[Federal Register Volume 63, Number 172 (Friday, September 4, 1998)]
[Proposed Rules]
[Pages 47209-47214]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23880]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-40386; File No. S7-25-98]
RIN 3235-AH53


Processing of Reorganization Events, Tender Offers, and Exchange 
Offers

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Commission is proposing for comment amendments to Rule 
17Ad-14 under the Securities Exchange Act of 1934. Under the proposed 
amendments, registered transfer agents acting on behalf of issuers in 
connection with reorganization events would be required to set up 
accounts at securities depositories to receive securities by book-entry 
movements from depository participants. Also under the proposal, 
registered transfer agents acting as depositaries, exchange agents, or 
reorganization agents would not be permitted to require a securities 
depository to deliver securities certificates prior to the third 
business day following the expiration date of the tender offer, 
exchange offer, or reorganization event. The proposed amendments are 
designed to increase efficiency and certainty in the processing of 
reorganization events, tender offers, and exchange offers.

DATES: Comments should be received on or before November 3, 1998.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Mail Stop 6-9, Washington, DC 20549. Comments also may be 
submitted electronically at the following E-mail address: rule-
[email protected]. All comment letters should refer to File No. S7-25-
98; this file number should be used on the subject line if E-mail is 
used. Comment letters will be available for public inspection and 
copying at the Commission's Public Reference Room, 450 Fifth Street, 
NW., Washington, DC 20549. Electronically submitted comment letters 
will be posted on the Commission's Internet site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Jerry W. Carpenter, Assistant 
Director, or Theodore R. Lazo, Attorney, at 202/942-4187, Office of 
Risk Management and Control, Division of Market Regulation, Securities 
and Exchange Commission, 450 Fifth Street, N.W., Mail Stop 10-1, 
Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Current Rules Governing the Processing of Securities 
Certificates in Tender Offers, Exchange Offers, and Reorganization 
Events

A. Tender Offers and Exchange Offers

    In 1984, the Commission adopted Rule 17Ad-14 under the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ to address inefficiencies 
in the processing of securities certificates in tender offers and 
exchange offers.\2\ Rule 17Ad-14 requires any registered transfer agent 
acting as a depositary \3\ in the case of a tender offer or as an 
exchange agent \4\ in the case of an exchange offer to establish and 
maintain specially designated accounts at all qualified registered 
securities depositories \5\ holding the subject company's \6\ 
securities for purposes of (1) receiving tendered securities by book-
entry movement and (2) returning securities that have been withdrawn 
from the offer by book-entry movement.
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    \1\ 17 CFR 240.17Ad-14.
    \2\ Securities Exchange Act Release No. 20581 (January 19, 
1984), 49 FR 3064.
    \3\ A ``depositary'' is an agent of a bidder that is appointed 
during a tender offer to receive and hold all securities tendered by 
security holders and to pay the security holders for the tendered 
shares. 17 CFR 240.17Ad-14(c)(5). A bidder is a person who makes a 
tender or exchange offer or on whose behalf a tender or exchange 
offer is made. 17 CFR 17Ad-14(c)(3).
    \4\ An ``exchange agent'' is an agent of a bidder that performs 
functions in a exchange offer similar to those performed by a 
depositary. 17 CFR 240.17Ad-14(c)(5).
    \5\ A ``qualified registered securities depository'' is a 
clearing agency registered under the Exchange Act that has rules and 
procedures approved by the Commission to enable book-entry movement 
of the securities of subject company to, and return of those 
securities from, the transfer agent through the facilities of that 
depository. 17 CFR 240.17Ad-14(c)(4). Currently, The Depository 
Trust Company (``DTC'') is the only qualified registered securities 
depository for corporate debt and equity securities.
    Securities depositories carry out several specific functions in 
the clearance and settlement of securities transactions, e.g.: 
Accepting deposits of securities from their participants (which 
currently include broker-dealers, banks, and other financial 
institutions); crediting those securities to the participants' 
accounts; and carrying out book-entry deliveries of securities among 
participants pursuant to the participants' instructions. Securities 
depositories greatly aid in the Exchange Act's mandate that the 
Commission use its authority to end the physical movement of 
securities certificates in connection with the settlement of 
securities transactions. See Section 17A(e) of the Exchange Act, 15 
U.S.C. 78q-1(e).
    \6\ The term ``subject company'' is defined in Rule 14d-1(e)(2) 
under the Exchange Act, 17 CFR 240.14d-1(e)(2), as the issuer of 
securities sought by a bidder pursuant to a tender offer.
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    Before the adoption of Rule 17Ad-14, bidders could require the 
tender of securities certificates outside the depository system even 
though in many cases the delivering entities were depository 
participants and the securities themselves were eligible for processing 
by the depository.\7\ This was an inefficient and time-consuming 
process, especially in large tender offers when severe time constraints 
existed.\8\

[[Page 47210]]

At that time, securities depositories customarily suspended depository 
eligibility for securities that were subject to a large tender or 
exchange offer if the depositary or exchange agent did not establish a 
depository account. This was particularly true if an offer was for a 
significant percentage of the subject company's stock that was on 
deposit at the depository and when the subject company's transfer agent 
and the depository were located in different cities.\9\
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    \7\ Securities eligible for deposit at a depository are 
securities that are eligible for deposit at any securities 
depository that is registered as a clearing agency under the 
Exchange Act. See 17 CFR 240.17Ad-1(j).
    \8\ In many cases, depository participants were required to 
withdraw securities certificates from the depository in order to 
participate in a tender or exchange offer. Because these 
certificates typically were held at the depository in nominee name 
rather than in the name of the beneficial owner, the nominee name 
certificates had to be sent to the transfer agent to have the record 
ownership of the securities changed to that of the beneficial owner 
and to have a new certificate issued before the beneficial owner 
could deliver the securities to the bidder. As a result, it was very 
difficult for securities depositories to manage their certificate 
inventory for issues that were subject to tender or exchange offers.
    \9\ For example, during the summer of 1981 DTC declared the 
securities of Conoco, Inc. (``Conoco'') ineligible for its services 
because of competing tender offers for control of Conoco by E.I. 
DuPont de Nemours, Joseph E. Seagram & Sons, Inc., and Mobil 
Corporation. DTC took this action because it could not process all 
of the requests that it was receiving for Conoco stock certificates.
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    The Commission acted to improve the process by requiring agents in 
tender or exchange offers to establish accounts at securities 
depositories to permit book-entry movement of securities in connection 
with the offer. Under Rule 17Ad-14, depository participants can tender 
their shares pursuant to such offers by forwarding transmittal 
instructions to securities depositories.\10\ Securities depositories 
then debit tendering participants' accounts and simultaneously credit 
the accounts of the agent for the offer for the securities tendered. 
The agents accept book-entry delivery as a completed tender of shares. 
After a tender or exchange offer expires, the securities depositories 
make bulk deliveries of the securities certificates to the agent.
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    \10\ Transmittal letters and other delivery instructions are now 
commonly transmitted electronically instead of by paper to 
securities depositories.
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    The adoption of Rule 17Ad-14 has resulted in a reduction in the 
amount of securities certificates that must be exchanged among 
securities depositories, their participants, transfer agents, and 
depositaries and exchange agents during tender or exchange offers. This 
reduction has led to an increase in the efficient and reliable 
processing of securities and a decrease in the risk of loss resulting 
from loss or theft of securities certificates or from manual processing 
errors. In addition, depositories no longer have to suspend eligibility 
for the services for issues subject to a tender or exchange offer.

B. Reorganization Events

    Reorganization events typically include conversions, maturities, 
full or partial redemptions, calls, put option exercises, and warrants 
and rights exercises involving corporate and municipal securities. In 
recent years, there has been an increase in the volume and complexity 
of these reorganization events.\11\
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    \11\ In 1997, DTC processed approximately 76,000 instructions 
submitted by its participants in connection with conversions and 
warrants, rights, and puts exercises. Conversions and warrants 
exercises accounted for the issuance of approximately 685 million 
shares of stock. The total value of all such conversions and 
exercises exceeded $46.7 billion. Letter from Carl H. Urist, Deputy 
General Councel and Vice President, DTC (February 5, 1998).
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    The mechanical aspects of reorganization events closely resemble 
those of tender offers and exchange offers.\12\ Under the current 
method of processing reorganization events, depository participants 
with positions in the subject securities that are on deposit at 
securities depositories submit instructions to the depositories to send 
the subject securities to the reorganization agent.\13\ However, the 
legal documents containing the terms of reorganization events (e.g., 
bond indentures) often are interpreted to require security holders to 
submit securities certificates in order to exercise their rights under 
the event. Similar conditions existed with respect to tender offers and 
exchange offers before the adoption of Rule 17Ad-14 in 1984. Changes in 
the law since 1984 have clarified even further that book-entry delivery 
satisfies legal requirements.\14\
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    \12\ For example, in a bond conversion security holders submit 
their bonds to a reorganization agent in exchange for another 
security of the issuer.
    \13\ Reorganization agents are usually issuers or their transfer 
agents.
    \14\ See Revised Article 8 of the Uniform Commercial Code.
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    Book-entry delivery is important for efficient securities 
processing during reorganization events. Depending upon the size and 
timing of the reorganization event, the securities depositories may 
have to make multiple deliveries of securities certificates before the 
expiration date of the reorganization event.\15\ In order to control 
their certificate inventory during reorganization events, some 
securities depositories stop accepting deposits of and book-entry 
delivery instructions for the subject securities prior to the 
expiration date of the reorganization event.\16\ If a depository 
participant wants to participate in a reorganization event after the 
depository's cutoff it must submit securities certificates to the 
reorganization agent on its own.\17\
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    \15\ Securities depositories usually maintain in their vaults 
large denomination securities certificates representing aggregated 
participant positions in that issue of securities (``jumbo 
certificates''). The number of certificates in smaller denominations 
is often sufficient only to meet participants' routine withdrawal 
needs. As a result, each time a securities depository receives a 
request for certificates it must present jumbo certificates to the 
transfer agent to be broken down into certificates of smaller 
denominations. During a reorganization event in which depository 
facilities are not utilized, the timing and extent of demand for 
securities certificates can be unpredictable. Therefore, it can be 
difficult for securities depositories to make requested physical 
deliveries in the precise denominations required on an expedited 
basis.
    \16\ For example, DTC stops accepting deposits and book-entry 
delivery instructions in some securities up to five business days 
prior to the expiration date or payment date for the reorganization 
event. In the case of maturities or calls, DTC stops accepting 
deposits thirty days prior to the payment date. DTC stops accepting 
instructions from its participants regarding voluntary 
reorganizations activities (e.g., conversions) early on the 
expiration date or one or two business days prior to the expiration 
date.
    \17\ Alternatively, a securities depository could wait to 
deliver cash or securities to its participants following a tender of 
securities in a reorganization event until the depository receives 
full credit for the securities or payment from the reorganization 
agent. However, the securities depository could then be subject to 
interest claims or contractual liability from its participants for 
failure to make deliveries according to the particular terms of the 
reorganization event.
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II. Proposed Amendments to Rule 17Ad-14

    DTC has requested that the Commission amend Rule 17Ad-14 to expand 
the scope of the rule to include reorganization events in addition to 
tender offers and exchange offers. DTC also has requested that Rule 
17Ad-14 be amended so that qualified registered securities depositories 
would have three business days following the expiration of a tender 
offer, exchange offer, or reorganization event to deliver securities 
certificates that are due to depositaries, exchange agents, and 
reorganization agents.\18\
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    \18\ Letter from Carl H. Urist, Deputy General Counsel and Vice 
President, DTC (September 14, 1994).
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A. Establishment of Book-Entry Depository Accounts by Reorganization 
Agents in Connection With Reorganization Events

    Under the proposed amendments to Rule 17Ad-14, reorganization 
events \19\ would become subject to procedures similar to those 
currently governing tender offers and exchange offers. Specifically, 
Rule 17Ad-14 would be amended to state that no registered transfer 
agent may act as a reorganization agent \20\ unless within

[[Page 47211]]

two business days after commencement of the reorganization event it 
establishes at all qualified registered securities depositories \21\ 
specially designated accounts for purposes of receiving securities 
tendered to the reorganization agent in connection with the 
reorganization event.
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    \19\ Under the proposed amendments, the term ``reorganization 
event'' would be defined to include conversions, maturities, full 
and partial redemptions, calls, put option exercises, and warrant 
and rights exercises involving corporate and municipal securities of 
an issuer.
    \20\ Under the proposed amendments, the term ``reorganization 
agent'' would be defined as an agent of an issuer receiving 
securities from tendering depository participants and performing 
payment or exchange functions with respect to those tendering 
participants as required by the particular reorganization event. The 
term ``issuer'' is defined in section 3(a)(8) of the Exchange Act, 
15 U.S.C. 78c(a)(8)
    \21\ As noted above, the term ``qualified registered securities 
depository'' is defined in Rule 17Ad-14(c), 17 CFR 240.17Ad-14(c). 
Currently, Rule 17Ad-14(c) only requires a depository to provide 
book-entry services for a ``subject company'' in connection with a 
tender or exchange offer. Under the proposed amendments, the 
definition of ``qualified registered securities depository'' would 
be amended to reflect that each such depository also must be able to 
provide book-entry services for securities that are subject to a 
reorganization event.
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    Under the terms of the proposed amendments, after a reorganization 
agent establishes the required accounts with each qualified registered 
securities depository, participants electing to participate in or 
affected by the reorganization event would be able to deliver the 
subject securities to the reorganization agent by book-entry movement. 
After a securities depository received and verified a participant's 
reorganization instructions, it would debit the subject securities from 
the participant's securities account and would credit them to the 
reorganization agent's securities account. Upon receipt of the subject 
securities into its book-entry account, the reorganization agent would 
act upon the participants' reorganization instructions (i.e., carry out 
the conversion, redemption, or other activity). The Commission believes 
that under the proposed amendments to Rule 17Ad-14, book-entry delivery 
of securities subject to a reorganization event would satisfy the 
delivery requirements under the terms of the event.
    Requiring reorganization agents to maintain an account with each 
qualified registered securities depository during the course of a 
reorganization event would allow the delivery of securities by book-
entry movement rather than by physical transfer. As a result, the need 
for delivery of securities certificates from multiple holders to 
reorganization agents outside the depository system should be greatly 
reduced and securities depositories should be able to accept book-entry 
delivery instructions closer to the expiration date of a reorganization 
event. Securities depositories also would be able to make bulk 
deliveries of securities certificates to reorganization agents which 
should reduce the likelihood of securities certificates being lost, 
stolen, or destroyed. In addition, the proposed amendments would 
further the Exchange Act's mandate that the Commission use its 
authority to end the physical movement of securities certificates in 
connection with the settlement of securities transactions.\22\
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    \22\ See Section 17A(e) of the Exchange Act, 15 U.S.C. 78q-1(e).
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    As noted above, in the context of tender and exchange offers Rule 
17Ad-14 has reduced the amount of movements of securities certificates 
among depositaries and exchange agents, participants, and depositories 
and thereby has reduced the costs and risks associated with such 
physical transfers. Under the proposed amendments to Rule 17Ad-14, 
these benefits should also be realized for reorganization events.

B. Timing for Deliveries of Securities Certificates in Connection With 
Tender Offers, Exchange Offers, and Reorganization Events

    The Commission is proposing to amend Rule 17Ad-14 to state that a 
registered transfer agent acting as a depositary, exchange agent, or 
reorganization agent may not require a qualified registered securities 
depository to deliver securities certificates prior to the third 
business day following the expiration date of a tender offer, exchange 
offer, or reorganization event, as the case may be.
    The Commission understands that securities certificates generally 
are delivered to depositaries and exchange agents only as an 
administrative matter \23\ because depositaries and exchange agents 
accept book-entry delivery of shares as a completed tender.\24\ Under 
the proposed amendments, delivery of securities certificates to the 
reorganization agent after a reorganization event has expired also 
should become purely an administrative matter.
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    \23\ For example, if a company carries out a tender offer for 
its own securities, it might want to receive securities certificates 
in order to cancel them.
    \24\ These understandings are based on conversations between 
Commission staff and DTC.
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    Rule 17Ad-14 currently does not specify when securities 
certificates must be delivered. Establishing a three-day period for 
delivery of securities certificates should ensure that securities 
depositories have the time necessary to properly account for the 
inventory of securities certificates to be delivered. In addition, the 
proposed amendments should establish a clear and uniform date by which 
securities depositories will deliver securities certificates in tender 
offers, exchange offers, and reorganization events.
    The proposed amendments to Rule 17Ad-14 regarding delivery of 
securities certificates are not intended to affect or to alter current 
practice regarding tender and exchange offers or the obligations of 
depositaries and exchange agents. Portions of the rule have been 
reorganized in order to maintain certain distinctions between tender or 
exchange offers and reorganization events as well as to provide 
clarity. Other technical changes include the addition of the definition 
of ``reorganization agent'' and ``reorganization event'' to the rule 
and the amendment of the definition of ``qualified registered 
securities depository.''

III. Request for Comments

    Any interested person wishing to submit comments on the proposed 
amendments to Rule 17Ad-14, as well as on other matters that might have 
an impact on the proposal, is requested to do so. The Commission 
specifically solicits comments as to whether requiring reorganization 
agents to establish accounts with registered securities depositories in 
connection with reorganization events presents any issues that are 
unique to reorganization events (i.e., issues that are not present in 
the context of tender or exchange offers) or that will create an undue 
burden upon reorganization agents or others. The Commission seeks 
comment on whether any additional regulatory safeguards may be required 
in the context of reorganization events (e.g., restrictions on 
depository policies that allow securities to be withdrawn from a 
securities depository in connection with reorganization events). The 
Commission also seeks comment on whether the term ``reorganization 
events'' should be defined to include either fewer or additional events 
or whether it should be defined more broadly to anticipate new types of 
reorganization events that may develop in the future.
    While the Commission believes that permitting book-entry delivery 
of securities to reorganization agents is consistent with the delivery 
requirements under most states' laws, the Commission requests comment 
on whether any operative agreements governing reorganization events 
(e.g., bond indentures) specifically require delivery of physical 
securities certificates.
    The Commission also seeks comment on the effect of providing 
qualified registered securities depositories with three business days 
following the expiration of a tender offer, exchange offer, or 
reorganization event to deliver

[[Page 47212]]

securities certificates. Would delivery of securities certificates 
three days after the expiration of a tender offer, exchange offer, or 
reorganization event have any negative effect on their operation? In 
addressing these issues, the Commission invites commenters to discuss 
the relevance of the book-entry transfer issues presented in Pryor v. 
USX Corp.\25\ to the proposed rulemaking and whether it would be 
appropriate to impose a time limit within which securities certificates 
must ultimately be delivered.
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    \25\ 806 F. Supp. 460 (S.D.N.Y. 1992). Pryor involved a 1981 
tender offer by United States Steel Corporation (``U.S. Steel'') for 
shares of Marathon Oil Company. The tender offer was oversubscribed, 
and the offering document provided that in the event of an 
oversubscription U.S. Steel would purchase the Marathon shares on a 
pro-rata basis prior to the proration date. Shareholders permitted 
to share at the tender offer price were to earn a significant 
premium on their shares. Thus, as the number of tenderers increased, 
the number of shares held by each tenderer that would be eligible 
for sale would decrease. Some tenderers initiated book-entry 
deliveries of securities prior to the proration date at DTC, but DTC 
delivered the certificates for these shares subsequent to the 
proration date. In denying the motions for summary judgment 
submitted by each of the plaintiff and defendant, the court did not 
resolve the issue as to whether book-entry delivery of securities 
prior to the proration date constituted good delivery even though 
DTC delivered the securities certificates after the proration date. 
Instead, the court set the matter for trail, but the case was 
settled.
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IV. Costs and Benefits of the Rules and Their Effect on 
Competition, Efficiency, and Capital Formation

    Section 23(a)(2) of the Exchange Act \26\ requires the Commission, 
in adopting rules under the Exchange Act, to consider the impact any 
such rule would have on competition, and to not adopt any rule which 
would impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. In addition, section 3 
of the Exchange Act \27\ as amended by the National Securities Markets 
Improvement Act of 1996 \28\ provides that whenever the Commission is 
engaged in rulemaking and is required to consider or determine whether 
an action is necessary or appropriate in the public interest, the 
Commission shall consider, in addition to the protection of investors, 
whether the action will promote efficiency, competition, and capital 
formation.
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    \26\ 15 U.S.C. 78w(a)(2).
    \27\ 15 U.S.C. 78c.
    \28\ 1Pub. L. No. 104-290, 110 Stat. 3416 (1996).
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    The Commission is considering the proposed amendments to Rule 17Ad-
14 in light of the standards cited in sections 3 and 23(a)(2) of the 
Exchange Act. For the reasons stated herein, the proposed amendments 
(i) should promote efficiency by ensuring that all securities transfers 
associated with reorganization events may be carried out by book-entry 
movement and by providing a reasonable and uniform amount of time for 
the delivery of securities certificates that are the subject of tender 
offers, exchange offers, and reorganization events, (ii) should not 
adversely affect capital formation because they should not increase 
issuer transaction costs, and (iii) should not impose any burden on 
competition because they will apply equally to all registered transfer 
agents that act as depositaries or reorganization agents.
    The Commission does not anticipate that the proposed amendments 
would have a significant effect on competition or impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
Exchange Act. Under the proposed amendments, all reorganization agents 
will be required to establish and maintain separate accounts for book-
entry delivery of securities during reorganization events. In addition, 
the standards with respect to the time in which delivery of securities 
certificates must be made to depositaries, exchange agents, or 
reorganization agents will apply equally to all qualified registered 
securities depositories. However, in order to evaluate fully the 
effects on competition of the proposed amendments, the Commission 
requests commenters to provide their views and specific empirical data 
as to any effects on competition that might result from the 
Commission's proposed amendments to Rule 17Ad-14.
    The Commission is considering the costs and the benefits of the 
proposed amendments to Rule 17Ad-14. The proposed amendments to Rule 
17Ad-14 should provide specific benefits to U.S. investors, issuers, 
and other financial intermediaries. These benefits are not readily 
quantifiable in terms of dollar value. Providing for book-entry 
movements of securities that are subject to reorganization events 
should increase the efficiency of the processing of such events by 
reducing the need for delivery of securities certificates from multiple 
holders to reorganization agents. In addition, the proposed amendments 
to Rule 17Ad-14 should reduce the risk of loss of securities 
certificates because movements of securities in reorganization events 
will be carried out by book-entry movement rather than by multiple 
transfers of securities certificates.
    By providing securities depositories with three business days after 
the expiration of a tender offer, exchange offer, or reorganization 
event to deliver securities certificates, the proposed amendments 
should create a clear and uniform standard for the delivery of 
securities certificates subject to such events. This standard should 
give securities depositories greater certainty in managing their 
certificate inventory after the expiration of a tender offer, exchange 
offer, or reorganization event.
    The proposed amendments to Rule 17Ad-14 should not result in 
significant costs to any particular person or entity. The Commission 
estimates that there will be minimal cost to reorganization agents to 
establish and maintain a specially designated account at a securities 
depository and otherwise to comply with the proposed amendments.\29\ A 
small number of entities that act as reorganization agents may incur 
some systems and communications costs but the Commission believes many 
of those entities already have the necessary systems in place because 
they provide book-entry services for tender and exchange offers and 
therefore any such costs should be insignificant. No entity should 
incur any additional cost because of the proposed amendments to Rule 
17Ad-14 that would give securities depositories three days to deliver 
securities certificates associated with tender offers, exchange offers, 
and reorganization events. Therefore, the proposed amendments to Rule 
17Ad-14 should not have any measurable aggregate cost.
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    \29\ DTC has informed the Commission staff that it does not 
charge a fee to establish and maintain a book-entry account.
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    The Commission requests comment on these estimates and invites 
commenters to submit their own estimates of the costs and benefits that 
would result from the proposed amendments to Rule 17Ad-14. In 
particular, the Commission requests comment on whether any entity will 
incur any additional cost as a result of the proposed amendments to 
Rule 17Ad-14 that would give securities depositories three days to 
deliver securities certificates associated with tender offers, exchange 
offers, and reorganization events. In order to evaluate fully the costs 
and benefits associated with the proposed amendments, the Commission 
requests that commenters' estimates of the costs and benefits of the 
proposed amendments be accompanied by specific empirical data 
supporting the estimates.

V. Summary of Regulatory Flexibility Analysis

    The Commission has prepared an initial regulatory flexibility 
analysis

[[Page 47213]]

(``IRFA'') in accordance with 5 U.S.C. 603(a) regarding the proposed 
amendments to Rule 17Ad-14. The IRFA states that the proposed 
amendments are intended to facilitate book-entry delivery of securities 
during reorganization events. In addition, the IRFA states that the 
proposed amendments are intended to establish a clear and uniform time 
frame for the delivery of securities certificates that are the subject 
of tender offers, exchange offers, and reorganization events. The IRFA 
sets forth the statutory basis for the proposed amendments.
    The IRFA states that, for purposes of Commission rulemaking, 
paragraph (h) of Rule 0-10 under the Exchange Act \30\ defines the term 
``small business'' or ``small organization'' to include any transfer 
agent that: (1) Received less than 500 items for transfer and less than 
500 items for processing during the preceding six months (or in the 
time that it has been in business, if shorter); (2) transferred items 
only of issuers that would be deemed ``small businesses'' or ``small 
organizations'' as defined in Rule 0-10 under the Exchange Act; (3) 
maintained master shareholder files that in the aggregate contained 
less than 1,000 shareholder accounts or was the named transfer agent 
for less than 1,000 shareholder accounts at all times during the 
preceding fiscal year (or in the time that it has been in business, if 
shorter); and (4) is not affiliated with any person (other than a 
natural person) that is not a small business or small organization 
under Rule 0-10.\31\ The IRFA states that, for purposes of Commission 
rulemaking, paragraph (d) of Rule 0-10 under the Exchange Act \32\ 
defines the term ``small business'' or ``small organization'' to 
include any clearing agency that (1) compared, cleared and settled less 
than $500 million in securities transactions during the preceding 
fiscal year (or in the time that it has been in business, if shorter); 
(2) had less than $200 million of funds and securities in its custody 
or control at all times during the preceding fiscal year (or in the 
time that it has been in business, if shorter); and (3) is not 
affiliated with any person (other than a natural person) that is not a 
small business or small organization as defined in Rule 0-10. In 
addition, the IRFA states that paragraph (a) of Rule 0-10 under the 
Exchange Act \33\ defines the term ``small business'' or ``small 
organization'' to include any person (i.e., business) that, on the last 
day of its most recent fiscal year, had total assets of $5 million or 
less.
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    \30\ 17 CFR 240.0-10(h).
    \31\ The Commission recently amended this definition. Securities 
Exchange Commission Release Nos. 33-7548, 34-40122, IC-23272, and 
IA-1727 (June 24, 1998), 63 FR 35508.
    \32\ 17 CFR 240.0-10(d).
    \33\ 17 CFR 240.0-10(a).
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    The IRFA states that the Commission estimates that 180 transfer 
agents qualify as small entities. The IRFA further states that if the 
proposed amendments are adopted, it is possible that some registered 
transfer agents that act as reorganization agents will be small 
entities. In addition, the IRFA states that if the proposed amendments 
are adopted, it is possible that certain issuers of securities that are 
subject to reorganization events and some bidders that extend tender or 
exchange offers will be small entities. However, the IRFA states 
further that the Commission currently cannot predict how many of the 
affected issuers and bidders would be small entities.
    The IRFA states that the proposed amendments would not impose any 
new reporting or recordkeeping requirements. The IRFA states further 
that if the proposed amendments are adopted, registered transfer agents 
acting as reorganization agents would be required to establish and 
maintain specially designated accounts at qualified registered 
securities depositories to provide for book-entry movements of the 
affected securities during the course of reorganization events. The 
IRFA states that the proposed amendments to Rule 17Ad-14 should not 
have a significant economic impact on a substantial number of small 
entities.
    The IRFA states that as an alternative to the proposed amendments 
the Commission considered requesting that reorganization agents 
voluntarily accept book-entry delivery of securities affected by 
reorganization events. However, the IRFA states that it is the 
Commission's understanding that the agreements governing the terms of 
some reorganization events currently require or are interpreted to 
require delivery of securities certificates and that reorganization 
agents will not accept the affected securities by book-entry delivery 
in the absence of a Commission rule.
    In addition, the IRFA states that the Commission believes that it 
is not feasible to further clarify, consolidate, or simplify the 
proposed amendments for small entities. The IRFA also states that the 
Commission believes that the use of performance standards rather than 
design standards is not applicable to the proposed amendments. The IRFA 
states that the Commission believes that creating an exemption from the 
requirements of the proposed amendments would not reduce the impact of 
the proposed amendments on small entities due to the minimal burden 
they are expected to impose on small entities. The IRFA states that the 
Commission believes that there are no rules that duplicate, overlap, or 
conflict with the proposed alternative versions of the rule.
    The IFRA contains information concerning the solicitation of 
comments with respect to the IRFA. In particular, the IRFA requests 
comment on whether the proposed amendments to Rule 17Ad-14 would have a 
significant economic impact on a substantial number of small entities 
and requests that any such comments be accompanied by specific 
empirical data. Cost-benefit information reflected in the ``Cost/
Benefit Analysis'' section of this Release also is reflected in the 
IRFA. The IRFA states that in the absence of specific comments to the 
contrary, the Commission anticipates that if the proposed amendments 
are adopted it will certify that the proposed amendments will not have 
a significant economic impact on a substantial number of small entities 
and will not prepare a Final Regulatory Flexibility Analysis. A copy of 
the IRFA may be obtained by contacting Theodore R. Lazo, Securities and 
Exchange Commission, 450 Fifth Street, NW, Mail Stop 10-1, Washington, 
DC 20549.

VI. Statutory Bases

    The amendments to Rule 17Ad-14 are being proposed pursuant to 
Sections 2, 11A(a)(1)(B), 14(d)(4), 15(c)(3), 15(c)(6), 17A(a), 
17A(d)(1), and 23(a) of the Exchange Act [15 U.S.C. 78b, 78k-
1(a)(1)(B), 78n(d)(4), 78o(c)(3), 78o(c)(6), 78q-1(a), 78q-1(d)(1) and 
78w(a)].

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Proposed Amendments

    In accordance with the foregoing, the Commission proposes to amend 
part 240 of Chapter II of Title 17 of the Code of Federal Regulations 
as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, and 
80b-11, unless otherwise noted.

    2. Section 240.17Ad-14 is revised to read as follows:

[[Page 47214]]

Sec. 240.17Ad-14  Tender and reorganization agents

    (a) Establishing book-entry depository accounts for tender or 
exchange offers and reorganization events. (1) When securities of a 
subject company have been declared eligible by one or more qualified 
registered securities depositories for the services of those 
depositories at the time a tender or exchange offer is commenced, no 
registered transfer agent shall act on behalf of the bidder as a 
depositary, in the case of a tender offer, or an exchange agent, in the 
case of an exchange offer, in connection with a tender or exchange 
offer, unless that transfer agent has established, within two business 
days after commencement of the offer, specially designated accounts. 
These accounts shall be maintained throughout the duration of the 
offer, including protection periods, with all qualified registered 
securities depositories holding the subject company's securities, for 
purposes of receiving from depository participants securities being 
tendered to the bidder by book-entry delivery pursuant to transmittal 
letters and other documentation and for purposes of allowing 
depositaries to return to depository participants by book-entry 
movement securities withdrawn from the offer.
    (2) When securities of an issuer have been declared eligible by one 
or more qualified registered securities depositories for the services 
of those depositories at the time a reorganization event is commenced, 
no registered transfer agent shall act as a reorganization agent on 
behalf of any issuer in connection with a reorganization event unless 
that registered transfer agent has established, within two business 
days after commencement of the reorganization event, specially 
designated accounts. These accounts shall be maintained with all 
qualified registered securities depositories holding the issuer's 
securities until the depository's close of business on the record date, 
expiration date, or payment date, as the case may be, including any 
protect periods, of the reorganization event for purposes of receiving 
from depository participants securities presented to registered 
transfer agents by book-entry delivery pursuant to proper documentation 
and for purposes of allowing reorganization agents to return securities 
to depository participants by book-entry movement in connection with 
the reorganization event.
    (3) No registered transfer agent acting as a depositary, exchange 
agent, or reorganization agent shall require a qualified registered 
securities depository to deliver any physical security pursuant to a 
tender offer, exchange offer, or reorganization event prior to:
    (i) In the case of a tender or exchange offer, the third business 
day following the qualified registered securities depository's close of 
business on the expiration date of a tender or exchange offer, 
including any protect periods or
    (ii) In the case of a reorganization event, the third business day 
following the qualified registered securities depository's close of 
business on the record date, payment date, or expiration date, as 
applicable, including any protect periods, of the reorganization event.
    (b) Exclusions. This section shall not apply to tender or exchange 
offers or reorganization events:
    (1) That are made for a class of securities of a subject company or 
issuer that has fewer than:
    (i) 500 security holders of record for that class; or
    (ii) 500,000 shares of that class outstanding; or
    (2) That are made exclusively to security holders of fewer than 100 
shares of a class of securities.
    (c) Definitions. For purposes of this section:
    (1) The terms bidder, subject company, business day, security 
holders, and transmittal letter shall have the meanings provided in 
Sec. 240.14d-1(e);
    (2) Unless the context otherwise requires, a tender or exchange 
offer shall be deemed to have commenced as specified in Sec. 240.14d-2;
    (3) The term qualified registered securities depository shall mean 
a registered clearing agency having rules and procedures approved by 
the Commission pursuant to section 19 of the Act (15 U.S.C. 78s) to 
enable book-entry delivery of the securities of the subject company or 
issuer to, and return of those securities from, a transfer agent or 
reorganization agent, as the case may be, through the facilities of 
that registered clearing agency;
    (4) The term depositary refers to that agent of the bidder 
receiving securities from tendering depository participants during a 
tender offer and paying those participants for shares tendered. The 
term exchange agent refers to the agent performing like functions in 
connection with an exchange offer. The term reorganization agent refers 
to the agent performing like functions in connection with a 
reorganization event; and
    (5) The term reorganization event shall mean and include 
conversions, maturities, full and partial redemptions, calls, put 
option exercises, and warrant and rights exercises involving corporate 
and municipal securities of an issuer.
    (d) Exemptions. The Commission may exempt from the provisions of 
this section, either unconditionally or on specified terms and 
conditions, any registered transfer agent, reorganization agent, tender 
or exchange offer, class of tender or exchange offers, or 
reorganization event if the Commission determines that an exemption is 
consistent with the public interest, the protection of investors, the 
prompt and accurate clearance and settlement of securities 
transactions, the maintenance of fair and orderly markets, or the 
removal of impediments to a national clearance and settlement system.

    Dated: August 31, 1998.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-23880 Filed 9-3-98; 8:45 am]
BILLING CODE 8010-01-P