[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] ======================================================================= ----------------------------------------------------------------------- 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. ----------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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''). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \6\17 CFR 240.10b-6, 240.10b-7, and 240.10b-8. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \1\4Source: Securities Industry Association. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \1\517 CFR 240.10b-6A. \1\6See Securities Exchange Act Release No. 32177 (April 8, 1993), 58 FR 19598 (``Passive Market Making Release''). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \3\3Foshay, supra note 5, at 919. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \3\4The Commission will continue to rigorously apply the current antimanipulation provisions during the course of this review. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \3\5See Securities Exchange Act Release No. 31347 (October 29, 1992), 57 FR 49039, 49040. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \5\4See Banks Raising Millions in Equity By Giving Discounts to Arbitragers, Am. Banker, September 17, 1992, at 1. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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? --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- Question 1.4. What difficulties do the ``functional'' beginning and ending points for a distribution present? Can more definite points be identified?60 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- Question 1.7. What is the appropriate application of anti- manipulation regulation to valuation and shareholder-election periods?62 --------------------------------------------------------------------------- \6\2See n.47 supra. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \70\Eg., 1982 Release, 47 FR at 11483. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \71\Paragraph (a). See section V.E. infra for a discussion of covered securities. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \7\5See 1987 Release, 52 FR at 2995 n.17; 1982 Release, 47 FR at 42718 n.19. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \7\6See also Securities Exchange Act Release No. 3056 (October 27, 1941), 11 FR 10984 (Opinion of SEC General Counsel). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \7\9Paragraph (a)(4)(xiv) and 17 CFR 240.10b-6A, respectively. See Passive Market Making Release. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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 --------------------------------------------------------------------------- \8\117 CFR 240.10b-18. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \8\2Paragraph (a). This collection of securities are referred to as the ``covered securities'' in this release. \8\3Paragraph (b). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \8\7Release 34-2446. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \9\1See, e.g., Hanley, Kumar & Seguin, Price stabilization in the market for new issues, 34 J. Fin. Econ. 177 (1993). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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.'' --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \9\5See Securities Exchange Act Release No. 3506 (October 27, 1941), 11 FR 10984. --------------------------------------------------------------------------- Question 2.9. Does the presence of a penalty bid have the effect of ``stabilizing'' the aftermarket of the offered security?96 --------------------------------------------------------------------------- \9\6Cf. Zweig, Spiro and Schroeder, Beware The IPO Market, Business Week, April 4, 1994, at 84. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \9\7See generally Loss, supra note 46, at 1604-1614; Foshay, supra note 5, at 916-918. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \9\8The Shields Plan originated in 1947 with a committee of the Investment Bankers Association headed by a partner of Shields & Co. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \1\01Loss, supra note 46, at 1605. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- The rule has remained essentially unchanged since it was adopted in 1955.103 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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: --------------------------------------------------------------------------- \1\0417 CFR 240.10b-8(d). Purchases of the underlying securities remain subject to Rule 10b-6. See Paragraph (a)(4)(ix). --------------------------------------------------------------------------- (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 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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? --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \1\10J.A.B. Securities Co., Inc., 47 SEC 86, 92 & n.17 (1979). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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)). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \1\18See, e.g., SEC, Fifty-Eighth Annual Report 33 (1992). --------------------------------------------------------------------------- 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? --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \1\28ALI Code Section 1609(d)(1). \1\29ALI Code Section 1610 & Comment (1). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \1\30Chapter III, part 10 of the SIB Rules, 2 Fin. Serv. Rep. (CCH) 184.314-184.401. --------------------------------------------------------------------------- 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? --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \1\15 U.S.C. 78a et seq. --------------------------------------------------------------------------- I. Background\2\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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: --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \7\Edward J. Mawod & Co., 46 S.E.C. 865, 871-872 (1977), aff'd, 591 F.2d 588 (10th Cir. 1979). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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: --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- (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\ --------------------------------------------------------------------------- \14\See, e.g., Exchange Act sections 9(a)(6), (b), and (c), 15 U.S.C. 78i(a)(6), (b), (c). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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.). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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