Release No. 33-6383

Release No. 34-18524

Release No. 35-22407

Release No. 39-700

Release IC-12264

Release ASR-306

47 Fed. Reg. 11466 - Mar. 16, 1982

Adoption of Integrated Disclosure System

ACTION: Final rules.

Table of Conents

V. Liability Issues

A. Background

The Liability Release published for comment three proposals addressing certain issues of civil liability under the Commissions integrated disclosure program. Proposed Rule 176 would identify certain of the circumstances bearing upon the reasonableness of the investigation and the determination of what constitutes reasonable ground for belief under section 11(b) of the Securities Act. ⁹⁷ Proposed Rule 412 would deem the effective date of documents incorporated by reference into a registration statement to be the documents initial filing date and proposed Rule 418 would: (1) Deem a statement contained in a document incorporated by reference to be modified or superseded to the extent that it has been modified or replaced by a statement contained in the prospectus or in any other subsequently filed document incorporated by reference; (2) provide that the making of a modifying or superseding statement shall not be deemed an admission that the modified or superseded statement constituted a violation of the federal securities laws; and (3) provide that any statement so modified or superseded shall not be deemed in its prior form to constitute a part of the registration statement or prospectus for purposes of the Securities Act.

There were relatively few comments directed to proposed Rule 176. Although commentators generally supported adoption of the proposed Rule, ⁹⁸ several commentators criticized the description in the Liability Release of several information-gathering techniques which could minimize the amount of time required for investigation immediately prior to the filing of a short form registration statement. The Commission, therefore, wishes to emphasize that the techniques identified were in no way intended to be mandatory, but rather were presented to help facilitate the development of procedures compatible with the integrated approach to registration. Underwriters and others may accept or reject any of the measures described in this part of the Liability Release. The important point is that each subject person should evaluate the surrounding facts, including the extent of his prior relationship with the registrant, and utilize techniques of investigation appropriate to the circumstances of the offering.

B. Implementing Rules

1. Rule 176.

Proposed Rule 176 would codify section 1704(g) of the proposed Federal Securities Code (the "Code"), ⁹⁹ which the Commission has endorsed with certain modifications. ¹⁰⁰ While the Rule describes some circumstances which may affect the reasonableness of an inquiry, the Commission recognizes that there are other circumstances beyond those enumerated in the Rule which may bear upon the reasonableness of the conduct of persons subject to Section 11. Judicial interpretations of section 11 have confirmed the principle that what constitutes reasonable investigation and reasonable ground for belief depends upon the circumstances of each registration. ¹⁰¹ The prospect of continued flexible application of that standard by the courts should provide assurance to subject persons that they will not incur unreasonable investigative burdens.

Several commentators urged that the Commission restore the reference to the underwriters access to information which appeared in clause (b) of section 1704(g) of the Code before it was modified and endorsed by the Commission in September 1980. The Commission objected to the Codes reference to access to information because the word "access" could imply that a registrants refusal to grant the underwriter access to pertinent information would be a legitimate ground for not investigating. There, however, will be occasions where information cannot be investigated fully because of its unavailability. For example, the information may be in the possession of a hostile subject company. ¹⁰² To take account of circumstances such as these, the Commission is inserting in paragraph (g) the phrase "the availability of information with respect to the registrant."

Accordingly, the Commission is adopting Rule 176 as proposed with the addition to paragraph (g) described above. The Commission staff will monitor the operation of Rule 176 and Section 11 suits involving short from registration statements in order to determine whether there is need for further action by the Commission or the Congress in view of the conduct of persons subject to Section 11 and the standards to which they are held by the courts.

2. Proposed Rule 412.

A number of commentators, for a variety of reasons, opposed the adoption of proposed Rule 412. Among other things, it was noted that the Rule seemed unnecessary and could be confusing to subject persons. In light of these problems, the Commission is withdrawing proposed Rule 412.

3. Proposed Rule 418.

The majority of the commentators supported proposed Rule 418 and the Rule is being adopted as proposed. In view of the withdrawal of proposed Rule 412, the final Rule, originally proposed as Rule 418, is being renumbered as Rule 412.

4. Possible Amendment of Rule 461.

In the Liability Release, the Commission specifically solicited comment on whether there is any need to amend Rule 461 (Requests for acceleration of effective date of registration statements) to require that the managing underwriter state, in connection with a request for acceleration, whether there has been time to reasonably review and comment upon documents incorporated by reference into the registration statement. Most commentators opined that such a determination already is implicit in the underwriters participation and that such a written statement could impair the underwriters defense in litigation arising from the offering. Accordingly, the Commission is not amending Rule 461.

VI. Implementing and Coordinating Amendments

In order to facilitate implementation of the integrated disclosure program, the Commission reviewed Securities Act and Exchange Act rules, forms and schedules generally to determine whether any coordinating amendments in addition to those discussed above were necessary. Those amendments proposed together with the other August 1981 proposals are as follows.

A. Securities Act Rules 135 and 138 ¹⁰³

Rule 135 (17 CFR 230.135, Notice of certain proposed offerings) is being amended substantially as proposed in the Securities Act Coordinating Release, but now will permit dissemination of the information specified by the Rule not only with respect to exchange listed securities, but also with respect to securities quoted on the NASDAQ interdealer quotation system. Dissemination will be permitted through the facilities of the consolidated transaction reporting system and the NASDAQ system as well as through the facilities of the national exchanges and the Dow Jones broad tape. This change should assure more complete dissemination of information with respect to rights offerings of securities.

Rule 138 (17 CFR 230.138, Definition of "offer for sale" and "offer to sell" in sections 2(10) and 5(c) in relation to certain publications) is being amended as proposed in the Securities Act Coordinating Release. The changes will replace references to deleted forms.

B. Exchange Act Rules and Schedules

In the Exchange Act Coordinating Release, the Commission proposed to amend (1) Item 15 of Schedule 14A of Regulation 14A to require registrants to furnish managements discussion and analysis of financial condition and results of operations as required by Item 303 of Regulation S-K relating to proxy statements soliciting action with respect to certain authorizations or issuances of securities and the modification or exchange of securities; (2) Rule 15c2-8 (17 CFR 240.15c2-8) regarding delivery of prospectuses to incorporate the "48-hour rule" of Release No. 33-4968; ¹⁰⁴ -and (3) Rules 13e-4 and 14d-6 (17 CFR 240.14d-6) regarding summary financial disclosure in tender offers. In addition, Appendix A of Schedule 14A was proposed to be deleted, No commentators objected to the proposals, although several changes were suggested. Accordingly, the Commissions adopting the amendments, with certain changes as discussed below, and is deleting Appendix A. ¹⁰⁵ In addition, the Commission is making several technical changes in Regulation 14A to correct inadvertent omissions.

1. Regulation 14A.

In addition to amending Item 15 of Schedule 14A and deleting Appendix A, the Commission is making three technical amendments to Regulation 14A. The first concerns Item 4 of Schedule 14A, which specifies information to be included in a proxy statement about certain persons who have an interest in any matter to be acted upon. It has come to light that the requirement in Item 4(b)(2) to describe, in connection with solicitations subject to Rule 14a-11 (17 CFR 240.14a-11), the interest of "any person named in answer to Item 6(b)" was inadvertently left unchanged when Item 6(b) was changed substantially in 1978. ¹⁰⁶ Prior to 1978, Item 6(b) concerned certain persons who were a party to an arrangement or understanding pursuant to which a nominee was to be elected. Since the substance of Item 4(b)(2) was not intended to be changed when Item 6(b) was amended, the Commission is now amending Item 4(b)(2) to require information with respect to the persons formerly described in Item 6(b).

Second, the Commission has become aware that the Code of Federal Regulations does not correctly state the text of Item 20 of Schedule 14A, which specifies the disclosure required in a proxy statement if action is to be taken with respect to any amendment of the issuers charter, bylaws or other documents. Accordingly, Item 20 is being amended to include the correct text.

Third, it also has come to light that the fee requirements applicable to the filing of proxy statements, ordinarily contained in Rule 14a-6, were inadvertently omitted from that rule when it was amended in coordination with the adoption of Form S-15. ¹⁰⁷ Accordingly, the Commission is amending Rule 14a-6 to reinsert paragraph (i) setting forth the fee schedule. In coordination with this, existing paragraph (i) is being redesignated as paragraph (j).

2. Rule 15c2-8.

The proposed amendment to Rule 15c2-8, which sets forth the specific steps participating brokers or dealers must follow reasonably to distribute the preliminary prospectus, required a broker-dealer to comply with the 48-hour rule in connection with any issue of securities the issuer of which had not previously been required to file reports pursuant to section 13(a) or 15(d) of the Exchange Act or is required to include in the prospectus reference to material risks pursuant to Item 501 of Regulation S-K. After further consideration, the Commission is amending Rule 15c2-8 to require compliance with the 48-hour rule only in the case of registrants not subject to the reporting requirements of section 13(a) or 15(d) and to provide that compliance is not required where a registrant is not required to file reports to section 13(a) or 15(d) because it has been exempted from those requirements pursuant to section 12(h) of the Exchange Act.

3. Rules 13e-4 and 14d-6.

Rules 13e-4 and 14d-6 under the Exchange Act, regarding tender offer disclosure requirements, are revised to substitute the substantive summary financial information contained in paragraph (e) of Guide 59 for the references to Guide 59 previously contained in the Rules. As explained in the Exchange Act Coordinating Release, the substitutions are necessary in view of the Commissions decision to rescind Guide 59. They are intended to ensure that Rules 13e-4 and 14d-6 will continue to provide guidance as to what is sufficient to constitute a fair and adequate summary of financial information for purposes of the disclosure requirements therein.

C. Safe Harbor Rules for Projections

The Commission is amending the safe harbor rules for projections under the Exchange Act (Rule 3b-6, 17 CFR 240.3b-6), Securities Act (Rule 175, 17 CFR 230.175), and related federal securities laws ¹⁰⁸ in order to clarify and broaden the scope of the safe harbor protection provided thereunder. The amendments make clear the Rules original intent that safe harbor protection extend to projections made in a quarterly report on Form 10-Q, a registration statement on Form 10 or an annual report to security holders furnished to the Commission, even though the registrant has not yet been required to file an annual report on Form 10-K, as well as to the registrants first filing on Form 10-K.

Statutory Authority and Findings

The Commission hereby adopts the rulemaking actions set forth below pursuant to the following statutory authority. The actions revising 17 CFR Parts 230 and 239 are adopted pursuant to the authority in sections 6, 7, 8, 10 and 19(a) of the Securities Act of 1933. The actions revising 17 CFR Parts 240 and 249 are adopted pursuant to the authority in sections 3(b), 12, 13, 14, 15(d) and 23(a) of the Securities Exchange Act of 1934. The action revising 17 CFR Part 250 is adopted pursuant to the authority in section 20(a) of the Public Utility Holding Company Act of 1935. The action revising 17 CFR Part 260 is adopted pursuant to the authority in section 319(a) of the Trust Indenture Act of 1939. The action revising 17 CFR Part 274 is adopted pursuant to the authority in section 38(a) of the Investment Company Act of 1940. The action revising 17 CFR Parts 200, 201 and 229 are adopted pursuant to the authority in sections 6, 7, 8, 10 and 19(a) of the Securities Act; sections 3(b), 12, 13, 14, 15(d) and 23(a) of the Exchange Act; section 20(a) of the Public Utility Holding Company Act; section 319(a) of the Trust Indenture Act; and section 38(a) of the Investment Company Act.

As required by section 23(a) of the Exchange Act, the Commission has specifically considered the impact that the rulemaking actions revising 17 CFR Parts 200, 201, 229, 240 and 249, taken pursuant to the various provisions of the Exchange Act would have on competition and has concluded that they would impose no significant burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.

Pursuant to section 553(d) of the Administrative Procedure Act of 1949 (5 U.S.C. 553), the Commission finds for good cause that Rule 415 shall become effective immediately upon publication in the Federal Register (March 16, 1982), in view of the temporary basis on which it is adopted, and that it and the other rulemaking actions adopted herein may be used and relied upon prior to their effective dates by any persons desiring to do so.

Availability of Final Regulatory Flexibility Analysis With Regard to Forms S-1, S-2 and S-3

In accordance with 5 U.S.C. 604, the Commission has prepared a final Regulatory Flexibility Analysis with regard to Forms S-1, S-2 and S-3. The corresponding Initial Regulatory Flexibility Analysis was included in the S-1-2-3 Release at 46 FR 41923. Members of the public who wish to obtain copies of the Final Regulatory Flexibility Analysis of Forms S-1, S-2 and S-3 should contact William L. Larsen, Office of Disclosure Policy, Division of Corporation Finance, Securities and Exchange Commission, 500 North Capitol Street, Washington, D.C. 20549 (202-272-2604).

⁹⁷ Section 11(b) of the Securities Act provides that each person, other than the issuer, will not be held liable, if he can sustain the burden of proof that his conduct, under the circumstances, was reasonable. Specifically, section 11(b)(3) permits the defendant to prove that he made a reasonable investigation of and had reasonable grounds to believe in the accuracy of the non-expertised portions of the registration statement or, with respect to any part presented upon the authority of an expert other than the defendant, that he had no reasonable ground to believe and did not believe there was a material omission or misstatement. 15 U.S.C. 77k(b)(3). Section 11(c) provides that "the standard of reasonableness shall be that required of a prudent man in the management of his own property." 15 U.S.C. 77k(c).

⁹⁸ It should be noted that three commentators urged the Commission to adopt, in lieu of proposed Rule 176, a safe harbor rule for underwriters with respect to documents incorporated by reference. In 1978, however, the Commission declined to adopt a proposed rule which would have provided underwriters a safe harbor from liability under section 11 and section 12(2). Release No. 33-5998 (November 17, 1978) 43 FR 56054. See the Liability Release for a more detailed discussion of these proposals.

⁹⁹ ALI. Federal Securities Code (1980).

¹⁰⁰ Release No. 33-6242. (September 18, 1980).

¹⁰¹ For example, the Commission believes that a court would not expect the investigation undertaken in connection with a short form registration of a seasoned company to be the same as that which would be reasonable in connection with an initial public offering.

¹⁰² Feit v. Leasco Data Processing Equipment Co., 332 F. Supp. 544 at 584-85 (E.D.N.Y. 1971).

¹⁰³ Rules 135, 138 and 139 (discussed above in connection with the shelf rule) are among those rules which will be the subject of the "sunset" review of the "100" rules under the Securities Act which will be undertaken during the next year.

¹⁰⁴ (April 24, 1969) 34 FR 7235. The 48-hour rule requires a broker-dealer to distribute a copy of the preliminary prospectus to each person who is expected to receive a confirmation of sale at least 48 hours prior to the mailing of such confirmation.

¹⁰⁵ As noted in the discussion above of Rule 405 of Regulation C, the adoption of a definition of the term "executive officer" in Rule 3b-7 necessitated deleting definitions of that term previously found in various Exchange Act rules and schedules

¹⁰⁶ Release No. 34-15384 (December 6, 1978) 43 FR 58522.

¹⁰⁷ Securities Act Release No. 33-6332 (September 2, 1981) 45 FR 63647.

¹⁰⁸ Specifically, Rule 103A (17 CFR 250.103A) under the Public Utility Holding Company Act of 1935, 15 U.S.C. 79a et seq., and Rule 0-11 under the Trust Indenture Act of 1939, 15 U.S.C. 77aaa-77bbbb.