SLB 9

Rule 103

Q: Are affiliated purchasers of the issuer, a selling security holder, or of a distribution participant permitted to purchase the issuer's securities that are being distributed?

A: Yes. The definition of "completion of participation in a distribution" clarifies that affiliated purchasers of an issuer, a selling security holder, or of a distribution participant may purchase in the distribution, provided that the securities are acquired for investment purposes. However, consideration may need to be given to other requirements, depending on the nature of the offering or the extent of purchases. For example, disclosure in the registration statement may be necessary, if information regarding such purchases would be material to investors' decision to buy in the offering. Also, affiliated purchasers must comply with the requirements under Exchange Act Rule 10b-9 if applicable to the offering and the Free-Riding and Withholding Interpretation, IM-2110-1 (Interpretation) contained in National Association of Securities Dealers, Inc. ("NASD") Conduct Rule 2110, if the offering involves a "hot issue."

Q: A broker-dealer is an affiliate of an issuer (or selling security holder) and it is a distribution participant in a distribution of the issuer's securities. The securities qualify for the actively-traded securities exception under Rule 101. Under Regulation M, does Rule 101 or Rule 102 apply to the broker-dealer?

A: Rule 101 applies. Note, however, that a distribution participant that is an affiliate of the issuer may not rely on the actively-traded securities exception of Rule 101. Of course, if the broker-dealer engages in stabilization activity, Rule 104 applies also.

Q: An acquiror and a target company have signed a merger agreement. Would the target be an "affiliated purchaser" of the acquiror?

A: Yes. The restrictions of Rule 102 apply to the target company with respect to purchases of the acquiror's securities.

Q: At what point in the day does a restricted period start?

A: "Business day" refers to the 24 hour period based on the principal market for the securities to be distributed, and includes a complete trading session for that market.

For example, if pricing occurs at the close of trading in the principal market on Tuesday, and a one business day restricted period applies, the restricted period would begin at the close of trading in the principal market on Monday. If, however, pricing occurs prior to the close of trading on Tuesday, the restricted period would then begin prior to the opening of trading in the principal market on Monday, because the restricted period requires a full trading day.

Q: When is an underwriter's participation in a distribution completed? Furthermore, when is the participation in a distribution completed for a selling group member that is not part of the underwriting syndicate?

A: Generally, each syndicate member's participation in a distribution is completed when all of the shares in the offering have been distributed and after any stabilization arrangements and trading restrictions in connection with the distribution have been terminated. For a selling group member that is not part of the underwriting syndicate, its participation in a distribution is completed when the selling group member has sold its entire allotment.

Q: If the managing underwriter of a distribution intends to exercise an overallotment option granted in connection with the offering, when is the distribution considered completed?

A: A syndicate member's participation in the distribution is completed when all of the securities have been distributed and after any stabilization arrangements and trading restrictions in connection with the distribution have been terminated. A later exercise of an overallotment option does not affect the "termination" of the distribution, unless it is exercised for an amount exceeding the syndicate short position at the time of exercise. In this case, the distribution would be deemed to continue until the time that all the excess shares were sold. If the syndicate agreement is terminated before all of the shares have been sold, a syndicate member's participation would be completed once its remaining shares are distributed and its financial interests in the offering are terminated.

Q: Does the existence of outstanding exercisable warrants place an issuer in distribution? If not in distribution now, would the issuer be in distribution just before the warrants expire if it anticipates that a large number of warrants will be exercised before their expiration? Similarly, does the existence of outstanding convertible securities that can be converted into an issuer's common stock cause the issuer to be deemed in distribution of its common stock?

A: No. Neither the existence of exercisable warrants (or convertible securities) nor the approaching expiration date of such securities alone would cause the issuer to be deemed in distribution. However, a distribution could be present if special selling efforts, such as the solicitation to exercise the warrants or the payment of a soliciting dealer's fee, are used to encourage the exercise of the securities.

Q: Can a private placement of securities be a distribution under Regulation M?

A: Yes, if the offering satisfies the "magnitude" and "special selling efforts and selling methods" criteria of the definition of distribution.

Q: Rule 101 applies to distribution participants and their affiliated purchasers. The definition of a distribution participant includes any "other person who has agreed to participate or is participating in a distribution." Can an issuer or a selling security holder ever fit within the definition of a distribution participant?

A: No. Issuers and selling security holders are always subject to the provisions of Rule 102.

Q: Is a broker-dealer considered a distribution participant if its sole responsibility with respect to a call for redemption of warrants is to send notices to warrant holders of the call for redemption and it receives a fixed fee for its services?

A: No. If the broker-dealer performs only ministerial duties and receives a fixed fee consistent with its limited role (i.e., its compensation is not based on the success of the offering and is a customary amount), it will not be deemed a distribution participant.

Q: In an exchange offer, the market price of the target's securities will be used as a factor in determining the exchange ratio for the offer. In other words, the relationship between the target's and acquiror's securities is solely a result of an external factor (i.e., the exchange offer terms). Would the target's securities be considered reference securities for the acquiror's securities?

A: No. The target's securities would be reference securities only if the relationship between the two securities was a feature of the acquiror's securities themselves.

Q: In a distribution in which an issuer will exchange publicly-traded securities for restricted securities, and the publicly-traded and restricted securities are otherwise identical in all material respects, would Regulation M apply to transactions in the restricted securities?

A: Yes. They would be considered the same security.

Q: When is the price of an offered security "determined" for purposes of applying the Regulation M restricted period? Is the price determined when the underwriter and issuer orally agree on the price or when the underwriters formally contract to underwrite the offering, which may occur later?

A: The determination of the offering price occurs when the parties agree on the price, whether or not the agreement is memorialized in writing.

Q: A security in distribution is convertible into an actively-traded security. Is the security in distribution subject to a restricted period under Rule 101?

A: Yes. The ADTV value of the subject security determines the restricted period. The ADTV value of a reference security does not affect the restricted period of a subject security.

Q: How is ADTV calculated?

A: As defined in Rule 100 of Regulation M, ADTV is worldwide average daily trading volume as measured during the two full calendar months immediately preceding, or any 60 consecutive calendar days ending within the 10 calendar days preceding, the filing of the registration statement. If the offering is made without a registration statement or involves the sale of securities on a delayed basis pursuant to §230.415, ADTV would be measured during the two full calendar months immediately preceding, or any consecutive 60 calendar days ending within the 10 calendar days preceding, the determination of the offering price.

Q: A security in distribution is an actively-traded security and thus excepted from Rule 101. It is convertible into a security (a reference security) that is not an actively-traded security. Is the reference security subject to a restricted period under Rule 101?

A: No. The restricted period for a reference security is never greater than that of the subject security.

Q: When does the restricted period for a distribution through a call for redemption of "in-the-money" convertibles or exercisable securities commence?

A: The restricted period commences upon mailing of the notice and continues through the end of the period in which the security holders can decide whether to convert.

Q: What is the restricted period for a security to be distributed through a merger or an exchange offer? If the valuation period extends after the vote, how does this affect the restricted period?

A: The restricted period begins on the day of mailing the proxy solicitation materials and continues through the end of the period in which the target shareholders can vote on the merger or exchange. The restricted period includes the valuation period as well. For instance, if the valuation period occurs outside of the proxy solicitation period, an additional restricted period would commence one or five business days prior to the commencement of the valuation period and continue until the valuation period ends.

Q: In a merger, is the restricted period based on both the target company's and acquiror company's shareholder votes?

A: No. The restricted period is based solely on the target company's shareholder vote.

Q: What is the restricted period for a security to be distributed in connection with the acquisition of a privately held company when the shareholders will not be solicited through proxies?

A: The day most comparable to the day of mailing the proxy solicitation materials is the day the target security holders are first asked to commit to the transaction, which would be the day the acquiror sends a definitive acquisition agreement to the target security holders for their execution. The restricted period would commence on the earlier of one (or five) business day(s) prior to (i) the time the acquiror furnishes the definitive acquisition agreement for execution to the security holders of the privately held target company or (ii) the commencement of the valuation period. The restricted period would continue until the later of (i) execution of the definitive acquisition agreement or (ii) the end of the valuation period.

Q: If an issuer purchases its securities before the Regulation M restricted period begins for the security in distribution, may the settlement of this trade occur during the restricted period without violating Regulation M?

A: Yes. The settlement may occur during the restricted period as long as the trade occurred outside the restricted period.

Q: Rule 100 of Regulation M states that in the case of a merger, acquisition or exchange offer, a restricted period commences on the day proxy solicitations or offering materials are first disseminated to security holders. Is a restricted period triggered when a third party solicits proxies in opposition to a proposed merger on the basis of its proposed alternative to exchange its stock for the target company stock (alternative stock transaction)?

A: In some cases, the answer is yes. "Distribution" is defined in Rule 100 as an "offering of securities . . . that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts." The application of Regulation M to the opposition proxy solicitation involves an analysis of the three elements of a distribution: (1) is there an "offering of securities;" (2) does the amount offered satisfy the "magnitude" test; and (3) will "special selling efforts and selling methods" be employed.

For purposes of this question, it is assumed that the alternative stock transaction will satisfy the "magnitude" and "special selling efforts and selling methods" elements because a large quantity of shares will be offered in exchange for the target company, and because of the use of a proxy solicitation.

Where the alternative stock transaction is presented to target shareholders in such specific terms so as to constitute an offering of securities under the Securities Act of 1933 (Securities Act), then the offering element is satisfied. In such circumstances, Securities Act Rules 165 and 425 permit the company presenting the alternative proposal to publicly disclose information about its counteroffer before filing a registration statement.

When an alternative investment transaction is presented to target shareholders at the time they are to vote on the proposed merger and specific details about the proposed alternative are presented so as to invite comparison with the terms of the pending proposed merger, the investment decision (i.e., the vote) necessarily requires shareholders to consider both transactions. Consequently, the company offering the alternative stock transaction has an incentive to manipulate its stock price to facilitate its offering. Therefore, the restricted period with respect to the alternative transaction would commence with the dissemination of materials soliciting proxies against the proposed merger that contained the terms of the proposed alternative.

Example: B solicits the target's shareholders to vote against A's proposed stock merger with the target. In conjunction with B's solicitation against the merger, B states that it intends to propose its own stock merger with the target. B's solicitation against the target's merger with A contains detailed information about B's proposal (such as a fixed exchange ratio and a prospective dividend payout). B's proposal constitutes an offer of securities under the Securities Act and a distribution under Regulation M. The restricted period for B's distribution begins when it sends its proxy solicitation and continues through the vote on A's merger proposal.

B's distribution continues until B's offering is concluded or abandoned. Therefore, B will be in distribution at least until the shareholder vote on B's alternative stock merger proposal or until B's offering is abandoned.

In the staff's view, however, B's restricted period need not be co-extensive with B's distribution period. Instead, it should apply when the target company's shareholders are requested to make an investment decision affected by B's counteroffer and B has an incentive to manipulate the price of its securities. Therefore, after the vote for or against A's merger proposal (and implicitly on B's counter offer), the restricted period for B would terminate. B would have another restricted period if and when it sends out the proxy solicitation for its merger proposal, and this restricted period would end upon that shareholder vote. Note that other restricted periods may apply if the offer involves an election or a valuation period separate from the proxy solicitation periods.

Q: The actively-traded securities exception from Rule 101 requires the public float value of the issuer's "common equity securities" to be at least $150 million. Are ordinary shares issued by a foreign issuer treated as "common equity securities" for purposes of this calculation?

A: Yes. The phrase "common equity securities" includes the equivalent type of stock of a foreign issuer.

Q: A distribution participant for an actively-traded Nasdaq security is also a Nasdaq market maker for the security. Can the distribution participant obtain an excused withdrawal from the NASD so that it may temporarily stop making a market in the security in distribution?

A: No. The NASD has amended its rules to permit excused withdrawals for Nasdaq market makers if the withdrawal is necessary for the market maker to comply with the restricted period under Rule 101 or with its obligations when it stabilizes the price of a security or acts as a passive market maker. See NASD Notices to Members 97-10 and 98-06 concerning NASD Marketplace Rule 4619. Such excused withdrawals are not applicable to actively-traded securities because these securities are not subject to a restricted period under Rule 101.

Q: If a syndicate manager is an affiliate of an issuer, it is subject to Rule 101 and cannot avail itself of the actively-traded securities exception under Rule 101. Are syndicate members (i.e., all syndicate members not affiliated with the issuer) able to avail themselves of the actively-traded securities exception?

A: Yes. The non-affiliated syndicate members are subject to Rule 101 and may rely on the actively-traded securities exception.

Q: Can debt securities qualify for the actively-traded securities exception?

A: As a practical matter, the absence of public information regarding the debt security's trading history generally would prevent reliance on this exception for most debt issues.

Q: Is the ADTV used to calculate the restricted periods the same ADTV used to calculate the 2% de minimis exception?

A: Yes.

Q: Have restrictions on purchases of target company securities by an acquiror during an exchange offer been eliminated?

A: Regulation M generally does not apply to purchases of the target security by an acquiror or target during a merger or exchange offer. Purchases of the target stock are restricted, however, where the acquiror's securities have a feature that ties its value directly to the price of the target securities. We also note that Rule 14e-5 under the Exchange Act generally will prohibit purchases of the target security by the bidder during an exchange offer.

Q: If a syndicate member solicits an indication of interest from a client to purchase in a distribution, and the client instead wishes to buy immediately in the market, are the market transactions considered unsolicited?

A: No. Any market transactions during the restricted period resulting from the original solicitation would be deemed solicited.

Q: A shareholder that has shares registered on a shelf plans to make periodic sales of those shares. Does Rule 102 apply from the time the shares are registered on the shelf until they are all sold?

A: No. The shareholder should analyze each takedown off the shelf to determine whether it constitutes a distribution for purposes of Rule 102.

Q: Is the method for determining whether a particular sale off of a shelf constitutes a distribution different under Rule 102 from that under Rule 101?

A: No. The distribution analysis is the same under both Rules 101 and 102: each takedown off the shelf must be analyzed to determine whether it constitutes a distribution. Moreover, when sales off a shelf by an issuer, or by any affiliated purchaser, constitute a distribution of securities, an issuer and all its affiliated purchasers are subject to the applicable restricted period under Rule 102. Similarly, when sales off a shelf by a selling security holder constitute a distribution, all other security holders who are affiliated purchasers of the selling security holder are subject to the applicable restricted period under Rule 102.

Q: An issuer conducts different but concurrent distributions of the same securities, such as an offering of its common stock for cash while it is offering its common stock to security holders of another company in connection with a merger or exchange offer. Is the issuer (or distribution participant) permitted to solicit investors to purchase the common stock in the cash distribution without violating Rule 102 (or Rule 101 in the case of a distribution participant) as it applied to the merger or exchange offer distribution, and vice versa, or would selling activity in one distribution be deemed an impermissible inducement to purchase with regard to the other distribution?

A: Paragraph (b)(5) of Rule 102 provides an exception for "offers to sell or the solicitation of offers to buy the securities being distributed." Similarly, Rule 101(b)(9) allows distribution participants and their affiliated purchasers to conduct bona fide selling activities in connection with the securities being distributed. However, neither Rule 101(b)(9) nor Rule 102(b)(5) explicitly allows any inducements to purchase otherwise than for offers to sell the securities in a specific distribution. Accordingly, these provisions do not extend to inducements to purchase in one distribution while the issuer or distribution participant is engaged in another distribution of the same security or a reference security. We do not believe, however, that solicitation activity qualifying for the Rule 101(b)(9) and Rule 102(b)(5) exceptions necessarily creates an impermissible inducement to purchase in a concurrent distribution. Therefore, absent additional factors, bona fide offers to sell or the solicitation of offers to buy the securities being distributed in one distribution would not be impermissible inducements with respect to a concurrent distribution.

For example, Company A conducts an offering of A common stock for cash. At the same time, Company A conducts an exchange offer in which it distributes A common stock and purchases Company B's common stock. Assuming the cash offering and exchange offer are distributions of A's common stock, Company A may solicit offers to purchase the common stock in the cash offering at same time it solicits offers to exchange securities in the exchange offer, and vice versa.

However, a distribution may rise to the level of an impermissible inducement to purchase when a distribution participant engages in sales efforts that go beyond bona fide offers to sell or the solicitation of offers to buy the securities in distribution.

Q: May a passive market maker that, just prior to the beginning of the restricted period, is quoting the highest bid as of the Nasdaq close carry over its bid to the restricted period?

A: No. Once a market maker becomes passive, Rule 103 requires that its bids and purchases be no higher than the current highest independent bid. A passive market maker may submit a bid at the same level that it previously was quoting only if the bid is no higher than the current highest independent bid.

Q: May a distribution participant (e.g., an underwriter) that is an affiliate of an issuer or selling security holder conduct passive market making in a covered security pursuant to Rule 103?

A: Yes. However, a Nasdaq market maker that is affiliated with the issuer or selling security holder, but is not acting as a distribution participant, may not rely on Rule 103.

A: No. Rule 104 applies to all offerings, not just distributions. This means that a person placing a stabilizing bid for an offering not satisfying the definition of "distribution" is nonetheless subject to Rule 104.

Q: Is the exercise of the overallotment option considered a syndicate covering transaction?

A: No.

Q: Does an underwriter stabilizing the price of a security have to comply with Rule 104 even though the securities qualify for the actively-traded securities exception under Rule 101?

A: Yes. Rule 104 does not contain an exception for actively-traded securities.

Q: When should notice of penalty bids be submitted to the relevant SRO under Rule 104?

A: Notice of penalty bids need only be furnished when the penalty bid will be assessed. If notice of a penalty bid is given at the time of pricing because an agreement among the underwriters contains a penalty bid provision, but the penalty bid is not in fact imposed, an amended notice should be filed to reflect that no assessments were made.

The Commission has granted an exemption from the notification requirement contained in Rule 104(h)(2) for nonconvertible debt securities, nonconvertible preferred securities and asset-backed securities that are rated investment grade.

Q: A company's debt is listed on an exchange, but a majority of the debt is expected to trade in the over-the-counter market. Where should the company's underwriter give notice of its syndicate covering transactions, as required by Rule 104?

A: The underwriter should give notice to the NASD, the self-regulatory organization that has direct oversight authority over the principal market for the security.

A: No. In order to avoid the abuse at which Rule 105 is directed, a person cannot purchase securities in a distribution to cover any short position where it made short sales of the security during the five business days before pricing.

Q: Are exemption and no-action letters issued under the former trading practices regulations still valid?

A: No. Any recipient or beneficiary of such a letter who believes that the relief granted by a particular letter is still necessary or appropriate under Regulation M should contact the Office of Risk Management and Control at (202) 942-0772.

Q: Does Regulation M apply to affiliated purchasers located outside the United States?

A: Yes.

Q: In an entirely foreign distribution of a security that has no market in the United States, but whose reference security does have a market in the United States, is the foreign distribution subject to Regulation M?

A: No. However, the general anti-fraud and anti-manipulation provisions of the federal securities laws apply to any transactions effected in the United States.

Q: What is meant by the statement that Regulation M deregulates rights offerings?

A: There no longer is a separate rule covering rights offerings. Rather, rights offerings will be treated under Regulation M like any other offering. Therefore, if the rights offering involves a distribution, as defined in Rule 100, the applicable restricted period of Rules 101 and 102 applies to bids for or purchases of the security being distributed (i.e., the security acquired through the exercise of the rights) and any reference security. Transactions in the rights themselves are not subject to Rules 101 or 102. However, Rule 104 applies to stabilization transactions in any security, including the rights.

Exchange Traded Funds NEW!

Q: Is the Rule 101(c)(4) exception available to permit persons who may be deemed to be participating in a distribution of actively managed exchange traded fund (ETF) shares (Shares) to bid for or purchase such Shares during their participation in a distribution?

A: Yes, if the following conditions are met: (i) the Shares are issued by a registered open-end investment company; (ii) the Shares are exchange listed and exchange traded; (iii) the ETF continuously redeems the Shares at net asset value (NAV); (iv) a close alignment between the Shares' secondary market price and the ETF's NAV is expected; (v) on each day the Shares trade, prior to commencement of such trading, the ETF discloses on its website the identities and quantities of the securities and assets held by the ETF which will form the basis of the calculation of the ETF's NAV at the end of such day; (vi) the exchange listing the Shares or other information provider disseminates every 15 seconds throughout the trading day, through the facilities of the Consolidated Tape Association, an amount representing on a per Share basis the sum of the current value of the securities, assets, and cash required to create new Shares (intraday indicative value or IIV); (vii) arbitrageurs are expected to take advantage of price variations between Shares' secondary market price and the ETF's NAV; and (viii) the arbitrage mechanism will be facilitated by the transparency of the ETF's portfolio, the availability of the IIV, the liquidity of the ETF's portfolio securities, the ability to access such securities, and the arbitrageurs' ability to create workable hedges.

Q: Does the redemption of creation unit sized aggregations of exchange traded fund shares (Shares) and the receipt of securities in exchange therefor by persons who may be deemed to be participating in a distribution of Shares constitute an "attempt to induce any person to bid for or purchase" a covered security during an applicable restricted period for purposes of Rule 101?

A: No, but only if the redemptions are not made for the purpose of creating actual, or apparent, active trading in or raising or otherwise affecting the price of Shares or the securities received in exchange for the Shares redeemed.

Q: Is the Rule 102(d)(4) exception available to permit an open-end investment company to redeem actively managed exchange traded fund (ETF) shares (Shares)?

A: Yes, if the following conditions are met: (i) the Shares are issued by a registered open-end investment company; (ii) the Shares are exchange listed and exchange traded; (iii) the ETF continuously redeems the Shares at net asset value (NAV); (iv) a close alignment between the Shares' secondary market price and the ETF's NAV is expected; (v) on each day the Shares trade, prior to commencement of such trading, the ETF discloses on its website the identities and quantities of the securities and assets held by the ETF which will form the basis of the calculation of the ETF's NAV at the end of such day; (vi) the exchange listing the Shares or other information provider disseminates every 15 seconds throughout the trading day, through the facilities of the Consolidated Tape Association, an amount representing on a per Share basis the sum of the current value of the securities, assets, and cash required to create new Shares (intraday indicative value or IIV); (vii) arbitrageurs are expected to take advantage of price variations between Shares' secondary market price and the ETF's NAV; and (viii) the arbitrage mechanism will be facilitated by the transparency of the ETF's portfolio, the availability of the IIV, the liquidity of the ETF's portfolio securities, the ability to access such securities, and the arbitrageurs' ability to create workable hedges.