Company Name: Jeffries & Co., Inc.
Public Availability Date: 11-29-1982INQUIRY LETTER
MORGAN, LEWIS & BOCKIUS
1800 M STREET, N.W.
WASHINGTON, D.C. 20036
TELEPHONE(202) 872-5000 September 01, 1982 John B. Manning, Jr.
Assistant Director, Trading Practices
Division of Market Regulation
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549 RE: Rule 144(f) Dear Mr. Manning: On behalf of one of our clients, we request that the staff provide
interpretative guidance with respect to the transaction described below as it
relates to the provisions of Rule 144 under the Securities Act of 1933, 17 CFR
§230.144, and particularly subsection (f) thereunder. DESCRIPTION OF TRANSACTION Our client is a registered broker-dealer which is engaged primarily in
institutional trading. In the normal course of its business, customers will
indicate an interest in buying particular securities. In order to meet this interest, on occasion the broker may solicit holders of
securities subject to the provisions of Rule 144(f) to sell such securities to
satisfy the interest expressed by its customers. For tax reasons, the seller may
wish to sell his or her securities for cash and notes, thus providing a deferral
of tax liability pursuant to the installment sale provisions applicable under
the Internal Revenue Code of 1954, as amended. Our client has been advised by counsel that such a transaction must be
structured with it acting as principal in order for the transaction to qualify
for installment sale treatment. In such instances, our client would issue its
notes to its customers in payment for the stock which it would then sell to the
original customer expressing the buy interest. The amount of any mark-up or
mark-down would be no more than the usual or customary commission for similar
transactions executed on an agency basis. Pursuant to the provisions of Rule 10b-10 under the Securities Exchange Act of
1934, 17 CFR §240.10b-10, such a transaction must be confirmed as a "riskless"
principal transaction. This raises the question as to whether a transaction
structured in this manner is in compliance with the manner of sale provisions
set forth in subsection (f) of Rule 144. DISCUSSION Subsection (f) of Rule 144 requires, in relevant part, that the securities sold
pursuant to Rule 144 be sold in "brokers' transactions." Subsection (g) states
that "brokers' transactions" for purposes of Rule 144 are "deemed to include"
transactions by a broker in which such broker does no more than execute the
order or orders to sell the securities as agent for the person for whose account
the securities are sold. However, Subsection (g) does not by its terms limit the
transactions that may be deemed to be within the meaning of "brokers'
transactions" contained in paragraph (f). For example, the staff has
consistently expressed the position that Rule 144 permits a broker to solicit
the holder of securities subject to Rule 144 to sell such securities. See
Securities Act Rel. No. 6099 (August 2, 1979), 2 Fed. Sec. L. Rep. (CCH) 2705H,
at 2819-18, n.15. Moreover, the broker is permitted to act as agent not only for
the seller but also for the buyer in an agency transaction, provided the
receives no more than the usual and customary broker's commission from either
party. Id. at 2819-21 (Q. and A. No. 59). In adopting Rule 10b-10, the Commission noted that riskless principal
transactions "are in many respects equivalent to transactions affected on an
agency basis." Securities Exchange Act Release No. 15219 (Oct. 6, 1978), 1978
Decisions Fed. Sec. L. Rep. (CCH) 81,746, at 80,970. In addition, the
Commission noted that the disclosure requirement in riskless principal
transactions is applicable "solely to those transactions in which the dealer
structures as two back-to-back principal transactions what is in economic
substance an agency transaction." Id at 80,972. The Commission thus appears to
have required disclosure of mark-ups and mark-downs in confirmation for riskless
principal transactions because in substance they are the equivalent of agency
transactions. In all respects other than for the need to structure the transaction as a
principal transaction in order to provide the benefits of an installment sale
for tax purposes, transactions of the type described above would be treated as
an agency transaction meeting the requirements of Rule 144(f). If the transactions described above were to be confirmed on an agency basis,
there would be no question but that they would be within Rule 144(f). It seems
to make little sense to take what in substance is the same transaction and to
treat it differently for the sole reason that the seller wishes to take
advantage of installment sale treatment for tax purposes. From the standpoint of
investor protection, the transaction remains the same. The holder will have held
the securities for any applicable period of time, there will be current
information outstanding with respect to the issuer of the securities involved,
there will have been no solicitation of the buy side (except as may be permitted
by paragraph (g)(2) of Rule 144), and all other concerns addressed by Rule 144
will have been met. No regulatory purpose would be furthered by preventing such sellers from
obtaining the benefits otherwise available to them under the applicable
provisions of the tax law in circumstances in which there is no potential for
abuse. In the circumstances, we request confirmation that such transactions
comply with the manner of sale provision in Rule 144(f). * * * If you have any questions with respect to the mechanics of the above described
transaction, or if the Staff should wish any further analysis of the substance
or legal effect of these types of transactions, please telephone me at
202/872-3932. Very truly yours, Lloyd H. Feller LHF:svb STAFF REPLY LETTER
OCT 29 1982 Lloyd H. Feller, Esq.
Morgan, Lewis & Bockius
1800 M Street, N.W.
Washington, D.C. 20036 Re: Jefferies & Company, Inc. Dear Mr. Feller: In your letter dated September 1, 1982, as supplemented by telephone
conversations with the staff, you request on behalf of Jefferies & Company, Inc.
("Company") interpretive advice under paragraph (f) of Rule 144 ("Rule") under
the Securities Act of 1933 "Act") with respect to certain transactions proposed
to be effected by the Company in the regular course of its business,
specifically whether such transactions constitute permissible "brokers'
transactions," as more fully described below. In pertinent part, paragraph (1) of the Rule permits securities to be sold
pursuant to the Rule in "brokers' transactions." Paragraph (g)(1) of the Rule
defines "brokers' transactions," for purposes of the Rule, to include
transactions in which the broker does no more than execute customer sell orders
and receives no more than the usual and customary broker's commission. Paragraph
(g)(2) generally requires that the broker neither solicit nor arrange for the
solicitation of customer buy orders in anticipation of or in connection with a
Rule 144 transaction. The staff of the Commission has, however, stated that the
Rule permits brokers to solicit affiliates of an issuer to sell their
securities. Securities Act Release No. 33-6099 (August 2, 1979), 44 F.R. 46752,
46760, n.15 (1979). You make the following representations: The Company is a registered broker-dealer, engaged primarily in institutional
trading. The Company is in regular contact with customers, who may indicate an
interest in purchasing certain securities. Such customers are not contacted in
anticipation of or in connection with a proposed Rule 144 transaction, but in
the regular course of the Company's business. In response, however, the Company
may solicit affiliates of the issuer or holders of restricted securities subject
to the provisions of the Rule ("Rule 144 Sellers") to sell their securities
("Rule 144 Securities") pursuant to the Rule. The Rule 144 Sellers clearly are
permitted under such circumstances to sell their Rule 144 Securities in
brokerage transactions. You state, however, that when contacted, the Rule 144
Sellers occasionally have expressed a desire to sell their Rule 144 Securities
for a combination of cash and notes, pursuant to the installment sales
provisions applicable under the Internal Revenue Code of 1954, as amended,
thereby deferring the tax liability that would result from a cash sale. In order
to structure these transactions as installment sales, the Company would be
willing in certain instances to act as principal in these transactions. Under
such circumstances, in payment for a Rule 144 Seller's stock, the Company would
issue notes to the sellers and then sell the stock to the customer that had
expressed purchasing interest. The amount of any mark-up or mark-down would be
no more than the customary commission received by the Company for similar
transactions executed on an agency basis. These transactions, however, would be
required to be confirmed as "riskless" principal transactions pursuant to the
provisions of Rule 10b-10 under the Securities Exchange Act of 1934,
notwithstanding that, for purposes of Rule 144, they are the functional
equivalent of brokerage transactions. On the basis of your representations and the facts presented, this Division has
concluded that installment sales confirmed on a "riskless" principal basis under
the circumstances described above are not likely to result in any abuse that
paragraph (f) of the Rule was designed to prevent. Accordingly, this Division
takes the position that such "riskless" principal transactions, if otherwise
made in compliance with Rule 144, may be effected as brokers' transactions
within the meaning of paragraph (f) of Rule 144. The foregoing interpretive
advice is based solely on your representations and the facts you have presented
to the staff, and is strictly limited to the application of the Rule to the
installment sales transactions described in your letter. Sincerely, John B. Manning, Jr.
Assistant Director
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