[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