Release No. 33-8591

Release No. 34-52056

Release No. IC-26993

Financial Reporting Rel. No. 75

International Series Rel. No. 1294

70 Fed. Reg. _____ - ____

Table of Contents

Securities Offering Reform

D. Communications Rules (continued)

4. Use of Research Reports

a. Current Regulatory Treatment of Research Reports

The veracity and reliability of research reports, particularly those issued by full service broker-dealers, have received significant attention in recent years. The Sarbanes-Oxley Act,³⁴⁷ Regulation AC,³⁴⁸ the self-regulatory organization rules we approved,³⁴⁹and the global research analyst settlement³⁵⁰ have addressed many of the abuses identified with analyst research and have required structural reforms and increased disclosures.³⁵¹ As a direct result of these initiatives and actions, we expect that analyst research reports used by market participants will better disclose conflicts of interest relating to research of which investors should be aware.

The value of research reports in continuing to provide the market and investors with information about reporting issuers cannot be disputed. Research analysts study publicly traded issuers and provide information about the securities of those issuers, often through the issuance of research reports.

We believe it is appropriate to limit the restrictions on research under the gun-jumping provisions of the Securities Act to those we believe are appropriate to avoid offering abuses. Given the ongoing flow of information into the market, particularly with respect to reporting issuers and the enhancements to the environment for research imposed by recent statutory, regulatory, and enforcement developments, we believe it is appropriate to make measured revisions to the research rules that are consistent with investor protection but that will permit dissemination of research around the time of an offering under a broader range of circumstances.

b. Amendments to Exemptions for Research

Rules 137, 138, and 139 under the Securities Act describe circumstances in which a broker or dealer may publish research constituting an offer around the time of a registered offering without violating the Section 5 prohibitions on pre-filing offers and impermissible prospectuses. We are adopting measured amendments that will make incremental modifications to these rules.³⁵² As adopted, the rules will, for the first time, contain a definition of research report. The rules also expand the circumstances in which offering participants and persons who are not offering participants will have safe harbor exemptions for dissemination of research reports during a registered offering.³⁵³

The amendments we are adopting today are designed to ensure that appropriate investor protections are maintained. In that regard, we have maintained our current approach with respect to liability for research, which includes general anti-fraud liability, used in reliance on these rules.³⁵⁴

i. Definition of Research Report

Based on comments, we believe it is important to have a significant measure of consistency between Regulation AC and the research safe harbors contained in Rules 137, 138, and 139. We do not believe, however, that absolute consistency is appropriate in recognition of the differences in the purposes of the rules. Accordingly, we are adopting a definition of research report that builds on the definition of “research report” in Regulation AC, while preserving the purposes of Rules 137, 138, and 139.

(A) Definition

As adopted, “research report” is defined as a written communication, as defined in Securities Act Rule 405, that includes information, opinions, or recommendations with respect to securities of an issuer or an analysis of a security or an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision.³⁵⁵This definition is intended to encompass all types of research reports, whether issuer-specific or industry research separately identifying the issuer.

Unlike the proposals, the definition does not require that the research report contain sufficient information on which to base an investment decision. As with the current research rules, the definition is limited to research, including information, opinions, or recommendations, contained in written communications.³⁵⁶

Under the definition of “research report” we are adopting today, there could be some differences in the types of communications that will constitute a research reports under the research safe harbors as compared to Regulation AC. In light of the different purposes of the rules, we believe the distinctions are appropriate and will not raise investor protection concerns. For example, for purposes of Rule 139, it is possible that particular documents, such as industry reports, will be research reports under our new definition, even if they fall outside of the definition of “research report” under Regulation AC.

The definition of research report we are adopting today retains the condition that the research be in a written communication. A publication element has been a condition of the research safe harbors since the rules were first contemplated and adopted. From the earliest Commission statements in the 1960’s, the Commission did not want to discourage the ongoing publication of research reports by market professionals, provided they were provided within the scope of the restrictions of Securities Act Section 5.³⁵⁷

The research safe harbors have always been aimed at written reports due to the Section 5 restrictions on written offers.

The research safe harbors are not intended to protect oral communications that might be offers from the liability provisions of Securities Act Section 12(a)(2).³⁵⁸Similarly, in our new definition, we are not expanding the scope of the research safe harbors to cover oral communications because we believe that the appropriate liability provisions should continue to apply to such oral communications. Whether oral communications relate to general research or are in connection with an offering may also involve distinctions that are too fine to be appropriate for the research exemptions. Whether a particular oral communication about an issuer or its securities by an offering participant is an offer will thus continue to depend on the facts and circumstances.

(B) Comments on Definition of Research Report

While commenters supported the proposed amendments to the research safe harbors,³⁵⁹ they were concerned that the proposed definition of research report would narrow the types of research that would be eligible for the safe harbors.³⁶⁰ In particular, commenters requested that the research report definition not be the same as in Regulation AC requiring that the research report contain information sufficient upon which to make an investment decision.³⁶¹ Rather, the commenters requested that, as today, the research safe harbors be available for information, opinions, and recommendations about an issuer or its securities.³⁶² Some commenters also requested that the definition of research permit the use of oral, rather than just written, research in reliance on the safe harbors.³⁶³

As we discuss above, we have revised the proposed definition of research report for purposes of Rules 137, 138, and 139 to make clear that it continues to apply to information, opinions, or recommendations contained in written communications. We agree with commenters that for purposes of Rules 137, 138, and 139 a research report does not have to contain information sufficient to make an investment decision for the research safe harbors to be available and have revised the definition accordingly. We have not, however, expanded the scope of the research safe harbors to encompass oral communications.

ii. Rule 137

Rule 137 provides that a broker or dealer that is not an offering participant in a registered offering but publishes or distributes research reports with respect to an issuer’s securities will not be considered to be engaged in a distribution of the issuer’s securities and would therefore not be an underwriter in the offering. We are expanding the exemption, as proposed, to apply to securities of any issuer, including non-reporting issuers, with exceptions for blank check companies, shell companies, and penny stock issuers. Rule 137 will continue to be available only to brokers and dealers who:

• are not participating in the registered offering of the issuer’s securities;

• have not received compensation from the issuer, its affiliates, or participants in the securities distribution, among others, in connection with the research report; and

• publish or distribute the research report in the regular course of business.

Commenters supported the proposed changes to Rule 137 but requested that the rule make clear that the prohibition on consideration from the issuer would apply only to consideration paid in connection with the publication or distribution of the research report.³⁶⁴ Other commenters suggested that the safe harbor be expanded to permit dealers to rely on the safe harbor for the publication and distribution of research reports after the effectiveness of the registration statement.³⁶⁵

We are adopting as proposed, and as is in current Rule 137, the provision prohibiting compensation in connection with the publication or distribution of the research report. In response to commenters’ concerns regarding compensation, however, we have clarified the compensation language in Rule 137 to provide that the prohibition on compensation applies to compensation for the particular research report. While the safe harbor covers research reports provided after effectiveness of the registration statement, it continues to be an exemption from the definition of underwriter.

iii. Rule 138

Rule 138 permits a broker or dealer participating in a distribution of an issuer's common stock and similar securities to publish or distribute research that is confined to that issuer’s fixed income securities, and vice versa, if it publishes or distributes that research in the regular course of its business. We believe it is appropriate to permit research on a broader group of reporting issuers under Rule 138 in view of the regulatory reforms and the role of independent research. Further, we believe the current limitation on the type of issuers under this Rule is no longer necessary to protect investors.

(A) Amendments to Rule 138

We are amending Rule 138 substantially as proposed to expand the categories of eligible issuers. As adopted, the Rule generally will cover research reports on all reporting issuers that are current in their periodic Exchange Act reports on Forms 10-K, 10-KSB, 10-Q, 10-QSB, and 20-F at the time of reliance on the exemptions, rather than only issuers who are Form S-3 or Form F-3 eligible, as is currently the case. In addition, in response to commenters’ suggestions, we are expanding the Rule as it applies to foreign private issuers to allow broker-dealers publishing or distributing research reports on non-reporting foreign private issuers that either have had equity securities traded on a designated offshore market or have a $700 million worldwide public float to rely on the Rule.³⁶⁶ Like the amendments regarding Rules 137 and 139 that we are adopting today, the Rule excludes research reports on issuers that have historically posed certain risks of abuse, including blank check companies, shell companies, and penny stock issuers.

We also are adopting as proposed the condition to the Rule 138 exemption that the broker or dealer must have previously published or distributed research reports on the types of securities that are the subject of the reports in the regular course of its business.³⁶⁷ As we stated in the Proposing Release, we believe that it is appropriate to include this condition because it is important that the broker or dealer have a history of publishing or distributing a particular type of research. This condition does not mean, however, that the broker or dealer must have a history of publishing research reports about the particular issuer or its securities. If a broker or dealer begins publishing research about a different type of security around the time of a public offering of an issuer’s security and does not have a history of publishing research on those types of securities, we are concerned that such publication or distribution might be a way to provide information about the publicly offered securities in order to circumvent the provisions of Section 5 and the permissible free writing rules we are adopting today.

(B) Comments on Rule 138 Amendments

Commenters generally supported the expansion of the safe harbor to a broader class of issuers.³⁶⁸ Some commenters suggested that the safe harbor also be available to research reports on voluntary filers and Schedule B issuers and that it apply to all private offerings.³⁶⁹ A number of commenters requested a further change to the existing provisions of Rule 138 to eliminate the foreign private issuer eligibility condition regarding trading on a designated offshore securities market.³⁷⁰ Finally, some commenters requested clarification of the condition that the broker or dealer be publishing reports on the same types of securities to be able to rely on the safe harbor, while others recommended eliminating this condition.³⁷¹

We have adopted the amendments to Rule 138 substantially as proposed. We do not believe it is appropriate at this time to further expand the categories of eligible issuers under the Rule, other than for certain non-reporting foreign private issuers that have a significant worldwide public float. We have clarified that the broker dealer does not have to be publishing or distributing research reports about a particular issuer or its securities to rely on the Rule, only that the research reports cover the same types of securities. We have not expanded the scope of the research safe harbor to cover all private offerings.

iv. Rule 139

Rule 139 permits a broker or dealer participating in a distribution of securities by a seasoned issuer or by certain non-reporting foreign private issuers to publish research concerning the issuer or any class of its securities, if that research is in a publication distributed with reasonable regularity in the normal course of its business. Rule 139 also provides a safe harbor for industry reports covering smaller seasoned issuers, if the broker or dealer complies with restrictions on the nature of the publication and the opinion or recommendation expressed in that publication.

(A) Issuer-Specific Reports

(1) Amendments Regarding Issuer-Specific Reports

We are adopting the amendments to Rule 139 to allow reports about a specific issuer that, at the time of reliance on the Rule, is current in its Exchange Act periodic reports and:

• at the later of the time of filing its most recent registration statement on Form S-3 or Form F-3 or the time of filing of its most recent amendment to such registration statement for purposes of complying with Securities Act Section 10(a)(3), is eligible to register a primary offering of securities on Forms S-3 or F-3, based on the $75 million minimum public float eligibility provision of those forms; or

• at the time of reliance on the Rule, the issuer’s registration statement covers an offering of the issuer’s securities in reliance on General Instruction I.B.2 of Form S-3 or Form F-3.

As with Rule 138, we are allowing reports on a broader category of non-reporting foreign private issuers also to be covered by the Rule.³⁷² Research reports on penny stock issuers, blank check companies, and shell companies are excluded from Rule 139.

In the amendments we are adopting today, we are retaining the requirement that the broker or dealer publish or distribute the research report in the regular course of its business. We are not retaining the requirement of publication with reasonable regularity.

As we stated in the Proposing Release, we do not believe that the reasonable regularity requirement has added any particular degree of investor protection and has raised concerns as to when the condition is satisfied. We are, however, requiring that the broker or dealer must, at the time of reliance on the Rule, have distributed or published at least one research report about the issuer or its securities, or have distributed or published at least one such report following discontinuing coverage. This requirement, we believe, retains the most important element of the “reasonable regularity” requirement, namely that the report initiating (or re-initiating) coverage of an issuer not benefit from an exemption under Rule 139.

As we note previously, we are not requiring any minimum time period for the broker or dealer to have distributed or published research reports, only that the particular broker or dealer have initiated or re-initiated coverage. In addition, the amendment as adopted does not require that the previously published or distributed research report cover the same securities that are the subject of the registered offering.

(2) Comments on Issuer-Specific Reports

Commenters supported extending the safe harbor to a broader class of issuers and recommended further extension to all reporting issuers, investment companies, and business development companies.³⁷³ We have not extended the safe harbor to a broader class of issuers than we proposed, other than for certain non-reporting foreign private issuers with a significant public float. Commenters also requested clarification that the proposed changes would only require the publication or distribution of one prior research report in order to be able to rely on the safe harbor.³⁷⁴ As noted above, we have clarified the Rule in this regard to require only that coverage be initiated or re-initiated.

(B) Industry-Related Reports

(1) Amendments Regarding Industry-Related Reports

As adopted, industry reports under Rule 139 can cover issuers required to file reports pursuant to Exchange Act Section 13 or Section 15(d) and issuers satisfying the conditions regarding non-reporting foreign private issuers. The safe harbor for industry reports is not available if the issuer is or during the last three years was or any of its predecessors was a blank check company, shell company (other than business combination related shell company), or penny stock issuer. As adopted, the amendments extend the safe harbor for industry reports to registered offerings of any reporting issuer.

Today’s amendments remove the prohibition on a broker or dealer making a more favorable recommendation than the one it made in the last publication. As in the proposals, we are not requiring that the research report include any prior recommendations regarding the issuer or its securities. We are adopting as proposed the requirement that the research reports contain similar types of information about the issuer or its securities as contained in prior reports.

We believe that the recently adopted safeguards regarding analyst recommendations make it appropriate to remove the “no more favorable” recommendation conditions in current Rule 139. We believe the Rules, as amended, are consistent with our recent actions affecting research analysts and research reports and will result in enhanced opportunity to provide information to investors regarding issuers and their securities.

In the instruction regarding projections, we are requiring that projections be provided for substantially all the issuers listed in the comprehensive list of securities contained in the report.

(2) Comments on Industry-Related Reports

Commenters supported the safe harbor for industry-related reports for all reporting issuers and suggested expanding the safe harbor further to include all issuers, whether or not reporting, including voluntary filers.³⁷⁵ Commenters also supported the elimination of the previous publication condition in the safe harbor.³⁷⁶ Some commenters thought that the disqualification for research reports on blank check, shell companies, and penny stock issuers should remain at two years, not three, and that Rules 137 and 138 should have only a two-year disqualification.³⁷⁷

We have not expanded the coverage of the safe harbor to all issuers or to include voluntary filers. In addition, we have provided that the disqualification for blank check companies, shell companies (other than business combination related shell companies), and penny stock issuers is for three, rather than two, years to be consistent with all of the Rules we are adopting today that have similar disqualification provisions.

v. Rule 139a

In the Asset-Backed Securities Adopting Release, we noted that we were considering amendments to Rules 137, 138 and 139 in connection with these reform proposals and:

To the extent these existing safe harbors are modified, we also will consider similar modifications to the ABS safe harbor. We also encourage ABS market participants to comment specifically on the proposals in that release regarding any appropriate changes to the existing safe harbors or the ABS safe harbor.³⁷⁸

In light of the modifications we are making to Rule 139 today to eliminate the requirement that in an industry report a recommendation regarding the registrant or its securities can only be included if a recommendation as favorable or more favorable had appeared in the last publication of the broker-dealer, we are eliminating paragraph (c) of Rule 139a, which contains a comparable provision for recommendations in reports on asset-backed securities.

Commenters suggested the elimination of paragraph (c) and also suggested that the “reasonable regularity” requirement in Rule 139a be eliminated. While we have eliminated the latter requirement in Rule 139, we have added a requirement that the research report not represent the initiation or reinitiation of research coverage. In Rule 139a the “reasonable regularity” requirement extends to reports on multiple issuers and transactions. We have therefore decided to retain the “reasonable regularity” requirement in Rule 139a.

vi. Research Report Amendments in Connection with Regulation S and Rule 144A Offerings

We are concerned that the restrictions in Regulation S on directed selling efforts and offshore transactions³⁷⁹ and in Rule 144A on offers to non-qualified institutional buyers (“QIBs”) and general solicitation³⁸⁰ have resulted in brokers and dealers unnecessarily withholding regularly published research.³⁸¹ Accordingly, we are adopting as proposed amendments providing that research reports meeting the conditions of Rule 138 and Rule 139 will not be considered offers or general solicitation or general advertising in connection with offerings relying on Rule 144A.³⁸² The amendments also provide that these research reports will not constitute directed selling efforts or be inconsistent with the offshore transaction requirements of Regulation S.³⁸³

We do not believe that the publication of research in reliance on Rules 138 and 139 will jeopardize the interests of investors in transactions relying on Rule 144A or Regulation S. On the other hand, limiting the ability to rely on these exemptions when research on the issuers may otherwise be available could, we believe, negatively impact information available to investors. Commenters supported the proposals to exempt research reports meeting the conditions of the safe harbor from the restrictions in Regulation S and Rule 144A.³⁸⁴

vii. Research and Proxy Solicitations

We are adopting with one modification from the proposal a codification of a Commission staff position³⁸⁵ that the publication or distribution of research under the conditions set forth in Rules 138 and 139 is permitted in connection with a transaction that is subject to the proxy rules under the Exchange Act.³⁸⁶ The new Rule provides that distribution of research in accordance with Rule 138 or Rule 139 is a solicitation to which Rules 14a-3 through 14a-15 (other than Rule 14a-9) of the proxy rules³⁸⁷ does not apply. Commenters supported the proposal to codify the staff position and one requested that the exemption not be restricted to use only in connection with transactions registered under the Securities Act.³⁸⁸ We are adopting Rule 14a-2(b)(5) without the requirement that the exemption be limited to transactions registered under the Securities Act.

³⁴⁷ See Section 501 of the Sarbanes-Oxley Act [15 U.S.C. 78o-6(a)(2)].

³⁴⁸ Regulation AC requires, among other things, that brokers, dealers and certain persons associated with a broker or dealer include in research reports certifications by the research analyst that the views expressed in the report accurately reflect his or her personal views, and disclose whether or not the analyst received compensation or other payments in connection with his or her specific recommendation or views. See Regulation AC, note 327.

³⁴⁹ See Order Approving Proposed Rule Changes Relating to Research Analyst Conflicts of Interest, Release No. 34-45908 (May 10, 2002) [67 FR 34968]; Order Approving Proposed Rule Changes Relating to Research Analyst Conflicts of Interest, Release No. 34-48252 (Aug. 4, 2003)[68 FR 34968].

³⁵⁰ See Lit. Rel. No. 18438 (Oct. 31, 2003); Press Release 2004-120 (Aug. 26, 2004).

³⁵¹ The settlement, which involved twelve brokerage firms and two individuals, requires the settling firms to, among other things, adopt changes designed to ensure that there is a structural separation between the firm’s analysts and investment bankers. The firms are required to include enhanced disclosures, including disclosure of potential conflicts of interests in research reports and public disclosure of their analysts’ quarterly performance. The firms also are required to pay for independent research for a five-year period and to make this research available to the firm’s customers.

The National Association of Securities Dealers and the New York Stock Exchange adopted rules, among other things, requiring separating analyst compensation from investment banking influence, prohibiting analysts from issuing research reports around the expiration of a lock-up agreement (sometimes called “booster shot” research reports), imposing quiet periods around the issuance of research reports for offering participants, prohibiting analysts from participating in “pitches” or other communications for the purpose of soliciting investment banking business, restricting prepublication review of research reports by non-research personnel, prohibiting retaliation by investment banking against analysts whose reports or public appearances may adversely affect an investment banking relationship, requiring disclosure of any compensation received from an issuer as well as client relationship with an issuer, and imposing additional registration, qualification, and continuing education requirements on research analysts.

³⁵² The safe harbor provisions of Securities Act Rules 137, 138, and 139 will continue to be available only to brokers and dealers. Issuers cannot use the safe harbor provisions for research reports prepared or distributed by brokers or dealers in reliance on the rules to directly or indirectly communicate with potential investors about the issuer’s offering. For example, a hyperlink on an issuer’s web site during its registered offering to a research report could raise concerns in this regard. Issuers using research reports in this manner could be deemed to have adopted the contents of such reports and, under our rules, the reports could be considered free writing prospectuses.

³⁵³ The amendments to the rules will continue to permit the distribution of independent research within the safe harbor provisions. Our research rules permit the distribution of independent research provided the distribution satisfies the conditions of the rules. For brokers and dealers subject to the global research analyst settlement, their ability to continue to distribute independent research during a registered securities offering depends on concluding that the independent research distribution by the broker or dealer satisfies the conditions of the research rule at the time of the distribution or is otherwise not an offer. If a broker or dealer is not able to rely on any of the research safe harbors for their own research, they similarly cannot rely on the safe harbor to distribute independent research. For example, independent research that is prepared by an entity not participating in an offering but paid for by a broker or dealer participating in an offering will be distributed by an offering participant and thus will not satisfy the requirements of Securities Act Rule 137 and cannot be used in reliance on the safe harbor. Such research may continue to be distributed by the entity not participating in the offering that prepared it without involvement by an offering participant. A research report constituting an offer and not falling within a safe harbor will be considered a free writing prospectus. Our research rules also do not supersede the requirements of any applicable rule of a self-regulatory organization regarding the timing of the distribution of research reports. See, e.g., NYSE Rule 472(f)(1) through (4) and NASD Rule 2711(f)(1) through (4).

³⁵⁴ Research reports published or distributed in reliance on Rules 138 and 139 are not offers for purposes of Securities Act Section 2(a)(10) and Section 5(c). Brokers or dealers publishing or distributing research in reliance on Rule 137 are not considered underwriters of the securities under Securities Act Section 2(a)(11). Of course, the anti-fraud provisions of the federal securities laws continue to apply to such communications. See Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5 thereunder.

³⁵⁵ The definition of “research report” is included in each of Rules 137, 138, and 139.

³⁵⁶ The twelve brokerage firms that were part of the global research analyst settlement agreed to disclose, on trade confirmations and on account statements, as well as on the firms’ web sites, their research ratings, along with the research ratings of the independent research providers who cover the security. We do not believe that the continued publication of these ratings on trade confirmations and on account statements, as required under the global research analyst settlement, would raise concerns about whether the ratings were offers in that they would be provided in the ordinary course, and as to confirmations, after the sale of the securities. The continued inclusion of either the firm’s own ratings or those of the independent research provider on the firms’ web sites during an offering could be an offer of the issuer’s securities unless the safe harbors in Rules 137, 138, or 139 are available to the firm at that time.

³⁵⁷As the Commission stated in 1983,

…research reports containing information, opinions or recommendations with respect to a proposed offering, under certain circumstances, may be considered offers to sell under Section 5(c), particularly when a broker-dealer is a participant in the distribution. In addition, research reports disseminated by participating broker-dealers in the waiting or post-effective periods which do not meet Section 10 prospectus requirements or are not accompanied by a Section 10 prospectus may violate Section 5(b)(1).

Research Reports, Release No. 33-6492 (Oct. 5, 1983)[48 FR 46801]. See Publication of Information and Delivery of Prospectus by Broker Dealers Prior to or After the Filing of a Registration Statement Under the Securities Act of 1933, Release No. 33-5010 (Oct. 7, 1969) [34 FR 18130]; Adoption of Rules Relating to Publication of Information and Delivery of Prospectus by Broker-Dealers Prior to or After the Filing of a Registration Statement under the Securities Act of 1933, Release No. 33-5101 (Nov. 19, 1970) [35 FR 18457]; Research Reports, Release No. 33-6550 (Sept. 19, 1984) [49 FR 36719]; Amendments to Clarify Safe Harbors for Broker-Dealer Research Reports, Release No. 33-7120 (Dec. 13, 1994) [59 FR 31038]; and Adoption of Amendments to Clarify Safe Harbors for Broker-Dealer Research Reports, Release No. 33-7132 (Feb. 1, 1995) [60 FR 6965]. See also the Wheat Report, note 21.

³⁵⁸ In this regard, we note that the title of each safe harbor refers to “certain publications.” After a registration statement is filed, oral communications regarding a registered securities offering are not constrained by the gun-jumping provisions of the Securities Act.

³⁵⁹ See, e.g., letters from ABA; Davis Polk; Fried Frank; NYSBA; Richard Hall; and S & C.

³⁶⁰ See, e.g., letters from ABA; Citigroup; Cleary; Davis Polk; Merrill Lynch; NYSBA; Prudential Equity Group, LLC (“PEG”); S & C; and SIA.

³⁶¹ See, e.g., letters from ABA; NYSBA; S & C; and SIA.

³⁶² See, e.g., letters from ABA; Cleary; Merrill Lynch; PEG; and SIA.

³⁶³ See, e.g., letters from ABA; S & C; and SIA.

³⁶⁴ See, e.g., letters from Fried Frank; PEG; and S & C.

³⁶⁵ See, e.g., letters from ABA; Merrill Lynch; and PEG. 163

³⁶⁶ Prior to today’s amendments, Rule 138 required that a foreign private issuer’s securities be traded on a designated offshore securities market for at least twelve months. We are amending the Rule to specify that this requirement relates to the issuer’s equity securities. Current Rule 138 covers issuers that are Form S-2 or Form F-2 eligible as well. Because we are eliminating these Forms, as discussed below, we have revised Rule 138 to eliminate the reference to those forms.

³⁶⁷ Prior to today’s amendments, Rule 138 required that the broker or dealer publish or distribute research in the regular course of business, but did not contain a condition that the broker or dealer have published or distributed research reports on the same types of securities.

³⁶⁸ See, e.g., letters from ABA and S & C.

³⁶⁹ See, e.g., letters from ABA; Cleary;IBAA; Merrill Lynch; NYSBA; and SIA.

³⁷⁰ See, e.g., letters from ABA; Citigroup; Goldman Sachs; and SIA.

³⁷¹ See, e.g., letters from ABA; NYSBA; and SIA.

³⁷² As in the changes to Rule 138, we are providing that a non-reporting foreign private issuer must either have its equity securities be traded on a designated offshore securities market for at least twelve months or have a $700 million worldwide public float.

³⁷³ See, e.g., letters from ABA; Citigroup; Goldman Sachs; Morgan Stanley; NYSBA; S & C; and SIA.

³⁷⁴ See, e.g., letters from ABA; Citigroup; Cleary; CSFB; Merrill Lynch; Morgan Stanley; S & C; and SIA.

³⁷⁵ See, e.g., letters from ABA; NYSBA; S & C; and SIA.

³⁷⁶ See, e.g., letters from ABA and S & C.

³⁷⁷ See, e.g., letters from ABA and S & C.

³⁷⁸ See Asset-Backed Securities Adopting Release, note 82 at III.C.2.b..

³⁷⁹ Securities Act Regulation S [17 CFR 230.901 through 230.905] provides a safe harbor from the registration requirements of the Securities Act for offshore offers and sales of securities. When a broker or dealer participates in a Regulation S offering, questions arise regarding whether research activities would conflict with the prohibition against directed selling efforts or the offshore transaction condition. The concern stems from the fact that the distribution or publication of research could be viewed as conditioning the market, which would constitute directed selling efforts, or offering the securities in the United States, which is prohibited under the “offshore transaction” requirement.

³⁸⁰ Securities Act Rule 144A provides a safe harbor from the registration requirements of the Securities Act for resales of restricted securities to QIBs. When a broker or dealer is selling securities in reliance on Rule 144A, it is subject to the condition that it may not make offers to persons other than those it reasonably believes are QIBs. Where it distributes research about the issuer around the time of a Rule 144A transaction, questions arise regarding whether it may be viewed as making offers to persons that receive the research, including those who are not QIBs.

³⁸¹ In the 1998 proposals, we expressed the interpretive view that brokers and dealers may publish and distribute research reports as described in current Rule 138 and 139 without such reports being deemed to constitute “directed selling efforts.” The amendments we are adopting today codify that interpretation.

³⁸² See amendments to Rule 138 and Rule 139.

³⁸³ See amendments to Regulation S.

³⁸⁴ See, e.g., letters from ABA and Merrill Lynch.

³⁸⁵ See Division of Corporation Finance no-action letter to Merrill, Lynch, Pierce, Fenner & Smith, Inc. (Oct. 24, 1997).

³⁸⁶ See Exchange Act Rule 14a-2(b)(5) [17 CFR 240.14a-2(b)(5)].

³⁸⁷ 17 CFR 240.14a-3 through 240.14a-15.

³⁸⁸ See, e.g., letters from ABA and Merrill Lynch.