Release No. 33-6499

Release No. 34-20384

Release No. 35-23122

November 17, 1983

TIMELY REPORTING-FINAL AMENDMENT OF RULE AND FORM

ACTION: Final Rule.

SUMMARY: The Commission today announced the adoption of a revised shelf registration rule. Rule 415 relates to the registration of securities to be offered or sold on a delayed or continuous basis in the future. As revised, the Rule is available for offerings qualified to use short form registration statements and for traditional shelf offerings. These modifications reflect experience with the Rule and the views that have been expressed, particularly those relating to disclosure and due diligence.

EFFECTIVE DATE: December 31, 1983.

FOR FURTHER INFORMATION CONTACT: Prior to the effective date, contact Steven L. Molinari (202) 272-2589, Office of Disclosure Policy, Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. After the effective date, contact David B. H. Martin (202) 272-2573, Office of Chief Counsel, Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Executive Summary

In the eighteen months since its adoption on a temporary basis, Rule 415 ¹ has operated efficiently and has provided registrants with important benefits in their financings, most notably cost savings. The cost savings are attributable to a number of factors, including flexibility to respond to rapidly changing markets, reduced legal, accounting, printing and other expenses and increased competition among underwriters. At the same time, however, concerns have been raised, including institutionalization of the securities markets, impact on retail distribution, increased concentration in the securities industry, effects on the secondary markets, adequacy of disclosure and due diligence.

The Commission has considered the concerns that have been expressed about Rule 415. Some relate to economic factors, such as volatile interest rates and other market forces, which exist apart from Rule 415 and thus are not appropriate bases on which to take action on the Rule. The Commission believes that the concerns about disclosure and due diligence, however, should be addressed because they may be affected by the manner in which offerings under the Rule may proceed. Accordingly, the Commission has determined to modify the Rule to limit its availability to those offerings where the benefits of shelf registration are most significant and where the disclosure and due diligence concerns are mitigated by other factors. The Commission believes that limiting the Rule to primary offerings of securities qualified to be registered on Form S-3 or F-3 ² and to traditional shelf offerings strikes the appropriate balance.

The integrated disclosure system ³ recognizes that, for companies in the top tier, there is a steady stream high quality corporate information continually furnished to the market and broadly digested, synthesized and disseminated. In addition, procedures for conducting due diligence investigations of such registrants, including continuous due diligence by means such as designated underwriters counsel, are being adapted to the integrated disclosure system and shelf registration. The Commission believes that the widespread market following of such companies and the due diligence procedures being developed serve to address the concerns about the adequacy of disclosure and due diligence and, thus, ensure the protection of investors.

With respect to traditional shelf offerings, the Commission believes that continued use of Rule 415 also is appropriate. First, concerns have not been expressed about these offerings. Second, these offerings may not be feasible on other than a delayed or continuous offering basis.

As to other offerings by non-S-3 or F-3 registrants, however, disclosure and due diligence concerns need to be addressed. Accordingly, the Commission has determined not to allow the Rule to be used for such offerings.

As revised, Rule 415 enumerates the securities which are allowed to be offered on a continuous or delayed basis. Unless the securities fall within one of the provisions spelling out the various traditional shelf offerings, they must qualify for registration on Form S-3 or F-3. If they do not, they may not be registered for delayed or continuous offerings.

II. Background

Securities have been registered for continuous and delayed offerings for many years. Some of the instances in which shelf registration was allowed were set forth in Guide 4, which was promulgated in 1968. ⁴ These included securities to be issued in continuing acquisition programs or those underlying exercisable options, warrants or rights. Administrative practice, however, accommodated traditional shelf offerings beyond those specified in the Guide. Shelf registration was permitted for such diverse offerings as limited partnership tax shelters, employee benefit plans, pools of mortgage backed pass through certificates offered from time to time, and customer purchase plans.

Rule 415 arose in connection with the development of the integrated disclosure system. As part of that effort, the Commission comprehensively reviewed all of the Guides for the Preparation and Filing of Registration Statements and Reports and reorganized them to separate the substantive disclosure and procedural provisions. The shelf rule was the procedural rule which resulted from the reevaluation of Guide 4 and reflected current administrative practice as well as the provisions of the Guide.

The Rule was published for comment twice ⁵ before being adopted on a temporary basis in March 1982. ⁶ Following public hearings and further public comment, ⁷ the Commission, in September 1982, extended the effective date of the Rule until December 31, 1983. ⁸ In June 1983, the Commission published the shelf registration rule for comment again in order to provide all interested parties another opportunity to submit their views and experience under the Rule before the Commission made its final determination. ⁹ Throughout the course of this rulemaking proceeding, the Commission has received almost 400 written and oral submissions from commentators expressing their views on shelf registration. ¹⁰

Two dominant themes emerged from these comments on Rule 415. The majority of commentators, mostly registrants, have been pleased with the Rule and favor its adoption on a permanent basis. Members of the securities industry, on the other hand, have expressed a wide spectrum of views and have reiterated several concerns. In the most recent comment solicitation, they emphasize concerns over the adequacy of disclosure and due diligence. While these commentators voice concerns, only a few of them believe that there should be no shelf registration rule at all. Others with concerns about the Rule recommend that it be retained, either in its present form or in modified form.

The suggested modifications of Rule 415 include: (1) restricting eligibility for use of the Rule to (a) investment grade debt securities, (b) a combination of investment grade debt securities and limited types of equity securities or (c) registrants that are widely followed in the marketplace; (2) requiring advance notice to the marketplace of forthcoming offerings; and (3) imposing some form of "cooling off period" between the announcement and sale of securities. Some commentators also suggest providing underwriters relief from liability under the Securities Act.

III. Experience

The Commission, registrants, the securities industry, and others have had over eighteen months of experience with the shelf registration rule. During this time, the Commission has monitored the operation and impact of the Rule, has been provided information concerning actual experience with the Rule and has considered empirical data and studies related to the Rule. ¹¹

From March 1982 through September 1983, almost 4,600 shelf registration statements relating to $181 billion were filed. ¹² These shelf filings represent 52% of the over 8,800 registration statements and 52% of $345 billion of securities registered during this period.

Over 85% of the shelf registrations have been traditional shelf filings. ¹³ Filings for employee benefit plans and dividend or interest reinvestment plans alone account for 55% of the shelf filings and represent 26% of the $181 billion in shelf registered securities.

Most of the balance have been filings for investment grade debt securities offered and sold from time to time on a delayed basis. These 369 debt filings (registering almost $70 billion) represent 53% of the $133 billion of total debt issues filed from March 1982 through September 1983. Approximately 94% of the 369 delayed debt filings were on Form S-3. Over 35% of the filings were made by companies in the financial industry and over 20% were made by utilities.

The remaining shelf filings related to 195 delayed equity filings (registering $12.5 billion). These filings amounted to about 3% of the over 7,700 equity registration statements and 6% of the $212 billion in equity securities registered. Over half were fixed price syndicated offerings which were filed under Rule 415 largely for the procedural convenience afforded by the Rule. ¹⁴ Of the remaining delayed equity filings, 90% were on Form S-3. Approximately 70% were for common stock and 30% were for preferred stock. Fifteen percent listed an "at the market" distribution as one of the potential distribution methods described. Eleven of these filings were for so-called "dribble-outs" by utility companies, in which common stock is offered through an underwriter into an existing trading market on a regular basis.

IV. Discussion

A. Benefits of Shelf Registration

Virtually all commentators state that shelf registration provides substantial benefits for corporate financings. The principal benefit cited by commentators is that of cost savings. Empirical studies on shelf registration also suggest that securities sold under Rule 415 have lower issuance costs than securities not sold under the Rule. ¹⁵

Cost savings and other benefits are attributed to a number of factors. Flexibility is the Rules most frequently cited benefit, because it is the source of the greatest cost savings and provides other advantages as well. Commentators stress that flexibility is important in todays volatile markets; that the procedural flexibility afforded by the Rule enables a registrant to time its offering to avail itself of the most advantageous market conditions; that by being able to meet "market windows," registrants are able to obtain lower interest rates on debt and lower dividend rates on preferred stock, thereby benefiting their existing shareholders. The flexibility provided by the Rule also permits variation in the structure and terms of securities on short notice, enabling registrants to match securities with the current demands of the marketplace. Some commentators attributed the success of their offerings to the flexibility provided by the Rule. Empirical studies also support the importance of enhanced financing flexibility in new issue design, market timing and choice of distribution technique. ¹⁶ While most discussion of flexibility is in the context of debt offerings, some commentators also assert that flexibility is necessary in the equity markets.

Simplification of the securities registration process also is cited as reducing costs. Legal, accounting, printing and other costs are stated to have been reduced, because only a single registration statement need be filed for a series of offerings, rather than a separate registration statement each time an offering is made. Some commentators also state that simplification of the registration process has given them more flexibility in planning their financing schedules.

Finally, some commentators stress that increased competition among underwriters has resulted in lower underwriting spreads and offering yields, which produce cost savings for registrants and their shareholders. Empirical studies of debt and equity offerings under Rule 415 found lower issuance costs and attributed this primarily to increased competition among investment bankers. ¹⁷ Some commentators note that increased competition has spurred the innovation of new financing products.

On the basis of the benefits cited, many commentators, especially registrants, support permanent adoption of Rule 415 as proposed.

B. Concerns

1. Adequacy of Disclosure

A number of commentators, especially those from the securities industry, express concerns relating to the adequacy of disclosure. While Rule 415 has been the focal point of these concerns, these commentators question aspects of the Commissions integrated disclosure system, such as short form registration and incorporation by reference. They question the amount and quality of information available, as well as whether investors receive it in time to make investment decisions. These commentators express concern that the Rule contributes to deficiencies in the disclosure provided to investors caused, in great part, by short form registration statements.

The Commission believes that the integrated disclosure system has enhanced the level of disclosure to investors. The basis for the system was the upgrading of the continuous reporting requirements under the Securities Exchange Act of 1934 (the "Exchange Act"). ¹⁸ This upgrading was designed to ensure that complete and current information is available to all investors on a continuous basis, not only when a registrant makes a public offering of its securities, but for the trading markets as well. ¹⁹ This focus recognized that the secondary trading market volume dwarfs the volume of Securities Act offerings.

For Securities Act registration, the integrated disclosure system builds upon the existence of timely and accurate corporate reporting. Thus, registrants that are widely followed in the marketplace may use Forms S-3 and F-3, which allow maximum use of incorporation by reference of Exchange Act reports and generally do not require information contained in those reports to be reiterated in the prospectus and delivered to investors. Forms S-3 and F-3 recognize the applicability of the efficient market theory to those companies which provide a steady stream of high quality corporate information to the marketplace and whose corporate information is broadly disseminated. Information about these companies is constantly digested and synthesized by financial analysts, who act as essential conduits in the continuous flow of information to investors, and is broadly disseminated on a timely basis by the financial press and other participants in the marketplace. ²⁰ Accordingly, at the time S-3/F-3 registrants determine to make an offering of securities, a large amount of information already has been disseminated to and digested by the marketplace.

2. Due Diligence

Concerns expressed about the quality of disclosure also relate to underwriters ability to conduct due diligence investigations. ²¹ Commentators attribute concerns about due diligence largely to fast time schedules. Under the Rule, any underwriter may be selected to handle a particular offering. Some commentators suggest that no underwriter can afford to devote the time and expense necessary to conduct a due diligence review before knowing whether it will handle an offering and that there may not be sufficient time to do so once it is selected. These commentators also indicate that they may not have the opportunity to apply their independent scrutiny and judgment to documents prepared by registrants many months before an offering.

On the other hand, registrants using the Rule indicate that procedures for conducting due diligence investigations have developed and are developing to enable underwriters to adapt to the integrated disclosure system and the shelf registration environment. They note the use of continuous due diligence programs, which employ a number of procedures, including designated underwriters counsel. These registrants believe that underwriters ability to conduct adequate due diligence investigations in this environment has not been impaired and, in some cases, has been enhanced.

The Commission recognizes that procedures for conducting due diligence investigations of large, widely followed registrants have changed and are continuing to change. Registrants and the other parties involved in their public offerings--attorneys, accountants, and underwriters--are developing procedures which allow due diligence obligations under Section 11(b) to be met in the most effective and efficient manner possible. ²² The anticipatory and continuous due diligence programs being implemented combine a number of procedures designed both to protect investors by assuring timely and accurate disclosure of corporate information and to recognize the separate legal status of underwriters by providing them the opportunity to perform due diligence.

The trend toward appointment of a single law firm to act as underwriters counsel is a particularly significant development. ²³ Of course, this procedure is not new. Appointing a single law firm to act as underwriters counsel has been done traditionally by public utility holding companies and their subsidiaries subject to the competitive bid underwriting requirements of Rule 50 (17 CFR 250.50) under the Public Utility holding Company Act of 1935. ²⁴ This technique is now being followed more broadly in the shelf registration environment and represents what the Commission believes to be a sound practice because it provides for due diligence investigations to be performed continually throughout the effectiveness of the shelf registration statement. Designation of underwriters counsel facilitates continuous due diligence by ensuring on-going access to the registrant on the underwriters behalf. Recognizing the independent statutory basis on which underwriters perform due diligence, registrants cooperate with underwriters and designated counsel in making accommodations necessary for them to perform their due diligence investigation.

Other procedures registrants have developed complement the use of underwriters counsel by presenting various opportunities for continuous due diligence throughout the shelf process. A number of registrants indicate that they hold Exchange Act report "drafting sessions." This affords prospective underwriters and their counsel an opportunity to participate in the drafting and review of periodic disclosure documents before they are filed.

Another practice is to hold so-called periodic due diligence sessions. Some registrants hold sessions shortly after the release of quarterly earnings to provide prospective underwriters and their counsel an opportunity to discuss with management the most recent financial results and other events of that quarter. Periodic due diligence sessions also include annual meetings with management to review financial trends and business developments. In addition, some registrants indicate that prospective underwriters and underwriters counsel are able to schedule individual meetings with management at any time.

The Commission believes that the development of anticipatory and continuous due diligence techniques is consistent with the integrated disclosure system and will permit underwriters to perform due diligence in an orderly, efficient manner. Indeed, in adopting Rule 176 as part of that system, ²⁵ the Commission recognized that, just as different registration forms are appropriate for different companies, the method of due diligence investigation may not be the same for all registrants. Rule 176 sets forth a non-exclusive list of circumstances which the Commission believes bear upon the reasonableness of the investigation and the determination of what constitutes reasonable grounds for belief under Section 11(b) of the Securities Act. ²⁶ Circumstances which may be particularly relevant to an underwriters due diligence investigation of registrants qualified to use short form registration include the type of registrant, reasonable reliance on management, the type of underwriting arrangement and the underwriters role, and whether the underwriter participated in the preparation or review of documents incorporated by reference into the registration statement. The Commission expects that the techniques of conducting due diligence investigations of registrants qualified to use short form registration, where documents are incorporated by reference, would differ from due diligence investigations under other circumstances.

3. Other Concerns

Securities industry commentators also raise concerns relating to institutionalization of the securities markets, the impact on retail distribution, increased concentration in the securities industry and effects on the secondary markets. Specifically, these commentators believe that Rule 415 is accelerating the trends toward institutionalization of the securities markets and concentration in the securities industry. In their view, the Rule is decreasing the number of syndicated offerings in which regional securities firms participate and excluding individual investors from the new issues market.

While the Commission recognizes the existence of these trends, it believes that they reflect economic and other factors apart from shelf registration. These factors include volatile interest rates and markets, the growth of mutual and pension funds which act as intermediaries for individual investors, and the homogenization of the financial services industry. These factors are not necessarily affected by Rule 415. Rule 415 is a procedural rule which presents an optional filing technique. It does not mandate any particular method of distribution. Indeed, many offerings of debt and equity securities registered under the Rule have been sold in traditional syndicated offerings. The Commission therefore believes that these concerns transcend Rule 415.

V. Commission Action

The Commission has considered all views and suggestions with respect to Rule 415. There are several reasons why it may be appropriate to adopt the shelf registration rule in substantially its present form. During the eighteen months the Rule has been in effect, it has worked well and has provided registrants with substantial benefits in their financings. Also, most of the concerns raised transcend shelf registration. On the other hand, the Commission believes that concerns raised about the quality and timing of disclosure and due diligence are important to address because they relate to the adequacy of disclosure investors receive in connection with public offerings. Having weighed all considerations, the Commission is modifying Rule 415 to strike an appropriate balance by making it available for offerings eligible to be registered on Form S-3 or F-3 and for traditional shelf offerings.

The Commission believes that shelf registration should continue to be available for registrants eligible to use short form registration. The integrated disclosure system addresses concerns about the quality and timeliness of disclosure by ensuring that the marketplace is provided with a continuous stream of high quality corporate information about registrants widely followed in the marketplace. Similarly, evolving continuous due diligence practices as described above address concerns about due diligence by enhancing the ability of underwriters to conduct due diligence investigations of widely followed registrants.

The Commission also believes that Rule 415 should continue to be available for traditional primary and secondary shelf offerings. Examples of traditional primary shelf offerings include those where securities are sold to employees, customers or existing shareholders; those involving interests in limited partnerships; those related to acquisitions and other business combinations; and those of securities underlying options, warrants, rights or conversions. The Commission is not aware of any disclosure, due diligence or other concerns having been raised about the registration of these securities on a continuous or delayed basis. Moreover, these types of shelf offerings may only be feasible on a traditional shelf basis.

For registrants not eligible to use short form registration, however, the Commission believes that concerns about disclosure and due diligence outweigh the benefits of Rule 415. The Commission also notes that shelf registration may not be as advantageous for such registrants because they cannot rely on subsequently filed Exchange Act reports for certain updating of the information in the shelf registration statement. ²⁷ Such updating requires the filing of post-effective amendments. Indeed, few non-S-3 or F-3 registrants have used Rule 415 for other than traditional shelf offerings.

VI. Operation of Revised Rule 415

For the reasons stated above, the Commission has determined to limit the availability of Rule 415 to continuous and delayed offerings of securities which may be registered on Form S-3 or F-3 ²⁸ and traditional shelf offerings. Major revisions have been made to paragraph (a)(1)(i) of the Rule, which details those securities which may be registered for an offering to be made on a continuous or delayed basis in the future, to reflect this modification in the scope of the Rule. Corresponding revisions have been made elsewhere in the Rule.

A. Offerings Permitted Under Revised Rule

1. Traditional Shelf Offerings

A number of traditional shelf offerings were enumerated in former paragraphs (a)(1)(ii) through (vii). ²⁹ These provisions have been retained and redesignated as paragraphs (a)(1)(i) through (vi).

Other traditional shelf offerings came within former paragraph (a)(1)(i). Because the primary offerings which may be made under Rule 415 are now limited, paragraph (a)(1)(i) has been deleted. That paragraph provided that any securities not falling within one of the categories specifically enumerated in the balance of paragraph (a)(1) could be registered under the Rule, but were limited to an amount reasonably expected to be offered and sold within two years. Those traditional offerings covered by former paragraph (a)(1)(i) are now set forth in paragraphs (a)(1)(vii) through (ix).

Mortgage related securities, such as mortgage backed debt and mortgage participation or pass through certificates, are listed in paragraph (a)(1)(vii). Generally, the securities are registered and then offered from time to time as series of mortgage backed debt are established or pools of mortgages are formed. Shelf registration is essential to sales of these securities. Together with the formation of blind pools, shelf registration allows registrants to match capital demands with portfolio holdings. They can form pools of mortgages as sales of securities backed by those mortgages take place. It is not necessary for the mortgages to be purchased before the securities are priced and sold. With an effective shelf registration statement, pricing and sales can occur contemporaneously with mortgage acquisition. ³⁰

Paragraph (a)(1)(viii) relates to securities to be issued in connection with business combination transactions. All other traditional shelf offerings are covered by paragraph (a)(i)(ix), which permits offerings that (1) will be commenced promptly, (2) will be made on a continuous basis and (3) may continue for a period in excess of 30 days from the date of initial effectiveness.

Examples of the traditional shelf offerings which come within paragraph (a)(1)(ix) are: customer purchase plans; exchange, rights, subscription and rescission offers; offers to employees, consultants or independent agents; offerings on a best efforts basis; tax shelter and other limited partnership interests; commodity funds; condominium rental pools; time sharing agreements; real estate investment trusts; farmers cooperative organizations or others making distributions on a membership basis; and continuous debt sales by finance companies to their customers.

2. Short Form Registration Shelf Offerings

New paragraph (a)(1)(x) relates to primary delayed or continuous offerings of securities registered, or qualified to be registered, on Form S-3 or F-3. Unless an offering falls within one of the categories of offerings specified in paragraphs (a)(1)(i) through (a)(1)(ix), it must come within paragraph (a)(1)(x) or it cannot be registered pursuant to Rule 415. Thus, only traditional shelf offerings and primary shelf offerings that qualify for short form registration may be offered or sold under the Rule.

Examples of offerings which fall within paragraph (a)(1)(x) are: notes rated as investment grade to be offered from time to time at varying interest rates and maturities; debt or equity securities to be sold from time to time according to a plan of distribution that includes a number of options, such as sales directly to purchasers, through agents, through underwriters and through dealers; debt or equity securities to be sold from time to time pursuant to a plan of distribution that indicates they may be sold in one or more transactions, and lists such options as ordinary brokerage transactions, block transactions on an exchange, negotiated transactions, fixed price offerings, or any combination of methods described; and "dribble" programs, in which common stock is offered through an underwriter acting as exclusive sales agent into an existing trading market on a regular basis. Offerings such as these may no longer be made unless the securities are qualified to be registered on Form S-3 or F-3.

B. Shelf Registration Statements Filed for Procedural Convenience

The revised Rule specifically relates only to securities to be offered on a traditional shelf basis or S-3/F-3 securities to be offered on a continuous or delayed basis. It does not relate to any other offerings and, accordingly, nor do the procedures and techniques applicable under the Rule.

In adopting Rule 415, the Commission recognized that offers and sales of securities under the Rule may not be made immediately after the effective date of the registration statement. Thus, shelf registration statements must be declared effective without certain information such as price, interest rate, maturity and redemption provisions. ³¹ Post-effective amendments and prospectus supplements ³² serve to ensure that investors are provided with complete, accurate and current information at the time of the offering or sale of securities.

In allowing shelf registration statements to become effective without all required information, however, the Commission did not intend for registrants making offerings on other than a delayed or continuous basis to use the shelf registration rule as a basis for omitting required information from their registration statements when they become effective. Where securities are not to be offered and sold on a delayed or continuous basis, offers and sales generally take place promptly after the effective date and all required information should be included in the registration statement when it becomes effective.

In this regard, the Commission notes that, during the eighteen months that Rule 415 has been in effect, a number of registrants engaged in offerings made other than on a delayed or continuous basis have filed under the Rule for the procedural conveniences it affords prior to effectiveness. In particular, they have used the Rule to avoid the need to file pre-effective amendments reflecting the final terms and conditions of the offering.

As revised, Rule 415 is no longer available for this purpose. Accordingly, the Rule as revised reflects two changes which make clear that Rule 415 techniques are not available for offerings made on other than a delayed or continuous basis. First, the word "only" has been added to the introductory phrase of paragraph (a)(1) to clarify that the Rule pertains exclusively to the offerings enumerated in paragraphs (a)(1)(i) through (x). ³³ Second, paragraph (a)(1)(x) is limited to S-3 or F-3 securities to be offered and sold "on a continuous or delayed basis."

C. Other Provisions of Revised Rule

1. Two Year Amount Limitation

The two year amount limitation is now contained in a separate provision, new paragraph (a)(2), which specifies that it is applicable to offerings of securities covered by paragraphs (a)(1)(viii) through (x). These are the same offerings which were subject to the two year limit under the former Rule, except for mortgage related securities. The Commission believes that it is no longer necessary to subject these securities to the two year amount limitation.

2. Undertakings

Paragraph (a)(2), requiring the registrant to furnish the undertakings in Item 512(a) of Regulation S-K, has been redesignated as paragraph (a)(3). No other change has been made in this provision and the provisions of Item 512(a) remain unchanged as well.

3. At the Market Equity Offerings

Paragraph (a)(3), relating to primary at the market offerings of equity securities, has been redesignated as paragraph (a)(4). In addition, the requirement for Form S-3 eligibility has been revised to refer to paragraph (a)(1)(x), in light of the Form S-3 or F-3 limitation now contained in that paragraph.

D. Currently Effective Registration Statements for Offerings Not Permitted under Revised Rule

When Rule 415 was adopted on a temporary basis, the Commission contemplated that registrants with then-effective shelf registration statements would be subject immediately to the final action taken on the Rule. ³⁴ After December 31, 1983, registrants having effective registration statements pertaining to offerings no longer permitted under the Rule will not be able to offer or sell the securities as registered. ³⁵

Such registrants have several alternatives. First, securities registered on effective registration statements for types of offerings no longer permissible under the Rule may be removed from registration. Second, if registrants do not wish to deregister the securities, those securities may remain registered but no offerings may be made until the registration statement is post-effectively amended. ³⁶ The post-effective amendment is required to describe the material change to the plan of distribution because the offering may not be made on a shelf basis. ³⁷ Once the offering is commenced, it must be made on a non-Rule 415 basis and any securities then remaining unsold must be deregistered. ³⁸

VII. Public Utility Holding Companies

Utility companies have been frequent users of Rule 415. Some of these companies are subject to the Public Utility Holding Company Act of 1935 and, as such, are subject to certain additional requirements in connection with their financings. For example, paragraph (b) of Rule 50 requires that offerings of securities by registered holding companies and their subsidiaries be made in accordance with the formal competitive bidding procedures specified therein.

In September 1982, however, the Commission issued a statement of policy concerning the application of Rule 50 in the context of offerings of securities under Rule 415. ³⁹ Determining that the formal competitive bidding procedures specified in paragraph (b) of Rule 50 were inconsistent with those possible under the shelf registration rule, the Commission stated that registered holding companies and their subsidiaries could adopt alternative procedures to those described in paragraph (b) of Rule 50 to develop and procure two or more competitive offers for securities which have been authorized for sale by the Commission. The Commission continues to believe that this policy with respect to Rule 50 is appropriate and it remains in effect.

VIII. Foreign Governments

While Rule 415, by its terms, is not available to foreign governments, ⁴⁰ foreign governments have been permitted to use a shelf registration procedure since September 1980. ⁴¹ The Commission revised this staff interpretive position in September 1982 to be consistent with Rule 415 to the extent practicable. ⁴² Under the revised staff interpretation, seasoned foreign governments ⁴³ are permitted to use shelf registration in a manner substantially similar to that specified in Rule 415. The revised shelf procedure for seasoned foreign government issuers generally has operated well and has not been altered by the granting of any waivers. Accordingly, the Commission affirms the staff position for shelf registration by foreign governments as outlined in September 1982.

IX. Statutory Authority

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

List of Subjects in 17 CFR Part 230

Reporting and recordkeeping requirements.

Securities.

X. Text of Rule

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

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

1. By revising §230.415 (Rule 415) to read as follows:

§230.415 Delayed or continuous offering and sale of securities.

(a) Securities may be registered for an offering to be made on a continuous or delayed basis in the future, Provided, That--

(1) The registration statement pertains only to:

(i) Securities which are to be offered or sold solely by or on behalf of a person or persons other than the registrant, a subsidiary of the registrant or a person of which the registrant is a subsidiary;

(ii) Securities which are to be offered and sold pursuant to a dividend or interest reinvestment plan or an employee benefit plan of the registrant;

(iii) Securities which are to be issued upon the exercise of outstanding options, warrants or rights;

(iv) Securities which are to be issued upon conversion of other outstanding securities;

(v) Securities which are pledged as collateral;

(vi) Securities which are registered on Form F-6 (§239.36 of this chapter);

(vii) Mortgage related securities, including such securities as mortgage backed debt and mortgage participation or pass through certificates;

(viii) Securities which are to be issued in connection with business combination transactions;

(ix) Securities the offering of which will be commenced promptly, will be made on a continuous basis and may continue for a period in excess of 30 days from the date of initial effectiveness; or

(x) Securities registered (or qualified to be registered) on Form S-3 or Form F-3 (§239.13 or 239.33 of this chapter) which are to be offered and sold on a continuous or delayed basis by or on behalf of the registrant, a subsidiary of the registrant or a person of which the registrant is a subsidiary.

(2) Securities in paragraphs (a)(1)(viii) through (x) may only 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.

(3) The registrant furnishes the undertakings required by Item 512(a) of Regulation S-K (§229.512 of this chapter).

(4) In the case of a registration statement pertaining to an at the market offering of equity securities by or on behalf of the registrant:

(i) The offering comes within paragraph (a)(1)(x); (ii) where voting stock is registered, the amount of securities registered for such purposes must not exceed 10% of the aggregate market value of the registrants outstanding voting stock held by non-affiliates of the registrant (calculated as of a date within 60 days prior to the date of filing); (iii) the securities must be sold through an underwriter or underwriters, acting as principal(s) or as agent(s) for the registrant; and (iv) the underwriter or underwriters must be named in the prospectus which is part of the registration statement. As used in this paragraph, the term "at the market offering" means an offering of securities into an existing trading market for outstanding shares of the same class at other than a fixed price on or through the facilities of a national securities exchange or to or through a market maker otherwise than on an exchange.

(b) This section shall not apply to any registration statement pertaining to securities issued by a face-amount certificate company or redeemable securities issued by an open-end management company or unit investment trust under the Investment Company Act of 1940 or any registration statement filed by any foreign government or political subdivision thereof.

(Secs. 6, 7, 10, 19(a), 48 Stat. 78, 81, 85; secs. 205, 209, 46 Stat. 906, 908; sec. 8, 68 Stat. 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 (Chairman Shad and Commissioners Evans, Longstreth and Treadway); Commissioner Thomas concurring in part and dissenting in part. ⁴⁴

George A. Fitzsimmons

Secretary

____________________

Special Concurring Opinion of Chairman Shad

The revised shelf rule offers significant advantages to issuers and their shareholders, and mitigates the risk to investors by limiting such offerings to S-3 and F-3 corporations, the largest, most creditworthy and widely followed corporations.

However, concepts suggested under which underwriters might conduct due diligence investigations under the shelf rule are of limited practical value. Issuers can solicit competitive bids from underwriters and effect distributions of securities on the same day. In preparation for shelf offerings, it has been suggested that prospective issuers invite groups of underwriters and their counsel to attend several meetings a year. These would include meetings following release by the companies of their quarterly and annual reports, and when they are preparing their prospectuses, proxies, annual, quarterly and other SEC filing documents.

It would be very expensive for top management executives, underwriters and their counsels to spend hundreds of thousands of hours annually attending such meetings on the speculative possibility that the individual issuer will decide to do a public offering, and that one of the underwriters attending such meetings will be the high bidder for the issue. It therefore seems likely that over time, few top management executives will attend such meetings and that investment bankers will begin sending junior observers, rather than qualified participants.

It has also been suggested that the underwriters rely on due diligence reviews by attorneys hired by the issuer. It is of course the underwriter that is liable for failure to conduct an adequate due diligence investigation, and it is the underwriters capital and reputation that are at risk if the offering is unsuccessful or performs worse than the general market following the offering.

While due diligence reviews by issuer hired attorneys are useful in defending actions brought by investor-plaintiffs, this is not the principal purpose of such reviews. The principal purpose is to protect investors.

Assessment of the risk of adverse market performance following an offering requires a careful due diligence investigation and the judgment of an experienced underwriter. However, the accelerated time schedules of such offerings limit the opportunity for such assessments.

Issuer hired attorneys have been used in certain utility offerings. While the approach suffers the foregoing infirmities, utilities are the most predictable of corporate enterprises. They are not subject to the vagaries to which industrial and other issuers are subject.

The bulk of shelf offerings to date have occurred during the broadest and strongest stock, bond and new issue markets in history. Investors do not seek rescission or other redress, unless the security declines in price. The test of the shelf rule will come during the next bear market.

The revised shelf rule offers significant advantages to issuers and their shareholders, and mitigates the risks to investors, but the due diligence techniques suggested are of limited practical value. Other due diligence techniques should therefore be reviewed in the light of the shelf rule, as adopted, and the rapidly changing marketplace.

Commissioner Thomas, Concurring in Part and Dissenting in Part

I respectfully dissent from that portion of the Commissions decision today to adopt Rule 415 for offerings qualified to be registered on Forms S-3 and F-3 insofar as it relates to equity securities only. Although I am gratified at the compromise adopted by the Commission and sincerely believe that such a compromise was only reached because of the strong opposition to the Rule voiced by many during the experimental period, I must continue to express my reservations about the Rule on the basis of principle.

I am convinced that the Rule as applied to equities 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 Commission risks injuring our capital market system, which is widely regarded as one of our great national assets. As I stated before, I continue to favor, however, adoption of the praiseworthy portion of the Rule that permits major companies rapid access to the markets for the sale of their debt securities.

After studying the comment letters and conferring with issuers, representatives of the securities industry, and institutional and individual investors, I continue to believe that the Rule as applied to equity offerings (1) reduces the quality and timeliness of disclosure available to investors when making their investment decisions, and (2) jeopardizes the liquidity and stability of both our primary and secondary securities markets by encouraging greater concentration of underwriters, marketmakers, and other financial intermediaries and by discouraging individual investor participation in the capital markets, thereby furthering the trend toward institutionalization of securities holders.

Although I do not believe that it is possible at this time to quantify the various elements of these risks due to the exceptionally strong market we have been experiencing during most of the experimental period and the inactive market experienced at the beginning of the experimental period, I am convinced that many of these risks are real. Incurring these risks is antithetical to the statutory duty of the Commission to protect investors and to maintain the integrity of our capital markets.

¹ 17 CFR 230.415 under the Securities Act of 1933 ("Securities Act") (15 U.S.C. 77a et seq.).

² Forms S-3 17 CFR 239.13 and F-3 17 CFR 239.33 provide short form registration for a variety of transactions, including primary offerings of investment grade debt and non-convertible preferred securities and primary offerings where the registrant meets certain float requirements designed to ensure widespread market following.

³ The Commission has adopted an integrated disclosure system for domestic registrants and for foreign private issuers. See Release Nos. 33-6383 (March 3, 1982) 47 FR 11380 and 33-6437 (November 19, 1982) 47 FR 54764.

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

⁵See Release Nos. 33-6276 (December 23, 1980) 46 FR 78 and 33-6334 (August 6, 1981) 46 FR 42001.

⁶ Release No. 33-6383 (March 3, 1982).

⁷ The public hearings were announced in Release No. 33-6391 (March 12, 1982) 47 FR 11701.

⁸ Release No. 33-6423 (September 2, 1982) 47 FR 39799.

⁹ Release No. 33-6470 (June 9, 1983) 48 FR 27768.

¹⁰ The written submissions, transcripts and highlights prepared by the staff are available for public inspection and copying at the Commissions Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549 (see File Nos. S7-869, 896, 925 and 979).

¹¹ In particular, in response to the June 1983 comment solicitation, registrants and investment bankers provided data on their actual experience under the Rule. This and other experience with the Rule, including empirical data and studies (see note 15 infra), are included in the most recent public file of this proceeding and are available for inspection and copying at the Commissions Public Reference Room (see File No. S7-979).

¹² These do not include 45 shelf registration statements (registering almost $19 billion of debt securities) filed by 27 foreign government and political subdivisions thereof from September 1980 through October 1983. While Rule 415, by its terms, is not available to foreign government issuers (see 17 CFR 230.415(b)), such issuers have been permitted to use a shelf registration procedure since September 1980 (see discussion in Part VIII infra).

¹³ Traditional shelf offerings include those offerings enumerated in former paragraphs (a)(1)(ii) through (a)(1)(vii) of the Rule. These include: (1) secondary offerings; (2) securities offered pursuant to employee plans and dividend reinvestment plans; (3) securities which are to be issued upon the exercise of outstanding options, warrants or rights; (4) securities which are to be issued upon conversion of other outstanding securities; (5) securities which are to be pledged as collateral; and (6) securities which are registered on Form F-6 17 CFR 239.36. Traditional shelf offerings also include some offerings falling within former paragraph (a)(1)(i) of the Rule: commodity fund offerings, mortgage related securities, limited partnership interests, securities registered in connection with a planned series of acquisitions and offerings made on a best efforts basis. As discussed in greater detail in Part VI infra, the Commission, in modifying the Rule, has enumerated the permissible traditional shelf offerings.

¹⁴See discussion in Part VI.B infra.

¹⁵See Kidwell, Marr, and Thompson, "SEC Rule 415--the Ultimate Competitive Bid," University of Tennessee and Virginia Polytechnic Institute and State University Working Paper, 1983 (indicating that debt issues sold under Rule 415 sell between 30 and 40 basis points less than comparable negotiated issues); Rogowski and Sorensen, "Shelf Registration and the Cost of Capital: A Test of Market Efficiency," Washington State University and University of Arizona Working Paper, 1983 (evidence of improved efficiency in the securities markets resulting from the flexibility associated with Rule 415); and Bhagat, Marr, and Thompson, "The Rule Experiment: Equity Markets," University of Utah and Virginia Polytechnic Institute and State University Working Paper, 1983 (indicating that the issuing cost of equity securities sold under Rule 415 is about 29 percent less than that of comparable equity securities not sold under Rule 415).

¹⁶Id.

¹⁷Id.

¹⁸ 15 U.S.C. 78a et seq.

¹⁹See Release No. 33-6231 (September 2, 1980) 45 FR 63630, amending Form 10-K 17 CFR 249.310 and Rule 14a-3 17 CFR 240.14a-3; Release No. 33-6233 (September 2, 1980) 45 FR 63660, amending Articles 3, 5, and 12 of Regulation S-X 17 CFR Part 210; Release No. 33-6234 (September 2, 1980) 45 FR 63682, adopting uniform financial statement requirements; and Release No. 33-6288 (February 9, 1981) 46 FR 12480, amending Form 10-Q 17 CFR 249.308a.

²⁰ In recognition of the important role of research reports in the integrated disclosure system, the Commission recently proposed revisions to Rule 139 17 CFR 230.139, which provides guidance as to the publication of broker-dealer research reports relating to companies in registration. Release No. 33-6492 (October 5, 1983) 48 FR 46801. The proposals would increase the research reports that may be issued by reducing substantially the restrictions on research reports concerning registrants eligible to use Form S-3 or F-3.

²¹ Section 11 of the Securities Act imposes liability for material misstatements or omissions contained in a registration statement when it goes effective. Section 11(b) 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). This investigation is known as "due diligence."

²²See Olson, "Spotlight Shines Anew on Statutory Diligence Tasks," Legal Times (April 4, 1983), p. 14; Hovdesven and Wolfram, "Underwriter Liability in the Integrated Disclosure System," The National Law Journal (July 5, 1982), p. 13; Landau, "Some Aspects of the Implementation of Shelf Registration Procedures," in The New Exemptions from SEC Registration, Law & Business, Inc./ Harcourt Brace Jovanovich, p. 321; AICPA Exposure Draft, "Amendments to SAS No. 38: Letters for Underwriters" (November 4, 1983), which reflects the accounting professions adaptation to evolving procedures, including the use of designated underwriters counsel; and comment letters in File No. S7-979 in response to June 1983 comment solicitation.

²³ Registrants appoint the law firm to act as underwriters counsel, either with or without consulting with the prospective participating underwriters.

²⁴ 15 U.S.C. 79-79z-6.

²⁵ 17 CFR 230.176. Release No. 33-6383 (March 3, 1982).

²⁶ Rule 176 lists the following factors: (1) the type of issuer; (2) the type of security; (3) the type of person; (4) the office held when the person is an officer; (5) the presence or absence of another relationship to the issuer when the person is a director or proposed director; (6) reasonable reliance on officers, employees, and others whose duties should have given them knowledge of the particular facts (in light of the functions and responsibilities of the particular person with respect to the issuer and the filing); (7) when the person is an underwriter, the type of underwriting arrangement, the role of the particular person as underwriter and the availability of information with respect to the registration; and (8) whether, with respect to a fact or document incorporated by reference, the particular person had any responsibility for the fact or document at the time of the filing from which it was incorporated.

²⁷ Item 512(a) of Regulation S-K 17 CFR 229.512(a) requires that registrants, in offerings under Rule 415, furnish undertakings to file post-effective amendments: (1) to include updated financial statements as required by Section 10(a)(3) of the Securities Act; (2) to reflect a fundamental change in the information set forth in the registration statement; and (3) to include any new or changed material information with respect to the plan of distribution. Because Forms S-3 and S-8 17 CFR 239.16b automatically incorporate by reference all subsequently filed reports pursuant to Sections 13, 14 and 15(d) of the Exchange Act, registrants filing shelf registration statements on these forms may rely on their subsequently filed Exchange Act reports in lieu of post-effective amendments for the first two purposes if the Exchange Act reports contain the required information. Other registrants, however, are required to file post-effective amendments in all instances specified in Item 512(a), as well as for purposes of filing required exhibits, such as underwriting agreements, opinions of counsel and supplemental indentures.

²⁸ These forms may be used if their float tests are met or the securities to be registered are of investment grade. Form S-3 requires that the aggregate market value of stock held by non-affiliates must be either (1) $150 million or more or (2) $100 million or more and the registrant must have had an annual trading volume of such stock of 3 million shares or more. Form F-3 requires that the aggregate market value worldwide of voting stock held by non-affiliates is the equivalent of $300 million or more. Both forms define non-convertible debt or preferred securities as investment grade if, at the time of effectiveness of the registration statement, at least one nationally recognized statistical rating organization (as that term is used in Rule 15c3-1(c)(2)(vi)(F) under the Exchange Act 17 CFR 240.15c3-1(c)(2)(vi)(F)) has rated the security in one of its generic categories that signifies investment grade. The instructions in both forms note that the four highest rating categories (within which there may be subcategories or gradations indicating relative standing) typically signify investment grade.

²⁹ These offerings are: secondary offerings; securities offered pursuant to dividend or interest reinvestment or employee benefit plans; securities underlying options, warrants or rights or issuable upon conversions; securities pledged as collateral; and depositary shares evidenced by American Depositary Receipts registered on Form F-6.

³⁰ Mortgage related securities are the subject of pending legislation. S. 2040 (replaces S. 1821), S. Rep. No. 98-293 (1983). Section 104 of S. 2040 would provide for shelf registration of such securities.

³¹ Release No. 6383 (March 3, 1982).

³²See Rule 424 17 CFR 230.424.

³³ This change does not preclude using a single registration statement to register both securities to be offered and sold on a shelf basis and securities to be offered and sold otherwise than on a shelf basis. Of course, the Rule 415 provisions and techniques apply only to those securities registered for offer and sale on a shelf basis.

³⁴ Release No. 6383 (March 3, 1982) 47 FR 11380, p. 11395, note 77. See Rule 401(f) 17 CFR 230.401(f).

³⁵ In a related vein, if registrants with effective S-3 or F-3 shelf registration statements are ineligible to use those Forms at such time as updating for purposes of Section 10(a)(3) of the Securities Act is required, they may not thereafter make shelf offerings. See Item 512(a)(1)(i) of Regulation S-K and Rule 401. In such cases, they have the same alternatives as described herein.

³⁶See Item 512(a)(1)(iii) of Regulation S-K, pursuant to which the registrant will have undertaken to file a post-effective amendment "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."

³⁷ Where a registrant chooses not to deregister and then wishes to make a non-shelf offering of an amount of securities exceeding the remaining registered securities, it may file a new registration statement with respect to the additional securities and use the new registration statement to take the place of the post-effective amendment changing the plan of distribution in the earlier shelf registration statement from a Rule 415 to a non-Rule 415 basis. See Rule 429 17 CFR 230.429.

³⁸See Item 512(a)(3) of Regulation S-K, pursuant to which the registrant will have undertaken "to remove from the registration by means of a post-effective amendment any of the securities... which remain unsold at the termination of the offering."

³⁹ Release No. 35-22623 (September 2, 1982) 47 FR 39810.

⁴⁰ Rule 405 defines foreign government as "the government of any foreign country or of any political subdivision of a foreign country."

⁴¹See Release No. 33-6240 (September 10, 1980) 45 FR 61609.

⁴² Release No. 33-6424 (September 2, 1982) 47 FR 39809.

⁴³ Foreign governments that have registered their securities (or guarantees of securities of another issuer) under the Securities Act within five years and have not defaulted on any principal or interest are considered to be seasoned.

⁴⁴ Special Concurring Opinion of Chairman Shad and Opinion of Commissioner Thomas follow.