[Federal Register Volume 59, Number 235 (Thursday, December 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30127]
[[Page Unknown]]
[Federal Register: December 8, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Releases Nos. 33-7114; 34-35041]
Exemption From Rule 10b-6 for Certain Dividend Reinvestment and
Stock Purchase Plans
December 1, 1994.
Pursuant to delegated authority, on December 1, 1994, the Division
of Market Regulation issued the attached letter to The Securities
Transfer Association (``STA Letter'') granting a class exemption from
rule 10b-6 under the Securities Exchange Act of 1934, subject to
certain conditions, to facilitate the availability of certain dividend
reinvestment and stock purchase plans (``DRSPPs'') to investors. The
STA Letter is significant because many issuers no longer will need to
seek individual exemptions from Rule 10b-6 before implementing their
DRSPPs. The letter also addresses issues concerning broker-dealer
registration under Section 15(a) of the Exchange Act.
The STA Letter is consistent with prior Rule 10b-6 exemptions
granted to issuers, and facilitates investors' access to DRSPPs insofar
as it permits investors to obtain their first shares of an issuer's
securities directly from the issuer. The STA Letter has been issued in
the context of a continuing review of Rule 10b-6, and is published to
provide notice of the exemption's availability.
For further information, contact the Office of Trading Practices
(for matters regarding Rule 10b-6), at (202) 942-0772, and the Office
of Chief Counsel (for matters regarding broker-dealer registration), at
(202) 942-0073, Division of Market Regulation, Securities and Exchange
Commission, 450 Fifth Street, NW., Washington, DC 20549.
Margaret H. McFarland,
Deputy Secretary.
December 1, 1994.
Mr. Michael J. Foley, President,
The Securities Transfer Association, Inc., P.O. Box 5067, Hazlet, NJ
07730-5067.
Re: Dividend Reinvestment and Stock Purchase Plans.
Dear Mr. Foley: To clarify issues raised under Rule 10b-6
(``Rule 10b-6'' or ``Rule'')\1\ under the Securities Exchange Act of
1934 (``Exchange Act'')\2\ by dividend reinvestment and stock
purchase plans (``DRSPPs''), the Commission has determined to grant
an exemption from the Rule to certain issuers (``Issuers''), their
affiliated purchasers (``Affiliated Purchasers''), as defined in
paragraph (c)(6) of the Rule,\3\ and the agents of the Issuers'
DRSPPs (``DRSPPs Agents'') during distributions of the Issuers'
shares of common stock pursuant to the Issuers' DRSPPs. This letter
also addresses the application of Sections 15(a) and 17A of the
Exchange Act\4\ to DRSPPs. The discussion of Sections 15(a) and 17A
pertains to all DRSPPs. It applies both to ``plans,'' as defined in
paragraph (c)(4) of Rule 10b-6\5\ and to non-traditional DRSPPs,
which are the subject of the exemption from Rule 10b-6 discussed
below.
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\1\17 CFR 240.10b-6.
\2\15 U.S.C. Secs. 78a et seq.
\3\17 CFR 240.10b-6(c)(6). Generally, an affiliated purchaser
includes any person acting in concert with the issuer or other
person making the distribution; an affiliate who directly or
indirectly controls purchases by the issuer or other person, or
whose purchases are controlled by or under common control with the
issuer or other person; a broker-dealer affiliate; and a non-broker-
dealer affiliate that regularly purchases securities for its own
account or for another's account or recommends or exercises
investment discretion with respect to the purchase or sale of
securities.
\4\15 U.S.C. Secs. 78o and 78q-1, respectively.
\5\17 CFR 240.10b-6(c)(4). A plan includes ``any 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 or its subsidiaries.''
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I. Background
A DRSPP is a program offered by a corporation or closed-end fund
that allows participants to accumulate shares of an issuer's common
stock directly from the issuer by reinvesting dividends and, in many
cases, by making optional cash payments. Individual investors may be
attracted to DRSPPs because they often provide a relatively
convenient and inexpensive mechanism to accumulate shares of
particular issuers through the automatic, regular reinvestment of
dividends and, in many cases, through optional cash payments. These
programs also are favored by issuers because, among other things,
they can provide a relatively economical mechanism for raising
capital, while simultaneously improving shareholder relations and
broadening and stabilizing the issuer's shareholder base.
Approximately 1,000 issuers currently offer some form of DRSPP.
The earliest DRSPPs were dividend reinvestment plans (``DRPs''),
in which participation was limited to the issuer's shareholders, and
through which additional shares could be purchased only with
reinvested dividends. Since the first DRP was introduced in the
late-1960s, there has been considerable evolution in these programs.
The greatest changes have been in the categories of persons that are
permitted to participate in DRSPPs, and in the ability of
participants to accumulate issuers' shares by making optional cash
purchases as well as through dividend reinvestment.
Today, many issuers no longer limit participation in their
DRSPPs to shareholders or employees. Rather, various issuers have
extended DRSPP participation to, among others, retirees, outside
directors, consultants, suppliers, franchisees, independent
contractors, family members of the above, as well as credit card
holders and other customers. Moreover, some issuers permit
participation in their DRSPPs following an initial cash payment,
rather than requiring prior share ownership. Further, as noted
above, many DRSPPs allow shares to be purchased with optional cash
payments as well as reinvested dividends.
II. Rule 10b-6
Rule 10b-6 is an anti-manipulation rule that, subject to certain
exceptions, prohibits persons who are engaged in a distribution of
securities from bidding for or purchasing, or inducing others to
purchase, such securities, any security of the same class and series
as the distributed securities, or any security that is immediately
convertible into or exchangeable for or any right to acquire such
distributed securities (collectively ``related securities''), until
they have completed their participation in the distribution. The
Rule is intended to prevent those persons participating in a
distribution of securities from artificially conditioning the market
for the offered securities in order to facilitate the distribution,
and to protect the integrity of the securities trading market as an
independent pricing mechanism.
Paragraph (e) of Rule 10b-6 provides that the Rule does not
apply to any distribution of securities by an issuer or a subsidiary
of the issuer to employees or shareholders of the issuer or its
subsidiaries, or to a trustee or other person acquiring such
securities for the account of such employees or shareholders
pursuant to a plan as defined in paragraph (c)(4) of the Rule.\6\
Paragraph (g) of Rule 10b-6 further provides that a bid for or
purchase of any security made or effected by or for a plan shall be
deemed to be a purchase by the issuer unless the bid is made, or the
purchase is effected, by an ``agent independent of the issuer,'' as
that term is defined in paragraph (a)(6) of Rule 10b-18.\7\
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\6\17 CFR 240.10b-6(e).
\7\17 CFR 240.10b-18(a)(6).
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When an issuer expands its DRSPP to allow participation by
persons other than its employees or shareholders or those of its
subsidiaries, the exception in paragraph (e) of the Rule is no
longer available. Without this exception, bids for or purchases of
an issuer's common stock made or effected by or for a DRSPP are
attributed to the issuer. Consequently, many issuers offering non-
traditional DRSPPs have sought, and have been granted, exemptions
pursuant to paragraph (j) of the Rule of permit transactions that
otherwise would be prohibited by Rule 10b-6 during distributions
pursuant to DRSPPs. These exemptions permit bids and purchases by
issuers, their affiliated purchasers, and DRSPP Agents during
distributions pursuant to a plan, subject to specified conditions.
The exemptions focused not only on the relationship between the
issuer and the individuals participating in the DRSPP, but also upon
the magnitude of sales pursuant to the DRSPP and the use of special
selling efforts and selling methods to promote participation in such
programs. Additionally, the exemption letters were used to notify
issuers of other issues raised by DRSPPs, including activities by
issuers that may raise concerns under Section 15(a) of the Exchange
Act relating to broker-dealer registration.
The Commission recently published a concept release (``Concept
Release'') regarding the anti-manipulation regulation of securities
distributions, which sought comment on, among other things, the
application of Rule 10b-6 to DRSPPs.\8\ Because of the numerous
requests received by the Commission for exemptions for Rule 10b-6 on
behalf of individual issuers offering DRSPPs, an exemption from Rule
10b-6 appears to be appropriate pending consideration of responses
to the Concept Release. Moreover, the staff of the Division is
setting forth its views on other matters involving DRSPPs, including
the activities of issuers in connection with DRSPPs that raise
issues under Sections 15(a) and 17A of the Exchange Act.
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\8\Securities Exchange Act Release No. 33924 (April 19, 1994),
59 FR 21681.
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III. Exemption
The Commission, by the Division of Market Regulation pursuant to
delegated authority, hereby grants an exemption from Rule 10b-6
pursuant to paragraph (j) of the Rule to permit any Issuer, its
Affiliated Purchasers, and the DRSPP Agent to bid for or purchase
the Issuer's common stock during a distribution of such security
pursuant to the Issuer's DRSPP, and to permit the DRSPP Agent to bid
for or purchase the Issuer's common stock pursuant to the DRSPP
during a distribution of common stock or related securities, by the
Issuer or any Affiliated Purchaser of the Issuer, subject to the
following terms and conditions:
A. Plan Administration
1. DRSPP Agent
The Issuer shall appoint an independent agent (i.e., the DRSPP
Agent) to execute transactions on behalf of the DRSPP and its
participants. For purposes of this exemption, the DRSPP Agent must
be a registered broker-dealer or bank as defined in Section 3(a)(6)
under the Exchange Act. To be deemed independent, the DRSPP Agent
may not be an affiliate of the Issuer, and neither the Issuer nor
any affiliate of the Issuer may exercise any direct or indirect
control or influence over the times when\9\ or the prices at which,
the independent agency may purchase the Issuer's common stock for
the DRSPP, the amounts of the security to be purchased, the manner
in which the security is to be purchased, or the selection of a
broker or dealer (other than the independent agent itself) through
which purchases may be executed.
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\9\E.g., there can be no requirement that purchases for the
DRSPP be made within a specified number of days after the dividend
date or after any deadline for submitting payment toward optional
cash purchases, except as consistent with Letter regarding Lucky
Stores Incorporated (pub. avail. July 6, 1974) (``Lucky Stores'') as
modified infra.
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2. Clerical and Ministerial Functions
All bids and purchases, and offers and sales, of the Issuer's
common stock on behalf of the DRSPP or its participants shall be
made by the DRSPP agent, or by a registered broker-dealer or bank,
as defined in Section 3(a)((6) of the Exchange Act, that is
independent of the Issuer and that is selected by the DRSPP Agent to
execute such transactions. The Issuer may perform only purely
clerical and ministerial functions, including forwarding cash and
securities to an independent broker-dealer or bank, in connection
with the DRSPP. The Issuer also must comply with this condition in
order to avoid broker-dealer registration under Section 15(a) of the
Exchange Act. See Section IV, infra.
Where the Issuer is a registered transfer agent, see Section V,
infra, the Issuer also may assist the DRSPP Agent by maintaining
records of each participant's activities, issuing statements of
account, and performing other functions of a transfer agent.\10\
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\10\See U.S.C. Sec. 78c(a)(25).
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B. Purchases of Securities on Behalf of the DRSPP
Consistent with the DRSPP Agent's independent role, neither the
Issuer, nor any person in a control relationship with the Issuer,
through the provisions of the DRSPP or otherwise, may place any
restrictions upon the time, price, amount, or manner of purchases
made on behalf of the DRSPP. The Issuer cannot change its
determination that shares purchased for the DRSPP will be purchased
from the Issuer or in the open market more than once in any 12 month
period. The Issuer cannot exercise such right absent a documented
determination by its board of directors or chief financial officer
that the Issuer's need to raise additional capital has changed, or
that there is another valid reason for such change, such as action
by a state or federal regulatory agency recommending or requiring a
change in the capital structure of the Issuer or of one of its major
operating subsidiaries.
If securities are purchased directly from the Issuer, the Issuer
and its Affiliated Purchasers cannot purchase the common stock on
any day on which the market price of the common stock will be a
factor in determining the purchase price of the common stock to be
delivered under the DRSPP.
Unless otherwise excepted by or exempted from Rule 10b-6, the
Issuer and its Affiliated Purchasers shall not purchase the common
stock: (1) During the period commencing two business days prior to
the initial dissemination of announcements regarding the DRSPP, and
ending 30 calendar days after such initial dissemination, and (2)
during the period commencing two business days before any subsequent
general dissemination of announcements regarding the DRSPP and
ending 15 calendar days after such subsequent dissemination.
C. Selling Efforts
An Issuer may permit persons with whom the Issuer has a
preexisting, continuing relationship, as well as members of the
general public to participate in its DRSPP, however, sales efforts
relating to the DRSPP must be consistent with the solicitation
activities permitted in Section IV.A., infra.
D. General Conditions of the Exemption
No bids or purchases shall be made for the purpose of creating
actual, or apparent, active trading in or raising the price of the
Issuer's common stock. Additionally, this exemption does not apply
to sales of the Issuer's securities by participants in DRSPPs that
otherwise may involve a distribution for purposes of Rule 10b-6.
This exemption is subject to modification or revocation if at
any time the Commission or Division determines that such action is
necessary or appropriate in furtherance of the purposes of the
Exchange Act. As noted above, the Commission recently published the
Concept Release seeking comments on a broad range of issues relating
to the anti-manipulation regulation of securities offerings, and
specifically requested comments on the treatment of DRSPPs under
Rule 10b-6. Following review of comments received in response to
that release, the Commission may determine to undertake rulemaking
or other action that may supersede this exemption.
E. Notice Requirement
Any Issuer that relies on the exemption granted herein shall
provide a written notice (``Notice'') to the Director of the
Division. The Notice must identify the Issuer and represent that the
DRSPP will be operated consistently with the conditions of this
letter. The Notice may be provided by the Issuer, the DRSPP Agent,
the Issuer's transfer agent, or the legal representative of any of
the foregoing. Unless otherwise extended by the Division, this
notice requirement will expire on December 31, 1995.
F. Record Maintenance and Production
The Issuer shall maintain the following information for a period
of at least two years from the date of the event, which must be
provided promptly to the Division upon its request:
1. the dates and substance of any materials distributed in
connection with the DRSPP;
2. the number of persons participating in the DRSPP, on a
monthly basis;
3. the volume of securities purchased for the DRSPP by the DRSPP
Agent, on a weekly basis, or, if shares are purchased less
frequently, the number of shares purchased on a monthly basis; and
4. a notation of any period that the Issuer is engaged in any
other distribution of common stock for purposes of Rule 10b-6.
Unless otherwise extended by the Division, this record
maintenance and production requirement will expire on December 31,
1995.
IV. Interpretation of Section 15(a)
The staff of the Division is of the view that certain activities
in which Issuers, their Affiliated Purchasers, and DRSPP Agents
engage in connection with DRSPPs raise issues under Section
15(a).\11\ Therefore, in addition to granting the foregoing class
exemption from Rule 10b-6, this letter also clarifies the
application of those provisions of the Exchange Act to both
traditional and non-traditional DRSPPs.
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\11\Section 15(a) of the Exchange Act generally provides that a
``broker'' or ``dealer'' who uses the mails or any means of
interstate commerce to effect transactions in, or to induce or
attempt to induce the purchase or sale of, any security must
register with the Commission, unless an exemption applies. Section
3(a)(4) of the Exchange Act defines a ``broker'' as any person who
is in the business of effecting transactions in securities for the
account of others. A ``dealer'' under Section 3(a)(5) is defined as
any person engaged in the business of buying and selling securities
for its own account, whether through a broker or otherwise. A number
of factors are considered in determining whether a person is a
broker-dealer, including the type and basis for any compensation
received, the extent to which the person holds the funds and
securities of others, the extent of contact with the public, and
whether the person is ``engaged in the business,'' as that term is
used in the above definitions. Issuers that engage in both buying
and selling may be subject to Section 15(a) of the Exchange Act.
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When an issuer induces or attempts to induce the purchase or
sale of its securities, receives compensation based on securities
transactions, or holds and maintains the funds, securities, and
accounts of DRSPP participants, it may be required to register as a
broker-dealer under Section 15 of the Exchange Act. Broker-dealer
registration minimizes the DRSPP participant's exposure to the risks
typically associated with the execution of orders, and the handling
and placement of funds and securities with others. For example, the
Commission's financial responsibility rules are designed to provide
safeguards with respect to customer funds and securities held by
registered broker-dealers, by providing accountability for those
funds and securities, and requiring the maintenance of accurate
books and records, and sufficient liquid assets.
To avoid both the potential for sales practice abuse or loss of
investors' funds and securities, Issuers operating DRSPPs either
must limit their activities as described below or register as a
broker-dealer.\12\
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\12\Issuers that only sell their own securities (i.e., treasury
stock), but do not purchase and arrange for the sales of such
securities, and do not otherwise effect transactions in securities
for investors, would continue to be excluded from the broker-dealer
registration requirements of Section 15(a) of the Exchange Act.
Furthermore, associated persons of Issuers would not be required to
register as broker-dealers provided that they meet the requirements
of Rule 3a4-1 under the Exchange Act, 17 CFR 240.3a4-1. Associated
persons (e.g., partners, officers, directors, or employees) who are
participating in the sale of securities through a DRSPP, may qualify
for the safe harbor if they meet the requirements of subparagraphs
(a) (1)-(3) of Rule 3a4-1 (the associated person must not be subject
to a statutory disqualification, cannot receive transaction-based
compensation, and must not be an associated person of a broker-
dealer at the time of participation) and either: (a) restrict their
participation to offers and sales of securities involving employee
dividend reinvestment or stock purchase plans, pursuant to Rule 3a4-
1 (a)(4)(i)(D); or (b) restrict their activities to delivering and
preparing written materials, giving limited responses to inquiries
initiated by prospective participants, or perform ministerial and
clerical work, pursuant to Rule 3a4-1(a)(4)(iii).
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A. Solicitation
Under the conditions set forth below, the Issuer may inform the
general public through announcements, newspaper advertisements,
circulars, notices, and investor fairs about its securities or the
securities of the Issuer's subsidiary available through the DRSPP.
In addition, an Issuer may inform those prospective participants
with whom the Issuer has a pre-existing, continuing relationship
that encompasses the receipt of written communications by existing
means of communication (e.g., including the solicitation with a
bill, annual report, or payroll stub).\13\ The Issuer, however, may
not use an agent other than a registered broker-dealer or bank to
solicit participation in the DRSPP on its behalf.
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\13\Such prospective participants would include shareholders,
employees, customers, and other persons with a pre-existing
relationship with the issuer, such as independent contractors,
franchisees, and suppliers.
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The information contained in any solicitation material may
include no more than that allowed, nor less than that required under
Rule 134 under the Securities Act of 1933 (``Securities Act'')
(i.e., tombstone advertisements'').\14\ Thus, typically, materials
may include: (1) The Issuer's name; (2) the Issuer's type of
business; (3) the type of security being offered in the DRSPP (i.e.,
common or preferred stock); (4) the price of the security or the
method of price determination; and (5) information on how and where
a prospectus may be obtained.
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\14\17 CFR 230.134.
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If a registration statement for the securities to be offered
under the DRSPP has not yet been filed under the Securities Act, the
information contained in any communication, pursuant to Rule 135
under the Securities Act,\15\ must state that the Issuer proposes to
make a public offering of securities to be registered under the
Securities Act and that the offering will be made only by means of a
prospectus and may include no more information than that which is
allowed under the rule.\16\ Thus, typically, such a communication
would include, in addition to the mandatory information described:
(1) The title, amount, and basic terms of the securities proposed to
be offered in the DRSPP; (2) the anticipated time of the offering;
(3) the manner and purpose of the offering; and (4) any statement or
legend required by state or foreign law or administrative authority.
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\15\17 CFR 230.135.
\16\17 CFR 230.135.
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As required by Rules 134 and 135 under the Securities Act,
recommendations, predictions, and, unless accompanied by a
prospectus, applications or enrollment forms, may not be included in
any materials. Furthermore, the Issuer and its associated persons
may not engage in oral solicitation of potential DRSPP participants.
Associated persons (e.g., partners, officers, directors, or
employees) of the Issuer, however, may respond orally to inquiries
initiated by potential participants, provided that the content of
the response is limited to information provided in the registration
statement, prospectus, or other offering document.\17\
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\17\See Rule 3a4-1(a)(4)(iii), discussed supra at note 12.
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B. Fees and Expenses
The Issuer may not receive or collect for itself transaction-
based compensation, but may charge DRSPP participants fees that are
reasonably related to actual administrative costs (e.g., the cost to
print and mail brochures or authorization forms). In addition, all
costs to be paid by DRSPP participants must be disclosed prior to
enrollment.
C. Participants' Funds and Securities
As discussed in Section III.A.2., the Issuer must limit its
activities to clerical and ministerial functions.
The Issuer may receive optional cash investments from
participants, provided that the Issuer transmits promptly\18\ all
funds to be used to purchase shares of its common stock to a
segregated escrow account\19\ at a bank or to the DRSPP Agent.
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\18\For purposes of this letter, ``transmit promptly'' shall
mean by the opening of business on the next business day if the
funds are received before noon, and by noon of the next business day
if the funds are received after noon.
\19\The escrow account must be held for the benefit of the
participants, and cannot be subject to any liens, any creditor
claims, or any other claims against the Issuer. Furthermore, the
escrow account cannot be subject to bankruptcy proceedings if the
Issuer files for bankruptcy under federal or state law.
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Funds must be returned to the DRSPP participant if securities
have not been purchased: (a) within 35 days of receipt of optional
cash payments;\20\ or (b) within 30 days of the dividend date for
dividend reinvestments. Additionally, any participant must be
permitted to withdraw from the DRSPP at any time by giving written
notice to the Issuer or DRSPP Agent. Within 30 days of receipt of
such notice, the participant must be sent certificates for shares of
common stock held for the participant, or cash payments for any
shares that the participant wishes to sell pursuant to the DRSPP.
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\20\The Division of Investment Management would not object if a
DRSPP holds participants' optional cash payments for no more than 35
days and, accordingly, is modifying the position taken in Lucky
Stores, in which the staff advised plans to hold optional cash
payments for no more than 30 days.
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V. Transfer Agents
In connection with their DRSPPs, many Issuers engage in
activities that cause them to satisfy the definition of ``transfer
agent'' contained in Section 3(a)(25) of the Exchange Act.\21\ Thus,
any person, including an issuer of securities, who engages in such
activities in connection with a DRSPP must register with the
Commission pursuant to Section 17A(c) of the Exchange Act.\22\
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\21\15 U.S.C. Sec. 78c(a)(25). A ``transfer agent'' is defined
as any person who, on behalf of an issuer of securities or on its
own behalf as an issuer of securities, engages in the countersigning
of such securities, monitoring of the issuance of such securities
with a view to preventing unauthorized issuance, registering the
transfer of such securities, exchanging or converting such
securities, or transferring record ownership of securities by
bookkeeping entry without physical issuance of securities
certificates.
\22\15 U.S.C. Sec. 78q-1(c).
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The Commission recently issued releases\23\ soliciting comment
on, among other things, developments affecting the regulation of
transfer agent activities. You should be aware that following the
review of comments received in response to these releases, the
Commission may determine to undertake rulemaking or other action
pertaining to transfer agent regulation.
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\23\Securities Exchange Act Release Nos. 35038 and 35040
(December 1, 1994).
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VI. Conclusion
Your attention also is directed to the anti-fraud and anti-
manipulation provisions of the Securities Act, particularly Section
17(a), and the Exchange Act, particularly Sections 9(a)(2) and
10(b), and Rule 10b-5 thereunder.\24\ Responsibility for compliance
with these and any other applicable provisions of the federal
securities laws must rest with the Issuer, its Affiliated
Purchasers, and the DRSPP Agent. The Division expresses no view with
respect to other questions that the DRSPP-related transactions may
raise, including, but not limited to, the adequacy of disclosure
concerning, and the applicability of any other federal or state laws
to, the proposed transactions.
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\24\15 U.S.C. Secs. 78i(a)(2) and 78j(b), and 17 CFR 240.10b-5,
respectively.
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Sincerely,
Brandon Becker
Director.
[FR Doc. 94-30127 Filed 12-7-94; 8:45 am]
BILLING CODE 8010-01-M