May 23, 1997
Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20549
Attention:Mr. Jonathan G. Katz, Secretary
Re:Proposed Changes to Rules 144 and 145
(File No. S7-07-97)
Ladies and Gentlemen:
Morgan Stanley & Co. Incorporated is pleased
to submit this letter on behalf
of ourselves and our affiliates (together, "Morgan Stanley") in response to the
request
of the Securities and Exchange Commission (the "Commission") for comments on
Release No. 33-7391 (the "Release") regarding certain proposed amendments to
Rules 144 and 145 under the Securities Act of 1933, as amended (the "Securities
Act").
I. Manner-of-Sale Requirements
The Commission has proposed the elimination
of Rule 144(f)'s manner-of-sale
requirements, observing that those requirements currently hinder transactions
that are
not distributive in nature. We concur in the Commission's observation that the
current requirements impose unnecessary obstacles to legitimate transactions.
When
a sale is made in accordance with the current public information, holding
period,
volume and notice requirements of Rule 144, the manner in which the sale is
effected
should not be determinative of a distribution. Therefore, we support the
Commission's proposal.(1)
II. Change to the Rule 144 Definition of "Affiliate"
We generally support the Commission's
proposal to adopt a non-exclusive
safe harbor from the definition of "affiliate" for certain persons who are not
in a
position to control an issuer. The certainty that would be provided by such a
safe
harbor is important, especially in light of the Commission's expressed
unwillingness
to provide interpretive or no-action relief on the issue of affiliate status on
a case-by-case basis. However, we believe that a 10% threshold, borrowed from
Section 16 of
the Securities Exchange Act, is not appropriate in the context of Rule 144. It
is not
realistic in today's market to believe that a 10% stockholder of an issuer, who
is not
an executive officer or a director of the issuer and who has no other
affiliation with
the issuer, will be in a position to control the issuer or to cause the issuer
to undertake
the expense and management commitment required by a registered secondary sale of
securities (i.e. the registration process, the due diligence process, the
underwriting
process, etc.).(2)
As an alternative approach, we support a
non-exclusive safe harbor based on
the definition of "affiliate" put forth by the Advisory Committee on the Capital
Formation and Regulatory Processes,(3) which
would exclude persons other than the
chief executive officer, inside directors, 20% stockholders and 10% stockholders
that
also have a representative on the board of directors (the "Advisory Committee
Definition").(4) We believe that this definition
comes closer to taking into account the
reality of corporate control dynamics. We ask the Commission to make clear that
no
presumption of affiliate status would arise for a stockholder unable to meet the
requirements of the safe harbor and that such a stockholder could potentially
utilize
a traditional facts-and-circumstances analysis to determine that it was not an
affiliate.
If the Commission is unwilling to adopt the
Advisory Committee Definition,
we believe that the Commission should retain a facts-and-circumstances approach
rather than adopting the 10% threshold proposed in the Release. While the
Release
makes clear that the 10% threshold would be stated as a non-exclusive safe
harbor
(and we assume that the release adopting such proposal would make clear that a
failure to meet the requirements of the safe harbor would not raise a
presumption of
affiliate status), we are concerned that adoption of the proposed safe harbor
would
chill legitimate sales by persons who, as a practical matter, are not in a
position to
control the issuer. We note that current market practice is to treat many of
the
provisions of Rule 144 as if they were exclusive safe harbors.
Because Rule 144 provides a safe harbor for
certain sales by affiliates, a
narrower definition of "affiliate" in Rule 144, without corresponding
clarification in
other areas of the Securities Act, could have the perverse effect of denying
certain
persons the safe harbor of the Rule. For example, a 9.9% stockholder of an
issuer
that does not hold restricted securities could be concerned that it might be
considered
to be in a controlling position with respect to the issuer (and therefore an
"issuer" for
purposes of the definition of "underwriter" in Section 2(11) of the Securities
Act)
under the traditional facts-and-circumstances analysis, but could find itself
unable to
take advantage of the safe harbor provided by Rule 144 because it does not own
restricted securities and does not fit the Rule's definition of "affiliate". We
suggest
that if the Commission adopts a "bright-line" safe harbor test for establishing
non-affiliate status, the Commission make clear that compliance with the
requirements
imposed on affiliates by Rule 144 will enable any holder to take advantage of
the
Rule.
III. Rule 144(e) Volume Limitations
A Rule 144 seller determines the maximum
amount of securities that can be
sold pursuant to Rule 144 by taking the greatest amount resulting from any of
the
three separate tests set forth in Rule 144(e)(1). The Commission proposes to
retain
the test based on the number of outstanding shares of a particular class, while
eliminating the two tests based on trading volume. We oppose this modification
to
Rule 144(e).
Each of the three tests provides a sensible
and reasonable alternative method
for determining an appropriate volume limitation. As such, we do not agree that
any
of the three tests should be eliminated. The outstanding shares test reflects
the view,
which we support, that the sale of an amount of shares equivalent to one percent
of
the outstanding shares of a particular class could not have a significant impact
on the
market. The two trading volume tests, each based on calculations of the average
weekly volume of trading in the relevant security, similarly arrive at a number
of
securities whose sale pursuant to Rule 144 should not have a significant market
impact--even if the average weekly trading volume exceeds 1% of the shares
outstanding. Although elimination of the two trading volume tests would
simplify
Rule 144(e), it would only do so at the expense of reducing the flexibility of
the
current safe harbor. In our experience, substantially more than half of all
Rule 144
sellers rely on the trading volume tests.
IV. Notice of Sale Requirement
Rule 144(h) requires a person selling a
number of shares greater than 500 or
with an aggregate sales price in excess of $10,000, in reliance on Rule 144
during any
three-month period, to file a Form 144 notice with the Commission. We support
the
increase of the filing thresholds under Rule 144(h) from 500 shares or $10,000
to
1,000 shares or $40,000. We believe that such modification appropriately
reflects
changes in the market since the adoption of the original limits.
We suggest, however, that the deadline for
filing Form 144 notice be
modified. Currently, Rule 144(h) requires filing concurrently with either the
placing
of an order with a broker or the execution of a sale directly with a market
maker. We
believe that the purposes of Rule 144 can be accomplished by requiring the
filing to
be made promptly after the receipt of the order, but in no event later than the
settlement date. If filing a Rule 144 notice is a condition for use of Rule
144's safe
harbor, the failure to file a timely notice pursuant to Rule 144(h) would cause
the
seller to fall out of the safe harbor, but would not indicate that a violation
of Section
5 had occurred. We believe that our suggested modification of the required time
of
filing will lessen the burdens the Rule imposes on sellers without any harmful
effect
on the public market.
V. Holding Period -- Conversions, Exchanges, and Holding Company
Formations
The Commission proposes to amend Rule 144 to
codify the staff's interpretive
position that tacking is allowed, with regard to calculating the holding period
(i) for
securities acquired upon conversion of other securities of the same issuer,
whether or
not the surrendered securities are convertible by their terms and (ii) for
securities
acquired from the issuer solely in exchange for other securities of the issuer.
The
Commission also proposes to amend Rule 144 to codify an interpretive position
allowing tacking of the Rule 144 holding period in connection with transactions
effected solely for the purpose of forming a holding company. We support these
initiatives.
VI. Definition of Restricted Securities
Section 4(6) of the Securities Act provides a
transactional exemption for non-public offerings to accredited investors in an
amount that does not exceed $5 million.
We support the Commission's proposed revision to Rule 144 that will codify a
staff
interpretive position that deems securities acquired pursuant to Section 4(6) to
be
restricted securities under Rule 144.
VII. Rule 145
The Commission proposes eliminating the
presumptive underwriter and resale
provisions of Rule 145(c) and (d). The Commission suggests that Rule 144 and
traditional considerations can adequately determine whether persons who had been
covered by Rule 145(c) are indeed underwriters in connection with resales.
We support the Commission's proposal in the
Release to eliminate the
presumptive underwriter doctrine in Rule 145(c) and (d). We do not believe that
there is sufficient justification for presuming that holders of securities
received in a
registered transaction covered by Rule 145 (a "Rule 145 transaction") that are
not
affiliates of the issuer of those securities are underwriters for purposes of
the
Securities Act. If Rule 145(c) and (d) are eliminated, holders of securities
received
in a Rule 145 transaction that are not affiliates of the issuer of those
securities would
be free to sell those securities in the open market.
We note that it is important that the
Commission make clear in the release
adopting the proposals regarding Rule 145(c) and (d) that such securities could
be
freely sold by such holders without such holders being deemed underwriters for
purposes of the Securities Act. If the Commission were not to make this clear,
significant uncertainty would remain as to the status of a holder that was an
affiliate
of the target company in a Rule 145 transaction but is not an affiliate of the
surviving
company.
VIII. Rule 144 Holding Periods
We believe that the recently-adopted one-year
and two-year holding periods
under Rule 144 strike an appropriate balance between facilitating capital
formation
through private offerings of securities and ensuring that purchasers of
securities in
unregistered placements do not act as "conduits" for unregistered distributions
of
those securities into the open market. These holding periods provide adequate
separation between the unregistered placement of the securities and any
subsequent
movement of such securities into the open market. We suggest that the
Commission
obtain experience under the recent changes to the holding periods prior to
considering
any future reductions.
IX. Possible Regulatory Approaches to Hedging
Transactions
Our views with regard to hedging activities
are set out in the joint letter that
we have submitted with Goldman, Sachs & Co., J.P. Morgan Securities Inc. and
Salomon Brothers Inc. We will not repeat or summarize those views here in the
interest of economy. We would, however, emphasize our own enthusiastic support
for the views expressed in that letter.
We are pleased to have this opportunity to express our views on the important
issues raised by the Release. Please feel free to call the undersigned at (212)
761-4765 if you would like to discuss these views or if we can be of any further
assistance.
|
Sincerely, |
| /s/ Robin
Roger |
|
Robin Roger |
| Counsel and Principal |
1. Even if the Commission retains the current
manner-of-sale requirements of Rule 144,
we urge the Commission to reconsider the staff's position in Bear Stearns &
Co. Inc. (available
April 4, 1991). In Bear Stearns, the staff indicated that the delivery of stock
upon the exercise of
an over-the-counter option did not comply with the manner-of-sale requirements
of Rule 144.
We believe that this position is inconsistent with Rule 144(f), which expressly
permits
"transactions directly with a 'market maker'". So long as the counterparty to
the hedging
transaction is a "market maker" and the other requirements of Rule 144 are
satisfied at the time
of exercise, we believe that Rule 144 should be available to permit the delivery
of restricted and
control securities upon the exercise of an over-the-counter option. We perceive
no basis upon
which to distinguish between a direct sale to a market maker by a holder of
control or restricted
securities and a sale made to a market maker through the exercise of an
over-the-counter option.
2. The legislative history of the Securities Act
suggests that the principal reason for
equating "control persons" with issuers for purposes of Section 2(11) thereof is
that such persons
are presumably able to compel the issuer to initiate the registration process.
H.R. Rep. No. 85,
73d Cong., 1st Sess. 13-14 (1933).
3. We have not changed our opposition to the other
aspects of the Advisory Committee's
report, however, as expressed in our letter of December 9, 1996 in response to
Release No. 33-7314. See also the letters of the Capital Markets
Committee of the Securities Industry
Association of November 13, 1996 in response to Release No. 33-7314 and of
November 2, 1995
in response to the Term Sheet (Draft 10/13/95) that was the then current outline
of the Advisory
Committee's proposed report.
4. In calculating the 10% and 20% thresholds,
traditional "control group" aggregation
principles would continue to apply.