[Federal Register Volume 62, Number 87 (Tuesday, May 6, 1997)]
[Rules and Regulations]
[Pages 24572-24573]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11692]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-7418; File Number S7-6-97]
RIN 3235-AH14


Definition of ``Prepared By or On Behalf of the Issuer'' for 
Purposes of Determining if an Offering Document is Subject to State 
Regulation

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The National Securities Markets Improvements Act of 1996 
mandates that the Securities and Exchange Commission (``Commission'') 
adopt a definition of the phrase ``prepared by or on behalf of the 
issuer'' found in Section 18 of the Securities Act of 1933. The 
Commission today adopts this definition, thereby providing guidance as 
to when an offering document is subject to state regulation.

EFFECTIVE DATE: Rule 146 will be effective on May 6, 1997.

FOR FURTHER INFORMATION CONTACT: James R. Budge, Division of 
Corporation Finance, at (202) 942-2950, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission today adds Rule 146 
1 Under the Securities Act of 1933 (``Securities Act'' or 
``the Act'').2 The Rule defines the term ``prepared by or on 
behalf of the issuer,'' for purposes of recently revised Section 18 of 
the Act.3
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    \1\ The rule is codified at 17 CFR 230.146.
    \2\ 15 U.S.C. 77a et seq.
    \3\ 15 U.S.C. 77r.
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I. Background

    Congress enacted the National Securities Markets Improvement Act of 
1996, which became effective on October 11, 1996.4 The 
statute reallocates regulatory responsibility relating to securities 
offerings between the federal and state governments based on the nature 
of the security or offering. Among other things, it preempts state laws 
requiring or with respect to registration or qualification of covered 
securities as defined in the Act.5 It also prohibits states 
from directly or indirectly prohibiting, limiting or imposing any 
conditions on the use of any offering document for a covered security 
if the offering document is ``prepared by or on behalf of the issuer.'' 
6
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    \4\ Pub.L. 104-290, 110 Stat. 3416 (1996).
    \5\ The term ``covered security'' is defined in new section 
18(b) [15 U.S.C. 77r(b)].
    \6\ The term ``offering document'' is defined in new section 
18(d)(1) [15 U.S.C. 77r(d)(1)], as follows:
    (1) Offering Document.--The term ``offering document''--
    (A) has the meaning given the term ``prospectus'' in section 
2(10), but without regard to the provisions of subparagraphs (A) and 
(B) of that section; and
    (B) includes a communication that is not deemed to offer a 
security pursuant to a rule of the Commission.
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II. Rule 146

    The statute requires the Commission to define by rule the phrase 
``prepared by or on behalf of the issuer,'' as used in connection with 
the prohibition on state regulation of offering documents for covered 
securities.7 The Commission proposed a definition in 
February 1997 8 and received three comment letters. Today it 
adopts the definition, slightly modified from the proposed version.
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    \7\ Section 18(d)(2) requires the Commission to adopt this 
definition not later than six months after the section's enactment.
    \8\ Release No. 33-7388 (February 11, 1997) [62 FR 7186] 
(``Proposing Release'').
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    The Commission continues to believe, as it stated in the proposing 
release, that the phrase is intended to cover offering documents 
prepared with the issuer's knowledge and consent. Thus, the definition 
encompasses offering documents authorized and approved by the issuer. 
Conversely, documents that are prepared and circulated without issuer 
involvement are not covered, and are subject to state regulation.
    Like the proposal, the final rule requires a two-step approach to 
this process. First, the issuer must authorize the production of the 
document. This provision does not require a board of directors to act 
with respect to each document connected to a securities offering. A 
company may authorize agents or representatives to act in its stead. 
The final rule clarifies the proposed language by specifically 
acknowledging authorization by an agent or representative chosen by the 
issuer for that purpose.
    The second step requires the issuer, or its agent or 
representative, to approve an authorized offering document before its 
use. The proposal reflected this concept in its requirement that an 
authorized document be prepared by ``a director, officer, general 
partner, employee, affiliate, underwriter, attorney, accountant or 
agent of the issuer.'' In light of the public comment, and upon further 
consideration, the Commission has recrafted this provision to clarify 
its intentions and make the rule simpler. In the final rule, an issuer-
authorized offering document (including one

[[Page 24573]]

authorized by the issuer's agent or representative) is within the 
definition if the issuer or its agent or representative approves a 
prepared document before its use. The rule does not require the same 
person who authorized the document's production to be responsible for 
approving the prepared document. It is intended that this agent or 
representative will have reviewed the document in advance.
    Of course, state law controls how a company authorizes activities. 
For example, if under state law the board of directors or other 
governing body may delegate authorization or approval authority for all 
offering documents to an individual, committee, or even an outside 
entity such as an underwriter, then the authorization or approval of 
that person would be sufficient for Rule 146.9
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    \9\ As provided by statute, the definition is applicable only to 
Section 18 of the Securities Act. As noted in the Proposing Release, 
in the case of a registered investment company, an agent of the 
issuer would include, without limitation, the issuer's investment 
adviser, attorney, underwriter, depositor or any other agent that 
performs administrative functions on behalf of the company.
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III. Cost-Benefit Analysis

    There were no responses to the Commission's solicitation of comment 
regarding the costs and benefits of this definition. The Commission, at 
Congress' behest, crafted Rule 146 to provide guidance with respect to 
how to interpret the language of the statute. Therefore, the economic 
burdens and benefits relating to state preemption generally will be 
attributable to the statute. While the Commission expects the economic 
effects of this rule to be minimal, the definition will allow greater 
certainty about when an offering document is subject to state review.

IV. Summary of Final Regulatory Flexibility Analysis

    A final regulatory flexibility analysis has been prepared in 
accordance with 5 U.S.C. 604 concerning this definition. The analysis 
notes that the rulemaking relates to a Congressional mandate to define 
the term ``prepared by or on behalf of the issuer'' for purposes of 
Section 18 of the Act and describes the reasons for and purposes of the 
definition.
    The analysis states that no comments were received in response to 
Commission solicitation with respect to the Initial Regulatory 
Flexibility Analysis. The analysis goes on to state that there are 
approximately 1100 reporting companies that satisfy the definition of 
``small business'' under Exchange Act Rule 0-10, but there is no 
reliable way to determine the impact of the rule on these entities, 
because it cannot be determined how many of these entities may raise 
capital, thereby benefiting from the rule. The Commission does not 
expect that significant changes to reporting, recordkeeping and 
compliance burdens will result from the rule, inasmuch as the 
substantive effects of the changes to Section 18 are controlled 
primarily by the terms of the legislation, and not by the terms of this 
definition. The purpose of the definition is to give guidance with 
regard to the meaning of a statutory term.
    The Commission considered whether there are any appropriate steps 
available to minimize the economic impact of rule on small businesses 
and determined that establishing different requirements for small 
entities or exempting them from all or part of the definition would not 
serve the public interest, nor would it aid small businesses. The 
definition is purposefully crafted to give small entities equal footing 
with large companies with respect to the benefits of state preemption 
that Congress envisioned when it enacted revised Section 18.

V. Effective Date

    The effective date for Rule 146 is May 6, 1997, the Federal 
Register publication date. In accordance with the Administrative 
Procedure Act 5 U.S.C. 553(d)(3), the Commission finds that the 
statutory mandate to adopt a rule within six months of the statute's 
effective date provides good cause to establish an effective date less 
than 30 days after publication of these rules. The early effective date 
will also allow affected persons to begin relying on the new definition 
immediately by eliminating confusion in the marketplace over whether a 
document is ``prepared by or on behalf of the issuer'' for purposes of 
the statute. Finally, because the definition does not impose any new 
burdens, the public would derive no benefit from the time provided by a 
delayed implementation date.

VI. Statutory Basis

    Rule 146 is being adopted pursuant to Sections 18 and 19 of the 
Securities Act.

List of Subjects in Part 230

    Reporting and recordkeeping requirements, Securities.

Text of the Amendment

    In accordance with the foregoing, Title 17, chapter II of the Code 
of Federal Regulations is amended as follows:

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

    1. The general authority citation for part 230 is revised to read 
as follows:

    Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77r, 77s, 77sss, 
78c, 78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-29, 80a-
30, and 80a-37, unless otherwise noted.
* * * * *
    2. By adding Sec. 230.146, to read as follows:


Sec. 230.146  Definition of ``prepared by or on behalf of the issuer'' 
for purposes of Section 18 of the Act.

    Prepared by or on behalf of the issuer. An offering document (as 
defined in Section 18(d)(1) of the Act [15 U.S.C. 77r(d)(1)]) is 
``prepared by or on behalf of the issuer'' for purposes of Section 18 
of the Act, if the issuer or an agent or representative:
    (a) Authorizes the document's production, and
    (b) Approves the document before its use.

    Dated: April 30, 1997.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-11692 Filed 5-5-97; 8:45 am]
BILLING CODE 8010-01-P