Company Name: Bear, Stearns & Co. Inc.
Public Availability Date: July 20, 2000 

[LETTER OF INQUIRY]

July 19, 2000

Michael Hyatte, Esq.
Special Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Bear, Stearns & Co. Inc.: Dutch Auction internet Syndication System^{sm 1}

Dear Mr. Hyatte:

As you know, our client, Bear, Stearns & Co. Inc., has developed an Internet-based system designed to provide bidders of investment-grade debt securities with access to important pricing and bid quantity information on a real-time basis through a single-price, modified, Dutch Auction.

In connection with the Staffs review of this system, the Dutch Auction internet Syndication System ("DAiSS^sm" ²), as well as other similar pricing systems, we have provided the Staff substantial background information, as well as a live on-line demonstration of DAiSS. We have attempted to summarize in this letter the process of pricing and allocating securities on DAiSS and our view of the implication of such procedures under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "Securities Act"). In particular, we have highlighted some of the distinctions between an offering pursuant to an effective shelf-registration statement subject to Rule 415 under the Securities Act (a "Shelf-Offering") and an offering pursuant to a new registration statement that is subject to de novo review by the Staff. We have also addressed for the Staffs consideration certain legal issues under Section 5(b)(1) of the Securities Act relating to real-time pricing information being available to bidders during the conduct of an auction of publicly registered securities. We would appreciate any guidance the Staff would provide us with respect to the procedures set forth herein.

DAiSS Background and Procedures

Initially, DAiSS is intended to be used in public offerings of investment-grade debt securities. The market for such securities is highly developed and generally comprised of sophisticated issuers and institutional purchasers. Many, if not most, investment-grade debt offerings are drawn off of pre-existing Shelf-Offerings, allowing issuers virtually instantaneous access to the capital markets. DAiSS would also be available for the pricing and allocation of securities in the private arena, pursuant to Rule 144A, for debt securities that are rated below investment-grade and for exempt securities, including municipal securities.

In order to participate in a DAiSS auction, each bidder must access the Bear Stearns website at http://www.bearstearns.com, click on the hyperlink entitled "Access@bear" and log-in by entering the appropriate Bear Stearns user ID and password (or register to receive a user ID and password). Upon successful log-in, the bidder reaches the Access@bear homepage, which includes a hyperlink entitled "DAiSS." By clicking on the DAiSS hyperlink, the bidder will be routed to the DAiSS welcome page, which provides a list of all issuers for which a DAiSS auction has been scheduled, the size and maturity of the related offerings and the time schedule for each auction. The list of the proposed offerings will only contain information permitted under Rule 134 ³ and, accordingly, should not be viewed as a prospectus subject to the filing requirements of Section 10 of the Securities Act. The bidder will select an issue and then click the only active hyperlink on this page, entitled "Register."

Upon clicking the "Register" hyperlink, the bidder will be prompted to complete both a Jurisdictional Eligibility Certification and an Auction Registration Form. These forms will enable Bear Stearns to qualify the bidder to participate in a particular offering (such as QIBs in the case of a 144A transaction) and/or who reside in a jurisdiction in which the offering can be legally made. Upon Bear Stearns approval of a particular bidders Auction Registration Form, the bidder will be permitted access to the "Official Documents" hyperlink. Only after entering the "Official Documents" page, which will include the base offering prospectus, will the bidder be permitted to access the offering cul-de-sac, including hyperlinks entitled "Term Sheet," "Auction Rules," "Cash Bid," "Bid Assist," "Swap Bid" and "Bid Monitor." Based on the Commissions views, as expressed in the recent Interpretative Release entitled "Use of Electronic Media," the initial screens or pages to which a bidder can hyperlink from the "Official Documents" page, including a copy of the opening "Bid Monitor" screen, would become part of the Section 10 prospectus in the effective registration statement and the issuer would file copies of such material pursuant to Rule 424 under the Securities Act. The cul-de-sac for a particular offering will contain no hyperlinks, other than those mentioned above, and no hyperlink, other than through Access@bear, will permit access to the cul-de-sac for any offering. ⁴

In the case of a public offering that is not a Shelf-Offering, the cul-de-sac for a particular offering would be established after the registration statement was filed by the issuer with the Commission pursuant to Section 6 of the Securities Act. During the waiting period and prior to the commencement of the auction, the preliminary prospectus or prospectus that has been previously filed by the issuer with the Commission (including all material filed that is required by the securities laws to be delivered to investors) will be available on the "Official Documents" page in the offering cul-de-sac or by hyperlink to such information from the cul-de-sac and the issuer may conduct normal marketing activities, including a traditional live or an electronic road show. In connection with the sale of debt securities pursuant to a Shelf-Offering, the procedures and timing of information provided will depend to some degree on whether the Staff considers it necessary to file a post-effective amendment to update the disclosure of the "plan of distribution" contained in the base prospectus or supplement thereto or whether an alternative is accepted by the Staff. The possible need for such a post-effective amendment and an alternative procedure are discussed below. With respect to any registration statement that either includes sufficient "plan of distribution" disclosure in the base prospectus or has been effectively amended to contain the necessary disclosure, the offerings cul-de-sac hyperlink to "Official Documents" will provide the bidder with access to (i) the base prospectus, as amended, and any prospectus supplements that have been filed with the Commission pursuant to the Securities Act; (ii) an Annual Report on Form 10-K; (iii) the most recent Quarterly Report on Form 10-Q since the last Annual Report; (iv) the issuers most recent definitive proxy statement; and (v) any relevant issuer information contained on current periodic reports filed on Form 8-K. All information on this page would either be part of the registration statement directly or be incorporated into such registration statement pursuant to Rule 411 under the Securities Act.

The information contained on the "Term Sheet" hyperlink page, including the information concerning estimated pricing information, entitled "Price Talk," is permitted as information which may be communicated under Rule 134. ⁵ "Price Talk" is an estimated range (either stated in terms of a fixed price or spread to a benchmark security) where an underwriter and the issuer anticipate the offering to price based on current market conditions and comparable securities. An example of a typical Term Sheet page (Exhibit A) has been supplementally presented to the Staff for review.

The "Auction Rules" page contains the detailed procedures for participating in DAiSS, including how to bid, how to change a bid, how the offering will be allocated and other mechanical and legal aspects of participating in the process. Each bidder must certify that the bidder has reviewed the Auction Rules before proceeding to enter a bid. A brief description of the pricing and allocation rules governing the auction will be included in the "plan of distribution", unless the alternative discussed below is accepted by the Staff. A brief description of the Auction Rules may be annexed to the underwriting agreement, agreed to by the issuer and filed with the underwriting agreement as an exhibit to the registration statement, or in the case of a Shelf-Offering, on a Form 8-K. A copy of the Auction Rules has been presented to and reviewed by the Staff supplementally as Exhibit B hereto.

Restrictions on the maximum amount and the number of different bids that may be submitted by a bidder are established by the issuer and Bear Stearns before the start of the auction. During an auction, a bidder may enter a cash bid, which will be treated as a conditional offer to buy, by clicking on the Cash Bid hyperlink and completing the information prompts on the Cash Bid screen (See Exhibit C). Once a bid is submitted, a bidder may change or remove that bid in accordance with the Auction Rules. Furthermore, a bidder may employ an optional program, entitled BidAssist^{sm 6}, which enables a bidder to instruct the system to automatically improve certain bids within specified levels (See Exhibit D). BidAssist is explained in the Auction Rules. The Swap Bid screen allows the bidder the ability to offer to purchase the offered securities with the proceeds of the sale of securities that the bidder already owns. The cash market value of securities that the bidder already owns, less any applicable commission, would be netted against the cash purchase price for the securities purchased in the auction, a practice commonly employed in todays debt markets.

Once an auction has commenced, a bidder may monitor the auction on the Bid Monitor screen. The Bid Monitor screen (Exhibit E) presents:

• the amount and price or spread of bonds bid for by a particular bidder;
• the Clearing Spread, which is the lowest spread to a benchmark security (selected by the issuer and Bear Stearns) at which the entire amount of the offering would be purchased based on the bids at that given time;
• the total dollar amount of bids submitted during the auction which have not been removed at a particular point in the auction; and
• the time remaining in the auction.

The Bid Monitor screen will also reflect to each bidder, on a real-time basis, whether such bidders bids are above, at or below the Clearing Spread and when during the auction the bids were entered. The information displayed on the Bid Monitor screen will enhance price transparency and level the "playing field" between large and small investors. In addition, the real-time presentation of information on the Bid Monitor screen will provide bidders, the issuer and the underwriter with a dynamic view of the "book" as it is being built. Each of Exhibits C, D and E have been supplementally presented to and reviewed by the Staff.

The auction will be conducted during two specific time periods, the Regular Auction Period and the Quiet Close. The Regular Auction Period, which will generally last two hours, is the initial time period during which a bidder may submit a bid or bids which are below the Maximum Clearing Spread (the minimum admissible bid above which no securities will be purchased in an auction). The Quiet Close, which follows the Regular Auction Period, is a series of two-minute intervals during which a bidder may improve its existing bids. The Quiet Close will continue until the earlier of (a) the reduction of the Clearing Spread by less than one basis point during a two-minute interval and (b) one-half hour after the conclusion of the Regular Auction Period.

Following the termination of the Quiet Close, the securities being offered will be allocated based on the final offering price as determined by the auction (the "Final Clearing Spread") and in accordance with the proration rules. The Bid Monitor Screen will display a bidders allocation within a few minutes of the conclusion of an auction. In addition, a bidders Bear Stearns representative will orally inform the bidder of a final allocation. Following pricing, the issuer will file a final pricing supplement pursuant to Section 7 of the Securities Act and Rule 424 thereunder and such filing shall contain the final pricing information and a copy of the final Bid Monitor screen displaying the Final Clearing Spread and a brief summary of the bidding process during the Auction Period. ⁷ In accordance with Section 5(b)(2) of the Securities Act, a written confirmation, satisfying the requirements of Rule 10b-10 under the Exchange Act, a copy of the final prospectus and a pricing supplement will be sent to a bidder in the normal course of business.

We have considered whether each screen presenting such real-time pricing information should be deemed a prospectus, as defined in Section 2(a)(10) of the Securities Act, and, is thereby required to be filed pursuant to Section 10 of the Securities Act to avoid a violation of Section 5(b)(1) of the Securities Act. It is our view that the presentation of such interim pricing information does not constitute a prospectus. It is our view that the registration statement and prospectuses, including those filed pursuant to Section 7 of the Securities Act and Rule 424 thereunder, in connection with such an offering will contain all substantive and procedural information (as described above) necessary to meet the requirements of Section 5(b)(1) of the Securities Act and Rule 424 thereunder. Such information, presented as the Clearing Spread on the Bid Monitor screen, reflects the decisions of independent bidders and is not created or modified in any way by the issuer or underwriter as a means to condition the market or otherwise. As stated above, the final pricing information will be filed with the Commission pursuant to Section 7 of the Securities Act and Rule 424 thereunder, as is the case today in a traditional underwriting of debt securities. It is our view that (i) the presentation of real-time pricing information does not violate Section 5(b)(1) of the Securities Act and (ii) such information does not need to be filed as part of the registration statement.

Disclosure of Plan of Distribution

We are aware that the Staff is currently considering the need for specific disclosure relating to the use of DAiSS and other similar Internet-based systems in the "plan of distribution" section of registration statements. We have enclosed as Appendix A the type of supplemental disclosure we would propose.

Item 512 of Regulation S-K states that, in connection with a Shelf-Offering, the issuer must make certain undertakings, one of which is to "file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to include any material information with respect to a plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement." While Rule 415 permits information related to other undertakings to be filed on periodic reports in connection with a Form S-3 registration statement, no such allowance is made for changes to the plan of distribution. We understand it is the Staffs view that Item 512 requires disclosure by the issuer of the use of an Internet medium, including one such as DAiSS, for the pricing and allocation of securities pursuant to a post-effective amendment that is filed and declared effective before the shelf registration statement may be used for the sale of the securities in such a manner. ⁸

Conclusion

For the above reasons, we believe that DAiSS is a system which will promote transparent pricing and fair allocation of securities based on predisclosed criteria for all bidders and which will provide issuers with the most efficient mechanism for pricing investment-grade debt securities within the current regulatory framework of the federal securities laws. The development and acceptance of this type of system is, in our opinion, consistent with the Commissions goals, and should be encouraged and supported by the Staff. We welcome any comments or remarks that the Staff may offer to this analysis at its earliest convenience. Please call me at 212-504-5555 or my partner Louis J. Bevilacqua at 212-504-6057.

Sincerely,

Dennis J. Block

cc: John C. Maguire, Bear, Stearns & Co. Inc.

Ranada R. Fergerson, Bear, Stearns & Co. Inc.

[APPENDIX]

APPENDIX A

PLAN OF DISTRIBUTION SUPPLEMENT

We propose to offer the Notes directly to the public through Bear, Stearns & Co. Inc. and may utilize DAiSS^{sm 9} (Dutch Auction internet Syndication System ¹⁰), a rules-based, proprietary, single-priced, modified Dutch Auction syndication system for the pricing and allocation of the Notes. DAiSS allows bidders to directly participate, through Internet access to an auction site, by submitting conditional offers to buy (each, a "bid") that are subject to acceptance by the underwriter, and which may directly affect the price at which the Notes are sold.

The final offering price at which the Notes will be sold and the allocation of the Notes among bidders will be based solely on the results of the auction.

During an auction, DAiSS will present to each bidder, on a real-time basis, the clearing spread at which the offering would be sold, based on the bids submitted and not withdrawn, and whether a bidders individual bids would be accepted, prorated or rejected. Upon completion of the auction, the offering price of the Notes will be the lowest spread at which the aggregate dollar amount of bids submitted, and not removed, at that spread and lower spreads equals or exceeds the size of the offering as disclosed in the term sheet (Final Clearing Spread). If DAiSS is utilized, prior to the auction we and Bear, Stearns & Co. Inc. will establish minimum admissible bids, maximum quantity restrictions and other specific rules governing the auction process, all of which will be made available to bidders in the offering cul-de-sac.

Bids at a lower spread than the Final Clearing Spread will be fully allocated. Bids at the Final Clearing Spread will be prorated based on the time of submission and pursuant to the allocation procedures in the auction rules. Bids above the Final Clearing Spread will receive no allocation.

Please review the auction rules, as displayed in the offering cul-de-sac, for a more detailed description of the DAiSS offering procedures.

[STAFF REPLY LETTER]

July 20, 2000

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE

Re: Bear, Stearns & Co., Inc.

Incoming letter dated July 19, 2000

Based on the facts presented, the Divisions view is that Bear, Stearns & Co., Inc., may conduct auctions of debt securities by registrants subject to the periodic reporting requirements of the Securities Exchange Act of 1934 through the Internet system described in your letter in compliance with Section 5(b)(1) of the Securities Act of 1933 subject to the conditions described below. In this regard, the Division wishes to note that it disagrees with your view that screens presenting real-time pricing information are not prospectuses within the meaning of Section 2(a)(10) of the Securities Act. The use of those screens outside of a prospectus permitted by Section 10 of the Securities Act would violate Section 5(b)(1). Accordingly, it is essential to our view that these screens should only be used as part of a prospectus permitted by Section 10.

Where the Internet auction system is used for the sale of securities under an already effective shelf registration statement and where the prospectus forming part of the effective registration statement does not disclose the Internet auction as a possible method for distributing the securities, the Division believes that a post-effective amendment providing this disclosure is required by Item 512(a)(1)(iii) of Regulation S-K. The Division expresses no views regarding satisfaction of Rule 134 for offering materials outside the prospectus permitted by Section 10 of the Securities Act.

To meet the requirements of Rule 424, the documents filed with the Commission in connection with the proposed auctions should include the following:

• a preliminary prospectus supplement in the manner described in your letter; and
• a final prospectus supplement that provides a fair and accurate description of the information, including price information, as will have been presented electronically in the Internet auction, by presenting
• the final terms of the offering;
• the interim information describing bidding activity, as described in your letter; and
• any other interim information constituting a substantive change in the information already filed with the Commission.

With regard to Section 5(b)(1), it is our view that:

• the Internet auction screens must be a part of the prospectus permitted by Section 10 of the Securities Act;
• because they must be part of the electronic prospectus permitted by Section 10 of the Securities Act, the Internet auction screens must be accessible only through that electronic prospectus;
• a complete presentation of all bidding and other auction activity visible to participants on the Internet auction screens need not be filed under Rule 424 only if the filings that will be made under Rule 424 will include all substantive changes from information already filed with the Commission; and
• because the Internet auction screens, as described in your letter, are part of the prospectus, all bidding and other auction activity visible to participants on the Internet auction screens will be part of the prospectus.

The positions expressed above merely represent the Divisions views regarding compliance with Section 5(b)(1) of the Securities Act and the filing requirements of Rule 424. Because the positions expressed above are limited to the presentation and manner of conducting the Internet auction, we take no position regarding whether any announcement of the Internet auction would constitute a "prospectus," as defined in Section 2(a)(10) of the Securities Act. Further, we are not prescribing the method for filing the Internet auction screens on the EDGAR system. On this subject, you should consult Regulation S-T, including Rule 304 thereof, and the Commissions interpretations regarding the use of electronic media.

These positions are based on the representations made to the Division in your letter. Any different facts or conditions might require another conclusion.

Sincerely,

Michael Hyatte
Special Counsel

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