus or market letters, and conducting ``road shows'' are
generally indicative of ``special selling efforts and selling
methods.''46 Based upon an analysis of their individual
characteristics, the following transactions, among others, have been
viewed as involving distributions under this definition: registered
public offerings, private placements, Rule 144A transactions, rights
offerings, warrant exercise solicitations, dividend reinvestment and
stock purchase plans, the issuance of securities in connection with a
merger or exchange offer,47 ``major sales campaigns'' by a broker-
dealer, and sales made pursuant to a shelf registration statement.
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\4\3As the definition was proposed originally, either element
alone would have been sufficient. See 1982 Release, 47 FR at 11484.
\4\41982 Release, 47 FR at 11486.
\4\5See 1983 Release, 48 FR at 10630 n.13.
\4\6See, e.g., Note, The SEC's Rule 10b-6: Preserving a
Competitive Market During Distributions, 1967 Duke L.J. 809, 823-824
(``1967 Note''); III L. Loss, Securities Regulation at 1597 (2d. ed.
1961) (``Loss'').
\4\71983 Release, 48 FR at 10638. See also Chris-Craft
Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 377 (2d Cir.
1973), rev'd on other grounds, Piper v. Chris-Craft Industries,
Inc., 430 U.S. 1 (1977). Moreover, the restrictions of Rule 10b-6
also have been interpreted to apply to those periods when a
security's market price is used to value the consideration in the
distribution. 1983 Release, 48 FR at 10638 n.61.
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In addition to identifying the type of offerings that may present
the incentive for the particular harm that Rule 10b-6 was intended to
address, it also is necessary to determine when a distribution begins
and when it ends. ``A distribution commences at the point when the
incentive to engage in manipulative conduct is first present,''48
and a distribution is complete when the securities ``come to rest in
the hands of the investing public.''49 Rule 10b-6(c)(3) specifies
when a person's participation in a particular distribution is deemed to
have been completed. For example, the rule states that an underwriter's
participation is over when it has distributed its portion of the
offering, including any securities of the same class that were acquired
in connection with the distribution, and when any stabilizing
operations and trading restrictions in connection with the distribution
have been terminated.50 In addition, a person is deemed to have
distributed securities acquired by him for investment. The
determination of how long securities must be held to constitute an
investment will depend upon the facts and circumstances.51
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\4\8SEC v. Burns, 816 F.2d 471, 476 (9th Cir. 1987), citing 1982
Release, 47 FR at 11485 (in the case of a registered offering, the
distribution may commence not only before the registration statement
for those securities becomes effective, but also before such
statement is filed with the Commission); Gob Shops of America, Inc.,
39 SEC 93 (1959) (bids and purchases by a prospective underwriter
four months before the filing with the Commission of a notification
relating to a Regulation A offering were manipulative).
\4\9See, e.g., R.A. Holman & Co., Inc. v. SEC, 366 F.2d 446, 449
(2d Cir. 1966), amended on reh'g, 377 F.2d 665 (2d Cir. 1967), cert.
denied, 389 U.S. 991 (1967), rehearing denied, 389 U.S. 1060 (1968)
(``Holman''); Rooney, Pace Inc., 48 SEC 891, 898-99 (1987).
\5\0Paragraph (c)(3)(ii). The Commission has held that
completion of an underwriter's participation in a distribution
``does not mean substantial completion.'' Shearson, Hammill & Co.,
42 SEC 811, 821 n.20 (1965).
\5\1See Holman, 366 F.2d at 450. Simply placing shares in an
``investment account,'' however, is not conclusive as to whether the
securities are acquired ``for investment.'' See C.A. Benson & Co.,
Inc., 41 SEC 427 (1963).
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2. Particular Distribution Contexts
One example of significant changes in securities sales practices
that have affected the administration of Rule 10b-6 pertains to the
sale of securities pursuant to issuer stock purchase plans. Presently,
Rule 10b-6 contains an exception for distributions of securities by an
issuer or a subsidiary of an issuer to employees or shareholders of the
issuer, its subsidiaries, or a trustee or other person acquiring such
securities for the account of such employees or shareholders pursuant
to a plan.52 On its face, this exception applies irrespective of
the magnitude of the offering or the nature of the selling efforts.
Traditionally, stock purchase plans were seen as mechanisms by which
employees and shareholders, i.e., persons having a significant
relationship with the issuer, could increase their holdings, rather
than as major capital-raising vehicles. These distributions have not
been viewed as presenting the same incentives for manipulation by the
issuer as in other distributions because of the limited nature of the
sales, as well as the relationship between the issuer and plan
participants.53
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\5\2Paragraph (e). ``Plan'' is broadly defined in Paragraph
(c)(4) as a ``bonus, profit-sharing, pension, retirement, thrift,
savings, incentive, stock purchase, stock ownership, stock
appreciation, stock option, dividend reinvestment or similar plan
for employees or shareholders of an issuer.''
\5\3See generally Securities Exchange Act Release No. 16646
(March 13, 1980), 45 FR 18948; Securities Exchange Act Release No.
17556 (February 17, 1981), 46 FR 15133.
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Today, however, issuer plans often are available not only to
employees and shareholders, but also to outside directors, franchisees,
customers, and others having varying relationships with the issuer.
Moreover, plan distributions may be used as significant capital-raising
mechanisms.54 In the case of plans open to persons other than
shareholders or employees, sales of a security to the plan do not
qualify for the Paragraph (e) exception. As a result, absent an
exemption from Rule 10b-6, issuers and other distribution participants
are required to comply with Rule 10b-6. Even with respect to plans that
qualify for the Paragraph (e) exception, the more recent use of such
plans to broadly distribute the issuer's securities may not have been
contemplated by the Commission when Paragraph (e) was adopted.
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\5\4See Banks Raising Millions in Equity By Giving Discounts to
Arbitragers, Am. Banker, September 17, 1992, at 1.
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Other changes in the distribution process, such as those arising
from the adoption of Rules 415 and 430A under the Securities
Act,55 also have complicated the distribution analysis.56
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\5\517 CFR 230.415, 430A.
\5\6See Securities Exchange Act Release No. 23611 (September 11,
1986), 51 FR 33242. For purposes of Rule 10b-6, the Commission has
viewed a distribution pursuant to a shelf registration statement
under Rule 415 as constituting a unitary distribution throughout the
effectiveness of the shelf. Id. at 33243.
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Question 1.1. Should the Commission continue to define the term
``distribution,'' and if so, should the Commission continue to define
the term based on the ``magnitude of the offering'' and the presence of
``special selling efforts and selling methods''? If so, are there
identifiable factors that can be used to determine whether an offering
satisfies these criteria? Commenters may wish to suggest criteria that
distinguish ``distributions'' from ``ordinary trading transactions.''
Question 1.2. Should the ``magnitude'' element be clarified to
exclude de minimis offerings? If so, how would such offerings be
identified?57 Would a standard based on dollar value of average
daily trading volume or other factors be appropriate?
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\5\7In 1982, the Commission proposed that transactions that
complied with the volume and manner of sale provisions of Rule 144
under the Securities Act not be treated as ``distributions'' for
purposes of Rule 10b-6. See 1982 Release, 47 FR at 11482. The
Commission did not adopt the proposal. See 1983 Release, 48 FR at
10630.
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Question 1.3. Should certain categories of offerings (e.g., based
on the total dollar amount of securities offered or the number or type
of persons to whom the offering is made) be excluded from the
definition? Examples might include offerings made pursuant to the
authority of Section 3(b) of the Securities Act,58 and offerings
made solely to large institutions.59
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\5\8Securities Act Section 3(b), 15 U.S.C. 77c(b). It may be
noted, however, that offerings made pursuant to Regulation A have
resulted in a number of Commission actions alleging manipulation.
E.g., C.A. Benson & Co., Inc., 41 SEC 427 (1964); Bruns, Nordeman.
\5\9See, e.g., Rule 144A Release.
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Question 1.4. What difficulties do the ``functional'' beginning and
ending points for a distribution present? Can more definite points be
identified?60
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\6\0See Halsey, Stuart & Co., Inc., 30 SEC 106, 137 n.41 (1949)
(noting that the termination of the restrictions of Rule 10b-6 are
determined by whether an underwriter continues to function in its
capacity as an underwriter).
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Question 1.5. Should issuer plans be distinguished from other
distributions of securities? Should plans be distinguished based on the
nature of the participants, e.g., whether the plan is available only to
certain groups having an affinity or relationship to the issuer, such
as shareholders, employees, or customers? If so, are there limits to
the types of affiliations?
Question 1.6. Should mergers and exchange offers continue to be
deemed distributions in order to prevent an issuer from conditioning
the market and influencing the shareholders of the target company?
Commenters may wish to address the role of Exchange Act Rule 10b-
1361 in this context.
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\6\117 CFR 240.10b-13. Rule 10b-13 prohibits a person making a
tender or exchange offer for an equity security from, directly or
indirectly, purchasing or making an arrangement to purchase such
security or any security which is immediately convertible into or
exchangeable for such security, otherwise than pursuant to the
offer, from the time the offer is publicly announced until its
termination.
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Question 1.7. What is the appropriate application of anti-
manipulation regulation to valuation and shareholder-election
periods?62
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\6\2See n.47 supra.
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C. Persons
Concept Two: Regulation should be limited to those persons who have
a readily identifiable incentive to manipulate the market during an
offering.
Rule 10b-6 applies to the following persons:
(1) Issuers and selling shareholders;
(2) Underwriters and prospective underwriters;
(3) Brokers, dealers, and other persons that have agreed to
participate or are participating in the distribution; and
(4) ``Affiliated purchasers'' of the foregoing.63 In addition,
the prohibitions of the rule have been considered applicable to any
other person who has a material financial interest in the success of
the distribution which would provide that person with an incentive to
condition the market to facilitate the distribution.64 Except for
the duration of the distribution period in Paragraph (c)(3), the rule
applies equally to each category of distribution participant; yet the
incentives of each to facilitate a distribution may differ
substantially, reflecting very different risk and reward profiles.
Moreover, those incentives may vary at different times in the
distribution process.
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\6\3See Paragraphs (a), (c)(6).
\6\4This would include persons whose right to receive
substantial compensation is contingent upon the success of the
distribution. 1985 Release, 50 FR at 42719 n.30.
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In best efforts offerings and prior to the pricing of a firm
commitment offering, issuers and selling shareholders have a clear
incentive to manipulate the price of the securities to be distributed.
A very small change in the market price of a security, which in some
circumstances may be accomplished at relatively little expense, can
result in a substantial increase in offering proceeds, particularly
when a large number of shares are to be sold.
A firm commitment underwriting typically involves a group of
underwriters, represented by one or more managing underwriters, an
underwriting group, and a number of ``selling group'' members. The
financial risk of failure and the concomitant incentive to manipulate
largely shifts to the underwriters once the underwriting agreement with
the issuer is signed.65 Within the underwriting group, the
incentives may vary in proportion to the amount of the underwriting
commitment and the particular role of the underwriter in the offering.
For example, a managing underwriter may have a larger reputational
stake in the success of an offering and an ongoing business
relationship with the issuer that may align its interests more closely
with the issuer as compared with other members of the underwriting
syndicate. Selling group members participate in the sale of the offered
security, but do not assume any underwriting risk. Selling group
members pay for only the amount of securities necessary to satisfy
orders obtained from customers; their risk is limited to the extent
that their customers renege.
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\6\5The contractual commitment typically is executed shortly
(usually less than one day) before the commencement of sales of the
securities. The commitment also typically is subject to ``market
out'' clauses that permit the underwriters to avoid the risk of
proceeding with the underwriting in the event of certain specified
contingencies. Cf. Walk-In Medical Centers, Inc. v. Breuer Capital
Corp., 818 F.2d 260 (2d Cir. 1987).
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The restrictions of Rule 10b-6 also extend to ``affiliated
purchasers'' of distribution participants, i.e., persons that have
relationships with distribution participants as well as the incentive
and ability to facilitate a distribution of securities.\66\ Affiliated
purchasers include persons acting in concert with a distribution
participant in connection with the acquisition or distribution of
securities, and affiliates that, directly or indirectly, control the
purchases of a distribution participant, or whose purchasers are
controlled by or are under common control with a distribution
participant (e.g., decisional officers of the issuer who participate
directly or indirectly in the recommendation of, determination to
proceed with, or implementation of, a distribution). The increasingly
complex structure of financial and other conglomerates\67\ suggests
that the ``affiliated purchaser'' definition may require revision.
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\66\Paragraph (c)(6). See 1987 Release, 52 FR at 2995-2997.
\67\See, e.g., Letter regarding The Equitable Life Assurance
Society of the United States (December 30, 1988), [1989] Fed. Sec.
L. Rep. (CCH) 78,955.
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Question 1.8. What advantages or disadvantages are there in
treating all distribution participants similarly? Commenters suggesting
that certain categories of distribution participants should be subject
to lesser (or no) restrictions because of their degree of or lack of
manipulative incentive should suggest parameters for each such
category.\68\
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\68\See, e.g., Letter regarding Distributions of Certain
Canadian Securities (August 22, 1991), [1991] Fed. Sec. L. Rep.
(CCH) 79,753 (providing a conditional exemption from Rules 10b-6
and 10b-7 for selling group members).
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Question 1.9. Should the restrictions correspond to the varying
degree of manipulative incentive present during certain stages of the
distribution?
Question 1.10. What types of persons or entities should be
considered ``affiliated purchasers''? Commenters addressing this point
should give specific examples of the rule's current impact on
affiliated persons and entities of distribution participants. Should
affiliated purchasers that have a fiduciary duty to their customers be
excluded or treated separately?
Question 1.11. To what degree should regulatory oversight,
surveillance, and/or the existence of structural separations (e.g.,
information barriers) be relevant in determining whether an affiliated
purchaser should be subject to regulation?\69\
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\69\See Letter from James E. Buck, Secretary, NYSE, to Jonathan
G. Katz, Secretary, SEC, December 15, 1992 (commenting on Securities
Exchange Act Release No. 31347 proposing ``passive market making'').
The letter is available in File No. S7-33-92.
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Question 1.12. Are there other persons not currently covered by the
rule, such as prospective purchasers of the shares being distributed,
whose market activities should be subject to regulation?
D. Activities
Concept Three: Regulation should be limited to market activity that
would improperly affect the price of, or create the appearance of
excessive trading in, the offered security, but should not unduly
restrain legitimate market and business practices.
1. Bids, Purchases, and Inducements
It has been said on a number of occasions that the goal of
regulating the activities of distribution participants is to ``prevent
participants in a distribution from artificially conditioning the
market for the securities in distribution'' and to ``protect the
integrity of the securities trading market as an independent pricing
mechanism during the distribution period.''\70\ To prohibit all
activity of distribution participants, however, would result in a
distorted market simply by virtue of curtailing ``normal'' market
activity of distribution participants during the distribution period.
Accordingly, regulation should focus upon market activities by
distribution participants (and their affiliated purchasers) that
improperly would directly or indirectly raise or maintain the price of
the offered security or create the appearance of active trading in the
security.
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\70\Eg., 1982 Release, 47 FR at 11483.
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Rule 10b-6 broadly prohibits bids, purchases, and attempts to
induce the purchase of the offered security and related securities.\71\
These terms have been interpreted to cover a broad range of
transactions. For example, ``bid'' includes priced quotations, unpriced
indications of interest in purchasing a security, public announcement
of a tender offer or exchange offer, and the sale of put options.
``Purchases'' include the exercise of call options. These transactions
are covered irrespective of the market in which they are effected.
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\71\Paragraph (a). See section V.E. infra for a discussion of
covered securities.
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The proscription of ``inducements to purchase'' is less distinct.
It covers activity that causes or is likely to cause another person to
bid for or purchase covered securities.72 One type of inducement,
brokerage transactions that are solicited by distribution participants,
is explicitly covered in the rule.73 The distribution of research
reports is considered to involve inducements to purchase.
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\7\2See, e.g., Kidder Peabody & Co., 18 SEC 559 (1945)
(purchases made as a favor to underwriter); SEC v. Burns, 816 F.2d
471 (9th Cir. 1987) (president of issuer made loan to another person
to purchase covered securities).
\7\3Paragraph (a)(4)(v)(B). Rule 10b-6 allows offers to sell or
the solicitation of offers to buy the security being distributed,
i.e., sales in connection with the distribution. See Paragraph
(a)(4)(vi).
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Question 1.13. What activities by distribution participants should
be restricted? Should market sales by distribution participants be
prohibited at any point during a distribution or in connection with
certain types of distributions?74
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\7\4See, e.g., Hylton, Shearson Suspends Officials for Stock
Trade Violations, N.Y. Times, September 6, 1991, at D1 (sale to
depress closing price of stock that would be used to price an
offering); U.S. v. Regan, 937 F.2d 823, 829 (2d Cir. 1991), cert.
denied sub nom., Zarzecki v. U.S., 112 S. Ct. 2273 (1992) (sales of
underlying securities to enhance attractiveness of convertible debt
offering).
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Question 1.14. How should the dissemination of research be treated?
What type of research should be allowable during the distribution and
what type of research should be restricted? Is the manner in which
research is used relevant?75
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\7\5See 1987 Release, 52 FR at 2995 n.17; 1982 Release, 47 FR at
42718 n.19.
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2. Cooling-off Periods
Some activities may present greater manipulative concerns depending
upon when they occur during the distribution process. The most critical
period of the offering is the period beginning immediately before
pricing and continuing until the securities have come to rest in the
hands of investors (i.e., when the distribution has ended). Thus, Rule
10b-6 has incorporated the concept of ``cooling-off periods.''
Generally, distribution participants and their affiliated purchasers
may continue their trading and other market activities in the covered
securities until the applicable cooling-off period begins, at which
point they must suspend such activity until the termination of the
distribution.
The bases for applying cooling-off periods are:
(1) Restrictions on bids and purchases during the entire
distribution period could unnecessarily distort the market for the
offered security; and
(2) The effects on the offered security's price resulting from
distribution participants' market activities should dissipate within a
period of time. The cooling-off periods thus are intended to permit
supply and demand forces independent of the market activities of
persons with manipulative incentives to establish the market price of
the covered securities at the time the offering is priced and when they
are being sold to investors. The cooling-off periods also provide
guidance to distribution participants as to what period of time is
required between the cessation of their market activities (which may
have increased or maintained the market price of, or involved
substantial trading activity in, the covered securities) and sales to
investors.76 In this context, rather than requiring individual
broker-dealers or syndicate managers to determine when to taper off and
cease their market activities, the rule supplies uniform guidance.
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\7\6See also Securities Exchange Act Release No. 3056 (October
27, 1941), 11 FR 10984 (Opinion of SEC General Counsel).
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Rule 10b-6 uses market-related criteria to fix the lengths of the
cooling-off periods, which are two, five, and nine business days prior
to the ``commencement of offers and sales'' in the distribution. For
stock with a minimum share price of $5.00 and a public float of at
least 400,000 shares (``$5/400,000 Share Test''), the cooling-off
period is two business days. For all other securities, the cooling-off
period is nine business days. A minimum price per share requirement was
viewed as an appropriate criterion in light of the generally greater
volatility of low-priced stocks, while a public float standard was
viewed as providing a reasonable indication of the depth and liquidity
of the market for a security.77 The Commission also considered a
test based on the security's price and public float as having ``the
advantage of being relatively certain and easily determinable.''78
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\7\7Paragraphs (a)(4)(v), (xi), and (xii). See also Letter
regarding the Interpretation of ``Business Day'' (July 29, 1991),
[1991] Fed. Sec. L. Rep. (CCH) 79,751.
\7\81983 Release, 48 FR at 10634.
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Solicited principal and solicited brokerage transactions by
distribution participants are subject to the two and nine business day
cooling-off periods. A five business day cooling-off period applies to
the exercise of standardized call options on securities satisfying the
$5/400,000 Share Test, if such options were acquired after the person
exercising the option became a distribution participant. This cooling-
off period is intended to minimize the probability that purchases of
the underlying security resulting from options exercises would occur
during the two business day cooling-off period. No cooling-off period
is available for inducements to purchase. No cooling-off period is
applied to unsolicited principal transactions: the restriction on such
activity begins as of the commencement of offers or sales.
The Commission is aware of the perception that by curtailing
distribution participant activity, even with the availability of
cooling-off periods, the rule can affect adversely the ``normal''
trading market for a security. Because of this concern, the Commission
recently adopted an exception to Rule 10b-6 and a companion Rule 10b-6A
permitting ``passive market making'' (i.e., transactions that follow,
but do not lead, the market) by Nasdaq market makers participating in
distributions of Nasdaq securities satisfying the $5/400,000 Share
Test.79
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\7\9Paragraph (a)(4)(xiv) and 17 CFR 240.10b-6A, respectively.
See Passive Market Making Release.
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Question 1.15. Do the fundamental principles underlying the
cooling-off periods remain sound, and do they provide sufficient
assurances that a security's price is based on a market free from the
undue influences of distribution participants?
Question 1.16. What should be the role of disclosure, transaction
transparency, and regulatory surveillance in determining the
appropriate cooling-off periods?
Question 1.17. Are there more appropriate criteria on which to base
cooling-off period lengths than the $5/400,000 Share Test? Should the
test be based on the dollar value of public float, market
capitalization, or dollar value of average daily trading volume, or a
combination of these elements? What would be the appropriate
thresholds?80
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\8\0The Commission previously received limited, mixed comment on
this issue. See File No. S7-33-92, containing comment letters on
Securities Exchange Act Release No. 31347 (October 22, 1992), 57 FR
49039.
---------------------------------------------------------------------------
Question 1.18. Should securities of very highly capitalized issuers
be subject to a cooling-off period of less than two business days? How
should these issuers be identified? Should any securities (e.g., penny
stocks) have a cooling-off period longer than nine business days?
Question 1.19. Should distribution participants be permitted to
effect bona fide hedging transactions in the offered security if such
hedging is done to offset the risk of a position established before
becoming a distribution participant? What should be the parameters of
any such hedging exception?
Question 1.20. During distributions of index- or equity-linked
securities or similar derivative products, should broker-dealers be
permitted to engage in risk-reducing activities until the time that the
offering price or strike price is established? If so, what parameters
are necessary or appropriate?
Question 1.21. Should issuers be permitted to purchase covered
securities throughout the distribution period if other antimanipulation
guidelines are followed, e.g., Rule 10b-18?81
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\8\117 CFR 240.10b-18.
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E. Securities
Concept Four: Regulation should be limited to securities whose
prices may significantly affect the market's evaluation of a security
in distribution.
The provisions of Rule 10b-6 apply to the security being
distributed, any security of the ``same class and series'' as that
security, and ``any right to purchase'' any such security.82 The
rule also deems a distribution of a security that is ``immediately
exchangeable for or convertible into'' another security, or that
entitles the holder immediately to acquire another security, to include
a distribution of such other security, thereby prohibiting bids for or
purchases of the underlying security as well as the security in
distribution.83 The rule covers these securities because they bear
a relationship to the securities in distribution such that distribution
participants may be tempted to manipulate these related securities to
facilitate the distribution.
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\8\2Paragraph (a). This collection of securities are referred to
as the ``covered securities'' in this release.
\8\3Paragraph (b).
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The relationship between the securities to be distributed and those
to be purchased may be based on their similar terms or on a
mathematical relationship conferred, for example, by a right to convert
or exchange one security for the other. Bids for or purchases of
related securities may result in price changes that render them
expensive relative to the security in distribution. The disparate
prices may prompt arbitrage transactions by other market participants
involving the sale of the related security and the purchase (and
possible upward effect on the price) of the security in distribution.
Purchases of a related security by distribution participants also may
be used to induce unrelated market professionals to purchase the
security in distribution as a hedge. For example, large purchases of
standardized call options are likely to force options market makers
(who have sold the options) to purchase the underlying common stock to
hedge their risk. A price increase in a related security also may
indicate to a potential investor that the security in distribution is
under-priced.
The ``same class and series'' language has been construed broadly
to encompass securities that are sufficiently similar in their terms to
the security in distribution to raise the possibility that bids for or
purchases of the outstanding security might be utilized to facilitate
the distribution, even though there is no inherent mathematical
relationship between the prices of the securities.84
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\8\4``Same class and series'' questions have arisen most
frequently with regard to debt securities. See Letter regarding
Gamble Skogmo, Inc. (January 11, 1974) (available on LEXIS), in
which the staff took a no-action position to permit bids for or
purchases of the issuer's outstanding debt securities that varied by
at least 1% in coupon interest rate and by at least ten years in
maturity from those of the debt securities being distributed.
Transactions in nonconvertible debt securities or nonconvertible
preferred securities where both the nonconvertible securities being
distributed and those to be purchased have been rated investment
grade by at least one nationally recognized statistical rating
organization (``NRSRO'') are excepted from Rule 10b-6. Paragraph
(a)(4)(xiii). The exception is premised on the fungibility of
investment grade issues (i.e., that securities with similar terms
will trade on rating and yield rather than issuer identification).
Prices of high-yield debt securities, on the other hand, are
presumed to be influenced by issuer-specific information as well as
interest rates. Cf. Securities Exchange Act Release No. 33327
(December 13, 1993), 58 FR 67878.
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The ``right to purchase'' concept has been applied to call options,
warrants, convertible and exchangeable securities, and target
securities in exchange offers and mergers.85 The scope of the rule
is limited, however, and does not encompass a wide variety of
derivative securities and instruments developed in recent years that do
not give the holder the right to acquire another security. Nonetheless,
these instruments derive their value in whole or in part from an equity
security or from a group of equity securities, and thus potentially
raise the same manipulative concerns underlying Rule 10b-6. For
example, cash-settled index-related securities and instruments, such as
narrow-based index options, have a value that may be derived in
significant part from a component security. Similarly, the sale of a
put option86 is closely analogous in terms of its potential impact
on the underlying security as a purchase of a call option, but it is
not a right to purchase.
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\8\5Convertible securities are considered to be rights to
purchase when the holders would find it economically beneficial to
convert, such as when the securities are ``in-the-money.'' See 1983
Release, 48 FR at 10631 n.28.
\8\6Rule 10b-6 has been interpreted to cover sales of put
options on a security in distribution on the theory that the puts
are ``bids'' for the security in distribution, even though it is the
sale rather than the continuing open position that is more likely to
affect the price of the underlying stock through arbitrage or
otherwise. Securities Exchange Act Release No. 17609 (March 13,
1981), 46 FR 16670.
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Question 1.22. Should bids for and purchases of debt securities
distinct from those in distribution continue to be regulated? In what
circumstances is the price of or trading activity in an outstanding
bond likely to be relevant in evaluating a debt offering of the same
issuer?
Question 1.23. Are there objective standards or quantitative models
for identifying the securities that should or should not be covered?
Are factors other than stated interest rates and maturities relevant to
the ``same class and series'' analysis, such as differences in ratings,
rankings (senior versus subordinated), and redemption features?
Commenters favoring an objective approach may wish to suggest ``bright
line'' factors, the presence or absence of which would establish
conclusively that two securities are not of the same class and series.
Question 1.24. Should the ``right to purchase'' concept be
retained, or should it be replaced with a ``price-related security''
concept that would include all securities having a significant price
relationship with the security in distribution? Commenters favoring
such an approach should address how ``price-related securities'' should
be defined and how to exclude securities or other instruments whose
prices have a highly attenuated economic relationship to and,
therefore, little potential impact upon the security in distribution.
Question 1.25. Under what circumstances should it be permissible to
purchase a security in distribution in the normal course of business as
part of a standardized or non-standardized ``basket'' of securities?
VI. Stabilization
Concept Five: Stabilization of offerings should be restricted in
order to minimize its manipulative impact.
A. Current Regulatory Approach
The express purpose of stabilization is to affect a security's
price. Therefore, during securities offerings, where the underwriter
has the purpose to induce others to buy the offered security,
stabilization is a form of manipulation. As a rationale for permitting
stabilization through regulation, the Commission pointed to the
significant risks to which underwriters are subject in firm commitment
underwritings.87 In Rule 10b-7, the Commission codified previously
articulated guidelines for determining which transactions effected to
peg, fix, or stabilize the price of a security constitute lawful
stabilization as a means to facilitate the placement of securities in
an orderly manner, and which transactions constitute unlawful
manipulation.
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\8\7Release 34-2446.
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Rule 10b-7 applies to ``any person who, either alone or with one or
more other persons, directly or indirectly, stabilizes the price of a
security to facilitate an offering of any security.''88
Stabilizing transactions are those involving ``the placing of any bid,
or the effecting of any purchase, for the purpose of pegging, fixing or
stabilizing the price of any security.''89 To prevent stabilizing
activities from improperly affecting the market for a security, Rule
10b-7 prohibits certain specific activities, including bids or
purchases not necessary for the purpose of preventing or retarding a
decline in the open market price of the security, and stabilizing at a
price resulting from unlawful activity. The rule establishes the price
level at which a stabilizing bid may be entered, and rules of priority
for the execution of independent bids at times when a stabilizing bid
has been entered. In addition, the rule regulates the number of
stabilizing bids that an underwriting syndicate may enter in any one
market at any one time, and the entry of stabilizing bids on markets
other than the principal market for the security being stabilized. The
rule also requires that notice be given that the market will be or is
being stabilized, and requires a person effecting stabilizing
transactions to keep the information and make the notification required
by Rule 17a-2 under the Exchange Act.90
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\8\817 CFR 240.10b-7(a).
\8\917 CFR 240.10b-7(b)(3).
\9\017 CFR 240.17a-2. Rule 17a-2 generally requires the managing
underwriter in an offering that is being stabilized to record
specified information on the offered security, each stabilizing
purchase, and the identity and commitments of syndicate members, and
to furnish similar information to each syndicate member.
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Question 2.1. To what extent have changes in the securities markets
and underwriting practices affected the manner in which stabilization
is conducted? How frequently and under what circumstances are offerings
stabilized (as opposed to reserving the right to stabilize)? What new
techniques and trading systems (such as proprietary trading systems)
are used and how are bids and purchases disclosed in such systems?
Question 2.2. Should the ability to stabilize be based upon the
risk assumed in connection with an offering? Do current underwriting
practices allow underwriters to reduce risks to a greater extent than
when the Commission established its policies on stabilization? Do
issuers engage in stabilization during offerings? If so, is it
appropriate?
Question 2.3. Should stabilization be permitted only for certain
types of distributions (e.g., firm commitments) or securities? If so,
what should be the determinative criteria?
Question 2.4. How should stabilizing price levels be determined?
Should permissible stabilization price levels depend on the security's
characteristics (e.g., the degree of transparency, liquidity, or
reported/nonreported status) or should they apply uniformly to all
securities?
Question 2.5. What is the appropriate role of disclosure in
connection with stabilization? Do the current disclosure requirements
provide meaningful investor protection?
B. Aftermarket Bids and Purchases
Underwriters engage in numerous activities in the ``aftermarket''
of the offered security, i.e., the period following the cessation of
sales efforts in the offering. In purpose or effect, these activities
may support, or even raise, the market price of the security, and can
have the effect of ``stabilizing'' the security's price.91 In
fact, ``stabilization'' of the market in connection with offerings may
have shifted from the sales period to the aftermarket period.
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\9\1See, e.g., Hanley, Kumar & Seguin, Price stabilization in
the market for new issues, 34 J. Fin. Econ. 177 (1993).
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A significant volume of trading frequently occurs in the days
immediately following the end of the sales of the offered securities.
Three significant activities by persons who participated in the
distribution often occur during this period: market making; purchases
of the offered security to cover a syndicate short position; and
``penalty bids.'' Underwriters, particularly managing underwriters,
generally become market makers in the security (or resume market making
if it was suspended during the offering). Underwriters may have
``oversold'' the offering in order to compensate for cancellations and
to create aftermarket buying power against anticipated selling pressure
immediately following the offering.92 Issuers sometimes grant an
overallotment option (so-called ``Green Shoe'' option) to underwriters
to purchase securities in addition to the amount that the syndicate is
committed to purchase from the issuer.93 The manager may cover the
syndicate short position by exercising the option, through open market
purchases, or a combination of the two.
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\9\2Underwriters have reported that immediate aftermarket
selling by substantial purchasers in the offering, known as
``flipping,'' has become common. See, e.g., Peers, Wall Street Plans
to Crack Down on IPO 'Flippers,' Wall St. J., December 29, 1993, at
C1. It appears to be a longstanding phenomenon of offerings. Cf.
Release 34-2446, at 5.
\9\3Under Rule 10b-6, a distribution is deemed completed if the
underwriter exercises the overallotment option, but only to the
extent of the syndicate short position that remains in connection
with the distribution. See Paragraph (c)(3)(ii).
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A ``penalty bid'' provision often is included in the agreement
among underwriters.94 The managing underwriter imposes the penalty
by requiring underwriters or selling group members to forfeit their
selling concession for the shares sold to their customers in the
offering that are purchased in the aftermarket for the syndicate
account.
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\9\4A ``penalty bid'' is defined in the NASD By-Laws, Schedule
D, part 1(15) [NASD Manual (CCH) 1802] as: ``A stabilizing bid that
permits the managing underwriter to reclaim a selling concession
granted to a syndicate member in connection with the sale of
securities in an underwritten offering when the syndicate member
resells such securities to the managing underwriter.''
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Question 2.6. Do aftermarket bids and purchases by syndicate
members support the market price of the offered security and
``facilitate the offering?''
Question 2.7. Should such bids and purchases be regulated?
If so, what is the appropriate form of regulation? Is it relevant
whether the syndicate has a net short position?
Question 2.8. What should be the appropriate period during which
the short position may be covered?95
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\9\5See Securities Exchange Act Release No. 3506 (October 27,
1941), 11 FR 10984.
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Question 2.9. Does the presence of a penalty bid have the effect of
``stabilizing'' the aftermarket of the offered security?96
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\9\6Cf. Zweig, Spiro and Schroeder, Beware The IPO Market,
Business Week, April 4, 1994, at 84.
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VII. Rights Offerings
Concept Six: Regulation should be limited to rights offerings that
raise a readily identifiable incentive to manipulate the market.
Rights offerings are a means of raising capital whereby, for a
limited period of time, issuers offer existing security holders the
opportunity to purchase new securities, generally at a discount to the
market price of the security underlying the rights.
Because the structure differs significantly from that of a
traditional offering of equity or debt securities, rights offerings
involve different risks.97 For instance, a decline in the market
price during the often lengthy period during which rights may be
exercised (``rights exercise period'') can affect the success of the
offering. For this reason, issuers often retain underwriters who assume
the risk of failure of the offering, i.e., that a substantial amount of
rights will remain unexercised at the end of the rights exercise
period.
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\9\7See generally Loss, supra note 46, at 1604-1614; Foshay,
supra note 5, at 916-918.
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Broker-dealers often are employed by issuers in one of, or some
hybrid of, two methods to reduce market risk during the rights exercise
period. The first method is the so-called ``Shields Plan,''98
which is used when the underwriters (typically a syndicate of
underwriters) enter into a standby arrangement with the issuer, thereby
committing to purchase all shares left unsubscribed at the expiration
of the rights exercise period. During the rights exercise period, the
underwriters will seek to offset the risk of purchasing the shares
representing unexercised rights by purchasing rights, exercising them,
and selling the securities acquired. The underwriters also may effect
short sales of the underlying security and then purchase rights to
cover this short position.
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\9\8The Shields Plan originated in 1947 with a committee of the
Investment Bankers Association headed by a partner of Shields & Co.
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In the so-called ``Columbia Gas Plan,''99 the issuer retains a
securities dealer to act as dealer-manager of the offering, although
there is no standby commitment to purchase unsubscribed shares.100
Where rights are transferable, Shields Plan-type activities may be used
in this type of arrangement to increase the amount of rights exercised,
i.e., the soliciting dealers sell short the securities being offered
and purchase rights and exercise them to cover their short positions.
Accordingly, although the dealer-manager may facilitate the exercise of
rights and thus the distribution of the underlying securities, the risk
of failure remains with the issuer.
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\9\9The Columbia Gas Plan was first devised and implemented by
the Columbia Gas Company in 1948.
\1\00This is also referred to as the ``dealer-manager plan.''
Rule 10b-8 defines a dealer-manager as ``a person [other than the
issuer] who manages a distribution involving soliciting dealers.''
17 CFR 240.10b-8(d)(8)(viii).
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One commentator has observed that the Commission encouraged the
development of these plans because they reduced the flotation costs of
rights offerings and protected existing security holders who otherwise
might not receive a fair price for the rights that they did not wish to
exercise.101
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\1\01Loss, supra note 46, at 1605.
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Adopted by the Commission in 1955, Rule 10b-8 represented a
codification of prior administrative practice regarding rights
offerings by permitting purchases of rights and other activities
designed to reduce the risk of raising capital through rights
offerings, albeit subject to limitations consistent with the goals of
Rule 10b-6 (i.e., to restrict activities by persons participating in
the rights offering which might artificially affect the price of the
rights or the underlying security).102
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\1\02Rule 10b-8 applies to any person participating in a rights
distribution, including the issuer, underwriter, dealer-manager, and
soliciting dealers. The rule excludes from its coverage a person
whose activities consist solely of receiving compensation from the
issuer of rights for obtaining exercises of rights by security
holders to whom they were originally issued.
In recent years, certain persons or entities that are not
brokers or dealers have served as standby purchasers in rights
offerings in order to increase their ownership in the issuer's
securities. Unlike standby underwriters who purchase rights to
reduce their position risk, purchases of rights by such persons are
made to acquire or increase a position in the underlying security.
These latter standby purchasers are not covered by Rule 10b-8. See,
e.g., Letter regarding Elron Electronic Industries Ltd. (March 19,
1990), [1990-1991] Fed. Sec. L. Rep. (CCH) 79,656.
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The rule has remained essentially unchanged since it was adopted in
1955.103
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\1\03In 1983, the rule was amended to include within its scope
convertible securities called for redemption pursuant to a standby
underwriting agreement. Generally, calls for redemption contain
features similar to rights offerings, namely, that a standby
underwriter seeks to minimize its exposure to position risk during
the redemption period. In 1993, the rule was amended to except
certain rights offerings of foreign securities made exclusively in
the United States to ``qualified institutional buyers,'' as defined
in Rule 144A under the Securities Act. See Rule 144A Release.
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To prevent distribution participants from facilitating a rights
offering by creating the appearance of demand for the rights, paragraph
(d) of Rule 10b-8 restricts bids for and purchases of rights.104
Nevertheless, the restrictions apply only in two situations:
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\1\0417 CFR 240.10b-8(d). Purchases of the underlying securities
remain subject to Rule 10b-6. See Paragraph (a)(4)(ix).
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(1) When the price of the security underlying the rights is being
stabilized; or
(2) When any syndicate member, dealer-manager, soliciting dealer,
or other distribution participant has purchased rights, as principal,
without having sold the underlying securities obtainable upon exercise
(i.e., when any member of the syndicate has a net long position in the
underlying security, assuming the exercise of all rights owned by the
syndicate members).105 Otherwise, there is no restriction on the
price or manner in which the rights may be purchased. Where the
restrictions are applicable, the amount of rights that a distributor or
syndicate may purchase is limited to those necessary to acquire the
securities the distributor or syndicate has previously sold or
reasonably expects to be able to sell within five business days after
the expiration of the rights.106
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\1\05Accordingly, the restrictions on rights purchases do not
apply to distribution participants who purchase rights to cover an
existing short position in the underlying securities. There are
certain exceptions from the restrictions that are analogous to the
exceptions in Rule 10b-6. See 17 CFR 240.10b-8(d).
\1\0617 CFR 240.10b-8(d)(7).
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Rule 10b-8 also limits the price at which the underlying
securities, or securities of the same class and series, may be offered
or sold during the rights offering.\107\ The sales price is based upon
the last sale price by the manager of the distribution or by a price
set by that manager. Such price may be set from time to time, but an
offering price set in any day may not be increased more than once
during such day. The rule's restrictions on sales are designed to
address the relationship that exists between the rights and the
underlying security, and are intended to prevent distribution
participants from offering the underlying security at steadily
increasing prices, which could affect the market price of the
underlying security and enhance the attractiveness of the rights.
Because a distribution participant may buy rights to the extent such
rights are needed to acquire securities that were previously sold, the
sales price restriction on the underlying security may limit the size
of the participant's short position, in turn controlling that
participant's rights purchasing activity.108
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\1\0717 CFR 240.10b-8(b).
\1\08Because purchases of rights may have the effect of
increasing the price of the underlying security (e.g., non-
distribution participant arbitrage sellers of rights would hedge by
purchasing the underlying security), restrictions on the price at
which the underlying security may be sold reduces any indirect
effect on the underlying security through the purchase of rights.
Although the rule does not regulate directly the size of the short
position in the underlying security, it may do so indirectly to the
extent that it becomes economically impractical for a participant in
the rights offering to sell the underlying security at prices below
the total acquisition cost of the rights plus the exercise price.
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Question 3.1. To what extent have changes in the securities markets
and underwriting practices affected the manner in which rights
offerings are conducted?
Question 3.2. Is it necessary or appropriate to have anti-
manipulation regulation of rights offerings or calls for redemption of
convertible securities? If regulation continues to be appropriate, how
should it be structured? Who should be covered?
Question 3.3. Should transactions in the rights continue to be
subject to restrictions and, if so, in what manner? Is the existing
distinction between persons with a long position in the underlying
security and those with a short position appropriate, i.e., is there
greater or lesser incentive to manipulate based on positions in the
underlying security? Should limitations be placed on the volume of
rights purchases? Commenters should consider the manner in which
purchasing rights may facilitate the distribution of the underlying
security.
Question 3.4. Should sales of the underlying security and related
securities during a rights offering continue to be subject to
restrictions and, if so, in what manner?
Question 3.5. To what extent do the following considerations affect
rights offering practices, and can or should any of these factors be
taken into account as a means to simplify any continued regulation of
these offerings:
(a) The risks assumed by the persons participating in the rights
offering;
(b) The existence or extent of a discount in the rights exercise
price to the market price of the security; or
(c) The timing of the exercise of rights? 109Are there any
other relevant factors to be considered in the treatment of these
offerings?
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\1\09For example, it has been noted that, from an economic
perspective, shareholders tend to delay their decision regarding
whether to exercise rights until just before the rights expire. See,
e.g., E. Bloch, Inside Investment Banking 173 (1986).
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VIII. Regulation of Other Manipulative Activity During Offerings
Concept Seven: Where necessary or appropriate, regulation should
address the activities of persons other than distribution participants
who have substantial incentives to manipulate security prices during
offerings.
The Trading Practices Rules address the manipulative activities of
distribution participants and their affiliated purchasers. However,
other parties also may have substantial incentives to manipulate the
price of a security around the time of a securities offering. The
difficulty lies in drawing clear lines that appropriately address
manipulation practices but that do not interfere with legitimate market
and business activity.
One context that has been addressed is sales of securities prior to
the pricing of an offering. The Commission has applied fundamental
manipulation concepts to this activity: ``Where * * * those who have a
substantial interest in the establishment of lower market prices take
active steps to accomplish their objective, a finding of manipulative
purpose is warranted'' under Exchange act sections 9(a)(2) and 10(b)
and Securities Act Section 17(a).110
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\1\10J.A.B. Securities Co., Inc., 47 SEC 86, 92 & n.17 (1979).
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Specifically, the Commission views short selling in anticipation of
a public offering and the subsequent covering of those short sales with
the offered securities as a manipulative activity. Such short sales are
detrimental to the capital formation process, because the decreased
price resulting from those sales deprives the issuer of offering
proceeds that otherwise would have been realized had the market not
been subject to such activity.111 Persons who sell short and cover
their sales out of a public offering are not subject to the usual
market risk associated with short sales, because they have access to a
pool of securities obtainable from distribution participants at a
fixed, and generally lower, price. It is this lower risk that can
provide an incentive for manipulative short selling. The Commission
adopted Rule 10b-21 in 1988 to prohibit this type of short selling and
covering.112
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\1\11See Securities Exchange Act Release No. 26028 (August 25,
1988), 53 FR 33455, 33456. See also Rule 10b-21 Release.
\1\1217 CFR 240.10b-21. See, e.g., SEC v. Curtis Ivey and Gregg
Kaplan, Lit. Release No. 14042 (April 5, 1994).
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In addition to short sellers, persons may engage in long sales in
order to depress the market price in anticipation of an offering. For
instance, they may have indicated their interest in buying the offered
securities from the underwriter, but want to do so at a lower
price.113
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\1\13See, e.g., SEC v. Soros Fund Management, Inc., No. 79 Civ.
2641 (S.D.N.Y. 1979), Lit. Release No. 8763 (May 21, 1979) (consent
decree finding violations of Exchange Act sections 9(a)(2) and 10(b)
and Rule 10b-5 thereunder and Securities Act section 17(a)).
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Question 4.1. Does Rule 10b-21 adequately address the concerns
raised by short selling in anticipation of an offering?
Question 4.2. Should Rule 10b-21 explicitly cover sales of related
securities in addition to the offered securities?
Question 4.3. Are there other manipulative activities during an
offering that should be addressed by regulation and that can be
regulated feasibly?
IX. Extraterritorial Effects of Antimanipulation Regulation
Concept Eight: Consistent with the protection of United States
investors, regulation of offerings should avoid conflicts with global
distribution practices.
Shortly after adoption of the Trading Practices Rules, the
Commission took the position that, with respect to multinational
offerings of securities occurring in whole or in part in the United
States, the Trading Practices Rules apply to all distribution
participants and their affiliated purchasers, wherever they are located
or effect transactions.114 The basis for this position is that
transactions occurring in a foreign jurisdiction can affect the market
for the security being distributed in the United States, and such
activity might result in the harm that Rule 10b-6 was designed to
prevent (i.e., the creation of artificial prices by persons
participating in the distribution).115 As the world's securities
markets have become increasingly interconnected and, in particular, as
multinational offerings have become more common, market participants
have asserted that the extraterritorial effects of the Trading
Practices Rules disrupt foreign distribution participants' normal
market practices and may discourage some offerings from being made in
the United States.116 These effects also may impose compliance
burdens on foreign persons that conflict with regulatory requirements
in their home jurisdictions.117
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\1\14See, e.g., Letters regarding Royal Dutch Petroleum Co.
(December 23, 1957); Philips N.V. (May 15, 1962); Standard Oil Co.
(New Jersey) (February 6, 1970); and S.S. Kresge & Co. (April 14,
1972). In some respects, other jurisdictions have taken a similar
approach. See Chapter III, Part 10, Rule 10.06 of the Rules of the
U.K. Securities and Investments Board, 2 Fin. Serv. Rep. (CCH) at
184,281.
\1\15Generally, U.S. courts have recognized the application of
U.S. federal securities laws to fraudulent or manipulative
activities in a foreign jurisdiction where such activities have an
``effect'' in the United States, Schoenbaum v. Firstbrook, 405 F.2d
200, 208 (2d Cir.), rev'd in part on other grounds, 405 F.2d 215 (2d
Cir. 1968) (en banc), cert. denied sub nom. Manley v. Schoenbaum,
395 U.S. 906; Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 991
(2d Cir. 1975); see also Restatement (Third) of the Foreign
Relations Law of the United States, 416 (1987), or where conduct
that occurs in the United States is an ``essential link'' in the
foreign fraudulent or manipulative activities. Leasco Data
Processing Equip. Corp. v. Maxwell, 468 F.2d 1326, 1335 (2d Cir.
1972).
\1\16See Rule 144A Release, 58 FR at 60327.
\1\17See Statement of Policy, 58 FR at 60324.
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The Commission has addressed the international effects of these
rules by providing relief in appropriate contexts on an individual and
class basis.118 The Commission has applied the Trading Practices
Rules in a manner intended to limit disruption in the home country
market but in the context of its duty to protect U.S. investors from
manipulative offering practices. Relief has been based on a variety of
factors: The depth of the market for a foreign security; the
availability of transaction information to the Commission; information
sharing arrangements with foreign regulators; comparable foreign
regulation; the significance of a particular market for price
discovery; disclosure of foreign market practices and transactions; and
the characteristics of the market for the security in the United
States. In the case of rights offerings, which are quite common in
foreign jurisdictions, the lengthy rights exercise periods and the
amount of the discount between the rights exercise price and the price
of the underlying security also have been viewed as important factors
in fashioning relief.
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\1\18See, e.g., SEC, Fifty-Eighth Annual Report 33 (1992).
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Question 5.1. Should the regulation of offerings distinguish
between offerings in the United States of domestic and foreign
securities? Commenters should address the effect that the Commission's
initiatives concerning multinational offerings have had on U.S. and
foreign issuers, broker-dealers, and investors.
Question 5.2. In applying the Trading Practices Rules to offerings
of foreign securities in the United States, the Commission has
considered only the portion of the total offering that is offered in
the United States. Because manipulative incentive is related directly
to the magnitude of an offering, is the Commission's practice of
focusing only on the U.S. portion of a multinational offering
appropriate?
Question 5.3. Should antimanipulation regulations apply in the
``secondary'' markets for a particular security (i.e., those markets
that reasonably can be assumed not to have a price discovery role)? If
not, how should those markets be identified?119 Should the United
States ever be considered a secondary market for these purposes? What
potential is there for a secondary market to become a price discovery
market during the distribution period, and what consequence would that
have?
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\1\19In a recent exemption, the Commission disapplied the
Trading Practices Rules to markets that account for less than 10% of
a foreign security's worldwide reported trading volume. German
Offerings Exemptions, supra note 31, 58 FR at 53223-53225.
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Question 5.4. What is the role of transaction reporting to foreign
regulators and trade publication (i.e., transparency) in this context?
Question 5.5. What level of disclosure to U.S. investors regarding
foreign trading practices should be required?
Question 5.6. What information concerning transactions in foreign
countries during a distribution should be available to the Commission?
Question 5.7. Should regulation of foreign offerings be based on
information sharing agreements between the Commission and foreign
regulators?
Question 5.8. Should the Commission except transactions occurring
in those jurisdictions that have a comparable system of
antimanipulation regulation? How should comparability be determined?
X. Alternative Approaches
In considering the concepts noted above and the issues that they
raise, some commenters may believe that a different construct, rather
than amendments to the current rules, would provide a more appropriate
means of protecting investors from manipulation during securities
offerings. In assessing the general proposition of how and whether
market activities during distributions should be regulated, commenters
are requested to consider the following:
Question 6.1. How have changes in the securities markets and
securities offering practices affected the need for some form of
regulation of trading and similar activities during offerings of
securities? What are the costs and benefits of any continued regulation
of these activities? If regulation continues to be necessary or
appropriate, what form should such regulation take?
Additionally, commenters are invited to suggest and describe
alternatives to the current system, and may wish to consider the
approaches described below.
A. Safe Harbor Alternative
Under this approach, if certain conditions were satisfied, a ``safe
harbor'' from the antimanipulation provisions of sections 9(a)(2) and
10(b) and Rule 10b-5 thereunder would be available. For example, Rule
10b-18 under the Exchange Act provides a safe harbor from these
provisions for certain bids or purchases made by an issuer or its
affiliated purchasers. For that rule's safe harbor to apply, the issuer
or its affiliated purchasers must satisfy conditions relating to the
time, price, amount, and method of purchasing the issuer's security.
Commenters should consider whether it would be appropriate, and
practical, to adopt a safe harbor approach in lieu of, or as a
supplement to, the Trading Practices Rules. Because transactions within
any such safe harbor still could have a manipulative impact, the safe
harbor would be unavailable where the transactions were made with
manipulative or fraudulent intent.
Question 6.2. Could the Trading Practices Rules be restructured so
as to provide a ``safe harbor'' from charges of manipulation under the
Exchange Act? How and why should such a safe harbor approach be
implemented? What difficulties would be associated with such an
approach?120
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\1\20In the dynamic area covered by the Trading Practices Rules,
the views of the Commission's staff are frequently sought as to the
appropriateness of specific transactions. In general, the staff does
not provide similar advice regarding the scope of safe harbors from
antimanipulation provisions.
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B. Evidentiary Alternative
Under the Trading Practices Rules, it is unlawful for a
distribution participant to bid for or purchase the securities that are
the subject of a distribution (or related securities) until his or her
participation is completed, absent an exception or exemption. Some
market participants have voiced concerns that certain violations of
Rule 10b-6 are ``inadvertent'' or ``technical'' in nature and do not
evince an intent to artificially influence the price of a security in
distribution. A possible alternative would be to adopt a presumption
that a distribution participant or its affiliated purchaser who engages
in proscribed activity during a distribution has done so with
manipulative intent, and place the burden on that person to prove that
the conduct was not done with manipulative intent.121
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\1\21This approach would be analogous to the inference that is
drawn under the case law regarding section 9(a)(2). E.g., Crane Co.
v. Westinghouse Air Brake Co., 419 F.2d 787, 795 (2d Cir. 1969); The
Federal Corp., 25 SEC 227, 230 (1947).
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Question 6.3. Should distribution participants be permitted to
rebut findings of violations of the Trading Practices Rules by
establishing the absence of manipulative intent? How and why should
such an approach be implemented? What difficulties would be associated
with such an approach? What should be the evidentiary requirement for
rebutting such a presumption?
C. Definitional Approach
```Manipulation' is `virtually a term of art when used in
connection with the securities markets.'''122 Various sections of
the Exchange Act authorize the Commission to prohibit activities that
it deems or defines to be manipulative.123 The Trading Practices
Rules are among the antimanipulation rules that the Commission has
adopted pursuant to this authority.124
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\1\22Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476 (1977),
quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976).
\1\23E.g., Exchange Act Section 10(b), 15(c)(1)(D), 15(c)(2)(D),
15 U.S.C. 78j(b), 78o(c)(1)(D), 78o(c)(2)(D). For example, Rules
15c1-1 through 15c1-9 under the Exchange Act define the term
``manipulative, deceptive, or other fraudulent device or
contrivance'' as used in Section 15(c)(1) of the Exchange Act by
enumerating various acts and practices. 17 CFR 240.15c1-1--240.15c1-
9.
\1\24Cf. Santa Fe, supra note 122, at 476-477.
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Question 6.4. Should the Commission expressly define activities
that are manipulative in the context of offerings? How and why should
such an approach be implemented? What is the scope of activities that
should be covered by a definitional rule? What difficulties would be
associated with such an approach?
D. ALI Code Alternative
In 1978, the American Law Institute (``ALI'') proposed a
comprehensive codification of the federal securities laws (``ALI
Code'').125 The ALI Code retains many of the fundamental concepts
of Rules 10b-6 and 10b-7.126 For example, the ALI Code would
codify the basic principles of Rule 10b-6, but leave it to successor
rules to provide the details and exemptions. The code does not
recommend the repeal of any of the exceptions in Rule 10b-6.
Additionally, the proposed definition of ``distribution'' would permit
the Commission to define the term in light of a number of factors,
including the size of the offering, number of sellers and buyers,
selling methods, characteristics of the market used, and
compensation.127
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\1\25ALI, Federal Securities Code (Proposed Official Draft,
1978). The ALI Code was endorsed by the American Bar Association in
1979. The Commission published a ``Statement of Position'' on the
1978 version of the ALI Code essentially supporting the code, with
revisions. Securities Act Release No. 6242 (September 18, 1980),
[1980] Fed. Sec. L. Rep. (CCH) 82,655.
\1\26ALI Code Section 1609-1611 (Official Draft, 1980).
\1\27ALI Code Section 202(41); see also ALI Code Section
1609(d)(3).
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The proscriptions would apply to ``the issuer, a secondary
distributor, an underwriter, a prospective underwriter, or any other
person who has agreed to participate or is participating or otherwise
financially interested in a distribution.''128 The prohibitions
would stay in place until the completion of the person's participation
or the termination of his or her financial interest. The stabilization
provision of the ALI Code closely mirrors Rule 10b-7, and would retain
the Commission's authority to regulate or prohibit stabilization
conducted for any purpose.129
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\1\28ALI Code Section 1609(d)(1).
\1\29ALI Code Section 1610 & Comment (1).
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Question 6.5. Does the proposed ALI Code provide a preferable
alternative structure to dealing with manipulation during offerings?
How and why should such an approach be implemented? What difficulties
would be associated with such an approach?
E. Stabilization Alternative
An alternative regulatory framework for stabilization is provided
by the rules of the United Kingdom Securities and Investments Board
(``SIB Rules'').130 The SIB Rules provide a safe harbor from
charges of violating U.K. antimanipulation law only to the
``stabilizing manager,'' who is analogous to the U.S. managing
underwriter. The other syndicate members are neither protected nor
restricted by the SIB Rules. The stabilizing manager may bid for or
purchase the offered security for the purpose of ``stabilizing or
maintaining the market price of the security being offered'' during the
``stabilizing period,'' which can run to the 60th day after the date of
allotment made to subscribers and purchasers, potentially much longer
than the period covered by Rule 10b-7.
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\1\30Chapter III, part 10 of the SIB Rules, 2 Fin. Serv. Rep.
(CCH) 184.314-184.401.
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The SIB Rules are more flexible than Rule 10b-7 in permitting bids
and purchases to closely follow the market, moving up or down, at or
below the initial stabilizing price. In addition, the bid may be raised
to the last independent sale price even if that price is higher than
the initial stabilizing bid. As under Rule 10b-7, however, no
stabilizing price may exceed the offering price. The stabilizing
manager also is permitted to overallot the offered securities to
``subscribers or purchasers'' or sell short the securities to
facilitate its subsequent stabilizing purchases. Moreover, the SIB
Rules permit the stabilizing manager to buy in the market to cover a
syndicate short position, and to cover such short position without
regard to the general price limits otherwise imposed on stabilizing
transactions.
Question 6.6. Is the SIB stabilizing structure, or some adaptation
of that structure, a useful alternative to Rule 10b-7? What
difficulties would be associated with such an approach?
F. Tiered Modifications
As noted in the body of the release, the manipulative incentives
associated with a distribution may vary depending on the type of
offering and the nature of its participants. Accordingly, in discussing
these alternatives, commentators are requested to consider whether the
alternatives could be tiered to address these matters.
Question 6.7. Could an alternative be applied effectively to a
limited class of securities? How would such a class be defined, e.g.,
market capitalization and trading volume of the security?
Question 6.8. Could an alternative be applied effectively to a
limited class of institutional investors? How would such a class be
defined?
Question 6.9. Could an alternative be applied effectively to a
limited class of transactions? How would such a class be defined?
Question 6.10. Could an alternative be applied effectively to a
limited class of transactions involving a limited class of
institutional investors? How would such transactions or investors be
defined?
G. Deregulatory Alternative
Some may believe that the general antifraud and antimanipulation
provisions of the federal securities laws are sufficient to deter
conduct during distributions that is designed to artificially condition
the market for the offered security, and the Trading Practices Rules
could be rescinded.
Question 6.11. Should the Trading Practices Rules be rescinded?
Question 6.12. What difficulties, if any, would arise in applying
the concepts identified in this release, if only the general
antimanipulation provisions applied to distribution participant conduct
during offerings?131 Would there be viable methods for the
Commission and its staff to provide guidance as to lawful and unlawful
activity?
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\1\31One commentator has remarked: ``Through its very precise
and mechanical nature, Rule 10b-6 is a tradeoff against the possibly
more pernicious risk to the issuer or underwriter of an unfocused
prohibition against undefined manipulative conduct.'' Blanc, Rules
10b-6, 10b-7, 10b-8 and Other Anti-manipulation Considerations,
contained in Securities Underwriting 298 (Bialkin & Grant eds.,
1985).
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Question 6.13. Would this approach create the uncertainty that
apparently existed prior to the adoption of these rules and served as
their genesis?
Question 6.14. Assuming that disclosure would be an essential
element of this alternative, what disclosures would adequately inform
investors that market prices may be or were being influenced by
distribution participant activity?132
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\1\32In this regard, commenters may wish to consider United
States v. Lewis, [1989] Fed. Sec. L. Rep. (CCH) 94,479 (S.D.N.Y.
1989).
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H. Simplifying the Current Rules
The Trading Practices Rules are considered by many to be complex
and difficult to apply. Some have suggested that the current
construction of these rules could be simplified without sacrificing the
core protections afforded by these rules.
Question 6.15. Could the current structure of the Trading Practices
Rules be simplified and, if so, how?
Question 6.16. Rules 10b-6 and 10b-8 are structured in terms of a
basic prohibition and exceptions thereto. Would it be possible to
structure the prohibitions more narrowly to address specific types of
potentially manipulative conduct in connection with distributions
generally and rights offerings specifically?
By the Commission.
Dated: April 19, 1994.
Margaret H. McFarland,
Deputy Secretary.
Appendix A--Statutory and Regulatory Framework of the Trading Practices
Rules
This appendix provides a background summary of the antifraud and
antimanipulation provisions of the Securities Exchange Act of 1934
(``Exchange Act''),\1\ the promulgation of Rules 10b-6, 10b-7, and
10b-8 (``Trading Practices Rules'') under their authority, and an
index of the relevant interpretive and rulemaking releases
subsequent to the rules' adoption in 1955.
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\1\15 U.S.C. 78a et seq.
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I. Background\2\
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\2\See generally III L. Loss, Securities Regulation 1541-1570
(2d. ed. 1961); Foshay, Market Activities of Participants in
Securities Distributions, 45 U. Va. L. Rev. 907, 907-926 (1959).
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Following the 1929 stock market crash and amid public furor
concerning financial intermediaries that had engaged in flagrant
manipulation in the securities markets, Congress enacted the
Exchange Act to put an end to the practices that it found had
contributed to the economic problems facing the Nation.\3\ In
drafting the legislation, Congress determined that the available
common law remedies for fraud were inadequate to combat manipulation
in the securities markets.\4\ Because Congress recognized that
market manipulation can assume many forms, it did not define the
term in the Exchange Act or elsewhere. Congress intended the
Exchange Act to outlaw every ``device used to persuade the public
that activity in a security is the reflection of a genuine demand
instead of a mirage.''\5\ In a number of provisions, the Commission
is given authority to define manipulative practices and adopt rules
to proscribe and prevent such conduct.\6\ As the Commission has
stated:
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\3\Congressional findings leading to the enactment of the
Exchange Act pointed to widespread manipulation and fraud by
brokers, dealers, and other members of the financial industry. One
of the ``chief evils'' was the operation of ``pools,'' which were
agreements among several persons to trade actively in a security,
generally to raise the price of a security by concerted activity, in
order to sell their holdings at a profit to the public, which is
attracted by the activity or by information disseminated about the
stock. Report to the Secretary of Commerce, Staff of Senate
Committee on Stock Exchange Regulation, 73d Cong., 2d Sess. 13
(1934); S. Rep. No. 1455, 73d Cong., 2d Sess. 31 (1934). See, e.g.,
Thel, The Original Conception of section 10(b) of the Securities
Exchange Act, 42 Stan. L. Rev. 385, 404 (1990); Note, Manipulation
of Stock Markets Under the Securities Laws, 99 U. Pa. L. Rev. 651,
659-662 (1951).
\4\Prior to enacting the Securities Act of 1933, 15 U.S.C. 77a
et seq., and the Exchange Act, the federal government could only
combat securities fraud and manipulation by criminal prosecution for
violation of the mail fraud statute, 18 U.S.C. 1341, or for
conspiring to violate it, 18 U.S.C. 371. For example, in United
States v. Brown, 5 F. Supp. 81 (S.D.N.Y. 1933), aff'd, 79 F.2d 321
(2d Cir.), cert. denied sub nom. McCarthy v. United States, 296 U.S.
650 (1935), the court held that manipulative trading through a pool
arrangement was fraudulent as a form of misrepresentation and
``unfair dealing'' and thus violated the mail fraud statute. See
also Hearings before Comm. on Banking and Currency on Senate
Resolutions 56 and 84, 72d Cong., and 97, 73d Cong. (1934); Report
of Governor Hughes' Committee on Speculation in Securities and
Commodities (June 7, 1909).
\5\Stock Exchange Practices, Senate Comm. on Banking and
Currency, S. Rep. No. 1455, 73rd Cong., 2d Sess. 30 (1934). A fixed
definition could impair the ability to address new manipulative
devices. But cf. Fischel & Ross, Should the Law Prohibit
``Manipulation'' in Financial Markets?, 105 Harv. L. Rev. 503
(1991).
\6\See, e.g., Exchange Act sections 9(a)(6), 10, 15(c), 15
U.S.C. 78i(a)(6), 78j, 78o(c).
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When investors and prospective investors see activity, they are
entitled to assume that it is real activity. They are also entitled
to assume that the prices that they pay and receive are determined
by the unimpeded interaction of real supply and real demand so that
those prices are the collective marketplace judgment that they
purport to be. Manipulations frustrate these expectations. They
substitute fiction for fact. . . . The vice is that the market has
been distorted and made into 'a stage-managed performance.'\7\
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\7\Edward J. Mawod & Co., 46 S.E.C. 865, 871-872 (1977), aff'd,
591 F.2d 588 (10th Cir. 1979).
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II. Statutory Provisions
This section describes the principal antimanipulation provisions
of the Exchange Act, sections 9(a), 10, and 15(c),\8\ and the
implementation of the concepts underlying those provisions in the
regulation of securities offerings. It has long been recognized that
securities offerings, which can be affected dramatically by short-
term movements in security prices, are susceptible to
manipulation.\9\
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\8\15 U.S.C. 78i(a), 78j, and 78o(c), respectively.
\9\See Comment, Market Manipulation and the Securities Exchange
Act, 46 Yale L.J. 624, 626 (1937).
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The provisions of Section 9(a) were designed to ``purge the
securities exchanges of those practices which have prevented them
from fulfilling their primary function of furnishing open markets
for securities where supply and demand may freely meet at prices
uninfluenced by manipulation or control.''\10\ Congress explicitly
prohibited certain transactions when the purpose was to ``create a
false or misleading appearance of active trading'' or a ``false or
misleading appearance with respect to the market for an exchange-
registered security.''\11\ Congress included a general anti-
manipulation provision, Section 9(a)(2),\12\ which has been termed
the ``heart'' of the Exchange Act.\13\ Manipulation under this
section requires proof of three elements:
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\10\S. Rep. No. 1455, 73d Cong., 2d Sess. 30 (1934). The title
of section 9 is ``Prohibition Against Manipulation of Security
Prices.''
\11\15 U.S.C. 78i(a)(1).
\12\15 U.S.C. 78i(a)(2).
\13\See Report of the Securities and Exchange Commission on
Proposals for Amendments to the Securities Act of 1933 and the
Securities Exchange Act of 1934, 77th Cong., 1st Sess. 50 (1941).
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(1) A series of transactions in an exchange-registered security,
(2) Creating actual or apparent active trading in such security
or raising or depressing the price of such security,
(3) For the purpose of inducing the purchase or sale of such
security by others. However, Congress recognized that some forms of
market intervention should not be prohibited absolutely and left it
to Commission rulemaking to impose necessary or appropriate
restrictions on such activities for the protection of the
public.\14\
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\14\See, e.g., Exchange Act sections 9(a)(6), (b), and (c), 15
U.S.C. 78i(a)(6), (b), (c).
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Section 10 of the Exchange Act addresses the ``regulation of the
use of manipulative and deceptive devices.'' Section 10(a) provides
the Commission with plenary authority to regulate short sales in
exchange-registered securities.\15\ Section 10(b) makes unlawful the
use or employment of ``any manipulative or deceptive device or
contrivance'' in contravention of Commission rules adopted pursuant
to that section.\16\ In 1942, the Commission adopted Rule 10b-5,
which prohibits any person from using any device, scheme, or
artifice to defraud any person, making any untrue material statement
or any material omission, or engaging in any fraudulent or deceptive
act, practice, or course of business, in connection with the
purchase or sale of any security.\17\
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\15\See Stock Exchange Practices, Report of the Senate Comm. on
Banking and Currency, S. Rep. No. 1455, 73d Cong., 2d Sess. 55
(1934).
\16\Section 10(b), 15 U.S.C. 78j(b).
\17\17 CFR 240.10b-5.
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Sections 15(c) (1) and (2) prohibit brokers and dealers from
effecting securities transactions in the over-the-counter (``OTC'')
market by means of any ``manipulative, deceptive, or other
fraudulent device or contrivance,'' or engaging in ``any fraudulent,
deceptive, or manipulative act or practice.'' Section 15(c)(2) also
directs the Commission to define and prescribe means reasonably
designed to prevent fraudulent, deceptive, or manipulative acts and
practices.\18\ The Commission has exercised its authority under
these provisions to proscribe manipulative activity.\19\
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\18\15 U.S.C. 78o(c)(1), (2).
\19\See 17 CFR 240.15c1-1 to 15c1-9, 240.15c2-1 to 15c2-12. The
Commission and the courts have held that transactions that would
violate Section 9(a)(2) if effected in an exchange-registered
security would violate Exchange Act Section 15 if effected in a
security not so registered. See, e.g., SEC v. Management Dynamics,
Inc., 515 F.2d 801, 810 (2d Cir. 1975); Barrett & Co., 9 SEC 319,
328 (1941); Loss at 1573. See also NASD By-Laws, Schedule G, section
4, NASD Manual (CCH) Sec. 1921.
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III. Implementation of Exchange Act Provisions in the Context of
Securities Offerings
Securities offerings involve risk and uncertainty.20 The
Commission has recognized that the pricing of an offering is not an
exact science and that regulation of the market activities of
parties with an interest in the outcome of an offering presents
``intensely practical problem(s).''21 From its earliest days,
the Commission and its staff have been called upon to implement the
antimanipulation provisions of the Exchange Act in the context of
securities offerings.22 Sections 9(a)(2) and 15(c)(1) were
interpreted to require a broad prohibition of trading during a
distribution by persons interested in the distribution.23
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\2\0See, e.g., Securities Exchange Act Release No. 2446 (March
18, 1940), 11 FR 10971 (``Release 34-2446'').
\2\1Release 34-2446.
\2\2See, e.g., Koeppe v. SEC, 95 F.2d 550 (7th Cir. 1938);
Securities Exchange Act Release No. 605 (April 17, 1936) (``Release
34-605'').
\2\3See, e.g., Securities Exchange Act Release Nos. 3056
(October 27, 1941), 11 FR 10984 (Any series of purchases that raise
a security's price and are made for the purpose of inducing
purchases by others is unlawful manipulation whether or not the
purpose is achieved.); and 3505 (November 16, 1943), 11 FR 10965
(Where a participant in a distribution effects transactions which
raise the price of the security or create excessive activity in the
security, it is difficult, if not impossible, to avoid the
conclusion that the transactions were conducted, at least in part,
for the purpose of inducing the purchase of the security by
others.).
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IV. The Trading Practices Rules
A. 1955 Rulemaking
Rules 10b-6, 10b-7, and 10b-8 were proposed for comment in May
1954,24 reproposed in April 1955,25 and adopted in July
1955.26 From the outset, the Trading Practices Rules reflected
the framework established by the Commission during the preceding
twenty years interpreting section 9(a)'s prohibitions on
manipulative conduct, and consist of a broad trading prohibition
with exceptions thereto. In the following four decades, the
Commission and staff have administered the Trading Practices Rules
and related antimanipulation rules within this framework.
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\2\4Securities Exchange Act Release No. 5040 (May 18, 1954), 19
FR 2986.
\2\5Securities Exchange Act Release No. 5159 (April 19, 1955),
20 FR 2826.
\2\6Securities Exchange Act Release No. 5194 (July 5, 1955), 20
FR 5075.
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B. Index of Releases
The following is a chronological reference list of the releases
interpreting and proposing and adopting amendments to the Trading
Practices Rules and related Rules 10b-2, 10b-18, and 10b-21.
1. Rule 10b-6: Trading restrictions during offerings. a.
Securities Exchange Act Release No. 5415 (December 6, 1956), 21 FR
9983. The Commission proposed to amend Rule 10b-6 to clarify that
officers, directors, and controlling persons of the issuer or other
person on whose behalf the distribution is being made would be
subject to the rule. The proposed amendment was subsequently
withdrawn in Securities Exchange Act Release No. 7517 (January 22,
1965), 30 FR 1010.
b. Securities Exchange Act Release No. 7293 (April 21, 1964).
The Commission published notice of its consideration to amend
paragraph (e) of Rule 10b-6 excepting issuer distributions to
employees pursuant to stock option plans.
c. Securities Exchange Act Release No. 7403 (August 27, 1964).
The Commission amended Rule 10b-6 to add new paragraph (e) excepting
issuer distributions to employees pursuant to stock option plans.
d. Securities Exchange Act Release No. 16112 (August 16, 1979),
44 FR 49406. In adopting Rule 13e-4, the Commission noted that it
intended to amend Rule 10b-6 to except from the rule's prohibitions
purchases of securities by an issuer or its affiliate pursuant to a
tender offer that is subject to Exchange Act Rule 13e-4, where the
issuer or its affiliate is subject to Rule 10b-6 solely because the
issuer has outstanding securities convertible into or exchangeable
for the security that is the subject of the tender offer.
e. Securities Exchange Act Release No. 16645 (March 13, 1980),
45 FR 18915. The Commission amended Rule 10b-6 to add paragraph (f)
excepting purchases of securities pursuant to a tender offer by an
issuer or issuer affiliate for securities of the issuer, which is
subject to and made in compliance with Exchange Act Rule 13e-4,
where the issuer or affiliate is subject to Rule 10b-6 solely
because the issuer has outstanding securities convertible into or
exchangeable for the security for which the tender offer will be
made.
f. Securities Exchange Act Release No. 16646 (March 13, 1980),
45 FR 18948. The Commission proposed amendments to Rule 10b-6 that
would except from its application distributions of securities
pursuant to employee or shareholder plans sponsored by an issuer.
g. Securities Exchange Act Release No. 17556 (February 17,
1981), 46 FR 15133. The Commission amended paragraph (e) of Rule
10b-6 to except from the rule's application distributions of
securities pursuant to shareholder plans sponsored by an issuer or
its subsidiaries.
h. Securities Exchange Act Release No. 17609 (March 6, 1981), 46
FR 16670. The Commission authorized issuance of letters setting
forth the interpretive and enforcement positions of the Division of
Market Regulation (``Division'') regarding the application of Rule
10b-6 to certain transactions involving exchange-traded options by
participants in an underwriting of the security underlying such
options.
i. Securities Exchange Act Release No. 18528 (March 3, 1982), 47
FR 11482. The Commission proposed amendments to Rule 10b-6 which
would define the term ``distribution;'' permit distribution
participants to continue trading until three business days before
commencement of sales of the securities; clarify the rule's
applicability to persons who participate in delayed offerings; and
codify staff positions on various exceptions.
j. Securities Exchange Act Release No. 18666 (April 20, 1982),
47 FR 18359. The Commission authorized issuance of Division
interpretive positions concerning application of certain proposed
amendments to, and no-action positions taken under, Rule 10b-6 with
respect to offerings made in compliance with Securities Act Rule
415.
k. Securities Exchange Act Release No. 19244 (November 17,
1982), 47 FR 53333. The Commission amended paragraph (f) of Rule
10b-6 to provide that the rule does not apply to bids for and
purchases of a security solely because the issuer or a subsidiary of
the issuer has an outstanding class of securities that are
immediately convertible into, or exchangeable for, such securities
(so-called ``technical distributions'').
l. Securities Exchange Act Release No. 19565 (March 4, 1983), 48
FR 10628. The Commission adopted amendments to Rule 10b-6 defining
the term ``distribution;'' permitting certain distribution
participants to continue trading securities until the commencement
of the applicable two or nine business day cooling-off period;
clarifying the rule's applicability to persons who participate in
delayed offerings; and codifying staff positions on various
exceptions.
m. Securities Exchange Act Release No. 19988 (July 21, 1983), 48
FR 34251. In the context of amending Rule 13e-4 relating to odd-lot
tender offers, the Commission determined to allow staff
consideration of requests for relief from Rules 10b-6 and 10b-13
with respect to odd-lot purchases on a case-by-case basis.
n. Securities Act Release No. 6492 (October 5, 1983), 48 FR
46801. The Commission proposed amendments to Securities Act Rule 139
that would affect compliance with Rule 10b-6 in connection with the
issuance of research reports.
o. Securities Exchange Act Release No. 21332 (September 19,
1984), 49 FR 37569. The Commission adopted Securities Act Rule 139
amendments and published a staff no-action position under Rule 10b-6
with respect to a research report that is within Securities Act
Rules 137, 138, or paragraph (b) of Rule 139, or within paragraph
(a) of Rule 139 and does not contain a recommendation or earnings
forecast more favorable than that previously disseminated by the
firm.
p. Securities Exchange Act Release No. 22510 (October 10, 1985),
50 FR 42716. The Commission proposed amendments to Rule 10b-6 to
permit underwriter and broker-dealer participants in a distribution
to engage in solicited brokerage transactions until two or nine
business days before offers or sales of the securities being
distributed; define the rule's applicability to certain affiliated
persons; reduce the restrictions on the exercise of standardized
call options; provide parallel cooling-off periods within exceptions
(xi) and (xii) of the rule; modify the rule's preamble to more fully
reflect the Commission's authority; and codify the Commission's
position that a distribution participant may rely on the rule's
exceptions only if the contemplated transactions are not made for
manipulative purposes.
q. Securities Exchange Act Release No. 23611 (September 19,
1986), 51 FR 33242. The Commission published an interpretive release
regarding application of Rule 10b-6 in the context of shelf-
registered distributions by shareholders, including application of
the rule to issuers and broker-dealers during such distributions.
r. Securities Exchange Act Release No. 24003 (January 16, 1987),
52 FR 2994. The Commission adopted amendments to Rule 10b-6 that
permit underwriters and broker-dealers to engage in solicited
brokerage transactions until two or nine business days before offers
of sales of securities being distributed; define the rule's
applicability to certain persons who are affiliated with
participants in a distribution; allow distribution participants to
exercise throughout the distribution period standardized call
options written prior to the time that they became distribution
participants; and modify the rule's preamble to reflect more fully
authority for the rule's provisions.
s. Securities Exchange Act Release No. 31347 (October 22, 1992),
57 FR 49039. The Commission proposed an exception to Rule 10b-6 and
a new companion rule, Rule 10b-6A, which permit ``passive market
making'' by Nasdaq market makers in connection with certain
distributions of Nasdaq-quoted securities during the period when
Rule 10b-6 otherwise would prohibit such activity.
t. Securities Exchange Act Release No. 31943 (March 4, 1993), 58
FR 13288. Pursuant to delegated authority, the Division issued a
class exemption clarifying the application of the ``cooling-off''
periods in Rule 10b-6 to distributions of foreign securities in the
United States.
u. Securities Exchange Act Release No. 32117 (April 8, 1993), 58
FR 19598. The Commission adopted a new exception to Rule 10b-6 and a
new companion rule, Rule 10b-6A, which permit ``passive market
making'' by Nasdaq market makers in connection with certain
distributions of Nasdaq-quoted securities during the period when
Rule 10b-6 otherwise would prohibit such activity.
v. Securities Exchange Act Release No. 32266 (May 5, 1993), 58
FR 27686. The Commission proposed new exceptions to Rules 10b-6,
10b-7, and 10b-8 which would permit transactions otherwise
prohibited by those rules during distributions of foreign issuers'
securities eligible for resale pursuant to Securities Act Rule 144A
when such distributions in the United States are made exclusively to
qualified institutional buyers (``QIBs'').
w. Securities Exchange Act Release No. 33022 (October 6, 1993),
58 FR 53220. Pursuant to delegated authority, the Division issued
class exemptions from Rules 10b-6, 10b-7, and 10b-8 to facilitate
distributions in the United States of securities of certain highly
capitalized German issuers, permitting distribution participants to
effect transactions in Germany otherwise prohibited by these rules,
subject to certain disclosure, recordkeeping, record production, and
notice requirements.
x. Securities Exchange Act Release No. 33137 (November 3, 1993),
58 FR 60324. Statement of policy announcing the Commission's
position that, upon proper written request, class exemptions from
Rules 10b-6, 10b-7, and 10b-8, would be available during
distributions in the United States by issuers located in foreign
jurisdictions and would be subject to substantially similar
principles, terms, and conditions that applied to the exemptions
issued by the Commission in Securities Exchange Act Release No.
33022 in connection with distributions of certain German securities.
y. Securities Exchange Act Release No. 33138 (November 3, 1993),
58 FR 60326. The Commission adopted new exceptions to Rules 10b-6,
10b-7, and 10b-8 which permit transactions otherwise prohibited by
those rules during distributions of foreign issuers' securities
eligible for resale pursuant to Securities Act Rule 144A when such
distributions in the United States are made exclusively to QIBs.
z. Letter Regarding Regulation S Transactions during
Distributions of Foreign Securities to Qualified Institutional
Buyers (February 22, 1994). Pursuant to delegated authority, the
Division granted exemptions from Rules 10b-6, 10b-7, and 10b-8,
subject to certain conditions, to permit bids, purchases, and
inducements to purchase Securities Act Rule 144A-eligible foreign
securities being distributed, any security of the same class and
series, or any right to purchase such security by distribution
participants and their affiliated purchasers when such foreign
security is offered or sold in transactions in compliance with
Regulation S during a concurrent Rule 144A QIB distribution of the
foreign security.
2. Rules 10b-7 and 17a-2: stabilization. a. Securities Exchange
Act Release No. 5275 (January 16, 1956), 21 FR 501. The Commission
announced consideration of amendments to Rule X-17A-2 which would
require reports when stabilizing is conducted in connection with a
Regulation A offering or any other offering involving more than
$300,000, as well as offerings registered under the Securities Act
of 1933.
b. Securities Exchange Act Release No. 5300 (April 18, 1956), 21
FR 2787. The Commission adopted amendments to Rule X-17A-2 and Form
X-17A-1 that clarified and simplified the instructions to the form.
c. Securities Exchange Act Release No. 5415 (December 6, 1956),
21 FR 9983. The Commission published notice of a proposal to amend
Rule 10b-7 to clarify the language of paragraph (l) in light of
recent amendments to that rule.
d. Securities Exchange Act Release No. 6127 (November 30, 1959),
24 FR 9946. The Commission proposed to amend Rule 10b-7 to prohibit
all bids or purchases of a security which are intended to peg, fix,
or stabilize the price of a security unless such transactions are
for the purpose of facilitating a particular distribution of
securities, and to make conforming amendments to paragraph (l) of
the rule.
e. Securities Exchange Act Release No. 9605 (May 24, 1972), 37
FR 10960. The Commission proposed amendments adding new paragraph
(d)(5) to Rule 17a-2 and revising paragraph (d)(1) and (e) and
Instruction V of Form X-17-A-1 to require the ``not as manager''
reports to be made to the syndicate manager within five business
days after the determination of stabilization.
f. Securities Exchange Act Release No. 9717 (August 15, 1972),
37 FR 17383. The Commission amended Rule 17a-2 to add new paragraph
(d)(5), and revised paragraph (d)(1) and (e) and Instruction V of
Form X-17A-1 to require ``not as manager'' reports to be made to the
syndicate manager within five business days of the termination of
stabilization.
g. Securities Exchange Act Release No. 9876 (November 27, 1972).
The Commission clarified the amendments to Rule 17a-2 set forth in
Securities Exchange Act Release No. 9717.
h. Securities Exchange Act Release No. 18983 (August 26, 1982),
47 FR 37580. The Commission proposed amendments to Rules 17a-2 and
10b-7 to require that information concerning stabilizing
transactions be retained by the managing underwriter and to rescind
related Form X-17A-1.
i. Securities Exchange Act Release No. 20155 (September 7,
1983), 48 FR 41377. The Commission rescinded Form X-17A-1 and
adopted amendments to Rules 10b-7 and 17a-2 eliminating the
requirement that participants in an offering that is stabilized file
with the Commission reports of their transactions and requiring
instead that the managing underwriter retain information on
stabilizing transactions.
j. Securities Exchange Act Release No. 28732 (January 3, 1991),
56 FR 814. The Commission proposed amendments to Rule 10b-7 to
permit the stabilizing price to reflect the price in the foreign
market which is the principal market for such security if the
stabilizing otherwise complies with the rule's provisions.
k. Securities Exchange Act Release No. 28733 (January 3, 1991),
56 FR 820. In connection with Securities Exchange Act Release No.
28732, the Commission proposed for comment Rule 3b-10, which would
define certain terms relevant to the increasing internationalization
of the world securities markets.
l. Securities Exchange Act Release No. 33022 (October 6, 1993),
58 FR 53220. See 1.w supra.
m. Securities Exchange Act Release No. 33137 (November 3, 1993),
58 FR 60324. See 1.x supra.
n. Securities Exchange Act Release No. 33138 (November 3, 1993),
58 FR 60326. See 1.y supra.
o. Letter Regarding Regulation S Transactions. See 1.z supra.
3. Rule 10b-8: rights offerings. a. Securities Exchange Act
Release No. 5415 (December 6, 1956), 21 FR 9983. The Commission
proposed to amend Rule 10b-8 to clarify that the rule applies only
to distributions of securities being offered through transferable
rights issued on a pro rata basis to securities holders.
b. Securities Exchange Act Release No. 18528 (March 3, 1982), 47
FR 11482. The Commission proposed amendments to Rule 10b-8 to extend
its scope to ``standby underwriters'' in connection with a call for
redemption by an issuer of its convertible securities.
c. Securities Exchange Act Release No. 19565 (March 4, 1983), 48
FR 10628. The Commission amended Rule 10b-8, extending its scope to
cover purchasing and selling activity by broker-dealers who act as
``standby underwriters'' in connection with a call for redemption of
convertible securities.
d. Securities Exchange Act Release No. 33022 (October 6, 1993),
58 FR 53220. See 1.w supra.
e. Securities Exchange Act Release No. 33137 (November 3, 1993),
58 FR 60324. See 1.x supra.
f. Securities Exchange Act Release No. 33138 (November 3, 1993),
58 FR 60326. See 1.y supra.
g. Letter Regarding Regulation S Transactions. See 1.z supra.
4. Rule 10b-2. a. Securities Exchange Act Release No. 1330
(August 4, 1937). The Commission adopted Rule 10b-2.
b. Various. The Commission adopted a variety of exchange plans
pursuant to paragraph (d) of Rule 10b-2.
c. Securities Exchange Act Release No. 31520 (November 24,
1992), 57 FR 57397. The Commission proposed to rescind Rule 10b-2 in
view of the significant changes that have occurred in the securities
markets since its adoption and duplicative coverage of other
antifraud and antimanipulation provisions of the federal securities
laws.
d. Securities Exchange Act Release No. 32100 (April 2, 1993), 58
FR 18145. The Commission rescinded Rule 10b-2.
5. Rule 10b-18. a. Securities Exchange Act Release No. 17222
(October 17, 1980), 45 FR 70890; Securities Exchange Act Release No.
10539 (December 6, 1973), 38 FR 3434; Securities Exchange Act
Release No. 8930 (July 13, 1970), 35 FR 11410. On three separate
occasions, the Commission proposed Rule 13e-2 (predecessor of Rule
10b-18) to regulate purchase of certain classes of common stock and
preferred stock by or for the issuer, any affiliate of the issuer,
or any ``affiliated purchaser,'' through disclosure requirements and
substantive purchasing limitations imposed on an issuer and on any
affiliated purchaser.
b. Securities Exchange Act Release No. 19244 (November 17,
1982), 47 FR 53333. The Commission adopted Rule 10b-18 to provide a
safe harbor from liability from manipulation in connection with
purchases by an issuer and certain related persons of the issuer's
common stock.
6. Rule 10b-21. a. Securities Exchange Act Release No. 10636
(February 11, 1974), 39 FR 7806. The Commission proposed Rule 10b-21
to deter manipulative short selling in connection with an
underwritten offering.
b. Securities Exchange Act Release No. 11328 (April 2, 1975), 40
FR 16090. The Commission reproposed a version of Rule 10b-21 which
would deter manipulative short selling prior to underwritten
offerings by limiting the ability of short sellers to make covering
purchases from certain persons within certain periods during an
underwriting.
c. Securities Exchange Act Release No. 13092 (December 21,
1976), 41 FR 56542. The Commission proposed an alternative version
of Rule 10b-21 that focused on short selling itself, rather than on
covering purchases, and would regulate short sales from the
preoffering period until the end of the post-offering stabilization
arrangements through the use of a ``tick test.''
d. Securities Exchange Act Release No. 24485 (May 20, 1987), 52
FR 19885. Pursuant to a petition filed by the NASD, the Commission
reproposed Rule 10b-21 to prohibit a person who effects short sales
of an equity security during the period between the filing of a
registration statement relating to the same class of equity
securities and the commencement of the distribution of such equity
securities, from covering such short sales with securities purchased
from an underwriter or other broker-dealer participating in the
offering of such securities.
e. Securities Exchange Act Release No. 26028 (August 25, 1988),
53 FR 33455. The Commission adopted, on a temporary basis, Rule 10b-
21(T), and withdrew the first three rule proposals.
f. Securities Exchange Act Release No. 33702 (March 2, 1994), 59
FR 10984. The Commission adopted Rule 10b-21 on a permanent basis.
[FR Doc. 94-9895 Filed 4-25-94; 8:45 am]
BILLING CODE 8010-01-P
