Review of Antimanipulation Regulation of Securities Offerings

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release Nos. 33-7057; 34-33924; International Series Release No. 657;

File No. S7-14-94]

RIN 3235-AF54

Review of Antimanipulation Regulation of Securities Offerings

AGENCY: Securities and Exchange Commission.

ACTION: Review of regulation; concept release.

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

solicits comments on a broad range of issues relating to

antimanipulation regulation of securities offerings under the

Securities Exchange Act of 1934 (``Exchange Act''). In particular, the

Commission is conducting a comprehensive review of Rules 10b-6, 10b-7,

and 10b-8 (``Trading Practices Rules'') under the Exchange Act in light

of significant changes in the securities markets and in distribution

practices in recent years. The Commission requests comment on the

concepts identified in this release and any other issues that

commenters believe are relevant. Following review of public comments,

the Commission will determine whether rulemaking or other action is

appropriate.

DATES: The comment period will expire on August 12, 1994.

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

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

NW., Washington, DC 20549. All comment letters should refer to File

Number S7-14-94. All comments received will be available for public

inspection and copying in the Commission's Public Reference Room, 450

Fifth Street NW., Washington, DC 20549.

FOR FURTHER INFORMATION CONTACT: The Office of Trading Practices,

Division of Market Regulation, Securities and Exchange Commission, 450

Fifth Street NW., Washington, DC, at (202) 942-0772.

I. Executive Summary

The ability of corporations and other enterprises to finance their

operations is critical to the development of the nation's economy, and

the sale of securities is a principal means for obtaining

capital.1 The Commission has recognized that securities offerings

involve risk and uncertainty, and that the pricing of an offering is

not an exact science.2 From its earliest days, the Commission and

its staff have been called upon to implement the provisions of the

Securities Exchange Act of 1934 (``Exchange Act'')3 to prevent

manipulative activity in the context of securities offerings.4 The

challenge to the Commission in administering the Exchange Act in this

context is ``to determine the extent to which market activities of

participants or persons otherwise interested in the distribution should

be prohibited or permitted.''5

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\1\Securities offerings in 1993 reached a record of

approximately $1.1 trillion, surpassing the previous record set in

1992 of approximately $856 billion. See Siconolfi & Peers, No End in

Sight for Underwriting Boom, Wall St. J., January 3, 1994, at C1.;

Peers, New Issues Set to Hit Record of $1 Trillion, Wall St. J.,

December 10, 1993, at C1.

\2\Securities Exchange Act Release No. 2446 (March 18, 1940) at

10, 11 FR 10971 (``Release 34-2446'').

\3\15 U.S.C. 78a et seq.

\4\The prevention of manipulation is one of the principal goals

of the Exchange Act. See, e.g., section 2(3), 15 U.S.C. 78b(3).

\5\Foshay, Market Activities of Participants in Securities

Distributions, 45 U. Va. L. Rev. 907, 910 (1959) (``Foshay'').

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The Commission's principal antimanipulation provisions that apply

to securities offerings, Rules 10b-6, 10b-7, and 10b-8 (``Trading

Practices Rules'')6 under the Exchange Act, are intended to assure

prospective investors in a securities offering that the offering's

price has not been influenced improperly by persons who have a

significant interest in the success of the offering. Rule 10b-6 is an

antimanipulation rule that is intended to prevent those persons

participating in a distribution of securities from artificially

conditioning the market for the securities in order to facilitate the

distribution, and to protect the integrity of the securities trading

market as an independent pricing mechanism. Rule 10b-7 prevents any

stabilizing bid from being made to facilitate an offering of a security

except for the purpose of preventing or retarding a decline in the open

market price of the security. Rule 10b-8 pertains to distributions of

securities being offered through rights on a pro rata basis to security

holders, and restricts the prices at which rights may be purchased as

well as the prices at which the securities being distributed, or

securities of the same class and series, may be offered or sold.

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\6\17 CFR 240.10b-6, 240.10b-7, and 240.10b-8.

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Since these rules were adopted or last significantly amended, there

have been significant changes in the structure of the markets,

including the expanded role of institutional participants, new kinds of

trading instruments and strategies, enhanced transparency of securities

transactions, expanded surveillance capabilities, globalization of the

markets, and transformation of the capital raising process. Over the

years, the Commission has sought to address the effects of these

developments. Although the Commission has amended the rules several

times, the primary method of adapting the rules to changing

circumstances has been through the exemptive, interpretive, and ``no-

action'' letter processes.

The Commission believes that it would be useful and timely to

examine comprehensively the current regulatory structure and the

concepts that underlie the Trading Practices Rules. The review is not

limited, however, to these provisions, which concentrate on persons

participating in the distribution process. Other persons also may have

incentives to manipulate securities prices at the sensitive time

surrounding an offering. In this Concept Release, the Commission

solicits comment on necessary or appropriate regulation to prevent

manipulation during securities offerings. Rather than proposing

particular changes to the Trading Practices Rules or other provisions

at this time, the Commission is seeking comment on the scope and

direction that antimanipulation regulation should take in the

contemporary context. In addition to providing views pertaining to

revising and simplifying the present regulatory scheme, commenters are

invited to consider alternative approaches for applying

antimanipulation principles to persons who may have an incentive to

influence artificially the market during an offering.

II. The Trading Practices Rules

Protecting investors from manipulated stock prices was one of the

principal goals that prompted the enactment in 1934 of the Exchange

Act. Since shortly after the adoption of the Exchange Act, the

Commission and its staff have dealt with issues involving manipulation

in the context of securities offerings and provided formal and informal

advice regarding the scope of permissible activities during securities

offerings.7 As the Commission has noted, regulation of the market

activities of parties with an interest in the outcome of an offering

presents ``intensely practical problem[s].''8 Among other things,

the staff has provided advice regarding the types of activities engaged

in by participants in a securities distribution that would be viewed as

being undertaken for the purpose of inducing the purchase or sale of

the securities by others, in violation of section 9(a)(2) of the

Exchange Act.9

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\7\For example, in response to formal and informal staff

interpretations, managing underwriters followed the practice of

stopping or tapering off their trading activities when preparations

for the distribution were begun; and participating underwriters

curtailed their trading when the registration statement was first

filed or when they were later invited to participate. Foshay, supra

note 5, at 912.

\8\Release 34-2446, at 1.

\9\See, e.g., Securities Exchange Act Release No. 3056 (October

27, 1941). See also Foshay, supra note 5, at 910.

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The Commission adopted Rules 10b-6, 10b-7, and 10b-8\10\ almost

four decades ago to codify the ``principles which historically have

been applied in considering questions relating to manipulative activity

and stabilization in connection with a distribution.''\11\ These rules

provide guidance to securities professionals by removing uncertainties

regarding the scope of permissible market activities during securities

offerings. They also serve a deterrence function by expressly

prohibiting manipulative behavior during offerings, and promote

investor confidence in the securities markets by lessening the ability

of distribution participants to manipulate the price of an offering

upward to facilitate the offering. Moreover, as with other

antimanipulation provisions, the Trading Practices Rules provide the

Commission with important enforcement tools in bringing actions against

persons that have engaged in manipulative practices during securities

offerings.

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\10\See Appendix A for a discussion of the historical

development of the Trading Practices Rules and an index of

Commission releases relating to these rules.

\11\See Securities Exchange Act Release No. 5040 (May 18, 1954),

19 FR 2986 (``1954 Release''). The transcript of a public Commission

hearing, the extensive comment letters, and the structure and

context of the Trading Practices Rules reflect the substantial

industry participation in that rulemaking process. See Foshay, supra

note 5, at 919.

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III. The Need for Review

The Commission remains committed to the fundamental legal and

policy bases for regulating the activities of participants in a

distribution. Since the adoption of the Trading Practices Rules in 1955

and their most recent comprehensive review in 1983,12 however,

tremendous changes have occurred in the securities markets.13

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\1\2Securities Exchange Act Release No. 19565 (March 4, 1983),

48 FR 10628 (``1983 Release'').

\1\3The Commission's Division of Market Regulation recently

completed a comprehensive review to assess the state of the United

States (``U.S.'') equity markets and to provide guidance for the

development of a national market system. See Securities and Exchange

Commission, Division of Market Regulation, Market 2000: An

Examination of Current Equity Market Developments (1994) (``Market

2000 Report''), Introduction and Executive Summary reprinted at

[1993-1994] Fed. Sec. L. Rep. (CCH) 85,311.

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A. Transformation of the Securities Markets

In the 1950s, trading in the United States securities market was

dominated by activity on the national securities exchanges; little

information was publicly available about trading in the over-the-

counter (``OTC'') market. Today, however, the National Association of

Securities Dealers, Inc.'s (``NASD'') Nasdaq system is one of the

world's largest stock markets, with an average daily trading volume of

263.0 million shares, at an aggregate value in 1993 of $1.35 trillion.

This compares with an average daily trading volume of 264.5 million

shares on the New York Stock Exchange, Inc. (``NYSE''), at an aggregate

value in 1993 of $2.3 trillion.14 Such high levels of trading

volume have produced deeper, more liquid markets.

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\1\4Source: Securities Industry Association.

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Additionally, there has been an enormous growth in communications

and information technology, which has provided industry participants

with enhanced real-time price data and news about securities and their

issuers. These developments have fostered the high level of

transparency (i.e., the dissemination of trade reports and quotation

information is available to all market participants) that generally

characterizes the U.S. equity markets. The availability of quotation

information helps investors to determine when and where to trade, while

transaction reporting provides an indication of the reliability of the

quotations and the quality of transaction execution. A higher degree of

transparency helps investors, analysts, and other market participants

to better observe and evaluate security price movements. During a

distribution, this market transparency provides greater visibility to

transactions in the offered security, enhancing the ability of

investors, regulators, and others to observe unusual price movements.

Improved communications and information technology also has enabled

the exchanges and the NASD to implement sophisticated surveillance

systems to detect trading abuses such as those that the Trading

Practices Rules were designed to prevent. The NASD's surveillance

capabilities were an important consideration when the Commission last

year adopted a new exception to Rule 10b-6, as well as a companion

rule, Rule 10b-6A,15 to permit ``passive market making'' by Nasdaq

market makers.16

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\1\517 CFR 240.10b-6A.

\1\6See Securities Exchange Act Release No. 32177 (April 8,

1993), 58 FR 19598 (``Passive Market Making Release'').

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The financial markets themselves have been transformed by a

proliferation of options and other derivative products.17 Market

participants use these products to hedge investment risks, increase

transaction efficiencies, and profit from market movements.18

Because stocks were the primary equity instruments for trading and

investing at the time the Trading Practices Rules were adopted, it has

been necessary to apply these rules to new products through exemptions

and interpretations.19

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\1\7A derivative product is ``a financial instrument that

derives its value from the performance of other assets, including

securities, rates, or indexes.'' Securities Exchange Act Release No.

32256 (May 4, 1993), 58 FR 27486, 27487 citing Dictionary of Finance

and Investment Terms 107 (3d ed. 1991).

\1\8See, e.g., Securities and Exchange Commission, Division of

Market Regulation, The October 1987 Market Break, 3-1, 3-5 (1988);

Gilberg, Regulation of New Financial Instruments Under the Federal

Securities and Commodities Laws, 39 Vand. L. Rev. 1599, 1600 (1986).

\1\9See, e.g., Letters regarding CXM Baskets (October 15, 1993),

and Basket Trading During Distributions (August 6, 1991), [1991]

Fed. Sec. L. Rep. (CCH) 79,752, both of which granted exemptions

from the Trading Practices Rules for transactions in connection with

certain index-based stock baskets.

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The nature of market participants also has changed by virtue of the

enhanced market role of institutional investors, such as pension funds,

mutual funds, and money managers. In recent years, many individual

investors have shifted their funds into pooled investments at a

phenomenal rate, which has resulted in an enormous concentration of

investment assets in the hands of a relatively small number of market

participants.20 Their economic strength allows large institutions

to exert a significant influence on the structuring and pricing of many

securities offerings. Some have argued that the presence of these large

institutions in securities offerings has transferred the balance of

price-setting power from the underwriters to institutional

purchasers.21 Because of this shift, it is argued that

antimanipulation regulation should focus not only on the ``sell'' side

(e.g., the underwriters), but also on the ``buy'' side.22

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\2\0See, e.g., Market 2000 Report, Study II: Structure of the

U.S. Equity Markets, at II-1 to II-3; Fund Assets Surge Past $2

Trillion Mark, With Banks Reporting Solid Sales Gains, Am. Banker,

February 1, 1994, at 10, discussing report by the Investment Company

Institute that mutual fund assets rose to $2.011 trillion in

December 1993, a 26% gain from 1992.

\2\1At the same time, it should be noted that underwriting

revenue in 1993 was a record $9.1 billion. See Siconolfi, Surge in

Profits From Fees is Likely to Continue in 1994, Wall St.J., January

3, 1994, at A26.

\2\2For example, short sales in anticipation of a secondary

distribution of securities were addressed by the Commission with the

adoption in 1988 of Rule 10b-21, 17 CFR 240.10b-21. See also

Securities Exchange Act Release No. 33702 (March 2, 1994), 59 FR

10984 (``Rule 10b-21 Release'') (permanent adoption of Rule 10b-21).

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The nature of participants in distributions also has changed.

Today, distribution participants often are members of complex

conglomerates, with many affiliated entities in the United States and

abroad. For example, not only have broker-dealers expanded their

traditional lines of business, such as retail firms that have merged

with exchange specialists,23 but banking institutions also have

established broker-dealer units that are permitted to engage in the

underwriting of securities.24 If one member of a financial

conglomerate is a participant in a distribution of securities, all of

the affiliates of that entity potentially are subject to the

proscriptions of Rule 10b-6, irrespective of where they are located or

conduct business.

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\2\3See, e.g., Letter regarding Application of Rules 10b-6 and

10b-13 to Specialists Affiliated with NYSE Member Firms (September

15, 1992), [1992] Fed. Sec. L. Rep. (CCH) 76,279, permitting

certain NYSE specialists affiliated with broker-dealers to continue

to function as specialists while their affiliated broker-dealer

participates in certain mergers or tenders or exchange offers.

\2\4See, e.g., BankAmerica Corp., 79 Fed. Res. Bull. 1163

(1993); J.P. Morgan & Co., 75 Fed. Res. Bull. 192 (1989); Citicorp,

73 Fed. Res. Bull. 473 (1987).

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The securities distribution process itself has experienced

significant developments. Underwriting syndicates, where utilized, tend

to be smaller, and shelf registered offerings have become a standard

method of raising capital. ``Overselling'' of offerings by underwriting

syndicates has become common, resulting in increased aftermarket

covering activity by underwriters, and a decrease in formal

stabilization activity. Also, rights offerings by U.S. issuers may no

longer be as important for capital raising purposes as they were at the

time the Trading Practices Rules were adopted, although recently some

sectors have experienced a surge in such offerings. Rights offerings

continue to be a prevalent form of offering for foreign issuers.25

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\2\5See Gould, ``Rights Offerings'' at the Wrong Time?, N.Y.

Times, November 28, 1993, at F14; Eaton, Rites of Offerings: Not All

They Seem for Closed-end Funds, Barron's, June 14, 1993, at 3.

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Moreover, a global marketplace has unfolded, characterized by a

proliferation of multinational securities offerings. Many foreign

issuers now conduct concurrent offerings of their securities in the

United States and abroad as well as solely in the United States. This

rise in the supply of, and demand for, multinational offerings has

required careful coordination of the interaction of the Trading

Practices Rules with foreign distribution practices and regulatory

requirements.26

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\2\6See, e.g., Letter regarding Distributions of Certain SEAQ

and SEAQ International Securities (July 12, 1993), [1993] Fed. Sec.

L. Rep. (CCH) 76,707.

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B. Commission's Response to Market Developments

The Commission and its staff have responded to these developments

in the markets and distribution techniques through the exemptive, no-

action, interpretive, and rulemaking processes.27 In 1983, the

Commission adopted comprehensive amendments to Rule 10b-6 in response

to changes in the securities markets during the quarter century

following their adoption.28 Among other things, these amendments

codified and clarified staff positions that had been developed to deal

with various transactions on a case-by-case basis.29 Further

refinements to Rule 10b-6 were adopted in 1987 to address certain

issues left open by the Commission during its comprehensive review and

revision of that rule in 1983.30 More recently, the Commission has

issued exemptions to the Trading Practices Rules that recognize the

increasingly global nature of the securities markets31 and

enhanced surveillance capabilities.32 In addition, the staff

maintains its active program of responding to telephone inquiries

requesting guidance on the application of the Trading Practices Rules

and antimanipulation principles during offerings.

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\2\7The Commission is authorized to grant exemptions from the

requirements of the Trading Practices Rules. 17 CFR 240.10b-6(j); 17

CFR 240.10b-7(p); and 17 CFR 240.10b-8(g).

\2\81983 Release. See also Securities Exchange Act Release No.

18528, (March 10, 1982) 47 FR 11482 (``1982 Release'').

\2\9See 1983 Release, 48 FR at 10628.

\3\0See Securities Exchange Act Release No. 24003 (January 16,

1987), 52 FR 2994 (``1987 Release''). See also Securities Exchange

Act Release No. 22510 (October 10, 1985), 50 FR 42716 (``1985

Release'').

\3\1See, e.g., Securities Exchange Act Release No. 33022

(October 6, 1993), 58 FR 53220 (``German Offerings Exemptions''),

granting exemptions for transactions in the securities of certain

German issuers; Securities Exchange Act Release No. 33137 (November

3, 1993), 58 FR 60324 (``Statement of Policy''), inviting requests

for exemptions consistent with the principles of the German

Offerings Exemptions; Securities Exchange Act Release No. 33138

(November 3, 1993), 58 FR 60326 (``Rule 144A Release''), adding

Paragraph (i) to Rule 10b-6 excepting certain offerings made to

``qualified institutional buyers;'' Securities Exchange Act Release

No. 33862 (April 5, 1994), 59 FR 17125 (``Cooling-Off Periods

Release''), clarifying the availability of the cooling-off periods

to foreign securities.

\3\2See, e.g., Passive Market Making Release.

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It continues to be true that the activities relating to

distributions of securities are ``highly technical and complex, and

[are] conducted under limitless varieties of circumstances frequently

requiring the application of instantaneous business judgment.''33

Indeed, the developments discussed above have magnified the challenges

to issuers, distribution participants, and the Commission to apply and

adapt the Exchange Act antimanipulation provisions and their underlying

principles.

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\3\3Foshay, supra note 5, at 919.

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IV. Purpose of This Release

The transaction-driven nature of securities offerings means that

antimanipulation rules cannot address every situation that may arise.

Although the Commission continues to be responsive to the industry's

requests for interpretive guidance and relief from the present

regulations, the considerations discussed above suggest that a

comprehensive reexamination of the rules is warranted. Some securities

industry participants suggest that the Trading Practice Rules can be

simplified. Others argue that the rules are unnecessarily restrictive

and apply to situations where the manipulative potential is highly

attenuated. It has been suggested that alternative regulatory

structures may achieve the underlying legal and policy goals of the

Exchange Act and address the issues raised by market activities

conducted during securities offerings.

Accordingly, the Commission is undertaking this review of

antimanipulation regulation of securities offerings with a view toward

incorporating the above developments and simplifying its regulatory

structure. This release is intended to provide a forum for commenters

to discuss the current structure as well as alternative approaches to

governing trading during distributions. As focus points for analyzing

the pertinent issues, the following sections identify the concepts that

underlie the present regulations and raise a variety of questions on

the implementation of those concepts.

In reviewing the sections below, commenters should consider the

following central themes:

(1) Whether there are classes of investors, securities, or

transactions that do not need the protections of specific rules

governing manipulative conduct during offerings; and

(2) Whether there is a simpler structure for antimanipulation

regulation with regard to offerings that will achieve the identified

goals.34

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\3\4The Commission will continue to rigorously apply the current

antimanipulation provisions during the course of this review.

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Commenters are invited to discuss the issues identified below and

any others that they believe are relevant to the Commission's

consideration of these matters. Following its receipt and review of

comments, the Commission will determine whether rulemaking or other

action is appropriate.

V. Restrictions on Market Activities During Offerings: Rule 10b-6

A. Rule 10b-6 Generally

Rule 10b-6 is an antimanipulation rule that is intended to prevent

those persons participating in a distribution of securities, as defined

in the rule, from artificially conditioning the market for the

securities in order to facilitate the distribution, and to protect the

integrity of the securities trading market as an independent pricing

mechanism.35 Rule 10b-6 accomplishes these goals by prohibiting

these persons from bidding for or purchasing, or inducing others to

purchase the securities being distributed, or any security of the same

class and series as the security being distributed, or any right to

purchase that security until they have completed their participation in

the distribution.

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\3\5See Securities Exchange Act Release No. 31347 (October 29,

1992), 57 FR 49039, 49040.

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Thus, the primary focuses of Rules 10b-6 are: The offerings that

raise manipulative concerns, defined in the rule as ``distributions;''

the persons who are likely to engage in manipulative activity; and the

activities that could be expected to raise or support the security's

price. The rule is grounded on the view that:

A person contemplating or making a distribution has an obvious

incentive to artificially influence the market price of the

securities in order to facilitate the distribution or to increase

its profitability. [The Commission has] accordingly held that where

a person who has a substantial interest in the success of a

distribution takes active steps to increase the price of the

security, a prima facie case of manipulative purpose exists.36

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\3\6Bruns, Nordeman & Co., 40 SEC 652, 660 n.11 (1961) (``Bruns,

Nordeman'').

The rule identifies the participants in an offering who are

presumed to have an incentive to engage in activities for the purpose

of facilitating the distribution; i.e., to induce the purchase of the

offered securities. Various means by which such persons could achieve

this manipulative result are covered in the rule. Bids and purchases,

the most obvious means of influencing market activity, are prohibited

expressly. Rule 10b-6 also broadly proscribes other ``attempt[s] to

induce any person to purchase'' the securities covered by the rule. The

rule then carves out of the general prohibitions a number of activities

that are considered necessary in order to conduct an offering or have

little manipulative potential.37 One commentator has said that

``[i]t is the exceptions and the exemptions which give the rule

viability and feasibility.''38 None of the exceptions is

available, however, if the otherwise permitted activity is ``engaged in

for the purpose of creating actual, or apparent, active trading in or

raising the price of any [covered] security.''39

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\3\7Paragraph (a)(4)(i)-(xiv). The rule as originally adopted

contained 11 exceptions. Three exceptions have been added and one

has been deleted since 1955. Transactions in certain classes of

securities are excepted entirely from the rule. Paragraphs (d), (h),

and (i). The Commission also is authorized to grant exemptions from

the rule's requirements. Paragraph (j).

\3\8Whitney, Rules 10b-6: The Special Study's Rediscovered Rule,

62 Mich. L. Rev. 567, 568 (1964).

\3\9See Paragraph (a)(4) (introductory text).

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This structure and the rule's terminology reflect its direct

lineage to the implementation of the manipulative concepts of Section

9(a)(2) as they had been applied to offerings. The rule also reflects

the Commission's experience in combatting manipulative behavior during

offerings and provides guidelines to the investment banking community

as to what types of market activity generally would not be deemed by

the Commission to be manipulative.

B. Offerings

Concept One: Regulation should be limited to securities offerings

that give rise to a readily identifiable incentive to manipulate the

market.

1. Definition of ``Distribution''

In imposing restrictions on the market activities of persons

participating in a securities offering, the Commission has focused on

``offerings of such a nature or magnitude as to require restrictions

upon purchases by participants in order to prevent manipulative

practices.''40 The Commission has characterized such offerings as

``distributions,''41 and codified a definition of the term in Rule

10b-6: ``[T]he term distribution means an offering of securities,

whether or not subject to registration under the Securities Act, that

is distinguished from ordinary trading transactions by the magnitude of

the offering and the presence of special selling efforts and selling

methods.''42 This ``functional'' definition is intended to provide

a greater degree of guidance on, and certainty to, the types of

offerings that would give rise to an incentive to artificially

condition the market for the offered security. The identification of

these types of situations, however, needed to remain sufficiently

flexible to permit the protections afforded by Rule 10b-6 to evolve

with changes in the practices and methods of offering securities.

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\4\0Bruns, Nordeman, 40 SEC at 660.

\4\1Accordingly, in this context the terms ``offering'' and

``distribution'' are not synonymous. See, e.g., 1982 Release, 47 FR

at 11485. Generally, the term ``offering'' is used to encompass all

methods by which securities are offered and sold to investors. In

Rule 10b-6, the term ``distribution'' is used to identify an

offering that can be presumed to raise an incentive to manipulate

securities prices in order to facilitate the offering. See Bruns,

Nordeman, 40 SEC at 660. This use of the term ``distribution''

should be distinguished from its use in the context of the

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

Collins Securities Corp., 46 SEC 20, amended, 46 SEC 213 (1975),

rev'd on other grounds, Collins Securities Corp. v. SEC, 562 F.2d

820 (D.C. Cir. 1977). For a discussion of how the Commission has

used the term ``distribution'' under the Securities Act, and

relevant references, see Securities Act Release No. 6806 (October

25, 1988), 53 FR 44016, 44026 n.145 (proposing Rule 144A under the

Securities Act).

\4\2Paragraph (c)(5).

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A ``distribution'' must have two elements: ``Magnitude'' and

``special selling efforts and selling methods.''43 Factors

relevant to the magnitude element are: the number of shares to be

registered for sale by the issuer, and the percentage of the

outstanding shares, public float, and trading volume that those shares

represent.44 The Commission has indicated that providing greater

than normal sales compensation arrangements pertaining to the

distribution of a security,45 delivering a sales document, such as

a prospectus or market letters, and conducting ``road shows'' are

generally indicative of ``special selling efforts and selling

methods.''46 Based upon an analysis of their individual

characteristics, the following transactions, among others, have been

viewed as involving distributions under this definition: registered

public offerings, private placements, Rule 144A transactions, rights

offerings, warrant exercise solicitations, dividend reinvestment and

stock purchase plans, the issuance of securities in connection with a

merger or exchange offer,47 ``major sales campaigns'' by a broker-

dealer, and sales made pursuant to a shelf registration statement.

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\4\3As the definition was proposed originally, either element

alone would have been sufficient. See 1982 Release, 47 FR at 11484.

\4\41982 Release, 47 FR at 11486.

\4\5See 1983 Release, 48 FR at 10630 n.13.

\4\6See, e.g., Note, The SEC's Rule 10b-6: Preserving a

Competitive Market During Distributions, 1967 Duke L.J. 809, 823-824

(``1967 Note''); III L. Loss, Securities Regulation at 1597 (2d. ed.

1961) (``Loss'').

\4\71983 Release, 48 FR at 10638. See also Chris-Craft

Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 377 (2d Cir.

1973), rev'd on other grounds, Piper v. Chris-Craft Industries,

Inc., 430 U.S. 1 (1977). Moreover, the restrictions of Rule 10b-6

also have been interpreted to apply to those periods when a

security's market price is used to value the consideration in the

distribution. 1983 Release, 48 FR at 10638 n.61.

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In addition to identifying the type of offerings that may present

the incentive for the particular harm that Rule 10b-6 was intended to

address, it also is necessary to determine when a distribution begins

and when it ends. ``A distribution commences at the point when the

incentive to engage in manipulative conduct is first present,''48

and a distribution is complete when the securities ``come to rest in

the hands of the investing public.''49 Rule 10b-6(c)(3) specifies

when a person's participation in a particular distribution is deemed to

have been completed. For example, the rule states that an underwriter's

participation is over when it has distributed its portion of the

offering, including any securities of the same class that were acquired

in connection with the distribution, and when any stabilizing

operations and trading restrictions in connection with the distribution

have been terminated.50 In addition, a person is deemed to have

distributed securities acquired by him for investment. The

determination of how long securities must be held to constitute an

investment will depend upon the facts and circumstances.51

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\4\8SEC v. Burns, 816 F.2d 471, 476 (9th Cir. 1987), citing 1982

Release, 47 FR at 11485 (in the case of a registered offering, the

distribution may commence not only before the registration statement

for those securities becomes effective, but also before such

statement is filed with the Commission); Gob Shops of America, Inc.,

39 SEC 93 (1959) (bids and purchases by a prospective underwriter

four months before the filing with the Commission of a notification

relating to a Regulation A offering were manipulative).

\4\9See, e.g., R.A. Holman & Co., Inc. v. SEC, 366 F.2d 446, 449

(2d Cir. 1966), amended on reh'g, 377 F.2d 665 (2d Cir. 1967), cert.

denied, 389 U.S. 991 (1967), rehearing denied, 389 U.S. 1060 (1968)

(``Holman''); Rooney, Pace Inc., 48 SEC 891, 898-99 (1987).

\5\0Paragraph (c)(3)(ii). The Commission has held that

completion of an underwriter's participation in a distribution

``does not mean substantial completion.'' Shearson, Hammill & Co.,

42 SEC 811, 821 n.20 (1965).

\5\1See Holman, 366 F.2d at 450. Simply placing shares in an

``investment account,'' however, is not conclusive as to whether the

securities are acquired ``for investment.'' See C.A. Benson & Co.,

Inc., 41 SEC 427 (1963).

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2. Particular Distribution Contexts

One example of significant changes in securities sales practices

that have affected the administration of Rule 10b-6 pertains to the

sale of securities pursuant to issuer stock purchase plans. Presently,

Rule 10b-6 contains an exception for distributions of securities by an

issuer or a subsidiary of an issuer to employees or shareholders of the

issuer, its subsidiaries, or a trustee or other person acquiring such

securities for the account of such employees or shareholders pursuant

to a plan.52 On its face, this exception applies irrespective of

the magnitude of the offering or the nature of the selling efforts.

Traditionally, stock purchase plans were seen as mechanisms by which

employees and shareholders, i.e., persons having a significant

relationship with the issuer, could increase their holdings, rather

than as major capital-raising vehicles. These distributions have not

been viewed as presenting the same incentives for manipulation by the

issuer as in other distributions because of the limited nature of the

sales, as well as the relationship between the issuer and plan

participants.53

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\5\2Paragraph (e). ``Plan'' is broadly defined in Paragraph

(c)(4) as a ``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.''

\5\3See generally Securities Exchange Act Release No. 16646

(March 13, 1980), 45 FR 18948; Securities Exchange Act Release No.

17556 (February 17, 1981), 46 FR 15133.

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Today, however, issuer plans often are available not only to

employees and shareholders, but also to outside directors, franchisees,

customers, and others having varying relationships with the issuer.

Moreover, plan distributions may be used as significant capital-raising

mechanisms.54 In the case of plans open to persons other than

shareholders or employees, sales of a security to the plan do not

qualify for the Paragraph (e) exception. As a result, absent an

exemption from Rule 10b-6, issuers and other distribution participants

are required to comply with Rule 10b-6. Even with respect to plans that

qualify for the Paragraph (e) exception, the more recent use of such

plans to broadly distribute the issuer's securities may not have been

contemplated by the Commission when Paragraph (e) was adopted.

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\5\4See Banks Raising Millions in Equity By Giving Discounts to

Arbitragers, Am. Banker, September 17, 1992, at 1.

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Other changes in the distribution process, such as those arising

from the adoption of Rules 415 and 430A under the Securities

Act,55 also have complicated the distribution analysis.56

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\5\517 CFR 230.415, 430A.

\5\6See Securities Exchange Act Release No. 23611 (September 11,

1986), 51 FR 33242. For purposes of Rule 10b-6, the Commission has

viewed a distribution pursuant to a shelf registration statement

under Rule 415 as constituting a unitary distribution throughout the

effectiveness of the shelf. Id. at 33243.

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Question 1.1. Should the Commission continue to define the term

``distribution,'' and if so, should the Commission continue to define

the term based on the ``magnitude of the offering'' and the presence of

``special selling efforts and selling methods''? If so, are there

identifiable factors that can be used to determine whether an offering

satisfies these criteria? Commenters may wish to suggest criteria that

distinguish ``distributions'' from ``ordinary trading transactions.''

Question 1.2. Should the ``magnitude'' element be clarified to

exclude de minimis offerings? If so, how would such offerings be

identified?57 Would a standard based on dollar value of average

daily trading volume or other factors be appropriate?

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\5\7In 1982, the Commission proposed that transactions that

complied with the volume and manner of sale provisions of Rule 144

under the Securities Act not be treated as ``distributions'' for

purposes of Rule 10b-6. See 1982 Release, 47 FR at 11482. The

Commission did not adopt the proposal. See 1983 Release, 48 FR at

10630.

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Question 1.3. Should certain categories of offerings (e.g., based

on the total dollar amount of securities offered or the number or type

of persons to whom the offering is made) be excluded from the

definition? Examples might include offerings made pursuant to the

authority of Section 3(b) of the Securities Act,58 and offerings

made solely to large institutions.59

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\5\8Securities Act Section 3(b), 15 U.S.C. 77c(b). It may be

noted, however, that offerings made pursuant to Regulation A have

resulted in a number of Commission actions alleging manipulation.

E.g., C.A. Benson & Co., Inc., 41 SEC 427 (1964); Bruns, Nordeman.

\5\9See, e.g., Rule 144A Release.

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Question 1.4. What difficulties do the ``functional'' beginning and

ending points for a distribution present? Can more definite points be

identified?60

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\6\0See Halsey, Stuart & Co., Inc., 30 SEC 106, 137 n.41 (1949)

(noting that the termination of the restrictions of Rule 10b-6 are

determined by whether an underwriter continues to function in its

capacity as an underwriter).

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Question 1.5. Should issuer plans be distinguished from other

distributions of securities? Should plans be distinguished based on the

nature of the participants, e.g., whether the plan is available only to

certain groups having an affinity or relationship to the issuer, such

as shareholders, employees, or customers? If so, are there limits to

the types of affiliations?

Question 1.6. Should mergers and exchange offers continue to be

deemed distributions in order to prevent an issuer from conditioning

the market and influencing the shareholders of the target company?

Commenters may wish to address the role of Exchange Act Rule 10b-

1361 in this context.

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\6\117 CFR 240.10b-13. Rule 10b-13 prohibits a person making a

tender or exchange offer for an equity security from, directly or

indirectly, purchasing or making an arrangement to purchase such

security or any security which is immediately convertible into or

exchangeable for such security, otherwise than pursuant to the

offer, from the time the offer is publicly announced until its

termination.

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Question 1.7. What is the appropriate application of anti-

manipulation regulation to valuation and shareholder-election

periods?62

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\6\2See n.47 supra.

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C. Persons

Concept Two: Regulation should be limited to those persons who have

a readily identifiable incentive to manipulate the market during an

offering.

Rule 10b-6 applies to the following persons:

(1) Issuers and selling shareholders;

(2) Underwriters and prospective underwriters;

(3) Brokers, dealers, and other persons that have agreed to

participate or are participating in the distribution; and

(4) ``Affiliated purchasers'' of the foregoing.63 In addition,

the prohibitions of the rule have been considered applicable to any

other person who has a material financial interest in the success of

the distribution which would provide that person with an incentive to

condition the market to facilitate the distribution.64 Except for

the duration of the distribution period in Paragraph (c)(3), the rule

applies equally to each category of distribution participant; yet the

incentives of each to facilitate a distribution may differ

substantially, reflecting very different risk and reward profiles.

Moreover, those incentives may vary at different times in the

distribution process.

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\6\3See Paragraphs (a), (c)(6).

\6\4This would include persons whose right to receive

substantial compensation is contingent upon the success of the

distribution. 1985 Release, 50 FR at 42719 n.30.

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In best efforts offerings and prior to the pricing of a firm

commitment offering, issuers and selling shareholders have a clear

incentive to manipulate the price of the securities to be distributed.

A very small change in the market price of a security, which in some

circumstances may be accomplished at relatively little expense, can

result in a substantial increase in offering proceeds, particularly

when a large number of shares are to be sold.

A firm commitment underwriting typically involves a group of

underwriters, represented by one or more managing underwriters, an

underwriting group, and a number of ``selling group'' members. The

financial risk of failure and the concomitant incentive to manipulate

largely shifts to the underwriters once the underwriting agreement with

the issuer is signed.65 Within the underwriting group, the

incentives may vary in proportion to the amount of the underwriting

commitment and the particular role of the underwriter in the offering.

For example, a managing underwriter may have a larger reputational

stake in the success of an offering and an ongoing business

relationship with the issuer that may align its interests more closely

with the issuer as compared with other members of the underwriting

syndicate. Selling group members participate in the sale of the offered

security, but do not assume any underwriting risk. Selling group

members pay for only the amount of securities necessary to satisfy

orders obtained from customers; their risk is limited to the extent

that their customers renege.

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\6\5The contractual commitment typically is executed shortly

(usually less than one day) before the commencement of sales of the

securities. The commitment also typically is subject to ``market

out'' clauses that permit the underwriters to avoid the risk of

proceeding with the underwriting in the event of certain specified

contingencies. Cf. Walk-In Medical Centers, Inc. v. Breuer Capital

Corp., 818 F.2d 260 (2d Cir. 1987).

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The restrictions of Rule 10b-6 also extend to ``affiliated

purchasers'' of distribution participants, i.e., persons that have

relationships with distribution participants as well as the incentive

and ability to facilitate a distribution of securities.\66\ Affiliated

purchasers include persons acting in concert with a distribution

participant in connection with the acquisition or distribution of

securities, and affiliates that, directly or indirectly, control the

purchases of a distribution participant, or whose purchasers are

controlled by or are under common control with a distribution

participant (e.g., decisional officers of the issuer who participate

directly or indirectly in the recommendation of, determination to

proceed with, or implementation of, a distribution). The increasingly

complex structure of financial and other conglomerates\67\ suggests

that the ``affiliated purchaser'' definition may require revision.

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\66\Paragraph (c)(6). See 1987 Release, 52 FR at 2995-2997.

\67\See, e.g., Letter regarding The Equitable Life Assurance

Society of the United States (December 30, 1988), [1989] Fed. Sec.

L. Rep. (CCH) 78,955.

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Question 1.8. What advantages or disadvantages are there in

treating all distribution participants similarly? Commenters suggesting

that certain categories of distribution participants should be subject

to lesser (or no) restrictions because of their degree of or lack of

manipulative incentive should suggest parameters for each such

category.\68\

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\68\See, e.g., Letter regarding Distributions of Certain

Canadian Securities (August 22, 1991), [1991] Fed. Sec. L. Rep.

(CCH) 79,753 (providing a conditional exemption from Rules 10b-6

and 10b-7 for selling group members).

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Question 1.9. Should the restrictions correspond to the varying

degree of manipulative incentive present during certain stages of the

distribution?

Question 1.10. What types of persons or entities should be

considered ``affiliated purchasers''? Commenters addressing this point

should give specific examples of the rule's current impact on

affiliated persons and entities of distribution participants. Should

affiliated purchasers that have a fiduciary duty to their customers be

excluded or treated separately?

Question 1.11. To what degree should regulatory oversight,

surveillance, and/or the existence of structural separations (e.g.,

information barriers) be relevant in determining whether an affiliated

purchaser should be subject to regulation?\69\

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\69\See Letter from James E. Buck, Secretary, NYSE, to Jonathan

G. Katz, Secretary, SEC, December 15, 1992 (commenting on Securities

Exchange Act Release No. 31347 proposing ``passive market making'').

The letter is available in File No. S7-33-92.

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Question 1.12. Are there other persons not currently covered by the

rule, such as prospective purchasers of the shares being distributed,

whose market activities should be subject to regulation?

D. Activities

Concept Three: Regulation should be limited to market activity that

would improperly affect the price of, or create the appearance of

excessive trading in, the offered security, but should not unduly

restrain legitimate market and business practices.

1. Bids, Purchases, and Inducements

It has been said on a number of occasions that the goal of

regulating the activities of distribution participants is to ``prevent

participants in a distribution from artificially conditioning the

market for the securities in distribution'' and to ``protect the

integrity of the securities trading market as an independent pricing

mechanism during the distribution period.''\70\ To prohibit all

activity of distribution participants, however, would result in a

distorted market simply by virtue of curtailing ``normal'' market

activity of distribution participants during the distribution period.

Accordingly, regulation should focus upon market activities by

distribution participants (and their affiliated purchasers) that

improperly would directly or indirectly raise or maintain the price of

the offered security or create the appearance of active trading in the

security.

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\70\Eg., 1982 Release, 47 FR at 11483.

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Rule 10b-6 broadly prohibits bids, purchases, and attempts to

induce the purchase of the offered security and related securities.\71\

These terms have been interpreted to cover a broad range of

transactions. For example, ``bid'' includes priced quotations, unpriced

indications of interest in purchasing a security, public announcement

of a tender offer or exchange offer, and the sale of put options.

``Purchases'' include the exercise of call options. These transactions

are covered irrespective of the market in which they are effected.

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\71\Paragraph (a). See section V.E. infra for a discussion of

covered securities.

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The proscription of ``inducements to purchase'' is less distinct.

It covers activity that causes or is likely to cause another person to

bid for or purchase covered securities.72 One type of inducement,

brokerage transactions that are solicited by distribution participants,

is explicitly covered in the rule.73 The distribution of research

reports is considered to involve inducements to purchase.

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\7\2See, e.g., Kidder Peabody & Co., 18 SEC 559 (1945)

(purchases made as a favor to underwriter); SEC v. Burns, 816 F.2d

471 (9th Cir. 1987) (president of issuer made loan to another person

to purchase covered securities).

\7\3Paragraph (a)(4)(v)(B). Rule 10b-6 allows offers to sell or

the solicitation of offers to buy the security being distributed,

i.e., sales in connection with the distribution. See Paragraph

(a)(4)(vi).

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Question 1.13. What activities by distribution participants should

be restricted? Should market sales by distribution participants be

prohibited at any point during a distribution or in connection with

certain types of distributions?74

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\7\4See, e.g., Hylton, Shearson Suspends Officials for Stock

Trade Violations, N.Y. Times, September 6, 1991, at D1 (sale to

depress closing price of stock that would be used to price an

offering); U.S. v. Regan, 937 F.2d 823, 829 (2d Cir. 1991), cert.

denied sub nom., Zarzecki v. U.S., 112 S. Ct. 2273 (1992) (sales of

underlying securities to enhance attractiveness of convertible debt

offering).

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Question 1.14. How should the dissemination of research be treated?

What type of research should be allowable during the distribution and

what type of research should be restricted? Is the manner in which

research is used relevant?75

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\7\5See 1987 Release, 52 FR at 2995 n.17; 1982 Release, 47 FR at

42718 n.19.

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2. Cooling-off Periods

Some activities may present greater manipulative concerns depending

upon when they occur during the distribution process. The most critical

period of the offering is the period beginning immediately before

pricing and continuing until the securities have come to rest in the

hands of investors (i.e., when the distribution has ended). Thus, Rule

10b-6 has incorporated the concept of ``cooling-off periods.''

Generally, distribution participants and their affiliated purchasers

may continue their trading and other market activities in the covered

securities until the applicable cooling-off period begins, at which

point they must suspend such activity until the termination of the

distribution.

The bases for applying cooling-off periods are:

(1) Restrictions on bids and purchases during the entire

distribution period could unnecessarily distort the market for the

offered security; and

(2) The effects on the offered security's price resulting from

distribution participants' market activities should dissipate within a

period of time. The cooling-off periods thus are intended to permit

supply and demand forces independent of the market activities of

persons with manipulative incentives to establish the market price of

the covered securities at the time the offering is priced and when they

are being sold to investors. The cooling-off periods also provide

guidance to distribution participants as to what period of time is

required between the cessation of their market activities (which may

have increased or maintained the market price of, or involved

substantial trading activity in, the covered securities) and sales to

investors.76 In this context, rather than requiring individual

broker-dealers or syndicate managers to determine when to taper off and

cease their market activities, the rule supplies uniform guidance.

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\7\6See also Securities Exchange Act Release No. 3056 (October

27, 1941), 11 FR 10984 (Opinion of SEC General Counsel).

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Rule 10b-6 uses market-related criteria to fix the lengths of the

cooling-off periods, which are two, five, and nine business days prior

to the ``commencement of offers and sales'' in the distribution. For

stock with a minimum share price of $5.00 and a public float of at

least 400,000 shares (``$5/400,000 Share Test''), the cooling-off

period is two business days. For all other securities, the cooling-off

period is nine business days. A minimum price per share requirement was

viewed as an appropriate criterion in light of the generally greater

volatility of low-priced stocks, while a public float standard was

viewed as providing a reasonable indication of the depth and liquidity

of the market for a security.77 The Commission also considered a

test based on the security's price and public float as having ``the

advantage of being relatively certain and easily determinable.''78

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\7\7Paragraphs (a)(4)(v), (xi), and (xii). See also Letter

regarding the Interpretation of ``Business Day'' (July 29, 1991),

[1991] Fed. Sec. L. Rep. (CCH) 79,751.

\7\81983 Release, 48 FR at 10634.

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Solicited principal and solicited brokerage transactions by

distribution participants are subject to the two and nine business day

cooling-off periods. A five business day cooling-off period applies to

the exercise of standardized call options on securities satisfying the

$5/400,000 Share Test, if such options were acquired after the person

exercising the option became a distribution participant. This cooling-

off period is intended to minimize the probability that purchases of

the underlying security resulting from options exercises would occur

during the two business day cooling-off period. No cooling-off period

is available for inducements to purchase. No cooling-off period is

applied to unsolicited principal transactions: the restriction on such

activity begins as of the commencement of offers or sales.

The Commission is aware of the perception that by curtailing

distribution participant activity, even with the availability of

cooling-off periods, the rule can affect adversely the ``normal''

trading market for a security. Because of this concern, the Commission

recently adopted an exception to Rule 10b-6 and a companion Rule 10b-6A

permitting ``passive market making'' (i.e., transactions that follow,

but do not lead, the market) by Nasdaq market makers participating in

distributions of Nasdaq securities satisfying the $5/400,000 Share

Test.79

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\7\9Paragraph (a)(4)(xiv) and 17 CFR 240.10b-6A, respectively.

See Passive Market Making Release.

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Question 1.15. Do the fundamental principles underlying the

cooling-off periods remain sound, and do they provide sufficient

assurances that a security's price is based on a market free from the

undue influences of distribution participants?

Question 1.16. What should be the role of disclosure, transaction

transparency, and regulatory surveillance in determining the

appropriate cooling-off periods?

Question 1.17. Are there more appropriate criteria on which to base

cooling-off period lengths than the $5/400,000 Share Test? Should the

test be based on the dollar value of public float, market

capitalization, or dollar value of average daily trading volume, or a

combination of these elements? What would be the appropriate

thresholds?80

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\8\0The Commission previously received limited, mixed comment on

this issue. See File No. S7-33-92, containing comment letters on

Securities Exchange Act Release No. 31347 (October 22, 1992), 57 FR

49039.

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Question 1.18. Should securities of very highly capitalized issuers

be subject to a cooling-off period of less than two business days? How

should these issuers be identified? Should any securities (e.g., penny

stocks) have a cooling-off period longer than nine business days?

Question 1.19. Should distribution participants be permitted to

effect bona fide hedging transactions in the offered security if such

hedging is done to offset the risk of a position established before

becoming a distribution participant? What should be the parameters of

any such hedging exception?

Question 1.20. During distributions of index- or equity-linked

securities or similar derivative products, should broker-dealers be

permitted to engage in risk-reducing activities until the time that the

offering price or strike price is established? If so, what parameters

are necessary or appropriate?

Question 1.21. Should issuers be permitted to purchase covered

securities throughout the distribution period if other antimanipulation

guidelines are followed, e.g., Rule 10b-18?81

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\8\117 CFR 240.10b-18.

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E. Securities

Concept Four: Regulation should be limited to securities whose

prices may significantly affect the market's evaluation of a security

in distribution.

The provisions of Rule 10b-6 apply to the security being

distributed, any security of the ``same class and series'' as that

security, and ``any right to purchase'' any such security.82 The

rule also deems a distribution of a security that is ``immediately

exchangeable for or convertible into'' another security, or that

entitles the holder immediately to acquire another security, to include

a distribution of such other security, thereby prohibiting bids for or

purchases of the underlying security as well as the security in

distribution.83 The rule covers these securities because they bear

a relationship to the securities in distribution such that distribution

participants may be tempted to manipulate these related securities to

facilitate the distribution.

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\8\2Paragraph (a). This collection of securities are referred to

as the ``covered securities'' in this release.

\8\3Paragraph (b).

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The relationship between the securities to be distributed and those

to be purchased may be based on their similar terms or on a

mathematical relationship conferred, for example, by a right to convert

or exchange one security for the other. Bids for or purchases of

related securities may result in price changes that render them

expensive relative to the security in distribution. The disparate

prices may prompt arbitrage transactions by other market participants

involving the sale of the related security and the purchase (and

possible upward effect on the price) of the security in distribution.

Purchases of a related security by distribution participants also may

be used to induce unrelated market professionals to purchase the

security in distribution as a hedge. For example, large purchases of

standardized call options are likely to force options market makers

(who have sold the options) to purchase the underlying common stock to

hedge their risk. A price increase in a related security also may

indicate to a potential investor that the security in distribution is

under-priced.

The ``same class and series'' language has been construed broadly

to encompass securities that are sufficiently similar in their terms to

the security in distribution to raise the possibility that bids for or

purchases of the outstanding security might be utilized to facilitate

the distribution, even though there is no inherent mathematical

relationship between the prices of the securities.84

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\8\4``Same class and series'' questions have arisen most

frequently with regard to debt securities. See Letter regarding

Gamble Skogmo, Inc. (January 11, 1974) (available on LEXIS), in

which the staff took a no-action position to permit bids for or

purchases of the issuer's outstanding debt securities that varied by

at least 1% in coupon interest rate and by at least ten years in

maturity from those of the debt securities being distributed.

Transactions in nonconvertible debt securities or nonconvertible

preferred securities where both the nonconvertible securities being

distributed and those to be purchased have been rated investment

grade by at least one nationally recognized statistical rating

organization (``NRSRO'') are excepted from Rule 10b-6. Paragraph

(a)(4)(xiii). The exception is premised on the fungibility of

investment grade issues (i.e., that securities with similar terms

will trade on rating and yield rather than issuer identification).

Prices of high-yield debt securities, on the other hand, are

presumed to be influenced by issuer-specific information as well as

interest rates. Cf. Securities Exchange Act Release No. 33327

(December 13, 1993), 58 FR 67878.

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The ``right to purchase'' concept has been applied to call options,

warrants, convertible and exchangeable securities, and target

securities in exchange offers and mergers.85 The scope of the rule

is limited, however, and does not encompass a wide variety of

derivative securities and instruments developed in recent years that do

not give the holder the right to acquire another security. Nonetheless,

these instruments derive their value in whole or in part from an equity

security or from a group of equity securities, and thus potentially

raise the same manipulative concerns underlying Rule 10b-6. For

example, cash-settled index-related securities and instruments, such as

narrow-based index options, have a value that may be derived in

significant part from a component security. Similarly, the sale of a

put option86 is closely analogous in terms of its potential impact

on the underlying security as a purchase of a call option, but it is

not a right to purchase.

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\8\5Convertible securities are considered to be rights to

purchase when the holders would find it economically beneficial to

convert, such as when the securities are ``in-the-money.'' See 1983

Release, 48 FR at 10631 n.28.

\8\6Rule 10b-6 has been interpreted to cover sales of put

options on a security in distribution on the theory that the puts

are ``bids'' for the security in distribution, even though it is the

sale rather than the continuing open position that is more likely to

affect the price of the underlying stock through arbitrage or

otherwise. Securities Exchange Act Release No. 17609 (March 13,

1981), 46 FR 16670.

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Question 1.22. Should bids for and purchases of debt securities

distinct from those in distribution continue to be regulated? In what

circumstances is the price of or trading activity in an outstanding

bond likely to be relevant in evaluating a debt offering of the same

issuer?

Question 1.23. Are there objective standards or quantitative models

for identifying the securities that should or should not be covered?

Are factors other than stated interest rates and maturities relevant to

the ``same class and series'' analysis, such as differences in ratings,

rankings (senior versus subordinated), and redemption features?

Commenters favoring an objective approach may wish to suggest ``bright

line'' factors, the presence or absence of which would establish

conclusively that two securities are not of the same class and series.

Question 1.24. Should the ``right to purchase'' concept be

retained, or should it be replaced with a ``price-related security''

concept that would include all securities having a significant price

relationship with the security in distribution? Commenters favoring

such an approach should address how ``price-related securities'' should

be defined and how to exclude securities or other instruments whose

prices have a highly attenuated economic relationship to and,

therefore, little potential impact upon the security in distribution.

Question 1.25. Under what circumstances should it be permissible to

purchase a security in distribution in the normal course of business as

part of a standardized or non-standardized ``basket'' of securities?

VI. Stabilization

Concept Five: Stabilization of offerings should be restricted in

order to minimize its manipulative impact.

A. Current Regulatory Approach

The express purpose of stabilization is to affect a security's

price. Therefore, during securities offerings, where the underwriter

has the purpose to induce others to buy the offered security,

stabilization is a form of manipulation. As a rationale for permitting

stabilization through regulation, the Commission pointed to the

significant risks to which underwriters are subject in firm commitment

underwritings.87 In Rule 10b-7, the Commission codified previously

articulated guidelines for determining which transactions effected to

peg, fix, or stabilize the price of a security constitute lawful

stabilization as a means to facilitate the placement of securities in

an orderly manner, and which transactions constitute unlawful

manipulation.

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\8\7Release 34-2446.

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Rule 10b-7 applies to ``any person who, either alone or with one or

more other persons, directly or indirectly, stabilizes the price of a

security to facilitate an offering of any security.''88

Stabilizing transactions are those involving ``the placing of any bid,

or the effecting of any purchase, for the purpose of pegging, fixing or

stabilizing the price of any security.''89 To prevent stabilizing

activities from improperly affecting the market for a security, Rule

10b-7 prohibits certain specific activities, including bids or

purchases not necessary for the purpose of preventing or retarding a

decline in the open market price of the security, and stabilizing at a

price resulting from unlawful activity. The rule establishes the price

level at which a stabilizing bid may be entered, and rules of priority

for the execution of independent bids at times when a stabilizing bid

has been entered. In addition, the rule regulates the number of

stabilizing bids that an underwriting syndicate may enter in any one

market at any one time, and the entry of stabilizing bids on markets

other than the principal market for the security being stabilized. The

rule also requires that notice be given that the market will be or is

being stabilized, and requires a person effecting stabilizing

transactions to keep the information and make the notification required

by Rule 17a-2 under the Exchange Act.90

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\8\817 CFR 240.10b-7(a).

\8\917 CFR 240.10b-7(b)(3).

\9\017 CFR 240.17a-2. Rule 17a-2 generally requires the managing

underwriter in an offering that is being stabilized to record

specified information on the offered security, each stabilizing

purchase, and the identity and commitments of syndicate members, and

to furnish similar information to each syndicate member.

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Question 2.1. To what extent have changes in the securities markets

and underwriting practices affected the manner in which stabilization

is conducted? How frequently and under what circumstances are offerings

stabilized (as opposed to reserving the right to stabilize)? What new

techniques and trading systems (such as proprietary trading systems)

are used and how are bids and purchases disclosed in such systems?

Question 2.2. Should the ability to stabilize be based upon the

risk assumed in connection with an offering? Do current underwriting

practices allow underwriters to reduce risks to a greater extent than

when the Commission established its policies on stabilization? Do

issuers engage in stabilization during offerings? If so, is it

appropriate?

Question 2.3. Should stabilization be permitted only for certain

types of distributions (e.g., firm commitments) or securities? If so,

what should be the determinative criteria?

Question 2.4. How should stabilizing price levels be determined?

Should permissible stabilization price levels depend on the security's

characteristics (e.g., the degree of transparency, liquidity, or

reported/nonreported status) or should they apply uniformly to all

securities?

Question 2.5. What is the appropriate role of disclosure in

connection with stabilization? Do the current disclosure requirements

provide meaningful investor protection?

B. Aftermarket Bids and Purchases

Underwriters engage in numerous activities in the ``aftermarket''

of the offered security, i.e., the period following the cessation of

sales efforts in the offering. In purpose or effect, these activities

may support, or even raise, the market price of the security, and can

have the effect of ``stabilizing'' the security's price.91 In

fact, ``stabilization'' of the market in connection with offerings may

have shifted from the sales period to the aftermarket period.

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\9\1See, e.g., Hanley, Kumar & Seguin, Price stabilization in

the market for new issues, 34 J. Fin. Econ. 177 (1993).

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A significant volume of trading frequently occurs in the days

immediately following the end of the sales of the offered securities.

Three significant activities by persons who participated in the

distribution often occur during this period: market making; purchases

of the offered security to cover a syndicate short position; and

``penalty bids.'' Underwriters, particularly managing underwriters,

generally become market makers in the security (or resume market making

if it was suspended during the offering). Underwriters may have

``oversold'' the offering in order to compensate for cancellations and

to create aftermarket buying power against anticipated selling pressure

immediately following the offering.92 Issuers sometimes grant an

overallotment option (so-called ``Green Shoe'' option) to underwriters

to purchase securities in addition to the amount that the syndicate is

committed to purchase from the issuer.93 The manager may cover the

syndicate short position by exercising the option, through open market

purchases, or a combination of the two.

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\9\2Underwriters have reported that immediate aftermarket

selling by substantial purchasers in the offering, known as

``flipping,'' has become common. See, e.g., Peers, Wall Street Plans

to Crack Down on IPO 'Flippers,' Wall St. J., December 29, 1993, at

C1. It appears to be a longstanding phenomenon of offerings. Cf.

Release 34-2446, at 5.

\9\3Under Rule 10b-6, a distribution is deemed completed if the

underwriter exercises the overallotment option, but only to the

extent of the syndicate short position that remains in connection

with the distribution. See Paragraph (c)(3)(ii).

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A ``penalty bid'' provision often is included in the agreement

among underwriters.94 The managing underwriter imposes the penalty

by requiring underwriters or selling group members to forfeit their

selling concession for the shares sold to their customers in the

offering that are purchased in the aftermarket for the syndicate

account.

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\9\4A ``penalty bid'' is defined in the NASD By-Laws, Schedule

D, part 1(15) [NASD Manual (CCH) 1802] as: ``A stabilizing bid that

permits the managing underwriter to reclaim a selling concession

granted to a syndicate member in connection with the sale of

securities in an underwritten offering when the syndicate member

resells such securities to the managing underwriter.''

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Question 2.6. Do aftermarket bids and purchases by syndicate

members support the market price of the offered security and

``facilitate the offering?''

Question 2.7. Should such bids and purchases be regulated?

If so, what is the appropriate form of regulation? Is it relevant

whether the syndicate has a net short position?

Question 2.8. What should be the appropriate period during which

the short position may be covered?95

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\9\5See Securities Exchange Act Release No. 3506 (October 27,

1941), 11 FR 10984.

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Question 2.9. Does the presence of a penalty bid have the effect of

``stabilizing'' the aftermarket of the offered security?96

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\9\6Cf. Zweig, Spiro and Schroeder, Beware The IPO Market,

Business Week, April 4, 1994, at 84.

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VII. Rights Offerings

Concept Six: Regulation should be limited to rights offerings that

raise a readily identifiable incentive to manipulate the market.

Rights offerings are a means of raising capital whereby, for a

limited period of time, issuers offer existing security holders the

opportunity to purchase new securities, generally at a discount to the

market price of the security underlying the rights.

Because the structure differs significantly from that of a

traditional offering of equity or debt securities, rights offerings

involve different risks.97 For instance, a decline in the market

price during the often lengthy period during which rights may be

exercised (``rights exercise period'') can affect the success of the

offering. For this reason, issuers often retain underwriters who assume

the risk of failure of the offering, i.e., that a substantial amount of

rights will remain unexercised at the end of the rights exercise

period.

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\9\7See generally Loss, supra note 46, at 1604-1614; Foshay,

supra note 5, at 916-918.

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Broker-dealers often are employed by issuers in one of, or some

hybrid of, two methods to reduce market risk during the rights exercise

period. The first method is the so-called ``Shields Plan,''98

which is used when the underwriters (typically a syndicate of

underwriters) enter into a standby arrangement with the issuer, thereby

committing to purchase all shares left unsubscribed at the expiration

of the rights exercise period. During the rights exercise period, the

underwriters will seek to offset the risk of purchasing the shares

representing unexercised rights by purchasing rights, exercising them,

and selling the securities acquired. The underwriters also may effect

short sales of the underlying security and then purchase rights to

cover this short position.

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\9\8The Shields Plan originated in 1947 with a committee of the

Investment Bankers Association headed by a partner of Shields & Co.

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In the so-called ``Columbia Gas Plan,''99 the issuer retains a

securities dealer to act as dealer-manager of the offering, although

there is no standby commitment to purchase unsubscribed shares.100

Where rights are transferable, Shields Plan-type activities may be used

in this type of arrangement to increase the amount of rights exercised,

i.e., the soliciting dealers sell short the securities being offered

and purchase rights and exercise them to cover their short positions.

Accordingly, although the dealer-manager may facilitate the exercise of

rights and thus the distribution of the underlying securities, the risk

of failure remains with the issuer.

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\9\9The Columbia Gas Plan was first devised and implemented by

the Columbia Gas Company in 1948.

\1\00This is also referred to as the ``dealer-manager plan.''

Rule 10b-8 defines a dealer-manager as ``a person [other than the

issuer] who manages a distribution involving soliciting dealers.''

17 CFR 240.10b-8(d)(8)(viii).

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One commentator has observed that the Commission encouraged the

development of these plans because they reduced the flotation costs of

rights offerings and protected existing security holders who otherwise

might not receive a fair price for the rights that they did not wish to

exercise.101

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\1\01Loss, supra note 46, at 1605.

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Adopted by the Commission in 1955, Rule 10b-8 represented a

codification of prior administrative practice regarding rights

offerings by permitting purchases of rights and other activities

designed to reduce the risk of raising capital through rights

offerings, albeit subject to limitations consistent with the goals of

Rule 10b-6 (i.e., to restrict activities by persons participating in

the rights offering which might artificially affect the price of the

rights or the underlying security).102

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\1\02Rule 10b-8 applies to any person participating in a rights

distribution, including the issuer, underwriter, dealer-manager, and

soliciting dealers. The rule excludes from its coverage a person

whose activities consist solely of receiving compensation from the

issuer of rights for obtaining exercises of rights by security

holders to whom they were originally issued.

In recent years, certain persons or entities that are not

brokers or dealers have served as standby purchasers in rights

offerings in order to increase their ownership in the issuer's

securities. Unlike standby underwriters who purchase rights to

reduce their position risk, purchases of rights by such persons are

made to acquire or increase a position in the underlying security.

These latter standby purchasers are not covered by Rule 10b-8. See,

e.g., Letter regarding Elron Electronic Industries Ltd. (March 19,

1990), [1990-1991] Fed. Sec. L. Rep. (CCH) 79,656.

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The rule has remained essentially unchanged since it was adopted in

1955.103

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\1\03In 1983, the rule was amended to include within its scope

convertible securities called for redemption pursuant to a standby

underwriting agreement. Generally, calls for redemption contain

features similar to rights offerings, namely, that a standby

underwriter seeks to minimize its exposure to position risk during

the redemption period. In 1993, the rule was amended to except

certain rights offerings of foreign securities made exclusively in

the United States to ``qualified institutional buyers,'' as defined

in Rule 144A under the Securities Act. See Rule 144A Release.

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To prevent distribution participants from facilitating a rights

offering by creating the appearance of demand for the rights, paragraph

(d) of Rule 10b-8 restricts bids for and purchases of rights.104

Nevertheless, the restrictions apply only in two situations:

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\1\0417 CFR 240.10b-8(d). Purchases of the underlying securities

remain subject to Rule 10b-6. See Paragraph (a)(4)(ix).

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(1) When the price of the security underlying the rights is being

stabilized; or

(2) When any syndicate member, dealer-manager, soliciting dealer,

or other distribution participant has purchased rights, as principal,

without having sold the underlying securities obtainable upon exercise

(i.e., when any member of the syndicate has a net long position in the

underlying security, assuming the exercise of all rights owned by the

syndicate members).105 Otherwise, there is no restriction on the

price or manner in which the rights may be purchased. Where the

restrictions are applicable, the amount of rights that a distributor or

syndicate may purchase is limited to those necessary to acquire the

securities the distributor or syndicate has previously sold or

reasonably expects to be able to sell within five business days after

the expiration of the rights.106

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\1\05Accordingly, the restrictions on rights purchases do not

apply to distribution participants who purchase rights to cover an

existing short position in the underlying securities. There are

certain exceptions from the restrictions that are analogous to the

exceptions in Rule 10b-6. See 17 CFR 240.10b-8(d).

\1\0617 CFR 240.10b-8(d)(7).

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Rule 10b-8 also limits the price at which the underlying

securities, or securities of the same class and series, may be offered

or sold during the rights offering.\107\ The sales price is based upon

the last sale price by the manager of the distribution or by a price

set by that manager. Such price may be set from time to time, but an

offering price set in any day may not be increased more than once

during such day. The rule's restrictions on sales are designed to

address the relationship that exists between the rights and the

underlying security, and are intended to prevent distribution

participants from offering the underlying security at steadily

increasing prices, which could affect the market price of the

underlying security and enhance the attractiveness of the rights.

Because a distribution participant may buy rights to the extent such

rights are needed to acquire securities that were previously sold, the

sales price restriction on the underlying security may limit the size

of the participant's short position, in turn controlling that

participant's rights purchasing activity.108

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\1\0717 CFR 240.10b-8(b).

\1\08Because purchases of rights may have the effect of

increasing the price of the underlying security (e.g., non-

distribution participant arbitrage sellers of rights would hedge by

purchasing the underlying security), restrictions on the price at

which the underlying security may be sold reduces any indirect

effect on the underlying security through the purchase of rights.

Although the rule does not regulate directly the size of the short

position in the underlying security, it may do so indirectly to the

extent that it becomes economically impractical for a participant in

the rights offering to sell the underlying security at prices below

the total acquisition cost of the rights plus the exercise price.

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Question 3.1. To what extent have changes in the securities markets

and underwriting practices affected the manner in which rights

offerings are conducted?

Question 3.2. Is it necessary or appropriate to have anti-

manipulation regulation of rights offerings or calls for redemption of

convertible securities? If regulation continues to be appropriate, how

should it be structured? Who should be covered?

Question 3.3. Should transactions in the rights continue to be

subject to restrictions and, if so, in what manner? Is the existing

distinction between persons with a long position in the underlying

security and those with a short position appropriate, i.e., is there

greater or lesser incentive to manipulate based on positions in the

underlying security? Should limitations be placed on the volume of

rights purchases? Commenters should consider the manner in which

purchasing rights may facilitate the distribution of the underlying

security.

Question 3.4. Should sales of the underlying security and related

securities during a rights offering continue to be subject to

restrictions and, if so, in what manner?

Question 3.5. To what extent do the following considerations affect

rights offering practices, and can or should any of these factors be

taken into account as a means to simplify any continued regulation of

these offerings:

(a) The risks assumed by the persons participating in the rights

offering;

(b) The existence or extent of a discount in the rights exercise

price to the market price of the security; or

(c) The timing of the exercise of rights? 109Are there any

other relevant factors to be considered in the treatment of these

offerings?

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\1\09For example, it has been noted that, from an economic

perspective, shareholders tend to delay their decision regarding

whether to exercise rights until just before the rights expire. See,

e.g., E. Bloch, Inside Investment Banking 173 (1986).

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VIII. Regulation of Other Manipulative Activity During Offerings

Concept Seven: Where necessary or appropriate, regulation should

address the activities of persons other than distribution participants

who have substantial incentives to manipulate security prices during

offerings.

The Trading Practices Rules address the manipulative activities of

distribution participants and their affiliated purchasers. However,

other parties also may have substantial incentives to manipulate the

price of a security around the time of a securities offering. The

difficulty lies in drawing clear lines that appropriately address

manipulation practices but that do not interfere with legitimate market

and business activity.

One context that has been addressed is sales of securities prior to

the pricing of an offering. The Commission has applied fundamental

manipulation concepts to this activity: ``Where * * * those who have a

substantial interest in the establishment of lower market prices take

active steps to accomplish their objective, a finding of manipulative

purpose is warranted'' under Exchange act sections 9(a)(2) and 10(b)

and Securities Act Section 17(a).110

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\1\10J.A.B. Securities Co., Inc., 47 SEC 86, 92 & n.17 (1979).

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Specifically, the Commission views short selling in anticipation of

a public offering and the subsequent covering of those short sales with

the offered securities as a manipulative activity. Such short sales are

detrimental to the capital formation process, because the decreased

price resulting from those sales deprives the issuer of offering

proceeds that otherwise would have been realized had the market not

been subject to such activity.111 Persons who sell short and cover

their sales out of a public offering are not subject to the usual

market risk associated with short sales, because they have access to a

pool of securities obtainable from distribution participants at a

fixed, and generally lower, price. It is this lower risk that can

provide an incentive for manipulative short selling. The Commission

adopted Rule 10b-21 in 1988 to prohibit this type of short selling and

covering.112

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\1\11See Securities Exchange Act Release No. 26028 (August 25,

1988), 53 FR 33455, 33456. See also Rule 10b-21 Release.

\1\1217 CFR 240.10b-21. See, e.g., SEC v. Curtis Ivey and Gregg

Kaplan, Lit. Release No. 14042 (April 5, 1994).

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In addition to short sellers, persons may engage in long sales in

order to depress the market price in anticipation of an offering. For

instance, they may have indicated their interest in buying the offered

securities from the underwriter, but want to do so at a lower

price.113

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\1\13See, e.g., SEC v. Soros Fund Management, Inc., No. 79 Civ.

2641 (S.D.N.Y. 1979), Lit. Release No. 8763 (May 21, 1979) (consent

decree finding violations of Exchange Act sections 9(a)(2) and 10(b)

and Rule 10b-5 thereunder and Securities Act section 17(a)).

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Question 4.1. Does Rule 10b-21 adequately address the concerns

raised by short selling in anticipation of an offering?

Question 4.2. Should Rule 10b-21 explicitly cover sales of related

securities in addition to the offered securities?

Question 4.3. Are there other manipulative activities during an

offering that should be addressed by regulation and that can be

regulated feasibly?

IX. Extraterritorial Effects of Antimanipulation Regulation

Concept Eight: Consistent with the protection of United States

investors, regulation of offerings should avoid conflicts with global

distribution practices.

Shortly after adoption of the Trading Practices Rules, the

Commission took the position that, with respect to multinational

offerings of securities occurring in whole or in part in the United

States, the Trading Practices Rules apply to all distribution

participants and their affiliated purchasers, wherever they are located

or effect transactions.114 The basis for this position is that

transactions occurring in a foreign jurisdiction can affect the market

for the security being distributed in the United States, and such

activity might result in the harm that Rule 10b-6 was designed to

prevent (i.e., the creation of artificial prices by persons

participating in the distribution).115 As the world's securities

markets have become increasingly interconnected and, in particular, as

multinational offerings have become more common, market participants

have asserted that the extraterritorial effects of the Trading

Practices Rules disrupt foreign distribution participants' normal

market practices and may discourage some offerings from being made in

the United States.116 These effects also may impose compliance

burdens on foreign persons that conflict with regulatory requirements

in their home jurisdictions.117

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\1\14See, e.g., Letters regarding Royal Dutch Petroleum Co.

(December 23, 1957); Philips N.V. (May 15, 1962); Standard Oil Co.

(New Jersey) (February 6, 1970); and S.S. Kresge & Co. (April 14,

1972). In some respects, other jurisdictions have taken a similar

approach. See Chapter III, Part 10, Rule 10.06 of the Rules of the

U.K. Securities and Investments Board, 2 Fin. Serv. Rep. (CCH) at

184,281.

\1\15Generally, U.S. courts have recognized the application of

U.S. federal securities laws to fraudulent or manipulative

activities in a foreign jurisdiction where such activities have an

``effect'' in the United States, Schoenbaum v. Firstbrook, 405 F.2d

200, 208 (2d Cir.), rev'd in part on other grounds, 405 F.2d 215 (2d

Cir. 1968) (en banc), cert. denied sub nom. Manley v. Schoenbaum,

395 U.S. 906; Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 991

(2d Cir. 1975); see also Restatement (Third) of the Foreign

Relations Law of the United States, 416 (1987), or where conduct

that occurs in the United States is an ``essential link'' in the

foreign fraudulent or manipulative activities. Leasco Data

Processing Equip. Corp. v. Maxwell, 468 F.2d 1326, 1335 (2d Cir.

1972).

\1\16See Rule 144A Release, 58 FR at 60327.

\1\17See Statement of Policy, 58 FR at 60324.

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The Commission has addressed the international effects of these

rules by providing relief in appropriate contexts on an individual and

class basis.118 The Commission has applied the Trading Practices

Rules in a manner intended to limit disruption in the home country

market but in the context of its duty to protect U.S. investors from

manipulative offering practices. Relief has been based on a variety of

factors: The depth of the market for a foreign security; the

availability of transaction information to the Commission; information

sharing arrangements with foreign regulators; comparable foreign

regulation; the significance of a particular market for price

discovery; disclosure of foreign market practices and transactions; and

the characteristics of the market for the security in the United

States. In the case of rights offerings, which are quite common in

foreign jurisdictions, the lengthy rights exercise periods and the

amount of the discount between the rights exercise price and the price

of the underlying security also have been viewed as important factors

in fashioning relief.

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\1\18See, e.g., SEC, Fifty-Eighth Annual Report 33 (1992).

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Question 5.1. Should the regulation of offerings distinguish

between offerings in the United States of domestic and foreign

securities? Commenters should address the effect that the Commission's

initiatives concerning multinational offerings have had on U.S. and

foreign issuers, broker-dealers, and investors.

Question 5.2. In applying the Trading Practices Rules to offerings

of foreign securities in the United States, the Commission has

considered only the portion of the total offering that is offered in

the United States. Because manipulative incentive is related directly

to the magnitude of an offering, is the Commission's practice of

focusing only on the U.S. portion of a multinational offering

appropriate?

Question 5.3. Should antimanipulation regulations apply in the

``secondary'' markets for a particular security (i.e., those markets

that reasonably can be assumed not to have a price discovery role)? If

not, how should those markets be identified?119 Should the United

States ever be considered a secondary market for these purposes? What

potential is there for a secondary market to become a price discovery

market during the distribution period, and what consequence would that

have?

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\1\19In a recent exemption, the Commission disapplied the

Trading Practices Rules to markets that account for less than 10% of

a foreign security's worldwide reported trading volume. German

Offerings Exemptions, supra note 31, 58 FR at 53223-53225.

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Question 5.4. What is the role of transaction reporting to foreign

regulators and trade publication (i.e., transparency) in this context?

Question 5.5. What level of disclosure to U.S. investors regarding

foreign trading practices should be required?

Question 5.6. What information concerning transactions in foreign

countries during a distribution should be available to the Commission?

Question 5.7. Should regulation of foreign offerings be based on

information sharing agreements between the Commission and foreign

regulators?

Question 5.8. Should the Commission except transactions occurring

in those jurisdictions that have a comparable system of

antimanipulation regulation? How should comparability be determined?

X. Alternative Approaches

In considering the concepts noted above and the issues that they

raise, some commenters may believe that a different construct, rather

than amendments to the current rules, would provide a more appropriate

means of protecting investors from manipulation during securities

offerings. In assessing the general proposition of how and whether

market activities during distributions should be regulated, commenters

are requested to consider the following:

Question 6.1. How have changes in the securities markets and

securities offering practices affected the need for some form of

regulation of trading and similar activities during offerings of

securities? What are the costs and benefits of any continued regulation

of these activities? If regulation continues to be necessary or

appropriate, what form should such regulation take?

Additionally, commenters are invited to suggest and describe

alternatives to the current system, and may wish to consider the

approaches described below.

A. Safe Harbor Alternative

Under this approach, if certain conditions were satisfied, a ``safe

harbor'' from the antimanipulation provisions of sections 9(a)(2) and

10(b) and Rule 10b-5 thereunder would be available. For example, Rule

10b-18 under the Exchange Act provides a safe harbor from these

provisions for certain bids or purchases made by an issuer or its

affiliated purchasers. For that rule's safe harbor to apply, the issuer

or its affiliated purchasers must satisfy conditions relating to the

time, price, amount, and method of purchasing the issuer's security.

Commenters should consider whether it would be appropriate, and

practical, to adopt a safe harbor approach in lieu of, or as a

supplement to, the Trading Practices Rules. Because transactions within

any such safe harbor still could have a manipulative impact, the safe

harbor would be unavailable where the transactions were made with

manipulative or fraudulent intent.

Question 6.2. Could the Trading Practices Rules be restructured so

as to provide a ``safe harbor'' from charges of manipulation under the

Exchange Act? How and why should such a safe harbor approach be

implemented? What difficulties would be associated with such an

approach?120

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\1\20In the dynamic area covered by the Trading Practices Rules,

the views of the Commission's staff are frequently sought as to the

appropriateness of specific transactions. In general, the staff does

not provide similar advice regarding the scope of safe harbors from

antimanipulation provisions.

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B. Evidentiary Alternative

Under the Trading Practices Rules, it is unlawful for a

distribution participant to bid for or purchase the securities that are

the subject of a distribution (or related securities) until his or her

participation is completed, absent an exception or exemption. Some

market participants have voiced concerns that certain violations of

Rule 10b-6 are ``inadvertent'' or ``technical'' in nature and do not

evince an intent to artificially influence the price of a security in

distribution. A possible alternative would be to adopt a presumption

that a distribution participant or its affiliated purchaser who engages

in proscribed activity during a distribution has done so with

manipulative intent, and place the burden on that person to prove that

the conduct was not done with manipulative intent.121

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\1\21This approach would be analogous to the inference that is

drawn under the case law regarding section 9(a)(2). E.g., Crane Co.

v. Westinghouse Air Brake Co., 419 F.2d 787, 795 (2d Cir. 1969); The

Federal Corp., 25 SEC 227, 230 (1947).

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Question 6.3. Should distribution participants be permitted to

rebut findings of violations of the Trading Practices Rules by

establishing the absence of manipulative intent? How and why should

such an approach be implemented? What difficulties would be associated

with such an approach? What should be the evidentiary requirement for

rebutting such a presumption?

C. Definitional Approach

```Manipulation' is `virtually a term of art when used in

connection with the securities markets.'''122 Various sections of

the Exchange Act authorize the Commission to prohibit activities that

it deems or defines to be manipulative.123 The Trading Practices

Rules are among the antimanipulation rules that the Commission has

adopted pursuant to this authority.124

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\1\22Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476 (1977),

quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976).

\1\23E.g., Exchange Act Section 10(b), 15(c)(1)(D), 15(c)(2)(D),

15 U.S.C. 78j(b), 78o(c)(1)(D), 78o(c)(2)(D). For example, Rules

15c1-1 through 15c1-9 under the Exchange Act define the term

``manipulative, deceptive, or other fraudulent device or

contrivance'' as used in Section 15(c)(1) of the Exchange Act by

enumerating various acts and practices. 17 CFR 240.15c1-1--240.15c1-

9.

\1\24Cf. Santa Fe, supra note 122, at 476-477.

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Question 6.4. Should the Commission expressly define activities

that are manipulative in the context of offerings? How and why should

such an approach be implemented? What is the scope of activities that

should be covered by a definitional rule? What difficulties would be

associated with such an approach?

D. ALI Code Alternative

In 1978, the American Law Institute (``ALI'') proposed a

comprehensive codification of the federal securities laws (``ALI

Code'').125 The ALI Code retains many of the fundamental concepts

of Rules 10b-6 and 10b-7.126 For example, the ALI Code would

codify the basic principles of Rule 10b-6, but leave it to successor

rules to provide the details and exemptions. The code does not

recommend the repeal of any of the exceptions in Rule 10b-6.

Additionally, the proposed definition of ``distribution'' would permit

the Commission to define the term in light of a number of factors,

including the size of the offering, number of sellers and buyers,

selling methods, characteristics of the market used, and

compensation.127

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\1\25ALI, Federal Securities Code (Proposed Official Draft,

1978). The ALI Code was endorsed by the American Bar Association in

1979. The Commission published a ``Statement of Position'' on the

1978 version of the ALI Code essentially supporting the code, with

revisions. Securities Act Release No. 6242 (September 18, 1980),

[1980] Fed. Sec. L. Rep. (CCH) 82,655.

\1\26ALI Code Section 1609-1611 (Official Draft, 1980).

\1\27ALI Code Section 202(41); see also ALI Code Section

1609(d)(3).

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The proscriptions would apply to ``the issuer, a secondary

distributor, an underwriter, a prospective underwriter, or any other

person who has agreed to participate or is participating or otherwise

financially interested in a distribution.''128 The prohibitions

would stay in place until the completion of the person's participation

or the termination of his or her financial interest. The stabilization

provision of the ALI Code closely mirrors Rule 10b-7, and would retain

the Commission's authority to regulate or prohibit stabilization

conducted for any purpose.129

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\1\28ALI Code Section 1609(d)(1).

\1\29ALI Code Section 1610 & Comment (1).

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Question 6.5. Does the proposed ALI Code provide a preferable

alternative structure to dealing with manipulation during offerings?

How and why should such an approach be implemented? What difficulties

would be associated with such an approach?

E. Stabilization Alternative

An alternative regulatory framework for stabilization is provided

by the rules of the United Kingdom Securities and Investments Board

(``SIB Rules'').130 The SIB Rules provide a safe harbor from

charges of violating U.K. antimanipulation law only to the

``stabilizing manager,'' who is analogous to the U.S. managing

underwriter. The other syndicate members are neither protected nor

restricted by the SIB Rules. The stabilizing manager may bid for or

purchase the offered security for the purpose of ``stabilizing or

maintaining the market price of the security being offered'' during the

``stabilizing period,'' which can run to the 60th day after the date of

allotment made to subscribers and purchasers, potentially much longer

than the period covered by Rule 10b-7.

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\1\30Chapter III, part 10 of the SIB Rules, 2 Fin. Serv. Rep.

(CCH) 184.314-184.401.

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The SIB Rules are more flexible than Rule 10b-7 in permitting bids

and purchases to closely follow the market, moving up or down, at or

below the initial stabilizing price. In addition, the bid may be raised

to the last independent sale price even if that price is higher than

the initial stabilizing bid. As under Rule 10b-7, however, no

stabilizing price may exceed the offering price. The stabilizing

manager also is permitted to overallot the offered securities to

``subscribers or purchasers'' or sell short the securities to

facilitate its subsequent stabilizing purchases. Moreover, the SIB

Rules permit the stabilizing manager to buy in the market to cover a

syndicate short position, and to cover such short position without

regard to the general price limits otherwise imposed on stabilizing

transactions.

Question 6.6. Is the SIB stabilizing structure, or some adaptation

of that structure, a useful alternative to Rule 10b-7? What

difficulties would be associated with such an approach?

F. Tiered Modifications

As noted in the body of the release, the manipulative incentives

associated with a distribution may vary depending on the type of

offering and the nature of its participants. Accordingly, in discussing

these alternatives, commentators are requested to consider whether the

alternatives could be tiered to address these matters.

Question 6.7. Could an alternative be applied effectively to a

limited class of securities? How would such a class be defined, e.g.,

market capitalization and trading volume of the security?

Question 6.8. Could an alternative be applied effectively to a

limited class of institutional investors? How would such a class be

defined?

Question 6.9. Could an alternative be applied effectively to a

limited class of transactions? How would such a class be defined?

Question 6.10. Could an alternative be applied effectively to a

limited class of transactions involving a limited class of

institutional investors? How would such transactions or investors be

defined?

G. Deregulatory Alternative

Some may believe that the general antifraud and antimanipulation

provisions of the federal securities laws are sufficient to deter

conduct during distributions that is designed to artificially condition

the market for the offered security, and the Trading Practices Rules

could be rescinded.

Question 6.11. Should the Trading Practices Rules be rescinded?

Question 6.12. What difficulties, if any, would arise in applying

the concepts identified in this release, if only the general

antimanipulation provisions applied to distribution participant conduct

during offerings?131 Would there be viable methods for the

Commission and its staff to provide guidance as to lawful and unlawful

activity?

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\1\31One commentator has remarked: ``Through its very precise

and mechanical nature, Rule 10b-6 is a tradeoff against the possibly

more pernicious risk to the issuer or underwriter of an unfocused

prohibition against undefined manipulative conduct.'' Blanc, Rules

10b-6, 10b-7, 10b-8 and Other Anti-manipulation Considerations,

contained in Securities Underwriting 298 (Bialkin & Grant eds.,

1985).

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Question 6.13. Would this approach create the uncertainty that

apparently existed prior to the adoption of these rules and served as

their genesis?

Question 6.14. Assuming that disclosure would be an essential

element of this alternative, what disclosures would adequately inform

investors that market prices may be or were being influenced by

distribution participant activity?132

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\1\32In this regard, commenters may wish to consider United

States v. Lewis, [1989] Fed. Sec. L. Rep. (CCH) 94,479 (S.D.N.Y.

1989).

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H. Simplifying the Current Rules

The Trading Practices Rules are considered by many to be complex

and difficult to apply. Some have suggested that the current

construction of these rules could be simplified without sacrificing the

core protections afforded by these rules.

Question 6.15. Could the current structure of the Trading Practices

Rules be simplified and, if so, how?

Question 6.16. Rules 10b-6 and 10b-8 are structured in terms of a

basic prohibition and exceptions thereto. Would it be possible to

structure the prohibitions more narrowly to address specific types of

potentially manipulative conduct in connection with distributions

generally and rights offerings specifically?

By the Commission.

Dated: April 19, 1994.

Margaret H. McFarland,

Deputy Secretary.

Appendix A--Statutory and Regulatory Framework of the Trading Practices

Rules

This appendix provides a background summary of the antifraud and

antimanipulation provisions of the Securities Exchange Act of 1934

(``Exchange Act''),\1\ the promulgation of Rules 10b-6, 10b-7, and

10b-8 (``Trading Practices Rules'') under their authority, and an

index of the relevant interpretive and rulemaking releases

subsequent to the rules' adoption in 1955.

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

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I. Background\2\

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\2\See generally III L. Loss, Securities Regulation 1541-1570

(2d. ed. 1961); Foshay, Market Activities of Participants in

Securities Distributions, 45 U. Va. L. Rev. 907, 907-926 (1959).

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Following the 1929 stock market crash and amid public furor

concerning financial intermediaries that had engaged in flagrant

manipulation in the securities markets, Congress enacted the

Exchange Act to put an end to the practices that it found had

contributed to the economic problems facing the Nation.\3\ In

drafting the legislation, Congress determined that the available

common law remedies for fraud were inadequate to combat manipulation

in the securities markets.\4\ Because Congress recognized that

market manipulation can assume many forms, it did not define the

term in the Exchange Act or elsewhere. Congress intended the

Exchange Act to outlaw every ``device used to persuade the public

that activity in a security is the reflection of a genuine demand

instead of a mirage.''\5\ In a number of provisions, the Commission

is given authority to define manipulative practices and adopt rules

to proscribe and prevent such conduct.\6\ As the Commission has

stated:

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\3\Congressional findings leading to the enactment of the

Exchange Act pointed to widespread manipulation and fraud by

brokers, dealers, and other members of the financial industry. One

of the ``chief evils'' was the operation of ``pools,'' which were

agreements among several persons to trade actively in a security,

generally to raise the price of a security by concerted activity, in

order to sell their holdings at a profit to the public, which is

attracted by the activity or by information disseminated about the

stock. Report to the Secretary of Commerce, Staff of Senate

Committee on Stock Exchange Regulation, 73d Cong., 2d Sess. 13

(1934); S. Rep. No. 1455, 73d Cong., 2d Sess. 31 (1934). See, e.g.,

Thel, The Original Conception of section 10(b) of the Securities

Exchange Act, 42 Stan. L. Rev. 385, 404 (1990); Note, Manipulation

of Stock Markets Under the Securities Laws, 99 U. Pa. L. Rev. 651,

659-662 (1951).

\4\Prior to enacting the Securities Act of 1933, 15 U.S.C. 77a

et seq., and the Exchange Act, the federal government could only

combat securities fraud and manipulation by criminal prosecution for

violation of the mail fraud statute, 18 U.S.C. 1341, or for

conspiring to violate it, 18 U.S.C. 371. For example, in United

States v. Brown, 5 F. Supp. 81 (S.D.N.Y. 1933), aff'd, 79 F.2d 321

(2d Cir.), cert. denied sub nom. McCarthy v. United States, 296 U.S.

650 (1935), the court held that manipulative trading through a pool

arrangement was fraudulent as a form of misrepresentation and

``unfair dealing'' and thus violated the mail fraud statute. See

also Hearings before Comm. on Banking and Currency on Senate

Resolutions 56 and 84, 72d Cong., and 97, 73d Cong. (1934); Report

of Governor Hughes' Committee on Speculation in Securities and

Commodities (June 7, 1909).

\5\Stock Exchange Practices, Senate Comm. on Banking and

Currency, S. Rep. No. 1455, 73rd Cong., 2d Sess. 30 (1934). A fixed

definition could impair the ability to address new manipulative

devices. But cf. Fischel & Ross, Should the Law Prohibit

``Manipulation'' in Financial Markets?, 105 Harv. L. Rev. 503

(1991).

\6\See, e.g., Exchange Act sections 9(a)(6), 10, 15(c), 15

U.S.C. 78i(a)(6), 78j, 78o(c).

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When investors and prospective investors see activity, they are

entitled to assume that it is real activity. They are also entitled

to assume that the prices that they pay and receive are determined

by the unimpeded interaction of real supply and real demand so that

those prices are the collective marketplace judgment that they

purport to be. Manipulations frustrate these expectations. They

substitute fiction for fact. . . . The vice is that the market has

been distorted and made into 'a stage-managed performance.'\7\

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\7\Edward J. Mawod & Co., 46 S.E.C. 865, 871-872 (1977), aff'd,

591 F.2d 588 (10th Cir. 1979).

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II. Statutory Provisions

This section describes the principal antimanipulation provisions

of the Exchange Act, sections 9(a), 10, and 15(c),\8\ and the

implementation of the concepts underlying those provisions in the

regulation of securities offerings. It has long been recognized that

securities offerings, which can be affected dramatically by short-

term movements in security prices, are susceptible to

manipulation.\9\

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\8\15 U.S.C. 78i(a), 78j, and 78o(c), respectively.

\9\See Comment, Market Manipulation and the Securities Exchange

Act, 46 Yale L.J. 624, 626 (1937).

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The provisions of Section 9(a) were designed to ``purge the

securities exchanges of those practices which have prevented them

from fulfilling their primary function of furnishing open markets

for securities where supply and demand may freely meet at prices

uninfluenced by manipulation or control.''\10\ Congress explicitly

prohibited certain transactions when the purpose was to ``create a

false or misleading appearance of active trading'' or a ``false or

misleading appearance with respect to the market for an exchange-

registered security.''\11\ Congress included a general anti-

manipulation provision, Section 9(a)(2),\12\ which has been termed

the ``heart'' of the Exchange Act.\13\ Manipulation under this

section requires proof of three elements:

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\10\S. Rep. No. 1455, 73d Cong., 2d Sess. 30 (1934). The title

of section 9 is ``Prohibition Against Manipulation of Security

Prices.''

\11\15 U.S.C. 78i(a)(1).

\12\15 U.S.C. 78i(a)(2).

\13\See Report of the Securities and Exchange Commission on

Proposals for Amendments to the Securities Act of 1933 and the

Securities Exchange Act of 1934, 77th Cong., 1st Sess. 50 (1941).

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(1) A series of transactions in an exchange-registered security,

(2) Creating actual or apparent active trading in such security

or raising or depressing the price of such security,

(3) For the purpose of inducing the purchase or sale of such

security by others. However, Congress recognized that some forms of

market intervention should not be prohibited absolutely and left it

to Commission rulemaking to impose necessary or appropriate

restrictions on such activities for the protection of the

public.\14\

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\14\See, e.g., Exchange Act sections 9(a)(6), (b), and (c), 15

U.S.C. 78i(a)(6), (b), (c).

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Section 10 of the Exchange Act addresses the ``regulation of the

use of manipulative and deceptive devices.'' Section 10(a) provides

the Commission with plenary authority to regulate short sales in

exchange-registered securities.\15\ Section 10(b) makes unlawful the

use or employment of ``any manipulative or deceptive device or

contrivance'' in contravention of Commission rules adopted pursuant

to that section.\16\ In 1942, the Commission adopted Rule 10b-5,

which prohibits any person from using any device, scheme, or

artifice to defraud any person, making any untrue material statement

or any material omission, or engaging in any fraudulent or deceptive

act, practice, or course of business, in connection with the

purchase or sale of any security.\17\

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\15\See Stock Exchange Practices, Report of the Senate Comm. on

Banking and Currency, S. Rep. No. 1455, 73d Cong., 2d Sess. 55

(1934).

\16\Section 10(b), 15 U.S.C. 78j(b).

\17\17 CFR 240.10b-5.

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Sections 15(c) (1) and (2) prohibit brokers and dealers from

effecting securities transactions in the over-the-counter (``OTC'')

market by means of any ``manipulative, deceptive, or other

fraudulent device or contrivance,'' or engaging in ``any fraudulent,

deceptive, or manipulative act or practice.'' Section 15(c)(2) also

directs the Commission to define and prescribe means reasonably

designed to prevent fraudulent, deceptive, or manipulative acts and

practices.\18\ The Commission has exercised its authority under

these provisions to proscribe manipulative activity.\19\

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\18\15 U.S.C. 78o(c)(1), (2).

\19\See 17 CFR 240.15c1-1 to 15c1-9, 240.15c2-1 to 15c2-12. The

Commission and the courts have held that transactions that would

violate Section 9(a)(2) if effected in an exchange-registered

security would violate Exchange Act Section 15 if effected in a

security not so registered. See, e.g., SEC v. Management Dynamics,

Inc., 515 F.2d 801, 810 (2d Cir. 1975); Barrett & Co., 9 SEC 319,

328 (1941); Loss at 1573. See also NASD By-Laws, Schedule G, section

4, NASD Manual (CCH) Sec. 1921.

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III. Implementation of Exchange Act Provisions in the Context of

Securities Offerings

Securities offerings involve risk and uncertainty.20 The

Commission has recognized that the pricing of an offering is not an

exact science and that regulation of the market activities of

parties with an interest in the outcome of an offering presents

``intensely practical problem(s).''21 From its earliest days,

the Commission and its staff have been called upon to implement the

antimanipulation provisions of the Exchange Act in the context of

securities offerings.22 Sections 9(a)(2) and 15(c)(1) were

interpreted to require a broad prohibition of trading during a

distribution by persons interested in the distribution.23

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\2\0See, e.g., Securities Exchange Act Release No. 2446 (March

18, 1940), 11 FR 10971 (``Release 34-2446'').

\2\1Release 34-2446.

\2\2See, e.g., Koeppe v. SEC, 95 F.2d 550 (7th Cir. 1938);

Securities Exchange Act Release No. 605 (April 17, 1936) (``Release

34-605'').

\2\3See, e.g., Securities Exchange Act Release Nos. 3056

(October 27, 1941), 11 FR 10984 (Any series of purchases that raise

a security's price and are made for the purpose of inducing

purchases by others is unlawful manipulation whether or not the

purpose is achieved.); and 3505 (November 16, 1943), 11 FR 10965

(Where a participant in a distribution effects transactions which

raise the price of the security or create excessive activity in the

security, it is difficult, if not impossible, to avoid the

conclusion that the transactions were conducted, at least in part,

for the purpose of inducing the purchase of the security by

others.).

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IV. The Trading Practices Rules

A. 1955 Rulemaking

Rules 10b-6, 10b-7, and 10b-8 were proposed for comment in May

1954,24 reproposed in April 1955,25 and adopted in July

1955.26 From the outset, the Trading Practices Rules reflected

the framework established by the Commission during the preceding

twenty years interpreting section 9(a)'s prohibitions on

manipulative conduct, and consist of a broad trading prohibition

with exceptions thereto. In the following four decades, the

Commission and staff have administered the Trading Practices Rules

and related antimanipulation rules within this framework.

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\2\4Securities Exchange Act Release No. 5040 (May 18, 1954), 19

FR 2986.

\2\5Securities Exchange Act Release No. 5159 (April 19, 1955),

20 FR 2826.

\2\6Securities Exchange Act Release No. 5194 (July 5, 1955), 20

FR 5075.

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B. Index of Releases

The following is a chronological reference list of the releases

interpreting and proposing and adopting amendments to the Trading

Practices Rules and related Rules 10b-2, 10b-18, and 10b-21.

1. Rule 10b-6: Trading restrictions during offerings. a.

Securities Exchange Act Release No. 5415 (December 6, 1956), 21 FR

9983. The Commission proposed to amend Rule 10b-6 to clarify that

officers, directors, and controlling persons of the issuer or other

person on whose behalf the distribution is being made would be

subject to the rule. The proposed amendment was subsequently

withdrawn in Securities Exchange Act Release No. 7517 (January 22,

1965), 30 FR 1010.

b. Securities Exchange Act Release No. 7293 (April 21, 1964).

The Commission published notice of its consideration to amend

paragraph (e) of Rule 10b-6 excepting issuer distributions to

employees pursuant to stock option plans.

c. Securities Exchange Act Release No. 7403 (August 27, 1964).

The Commission amended Rule 10b-6 to add new paragraph (e) excepting

issuer distributions to employees pursuant to stock option plans.

d. Securities Exchange Act Release No. 16112 (August 16, 1979),

44 FR 49406. In adopting Rule 13e-4, the Commission noted that it

intended to amend Rule 10b-6 to except from the rule's prohibitions

purchases of securities by an issuer or its affiliate pursuant to a

tender offer that is subject to Exchange Act Rule 13e-4, where the

issuer or its affiliate is subject to Rule 10b-6 solely because the

issuer has outstanding securities convertible into or exchangeable

for the security that is the subject of the tender offer.

e. Securities Exchange Act Release No. 16645 (March 13, 1980),

45 FR 18915. The Commission amended Rule 10b-6 to add paragraph (f)

excepting purchases of securities pursuant to a tender offer by an

issuer or issuer affiliate for securities of the issuer, which is

subject to and made in compliance with Exchange Act Rule 13e-4,

where the issuer or affiliate is subject to Rule 10b-6 solely

because the issuer has outstanding securities convertible into or

exchangeable for the security for which the tender offer will be

made.

f. Securities Exchange Act Release No. 16646 (March 13, 1980),

45 FR 18948. The Commission proposed amendments to Rule 10b-6 that

would except from its application distributions of securities

pursuant to employee or shareholder plans sponsored by an issuer.

g. Securities Exchange Act Release No. 17556 (February 17,

1981), 46 FR 15133. The Commission amended paragraph (e) of Rule

10b-6 to except from the rule's application distributions of

securities pursuant to shareholder plans sponsored by an issuer or

its subsidiaries.

h. Securities Exchange Act Release No. 17609 (March 6, 1981), 46

FR 16670. The Commission authorized issuance of letters setting

forth the interpretive and enforcement positions of the Division of

Market Regulation (``Division'') regarding the application of Rule

10b-6 to certain transactions involving exchange-traded options by

participants in an underwriting of the security underlying such

options.

i. Securities Exchange Act Release No. 18528 (March 3, 1982), 47

FR 11482. The Commission proposed amendments to Rule 10b-6 which

would define the term ``distribution;'' permit distribution

participants to continue trading until three business days before

commencement of sales of the securities; clarify the rule's

applicability to persons who participate in delayed offerings; and

codify staff positions on various exceptions.

j. Securities Exchange Act Release No. 18666 (April 20, 1982),

47 FR 18359. The Commission authorized issuance of Division

interpretive positions concerning application of certain proposed

amendments to, and no-action positions taken under, Rule 10b-6 with

respect to offerings made in compliance with Securities Act Rule

415.

k. Securities Exchange Act Release No. 19244 (November 17,

1982), 47 FR 53333. The Commission amended paragraph (f) of Rule

10b-6 to provide that the rule does not apply to bids for and

purchases of a security solely because the issuer or a subsidiary of

the issuer has an outstanding class of securities that are

immediately convertible into, or exchangeable for, such securities

(so-called ``technical distributions'').

l. Securities Exchange Act Release No. 19565 (March 4, 1983), 48

FR 10628. The Commission adopted amendments to Rule 10b-6 defining

the term ``distribution;'' permitting certain distribution

participants to continue trading securities until the commencement

of the applicable two or nine business day cooling-off period;

clarifying the rule's applicability to persons who participate in

delayed offerings; and codifying staff positions on various

exceptions.

m. Securities Exchange Act Release No. 19988 (July 21, 1983), 48

FR 34251. In the context of amending Rule 13e-4 relating to odd-lot

tender offers, the Commission determined to allow staff

consideration of requests for relief from Rules 10b-6 and 10b-13

with respect to odd-lot purchases on a case-by-case basis.

n. Securities Act Release No. 6492 (October 5, 1983), 48 FR

46801. The Commission proposed amendments to Securities Act Rule 139

that would affect compliance with Rule 10b-6 in connection with the

issuance of research reports.

o. Securities Exchange Act Release No. 21332 (September 19,

1984), 49 FR 37569. The Commission adopted Securities Act Rule 139

amendments and published a staff no-action position under Rule 10b-6

with respect to a research report that is within Securities Act

Rules 137, 138, or paragraph (b) of Rule 139, or within paragraph

(a) of Rule 139 and does not contain a recommendation or earnings

forecast more favorable than that previously disseminated by the

firm.

p. Securities Exchange Act Release No. 22510 (October 10, 1985),

50 FR 42716. The Commission proposed amendments to Rule 10b-6 to

permit underwriter and broker-dealer participants in a distribution

to engage in solicited brokerage transactions until two or nine

business days before offers or sales of the securities being

distributed; define the rule's applicability to certain affiliated

persons; reduce the restrictions on the exercise of standardized

call options; provide parallel cooling-off periods within exceptions

(xi) and (xii) of the rule; modify the rule's preamble to more fully

reflect the Commission's authority; and codify the Commission's

position that a distribution participant may rely on the rule's

exceptions only if the contemplated transactions are not made for

manipulative purposes.

q. Securities Exchange Act Release No. 23611 (September 19,

1986), 51 FR 33242. The Commission published an interpretive release

regarding application of Rule 10b-6 in the context of shelf-

registered distributions by shareholders, including application of

the rule to issuers and broker-dealers during such distributions.

r. Securities Exchange Act Release No. 24003 (January 16, 1987),

52 FR 2994. The Commission adopted amendments to Rule 10b-6 that

permit underwriters and broker-dealers to engage in solicited

brokerage transactions until two or nine business days before offers

of sales of securities being distributed; define the rule's

applicability to certain persons who are affiliated with

participants in a distribution; allow distribution participants to

exercise throughout the distribution period standardized call

options written prior to the time that they became distribution

participants; and modify the rule's preamble to reflect more fully

authority for the rule's provisions.

s. Securities Exchange Act Release No. 31347 (October 22, 1992),

57 FR 49039. The Commission proposed an exception to Rule 10b-6 and

a new companion rule, Rule 10b-6A, which permit ``passive market

making'' by Nasdaq market makers in connection with certain

distributions of Nasdaq-quoted securities during the period when

Rule 10b-6 otherwise would prohibit such activity.

t. Securities Exchange Act Release No. 31943 (March 4, 1993), 58

FR 13288. Pursuant to delegated authority, the Division issued a

class exemption clarifying the application of the ``cooling-off''

periods in Rule 10b-6 to distributions of foreign securities in the

United States.

u. Securities Exchange Act Release No. 32117 (April 8, 1993), 58

FR 19598. The Commission adopted a new exception to Rule 10b-6 and a

new companion rule, Rule 10b-6A, which permit ``passive market

making'' by Nasdaq market makers in connection with certain

distributions of Nasdaq-quoted securities during the period when

Rule 10b-6 otherwise would prohibit such activity.

v. Securities Exchange Act Release No. 32266 (May 5, 1993), 58

FR 27686. The Commission proposed new exceptions to Rules 10b-6,

10b-7, and 10b-8 which would permit transactions otherwise

prohibited by those rules during distributions of foreign issuers'

securities eligible for resale pursuant to Securities Act Rule 144A

when such distributions in the United States are made exclusively to

qualified institutional buyers (``QIBs'').

w. Securities Exchange Act Release No. 33022 (October 6, 1993),

58 FR 53220. Pursuant to delegated authority, the Division issued

class exemptions from Rules 10b-6, 10b-7, and 10b-8 to facilitate

distributions in the United States of securities of certain highly

capitalized German issuers, permitting distribution participants to

effect transactions in Germany otherwise prohibited by these rules,

subject to certain disclosure, recordkeeping, record production, and

notice requirements.

x. Securities Exchange Act Release No. 33137 (November 3, 1993),

58 FR 60324. Statement of policy announcing the Commission's

position that, upon proper written request, class exemptions from

Rules 10b-6, 10b-7, and 10b-8, would be available during

distributions in the United States by issuers located in foreign

jurisdictions and would be subject to substantially similar

principles, terms, and conditions that applied to the exemptions

issued by the Commission in Securities Exchange Act Release No.

33022 in connection with distributions of certain German securities.

y. Securities Exchange Act Release No. 33138 (November 3, 1993),

58 FR 60326. The Commission adopted new exceptions to Rules 10b-6,

10b-7, and 10b-8 which permit transactions otherwise prohibited by

those rules during distributions of foreign issuers' securities

eligible for resale pursuant to Securities Act Rule 144A when such

distributions in the United States are made exclusively to QIBs.

z. Letter Regarding Regulation S Transactions during

Distributions of Foreign Securities to Qualified Institutional

Buyers (February 22, 1994). Pursuant to delegated authority, the

Division granted exemptions from Rules 10b-6, 10b-7, and 10b-8,

subject to certain conditions, to permit bids, purchases, and

inducements to purchase Securities Act Rule 144A-eligible foreign

securities being distributed, any security of the same class and

series, or any right to purchase such security by distribution

participants and their affiliated purchasers when such foreign

security is offered or sold in transactions in compliance with

Regulation S during a concurrent Rule 144A QIB distribution of the

foreign security.

2. Rules 10b-7 and 17a-2: stabilization. a. Securities Exchange

Act Release No. 5275 (January 16, 1956), 21 FR 501. The Commission

announced consideration of amendments to Rule X-17A-2 which would

require reports when stabilizing is conducted in connection with a

Regulation A offering or any other offering involving more than

$300,000, as well as offerings registered under the Securities Act

of 1933.

b. Securities Exchange Act Release No. 5300 (April 18, 1956), 21

FR 2787. The Commission adopted amendments to Rule X-17A-2 and Form

X-17A-1 that clarified and simplified the instructions to the form.

c. Securities Exchange Act Release No. 5415 (December 6, 1956),

21 FR 9983. The Commission published notice of a proposal to amend

Rule 10b-7 to clarify the language of paragraph (l) in light of

recent amendments to that rule.

d. Securities Exchange Act Release No. 6127 (November 30, 1959),

24 FR 9946. The Commission proposed to amend Rule 10b-7 to prohibit

all bids or purchases of a security which are intended to peg, fix,

or stabilize the price of a security unless such transactions are

for the purpose of facilitating a particular distribution of

securities, and to make conforming amendments to paragraph (l) of

the rule.

e. Securities Exchange Act Release No. 9605 (May 24, 1972), 37

FR 10960. The Commission proposed amendments adding new paragraph

(d)(5) to Rule 17a-2 and revising paragraph (d)(1) and (e) and

Instruction V of Form X-17-A-1 to require the ``not as manager''

reports to be made to the syndicate manager within five business

days after the determination of stabilization.

f. Securities Exchange Act Release No. 9717 (August 15, 1972),

37 FR 17383. The Commission amended Rule 17a-2 to add new paragraph

(d)(5), and revised paragraph (d)(1) and (e) and Instruction V of

Form X-17A-1 to require ``not as manager'' reports to be made to the

syndicate manager within five business days of the termination of

stabilization.

g. Securities Exchange Act Release No. 9876 (November 27, 1972).

The Commission clarified the amendments to Rule 17a-2 set forth in

Securities Exchange Act Release No. 9717.

h. Securities Exchange Act Release No. 18983 (August 26, 1982),

47 FR 37580. The Commission proposed amendments to Rules 17a-2 and

10b-7 to require that information concerning stabilizing

transactions be retained by the managing underwriter and to rescind

related Form X-17A-1.

i. Securities Exchange Act Release No. 20155 (September 7,

1983), 48 FR 41377. The Commission rescinded Form X-17A-1 and

adopted amendments to Rules 10b-7 and 17a-2 eliminating the

requirement that participants in an offering that is stabilized file

with the Commission reports of their transactions and requiring

instead that the managing underwriter retain information on

stabilizing transactions.

j. Securities Exchange Act Release No. 28732 (January 3, 1991),

56 FR 814. The Commission proposed amendments to Rule 10b-7 to

permit the stabilizing price to reflect the price in the foreign

market which is the principal market for such security if the

stabilizing otherwise complies with the rule's provisions.

k. Securities Exchange Act Release No. 28733 (January 3, 1991),

56 FR 820. In connection with Securities Exchange Act Release No.

28732, the Commission proposed for comment Rule 3b-10, which would

define certain terms relevant to the increasing internationalization

of the world securities markets.

l. Securities Exchange Act Release No. 33022 (October 6, 1993),

58 FR 53220. See 1.w supra.

m. Securities Exchange Act Release No. 33137 (November 3, 1993),

58 FR 60324. See 1.x supra.

n. Securities Exchange Act Release No. 33138 (November 3, 1993),

58 FR 60326. See 1.y supra.

o. Letter Regarding Regulation S Transactions. See 1.z supra.

3. Rule 10b-8: rights offerings. a. Securities Exchange Act

Release No. 5415 (December 6, 1956), 21 FR 9983. The Commission

proposed to amend Rule 10b-8 to clarify that the rule applies only

to distributions of securities being offered through transferable

rights issued on a pro rata basis to securities holders.

b. Securities Exchange Act Release No. 18528 (March 3, 1982), 47

FR 11482. The Commission proposed amendments to Rule 10b-8 to extend

its scope to ``standby underwriters'' in connection with a call for

redemption by an issuer of its convertible securities.

c. Securities Exchange Act Release No. 19565 (March 4, 1983), 48

FR 10628. The Commission amended Rule 10b-8, extending its scope to

cover purchasing and selling activity by broker-dealers who act as

``standby underwriters'' in connection with a call for redemption of

convertible securities.

d. Securities Exchange Act Release No. 33022 (October 6, 1993),

58 FR 53220. See 1.w supra.

e. Securities Exchange Act Release No. 33137 (November 3, 1993),

58 FR 60324. See 1.x supra.

f. Securities Exchange Act Release No. 33138 (November 3, 1993),

58 FR 60326. See 1.y supra.

g. Letter Regarding Regulation S Transactions. See 1.z supra.

4. Rule 10b-2. a. Securities Exchange Act Release No. 1330

(August 4, 1937). The Commission adopted Rule 10b-2.

b. Various. The Commission adopted a variety of exchange plans

pursuant to paragraph (d) of Rule 10b-2.

c. Securities Exchange Act Release No. 31520 (November 24,

1992), 57 FR 57397. The Commission proposed to rescind Rule 10b-2 in

view of the significant changes that have occurred in the securities

markets since its adoption and duplicative coverage of other

antifraud and antimanipulation provisions of the federal securities

laws.

d. Securities Exchange Act Release No. 32100 (April 2, 1993), 58

FR 18145. The Commission rescinded Rule 10b-2.

5. Rule 10b-18. a. Securities Exchange Act Release No. 17222

(October 17, 1980), 45 FR 70890; Securities Exchange Act Release No.

10539 (December 6, 1973), 38 FR 3434; Securities Exchange Act

Release No. 8930 (July 13, 1970), 35 FR 11410. On three separate

occasions, the Commission proposed Rule 13e-2 (predecessor of Rule

10b-18) to regulate purchase of certain classes of common stock and

preferred stock by or for the issuer, any affiliate of the issuer,

or any ``affiliated purchaser,'' through disclosure requirements and

substantive purchasing limitations imposed on an issuer and on any

affiliated purchaser.

b. Securities Exchange Act Release No. 19244 (November 17,

1982), 47 FR 53333. The Commission adopted Rule 10b-18 to provide a

safe harbor from liability from manipulation in connection with

purchases by an issuer and certain related persons of the issuer's

common stock.

6. Rule 10b-21. a. Securities Exchange Act Release No. 10636

(February 11, 1974), 39 FR 7806. The Commission proposed Rule 10b-21

to deter manipulative short selling in connection with an

underwritten offering.

b. Securities Exchange Act Release No. 11328 (April 2, 1975), 40

FR 16090. The Commission reproposed a version of Rule 10b-21 which

would deter manipulative short selling prior to underwritten

offerings by limiting the ability of short sellers to make covering

purchases from certain persons within certain periods during an

underwriting.

c. Securities Exchange Act Release No. 13092 (December 21,

1976), 41 FR 56542. The Commission proposed an alternative version

of Rule 10b-21 that focused on short selling itself, rather than on

covering purchases, and would regulate short sales from the

preoffering period until the end of the post-offering stabilization

arrangements through the use of a ``tick test.''

d. Securities Exchange Act Release No. 24485 (May 20, 1987), 52

FR 19885. Pursuant to a petition filed by the NASD, the Commission

reproposed Rule 10b-21 to prohibit a person who effects short sales

of an equity security during the period between the filing of a

registration statement relating to the same class of equity

securities and the commencement of the distribution of such equity

securities, from covering such short sales with securities purchased

from an underwriter or other broker-dealer participating in the

offering of such securities.

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

53 FR 33455. The Commission adopted, on a temporary basis, Rule 10b-

21(T), and withdrew the first three rule proposals.

f. Securities Exchange Act Release No. 33702 (March 2, 1994), 59

FR 10984. The Commission adopted Rule 10b-21 on a permanent basis.

[FR Doc. 94-9895 Filed 4-25-94; 8:45 am]

BILLING CODE 8010-01-P