Release No. 33-6423

Release No. 34-19031

Release No. IC-12626

September 2, 1982

Delayed or Continuous Offering and Sale of Securities

ACTION: Final rule and extension of temporary rule.

SUMMARY: The Commission today announced (1) the extension until December 31, 1983 of the effective period for Rule 415, which relates to the registration of securities to be offered and sold on a delayed or continuous basis in the future, and (2) the removal of undertaking provisions relating to the filing of post-effective amendments to reflect the addition or deletion of a managing underwriter. Following public hearings and comment concerning Rule 415, the Commission has determined that additional experience is necessary before final action on the Rule or related securities registration provisions and practices should be taken.

DATE: The amendments to Item 512(a) of Regulation S-K (17 CFR 229.512) and Rule 405 (17 CFR 230.405) are effective (upon publication in the Federal Register). Rule 415 will be effective until December 31, 1983.

FOR FURTHER INFORMATION CONTACT: William L. Larsen (202-272-2589), Office of Disclosure Policy, David B. H. Martin (202-272-2573), Office of Chief Counsel, Division of Corporation Finance, and John B. Manning, Jr. (202-272-2874), Division of Market Regulation (concerning Rule 10b-6, 17 CFR 240.10b-6, and related market matters), Securities and Exchange Commission, 450 5th Street, N.W. Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The actions announced today by the Commission with respect to Rule 415 (17 CFR 230.415) under the Securities Act of 1933 (the "Securities Act") 15 U.S.C. 77a et seq., which governs the registration of securities to be offered and sold on a delayed or continuous basis in the future ("shelf registration"), are part of the ongoing rulemaking proceeding announced in Release No. 33-6383 ¹ when the Commission adopted the integrated disclosure system. At that time, the Commission announced that it would take a series of procedural steps to afford the opportunity for continued consideration of shelf registration and Rule 415. Having concluded the public hearings and comment process ², which constituted two of the announced procedural steps, the Commission has determined that additional experience beyond December 10, 1982 is necessary in order to assess fully the issues raised by the registration of securities for delayed or continuous offerings. At the same time, the Commission has deleted provisions in Item 512(a) of Regulation S-K (17 CFR 229.512) and Rule 405 of Regulation C (17 CFR 230.405) relating to the requirement to file post-effective amendments to the registration statement to reflect the addition or deletion of a managing underwriter. The managing underwriter post-effective amendment provisions have been deleted in order to provide greater certainty and to avoid problems in the operation of Rule 415 during the course of the additional experimental period.

Table of Contents

I. Background

In connection with the development of the integrated disclosure system, the Commission undertook a comprehensive review of the Guides for the Preparation and Filing of Registration Statements and Reports (the "Guides"). After its reevaluation, the Commission proposed rescinding the Guides, with the exception of the Guides for disclosure by issuers in a particular industry ("Industry Guides"), and moving the retained substantive disclosure provisions to Regulation S-K (17 CFR Part 229) and the retained procedural provisions to Regulation C (17 CFR 230.400 through 230.494) and Regulation 12B (17 CFR 240.12b-1 and 240.12b-36). ³ Among the Guides proposed for rescission was Guide 4, which set forth the instances in which shelf registration was contemplated, such as where the issuer proposed to engage in a continuing acquisition program or in the case of securities underlying exercisable options, warrants or rights.

Since the promulgation of Guide 4 in 1968, ⁴ administrative practice had accommodated shelf offerings beyond those specifically described in the Guide. Thus, the procedural rule which resulted from the reevaluation of Guide 4 reflected administrative practice in addition to including the provisions of Guide 4. The resulting proposal was published for comment (as proposed Rule 462A), in December 1980 ⁵ and again in August 1981 ⁶ before being adopted on a temporary basis.

The adoption of Rule 415 on a temporary basis reflected the Commissions recognition of the importance of the views and concerns expressed by the many commentators on the shelf rule proposal. ⁷ The views ranged from support for the rule, as proposed or with modifications, to concern that the proposal would have various potential impacts upon the capital raising process and the securities trading markets. In addition to adopting Rule 415 on a temporary basis and monitoring the operation and impact of the Rule, the Commission afforded the opportunity for continued consideration of the Rule through the solicitation of further written comment and oral testimony at the public hearings.

II. Experience under Rule 415

Rule 415 governs the registration under the Securities Act of any securities which are to be offered on a delayed or continuous basis in the future. The offerings to which the Rule is applicable include:

(a) securities which are to be offered and sold solely in secondary offerings (Rule 415(a)(1)(ii));

(b) securities which are to be offered and sold pursuant to a dividend or interest reinvestment plan or an employee benefit plan (Rule 415(a)(1)(iii));

(c) securities which are to be issued upon the exercise of outstanding options, warrants or rights (Rule 415(a)(1)(iv));

(d) securities which are to be issued upon conversion of other outstanding securities (Rule 415(a)(1)(v));

(e) securities which are pledged as collateral (Rule 415(a)(1)(vi));

(f) securities which are registered on Form S-12 17 CFR 239.19 or From C-3 17 CFR 239.5 (Rule 415(a)(1)(vii)); and

(g) securities not falling within one of the above categories which may be registered in an amount which, at the time the registration statement becomes effective, is reasonably expected to be offered and sold within two years from the initial effective date of the registration statement, by or on behalf of the registrant (Rule 415(a)(1)(i)).

The Commission staff has monitored the operation of Rule 415 since its effectiveness in March 1982. ⁸ As of August 25, 1982, 1,150 registration statements subject to Rule 415 have been filed. ⁹ The 1,150 filings have fallen into all categories of offerings subject to the Rule, with the exception of those for securities pledged as collateral or registered on Form S-12 or C-3.

As the table below demonstrates, 73% of the Rule 415 filings have been for offerings falling within paragraphs (a)(1)(ii) through (a)(1)(vii) of the Rule. Registration statements relating to employee benefit plans and dividend reinvestment plans alone account for 61% of the Rule 415 filings. Of the remaining filings, those under paragraph (a)(1)(i), 162 filings, or 14% of the Rule 415 filings, related to commodity funds, mortgage participations or pass-throughs, tax shelters (e.g., real estate, oil and gas, leasing and cattle feeding programs) and acquisitions. Only 145, or 13% of the Rule 415 filings, have been for other continuous or delayed offerings. Of these, many have related to traditional continuous offerings of equity securities underwritten on a best efforts basis over such an extended period of time that Rule 415 was deemed applicable. There have been only 105 registration statements relating to continuous or delayed offerings of the type to which the commentators directed their attention and these have been primarily for offerings of debt securities.

The specific breakdown of the 1,150 Rule 415 filings as of August 25, 1982 is as follows:

                                        Number of

                                       Registration        Amount of

    Type of Offering                   Statements          Securities
415(a)(i)=Primary Offerings
Commodity Funds                                         8        $ 118,130,400
Mortgage Participations or Pass Thrus                 11          895,000,000
Tax Shelters
Real Estate                                            70        2,395,122,385
Oil & Gas                                              53        2,824,851,988
Leasing                                                 6          133,000,000
Cattle Feeding                                          3           97,224,500
Other                                                   6          108,900,000
Acquisitions                                            5          116,644,170
Continuous
debt                                                   30        3,864,985,653
equity                                             40 10        1,083,490,467
combined-debt & equity                                  2            7,700,000
Delayed
debt                                                   63       14,665,920,000
equity                                           10 11          937,393,750

                                              307         27,248,363,313
415(a)(1)(ii)=Secondary Offerings                      93          757,442,508
415(a)(1)(iii)=Securities offered
pursuant to employee plans, dividend
reinvestment plans
Employee benefit plans                                632       15,600,609,028
Dividend reinvestment plans                            70        1,993,563,493
415(a)(1)(iv)=Securities issuable upon
exercise of options, warrants or
rights                                                 42          440,565,336
415(a)(1)(v)=Securities issuable upon conversions       6          193,480,000
415(a)(1)(Vi)=Securities pledged as collateral          =                    =
415(a)(1)(vii)=Securities registered
on Forms S-12/C-3                                     =                    =

                                            1,150         46,234,023,678

  10 Primarily traditional "best efforts" underwritten offerings.

 11 Three of these registration statements include an "at the market"
 distribution, as defined in paragraph (a)(3) of Rule 415, as one of the many

            potential distribution methods described.

III. Concerns Expressed

Commentators who participated in the current phase of the Rule 415 rule-making proceeding, both through written submissions and through testimony at the hearings, expressed a wide diversity of views and recommendations. Approximately fifty percent of the commentators, including the issuer commentators and certain members of the securities industry, expressed support for the Rule. The remaining commentators in these proceedings expressed concerns about Rule 415. Many of their concerns, however, did not relate to the Rule, or to major portions thereof, and they varied in their recommendations as to what course of action the Commission should take. In addition, a substantial number of both the commentators supporting the Rule and those concerned about or opposed to the Rule indicated that there has not yet been sufficient experience under Rule 415 upon which to make judgments or assess impact.

The commentators who expressed support for Rule 415 either urged permanent adoption of the Rule or advocated extension of the temporary Rule. A number of these commentators also suggested changes in the Rule or in related areas. The issues they raised primarily related to: the determination of statutory underwriter status; the use of shelf registration by foreign governmental issuers; ¹⁰ and the requirement to file a post-effective amendment to reflect the addition or deletion of a managing underwriter. Of these issues, the requirement in Item 512(a) of Regulation S-K to file a post-effective amendment to reflect the addition or deletion of a managing underwriter generated the most comment. The commentators asserted that the delay caused by the requirement serves no useful purpose and expressed concerns about the possible anticompetitive impact of the requirement. Other commentators urged that, if the Item 512(a) requirement is not eliminated, the Commission should clarify the term "managing underwriter" because it has been the source of significant confusion and uncertainty.

Among the commentators who expressed concerns about shelf registration, opinion was divided. Some commentators either explicitly or implicitly urged rescission of Rule 415. During their testimony at the hearings, however, commentators indicated they do not object to shelf registration for employee benefit plans, secondary offerings, or any of the other categories of shelf registration governed by paragraphs (a)(1)(ii) through (a)(1)(vii) of Rule 415. Several other commentators called for rescission of only paragraph (a)(1)(i) of the Rule. ¹¹ The testimony of these commentators at the hearings confirmed, however, they do not object to shelf registration for such purposes as acquisitions, real estate partnerships and other tax shelters, and commodity funds and, thus, that their concerns are not addressed to a majority of the shelf offerings falling within paragraph (a)(1)(i). In addition, a number of commentators stated that they have no concerns with shelf offerings of debt securities pursuant to paragraph (a)(1)(i).

The commentators who expressed concerns about shelf registration, but did not call for rescission of Rule 415, acknowledged that their concerns were not with Rule 145 itself. A few commentators specifically stated that withdrawal of the Rule would not alleviate their concerns. Thus, while Rule 415 was the focal point of the proceeding, commentary addressed issues broader in scope. Commentators questioned such aspects of the Commissions integrated disclosure system as short from registration and incorporation by reference and also noted that the Rule is an extension of a number of developments which have taken place over the past few years and have led to rapid financings. Developments commentators cited apart from the Commissions regulations included the changing economics of the securities business, the impact of interest rate and market volatility, and the internationalization of securities markets.

The areas of concern addressed by commentators included the following: (1) the institutionalization of the securities market; (2) the impact on retail distribution, particularly as it affects regional broker-dealers and individual investors; (3) the impact on capital raising for local, new issuers; (4) the adequacy of the amount, content and timing of disclosure, particularly respecting due diligence; (5) the impact on competition in the securities industry; and (6) the impact on the secondary market.

Just as the concerns these commentators raised in the current rulemaking proceeding were broader than Rule 415, the variety of recommendations made to address those concerns also went beyond the Rule itself. The most frequently suggested proposal was the imposition of some form of "cooling off" period between the announcement and the sale of all registered offerings. Supporters of a cooling off period asserted that it would permit the dissemination of adequate information, the performance of more complete due diligence and the formation of a selling group. In recommending the cooling off period approach, those commentators acknowledged that their concerns were with all rapid financings and agreed that imposing a waiting period would be a change not only for Rule 415 but for the integrated disclosure system recently adopted. ¹² The length of the period suggested varied from 48 hours to 15 business days.

Recommendations also related to improving the quality and amount of information regarding issuers that is available to underwriters, retailers and investors. In this regard, several commentators supported the addition of disclosure requirements to Form S-3. Specifically, they suggested that the information called for by Items 301 (Selected Financial Data) and 303 (Managements Discussion and Analysis) of Regulation S-K (17 CFR 229.301 and 229-303) be presented in the prospectus delivered to investors. Other commentators advocated the development of a more meaningful and readable prospectus than that required by Form S-3 and suggested a concise, ten page document.

In addition, several other suggestions were made. First, commentators urged clarification or lessening of underwriter responsibility, particularly with respect to documents incorporated by reference. Second, certain commentators stated that they would support a requirement mandating the offering of securities on a fixed price basis or a syndicated fixed price basis.

Other recommendations for Commission action related to restricting eligibility for use of the Rule. Suggestions as to the specific restriction varied, however. As noted above, certain commentators objected to the use of the Rule for equity securities, but not for debt securities. Others suggested that consideration be given to restricting the type of issuer who could make use of Rule 415(a)(1)(i) to companies who are qualified to use Form S-3 (17 CFR 239.13), to companies who are frequent issuers of securities, or to companies who meet a float test higher than that imposed for Form S-3. ¹³

A substantial number of both the commentators who expressed support for the Rule and those who voiced various concerns asserted that the nine month period of effectiveness of Rule 415 is too short. Many believed that the temporary period has been too brief to obtain comprehensive data and experience with respect to the operation and impact of the Rule and specifically urged the Commission to extend Rule 415. The issuers who suggested extending Rule 415 expressed general support for the Rule and its underlying rationale and recommended the extension in order to provide sufficient time to test all aspects of the Rule. Several commentators from the securities industry urged extension of the temporary period in order to allow operation of the Rule 415 experiment during a representative market cycle. These commentators noted the aberrant market conditions which have prevailed since the adoption of the Rule and suggested that, if more experience is gained and the operation of Rule 415 is able to be observed under favorable as well as unfavorable market conditions, there will be a greater commentator consensus as to what changes, if any, are appropriate. Further, they believe that the Commission will be better able to make a final determination as to Rule 415 and to evaluate the need for changes in the regulation of Securities Act registration outside of Rule 415.

IV. Discussion of Actions Taken at this Time

In view of the number of commentators who believe that insufficient time has elapsed since the Rule became effective to assess its full impact and in light of the market conditions which have prevailed during this period, the Commission has concluded that it is necessary to extend the period during which Rule 415 is effective to December 31, 1983 in order to obtain sufficient experience upon which to base its final determination of the Rule. The Commission believes that an additional twelve month period is appropriate, because it would provide a greater opportunity to study the operation and impact of Rule 415 through what may be a full financial cycle. Prior to the expiration of the extended period of effectiveness, the Commission anticipates that further rulemaking proceedings will have been concluded and a determination will have been made whether to adopt Rule 415 on a permanent basis, adopt modifications to the Rule or related provisions, or allow the Rule to expire.

With the exception of the managing underwriter deletions discussed below, the Commission has determined not to implement other recommended changes at this time. The Commission recognizes the importance of the concerns expressed by the commentators. While the recommendations made to address these concerns could have merit, ¹⁴ the Commission believes that there has been an insufficient period of experience to evaluate the need for most of the recommended changes. The cooling off period and prospectus augmentation recommendations, in particular, are directed to the integrated disclosure system as a whole, not just to shelf registration under Rule 415. Because the integrated disclosure system adopted in Release No. 33-6383 did not go into effect until May 24, 1982, the Commission has limited experience with the operation of the system upon which to base a judgment with respect to changes in the system. ¹⁵

The Commission also believes that, were it to make some of the significant suggested changes at this time, the value to be gained from the additional period of experimentation under Rule 415 would be greatly diminished because the imposition of such changes during the course of the experiment under Rule 415 would produce inconsistent data. Subsequent evaluation of the experience under the Rule thus would be rendered not only difficult but of questionable value.

Accordingly, the only change being made at this time relates to the deletion of the provisions requiring the filing of a post-effective amendment to the registration statement to reflect the addition or deletion of a managing underwriter. The Commission is making this change because it believes it has had sufficient experience with this requirement, which has been part of Rule 415 since its adoption and as to which comment was specifically requested in the Hearings Release. In addition, the Commission believes this change will benefit experimentation under Rule 415 by eliminating an area of uncertainty which has presented interpretive difficulties for issuers, investment bankers and the Commission staff in the operation of the Rule to date.

Item 512(a) of Regulation S-K, as initially adopted, required Rule 415 offerings to include an undertaking to file a post-effective amendment, during periods in which offers or sales are being made, in three circumstances: to include any prospectus required by Section 10(a)(3) of the Securities Act; to reflect fundamental changes in the information set forth in the registration statement; and to include any material information as to the plan of distribution not previously disclosed or any material change in such information, including (but not limited to) any addition or deletion of a managing underwriter. In order to provide guidance as to when a post-effective amendment would be required for a managing underwriter change, the Commission also included two clarifying instructions to Item 512(a) and adopted a definition of the term "managing underwriter" in Rule 405. ¹⁶

In the course of administering Rule 415, questions have arisen as to whether potential types of distributions may be effectuated by means of a prospectus supplement pursuant to Rule 424 rather than by a post-effective amendment to the registration statement. Such questions, to a great extent, turn on the determination of those circumstances in which a party may be deemed to be a managing underwriter. Experience to date, as well as written and oral commentary on this point, has indicated that (1) determinations of managing underwriter status have presented the principal area of interpretive questions under Rule 415 and (2) the requirement for a post-effective amendment may have adverse consequences. The Commission believes that the lack of clarity in this area and the difficulty of interpretation and operation of the managing underwriter concept make it appropriate to address these matters at this time. Interested persons have had the opportunity to communicate their views to the Commission, by letters, ¹⁷ written submissions received in response to Release No. 33-6391, ¹⁸ and oral testimony presented at the hearings of the shelf rule which were held the week of June 28, 1982.

Upon consideration of the views received, the Commission has determined to delete the requirement to undertake to file a post-effective amendment to reflect the addition or deletion of a managing underwriter. The Commission also has deleted the Instructions to Item 512(a) and the definition of "managing underwriter" in Rule 405. These provisions were adopted together with the managing underwriter post-effective amendment requirement in an effort to provide guidance as to the operation of that requirement. In view of the deletion of the express requirement, the Commission believes the instructions and definition are no longer necessary.

IV. Statutory Authority and Findings

This rulemaking action is being taken pursuant to Sections 6,7,10 and 19(a) of the Securities Act of 1933 15 U.S.C. 77f, 77g, 77j and 77s(a).

The Commission for good cause finds, in accordance with the Administrative Procedure Act 5 U.S.C. 553(d), that the effective date of the amendments to Item 512(a) of Regulation S-K and Rule 405 shall be immediately upon publication in the Federal Register in light of the temporary basis upon which Rule 415 has been adopted and the interpretive uncertainty which has arisen concerning the managing underwriter post-effective amendment requirement.

List of Subjects in 17 CFR 229 and 230.

Reporting requirements, securities.

V. Text of Rules

In accordance with the foregoing, Title 17, Chapter II, of the Code of Federal Regulations is amended as follows:

Part 229--Standard Instructions for Filing Forms Under the Securities Act of 1933 and Securities Exchange Act of 1934--Regulation S-K

1. By removing the words "including (but not limited to) any addition or deletion of a managing underwriter" from Paragraph (a)(1)(iii) and removing Instructions 1 and 2 to Paragraph (a)(1) of §229.512.

Part 230--General Rules and Regulations, Securities Act of 1933

2. By removing the paragraph defining "Managing underwriter" from §230.405.

3. By revising paragraph (c) of §230.415 to read as follows: §230.415 Delayed or continuous offering and sale of securities.

* * * * *

(c) This section shall be effective until December 31, 1983.

Secs.6,7,10,19(a), 48 State. 78,81,85; secs.205,209,48 Stat. 906,908; sec.8,68 State. 685 sec.1,79 Stat. 1051; sec. 308(a)(2), 90 Stat. 57; 15 U.S.C. 77f,77g,77j,77s(a)

By the Commission, Commissioner Thomas dissenting. ¹⁹

George A. Fitzsimmons

Secretary

Commissioner Thomas, dissenting

I respectfully dissent from the decision today of the majority of the participating members of the Commission to extend, without substantial change, Rule 415 (the "Rule") 17 C.F.R. §230.415 on a temporary basis. I am convinced that the Rule, in its present form, encourages changes in our capital market system substantially in excess of those necessary to facilitate the financings for which it was fashioned. In so doing the majority risks, for little or no reward, injuring our capital market system, widely regarded as one of the nations greatest assets. I favor, however, a continuation of the praiseworthy provisions of the Rule that permit major companies rapid access to the market for the sale of their debt securities. ²⁰

INTRODUCTION

1. Weighing Risks Against Benefits

As discussed more fully below, I share the views of many commentators that the Rule in its present form, particularly when applied to equity offerings: (1) jeopardizes the liquidity and stability of our primary and secondary securities markets by encouraging greater concentration of underwriters, market-makers, and other financial intermediaries and by discouraging individual investor participation in the capital markets thereby furthering the trend toward institutionalization of securities holders, and (2) reduces the quality and timeliness of disclosure available to investors when making their investment decisions. Incurring these risks is antithetical to the statutory duty of the Commission to protect investors and to maintain the integrity of our capital markets.

Although I do not believe that it is possible at this time to quantify the various elements of these risks, I am convinced that many of them are real. In my judgment, we ought not, therefore, to run the risks, which I believe are inherent in a broad application of the Rule, without strong evidence of need--none of which has been forthcoming. Accordingly, I would at this time make certain mid-course modifications in the Rule to target it more precisely at the recognized need for speed by major companies in effecting their debt offerings, while minimizing unnecessary risks during the experimental period.

2. Proposal; Need for Monitoring

In order to strike an appropriate balance between the perceived needs of issuers and the potential risks to investors and our capital markets, in extending temporary Rule 415 I would make the following modifications:

(1) I would limit its principal application to debt offerings and not permit its general use for primary equity offerings. ²¹

(2) I would endorse the Rule as extended today with respect to debt issuances registered pursuant to Form S-3, but I would impose a "notice period" of two business days ²² with respect to debt issuances that are not registered on Form S-3.

In suggesting these modifications to the Rule, I realize that respectable arguments can be made either to modify or rebut my proposal. Indeed, I understand that my proposal will not avoid all of the risks outlined below, and that not all of those risks, or the others described by the commentators, are likely to be substantial or applicable to each element of the Rule in the form extended today. I believe, however, that the mid-course modifications which I am suggesting would run fewer risks than extending the Rule in its present form, while permitting the experiment to continue where necessary and desirable. Prudence dictates that, when tinkering with a system that on the whole has been quite successful, we would be wise to change only what is necessary to correct specific problems. Experiments for the sake of the experimentation are to be avoided.

The extension of the Rule in its present broad form makes it imperative that the Commission and the staff be diligent in the monitoring process during the so-called "experimental" period, so that as problems develop, modifications along the lines suggested above can be adopted, it is to be hoped, in a timely fashion. ²³

3. Majoritys Rationale

The participating majoritys rationale in deciding not to make further changes to the Rule at this time is somewhat disturbing. They seem to find comfort in the fact that approximately 50% of the commentators--a slim majority at best--stated that the Rule has been working effectively for issuers and has increased the economy, efficiency and flexibility in the capital-raising process. Yet a vast majority of the Rule 415 offerings filed to date could have been made under my proposal. For example 56 out of 70, or 80%, of these filings for offerings on a delayed basis under subsection (a)(1)(i) of the Rule involved S-3 issuers of debt. These offerings could have been made under Rule 415, even with all of my suggested modifications. In addition, the proponents of a general extension of the Rule have cited precious little need for continuation of the broad experiment.

The Release states that, although the concerns expressed by commentators opposed to broad application of the Rule may be important and their recommendations may have some merit, "there has been an insufficient period of experience to evaluate the need for most of the recommended changes." Even if this is correct, it misses the point. After studying the comment letters and attending the Commissions public hearings, I am convinced that the widespread apprehension voiced with respect to the Rules potential adverse impact on investor protection and the structure of the securities industry and the capital markets has raised serious questions that the Commission should address before the temporary Rule is extended without modification. We should not wait for the actual casualties to mount before recognizing and retreating from danger.

The Release also states "were the Commission to make some of the commentators significant suggested changes at this time, the value to be gained from the additional period of experimentation under Rule 415 would be greatly diminished because the imposition of such changes during the course of the experiment would produce inconsistent data." According to the Release, "subsequent evaluation of the experiment under the Rule thus would be rendered not only difficult but of questionable value."

In response to this argument, three points come easily to mind: First, to run even insubstantial risks, let alone substantial ones, for the mere consistency or purity of data seems bad public policy. Second, the extension period adopted today gives adequate time to gather data, more than half again as long as the original experimental period. Third, my proposed modifications would not affect at all data with respect to S-3 debt offerings which account for the preponderance of the data received to date and which is the principal purpose of the experiment.

Finally, I believe that the "trial period" endorsed today is a misnomer. It is our usual experience that temporary or proposed rules that have been in place over a period of time develop a life of their own. If the Commission does not act now to make the modifications that have been suggested, it will become progressively more difficult to do so in a timely fashion if an when adverse changes in the selling and investment patterns in the securities markets develop. Therefore, I suggest we err on the side of caution when dealing with the sensitive mechanism of the market system and make changes step by step rather than attempting later to backtrack when actual injuries to the market become apparent.

4. Developments Prior to Rule 415

It is important to emphasize at the outset that, although I have grave reservations about Rule 415 in the form extended today, I recognize that the Rule merely intensifies problems that began with developments initiated problems that began with developments initiated over the past few years. Perhaps of greatest significance in this regard was the extension to primary offerings by the Commission in 1978, under the Securities Act of 1933 ("the Act") 15 U.S.C. 77a et seq., of the S-16 short form registration statement, and more recently the adoption of its successor, the Form S-3. These forms streamlined the registration process and provided issuers with more rapid access to the increasingly volatile capital markets by permitting certain issuers to incorporate by reference into an abbreviated prospectus information contained in periodic reports already filed with the Commission pursuant to the Securities Exchange Act of 1934 ("Exchange Act") 15 U.S.C. 78a et seq. In addition, the Commissions selective review process, whereby certain registration statements are not reviewed at all, has reduced the time between filing a short form registration statement and its effective date to as little as 48 hours, further expediting the registration and offering process for issuers. The implications of those changes and their effect on Americas capital markets is not, however, the question before us today. ²⁴ The only issue before us is Rule 415 and the avoidance of any increased risk to the capital markets and to investors.

RISKS TO THE CAPITAL MARKETS

1. General

I share the judgment expressed by many commentators that the most serious risk posed by Rule 415 is its tendency to jeopardize the liquidity and stability of our primary and secondary securities markets by encouraging greater concentration of financial intermediaries, and by discouraging individual investor participation in the capital markets thereby furthering the institutionalization of securities holders. The resulting acceleration of changes already underway in the securities industry would be inimical to the interests of investors and the vitality of our capital markets.

I am most apprehensive that, as a result of an issuers ability under the Rule to gain rapid access to the capital markets, and to sell large amounts of securities on short notice, the instantaneous transaction, or the "bought deal" common in the Euromarket today, will soon become the norm in our markets. Issuers will more frequently demand that investment bankers bid on little if any notice to purchase off the shelf large blocks of securities. Because of the short time frame, investment bankers will not have the opportunity to form traditional underwriting syndicates. As a consequence, only the largest players--those that have the capital for, and can afford to bear the risks of, huge purchases--will inevitably come to be the exclusive underwriters and selling dealers for major new issues. In addition, to reduce their market risks, these investment bankers will be compelled immediately to resell their securities. Only a few well-capitalized institutions will be ready or willing to make such large purchases rapidly.

Thus, the Rule without modification would have the undesirable effect of contributing to the concentration and institutionalization of the major new issues market, with the biggest investment bankers and the largest institutional investors dominating most major transactions, squeezing out regional underwriters, small broker-dealers, individual investors and even small institutional investors. At a time when America needs greater breadth and depth in its capital markets, the Rule would have the opposite tendency; and it is this breadth and depth of our markets that has provided the liquidity and stability that has distinguished our capital markets from the foreign markets.

2. Impact on Regional Broker-Dealers

One of the most troubling elements of the risks outlined above, as many commentators have stated, is that small and regional broker-dealers will likely be all but eliminated from major underwritings, and may, therefore, drop out of the underwriting and market-making business completely.

As stated, above, the compressed offering period for new issues under the Rule is likely to make it impracticable for investment bankers to form traditional broad-based selling syndicates and therefore, these firms will tend to form smaller syndicates comprising only a fraction of those broker-dealers who formerly participated in their deals; ²⁵ and only the largest investment bankers--those that have the resources to bear largely un-syndicated risks--will be able to bid for offerings sold quickly off the shelf. This offering pattern will be most characteristic of new issues by S-3 companies, because these issuers are widely recognized in the marketplace and their securities can be sold quickly. ²⁶

These developments, as many commentators have pointed out, could seriously threaten the existence of many regional broker-dealers and their ability to provide valuable services to small issuers and individual investors. In the past, the regional firms that have maintained active investment banking divisions have heavily depended upon underwriting commissions generated by participation in the traditional syndication process as an important source of revenues. ²⁷ Regional firms have testified that, without underwriting revenues from major issues, they will be forced to retrench on valuable services such as providing research on, ²⁸ and underwriting and market-making support for, ²⁹ many small and emerging companies which are a traditional source of growth for the nations economy.

Furthermore, in the aggregate, these developments may also convince small and regional broker-dealers that acquisition by larger firms is the only alternative for survival, thereby hastening the current trend towards concentration in the securities industry. Such concentration has obvious anti-competitive tendencies. ³⁰

3. Impact on Capital Formation

The attrition of small and regional broker-dealers from the underwriting process could also have a major adverse impact on our nations capital-raising system as a whole. The crucial role that regional broker-dealers play in the capital formation of all types of companies is well documented. A recent report indicated that from 1972 to 1980, regional firms managed almost 80% of all initial public offerings (56% of the dollar value), and from 1979 to 1980, managed 85% of all initial public offerings (57% to 61% of the dollar value). ³¹

Small and emerging companies in particular have historically relied upon regional broker-dealers to provide them with seed capital by selling their early public offerings to a local network of retail investors and thereafter to continue to make a market in such securities. If, however, underwriting divisions of regional broker-dealers are no longer viable as a result of Rule 415, many small and emerging companies would be deprived of their primary vehicle for raising capital, and there is no reason to believe that large investment bankers will begin to take these smaller companies to market. ³² Because start-up and small companies are vital to our nations economic growth, I believe it is imperative that we facilitate, rather than frustrate, the capital-raising process for such issuers. It is indeed ironic that Rule 415, which was designed to encourage capital formation, will in fact undermine the ability of the vast majority of small issuers to raise capital.

4. Institutionalization of the Capital Markets

Another risk of the Rule identified by many commentators is that it will continue the current trend towards institutionalization of our securities investor group; institutions will become the dominant purchasers of new issues and the small investors will be denied equal access to these offerings. One of the hallmarks of our nations capital markets has been the broad participation of individual investors in the purchase of newly-issued securities. As time constraints fostered by the Rule, however, erode the syndication process, underwriters will need to place large blocks of securities quickly in order to reduce their market risks. This will inevitably result in the individual investor being bypassed.

Even when new issues sold under Rule 415 are not completely bought by institutions, the Rule is likely to disadvantage individual investors by facilitating a two-tiered pricing system whereby investment bankers will sell to institutions at lower prices than to individuals because of the leverage resulting from the ability of institutions to make block purchases. ³³

This risk of a multiple pricing system, I believe, underscores a major consequence of the Rule. The Rule seems to be premised in part upon the free market theory that competition among investment bankers will have a salutary effect on the entire distribution system by lowering under-writing spreads and reducing costs. Although increased competition among investment bankers seeking to manage a companys new issue of securities will inevitably narrow underwriting spreads, the cost savings will primarily benefit the issuer, which is in the position to select the lowest of numerous bids, and some institutional investors, who can demand lower prices from underwriters when buying securities in bulk. Quite conspicuously, however, the individual investor is not one of the beneficiaries of this system. On the contrary, as stated above, these investors will often be excluded totally from new issues, or will pay more for the privilege of purchasing them.

Further institutionalization of the new issues market may also impact all investors by reducing the depth and liquidity of our secondary markets. Because Rule 415 markedly favors the institutional purchaser, commentators have stated that the institutions may divert larger portions of their capital to the new issues market and, accordingly, they may have less capital to commit to trading in the secondary markets, thereby reducing depth and liquidity in these markets.

In addition, as many attractive new issues are sold to institutions either at lower prices than those obtained by, or to the entire exclusion of, the retail investor, such individual investors may lose confidence in the fairness of our markets or otherwise lose interest in investing in the stock market generally. In either case, they may ultimately channel their funds into non-securities investments. This would decrease depth in both the primary and secondary markets and undoubtedly have a detrimental impact on the capital formation process of all issuers. Because the strength and liquidity of our capital markets historically has been a function of the confidence and continued presence of the individual investors in these markets, we must be circumspect in developing a regulatory system that could discourage the participation of these investors and threaten to erode the foundation of our markets.

RISKS TO THE DISCLOSURE SYSTEM

1. General

My second category of reservations with respect to Rule 415 as extended today is that in further accelerating the registration process for issuers it, inadvertently or intentionally, reduces the quality and timeliness of disclosure available to investors. In this respect it alters the traditional disclosure scheme set forth in the Act and runs counter to the Acts statutory objective of protecting investors.

At its heart, the Act seeks to ensure that investors are adequately informed before purchasing newly-issued securities. Thus, each issuer offering securities to the public is required to provide investors with a disclosure document containing complete and accurate material information about the issuer and the proposed securities transaction. ³⁴ In addition, to ensure that such information is adequately disseminated to investors before they are called upon to make investment decisions, the Act provides for a 20-day waiting period between the time a registration statement is filed and its effectiveness, unless the Commission authorizes acceleration. ³⁵ The Act also imposes upon issuers and underwriters the duty to investigate the accuracy of information contained in their prospectuses to ensure the reliability of such disclosure. ³⁶ Traditionally, this investigation has been performed by the underwriter and its counsel, as well as by the issuers outside counsel, and the Act provides a defense to the underwriters liability under Section 11 if the underwriter has exercised "due diligence" in performing its investigation. ³⁷

2. Impact on Underwriters Due Diligence

In marked contrast to the statutory scheme, Rule 415 does not provide time for underwriters to discharge adequately their due diligence responsibilities. Before adoption of the Rule, due diligence was undertaken by the underwriters and their counsel and by the issuers outside counsel prior to the initial filing, and anything that remained to be done or double-checked was accomplished between the filing and the effective date. Under the Rule, not only is due diligence not practical prior to the filing, because the ultimate underwriters have not then been selected, but because there is little if any time between selection of the underwriters and the sale, no due diligence is practical at any time during the pre-sale process. Until they have actually been selected, prospective underwriters will have little incentive to begin what may turn out to be a useless and costly investigation. The competitive bidding environment will also surely create pressures for underwriters to complete deals rapidly, irrespective of the adequacy of their due diligence investigation. The result will be to undercut the investors ability to rely upon the underwriters obligation to interpose itself between the issuer and investor and to investigate the disclosures contained in the prospectus. ³⁸

All of these problems will be exacerbated in shelf offerings utilizing Form S-3, because most underwriters and their counsel (and, most likely, issuers outside counsel) will not have participated in the preparation of the issuers Exchange Act reports that are incorporated by reference into the S-3 prospectus, and, therefore, they will need more, rather than less, time to perform a due diligence investigation with respect to these unfamiliar documents. Furthermore, the underwriters weakened relationship with the issuer and the perceived need for haste will make it extremely difficult for the underwriter or its counsel to suggest, let alone require, any changes in previously filed Exchange Act reports whether by amendment or by inclusion of additional information in the bare-bones prospectus permitted by Form S-3. ³⁹

Although many of these observations may sound theoretical to some, in my experience as a securities lawyer representing both issuers and underwriters, I viewed first hand the importance of an underwriters counsel in the disclosure process. The give and take among the underwriters and their counsel, and the issuer and its counsel, increased the likelihood of complete and accurate disclosure, and many times during the process discoveries were made which kept troubled companies from coming to market, or at least fully informed the public as to the risks inherent in a proposed transaction. This give and take or shared responsibility, which acted as a system of checks and balances, is lost in an instantaneous offering system. The risk to the quality of disclosure is, in my judgment, substantial.

As a result of these developments, the very foundation of the disclosure process that has for many years worked so well to protect investors cannot help but be severely undermined.

3. Impact on Dissemination of Information to Investors

The absence of a notice period under the Rule also fails to insure that potential investors will have an opportunity to receive adequate information about an impending offering prior to being called upon to make an investment decision. In fact, issuers can file registration statements pursuant to the Rule and ultimately sell securities thereunder without distributing any preliminary disclosure materials to investors. As the Rule operates, when issuers are ready to sell their securities off the shelf, they are permitted to "sticker" pricing and other last minute information to the prospectus and sell their securities, without waiting for Commission action or making any preliminary distributions of the prospectus. A final prospectus is simply delivered to the investor with the confirmation. This is permitted irrespective of whether adequate information about the offering is available in the marketplace.

Although post-effective amendments are generally required to disclose certain changes in the information contained in the registration statement, ⁴⁰ such amendments with respect to a Form S-3 are often unnecessary if such information has been reported in Exchange Act filings that are incorporated by reference into the final prospectus sent to investors. ⁴¹

This registration procedure is extremely troubling. Because of the accelerated time schedules common under Rule 415 and the absence of a requirement for issuers to distribute preliminary disclosure materials before offering new securities to the public, investors will often be rushed in their investment decisions and will not receive the disclosure necessary to make an informed decision until after they have agreed to purchase securities.

I recognize that prior to Rule 415 many investors never read a prospectus, even when it was provided to them well in advance of an investment decision. Significantly, however, the prospectus was available if investors wanted it and many investors who did not read prospectuses relied upon their brokers and advisers, who had received and reviewed the disclosure documents and could therefore assist the investor in making informed judgments. In the instantaneous transaction under Rule 415 the lack of time for adequate dissemination of disclosure documents to salespersons before commencement and confirmation of sales may make it more difficult for brokers to discharge their responsibilities to make "suitable" recommendations to their customers. ⁴²

Of course, the lack of time to make reasoned investment decisions and the inability to receive disclosure documents in advance of these decisions will be less threatening to institutional investors which often receive and review Exchange Act information as a matter of course and which may use their purchasing power to demand any required additional information about an issuer before buying securities in large volume. The individual investors, on the other hand, must rely heavily on an issuers disclosure documents in evaluating an investment opportunity. Moreover, individual investors may be more vulnerable to high pressure sales tactics than institutional investors and therefore may need more time to receive and read disclosure materials before being called upon to make an investment decision.

I recognize that this lack of disclosure is more significant with respect to offerings under the Rule by issuers that are not eligible to use Form S-3, rather than those who may do so. Form S-3 issuers are large, widely followed companies, and it is reasonable to assume, under the efficient market theory, that financial analysts will study Exchange Act reports of these issuers and disseminate material information contained in these documents to the marketplace. Thus, if prospectuses do not reach investors before an investment decision must be made, important information about an S-3 issuer at least may be reflected in the current market price of the issuers security. Other companies, however, are generally not as widely followed by financial analysts, and material information about them is not as likely to be available in the marketplace and reflected in the market price of securities when investors are called upon to make investment decisions. ⁴³

Notwithstanding the distinction, however, between S-3 companies and other issuers, I remain troubled that Rule 415, by not imposing a notice period upon issuers or a requirement to disclose timely information before selling securities, will too often deprive the individual investor of material information necessary to make an adequate investment judgment. In so doing the Rule eviscerates one of the fundamental protections contemplated by the drafters of the Act.

SUMMARY

1. General

In formulating this dissent, I recognize--at least as clearly as the members of the participating majority--that we do not today write on a clear slate. Rather, our slate is filled not only with the previous experiences under the integrated disclosure system and Rule 415, but also with the nearly 50 years of experience under the Securities Acts and the customs and practices that have been developed and regulated by those Acts, of investors, issuers and intermediaries. This cumulative experience has produced the most effective, efficient and honest capital market system the world has ever known. We would do well to erase from that slate only what is necessary and to do that with extreme care.

As I have noted above, I believe that many of the innovations of Rule 415 and the roots of the Rule in the integrated disclosure system are sound and useful. I also believe, however, that the traditional practices under the Act prior to the rule are at least as useful to the American capital market system. Accordingly, I dissent to the extension of the Rule in its present overly broad form, and favor making the mid-course modifications to the Rule referred to herein. Those modifications, if adopted now, or subsequently if the risks identified above prove real, would, in my judgment, mitigate to a great extent many of those risks, while preserving the praiseworthy and useful innovations of the Rule.

2. Distinction Between Debt and Equity Offerings

In analyzing the impact of Rule 415 on investors and the capital markets, I believe that a useful distinction can be made between debt and equity offerings. In my judgment, it is likely that the issuance of debt securities off the shelf creates fewer adverse consequences for investors and the capital-raising process than the issuance of equity securities and that the offering of debt securities by widely-followed companies eligible to use Form S-3 produces even less significant problems under the Rule.

In accordance with this distinction, I would limit the Rules principal application to debt offerings and not permit its general use for primary equity offerings. ⁴⁴ I would endorse the Rule in the form as extended today with respect to debt issuances registered pursuant to Form S-3, but I would impose a notice period with respect to all other debt issuances under the Rule.

3. Equity Offerings

I dissent from the extension of the Rule with respect to general primary equity offerings, because I believe that such offerings have the greatest potential to produce the problems I have discussed above with respect to investor protection, the structure of the securities markets and the capital-raising process. At the same time, these offerings have the least need for the instantaneous offering procedure.

It was clearly stated at the public hearings and in various written comments that equity securities are more frequently sold through broad-based underwriting syndicates to large retail investment networks than are debt securities. Thus, the present breadth and depth of our capital markets are likely to be disproportionately affected by the instantaneous transactions and the absence of traditional selling syndicates that are the hallmarks of Rule 415. The exclusion of general primary equity offerings from the Rule would be likely to encourage small and regional broker-dealers to remain in the underwriting business with the resulting benefits to the liquidity and stability of the capital markets. Small and emerging issuers would be more likely to be served, individual investors would be less likely to be unfairly treated or squeezed out, and the anti-competitive threat of accelerating concentration in the securities industry would be reduced. That the inclusion of general primary equity offerings within the purview of the Rule is not required to solve existing problems in the marketplace is borne out by the hearings and written comments. Even potential frequent users of the Rule for debt offerings said they saw no need to use it for equity offerings. ⁴⁵

In addition, because equity securities, unlike debt, are still widely purchased by retail investors, there is a greater need in these offerings to distribute on a timely basis high quality information to individual investors to inform them about issuers and to maintain their confidence and interest in the equity markets. By exclusion of primary equity offerings from Rule 415, investors would be more likely to receive useful information about an offering on a timely basis. Furthermore, because in non-Rule 415 offerings the underwriters are selected before a filing, the underwriters due diligence can begin early in the process and the resulting give and take among the parties and their counsel should produce a higher quality disclosure document than one prepared unilaterally by the issuer.

4. Offerings of Debt Securities Generally

I concur with the participating majority to the extent that they permit the continued use of Rule 415 during the temporary period for all debt offerings. After weighing the risks and benefits, in my judgment, applying Rule 415 to offerings of debt securities appears to be justifiable because debt issuers have been shown to have a more compelling need than equity issuers to meet market "windows" rapidly as a result of the high volatility of interest rates and the sensitivity of these rates to market trends. ⁴⁶ Furthermore, as referred to above, debt securities, particularly those of large, well-known companies, do not appear to be sold through broad-based syndicates nor purchased by retail investors as often as equity securities, and the traditional broad syndicate members are not, therefore, as dependent upon such offerings for their continued viability.

The offering of debt securities also presents less troublesome disclosure problems than the offering of equity securities under Rule 415, first because fewer unsophisticated individual investors may participate in this market without expert aid, and second because investors receive a certain amount of reliable information about the issuers of debt from nationally recognized statistical rating services. In addition, the institutionalization of the securities markets that may be fueled by Rule 415 will be less significant with respect to debt securities because debt issues, unlike equity, traditionally have been sold principally to institutional investors.

5. Debt Offerings by Companies Ineligible to Use Form S-3

Although I believe that debt offerings present fewer problems than equity offerings under Rule 415, I am concerned that even debt issues sold off the shelf, especially by smaller companies not eligible to use Form S-3, might have a detrimental impact upon the capital-raising process disproportionate to their benefit, and would deprive investors of much needed information about an issuer. Therefore, I dissent from the extension of the Rule insofar as it does not provide for a notice period for debt offerings that are not registered on Form S-3. To ameliorate many potential problems, I would impose a notice period of two full business days prior to the commencement of sales. ⁴⁷

Such a notice period, I believe, would provide underwriters with more time to form traditional underwriting syndicates, and could provide for some retail distribution, with the attendant benefits described elsewhere herein. ⁴⁸ A notice period would also increase the accuracy of information disseminated to investors by providing underwriters with more time, after being selected for participation in a debt offering, to discharge their statutory due diligence responsibility to investigate the adequacy of information contained in or incorporated by reference into an issuers prospectus. ⁴⁹

6. Debt Offerings by S-3 Issuers

Finally, because I believe that the offering of debt securities by issuers eligible to use Form S-3 does not risk many of the problems associated with the offerings of smaller debt issuers, I concur in the extension of Rule 415 on a temporary basis for debt offerings on Form S-3, without imposing a notice period before the commencement of sales. Although not all their arguments are completely convincing, many commentators have urged that no notice period is necessary for S-3 debt offerings, because S-3 companies are widely followed by financial analysts and therefore, under the efficient market theory, it is reasonable to assume that information about these companies is generally available; ⁵⁰ the debt securities of S-3 companies are frequently highly rated, so that the value of these securities is often determined by prevailing interest rates rather than information in the marketplace; and traditional broad-based underwriting syndicates, selling to retail purchases are less customary in S-3 debt offerings. The perceived need for rapid access to the market for debt offerings of major companies was the original premise of Rule 415. In this limited context the Rule is, in my judgment, a useful and relatively low risk innovation and I would urge the experiment to proceed.

CONCLUSION

Because the Commission has a long tradition of acting by consensus, I dissent from the decision of my colleagues today with great reluctance. I cannot in good conscience, however, concur with the extension of the Rule 415 experiment in those situations in which the risks engendered by the Rule exceed the benefits that are sought, and that are likely to be realized.

Although I fully endorse the Rules laudable and timely objective of facilitating access of large issuers to an increasingly volatile debt market, I oppose the chosen route to accomplishing this goal, because it unnecessarily threatens to change dramatically--and perhaps damage irreparably--our capital market system that has worked effectively, efficiently and honestly for many years. Thus, I believe that at this time, we ought to make significant mid-course modifications to the Rule to aim it more directly at the problems it was designed to solve, and to ensure that the risks we take are commensurate with the rewards we seek.

Because the participating majority determined otherwise and extends the Rule in substantially its present form, the Commission and the staff have a responsibility in the coming months to monitor closely the Rule, and to scrutinize its impact on the market system and the quality of disclosure provided to investors. We must be diligent to change the Rule, along the lines I have suggested or otherwise, if the risks that have been outlined prove to be real. Now that we have chosen to run those risks, only by remaining vigilant during the experimental period will we be able to discharge our statutory responsibility to protect investors and to maintain the integrity and stability of our capital markets.

In addition, for these same reasons, I would support the continued use of Rule 415 for the other types of equity offerings that the Commission permitted to be registered on the shelf prior to the temporary adoption of Rule 415. Thus, I would extend Rule 415 on a temporary basis to secondary offerings of equity securities (Rule 415(a)(1)(ii)); equity securities offered or sold pursuant to a dividend or interest reinvestment plan or an employee benefit plan (Rule 415(a)(1)(iii)); equity securities to be issued upon the exercise of outstanding options, warrants or rights (Rule 415(a)(1)(iv)); equity securities to be issued upon conversion of outstanding securities (Rule 415(a)(1)(v)); and equity securities pledged as collateral (Rule 415(a)(1)(vi)).

¹ March 3, 1982 47 FR 11380 (the "Integration Release").

² The public hearings were announced in Release No. 33-6391 (March 12, 1982) 47 FR 11701 (the "Hearings Release"), which published the order of hearing and the issues to be considered at the hearings. Since announcing the hearings and requesting public comment on Rule 415, the Commission has received written submissions from over 120 commentators, forty of whom were witnesses who testified at the public hearings. Written submissions and the transcript of the public hearings are available for inspection and copying at the Commissions Public Reference Room (See File No. S7-925). The Commission has placed in the file a copy of highlights of written submissions and testimony prepared by the Division of Corporation Finance.

³ Release No. 33-6276 (December 23, 1980) 46 FR 78.

⁴ Release No. 33-4936 (December 9, 1968) 33 FR 18617.

⁵ Release No. 33-6276.

⁶ Release No. 33-6334 (August 6, 1981) 46 FR 42001.

⁷ Comments on proposed Rule 462A are contained in File Nos. S7-869 and S7-896 and are available for public inspection and copying in the Commissions Public Reference Room.

⁸ Rule 415 became effective upon publication in the Federal Register on March 16, 1982. Early compliance was permitted, however, from March 5, 1982, when Release No. 33-6383 was made publicly available.

⁹ Statistics relating to Rule 415 filings as of June 16, 1982 were published in the SEC Digest on June 25, 1982, for the convenience of those who wished to refer to them in connection with the public hearings.

¹⁰See Release No. 33-6424 (September 2, 1982) publishing a staff interpretation regarding shelf registration procedures applicable to foreign governmental issuers.

¹¹ This position would allow shelf registration for those primary shelf offerings, such as dividend or interest reinvestment plans, which are specified in paragraphs (iii)-(vii) of the Rule.

¹² Release No. 33-6383, which became effective May 24, 1982.

¹³ General Instruction I(B)1 of Form S-3 provides that securities may be registered on that Form if the Registrant Requirements are met and the aggregate market value of the voting stock held by non-affiliates of the registrant is $150 million or more or, alternatively, the aggregate market value of the voting stock of the registrant is $100 million or more and the registrant has had an annual trading volume of such stock of 3 million shares or more.

¹⁴ In this regard, see Release No. 33-6235 (September 2, 1980) 45 FR 63693 proposing Forms A, B and C and seeking comment, inter alia, on mandatory summary financial and other company-oriented disclosure in the short from prospectus; on a mandatory prospectus description of subsequent material developments described in reports incorporated by reference; and on a minimum time period before effectiveness of the short form registration statement. Commentator reaction to these provisions at that time was generally unfavorable. Public comments on that proposal are contained in File No. S7-849 and are available for public inspection and copying in the Commissions Public Reference Room.

¹⁵ A number of recent non-traditional public offerings were brought to the Commissions attention during this proceeding. For 60% of these filings, a period of longer than 7 days elapsed between filing and effectiveness. 80% of these offerings used prospectuses which were at least 10 pages in length.

¹⁶ For a discussion of the Instructions and definition, see Release No. 33-6383, 47 FR at 11396.

¹⁷See letter to Mr. Jack F. Bennett, Exxon Corporation (May 14, 1982) and letter to Mr. Lee B. Spencer, Jr., Director, Division of Corporation Finance, from Mr. Bennett (May 5, 1982).

¹⁸ Among the issues which the Commission published for consideration in Release No. 33-6391 was the extent to which the conditions and limitations contained in Rule 415, including the requirement to file a post-effective amendment in the circumstances set forth in Item 512(a), are necessary or appropriate.

¹⁹ Dissenting Opinion of Commissioner Thomas follows.

²⁰ For the reasons stated in todays Release, I concur with the Commissions decision to eliminate the requirement in Item 512(a) of Regulation S-K, 17 C.F.R. §229.512(a), to file a post-effective amendment when adding to or deleting from a registration statement a managing underwriter and to eliminate the definition of a managing underwriter in Rule 405 of Regulation C, 17 C.F.R. §230.405. Securities Act Release No. 6423 (September 2, 1982). In addition, I concur with the Commissions decision to permit foreign governments to use shelf registration procedures similar to Rule 415. Securities Act Release No. 6424 (September 2, 1982). I also agree with the Commissions decision today to modify on a temporary basis Rule 50(b) under the Public Utility Holding Company Act of 1935, 17 C.F.R. §250.50. Holding Company Act Release No. 22623 (September 2, 1982).

²¹ I would, however, permit Rule 415 to be used for the many other primary offerings of equity securities at present included under subsection (a)(1)(i) of the Rule, because these offerings generally were permitted to be registered on the shelf prior to Rule 415 and no significant risks have yet been linked to them. In addition, commentators generally have not expressed concern with these offerings off the shelf. Thus, I would extend Rule 415 on a temporary basis to subsection (a)(1)(i) offerings such as non-convertible preferred stock, commodity funds, mortgage participations, tax shelters, and securities sold pursuant to acquisitions.

²²See infra note 28 for a fuller discussion of this notice period.

²³ The Commissions role as a quasi-legislative body and its authority to set standards in an industry without Congressional approval underscores the importance of seriously evaluating any potential repercussions of proposed regulatory or deregulatory initiatives whenever such problems might be brought to the fore.

²⁴ As todays Release points out, many commentators have expressed the view that recission of Rule 415 would not alleviate their concerns, which encompass the Commissions integrated disclosure system and its short form registration statement and incorporation by reference technique. Some commentators also have asserted that Rule 415 is a mere extension of other developments over the past few years that have led to rapid financings, such as the changing economics of the securities industry and the impact of interest rate and market volatility. Securities Act Release No. 6423 (September 2, 1982).

²⁵ This impact on small and regional broker-dealers has been documented in a recent study by the National Association of Securities Dealers ("NASD"). After identifying firms which participated in certain offerings of securities prior to adoption of Rule 415, the NASD determined which of these firms also participated in the offerings of similar securities registered under Rule 415. It was determined that 88% of the firms participating in the pre-415 offerings (other than as manager) failed to participate in any capacity in the Rule 415 offerings. Most of the excluded broker-dealers were small and regional firms. Letter from Gordon Macklin, President, NASD, to George A. Fitzsimmons, Secretary, Securities and Exchange Commission (June 14, 1982), File No. S7-925, at 8.

²⁶ Because issuers that are not eligible to use Form S-3 are generally not as well recognized in the market as S-3 issuers, the securities of these smaller issuers will not sell as quickly. Consequently, underwriting syndicates composed of regional broker-dealers may be more common for offerings of S-2 and S-1 issuers under Rule 415 because managing underwriters may need to use the regional distribution network to sell the securities of these issuers.

²⁷ In 1981, underwriting revenues accounted for approximately 12% of the gross revenues of regional firms, compared with less than 8% for New York Stock Exchange firms dealing with the public. Letter from Securities Industry Association to George A. Fitzsimmons (June 7, 1982), File No. S7-925, at 10.

²⁸ Last year regional broker-dealers authorized over 69% of the research reports on high technology firms. Letter from F. Barton Harvey Jr., Managing Partner, Alex. Brown & Sons, to William L. Larsen (June 4, 1982), File No. S7-925, at 7.

²⁹ A joint report recently prepared by the Commission and the Small Business Administration recently stated: "Regional firms, as market-makers in initial public offering stocks, are also the leading providers of secondary market liquidity to initial public offering issuers. This is particularly true for smaller issuers which generally have fewer market-makers." U.S. Securities and Exchange Commission and U.S. Small Business Administration, The Role of Regional Broker-Dealers in the Capital Formation: Underwriting, Market-Making and Securities Research Activities, Phase II Report (August 1981) ("SEC-SBA Report").

³⁰ Congress has recognized the importance of the Commissions sensitivity to the anti-competitive impacts of its regulations. See Section 23(a)(2) of the Exchange Act, 15 U.S.C. §78w(a)(2), which provides:

³¹ SEC-SBA Report, supra note 10, at 13. The Report defines initial public offering "as an offering for cash involving the registration of common stock... with the Securities and Exchange Commission pursuant to the Securities Act of 1933... by a corporation not subject to the Commissions disclosure requirements pursuant to the Securities Exchange Act of 1934..." Id. at 1.

³² A recent report found that from 1972 to 1980, regional firms managed the initial public offerings for 88% of issuers with less than $10 million in annual revenue. Id. at 17.

³³ I recognize that in the absence of an agreement between an issuer and an underwriter to engage in a fixed-price offering, the Papilsky Rules are inapplicable and there is no general proscription with respect to the offering of securities at different prices to various purchasers. See Rules of Fair Practice, Article III, Section 24, NASD Manual (CCH) 2174. Although I am not suggesting that we should mandate a fixed price system for all offerings. I do not believe we should encourage and facilitate the erosion of the fixed price underwriting system that has worked effectively for many years in maintaining the confidence of individual investors in the integrity of our markets.

³⁴ Section 5 of the Act, 15 U.S.C. §77e, provides in pertinent part:

³⁵ The legislative history of the Act indicates that Congress contemplated a waiting period between the filing and effective date of a registration statement to inhibit high-pressure sales tactics and to ensure that investors received full disclosure about an issuer before being called upon to make an investment decision. The House Report to the Act states.

³⁶ Section 11(a) of the Act, 15 U.S.C. §77k(a), provides in pertinent part:

³⁷ Section 11(b) of the Act, 15 U.S.C. §77k(b), provides in pertinent part:

³⁸See Escott v. BarChris Construction Corp., 283 F. Supp. 643, 697 (S.D.N.Y. 1968), where the district court stated:

³⁹ It is significant that with respect to the short Form S-16, which also allowed incorporation by reference of information from Exchange Act reports, a firm commitment underwriting in which the underwriters were committed to take at least 90% of the offered securities was a condition to using the form for primary offerings made for cash. Securities Act Release No. 5923 (April 11, 1978) 43 FR 16677. As a result, the managing underwriter was traditionally called upon for advice in the planning stages of an offering, was provided the opportunity to perform due diligence before the S-16 registration statement was filed, and only had to update its investigation just prior to the effective date of a registration statement. This is in contrast to the use of Form S-3 under Rule 415, where there is no requirement for a firm commitment underwriting.

⁴⁰ In filing a registration statement under Rule 415, an issuer must undertake to file a post-effective amendment during any period in which offers or sales are being made,

⁴¹ Item 512(a)(1)(ii) of Regulation S-K, the undertaking to Rule 415 that requires the filing of a post-effective amendment for fundamental changes in information set forth in the registration statement,

⁴² Under the rules of many self-regulatory organizations, brokers must have a basis to believe that recommendations made to a customer are suitable in light of the customers financial resources and investment objectives. For example, the NASD Rules of Fair Practice provide:

⁴³ To ensure that investors are provided current information about non-S-3 issuers offering their securities off the shelf, it might be desirable to require these issuers to file a post-effective amendment whenever there is a "material" change in the information contained in a Rule 415 registration statement. This would lower the current threshold under the Rule which currently requires filing an amendment when there is a "fundamental" change in the information contained in the registration statement. See Item 512(a)(1)(ii) of Regulation S-K, supra note 21.

⁴⁴ Except as referred to at note 2 supra.

⁴⁵E.g., letter from Donald S. Howard, Executive Vice President, Citicorp, to George A. Fitzsimmons (June 7, 1982), File No. S7-925, at 1; comments of C.R. Minix, Treasurer, E. I. Du Pont de Nemours & Company (presented July 1, 1982 at Public Hearings on Rule 415), File No. S7-925, at 2.

⁴⁶ Indeed, the SEC originally authorized shelf registration in the mid 1970s for debt offerings in response to the needs of financing companies that borrowed frequently in the capital markets. See Johnson and Cote, The New Shelf Registration Rule, 15 Rev. Sec. Reg. 925 (1982).

⁴⁷ The precise duration and formulation of such a notice period should be considered. Although a longer notice period should be considered. Although a longer notice period may be appropriate, I believe that to be effective, it should be at least two full business days. I would suggest that such a period begin only upon the commencement of a public distribution of a prospectus with respect to the offering. In this way, my stated objective of ensuring public dissemination of a disclosure document prior to the time investors must make investment decisions would be achieved at the same time as some of the other objectives of a notice period were being fulfilled.

⁴⁸See supra notes 8-10, 12-13, and accompanying text.

⁴⁹ I do not conclude, however, that a notice period as short as two full business days will necessarily provide underwriters with sufficient time to discharge adequately their due diligence responsibility. Although I believe that more time is probably necessary to investigate properly the information contained in an issuers prospectus, I think that this problem can only be effectively addressed when, and if, we revisit the entire integrated disclosure system.

⁵⁰ Of course, it is also true that under the efficient market theory, S-3 companies that issue equity securities are widely-followed by financial analysts, and thus, there is information generally available about these issuers in the marketplace and a less compelling need for investors to receive timely disclosure documents of these issuers before making an investment decision. See supra note 24 and accompanying text for a fuller discussion of the efficient market theory.

"The Commission, in making rules and regulations pursuant to any provisions of this title, shall consider among other matters the impact any such rule or regulation would have on competition. The Commission shall not adopt any such rule or regulation which would impose a burden on competition not necessary or appropriate in furtherance of the purposes of this title. The Commission shall include in the statement of basis and purpose incorporated in any rule or regulation adopted under this title, the reasons for the Commissions determination that any burden on competition imposed by such rule or regulation is necessary or appropriate in furtherance of the purposes of this title."

"(b) It shall be unlawful for any person, directly or indirectly--

* * *

(2) to carry or cause to be carried through the mails or in interstate commerce any... security for the purpose of sale, or for delivery after sale, unless accompanied or preceded by a prospectus that meets the requirements of subsection (a) of Section 10."

"The compulsory 30-day now 20-day inspection period before securities can be sold is deliberately intended to interfere with the reckless traditions of the last few years of the securities business. It contemplates a change from methods of distribution lately in vogue which attempted complete sale of an issue sometimes within 1 day or at most a few days. Such methods practically compelled minor distributors, dealers, and even salesmen, as the price of participation in future issues of the underwriting house involved, to make commitments blindly... This high-pressure technique has assumed an undue importance in the eyes of the present generation of securities distributors, with its reliance upon delicate calculations of day-to-day fluctuations in market opportunities and its implicit temptations to market manipulation, and must be discarded because the resulting injury to an under-informed public demonstrably hurts the Nation..."

H.R. Rep. No. 85, 73d Cong., 1st Sess. 7-8 (1933).

Section 8(a) of the Act, 15 U.S.C. §77h(a), supports this policy by requiring a 20-day period between the filing of a registration statement and its effectiveness, unless the Commission authorizes acceleration. Section 8(a) also provides that a decision by the Commission to accelerate must be based in part upon the "adequacy of the information respecting the issuer theretofore available to the public."

The Commission, in administering Section 8 and in recognizing the importance to investors of timely information about an issuer, has traditionally conditioned acceleration of a registration statement upon a showing that a preliminary prospectus has been adequately distributed. Rule 460(a), 17 C.F.R. §230.460(a) provides:

"Pursuant to the statutory requirement that the Commission in ruling upon requests for acceleration of the effective date of a registration statement shall have due regard to the adequacy of the information respecting the issuer theretofore available to the public, the Commission may consider whether the persons making the offering have taken reasonable steps to make the information contained in the registration statement conveniently available to underwriters and dealers who it is reasonably anticipated will be invited to participate in the distribution of the security to be offered or sold."

"(a) In case any part of the registration statement when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security... may, either at law or in equity... sue--

(1) every person who signed the registration statement:

(2) every person who was a director of... the issuer at the time of the filing of the part of the registration statement with respect to which his liability is asserted:

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(5) every underwriter with respect to such security."

"(b) Notwithstanding the provisions of subsection (a) no person, other than the issuer, shall be liable as provided therein who shall sustain the burden of proof--

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"(3) that... as regards any part of the registration statement not purporting to be made on the authority of an expert... he had, after reasonable investigation, reasonable ground to believe and did believe, at the time such part of the registration statement became effective, that the statements made therein were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading;"

"The purpose of Section 11 is to protect investors. To that end the underwriters are made responsible for the truth of the prospectus. If they may escape that responsibility by taking at face value representations made to them by the companys management, then the inclusion of underwriters among those liable under Section 11 affords the investors no additional protection... In order to make the underwriters participation in this enterprise of any value to investors, the underwriters must make some reasonable attempt to verify the data submitted to them. They may not rely solely on the companys officers or on the companys counsel. A prudent man in the management of his own property would not rely on them."

"(1) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement... which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement;

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement..."

Item 512(a)(1) of Regulation S-K, 17 C.F.R. §229.512(a)(1). In todays Release, the Commission has decided to rescind the requirement under Item 512(a)(1)(iii) that requires the filing of a post-effective amendment if there is an addition or deletion of a managing underwriter in the registration statement.

"does not apply if the registration statement is on Form S-3... and the information required to be included in a post-effective amendment... is contained in periodic reports filed by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement."

Item 512 of Regulation S-K, 17 C.F.R. §229.512.

"In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs."

Rules of Fair Practice, Article III, Section 2, NASD Manual (CCH) 2152. The Commissions SECO suitability rule prescribes similar responsibilities for SECO brokers. See Rule 15b10-3, 17 C.F.R. §240.15b10-3. See generally R. Mundheim, Professional Responsibility of Broker-Dealers: The Suitability Doctrine, 1965 Duke L. J. 445 (1965).

Thus, one could construct a proposal that Rule 415 should be available only for S-3 companies issuing debt or equity securities because these offerings off the shelf will have a less adverse impact upon investors than the shelf offerings of smaller debt or equity issuers. I recognize that there are many defensible formulas for a shelf registration prototype. I, however, rejected formulating a Rule based solely on the size of an issuer because I believe that S-3 equity issues off the shelf still run significant risks with respect to adversely impacting the capital market system.