Merrill Lynch & Co., Inc.Apr. 26, 1976
Rogers & Wells 1666 K Street, N.W. Washington, D.C. 20006 (202) 331-7760 November 26, 1975 1933 Act/2(11), 4(1), 4(3) and 5 1934 Act/Rules 10a-1 and 10b-6
500 North Capitol Street Washington, D.C. 20549
Division of Corporation Finance
Smith Incorporated - Odd-Lot Proposal
In a letter to Merrill Lynch dated October 1, 1975 (a copy of which also is annexed hereto)-responding to its letter of September 4, Mr. Pickard advised that the Commission had granted exemptions from Rule 10a-1 and 10b-6 for Merrill Lynch's proposed odd-lot plan with respect to securities other than those of Merrill Lynch & Co., Inc. ("ML"), Merrill Lynch's parent corporation. The letter stated that the Commission had deferred taking any action respecting inclusion in the odd-lot proposal of securities issued by ML. On behalf of Merrill Lynch, we request confirmation of our interpretation of several sections of the Securities Act of 1933, as they might apply to Merrill Lynch transactions in securities of ML, and to request exemptions from Rule 10a-1 and Rule 10b-6 for transactions in ML stock pursuant to the proposed Plan. As Merrill Lynch stated in its letter, it is in the public interest and in keeping with the objectives of the Securities Acts Amendments of 1975 to allow broker-dealers to compete with each other and with the existing odd-lot dealer in executing odd-lot orders. The same public interest would be served by allowing Merrill Lynch to act as an odd-lot dealer with respect to the securities of its parent corporation. As we point out in the discussion which follows, there are no greater dangers to the public interest in Merrill Lynch's so acting with respect to this security than with respect to any other listed security. Moreover, a substantial number of holders of ML stock have accounts with Merrill Lynch and thus would be in a position to take advantage of its proposal. 1. The Securities Act. Section 5 of the Securities Act of 1933 prohibits the offer or sale of any security without an effective registration statement. However, Section 4(3) exempts from the provisions of Section 5, "transactions by a dealer." Just as Merrill Lynch would be acting as a dealer with respect to other securities in carrying out its odd-lot plan, so should it be considered a dealer with respect to the securities of its parent corporation. "X6A2 Both the language and intent of the definition of a "dealer" suggest that Merrill Lynch should be deemed a dealer with respect to its parent corporation's securities under its proposed odd-lot plan. A dealer is defined in Section 2(12) of the Securities Act as "any person who engages either for all or part of his time. . . in the business of. . . trading in securities issued by another person." The last phrase of this definition should not disqualify Merrill Lynch as a dealer in securities of its parent corporation, since ML and Merrill Lynch in fact are separate corporations. Moreover, reading the language with the purpose of the Securities Act in mind, it would appear that the phrase "in securities issued by another person" was meant to prevent one from taking advantage of the dealer exemption to engage in a distribution of one's own securities. Merrill Lynch's activities under the proposed plan clearly would not constitute such a distribution. Accordingly, there is no reason Merrill Lynch should not be able to claim the exemption from dealer transactions with respect to its odd-lot program. It also has been suggested that, notwithstanding the availability of an exemption for sales by Merrill Lynch itself, those that purchase ML stock from Merrill Lynch pursuant to the proposed plan may be statutory "under-writers" and thus may not be entitled to the exemption from registration under Section 4(1) of the Act for sales other than those by an "issuer, underwriter or dealer." Under this theory, Merrill Lynch would be considered an "issuer" of ML stock for purposes of the definition of "underwriter" contained in Section 2(11) of the Act. "X6A3 Therefore, those that purchase ML stock from Merrill Lynch would be considered "underwriters" within the meaning of the Section 4(1) exemption if they purchased the stock with a "view to distribution". We do not believe that those purchasing odd lots of ML stock from Merrill Lynch should be deemed "underwriters", as it would appear to be inconsistent with both the language and intention of the definition of "under-writer" in Section 2(11) of the Act so consider such purchases as made "with a view to distribution." The purpose for including within the definition of an underwriter those who purchase stock from an affiliate of an issuer with a view to distribution was to prevent sales of securities that "possess all the dangers attendant upon a new offering of securities." "X6A4 In interpreting the word "distribution" in this provision, the Commission itself has found two important factors to be whether there is "adequate current public information" about the issuer of the securities and whether the sale of the securities would "disrupt" the market in the securities. "X6A5 It would appear that sales effected pursuant to Merrill Lynch's odd-lot proposal satisfy both these standards. Because the plan involves only odd lots, both the number of shares held by any one purchaser and the total number traded by Merrill Lynch necessarily would be relatively small, and there could be no disruption of the trading market in ML stock (most if not all of the odd-lot transactions that would occur under the plan undoubtedly would occur whether the plan were offered or not). "X6A6 In addition, because ML is a reporting company under Section 12 of the Securities Exchange Act, there is no lack of current public information about ML. In sum, the proposed conduct of the odd-lot plan possesses no more dangers of the sort "attendant upon a new offering of securities" than the current conduct of odd-lot transactions in ML stock by the odd-lot dealer does. Thus, those purchasing ML stock from Merrill Lynch pursuant to the plan should not be considered underwriters under Section 2(11) and their sales to others should be exempt from registration pursuant to Section 4(1). In view of the foregoing, we believe that by engaging in transactions in ML stock pursuant to the proposed odd-lot plan Merrill Lynch simply would perform a traditional dealer function and its customers would be exempt from the registration requirements of the Securities Act. We would appreciate your confirmation of our interpretation of Sections 2(11), 4(1), 4(3) and 5 of the Act. 2. Rule 10a-1 and Rule 10b-6. We assume that questions arising under the Securities Act accounted for the staff's not granting exemptions under Rules 10a-1 and 10b-6 for ML stock upon Merrill Lynch's original request. If the staff agrees with our interpretations regarding the applicability of the Securities Act to Merrill Lynch's proposed plan, we would renew Merrill Lynch's request to receive an exemption from Rules 10a-1 and 10b-6, pursuant to paragraph (f) of each Rule, similar to those exemptions granted for the proposed plan for securities other than ML stock. Should you desire any further information in connection with this request, please do not hesitate to communicate with the undersigned or George Adams or Thomas Shearman of Merrill Lynch. Sincerely,
Mr. Robert C. Lewis [Footnotes]"X6A1However, whenever Merrill Lynch is engaged in or participating in a distribution within the meaning of Rule 10b-6 of any security offered in the odd-lot plan, it would maintain a nearly "flat" position in that security by making prompt offsetting transactions on the floor of the exchanges similar to those required of registered odd-lot dealers under the exemption from Rule 10b-6 afforded those dealers under paragraph 3 thereof.
[STAFF REPLY LETTER]MAR 26 1976
Rogers & Wells 1666 K Street, N.W., Washington, D.C. 20006
Merrill Lynch, Pierce, Fenner & Smith, Inc.
In January, 1976 Merrill Lynch, a registered broker-dealer, began executing customer odd-lot orders in a limited number of selected securities listed on the New York and American stock exchanges, off the floors of such exchanges, pursuant to exemptions granted by the Commission from Rules 10a-1 and 10b-6 under the Securities Exchange Act of 1934. These exemptions did not extend to the execution of orders with respect to the common stock of ML, the parent of Merrill Lynch. Merrill Lynch proposes to expand the odd-lot dealer program to include the common stock of ML, provided that exemptions from Rules 10a-1 and 10b-6 are granted by the Commission. As with the other securities included under this program, Merrill Lynch would cross, at the opening and at the opening price, as agent to the extent possible, unsolicited odd-lot orders in ML stock accumulated since the previous close. In addition, from an inventory not to exceed 500 shares long or short, Merrill Lynch would fill on a principal basis at the opening price those orders which could not be crossed at the opening and, at the current bid or asked quotations, those unsolicited odd-lot orders received during trading hours. You have asked this Division to agree with your opinion that such transactions in ML stock would be exempt from the registration provisions of Section 5 of the Act by virtue of the exemptions afforded by Sections 4(3) and 4(4). On the basis of the facts presented, this Division will not recommend any action to the Commission if Merrill Lynch handles off-the-floor odd-lot transactions in ML stock strictly on an agency basis without compliance with the registration provisions of the Act, in reliance upon your opinion as counsel that registration is not required. However, in view of the relationship between Merrill Lynch and ML, we do not agree with your opinion that ML securities will be "securities issued by another person" within the meaning of Section 2(12) of the Act. Accordingly, we are unable to conclude that Merrill Lynch can act as principal in such transactions without compliance with the registration provisions of the Act. Sincerely,
Assistant Chief Counsel |
 |