Exemptive Relief and Simplification of Filing Requirements for Debt Securities To Be Listed on a National Securities Exchange; Solicitation of Comment Concerning Reporting by Issuers of Debt Securities

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-34139; File No. S7-16-94]

RIN 3235-AG11

Exemptive Relief and Simplification of Filing Requirements for

Debt Securities To Be Listed on a National Securities Exchange;

Solicitation of Comment Concerning Reporting by Issuers of Debt

Securities

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is

proposing a new rule and proposing to amend its rules under the

Securities Exchange Act of 1934 to reduce existing regulatory

distinctions between debt securities listed on a national securities

exchange and those traded in the over-the-counter market. The

Commission also is proposing to simplify registration procedures under

the Securities Exchange Act of 1934 for listed debt securities. The

proposals would: exempt listed debt securities from restrictions on

borrowing and the proxy rules; provide for the automatic effectiveness

of a Form 8-A registration statement for listed debt securities; and

eliminate the filing fee associated with the Form 8-A registration

statement for listed debt. Comment also is being requested as to

whether it is advisable to extend reporting requirements to issuers of

debt securities that are traded in the over-the-counter market under

certain circumstances where the issuer is not otherwise subject to

periodic reporting requirements.

DATES: Comments should be received on or before August 8, 1994.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,

NW., Washington DC 20549. Comment letters should refer to File No. S7-

16-94. All comments received will be available for public inspection

and copying at the Commission's Public Reference Room, 450 Fifth

Street, NW., Washington, DC 20549.

FOR FURTHER INFORMATION CONTACT: With regard to the proposed exemption

from restrictions on borrowing, Beth A. Stekler, at (202) 942-0190,

Branch of Exchange Regulation, Division of Market Regulation; with

regard to issues relating to the proxy rules, Form 8-A, or reporting,

Joseph P. Babits, at (202) 942-2910, Office of Disclosure Policy,

Division of Corporation Finance; Securities and Exchange Commission

(Mail Stops 5-1 and 3-12, respectively), 450 Fifth Street, NW.,

Washington, DC 20549.

SUPPLEMENTARY INFORMATION: Under the Securities Exchange Act of 1934

(``Exchange Act''),\1\ the Commission is publishing for comment

proposed new Rule 3a12-11 and revisions to Rules 12b-7,\2\ 12d1-2,\3\

and Form 8-A.\4\ The proposed rule and amendments are intended to

provide regulatory relief to issuers listing debt securities on a

national securities exchange.

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

\2\17 CFR 240.12b-7.

\3\17 CFR 240.12d1-2.

\4\17 CFR 249.208a.

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I. Discussion of Proposals

A. Introduction and Summary

Section 12 of the Exchange Act\5\ requires all securities listed on

a national securities exchange to be registered under the Exchange

Act.\6\ Registration subjects the securities, whether debt or equity,

to a number of regulatory provisions, including restrictions on

borrowing,\7\ periodic reporting by the issuer,\8\ and proxy

regulation.\9\ In contrast, debt securities traded in the over-the-

counter (``OTC'') market are not required to be registered under the

Exchange Act,\10\ and, therefore, such securities are not subject to

the restrictions on borrowing or proxy regulation. These regulatory

distinctions may have unnecessarily and unintentionally affected the

structure and development of the debt markets.

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\5\15 U.S.C. 78l.

\6\Section 12(a) of the Exchange Act [15 U.S.C. 78l(a)] prevents

any member, broker or dealer from effecting any transaction in any

security listed on a national securities exchange unless the

security is registered pursuant to Section 12(b) of the Exchange Act

[15 U.S.C. 78l(b)].

\7\Section 8(a) of the Exchange Act [15 U.S.C. 78h(a)].

\8\Section 13(a) of the Exchange Act [15 U.S.C. 78m(a)].

\9\Section 14(a), (b), and (c) of the Exchange Act [15 U.S.C.

78n(a), (b), and (c)].

\10\See Section 12(g) of the Exchange Act [15 U.S.C. 78l(g)],

which only requires registration of equity securities.

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The New York Stock Exchange (``NYSE'') has advised the Commission

that the additional regulatory requirements imposed on listed debt

securities create significant disincentives for issuers to list their

debt on the national securities exchanges and urged that exemptive

action be taken to eliminate this disparity. To address this disparate

regulatory treatment between listed and OTC-traded debt, the Commission

is proposing to exempt listed debt securities from the borrowing

restrictions and proxy rules under the Exchange Act. Listed debt

securities, however, would remain subject to the registration and

reporting requirements. The Commission also is proposing to simplify

the registration process by providing for the immediate effectiveness

of Form 8-A registration statements pertaining to the listing of debt

securities on a national securities exchange and eliminating the filing

fee associated with the form.

In addition to these proposals to ease the regulatory obligations

resulting from listing debt securities, the Commission also is

considering whether additional informational requirements should be

imposed on issuers of OTC-traded debt securities. Accordingly, as

discussed below, the Commission is requesting comment on the benefits

of periodic reporting requirements with respect to issuers of debt

securities and on whether it is advisable to extend those requirements

to issuers of debt securities that are traded in the OTC market,

comparable to the requirements applicable to issuers that list their

debt securities on a national securities exchange.

B. Exemption From the Borrowing Restrictions of the Exchange Act

In the aftermath of the 1929 market crash, Congress enacted the

Exchange Act to regulate, among other matters, the extension of credit

in the securities markets.\11\ Along with margin provisions,\12\

Congress placed a restriction on the ability of broker-dealers to

borrow, in the ordinary course of business, using exchange-traded

securities as collateral. Under Section 8(a) of the Exchange Act,\13\ a

broker-dealer can pledge a listed security, other than an exempted

security, only to certain lenders: a member bank of the Federal Reserve

System; a non-member bank that has filed with the Federal Reserve Board

an agreement to comply with those provisions of the federal securities

and banking laws that apply to member banks; or another broker-dealer

if such a loan is permissible under the rules and regulations of the

Federal Reserve Board.\14\ As noted above, Section 8(a) specifically

excludes exempted securities from these restrictions on borrowing.

Under Section 3(a)(12) of the Exchange Act,\15\ the term ``exempted

securities'' includes such securities as the Commission may exempt from

the operation of any one or more provisions of the Exchange Act.

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\11\See, e.g., 78 Cong. Rec. 8386-96 (Senate debate rejecting an

amendment to prohibit, rather than regulate, margin transactions).

\12\In particular, Section 7(a) of the Exchange Act [15 U.S.C.

78g] authorized the Board of Governors of the Federal Reserve System

(``Federal Reserve Board'') to prescribe rules and regulations with

respect to the amount of credit that may be initially extended and

subsequently maintained on any security traded on a national

securities exchange.

\13\15 U.S.C. 78h(a).

\14\For example, Regulation T [17 CFR 220.1 et seq.] authorizes

a broker-dealer to clear or finance transactions for a specialist's

market functions account. See 12 CFR 220.12(b).

\15\15 U.S.C. 78c(a)(12).

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In 1968, when Congress extended many of the margin provisions

(i.e., Section 7(a)) to securities traded exclusively in the OTC

market,\16\ Congress placed no comparable restriction on the ability of

broker-dealers to borrow against OTC securities.\17\ As a result, a

broker-dealer can use bonds that are not listed on an exchange to

secure financing from any lender, whether or not that lender falls

within the statutorily enumerated categories.

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\16\1968 Amendments to the Securities Exchange Act of 1934, Pub.

L. No. 90-437, 82 Stat. 452 (1968).

\17\Congress did not amend Section 8(a), as it amended Section

7(a), to extend that provision to securities traded exclusively in

the OTC market. Congress, however, did not repeal Section 8(a) for

listed securities.

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Since that time, various market participants have voiced concerns

that Section 8(a) is overly restrictive and competitively unfair.\18\

According to these participants, broker-dealers' discretion in

financing their positions is unduly constrained once a debt security is

traded on an exchange. In addition, at least one national securities

exchange has been informed by its members that the members may advise

an issuer against listing bonds due to the restrictions in Section

8(a).\19\

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\18\See, e.g., letter from Donald J. Solodar, Executive Vice

President, Fixed Income, Options & Administration, New York Stock

Exchange (``NYSE''), to Brandon Becker, Director, Division of Market

Regulation, SEC, and Linda C. Quinn, Director, Division of

Corporation Finance, SEC, dated July 19, 1993 (``NYSE letter'');

letter from Marc E. Lackritz, President, Securities Industry

Association (``SIA''), to William W. Wiles, Secretary, Federal

Reserve Board, dated December 23, 1992 (``SIA letter'').

\19\See NYSE letter, supra note 18.

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Given the developments in the OTC market since Congress took action

in the 1960s, the current structure of the bond market and the nature

of debt financing, the differential treatment of exchange-listed and

OTC-traded debt securities does not appear to be warranted. In today's

highly competitive market environment, the current regulatory scheme

may detract unfairly from broker dealers' ability to finance their

positions, and from the national securities exchanges' ability to

obtain debt listings.\20\

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\20\The Commission notes that, at this time, most secondary

trading in debt securities (including listed debt securities) takes

place in the OTC market; exchange trading of corporate bonds

currently accounts for a relatively small percentage of the daily

trading volume in such securities and is often in ``odd-lot'' size.

United States Securities and Exchange Commission, Division of Market

Regulation, The Corporate Bond Markets: Structure, Pricing and

Trading 1, 13 (January 1992). Although these circumstances may

change if the relief proposed herein is granted, the Commission

recognizes that it places a competitive burden on exchange markets

to subject them to more restrictive regulation than the OTC market,

which is, in this case, the primary market for the trading of debt

securities.

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The Commission is proposing to exempt\21\ exchange-traded debt

securities from the borrowing restrictions of Section 8(a).\22\ The

proposed exemption to the restrictions on borrowing would eliminate one

competitive barrier to the exchange trading of debt securities.

Specifically, to the extent that the restrictions of Section 8(a) may

encourage underwriters and investment bankers to recommend against debt

securities being listed, the proposed exemption would eliminate that

impediment to the listing of debt securities on a national securities

exchange.

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\21\Section 3(a)(12) of the Exchange Act.

\22\Proposed Rule 3a12-11(a) would exempt debt securities that

are traded on a national securities exchange from the restrictions

on borrowing of Section 8(a) of the Exchange Act. A broker-dealer

who extends credit on that collateral would continue to be required

to comply with the applicable rules and regulations of the Federal

Reserve Board, including Regulation T [17 CFR 220.1 et seq].

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Moreover, the exemption from the restrictions on borrowing could

provide certain benefits to the financial system. Under this proposal,

a broker-dealer borrowing against a listed debt security could choose

among prospective lenders based solely upon the terms of the financing

that they offer. For instance, the exemption would make it possible for

a broker-dealer to enter into a repurchase agreement with a non-bank

institutional investor. This flexibility should help broker-dealers

obtain financing at the lowest available cost.

For purposes of the proposed rule, the term ``debt security'' would

include any security that is not an ``equity security'' as defined by

the Exchange Act and the rules thereunder.\23\ Comment is solicited as

to whether, in lieu of the proposed definition, the term ``debt

security'' should be more specifically defined. For example, should the

term ``debt security'' be defined as: ``(1) A note, bond, debenture or

evidence of indebtedness; (2) a certificate of interest or

participation in any such note, bond, debenture or evidence of

indebtedness; or (3) a temporary certificate for, or guarantee of, any

such note, bond, debenture, evidence of indebtedness or certificate;

but shall not include an `equity security' as defined in Section

3(a)(11) of the Act and Rule 3a11-1 thereunder''?\24\ Comment also is

solicited as to whether hybrid debt securities should be treated as

debt securities for purposes of Rule 3a12-11.

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\23\Proposed Rule 3a12-11(c). The term ``equity security'' is

defined in Section 3(a)(11) [15 U.S.C. 78c(a)(11)] and Rule 3a11-1

[17 CFR 240.3a11-1] thereunder. Equity securities would include,

among other items, stock or similar security, certificates of

interest or participation in any profit sharing agreement, voting

trust certificate or certificate of deposit for any equity security,

limited partnership interest, any security that is convertible, with

or without consideration, into an equity security or any warrant or

right to subscribe or purchase an equity security.

\24\This definition is modeled after Section 304(a)(1) of the

Trust Indenture Act of 1939, (``Trust Indenture Act'') [15 U.S.C.

77ddd(a)(1)].

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The Commission requests commenters to address the scope of the

proposed exemption as well as its merits. Are there any categories of

listed debt securities that should remain subject to the borrowing

restrictions? Interested persons may also wish to comment on how

exempting exchange-traded debt securities from Section 8(a)

restrictions would affect investor protection in the debt market,

including whether the purposes behind the Exchange Act's credit

provisions would be frustrated as a result. Interested persons may also

wish to comment on the proposed rule's impact on the transparency and

liquidity of the market for debt securities.

C. Exemption From Compliance With the Proxy Rules

A second provision of the proposed rule would exempt debt

securities listed on a national securities exchange from proxy

regulation.\25\ By proposing to exempt debt listed on a national

securities exchange from the proxy rules, the Commission seeks to

address the disparate application of the proxy rules between listed

debt securities and debt securities traded in the OTC market. The proxy

rules principally apply to equity securities, since most debt

securities are not listed on a national securities exchange and thus

not subject to the proxy rules.\26\

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\25\Proposed Rule 3a12-11(b) would exempt listed debt securities

from the proxy, shareholder communications, and information

statement rules under Sections 14(a), 14(b), and 14(c) of the

Exchange Act. The term ``debt securities'' would be defined in the

same manner as in the exemption from the restrictions on borrowing.

See proposed Rule 3a12-11(c).

\26\The OTC market is the principal trading market for debt (see

n.20). Of the more than 13,000 publicly traded domestic corporate

bond issues in 1989, fewer than 20% (2,135 on the NYSE and 280 on

the American Stock Exchange (``AMEX'') were listed on the NYSE and

AMEX. See Colloton, ``Bondholder Communications--The Missing Link in

High Yield Debt,'' Hill and Knowlton, Inc. at 17 (August 1990).

Similarly, less than 20% of the total face amount of corporate debt

securities outstanding is listed on the NYSE. See New York Stock

Exchange, Inc., Fact Book 54 (1993); Board of Governors of the

Federal Reserve System, Flow of Funds Account L.213 (March 9, 1994).

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In 1963, the Commission submitted a report to Congress that set

forth its recommendations as to the scope of regulation needed for the

OTC market.\27\ These recommendations led to the adoption of Section

12(g) in 1964. The Commission concluded that proxy regulation should

not be required with respect to debt securities since Section 14 was

designed to protect shareholders and the solicitation of proxies was

``rarely [a] problem[ ] related to debt securities and, then, most

probably in insolvency cases when other protections were

available.''\28\ Today, solicitations of debtholders subject to the

proxy rules continue to be infrequent, with only 18 such solicitations

having occurred between 1990 and 1993 with respect to NYSE-listed

issuers.\29\

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\27\Report of Special Study of Securities Markets, (``1963

Special Study'') U.S. Securities and Exchange Commission, H.R. Doc.

No. 95, 88th Cong., 1st Sess. pt. 3, 34 (1963).

\28\Id. at 34.

\29\See letter from Fred Siesel of NYSE to David Sirignano of

the Division of Corporation Finance dated May 12, 1994.

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In the context of listed debt, the proxy rules, for the most part,

cover solicitations to modify the terms of a trust indenture. Given the

strictures already imposed by the indenture contract, as well as the

Trust Indenture Act, comment is solicited as to whether the benefits to

debtholders from the application of the proxy rules to debt securities

listed on a national securities exchange outweigh the costs to the

issuers in complying with the proxy rules in connection with proxy or

consent solicitations.30 If the proxy rules provide important

protections with respect to publicly-traded debt securities that should

be preserved, does the need for these protections derive from the

listing of the security on a national securities exchange or rather

because it is traded in the public debt markets? If the latter is the

case, should the Commission seek to extend the proxy rules to all

publicly-traded debt securities, similar to the treatment of equity

securities under Section 12(g) of the Exchange Act? Comment also is

solicited as to whether an issuer's solicitation of holders of debt

securities listed on a national securities exchange should remain

subject to the antifraud proscriptions of Rule 14a-931 and/or the

rules adopted under Section 14 of the Exchange Act to facilitate the

transmission of proxy and consent materials to beneficial

owners,32 even if exempted from other proxy regulation. Finally,

is the application of the proxy rules currently part of the

expectations of the parties negotiating an indenture agreement, or of

investors purchasing a listed debt security? If so, should the proposed

exemption be prospective in nature and thus inapplicable to classes of

debt listed before the effective date of the exemption?

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\3\0When Congress first began to consider the need for 12(g), an

earlier version of Senate Bill 1168 would have subjected issuers

with more than $1 million of debt securities outstanding to

registration and the proxy rules. The Senate Committee on Banking

and Currency, however, ``recognized that debt security holders are

normally better protected, from a financial standpoint, by the fixed

dollar obligation in the debt contract than are holders of equity

securities, and hence eliminated the debt security test from the

provisions of the bill.'' S. Rep. No. 700, 85th Cong., 1 Sess. 6

(1957).

\3\117 CFR 240.14a-9.

\3\2Rules 14a-13 [17 CFR 240.14a-13], 14b-1 [17 CFR 240.14b-1],

and 14b-2 [17 CFR 240.14b-2].

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D. Automatic Effectiveness of Form 8-A and Elimination of Filing Fee

The Commission proposes to reduce or eliminate some of the

procedural costs of listing debt on a national securities exchange,

both through rulemaking and through practical modifications to filing

procedures.33 Currently, Form 8-A registration statements must be

declared effective by the staff, pursuant to delegated authority, which

necessitates coordination among the issuer, its counsel, the Commission

staff, and the national securities exchange. A rule change is proposed

to provide for the automatic effectiveness of registration statements

on Form 8-A, including amendments, that pertain only to the listing of

debt securities on a national securities exchange.34 In the case

where debt securities of the class being registered were concurrently

being registered under the Securities Act, the Form 8-A would become

effective simultaneously with the effectiveness of the related

Securities Act registration statement if certification by the national

securities exchange had been received by the Commission on or before

the effectiveness of the related Securities Act registration statement.

If, however, that class of debt securities was not concurrently being

registered under the Securities Act, then the Form 8-A would become

effective upon filing if certification by the exchange had been

received by the Commission on or before the filing of the form.35

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\3\3The Commission will accept the filing of a combined Form 8-A

and NYSE Listing Application on behalf of any issuer listing debt

securities on the NYSE. The combined Form 8-A/Listing Application

will include all the current disclosure requirements of Form 8-A and

the listing application requirements of NYSE. The NYSE intends to

assist its listed companies by filing the combined Form 8-A/Listing

Application with the Commission on behalf of the issuer and as its

agent. The issuer, however, may choose to file the Form 8-A itself.

Regardless of whether the issuer or the national securities exchange

files the Form 8-A/Listing Application, the issuer is solely

responsible for the filing and its contents.

National securities exchange representatives wishing to use a

similar procedure should contact Joseph P. Babits at (202) 942-2910.

National securities exchanges that intend to use a combined Form 8-

A/Listing Application that will become effective upon filing must

confirm that the combined Form has been in fact filed with the

Commission prior to the commencement of trading in the class of

securities.

A national securities exchange using such a procedure may wish

to make Form 8-A filings with the Commission in paper, whether or

not the registrant is subject to mandated electronic filing via the

Electronic Data Gathering, Analysis, and Retrieval system (EDGAR).

Accordingly, the Division of Corporation Finance will consider

requests for a continuing hardship exemption pursuant to Rule 202 of

Regulation S-T [17 CFR 232.202] from any national securities

exchange filing Forms 8-A on behalf of electronic filers.

\3\4Proposed amendments to Rule 12d1-2 and Instruction A of Form

8-A. Forms 8-A that register both debt and equity securities would

not be encompassed by the proposed amendments.

\3\5If an issuer elects to file the Form 8-A (or Form 8-A/

Listing Application) itself, it must ensure that the Commission has

received certification from the exchange on or before the date of

filing the Form if automatic effectiveness is requested, or, if

concurrent effectiveness is requested, on or before the Securities

Act registration statement has been declared effective. An issuer

may contact the Office of Quality Control at (202) 942-8970 (ext.

4475) to verify that certification has been received by the

Commission.

To the extent that multiple debt issues are being registered on

a single Form 8-A, then certification for each issue must be

received by the Commission prior to effectiveness. Where a Form 8-A

relates to debt securities to be listed on multiple national

securities exchanges (e.g., the NYSE and the Boston Stock Exchange),

then certifications must be received by the Commission from each

exchange prior to effectiveness.

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In addition, the Commission proposes to eliminate the $250 filing

fee for registering a class of debt securities on Form 8-A.36 Form

8-A would be revised to add two new boxes, one of which the issuer

would check to signify it is a debt registration requiring no fee and

that the Form 8-A: (1) Is to be effective automatically upon filing, as

no debt securities of the class being registered on the form are being

registered concurrently under the Securities Act; or (2) is to be

effective simultaneously with the effectiveness of a related Securities

Act registration statement. Comment is solicited as to whether these

proposed amendments address the procedural and timing concerns of

issuers listing debt securities on a national securities exchange.

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\3\6Proposed amendment to Rule 12b-7.

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E. Reporting

Today's proposals do not exempt listed debt securities from

registration and reporting under the Exchange Act. Companies that list

their debt securities for trading in the public market will still have

to provide annual, quarterly, and current reports. This raises the

question as to the need for similar requirements for issuers with

substantial amounts of debt securities traded in the OTC market.

When Congress amended the Exchange Act in 1964 to add Section

12(g), it extended registration to the OTC market for the first time.

However, the 1964 amendments focused exclusively on issuers of equity

securities. No comparable provision was provided for debt securities

that are traded in the OTC market. This difference in regulatory

treatment was not based on a policy decision that current financial

information is not important to the market. Rather, the decision

appears to have been based, at least in part, on the nature of the debt

securities market in 1963. At that time, it was considered unnecessary

to extend registration to debt securities trading in the OTC market, as

it appeared that a company that had a significant amount of debt

securities outstanding would probably meet the Section 12(g) threshold

with respect to its equity securities.37

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\3\71963 Special Study, supra note 27, at n.55.

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Specifically, in its 1963 Special Study, the Commission cited the

results of a questionnaire it used in, among other matters, determining

whether debtholders independently needed the protections of Section 13,

14, and 16 of the Exchange Act.38 The questionnaire sought

information about outstanding debt securities, face dollar amount, and

number of holders. While acknowledging the small number of respondents

to the questionnaire, the Commission found that of 218 issuers that

responded, only 58 would not have incurred a reporting

obligation.39 Of these issuers, 45% had less than $250,000 face

amount of debt securities outstanding, 60% less than $500,000

outstanding, and 76% less than $1,000,000.40 The Commission

concluded that the proposed Section 12(g) equity threshold would make

financial reports publicly available to a large majority of

debtholders. Furthermore, the aggregate sums lent by issuers that would

not be subject to any reporting obligation tended to be modest. Thus,

the 1963 Special Study recommended to Congress that Section 12(g) not

apply to debt securities.41

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\3\8Id.

\3\9Publicly available financial information would have been

available for 160 issuers that would have met the proposed Section

12(g) threshold requiring registration of their equity securities.

Id.

\4\0Id.

\4\1Id. The Commission also noted that Section 314(a)(1) [15

U.S.C. 77nnn(a)(1)] of ``[t]he Trust Indenture Act of 1939 gave the

Commission power to require companies which qualify indentures under

it, but are not otherwise under a statutory duty to report under the

provisions of Sections 13 and 15(d) of the Exchange Act, to comply

with such of the reporting requirements of section 13 as the

Commission might prescribe.'' 1963 Special Study, supra note 27, at

6.

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In the 1980s, the issuance of debt securities in both private

placements and public offerings began to increase dramatically.42

In addition, the increasing use of leveraged buyouts that concentrated

equity ownership below Section 12(g) thresholds resulted in a number of

companies with significant outstanding debt securities that are not

reporting companies. Concerns have been expressed about the lack of

information being available to the market regarding the issuers of some

of these securities.43 In the case of privately placed debt

securities traded in the OTC market, no registration or periodic

reporting under the Exchange Act is required. Section 15(d) of the

Exchange Act44 requires reporting by issuers that make a

registered offering of equity or debt securities, but permits companies

to suspend their reporting obligations after one year when a class of

securities are held by fewer than 300 record holders.

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\4\2Federal Reserve Bulletin, Vol. 68.12-79.3 (December 1982-

March 1993).

\4\3See generally, Jereski, ``None of Your Business,'' Forbes

(April 29, 1991) at 68; Norris, ``Market Place--When Companies

Conceal the Facts,'' The New York Times (September 14, 1990);

Jereski, ``Now You See the Junk, Now You Don't,'' Business Week

(April 2, 1990) at 40; Colloton, supra note 26.

See also, Harris Trust and Savings Bank et al. v. E-II Holdings,

Inc., (N.D. Ill. No. 89 C 203) Fed. Sec. L. Rep. [CCH] par. 94,917

at 95,057 (September 5, 1989). The court held that absent specific

provisions in the indenture, Section 314(a) of the Trust Indenture

Act would not compel production of financial and other information

by the non-reporting company to its trustees.

\4\415 U.S.C. 78o(d).

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As applied, most issuances of debt securities are viewed as

separate classes of debt. Therefore, it is not uncommon for a company

that sells registered debt securities not to have a 15(d) reporting

obligation after its first year. While there may be more than 300

holders of record for all the registered debt of a company, it is not

uncommon that there are fewer than 300 holders of record for any one

issue.

The staff of the Division of Corporation Finance recently examined

information on companies that had more than 5 million dollars of debt

securities outstanding to determine whether the companies were

reporting with the Commission. The staff concluded that there are at

least 200 non-reporting issuers, with over $47 billion of debt

securities outstanding.45 It appears appropriate to determine

whether the nature and size of the debt market has sufficiently changed

since the 1960s such that continuous reporting by issuers with

significant amount of debt securities may now be warranted.

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\4\5The staff believes that these statistics are understated

since non-reporting companies often consider their financial and

operating information proprietary.

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Comment is solicited as to whether it is now desirable for the

Commission to adopt rules or exercise definitional authority under the

Exchange Act or Trust Indenture Act to increase the number of issuers

with debt securities traded in the OTC market that would be subject to

periodic reporting. For example, are periodic reports needed for

companies that have issued debt securities but subsequently suspended

their reporting obligations pursuant to Section 15(d) of the Exchange

Act? Comment also is solicited as to whether, even in the absence of a

registered offering, an issuer of debt securities should be subject to

an Exchange Act reporting obligation, similar to the provisions

governing the registration of equity under Section 12(g) of the

Exchange Act.

If such reporting obligations are needed, should the thresholds be

based upon the total dollar amount of debt securities outstanding, the

number of record or beneficial holders, and/or other criteria? If the

number of holders, comment is solicited as to the appropriate threshold

number of holders (i.e., 300, 500, or some greater or lesser number)?

Comment is solicited as to how the number of holders should be

calculated for these purposes.46 Comment also is solicited as to

whether the total amount of registered debt securities outstanding of

an issuer should be viewed as one class in determining whether the

threshold is met.

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\4\6Where securities have been issued in book-entry form and

held by the Depository Trust Company (``DTC''), the staff has taken

the position that DTC participants should be included in the

calculation of the total number of record holders. See, CFAC Remic

Trust 1989-A (available March 30, 1990).

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II. Request for Comment

Any interested persons wishing to submit written comments on the

proposed rules and amendments, as well as any other matters that might

have an impact on the proposals set forth in the release are requested

to do so. Comments are requested on the impact of the proposals on

issuers, debtholders, broker-dealers, and others. The Commission also

requests comment on whether the proposals, if adopted, would have an

adverse effect on competition that is neither necessary nor appropriate

in furthering the purposes of the Exchange Act. Comments will be

considered by the Commission in complying with its responsibilities

under Section 23(a) of the Exchange Act.47

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\4\715 U.S.C. 78w(a).

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III. Cost-Benefit Analysis

To assist the Commission in its evaluation of the costs and

benefits that may result from the proposals, commenters are requested

to provide views and data relating to any costs and benefits associated

with these proposals. The proposals are expected to decrease the net

costs to issuers associated with listing debt securities on a national

securities exchange, without materially diminishing the benefits to

investors. Among other matters, the proposals would exempt the class of

debt securities from the restrictions on borrowing and the proxy rules.

The costs to investors associated with these proposed rules and

revisions are minimal. Currently, an issuer is not required to register

debt securities under the Exchange Act in order for those securities to

be traded in the OTC market. By reducing the regulatory costs of

listing debt on a national securities exchange, it is expected that

more issuers will list such securities and thus register under the

Exchange Act.

IV. Summary of Initial Regulatory Flexibility Analysis

An Initial Regulatory Flexibility Analysis has been prepared in

accordance with 5 U.S.C. 603 for the proposed rule and amendments to

Rule 12b-7, 12d1-2, and Form 8-A. The analysis notes that the proposals

are expected to reduce regulatory costs for small entities.

As discussed more fully in the analysis, the proposed changes would

affect persons that are small entities, as defined by the Commission's

rules. The exemptions provided by Rule 3a12-11 and revisions to Rules

12b-7, 12d1-2, and Form 8-A are expected to decrease the compliance

burdens of small entities.

Commenters are encouraged to comment on any aspect of the analysis.

Such comments will be considered in the preparation of the Final

Regulatory Flexibility Analysis if the proposed rule and amendments are

adopted. A copy of the analysis may be obtained by contacting Joseph P.

Babits, Office of Disclosure Policy, Division of Corporation Finance,

Securities and Exchange Commission, 450 Fifth Street, NW., Washington,

DC 20549.

V. Statutory Basis for Rules

New Rule 3a12-11 and all amendments are being proposed pursuant to

Exchange Act Sections 3(a)(12),48 9,49 10,50 12,51

14,52 and 23,53 as amended.

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\4\815 U.S.C. 78c(a)(12).

\4\915 U.S.C. 78i.

\5\015 U.S.C. 78j.

\5\115 U.S.C. 78l.

\5\215 U.S.C. 78n.

\5\315 U.S.C. 78w.

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List of Subjects in 17 CFR Parts 240 and 249

Reporting and recordkeeping requirements, Securities.

Text of Proposals

In accordance with the foregoing, Title 17, Chapter II of the Code

of Federal Regulations is proposed to be amended in part 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, 77eee, 77ggg,

77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,

78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37,

80b-3, 80b-4 and 80b-11, unless otherwise noted.

* * * * *

2. By adding Sec. 240.3a12-11 to read as follows:

Sec. 240.3a12-11 Exemption from Sections 8(a), 14(a), 14(b), and 14(c)

for debt securities listed on a national securities exchange.

(a) Debt securities that are listed for trading on a national

securities exchange shall be exempt from the restrictions on borrowing

of Section 8(a) of the Act (15 U.S.C. 78h(a)).

(b) Debt securities registered pursuant to the provisions of

Section 12(b) of the Act (15 U.S.C. 78l(b)) shall be exempt from

Sections 14(a), 14(b), and 14(c) of the Act (15 U.S.C. 78n(a), (b), and

(c)).

(c) For purposes of this section, debt securities is defined to

mean any securities that are not ``equity securities'' as defined in

Section 3(a)(11) of the Act (15 U.S.C. 78c(a)(11)) and Sec. 240.3a11-1

thereunder.

3. By adding a sentence to the end of Sec. 240.12b-7 to read as

follows:

Sec. 240.12b-7 Filing fee.

* * * No fee, however, shall be paid to the Commission for the

registration of debt securities, as defined in Sec. 240.3a12-11(c), on

Form 8-A (17 CFR 249.208a) pursuant to Section 12(b) of the Act (15

U.S.C. 78l(b)).

4. By revising the section heading, designating the existing text

as paragraph (a), and adding paragraph (b) to Sec. 240.12d1-2 to read

as follows:

Sec. 240.12d1-2 Effectiveness of registration.

(a) * * *

(b) A registration statement on Form 8-A (17 CFR 249.208a) that

only pertains to the listing of a class or classes of debt securities,

as defined in Sec. 240.3a12-11(c), on a national securities exchange

for which certification has been received by the Commission shall

become effective upon filing with the Commission, in the case of a

class of debt securities not concurrently being registered under the

Securities Act of 1933 (15 U.S.C. 77a et seq.) (``Securities Act'');

and otherwise, upon the effectiveness of a concurrent Securities Act

registration statement to which the debt securities relate.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

5. The authority citation for part 249 continues to read in part as

follows:

Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;

* * * * *

6. By amending Sec. 249.208a by adding paragraph (c) to read as

follows:

Sec. 249.208a Form 8-A, for registration of certain classes of

securities pursuant to section 12 (b) or (g) of the Securities Exchange

Act of 1934.

* * * * *

(c) If this form is used only for the registration of a class of

debt securities as defined in Rule 3a12-11(c) and certification from

the national securities exchange has been received by the Commission,

it shall become effective either:

(1) Upon filing with the Commission, in the case of a class of debt

securities not concurrently being registered under the Securities Act

of 1933 (15 U.S.C. 77a et seq.) (``Securities Act''); or

(2) Upon the effectiveness of a concurrent Securities Act

registration statement to which the debt securities relate.

7. By amending Form 8-A (Sec. 249.208a) by adding two check boxes

to the cover page immediately before ``Securities to be registered

pursuant to Section 12(g) of the Act,'' and by adding paragraph (c) to

General Instruction A to read as follows:

Note: The text of Form 8-A does not and the amendments will not

appear in the Code of Federal Regulations.

Form 8-A--For Registration of Certain Classes of Securities Pursuant to

Section 12(b) or (g) of the Securities Exchange Act of 1934.

* * * * *

If this Form relates to the registration of a class of debt

securities and is effective upon filing pursuant to General

Instruction A.(c)(1), please check the following box. [ ]

If this Form relates to the registration of a class of debt

securities and is to become effective simultaneously with the

effectiveness of a concurrent registration statement under the

Securities Act of 1933 pursuant to General Instruction A.(c)(2),

please check the following box. [ ]

* * * * *

GENERAL INSTRUCTIONS

A. Rule as to Use of Form 8-A

* * * * *

(c) If this form is used only for the registration of a class of

debt securities as defined in Rule 3a12-11(c) (17 CFR 240.3a12-

11(c)) and certification from the national securities exchange has

been received by the Commission, it shall become effective:

(1) upon filing with the Commission, in the case of a class of

debt securities not concurrently being registered under the

Securities Act of 1933 (15 U.S.C. 78a et seq.) (``Securities Act'');

or

(2) simultaneously with the effectiveness of a concurrent

Securities Act registration statement to which the debt securities

relate. See Rule 12d1-2(b) (17 CFR 240.12d1-2(b)).

By the Commission.

Dated: June 1, 1994.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-13731 Filed 6-6-94; 8:45 am]

BILLING CODE 8010-01-P