[Federal Register Volume 59, Number 80 (Tuesday, April 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9895]


[[Page Unknown]]

[Federal Register: April 26, 1994]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release Nos. 33-7057; 34-33924; International Series Release No. 657; 
File No. S7-14-94]
RIN 3235-AF54

 

Review of Antimanipulation Regulation of Securities Offerings

AGENCY: Securities and Exchange Commission.

ACTION: Review of regulation; concept release.

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SUMMARY: The Securities and Exchange Commission (``Commission'') 
solicits comments on a broad range of issues relating to 
antimanipulation regulation of securities offerings under the 
Securities Exchange Act of 1934 (``Exchange Act''). In particular, the 
Commission is conducting a comprehensive review of Rules 10b-6, 10b-7, 
and 10b-8 (``Trading Practices Rules'') under the Exchange Act in light 
of significant changes in the securities markets and in distribution 
practices in recent years. The Commission requests comment on the 
concepts identified in this release and any other issues that 
commenters believe are relevant. Following review of public comments, 
the Commission will determine whether rulemaking or other action is 
appropriate.

DATES: The comment period will expire on August 12, 1994.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street 
NW., Washington, DC 20549. All comment letters should refer to File 
Number S7-14-94. All comments received will be available for public 
inspection and copying in the Commission's Public Reference Room, 450 
Fifth Street NW., Washington, DC 20549.

FOR FURTHER INFORMATION CONTACT: The Office of Trading Practices, 
Division of Market Regulation, Securities and Exchange Commission, 450 
Fifth Street NW., Washington, DC, at (202) 942-0772.

I. Executive Summary

    The ability of corporations and other enterprises to finance their 
operations is critical to the development of the nation's economy, and 
the sale of securities is a principal means for obtaining 
capital.1 The Commission has recognized that securities offerings 
involve risk and uncertainty, and that the pricing of an offering is 
not an exact science.2 From its earliest days, the Commission and 
its staff have been called upon to implement the provisions of the 
Securities Exchange Act of 1934 (``Exchange Act'')3 to prevent 
manipulative activity in the context of securities offerings.4 The 
challenge to the Commission in administering the Exchange Act in this 
context is ``to determine the extent to which market activities of 
participants or persons otherwise interested in the distribution should 
be prohibited or permitted.''5
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    \1\Securities offerings in 1993 reached a record of 
approximately $1.1 trillion, surpassing the previous record set in 
1992 of approximately $856 billion. See Siconolfi & Peers, No End in 
Sight for Underwriting Boom, Wall St. J., January 3, 1994, at C1.; 
Peers, New Issues Set to Hit Record of $1 Trillion, Wall St. J., 
December 10, 1993, at C1.
    \2\Securities Exchange Act Release No. 2446 (March 18, 1940) at 
10, 11 FR 10971 (``Release 34-2446'').
    \3\15 U.S.C. 78a et seq.
    \4\The prevention of manipulation is one of the principal goals 
of the Exchange Act. See, e.g., section 2(3), 15 U.S.C. 78b(3).
    \5\Foshay, Market Activities of Participants in Securities 
Distributions, 45 U. Va. L. Rev. 907, 910 (1959) (``Foshay'').
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    The Commission's principal antimanipulation provisions that apply 
to securities offerings, Rules 10b-6, 10b-7, and 10b-8 (``Trading 
Practices Rules'')6 under the Exchange Act, are intended to assure 
prospective investors in a securities offering that the offering's 
price has not been influenced improperly by persons who have a 
significant interest in the success of the offering. Rule 10b-6 is an 
antimanipulation rule that is intended to prevent those persons 
participating in a distribution of securities from artificially 
conditioning the market for the securities in order to facilitate the 
distribution, and to protect the integrity of the securities trading 
market as an independent pricing mechanism. Rule 10b-7 prevents any 
stabilizing bid from being made to facilitate an offering of a security 
except for the purpose of preventing or retarding a decline in the open 
market price of the security. Rule 10b-8 pertains to distributions of 
securities being offered through rights on a pro rata basis to security 
holders, and restricts the prices at which rights may be purchased as 
well as the prices at which the securities being distributed, or 
securities of the same class and series, may be offered or sold.
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    \6\17 CFR 240.10b-6, 240.10b-7, and 240.10b-8.
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    Since these rules were adopted or last significantly amended, there 
have been significant changes in the structure of the markets, 
including the expanded role of institutional participants, new kinds of 
trading instruments and strategies, enhanced transparency of securities 
transactions, expanded surveillance capabilities, globalization of the 
markets, and transformation of the capital raising process. Over the 
years, the Commission has sought to address the effects of these 
developments. Although the Commission has amended the rules several 
times, the primary method of adapting the rules to changing 
circumstances has been through the exemptive, interpretive, and ``no-
action'' letter processes.
    The Commission believes that it would be useful and timely to 
examine comprehensively the current regulatory structure and the 
concepts that underlie the Trading Practices Rules. The review is not 
limited, however, to these provisions, which concentrate on persons 
participating in the distribution process. Other persons also may have 
incentives to manipulate securities prices at the sensitive time 
surrounding an offering. In this Concept Release, the Commission 
solicits comment on necessary or appropriate regulation to prevent 
manipulation during securities offerings. Rather than proposing 
particular changes to the Trading Practices Rules or other provisions 
at this time, the Commission is seeking comment on the scope and 
direction that antimanipulation regulation should take in the 
contemporary context. In addition to providing views pertaining to 
revising and simplifying the present regulatory scheme, commenters are 
invited to consider alternative approaches for applying 
antimanipulation principles to persons who may have an incentive to 
influence artificially the market during an offering.

II. The Trading Practices Rules

    Protecting investors from manipulated stock prices was one of the 
principal goals that prompted the enactment in 1934 of the Exchange 
Act. Since shortly after the adoption of the Exchange Act, the 
Commission and its staff have dealt with issues involving manipulation 
in the context of securities offerings and provided formal and informal 
advice regarding the scope of permissible activities during securities 
offerings.7 As the Commission has noted, regulation of the market 
activities of parties with an interest in the outcome of an offering 
presents ``intensely practical problem[s].''8 Among other things, 
the staff has provided advice regarding the types of activities engaged 
in by participants in a securities distribution that would be viewed as 
being undertaken for the purpose of inducing the purchase or sale of 
the securities by others, in violation of section 9(a)(2) of the 
Exchange Act.9
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    \7\For example, in response to formal and informal staff 
interpretations, managing underwriters followed the practice of 
stopping or tapering off their trading activities when preparations 
for the distribution were begun; and participating underwriters 
curtailed their trading when the registration statement was first 
filed or when they were later invited to participate. Foshay, supra 
note 5, at 912.
    \8\Release 34-2446, at 1.
    \9\See, e.g., Securities Exchange Act Release No. 3056 (October 
27, 1941). See also Foshay, supra note 5, at 910.
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    The Commission adopted Rules 10b-6, 10b-7, and 10b-8\10\ almost 
four decades ago to codify the ``principles which historically have 
been applied in considering questions relating to manipulative activity 
and stabilization in connection with a distribution.''\11\ These rules 
provide guidance to securities professionals by removing uncertainties 
regarding the scope of permissible market activities during securities 
offerings. They also serve a deterrence function by expressly 
prohibiting manipulative behavior during offerings, and promote 
investor confidence in the securities markets by lessening the ability 
of distribution participants to manipulate the price of an offering 
upward to facilitate the offering. Moreover, as with other 
antimanipulation provisions, the Trading Practices Rules provide the 
Commission with important enforcement tools in bringing actions against 
persons that have engaged in manipulative practices during securities 
offerings.
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    \10\See Appendix A for a discussion of the historical 
development of the Trading Practices Rules and an index of 
Commission releases relating to these rules.
    \11\See Securities Exchange Act Release No. 5040 (May 18, 1954), 
19 FR 2986 (``1954 Release''). The transcript of a public Commission 
hearing, the extensive comment letters, and the structure and 
context of the Trading Practices Rules reflect the substantial 
industry participation in that rulemaking process. See Foshay, supra 
note 5, at 919.
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III. The Need for Review

    The Commission remains committed to the fundamental legal and 
policy bases for regulating the activities of participants in a 
distribution. Since the adoption of the Trading Practices Rules in 1955 
and their most recent comprehensive review in 1983,12 however, 
tremendous changes have occurred in the securities markets.13
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    \1\2Securities Exchange Act Release No. 19565 (March 4, 1983), 
48 FR 10628 (``1983 Release'').
    \1\3The Commission's Division of Market Regulation recently 
completed a comprehensive review to assess the state of the United 
States (``U.S.'') equity markets and to provide guidance for the 
development of a national market system. See Securities and Exchange 
Commission, Division of Market Regulation, Market 2000: An 
Examination of Current Equity Market Developments (1994) (``Market 
2000 Report''), Introduction and Executive Summary reprinted at 
[1993-1994] Fed. Sec. L. Rep. (CCH) 85,311.
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A. Transformation of the Securities Markets

    In the 1950s, trading in the United States securities market was 
dominated by activity on the national securities exchanges; little 
information was publicly available about trading in the over-the-
counter (``OTC'') market. Today, however, the National Association of 
Securities Dealers, Inc.'s (``NASD'') Nasdaq system is one of the 
world's largest stock markets, with an average daily trading volume of 
263.0 million shares, at an aggregate value in 1993 of $1.35 trillion. 
This compares with an average daily trading volume of 264.5 million 
shares on the New York Stock Exchange, Inc. (``NYSE''), at an aggregate 
value in 1993 of $2.3 trillion.14 Such high levels of trading 
volume have produced deeper, more liquid markets.
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    \1\4Source: Securities Industry Association.
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    Additionally, there has been an enormous growth in communications 
and information technology, which has provided industry participants 
with enhanced real-time price data and news about securities and their 
issuers. These developments have fostered the high level of 
transparency (i.e., the dissemination of trade reports and quotation 
information is available to all market participants) that generally 
characterizes the U.S. equity markets. The availability of quotation 
information helps investors to determine when and where to trade, while 
transaction reporting provides an indication of the reliability of the 
quotations and the quality of transaction execution. A higher degree of 
transparency helps investors, analysts, and other market participants 
to better observe and evaluate security price movements. During a 
distribution, this market transparency provides greater visibility to 
transactions in the offered security, enhancing the ability of 
investors, regulators, and others to observe unusual price movements.
    Improved communications and information technology also has enabled 
the exchanges and the NASD to implement sophisticated surveillance 
systems to detect trading abuses such as those that the Trading 
Practices Rules were designed to prevent. The NASD's surveillance 
capabilities were an important consideration when the Commission last 
year adopted a new exception to Rule 10b-6, as well as a companion 
rule, Rule 10b-6A,15 to permit ``passive market making'' by Nasdaq 
market makers.16
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    \1\517 CFR 240.10b-6A.
    \1\6See Securities Exchange Act Release No. 32177 (April 8, 
1993), 58 FR 19598 (``Passive Market Making Release'').
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    The financial markets themselves have been transformed by a 
proliferation of options and other derivative products.17 Market 
participants use these products to hedge investment risks, increase 
transaction efficiencies, and profit from market movements.18 
Because stocks were the primary equity instruments for trading and 
investing at the time the Trading Practices Rules were adopted, it has 
been necessary to apply these rules to new products through exemptions 
and interpretations.19
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    \1\7A derivative product is ``a financial instrument that 
derives its value from the performance of other assets, including 
securities, rates, or indexes.'' Securities Exchange Act Release No. 
32256 (May 4, 1993), 58 FR 27486, 27487 citing Dictionary of Finance 
and Investment Terms 107 (3d ed. 1991).
    \1\8See, e.g., Securities and Exchange Commission, Division of 
Market Regulation, The October 1987 Market Break, 3-1, 3-5 (1988); 
Gilberg, Regulation of New Financial Instruments Under the Federal 
Securities and Commodities Laws, 39 Vand. L. Rev. 1599, 1600 (1986).
    \1\9See, e.g., Letters regarding CXM Baskets (October 15, 1993), 
and Basket Trading During Distributions (August 6, 1991), [1991] 
Fed. Sec. L. Rep. (CCH) 79,752, both of which granted exemptions 
from the Trading Practices Rules for transactions in connection with 
certain index-based stock baskets.
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    The nature of market participants also has changed by virtue of the 
enhanced market role of institutional investors, such as pension funds, 
mutual funds, and money managers. In recent years, many individual 
investors have shifted their funds into pooled investments at a 
phenomenal rate, which has resulted in an enormous concentration of 
investment assets in the hands of a relatively small number of market 
participants.20 Their economic strength allows large institutions 
to exert a significant influence on the structuring and pricing of many 
securities offerings. Some have argued that the presence of these large 
institutions in securities offerings has transferred the balance of 
price-setting power from the underwriters to institutional 
purchasers.21 Because of this shift, it is argued that 
antimanipulation regulation should focus not only on the ``sell'' side 
(e.g., the underwriters), but also on the ``buy'' side.22
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    \2\0See, e.g., Market 2000 Report, Study II: Structure of the 
U.S. Equity Markets, at II-1 to II-3; Fund Assets Surge Past $2 
Trillion Mark, With Banks Reporting Solid Sales Gains, Am. Banker, 
February 1, 1994, at 10, discussing report by the Investment Company 
Institute that mutual fund assets rose to $2.011 trillion in 
December 1993, a 26% gain from 1992.
    \2\1At the same time, it should be noted that underwriting 
revenue in 1993 was a record $9.1 billion. See Siconolfi, Surge in 
Profits From Fees is Likely to Continue in 1994, Wall St.J., January 
3, 1994, at A26.
    \2\2For example, short sales in anticipation of a secondary 
distribution of securities were addressed by the Commission with the 
adoption in 1988 of Rule 10b-21, 17 CFR 240.10b-21. See also 
Securities Exchange Act Release No. 33702 (March 2, 1994), 59 FR 
10984 (``Rule 10b-21 Release'') (permanent adoption of Rule 10b-21).
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    The nature of participants in distributions also has changed. 
Today, distribution participants often are members of complex 
conglomerates, with many affiliated entities in the United States and 
abroad. For example, not only have broker-dealers expanded their 
traditional lines of business, such as retail firms that have merged 
with exchange specialists,23 but banking institutions also have 
established broker-dealer units that are permitted to engage in the 
underwriting of securities.24 If one member of a financial 
conglomerate is a participant in a distribution of securities, all of 
the affiliates of that entity potentially are subject to the 
proscriptions of Rule 10b-6, irrespective of where they are located or 
conduct business.
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    \2\3See, e.g., Letter regarding Application of Rules 10b-6 and 
10b-13 to Specialists Affiliated with NYSE Member Firms (September 
15, 1992), [1992] Fed. Sec. L. Rep. (CCH) 76,279, permitting 
certain NYSE specialists affiliated with broker-dealers to continue 
to function as specialists while their affiliated broker-dealer 
participates in certain mergers or tenders or exchange offers.
    \2\4See, e.g., BankAmerica Corp., 79 Fed. Res. Bull. 1163 
(1993); J.P. Morgan & Co., 75 Fed. Res. Bull. 192 (1989); Citicorp, 
73 Fed. Res. Bull. 473 (1987).
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    The securities distribution process itself has experienced 
significant developments. Underwriting syndicates, where utilized, tend 
to be smaller, and shelf registered offerings have become a standard 
method of raising capital. ``Overselling'' of offerings by underwriting 
syndicates has become common, resulting in increased aftermarket 
covering activity by underwriters, and a decrease in formal 
stabilization activity. Also, rights offerings by U.S. issuers may no 
longer be as important for capital raising purposes as they were at the 
time the Trading Practices Rules were adopted, although recently some 
sectors have experienced a surge in such offerings. Rights offerings 
continue to be a prevalent form of offering for foreign issuers.25
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    \2\5See Gould, ``Rights Offerings'' at the Wrong Time?, N.Y. 
Times, November 28, 1993, at F14; Eaton, Rites of Offerings: Not All 
They Seem for Closed-end Funds, Barron's, June 14, 1993, at 3.
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    Moreover, a global marketplace has unfolded, characterized by a 
proliferation of multinational securities offerings. Many foreign 
issuers now conduct concurrent offerings of their securities in the 
United States and abroad as well as solely in the United States. This 
rise in the supply of, and demand for, multinational offerings has 
required careful coordination of the interaction of the Trading 
Practices Rules with foreign distribution practices and regulatory 
requirements.26
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    \2\6See, e.g., Letter regarding Distributions of Certain SEAQ 
and SEAQ International Securities (July 12, 1993), [1993] Fed. Sec. 
L. Rep. (CCH) 76,707.
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B. Commission's Response to Market Developments

    The Commission and its staff have responded to these developments 
in the markets and distribution techniques through the exemptive, no-
action, interpretive, and rulemaking processes.27 In 1983, the 
Commission adopted comprehensive amendments to Rule 10b-6 in response 
to changes in the securities markets during the quarter century 
following their adoption.28 Among other things, these amendments 
codified and clarified staff positions that had been developed to deal 
with various transactions on a case-by-case basis.29 Further 
refinements to Rule 10b-6 were adopted in 1987 to address certain 
issues left open by the Commission during its comprehensive review and 
revision of that rule in 1983.30 More recently, the Commission has 
issued exemptions to the Trading Practices Rules that recognize the 
increasingly global nature of the securities markets31 and 
enhanced surveillance capabilities.32 In addition, the staff 
maintains its active program of responding to telephone inquiries 
requesting guidance on the application of the Trading Practices Rules 
and antimanipulation principles during offerings.
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    \2\7The Commission is authorized to grant exemptions from the 
requirements of the Trading Practices Rules. 17 CFR 240.10b-6(j); 17 
CFR 240.10b-7(p); and 17 CFR 240.10b-8(g).
    \2\81983 Release. See also Securities Exchange Act Release No. 
18528, (March 10, 1982) 47 FR 11482 (``1982 Release'').
    \2\9See 1983 Release, 48 FR at 10628.
    \3\0See Securities Exchange Act Release No. 24003 (January 16, 
1987), 52 FR 2994 (``1987 Release''). See also Securities Exchange 
Act Release No. 22510 (October 10, 1985), 50 FR 42716 (``1985 
Release'').
    \3\1See, e.g., Securities Exchange Act Release No. 33022 
(October 6, 1993), 58 FR 53220 (``German Offerings Exemptions''), 
granting exemptions for transactions in the securities of certain 
German issuers; Securities Exchange Act Release No. 33137 (November 
3, 1993), 58 FR 60324 (``Statement of Policy''), inviting requests 
for exemptions consistent with the principles of the German 
Offerings Exemptions; Securities Exchange Act Release No. 33138 
(November 3, 1993), 58 FR 60326 (``Rule 144A Release''), adding 
Paragraph (i) to Rule 10b-6 excepting certain offerings made to 
``qualified institutional buyers;'' Securities Exchange Act Release 
No. 33862 (April 5, 1994), 59 FR 17125 (``Cooling-Off Periods 
Release''), clarifying the availability of the cooling-off periods 
to foreign securities.
    \3\2See, e.g., Passive Market Making Release.
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    It continues to be true that the activities relating to 
distributions of securities are ``highly technical and complex, and 
[are] conducted under limitless varieties of circumstances frequently 
requiring the application of instantaneous business judgment.''33 
Indeed, the developments discussed above have magnified the challenges 
to issuers, distribution participants, and the Commission to apply and 
adapt the Exchange Act antimanipulation provisions and their underlying 
principles.
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    \3\3Foshay, supra note 5, at 919.
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IV. Purpose of This Release

    The transaction-driven nature of securities offerings means that 
antimanipulation rules cannot address every situation that may arise. 
Although the Commission continues to be responsive to the industry's 
requests for interpretive guidance and relief from the present 
regulations, the considerations discussed above suggest that a 
comprehensive reexamination of the rules is warranted. Some securities 
industry participants suggest that the Trading Practice Rules can be 
simplified. Others argue that the rules are unnecessarily restrictive 
and apply to situations where the manipulative potential is highly 
attenuated. It has been suggested that alternative regulatory 
structures may achieve the underlying legal and policy goals of the 
Exchange Act and address the issues raised by market activities 
conducted during securities offerings.
    Accordingly, the Commission is undertaking this review of 
antimanipulation regulation of securities offerings with a view toward 
incorporating the above developments and simplifying its regulatory 
structure. This release is intended to provide a forum for commenters 
to discuss the current structure as well as alternative approaches to 
governing trading during distributions. As focus points for analyzing 
the pertinent issues, the following sections identify the concepts that 
underlie the present regulations and raise a variety of questions on 
the implementation of those concepts.
    In reviewing the sections below, commenters should consider the 
following central themes:
    (1) Whether there are classes of investors, securities, or 
transactions that do not need the protections of specific rules 
governing manipulative conduct during offerings; and
    (2) Whether there is a simpler structure for antimanipulation 
regulation with regard to offerings that will achieve the identified 
goals.34
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    \3\4The Commission will continue to rigorously apply the current 
antimanipulation provisions during the course of this review.
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    Commenters are invited to discuss the issues identified below and 
any others that they believe are relevant to the Commission's 
consideration of these matters. Following its receipt and review of 
comments, the Commission will determine whether rulemaking or other 
action is appropriate.

V. Restrictions on Market Activities During Offerings: Rule 10b-6

A. Rule 10b-6 Generally

    Rule 10b-6 is an antimanipulation rule that is intended to prevent 
those persons participating in a distribution of securities, as defined 
in the rule, from artificially conditioning the market for the 
securities in order to facilitate the distribution, and to protect the 
integrity of the securities trading market as an independent pricing 
mechanism.35 Rule 10b-6 accomplishes these goals by prohibiting 
these persons from bidding for or purchasing, or inducing others to 
purchase the securities being distributed, or any security of the same 
class and series as the security being distributed, or any right to 
purchase that security until they have completed their participation in 
the distribution.
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    \3\5See Securities Exchange Act Release No. 31347 (October 29, 
1992), 57 FR 49039, 49040.
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    Thus, the primary focuses of Rules 10b-6 are: The offerings that 
raise manipulative concerns, defined in the rule as ``distributions;'' 
the persons who are likely to engage in manipulative activity; and the 
activities that could be expected to raise or support the security's 
price. The rule is grounded on the view that:

    A person contemplating or making a distribution has an obvious 
incentive to artificially influence the market price of the 
securities in order to facilitate the distribution or to increase 
its profitability. [The Commission has] accordingly held that where 
a person who has a substantial interest in the success of a 
distribution takes active steps to increase the price of the 
security, a prima facie case of manipulative purpose exists.36
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    \3\6Bruns, Nordeman & Co., 40 SEC 652, 660 n.11 (1961) (``Bruns, 
Nordeman'').

    The rule identifies the participants in an offering who are 
presumed to have an incentive to engage in activities for the purpose 
of facilitating the distribution; i.e., to induce the purchase of the 
offered securities. Various means by which such persons could achieve 
this manipulative result are covered in the rule. Bids and purchases, 
the most obvious means of influencing market activity, are prohibited 
expressly. Rule 10b-6 also broadly proscribes other ``attempt[s] to 
induce any person to purchase'' the securities covered by the rule. The 
rule then carves out of the general prohibitions a number of activities 
that are considered necessary in order to conduct an offering or have 
little manipulative potential.37 One commentator has said that 
``[i]t is the exceptions and the exemptions which give the rule 
viability and feasibility.''38 None of the exceptions is 
available, however, if the otherwise permitted activity is ``engaged in 
for the purpose of creating actual, or apparent, active trading in or 
raising the price of any [covered] security.''39
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    \3\7Paragraph (a)(4)(i)-(xiv). The rule as originally adopted 
contained 11 exceptions. Three exceptions have been added and one 
has been deleted since 1955. Transactions in certain classes of 
securities are excepted entirely from the rule. Paragraphs (d), (h), 
and (i). The Commission also is authorized to grant exemptions from 
the rule's requirements. Paragraph (j).
    \3\8Whitney, Rules 10b-6: The Special Study's Rediscovered Rule, 
62 Mich. L. Rev. 567, 568 (1964).
    \3\9See Paragraph (a)(4) (introductory text).
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    This structure and the rule's terminology reflect its direct 
lineage to the implementation of the manipulative concepts of Section 
9(a)(2) as they had been applied to offerings. The rule also reflects 
the Commission's experience in combatting manipulative behavior during 
offerings and provides guidelines to the investment banking community 
as to what types of market activity generally would not be deemed by 
the Commission to be manipulative.

B. Offerings

    Concept One: Regulation should be limited to securities offerings 
that give rise to a readily identifiable incentive to manipulate the 
market.
1. Definition of ``Distribution''
    In imposing restrictions on the market activities of persons 
participating in a securities offering, the Commission has focused on 
``offerings of such a nature or magnitude as to require restrictions 
upon purchases by participants in order to prevent manipulative 
practices.''40 The Commission has characterized such offerings as 
``distributions,''41 and codified a definition of the term in Rule 
10b-6: ``[T]he term distribution means an offering of securities, 
whether or not subject to registration under the Securities Act, that 
is distinguished from ordinary trading transactions by the magnitude of 
the offering and the presence of special selling efforts and selling 
methods.''42 This ``functional'' definition is intended to provide 
a greater degree of guidance on, and certainty to, the types of 
offerings that would give rise to an incentive to artificially 
condition the market for the offered security. The identification of 
these types of situations, however, needed to remain sufficiently 
flexible to permit the protections afforded by Rule 10b-6 to evolve 
with changes in the practices and methods of offering securities.
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    \4\0Bruns, Nordeman, 40 SEC at 660.
    \4\1Accordingly, in this context the terms ``offering'' and 
``distribution'' are not synonymous. See, e.g., 1982 Release, 47 FR 
at 11485. Generally, the term ``offering'' is used to encompass all 
methods by which securities are offered and sold to investors. In 
Rule 10b-6, the term ``distribution'' is used to identify an 
offering that can be presumed to raise an incentive to manipulate 
securities prices in order to facilitate the offering. See Bruns, 
Nordeman, 40 SEC at 660. This use of the term ``distribution'' 
should be distinguished from its use in the context of the 
Securities Act of 1933 (``Securities Act''), 15 U.S.C. 77a et seq. 
Collins Securities Corp., 46 SEC 20, amended, 46 SEC 213 (1975), 
rev'd on other grounds, Collins Securities Corp. v. SEC, 562 F.2d 
820 (D.C. Cir. 1977). For a discussion of how the Commission has 
used the term ``distribution'' under the Securities Act, and 
relevant references, see Securities Act Release No. 6806 (October 
25, 1988), 53 FR 44016, 44026 n.145 (proposing Rule 144A under the 
Securities Act).
    \4\2Paragraph (c)(5).
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    A ``distribution'' must have two elements: ``Magnitude'' and 
``special selling efforts and selling methods.''43 Factors 
relevant to the magnitude element are: the number of shares to be 
registered for sale by the issuer, and the percentage of the 
outstanding shares, public float, and trading volume that those shares 
represent.44 The Commission has indicated that providing greater 
than normal sales compensation arrangements pertaining to the 
distribution of a security,45 delivering a sales document, such as 
a prospectus or market letters, and conducting ``road shows'' are 
generally indicative of ``special selling efforts and selling 
methods.''46 Based upon an analysis of their individual 
characteristics, the following transactions, among others, have been 
viewed as involving distributions under this definition: registered 
public offerings, private placements, Rule 144A transactions, rights 
offerings, warrant exercise solicitations, dividend reinvestment and 
stock purchase plans, the issuance of securities in connection with a 
merger or exchange offer,47 ``major sales campaigns'' by a broker-
dealer, and sales made pursuant to a shelf registration statement.
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    \4\3As the definition was proposed originally, either element 
alone would have been sufficient. See 1982 Release, 47 FR at 11484.
    \4\41982 Release, 47 FR at 11486.
    \4\5See 1983 Release, 48 FR at 10630 n.13.
    \4\6See, e.g., Note, The SEC's Rule 10b-6: Preserving a 
Competitive Market During Distributions, 1967 Duke L.J. 809, 823-824 
(``1967 Note''); III L. Loss, Securities Regulation at 1597 (2d. ed. 
1961) (``Loss'').
    \4\71983 Release, 48 FR at 10638. See also Chris-Craft 
Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 377 (2d Cir. 
1973), rev'd on other grounds, Piper v. Chris-Craft Industries, 
Inc., 430 U.S. 1 (1977). Moreover, the restrictions of Rule 10b-6 
also have been interpreted to apply to those periods when a 
security's market price is used to value the consideration in the 
distribution. 1983 Release, 48 FR at 10638 n.61.
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    In addition to identifying the type of offerings that may present 
the incentive for the particular harm that Rule 10b-6 was intended to 
address, it also is necessary to determine when a distribution begins 
and when it ends. ``A distribution commences at the point when the 
incentive to engage in manipulative conduct is first present,''48 
and a distribution is complete when the securities ``come to rest in 
the hands of the investing public.''49 Rule 10b-6(c)(3) specifies 
when a person's participation in a particular distribution is deemed to 
have been completed. For example, the rule states that an underwriter's 
participation is over when it has distributed its portion of the 
offering, including any securities of the same class that were acquired 
in connection with the distribution, and when any stabilizing 
operations and trading restrictions in connection with the distribution 
have been terminated.50 In addition, a person is deemed to have 
distributed securities acquired by him for investment. The 
determination of how long securities must be held to constitute an 
investment will depend upon the facts and circumstances.51
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    \4\8SEC v. Burns, 816 F.2d 471, 476 (9th Cir. 1987), citing 1982 
Release, 47 FR at 11485 (in the case of a registered offering, the 
distribution may commence not only before the registration statement 
for those securities becomes effective, but also before such 
statement is filed with the Commission); Gob Shops of America, Inc., 
39 SEC 93 (1959) (bids and purchases by a prospective underwriter 
four months before the filing with the Commission of a notification 
relating to a Regulation A offering were manipulative).
    \4\9See, e.g., R.A. Holman & Co., Inc. v. SEC, 366 F.2d 446, 449 
(2d Cir. 1966), amended on reh'g, 377 F.2d 665 (2d Cir. 1967), cert. 
denied, 389 U.S. 991 (1967), rehearing denied, 389 U.S. 1060 (1968) 
(``Holman''); Rooney, Pace Inc., 48 SEC 891, 898-99 (1987).
    \5\0Paragraph (c)(3)(ii). The Commission has held that 
completion of an underwriter's participation in a distribution 
``does not mean substantial completion.'' Shearson, Hammill & Co., 
42 SEC 811, 821 n.20 (1965).
    \5\1See Holman, 366 F.2d at 450. Simply placing shares in an 
``investment account,'' however, is not conclusive as to whether the 
securities are acquired ``for investment.'' See C.A. Benson & Co., 
Inc., 41 SEC 427 (1963).
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2. Particular Distribution Contexts
    One example of significant changes in securities sales practices 
that have affected the administration of Rule 10b-6 pertains to the 
sale of securities pursuant to issuer stock purchase plans. Presently, 
Rule 10b-6 contains an exception for distributions of securities by an 
issuer or a subsidiary of an issuer to employees or shareholders of the 
issuer, its subsidiaries, or a trustee or other person acquiring such 
securities for the account of such employees or shareholders pursuant 
to a plan.52 On its face, this exception applies irrespective of 
the magnitude of the offering or the nature of the selling efforts. 
Traditionally, stock purchase plans were seen as mechanisms by which 
employees and shareholders, i.e., persons having a significant 
relationship with the issuer, could increase their holdings, rather 
than as major capital-raising vehicles. These distributions have not 
been viewed as presenting the same incentives for manipulation by the 
issuer as in other distributions because of the limited nature of the 
sales, as well as the relationship between the issuer and plan 
participants.53
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    \5\2Paragraph (e). ``Plan'' is broadly defined in Paragraph 
(c)(4) as a ``bonus, profit-sharing, pension, retirement, thrift, 
savings, incentive, stock purchase, stock ownership, stock 
appreciation, stock option, dividend reinvestment or similar plan 
for employees or shareholders of an issuer.''
    \5\3See generally Securities Exchange Act Release No. 16646 
(March 13, 1980), 45 FR 18948; Securities Exchange Act Release No. 
17556 (February 17, 1981), 46 FR 15133.
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    Today, however, issuer plans often are available not only to 
employees and shareholders, but also to outside directors, franchisees, 
customers, and others having varying relationships with the issuer. 
Moreover, plan distributions may be used as significant capital-raising 
mechanisms.54 In the case of plans open to persons other than 
shareholders or employees, sales of a security to the plan do not 
qualify for the Paragraph (e) exception. As a result, absent an 
exemption from Rule 10b-6, issuers and other distribution participants 
are required to comply with Rule 10b-6. Even with respect to plans that 
qualify for the Paragraph (e) exception, the more recent use of such 
plans to broadly distribute the issuer's securities may not have been 
contemplated by the Commission when Paragraph (e) was adopted.
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    \5\4See Banks Raising Millions in Equity By Giving Discounts to 
Arbitragers, Am. Banker, September 17, 1992, at 1.
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    Other changes in the distribution process, such as those arising 
from the adoption of Rules 415 and 430A under the Securities 
Act,55 also have complicated the distribution analysis.56
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    \5\517 CFR 230.415, 430A.
    \5\6See Securities Exchange Act Release No. 23611 (September 11, 
1986), 51 FR 33242. For purposes of Rule 10b-6, the Commission has 
viewed a distribution pursuant to a shelf registration statement 
under Rule 415 as constituting a unitary distribution throughout the 
effectiveness of the shelf. Id. at 33243.
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    Question 1.1. Should the Commission continue to define the term 
``distribution,'' and if so, should the Commission continue to define 
the term based on the ``magnitude of the offering'' and the presence of 
``special selling efforts and selling methods''? If so, are there 
identifiable factors that can be used to determine whether an offering 
satisfies these criteria? Commenters may wish to suggest criteria that 
distinguish ``distributions'' from ``ordinary trading transactions.''
    Question 1.2. Should the ``magnitude'' element be clarified to 
exclude de minimis offerings? If so, how would such offerings be 
identified?57 Would a standard based on dollar value of average 
daily trading volume or other factors be appropriate?
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    \5\7In 1982, the Commission proposed that transactions that 
complied with the volume and manner of sale provisions of Rule 144 
under the Securities Act not be treated as ``distributions'' for 
purposes of Rule 10b-6. See 1982 Release, 47 FR at 11482. The 
Commission did not adopt the proposal. See 1983 Release, 48 FR at 
10630.
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    Question 1.3. Should certain categories of offerings (e.g., based 
on the total dollar amount of securities offered or the number or type 
of persons to whom the offering is made) be excluded from the 
definition? Examples might include offerings made pursuant to the 
authority of Section 3(b) of the Securities Act,58 and offerings 
made solely to large institutions.59
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    \5\8Securities Act Section 3(b), 15 U.S.C. 77c(b). It may be 
noted, however, that offerings made pursuant to Regulation A have 
resulted in a number of Commission actions alleging manipulation. 
E.g., C.A. Benson & Co., Inc., 41 SEC 427 (1964); Bruns, Nordeman.
    \5\9See, e.g., Rule 144A Release.
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    Question 1.4. What difficulties do the ``functional'' beginning and 
ending points for a distribution present? Can more definite points be 
identified?60
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    \6\0See Halsey, Stuart & Co., Inc., 30 SEC 106, 137 n.41 (1949) 
(noting that the termination of the restrictions of Rule 10b-6 are 
determined by whether an underwriter continues to function in its 
capacity as an underwriter).
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    Question 1.5. Should issuer plans be distinguished from other 
distributions of securities? Should plans be distinguished based on the 
nature of the participants, e.g., whether the plan is available only to 
certain groups having an affinity or relationship to the issuer, such 
as shareholders, employees, or customers? If so, are there limits to 
the types of affiliations?
    Question 1.6. Should mergers and exchange offers continue to be 
deemed distributions in order to prevent an issuer from conditioning 
the market and influencing the shareholders of the target company? 
Commenters may wish to address the role of Exchange Act Rule 10b-
1361 in this context.
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    \6\117 CFR 240.10b-13. Rule 10b-13 prohibits a person making a 
tender or exchange offer for an equity security from, directly or 
indirectly, purchasing or making an arrangement to purchase such 
security or any security which is immediately convertible into or 
exchangeable for such security, otherwise than pursuant to the 
offer, from the time the offer is publicly announced until its 
termination.
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    Question 1.7. What is the appropriate application of anti-
manipulation regulation to valuation and shareholder-election 
periods?62
---------------------------------------------------------------------------

    \6\2See n.47 supra.
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C. Persons

    Concept Two: Regulation should be limited to those persons who have 
a readily identifiable incentive to manipulate the market during an 
offering.
    Rule 10b-6 applies to the following persons:
    (1) Issuers and selling shareholders;
    (2) Underwriters and prospective underwriters;
    (3) Brokers, dealers, and other persons that have agreed to 
participate or are participating in the distribution; and
    (4) ``Affiliated purchasers'' of the foregoing.63 In addition, 
the prohibitions of the rule have been considered applicable to any 
other person who has a material financial interest in the success of 
the distribution which would provide that person with an incentive to 
condition the market to facilitate the distribution.64 Except for 
the duration of the distribution period in Paragraph (c)(3), the rule 
applies equally to each category of distribution participant; yet the 
incentives of each to facilitate a distribution may differ 
substantially, reflecting very different risk and reward profiles. 
Moreover, those incentives may vary at different times in the 
distribution process.
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    \6\3See Paragraphs (a), (c)(6).
    \6\4This would include persons whose right to receive 
substantial compensation is contingent upon the success of the 
distribution. 1985 Release, 50 FR at 42719 n.30.
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    In best efforts offerings and prior to the pricing of a firm 
commitment offering, issuers and selling shareholders have a clear 
incentive to manipulate the price of the securities to be distributed. 
A very small change in the market price of a security, which in some 
circumstances may be accomplished at relatively little expense, can 
result in a substantial increase in offering proceeds, particularly 
when a large number of shares are to be sold.
    A firm commitment underwriting typically involves a group of 
underwriters, represented by one or more managing underwriters, an 
underwriting group, and a number of ``selling group'' members. The 
financial risk of failure and the concomitant incentive to manipulate 
largely shifts to the underwriters once the underwriting agreement with 
the issuer is signed.65 Within the underwriting group, the 
incentives may vary in proportion to the amount of the underwriting 
commitment and the particular role of the underwriter in the offering. 
For example, a managing underwriter may have a larger reputational 
stake in the success of an offering and an ongoing business 
relationship with the issuer that may align its interests more closely 
with the issuer as compared with other members of the underwriting 
syndicate. Selling group members participate in the sale of the offered 
security, but do not assume any underwriting risk. Selling group 
members pay for only the amount of securities necessary to satisfy 
orders obtained from customers; their risk is limited to the extent 
that their customers renege.
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    \6\5The contractual commitment typically is executed shortly 
(usually less than one day) before the commencement of sales of the 
securities. The commitment also typically is subject to ``market 
out'' clauses that permit the underwriters to avoid the risk of 
proceeding with the underwriting in the event of certain specified 
contingencies. Cf. Walk-In Medical Centers, Inc. v. Breuer Capital 
Corp., 818 F.2d 260 (2d Cir. 1987).
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    The restrictions of Rule 10b-6 also extend to ``affiliated 
purchasers'' of distribution participants, i.e., persons that have 
relationships with distribution participants as well as the incentive 
and ability to facilitate a distribution of securities.\66\ Affiliated 
purchasers include persons acting in concert with a distribution 
participant in connection with the acquisition or distribution of 
securities, and affiliates that, directly or indirectly, control the 
purchases of a distribution participant, or whose purchasers are 
controlled by or are under common control with a distribution 
participant (e.g., decisional officers of the issuer who participate 
directly or indirectly in the recommendation of, determination to 
proceed with, or implementation of, a distribution). The increasingly 
complex structure of financial and other conglomerates\67\ suggests 
that the ``affiliated purchaser'' definition may require revision.
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    \66\Paragraph (c)(6). See 1987 Release, 52 FR at 2995-2997.
    \67\See, e.g., Letter regarding The Equitable Life Assurance 
Society of the United States (December 30, 1988), [1989] Fed. Sec. 
L. Rep. (CCH) 78,955.
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    Question 1.8. What advantages or disadvantages are there in 
treating all distribution participants similarly? Commenters suggesting 
that certain categories of distribution participants should be subject 
to lesser (or no) restrictions because of their degree of or lack of 
manipulative incentive should suggest parameters for each such 
category.\68\
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    \68\See, e.g., Letter regarding Distributions of Certain 
Canadian Securities (August 22, 1991), [1991] Fed. Sec. L. Rep. 
(CCH) 79,753 (providing a conditional exemption from Rules 10b-6 
and 10b-7 for selling group members).
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    Question 1.9. Should the restrictions correspond to the varying 
degree of manipulative incentive present during certain stages of the 
distribution?
    Question 1.10. What types of persons or entities should be 
considered ``affiliated purchasers''? Commenters addressing this point 
should give specific examples of the rule's current impact on 
affiliated persons and entities of distribution participants. Should 
affiliated purchasers that have a fiduciary duty to their customers be 
excluded or treated separately?
    Question 1.11. To what degree should regulatory oversight, 
surveillance, and/or the existence of structural separations (e.g., 
information barriers) be relevant in determining whether an affiliated 
purchaser should be subject to regulation?\69\
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    \69\See Letter from James E. Buck, Secretary, NYSE, to Jonathan 
G. Katz, Secretary, SEC, December 15, 1992 (commenting on Securities 
Exchange Act Release No. 31347 proposing ``passive market making''). 
The letter is available in File No. S7-33-92.
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    Question 1.12. Are there other persons not currently covered by the 
rule, such as prospective purchasers of the shares being distributed, 
whose market activities should be subject to regulation?

D. Activities

    Concept Three: Regulation should be limited to market activity that 
would improperly affect the price of, or create the appearance of 
excessive trading in, the offered security, but should not unduly 
restrain legitimate market and business practices.
1. Bids, Purchases, and Inducements
    It has been said on a number of occasions that the goal of 
regulating the activities of distribution participants is to ``prevent 
participants in a distribution from artificially conditioning the 
market for the securities in distribution'' and to ``protect the 
integrity of the securities trading market as an independent pricing 
mechanism during the distribution period.''\70\ To prohibit all 
activity of distribution participants, however, would result in a 
distorted market simply by virtue of curtailing ``normal'' market 
activity of distribution participants during the distribution period. 
Accordingly, regulation should focus upon market activities by 
distribution participants (and their affiliated purchasers) that 
improperly would directly or indirectly raise or maintain the price of 
the offered security or create the appearance of active trading in the 
security.
---------------------------------------------------------------------------

    \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.
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    \71\Paragraph (a). See section V.E. infra for a discussion of 
covered securities.
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    The proscription of ``inducements to purchase'' is less distinct. 
It covers activity that causes or is likely to cause another person to 
bid for or purchase covered securities.72 One type of inducement, 
brokerage transactions that are solicited by distribution participants, 
is explicitly covered in the rule.73 The distribution of research 
reports is considered to involve inducements to purchase.
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    \7\2See, e.g., Kidder Peabody & Co., 18 SEC 559 (1945) 
(purchases made as a favor to underwriter); SEC v. Burns, 816 F.2d 
471 (9th Cir. 1987) (president of issuer made loan to another person 
to purchase covered securities).
    \7\3Paragraph (a)(4)(v)(B). Rule 10b-6 allows offers to sell or 
the solicitation of offers to buy the security being distributed, 
i.e., sales in connection with the distribution. See Paragraph 
(a)(4)(vi).
---------------------------------------------------------------------------

    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
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    \7\5See 1987 Release, 52 FR at 2995 n.17; 1982 Release, 47 FR at 
42718 n.19.
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2. Cooling-off Periods
    Some activities may present greater manipulative concerns depending 
upon when they occur during the distribution process. The most critical 
period of the offering is the period beginning immediately before 
pricing and continuing until the securities have come to rest in the 
hands of investors (i.e., when the distribution has ended). Thus, Rule 
10b-6 has incorporated the concept of ``cooling-off periods.'' 
Generally, distribution participants and their affiliated purchasers 
may continue their trading and other market activities in the covered 
securities until the applicable cooling-off period begins, at which 
point they must suspend such activity until the termination of the 
distribution.
    The bases for applying cooling-off periods are:
    (1) Restrictions on bids and purchases during the entire 
distribution period could unnecessarily distort the market for the 
offered security; and
    (2) The effects on the offered security's price resulting from 
distribution participants' market activities should dissipate within a 
period of time. The cooling-off periods thus are intended to permit 
supply and demand forces independent of the market activities of 
persons with manipulative incentives to establish the market price of 
the covered securities at the time the offering is priced and when they 
are being sold to investors. The cooling-off periods also provide 
guidance to distribution participants as to what period of time is 
required between the cessation of their market activities (which may 
have increased or maintained the market price of, or involved 
substantial trading activity in, the covered securities) and sales to 
investors.76 In this context, rather than requiring individual 
broker-dealers or syndicate managers to determine when to taper off and 
cease their market activities, the rule supplies uniform guidance.
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    \7\6See also Securities Exchange Act Release No. 3056 (October 
27, 1941), 11 FR 10984 (Opinion of SEC General Counsel).
---------------------------------------------------------------------------

    Rule 10b-6 uses market-related criteria to fix the lengths of the 
cooling-off periods, which are two, five, and nine business days prior 
to the ``commencement of offers and sales'' in the distribution. For 
stock with a minimum share price of $5.00 and a public float of at 
least 400,000 shares (``$5/400,000 Share Test''), the cooling-off 
period is two business days. For all other securities, the cooling-off 
period is nine business days. A minimum price per share requirement was 
viewed as an appropriate criterion in light of the generally greater 
volatility of low-priced stocks, while a public float standard was 
viewed as providing a reasonable indication of the depth and liquidity 
of the market for a security.77 The Commission also considered a 
test based on the security's price and public float as having ``the 
advantage of being relatively certain and easily determinable.''78
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    \7\7Paragraphs (a)(4)(v), (xi), and (xii). See also Letter 
regarding the Interpretation of ``Business Day'' (July 29, 1991), 
[1991] Fed. Sec. L. Rep. (CCH) 79,751.
    \7\81983 Release, 48 FR at 10634.
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    Solicited principal and solicited brokerage transactions by 
distribution participants are subject to the two and nine business day 
cooling-off periods. A five business day cooling-off period applies to 
the exercise of standardized call options on securities satisfying the 
$5/400,000 Share Test, if such options were acquired after the person 
exercising the option became a distribution participant. This cooling-
off period is intended to minimize the probability that purchases of 
the underlying security resulting from options exercises would occur 
during the two business day cooling-off period. No cooling-off period 
is available for inducements to purchase. No cooling-off period is 
applied to unsolicited principal transactions: the restriction on such 
activity begins as of the commencement of offers or sales.
    The Commission is aware of the perception that by curtailing 
distribution participant activity, even with the availability of 
cooling-off periods, the rule can affect adversely the ``normal'' 
trading market for a security. Because of this concern, the Commission 
recently adopted an exception to Rule 10b-6 and a companion Rule 10b-6A 
permitting ``passive market making'' (i.e., transactions that follow, 
but do not lead, the market) by Nasdaq market makers participating in 
distributions of Nasdaq securities satisfying the $5/400,000 Share 
Test.79
---------------------------------------------------------------------------

    \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
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    \8\4``Same class and series'' questions have arisen most 
frequently with regard to debt securities. See Letter regarding 
Gamble Skogmo, Inc. (January 11, 1974) (available on LEXIS), in 
which the staff took a no-action position to permit bids for or 
purchases of the issuer's outstanding debt securities that varied by 
at least 1% in coupon interest rate and by at least ten years in 
maturity from those of the debt securities being distributed.
    Transactions in nonconvertible debt securities or nonconvertible 
preferred securities where both the nonconvertible securities being 
distributed and those to be purchased have been rated investment 
grade by at least one nationally recognized statistical rating 
organization (``NRSRO'') are excepted from Rule 10b-6. Paragraph 
(a)(4)(xiii). The exception is premised on the fungibility of 
investment grade issues (i.e., that securities with similar terms 
will trade on rating and yield rather than issuer identification). 
Prices of high-yield debt securities, on the other hand, are 
presumed to be influenced by issuer-specific information as well as 
interest rates. Cf. Securities Exchange Act Release No. 33327 
(December 13, 1993), 58 FR 67878.
---------------------------------------------------------------------------

    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.
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    \8\7Release 34-2446.
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    Rule 10b-7 applies to ``any person who, either alone or with one or 
more other persons, directly or indirectly, stabilizes the price of a 
security to facilitate an offering of any security.''88 
Stabilizing transactions are those involving ``the placing of any bid, 
or the effecting of any purchase, for the purpose of pegging, fixing or 
stabilizing the price of any security.''89 To prevent stabilizing 
activities from improperly affecting the market for a security, Rule 
10b-7 prohibits certain specific activities, including bids or 
purchases not necessary for the purpose of preventing or retarding a 
decline in the open market price of the security, and stabilizing at a 
price resulting from unlawful activity. The rule establishes the price 
level at which a stabilizing bid may be entered, and rules of priority 
for the execution of independent bids at times when a stabilizing bid 
has been entered. In addition, the rule regulates the number of 
stabilizing bids that an underwriting syndicate may enter in any one 
market at any one time, and the entry of stabilizing bids on markets 
other than the principal market for the security being stabilized. The 
rule also requires that notice be given that the market will be or is 
being stabilized, and requires a person effecting stabilizing 
transactions to keep the information and make the notification required 
by Rule 17a-2 under the Exchange Act.90
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    \8\817 CFR 240.10b-7(a).
    \8\917 CFR 240.10b-7(b)(3).
    \9\017 CFR 240.17a-2. Rule 17a-2 generally requires the managing 
underwriter in an offering that is being stabilized to record 
specified information on the offered security, each stabilizing 
purchase, and the identity and commitments of syndicate members, and 
to furnish similar information to each syndicate member.
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    Question 2.1. To what extent have changes in the securities markets 
and underwriting practices affected the manner in which stabilization 
is conducted? How frequently and under what circumstances are offerings 
stabilized (as opposed to reserving the right to stabilize)? What new 
techniques and trading systems (such as proprietary trading systems) 
are used and how are bids and purchases disclosed in such systems?
    Question 2.2. Should the ability to stabilize be based upon the 
risk assumed in connection with an offering? Do current underwriting 
practices allow underwriters to reduce risks to a greater extent than 
when the Commission established its policies on stabilization? Do 
issuers engage in stabilization during offerings? If so, is it 
appropriate?
    Question 2.3. Should stabilization be permitted only for certain 
types of distributions (e.g., firm commitments) or securities? If so, 
what should be the determinative criteria?
    Question 2.4. How should stabilizing price levels be determined? 
Should permissible stabilization price levels depend on the security's 
characteristics (e.g., the degree of transparency, liquidity, or 
reported/nonreported status) or should they apply uniformly to all 
securities?
    Question 2.5. What is the appropriate role of disclosure in 
connection with stabilization? Do the current disclosure requirements 
provide meaningful investor protection?

B. Aftermarket Bids and Purchases

    Underwriters engage in numerous activities in the ``aftermarket'' 
of the offered security, i.e., the period following the cessation of 
sales efforts in the offering. In purpose or effect, these activities 
may support, or even raise, the market price of the security, and can 
have the effect of ``stabilizing'' the security's price.91 In 
fact, ``stabilization'' of the market in connection with offerings may 
have shifted from the sales period to the aftermarket period.
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    \9\1See, e.g., Hanley, Kumar & Seguin, Price stabilization in 
the market for new issues, 34 J. Fin. Econ. 177 (1993).
---------------------------------------------------------------------------

    A significant volume of trading frequently occurs in the days 
immediately following the end of the sales of the offered securities. 
Three significant activities by persons who participated in the 
distribution often occur during this period: market making; purchases 
of the offered security to cover a syndicate short position; and 
``penalty bids.'' Underwriters, particularly managing underwriters, 
generally become market makers in the security (or resume market making 
if it was suspended during the offering). Underwriters may have 
``oversold'' the offering in order to compensate for cancellations and 
to create aftermarket buying power against anticipated selling pressure 
immediately following the offering.92 Issuers sometimes grant an 
overallotment option (so-called ``Green Shoe'' option) to underwriters 
to purchase securities in addition to the amount that the syndicate is 
committed to purchase from the issuer.93 The manager may cover the 
syndicate short position by exercising the option, through open market 
purchases, or a combination of the two.
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    \9\2Underwriters have reported that immediate aftermarket 
selling by substantial purchasers in the offering, known as 
``flipping,'' has become common. See, e.g., Peers, Wall Street Plans 
to Crack Down on IPO 'Flippers,' Wall St. J., December 29, 1993, at 
C1. It appears to be a longstanding phenomenon of offerings. Cf. 
Release 34-2446, at 5.
    \9\3Under Rule 10b-6, a distribution is deemed completed if the 
underwriter exercises the overallotment option, but only to the 
extent of the syndicate short position that remains in connection 
with the distribution. See Paragraph (c)(3)(ii).
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    A ``penalty bid'' provision often is included in the agreement 
among underwriters.94 The managing underwriter imposes the penalty 
by requiring underwriters or selling group members to forfeit their 
selling concession for the shares sold to their customers in the 
offering that are purchased in the aftermarket for the syndicate 
account.
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    \9\4A ``penalty bid'' is defined in the NASD By-Laws, Schedule 
D, part 1(15) [NASD Manual (CCH) 1802] as: ``A stabilizing bid that 
permits the managing underwriter to reclaim a selling concession 
granted to a syndicate member in connection with the sale of 
securities in an underwritten offering when the syndicate member 
resells such securities to the managing underwriter.''
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    Question 2.6. Do aftermarket bids and purchases by syndicate 
members support the market price of the offered security and 
``facilitate the offering?''
    Question 2.7. Should such bids and purchases be regulated?
    If so, what is the appropriate form of regulation? Is it relevant 
whether the syndicate has a net short position?
    Question 2.8. What should be the appropriate period during which 
the short position may be covered?95
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    \9\5See Securities Exchange Act Release No. 3506 (October 27, 
1941), 11 FR 10984.
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    Question 2.9. Does the presence of a penalty bid have the effect of 
``stabilizing'' the aftermarket of the offered security?96
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    \9\6Cf. Zweig, Spiro and Schroeder, Beware The IPO Market, 
Business Week, April 4, 1994, at 84.
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VII. Rights Offerings

    Concept Six: Regulation should be limited to rights offerings that 
raise a readily identifiable incentive to manipulate the market.
    Rights offerings are a means of raising capital whereby, for a 
limited period of time, issuers offer existing security holders the 
opportunity to purchase new securities, generally at a discount to the 
market price of the security underlying the rights.
    Because the structure differs significantly from that of a 
traditional offering of equity or debt securities, rights offerings 
involve different risks.97 For instance, a decline in the market 
price during the often lengthy period during which rights may be 
exercised (``rights exercise period'') can affect the success of the 
offering. For this reason, issuers often retain underwriters who assume 
the risk of failure of the offering, i.e., that a substantial amount of 
rights will remain unexercised at the end of the rights exercise 
period.
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    \9\7See generally Loss, supra note 46, at 1604-1614; Foshay, 
supra note 5, at 916-918.
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    Broker-dealers often are employed by issuers in one of, or some 
hybrid of, two methods to reduce market risk during the rights exercise 
period. The first method is the so-called ``Shields Plan,''98 
which is used when the underwriters (typically a syndicate of 
underwriters) enter into a standby arrangement with the issuer, thereby 
committing to purchase all shares left unsubscribed at the expiration 
of the rights exercise period. During the rights exercise period, the 
underwriters will seek to offset the risk of purchasing the shares 
representing unexercised rights by purchasing rights, exercising them, 
and selling the securities acquired. The underwriters also may effect 
short sales of the underlying security and then purchase rights to 
cover this short position.
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    \9\8The Shields Plan originated in 1947 with a committee of the 
Investment Bankers Association headed by a partner of Shields & Co.
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    In the so-called ``Columbia Gas Plan,''99 the issuer retains a 
securities dealer to act as dealer-manager of the offering, although 
there is no standby commitment to purchase unsubscribed shares.100 
Where rights are transferable, Shields Plan-type activities may be used 
in this type of arrangement to increase the amount of rights exercised, 
i.e., the soliciting dealers sell short the securities being offered 
and purchase rights and exercise them to cover their short positions. 
Accordingly, although the dealer-manager may facilitate the exercise of 
rights and thus the distribution of the underlying securities, the risk 
of failure remains with the issuer.
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    \9\9The Columbia Gas Plan was first devised and implemented by 
the Columbia Gas Company in 1948.
    \1\00This is also referred to as the ``dealer-manager plan.'' 
Rule 10b-8 defines a dealer-manager as ``a person [other than the 
issuer] who manages a distribution involving soliciting dealers.'' 
17 CFR 240.10b-8(d)(8)(viii).
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    One commentator has observed that the Commission encouraged the 
development of these plans because they reduced the flotation costs of 
rights offerings and protected existing security holders who otherwise 
might not receive a fair price for the rights that they did not wish to 
exercise.101
---------------------------------------------------------------------------

    \1\01Loss, supra note 46, at 1605.
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    Adopted by the Commission in 1955, Rule 10b-8 represented a 
codification of prior administrative practice regarding rights 
offerings by permitting purchases of rights and other activities 
designed to reduce the risk of raising capital through rights 
offerings, albeit subject to limitations consistent with the goals of 
Rule 10b-6 (i.e., to restrict activities by persons participating in 
the rights offering which might artificially affect the price of the 
rights or the underlying security).102
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    \1\02Rule 10b-8 applies to any person participating in a rights 
distribution, including the issuer, underwriter, dealer-manager, and 
soliciting dealers. The rule excludes from its coverage a person 
whose activities consist solely of receiving compensation from the 
issuer of rights for obtaining exercises of rights by security 
holders to whom they were originally issued.
    In recent years, certain persons or entities that are not 
brokers or dealers have served as standby purchasers in rights 
offerings in order to increase their ownership in the issuer's 
securities. Unlike standby underwriters who purchase rights to 
reduce their position risk, purchases of rights by such persons are 
made to acquire or increase a position in the underlying security. 
These latter standby purchasers are not covered by Rule 10b-8. See, 
e.g., Letter regarding Elron Electronic Industries Ltd. (March 19, 
1990), [1990-1991] Fed. Sec. L. Rep. (CCH) 79,656.
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    The rule has remained essentially unchanged since it was adopted in 
1955.103
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    \1\03In 1983, the rule was amended to include within its scope 
convertible securities called for redemption pursuant to a standby 
underwriting agreement. Generally, calls for redemption contain 
features similar to rights offerings, namely, that a standby 
underwriter seeks to minimize its exposure to position risk during 
the redemption period. In 1993, the rule was amended to except 
certain rights offerings of foreign securities made exclusively in 
the United States to ``qualified institutional buyers,'' as defined 
in Rule 144A under the Securities Act. See Rule 144A Release.
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    To prevent distribution participants from facilitating a rights 
offering by creating the appearance of demand for the rights, paragraph 
(d) of Rule 10b-8 restricts bids for and purchases of rights.104 
Nevertheless, the restrictions apply only in two situations:
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    \1\0417 CFR 240.10b-8(d). Purchases of the underlying securities 
remain subject to Rule 10b-6. See Paragraph (a)(4)(ix).
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    (1) When the price of the security underlying the rights is being 
stabilized; or
    (2) When any syndicate member, dealer-manager, soliciting dealer, 
or other distribution participant has purchased rights, as principal, 
without having sold the underlying securities obtainable upon exercise 
(i.e., when any member of the syndicate has a net long position in the 
underlying security, assuming the exercise of all rights owned by the 
syndicate members).105 Otherwise, there is no restriction on the 
price or manner in which the rights may be purchased. Where the 
restrictions are applicable, the amount of rights that a distributor or 
syndicate may purchase is limited to those necessary to acquire the 
securities the distributor or syndicate has previously sold or 
reasonably expects to be able to sell within five business days after 
the expiration of the rights.106
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    \1\05Accordingly, the restrictions on rights purchases do not 
apply to distribution participants who purchase rights to cover an 
existing short position in the underlying securities. There are 
certain exceptions from the restrictions that are analogous to the 
exceptions in Rule 10b-6. See 17 CFR 240.10b-8(d).
    \1\0617 CFR 240.10b-8(d)(7).
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    Rule 10b-8 also limits the price at which the underlying 
securities, or securities of the same class and series, may be offered 
or sold during the rights offering.\107\ The sales price is based upon 
the last sale price by the manager of the distribution or by a price 
set by that manager. Such price may be set from time to time, but an 
offering price set in any day may not be increased more than once 
during such day. The rule's restrictions on sales are designed to 
address the relationship that exists between the rights and the 
underlying security, and are intended to prevent distribution 
participants from offering the underlying security at steadily 
increasing prices, which could affect the market price of the 
underlying security and enhance the attractiveness of the rights. 
Because a distribution participant may buy rights to the extent such 
rights are needed to acquire securities that were previously sold, the 
sales price restriction on the underlying security may limit the size 
of the participant's short position, in turn controlling that 
participant's rights purchasing activity.108
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    \1\0717 CFR 240.10b-8(b).
    \1\08Because purchases of rights may have the effect of 
increasing the price of the underlying security (e.g., non-
distribution participant arbitrage sellers of rights would hedge by 
purchasing the underlying security), restrictions on the price at 
which the underlying security may be sold reduces any indirect 
effect on the underlying security through the purchase of rights. 
Although the rule does not regulate directly the size of the short 
position in the underlying security, it may do so indirectly to the 
extent that it becomes economically impractical for a participant in 
the rights offering to sell the underlying security at prices below 
the total acquisition cost of the rights plus the exercise price.
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    Question 3.1. To what extent have changes in the securities markets 
and underwriting practices affected the manner in which rights 
offerings are conducted?
    Question 3.2. Is it necessary or appropriate to have anti-
manipulation regulation of rights offerings or calls for redemption of 
convertible securities? If regulation continues to be appropriate, how 
should it be structured? Who should be covered?
    Question 3.3. Should transactions in the rights continue to be 
subject to restrictions and, if so, in what manner? Is the existing 
distinction between persons with a long position in the underlying 
security and those with a short position appropriate, i.e., is there 
greater or lesser incentive to manipulate based on positions in the 
underlying security? Should limitations be placed on the volume of 
rights purchases? Commenters should consider the manner in which 
purchasing rights may facilitate the distribution of the underlying 
security.
    Question 3.4. Should sales of the underlying security and related 
securities during a rights offering continue to be subject to 
restrictions and, if so, in what manner?
    Question 3.5. To what extent do the following considerations affect 
rights offering practices, and can or should any of these factors be 
taken into account as a means to simplify any continued regulation of 
these offerings:
    (a) The risks assumed by the persons participating in the rights 
offering;
    (b) The existence or extent of a discount in the rights exercise 
price to the market price of the security; or
    (c) The timing of the exercise of rights? 109Are there any 
other relevant factors to be considered in the treatment of these 
offerings?
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    \1\09For example, it has been noted that, from an economic 
perspective, shareholders tend to delay their decision regarding 
whether to exercise rights until just before the rights expire. See, 
e.g., E. Bloch, Inside Investment Banking 173 (1986).
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VIII. Regulation of Other Manipulative Activity During Offerings

    Concept Seven: Where necessary or appropriate, regulation should 
address the activities of persons other than distribution participants 
who have substantial incentives to manipulate security prices during 
offerings.
    The Trading Practices Rules address the manipulative activities of 
distribution participants and their affiliated purchasers. However, 
other parties also may have substantial incentives to manipulate the 
price of a security around the time of a securities offering. The 
difficulty lies in drawing clear lines that appropriately address 
manipulation practices but that do not interfere with legitimate market 
and business activity.
    One context that has been addressed is sales of securities prior to 
the pricing of an offering. The Commission has applied fundamental 
manipulation concepts to this activity: ``Where * * * those who have a 
substantial interest in the establishment of lower market prices take 
active steps to accomplish their objective, a finding of manipulative 
purpose is warranted'' under Exchange act sections 9(a)(2) and 10(b) 
and Securities Act Section 17(a).110
---------------------------------------------------------------------------

    \1\10J.A.B. Securities Co., Inc., 47 SEC 86, 92 & n.17 (1979).
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    Specifically, the Commission views short selling in anticipation of 
a public offering and the subsequent covering of those short sales with 
the offered securities as a manipulative activity. Such short sales are 
detrimental to the capital formation process, because the decreased 
price resulting from those sales deprives the issuer of offering 
proceeds that otherwise would have been realized had the market not 
been subject to such activity.111 Persons who sell short and cover 
their sales out of a public offering are not subject to the usual 
market risk associated with short sales, because they have access to a 
pool of securities obtainable from distribution participants at a 
fixed, and generally lower, price. It is this lower risk that can 
provide an incentive for manipulative short selling. The Commission 
adopted Rule 10b-21 in 1988 to prohibit this type of short selling and 
covering.112
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    \1\11See Securities Exchange Act Release No. 26028 (August 25, 
1988), 53 FR 33455, 33456. See also Rule 10b-21 Release.
    \1\1217 CFR 240.10b-21. See, e.g., SEC v. Curtis Ivey and Gregg 
Kaplan, Lit. Release No. 14042 (April 5, 1994).
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    In addition to short sellers, persons may engage in long sales in 
order to depress the market price in anticipation of an offering. For 
instance, they may have indicated their interest in buying the offered 
securities from the underwriter, but want to do so at a lower 
price.113
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    \1\13See, e.g., SEC v. Soros Fund Management, Inc., No. 79 Civ. 
2641 (S.D.N.Y. 1979), Lit. Release No. 8763 (May 21, 1979) (consent 
decree finding violations of Exchange Act sections 9(a)(2) and 10(b) 
and Rule 10b-5 thereunder and Securities Act section 17(a)).
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    Question 4.1. Does Rule 10b-21 adequately address the concerns 
raised by short selling in anticipation of an offering?
    Question 4.2. Should Rule 10b-21 explicitly cover sales of related 
securities in addition to the offered securities?
    Question 4.3. Are there other manipulative activities during an 
offering that should be addressed by regulation and that can be 
regulated feasibly?

IX. Extraterritorial Effects of Antimanipulation Regulation

    Concept Eight: Consistent with the protection of United States 
investors, regulation of offerings should avoid conflicts with global 
distribution practices.
    Shortly after adoption of the Trading Practices Rules, the 
Commission took the position that, with respect to multinational 
offerings of securities occurring in whole or in part in the United 
States, the Trading Practices Rules apply to all distribution 
participants and their affiliated purchasers, wherever they are located 
or effect transactions.114 The basis for this position is that 
transactions occurring in a foreign jurisdiction can affect the market 
for the security being distributed in the United States, and such 
activity might result in the harm that Rule 10b-6 was designed to 
prevent (i.e., the creation of artificial prices by persons 
participating in the distribution).115 As the world's securities 
markets have become increasingly interconnected and, in particular, as 
multinational offerings have become more common, market participants 
have asserted that the extraterritorial effects of the Trading 
Practices Rules disrupt foreign distribution participants' normal 
market practices and may discourage some offerings from being made in 
the United States.116 These effects also may impose compliance 
burdens on foreign persons that conflict with regulatory requirements 
in their home jurisdictions.117
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    \1\14See, e.g., Letters regarding Royal Dutch Petroleum Co. 
(December 23, 1957); Philips N.V. (May 15, 1962); Standard Oil Co. 
(New Jersey) (February 6, 1970); and S.S. Kresge & Co. (April 14, 
1972). In some respects, other jurisdictions have taken a similar 
approach. See Chapter III, Part 10, Rule 10.06 of the Rules of the 
U.K. Securities and Investments Board, 2 Fin. Serv. Rep. (CCH) at 
184,281.
    \1\15Generally, U.S. courts have recognized the application of 
U.S. federal securities laws to fraudulent or manipulative 
activities in a foreign jurisdiction where such activities have an 
``effect'' in the United States, Schoenbaum v. Firstbrook, 405 F.2d 
200, 208 (2d Cir.), rev'd in part on other grounds, 405 F.2d 215 (2d 
Cir. 1968) (en banc), cert. denied sub nom. Manley v. Schoenbaum, 
395 U.S. 906; Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 991 
(2d Cir. 1975); see also Restatement (Third) of the Foreign 
Relations Law of the United States, 416 (1987), or where conduct 
that occurs in the United States is an ``essential link'' in the 
foreign fraudulent or manipulative activities. Leasco Data 
Processing Equip. Corp. v. Maxwell, 468 F.2d 1326, 1335 (2d Cir. 
1972).
    \1\16See Rule 144A Release, 58 FR at 60327.
    \1\17See Statement of Policy, 58 FR at 60324.
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    The Commission has addressed the international effects of these 
rules by providing relief in appropriate contexts on an individual and 
class basis.118 The Commission has applied the Trading Practices 
Rules in a manner intended to limit disruption in the home country 
market but in the context of its duty to protect U.S. investors from 
manipulative offering practices. Relief has been based on a variety of 
factors: The depth of the market for a foreign security; the 
availability of transaction information to the Commission; information 
sharing arrangements with foreign regulators; comparable foreign 
regulation; the significance of a particular market for price 
discovery; disclosure of foreign market practices and transactions; and 
the characteristics of the market for the security in the United 
States. In the case of rights offerings, which are quite common in 
foreign jurisdictions, the lengthy rights exercise periods and the 
amount of the discount between the rights exercise price and the price 
of the underlying security also have been viewed as important factors 
in fashioning relief.
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    \1\18See, e.g., SEC, Fifty-Eighth Annual Report 33 (1992).
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    Question 5.1. Should the regulation of offerings distinguish 
between offerings in the United States of domestic and foreign 
securities? Commenters should address the effect that the Commission's 
initiatives concerning multinational offerings have had on U.S. and 
foreign issuers, broker-dealers, and investors.
    Question 5.2. In applying the Trading Practices Rules to offerings 
of foreign securities in the United States, the Commission has 
considered only the portion of the total offering that is offered in 
the United States. Because manipulative incentive is related directly 
to the magnitude of an offering, is the Commission's practice of 
focusing only on the U.S. portion of a multinational offering 
appropriate?
    Question 5.3. Should antimanipulation regulations apply in the 
``secondary'' markets for a particular security (i.e., those markets 
that reasonably can be assumed not to have a price discovery role)? If 
not, how should those markets be identified?119 Should the United 
States ever be considered a secondary market for these purposes? What 
potential is there for a secondary market to become a price discovery 
market during the distribution period, and what consequence would that 
have?
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    \1\19In a recent exemption, the Commission disapplied the 
Trading Practices Rules to markets that account for less than 10% of 
a foreign security's worldwide reported trading volume. German 
Offerings Exemptions, supra note 31, 58 FR at 53223-53225.
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    Question 5.4. What is the role of transaction reporting to foreign 
regulators and trade publication (i.e., transparency) in this context?
    Question 5.5. What level of disclosure to U.S. investors regarding 
foreign trading practices should be required?
    Question 5.6. What information concerning transactions in foreign 
countries during a distribution should be available to the Commission?
    Question 5.7. Should regulation of foreign offerings be based on 
information sharing agreements between the Commission and foreign 
regulators?
    Question 5.8. Should the Commission except transactions occurring 
in those jurisdictions that have a comparable system of 
antimanipulation regulation? How should comparability be determined?

X. Alternative Approaches

    In considering the concepts noted above and the issues that they 
raise, some commenters may believe that a different construct, rather 
than amendments to the current rules, would provide a more appropriate 
means of protecting investors from manipulation during securities 
offerings. In assessing the general proposition of how and whether 
market activities during distributions should be regulated, commenters 
are requested to consider the following:
    Question 6.1. How have changes in the securities markets and 
securities offering practices affected the need for some form of 
regulation of trading and similar activities during offerings of 
securities? What are the costs and benefits of any continued regulation 
of these activities? If regulation continues to be necessary or 
appropriate, what form should such regulation take?
    Additionally, commenters are invited to suggest and describe 
alternatives to the current system, and may wish to consider the 
approaches described below.

A. Safe Harbor Alternative

    Under this approach, if certain conditions were satisfied, a ``safe 
harbor'' from the antimanipulation provisions of sections 9(a)(2) and 
10(b) and Rule 10b-5 thereunder would be available. For example, Rule 
10b-18 under the Exchange Act provides a safe harbor from these 
provisions for certain bids or purchases made by an issuer or its 
affiliated purchasers. For that rule's safe harbor to apply, the issuer 
or its affiliated purchasers must satisfy conditions relating to the 
time, price, amount, and method of purchasing the issuer's security. 
Commenters should consider whether it would be appropriate, and 
practical, to adopt a safe harbor approach in lieu of, or as a 
supplement to, the Trading Practices Rules. Because transactions within 
any such safe harbor still could have a manipulative impact, the safe 
harbor would be unavailable where the transactions were made with 
manipulative or fraudulent intent.
    Question 6.2. Could the Trading Practices Rules be restructured so 
as to provide a ``safe harbor'' from charges of manipulation under the 
Exchange Act? How and why should such a safe harbor approach be 
implemented? What difficulties would be associated with such an 
approach?120
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    \1\20In the dynamic area covered by the Trading Practices Rules, 
the views of the Commission's staff are frequently sought as to the 
appropriateness of specific transactions. In general, the staff does 
not provide similar advice regarding the scope of safe harbors from 
antimanipulation provisions.
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B. Evidentiary Alternative

    Under the Trading Practices Rules, it is unlawful for a 
distribution participant to bid for or purchase the securities that are 
the subject of a distribution (or related securities) until his or her 
participation is completed, absent an exception or exemption. Some 
market participants have voiced concerns that certain violations of 
Rule 10b-6 are ``inadvertent'' or ``technical'' in nature and do not 
evince an intent to artificially influence the price of a security in 
distribution. A possible alternative would be to adopt a presumption 
that a distribution participant or its affiliated purchaser who engages 
in proscribed activity during a distribution has done so with 
manipulative intent, and place the burden on that person to prove that 
the conduct was not done with manipulative intent.121
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    \1\21This approach would be analogous to the inference that is 
drawn under the case law regarding section 9(a)(2). E.g., Crane Co. 
v. Westinghouse Air Brake Co., 419 F.2d 787, 795 (2d Cir. 1969); The 
Federal Corp., 25 SEC 227, 230 (1947).
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    Question 6.3. Should distribution participants be permitted to 
rebut findings of violations of the Trading Practices Rules by 
establishing the absence of manipulative intent? How and why should 
such an approach be implemented? What difficulties would be associated 
with such an approach? What should be the evidentiary requirement for 
rebutting such a presumption?

C. Definitional Approach

    ```Manipulation' is `virtually a term of art when used in 
connection with the securities markets.'''122 Various sections of 
the Exchange Act authorize the Commission to prohibit activities that 
it deems or defines to be manipulative.123 The Trading Practices 
Rules are among the antimanipulation rules that the Commission has 
adopted pursuant to this authority.124
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    \1\22Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476 (1977), 
quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976).
    \1\23E.g., Exchange Act Section 10(b), 15(c)(1)(D), 15(c)(2)(D), 
15 U.S.C. 78j(b), 78o(c)(1)(D), 78o(c)(2)(D). For example, Rules 
15c1-1 through 15c1-9 under the Exchange Act define the term 
``manipulative, deceptive, or other fraudulent device or 
contrivance'' as used in Section 15(c)(1) of the Exchange Act by 
enumerating various acts and practices. 17 CFR 240.15c1-1--240.15c1-
9.
    \1\24Cf. Santa Fe, supra note 122, at 476-477.
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    Question 6.4. Should the Commission expressly define activities 
that are manipulative in the context of offerings? How and why should 
such an approach be implemented? What is the scope of activities that 
should be covered by a definitional rule? What difficulties would be 
associated with such an approach?

D. ALI Code Alternative

    In 1978, the American Law Institute (``ALI'') proposed a 
comprehensive codification of the federal securities laws (``ALI 
Code'').125 The ALI Code retains many of the fundamental concepts 
of Rules 10b-6 and 10b-7.126 For example, the ALI Code would 
codify the basic principles of Rule 10b-6, but leave it to successor 
rules to provide the details and exemptions. The code does not 
recommend the repeal of any of the exceptions in Rule 10b-6. 
Additionally, the proposed definition of ``distribution'' would permit 
the Commission to define the term in light of a number of factors, 
including the size of the offering, number of sellers and buyers, 
selling methods, characteristics of the market used, and 
compensation.127
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    \1\25ALI, Federal Securities Code (Proposed Official Draft, 
1978). The ALI Code was endorsed by the American Bar Association in 
1979. The Commission published a ``Statement of Position'' on the 
1978 version of the ALI Code essentially supporting the code, with 
revisions. Securities Act Release No. 6242 (September 18, 1980), 
[1980] Fed. Sec. L. Rep. (CCH) 82,655.
    \1\26ALI Code Section 1609-1611 (Official Draft, 1980).
    \1\27ALI Code Section 202(41); see also ALI Code Section 
1609(d)(3).
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    The proscriptions would apply to ``the issuer, a secondary 
distributor, an underwriter, a prospective underwriter, or any other 
person who has agreed to participate or is participating or otherwise 
financially interested in a distribution.''128 The prohibitions 
would stay in place until the completion of the person's participation 
or the termination of his or her financial interest. The stabilization 
provision of the ALI Code closely mirrors Rule 10b-7, and would retain 
the Commission's authority to regulate or prohibit stabilization 
conducted for any purpose.129
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    \1\28ALI Code Section 1609(d)(1).
    \1\29ALI Code Section 1610 & Comment (1).
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    Question 6.5. Does the proposed ALI Code provide a preferable 
alternative structure to dealing with manipulation during offerings? 
How and why should such an approach be implemented? What difficulties 
would be associated with such an approach?

E. Stabilization Alternative

    An alternative regulatory framework for stabilization is provided 
by the rules of the United Kingdom Securities and Investments Board 
(``SIB Rules'').130 The SIB Rules provide a safe harbor from 
charges of violating U.K. antimanipulation law only to the 
``stabilizing manager,'' who is analogous to the U.S. managing 
underwriter. The other syndicate members are neither protected nor 
restricted by the SIB Rules. The stabilizing manager may bid for or 
purchase the offered security for the purpose of ``stabilizing or 
maintaining the market price of the security being offered'' during the 
``stabilizing period,'' which can run to the 60th day after the date of 
allotment made to subscribers and purchasers, potentially much longer 
than the period covered by Rule 10b-7.
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    \1\30Chapter III, part 10 of the SIB Rules, 2 Fin. Serv. Rep. 
(CCH) 184.314-184.401.
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    The SIB Rules are more flexible than Rule 10b-7 in permitting bids 
and purchases to closely follow the market, moving up or down, at or 
below the initial stabilizing price. In addition, the bid may be raised 
to the last independent sale price even if that price is higher than 
the initial stabilizing bid. As under Rule 10b-7, however, no 
stabilizing price may exceed the offering price. The stabilizing 
manager also is permitted to overallot the offered securities to 
``subscribers or purchasers'' or sell short the securities to 
facilitate its subsequent stabilizing purchases. Moreover, the SIB 
Rules permit the stabilizing manager to buy in the market to cover a 
syndicate short position, and to cover such short position without 
regard to the general price limits otherwise imposed on stabilizing 
transactions.
    Question 6.6. Is the SIB stabilizing structure, or some adaptation 
of that structure, a useful alternative to Rule 10b-7? What 
difficulties would be associated with such an approach?

F. Tiered Modifications

    As noted in the body of the release, the manipulative incentives 
associated with a distribution may vary depending on the type of 
offering and the nature of its participants. Accordingly, in discussing 
these alternatives, commentators are requested to consider whether the 
alternatives could be tiered to address these matters.
    Question 6.7. Could an alternative be applied effectively to a 
limited class of securities? How would such a class be defined, e.g., 
market capitalization and trading volume of the security?
    Question 6.8. Could an alternative be applied effectively to a 
limited class of institutional investors? How would such a class be 
defined?
    Question 6.9. Could an alternative be applied effectively to a 
limited class of transactions? How would such a class be defined?
    Question 6.10. Could an alternative be applied effectively to a 
limited class of transactions involving a limited class of 
institutional investors? How would such transactions or investors be 
defined?

G. Deregulatory Alternative

    Some may believe that the general antifraud and antimanipulation 
provisions of the federal securities laws are sufficient to deter 
conduct during distributions that is designed to artificially condition 
the market for the offered security, and the Trading Practices Rules 
could be rescinded.
    Question 6.11. Should the Trading Practices Rules be rescinded?
    Question 6.12. What difficulties, if any, would arise in applying 
the concepts identified in this release, if only the general 
antimanipulation provisions applied to distribution participant conduct 
during offerings?131 Would there be viable methods for the 
Commission and its staff to provide guidance as to lawful and unlawful 
activity?
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    \1\31One commentator has remarked: ``Through its very precise 
and mechanical nature, Rule 10b-6 is a tradeoff against the possibly 
more pernicious risk to the issuer or underwriter of an unfocused 
prohibition against undefined manipulative conduct.'' Blanc, Rules 
10b-6, 10b-7, 10b-8 and Other Anti-manipulation Considerations, 
contained in Securities Underwriting 298 (Bialkin & Grant eds., 
1985).
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    Question 6.13. Would this approach create the uncertainty that 
apparently existed prior to the adoption of these rules and served as 
their genesis?
    Question 6.14. Assuming that disclosure would be an essential 
element of this alternative, what disclosures would adequately inform 
investors that market prices may be or were being influenced by 
distribution participant activity?132
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    \1\32In this regard, commenters may wish to consider United 
States v. Lewis, [1989] Fed. Sec. L. Rep. (CCH) 94,479 (S.D.N.Y. 
1989).
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H. Simplifying the Current Rules

    The Trading Practices Rules are considered by many to be complex 
and difficult to apply. Some have suggested that the current 
construction of these rules could be simplified without sacrificing the 
core protections afforded by these rules.
    Question 6.15. Could the current structure of the Trading Practices 
Rules be simplified and, if so, how?
    Question 6.16. Rules 10b-6 and 10b-8 are structured in terms of a 
basic prohibition and exceptions thereto. Would it be possible to 
structure the prohibitions more narrowly to address specific types of 
potentially manipulative conduct in connection with distributions 
generally and rights offerings specifically?


    By the Commission.

    Dated: April 19, 1994.
Margaret H. McFarland,
Deputy Secretary.

Appendix A--Statutory and Regulatory Framework of the Trading Practices 
Rules

    This appendix provides a background summary of the antifraud and 
antimanipulation provisions of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ the promulgation of Rules 10b-6, 10b-7, and 
10b-8 (``Trading Practices Rules'') under their authority, and an 
index of the relevant interpretive and rulemaking releases 
subsequent to the rules' adoption in 1955.
---------------------------------------------------------------------------

    \1\15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

I. Background\2\
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    \2\See generally III L. Loss, Securities Regulation 1541-1570 
(2d. ed. 1961); Foshay, Market Activities of Participants in 
Securities Distributions, 45 U. Va. L. Rev. 907, 907-926 (1959).
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    Following the 1929 stock market crash and amid public furor 
concerning financial intermediaries that had engaged in flagrant 
manipulation in the securities markets, Congress enacted the 
Exchange Act to put an end to the practices that it found had 
contributed to the economic problems facing the Nation.\3\ In 
drafting the legislation, Congress determined that the available 
common law remedies for fraud were inadequate to combat manipulation 
in the securities markets.\4\ Because Congress recognized that 
market manipulation can assume many forms, it did not define the 
term in the Exchange Act or elsewhere. Congress intended the 
Exchange Act to outlaw every ``device used to persuade the public 
that activity in a security is the reflection of a genuine demand 
instead of a mirage.''\5\ In a number of provisions, the Commission 
is given authority to define manipulative practices and adopt rules 
to proscribe and prevent such conduct.\6\ As the Commission has 
stated:
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    \3\Congressional findings leading to the enactment of the 
Exchange Act pointed to widespread manipulation and fraud by 
brokers, dealers, and other members of the financial industry. One 
of the ``chief evils'' was the operation of ``pools,'' which were 
agreements among several persons to trade actively in a security, 
generally to raise the price of a security by concerted activity, in 
order to sell their holdings at a profit to the public, which is 
attracted by the activity or by information disseminated about the 
stock. Report to the Secretary of Commerce, Staff of Senate 
Committee on Stock Exchange Regulation, 73d Cong., 2d Sess. 13 
(1934); S. Rep. No. 1455, 73d Cong., 2d Sess. 31 (1934). See, e.g., 
Thel, The Original Conception of section 10(b) of the Securities 
Exchange Act, 42 Stan. L. Rev. 385, 404 (1990); Note, Manipulation 
of Stock Markets Under the Securities Laws, 99 U. Pa. L. Rev. 651, 
659-662 (1951).
    \4\Prior to enacting the Securities Act of 1933, 15 U.S.C. 77a 
et seq., and the Exchange Act, the federal government could only 
combat securities fraud and manipulation by criminal prosecution for 
violation of the mail fraud statute, 18 U.S.C. 1341, or for 
conspiring to violate it, 18 U.S.C. 371. For example, in United 
States v. Brown, 5 F. Supp. 81 (S.D.N.Y. 1933), aff'd, 79 F.2d 321 
(2d Cir.), cert. denied sub nom. McCarthy v. United States, 296 U.S. 
650 (1935), the court held that manipulative trading through a pool 
arrangement was fraudulent as a form of misrepresentation and 
``unfair dealing'' and thus violated the mail fraud statute. See 
also Hearings before Comm. on Banking and Currency on Senate 
Resolutions 56 and 84, 72d Cong., and 97, 73d Cong. (1934); Report 
of Governor Hughes' Committee on Speculation in Securities and 
Commodities (June 7, 1909).
    \5\Stock Exchange Practices, Senate Comm. on Banking and 
Currency, S. Rep. No. 1455, 73rd Cong., 2d Sess. 30 (1934). A fixed 
definition could impair the ability to address new manipulative 
devices. But cf. Fischel & Ross, Should the Law Prohibit 
``Manipulation'' in Financial Markets?, 105 Harv. L. Rev. 503 
(1991).
    \6\See, e.g., Exchange Act sections 9(a)(6), 10, 15(c), 15 
U.S.C. 78i(a)(6), 78j, 78o(c).
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    When investors and prospective investors see activity, they are 
entitled to assume that it is real activity. They are also entitled 
to assume that the prices that they pay and receive are determined 
by the unimpeded interaction of real supply and real demand so that 
those prices are the collective marketplace judgment that they 
purport to be. Manipulations frustrate these expectations. They 
substitute fiction for fact. . . . The vice is that the market has 
been distorted and made into 'a stage-managed performance.'\7\
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    \7\Edward J. Mawod & Co., 46 S.E.C. 865, 871-872 (1977), aff'd, 
591 F.2d 588 (10th Cir. 1979).
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II. Statutory Provisions

    This section describes the principal antimanipulation provisions 
of the Exchange Act, sections 9(a), 10, and 15(c),\8\ and the 
implementation of the concepts underlying those provisions in the 
regulation of securities offerings. It has long been recognized that 
securities offerings, which can be affected dramatically by short-
term movements in security prices, are susceptible to 
manipulation.\9\
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    \8\15 U.S.C. 78i(a), 78j, and 78o(c), respectively.
    \9\See Comment, Market Manipulation and the Securities Exchange 
Act, 46 Yale L.J. 624, 626 (1937).
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    The provisions of Section 9(a) were designed to ``purge the 
securities exchanges of those practices which have prevented them 
from fulfilling their primary function of furnishing open markets 
for securities where supply and demand may freely meet at prices 
uninfluenced by manipulation or control.''\10\ Congress explicitly 
prohibited certain transactions when the purpose was to ``create a 
false or misleading appearance of active trading'' or a ``false or 
misleading appearance with respect to the market for an exchange-
registered security.''\11\ Congress included a general anti-
manipulation provision, Section 9(a)(2),\12\ which has been termed 
the ``heart'' of the Exchange Act.\13\ Manipulation under this 
section requires proof of three elements:
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    \10\S. Rep. No. 1455, 73d Cong., 2d Sess. 30 (1934). The title 
of section 9 is ``Prohibition Against Manipulation of Security 
Prices.''
    \11\15 U.S.C. 78i(a)(1).
    \12\15 U.S.C. 78i(a)(2).
    \13\See Report of the Securities and Exchange Commission on 
Proposals for Amendments to the Securities Act of 1933 and the 
Securities Exchange Act of 1934, 77th Cong., 1st Sess. 50 (1941).
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    (1) A series of transactions in an exchange-registered security,
    (2) Creating actual or apparent active trading in such security 
or raising or depressing the price of such security,
    (3) For the purpose of inducing the purchase or sale of such 
security by others. However, Congress recognized that some forms of 
market intervention should not be prohibited absolutely and left it 
to Commission rulemaking to impose necessary or appropriate 
restrictions on such activities for the protection of the 
public.\14\
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    \14\See, e.g., Exchange Act sections 9(a)(6), (b), and (c), 15 
U.S.C. 78i(a)(6), (b), (c).
---------------------------------------------------------------------------

    Section 10 of the Exchange Act addresses the ``regulation of the 
use of manipulative and deceptive devices.'' Section 10(a) provides 
the Commission with plenary authority to regulate short sales in 
exchange-registered securities.\15\ Section 10(b) makes unlawful the 
use or employment of ``any manipulative or deceptive device or 
contrivance'' in contravention of Commission rules adopted pursuant 
to that section.\16\ In 1942, the Commission adopted Rule 10b-5, 
which prohibits any person from using any device, scheme, or 
artifice to defraud any person, making any untrue material statement 
or any material omission, or engaging in any fraudulent or deceptive 
act, practice, or course of business, in connection with the 
purchase or sale of any security.\17\
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    \15\See Stock Exchange Practices, Report of the Senate Comm. on 
Banking and Currency, S. Rep. No. 1455, 73d Cong., 2d Sess. 55 
(1934).
    \16\Section 10(b), 15 U.S.C. 78j(b).
    \17\17 CFR 240.10b-5.
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    Sections 15(c) (1) and (2) prohibit brokers and dealers from 
effecting securities transactions in the over-the-counter (``OTC'') 
market by means of any ``manipulative, deceptive, or other 
fraudulent device or contrivance,'' or engaging in ``any fraudulent, 
deceptive, or manipulative act or practice.'' Section 15(c)(2) also 
directs the Commission to define and prescribe means reasonably 
designed to prevent fraudulent, deceptive, or manipulative acts and 
practices.\18\ The Commission has exercised its authority under 
these provisions to proscribe manipulative activity.\19\
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    \18\15 U.S.C. 78o(c)(1), (2).
    \19\See 17 CFR 240.15c1-1 to 15c1-9, 240.15c2-1 to 15c2-12. The 
Commission and the courts have held that transactions that would 
violate Section 9(a)(2) if effected in an exchange-registered 
security would violate Exchange Act Section 15 if effected in a 
security not so registered. See, e.g., SEC v. Management Dynamics, 
Inc., 515 F.2d 801, 810 (2d Cir. 1975); Barrett & Co., 9 SEC 319, 
328 (1941); Loss at 1573. See also NASD By-Laws, Schedule G, section 
4, NASD Manual (CCH) Sec. 1921.
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III. Implementation of Exchange Act Provisions in the Context of 
Securities Offerings

    Securities offerings involve risk and uncertainty.20 The 
Commission has recognized that the pricing of an offering is not an 
exact science and that regulation of the market activities of 
parties with an interest in the outcome of an offering presents 
``intensely practical problem(s).''21 From its earliest days, 
the Commission and its staff have been called upon to implement the 
antimanipulation provisions of the Exchange Act in the context of 
securities offerings.22 Sections 9(a)(2) and 15(c)(1) were 
interpreted to require a broad prohibition of trading during a 
distribution by persons interested in the distribution.23
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    \2\0See, e.g., Securities Exchange Act Release No. 2446 (March 
18, 1940), 11 FR 10971 (``Release 34-2446'').
    \2\1Release 34-2446.
    \2\2See, e.g., Koeppe v. SEC, 95 F.2d 550 (7th Cir. 1938); 
Securities Exchange Act Release No. 605 (April 17, 1936) (``Release 
34-605'').
    \2\3See, e.g., Securities Exchange Act Release Nos. 3056 
(October 27, 1941), 11 FR 10984 (Any series of purchases that raise 
a security's price and are made for the purpose of inducing 
purchases by others is unlawful manipulation whether or not the 
purpose is achieved.); and 3505 (November 16, 1943), 11 FR 10965 
(Where a participant in a distribution effects transactions which 
raise the price of the security or create excessive activity in the 
security, it is difficult, if not impossible, to avoid the 
conclusion that the transactions were conducted, at least in part, 
for the purpose of inducing the purchase of the security by 
others.).
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IV. The Trading Practices Rules

A. 1955 Rulemaking

    Rules 10b-6, 10b-7, and 10b-8 were proposed for comment in May 
1954,24 reproposed in April 1955,25 and adopted in July 
1955.26 From the outset, the Trading Practices Rules reflected 
the framework established by the Commission during the preceding 
twenty years interpreting section 9(a)'s prohibitions on 
manipulative conduct, and consist of a broad trading prohibition 
with exceptions thereto. In the following four decades, the 
Commission and staff have administered the Trading Practices Rules 
and related antimanipulation rules within this framework.
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    \2\4Securities Exchange Act Release No. 5040 (May 18, 1954), 19 
FR 2986.
    \2\5Securities Exchange Act Release No. 5159 (April 19, 1955), 
20 FR 2826.
    \2\6Securities Exchange Act Release No. 5194 (July 5, 1955), 20 
FR 5075.
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B. Index of Releases

    The following is a chronological reference list of the releases 
interpreting and proposing and adopting amendments to the Trading 
Practices Rules and related Rules 10b-2, 10b-18, and 10b-21.
    1. Rule 10b-6: Trading restrictions during offerings. a. 
Securities Exchange Act Release No. 5415 (December 6, 1956), 21 FR 
9983. The Commission proposed to amend Rule 10b-6 to clarify that 
officers, directors, and controlling persons of the issuer or other 
person on whose behalf the distribution is being made would be 
subject to the rule. The proposed amendment was subsequently 
withdrawn in Securities Exchange Act Release No. 7517 (January 22, 
1965), 30 FR 1010.
    b. Securities Exchange Act Release No. 7293 (April 21, 1964). 
The Commission published notice of its consideration to amend 
paragraph (e) of Rule 10b-6 excepting issuer distributions to 
employees pursuant to stock option plans.
    c. Securities Exchange Act Release No. 7403 (August 27, 1964). 
The Commission amended Rule 10b-6 to add new paragraph (e) excepting 
issuer distributions to employees pursuant to stock option plans.
    d. Securities Exchange Act Release No. 16112 (August 16, 1979), 
44 FR 49406. In adopting Rule 13e-4, the Commission noted that it 
intended to amend Rule 10b-6 to except from the rule's prohibitions 
purchases of securities by an issuer or its affiliate pursuant to a 
tender offer that is subject to Exchange Act Rule 13e-4, where the 
issuer or its affiliate is subject to Rule 10b-6 solely because the 
issuer has outstanding securities convertible into or exchangeable 
for the security that is the subject of the tender offer.
    e. Securities Exchange Act Release No. 16645 (March 13, 1980), 
45 FR 18915. The Commission amended Rule 10b-6 to add paragraph (f) 
excepting purchases of securities pursuant to a tender offer by an 
issuer or issuer affiliate for securities of the issuer, which is 
subject to and made in compliance with Exchange Act Rule 13e-4, 
where the issuer or affiliate is subject to Rule 10b-6 solely 
because the issuer has outstanding securities convertible into or 
exchangeable for the security for which the tender offer will be 
made.
    f. Securities Exchange Act Release No. 16646 (March 13, 1980), 
45 FR 18948. The Commission proposed amendments to Rule 10b-6 that 
would except from its application distributions of securities 
pursuant to employee or shareholder plans sponsored by an issuer.
    g. Securities Exchange Act Release No. 17556 (February 17, 
1981), 46 FR 15133. The Commission amended paragraph (e) of Rule 
10b-6 to except from the rule's application distributions of 
securities pursuant to shareholder plans sponsored by an issuer or 
its subsidiaries.
    h. Securities Exchange Act Release No. 17609 (March 6, 1981), 46 
FR 16670. The Commission authorized issuance of letters setting 
forth the interpretive and enforcement positions of the Division of 
Market Regulation (``Division'') regarding the application of Rule 
10b-6 to certain transactions involving exchange-traded options by 
participants in an underwriting of the security underlying such 
options.
    i. Securities Exchange Act Release No. 18528 (March 3, 1982), 47 
FR 11482. The Commission proposed amendments to Rule 10b-6 which 
would define the term ``distribution;'' permit distribution 
participants to continue trading until three business days before 
commencement of sales of the securities; clarify the rule's 
applicability to persons who participate in delayed offerings; and 
codify staff positions on various exceptions.
    j. Securities Exchange Act Release No. 18666 (April 20, 1982), 
47 FR 18359. The Commission authorized issuance of Division 
interpretive positions concerning application of certain proposed 
amendments to, and no-action positions taken under, Rule 10b-6 with 
respect to offerings made in compliance with Securities Act Rule 
415.
    k. Securities Exchange Act Release No. 19244 (November 17, 
1982), 47 FR 53333. The Commission amended paragraph (f) of Rule 
10b-6 to provide that the rule does not apply to bids for and 
purchases of a security solely because the issuer or a subsidiary of 
the issuer has an outstanding class of securities that are 
immediately convertible into, or exchangeable for, such securities 
(so-called ``technical distributions'').
    l. Securities Exchange Act Release No. 19565 (March 4, 1983), 48 
FR 10628. The Commission adopted amendments to Rule 10b-6 defining 
the term ``distribution;'' permitting certain distribution 
participants to continue trading securities until the commencement 
of the applicable two or nine business day cooling-off period; 
clarifying the rule's applicability to persons who participate in 
delayed offerings; and codifying staff positions on various 
exceptions.
    m. Securities Exchange Act Release No. 19988 (July 21, 1983), 48 
FR 34251. In the context of amending Rule 13e-4 relating to odd-lot 
tender offers, the Commission determined to allow staff 
consideration of requests for relief from Rules 10b-6 and 10b-13 
with respect to odd-lot purchases on a case-by-case basis.
    n. Securities Act Release No. 6492 (October 5, 1983), 48 FR 
46801. The Commission proposed amendments to Securities Act Rule 139 
that would affect compliance with Rule 10b-6 in connection with the 
issuance of research reports.
    o. Securities Exchange Act Release No. 21332 (September 19, 
1984), 49 FR 37569. The Commission adopted Securities Act Rule 139 
amendments and published a staff no-action position under Rule 10b-6 
with respect to a research report that is within Securities Act 
Rules 137, 138, or paragraph (b) of Rule 139, or within paragraph 
(a) of Rule 139 and does not contain a recommendation or earnings 
forecast more favorable than that previously disseminated by the 
firm.
    p. Securities Exchange Act Release No. 22510 (October 10, 1985), 
50 FR 42716. The Commission proposed amendments to Rule 10b-6 to 
permit underwriter and broker-dealer participants in a distribution 
to engage in solicited brokerage transactions until two or nine 
business days before offers or sales of the securities being 
distributed; define the rule's applicability to certain affiliated 
persons; reduce the restrictions on the exercise of standardized 
call options; provide parallel cooling-off periods within exceptions 
(xi) and (xii) of the rule; modify the rule's preamble to more fully 
reflect the Commission's authority; and codify the Commission's 
position that a distribution participant may rely on the rule's 
exceptions only if the contemplated transactions are not made for 
manipulative purposes.
    q. Securities Exchange Act Release No. 23611 (September 19, 
1986), 51 FR 33242. The Commission published an interpretive release 
regarding application of Rule 10b-6 in the context of shelf-
registered distributions by shareholders, including application of 
the rule to issuers and broker-dealers during such distributions.
    r. Securities Exchange Act Release No. 24003 (January 16, 1987), 
52 FR 2994. The Commission adopted amendments to Rule 10b-6 that 
permit underwriters and broker-dealers to engage in solicited 
brokerage transactions until two or nine business days before offers 
of sales of securities being distributed; define the rule's 
applicability to certain persons who are affiliated with 
participants in a distribution; allow distribution participants to 
exercise throughout the distribution period standardized call 
options written prior to the time that they became distribution 
participants; and modify the rule's preamble to reflect more fully 
authority for the rule's provisions.
    s. Securities Exchange Act Release No. 31347 (October 22, 1992), 
57 FR 49039. The Commission proposed an exception to Rule 10b-6 and 
a new companion rule, Rule 10b-6A, which permit ``passive market 
making'' by Nasdaq market makers in connection with certain 
distributions of Nasdaq-quoted securities during the period when 
Rule 10b-6 otherwise would prohibit such activity.
    t. Securities Exchange Act Release No. 31943 (March 4, 1993), 58 
FR 13288. Pursuant to delegated authority, the Division issued a 
class exemption clarifying the application of the ``cooling-off'' 
periods in Rule 10b-6 to distributions of foreign securities in the 
United States.
    u. Securities Exchange Act Release No. 32117 (April 8, 1993), 58 
FR 19598. The Commission adopted a new exception to Rule 10b-6 and a 
new companion rule, Rule 10b-6A, which permit ``passive market 
making'' by Nasdaq market makers in connection with certain 
distributions of Nasdaq-quoted securities during the period when 
Rule 10b-6 otherwise would prohibit such activity.
    v. Securities Exchange Act Release No. 32266 (May 5, 1993), 58 
FR 27686. The Commission proposed new exceptions to Rules 10b-6, 
10b-7, and 10b-8 which would permit transactions otherwise 
prohibited by those rules during distributions of foreign issuers' 
securities eligible for resale pursuant to Securities Act Rule 144A 
when such distributions in the United States are made exclusively to 
qualified institutional buyers (``QIBs'').
    w. Securities Exchange Act Release No. 33022 (October 6, 1993), 
58 FR 53220. Pursuant to delegated authority, the Division issued 
class exemptions from Rules 10b-6, 10b-7, and 10b-8 to facilitate 
distributions in the United States of securities of certain highly 
capitalized German issuers, permitting distribution participants to 
effect transactions in Germany otherwise prohibited by these rules, 
subject to certain disclosure, recordkeeping, record production, and 
notice requirements.
    x. Securities Exchange Act Release No. 33137 (November 3, 1993), 
58 FR 60324. Statement of policy announcing the Commission's 
position that, upon proper written request, class exemptions from 
Rules 10b-6, 10b-7, and 10b-8, would be available during 
distributions in the United States by issuers located in foreign 
jurisdictions and would be subject to substantially similar 
principles, terms, and conditions that applied to the exemptions 
issued by the Commission in Securities Exchange Act Release No. 
33022 in connection with distributions of certain German securities.
    y. Securities Exchange Act Release No. 33138 (November 3, 1993), 
58 FR 60326. The Commission adopted new exceptions to Rules 10b-6, 
10b-7, and 10b-8 which permit transactions otherwise prohibited by 
those rules during distributions of foreign issuers' securities 
eligible for resale pursuant to Securities Act Rule 144A when such 
distributions in the United States are made exclusively to QIBs.
    z. Letter Regarding Regulation S Transactions during 
Distributions of Foreign Securities to Qualified Institutional 
Buyers (February 22, 1994). Pursuant to delegated authority, the 
Division granted exemptions from Rules 10b-6, 10b-7, and 10b-8, 
subject to certain conditions, to permit bids, purchases, and 
inducements to purchase Securities Act Rule 144A-eligible foreign 
securities being distributed, any security of the same class and 
series, or any right to purchase such security by distribution 
participants and their affiliated purchasers when such foreign 
security is offered or sold in transactions in compliance with 
Regulation S during a concurrent Rule 144A QIB distribution of the 
foreign security.
    2. Rules 10b-7 and 17a-2: stabilization. a. Securities Exchange 
Act Release No. 5275 (January 16, 1956), 21 FR 501. The Commission 
announced consideration of amendments to Rule X-17A-2 which would 
require reports when stabilizing is conducted in connection with a 
Regulation A offering or any other offering involving more than 
$300,000, as well as offerings registered under the Securities Act 
of 1933.
    b. Securities Exchange Act Release No. 5300 (April 18, 1956), 21 
FR 2787. The Commission adopted amendments to Rule X-17A-2 and Form 
X-17A-1 that clarified and simplified the instructions to the form.
    c. Securities Exchange Act Release No. 5415 (December 6, 1956), 
21 FR 9983. The Commission published notice of a proposal to amend 
Rule 10b-7 to clarify the language of paragraph (l) in light of 
recent amendments to that rule.
    d. Securities Exchange Act Release No. 6127 (November 30, 1959), 
24 FR 9946. The Commission proposed to amend Rule 10b-7 to prohibit 
all bids or purchases of a security which are intended to peg, fix, 
or stabilize the price of a security unless such transactions are 
for the purpose of facilitating a particular distribution of 
securities, and to make conforming amendments to paragraph (l) of 
the rule.
    e. Securities Exchange Act Release No. 9605 (May 24, 1972), 37 
FR 10960. The Commission proposed amendments adding new paragraph 
(d)(5) to Rule 17a-2 and revising paragraph (d)(1) and (e) and 
Instruction V of Form X-17-A-1 to require the ``not as manager'' 
reports to be made to the syndicate manager within five business 
days after the determination of stabilization.
    f. Securities Exchange Act Release No. 9717 (August 15, 1972), 
37 FR 17383. The Commission amended Rule 17a-2 to add new paragraph 
(d)(5), and revised paragraph (d)(1) and (e) and Instruction V of 
Form X-17A-1 to require ``not as manager'' reports to be made to the 
syndicate manager within five business days of the termination of 
stabilization.
    g. Securities Exchange Act Release No. 9876 (November 27, 1972). 
The Commission clarified the amendments to Rule 17a-2 set forth in 
Securities Exchange Act Release No. 9717.
    h. Securities Exchange Act Release No. 18983 (August 26, 1982), 
47 FR 37580. The Commission proposed amendments to Rules 17a-2 and 
10b-7 to require that information concerning stabilizing 
transactions be retained by the managing underwriter and to rescind 
related Form X-17A-1.
    i. Securities Exchange Act Release No. 20155 (September 7, 
1983), 48 FR 41377. The Commission rescinded Form X-17A-1 and 
adopted amendments to Rules 10b-7 and 17a-2 eliminating the 
requirement that participants in an offering that is stabilized file 
with the Commission reports of their transactions and requiring 
instead that the managing underwriter retain information on 
stabilizing transactions.
    j. Securities Exchange Act Release No. 28732 (January 3, 1991), 
56 FR 814. The Commission proposed amendments to Rule 10b-7 to 
permit the stabilizing price to reflect the price in the foreign 
market which is the principal market for such security if the 
stabilizing otherwise complies with the rule's provisions.
    k. Securities Exchange Act Release No. 28733 (January 3, 1991), 
56 FR 820. In connection with Securities Exchange Act Release No. 
28732, the Commission proposed for comment Rule 3b-10, which would 
define certain terms relevant to the increasing internationalization 
of the world securities markets.
    l. Securities Exchange Act Release No. 33022 (October 6, 1993), 
58 FR 53220. See 1.w supra.
    m. Securities Exchange Act Release No. 33137 (November 3, 1993), 
58 FR 60324. See 1.x supra.
    n. Securities Exchange Act Release No. 33138 (November 3, 1993), 
58 FR 60326. See 1.y supra.
    o. Letter Regarding Regulation S Transactions. See 1.z supra.
    3. Rule 10b-8: rights offerings. a. Securities Exchange Act 
Release No. 5415 (December 6, 1956), 21 FR 9983. The Commission 
proposed to amend Rule 10b-8 to clarify that the rule applies only 
to distributions of securities being offered through transferable 
rights issued on a pro rata basis to securities holders.
    b. Securities Exchange Act Release No. 18528 (March 3, 1982), 47 
FR 11482. The Commission proposed amendments to Rule 10b-8 to extend 
its scope to ``standby underwriters'' in connection with a call for 
redemption by an issuer of its convertible securities.
    c. Securities Exchange Act Release No. 19565 (March 4, 1983), 48 
FR 10628. The Commission amended Rule 10b-8, extending its scope to 
cover purchasing and selling activity by broker-dealers who act as 
``standby underwriters'' in connection with a call for redemption of 
convertible securities.
    d. Securities Exchange Act Release No. 33022 (October 6, 1993), 
58 FR 53220. See 1.w supra.
    e. Securities Exchange Act Release No. 33137 (November 3, 1993), 
58 FR 60324. See 1.x supra.
    f. Securities Exchange Act Release No. 33138 (November 3, 1993), 
58 FR 60326. See 1.y supra.
    g. Letter Regarding Regulation S Transactions. See 1.z supra.
    4. Rule 10b-2. a. Securities Exchange Act Release No. 1330 
(August 4, 1937). The Commission adopted Rule 10b-2.
    b. Various. The Commission adopted a variety of exchange plans 
pursuant to paragraph (d) of Rule 10b-2.
    c. Securities Exchange Act Release No. 31520 (November 24, 
1992), 57 FR 57397. The Commission proposed to rescind Rule 10b-2 in 
view of the significant changes that have occurred in the securities 
markets since its adoption and duplicative coverage of other 
antifraud and antimanipulation provisions of the federal securities 
laws.
    d. Securities Exchange Act Release No. 32100 (April 2, 1993), 58 
FR 18145. The Commission rescinded Rule 10b-2.
    5. Rule 10b-18. a. Securities Exchange Act Release No. 17222 
(October 17, 1980), 45 FR 70890; Securities Exchange Act Release No. 
10539 (December 6, 1973), 38 FR 3434; Securities Exchange Act 
Release No. 8930 (July 13, 1970), 35 FR 11410. On three separate 
occasions, the Commission proposed Rule 13e-2 (predecessor of Rule 
10b-18) to regulate purchase of certain classes of common stock and 
preferred stock by or for the issuer, any affiliate of the issuer, 
or any ``affiliated purchaser,'' through disclosure requirements and 
substantive purchasing limitations imposed on an issuer and on any 
affiliated purchaser.
    b. Securities Exchange Act Release No. 19244 (November 17, 
1982), 47 FR 53333. The Commission adopted Rule 10b-18 to provide a 
safe harbor from liability from manipulation in connection with 
purchases by an issuer and certain related persons of the issuer's 
common stock.
    6. Rule 10b-21. a. Securities Exchange Act Release No. 10636 
(February 11, 1974), 39 FR 7806. The Commission proposed Rule 10b-21 
to deter manipulative short selling in connection with an 
underwritten offering.
    b. Securities Exchange Act Release No. 11328 (April 2, 1975), 40 
FR 16090. The Commission reproposed a version of Rule 10b-21 which 
would deter manipulative short selling prior to underwritten 
offerings by limiting the ability of short sellers to make covering 
purchases from certain persons within certain periods during an 
underwriting.
    c. Securities Exchange Act Release No. 13092 (December 21, 
1976), 41 FR 56542. The Commission proposed an alternative version 
of Rule 10b-21 that focused on short selling itself, rather than on 
covering purchases, and would regulate short sales from the 
preoffering period until the end of the post-offering stabilization 
arrangements through the use of a ``tick test.''
    d. Securities Exchange Act Release No. 24485 (May 20, 1987), 52 
FR 19885. Pursuant to a petition filed by the NASD, the Commission 
reproposed Rule 10b-21 to prohibit a person who effects short sales 
of an equity security during the period between the filing of a 
registration statement relating to the same class of equity 
securities and the commencement of the distribution of such equity 
securities, from covering such short sales with securities purchased 
from an underwriter or other broker-dealer participating in the 
offering of such securities.
    e. Securities Exchange Act Release No. 26028 (August 25, 1988), 
53 FR 33455. The Commission adopted, on a temporary basis, Rule 10b-
21(T), and withdrew the first three rule proposals.
    f. Securities Exchange Act Release No. 33702 (March 2, 1994), 59 
FR 10984. The Commission adopted Rule 10b-21 on a permanent basis.

[FR Doc. 94-9895 Filed 4-25-94; 8:45 am]
BILLING CODE 8010-01-P