Exemption From Rule 10b-6 for Certain Dividend Reinvestment and Stock Purchase Plans

SECURITIES AND EXCHANGE COMMISSION

[Releases Nos. 33-7114; 34-35041]

Exemption From Rule 10b-6 for Certain Dividend Reinvestment and

Stock Purchase Plans

December 1, 1994.

Pursuant to delegated authority, on December 1, 1994, the Division

of Market Regulation issued the attached letter to The Securities

Transfer Association (``STA Letter'') granting a class exemption from

rule 10b-6 under the Securities Exchange Act of 1934, subject to

certain conditions, to facilitate the availability of certain dividend

reinvestment and stock purchase plans (``DRSPPs'') to investors. The

STA Letter is significant because many issuers no longer will need to

seek individual exemptions from Rule 10b-6 before implementing their

DRSPPs. The letter also addresses issues concerning broker-dealer

registration under Section 15(a) of the Exchange Act.

The STA Letter is consistent with prior Rule 10b-6 exemptions

granted to issuers, and facilitates investors' access to DRSPPs insofar

as it permits investors to obtain their first shares of an issuer's

securities directly from the issuer. The STA Letter has been issued in

the context of a continuing review of Rule 10b-6, and is published to

provide notice of the exemption's availability.

For further information, contact the Office of Trading Practices

(for matters regarding Rule 10b-6), at (202) 942-0772, and the Office

of Chief Counsel (for matters regarding broker-dealer registration), at

(202) 942-0073, Division of Market Regulation, Securities and Exchange

Commission, 450 Fifth Street, NW., Washington, DC 20549.

Margaret H. McFarland,

Deputy Secretary.

December 1, 1994.

Mr. Michael J. Foley, President,

The Securities Transfer Association, Inc., P.O. Box 5067, Hazlet, NJ

07730-5067.

Re: Dividend Reinvestment and Stock Purchase Plans.

Dear Mr. Foley: To clarify issues raised under Rule 10b-6

(``Rule 10b-6'' or ``Rule'')\1\ under the Securities Exchange Act of

1934 (``Exchange Act'')\2\ by dividend reinvestment and stock

purchase plans (``DRSPPs''), the Commission has determined to grant

an exemption from the Rule to certain issuers (``Issuers''), their

affiliated purchasers (``Affiliated Purchasers''), as defined in

paragraph (c)(6) of the Rule,\3\ and the agents of the Issuers'

DRSPPs (``DRSPPs Agents'') during distributions of the Issuers'

shares of common stock pursuant to the Issuers' DRSPPs. This letter

also addresses the application of Sections 15(a) and 17A of the

Exchange Act\4\ to DRSPPs. The discussion of Sections 15(a) and 17A

pertains to all DRSPPs. It applies both to ``plans,'' as defined in

paragraph (c)(4) of Rule 10b-6\5\ and to non-traditional DRSPPs,

which are the subject of the exemption from Rule 10b-6 discussed

below.

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\1\17 CFR 240.10b-6.

\2\15 U.S.C. Secs. 78a et seq.

\3\17 CFR 240.10b-6(c)(6). Generally, an affiliated purchaser

includes any person acting in concert with the issuer or other

person making the distribution; an affiliate who directly or

indirectly controls purchases by the issuer or other person, or

whose purchases are controlled by or under common control with the

issuer or other person; a broker-dealer affiliate; and a non-broker-

dealer affiliate that regularly purchases securities for its own

account or for another's account or recommends or exercises

investment discretion with respect to the purchase or sale of

securities.

\4\15 U.S.C. Secs. 78o and 78q-1, respectively.

\5\17 CFR 240.10b-6(c)(4). A plan includes ``any bonus, profit-

sharing, pension, retirement, thrift, savings, incentive, stock

purchase, stock ownership, stock appreciation, stock option,

dividend reinvestment or similar plan for employees or shareholders

of an issuer or its subsidiaries.''

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I. Background

A DRSPP is a program offered by a corporation or closed-end fund

that allows participants to accumulate shares of an issuer's common

stock directly from the issuer by reinvesting dividends and, in many

cases, by making optional cash payments. Individual investors may be

attracted to DRSPPs because they often provide a relatively

convenient and inexpensive mechanism to accumulate shares of

particular issuers through the automatic, regular reinvestment of

dividends and, in many cases, through optional cash payments. These

programs also are favored by issuers because, among other things,

they can provide a relatively economical mechanism for raising

capital, while simultaneously improving shareholder relations and

broadening and stabilizing the issuer's shareholder base.

Approximately 1,000 issuers currently offer some form of DRSPP.

The earliest DRSPPs were dividend reinvestment plans (``DRPs''),

in which participation was limited to the issuer's shareholders, and

through which additional shares could be purchased only with

reinvested dividends. Since the first DRP was introduced in the

late-1960s, there has been considerable evolution in these programs.

The greatest changes have been in the categories of persons that are

permitted to participate in DRSPPs, and in the ability of

participants to accumulate issuers' shares by making optional cash

purchases as well as through dividend reinvestment.

Today, many issuers no longer limit participation in their

DRSPPs to shareholders or employees. Rather, various issuers have

extended DRSPP participation to, among others, retirees, outside

directors, consultants, suppliers, franchisees, independent

contractors, family members of the above, as well as credit card

holders and other customers. Moreover, some issuers permit

participation in their DRSPPs following an initial cash payment,

rather than requiring prior share ownership. Further, as noted

above, many DRSPPs allow shares to be purchased with optional cash

payments as well as reinvested dividends.

II. Rule 10b-6

Rule 10b-6 is an anti-manipulation rule that, subject to certain

exceptions, prohibits persons who are engaged in a distribution of

securities from bidding for or purchasing, or inducing others to

purchase, such securities, any security of the same class and series

as the distributed securities, or any security that is immediately

convertible into or exchangeable for or any right to acquire such

distributed securities (collectively ``related securities''), until

they have completed their participation in the distribution. The

Rule is intended to prevent those persons participating in a

distribution of securities from artificially conditioning the market

for the offered securities in order to facilitate the distribution,

and to protect the integrity of the securities trading market as an

independent pricing mechanism.

Paragraph (e) of Rule 10b-6 provides that the Rule does not

apply to any distribution of securities by an issuer or a subsidiary

of the issuer to employees or shareholders of the issuer or its

subsidiaries, or to a trustee or other person acquiring such

securities for the account of such employees or shareholders

pursuant to a plan as defined in paragraph (c)(4) of the Rule.\6\

Paragraph (g) of Rule 10b-6 further provides that a bid for or

purchase of any security made or effected by or for a plan shall be

deemed to be a purchase by the issuer unless the bid is made, or the

purchase is effected, by an ``agent independent of the issuer,'' as

that term is defined in paragraph (a)(6) of Rule 10b-18.\7\

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\6\17 CFR 240.10b-6(e).

\7\17 CFR 240.10b-18(a)(6).

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When an issuer expands its DRSPP to allow participation by

persons other than its employees or shareholders or those of its

subsidiaries, the exception in paragraph (e) of the Rule is no

longer available. Without this exception, bids for or purchases of

an issuer's common stock made or effected by or for a DRSPP are

attributed to the issuer. Consequently, many issuers offering non-

traditional DRSPPs have sought, and have been granted, exemptions

pursuant to paragraph (j) of the Rule of permit transactions that

otherwise would be prohibited by Rule 10b-6 during distributions

pursuant to DRSPPs. These exemptions permit bids and purchases by

issuers, their affiliated purchasers, and DRSPP Agents during

distributions pursuant to a plan, subject to specified conditions.

The exemptions focused not only on the relationship between the

issuer and the individuals participating in the DRSPP, but also upon

the magnitude of sales pursuant to the DRSPP and the use of special

selling efforts and selling methods to promote participation in such

programs. Additionally, the exemption letters were used to notify

issuers of other issues raised by DRSPPs, including activities by

issuers that may raise concerns under Section 15(a) of the Exchange

Act relating to broker-dealer registration.

The Commission recently published a concept release (``Concept

Release'') regarding the anti-manipulation regulation of securities

distributions, which sought comment on, among other things, the

application of Rule 10b-6 to DRSPPs.\8\ Because of the numerous

requests received by the Commission for exemptions for Rule 10b-6 on

behalf of individual issuers offering DRSPPs, an exemption from Rule

10b-6 appears to be appropriate pending consideration of responses

to the Concept Release. Moreover, the staff of the Division is

setting forth its views on other matters involving DRSPPs, including

the activities of issuers in connection with DRSPPs that raise

issues under Sections 15(a) and 17A of the Exchange Act.

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\8\Securities Exchange Act Release No. 33924 (April 19, 1994),

59 FR 21681.

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III. Exemption

The Commission, by the Division of Market Regulation pursuant to

delegated authority, hereby grants an exemption from Rule 10b-6

pursuant to paragraph (j) of the Rule to permit any Issuer, its

Affiliated Purchasers, and the DRSPP Agent to bid for or purchase

the Issuer's common stock during a distribution of such security

pursuant to the Issuer's DRSPP, and to permit the DRSPP Agent to bid

for or purchase the Issuer's common stock pursuant to the DRSPP

during a distribution of common stock or related securities, by the

Issuer or any Affiliated Purchaser of the Issuer, subject to the

following terms and conditions:

A. Plan Administration

1. DRSPP Agent

The Issuer shall appoint an independent agent (i.e., the DRSPP

Agent) to execute transactions on behalf of the DRSPP and its

participants. For purposes of this exemption, the DRSPP Agent must

be a registered broker-dealer or bank as defined in Section 3(a)(6)

under the Exchange Act. To be deemed independent, the DRSPP Agent

may not be an affiliate of the Issuer, and neither the Issuer nor

any affiliate of the Issuer may exercise any direct or indirect

control or influence over the times when\9\ or the prices at which,

the independent agency may purchase the Issuer's common stock for

the DRSPP, the amounts of the security to be purchased, the manner

in which the security is to be purchased, or the selection of a

broker or dealer (other than the independent agent itself) through

which purchases may be executed.

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\9\E.g., there can be no requirement that purchases for the

DRSPP be made within a specified number of days after the dividend

date or after any deadline for submitting payment toward optional

cash purchases, except as consistent with Letter regarding Lucky

Stores Incorporated (pub. avail. July 6, 1974) (``Lucky Stores'') as

modified infra.

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2. Clerical and Ministerial Functions

All bids and purchases, and offers and sales, of the Issuer's

common stock on behalf of the DRSPP or its participants shall be

made by the DRSPP agent, or by a registered broker-dealer or bank,

as defined in Section 3(a)((6) of the Exchange Act, that is

independent of the Issuer and that is selected by the DRSPP Agent to

execute such transactions. The Issuer may perform only purely

clerical and ministerial functions, including forwarding cash and

securities to an independent broker-dealer or bank, in connection

with the DRSPP. The Issuer also must comply with this condition in

order to avoid broker-dealer registration under Section 15(a) of the

Exchange Act. See Section IV, infra.

Where the Issuer is a registered transfer agent, see Section V,

infra, the Issuer also may assist the DRSPP Agent by maintaining

records of each participant's activities, issuing statements of

account, and performing other functions of a transfer agent.\10\

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\10\See U.S.C. Sec. 78c(a)(25).

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B. Purchases of Securities on Behalf of the DRSPP

Consistent with the DRSPP Agent's independent role, neither the

Issuer, nor any person in a control relationship with the Issuer,

through the provisions of the DRSPP or otherwise, may place any

restrictions upon the time, price, amount, or manner of purchases

made on behalf of the DRSPP. The Issuer cannot change its

determination that shares purchased for the DRSPP will be purchased

from the Issuer or in the open market more than once in any 12 month

period. The Issuer cannot exercise such right absent a documented

determination by its board of directors or chief financial officer

that the Issuer's need to raise additional capital has changed, or

that there is another valid reason for such change, such as action

by a state or federal regulatory agency recommending or requiring a

change in the capital structure of the Issuer or of one of its major

operating subsidiaries.

If securities are purchased directly from the Issuer, the Issuer

and its Affiliated Purchasers cannot purchase the common stock on

any day on which the market price of the common stock will be a

factor in determining the purchase price of the common stock to be

delivered under the DRSPP.

Unless otherwise excepted by or exempted from Rule 10b-6, the

Issuer and its Affiliated Purchasers shall not purchase the common

stock: (1) During the period commencing two business days prior to

the initial dissemination of announcements regarding the DRSPP, and

ending 30 calendar days after such initial dissemination, and (2)

during the period commencing two business days before any subsequent

general dissemination of announcements regarding the DRSPP and

ending 15 calendar days after such subsequent dissemination.

C. Selling Efforts

An Issuer may permit persons with whom the Issuer has a

preexisting, continuing relationship, as well as members of the

general public to participate in its DRSPP, however, sales efforts

relating to the DRSPP must be consistent with the solicitation

activities permitted in Section IV.A., infra.

D. General Conditions of the Exemption

No bids or purchases shall be made for the purpose of creating

actual, or apparent, active trading in or raising the price of the

Issuer's common stock. Additionally, this exemption does not apply

to sales of the Issuer's securities by participants in DRSPPs that

otherwise may involve a distribution for purposes of Rule 10b-6.

This exemption is subject to modification or revocation if at

any time the Commission or Division determines that such action is

necessary or appropriate in furtherance of the purposes of the

Exchange Act. As noted above, the Commission recently published the

Concept Release seeking comments on a broad range of issues relating

to the anti-manipulation regulation of securities offerings, and

specifically requested comments on the treatment of DRSPPs under

Rule 10b-6. Following review of comments received in response to

that release, the Commission may determine to undertake rulemaking

or other action that may supersede this exemption.

E. Notice Requirement

Any Issuer that relies on the exemption granted herein shall

provide a written notice (``Notice'') to the Director of the

Division. The Notice must identify the Issuer and represent that the

DRSPP will be operated consistently with the conditions of this

letter. The Notice may be provided by the Issuer, the DRSPP Agent,

the Issuer's transfer agent, or the legal representative of any of

the foregoing. Unless otherwise extended by the Division, this

notice requirement will expire on December 31, 1995.

F. Record Maintenance and Production

The Issuer shall maintain the following information for a period

of at least two years from the date of the event, which must be

provided promptly to the Division upon its request:

1. the dates and substance of any materials distributed in

connection with the DRSPP;

2. the number of persons participating in the DRSPP, on a

monthly basis;

3. the volume of securities purchased for the DRSPP by the DRSPP

Agent, on a weekly basis, or, if shares are purchased less

frequently, the number of shares purchased on a monthly basis; and

4. a notation of any period that the Issuer is engaged in any

other distribution of common stock for purposes of Rule 10b-6.

Unless otherwise extended by the Division, this record

maintenance and production requirement will expire on December 31,

1995.

IV. Interpretation of Section 15(a)

The staff of the Division is of the view that certain activities

in which Issuers, their Affiliated Purchasers, and DRSPP Agents

engage in connection with DRSPPs raise issues under Section

15(a).\11\ Therefore, in addition to granting the foregoing class

exemption from Rule 10b-6, this letter also clarifies the

application of those provisions of the Exchange Act to both

traditional and non-traditional DRSPPs.

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\11\Section 15(a) of the Exchange Act generally provides that a

``broker'' or ``dealer'' who uses the mails or any means of

interstate commerce to effect transactions in, or to induce or

attempt to induce the purchase or sale of, any security must

register with the Commission, unless an exemption applies. Section

3(a)(4) of the Exchange Act defines a ``broker'' as any person who

is in the business of effecting transactions in securities for the

account of others. A ``dealer'' under Section 3(a)(5) is defined as

any person engaged in the business of buying and selling securities

for its own account, whether through a broker or otherwise. A number

of factors are considered in determining whether a person is a

broker-dealer, including the type and basis for any compensation

received, the extent to which the person holds the funds and

securities of others, the extent of contact with the public, and

whether the person is ``engaged in the business,'' as that term is

used in the above definitions. Issuers that engage in both buying

and selling may be subject to Section 15(a) of the Exchange Act.

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When an issuer induces or attempts to induce the purchase or

sale of its securities, receives compensation based on securities

transactions, or holds and maintains the funds, securities, and

accounts of DRSPP participants, it may be required to register as a

broker-dealer under Section 15 of the Exchange Act. Broker-dealer

registration minimizes the DRSPP participant's exposure to the risks

typically associated with the execution of orders, and the handling

and placement of funds and securities with others. For example, the

Commission's financial responsibility rules are designed to provide

safeguards with respect to customer funds and securities held by

registered broker-dealers, by providing accountability for those

funds and securities, and requiring the maintenance of accurate

books and records, and sufficient liquid assets.

To avoid both the potential for sales practice abuse or loss of

investors' funds and securities, Issuers operating DRSPPs either

must limit their activities as described below or register as a

broker-dealer.\12\

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\12\Issuers that only sell their own securities (i.e., treasury

stock), but do not purchase and arrange for the sales of such

securities, and do not otherwise effect transactions in securities

for investors, would continue to be excluded from the broker-dealer

registration requirements of Section 15(a) of the Exchange Act.

Furthermore, associated persons of Issuers would not be required to

register as broker-dealers provided that they meet the requirements

of Rule 3a4-1 under the Exchange Act, 17 CFR 240.3a4-1. Associated

persons (e.g., partners, officers, directors, or employees) who are

participating in the sale of securities through a DRSPP, may qualify

for the safe harbor if they meet the requirements of subparagraphs

(a) (1)-(3) of Rule 3a4-1 (the associated person must not be subject

to a statutory disqualification, cannot receive transaction-based

compensation, and must not be an associated person of a broker-

dealer at the time of participation) and either: (a) restrict their

participation to offers and sales of securities involving employee

dividend reinvestment or stock purchase plans, pursuant to Rule 3a4-

1 (a)(4)(i)(D); or (b) restrict their activities to delivering and

preparing written materials, giving limited responses to inquiries

initiated by prospective participants, or perform ministerial and

clerical work, pursuant to Rule 3a4-1(a)(4)(iii).

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A. Solicitation

Under the conditions set forth below, the Issuer may inform the

general public through announcements, newspaper advertisements,

circulars, notices, and investor fairs about its securities or the

securities of the Issuer's subsidiary available through the DRSPP.

In addition, an Issuer may inform those prospective participants

with whom the Issuer has a pre-existing, continuing relationship

that encompasses the receipt of written communications by existing

means of communication (e.g., including the solicitation with a

bill, annual report, or payroll stub).\13\ The Issuer, however, may

not use an agent other than a registered broker-dealer or bank to

solicit participation in the DRSPP on its behalf.

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\13\Such prospective participants would include shareholders,

employees, customers, and other persons with a pre-existing

relationship with the issuer, such as independent contractors,

franchisees, and suppliers.

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The information contained in any solicitation material may

include no more than that allowed, nor less than that required under

Rule 134 under the Securities Act of 1933 (``Securities Act'')

(i.e., tombstone advertisements'').\14\ Thus, typically, materials

may include: (1) The Issuer's name; (2) the Issuer's type of

business; (3) the type of security being offered in the DRSPP (i.e.,

common or preferred stock); (4) the price of the security or the

method of price determination; and (5) information on how and where

a prospectus may be obtained.

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\14\17 CFR 230.134.

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If a registration statement for the securities to be offered

under the DRSPP has not yet been filed under the Securities Act, the

information contained in any communication, pursuant to Rule 135

under the Securities Act,\15\ must state that the Issuer proposes to

make a public offering of securities to be registered under the

Securities Act and that the offering will be made only by means of a

prospectus and may include no more information than that which is

allowed under the rule.\16\ Thus, typically, such a communication

would include, in addition to the mandatory information described:

(1) The title, amount, and basic terms of the securities proposed to

be offered in the DRSPP; (2) the anticipated time of the offering;

(3) the manner and purpose of the offering; and (4) any statement or

legend required by state or foreign law or administrative authority.

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\15\17 CFR 230.135.

\16\17 CFR 230.135.

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As required by Rules 134 and 135 under the Securities Act,

recommendations, predictions, and, unless accompanied by a

prospectus, applications or enrollment forms, may not be included in

any materials. Furthermore, the Issuer and its associated persons

may not engage in oral solicitation of potential DRSPP participants.

Associated persons (e.g., partners, officers, directors, or

employees) of the Issuer, however, may respond orally to inquiries

initiated by potential participants, provided that the content of

the response is limited to information provided in the registration

statement, prospectus, or other offering document.\17\

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\17\See Rule 3a4-1(a)(4)(iii), discussed supra at note 12.

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B. Fees and Expenses

The Issuer may not receive or collect for itself transaction-

based compensation, but may charge DRSPP participants fees that are

reasonably related to actual administrative costs (e.g., the cost to

print and mail brochures or authorization forms). In addition, all

costs to be paid by DRSPP participants must be disclosed prior to

enrollment.

C. Participants' Funds and Securities

As discussed in Section III.A.2., the Issuer must limit its

activities to clerical and ministerial functions.

The Issuer may receive optional cash investments from

participants, provided that the Issuer transmits promptly\18\ all

funds to be used to purchase shares of its common stock to a

segregated escrow account\19\ at a bank or to the DRSPP Agent.

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\18\For purposes of this letter, ``transmit promptly'' shall

mean by the opening of business on the next business day if the

funds are received before noon, and by noon of the next business day

if the funds are received after noon.

\19\The escrow account must be held for the benefit of the

participants, and cannot be subject to any liens, any creditor

claims, or any other claims against the Issuer. Furthermore, the

escrow account cannot be subject to bankruptcy proceedings if the

Issuer files for bankruptcy under federal or state law.

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Funds must be returned to the DRSPP participant if securities

have not been purchased: (a) within 35 days of receipt of optional

cash payments;\20\ or (b) within 30 days of the dividend date for

dividend reinvestments. Additionally, any participant must be

permitted to withdraw from the DRSPP at any time by giving written

notice to the Issuer or DRSPP Agent. Within 30 days of receipt of

such notice, the participant must be sent certificates for shares of

common stock held for the participant, or cash payments for any

shares that the participant wishes to sell pursuant to the DRSPP.

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\20\The Division of Investment Management would not object if a

DRSPP holds participants' optional cash payments for no more than 35

days and, accordingly, is modifying the position taken in Lucky

Stores, in which the staff advised plans to hold optional cash

payments for no more than 30 days.

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V. Transfer Agents

In connection with their DRSPPs, many Issuers engage in

activities that cause them to satisfy the definition of ``transfer

agent'' contained in Section 3(a)(25) of the Exchange Act.\21\ Thus,

any person, including an issuer of securities, who engages in such

activities in connection with a DRSPP must register with the

Commission pursuant to Section 17A(c) of the Exchange Act.\22\

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\21\15 U.S.C. Sec. 78c(a)(25). A ``transfer agent'' is defined

as any person who, on behalf of an issuer of securities or on its

own behalf as an issuer of securities, engages in the countersigning

of such securities, monitoring of the issuance of such securities

with a view to preventing unauthorized issuance, registering the

transfer of such securities, exchanging or converting such

securities, or transferring record ownership of securities by

bookkeeping entry without physical issuance of securities

certificates.

\22\15 U.S.C. Sec. 78q-1(c).

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The Commission recently issued releases\23\ soliciting comment

on, among other things, developments affecting the regulation of

transfer agent activities. You should be aware that following the

review of comments received in response to these releases, the

Commission may determine to undertake rulemaking or other action

pertaining to transfer agent regulation.

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\23\Securities Exchange Act Release Nos. 35038 and 35040

(December 1, 1994).

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VI. Conclusion

Your attention also is directed to the anti-fraud and anti-

manipulation provisions of the Securities Act, particularly Section

17(a), and the Exchange Act, particularly Sections 9(a)(2) and

10(b), and Rule 10b-5 thereunder.\24\ Responsibility for compliance

with these and any other applicable provisions of the federal

securities laws must rest with the Issuer, its Affiliated

Purchasers, and the DRSPP Agent. The Division expresses no view with

respect to other questions that the DRSPP-related transactions may

raise, including, but not limited to, the adequacy of disclosure

concerning, and the applicability of any other federal or state laws

to, the proposed transactions.

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\24\15 U.S.C. Secs. 78i(a)(2) and 78j(b), and 17 CFR 240.10b-5,

respectively.

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Sincerely,

Brandon Becker

Director.

[FR Doc. 94-30127 Filed 12-7-94; 8:45 am]

BILLING CODE 8010-01-M