Amendments To Clarify Safe Harbors for Broker-Dealer Research Reports

SUMMARY: The Commission is proposing today amendments relating to the

safe harbor provisions of Rules 138 and 139 under the Securities Act of

1933. The proposed amendments are intended to clarify the availability

of the safe harbor provisions of Rule 138 relating to broker-dealer

research reports on individual companies and the availability of the

safe harbor provisions of Rule 139 for broker-dealer industry research

reports which include sizable, first-time foreign registrants.

DATES: Comments should be received on or before January 19, 1995.

ADDRESSES: Comment letters should refer to File Number S7-36-94 and be

submitted in triplicate to Jonathan G. Katz, Secretary, U.S. Securities

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

The Commission will make all comments available for public inspection

and copying in its Public Reference Room at the same address.

FOR FURTHER INFORMATION CONTACT: Annemarie Tierney, (202) 942-2990,

Office of International Corporate Finance, Division of Corporation

Finance, U.S. Securities and Exchange Commission, 450 Fifth Street NW.,

Washington, DC 20549.

SUPPLEMENTARY INFORMATION: As described in detail below, the

Commission is proposing amendments to Rule 138\1\ and Rule 139\2\

under the Securities Act of 1933 (the ``Securities Act'').\3\

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\1\17 CFR 230.138.

\2\17 CFR 230.139.

\3\15 U.S.C. 77a et seq.

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I. Availability of Research Report Safe Harbors

A. Rule 139 Safe Harbor

Rule 139 under the Securities Act provides safe harbor protection

from the registration requirements of that Act for the distribution by

broker-dealers of information, opinions or recommendations concerning

issuers in the process of registering securities under the Securities

Act.

Prior to April 1994, reliance on the safe harbor for research

reports concerning a foreign private issuer were conditioned on

eligibility of the foreign private issuer for use of Form F-3.4 On

April 19, 1994, the Commission adopted amendments to Rule 139 that make

the rule available for offerings by foreign private issuers that would

be eligible to use Form F-3 but for the 12-month reporting requirement

if the issuer meets an alternative offshore trading history test.5

Under the alternative test, a foreign private issuer must have been

listed or quoted on a designated offshore securities market6 for a

period of at least 12 months.

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\4\17 CFR 239.33.

\5\Release No. 33-7053 (Apr. 19, 1994), 59 FR 21644.

\6\``Designated offshore securities market'' is defined in Rule

902(a) of Regulation S (17 CFR 230.902(a)).

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In adopting these amendments, the Commission intended that broker-

dealers would be able to rely upon Rule 139 for sizable foreign private

issuers with respect to which there is a stream of corporate

information available in the marketplace, including qualifying foreign

issuers registering securities with the Commission for the first time.

As drafted, however, the amendments did not make clear that the

elimination of the reporting history requirement included the

elimination of the requirement that a foreign issuer be previously

reporting pursuant to the Securities Exchange Act of 1934 (the

``Exchange Act'')7 and have filed at least one annual report.

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\7\15 U.S.C. 78a et seq.

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The amendments proposed today revise Rule 139 to make clear that

the special provisions adopted last year for sizable foreign issuers

are also available for those issuers' initial public offerings in the

United States.8

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\8\In order to make the rule available to first-time sizable

foreign registrants, the Commission is proposing to amend the first

sentence of the rule to provide that a foreign private issuer that

meets the requirements of paragraph (a)(2) of the Rule need not

previously have been reporting pursuant to the Exchange Act. In

addition, language would be added to paragraph (a)(2) to provide

that such foreign private issuer need not have filed an annual

report as a condition of eligibility for the rule.

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B. Rule 138 Safe Harbor

Rule 138 under the Securities Act permits publication of

information, opinions and recommendations concerning qualifying issuers

by broker-dealers that are participants in a distribution, so long as

the reports contain information, opinions or recommendations regarding

a specified class of the issuer's securities which is not the subject

of the offering in which the broker-dealer is a participant. The rule

defines eligible issuers as those that may register securities on Forms

S-29 or F-2.10 The reference to Forms S-2 and F-2 is intended

to include issuers eligible to register on Forms S-3 and F-3 as well.

Questions have arisen as to the availability of the Rule 138 safe

harbor for offerings registered on Form S-3 where issuers have not been

subject to reporting requirements for 36 months. The Commission did not

intend to change the availability of Rule 138 for those offerings when

it reduced the reporting history requirements for Form S-311 and

is of the view that Rule 138 is still available for offerings

registered on Form S-3. Rule 138 is proposed to be amended to clarify

this point. The Commission is also proposing to amend the rule to

clarify that Form F-3 eligible issuers would qualify for the rule, as

would qualifying first-time foreign issuers that meet the alternative

offshore trading history test proposed for Rule 139.12

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\9\17 CFR 239.12.

\1\017 CFR 239.32.

\1\117 CFR 239.13 as amended by Release No. 33-6964 (Oct. 22,

1992) 57 FR 48970.

\1\2In Release No. 33-6550 (Sept. 19, 1984) 49 FR 37569 at

footnote 26, the Commission stated that ``[b]ecause the markets for

nonconvertible senior securities and common stock differ, Rule 138

provides a somewhat broader safe harbor [than Rule 139] in

circumstances where the opportunity to condition the market is

lessened.''

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In addition, in light of the fact that shelf registration

statements often register both debt and equity securities (on an either

allocated or unallocated basis), the Commission is proposing to add an

instruction to Rule 138 to codify the staff interpretation that the

rule should be applied on an offering-by-offering basis for issuers

which are eligible to use Forms S-3 or F-3 and are using the

Commission's shelf registration procedures.

II. Cost-Benefit Analysis

To fully evaluate the costs and benefits associated with the

proposed amendments to Rule 138 and Rule 139, the Commission requests

commenters to provide views and empirical data as to the costs and

benefits associated with such proposals.

III. Regulatory Flexibility Act Certification

Pursuant to the Regulatory Flexibility Act (5 U.S.C. 605(b)), the

Chairman of the Commission has certified that the proposed amendments

to Securities Act Rules 138 and 139 relating to broker-dealer research

reports (17 CFR 230.138 and 17 CFR 230.139) will not, if adopted, have

a significant impact on a substantial number of small entities. This

certification, including the reasons therefor, is attached as Appendix

A to this release.

IV. General Request for Comments

Any interested person wishing to submit written comments on any

aspect of the amendments to the rules that are subject to this release

are requested to do so. Comments should be submitted in triplicate to

Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission,

450 Fifth Street, NW., Washington, DC 20549 and should refer to file

number S7-36-94.

V. Statutory Bases

The amendments to the Commission's rule are being proposed pursuant

to sections 6, 7, 8, 10 and 19(a) of the Securities Act of 1933, as

amended.

List of Subjects in 17 CFR Part 230

Reporting and recordkeeping requirements, securities

Text of Proposed Amendments

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

of Federal Regulations is proposed to be amended as follows:

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

1. The general authority citation for Part 230 continues to read in

part as follows:

Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c,

78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-29, 80a-30, and

80a-37, unless otherwise noted.

* * * * *

2. By revising Sec. 230.138 to read as follows:

Sec. 230.138 Definition of ``offer for sale'' and ``offer to sell'' in

sections 2(10) and 5(c) in relation to certain publications.

(a) Where a registrant which meets the requirements of paragraph

(c)(1), (c)(2) or (c)(3) of this section proposes to file, has filed or

has an effective registration statement under the Act relating solely

to a nonconvertible debt security or to a nonconvertible,

nonparticipating preferred stock, publication or distribution in the

regular course of its business by a broker or dealer of information,

opinions or recommendations relating solely to common stock or to debt

or preferred stock convertible into common stock of such registrant

shall not be deemed to constitute an offer for sale or offer to sell

the security to which such registration statement relates for purposes

of sections 2(10) and 5(c) of the Act (15 U.S.C. 77a et seq.) even

though such broker or dealer is or will be a participant in the

distribution of the security to which such registration statement

relates.

(b) Where a registrant which meets the requirements of paragraph

(c)(1), (c)(2) or (c)(3) of this section proposes to file, has filed or

has an effective registration statement under the Act relating solely

to common stock or to debt or preferred stock convertible into common

stock, the publication or distribution in the regular course of its

business by a broker or dealer of information, opinions or

recommendations relating solely to a nonconvertible debt security, or

to a nonconvertible nonparticipating preferred stock shall not be

deemed to constitute an offer for sale or offer to sell the security to

which such registration statement relates for purposes of sections

2(10) and 5(c) of the Act (15 U.S.C. 77a et seq.), even though such

broker or dealer is or will be a participant in the distribution of the

security to which such registration statement relates.

(c)(1) The registrant meets all of the conditions for the use of

Form S-2 (Sec. 239.12 of this chapter) or Form F-2 (Sec. 239.32 of this

chapter);

(2) The registrant meets the registrant requirements of Form S-3

(Sec. 239.13 of this chapter) or Form F-3 (Sec. 239.33 of this

chapter); or

(3) The registrant is a foreign private issuer which meets all the

registrant requirements of Form F-3 (Sec. 239.33 of this chapter),

other than the reporting history provisions of paragraph A.1. and

A.2.(a) of General Instruction I of such form, and meets the minimum

float or investment grade securities provisions of either paragraph

B.1. or B.2. of General Instruction I. of such form and the

registrant's securities have been traded for a period of at least 12

months on a designated offshore securities market, as defined in

Sec. 230.902(a).

Instruction to Rule 138

When a registration statement relates to securities which are being

registered for an offering to be made on a continuous or delayed basis

pursuant to Rule 415(a)(1)(x) under the Act (Sec. 230.415(a)(1)(x)) and

the securities which are being registered include classes of securities

which are specified in both paragraph (a) and (b) of this section on

either an allocated or unallocated basis, a broker or dealer may

nonetheless rely on:

(1) Paragraph (a) of this section when the offering in which such

broker or dealer is or will be a participant relates solely to classes

of securities specified in paragraph (a) of this section, and

(2) Paragraph (b) of this section when the offering in which such

broker or dealer is or will be a participant relates solely to classes

of securities specified in paragraph (b) of this section.

3. By revising the introductory text to Sec. 230.139 and paragraph

(a)(2) to read as follows:

Sec. 230.139 Definition of ``offer for sale'' and ``offer to sell'' in

sections 2(10) and 5(c) in relation to certain publications.

Where a registrant which is required to file reports pursuant to

section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.

78a et seq.) or which is a foreign private issuer meeting the

conditions of paragraph (a)(2) of this section proposes to file, has

filed or has an effective registration statement under the Securities

Act of 1933 (15 U.S.C. 77a et seq.) relating to its securities, the

publication or distribution by a broker or dealer of information, an

opinion or a recommendation with respect to the registrant or any class

of its securities shall not be deemed to constitute an offer for sale

or offer to sell the securities registered or proposed to be registered

for purposes of sections 2(10) and 5(c) of the Act (15 U.S.C. 77a et

seq.), even though such broker or dealer is or will be a participant in

the distribution of such securities, if the conditions of paragraph (a)

or (b) of this section have been met:

(a)(1) * * *

(2) The registrant is a foreign private issuer that meets all the

registrant requirements of Form F-3 (Sec. 239.33 of this chapter),

other than the reporting history provisions of paragraphs A.1. and

A.2.(a) of General Instruction I of such form, and meets the minimum

float or investment grade securities provisions of either paragraph

B.1. or B.2. of General Instruction I of such form, and the

registrant's securities have been traded for a period of at least 12

months on a designated offshore securities market, as defined in

Sec. 230.902(a), and such information, opinion or recommendation is

contained in a publication which is distributed with reasonable

regularity in the normal course of business.

* * * * *

By the Commission.

Dated: December 13, 1994.

Margaret H. McFarland,

Deputy Secretary.

Note: This Appendix to the Preamble will not appear in the Code

of Federal Regulations.

Appendix A

Securities and Exchange Commission Regulatory Flexibility Act

Certification

I, Arthur Levitt, Chairman of the United States Securities and

Exchange Commission (the ``Commission''), hereby certify pursuant to

5 U.S.C. 605(b) that proposed revisions to Rules 138 and 139 under

the Securities Act of 1933 (the ``Securities Act''), if promulgated,

will not have a significant economic impact on a substantial number

of small entities. The reason for this certification is that the

proposed revisions to the rules are intended to clarify the

availability of the safe harbor provisions of the rules with respect

to large domestic and foreign issuers. Any incidental impact on

small U.S. entities is not expected to be significant.

Dated: December 12, 1994.

Arthur Levitt,

Chairman.

[FR Doc. 94-31038 Filed 12-19-94; 8:45 am]

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