Short Selling in Connection With a Public Offering

DEPARTMENT OF COMMERCE

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release Nos. 33-7046; 34-33702; File No. S7-18-87]

Short Selling in Connection With a Public Offering

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Commission announced the permanent adoption of rule 10b-21

under the Securities Exchange Act of 1934. The Commission adopted rule

10b-21 on a temporary basis in 1988. Rule 10b-21 is designed to prevent

manipulative short sales of an equity security in anticipation of a

public offering by prohibiting the covering of such short sales with

securities purchased in the offering. The Commission has determined to

remove the ``Temporary'' designation from rule 10b-21 because the rule

continues to serve an important purpose in preventing manipulative

conduct during offerings.

EFFECTIVE DATE: March 9, 1994.

FOR FURTHER INFORMATION CONTACT: M. Blair Corkran, Senior Special

Counsel, or Elisa A. D. Metzger, Attorney-Adviser, at (202) 272-2848,

Office of Trading Practices, Division of Market Regulation, Securities

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

SUPPLEMENTARY INFORMATION:

I. Introduction

In August 1988, the Commission adopted on a temporary basis rule

10b-21(T)\1\ (``rule 10b-21(T)'' or ``rule'') under the Securities

Exchange Act of 1934 (``Exchange Act''),\2\ which is designed to

prevent manipulative short selling of securities in anticipation of a

public offering of the same securities.\3\ The rule prohibits a person

from selling short an equity security (and any security of the same

class) that is being offered for cash pursuant to a registration

statement filed under the Securities Act of 1933 (``Securities

Act'')\4\ from the time that the registration statement is filed until

the securities are available for sale, if such short sale is covered

with offered securities purchased from a broker-dealer participating in

the offering.\5\

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\1\17 CFR 240.10b-21(T).

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

\3\Securities Exchange Act Release No. 26028 (August 25, 1988),

53 FR 33455 (``Adopting Release''). The Commission adopted the Rule

in response to a petition for rulemaking (``NASD Petition'') filed

by the National Association of Securities Dealers, Inc. (``NASD'').

See also Securities Exchange Act Release No. 24485 (May 20, 1987),

52 FR 19885 (``1987 Proposing Release'').

\4\15 U.S.C. 77a et seq.

\5\The rule also applies to equity securities sold pursuant to

Regulation A under the Securities Act. See 17 CFR 239.90.

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The NASD Petition and the adoption of the rule by the Commission

were based on concerns relating to certain short selling prior to a

public offering. Short sales immediately prior to an offering of a

security may result in a decrease in the price of the security and

consequently a lower offering price. The short sellers may then seek to

cover their short positions and realize a profit by purchasing

securities in the offering at the reduced price. Persons selling short

in anticipation of a public offering are not subject to the usual

market risk because they can cover their short position from a pool of

securities obtainable from identifiable sources at a fixed, and

generally lower, price. This type of short selling, coupled with

covering from the offering, adversely affects issuers. A decrease in

price resulting from these unlawful short sales deprives the issuer of

offering proceeds that would have been realized had the market not been

subject to such short selling. This activity can be detrimental to the

capital raising process.\6\

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\6\See Adopting Release, 53 FR at 33456.

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II. Experience Under the Rule

The Commission's staff prepared a statistical analysis of non-

initial public offerings of securities listed for quotation on the

NASD's NASDAQ system and listed for trading on the New York Stock

Exchange, Inc. (``NYSE'') during the period from January 1, 1986

through December 31, 1990. The staff concluded that there was no

statistical evidence that rule 10b-21(T) had an impact on stock price

patterns around the time of offerings.

While statistical evidence of the impact of rule 10b-21(T) on pre-

offering price performance is not dispositive, the NASD, NYSE and

American Stock Exchange, Inc. continue to support the rule. These self-

regulatory organizations have implemented surveillance systems that are

designed to detect questionable market activities, including those

involving short sales, prior to an offering. Others also have commented

favorably on rule 10b-21(T) in other contexts.\7\

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\7\See Letter from John F. Olson, Chair Federal Regulation of

Securities Committee and Robert Todd Lang, Chair Subcommittee on

Proxy Solicitations and Tender Offers, American Bar Association, to

Jonathan G. Katz, Secretary, SEC (October 4, 1991); Letter from Guy

W. Adams, Hecco Ventures Management Inc., to Jonathan G. Katz,

Secretary, SEC (August 22, 1991); and Letter from Sullivan &

Cromwell, to Jonathan G. Katz, Secretary, SEC (August 22, 1991)

regarding Concept Release on Public Disclosure of Material Short

Positions, Securities Exchange Act Release No. 29278 (June 7, 1991)

56 FR 27280. These letters are publicly available for inspection and

copying in File No. S7-20-91 in the Commission's Public Reference

Room.

In response to the 1987 Proposing Release, the Commission

received 36 comment letters, the majority of which supported the

adoption of the Rule. These comment letters, as well as a summary of

the comment letters prepared by the Division of Market Regulation,

are available for public inspection and copying at the Commission's

Public Reference Room. See File No. S7-18-87.

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The Commission does not have any evidence that the Rule adversely

affects legitimate market activities. The Rule does not proscribe short

selling at any time, nor does it prohibit the covering of short sales

with securities purchased in the open market. Moreover, the Rule does

not prevent using securities acquired in a public offering to cover

short sales effected before the registration statement was filed. The

Rule is narrowly drawn to impede only the particular practice of short

selling in anticipation of a public offering and covering those short

sales with securities purchased in the offering. The Commission views

such short sales as manipulative and destructive of capital formation

activities by issuers. For these reasons, the Commission has determined

to remove the ``Temporary'' designation from the rule.\8\

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\8\The Commission previously solicited comment on adoption of

the rule on a permanent basis. Since removing the ``Temporary''

designation does not in any way alter the Rule substantively or

procedurally, the Commission is not seeking comment on this change.

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III. Effects on Competition

Section 23(a)(2) of the Exchange Act\9\ requires the Commission, in

adopting rules under the Exchange Act, to consider the anti-competitive

effects of such rules, if any, and to balance any impact against the

regulatory benefits gained in terms of furthering the purposes of the

Exchange Act. The Commission has considered the revision in light of

the standard cited in section 23(a)(2) and believes that permanent

adoption of the rule will not impose any burden on competition not

necessary or appropriate in furtherance of the Exchange Act.

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\9\15 U.S.C. 78w(a)(2).

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Statutory Authority and Text of Rule Amendment

List of Subjects in 17 CFR Part 240

Broker-dealers, Fraud, Issuers, Reporting and recordkeeping

requirements, Securities.

For the reasons set out in the preamble, title 17, chapter II of

the Code of Federal Regulations is amended as follows:

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

1934

1. The authority citation for part 240 is amended by revising the

specific authority for Sec. 240.10b-21(T) to read 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.

* * * * *

Section 240.10b-21 also issued under 15 U.S.C. 78b, 78c,

78i(a)(6), 78j(a), 78j(b), 78o(c), 78w(a), and 78dd(a);

* * * * *

Sec. 240.10b-21(T) [Amended]

2. Section 240.10b-21(T) is amended by removing the ``(T)''

following the section number.

Dated: March 2, 1994.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-5374 Filed 3-8-94; 8:45 am]

BILLING CODE 8010-01-M