[Federal Register Volume 60, Number 131 (Monday, July 10, 1995)]
[Proposed Rules]
[Pages 35645-35648]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16390]



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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 230

[Release Nos. 33-7187; 34-35896; File No. S7-17-95]
RIN 3235-AG53


Revision of Holding Period Requirements in Rule 144; Section 
16(a) Reporting of Equity Swaps and Other Derivative Securities

AGENCY: Securities and Exchange Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commission is proposing to amend the holding period 
requirements contained in Rule 144 (d) and (k) to permit resales of 
``restricted'' securities after a one-year, rather than a two-year, 
holding period, if the sale complies with all of the other provisions 
of Rule 144. Securities held by non-affiliated shareholders could be 
resold without restriction after a holding period of two, rather than 
three years. In addition, the Commission is requesting comment on 
whether Rule 144 should be revised to address new trading strategies, 
such as equity swaps, and is reminding persons subject to reporting 
under Section 16 of the Securities Exchange Act of 1934 (the ``Exchange 
Act'') that reporting of these transactions is required under the 
current rules.

DATES: Comments must be submitted on or before September 8, 1995.

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 No. 
S7-17-95 and will be available for public inspection and copying in the 
Commission's Public Reference Room.

FOR FURTHER INFORMATION CONTACT: Richard K. Wulff, Office of Small 
Business Policy, Division of Corporation Finance at (202) 942-2950.

SUPPLEMENTARY INFORMATION: The Commission is proposing to shorten the 
holding periods in Securities Act of 1933 (the ``Securities Act'') 
1 Rule 144,2 the non-exclusive safe harbor for resales of 
``restricted'' securities 3 and securities held by affiliates of 
the issuer. Under the proposal, the holding period for resales of 
limited amounts of securities by any person would be reduced from two 
years to one year, and the holding period for resales by non-affiliates 
without compliance with any provisions of the rule would be reduced 
from three years to two years.4 This release also includes a 
discussion of whether Rule 144 should be amended to reflect new trading 
strategies, such as equity swaps, and a reminder to persons subject to 
reporting under Section 16 of the Exchange Act 5 that reporting of 
these transactions is required under the current rules.

    \1\ 15 U.S.C. 77a et seq.
    \2\ 17 CFR 230.144.
    \3\ ``Restricted securities'' are defined in Rule 144(a)(3). See 
infra Note 7.
    \4\ The Commission has established the Advisory Committee on the 
Capital Formation and Regulatory Processes (the ``Advisory 
Committee''), chaired by Commissioner Steven M.H. Wallman. The 
Advisory Committee is considering fundamental issues relating to the 
regulatory framework governing the capital formation process, 
including whether the current system of registering securities 
offerings should be replaced with a company registration system. The 
recommendations of the Advisory Committee may result in rule 
proposals or legislative recommendations that, if endorsed by the 
Commission, ultimately may address the matters discussed in this 
release. Under some of the company registration models now being 
considered by the Advisory Committee, many of the legal distinctions 
between publicly offered and privately placed securities would be 
eliminated, including the concept of restricted securities. 
Securities issued by a company registered with the Commission would 
be freely tradeable, regardless of the public or private character 
of the transaction.
    \5\ 15 U.S.C. 78p. 

[[Page 35646]]

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I. Background and Proposal

    The Commission adopted Rule 144 in 1972 6 to provide an 
objectively determinable safe harbor for resales of ``restricted'' 
securities and ``control'' securities. ``Restricted'' securities 
generally are securities issued in private placements; 7 
``control'' securities are securities owned by affiliates of the 
issuer. The rule provides that a person that complies with its terms 
and conditions will not be engaged in a distribution of securities and, 
thus, not be an underwriter 8 for purposes of the Section 4(1) 
exemption from Securities Act registration for ordinary trading 
transactions.9

    \6\ Release No. 33-5223 (January 11, 1972) [37 FR 591].
    \7\ ``Restricted'' securities include those acquired from the 
issuer or an affiliate in a transaction or chain of transactions not 
involving a public offering; those acquired from the issuer and 
subject to resale limitations under Regulation D, 17 CFR 230.501-508 
or Rule 701, 17 CFR 230.701; those subject to the Regulation D 
resale limitations and acquired in a transaction or chain of 
transactions not involving a public offering; and those acquired in 
a transaction or chain of transactions meeting the requirements of 
Rule 144A, 17 CFR 230.144A.
    \8\ See Section 2(11) of the Securities Act.
    \9\ Section 4(1) exempts transactions by persons that are not 
issuers, underwriters or dealers.
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    The rule includes holding periods for ``restricted'' securities to 
establish that the holder did not purchase with a view to an 
unregistered public distribution. Under the rule, all ``restricted'' 
securities must be held at least two years before any can be resold, 
measured from the time the securities were purchased from the issuer or 
an affiliate. For ``restricted'' securities held between two and three 
years, other provisions of the rule require that the issuer be 
providing certain current information about itself, that limited 
amounts of securities are resold, that the resales are effected in 
ordinary brokerage transactions or directly with a market-maker, and 
that a notification of the resale is filed with the Commission. After a 
three-year holding period, ``restricted'' securities may be resold by 
non-affiliates without compliance with any of these provisions.
    The length of the holding period for ``restricted'' securities 
significantly impacts the costs of raising capital in private 
placements since investors require that the price of the securities be 
discounted commensurate with the market risk during the holding period. 
In each of the past four years, the small business community has asked 
the Commission through the annual Government-Business Forums on Small 
Business Capital Formation to consider shortening the Rule 144 holding 
period.10 The two-year holding period has been in place since the 
rule was adopted in 1972; the concept of ``free'' resales for non-
affiliates after three years was adopted in 1981.11 In 1990, the 
rule was revised 12 to permit the holding period to be measured 
from the time that the securities were purchased from the issuer or an 
affiliate, so that holders may tack each other's holding periods, 
rather than requiring the entire holding period for each holder.

    \10\ Final Reports of the SEC Government-Business Forum On Small 
Business Capital Formation (June 1992) (June 1993) (June 1994) 
(February 1995). The Small Business Investment Incentive Act of 1980 
directs the Commission to host this annual meeting for the purpose 
of reviewing ``the current status of problems and programs relating 
to small business capital formation.'' Pub. L. No. 96-477, Section 
503, 94 Stat. 2275, 2292-93 (1980).
    \11\ Release No. 33-6286 (February 6, 1981) [46 FR 12195].
    \12\ Release No. 33-6862 (April 23, 1990) [55 FR 17933].
    Based on the Commission's experience with Rule 144 in the 20 years 
since adoption, the Commission believes that it is appropriate to 
enhance the utility of the safe harbor, and reduce costs for private 
capital formation, by shortening the holding periods. Consequently, the 
Commission is proposing that the holding period applicable to limited 
Rule 144 resales be reduced from two years to one 13 and the 
holding period for ``free'' resales by non-affiliates reduced from 
three years to two. The Commission believes that these proposed holding 
periods are sufficiently long to establish that the securities were not 
purchased with a view to a public unregistered distribution.

    \13\ Conforming changes also are proposed to be made in 
paragraph (e)(3) relating to determining the limitations on the 
amounts resalable by pledgees, donees and trusts, reducing the 
period from two years after the event of pledge default, donation or 
trust acquisition, to one year.
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    Comment is requested as to whether the proposed revisions to the 
holding period are appropriate. Are these periods sufficient to assure 
that persons relying upon Rule 144 are not engaged in a public 
distribution of securities inconsistent with the Section 4(1) ordinary 
trading transaction exemption? Should the periods be retained, or 
should the proposed periods be changed to be shorter or longer? If 
other holding periods are suggested, the basis for the selected holding 
period should be indicated.

II. Equity Swaps and Other Like Investment Strategies

A. Treatment Under Rule 144

    In 1990 when the Commission amended Rule 144 to allow tacking of 
the holding period between investors, the Commission also deleted the 
provision that previously tolled the holding period if the holder 
engaged in short sales, puts or other options to sell 
securities.14 The intervening 5-year period since implementation 
of the holding period revisions has evidenced the growth of a variety 
of investment strategies associated with separating the bundle of 
rights that make up a security: strategies that are used in both the 
private and public securities markets. Through the use of equity swaps, 
forward contracts, derivatives and other financial tools, holders of 
restricted and control shares are selling interests in such shares 
while retaining legal title to the ``underlying'' security. Today, 
record or beneficial ownership does not necessarily reflect who holds 
the voting, investment or income interests of a security.15

    \14\ In 1990, the Commission rescinded former subdivision (d)(3) 
of Rule 144, which generally tolled the holding period while a 
holder had a short position in or an option to sell securities of 
the same class as the restricted securities.
    \15\ See Release No. 33-7190, which addresses other issues 
relating to equity swaps and similar transactions.
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    The Commission is examining whether it may be appropriate to revise 
Rule 144 to reflect the economic realities of these transactions. For 
example, is it appropriate to treat securities as ``held'' in the 
private markets if the economic risk of the investment has been shifted 
to the public markets? If not, should this be addressed through 
reintroducing holding period tolling concepts for periods when the 
holder is not at risk, or should the rule be revised to require 
compliance with the rule when the risk shifting transaction to the 
public markets occurs? If Rule 144 were to be revised to address these 
questions, what changes would best ensure that the economic benefits 
and risks of investment are not shifted during the prescribed holding 
period? Also, should any possible revisions distinguish between 
companies that are and are not widely followed in the market and, if 
so, why? In addressing the question generally, commenters should 
provide their views as to the need to have a fungibility doctrine 
underlie Rule 144 to assure that the safe harbor in fact protects 
resales that are not part of the distribution and that are consistent 
with investment intent.

B. Reminder of Requirement To File Section 16 Reports

    Questions are being raised as to the adequacy of information to the 
markets about the securities transactions effected through equity swaps 
and similar 

[[Page 35647]]
strategies.16 In August 1994, the Commission's release proposing 
revisions to rules under Section 16 of the Exchange Act 17 
included a discussion of reporting obligations arising from equity 
swaps and similar risk-shifting transactions. In that release, the 
Commission stated that Section 16 insiders must report equity swaps and 
similar transactions in equity securities of the issuer,18 unless 
the swap relates solely to interests in securities comprising part of 
specified market baskets or indices of stocks.19

    \16\ See Rocker, ``Short Interest: No More Bullish Bellow,'' 
Barron's, May 1, 1995.
    \17\ Release No. 34-34514 (August 10, 1994) [59 FR 42449].
    \18\ The term ``insider'' as used in this release refers to 
officers, directors and holders of more than ten percent of a class 
of equity securities who are subject to Section 16.
    \19\ 59 FR 42449, 42457, footnote 101 and accompanying text. No 
Section 16 consequences would flow from a swap transaction to the 
extent the swap relates solely to interests in securities comprising 
part of a broad-based, publicly traded market basket or index of 
stocks, approved for trading by the appropriate federal governmental 
authority, that are deemed not to confer beneficial ownership for 
purposes of Section 16 pursuant to Rule 16a-1(a)(5)(iii) [17 CFR 
240.16a-1(a)(5)(iii)] and/or are excluded from the definition of 
``derivative securities'' pursuant to Rule 16a-1(c)(4) [17 CFR 
240.16a-1(c)(4)].
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    The release provided the following example of an equity swap 
required to be reported. An insider agrees to pay to the counterparty 
for a period of three years the value of dividend payments on 100,000 
shares of issuer common stock, in exchange for payment of a fixed 
interest rate based on the market value of the 100,000 shares of stock 
at the commencement of the swap term. The parties also agree that at 
the end of the swap term, the insider will pay to the counterparty the 
cash value of any appreciation on the shares during the term, or, 
conversely, the counterparty will pay to the insider the cash value of 
any depreciation. The insider retains title to and any voting rights in 
the securities.
    The release suggested a method of reporting entering into and 
closing out the swap using stock appreciation and depreciation rights 
and deemed acquisitions and dispositions of the underlying securities. 
In setting forth this analysis, the Commission specially noted in the 
release that it was not suggesting that previously filed forms 
reporting swap transactions in another manner needed to be revised, or 
that swap transactions reported differently would be subject to 
disclosure pursuant to Item 405 of Regulations S-B or S-K.20 The 
release solicited comment on whether the Commission's approach reflects 
economic reality and whether a separate reporting code for equity swaps 
is needed. The Commission wishes to remind Section 16 insiders that 
reporting at the time these transactions are entered into and when they 
are closed out is required.21

    \20\ 17 CFR 228.405 and 229.405.
    \21\ To the extent settlement of the parties obligations occurs 
on an interim basis during the term of the swap, such as quarterly, 
the insider's Section 16 obligations would arise with respect to 
each settlement.
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III. Summary of Initial Regulatory Flexibility Analysis

    The Commission has prepared an initial regulatory flexibility 
analysis in accordance with the Regulatory Flexibility Act.22 The 
analysis notes that the amendments to Rule 144 are being proposed as a 
result of recommendations developed at the SEC Government-Business 
Forums on Small Business Capital Formation. The purpose of the 
revisions is to remove unnecessary restrictions in the resale of 
securities while maintaining important protections to the investing 
public.

    \22\ 5 U.S.C. 603.
    A copy of the initial regulatory flexibility analysis may be 
obtained from Twanna M. Young, Office of Small Business Policy, 
Division of Corporation Finance, Securities and Exchange Commission, 
450 Fifth Street, NW., Stop 7-8, Washington, DC 20549, (202) 942-2950.

IV. Statutory Basis, Text of Proposal and Authority

    The amendment to the Commission's rule is being proposed pursuant 
to sections 2(11), 4(1), 4(4) and 19(a) of the Securities Act.

List of Subjects in 17 CFR Part 230

    Reporting and recordkeeping. Securities.

    For the reasons set out in the preamble, title 17, chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    1. The authority citation for Part 230 continues to read in part, 
as follows:

    Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 
78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-29, 80a-30, and 
80a-37, unless otherwise noted.
* * * * *
    2. Section 230.144 is amended by revising paragraphs (d)(1), 
(e)(3)(ii), (e)(3)(iii), (e)(3)(iv) and (k) to read as follows:


Sec. 230.144  Persons deemed not to be engaged in a distribution and 
therefore not underwriters.

* * * * *
    (d) Holding period for restricted securities. * * *
    (1) General rule. A minimum of one year must elapse between the 
later of the date of the acquisition of the securities from the issuer 
or from an affiliate of the issuer, and any resale of such securities 
in reliance on this section for the account of either the acquiror or 
any subsequent holder of those securities, and if the acquiror takes 
the securities by purchase, the one-year period shall not begin until 
the full purchase price or other consideration is paid or given by the 
person acquiring the securities from the issuer or from an affiliate of 
the issuer.
* * * * *
    (e) Limitation on amount of securities sold. * * *
* * * * *
    (3) Determination of amount. * * *
* * * * *
    (ii) The amount of securities sold for the account of a pledgee 
thereof, or for the account of a purchaser of the pledged securities, 
during any period of three months within one year after a default in 
the obligation secured by the pledge, and the amount of securities sold 
during the same three-month period for the account of the pledgor shall 
not exceed, in the aggregate, the amount specified in paragraph (e)(1) 
or (2) of this section, whichever is applicable;
    (iii) The amount of securities sold for the account of a donee 
thereof during any period of three months within one year after the 
donation, and the amount of securities sold during the same three-month 
period for the account of the donor, shall not exceed, in the 
aggregate, the amount specified in paragraph (e)(1) or (2) of this 
section, whichever is applicable;
    (iv) Where securities were acquired by a trust from the settlor of 
the trust, the amount of such securities sold for the account of the 
trust during any period of three months within one year after the 
acquisition of the securities by the trust, and the amount of 
securities sold during the same three-month period for the account of 
the settlor, shall not exceed, in the aggregate, the amount specified 
in paragraph (e)(1) or (2) of this section, whichever is applicable;
* * * * *
    (k) Termination of certain restrictions on sales of restricted 
securities by persons other than affiliates. The requirements of 
paragraphs (c), (e), (f) and (h) of this section shall not apply to 

[[Page 35648]]
restricted securities sold for the account of a person who is not an 
affiliate of the issuer at the time of the sale and has not been an 
affiliate during the preceding three months, provided a period of at 
least two years has elapsed since the later of the date the securities 
were acquired from the issuer or from an affiliate of the issuer. In 
computing the two-year period for purposes of this provision, reference 
should be made to paragraph (d) of this section.
* * * * *
    Dated: June 27, 1995.

    By the Commission.
Margaret H. McFarland,
Deputy Secreatary.
[FR Doc. 95-16390 Filed 7-7-95; 8:45 am]
BILLING CODE 8010-01-P