[Federal Register Volume 63, Number 172 (Friday, September 4, 1998)]
[Proposed Rules]
[Pages 47209-47214]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23880]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-40386; File No. S7-25-98]
RIN 3235-AH53
Processing of Reorganization Events, Tender Offers, and Exchange
Offers
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Commission is proposing for comment amendments to Rule
17Ad-14 under the Securities Exchange Act of 1934. Under the proposed
amendments, registered transfer agents acting on behalf of issuers in
connection with reorganization events would be required to set up
accounts at securities depositories to receive securities by book-entry
movements from depository participants. Also under the proposal,
registered transfer agents acting as depositaries, exchange agents, or
reorganization agents would not be permitted to require a securities
depository to deliver securities certificates prior to the third
business day following the expiration date of the tender offer,
exchange offer, or reorganization event. The proposed amendments are
designed to increase efficiency and certainty in the processing of
reorganization events, tender offers, and exchange offers.
DATES: Comments should be received on or before November 3, 1998.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW., Mail Stop 6-9, Washington, DC 20549. Comments also may be
submitted electronically at the following E-mail address: comments@sec.gov. All comment letters should refer to File No. S7-25-
98; this file number should be used on the subject line if E-mail is
used. Comment letters will be available for public inspection and
copying at the Commission's Public Reference Room, 450 Fifth Street,
NW., Washington, DC 20549. Electronically submitted comment letters
will be posted on the Commission's Internet site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Jerry W. Carpenter, Assistant
Director, or Theodore R. Lazo, Attorney, at 202/942-4187, Office of
Risk Management and Control, Division of Market Regulation, Securities
and Exchange Commission, 450 Fifth Street, N.W., Mail Stop 10-1,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
I. Current Rules Governing the Processing of Securities
Certificates in Tender Offers, Exchange Offers, and Reorganization
Events
A. Tender Offers and Exchange Offers
In 1984, the Commission adopted Rule 17Ad-14 under the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ to address inefficiencies
in the processing of securities certificates in tender offers and
exchange offers.\2\ Rule 17Ad-14 requires any registered transfer agent
acting as a depositary \3\ in the case of a tender offer or as an
exchange agent \4\ in the case of an exchange offer to establish and
maintain specially designated accounts at all qualified registered
securities depositories \5\ holding the subject company's \6\
securities for purposes of (1) receiving tendered securities by book-
entry movement and (2) returning securities that have been withdrawn
from the offer by book-entry movement.
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\1\ 17 CFR 240.17Ad-14.
\2\ Securities Exchange Act Release No. 20581 (January 19,
1984), 49 FR 3064.
\3\ A ``depositary'' is an agent of a bidder that is appointed
during a tender offer to receive and hold all securities tendered by
security holders and to pay the security holders for the tendered
shares. 17 CFR 240.17Ad-14(c)(5). A bidder is a person who makes a
tender or exchange offer or on whose behalf a tender or exchange
offer is made. 17 CFR 17Ad-14(c)(3).
\4\ An ``exchange agent'' is an agent of a bidder that performs
functions in a exchange offer similar to those performed by a
depositary. 17 CFR 240.17Ad-14(c)(5).
\5\ A ``qualified registered securities depository'' is a
clearing agency registered under the Exchange Act that has rules and
procedures approved by the Commission to enable book-entry movement
of the securities of subject company to, and return of those
securities from, the transfer agent through the facilities of that
depository. 17 CFR 240.17Ad-14(c)(4). Currently, The Depository
Trust Company (``DTC'') is the only qualified registered securities
depository for corporate debt and equity securities.
Securities depositories carry out several specific functions in
the clearance and settlement of securities transactions, e.g.:
Accepting deposits of securities from their participants (which
currently include broker-dealers, banks, and other financial
institutions); crediting those securities to the participants'
accounts; and carrying out book-entry deliveries of securities among
participants pursuant to the participants' instructions. Securities
depositories greatly aid in the Exchange Act's mandate that the
Commission use its authority to end the physical movement of
securities certificates in connection with the settlement of
securities transactions. See Section 17A(e) of the Exchange Act, 15
U.S.C. 78q-1(e).
\6\ The term ``subject company'' is defined in Rule 14d-1(e)(2)
under the Exchange Act, 17 CFR 240.14d-1(e)(2), as the issuer of
securities sought by a bidder pursuant to a tender offer.
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Before the adoption of Rule 17Ad-14, bidders could require the
tender of securities certificates outside the depository system even
though in many cases the delivering entities were depository
participants and the securities themselves were eligible for processing
by the depository.\7\ This was an inefficient and time-consuming
process, especially in large tender offers when severe time constraints
existed.\8\
[[Page 47210]]
At that time, securities depositories customarily suspended depository
eligibility for securities that were subject to a large tender or
exchange offer if the depositary or exchange agent did not establish a
depository account. This was particularly true if an offer was for a
significant percentage of the subject company's stock that was on
deposit at the depository and when the subject company's transfer agent
and the depository were located in different cities.\9\
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\7\ Securities eligible for deposit at a depository are
securities that are eligible for deposit at any securities
depository that is registered as a clearing agency under the
Exchange Act. See 17 CFR 240.17Ad-1(j).
\8\ In many cases, depository participants were required to
withdraw securities certificates from the depository in order to
participate in a tender or exchange offer. Because these
certificates typically were held at the depository in nominee name
rather than in the name of the beneficial owner, the nominee name
certificates had to be sent to the transfer agent to have the record
ownership of the securities changed to that of the beneficial owner
and to have a new certificate issued before the beneficial owner
could deliver the securities to the bidder. As a result, it was very
difficult for securities depositories to manage their certificate
inventory for issues that were subject to tender or exchange offers.
\9\ For example, during the summer of 1981 DTC declared the
securities of Conoco, Inc. (``Conoco'') ineligible for its services
because of competing tender offers for control of Conoco by E.I.
DuPont de Nemours, Joseph E. Seagram & Sons, Inc., and Mobil
Corporation. DTC took this action because it could not process all
of the requests that it was receiving for Conoco stock certificates.
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The Commission acted to improve the process by requiring agents in
tender or exchange offers to establish accounts at securities
depositories to permit book-entry movement of securities in connection
with the offer. Under Rule 17Ad-14, depository participants can tender
their shares pursuant to such offers by forwarding transmittal
instructions to securities depositories.\10\ Securities depositories
then debit tendering participants' accounts and simultaneously credit
the accounts of the agent for the offer for the securities tendered.
The agents accept book-entry delivery as a completed tender of shares.
After a tender or exchange offer expires, the securities depositories
make bulk deliveries of the securities certificates to the agent.
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\10\ Transmittal letters and other delivery instructions are now
commonly transmitted electronically instead of by paper to
securities depositories.
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The adoption of Rule 17Ad-14 has resulted in a reduction in the
amount of securities certificates that must be exchanged among
securities depositories, their participants, transfer agents, and
depositaries and exchange agents during tender or exchange offers. This
reduction has led to an increase in the efficient and reliable
processing of securities and a decrease in the risk of loss resulting
from loss or theft of securities certificates or from manual processing
errors. In addition, depositories no longer have to suspend eligibility
for the services for issues subject to a tender or exchange offer.
B. Reorganization Events
Reorganization events typically include conversions, maturities,
full or partial redemptions, calls, put option exercises, and warrants
and rights exercises involving corporate and municipal securities. In
recent years, there has been an increase in the volume and complexity
of these reorganization events.\11\
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\11\ In 1997, DTC processed approximately 76,000 instructions
submitted by its participants in connection with conversions and
warrants, rights, and puts exercises. Conversions and warrants
exercises accounted for the issuance of approximately 685 million
shares of stock. The total value of all such conversions and
exercises exceeded $46.7 billion. Letter from Carl H. Urist, Deputy
General Councel and Vice President, DTC (February 5, 1998).
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The mechanical aspects of reorganization events closely resemble
those of tender offers and exchange offers.\12\ Under the current
method of processing reorganization events, depository participants
with positions in the subject securities that are on deposit at
securities depositories submit instructions to the depositories to send
the subject securities to the reorganization agent.\13\ However, the
legal documents containing the terms of reorganization events (e.g.,
bond indentures) often are interpreted to require security holders to
submit securities certificates in order to exercise their rights under
the event. Similar conditions existed with respect to tender offers and
exchange offers before the adoption of Rule 17Ad-14 in 1984. Changes in
the law since 1984 have clarified even further that book-entry delivery
satisfies legal requirements.\14\
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\12\ For example, in a bond conversion security holders submit
their bonds to a reorganization agent in exchange for another
security of the issuer.
\13\ Reorganization agents are usually issuers or their transfer
agents.
\14\ See Revised Article 8 of the Uniform Commercial Code.
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Book-entry delivery is important for efficient securities
processing during reorganization events. Depending upon the size and
timing of the reorganization event, the securities depositories may
have to make multiple deliveries of securities certificates before the
expiration date of the reorganization event.\15\ In order to control
their certificate inventory during reorganization events, some
securities depositories stop accepting deposits of and book-entry
delivery instructions for the subject securities prior to the
expiration date of the reorganization event.\16\ If a depository
participant wants to participate in a reorganization event after the
depository's cutoff it must submit securities certificates to the
reorganization agent on its own.\17\
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\15\ Securities depositories usually maintain in their vaults
large denomination securities certificates representing aggregated
participant positions in that issue of securities (``jumbo
certificates''). The number of certificates in smaller denominations
is often sufficient only to meet participants' routine withdrawal
needs. As a result, each time a securities depository receives a
request for certificates it must present jumbo certificates to the
transfer agent to be broken down into certificates of smaller
denominations. During a reorganization event in which depository
facilities are not utilized, the timing and extent of demand for
securities certificates can be unpredictable. Therefore, it can be
difficult for securities depositories to make requested physical
deliveries in the precise denominations required on an expedited
basis.
\16\ For example, DTC stops accepting deposits and book-entry
delivery instructions in some securities up to five business days
prior to the expiration date or payment date for the reorganization
event. In the case of maturities or calls, DTC stops accepting
deposits thirty days prior to the payment date. DTC stops accepting
instructions from its participants regarding voluntary
reorganizations activities (e.g., conversions) early on the
expiration date or one or two business days prior to the expiration
date.
\17\ Alternatively, a securities depository could wait to
deliver cash or securities to its participants following a tender of
securities in a reorganization event until the depository receives
full credit for the securities or payment from the reorganization
agent. However, the securities depository could then be subject to
interest claims or contractual liability from its participants for
failure to make deliveries according to the particular terms of the
reorganization event.
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II. Proposed Amendments to Rule 17Ad-14
DTC has requested that the Commission amend Rule 17Ad-14 to expand
the scope of the rule to include reorganization events in addition to
tender offers and exchange offers. DTC also has requested that Rule
17Ad-14 be amended so that qualified registered securities depositories
would have three business days following the expiration of a tender
offer, exchange offer, or reorganization event to deliver securities
certificates that are due to depositaries, exchange agents, and
reorganization agents.\18\
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\18\ Letter from Carl H. Urist, Deputy General Counsel and Vice
President, DTC (September 14, 1994).
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A. Establishment of Book-Entry Depository Accounts by Reorganization
Agents in Connection With Reorganization Events
Under the proposed amendments to Rule 17Ad-14, reorganization
events \19\ would become subject to procedures similar to those
currently governing tender offers and exchange offers. Specifically,
Rule 17Ad-14 would be amended to state that no registered transfer
agent may act as a reorganization agent \20\ unless within
[[Page 47211]]
two business days after commencement of the reorganization event it
establishes at all qualified registered securities depositories \21\
specially designated accounts for purposes of receiving securities
tendered to the reorganization agent in connection with the
reorganization event.
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\19\ Under the proposed amendments, the term ``reorganization
event'' would be defined to include conversions, maturities, full
and partial redemptions, calls, put option exercises, and warrant
and rights exercises involving corporate and municipal securities of
an issuer.
\20\ Under the proposed amendments, the term ``reorganization
agent'' would be defined as an agent of an issuer receiving
securities from tendering depository participants and performing
payment or exchange functions with respect to those tendering
participants as required by the particular reorganization event. The
term ``issuer'' is defined in section 3(a)(8) of the Exchange Act,
15 U.S.C. 78c(a)(8)
\21\ As noted above, the term ``qualified registered securities
depository'' is defined in Rule 17Ad-14(c), 17 CFR 240.17Ad-14(c).
Currently, Rule 17Ad-14(c) only requires a depository to provide
book-entry services for a ``subject company'' in connection with a
tender or exchange offer. Under the proposed amendments, the
definition of ``qualified registered securities depository'' would
be amended to reflect that each such depository also must be able to
provide book-entry services for securities that are subject to a
reorganization event.
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Under the terms of the proposed amendments, after a reorganization
agent establishes the required accounts with each qualified registered
securities depository, participants electing to participate in or
affected by the reorganization event would be able to deliver the
subject securities to the reorganization agent by book-entry movement.
After a securities depository received and verified a participant's
reorganization instructions, it would debit the subject securities from
the participant's securities account and would credit them to the
reorganization agent's securities account. Upon receipt of the subject
securities into its book-entry account, the reorganization agent would
act upon the participants' reorganization instructions (i.e., carry out
the conversion, redemption, or other activity). The Commission believes
that under the proposed amendments to Rule 17Ad-14, book-entry delivery
of securities subject to a reorganization event would satisfy the
delivery requirements under the terms of the event.
Requiring reorganization agents to maintain an account with each
qualified registered securities depository during the course of a
reorganization event would allow the delivery of securities by book-
entry movement rather than by physical transfer. As a result, the need
for delivery of securities certificates from multiple holders to
reorganization agents outside the depository system should be greatly
reduced and securities depositories should be able to accept book-entry
delivery instructions closer to the expiration date of a reorganization
event. Securities depositories also would be able to make bulk
deliveries of securities certificates to reorganization agents which
should reduce the likelihood of securities certificates being lost,
stolen, or destroyed. In addition, the proposed amendments would
further the Exchange Act's mandate that the Commission use its
authority to end the physical movement of securities certificates in
connection with the settlement of securities transactions.\22\
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\22\ See Section 17A(e) of the Exchange Act, 15 U.S.C. 78q-1(e).
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As noted above, in the context of tender and exchange offers Rule
17Ad-14 has reduced the amount of movements of securities certificates
among depositaries and exchange agents, participants, and depositories
and thereby has reduced the costs and risks associated with such
physical transfers. Under the proposed amendments to Rule 17Ad-14,
these benefits should also be realized for reorganization events.
B. Timing for Deliveries of Securities Certificates in Connection With
Tender Offers, Exchange Offers, and Reorganization Events
The Commission is proposing to amend Rule 17Ad-14 to state that a
registered transfer agent acting as a depositary, exchange agent, or
reorganization agent may not require a qualified registered securities
depository to deliver securities certificates prior to the third
business day following the expiration date of a tender offer, exchange
offer, or reorganization event, as the case may be.
The Commission understands that securities certificates generally
are delivered to depositaries and exchange agents only as an
administrative matter \23\ because depositaries and exchange agents
accept book-entry delivery of shares as a completed tender.\24\ Under
the proposed amendments, delivery of securities certificates to the
reorganization agent after a reorganization event has expired also
should become purely an administrative matter.
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\23\ For example, if a company carries out a tender offer for
its own securities, it might want to receive securities certificates
in order to cancel them.
\24\ These understandings are based on conversations between
Commission staff and DTC.
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Rule 17Ad-14 currently does not specify when securities
certificates must be delivered. Establishing a three-day period for
delivery of securities certificates should ensure that securities
depositories have the time necessary to properly account for the
inventory of securities certificates to be delivered. In addition, the
proposed amendments should establish a clear and uniform date by which
securities depositories will deliver securities certificates in tender
offers, exchange offers, and reorganization events.
The proposed amendments to Rule 17Ad-14 regarding delivery of
securities certificates are not intended to affect or to alter current
practice regarding tender and exchange offers or the obligations of
depositaries and exchange agents. Portions of the rule have been
reorganized in order to maintain certain distinctions between tender or
exchange offers and reorganization events as well as to provide
clarity. Other technical changes include the addition of the definition
of ``reorganization agent'' and ``reorganization event'' to the rule
and the amendment of the definition of ``qualified registered
securities depository.''
III. Request for Comments
Any interested person wishing to submit comments on the proposed
amendments to Rule 17Ad-14, as well as on other matters that might have
an impact on the proposal, is requested to do so. The Commission
specifically solicits comments as to whether requiring reorganization
agents to establish accounts with registered securities depositories in
connection with reorganization events presents any issues that are
unique to reorganization events (i.e., issues that are not present in
the context of tender or exchange offers) or that will create an undue
burden upon reorganization agents or others. The Commission seeks
comment on whether any additional regulatory safeguards may be required
in the context of reorganization events (e.g., restrictions on
depository policies that allow securities to be withdrawn from a
securities depository in connection with reorganization events). The
Commission also seeks comment on whether the term ``reorganization
events'' should be defined to include either fewer or additional events
or whether it should be defined more broadly to anticipate new types of
reorganization events that may develop in the future.
While the Commission believes that permitting book-entry delivery
of securities to reorganization agents is consistent with the delivery
requirements under most states' laws, the Commission requests comment
on whether any operative agreements governing reorganization events
(e.g., bond indentures) specifically require delivery of physical
securities certificates.
The Commission also seeks comment on the effect of providing
qualified registered securities depositories with three business days
following the expiration of a tender offer, exchange offer, or
reorganization event to deliver
[[Page 47212]]
securities certificates. Would delivery of securities certificates
three days after the expiration of a tender offer, exchange offer, or
reorganization event have any negative effect on their operation? In
addressing these issues, the Commission invites commenters to discuss
the relevance of the book-entry transfer issues presented in Pryor v.
USX Corp.\25\ to the proposed rulemaking and whether it would be
appropriate to impose a time limit within which securities certificates
must ultimately be delivered.
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\25\ 806 F. Supp. 460 (S.D.N.Y. 1992). Pryor involved a 1981
tender offer by United States Steel Corporation (``U.S. Steel'') for
shares of Marathon Oil Company. The tender offer was oversubscribed,
and the offering document provided that in the event of an
oversubscription U.S. Steel would purchase the Marathon shares on a
pro-rata basis prior to the proration date. Shareholders permitted
to share at the tender offer price were to earn a significant
premium on their shares. Thus, as the number of tenderers increased,
the number of shares held by each tenderer that would be eligible
for sale would decrease. Some tenderers initiated book-entry
deliveries of securities prior to the proration date at DTC, but DTC
delivered the certificates for these shares subsequent to the
proration date. In denying the motions for summary judgment
submitted by each of the plaintiff and defendant, the court did not
resolve the issue as to whether book-entry delivery of securities
prior to the proration date constituted good delivery even though
DTC delivered the securities certificates after the proration date.
Instead, the court set the matter for trail, but the case was
settled.
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IV. Costs and Benefits of the Rules and Their Effect on
Competition, Efficiency, and Capital Formation
Section 23(a)(2) of the Exchange Act \26\ requires the Commission,
in adopting rules under the Exchange Act, to consider the impact any
such rule would have on competition, and to not adopt any rule which
would impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act. In addition, section 3
of the Exchange Act \27\ as amended by the National Securities Markets
Improvement Act of 1996 \28\ provides that whenever the Commission is
engaged in rulemaking and is required to consider or determine whether
an action is necessary or appropriate in the public interest, the
Commission shall consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation.
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\26\ 15 U.S.C. 78w(a)(2).
\27\ 15 U.S.C. 78c.
\28\ 1Pub. L. No. 104-290, 110 Stat. 3416 (1996).
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The Commission is considering the proposed amendments to Rule 17Ad-
14 in light of the standards cited in sections 3 and 23(a)(2) of the
Exchange Act. For the reasons stated herein, the proposed amendments
(i) should promote efficiency by ensuring that all securities transfers
associated with reorganization events may be carried out by book-entry
movement and by providing a reasonable and uniform amount of time for
the delivery of securities certificates that are the subject of tender
offers, exchange offers, and reorganization events, (ii) should not
adversely affect capital formation because they should not increase
issuer transaction costs, and (iii) should not impose any burden on
competition because they will apply equally to all registered transfer
agents that act as depositaries or reorganization agents.
The Commission does not anticipate that the proposed amendments
would have a significant effect on competition or impose any burden on
competition that is not necessary or appropriate in furtherance of the
Exchange Act. Under the proposed amendments, all reorganization agents
will be required to establish and maintain separate accounts for book-
entry delivery of securities during reorganization events. In addition,
the standards with respect to the time in which delivery of securities
certificates must be made to depositaries, exchange agents, or
reorganization agents will apply equally to all qualified registered
securities depositories. However, in order to evaluate fully the
effects on competition of the proposed amendments, the Commission
requests commenters to provide their views and specific empirical data
as to any effects on competition that might result from the
Commission's proposed amendments to Rule 17Ad-14.
The Commission is considering the costs and the benefits of the
proposed amendments to Rule 17Ad-14. The proposed amendments to Rule
17Ad-14 should provide specific benefits to U.S. investors, issuers,
and other financial intermediaries. These benefits are not readily
quantifiable in terms of dollar value. Providing for book-entry
movements of securities that are subject to reorganization events
should increase the efficiency of the processing of such events by
reducing the need for delivery of securities certificates from multiple
holders to reorganization agents. In addition, the proposed amendments
to Rule 17Ad-14 should reduce the risk of loss of securities
certificates because movements of securities in reorganization events
will be carried out by book-entry movement rather than by multiple
transfers of securities certificates.
By providing securities depositories with three business days after
the expiration of a tender offer, exchange offer, or reorganization
event to deliver securities certificates, the proposed amendments
should create a clear and uniform standard for the delivery of
securities certificates subject to such events. This standard should
give securities depositories greater certainty in managing their
certificate inventory after the expiration of a tender offer, exchange
offer, or reorganization event.
The proposed amendments to Rule 17Ad-14 should not result in
significant costs to any particular person or entity. The Commission
estimates that there will be minimal cost to reorganization agents to
establish and maintain a specially designated account at a securities
depository and otherwise to comply with the proposed amendments.\29\ A
small number of entities that act as reorganization agents may incur
some systems and communications costs but the Commission believes many
of those entities already have the necessary systems in place because
they provide book-entry services for tender and exchange offers and
therefore any such costs should be insignificant. No entity should
incur any additional cost because of the proposed amendments to Rule
17Ad-14 that would give securities depositories three days to deliver
securities certificates associated with tender offers, exchange offers,
and reorganization events. Therefore, the proposed amendments to Rule
17Ad-14 should not have any measurable aggregate cost.
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\29\ DTC has informed the Commission staff that it does not
charge a fee to establish and maintain a book-entry account.
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The Commission requests comment on these estimates and invites
commenters to submit their own estimates of the costs and benefits that
would result from the proposed amendments to Rule 17Ad-14. In
particular, the Commission requests comment on whether any entity will
incur any additional cost as a result of the proposed amendments to
Rule 17Ad-14 that would give securities depositories three days to
deliver securities certificates associated with tender offers, exchange
offers, and reorganization events. In order to evaluate fully the costs
and benefits associated with the proposed amendments, the Commission
requests that commenters' estimates of the costs and benefits of the
proposed amendments be accompanied by specific empirical data
supporting the estimates.
V. Summary of Regulatory Flexibility Analysis
The Commission has prepared an initial regulatory flexibility
analysis
[[Page 47213]]
(``IRFA'') in accordance with 5 U.S.C. 603(a) regarding the proposed
amendments to Rule 17Ad-14. The IRFA states that the proposed
amendments are intended to facilitate book-entry delivery of securities
during reorganization events. In addition, the IRFA states that the
proposed amendments are intended to establish a clear and uniform time
frame for the delivery of securities certificates that are the subject
of tender offers, exchange offers, and reorganization events. The IRFA
sets forth the statutory basis for the proposed amendments.
The IRFA states that, for purposes of Commission rulemaking,
paragraph (h) of Rule 0-10 under the Exchange Act \30\ defines the term
``small business'' or ``small organization'' to include any transfer
agent that: (1) Received less than 500 items for transfer and less than
500 items for processing during the preceding six months (or in the
time that it has been in business, if shorter); (2) transferred items
only of issuers that would be deemed ``small businesses'' or ``small
organizations'' as defined in Rule 0-10 under the Exchange Act; (3)
maintained master shareholder files that in the aggregate contained
less than 1,000 shareholder accounts or was the named transfer agent
for less than 1,000 shareholder accounts at all times during the
preceding fiscal year (or in the time that it has been in business, if
shorter); and (4) is not affiliated with any person (other than a
natural person) that is not a small business or small organization
under Rule 0-10.\31\ The IRFA states that, for purposes of Commission
rulemaking, paragraph (d) of Rule 0-10 under the Exchange Act \32\
defines the term ``small business'' or ``small organization'' to
include any clearing agency that (1) compared, cleared and settled less
than $500 million in securities transactions during the preceding
fiscal year (or in the time that it has been in business, if shorter);
(2) had less than $200 million of funds and securities in its custody
or control at all times during the preceding fiscal year (or in the
time that it has been in business, if shorter); and (3) is not
affiliated with any person (other than a natural person) that is not a
small business or small organization as defined in Rule 0-10. In
addition, the IRFA states that paragraph (a) of Rule 0-10 under the
Exchange Act \33\ defines the term ``small business'' or ``small
organization'' to include any person (i.e., business) that, on the last
day of its most recent fiscal year, had total assets of $5 million or
less.
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\30\ 17 CFR 240.0-10(h).
\31\ The Commission recently amended this definition. Securities
Exchange Commission Release Nos. 33-7548, 34-40122, IC-23272, and
IA-1727 (June 24, 1998), 63 FR 35508.
\32\ 17 CFR 240.0-10(d).
\33\ 17 CFR 240.0-10(a).
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The IRFA states that the Commission estimates that 180 transfer
agents qualify as small entities. The IRFA further states that if the
proposed amendments are adopted, it is possible that some registered
transfer agents that act as reorganization agents will be small
entities. In addition, the IRFA states that if the proposed amendments
are adopted, it is possible that certain issuers of securities that are
subject to reorganization events and some bidders that extend tender or
exchange offers will be small entities. However, the IRFA states
further that the Commission currently cannot predict how many of the
affected issuers and bidders would be small entities.
The IRFA states that the proposed amendments would not impose any
new reporting or recordkeeping requirements. The IRFA states further
that if the proposed amendments are adopted, registered transfer agents
acting as reorganization agents would be required to establish and
maintain specially designated accounts at qualified registered
securities depositories to provide for book-entry movements of the
affected securities during the course of reorganization events. The
IRFA states that the proposed amendments to Rule 17Ad-14 should not
have a significant economic impact on a substantial number of small
entities.
The IRFA states that as an alternative to the proposed amendments
the Commission considered requesting that reorganization agents
voluntarily accept book-entry delivery of securities affected by
reorganization events. However, the IRFA states that it is the
Commission's understanding that the agreements governing the terms of
some reorganization events currently require or are interpreted to
require delivery of securities certificates and that reorganization
agents will not accept the affected securities by book-entry delivery
in the absence of a Commission rule.
In addition, the IRFA states that the Commission believes that it
is not feasible to further clarify, consolidate, or simplify the
proposed amendments for small entities. The IRFA also states that the
Commission believes that the use of performance standards rather than
design standards is not applicable to the proposed amendments. The IRFA
states that the Commission believes that creating an exemption from the
requirements of the proposed amendments would not reduce the impact of
the proposed amendments on small entities due to the minimal burden
they are expected to impose on small entities. The IRFA states that the
Commission believes that there are no rules that duplicate, overlap, or
conflict with the proposed alternative versions of the rule.
The IFRA contains information concerning the solicitation of
comments with respect to the IRFA. In particular, the IRFA requests
comment on whether the proposed amendments to Rule 17Ad-14 would have a
significant economic impact on a substantial number of small entities
and requests that any such comments be accompanied by specific
empirical data. Cost-benefit information reflected in the ``Cost/
Benefit Analysis'' section of this Release also is reflected in the
IRFA. The IRFA states that in the absence of specific comments to the
contrary, the Commission anticipates that if the proposed amendments
are adopted it will certify that the proposed amendments will not have
a significant economic impact on a substantial number of small entities
and will not prepare a Final Regulatory Flexibility Analysis. A copy of
the IRFA may be obtained by contacting Theodore R. Lazo, Securities and
Exchange Commission, 450 Fifth Street, NW, Mail Stop 10-1, Washington,
DC 20549.
VI. Statutory Bases
The amendments to Rule 17Ad-14 are being proposed pursuant to
Sections 2, 11A(a)(1)(B), 14(d)(4), 15(c)(3), 15(c)(6), 17A(a),
17A(d)(1), and 23(a) of the Exchange Act [15 U.S.C. 78b, 78k-
1(a)(1)(B), 78n(d)(4), 78o(c)(3), 78o(c)(6), 78q-1(a), 78q-1(d)(1) and
78w(a)].
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
Text of Proposed Amendments
In accordance with the foregoing, the Commission proposes to amend
part 240 of Chapter II of Title 17 of the Code of Federal Regulations
as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d),
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, and
80b-11, unless otherwise noted.
2. Section 240.17Ad-14 is revised to read as follows:
[[Page 47214]]
Sec. 240.17Ad-14 Tender and reorganization agents
(a) Establishing book-entry depository accounts for tender or
exchange offers and reorganization events. (1) When securities of a
subject company have been declared eligible by one or more qualified
registered securities depositories for the services of those
depositories at the time a tender or exchange offer is commenced, no
registered transfer agent shall act on behalf of the bidder as a
depositary, in the case of a tender offer, or an exchange agent, in the
case of an exchange offer, in connection with a tender or exchange
offer, unless that transfer agent has established, within two business
days after commencement of the offer, specially designated accounts.
These accounts shall be maintained throughout the duration of the
offer, including protection periods, with all qualified registered
securities depositories holding the subject company's securities, for
purposes of receiving from depository participants securities being
tendered to the bidder by book-entry delivery pursuant to transmittal
letters and other documentation and for purposes of allowing
depositaries to return to depository participants by book-entry
movement securities withdrawn from the offer.
(2) When securities of an issuer have been declared eligible by one
or more qualified registered securities depositories for the services
of those depositories at the time a reorganization event is commenced,
no registered transfer agent shall act as a reorganization agent on
behalf of any issuer in connection with a reorganization event unless
that registered transfer agent has established, within two business
days after commencement of the reorganization event, specially
designated accounts. These accounts shall be maintained with all
qualified registered securities depositories holding the issuer's
securities until the depository's close of business on the record date,
expiration date, or payment date, as the case may be, including any
protect periods, of the reorganization event for purposes of receiving
from depository participants securities presented to registered
transfer agents by book-entry delivery pursuant to proper documentation
and for purposes of allowing reorganization agents to return securities
to depository participants by book-entry movement in connection with
the reorganization event.
(3) No registered transfer agent acting as a depositary, exchange
agent, or reorganization agent shall require a qualified registered
securities depository to deliver any physical security pursuant to a
tender offer, exchange offer, or reorganization event prior to:
(i) In the case of a tender or exchange offer, the third business
day following the qualified registered securities depository's close of
business on the expiration date of a tender or exchange offer,
including any protect periods or
(ii) In the case of a reorganization event, the third business day
following the qualified registered securities depository's close of
business on the record date, payment date, or expiration date, as
applicable, including any protect periods, of the reorganization event.
(b) Exclusions. This section shall not apply to tender or exchange
offers or reorganization events:
(1) That are made for a class of securities of a subject company or
issuer that has fewer than:
(i) 500 security holders of record for that class; or
(ii) 500,000 shares of that class outstanding; or
(2) That are made exclusively to security holders of fewer than 100
shares of a class of securities.
(c) Definitions. For purposes of this section:
(1) The terms bidder, subject company, business day, security
holders, and transmittal letter shall have the meanings provided in
Sec. 240.14d-1(e);
(2) Unless the context otherwise requires, a tender or exchange
offer shall be deemed to have commenced as specified in Sec. 240.14d-2;
(3) The term qualified registered securities depository shall mean
a registered clearing agency having rules and procedures approved by
the Commission pursuant to section 19 of the Act (15 U.S.C. 78s) to
enable book-entry delivery of the securities of the subject company or
issuer to, and return of those securities from, a transfer agent or
reorganization agent, as the case may be, through the facilities of
that registered clearing agency;
(4) The term depositary refers to that agent of the bidder
receiving securities from tendering depository participants during a
tender offer and paying those participants for shares tendered. The
term exchange agent refers to the agent performing like functions in
connection with an exchange offer. The term reorganization agent refers
to the agent performing like functions in connection with a
reorganization event; and
(5) The term reorganization event shall mean and include
conversions, maturities, full and partial redemptions, calls, put
option exercises, and warrant and rights exercises involving corporate
and municipal securities of an issuer.
(d) Exemptions. The Commission may exempt from the provisions of
this section, either unconditionally or on specified terms and
conditions, any registered transfer agent, reorganization agent, tender
or exchange offer, class of tender or exchange offers, or
reorganization event if the Commission determines that an exemption is
consistent with the public interest, the protection of investors, the
prompt and accurate clearance and settlement of securities
transactions, the maintenance of fair and orderly markets, or the
removal of impediments to a national clearance and settlement system.
Dated: August 31, 1998.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-23880 Filed 9-3-98; 8:45 am]
BILLING CODE 8010-01-P
