[Federal Register Volume 59, Number 46 (Wednesday, March 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5374]


[[Page Unknown]]

[Federal Register: March 9, 1994]


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DEPARTMENT OF COMMERCE
SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release Nos. 33-7046; 34-33702; File No. S7-18-87]

 

Short Selling in Connection With a Public Offering

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Commission announced the permanent adoption of rule 10b-21 
under the Securities Exchange Act of 1934. The Commission adopted rule 
10b-21 on a temporary basis in 1988. Rule 10b-21 is designed to prevent 
manipulative short sales of an equity security in anticipation of a 
public offering by prohibiting the covering of such short sales with 
securities purchased in the offering. The Commission has determined to 
remove the ``Temporary'' designation from rule 10b-21 because the rule 
continues to serve an important purpose in preventing manipulative 
conduct during offerings.

EFFECTIVE DATE: March 9, 1994.

FOR FURTHER INFORMATION CONTACT: M. Blair Corkran, Senior Special 
Counsel, or Elisa A. D. Metzger, Attorney-Adviser, at (202) 272-2848, 
Office of Trading Practices, Division of Market Regulation, Securities 
and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

    In August 1988, the Commission adopted on a temporary basis rule 
10b-21(T)\1\ (``rule 10b-21(T)'' or ``rule'') under the Securities 
Exchange Act of 1934 (``Exchange Act''),\2\ which is designed to 
prevent manipulative short selling of securities in anticipation of a 
public offering of the same securities.\3\ The rule prohibits a person 
from selling short an equity security (and any security of the same 
class) that is being offered for cash pursuant to a registration 
statement filed under the Securities Act of 1933 (``Securities 
Act'')\4\ from the time that the registration statement is filed until 
the securities are available for sale, if such short sale is covered 
with offered securities purchased from a broker-dealer participating in 
the offering.\5\
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    \1\17 CFR 240.10b-21(T).
    \2\15 U.S.C. 78a et seq.
    \3\Securities Exchange Act Release No. 26028 (August 25, 1988), 
53 FR 33455 (``Adopting Release''). The Commission adopted the Rule 
in response to a petition for rulemaking (``NASD Petition'') filed 
by the National Association of Securities Dealers, Inc. (``NASD''). 
See also Securities Exchange Act Release No. 24485 (May 20, 1987), 
52 FR 19885 (``1987 Proposing Release'').
    \4\15 U.S.C. 77a et seq.
    \5\The rule also applies to equity securities sold pursuant to 
Regulation A under the Securities Act. See 17 CFR 239.90.
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    The NASD Petition and the adoption of the rule by the Commission 
were based on concerns relating to certain short selling prior to a 
public offering. Short sales immediately prior to an offering of a 
security may result in a decrease in the price of the security and 
consequently a lower offering price. The short sellers may then seek to 
cover their short positions and realize a profit by purchasing 
securities in the offering at the reduced price. Persons selling short 
in anticipation of a public offering are not subject to the usual 
market risk because they can cover their short position from a pool of 
securities obtainable from identifiable sources at a fixed, and 
generally lower, price. This type of short selling, coupled with 
covering from the offering, adversely affects issuers. A decrease in 
price resulting from these unlawful short sales deprives the issuer of 
offering proceeds that would have been realized had the market not been 
subject to such short selling. This activity can be detrimental to the 
capital raising process.\6\
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    \6\See Adopting Release, 53 FR at 33456.
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II. Experience Under the Rule

    The Commission's staff prepared a statistical analysis of non-
initial public offerings of securities listed for quotation on the 
NASD's NASDAQ system and listed for trading on the New York Stock 
Exchange, Inc. (``NYSE'') during the period from January 1, 1986 
through December 31, 1990. The staff concluded that there was no 
statistical evidence that rule 10b-21(T) had an impact on stock price 
patterns around the time of offerings.
    While statistical evidence of the impact of rule 10b-21(T) on pre-
offering price performance is not dispositive, the NASD, NYSE and 
American Stock Exchange, Inc. continue to support the rule. These self-
regulatory organizations have implemented surveillance systems that are 
designed to detect questionable market activities, including those 
involving short sales, prior to an offering. Others also have commented 
favorably on rule 10b-21(T) in other contexts.\7\
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    \7\See Letter from John F. Olson, Chair Federal Regulation of 
Securities Committee and Robert Todd Lang, Chair Subcommittee on 
Proxy Solicitations and Tender Offers, American Bar Association, to 
Jonathan G. Katz, Secretary, SEC (October 4, 1991); Letter from Guy 
W. Adams, Hecco Ventures Management Inc., to Jonathan G. Katz, 
Secretary, SEC (August 22, 1991); and Letter from Sullivan & 
Cromwell, to Jonathan G. Katz, Secretary, SEC (August 22, 1991) 
regarding Concept Release on Public Disclosure of Material Short 
Positions, Securities Exchange Act Release No. 29278 (June 7, 1991) 
56 FR 27280. These letters are publicly available for inspection and 
copying in File No. S7-20-91 in the Commission's Public Reference 
Room.
    In response to the 1987 Proposing Release, the Commission 
received 36 comment letters, the majority of which supported the 
adoption of the Rule. These comment letters, as well as a summary of 
the comment letters prepared by the Division of Market Regulation, 
are available for public inspection and copying at the Commission's 
Public Reference Room. See File No. S7-18-87.
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    The Commission does not have any evidence that the Rule adversely 
affects legitimate market activities. The Rule does not proscribe short 
selling at any time, nor does it prohibit the covering of short sales 
with securities purchased in the open market. Moreover, the Rule does 
not prevent using securities acquired in a public offering to cover 
short sales effected before the registration statement was filed. The 
Rule is narrowly drawn to impede only the particular practice of short 
selling in anticipation of a public offering and covering those short 
sales with securities purchased in the offering. The Commission views 
such short sales as manipulative and destructive of capital formation 
activities by issuers. For these reasons, the Commission has determined 
to remove the ``Temporary'' designation from the rule.\8\
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    \8\The Commission previously solicited comment on adoption of 
the rule on a permanent basis. Since removing the ``Temporary'' 
designation does not in any way alter the Rule substantively or 
procedurally, the Commission is not seeking comment on this change.
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III. Effects on Competition

    Section 23(a)(2) of the Exchange Act\9\ requires the Commission, in 
adopting rules under the Exchange Act, to consider the anti-competitive 
effects of such rules, if any, and to balance any impact against the 
regulatory benefits gained in terms of furthering the purposes of the 
Exchange Act. The Commission has considered the revision in light of 
the standard cited in section 23(a)(2) and believes that permanent 
adoption of the rule will not impose any burden on competition not 
necessary or appropriate in furtherance of the Exchange Act.
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    \9\15 U.S.C. 78w(a)(2).
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Statutory Authority and Text of Rule Amendment

List of Subjects in 17 CFR Part 240

    Broker-dealers, Fraud, Issuers, Reporting and recordkeeping 
requirements, Securities.
    For the reasons set out in the preamble, title 17, chapter II of 
the Code of Federal Regulations is amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 is amended by revising the 
specific authority for Sec. 240.10b-21(T) to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 
78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 
80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
    Section 240.10b-21 also issued under 15 U.S.C. 78b, 78c, 
78i(a)(6), 78j(a), 78j(b), 78o(c), 78w(a), and 78dd(a);
* * * * *


Sec. 240.10b-21(T)  [Amended]

    2. Section 240.10b-21(T) is amended by removing the ``(T)'' 
following the section number.

    Dated: March 2, 1994.
    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5374 Filed 3-8-94; 8:45 am]
BILLING CODE 8010-01-M