**NOVEMBER 14, 2000**

**[CURRENT ISSUES AND RULEMAKING PROJECTS]{.underline}**

**DIVISION OF CORPORATION FINANCE**

**Securities and Exchange Commission**

**Washington, D.C. 20549**

The Securities and Exchange Commission disclaims responsibility for any
private publication or statement of any of its employees. This outline
was prepared by members of the staff of the Division of Corporation
Finance and does not necessarily reflect the views of the Commission,
the Commissioners or other members of the staff.

TABLE OF CONTENTS

\[Asterisks mark substantive changes from the last version of this
outline posted on the web site (July 25, 2000).\]

I.\* DIVISION ORGANIZATION AND EMPLOYMENT OPPORTUNITIES

II\. MERGERS & ACQUISITIONS

A. Regulation of Takeovers and Security Holder Communications

B. Cross Border Tender Offers, Rights Offers and Business Combinations

C.\* Mini-Tender Offers and Tender Offers for Limited

Partnership Units

D. Current Issues

1\. Investment Banking Firm Disclaimers

2\. Identifying the Bidder in a Tender Offer

3\. Schedule 13E-3 Filing Obligations of Issuers

or Affiliates Engaged in a Going-Private

Transaction

III\. ELECTRONIC FILING AND TECHNOLOGY

A. EDGAR

B. Electronic Delivery of Information

C. Interpretive Release Relating to Use of Internet Web Sites to Offer
Securities, Solicit Securities Transactions or Advertise Investment
Services Offshore

D. Roadshows

IV\. SMALL BUSINESS ISSUES

A. Small Business Initiatives

B. Small Business Rulemaking

V. INTERNATIONALIZATION OF THE SECURITIES MARKETS

A. Foreign Issuers in the U.S. Market

B. Abusive Practices under Regulation S and Amendments to Regulation S

C. International Accounting Standards

> D. International Disclosure Standards - Amendments to
>
> Form 20-F

VI\. OTHER PENDING RULEMAKING AND RECENT RULE

ADOPTIONS

A. Roadshows

B. Proposed Amendments to Options Disclosure Document Rule

C.\* Financial Statements and Periodic Reports for Related

Issuers and Guarantors

D.\* Delivery of Disclosure Documents to Households

E.\* Selective Disclosure and Insider Trading Rules

VII\. STAFF LEGAL BULLETINS FOR DIVISION OF CORPORATION FINANCE

VIII\. CURRENT DISCLOSURE, LEGAL AND PROCESSING ISSUES

A. Disclosure, Legal and Processing Issues

1\. Disclosures about \"Targeted Stock\"

2\. \"Blank Check\" Companies

3\. Syndicate Short Sales

4\. Third-Party Derivative Securities

5\. Section 5 Issues Arising from On-line Offerings and Related
Communications, Including Offers to Buy

6.\* Presentation of Live Electronic Auctions

> 7\. Coordination with Other Government

Agencies

8\. Monitor of Form 12b-25 Notices

> 9\. Related Public and Private Offerings

10\. Equity Swap Arrangements

11\. "Gypsy Swaps"

12\. Non-Qualified Deferred Compensation Plans

> 13\. Trust Indenture Act Issues Arising in Certain

Transactions Exempt from Securities Act

Registration

14\. Legality Opinion Issues

15\. Plain English Initiative

> 16\. Clarification of Oil and Gas Reserve Definitions and

Requirements

17\. Shelf Registration Deal Information and Rule 412

> 18.\* Recent Enforcement Action -- CGI Capital, Inc.

B. Industry-Specific Issues

1\. Real Estate

2\. Exemption from Registration for Bank and

Thrift Holding Company Formations

3\. Structured Financings

4\. Credit Linked Securities of Bank Subsidiaries

IX\. ACCOUNTING ISSUES

A. Initiative to Address Improper Earnings Management

B.  New Rules for Audit Committees and Reviews of Interim

Financial Statements

C. Materiality in the Preparation or Audit of Financial Statements

(SAB 99)

D. Restructuring Charges, Impairments and Related Issues (SAB 100)

> E.\* Interpretive Guidance on Revenue Recognition
>
> (SAB 101, SAB 101A and SAB 101B)

F. Mandatorily Redeemable Securities of Subsidiaries Holding Debt of
Registrant

G. Accountant\'s Refusals to Re-issue Audit Reports

H. Market Risk Disclosures

I. Financial Statements in Hostile Exchange Offers

J. Proposed Rule for Disclosure about Valuation and Loss Accruals and
Long-Lived Assets

K. Recent Enforcement Action -- America Online, Inc.

L.\* Segment Disclosure

Please also see \"Current Accounting and Disclosure Issues in the
Division of Corporation Finance,\" available on our web site at
*www.sec.gov/rules/othrindx.htm.*

X. SIGNIFICANT NO-ACTION AND INTERPRETIVE LETTERS

THROUGH NOVEMBER 2000

A. Section 2(a)(1) of the Securities Act

B.\* Section 2(a)(3) of the Securities Act

C.\* Section 2(a)(10) of the Securities Act

D. Section 3(a)(10) of the Securities Act

E. Section 5 of the Securities Act

F. Rules 144, 145, and 144A

G. Rule 701

H. Regulation S

I. Section 18(b)(4)(A) of the Securities Act

J. Securities Act Forms

K. Section 12 of the Exchange Act

L. Proxy Rules

M.\* Section 16 Rules

N. Regulation D

O. Trust Indenture Act of 1939

**CURRENT ISSUES AND RULEMAKING PROJECTS**

**DIVISION OF CORPORATION FINANCE**

**NOVEMBER 14, 2000**

In addition to this outline, several other sources of information about
issues involving the Division of Corporation Finance are available in
the "Current SEC Rulemaking" section of the Securities and Exchange
Commission's web site, *http://www.sec.gov*:

-   Releases, Staff Legal Bulletins, Staff Accounting Bulletins

-   Division of Corporation Finance: Frequently Requested Accounting and
    Financial Reporting Interpretations and Guidance

-   Division of Corporation Finance: Current Accounting and Disclosure
    Issues in the Division of Corporation Finance

-   Division of Corporation Finance: Manual of Publicly Available
    Telephone Interpretations (including updates)

-   A number of the forms and regulations administered by the Division
    are available in the "Small Business Information" section of the web
    site.

**I. [DIVISION ORGANIZATION AND EMPLOYMENT OPPORTUNITIES]{.underline}**

The Division\'s organizational structure follows:

Division Director - David B. H. Martin (202) 942‑2800

Deputy Director - Michael McAlevey (202) 942-2810

[Operations]{.underline}

Principal Associate Director (Disclosure Operations)

\- Shelley Parratt (202) 942-2830

Associate Director (Disclosure Operations)

\- James Daly (202) 942-2881

Associate Director (Disclosure Operations)

\- William L. Tolbert, Jr. (202) 942-2891

[Disclosure Support]{.underline}

Associate Director (Legal)

\- Martin P. Dunn (202) 942‑2890

Associate Director (Regulatory Policy)

\- Mauri Osheroff (202) 942‑2840

Associate Director (Chief Accountant)

\- Robert Bayless (202) 942‑2850

Senior Counsel to the Director

\- Anita Klein (202) 942-2980

[Assistant Directors]{.underline}

Health Care and Insurance

\- Jeffrey P. Riedler (202) 942‑1840

Consumer Products

\- H. Christopher Owings (202) 942‑1900

Computers and Office Equipment

\- Barbara Jacobs (202) 942‑1800

Natural Resources

\- Roger Schwall (202) 942‑1870

Transportation and Leisure

\- Max Webb (202) 942‑1850

Manufacturing and Construction

\- Steven Duvall (202) 942‑1950

Financial Services

\- Todd Schiffman (202) 942‑1760

Real Estate and Business Services

\- Karen Garnett (202) 942‑1960

Small Business

\- Vacant (202) 942‑2950

Electronics and Machinery

\- Peggy Fisher (202) 942-1880

Telecommunications

\- Barry Summer (202) 942-1990

Structured Finance and New Products

\- Mark W. Green (202) 942-1940

[Other Offices]{.underline}

Office of Chief Counsel

\- Paula Dubberly, Chief (202) 942‑2900

Office of Mergers and Acquisitions

\- Dennis O. Garris, Chief (202) 942‑2920

Office of International Corporate Finance

\- Paul Dudek, Chief (202) 942‑2990

Office of EDGAR and Information Analysis

\- Herbert Scholl, Chief (202) 942‑2930

Office of Rulemaking

\- Elizabeth Murphy, Chief (202) 942-2900

Office of Small Business Policy

\- Richard Wulff, Chief (202) 942‑2950

**[Division Employment Opportunities for Accountants and
Attorneys]{.underline}**

[Accountants]{.underline}

The Division has about 110 staff accountants with specialized expertise
in the various industry offices. The Division provides a fast-paced,
challenging work environment for accounting professionals. Our staff
works on hot IPOs and current and emerging accounting issues. We
influence accounting standards and practices and interact with the top
professionals in the securities industry.

A staff accountant's responsibilities include examining financial
statements in public filings and finding solutions to the most difficult
and controversial accounting issues. A minimum of three years'
experience in a public accounting firm or public company dealing with
SEC reporting is required. If you want to experience a unique learning
opportunity and explore the depth and breadth of accounting theory,
principles, and practices, call (202) 942-2960 for information on
employment opportunities in the Division.

[Attorneys]{.underline}

The Division has about 130 attorneys who process filings and draft and
interpret regulations. Every year, we recruit top law school graduates,
and from time to time have positions for lateral applicants with solid
legal skills and experience. Applicants should demonstrate an ability to
accept major responsibilities. We prefer applicants who have had
experience in securities transactions involving public companies. It is
also helpful, but not necessary, if applicants have accounting and/or
business training.

Responsibilities include analyzing and commenting on disclosure
documents in public offerings, including those relating to mergers and
acquisitions. The positions involve working directly with companies,
their executives, underwriters and investment banking firms, outside
counsel and outside accountants. The work involves innovative financing
and business structures. Interested persons should send resumes to \--
Division of Corporation Finance, U.S. Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

**II. [MERGERS AND ACQUISITIONS]{.underline}**

In addition to the matters in this section, see Section IX.I. below,
"Financial Statements in Hostile Exchange Offers." Also, see the Third
Supplement to our Manual of Publicly Available Telephone
Interpretations.

> **A. [Regulation of Takeovers and Security Holder
> Communications]{.underline}**

On October 22, 1999, the Commission adopted a new regulatory scheme for
business combination transactions and security holder communications
(Securities Act Release No. 7760). The new rules and amendments became
effective January 24, 2000. The amendments significantly update the
existing regulations to meet the realities of today's markets while
maintaining important investor protections. Specifically, the amendments
reduce restrictions on communications, balance the regulatory treatment
of cash and stock tender offers, and update, simplify and harmonize the
disclosure requirements.

**1. Reduce Restrictions on Communications**

The Securities Act, as well as the proxy and tender offer rules,
restrict communications. The new rules and amendments relax these
restrictions by permitting the dissemination of more information on a
timely basis without triggering the need to file a mandated disclosure
document. Under the new scheme, a complete disclosure document still
must be provided before a security holder may vote or tender securities,
but other communications regarding the transaction are permitted. This
should permit more informed voting and tendering decisions. The content
of communications is not restricted, but anyone relying on the new rules
must file written communications relating to the transaction on the date
of first use, so that all security holders have access to the
information. In particular, the amendments permit more communications:

1.  before the filing of a registration statement relating to either a
    stock merger or a stock tender offer transaction;

    before the filing of a proxy statement (regardless of the subject
    matter or contested nature of the solicitation); and

    regarding a proposed tender offer without "commencing" the offer and
    requiring the filing and dissemination of specified information.

The amendments also harmonize the various communications principles
applicable to business combination transactions under the Securities
Act, tender offer rules and proxy rules. Confidential treatment of
merger proxy statements is retained, but only under limited
circumstances. Under the new scheme, if parties to a transaction
publicly disclose information beyond that specified in Rule 135, the
proxy statement must be filed publicly. If a proxy statement is filed
confidentially, but later the parties disclose information beyond Rule
135, then the proxy statement must be re-filed publicly.

> **2. Balance the Regulatory Treatment of Cash and Stock Tender
> Offers**

Registered stock tender offers (exchange offers) are subject to
regulatory delays not imposed on cash tender offers. A cash tender offer
may commence as soon as a tender offer schedule is filed and the
information disseminated to security holders, while an exchange offer
may not commence before a registration statement is filed and becomes
effective. The delay associated with exchange offers may cause some
bidders to favor cash over stock as consideration in a business
combination transaction. In addition, the different regulatory treatment
can give a bidder offering cash a timing advantage over a competing
bidder offering stock. The amendments adopted balance the regulatory
treatment of cash and stock tender offers to the extent practicable.

Under the new rules third-party or issuer exchange offers may commence
as early as the filing of a registration statement, or on a later date
selected by the bidder, before effectiveness of the registration
statement. As a result, a bidder offering securities will not need to
wait until effectiveness to commence an exchange offer. Early
commencement is not mandatory, but rather at the election of the bidder.
A bidder may file a registration statement, wait for staff comments, if
any, and then decide to commence its offer. Any securities tendered in
the offer could not be purchased until after the registration statement
becomes effective, the minimum 20 business day tender offer period has
expired, and all material changes are disseminated to security holders
with adequate time remaining in the offer to review and act upon the
information. A bidder need not deliver a final prospectus to security
holders. Security holders may withdraw tendered securities at any time
before they are purchased by the bidder.

> **3. Updating, Simplifying and Harmonizing the Disclosure
> Requirements**

The procedural and disclosure requirements for business combination
transactions vary depending upon the form of the transaction. The
amendments clarify and harmonize many of the requirements. The
amendments also make the requirements easier to understand and
facilitate compliance with the regulations.

The substantive disclosure requirements for tender offers, going-private
transactions and other extraordinary transactions remain substantially
the same, but are moved to one central location within the rules, called
"Regulation M-A." In some cases, harmonization reduces the disclosure
requirements. The amendments also update the rules in several respects.
The more significant amendments:

1.  combine the existing schedules for issuer and third-party tender
    offers into one new schedule available for all tender offers, called
    "Schedule TO";

    require a plain English summary term sheet in all tender offers,
    mergers and going-private transactions, except when the transaction
    is already subject to the plain English requirements of the
    Securities Act rules;

    update and generally reduce the financial statements required for
    business combinations;

    require pro forma and related financial information in negotiated
    cash tender offers when the bidder intends to engage in a back-end
    securities transaction;

    permit an optional subsequent offering period after completion of a
    tender offer during which security holders can tender their shares
    without withdrawal rights;

    revise Rule 13e-1, which requires issuers to report intended
    repurchases of their own securities once a third-party tender offer
    has commenced, so that the required information need not be
    disseminated to security holders and to provide an exclusion from
    the rule for certain periodic, routine purchases;

    conform the current security holder list requirement in the tender
    offer rules with the comparable provision in the proxy rules so that
    the list will include non-objecting beneficial owners; and

    clarify the rule that prohibits purchases outside a tender offer
    (Rule 10b-13), codify prior interpretations of and exemptions from
    the rule; add several new exceptions to the rule, and redesignate it
    as new Rule 14e-5.

> **B. [Cross-Border Tender Offers, Rights Offers and Business
> Combinations]{.underline}**

The Commission has adopted exemptive provisions to facilitate the
inclusion of U.S. investors in tender and exchange offers, business
combinations and rights offerings for the securities of foreign
companies (Securities Act Release No. 7759 (October 22, 1999)).

**1. Reasons for the Exemptions**

Although it is very common for U.S. persons to hold securities of
foreign companies, they often are unable to participate fully in tender
offers, rights offerings and business combinations involving those
securities. Offerors often exclude U.S. security holders due to
conflicts between U.S. regulation and the regulation of the home
jurisdiction or the perceived burdens of complying with multiple
regulatory regimes.

In tender offers where the bidder is offering its own securities and
rights offers where existing shareholders are offered the opportunity to
buy more stock, in the absence of an exemption (such as the new
exemptions contained in the release), inclusion of U.S. holders would
require registration under the Securities Act. Registration requires the
issuer to provide to shareholders financial statements prepared in
accordance with U.S. accounting standards. Also, the issuer would incur
an ongoing reporting obligation in the United States.

**2. Harmful Effects of Excluding U.S. Investors**

U.S. investors often are unable to receive the full benefits offered to
other investors in these types of offshore transactions. When bidders
exclude the U.S. security holders from tender or exchange offers, the
U.S. investors are denied the opportunity to receive the full value of
the premium offered for their shares. (In some cases, these holders may
eventually have their securities acquired in a compulsory acquisition
when the offeror completes the acquisition.) Similarly, when issuers
exclude their U.S. security holders from participation in rights
offerings, the U.S. investors lose the opportunity to retain their
relative ownership position or possibly to purchase at a discount. (In
some instances, they may be able to receive the cash value of their
rights.)

These offshore transactions may affect the interests of the U.S.
investors in the foreign securities, regardless of whether they receive
information about the transaction or are able to participate directly in
the offer. For example, market activity in the stock after announcement
of a tender offer may affect the price of the stock. Even though U.S.
investors cannot participate in the tender offer, they must react to the
event by deciding whether to sell, hold, or buy additional securities.
Offerors will often take affirmative steps to prevent their
informational materials from being disseminated in the United States as
a means to avoid triggering U.S. regulatory requirements. U.S.
investors, therefore, must make this decision without the benefit of
information required by either U.S. or foreign securities regulation.

**3. The Exemptions**

The new exemptions balance the need to promote the inclusion of U.S.
investors in these types of cross-border transactions against the need
to provide U.S. investors with the protections of the U.S. securities
laws. The U.S. anti-fraud and anti-manipulation rules and civil
liability provisions will continue to apply to these transactions. The
rule changes became effective January 24, 2000.

New provisions in the tender offer rules exempt:

1.  tender offers for the securities of foreign private issuers from
    most provisions of the Exchange Act and rules governing tender
    offers when U.S. security holders hold 10 percent or less of the
    foreign company's securities that are subject to the offer (the
    "Tier I exemption").

    tender offers from certain limited provisions of the Securities
    Exchange Act of 1934 and rules governing tender offers when U.S.
    security holders hold 40 percent or less of a foreign private
    issuer's securities that are subject to the offer (the "Tier II
    exemption"). The Tier II exemption represents a codification of
    current exemptive and interpretive positions that eliminate frequent
    areas of conflict between U.S. and foreign regulatory requirements.

    tender offers for the securities of foreign private issuers from
    Rule 10b-13 of the Exchange Act (redesignated Rule 14e-5 in the
    Regulation M-A rulemaking), which will permit purchases outside the
    tender offer during the offer when U.S. security holders hold 10
    percent or less of the subject securities.

In addition, two new exemptions from the Securities Act registration and
Trust Indenture Act provisions exempt:

1.  under new Rule 801, rights offerings of equity securities by foreign
    private issuers from the registration requirements of the Securities
    Act when U.S. security holders hold 10 percent or less of the
    securities.

    under new Rule 802, securities issued in an exchange offer, merger
    or similar transaction for a foreign private issuer from the
    registration requirements of the Securities Act and the
    qualification requirements of the Trust Indenture Act when U.S.
    security holders hold 10 percent or less of the subject class of
    securities.

Some of the more significant changes from the November 1998 proposals
include:

1.  The U.S. ownership thresholds for the Rule 801 and Rule 802
    registration exemptions have been increased from five to 10 percent.

    Under a "cash-only alternative" for Tier I tender offers, bidders
    will be permitted to offer cash in the United States while offering
    securities offshore without violating the equal treatment
    requirements of the tender offer rules. The bidder must have a
    reasonable basis to believe that the cash being offered to U.S.
    security holders is substantially equivalent to the value of the
    consideration being offered to non-U.S. holders.

    Holders in both rights offerings and exchange offers would receive
    restricted stock under Rule 144 only to the extent their existing
    holdings were restricted. We had proposed treating all securities
    issued in rights offerings as restricted.

    In determining U.S. ownership, an offeror would be required to "look
    through" the record ownership of certain brokers, dealers, banks or
    nominees holding securities for the accounts of their customers. Ten
    percent holders, foreign or domestic, are excluded from the
    calculation, rather than just foreign 10 percent holders as had been
    proposed. Securities held by the bidder also are excluded from the
    calculation.

> **C. [Mini-Tender Offers and Tender Offers for Limited ]{.underline}**
>
> **[Partnership Units]{.underline}**

The Commission issued an interpretive release on July 24, 2000 (Exchange
Act Release No. 43069) that provides guidance on:

1.  the disclosure and dissemination of tender offers that result in the
    bidder holding five percent or less of the outstanding securities of
    a company ("mini-tender offers"); and

    the disclosure in tender offers for limited partnership units.

> **1. Mini-Tender Offers[\
> \
> ]{.underline}a. Background**

\"Mini-tender offers" are tender offers that would result in the bidder
holding not more than five percent of a company\'s securities, and are
generally structured to avoid the filing, disclosure and procedural
requirements of Section 14(d) of the Exchange Act and Regulation 14D.
Mini-tender offers, however, remain subject to the antifraud provisions
of Section 14(e) and the substantive and procedural requirements of
Regulation 14E. These requirements provide that a tender offer be open
for at least 20 business days, that the offer remain open for 10
business days following a change in the offering price or the percentage
of securities being sought, and that the bidder promptly pay for or
return securities when the tender offer expires.

Because mini-tender offers are not subject to Section 14(d) and
Regulation 14D, offerors are able to design the offer as a first-come,
first-served offer without withdrawal rights and prorationing. This
structure pressures security holders into tendering quickly. Permanently
locked into their decision, security holders are then unable to take
advantage of new information or opportunities that may become available
during the course of the offer. Disclosure in mini-tender offers is
usually deficient, and ordinarily does not communicate the absence of
these procedural protections to security holders.

Because of inadequate disclosure, some bidders have also been able to
devise schemes to confuse security holders about the actual offer price.
In some cases, the offer is for less than the market price. In other
cases, a premium is offered initially offered but bidders never intend
to pay a premium for the securities -- they wait and do not pay for the
securities tendered until the market price rises above the offer price.
They then sell the securities in the market and pay tendering security
holders with the proceeds. The Commission believes these practices are
"fraudulent practices" within the meaning of Section 14(e).

> **b. Disclosure Guidelines**

The interpretive release sets out specific disclosure guidelines for
bidders in mini-tender offers in order to avoid \"fraudulent, deceptive
or manipulative practices\" within the meaning of Section 14(e). Bidders
should provide clear disclosures concerning the offer price, price
changes, ability to finance the offer, identity of the bidder, plans or
proposals, conditions to the offer, possible extension of the offer, pro
rata acceptance, withdrawal rights, and the forthcoming target
recommendation.

For example, bidders should disclose clearly if the offer price is below
the market price. Bidders who make mini-tender offers at, or slightly
above, the market price of the security should communicate whether they
only intend to purchase the shares if the market price rises above the
offer price. Because security holders generally are not permitted to
withdraw their securities from the offer once the securities have been
tendered, failing to disclose the bidder's actual intentions may be
deemed a \"fraudulent, deceptive or manipulative practice\" within the
meaning of Section 14(e).

Similarly, bidders who do not have the financing necessary to purchase
the shares in the offer, and merely expect to sell tendered shares in
the market at a higher price and then use the proceeds to pay the
security holders who tendered at a lower price, would be under the same
obligation to disclose their plan in the tender offer materials. Rule
14e-8(c) also expressly prohibits a person from publicly announcing a
tender offer if that person \"does not have the reasonable belief that
the person will have the means to purchase the securities to complete
the offer.\"

> **c. Dissemination Guidelines**

The bidder in a tender offer must make reasonable efforts to disseminate
material information about the tender offer to security holders. The
failure to disseminate the disclosure frustrates the purpose of the
tender offer rules. The Commission believes dissemination of material
information using mechanisms the bidder knows or is reckless in not
knowing are inadequate would be a \"fraudulent, deceptive or
manipulative\" practice within the meaning of Section 14(e) and Rule
14e-1. It is the bidder\'s obligation to assure that security holders
get material information about the tender offer, including material
changes. Posting the information on a web site would not, by itself, be
adequate dissemination. Not all security holders have access to the
Internet. Further, merely sending the offering documents to DTC is not
an adequate means of communicating the information to security holders.
**\
**

> **d. Prompt Payment**

Rule 14e-1(c) requires bidders to pay the consideration offered or
return the tendered securities promptly after the termination or
withdrawal of the tender offer. The rule does not define \"promptly.\"
The Commission believes payment is prompt if made according to current
settlement practices (within three business days). Bidders who delay
payment because they expect to pay security holders with sales proceeds
of shares sold in the market at a price higher than the offer price risk
violating Section 14(e) and Rule14e-1(c).

If the target is a limited partnership, and its securities are not
listed on an exchange or quoted on an interdealer quotation system, it
may not be possible to pay within three days due to delays in
transferring the limited partnership interests. When the bidder is a
third party and cannot control the transfer and settlement process, we
would consider a reasonable extension of the three-day period to be in
compliance with Rule 14e-1(c). If the bidder is an affiliate, however,
and is able to control the settlement process, payment should not be
delayed for these reasons and should be made as soon as possible.

> **2. Tender Offers For Limited Partnership Units**
>
> **\
> a. Background**

Tender offers for limited partnership units, whether or not the bidder
is affiliated with the target, raise significant disclosure issues due
to the nature of limited partnership investments and offers. Limited
partnership units may be difficult to sell, and general partners face
conflicts of interest in deciding when and whether to liquidate the
partnership.

> **b. Disclosure Guidelines for Limited Partnership Tender Offers**

**\
i**. **Bidder Disclosure Guidelines**

In preparing disclosure documents for these transactions, bidders are
advised to remember that the 1991 release adopting the roll-up
provisions (Securities Act Release No. 6922 (October 30, 1991))
specifically addresses transactions, which, although by definition not
roll-ups, raise similar concerns. To avoid misleading security holders,
and to help investors make an informed investment decision, the
interpretive release states that bidders should disclose known risks,
conflicts of interest, market prices, methods of determining the offer
price, third party reports, valuations by the general partner, offer
purpose and plans, property/business disclosure, financial information,
tax consequences, transfer or processing fees, and anticipated price
reductions due to distributions.

When determining the adequacy of disclosure, bidders should focus on the
materiality of the information to security holders (Securities Act
Release No. 6900 (June 17, 1991)). For example, bidders should disclose
any valuation analysis that is materially related to the transaction or
used in determining offer price, and whether transfer fees may reduce
the amount of consideration received on a per unit or per investor
basis. If the bidder is affiliated with the target, it should disclose
the benefits of the transaction to the bidder and the reasons for
conducting the tender offer versus liquidating the partnership.

> **ii. Target Disclosure Guidelines**

Rule 14e-2 requires the general partner to respond within 10 days of
commencement of an offer by publicly stating the reasons for a position
with respect to the offer. To avoid misleading security holders, and in
order to assist investors in making an informed investment decision, we
recommend that targets disclose third party reports, valuations by the
general partner, and any conflicts of interest that arise when making a
recommendation. For example, disclose, if true, why the partnership is
not being liquidated in accordance with the terms in the original
offering document.

> **D. [Current Issues]{.underline}**

**1. Investment Banking Firm Disclaimers**

Boards of directors of companies soliciting shareholder voting and/or
investment decisions in connection with mergers and other extraordinary
transactions often retain investment banking firms as financial
advisors, in many cases to render an opinion on the financial fairness
of the transaction. In connection with its review of proxy statements,
Securities Act registration statements and other Commission filings made
in this context, the staff increasingly has observed the appearance of
disclaimers by or on behalf of the financial advisor regarding
shareholders\' right to rely on a fairness opinion that the advisor has
furnished to the registrant\'s board, a special committee of the board,
and/or the registrant. Examples of such disclaimers include the
following:

1.  \"No one other than the Board of Directors \[or the Special
    Committee and/or the Company\] has the right to rely on this
    opinion;\"

    \"This opinion is provided solely/only to the Board of Directors
    \[or the Special Committee and/or the Company\]:\"

    \"This opinion is solely/only for the benefit of the Board of
    Directors \[or the Special Committee and/or the Company\];\"

    \"No one may rely on this opinion without the prior consent of the
    Financial Advisor;\" and

    \"This opinion is addressed \[solely/only\] to the Board of
    Directors \[Special Committee and/or the Company\] and is not
    intended to be relied upon by any shareholder.\"

During the review and comment process, the staff has objected to such
statements as inconsistent with the balance of the registrant\'s
disclosure addressing the fairness to shareholders of the proposed
transaction from a financial perspective. Specifically, the staff has
requested that any such direct or indirect disclaimer of responsibility
to shareholders, whether made by or on behalf of the financial advisor,
be deleted from any portion of the disclosure document in which it
appears (including exhibits). Alternatively, the registrant may add an
explanation that clarifies:

1.  the basis for the advisor\'s belief that shareholders cannot rely on
    its opinion, including (but not limited to) whether the advisor
    intends to assert the substance of the disclaimer as a defense to
    shareholder claims that might be brought against it under applicable
    state law;

    whether the governing state law has addressed the availability of
    such a defense to the advisor in connection with any such
    shareholder claim; if not, a statement must be added that the issue
    necessarily would have to be resolved by a court of competent
    jurisdiction; and

    that the availability or non-availability of such a defense will
    have no effect on the rights and responsibilities of the board of
    directors under governing state law, or the rights and
    responsibilities of the board or the advisor under the federal
    securities laws.

**2. Identifying the Bidder in a Tender Offer**

Rule 14d-1(c)(1) of Regulation 14D defines \"bidder\" in a tender offer
as \"any person who makes a tender offer or on whose behalf a tender
offer is made.\" The term bidder, for Regulation 14D purposes, does not
include an issuer that makes a tender offer for its own securities. Each
bidder in a tender offer subject to Regulation 14D must file a Schedule
TO and disseminate the information required by that schedule.

The determination of who is the bidder does not necessarily stop at the
entity used to make the offer and purchase the securities. Rule
14d-1(c)(1) also requires persons \"on whose behalf\" the tender offer
is being made to be included as bidders. For instance, where a parent
company forms an acquisition entity for the purpose of making the tender
offer, both the acquisition entity and the parent company are bidders
even though the acquisition entity will purchase all securities
tendered. The staff views the acquisition entity as the nominal bidder
and the parent company as the real bidder. They both should be named
bidders in the Schedule TO. Each offer must have at least one real
bidder, and there can be co-bidders as well.

The fact that the parent company or other persons control the purchaser
through share ownership does not mean that the entity is automatically
viewed as a bidder. Instead, we look at the parent\'s or control
person\'s role in the tender offer. Bidder status is a question that is
determined by the particular facts and circumstances of each
transaction. A similar analysis of bidder status is made in a tender
offer subject only to Regulation 14E. When we analyze who is the bidder,
some relevant factors include:

1.  Did the person play a significant role in initiating, structuring,
    and negotiating the tender offer?

    Is the person acting together with the named bidder?

    To what extent did or does the person control the terms of the
    offer?

    Is the person providing financing for the tender offer, or playing a
    primary role in obtaining financing?

    Does the person control the named bidder, directly or indirectly?

    Did the person form the nominal bidder, or cause it to be formed?,
    and

    Would the person beneficially own the securities purchased by the
    named bidder in the tender offer or the assets of the target
    company?

One or two of these factors may control the determination, depending on
the circumstances. These factors are not exclusive.

We also consider whether adding the person as a named bidder means
shareholders will receive material information that is not otherwise
required under the control person instruction, Instruction C to Schedule
TO. However, this issue is not dispositive of bidder status. A person
who qualifies as a bidder under Rule 14d-1(c)(1) must be included as a
bidder on the Schedule TO even if the disclosure in the Schedule TO will
not change as a result. Instruction C elicits information about the
control persons of the bidder. Merely disclosing the Instruction C
information does not eliminate the requirement that the real bidder sign
the Schedule TO and take direct responsibility for the disclosure. Where
the real bidder does not sign the Schedule TO and does not provide the
required disclosure, the parties run the risk of having to extend the
offer to provide a full 20 business day period for shareholders to
consider the new information.

If a named bidder is an established entity with substantive operations
and assets apart from those related to the offer, the staff ordinarily
will not go further up the chain of ownership to analyze whether that
entity\'s control persons are bidders. However, it still would be
possible for other parties involved with the offer to be co-bidders. The
factors listed above would be used in the analysis. In addition, we
would consider the degree to which the other party acted with the named
bidder, and the extent to which the other party benefits from the
transaction.

> **3. Schedule 13E-3 Filing Obligations of Issuers or Affiliates
> Engaged in a Going-Private Transaction**

Generally, Exchange Act Rule 13e-3 requires that each issuer and
affiliate engaged, directly or indirectly, in a going-private
transaction file a Schedule 13E-3 with the Commission and furnish the
required disclosures (e.g., the statement of \"reasonable belief\" as to
the fairness or unfairness of the proposed transaction) directly to the
holders of the class of equity securities that is the subject of the
transaction. A joint filing may be permissible in this situation,
provided each filing person individually makes the required disclosures
and signs the Schedule 13E‑3.

Two separate but related issues may be raised with respect to the
determination of \"filing-person\" status in situations where a third
party proposes a transaction with an issuer that has at least one of the
requisite \"going-private\" effects: first, what entities or persons are
\"affiliates\" of the issuer within the scope of Rule 13e‑3(a)(1) and,
second, when should those affiliates be deemed to be engaged, either
directly or indirectly, in the going-private transaction. While
resolution of both issues necessarily turns on all relevant facts and
circumstances of a particular transaction, you should note the
following.

First, the staff consistently has taken the position that members of
senior management of the issuer that is going private are affiliates of
that issuer. Depending on the particular facts and circumstances of the
transaction, such management also might be deemed to be engaged in the
transaction. As a result, such management-affiliates may incur a
Schedule 13E‑3 filing obligation separate from that of the issuer. For
example, the staff has taken the position that members of senior
management of an issuer that will be going private are required to file
a Schedule 13E-3 where the transaction will be effected through merger
of the issuer into the purchaser or that purchaser\'s acquisition
subsidiary, even though:

1.  such management\'s involvement in the issuer\'s negotiations with
    > the purchaser is limited to the terms of each manager\'s future
    > employment with and/or equity participation in the surviving
    > company; and

    > the issuer\'s board of directors appointed a special committee of
    > outside directors to negotiate all other terms of the transaction
    > except management\'s role in the surviving entity.

An important aspect of the staff\'s analysis was the fact that the
issuer\'s management ultimately would hold a material amount of the
surviving company\'s outstanding equity securities, occupy seats on the
board of this company in addition to senior management positions, and
otherwise be in a position to \"control\" the surviving company within
the meaning of Exchange Act Rule 12b‑2 ([i.e.]{.underline},
\"possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether through
the ownership of voting securities, by contract, or otherwise.\").

Second, questions have arisen regarding the nature and scope of the
Schedule 13E-3 filing obligation of an acquiring person, or
\"purchaser,\" in a merger or other going-private transaction. In the
situation described in above, where management of the issuer-seller that
will be going private is essentially \"on both sides\" of the
transaction, the purchaser also may be deemed to be an affiliate of the
issuer engaged in the transaction and, as a consequence, required to
file on Schedule 13E‑3. See Exchange Act Release No. 16075 (August 2,
1979) (noting that \"affiliates of the seller often become affiliates of
the purchaser through means other than equity ownership, and thereby are
in control of the seller\'s business both before and after the
transaction. In such cases the sale, in substance and effect, is being
made to an affiliate of the issuer\...\"). Accordingly, the
issuer-seller, its senior management and the purchaser may be deemed
Schedule 13E-3 filing persons in connection with the going-private
transaction. Where the purchaser has created a merger subsidiary or
other acquisition vehicle to effect the transaction, moreover, the staff
will \"look through\" the acquisition vehicle and treat as a separate,
affiliated purchaser the intermediate or ultimate parent of that
acquisition vehicle. Accordingly, [both]{.underline} the acquisition
vehicle and the entity or person who formed it to acquire the issuer
would have separate filing obligations (although, as noted, a joint
filing may be permitted by the staff).

**III. [ELECTRONIC FILING AND TECHNOLOGY]{.underline}**

**A. [EDGAR]{.underline}**

The Commission\'s Electronic Data Gathering, Analysis, and Retrieval
(\"EDGAR\") system has been operational since 1992, with mandated
electronic filing by those subject to the Division\'s review beginning
in April 1993. Electronic filings are publicly available on a 24-hour
delayed basis in the "EDGAR Database" area of the Commission's web site,
*http://www.sec.gov*. This area also contains other information about
EDGAR, including an outline entitled "Electronic Filing and the EDGAR
System: A Regulatory Overview."

On June 22, 1998, the Commission awarded to TRW, Inc. a three year
contract for the modernization of the EDGAR System, with options for
contract extensions for up to five years. The EDGAR architecture will be
converted to an Internet-based system using Hyper Text Markup language
("HTML") as the filing format, and also will support the attachment of
graphical files. The new system is expected to reduce costs and efforts
of preparing and submitting electronic filings, as well as permit more
attractive and readable documents.

On May 17, 1999, the Commission issued Securities Act Release No. 7684
adopting new rules and amendments to existing rules and forms in
connection with the first stage of EDGAR modernization. The rules became
effective June 28, 1999.

On June 28, the Commission began accepting live filings submitted in
HTML, as well as documents submitted in the currently required American
Standard Code for Information Interchange ("ASCII") format. Filers have
the option of accompanying their required filings with unofficial copies
in Portable Document Format ("PDF"). Filers also are encouraged to
submit test filings that include documents in HTML and PDF format.

On April 24, 2000, the Commission issued Securities Act Release No. 7855
adopting rule amendments in connection with the next stage of EDGAR
modernization, which was implemented May 30, 2000. The release addresses
the following new features of the system and related rule changes:

1.  the ability to include graphic and image files in HTML documents;

    the expanded ability to use hyperlinks in HTML documents, including
    links between documents within a submission and to previously filed
    documents on our public web site EDGAR database at *www.sec.gov*;
    and

    the addition of the Internet as an available means of transmitting
    filings to the EDGAR system.

The release removes the requirement for filers to submit Financial Data
Schedules, effective January 1, 2001. It also removes diskettes as an
available means of transmitting filings to the EDGAR system, effective
July 10, 2000. All other rule changes became effective May 30, 2000.

The proposing release (Securities Act Release No. 7803, February 25,
2000) solicited comments on the concept of requiring more filings to be
made electronically, such as Forms 3, 4, 5, 144, and foreign private
issuer filings. The Commission will consider the comments received in
connection with future rule proposals.

**B. [Electronic Delivery of Information]{.underline}**

The Commission has issued a series of interpretive releases and rules
addressing the use of electronic media to deliver or transmit
information under the federal securities laws. These initiatives reflect
the Commission's continuing recognition of the benefits that electronic
technology provides to the financial markets. These releases are
premised on the belief that the use of electronic media should be at
least an equal alternative to the use of paper delivery.

**1. 1995 Interpretive Release**

The first interpretive release (Securities Act Release No. 7233 (Oct. 6,
1995)) provides guidance to issuers who use electronic media to comply
with the applicable delivery requirements of the federal securities
laws. Information distributed through electronic means may be viewed as
satisfying the delivery requirements of the federal securities laws if
it results in the delivery to the intended recipients of substantially
equivalent information as they would have had if the information were
delivered in paper form. The release advises issuers to consider the
following:

1.  Has timely and adequate notice been provided to the investor that
    the information is available?

    Does the investor have access to the information? Specifically:

    is it practically accessible?

    is it available on-line for as long as a delivery requirement
    applies?

    does the investor have the opportunity to retain the information or
    have ongoing access equivalent to personal retention?

    is it available in paper upon request?

    Does the selected distribution method provide reasonable assurance
    that it will result in delivery? Examples for consideration by
    persons with delivery obligations include:

    an investor has given an informed consent to receive the information
    through a particular electronic medium and been provided appropriate
    notice and access;

    there is evidence that the investor actually received the
    information (for example, electronic mail return receipt or
    confirmation of downloading);

    the information is provided by facsimile to an investor who has
    provided a fax machine number;

    the investor has accessed an electronic document with hypertext
    linking to a document required to be delivered; or

    an investor returns an order form available only through an
    electronically delivered document.

The release also contains numerous examples applying these concepts to
specific fact situations.

**2. 1996 Interpretive Release and Rulemaking**

The second interpretive release primarily addresses issues associated
with the electronic delivery of information by broker-dealers, transfer
agents and investment advisers under certain Exchange Act and Advisers
Act rules (Securities Act Release No. 7288 (May 9, 1996)). The release
also contains a section following up the 1995 release with additional
examples.

At the same time, the Commission also adopted a number of technical
amendments to its rules and forms intended to codify some
interpretations set out in the 1996 release (Securities Act Release No.
7289 (May 9, 1996)). Most changes relate to rules that require
distribution of information by mail, or rules that require presentation
of information in a specified type size or font, or in red ink or
bold-face type. For example, if a rule requires presentation of a legend
using a specified type size and font, the rule now provides that if an
electronic medium is used, the legend must be presented using any means
reasonably calculated to draw attention to it.

**3. 2000 Interpretive Release**

The most recent interpretive release addresses a number of questions
concerning the use of electronic media under the federal securities laws
(Securities Act Release No. 7856 (Apr. 25, 2000)).

**a. Electronic Delivery**

The release resolves several issues arising out of the 1995 and 1996
releases on the use of electronic media to satisfy delivery obligations
under the federal securities laws. In brief, the release:

1.  clarifies that, in addition to written consent, investors and
    security holders may consent to electronic delivery of documents
    telephonically, as long as the consent is obtained in a manner that
    assures its validity and a record of the consent is retained;

    permits market intermediaries (such as broker-dealers and banks) to
    obtain consent to electronic delivery of documents on a "global,"
    multiple-issuer basis, as long as the consent is informed;

    clarifies that issuers and market intermediaries may deliver
    documents electronically in portable document format, or PDF, as
    long as investors and security holders are adequately informed of
    the requirements to download PDF and are provided with any necessary
    software and assistance;

    clarifies that a hyperlink embedded within a prospectus or any other
    document required to be filed or delivered under the federal
    securities laws causes the hyperlinked information to be a part of
    that document; and

    clarifies that the close proximity of information on a web site to a
    public offering prospectus does not, by itself, make that
    information an "offer to sell," "offer for sale" or "offer" within
    the meaning of the federal securities laws.

**b. Web Site Content**

The release also provides guidance on an issuer's responsibility under
the anti-fraud provisions of the federal securities laws for information
on a third-party web site to which the issuer has established a
hyperlink and for its web site communications when conducting a public
offering.

> **i. Responsibility for Hyperlinked Information**

Issuers have been concerned that by establishing a hyperlink from their
corporate web sites to information on a third-party web site they may be
held liable for any material misstatements contained in the hyperlinked
information. The release confirms that the attribution of hyperlinked
information on the third-party web site to an issuer depends on the
facts and circumstances of the particular situation. Hyperlinked
information will be considered to be "adopted" by an issuer if the
issuer, explicitly or implicitly, has endorsed or approved the
hyperlinked information. The release discusses three, non-exclusive
factors that are relevant in answering this question: the context of the
hyperlink, the risk of investor confusion and the presentation of the
hyperlinked information.

**ii.** **Web Site Content When in Registration**

The release reminds issuers that, when in registration, their web site
content, like their other communications to the securities markets, is
subject to Section 5 of the Securities Act. Issuers are directed to the
Commission's long-standing guidance on permissible business and
financial communications while in registration and instructed on how to
apply this guidance to their Internet web sites. This guidance (which
was originally directed only to publicly-traded companies) is extended
to non-reporting issuers conducting initial public offerings as well.

**c. Registered Offerings**

The release discusses two fundamental legal principles that have shaped,
and will continue to shape, the Commission\'s view on the evolving
practices for conducting online registered offerings. First, offering
participants can neither sell, nor make contracts to sell, a security
before effectiveness of the related registration statement.
Consequently, no offer to buy may be accepted and no part of the
purchase price may be received for a security until the registration
statement becomes effective. Second, until delivery of the final
prospectus has been completed, offers cannot be made outside of a
Section 10 prospectus (except in connection with business combinations).
The Commission reserves the development of detailed procedures for
conducting online registered offerings to further staff interpretation
and Commission regulatory action as it gains more experience through the
review and comment process.

**d. Private Placements Under Regulation D**

The 1995 release indicated that an issuer's use of a web site in
connection with a purported private offering would constitute a "general
solicitation" and disqualify the offering as "private." Subsequently,
the staff issued interpretive guidance to a registered broker-dealer and
an affiliated entity that proposed to invite previously unknown
prospective investors to complete a questionnaire posted on the
affiliate's web site in order to build a database of accredited and
sophisticated investors for the broker-dealer. The guidance permitted
prospective investors, once qualified to access a password-restricted
web page containing information about private offerings, so long as they
were restricted to participating in offerings posted on the web site
[after]{.underline} they had opened an account with the broker-dealer.
(See the discussion of the staff's interpretive letter to *IPONET* (July
26, 1996) in Section X.E. below.)

The release reminds issuers contemplating an online private offering and
web site operators purporting to facilitate these transactions that
their offering activities must not involve a "general solicitation." The
release points out that one method of ensuring that a general
solicitation is not involved is to establish the existence of a
"pre-existing, substantive relationship" and that, generally, staff
interpretations of whether a "pre-existing, substantive relationship"
exists have been limited to procedures established by broker-dealers in
connection with their customers. The presence or absence of a general
solicitation, however, is always dependent on the facts and
circumstances of each particular case.

In addition, web site operators need to consider whether the activities
that they are undertaking require them to register as broker-dealers
under Section 15 of the Exchange Act. Generally, broker-dealer
registration is required to effect transactions in securities even where
the securities are exempt from registration under the Securities Act.

**e. Technology Concepts**

To facilitate any necessary regulatory action in the future, the release
solicits comment on a number of issues involving the use of electronic
media under the federal securities laws, including:

1.  the circumstances, if any, under which the requirement to deliver a
    disclosure document could be satisfied by simply posting the
    document on an Internet web site;

    the circumstances, if any, under which an investor would be deemed
    to have consented to electronic delivery of a disclosure document
    because the investor did not affirmatively reject electronic
    delivery, so-called "implied consent";

    the circumstances, if any, under which the posting, rather than the
    direct delivery, of electronic notice might constitute adequate
    notice of the availability of electronic disclosure documents;

    issues that arise in the context of "electronic-only" offerings;

    the factors, if any, to be considered in determining anti-fraud
    liability for outdated information on an issuer's web site;

    permissible communications when in registration by businesses that
    operate solely through their web sites; and

    issues associated with Internet discussion forums.

**4. Additional Guidance**

Interpretive letters addressing particular issues regarding electronic
dissemination also provide guidance in this area. See Section X of this
outline. See also Section VIII.A.5. for guidance concerning on-line
offerings and related communications.

> **C. [Interpretive Release Relating to Use of Internet Web Sites to
> Offer Securities, Solicit Securities Transactions or Advertise
> Investment Services Offshore]{.underline}**

The Commission issued an interpretive release on March 23, 1998, that
provides guidance on the application of the registration requirements of
the U.S. securities laws to offers of securities or investment services
made on Internet Web sites by foreign issuers, investment companies,
investment advisers, broker-dealers and exchanges. In the release
(Securities Act Release No. 7516), the Commission expresses its views on
when the posting of offering or solicitation materials on Internet Web
sites would not be considered to be an offering "in the United States."

The release states that, for purposes of the registration requirements
only, offshore Internet offers and solicitation activities would not be
considered to be made "in the United States" if Internet offerors
implement measures that are reasonably designed to ensure that their
offshore Internet offers are not targeted to the United States or to
U.S. persons. In the Commission's view, offshore Internet offers that
are not targeted to the United States would not trigger the registration
requirements of the U.S. securities laws, even if U.S. persons are able
to access the Web site offers.

The interpretation suggests measures that Web site offerors could
implement to guard against targeting their offers to the United States.
The measures outlined in the release are not exclusive. Other procedures
may suffice to guard against sales to U.S. persons. Under the
interpretation's general approach, a foreign offeror could post an offer
on its Web site without registering the offer, if: i) the offeror puts a
meaningful disclaimer on the Web site that would specify intended
offerees by identifying the jurisdictions in which the offer is or is
not being made; and ii) the offeror implements measures reasonably
designed to prevent sales to U.S. persons.

The release explains that the measures suggested under the general
approach may not be adequate for U.S. offerors making offshore Internet
offers. Because domestic offerors are very likely to have significant
contacts with the United States, and because investors may reasonably
assume SEC regulation of the Internet offers of domestic entities, the
Commission believes that U.S. offerors making offshore Internet offers
should, in addition to following the general approach, password protect
their Web sites to ensure that only non-U.S. persons may access their
unregistered Web site offers.

Offerors may wish to post their offerings on third-party Internet sites
or communicate with offerees through forms of Internet communication
that are more directed than through an Internet Web site posting.
Depending on the activities and status of the offerors, implementation
of the measures described under the general approach may not be adequate
to guard against targeting the United States. For example:

1.  If an offeror seeks to have its offshore offer posted on the Web
    sites of third parties that are acting on its behalf, such as Web
    site service providers or underwriters, the offeror should only use
    third parties that employ at least the same level of precautions
    against targeting the United States as would be adequate for the
    offeror to employ.

    If, to generate interest in their offshore Internet offers, offerors
    use the services of investment-oriented Web site sponsors that have
    a significant number of U.S. clients or subscribers, then those
    offerors should employ measures to ensure that only non-U.S. persons
    may access the offering materials on their Web sites.

    Offerors that address or direct communications, such as e-mail,
    about their offers to particular U.S. persons or groups must assume
    the responsibility of determining when their offering communications
    are being sent to persons in the United States, and must fully
    comply with U.S. securities laws.

The release discusses issues that arise under the Securities Act of 1933
when foreign issuers make offshore Internet offers at the same time they
make other offers in the United States. Offerors of concurrent offerings
should consider whether, in addition to following the general approach,
they should implement more restrictive measures to avoid targeting the
United States. The release indicates that:

1.  Offerors of concurrent offshore Internet and U.S. private offers may
    not use their Web site offers as a means to solicit investors for
    their U.S. private offerings. The release suggests two non-exclusive
    ways to reach that result. These offerors could either: i) allow
    unrestricted access to their offshore Internet offers, but implement
    procedures to identify respondents to their Web site offers and
    restrict them from participating in their U.S. private offers;
    or ii) limit access to their offshore Internet offers to only those
    respondents who first provide the offerors with information
    indicating that they are not U.S. persons.

    Offerors of concurrent offshore Internet and U.S. registered offers
    should keep in mind U.S. securities laws limitations on pre-filing
    and waiting period communications.

In addition to addressing issues under the Securities Act of 1933, the
release provides guidance on the application of the general approach to
the registration obligations under the Investment Company Act of 1940,
the Investment Advisers Act of 1940, and the broker-dealer and exchange
registration provisions under the Securities Exchange Act of 1934.

**D.** **[Roadshows]{.underline}**

Please see Section VI.A. of this outline. The significant no-action
letters that the Division has issued regarding the electronic
transmission of roadshow presentations are summarized in Section X.C. of
this outline. In light of the pending rulemaking, the Division will no
longer respond to interpretive or no-action requests about roadshows.

**IV. [SMALL BUSINESS ISSUES]{.underline}**

**A. [Small Business Initiatives]{.underline}**

The Commission has undertaken several initiatives to help small
businesses, including the following:

1.  A special Corporation Finance headquarters unit specializes in small
    company filings and the needs of small businesses, including
    crafting rules to lessen the burden of Commission\'s regulation on
    these issuers. The telephone number for the unit is (202) 942‑2950.

    The Commission's Internet site (*http://www.sec.gov*) has been
    enhanced to provide information specifically designed for small
    business and access to such Commission publications as \"Q & A:
    Small Business and the SEC.\"

    The Division has added a new section to the Small Business
    Information page on the Commission\'s Internet site. The new
    section, Small Business Forms and Associated Regulations, provides
    guidance to small businesses as they prepare their SEC filings under
    the Securities Act of 1933 and Securities Exchange Act of 1934. The
    new section contains the text of a number of forms and regulations
    of interest to small businesses. Hypertext links between the forms
    and the regulations are provided, and updates will be made to
    reflect the adoption of new rules or changes to existing rules. More
    forms and rules will be added in the future.

    Since 1996, a number of town hall meetings between the Commission
    and small businesses have been conducted throughout the United
    States. These town hall meetings convey basic information to small
    businesses about fundamental requirements that must be addressed
    when they wish to raise capital through the public sale of
    securities. In addition, the Commission hopes to learn more about
    the concerns and problems facing small businesses in raising capital
    so that programs can be designed to meet their needs, consistent
    with the protection of investors.

    The 19th annual Government-Business Forum on Small Business Capital
    Formation was held in San Antonio, Texas on September 11-12, 2000.
    This platform for small business is the only
    governmentally-sponsored national gathering for small business,
    which offers annually the opportunity for small businesses to let
    government officials know how the laws, rules and regulations are
    affecting their ability to raise capital. The next
    Government-Business Forum will be in Colorado in September of 2001.

**B. [Small Business Rulemaking]{.underline}**

**1. Rule 504 of Regulation D**

On February 25, 1999, the Commission issued a release (Securities Act
Release No. 7644) adopting amendments to Rule 504, the limited offering
exemption under Regulation D. Rule 504 permits non-reporting issuers to
offer and sell securities to an unlimited number of persons without
regard to their sophistication or experience and without delivery of any
specified information. The aggregate offering price of this exemption is
limited to \$1 million in any 12-month period, and certain other
offerings must be aggregated with the Rule 504 offering in determining
the available sales amount. Before these amendments were adopted,
general solicitation and advertising was permitted and the securities
sold under this exemption could be resold freely by non-affiliates of
the issuer.

Unfortunately, there have been some disturbing developments in the
secondary markets for some securities initially issued under Rule 504,
and to a lesser degree, in the initial Rule 504 issuances themselves.
These offerings generally involve the securities of "microcap"
companies. Recent market innovations and technological changes, most
notably, the Internet, have created the possibility of nation-wide Rule
504 offerings for securities of non-reporting companies that were once
thought to be sold locally.

As part of the Commission's comprehensive agenda to deter registration
and trading abuses, particularly by microcap issuers, in May 1998, the
Commission proposed amendments to Rule 504 to eliminate the freely
tradable nature of the securities issued under the exemption (Securities
Act Release No. 7541). Under the proposals, these securities could only
have been resold only after the one-year holding period of Rule 144,
through registration, or through another exemption (such as Regulation
A) if available. The Commission also solicited comment on an alternative
to revise Rule 504 so it would be substantially similar to its pre-1992
format, permitting public offerings only where the issuer complies with
state registration processes that require the preparation and delivery
of a disclosure document to investors before sale of the securities.
Comment also was solicited on the appropriate treatment for offerings
made under certain state exemptions, such as the one recently developed
for sales to accredited investors ([e.g]{.underline}., the Model
Accredited Investor Exemption).

Almost all commenters objected to the proposal to make all securities
issued in a Rule 504 transaction restricted, since it would require
issuers to offer a substantial liquidity discount in all Rule 504
issuances, even fully state registered ones, causing a significant
reduction of capital. Commenters believed that the alternative approach,
which was to reinstitute the rule largely as it had been in effect for a
number of years before 1992, would be equally, if not more, effective.
If an issuer goes through state registration and must deliver a
disclosure document to investors, sufficient information ought to be
available in the markets to permit investors to make more informed
investment decisions and thus deter manipulation of Rule 504 securities.

After consideration of the comments, the Commission decided to return to
the pre-1992 approach, which should deter microcap fraud without unduly
penalizing small businesses. As amended, Rule 504 establishes the
general principle that securities issued under the exemption, just like
the other Regulation D exemptions, will be restricted, and prohibits
general solicitation and general advertising, unless the specified
conditions permitting a public offering are met. These conditions are:

1.  the transactions are registered under a state law requiring public
    filing and delivery of a substantive disclosure document to
    investors before sale. For sales to occur in a state without this
    sort of provision, the transactions must be registered in another
    state with such a provision and the disclosure document filed in the
    state must be delivered to all purchasers before sale in both
    states; or

    the securities are issued under a state law exemption that permits
    general solicitation and advertising, so long as sales are made only
    to accredited investors as that term is defined in Regulation D.

Most Rule 504 offerings are private. Private Rule 504 offerings are
still permitted for up to \$1 million in a 12-month period, under the
same terms and conditions, except for the specific disclosure
requirements, as offerings under Rules 505 and 506. Securities in these
offerings would be restricted, and these offerings would no longer
involve general solicitation and advertising.

In response to questions the staff has received about the Rule 504
amendments, we would like to point that for public offerings registered
under the provisions of a complying state registration system (New York
and the District of Columbia do not have such a system), such offerings
must be made exclusively to the citizens of the state(s) of
registration. Registration in one state and attempted sale to the
citizens of another state (except for New York and the District of
Columbia) would not meet the public offering requirements and also may
violate the law of the state where registration was not effected.
Registration under a state law with sales to citizens of a foreign
jurisdiction would not meet the standards for a public offering under
revised Rule 504.

**2. Rule 701**

On February 25, 1999, the Commission issued a release (Securities Act
Release No. 7645) adopting amendments to Rule 701 under the Securities
Act of 1933, which allows private companies to sell securities to their
employees without the need to file a registration statement, as public
companies do. Rule 701 provides an exemption from the registration
requirements of the Securities Act for offers and sales of securities
under certain compensatory benefit plans or written agreements relating
to compensation. The exemptive scope covers securities offered or sold
under a plan or agreement between a non-reporting company (or its
parents or majority-owned subsidiaries) and the company's employees,
officers, directors, partners, trustees, consultants and advisors Before
these amendments were adopted, the total amount of securities that could
be offered in the preceding 12 months could not exceed the greater of
\$500,000 or an amount determined under one of two formulas (i.e., 15%
of the issuer's total assets or 15% of the outstanding securities of the
class being offered), but in no event more than \$5 million.

In February 1998, the Commission proposed a number of revisions to
increase the flexibility and usefulness of Rule 701, as well as to
simplify and clarify the rule (Securities Act Release No. 7511). On
February 25, 1999, the Commission issued an adopting release that:

1.  removes the \$5 million aggregate offering price ceiling and,
    instead, sets the maximum amount of securities that may be sold in a
    year at the greatest of:

    \$1 million (rather than the current \$500,000);

    15% of the issuer's total assets; or

    15% of the outstanding securities of the class;

    requires issuers to provide specific disclosure if more than \$5
    million worth of securities are to be sold (i.e., a copy of the
    compensatory benefit plan or contract; a copy of the summary plan
    description required by the Employee Retirement Income Security Act
    of 1974 ("ERISA"), or if the plan is not subject to ERISA, a summary
    of the plan's material terms; risk factors associated with
    investment in the securities under the plan or agreement; and the
    financial statements required in an offering statement on Form 1-A
    under Regulation A);

    does not count offers for purposes of calculating the available
    exempted amounts;

    harmonizes the definition of consultants and advisors permitted to
    use the exemption to the narrower definition of Form S-8, thereby
    narrowing the scope of eligible consultants and advisors;

    amends Rule 701 to codify current and more flexible interpretations;
    and

    simplifies the rule by recasting it in plain English.

Non-reporting foreign private issuers will be required to provide the
same disclosure as non-reporting domestic issuers if sales under Rule
701 exceed \$5 million in a 12-month period. When, and if, the
Commission accepts international accounting standards or guidelines for
filing and reporting purposes, Rule 701 will be amended to allow theses
standards to satisfy Rule 701's financial statement disclosure
obligations for foreign private issuers. For issuers making smaller
offerings, the foreign companies may continue to follow the rule as they
have in the past, which means that "home country" reports may be used,
as necessary, to satisfy the antifraud standards. However, both domestic
and foreign private issuers that cross the \$5 million barrier will have
to provide the disclosure required under Regulation A, which includes
unaudited financial statements. Where the foreign private issuer does
not provide financial statements prepared in accordance with U.S. GAAP,
a reconciliation to such principles must be attached.

These amendments to Rule 701 became effective on April 7, 1999. The
changes to the rule are not retroactive. Offers and sales made in
reliance before the effective date will continue to be valid if they
meet the conditions of the rule before its revision.

Because of errors in the Federal Register version of the adopting
release, a different way of calculating the amount of the exempt
offering appears in the Code of Federal Regulations than that approved
by the Commission. On November 5, 1999, the Secretary of the Commission
issued a release (Securities Act Release No. 7645A) to correct the
errors. The correction deletes a reference to the necessity of only
making calculations based upon an annual balance sheet. The original
intention was to permit calculations to be made on the basis of interim
balance sheets as long as they were no older than the issuer's most
recent fiscal year end.

**V. [INTERNATIONALIZATION OF THE SECURITIES MARKETS]{.underline}**

**A. [Foreign Issuers in the U.S. Market]{.underline}**

Foreign companies raising funds from the public or having their
securities traded on a national exchange or the Nasdaq Stock Market are
generally subject to the registration requirements of the Securities Act
and the registration and reporting requirements of the Exchange Act. The
Commission has provided a separate integrated disclosure system for
foreign private issuers that provides a number of accommodations to
foreign practices and policies. These accommodations include:

1.  interim reporting on the basis of home country and stock exchange
    practice rather than quarterly reports;

    exemption from the proxy rules and the insider reporting and short
    swing profit recovery provisions of Section 16;

    aggregate executive compensation disclosure rather than individual
    disclosure, if so permitted in an issuer\'s home country;

    acceptance of three International Accounting Standards relating to
    cash flow statements (IAS \# 7), business combinations (IAS \# 22)
    and operations in hyperinflationary economies (IAS \# 21);

    offering document financial statements updated principally on a
    semi-annual, rather than a quarterly basis; and

    an exemption from Exchange Act registration under Section 12(g) for
    foreign private issuers that have not engaged in a U.S. public
    offering or whose securities are not traded on a national exchange
    or the Nasdaq Stock Market.

Additionally, the Commission staff has implemented procedures to review
foreign issuers\' disclosure documents on an expedited basis and in
draft form, if requested by the issuer. This helps to facilitate
cross-border offerings and listings in light of potentially conflicting
home-country schedules and disclosure requirements.

Over the last five years, the number of foreign companies accessing the
U.S. public markets has increased dramatically. As of October 1, 2000,
there were over 1300 foreign companies from over 58 countries filing
periodic reports with the Commission.

In addition to the topics discussed below in this "Internationalization"
section, the Commission has issued an interpretive release on offshore
Internet offerings; see Section III.C.

> **B. [Abusive Practices under Regulation S and Amendments
> to]{.underline}**

#### Regulation S

The Commission adopted Regulation S in 1990 to clarify the applicability
of the Securities Act registration requirements to offshore
transactions. Since the adoption of Regulation S, a number of abusive
practices have developed involving unregistered sales of equity
securities by U.S. companies purportedly in reliance upon Regulation S.
These transactions have resulted in indirect distributions of those
securities into the United States without the investor protection
provided by registration.

Regulation S has been used as a means of perpetrating fraudulent and
manipulative schemes. In these schemes, the securities are being placed
offshore temporarily to evade U.S. registration requirements, but the
ownership of the securities never leaves the U.S. market, or a
substantial portion of the economic risk is left in or is returned to
the U.S. market during the restricted period, or there is no reasonable
expectation that the securities could be viewed as coming to rest
abroad.

In June 1995, the Commission issued an interpretive release that
described certain abusive practices under Regulation S and requested
comment on whether the regulation should be revised to limit its
vulnerability to abuse, Securities Act Release No. 7190 (June 27, 1995).
To address continued abuses of this rule, the Commission published for
comment a proposal to amend Regulation S, Securities Act Release No.
7392 (February 20, 1997). In February 1998, the Commission adopted most
of these proposed amendments, Securities Act Release No. 7505 (Feb. 17,
1998).

The amendments are designed to eliminate abusive practices under
Regulation S, while preserving the benefits of the rule for capital
formation. As a result of these amendments, securities offered and sold
by domestic issuers pursuant to the Regulation S exemption will be
treated in a manner similar to securities sold under the Regulation D
exemption from registration.

The amendments to Regulation S affect offshore offerings of equity
securities, including convertible securities, by U.S. companies. The
amendments are as follows:

1.  Equity securities of domestic issuers placed offshore pursuant to
    Regulation S are classified as \"restricted securities\" within the
    meaning of Rule 144, so that resales without registration or an
    exemption from registration will be restricted;

    To avoid confusion between the holding period for \"restricted
    securities\" under Rule 144 and the \"restricted period\" under
    Regulation S, the term \"restricted period\" is renamed the
    \"distribution compliance period;"

    The distribution compliance period for these securities is
    lengthened from 40 days to one year;

    Certification, legending and other requirements, which were
    applicable only to sales of equity securities by non-reporting
    issuers, are imposed on these equity securities;

    Purchasers of these equity securities are required to agree that
    their hedging transactions with respect to these securities will be
    conducted in compliance with the Securities Act, such as Rule 144
    thereunder; and

    Domestic issuers are able to report sales of equity securities
    pursuant to Regulation S on a quarterly basis, rather than on Form
    8-K. This change in reporting requirement was not effective until
    January 1, 1999, to allow Commission staff to monitor developments
    under the new amendments.

In addition, the amendments codify an existing Commission interpretive
position that resales of these equity securities offshore do not \"wash
off\" the restrictions applicable to these securities.

**C. [International Accounting Standards]{.underline}**

The Commission has been working with the International Accounting
Standards Committee (IASC) through the International Organization of
Securities Commissions (IOSCO) since 1987 in an effort to develop a set
of accounting standards for cross-border offerings and listings. The
IASC is an independent, private sector body that was formed in 1973 by
the professional accounting bodies in the U.S. and eight other
industrialized countries to improve and harmonize accounting standards.

In July 1995, IOSCO and the IASC joined in an announcement that the IASC
had developed a work program focusing on a core set of standards
previously identified by IOSCO as being the necessary components of a
reasonably complete set of accounting standards. The announcement noted
that completion of comprehensive core standards that are acceptable to
the IOSCO Technical Committee would allow the Technical Committee to
recommend endorsement of the standards for cross-border capital raising
and listing purposes in all global markets.

In April 1996, the IASC announced that it had accelerated its work
program, and the Commission responded with a press release expressing
support for the IASC\'s objective. The Commission\'s statement noted
that the standards should include a core set of accounting
pronouncements that constitute a comprehensive, generally accepted basis
of accounting; that the standards be of high quality,
[i.e.]{.underline}, they must result in comparability and transparency,
and they must provide for full disclosure; and that the standards must
be rigorously interpreted and applied. In October 1997, the Commission
published a report to Congress that discussed the progress of the IASC.
The report is available on the Commission's web site.

The IASC has completed substantially all the components of its core
standards project, and both IOSCO and the Commission currently are
engaged in a detailed assessment of the completed standards. On February
16, 2000, the Commission issued a concept release on the elements of a
high quality financial reporting framework, one of which is high quality
accounting standards (Securities Act Release No. 7801). The release
solicits comment about the quality of the IASC standards and frames the
discussion in the context of a number of related issues that will affect
how the IASC standards are interpreted and applied in practice. The
deadline for comments is May 23, 2000.

**D. [International Disclosure Standards -- Amendments to]{.underline}**

#### Form 20-F

On September 28, 1999, the Commission adopted changes to its
non-financial statement disclosure requirements for foreign private
issuers, to conform those requirements more closely to the International
Disclosure Standards endorsed by IOSCO in September 1998 (Securities Act
Release No. 7745). The changes are intended to harmonize disclosure
requirements on fundamental topics among the securities regulations of
various jurisdictions.

**1. Background**

The Commission has long supported the concept of a harmonized
international disclosure system, and for a number of years has been
working with other members of IOSCO to develop a set of international
standards for non-financial statement disclosures that could be used in
cross border offerings and listings. The International Disclosure
Standards developed by IOSCO reflect a consensus among securities
regulators in the major capital markets as to the types of disclosures
that should be required for cross border offerings and listings. The
Standards cover fundamental disclosure topics such as the description of
the issuer's business, results of operations and management and the
securities it plans to offer or list.

**2. Changes to Foreign Integrated Disclosure System**

The Commission amended Form 20-F, the basic Exchange Act registration
statement and annual report form used by foreign issuers, to incorporate
the International Disclosure Standards. The Commission also revised the
Securities Act registration forms designated for use by foreign private
issuers, and related rules and forms, to reflect the changes in Form
20-F. The amendments do not change the financial statement
reconciliation requirements for foreign issuers, and the Commission will
continue to require disclosure on topics not covered by the
International Disclosure Standards, such as disclosures relating to
market risk and specialized industries such as banks. Unlike the IOSCO
International Disclosure Standards, which were intended to apply only to
offerings and listings of common equity securities and only to listings
and transactions for cash, the amendments to Form 20-F apply to all
types of offerings and listings and to annual reports. The Commission
also revised the definition of "foreign private issuer," which
determines an issuer's eligibility to use certain Commission forms and
benefit from certain accommodations under Commission rules, to clarify
how issuers should calculate their U.S. ownership for purposes of the
definition.

The changes to Form 20-F, the Securities Act registration forms and the
"foreign private issuer" definition became effective in September 2000.

**VI. [OTHER PENDING RULEMAKING AND RECENT RULE ADOPTIONS]{.underline}**

**A.** **[Roadshows]{.underline}**

The Division\'s staff has begun to work on rule proposals regarding
presentations by issuers or underwriters intended to develop potential
investors\' interest in registered public offerings (\"roadshows\"). The
proposals may address topics such as access to roadshows and roadshow
information, whether the roadshow itself or roadshow information should
be filed with the Commission, and the application of liability
provisions to issuers and underwriters with respect to a roadshow. The
significant no-action letters that the Division has issued regarding the
electronic transmission of roadshow presentations are summarized in
Section X.C. of this outline. In light of the pending rulemaking, the
Division will no longer respond to interpretive or no-action requests
about roadshows.

**B. [Proposed Amendment to Options Disclosure Document
Rule]{.underline}**

On June 25, 1998, the Commission issued a release soliciting comments on
a proposal to revise Rule 135b (Securities Act Release No. 7550). The
proposal provides that an options disclosure document prepared in
accordance with Rule 9b-1 under the Securities Exchange Act of 1934 is
not a prospectus, and accordingly is not subject to civil liability
under Section 12(a)(2) of the Securities Act. The proposal is intended
to codify a long-standing interpretive position that was issued
immediately after the Commission adopted the current registration and
disclosure system applicable to standardized options. The proposed
revision is intended to eliminate any legal uncertainty in this area.

> **C. [Financial Statements and Periodic Reports For Related Issuers
> and Guarantors]{.underline}**

On August 24, 2000, the Commission adopted rules concerning the
financial statements and Exchange Act reporting requirements for
subsidiary guarantors and subsidiary issuers of guaranteed securities
(Securities Act Release No. 7878). These rules include revisions to Rule
3-10 of Regulation S-X and new Rule 12h-5 under the Exchange Act. The
rules supersede Staff Accounting Bulletin 53 (SAB 53).

The amendments to Rule 3-10 codify the staff's current positions as
articulated in SAB 53 and the interpretive positions that the staff has
taken with respect to SAB 53, with one principal difference. The rule
does not permit the presentation of summarized financial information in
lieu of separate financial statements of a subsidiary issuer or
guarantor. Rather, it requires condensed consolidating financial
information in all situations where SAB 53 permitted summarized
financial information.

Amended Rule 3-10 retains the general requirement that each subsidiary
issuer or guarantor must file the same financial statements specified by
Regulation S-X for a registrant. It then identifies exceptions where
more limited financial information is permitted. To qualify for an
exception, the guarantee must be full and unconditional, the subsidiary
must be 100% owned by its parent company, the parent company must file
consolidated financial statements meeting the requirements of Rules 3-01
and 3-02 of Regulation S-X, and the parent company's consolidated
financial statements must include condensed consolidating financial
information reflecting in separate columns the parent company, the
subsidiary issuer(s), the subsidiary guarantors(s), any non-guarantor
subsidiaries, consolidating adjustments, and the consolidated totals.
This information is required in the registration statement and in the
parent company's subsequent annual and quarterly reports under the
Exchange Act. In certain limited cases, narrative disclosure about the
guarantees is permitted in lieu of the condensed consolidating
information. These limited circumstances include "plain vanilla" finance
subsidiary issuers guaranteed solely by the parent company, and parent
company issuers with no independent assets or operations where all the
subsidiaries are guarantors. The exceptions described above also apply
to parent companies and subsidiaries that co-issue debt, provided that
all other qualifying conditions are met.

Amended Rule 3-10 includes specific requirements applicable to recently
acquired guarantors. If a significant recently acquired guarantor has
not been included in the parent company's consolidation for at least
nine months, one year of audited pre-acquisition financial statements of
that guarantor is required in any registration statement for guaranteed
securities. A recently acquired guarantor is significant if the greater
of its pre-acquisition net book value or purchase price exceeds 20% of
the principal amount of the securities being registered. Financial
statements of recently acquired guarantors are not required in periodic
reports under the Exchange Act.

New Rule 12h-5 exempts from Exchange Act reporting any subsidiary issuer
or guarantor permitted by Rule 3-10 to omit financial statements. Thus
Rule 12h-5 eliminates the need for subsidiary issuers or guarantors to
request exemptive or no-action relief from Exchange Act reporting.

The rule revisions did not change the financial statement requirements
for affiliates whose securities are pledged as collateral for a
registered security, but those requirements have been relocated to new
Rule 3-16 to distinguish them from the subsidiary issuer and guarantor
requirements. Revisions to Item 310 of Regulation S-B clarify that the
requirements of amended Rule 3-10 and Rule 3-16 apply to small business
issuers. Appendices to the adopting release provide implementation
guidance regarding the 100%-owned test, the identification of the parent
company, and the financial statement requirements for recently acquired
guarantors.

The rules became effective September 25, 2000. Registrants must apply
the new rules in registration statements and post-effective amendments
first filed after September 25, 2000, and in all subsequent Exchange Act
periodic reports. Registrants that have existing Exchange Act reporting
obligations with respect to guaranteed securities must apply the new
rules beginning with their annual report for their first fiscal year
ending after September 25, 2000.

**D. [Delivery of Disclosure Documents to Households]{.underline}**

On October 27, 2000, the Commission issued a release concerning the
delivery of proxy statements and information statements to two or more
investors sharing the same address. This method of delivery is referred
to as householding. The release sets forth final rules regarding the
householding of proxy statements, information statements, and annual
reports. (Securities Act Release 33-7912).

Under the amended Exchange Act rules, companies may satisfy proxy
statement, information statement and annual report delivery requirements
by sending a single copy of the relevant document to two or more
security holders residing at the same address if the security holders
have consented to householding on a written or implied basis. Consent
can be implied if four conditions are met:

1.  the security holders have the same last name or the company
    reasonably believes that they are members of the same family;

    security holders are given 60 days advance notice of householding
    and an opportunity to opt out;

    the security holders do not opt out of householding; and

    the prospectus or shareholder report is delivered to a residential
    street address or a post-office box.

A separate proxy card of form of voting instructions still will need to
be delivered to each security holder in the household. Banks and
broker-dealers may also rely on the rules to household proxy statements,
information statements and annual reports, unless the company whose
document is to be householded objects.

In addition to the amendments regarding householding of proxy
statements, information statements and annual reports, the Commission
amended Securities Act Rule 154 to permit the householding of combined
proxy statement-prospectuses.

The adopted householding amendments are intended to reduce the amount of
duplicative information that investors receive, and to lower printing
and mailing costs to companies that ultimately are borne by investors.

> **E. [Selective Disclosure and Insider Trading Rules]{.underline}**

Effective October 23, 2000, the Commission adopted Regulation FD and
Rules 10b5-1 and 10b5-2. These rules are designed to

1.  eliminate selective disclosure of material nonpublic information by
    public companies;

    clarify, for insider trading liability purposes, that someone
    trading while **aware** of material nonpublic information is trading
    **on the basis of** that information unless trading is done under
    one of the newly created affirmative defenses; and

    clarify, for insider trading liability purposes, in what family and
    other non-business relationships a person is presumed to have a duty
    of trust and confidence.

> **1. Regulation FD (Fair Disclosure)**

Regulation FD provides that whenever a reporting company or a person
acting on its behalf discloses material nonpublic information to
specified securities market professionals or shareholders, the issuer
must make the same information public. If the person making the
disclosure to those persons knows at that time (or is reckless in not
knowing) that the information is both material and nonpublic, the
disclosure is "intentional." If the disclosure is intentional, then the
public disclosure must be simultaneous. In all other cases, the public
disclosure must be made "promptly." Promptly means as soon as
practicable (but in no event after the later of 24 hours or the
commencement of the next day of trading on the New York Stock Exchange)
after a senior official of the company learns that there has been a
selective disclosure of material nonpublic information.

> **a. Covered securities market professionals and shareholders**

Regulation FD only covers selective disclosure to specified persons that
are outside the issuer. They are

1.  a broker or dealer, or a person associated with a broker or dealer;

    an investment adviser, or a person associated with one;

    an institutional investment manager reporting on Form 13F or a
    person associated with one;

    an investment company, a hedge fund, or an affiliated person of
    either one; or

    a holder of the issuer\'s securities, under circumstances in which
    it is reasonably foreseeable that the person will purchase or sell
    the issuer\'s securities on the basis of the information.

    **b. Persons acting on behalf of the issuer**

    "Person acting on behalf of an issuer\" means any

    director;

    executive officer (as defined in Exchange Act Rule 3b-7);

    investor relations or public relations officer;

    other person with functions similar to a director, executive officer
    or investor relations or public relations officer; or

    other officer, employee, or agent of an issuer who regularly
    communicates with the covered securities market professionals or
    with holders of the issuer\'s securities.

    A director, officer, employee or agent of an issuer who discloses
    material nonpublic information in breach of a duty of trust or
    confidence to the issuer, however, is not treated as a person acting
    on behalf of the issuer for purposes of Regulation FD. Such a person
    would, nonetheless, face liability for insider trading under Rule
    10b-5.

    **c. Methods of public disclosure**

    An issuer may satisfy its obligation to make public disclosure under
    Regulation FD by including the information in a Form 8-K. The issuer
    may choose whether to "furnish" that Form 8-K under new Item 9 or
    file it under Item 5. Only a \"filed\" Form 8-K is subject to
    Section 18 of the Exchange Act and automatically incorporated by
    reference into short-form filings under the Securities Act. Form 8-K
    now provides that issuers making disclosure under Item 5 or 9 are
    not admitting that the information is material if the disclosure is
    required solely by Regulation FD.

    An issuer is exempt from the requirement to furnish or file a Form
    8-K if it instead disseminates the information through another
    method (or combination of methods) of disclosure that is reasonably
    designed to provide broad, non-exclusionary distribution of the
    information to the public.

    Upon adoption of Regulation FD, the Commission described a
    three-step best practices model for making a planned public
    disclosure of material information under Regulation FD other than
    through a Form 8-K filing. It includes

    distributing a press release through regular channels that contains
    the information;

    providing adequate notice, by a press release or a website posting,
    of a scheduled conference call to discuss the information; and

    holding the call in an open manner, either allowing investors access
    through the telephone or through webcasting.

    **d. Material Nonpublic Information**

    Regulation FD relies on definitions of \"material\" and
    \"nonpublic\" established in the case law. Information is material
    if \"there is a substantial likelihood that a reasonable shareholder
    would consider it important\" in making an investment decision. To
    fulfill the materiality requirement, there must be a substantial
    likelihood that a fact \"would have been viewed by the reasonable
    investor as having significantly altered the \'total mix\' of
    information made available.\" Information is nonpublic if it has not
    been disseminated in a manner making it available to investors
    generally.

    An issuer would not be conveying material nonpublic information if
    it shared seemingly inconsequential data which, pieced together with
    public information by a skilled analyst with knowledge of the issuer
    and the industry, helps form a mosaic that reveals material
    nonpublic information. Provided that the issuer is not simply
    breaking material information into pieces to evade the regulation,
    it would not violate Regulation FD by revealing this type of data
    even if, when added to the analyst\'s own fund of knowledge, it is
    used to construct his or her ultimate judgments about the issuer.

    **e. Exclusions to Regulation FD**

    Regulation FD does not apply to issuers that

    are not required to file reports under Exchange Act Section 12 or
    15(d);

    are foreign governments;

    are foreign private issuers; or

    are investment companies other than closed-end mutual funds.

    Regulation FD does not apply to a disclosure made

    to a person who owes a duty of trust or confidence to the issuer (a
    temporary insider, such as an attorney, investment banker, or
    accountant);

    to a person who expressly agrees to maintain the disclosed
    information in confidence;

    to a credit rating agency that makes its ratings public, provided
    the information is disclosed solely for the purpose of developing a
    credit rating; or

    in connection with a securities offering registered under the
    Securities Act, other than an offering of the type described in any
    of Rule 415(a)(1)(i) - (vi).

To clarify the scope of the registered securities offering exception,
Regulation FD states when registered offerings of various types begin
and end. They begin and end as follows:

+-----------------------+-----------------------+----------------------+
| **[Type of            | **[                   | **                   |
| Of                    | Begins]{.underline}** | [Ends]{.underline}** |
| fering]{.underline}** |                       |                      |
+-----------------------+-----------------------+----------------------+
| [Underwritten         | When the issuer       | Unless terminated    |
| Offering]{.underline} | reaches an            | sooner, at the later |
|                       | understanding with    | of the end of the    |
|                       | the broker-dealer     | period during which  |
|                       | that is to act as     | dealers must deliver |
|                       | managing underwriter  | a prospectus, or the |
|                       |                       | sale of the          |
|                       |                       | securities           |
+-----------------------+-----------------------+----------------------+
| [Non-Underwritten     |                       |                      |
| Offering]{.underline} |                       |                      |
+-----------------------+-----------------------+----------------------+
| 1.  Delayed shelf     | When the issuer makes | Unless terminated    |
|     takedown          | its first bona fide   | sooner, at the later |
|                       | offer in the takedown | of the end of the    |
|                       |                       | period during which  |
|                       |                       | dealers must deliver |
|                       |                       | a prospectus, or the |
|                       |                       | sale of the          |
|                       |                       | securities in that   |
|                       |                       | takedown             |
+-----------------------+-----------------------+----------------------+
| 2.  All others        | When the registration | Unless terminated    |
|                       | statement is filed    | sooner, at the later |
|                       |                       | of the end of the    |
|                       |                       | period during which  |
|                       |                       | dealers must deliver |
|                       |                       | a prospectus, or the |
|                       |                       | sale of the          |
|                       |                       | securities           |
+-----------------------+-----------------------+----------------------+
| [Business             | When the first public | When the vote is     |
| Com                   | announcement of the   | completed or the     |
| bination]{.underline} | transaction is made   | tender offer         |
|                       |                       | expires, as          |
|                       |                       | applicable           |
+-----------------------+-----------------------+----------------------+

> **f. Impact of a Violation of Regulation FD**

Regulation FD provides that an issuer's failure to make a public
disclosure required solely by the regulation will not be deemed a
violation of Rule 10b-5. Thus, while the Commission could proceed
against an issuer for a violation of Regulation FD, private parties
would not have a cause of action under Rule 10b-5 based solely on a
failure to disclose under Regulation FD.

A failure to make a public disclosure required by Regulation FD does not
affect whether the issuer is timely or current in its reporting for
purposes of Forms S-2, S-3 and S-8 or whether there is adequate current
public information about the issuer for purposes of Rule 144(c).

> **2. Rule 10b5-1: Trading While Aware of Material Non-Public
> Information**

For purposes of insider trading liability, Rule 10b5-1 provides that a
person who buys or sells securities while aware of material nonpublic
information about the issuer or those securities trades "on the basis
of" that information. The rule also provides, however, affirmative
defenses to that general rule. The affirmative defenses allow persons,
including corporate officers and directors, to buy and sell the issuer's
securities without liability under Rule 10b-5 while aware of material
nonpublic information if the transaction was arranged before the person
became aware of the information. In order to claim an affirmative
defense, a person must

1.  enter into a binding contract to buy or sell;

    instruct another person to buy or sell for him, her or it; or

    adopt a written trading plan.

    The contract, instruction or plan must be entered into in good faith
    and not be a scheme to evade the prohibitions of Rule 10b5-1. At the
    time of establishing the contract, instruction or plan, a person
    must set the amount to buy or sell, the price at which to buy or
    sell, and the date at which to buy or sell. (The price may be a
    market price on a particular date, a limit price or a particular
    dollar price.) A person may specify these terms or set forth in the
    contract, instruction or plan a written formula, algorithm or
    computer program that makes those determinations. Alternatively, a
    person may specify in the contract, instruction or plan that he, she
    or it may not have any subsequent influence over the sales or
    purchases, and grant the power to determine how, when and whether to
    buy or sell to another person. The other person must not be aware of
    material nonpublic information when doing so.

    For the affirmative defense to apply, the purchase or sale must
    occur pursuant to the contract, instruction or plan. A transaction
    is not pursuant to the contract, instruction or plan if the person
    altered or deviated from the contract, instruction or plan by
    changing the amount, price or timing or entered into or altered a
    corresponding or hedging transaction.

    For a buyer or seller that is not a natural person, there is an
    additional affirmative defense under Rule 10b5-1. It may show that
    it is not selling or buying on the basis of material nonpublic
    information if

    the person making the investment decision on behalf of it was not
    aware of any material nonpublic information; and

    it implemented reasonable policies and procedures to ensure that
    individuals making investment decisions would not violate insider
    trading laws.

> **3. Rule 10b5-2: Insider Trading and Families**

Rule 10b5-2 defines some of the circumstances in which a duty of trust
and confidence exists for purposes of insider trading under Rule 10b-5.
The duty exists when

1.  the person agrees to maintain information in confidence;

    there is a history, pattern or practice of sharing confidences such
    that the recipient knows or should know that the person
    communicating the material nonpublic information expects the
    recipient to maintain its confidentiality; or

    a person receives or obtains material nonpublic information from his
    or her spouse, parent, child or sibling.

Rule 10b5-2 provides, however, that the presumption that a duty of trust
of confidence exists within the identified family relationships may be
rebutted. A person who receives information from a spouse, parent, child
or sibling could show that the requisite duty did not exist in his or
her particular family relationship.

**VII. [STAFF LEGAL BULLETINS FOR DIVISION OF CORPORATION]{.underline}**

######  FINANCE

The Division of Corporation Finance publishes Staff Legal Bulletins to
provide advice to the public on frequently recurring issues. Copies of
the bulletins may be obtained from the Commission\'s web site
(*http://www.sec.gov*) or by writing to, or making a request in person
at, the Public Reference Room, Securities and Exchange Commission, 450
5th Street, N.W., Room 1024, Washington, DC, 20549 ((202) 942‑8090).
These are the Staff Legal Bulletins the Division has issued to date:

1.  Staff Legal Bulletin No. 1 (CF) ‑ Confidential Treatment Requests

    Staff Legal Bulletin No. 2 (CF) - Modified Exchange Act Reporting
    for Companies in Bankruptcy

    Staff Legal Bulletin No. 3 (CF) - Reliance on the Section 3(a)(10)
    exemption from the Securities Act of 1933 registration requirements
    (updated October 20, 1999)

    Staff Legal Bulletin No. 4 (CF) - Spin-Offs

    Staff Legal Bulletin No. 5 (CF/IM) - Year 2000 Disclosure Issues
    (Superseded by Securities Act Release No. 7558)

    Staff Legal Bulletin No. 6 (CF/MR/IM) - Euro Conversion Issues

    Staff Legal Bulletin No. 7 (CF) - Plain English (Updated June 7,
    1999)

**VIII. [CURRENT DISCLOSURE, LEGAL AND PROCESSING ISSUES]{.underline}**

**A. [Disclosure, Legal and Processing Issues]{.underline}**

**1. Disclosures about \"Targeted Stock\"**

> **a. Overview**

Some registrants have issued classes of stock that they characterize as
"targeted" or "tracking" stock because they are referenced in some
manner to a specific business unit, activity or assets of the
registrant. The staff is concerned that the style and content of
disclosures about the operations referenced by a class of common stock
may give the inaccurate impression that the investor has a direct or
exclusive financial interest in that unit.

Notwithstanding the title given to a particular class of stock, an
investor in any of a registrant's classes of common stock has a
financial interest only in the residual net assets of the registrant,
allocated among the shareholder classes in accordance with the formulae
stipulated in the corporate charter. Assets and income attributed to
units referenced by each class typically are available to all of the
registrant's creditors, and even other classes of shareholders, in the
event of liquidation. While dividends declared on each class may not
exceed some measure of the performance of the referenced business unit,
no dividends need be declared at all. Moreover, the dividend declaration
policies typically are subject to change and need bear no relationship
to the relative performance of the referenced businesses. Methods and
assumptions that can significantly affect measurement of the referenced
unit's performance typically can be changed at any time without the
consent of the security holders.

b\. Characterizations of the security as "tracking" a business unit

If no term of the targeted stock requires or assures that potential
distributions will correlate with the performance of the business unit
nominally associated with the security, implications that the market
value of the security will "track," or is otherwise linked with, a
business unit are subject to challenge. The staff has asked registrants
to explain in their filings why the formula for determining the amount
available for dividends (or any other term or feature of the security)
can be expected to link in some fashion the market value of a class of
common stock with the value or performance of any subpart of the
registrant, or state clearly that management does not intend to imply
such a linkage.

c\. Recommended approach to disclosure about targeted stock

While the staff encourages robust disclosure about the registrant's
operating segments, presenting information about the referenced
businesses as if distinct from the registrant may confuse investors
about the nature of the security. We believe companies should integrate
discussions and quantitative data about the referenced business units
more closely within a comprehensive discussion of the registrant's
financial condition and operating results. While schedules or condensed
financial information demonstrating the calculation of earnings
available for each class of the registrant's common stock are relevant,
more extensive presentations can be misunderstood and should be
reconsidered. If a company chooses to present more than condensed
financial data, the staff has recommended that companies present no
greater detail than "consolidating financial statements" that include
the referenced businesses together with the financial statements of the
registrant. That presentation would show explicitly how management and
the board have allocated and attributed revenues, expenses, assets,
liabilities, and cash flows, but will not necessarily reflect earnings
applicable to the different classes of stock due to features of the
allocation formula that are incompatible with GAAP.

d\. Use of separate full financial statements for a referenced business
unit

Notwithstanding our recommendation to the contrary, some issuers of
targeted stock have chosen to present complete separate audited
financial statements of the referenced units. In this case, the staff
believes that financial statements of the referenced unit furnished to
investors should be accompanied always by financial statements of the
registrant, as issuer of the security. Most auditors will permit use of
their report on the financial statements of the referenced business only
in those circumstances. EPS of one class of stock should not be
presented alone or within the separate financial statements of the
referenced business security because that business did not issue the
security. EPS with respect to any class of the issuer's securities
should be presented only with the issuer's consolidated financial
statements or with its related consolidated information.

e\. Consequences of formula-based financial statements

In some cases, separate financial statements presented in an issuer's
filing do not appear to be an actual business or division, but rather an
elaborate depiction of the earnings allocation formula for a class of
stock, as if those legal terms defined an accounting entity. For
example, sometimes that formula results in the depiction of one of the
issuer's businesses as if it had a financial interest in another of its
businesses. Financial statements prepared in accordance with the
dictates of management, the board and the corporate charter for the
purpose of measuring earnings available to a class of shareholders do
not necessarily present fairly the financial condition, cash flows and
operating results of an actual business unit within the registrant.

The staff has raised a number of questions in these circumstances: Do
financial statements based on these formulae comply with GAAP? Does the
association of the auditor with these presentations give unwarranted
comfort to investors about the fairness to the different shareholder
groups of management's assignment of revenues and expenses and its
allocation of capital and other costs? Are the financial statements
\"special purpose\" financial statements that are prepared on a basis of
accounting prescribed in a contractual agreement, requiring special
considerations for disclosure and auditor association?

**f. Non-GAAP measures of performance**

In some cases, the terms of the targeted stock stipulate explicitly that
the performance of the unit will be measured on a basis that departs
from GAAP. Any measurement, classification, allocation or disclosure
that departs from GAAP but is necessary to measure or explain amounts
available for dividends on stock referenced to the unit should be
depicted separately from presentations that are purported to be in
accordance with GAAP. An amount should not be labeled as \"net income\"
unless it is calculated in accordance with GAAP. If the financial
statements of the unit are purported to be in accordance with GAAP,
management should ensure that all information essential for a fair
presentation of the entity\'s financial position, results of operations,
and cash flows in conformity with GAAP is set forth in the financial
statements. Failure to include all such information should result in a
qualification of the auditor\'s report on the unit\'s financial
statements.

**g. Cost allocations**

The units referenced by the targeted stock may share many common costs,
such as general and administrative and interest costs. As required by
SAB Topic 1B, a complete description of any allocation methods used for
cash, debt, related interest and financing costs, corporate overhead,
and other common costs should be provided in the notes to the financial
statements that purport to be prepared in accordance with GAAP. The
amounts likely to be reported by the entity were it a stand-alone entity
should be disclosed. In some cases, the staff has questioned whether
allocations have been biased. For example, operating results and EPS of
operations that are valued on the basis of earnings could be unfairly
inflated as a result of excessive allocations of common costs to
operations that are valued on the basis of revenue growth. If the
methodologies and assumptions underlying the allocations of debt and
corporate expenses may change without security holder approval, that
fact should be stated clearly. If the financial statements of the
business unit before and after the issuance of the tracking stock will
not be comparable, that fact should be disclosed. On occasion, the staff
has questioned whether a change in the method of attributing revenue or
expense from one shareholder group to another would be reported as a
change in reporting entity or, if deemed a change in estimate or
principle, how the auditor will determine whether a change is a "better"
method of calculating earnings attributable to a particular shareholder
group.

**h. Other disclosure issues**

Other areas of disclosure that are of particular significance for
issuers of targeted stock include the following:

1.  Policies for the management of cash generated by and capital
    investment in the referenced units, and for the pricing of
    "transactions" between the referenced units.

    Conflicts of interest.

    Effects of corporate events (mergers, tender offers, changes in
    control, adverse tax rulings, liquidation) on rights of the security
    holders.

    Terms under which one class may be converted into another class.

    Effects of changes in relative market values of the registrant's
    outstanding classes of stock on rights of the security holders.

**2. \"Blank Check\" Companies**

Where a reporting \"blank check\" company, as defined in Rule 419(a)(2)
of Regulation C, merges into a non-reporting operating company, Rule
12g-3(a) is not available unless complete audited financial statements
of the operating company, as well as pro formas, are provided at the
effective date of the \"succession transaction.\" This information
should be filed under cover of Form 8-K. For additional information
concerning \"back door\" registration on Form 8-K, see *National
Association of Securities Dealers* (April 7, 2000) at
*www.otcbb.com/news/EligibilityRule/8kreg.stm*. For Section 5 issues
related to \"blank check\" companies, see *NASD Regulation, Inc.*
(January 21, 2000) located in Section X.E. of this outline. See also
Rule 419 of Regulation C, which applies generally to offerings by
\"blank check\" companies.

**3. Syndicate Short Sales**

**a. What are "syndicate short sales"?**

In a registered IPO or follow-on offering of equity and equity-related
securities, the Agreement among Underwriters customarily will authorize
the lead manager to sell securities in excess of the number of
securities included in the firm commitment underwriting for the account
of the syndicate. This "syndicate short position" could include:

-   a "covered" short position equal to the securities registered to
    cover the underwriters' option to purchase additional securities
    from the issuer \-- this option to purchase additional shares is
    called the "overallotment option" or "green shoe," and

-   a "naked" short position equal to a specified percentage of the
    securities included in the firm commitment underwriting \-- the AAU
    specifies the extent of the permissible naked short.

    The "covered" short position customarily is 15% of the amount of the
    firm commitment underwriting. This limit is related to the limit on
    the size of the overallotment option set forth in National
    Association of Securities Dealers rules. In recent years, the
    "naked" short position has customarily been up to either 15% or 20%
    of the amount of the firm commitment underwriting. The size of the
    "naked" short position is not addressed in the NASD rules.

    b\. When is a syndicate short position established and how is it
    covered?

    The short position is created at the same time securities in the
    firm commitment underwriting are allocated \-- after effectiveness
    and pricing of the transaction. The syndicate short shares are sold
    at the public offering price. All purchasers of securities sold by
    the underwriting syndicate receive final prospectuses and identical
    forms of Exchange Act Rule 10b-10 confirmations reflecting the
    prospectus delivery requirement. No distinction is made between the
    firm commitment and short sale securities on the books and records
    of the underwriters, the transfer agent or any clearing agency. For
    all intents and purposes, the syndicate short shares are
    indistinguishable from all other shares sold under the registration
    statement.

    The decision to create a syndicate short position (both "covered"
    and "naked") is made by the lead manager, in its sole discretion, at
    the time of pricing. Most offerings have a short position at least
    equal to the underwriters' overallotment option or "green shoe." The
    decision to exercise the green shoe to cover a syndicate short
    position, if any, must be made within the period specified in the
    Underwriting Agreement, typically 30 days. The green shoe is often
    exercised almost immediately in transactions that trade at price
    levels significantly in excess of the public offering price in order
    to obviate the need to have a second "closing" with respect to the
    green shoe shares. However, in some transactions the decision to
    exercise the green shoe is not made until nearly the end of the
    30-day period.

    While there is usually a covered syndicate short, the creation of a
    naked syndicate short is less common. The naked short is more likely
    to be created in a transaction where the lead manager has reason to
    be concerned that the supply of securities offered for sale in the
    secondary market after the commencement of trading in the securities
    will significantly exceed the demand to purchase such securities,
    thereby creating downward pressure on the price of the securities
    that could adversely affect the investors who have purchased in the
    offering. These concerns may be based on the volatility of the
    overall market or the level or quality of demand for the securities
    being offered. The level or quality of demand refers to the ratio of
    indications of interest or conditional offers to the number of
    securities being offered and the extent to which the lead manager
    perceives that if the buyers receive allocations of securities they
    will be long term holders of all or a significant portion of those
    securities.

    The "naked short shares" are delivered and paid for by investors at
    the same time as the firm commitment and covered short shares. In
    order to deliver the naked short shares, the underwriters may borrow
    shares which, in the case of an IPO, may be shares issued in the
    offering. In a follow-on offering, the underwriters may borrow
    either shares that were issued in the offering or shares that were
    outstanding before the offering. The syndicate bears the cost of
    borrowing those shares.

    **c. What prospectus disclosure is required with regard to the
    syndicate short position and the manner in which it is covered?**

    The fact that the underwriters may make short sales and may engage
    in short covering transactions must be disclosed in the "Plan of
    Distribution" or "Underwriting" section of the prospectus. The staff
    will raise comments if this disclosure does not address the
    following material points regarding any applicable short sale
    transactions. The disclosure may use the language set forth
    following each point or may be in other clear, plain language.

-   *The potential for underwriter short sales in connection with the
    offering* \-- for example, the disclosure may state: "In connection
    with the offering, the underwriters may make short sales of the
    issuer's shares and may purchase the issuer's shares on the open
    market to cover positions created by short sales."

-   *What short sales are* \-- for example, the disclosure may state:
    "Short sales involve the sale by the underwriters of a greater
    number of shares than they are required to purchase in the
    offering."

-   *What covered short sales are* \-- for example, the disclosure may
    state: "'Covered' short sales are sales made in an amount not
    greater than the underwriters' 'overallotment' option to purchase
    additional shares in the offering."

-   *How underwriters close out covered short sale positions* \-- for
    example, the disclosure may state: "The underwriters may close out
    any covered short position by either exercising their overallotment
    option or purchasing shares in the open market."

-   *How underwriters determine the method for closing out covered short
    sale positions* \-- for example, the disclosure may state: "In
    determining the source of shares to close out the covered short
    position, the underwriters will consider, among other things, the
    price of shares available for purchase in the open market as
    compared to the price at which they may purchase shares through the
    overallotment option."

-   *What naked short sales are* \-- for example, the disclosure may
    state: "'Naked' short sales are sales in excess of the overallotment
    option."

-   *How underwriters close out naked short sale positions* \-- for
    example, the disclosure may state: "The underwriters must close out
    any naked short position by purchasing shares in the open market."

-   *When a naked short position will be created* \-- for example, the
    disclosure may state: "A naked short position is more likely to be
    created if the underwriters are concerned that there may be downward
    pressure on the price of the shares in the open market after pricing
    that could adversely affect investors who purchase in the offering."

-   *The potential effects of underwriters' short sales and
    underwriters' transactions to cover those short sales* \-- for
    example, the disclosure may state: "Similar to other purchase
    transactions, the underwriters' purchases to cover the syndicate
    short sales may have the effect of raising or maintaining the market
    price of the \[issuer's\] stock or preventing or retarding a decline
    in the market price of \[issuer's\] stock. As a result, the price of
    the \[issuer's\] stock may be higher than the price that might
    otherwise exist in the open market."

    This disclosure is, of course, in addition to the other disclosure
    included in that section of the prospectus regarding stabilizing
    transactions. The disclosure addressing the foregoing points may be
    combined with that other disclosure.

    **d. Is the offer and sale of the "naked short shares" registered
    under the Securities Act?**

    Yes. It is the Division's view that the offer and sale of all shares
    in the registered offering are registered under the registration
    statement. In this regard, "all shares in the registered offering"
    refers to

-   the firm commitment shares,

-   the covered short - or green shoe - shares, and

-   the naked short shares.

Although the naked short shares are included in "all shares in the
registered offering," the number of shares specified on the cover page
of the registration statement need only include the number of firm
commitment shares and the green shoe shares. The number of shares
specified on the cover page of the registration statement is understood
to include an indeterminate number of naked short shares up to the
extent permitted by the AAU. The "Plan of Distribution" or
"Underwriting" section of the prospectus must describe the offer and
sale of all shares in the registered offering.

The treatment of the naked short shares on the cover page of the
registration statement set forth above differs from the method in which
registrants register shares to be sold in "market making" transactions.
With respect to "market making shares," the registrant must include an
indeterminate number of those shares on the cover page of the
registration statement.

> **e. How do the anti-fraud and civil liability provisions of the
> federal securities laws apply to the offer and sale of the naked short
> shares?**

In a registered offering, the anti-fraud and civil liability provisions
of the federal securities laws apply to the offer and sale of the naked
short shares in the same manner as the offer and sale of other shares in
that registered offering.

**4. Third-Party Derivative Securities**

In *Morgan Stanley & Co., Inc.* (June 24, 1996), the Division addressed
disclosure issues relating to Securities Act Section 5 registered
offerings of securities that are exchangeable, on either an optional or
a mandatory basis (\"Exchangeable Securities\"), for the equity
securities (or the cash value thereof) of another issuer (\"Underlying
Securities\").

The Division took the position that complete disclosure regarding the
issuer of the Underlying Securities is material to investors at the time
of both the initial sale of the Exchangeable Securities and on a
continuous basis thereafter until the Underlying Securities (or the cash
value thereof) have been exchanged for the Exchangeable Securities and
other payment obligations on the Exchangeable Securities, if any, have
been satisfied. The Division also took the view that this complete
disclosure is not required to be set forth in the filings of the issuer
of the Exchangeable Securities where there is sufficient market interest
and publicly available information regarding the issuer of the
Underlying Securities.

The Division stated that sufficient market interest and publicly
available information will be deemed to exist where the issuer of the
Underlying Securities

1.  has a class of equity securities registered under Exchange Act
    Section 12; and

    is either

    eligible to use Securities Act Form S-3 or F-3 for a primary
    offering of non-investment grade securities pursuant to General
    Instruction B.1 of such forms; or

    meets the listing criteria that an issuer of the Underlying
    Securities would have to meet if the class of Exchangeable
    Securities was to be listed on a national securities exchange as
    equity linked securities, such as American Stock Exchange Rule
    107.B.

The Division also stated that where there is sufficient market interest
and publicly available information, as described above, the issuer of
the Exchangeable Securities may include abbreviated disclosure about the
issuer and terms of the Underlying Securities in its Securities Act
registration statement and Exchange Act periodic reports. Abbreviated
disclosure in a report is adequate only where there is sufficient market
interest and publicly available information at the time the report is
filed.

Finally, the Division stated that the abbreviated disclosure would
include at least:

1.  a brief discussion of the business of the issuer of the Underlying
    Securities;

```{=html}
<!-- -->
```
1.  disclosure about the availability of information with respect to the
    issuer of the Underlying Securities similar to that required by
    Regulation S-K Item 502(a); and

    information concerning the market price of the Underlying Securities
    similar to that called for Regulation S-K Item 201(a).

EITF Issues Nos. 86‑28 and 96‑12 address certain aspects of the
accounting for third-party derivative securities.

> **5. Section 5 Issues Arising from On-line Offerings and Related
> Communications, Including Offers to Buy**

Many underwriters have begun using the Internet to offer and sell
securities in registered public offerings. These e-brokers post
preliminary prospectuses, and sometimes other material, on their web
sites and many solicit conditional offers to buy securities rather than
the more customary indications of interest.

In connection with our review of registration statements, we have been
issuing comments to get information on what procedures the different
e-brokers are using to assure compliance with Section 5 of the
Securities Act, and specifically, to avoid pre-effective sales of
securities violative of Section 5(a). In addition, we have been actively
contacting e-brokers to review their procedures outside the context of a
particular offering to avoid timing concerns. In our review of the
offering procedures of e-brokers, we examine how conditional offers to
buy securities are solicited, how and when they are accepted, and how
these purchases are funded. To the extent e-brokers take indications of
interest, we also check to ensure that they have procedures in place to
obtain reconfirmations from customers after effectiveness.

The following discussion principally relates to our experience in
examining e-brokers\' practices in IPOs. We may issue additional
guidance with respect to follow-on offerings as we gain more experience
in that area.

> **a. Communications during the offering process**

Before effectiveness, communications on an e-broker's (as well as on the
issuer\'s) web site that make an offer to sell or solicit an offer to
buy may only be made by means of a prospectus complying with Section 10
or by communications that come within the safe harbor of Rule 134.
Communications that are merely instructional and are not designed to
generate interest in a particular offering typically are unobjectionable
even if they do not fall within the safe harbor of Rule 134. See, for
example, *Wit Capital* (July 14, 1999), such as general information on
how to use the web site, how the brokerage service operates and how to
open an account.

> b\. How the offer and sale of the security are conducted

We want to make sure that each e-broker has procedures in place to
assure compliance with Section 5.

> **i. When may an e-broker take a conditional offer to buy?**

We ask e-brokers not to take conditional offers to buy from prospective
investors more than seven days before the offer is accepted --- which
acceptance cannot occur until after effectiveness, pricing and a
meaningful opportunity to withdraw. If they do take conditional offers
more than seven days before acceptance of the offers, the conditional
offers must be reconfirmed no more than seven days before acceptance. If
the deal is delayed or, for whatever reason, the offer is not accepted
within seven days, we ask e-brokers to obtain new conditional offers to
buy or to get reconfirmations of the expired conditional offers to buy.

> **ii. When must an e-broker resolicit a conditional offer to buy from
> a customer during the seven day period?**

E-brokers must notify customers and get new conditional offers to buy or
reconfirmations of prior conditional offers to buy if:

1.  there is a material change in the prospectus that requires
    recirculation;

    the offering price range changes pre-effectively; or

    the offering prices outside the range.

> **iii. May customers make conditional offers to buy at a price above
> the range in the prospectus?**

Yes, but we have asked e-brokers to treat these offers as limit orders
at the top of the range disclosed in the preliminary prospectus. If the
price range changes pre-effectively or the offering prices outside of
the disclosed range, customers must be contacted and must reconfirm
their offers to buy at the new price.

> **iv. When may an e-broker accept a conditional offer to buy?**

Offers to buy must be conditioned upon the occurrence of each of the
following steps and cannot be accepted by e-brokers until each step
occurs:

1.  the registration statement is declared effective;

    customers are given notice of effectiveness after the registration
    statement is declared effective (this notice can be before or after
    pricing);

    customers are given a meaningful opportunity \-- at least one hour
    \-- to withdraw their offers to buy between the notice of
    effectiveness (or notice of pricing) and acceptance of the offer to
    buy;

    the offering must price before offers are accepted;

    the offering must price within the customer's range and the range in
    the preliminary prospectus or the e-broker must receive affirmative
    confirmations of conditional offers to buy at the revised price; and

    customers must be able to withdraw their offers to buy **at any
    time** up to notice of acceptance.

> **v. Before effectiveness, may e-brokers make offers to sell or
> solicit offers to buy by means of a prospectus that does not comply
> with Section 10?**

No. A preliminary prospectus that omits required information does not
comply with Section 10. An offer to sell, a solicitation of an offer to
buy, or solicitation of a written indication of interest by means of a
prospectus that does not comply with Section 10 would violate Section 5.
Similarly, we have taken the position that brokers may not rely on the
safe harbor of Rule 134 if a prospectus that complies with Section 10 is
unavailable.

The practice of filing the registration statement for an initial public
offering without a bona fide estimated offering price range has created
concerns with respect to some e-brokers' compliance with Section 5.
Because a bona fide estimated range is required in a prospectus used for
an IPO, the use of a prospectus without a price range would not comply
with Section 5. Similarly, brokers cannot rely on the safe harbor of
Rule 134 until the prospectus includes a bona fide estimated range.
Therefore, brokers should be careful when communicating in writing
before a prospectus that complies with Section 10 is available, and take
appropriate steps to ensure that no such communications constitute an
"offer" within the meaning of Section 2(a)(3).

> **vi. May e-brokers require customers to certify that they have read
> the prospectus?**

No. We have found that some e-brokers require prospective investors to
certify that they have read the prospectus before these investors can
give indications of interest or make conditional offers to buy. This is
not acceptable because the issuer, underwriters and brokers may not use
language that could induce investors to believe that they have waived
any rights that they have under the securities laws. We would not
object, however, to language that encourages investors to read the
prospectus, but that does not require investors to certify that they
have read the prospectus. In addition, we have not objected when brokers
ask for certification that investors have accessed or received the
prospectus.

> **c. Payment of the purchase price**

We also want to make sure that e-brokers do not require any part of the
purchase price to be paid before effectiveness. We have not objected
when brokers have required new customers to make a small deposit in
order to open an account, but this amount cannot be tied in any way to
the purchase price of the securities. In most cases, this amount is
\$2,000. Funds in the account must remain in the control of the customer
at least until his or her conditional offer to buy is accepted after
effectiveness and pricing. Also, funds in any account cannot be
earmarked for the purchase of securities in any particular offering
before effectiveness.

We have found that the procedures followed by individual e-brokers vary
from firm to firm. The *Wit Capital* no-action letter (July 14, 1999)
describes only one set of acceptable procedures. These are not the only
procedures that may be acceptable and e-brokers do not need to follow
[Wit Capital]{.underline} in order to comply with Section 5.

6\. Presentation of live electronic auctions

**a. Interpretive letters**

Three interpretive letters address "live" online auctions in offerings
registered under the Securities Act. *W.R. Hambrecht & Co.* (July 12,
2000), *Wit Capital Corporation* (July 20, 2000) and *Bear, Stearns &
Co., Inc.* (July 20, 2000) describe systems by which the underwriters
will conduct auctions on the Internet and allow investors to view the
auction as they progress. The auctions follow the effectiveness of the
registration statement.

# **b. Concern that the auction screens would be non-conforming prospectuses**

The auctions establish the price that investors will pay for the
securities. Because price is an important factor in a decision to buy a
security, the presentation of the live, transparent auction created the
concern that the auction screens would be offers to sell or
solicitations of offers to buy the securities within the meaning of
Section 2(a)(3) of the Securities Act. A written offer for a security is
a prospectus as defined by Section 2(a)(10). Section 5(b)(1) prevents
the use of any prospectus not allowed by Section 10 of the Securities
Act. The auction screens would not, by themselves, comply with Section
10. Therefore, as permitted by Section 2(a)(10)(a), they could only be
used if they were accompanied or preceded by a final prospectus that
complies with Section 10(a) of the Securities Act. This is not possible,
as the price has not yet been determined at the time of the auction
presentation and, therefore, there cannot yet be a final prospectus that
complies with Section 10(a).

# **c. Inclusion of the auction screens as part of the electronic prospectus**

To resolve the issue under Section 5(b)(1), the electronic auction
presentations described in the letters are made part of a prospectus
permitted by Section 10. The letters state that the auction screens must
be made accessible only "through" the electronic prospectus. This means
that an investor would be able to access the auction screens only by
entering the electronic prospectus and clicking a button from within the
prospectus that leads to the auction. This method makes the auction
screens part of the electronic prospectus and is consistent with the
guidance the Commission gave in the electronic media release. Securities
Act Release No. 7856 (April 28, 2000). In the release, the Commission
stated that

> "Information on a web site would be part of a Section 10 prospectus
> only if an issuer (or person acting on behalf of the issuer, including
> an intermediary with delivery obligations) acts to make it part of the
> prospectus. For example, if an issuer includes a hyperlink within a
> Section 10 prospectus, the hyperlinked information would become a part
> of that prospectus. When embedded hyperlinks are used, the hyperlinked
> information must be filed as part of the prospectus in the effective
> registration statement and will be subject to liability under Section
> 11 of the Securities Act. In contrast, a hyperlink from an external
> document to a Section 10 prospectus would result in both documents
> being delivered together, but would not result in the non-prospectus
> document being deemed part of the prospectus."

Access to the auction screens from a hyperlink within the electronic
prospectus makes the auction site part of the permitted prospectus. In
contrast, a hyperlink from a separately accessible auction site to the
electronic prospectus would merely cause the documents to be *delivered*
together. Without additional steps to make it clear that the auction
screens are part of the prospectus, the auction screens would not be
part of the electronic prospectus. Making the auction screens available
separate from the electronic prospectus and simply hyperlinking to the
prospectus, therefore, will not alleviate the concern that the auction
screens are non-conforming prospectuses, the use of which violates
Section 5(b)(1).

The method described, where the underwriter makes the auction site
accessible *through* the electronic prospectus, is not the exclusive
method to make a document part of the electronic prospectus. For
example, the electronic prospectus could be represented by means of its
table of contents, with each item in the table presented as an active
hyperlink to the section of the prospectus that the item represents. If
the auction site is presented as an item in the table of contents, the
hyperlink to the auction site from the table of contents generally would
make the auction site a part of the prospectus. Similarly, we believe
that the electronic auction could be presented on a web page next to the
electronic prospectus along with a statement that the auction web page
is part of the prospectus. Our central concerns are that the information
be presented in a manner that makes it clear that the information is
part of the electronic prospectus and that makes the remainder of the
prospectus disclosure easily accessible to investors. We invite issuers
and underwriters to consult with us about other means of making an
electronic presentation part of the electronic prospectus.

> **d. Description of the auction in the preliminary prospectus**

Any prospectus used by the issuer or the underwriter must meet the
requirements of Section 10. For example, the plan of distribution
disclosure must describe the auction process in a manner sufficient to
satisfy Item 508 of Regulation S-K. The preliminary prospectus should
include

1.  a description of the terms to be established by the auction, such as
    price,

    a summary of the auction process, and

    a fair and accurate description, or screen shots, of the Internet
    web pages that investors participating in the auction will see prior
    to the auction.

The issuer and the underwriter must evaluate whether they need to update
the preliminary prospectus. Whether the prospectus may be updated
through a prospectus supplement or through a post-effective amendment
will depend upon the circumstances. For example, if the securities are
offered and sold pursuant to an effective shelf registration statement
and the base prospectus does not describe the auction process, the
issuer would file a post-effective amendment to amend the plan of
distribution section to satisfy the requirements of Item 508.

> **e. Filing the auction screens as part of the final prospectus**

After the auction, the issuer must file a final prospectus that includes
the results of the auction and that provides a fair and accurate
representation of the electronic auction presentation. Rule 424(b)
requires an issuer to file with the Commission every prospectus with
substantive changes from a previously filed prospectus. The auction
screens are continually changing during the auction, and every different
view of the auction screens is a separate prospectus. Nevertheless, we
do not believe it is necessary to file separate prospectuses under Rule
424 for each change to the screens shown during the auction. Instead,
the issuer can file a final prospectus that contains a fair and accurate
representation of the auction process, including all substantive changes
that occurred during the course of the auction.

The final prospectus should, at a minimum, describe the final terms of
the offering, interim auction bidding activity, and any other
substantive change from information already filed with the Commission.
Auction screens, or summaries of the auction screens, at sufficiently
small intervals to capture all substantive changes in the bidding
process should be filed.

**7. Coordination with Other Government Agencies**

On occasion, the staff communicates with other government agencies when
disclosure indicates that the rules and regulations enforced by that
government entity may materially effect the issuer\'s operations. For
example, the staff continues to have an informal understanding with the
staff of the Environmental Protection Agency (\"EPA\") whereby the
Commission staff receives from the EPA lists of companies identified as
potentially responsible parties on hazardous waste sites; companies
subject to cleanup requirements under Resource Conservation and Recovery
Act; and companies named in criminal and civil proceedings under
environmental laws. The staff uses this information in its review
process.

**8. Monitor of Form 12b‑25 Notices**

The staff has implemented procedures to strengthen its monitoring
efforts of all Forms 12b‑25 notices of late filing. Notices are being
monitored, with appropriate action taken depending upon the issuer\'s
reason for delay and whether the subject filing is subsequently filed
during the extension period. Possible staff action includes referral to
the Division of Enforcement and prioritization of the subject report for
staff review.

**9. Related Public and Private Offerings**

Some companies with pending registration statements have advised the
staff that they intend to withdraw the registration statement and
shortly thereafter complete the offering without registration in
reliance upon the Section 4(2) private offering exemption. This appears
to be proposed for both timing and disclosure reasons. In the staff\'s
view, this procedure ordinarily would not be consistent with Section 5
of the Securities Act. The filing of a registration statement for a
specific securities offering (as contrasted with a generic shelf
registration) constitutes a general solicitation for that securities
offering, thus rendering Section 4(2) unavailable for the same offering.
In addition, the procedure raises significant integration issues under
the traditional five factor test (Securities Act Release No. 4552
(November 6, 1962)) and the staff\'s integration policy positions,
because the subsequent private offering does not appear to be a separate
offering.

A related issue arises when a company files a registration statement to
register issuances of securities to purchasers who committed to purchase
securities from the issuer before the filing of the registration
statement on the condition that the securities be registered before
issuance. It appears that the purpose of this procedure is to provide
the purchasers with registered (rather than restricted) securities. The
staff does not believe that this procedure is consistent with the
registration provisions of the Securities Act, which cover offers and
sales of securities, not issuances. In this situation, it appears that
the offers were made and the commitments obtained before filing in
reliance upon the Section 4(2) private placement exemption. If so, the
registration statement should cover resales by the purchasers, not
issuances to the purchasers.

The use of \"lock-up agreements\" in business combination transactions
is common. What is not common or consistent is the extent to which these
agreements may be used to lock up target shareholders beyond key
executives and \"blocking\" shareholders of the target. While the
signing of a lock-up agreement may constitute the making of an
investment decision, the staff, noting the realities of these
transactions, traditionally has not raised issues with respect to these
agreements in connection with acquisitions of public companies. However,
the staff has raised issues concerning recently filed acquisition
registration statements where 100% of the target shares are locked up or
the \"lock-up\" group is expanded to include non-traditional \"members\"
such as middle management. \[Note that the Commission has proposed to
address lock-up agreements and related public and private offerings in
Securities Act Release No. 7606A (November 13, 1998).\]

**10. Equity Swap Arrangements**

Equity swap arrangements (including the related equity security) and
similar devices typically shift some or all of the economic interests
and risks of an equity security. These arrangements raise a number of
legal and regulatory issues under the federal securities laws.
Application of Exchange Act Section 16 to these arrangements is
addressed in Exchange Act Releases No. 34514 and 37260. Those releases
stated that equity swaps and similar transactions are subject to Section
16, and discussed the manner in which they should be reported. The staff
continues to consider the issues raised by equity swaps and other
risk-shifting transactions in other areas, including disclosure of
security holdings and executive compensation, Schedule 13D reporting and
transactions subject to Rule 144, Rule 144A and Regulation S. See also
*Goldman Sachs* (December 20, 1999), located in Section X.F. of this
outline. The treatment of these transactions under Rule 144 is addressed
in Securities Act Release No. 7391 (February 20, 1997). The treatment of
these transactions under Regulation S is addressed in Securities Act
Release Nos. 7392 and 7505; see Section V.B.

**11.** **\"Gypsy Swaps\"**

A private purchaser wishes to invest directly in an issuer but hopes to
acquire unrestricted securities. Through arrangements and understandings
with the issuer, a stockholder with shares that are either restricted
securities currently eligible for sale under Rule 144 or unrestricted
securities sells the shares to the private purchaser. At about the same
time, the issuer sells an equivalent number of shares to the
stockholder. The Division's view is that the shares taken by the private
purchaser from the stockholder will be restricted securities within the
meaning of Rule 144(a)(3). The holding period will date to the private
acquisition. A public resale of the shares acquired from the stockholder
without regard to the conditions of Rule 144 would raise serious issues
under Section 5 of the Securities Act for all parties to the
transactions.

**12. Non-Qualified Deferred Compensation Plans**

A typical non-qualified deferred compensation plan permits an employee
to defer compensation over a set dollar amount. The employer retains
those monies. The employee will then either receive a fixed rate of
return on the deferred monies or the employer may permit the employee to
index the return on those monies off of a number of investment return
alternatives.

In a number of no-action positions, the Division has indicated that it
would not recommend enforcement action if transactions in non-qualified
deferred compensation plans were not registered. The requests in those
instances set forth two bases for the determination that registration
under the Securities Act was not required. First, those requests set
forth the argument that the offer and sale of interests in the deferred
compensation plan did not involve the offer or sale of a security
because the decision to participate in those plans was based primarily
on tax management, not investment, purposes. Second, the requests
contained the argument that the employees participating in the plan were
top-level executives who did not need the protections provided by
registration under the Securities Act. In providing the no-action
position requested, the Division\'s responses state that, while not
agreeing with the analysis in the request, it would not recommend
enforcement action if transactions under the plans were not registered.
The Division has not taken such a no-action position since 1991.

Due to a number of market and regulatory factors, non-qualified deferred
compensation plans have greatly proliferated, both with respect to the
number of employers offering such plans and the number of employees
participating. At this time, the Division is not prepared to disregard
the argument that the debt owing to plan participants is analogous to
investment notes, which typically are viewed as debt securities.
Further, the staff is not persuaded that there is a meaningful
distinction between those plans that offer returns tied to different
investment alternatives and those that offer only a fixed rate. The
Division, therefore, will not grant requests for no-action with respect
to any non-qualified deferred compensation plan, including those that
have an interest only return. The Division has not stated affirmatively,
however, that all interest only deferred compensation plans involve
securities. Instead, the Division currently is leaving that question for
counsel\'s analysis of the facts and circumstances. To the extent that
interests in a non-qualified deferred compensation plan are securities,
registration would be required unless the offerings under the plan would
qualify for an exemption, [e.g.]{.underline}, Section 4(2).

Form S-8 would be available when an employer registers the offer and
sale of interests in the deferred compensation plan under the Securities
Act. The filing fee should be based on the amount of compensation being
deferred, not on the ultimate investment return. As the \"deferred
compensation obligations\" to be registered are obligations of the
issuer/employer, not interests in the plan, the registration of the
\"deferred compensation obligations\" would not result in a requirement
that a deferred compensation plan file a Form 11-K with respect to those
securities. Further, based on the unique terms of the \"deferred
compensation obligations\" (both with respect to interest and maturity),
compliance with the Trust Indenture Act of 1939 has not been required.

> **13. Trust Indenture Act Issues Arising in Certain Transactions
> Exempt from Securities Act Registration**

Offerings exempt from registration under Sections 3(a)(9) and 3(a)(10)
of the Securities Act and Section 1145(a) of the Bankruptcy Code are not
exempt from qualification under the Trust Indenture Act. Like Section 5
of the Securities Act, Section 306 of the Trust Indenture Act works
transactionally. Unless the indenture for a debt security is qualified
under Section 305 of the Trust Indenture Act, which covers registered
offerings, or exempt from qualification under Section 304, the sale of
the debt security violates Section 306 of the statute. Section 306(c)
forbids any offer of the debt security until an application for
qualification of the related indenture has been filed with the
Commission.

The Division has recently noted a number of offerings of debt securities
for issuers in Chapter 11 proceedings where the applications for
qualification on Form T-3 were not filed until after approval of the
plans of reorganization by both creditors and other claimants and the
bankruptcy courts. The Division\'s view is that the offering event in
bankruptcy is the solicitation of plan approval from creditors and other
claimants. Accordingly, the application for qualification in these cases
should be filed before such approval is sought.

**14. Legality Opinion Issues**

It is customary practice for counsel drafting legality opinions
regarding securities whose issuer is incorporated in Delaware to limit
their opinion to "the Delaware General Corporation Law." In these
situations, we ask that counsel revise its opinion to make clear that
the law covered by the opinion includes not only the Delaware General
Corporation Law, but also the applicable provisions of the Delaware
Constitution and reported judicial decisions interpreting these laws.

Recently, we discussed this limitation with the Ad Hoc Committee on
Legal Opinions in SEC Filings of the Federal Regulation of Securities
Committee of the Business Law Section of the American Bar Association.
In those discussion, the Ad Hoc Committee emphasized that the reference
to the "Delaware General Corporations Law" was an opinion drafting
convention and that the practicing bar understood this phrase to mean
the Delaware General Corporation Law, the applicable provisions of the
Delaware Constitution, and reported judicial decisions interpreting
these laws.

Based on these discussions, we have revised our procedures for reviewing
a legality opinion filed as an exhibit to a registration that includes a
statement that it is "limited to the Delaware General Corporation Law."
Our new procedures are as follows:

1.  We will issue a comment asking counsel to confirm to us in writing
    that it concurs with our understanding that the reference and
    limitation to "Delaware General Corporate Law" includes the
    statutory provisions and also all applicable provisions of the
    Delaware Constitution and reported judicial decisions interpreting
    these laws. As part of this standard comment, we will ask that
    counsel file this written confirmation as correspondence on the
    EDGAR system. As such, it will be part of the Commission's official
    file regarding the related registration statement.

    Once we receive this written confirmation from counsel, we will not
    comment further on the inclusion of this language in the opinion for
    that registration statement.

**15. Plain English Initiative**

On January 22, 1998, the Commission adopted the final plain English
rules (Securities Act Release No. 7497). See also the proposed rules at
Securities Act Release No. 7380 (January 14, 1997). These rules apply to
public companies and mutual funds. The Division of Corporation Finance
has also issued Staff Legal Bulletin No. 7 on the new rules, and updated
it on June 7, 1999.

"A Plain English Handbook\--How to Create Clear SEC Disclosure
Documents," issued by the Office of Investor Education and Assistance,
is available. You can download a copy from our web site at
*http://www.sec.gov* or request a paper copy by calling 1-800-SEC-0330.

> **16. Clarification of Oil and Gas Reserve Definitions and
> Requirements**

Over the last several years, the estimation and classification of
petroleum reserves has been impacted by the development of new
technologies such as 3-D seismic interpretation and reservoir
simulation. Computer processor improvements have allowed the increased
use of probabilistic methods in proved reserve assessments. These have
led to issues of consistency and, therefore, some confusion in the
reporting of proved oil and gas reserves by public issuers in their
filings with the Commission. The following discussion addresses some
issues the Division of Corporation Finance's engineering staff has
detected in its review of these filings.

The definitions for proved oil and gas reserves for the SEC are found in
Rule 4-10(a) of Regulation S-X of the Securities Exchange Act of 1934.
The SEC definitions are below in bold italics. Under each section we
have tried to explain the SEC staff's position regarding some of the
more common issues that arise from each portion of the definitions. As
most engineers who deal with the classification of reserves have come to
realize, it is difficult, if not impossible, to write reserve
definitions that easily cover all possible situations. Each case has to
be studied as to its own unique issues. This is true with the Society of
Petroleum Engineers' and others' reserve definitions as well as the
SEC's definitions.

> a\. Proved oil and gas reserves are the estimated quantities of crude
> oil, natural gas, and natural gas liquids which geological and
> engineering data demonstrate with reasonable certainty to be
> recoverable in future years from known reservoirs under existing
> economic and operating conditions, i.e., prices and costs as of the
> date the estimate is made. Prices include consideration of changes in
> existing prices provided by contractual arrangements, but not on
> escalations based upon future conditions.

The determination of **reasonable certainty** is generated by supporting
geological and engineering data. There must be data available which
indicate that assumptions such as decline rates, recovery factors,
reservoir limits, recovery mechanisms and volumetric estimates, gas-oil
ratios or liquid yield are valid. If the area in question is new to
exploration and there is little supporting data for decline rates,
recovery factors, reservoir drive mechanisms etc., a conservative
approach is appropriate until there is enough supporting data to justify
the use of more liberal parameters for the estimation of proved
reserves. **The concept of reasonable certainty implies that, as more
technical data becomes available, a positive, or upward, revision is
much more likely than a negative, or downward, revision.**

**Existing economic and operating conditions** are the product prices,
operating costs, production methods, recovery techniques, transportation
and marketing arrangements, ownership and/or entitlement terms and
regulatory requirements that are extant on the effective date of the
estimate. An anticipated change in conditions must have reasonable
certainty of occurrence; the corresponding investment and operating
expense to make that change must be included in the economic feasibility
at the appropriate time. These conditions include estimated net
abandonment costs to be incurred and duration of current licenses and
permits.

If oil and gas prices are so low that production is actually shut-in
because of uneconomic conditions, the reserves attributed to the shut-in
properties can no longer be classified as proved and must be subtracted
from the proved reserve data base as a negative revision. Those volumes
may be included as positive revisions to a subsequent year's proved
reserves only upon their return to economic status.

> b\. Reservoirs are considered proved if economic producibility is
> supported by either actual production or conclusive formation test.
> The area of a reservoir considered proved includes that portion
> delineated by drilling and defined by gas-oil and/or oil-water
> contacts, if any, and the immediately adjoining portions not yet
> drilled, but which can be reasonably judged as economically productive
> on the basis of available geological and engineering data. In the
> absence of information on fluid contacts, the lowest known structural
> occurrence of hydrocarbons controls the lower proved limits of the
> reservoir.

Proved reserves may be attributed to a prospective zone if a conclusive
formation test has been performed or if there is production from the
zone at economic rates. It is clear to the SEC staff that wireline
recovery of small volumes (e.g. 100 cc) or production of a few hundred
barrels per day in remote locations is not necessarily conclusive.
Analyses of open-hole well logs which imply that an interval is
productive are not sufficient for attribution of proved reserves. If
there is an indication of economic producibility by either formation
test or production, the reserves in the legal and technically justified
drainage area around the well projected down to a known fluid contact or
the lowest known hydrocarbons, or LKH may be considered to be proved.

In order to attribute proved reserves to legal locations adjacent to
such a well (i.e. offsets), there must be conclusive, unambiguous
technical data which supports reasonable certainty of production of
those volumes and sufficient legal acreage to economically justify the
development without going below the shallower of the fluid contact or
the LKH. In the absence of a fluid contact, no offsetting reservoir
volume below the LKH from a well penetration shall be classified as
proved.

Upon obtaining performance history sufficient to reasonably conclude
that more reserves will be recovered than those estimated volumetrically
down to LKH, positive reserve revisions should be made.

c\. Reserves that can be produced economically through applications of
improved recovery techniques (such as fluid injection) are included in
the "proved" classification when successful testing by a pilot project,
or the operation of an installed program in the reservoir, provides
support for the engineering analysis on which the project or program was
based.

If an improved recovery technique which has not been verified by routine
commercial use in the area is to be applied, the hydrocarbon volumes
estimated to be recoverable cannot be classified as proved reserves
unless the technique has been demonstrated to be technically and
economically successful by a pilot project or installed program in that
specific rock volume. That demonstration should validate the feasibility
study leading to the project.

> **d. Estimates of proved reserves do not include the following:**

-   **oil that may become available from known reservoirs but is
    classified separately as "indicated additional reserves";**

-   **crude oil, natural gas, and natural gas liquids, the recovery of
    which is subject to reasonable doubt because of uncertainty as to
    geology, reservoir characteristics, or economic factors;**

-   **crude oil, natural gas, and natural gas liquids, that may occur in
    undrilled prospects;**

-   **crude oil, natural gas, and natural gas liquids, that may be
    recovered from oil shales, coal, gilsonite and other sources.**

Geologic and reservoir characteristic uncertainties such as those
relating to permeability, reservoir continuity, sealing nature of
faults, structure and other unknown characteristics may prevent reserves
from being classified as proved. Economic uncertainties such as the lack
of a market (e.g. stranded hydrocarbons), uneconomic prices and marginal
reserves that do not show a positive cash flow can also prevent reserves
from being classified as proved. Hydrocarbons "manufactured" through
extensive treatment of gilsonite, coal and oil shales are mining
activities reportable under Industry Guide 7. They cannot be called
proved oil and gas reserves. However, coal bed methane gas can be
classified as proved reserves if their recovery is shown to be
economically feasible.

In developing frontier areas, the existence of wells with a formation
test or limited production may not be enough to classify those estimated
hydrocarbon volumes as proved reserves. Issuers must demonstrate that
there is reasonable certainty that a market exists for the hydrocarbons
and that an economic method of extracting, treating and transporting
them to market exists or is feasible and is likely to exist in the near
future. A commitment by the company to develop the necessary production,
treatment and transportation infrastructure is essential to the
attribution of proved undeveloped reserves. Significant lack of progress
on the development of those reserves may be evidence of a lack of such a
commitment. Affirmation of this commitment may take the form of signed
sales contracts for the products; request for proposals to build
facilities; signed acceptance of bid proposals; memos of understanding
between the appropriate organizations and governments; firm plans and
timetables established; approved authorization for expenditures to build
facilities; approved loan documents to finance the required
infrastructure; initiation of construction of facilities; approved
environmental permits etc. Reasonable certainty of procurement of
project financing by the company is a requirement for the attribution of
proved reserves. An inordinately long delay in the schedule of
development may introduce doubt sufficient to preclude the attribution
of proved reserves.

The history of issuance and continued recognition of permits,
concessions and commerciality agreements by regulatory bodies and
governments should be considered when determining whether hydrocarbon
accumulations can be classified as proved reserves. Automatic renewal of
those agreements cannot be expected if the regulatory body has the
authority to end the agreement unless there is a long and clear track
record which supports the conclusion that those approvals and renewal
are a matter of course.

e\. Proved developed oil and gas reserves are reserves that can be
expected to be recovered through existing wells with existing equipment
and operating methods. Additional oil and gas expected to be obtained
through the application of fluid injection or other improved recovery
techniques for supplementing the natural forces and mechanisms of
primary recovery should be included as "proved developed reserves" only
after testing by a pilot project or after the operation of an installed
program has confirmed through production response that increased
recovery will be achieved.

Currently producing wells and wells awaiting minor sales connection
expenditure, recompletion, additional perforations or bore hole
stimulation treatment would be examples of properties with proved
developed reserves since the majority of the expenditures to develop the
reserves has already been spent.

Proved developed reserves from **improved recovery techniques** can be
assigned after either the operation of an installed pilot program shows
a positive production response to the technique or the project is fully
installed and operational and has shown the production response
anticipated by earlier feasibility studies. In the case with a pilot,
proved developed reserves can be assigned only to that volume
attributable to the pilot's influence. In the case of the fully
installed project, response must be seen from the full project before
all the proved developed reserves estimated can be assigned. If a
project is not following original forecasts, proved developed reserves
can only be assigned to the extent actually supported by the current
performance. An important point here is that attribution of incremental
proved developed reserves from the application of improved recovery
techniques requires the installation of facilities and a production
increase.

> **f. Proved undeveloped oil and gas reserves are reserves that are
> expected to be recovered from new wells on undrilled acreage, or from
> existing wells where a relatively major expenditure is required for
> recompletion. Reserves on undrilled acreage shall be limited to those
> drilling units offsetting productive units that are reasonably certain
> of production when drilled. Proved reserves for other undrilled units
> can be claimed only where it can be demonstrated with
> [certainty]{.underline} that there is [continuity of
> production]{.underline} from the existing productive formation. Under
> no circumstances should estimates of proved undeveloped reserves be
> attributable to any acreage for which an application of fluid
> injection or other improved recovery technique is contemplated, unless
> those techniques have been proved effective by actual tests in the
> area and in the same reservoir.** (Emphasis added)

The SEC staff points out that this definition contains no mitigating
modifier for the word *certainty*. Also, *continuity of production*
requires more than the technical indication of favorable structure alone
(e.g. seismic data) to meet the test for proved undeveloped reserves.
Generally, proved undeveloped reserves can be claimed only for legal and
technically justified drainage areas offsetting an existing productive
well (but structurally no lower than LKH). If there are at least two
wells in the same reservoir which are separated by more than one legal
location and which show communication (reservoir continuity), proved
undeveloped reserves could be claimed between the two wells, even though
the location in question might be more than an offset well location away
from any of the wells. In this illustration, seismic data could be used
to help support this claim by showing reservoir continuity between the
wells, but the required data would be the conclusive evidence of
communication from production or pressure tests. The SEC staff
emphasizes that proved reserves cannot be claimed more than one offset
location away from a productive well if there are no other wells in the
reservoir, even though seismic data may exist. The use of high-quality,
well calibrated seismic data can improve reservoir description for
performing volumetrics (e.g. fluid contacts). However, seismic data is
not an indicator of continuity of production and, therefore, can not be
the sole indicator of additional proved reserves beyond the legal and
technically justified drainage areas of wells that were drilled.
Continuity of production would have to be demonstrated by something
other than seismic data.

In a new reservoir with only a few wells, reservoir simulation or
application of generalized hydrocarbon recovery correlations would not
be considered a reliable method to show increased proved undeveloped
reserves. With only a few wells as data points from which to build a
geologic model and little performance history to validate the results
with an acceptable history match, the results of a simulation or
material balance model would be speculative in nature. The results of
such a simulation or material balance model would not be considered to
be reasonably certain to occur in the field to the extent that
additional proved undeveloped reserves could be recognized. The
application of recovery correlations which are not specific to the field
under consideration is not reliable enough to be the sole source for
proved reserve calculations.

Reserves cannot be classified as proved undeveloped reserves based on
improved recovery techniques until they have been proved effective in
that reservoir or an analogous reservoir in the same geologic formation
in the immediate area. An analogous reservoir is one having at least the
same values or better for porosity, permeability, permeability
distribution, thickness, continuity and hydrocarbon saturations.

g\. Topic 12 of Accounting Series Release No. 257 of the Staff
Accounting Bulletins states:

> **In certain instances, proved reserves may be assigned to reservoirs
> on the basis of a combination of electrical and other type logs and
> core analyses which indicate the reservoirs are analogous to similar
> reservoirs in the same field which are producing or have demonstrated
> the ability to produce on a formation test.**

If the combination of data from open-hole logs and core analyses is
overwhelmingly in support of economic producibility and the indicated
reservoir properties are analogous to similar reservoirs in the same
field which have produced or demonstrated the ability to produce on a
conclusive formation test, the reserves may be classified as proved.
This would probably be a rare event especially in an exploratory
situation. The essence of the SEC definition is that in most cases there
must at least be a conclusive formation test in a new reservoir before
any reserves can be considered to be proved.

> **h. Statement of Financial Accounting Standards 69, paragraph 30.a.
> requires the following disclosure:**
>
> ***Future cash inflows.* These shall be computed by applying [year-end
> prices]{.underline} of oil and gas relating to the enterprise's proved
> reserves to the year-end quantities of those reserves.** (Emphasis
> added)

This requires the use of physical pricing determined by the market on
the last day of the (fiscal) year. For instance, a west Texas oil
producer should determine the posted price of crude (hub spot price for
gas) on the last day of the year, apply historical adjustments
(transportation, gravity, BS&W, purchaser bonuses, etc.) and use this
oil or gas price on an individual property basis for proved reserve
estimation and future cash flow calculation (this price is also used in
the application of the full cost ceiling test). A monthly average is not
the price on the last day of the year, even though that may be the price
received for production on the last day of the year.

Paragraph 30b) states that future production costs are to be based on
year-end figures with the assumption of the continuation of existing
economic conditions.

i\. Position on Probabilistic Methods of Reserve Estimating

Probabilistic methods of reserve estimating have become more useful due
to improved computing and more important because of its acceptance by
professional organizations such as the SPE. The SEC staff feels that it
would be premature to issue any confidence criteria at this time. The
SPE has specified a 90% confidence level for the determination of proved
reserves by probabilistic methods. Yet, many instances of past and
current practice in deterministic methodology utilize a median or best
estimate for proved reserves. Since the likelihood of a subsequent
increase or positive revision to proved reserve estimates should be much
greater than the likelihood of a decrease, we see an inconsistency that
should be resolved. If probabilistic methods are used, the limiting
criteria in the SEC definitions, such as LKH, are still in effect and
shall be honored. Probabilistic aggregation of proved reserves can
result in larger reserve estimates (due to the decrease in uncertainty
of recovery) than simple addition would yield. We require a straight
forward reconciliation of this for financial reporting purposes.

j\. Use of Cautionary Note in Connection with Disclosure Language

We have seen in press releases and web sites disclosure language by oil
and gas companies which would not be allowed in a document filed with
the SEC. We will request that these disclosures be accompanied by the
following cautionary language:

> ***Cautionary Note to U.S. Investors \-- The United States Securities
> and Exchange Commission permits oil and gas companies, in their
> filings with the SEC, to disclose only proved reserves that a company
> has demonstrated by actual production or conclusive formation tests to
> be economically and legally producible under existing economic and
> operating conditions. We use certain terms {*in this press release/on
> this web site*}, such as \[*identify the terms*\], that the SEC\'s
> guidelines strictly prohibit us from including in filings with the
> SEC. U.S. Investors are urged to consider closely the disclosure in
> our Form XX, File No. X-XXXX, available from us at* \[registrant
> address at which investors can request the filing\]*. You can also
> obtain this form from the SEC by calling 1-800-SEC-0330.***

Examples of these disclosures would be statements regarding "probable,"
"possible," or "recoverable" reserves among others.

> **k. Consent of Experts and Potential Civil Liability**

The SEC staff reminds professionals engaged in the practice of reserve
estimating and evaluation that the Securities Act of 1933 subjects to
potential civil liability every expert who, with his or her consent, has
been named as having prepared or certified any part of the registration
statement, or as having prepared or certified any report or valuation
used in connection with the registration statement. These experts
include accountants, attorneys, engineers or appraisers.

**17. Shelf Registration Deal Information under Rule 412**

On several occasions, Form 8-K was used to file information identified
as relating to a particular takedown of securities from a delayed shelf
registration statement. By operation of the shelf registration system,
the Form 8-K was incorporated by reference into the prospectus of the
relevant effective S-3 registration statement. The Form 8-K included
information that, if not made a part of the Section 10(b) prospectus,
may have violated Section 5(b)(1) if used in the offering as
contemplated.

In each case, following the closing of the transaction, the registrant
filed another Form 8-K for the sole purpose of asserting that the
information contained in the earlier Form 8-K and incorporated by
reference into the registration statement was expunged. In these cases,
we were advised by the registrants that they relied on Securities Act
Rule 412 for this removal of information. Under Rule 412, statements in
documents incorporated by reference in a Securities Act registration
statement are deemed to be modified or superseded by new information
contained in a prospectus or a document later incorporated by reference.

While the staff generally has no objection to the use of Form 8-K to
include information in a prospectus that is part of a delayed shelf
registration statement, Rule 412 does not permit an issuer to file a
statement later to remove or "expunge" the information in the earlier
Form 8-K. Registrants are advised to refrain from attempting to do so.
The staff is of the view that any attempt to remove information under
Rule 412 would be null and void. If this practice comes to the attention
of the staff in the future, the registrant will be asked to file an
amended Form 8-K to correct the attempted removal. Registrants are also
advised that they may include deal-specific information as part of the
prospectus in a shelf registration statement by filing that information
under Securities Act Rule 424 before its use as part of the Section
10(b) prospectus.

**18. Recent Enforcement Action -- CGI Capital, Inc.**

On September 29, 2000, CGI Capital, Inc. consented to the entry of an
Order by the Commission censuring CGI Capital for its conduct in
connection with two unregistered offerings and directing CGI Capital to
cease and desist from committing or causing violations of Section 5 of
the Securities Act. CGI Capital also agreed to pay a \$25,000 civil
penalty.

From August 1999 through December 1999, CGI Capital, a broker-dealer
registered with the Commission, solicited thousands of individuals to
invest in two unregistered offerings available through its web site.
Specifically, CGI Capital disseminated e-mail messages to prospective
investors that contained:

1.  preliminary information regarding the offerings;

    a link to CGI Capital's web site; and

    a password that allowed these investors to access a
    password-protected area of CGI Capital's web site that contained
    brief sales presentations and subscription forms for each offering.

Some recipients of the e-mails did not have a pre-existing substantive
relationship with CGI Capital, and CGI Capital failed to determine
adequately whether the prospective investors were either accredited or
sophisticated. The Commission found that these

e-mails constituted general solicitation, and therefore, there was no
exemption available for the unregistered offerings.

The Commission also found that CGI Capital engaged in a general
solicitation by failing to take adequate steps to restrict access to the
offerings on its web site. \[[Cf.]{.underline} No-Action Letter of
Divisions of Corporation Finance and Market Regulation to IPONET (July
26, 1996); Interpretive Release on Use of Electronic Media, Securities
Act Rel. No. 33-7856 (April 28, 2000). \] In particular, CGI Capital:

1.  sent its e-mail solicitations to several thousand potential
    investors and included in each e-mail a password to the
    password-protected page of its web site containing the offering
    materials;

    allowed these potential investors to access the offering materials
    on its web site before CGI Capital had made a determination that any
    particular potential investor was accredited or sophisticated;

    failed to gather information from certain potential investors in
    order to form a reasonable basis for believing these investors to be
    accredited or sophisticated; and

    allowed these potential investors to purchase securities in
    offerings that had been posted on the password-protected page of its
    web site before CGI Capital had made a determination that these
    potential investors were accredited or sophisticated.

As a result, the Commission found that CGI's activities violated Section
5 of the Securities Act.

**B. [Industry-Specific Issues]{.underline}**

**1. Real Estate**

**a. Review of Filings**

The Division has issued three releases regarding real estate disclosure.
On June 17, 1991, the Commission issued an interpretive release relating
to partnership offerings and reorganizations (Securities Act Release No.
6900); on October 30, 1991, final rules concerning disclosure of roll-up
transactions were issued (Securities Act Release No. 6922). On December
1, 1994, the Commission adopted amendments to its roll-up rules
(Securities Act Release No. 7113). The staff considers the disclosure
guidelines of each of these releases in connection with its reviews of
registration statements and proxy statements filed by limited
partnerships and real estate investment trusts.

Current real estate filings relate primarily to real estate investment
trusts (REITs) and, to a lesser extent, limited partnerships and limited
liability companies. Frequently, REIT filings contain an UPREIT
structure which includes an Umbrella Operating Partnership formed by the
sponsor and affiliated partnerships to contribute properties or
partnership interests to the REIT. In connection with REIT initial
public offerings, the staff considers the availability of any claimed
exemption from Securities Act registration for the pre-formation roll-up
transactions undertaken to form the operating partnership.

Primary offerings by Operating Partnerships must comply with appropriate
form requirements. Operating Partnerships may use Form S-3 if the
applicable requirements are met, specifically, Instruction I.C., but
since the Operating Partnership is unlikely to be able to meet the
requirements of Staff Accounting Bulletin 53, separate financial
statements and related disclosure must be provided either in the
registration statement or through incorporation by reference of a
voluntary Form 10. Following the offering, applicable reports must be
filed by the Operating Partnership.

Reviews of limited partnership offerings and proxy solicitation
materials continue to focus on prior performance and on claims made by
sponsors concerning investment obligations and future performance. These
reviews also focus on changes to partnership objectives and structure.
Finally, the staff continues to examine the practices and disclosure
associated with the solicitation of proxies and registration statements
related to roll-ups, pursuant to the revised rules. See also Section
II.C.1 for a discussion of the disclosure required in tender offers for
limited partnership units.

> **b. Sales Literature Used in Connection with the Offering of Limited
> Partnerships**

Item 19 of Industry Guide 5 requires that sales literature used in the
offering of limited partnership units, including material marked for
\"Broker Dealer Use Only,\" be submitted for staff review. These
materials should provide a balanced presentation of the risks and
rewards involved in the offering. All information must be consistent
with the information and representations contained in the prospectus and
the sales literature should not be presented in a manner which obscures
the prospectus cover page. Registrants should contact the staff before
using submitted sales materials.

> **c. Low Income Housing, Rehabilitation, and Historic Tax Credit Real
> Estate Limited Partnerships**

Certain real estate limited partnership offerings indicate the
sponsor\'s intention to invest in low income housing or other programs
eligible for federal or state income tax credits. Most of these
offerings highlight the percentage returns to the investor of the tax
credits on a simple annualized basis. Since the tax credits are
available for only 10 years and the enabling statutes require a 15‑year
holding period for the property, the rate of return disclosure should
include the effects of the time value of money. Further, since it is
possible that the property may have no or little residual value at the
end of the 15-year holding period, the disclosure of the rate of return
should assume a zero resale value of the property.

Further, prior performance disclosure of the results of earlier tax
credit offerings by the sponsor should be included. Disclosure of the
total amount of tax credits generated for each year should be included
as should the amount of tax credits per \$1000 invested.

> **2. Exemption from Registration for Bank and Thrift Holding Company
> Formations**

Section 3(a)(12) of the Securities Act provides an exemption from
registration for securities issued in connection with the formation of a
bank or savings association holding company where shareholders maintain
the same proportional interest in the holding company as they had in the
bank or savings association; the rights and interests of the
shareholders are substantially the same after the transaction as before
it; and the holding company has substantially the same assets and
liabilities, on a consolidated basis, as the bank or savings association
had before the transaction. The staff has informally taken the position
that the exemption would not be available if the new holding company\'s
corporate charter contained antitakeover provisions that were not in the
governing documents of the predecessor bank or thrift.

**3. Structured Financings**

In fall 1992, the Commission extended the benefits of Rule 415 \"shelf\"
registration through the expansion of the availability of Form S-3 to
investment grade asset-backed securities offerings (Securities Act
Release No. 6964 (October 22, 1992)(the \"Shelf Release\")). Shortly
thereafter, the Commission adopted Rule 3a‑7 under the Investment
Company Act of 1940 excluding from the definition of \"investment
company\" structured financings that meet the rule\'s conditions
(Investment Company Act Release No. 19105 (November 19, 1992)). These
changes appear to have precipitated, or at least coincided with, a
movement in the structured finance market toward securitization of
assets in the public markets that previously were offered in the private
markets. Significant disclosure and eligibility issues continue to come
up as a result of market developments.

**a. Asset Concentration**

The Shelf Release expressly does not adopt a specific asset
concentration test. Instead, asset concentration questions have been
addressed through existing disclosure rules. While an asset
concentration test was not included, the release indicates that the
definition of asset-backed security does not encompass securities issued
in structured financings for one obligor or group of related obligors.

**i. Multiple Core Prospectuses**

Another issue involving asset concentration arises in the context of
pooling several different types of underlying assets. The staff permits
issuers to register on a single shelf registration statement
asset-backed securities supported by more than one category of
underlying assets without specifying the amount of each type to be
offered. The registration statement must specifically identify the
various asset categories and include a separate core prospectus for each
such category. In considering whether a separate core prospectus is
required, the staff will consider whether the assets described are
intended to be pooled together or securitized separately. If the latter,
separate core prospectuses ordinarily would be required.

**ii. Commercial Mortgages**

For securitization of commercial mortgages and leases, where the
mortgage loan is a non-recourse obligation of the mortgagor, disclosure
related to the operating property(ies) will be required where
concentration exists. The staff applies the standards described in Staff
Accounting Bulletin 71/71A (\"SAB 71/71A\"). SAB 71/71A generally
employs a 20% asset concentration test to determine whether audited
property financial statements are required. At concentration levels
between 10‑20%, financial and other information regarding the underlying
properties is required. In determining whether these concentration
thresholds are crossed, loans to the same obligor, group of related
obligors, or loans on related properties may be aggregated.

In addition, where a mortgage loan or loans of a single obligor, or
group of related obligors, accounts for more than 45% of the pool
assets, one or more co-issuers may exist. See *FBC Conduit Trust I,
First Boston Mortgage Securities Corporation* (October 6, 1987).

**b. Securitizing Outstanding Securities**

**i. Corporate Debt Securities**

The pooling and securitization of outstanding corporate debt securities
of other issuers may be registered on Form S-3 if the requirements of
the Form for asset-backed securities offerings are met, provided that
the depositor would be free to publicly resell the securities without
registration. Thus, a depositor generally cannot include restricted
securities ([i.e.]{.underline}, privately-placed securities where the
Rule 144(k) two-year holding period has not run) nor can it include
registered securities if the securitization is part of the original
distribution. To provide certainty in deciding what is part of the
original distribution in resecuritizations by affiliates of underwriters
involved in the original offering, the staff has used a bright line test
([i.e.]{.underline}, securities purchased in the secondary market and at
least three months after the depositor had sold out any unsold allotment
are not viewed as part of the original dispatch).

Where 20% or more of the pool consists of the securities of a single
issuer, the staff requires audited financial statements of such issuer
to be included in the prospectus. However, if the underlying issuer is
eligible to use Form S-3 for a primary common stock offering, and the
depositor\'s transaction in the securities is purely secondary
([e.g.]{.underline}, there is no tie to the issuer or the issuer\'s
distribution), the staff would accept a reference in the prospectus to
the issuer\'s periodic reports on file with the Commission. Of course,
the prospectus must include a description of the material terms of the
pooled securities.

In connection with Exchange Act reporting, reference to the S-3 eligible
underlying issuer\'s periodic reports on file with the Commission will
be accepted in lieu of direct disclosure of this information. In
addition, the staff generally requires the depositor to undertake to
provide financial and other information relating to such underlying
issuer directly in its reports in the event such underlying issuer
terminates reporting after the pooling transaction.

**ii. Asset-Backed Securities**

Securitization of outstanding asset-backed securities is treated
similarly if the underlying trust has outstanding securities held by
non-affiliates in excess of \$75 million and files periodic reports with
the Commission. The securities of government-sponsored enterprises
(\"GSE\") which have a comparable market float and which make
information publicly available comparable to that of Exchange Act
reporting entities are treated similarly.

**iii. Municipal Securities**

The offering of asset-backed securities supported by pools of municipal
bonds where asset concentration exists, in general, requires that
financial statements and other information relating to the underlying
municipal issuer be provided. This information must be included directly
in the prospectus, must be current, and must otherwise satisfy fully the
disclosure requirements under the federal securities regulations.

While there may be instances where financial statements of the municipal
issuer are not material to the investor in the asset-backed security,
such instances would appear to be rare and the staff will require
appropriate legal opinions and other documentation necessary to support
the conclusion that financial and other information relating to the
municipal issuer is not material to investors.

**c. Structuring the Offering**

Often the payment terms of asset-backed securities are tailored to meet
the particular investment needs of the investor. Prior to effectiveness
of the registration statement, investors often ask the underwriter for
various computational materials so as to analyze prepayment and other
assumptions affecting yield. These computational materials are not
permissible prospectuses under the Securities Act and the Commission\'s
rules and regulations. However, recognizing the realities of the
asset-backed market, the staff has issued three no-action letters that
recognize the industry\'s practice of providing written information
(other than the statutory prospectus) to prospective purchasers of
asset-backed securities when negotiating and structuring the securities
to meet purchasers\' investment criteria. These letters generally permit
the provision of limited information outside the preliminary prospectus
to purchasers, provided that the final information is filed as part of
the registration statement.

**4. Credit Linked Securities of Bank Subsidiaries**

Recently, a number of banks proposed the following transaction
structure:

1.  the bank forms a limited purpose finance subsidiary;

    the bank transfers mortgages or asset-backed securities to the
    subsidiary;

    the bank owns all of the subsidiary's common stock; and

    the subsidiary registers the sale of its preferred stock to the
    public.

The source of funds for dividend payments on the preferred stock would
be limited to the income generated by the finance subsidiary's assets.
The banks proposed this structure because the preferred securities of
the subsidiary may, under relevant risk based capital guidelines,
qualify as capital of the bank.

Under bank regulations, if a financial regulatory event occurs, banks
must retrieve, or "claw back," the assets of these subsidiaries. Because
the assets of these subsidiaries are subject to this claw back, this
structure raises significant registration and disclosure issues.

Under one structure, the preferred securities of the subsidiary
automatically convert into securities of the bank. Therefore:

1.  the bank and the subsidiary must be co-registrants on the
    registration statement for the initial sale of the preferred stock
    since the bank is also offering preferred stock;

    the full audited financial statements of the bank must be included
    in this registration statement; and

    if the bank's financial statements are not in US GAAP, they must be
    reconciled to US GAAP.

If the bank regulators can require the bank to claw back the
subsidiary's assets, the financial condition of the bank is material to
the subsidiary preferred stockholder at all times. Therefore:

1.  the full audited financial statements of the bank must be in the
    registration statement and in the subsequent periodic reports of the
    subsidiary; and

    if the bank's financial statements are not in US GAAP, they must be
    reconciled to US GAAP.

**IX. [ACCOUNTING ISSUES]{.underline}**

## 

##  Please also see \"Current Accounting and Disclosure Issues in the Division of Corporation Finance,\" dated January 21, 2000, available on our web site at *www.sec.gov/rules/othrindx.htm.*

**A. [Initiative to Address Improper Earnings Management]{.underline}**

Many in the financial community have expressed concern that market
pressures are driving more public companies to use improper earnings
management tricks. In remarks made to the NYC Center for Law and
Business in September 1998, Chairman Levitt identified several areas
where accounting rules have been abused by some companies to manage
earnings: "big bath" restructuring charges, "creative" acquisition
accounting, miscellaneous "cookie jar" reserves, intentional
"immaterial" errors, and manipulative revenue recognition. The Chairman
outlined a plan to address the threat to the integrity of financial
reporting posed by improper earnings management. The Chairman's speech
can be found at *www.sec.gov/news/spchindx.htm*.

The Division of Corporation Finance established an Earnings Management
Task Force that focused staff resources on the review of filings where
potential improper earnings management issues could be present. A
primary objective of the reviews has been to elicit improved disclosure
in financial statements and MD&A about charges involving asset
impairments, restructuring charges, purchased in-process research and
development, and similar items. Disclosure sought by the staff has
included explanation of the types and amounts of restructuring
liabilities and valuation reserves, the timing and amount of increases
and decreases in these accounts, and the nature and amount of any
changes in estimates. The Task Force also examined filings for indicia
of earnings management and other accounting abuses involving revenue
recognition, unreasonable valuations of purchased in-process research
and development, and manipulation of loss allowances and estimated
liabilities. Also, as part of its proactive disclosure program, the
Division of Corporation Finance sent letters alerting companies, before
their filing 1998 annual reports, of disclosures that are often needed
to give transparency to significant charges. Samples of those letters
are available at the SEC web site.

In further response to the Chairman's earnings management initiative,
the AIPCA published *Issues in Revenue Recognition*, available at
*www.aicpa.org*, to help auditors evaluate assertions about revenue. The
Office of the Chief Accountant is working closely with the FASB to
establish clearer standards concerning liability recognition. The Public
Oversight Board has established a distinguished committee to review the
way audits are performed today and assess the impact of recent trends in
business and the accounting profession on the effectiveness of the
audit. Other actions taken in connection with the Chairman's earnings
management initiative include issuance of staff interpretive guidance
and rulemaking proposals discussed elsewhere in this outline.

> **B.** **[New Rules for Audit Committees and Reviews of Interim
> Financial Statements]{.underline}**

On December 15, 1999, the Commission adopted new rules to improve public
disclosure about the functioning of corporate audit committees and to
enhance the reliability and credibility of financial statements of
public companies. Exchange Act Release No. 42266 (December 22, 1999).
The new rules became effective on January 31, 2000. The Commission\'s
actions are part of a broader effort by the securities exchanges and the
accounting profession to improve the oversight of financial reporting by
corporate boards. Proposals for action by each of the different groups
were set forth in the Report and Recommendations of the Blue Ribbon
Committee on Improving the Effectiveness of Corporate Audit Committees.
The Blue Ribbon Committee is a prestigious group of business,
accounting, and securities professionals led by John Whitehead and Ira
Millstein. The committee\'s report is available at *www.nasd.com*. The
Commission\'s new rules coincide with rule changes by the New York Stock
Exchange, the American Stock Exchange, and the National Association of
Securities Dealers.

In brief, the rules require that:

1.  companies\' interim financial statements must be reviewed by
    independent auditors before they are filed on Forms 10-Q or 10-QSB
    with the Commission;

    companies, other than small business issuers filing on small
    business forms, must supplement their annual financial information
    with disclosures of selected quarterly financial data under Item
    302(a) of Regulation S-K;

    companies must disclose in their proxy statements whether the audit
    committee reviewed and discussed certain matters specified in the
    ASB\'s Statements of Auditing Standards No. 61 (concerning the
    accounting methods used in the financial statements) and the
    Independence Standard Board\'s Standard No. 1 (concerning matters
    that may affect the auditor\'s independence) with management and the
    auditors, and whether it recommended to the Board that the audited
    financial statements be included in the Annual Report on Form 10-K
    or 10-KSB for filings with the Commission;

    companies disclose in their proxy statements whether the audit
    committee has a written charter, and file a copy of their charter
    every three years; and

    companies whose securities are listed on the NYSE or AMEX or are
    quoted on Nasdaq disclose certain information in their proxy
    statements about any audit committee member who is not
    \"independent.\" All companies must disclose, if they have an audit
    committee, whether the members are \"independent.\" Independence is
    defined in the listing standards of the NYSE, AMEX and NASD.

Under the new rules, interim auditor reviews must begin with the first
fiscal quarter ended after March 15, 2000, and compliance with the other
new requirements begin after December 15, 2000. Foreign private issuers
are exempt from requirements of the new rules. The new rules include a
\"safe harbor\" for the disclosures.

The Commission\'s new rules build upon rule changes proposed by the NYSE
and the AMEX and the NASD and approved by the Commission on December 15,
1999, which were also part of the recommendations of the Blue Ribbon
Committee. Those rules:

1.  define \"independence\" more rigorously for audit committee members;

    require audit committees to include at least three members and be
    comprised solely of \"independent\" directors who are financially
    literate;

    require companies to adopt written charters for their audit
    committees;

    give the audit committee the right to hire and terminate the
    auditors; and

    require at least one member of the audit committee to have
    accounting or financial management expertise.

In December 1999, the AICPA\'s Auditing Standards Board issued the
Statement of Auditing Standard No. 90 which requires independent
auditors to discuss with the audit committee the auditor\'s judgment
about the quality, and not just the acceptability under generally
accepted accounting principles, of the company\'s accounting principles
as applied in its financial reporting.

## **C. [Materiality in the Preparation or Audit of Financial Statements (SAB 99) ]{.underline}**

On August 12, 1999, the staff published Staff Accounting Bulletin No.
99. That SAB expressed the staff's view that exclusive reliance on
certain quantitative benchmarks to assess materiality in preparing or
auditing financial statements is inappropriate. The SAB states that the
staff has no objection to the use of a percentage threshold as an
initial assessment of materiality, but exclusive use of such thresholds
has no basis in law or in the accounting literature. The staff stresses
that evaluations of materiality require registrants and auditors to
consider *all* of the relevant circumstances, and that there are
numerous circumstances in which misstatements below that percentage
threshold could be material. Some of the circumstances listed in the SAB
that should be considered are:

1.  whether the misstatement masks a change in earnings or other trends,

    whether the misstatement hides a failure to meet analysts' consensus
    expectations for the enterprise,

    whether a misstatement changes a loss into income or vice versa,

    whether the misstatement concerns a segment of the registrant's
    business that plays a significant role in the registrant's present
    or future operations or profitability,

    whether the misstatement affects compliance with loan covenants or
    other contractual requirements,

    whether the misstatement has the effect of increasing management's
    compensation.

The SAB observes that managers should not direct or acquiesce to
immaterial misstatements in the financial statements for the purpose of
managing earnings. The SAB indicates that investors generally would
consider significant an ongoing practice to over- or understate earnings
up to an amount just short of some percentage threshold in order to
manage earnings.

The SAB also notes that even though a misstatement of an individual
amount may not cause the financial statements to be materially
misstated, it may, when aggregated with other misstatements, render the
financial statements taken as a whole to be materially misleading. The
SAB, therefore, provides guidance on when and how to aggregate and net
misstatements to see if they materially misstate the financial
statements.

The SAB advises that, even if management and auditors find that a
misstatement is immaterial, they must consider whether the misstatement
results in a violation of the books and records provisions in Section
13(b) of the Exchange Act. Section 13(b) requires that public companies
make and keep books, records, and accounts, which, in reasonable detail,
accurately and fairly reflect transactions and the disposition of assets
of the registrant, and that they maintain internal accounting controls
that are sufficient to provide reasonable assurances that financial
statements are prepared in conformity with GAAP. In this context, what
constitutes "reasonable assurance" and "reasonable detail" are not based
on a "materiality" standard but on the level of detail and degree of
assurance that would satisfy prudent officials in the conduct of their
own affairs.

The SAB sets forth various factors, in addition to those used to
evaluate materiality, that a company may consider in deciding whether a
misstatement violates its obligation to keep books and records that are
accurate "in reasonable detail." Some of these factors are:

1.  the significance of the misstatement,

    how the misstatement arose,

    the cost of correcting the misstatement, and

    the clarity of the authoritative accounting guidance with respect to
    the misstatement.

Finally, the SAB reminds auditors of their obligations under Section 10A
of the Exchange Act and auditing standards to inform management and, in
some cases, audit committees of illegal acts, such as violations of the
books and records provisions of the Exchange Act, coming to the
auditor's attention during the course of an audit.

**D. [Restructuring Charges, Impairments and Related
Issues]{.underline}**

> **[(SAB 100)]{.underline}**

On November 24, 1999, the staff published Staff Accounting Bulletin No.
100, which provides guidance on the accounting for and disclosure of
certain expenses and liabilities commonly reported in connection with
restructuring activities and business combinations, and the recognition
and disclosure of asset impairment charges.

The Emerging Issues Task Force addressed Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring) in Issue
No. 94-3. Generally, that consensus limits costs that may be recognized
solely pursuant to management's plan to incur them to those costs which
result directly from an exit activity, are not associated with and do
not benefit continuing activities, and for which there is appropriate
authorization, specification, and commitment to execute. SAB 100
discusses the EITF criteria and related disclosure requirements in
particular circumstances encountered by the staff in its review of
filings by public companies. The SAB expresses the staff's view that a
company's exit plan should be at least comparable in its level of detail
and precision of estimation to the company's other operating and capital
budgets, and should be accompanied by controls and procedures to detect
and explain variances and adjust accounting accruals. The SAB discusses
disclosures in financial statements and MD&A that are often necessary to
make the effects of restructuring activities on reported results
sufficiently transparent to investors.

SAB 100 also addresses issues that arise in the application of FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of. The SAB reminds registrants
that the operational requirement to continue to use an asset disallows
accounting for the asset as held for sale. If the asset is held for use,
its carrying value must be systematically amortized to its salvage value
over its remaining economic life. If management contemplates the removal
or replacement of assets more quickly than implied by their depreciation
rates, the useful lives of the assets and rates of depreciation must be
re-evaluated. The SAB also provides the staff's views regarding the
assessment and measurement of any impairment of enterprise level
goodwill, and it specifies the accounting policy disclosures that should
be provided.

The SAB also highlights the staff's concerns when a registrant records
liabilities assumed in a business combination at amounts materially
greater than historically reported by the acquired company. That
circumstance could indicate that costs incurred before or after the
merger were not properly recognized in the reported results of one or
the other combining company. The SAB reminds registrants that, if the
acquired company's historical accounting for a liability is based on
reasonable estimates of undiscounted future cash flows, the estimated
undiscounted cash flows underlying the liability recorded by the
acquiring company would not be expected to differ materially from those
estimates unless the acquirer intends to settle the liability in a
manner demonstrably different from that contemplated by the acquired
company.

> **E. [Interpretive Guidance on Revenue Recognition (SAB
> 101,]{.underline}**
>
> **[SAB 101A and SAB 101B)]{.underline}**

On December 3, 1999, the staff published Staff Accounting Bulletin 101
to provide guidance on the recognition, presentation and disclosure of
revenue in financial statements (www.sec.gov/rules/acctreps/sab101.htm).
The SAB draws on the existing accounting rules and explains how the
staff applies those rules, by analogy, to transactions that the
accounting literature does not otherwise address specifically. On
October 12, 2000 the staff published Frequently Asked Questions and
Answers which responds to inquiries received from auditors, preparers
and analysts about how the accounting literature and guidance in SAB 101
should be applied (www.sec.gov/offices/account/sab101fq.htm).

SAB 101 identifies basic criteria that must be met before registrants
can record revenue:

1.  persuasive evidence of an arrangement exists;

    delivery has occurred or services have been rendered;

    the seller's price to the buyer is fixed or determinable; and

    collectibility is reasonably assured.

In the absence of authoritative literature addressing a specific
arrangement or a specific industry, the staff believes preparers and
auditors should assure that the company's revenue recognition policy
satisfies all of these criteria.

Specific fact patterns discussed in the SAB include bill-and-hold
transactions, long-term service transactions, refundable membership
fees, contingent rental income, and up-front fees when the seller has
significant continuing involvement. The SAB also addresses whether
revenue should be presented at the full transaction amount or on a fee
or commission basis when the seller is acting as a sales agent or in a
similar capacity. Finally, the SAB provides guidance on the disclosures
registrants should make about their revenue recognition policies and the
impact of events and trends on revenue.

The Q&A provides additional interpretive guidance about the significance
of title transfer, the meaning of substantial performance and customer
acceptance, the effect of undelivered elements on nonrefundable
payments, the conditions for recognition of refundable service revenue,
and various SAB 101 implementation questions.

Registrants may need to change their accounting policies to comply with
the SAB. Provisions of the SAB addressing the period in which the new
policies should be adopted were amended by Staff Accounting Bulletin
101B, which was issued June 26, 2000. Provided the registrant's former
policy was not an improper application of GAAP, registrants may adopt a
change in accounting principle to comply with the SAB no later than the
last fiscal quarter of the fiscal year beginning after December 15,
1999.

> **F. [Mandatorily Redeemable Securities of Subsidiaries Holding Debt
> of Registrant]{.underline}**

Registrants should consider the adequacy of disclosures about
mandatorily redeemable securities issued by a finance subsidiary of a
parent company when the financial subsidiary holds only debt instruments
issued by the parent, particularly if the outstanding security of the
finance subsidiary is guaranteed by the parent and mirrors the cash
flows of the debt of the parent held by the finance subsidiary. The
staff believes that disclosures in these situations often must be
expanded to provide investors with a fair and balanced picture of the
registrant\'s effective capitalization and leverage. Inclusion of the
outstanding public security in minority interest with minimal disclosure
of its characteristics is not adequate, particularly when Section 12(h)
reporting relief is requested by registrants for the finance subsidiary.
In those situations, the parent should disclose the subsidiary\'s
outstanding securities as a separate line item in the parent\'s balance
sheet captioned \"Company-obligated mandatorily redeemable security of
subsidiary holding solely parent debentures,\" \"Guaranteed preferred
beneficial interests in Company\'s debentures,\" or similar descriptive
wording. Notes to the financial statements should describe fully the
terms of the securities and explain that those terms parallel the terms
of the company\'s debentures which comprise substantially all of the
assets of the consolidated trust or subsidiary.

**G. [Accountant\'s Refusals to Re-issue Audit Reports]{.underline}**

Some accounting firms have adopted risk management policies that lead
them to refuse to re-issue their reports on the audits of financial
statements that have been included previously in Commission filings. In
some cases, accountants whose reports on acquired businesses were
included in a registrant\'s Form 8-K have declined to permit that report
to be included in a registrant\'s subsequent registration statement. In
other cases, accountants have declined to reissue their reports on the
registrant\'s financial statements after the registrant engaged a
different auditor for subsequent periods. The Commission\'s staff is not
in a position to evaluate the reasons for an accountant\'s refusal to
re-issue its report and will not intervene in disputes between
registrants and their auditors. Moreover, the staff will not waive the
requirements for the audit report or the accountant\'s consent to be
named as an expert in filings. If a registrant is unable to re-use the
previously issued audit report in a current filing, the registrant must
engage another accountant to re-audit those financial statements. A
registrant that is unable to obtain either re-issuance of an audit
report or a new audit by a different firm may be precluded from raising
capital in a public offering.

When registrants engage an accountant to perform audit services, they
should consider the need for the accountant to re-issue its audit report
in future periods. It may be appropriate to address in the audit
services contract the registrant\'s expectations regarding the use of
the audit report in filings that it or its successors may make under
either the Exchange Act or the Securities Act and the circumstances
under which the accountant may decline to permit its re-use.

**H. [Market Risk Disclosures]{.underline}**

On January 28, 1997, the Commission adopted amendments to Regulation
S‑K, Regulation S‑X, and various forms (Securities Act Release No. 7386)
to clarify and expand existing requirements for disclosures about
derivatives and market risks inherent in derivatives and other financial
instruments. Derivative financial instruments are defined in FASB
Statement No. 119 to include futures, forwards, swaps, and options.
Derivative commodity instruments are defined in the Release to be
commodity contracts that are permitted by contract or business custom to
be settled in cash or with another financial instrument
([e.g.]{.underline}, commodity futures, commodity forwards, commodity
swaps, and commodity options). Other financial instruments are defined
in FASB Statement No. 107 to include, for example, investments,
including structured notes, loan receivables, debt obligations, and
deposit liabilities. The requirements for quantitative and qualitative
information about market risk apply to all registrants except registered
investment companies and small business issuers.

In general, the release:

1.  requires enhanced descriptions of accounting policies for
    derivatives in the footnotes to the financial statements;

    requires quantitative and qualitative disclosures about market risk
    inherent in derivatives and other financial instruments outside the
    financial statements; and

    provides a reminder to registrants to supplement existing
    disclosures about financial instruments, commodity positions, firm
    commitments, and other anticipated transactions with related
    disclosures about derivatives.

On July 31, 1997, the staff released Questions and Answers about the New
\"Market Risk\" Disclosure Rules. The interpretive answers were prepared
by the staffs of the Office of the Chief Accountant and the Division of
Corporation Finance. This publication is posted at the Commission\'s
Internet site;

*http:// www.sec.gov*.

Based on the Division's reviews of filings by some registrants required
to provide the disclosures about derivatives and market risks inherent
in derivatives and other financial instruments, we have the following
suggestions:

##### 1. Accounting policies for derivatives

Remember to provide all of the disclosures regarding accounting policies
for certain derivative financial instruments and derivative commodity
instruments, to the extent material, as required by Rule 4-08(n) of
Regulation S-X and SFAS 119. Include clear disclosure of the method used
to account for each type of derivative financial instrument and
derivative commodity instrument.

> **2. General**

Remember to cite the new Item specifically (e.g., Item 7A for Form 10-K
or Item 9A for Form 20-F) in the form. Registrants can include the
quantitative and qualitative disclosures under the Item reference,
cross-reference from the Item reference to the disclosures elsewhere in
the filing, or indicate under the Item reference that the disclosures
are not required (See Rule 12b-13).

Registrants may need to discuss a material exposure under the Item even
though they do not invest in derivatives. For example, registrants that
have investments in debt securities or have issued long-term debt should
discuss risk exposure if the impact of reasonably possible changes in
interest rates would be material. Likewise, registrants that have
invested or borrowed amounts in a currency different from their
functional currency should discuss risk exposure if the impact of
reasonably possible changes in exchange rates would be material.

The market risk disclosures can refer to the financial statements but
disclosures required by the new rules should be furnished outside the
financial statements. The "safe harbor" established under the new rules
does not extend to information presented in the financial statements.

> **3. Quantitative disclosures**

**a. Tabular presentation**

Include all relevant terms of the related market sensitive instruments.
In addition, disclose the method and assumptions used to determine
estimated fair value, cash flows and future variable rates. In addition,
segregate instruments by common characteristics and by risk
classification.

**b. Sensitivity analysis and Value at Risk (VAR)**

Disclose the types of instruments ([e.g]{.underline}., derivative
financial instruments, other financial instruments, derivative commodity
instruments) included in the sensitivity analysis and VAR analysis and
provide an adequate description of the model and the significant
assumptions used, such as the magnitude and timing of selected
hypothetical changes in market prices, method for determining discount
rates, or key prepayment or reinvestment assumptions. Indicate whether
other instruments are included voluntarily, such as certain commodity
instruments and positions outside the required scope of the rule, cash
flows from anticipated transactions, etc.

> **4. Qualitative disclosures**

Explain clearly how the company manages its primary market risk
exposures, including the objectives, general strategies and instruments,
if any, used to manage those exposures. Explain clearly the changes in
how the company manages its exposures during the year in comparison to
the prior year and any known or expected changes in the future.

**I. [Financial Statements in Hostile Exchange Offers]{.underline}**

In registration statements that require financial statements of a
company other than the registrant (such as when the registrant acquires
or will acquire another entity), the audit report of the target's
independent accountants must be included in the registration statement.
The consent of the target's auditor to the inclusion of its report in
the registration statement is required pursuant to Rule 436 of
Regulation C.

A registrant offering its own securities in a hostile exchange offer for
the target's stock may seek and not be able to obtain the target's
cooperation in providing either its audited financial statements or the
target auditor's consent to the use of its report in the required
registration statement. In this situation, the registrant should follow
the guidance in SAB Topic 1A. If the target is a public company, SAB
Topic 1A requires that any publicly filed financial information of the
target, including its financial statements, be included in the
registrant's filing or incorporated by reference into, and therefore
made a part of, that filing.

The acquirer/registrant should use its best efforts to obtain the
target's permission and cooperation for the filing or incorporation by
reference of the target's financial statements, and the target auditor's
consent to including its report on the financial statements. At a
minimum, a registrant is expected to write to the target requesting
these items and to allow a reasonable amount of time for a response
prior to effectiveness of the filing. The target may, however, fail to
cooperate with the registrant.

Under Rule 437 of Regulation C, a registrant may request a waiver of the
target auditor's consent by filing an affidavit that states the reasons
why obtaining a consent is impracticable. The affidavit should document
the specific actions taken by the registrant to obtain the cooperation
of the target for the filing of its financial statements as well as the
efforts made to obtain the target auditor's consent. As stated in SAB
Topic 1A, the staff will request copies of correspondence between the
registrant and the target evidencing the request for and the refusal to
furnish financial statements.

##  If the registrant uses its best efforts but is still unsuccessful in obtaining the target's permission and cooperation on a timely basis, the staff will generally agree to waive the requirement to include or incorporate by reference the target auditor's audit report, but not the target's financial statements. If target financial statements are incorporated by reference into the acquirer's registration statement from the target's public filings, disclosure should be made that, although an audit report was issued on the target's financial statements and is included in the target's filings, the auditor has not permitted use of its report in the registrant's registration statement. The auditor should not be named. Any legal or practical implication for shareholders of either the registrant or the target of the inability to obtain the cooperation of the target or consent of the target's auditor should be explained. No disclosure in the registration statement should expressly or implicitly purport to disclaim the registrant's liability for the target's financial statements. In the event that circumstances change, for example, if the deal turns friendly, the registration statement should be amended to include the audited financial statements and the auditor's consent required by the form.

> **J. [Proposed Rule for Disclosure about Valuation and Loss Accruals
> and Long-Lived Assets]{.underline}**

On January 21, 2000, the Commission proposed rule amendments to
reposition certain schedule information about valuation and loss
accruals that is currently required in exhibits to certain periodic
reports and registration statements (Securities Act Release No.
33-7793). Under the proposed rule, this information would be required by
new Item 302(c) of Regulation S-K and be included within the main body
of reports and registration statements. Also, a proposed new Item 302(d)
of Regulation S-K would require certain information concerning tangible
and intangible long-lived assets and related accumulated depreciation,
depletion, and amortization. Amendment of Form 20-F also is proposed to
include a new Item 8C soliciting identical information in filings by
foreign private issuers. The rule proposals are intended to provide
investors with (1) more transparent, better detailed disclosures
concerning changes in valuation and loss accrual accounts and in the
underlying accounting assumptions, and (2) more detailed information to
assess the effects of useful lives assigned to long-lived assets.

Under the proposed rule, registrants would be required to provide
beginning and ending balances and additions to and deductions from
accounts established for each major class of valuation or loss accrual.
Examples of accounts for which the disclosure would be required include
allowances for doubtful trading accounts or notes receivable; allowances
for sales returns, discounts and contractual allowances; unamortized
discount or premium; excess of estimated costs over revenues on
contracts (losses accrued under SFAS 5); liabilities for costs of
discontinued operations; liabilities for exit and employee termination
relating to a restructuring or business combination; contingent tax
liabilities recorded under SFAS 5; product warranty liabilities, and
probable losses from pending litigation. Disclosures provided in
response to this item would not be audited, and would not be duplicated
if they are presented in the financial statements.

Similarly, the proposed rule would require provision of unaudited
information depicting beginning and ending balances and additions to and
deductions from accounts established for each major long-lived asset
classification and its corresponding accumulated depreciation, depletion
and amortization account. Major long-lived asset classifications are
those for which separate presentation is made on the balance sheet and
include land, buildings, equipment, leaseholds, brand names, non-compete
agreements, customer lists, and goodwill.

**K. [Recent Enforcement Action -- America Online, Inc.]{.underline}**

On May 15, 2000, America Online, Inc. consented to the entry of an Order
by the Commission making findings about the company's accounting for
certain advertising costs, and directing AOL to cease and desist from
causing any violations of Sections 13(a) and 13(b)(2)(A) of the Exchange
Act and rules thereunder. (Accounting and Auditing Enforcement Release
No. 1257). In addition, AOL agreed to pay a \$3.5 million civil penalty.

During the two fiscal years ending June 30, 1996, AOL capitalized
certain direct response advertising costs \-- primarily the costs
associated with sending disks to potential customers. AOL reported those
costs as an asset which was amortized over 12 months until July 1, 1995,
when the amortization period was increased to 24 months. On a quarterly
basis, the effect of capitalizing those costs was that AOL reported
profits for six of the eight quarters in the two years ended June 30,
1996, rather than losses that it would have reported had the costs been
expensed as incurred.

The AICPA's Statement of Position 93-7, *Reporting on Advertising
Costs*, permits the capitalization and amortization of direct response
advertising costs only when persuasive historical evidence exists that
allows the entity to reliably predict future net revenues that will be
obtained as a result of the advertising. Further, that rule specified
that the realizability of the amounts reported as assets must be
evaluated at each balance-sheet date on a cost-pool-by-cost-pool basis.
Paragraph 70 of the SOP observes that the conditions under which direct
response advertising may be capitalized "are narrow because it is
generally difficult to determine the probable future benefits of
advertising with the degree of reliability sufficient to report the
results of the advertising as assets."

AOL based its capitalization of the advertising costs on a model which
assumed stability of customer retention rates over an extended period,
as well as the maintenance of the company's gross profit margin
percentage. The Commission found that AOL did not meet the essential
requirements of SOP 93-7 because its unstable business environment
precluded reliable forecasts of future net revenues. Moreover, AOL did
not assess recoverability of the capitalized cost on a
cost-pool-by-cost-pool basis.

> **L. [Segment Disclosure]{.underline}**

SFAS 131 defines an operating segment, in part, as a component of an
enterprise whose operating results are regularly reviewed by the chief
operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance. Segments may be
aggregated in the disclosure only to the limited extent permitted by the
standard. If segments are aggregated, that fact must be disclosed. Under
SFAS 131, the chief operating decision maker is not necessarily a single
person, but is a function that may be performed by several persons.

If the chief operating decision maker receives reports of a component's
operating results on a quarterly or more frequent basis, the staff may
challenge a registrant's determination that the component is not a
segment for purposes of SFAS 131 unless reports of other overlapping
sets of components are more clearly representative of the way the
business is managed. On a few occasions, the staff has requested copies
of all reports furnished to the chief operating decision maker if the
reported segments did not appear realistic for management's assessment
of a company's performance or conflicted with that officer's public
statements describing the company. The staff also has reviewed analysts'
reports, interviews by management with the press, and other public
information to evaluate consistency with segment disclosures in the
financial statements. Where that information revealed different or
additional segments, amendment of the registrant's filings to comply
with SFAS 131 was required.

**X. [SIGNIFICANT NO-ACTION AND INTERPRETIVE LETTERS THROUGH
]{.underline}**

###### OCTOBER 2000

**A. [Section 2(a)(1) of the Securities Act]{.underline}**

####### Minnesota Mutual Companies, Inc. - November 24, 1999

The Division stated that it will not recommend enforcement action to the
Commission if, following the adoption of a plan to provide benefits to
Company members, Minnesota Mutual, a mutual insurance holding company,
continues to issue membership interests without registration under the
Securities Act or the Exchange Act. In reaching this position, the
Division noted particularly counsel\'s representation that the
regulation of Minnesota Mutual and its subsidiaries by the Minnesota
Commissioner of Commerce remains as described in Minnesota Mutual\'s
prior no-action request dated May 19, 1998.

####### American Stock Exchange - NASD - July 10, 1998

The Division expressed the view that the American Stock Exchange (the
"Exchange") memberships, or "seats," described in the letter are not
securities within the meaning of Section 2(a)(1) under the Securities
Act. The Division also expressed the view that the described
transaction, in which substantially all of the assets and liabilities of
the Exchange would be transferred to a limited liability company in
exchange for i) an interest in the limited liability company and ii)
contractual obligations of the NASD under the agreement governing the
transaction, would not involve a distribution of the securities issued
by the limited liability company under Securities Act Rule 145(a)(3).

**B**. **[Sections 2(a)(3) and 5 of the Securities Act]{.underline}**

## **American Bar Association -- July 25, 2000**

The Division expressed the view that the automatic enrollment, as
described below, of employees in a Section 423 employee stock purchase
plan before the company's initial public offering would not involve the
offer or sale of a security before effectiveness of the plan's Form S-8
registration statement.

The plan's initial offering period would begin upon effectiveness of
this Form S-8, which would be filed following effectiveness of the
company's initial public offering registration statement. Employee
enrollment would take place earlier on an involuntary, automatic basis.
This enrollment would provide for the maximum level of participation set
by the plan and lump sum cash payment by the end of the offering period.

No offers would be made to employees, nor would any employee take any
action regarding the plan, before the company files the Form S-8. After
the plan's Form S-8 becomes effective, an employee would be able to
elect participation at a lower percentage of compensation or switch to
payroll deductions as the form of payment. The Division expressed the
view that company solicitation or payroll deduction elections after
effectiveness of the plan's Form S-8 would not violate Section 5.

####### First Mutual Savings Bank - October 8, 1999

The Division stated that it no longer responds to requests for no-action
advice under Sections 2(a)(3) and 5 for holding company formations
structured to occur without a vote of shareholders.

**Vanderkam & Sanders - January 27, 1999**

####### Simplystocks.com - February 4, 1999

In each of these letters, the Division expressed the view that the
issuance of securities in consideration of a person's registration or
visit to an issuer's internet site would be an event of sale within the
meaning of Section 2(a)(3), and would violate Section 5 of the
Securities Act unless it were the subject of a registration statement or
a valid exemption from registration.

**C. [Section 2(a)(10) of the Securities Act]{.underline}**

Since 1997, the Division has issued a series of no-action letters
enabling third-party providers to contract with underwriting firms for
the recording and electronic transmission of roadshows to a limited
audience selected by the managing or lead underwriter in connection with
registered non-shelf offerings. In each request, counsel provided a
legal opinion that the transmissions would not be "prospectuses\" within
the meaning of Section 2(a)(10) of the Securities Act. The Division
responded that, without necessarily agreeing with that analysis, it
would not recommend enforcement action if the parties proceeded as
described in their letters*.* See *Private Financial Network* (March 12,
1997); *Net Roadshow, Inc.* (July 30, 1997); *Bloomberg L.P.* (October
27, 1997); *Thomson Financial Services, Inc.* (September 4, 1998);
*Activate.net Corporation* (September 21, 1999). Conditions common to
these letters include:

> \(1\) an entire \"live\" roadshow, including any questions and answers
> from the audience, would be recorded after the filing of the
> registration statement for transmission on a real-time or subsequent
> basis; there would be no editing, except for \"housekeeping\"-type
> changes to eliminate dead airtime and to correct mistakes;
>
> \(2\) the electronic roadshow would not be made widely available, but
> instead, access would be restricted by password to a limited audience
> of persons customarily invited by the underwriter to attend a \"live\"
> roadshow;
>
> \(3\) any investor given password-restricted access to an electronic
> roadshow would only be able to view the presentation twice in
> connection with a particular offering (*e.g., Private Financial
> Network*), or an unlimited number of times within a single 24-hour
> *period (e.g., Bloomberg L.P.*). In either case, a registration
> statement first would be filed;
>
> \(4\) a copy of the prospectus in the registration statement would be
> delivered, either in paper or electronic format, to each viewer before
> or contemporaneously with obtaining access to the roadshow; viewers
> would be able to download and print any electronically delivered
> prospectus;
>
> \(5\) viewers would agree not to copy, download or further distribute
> the roadshow transmission, and a visual statement or \"crawl\" would
> be included in each transmission to emphasize this prohibition;
>
> \(6\) material developments occurring after the taping of the
> original, or \"live,\" roadshow would be presented pursuant to a
> periodic textual crawl; and
>
> \(7\) information provided in the electronic roadshow would not be
> inconsistent with the filed prospectus.

In 1998, the staff also issued a letter to Net Roadshow addressing the
internet-based transmission of roadshows in Rule 144A deals. See *Net
Roadshow, Inc.* (January 30, 1998), located in Section X.F. of this
outline.

Most recently, in letters dated November 15, 1999, and February 9, 2000,
the Division allowed Charles Schwab & Co., Inc., a broker-dealer firm,
to make electronic roadshows transmitted in connection with
firm-commitment, underwritten IPOs available to a segment of its retail
customer base (as well as certain \"independent\" investment advisers),
where Schwab is a member of the underwriting syndicate or selling group.
Under the Schwab letters, however, the Division has clarified that: (1)
there can only be one version of the \"live\" roadshow captured for
electronic transmission to eligible investors; (2) the electronically
transmitted roadshow cannot exclude any material information, such as
earnings projections, intended to be included in any other presentation
of the roadshow; and (3) the content of the electronic roadshow must be
consistent with the content of the statutory prospectus relating to a
particular IPO.

Given the increasing use of electronic roadshows evidenced by the
letters described above, as well as the more general use of the Internet
in securities offerings, the Commission has indicated that it wishes to
consider rulemaking in these areas. Because of this, the staff has
determined to cease issuance of no-action or interpretive letters
focusing on electronic roadshows pending Commission action.

**W.R. Hambrecht + Co. July 12, 2000**

**Wit Capital Corporation July 20, 2000**

#####  Bear, Stearns & Co., Inc. July 20, 2000

These interpretive letters address "live" online auctions in offerings
registered under the Securities Act. The letters are discussed in detail
in Section VIII.A.6.

**D. [Section 3(a)(10) of the Securities Act]{.underline}**

####### Food Lion, Inc. - January 13, 1999

The Division stated that it would not object if , based on counsel's
opinion that the exemption from registration provided by Section
3(a)(10) is available, the described exchange of securities traded on
the Nasdaq National Market were conducted as proposed.

In reaching its position, the Division noted the recent enactment of the
Securities Litigation Uniform Standards Act of 1998 (105 P.L. 353, 112
Stat. 3227), which amended Section 18(b)(4)(C) of the Securities Act to
include a reference to Section 3(a)(10). Section 18 of the Securities
Act creates an exemption from state securities law registration
requirements for "covered securities", and defines "covered security" to
include any security listed on the Nasdaq National Market System. As
amended, Section 18(b)(4)(C) removes securities that are otherwise
covered securities from the definition if they are offered and sold in
reliance on certain federal exemptions, including Section 3(a)(10). The
Division expressed the view that, as a result of the amendment, state
securities law provisions authorizing the approval of certain exchanges
of securities may be used to perfect an exemptive claim under Section
3(a)(10) where the security is otherwise a "covered security". The
Division stated that, because of this Congressional action, statements
to the contrary in Staff Legal Bulletin No. 3, as published on July 25,
1997, are no longer valid.

The Division also addressed other questions raised with respect to the
proposed exchange.

####### Maverick Networks - January 25, 1999

The Division expressed the view that an exemptive claim under Section
3(a)(10) for securities listed on the New York Stock Exchange, the
American Stock Exchange, or the Nasdaq Market System in a transaction
reviewed under Section 25142 of the California Corporations Code would
not be impaired by Section 18(b) of the Securities Act. The Division
noted that through the recent amendment to Section 18(b)(4)(C) of the
Securities Act, such securities, which otherwise would be "covered
securities" exempted by Section 18 from state securities law regulatory
requirements, are removed from the definition of covered securities if
they are offered and sold in reliance on Section 3(a)(10). As a result,
the Division stated, state securities law provisions (such as the
California provision at issue) authorizing the approval of certain
exchanges of securities may again be used to perfect exemptive claims
under Section 3(a)(10) with respect to securities that otherwise would
be covered securities.

**E. [Section 5 of the Securities Act]{.underline}**

####### NASD Regulation, Inc. - January 21, 2000

In a letter to NASD Regulation, Inc., dated January 21, 2000, the staff
advised that persons who hold securities in blank check companies are
probably underwriters of those securities. While the facts and
circumstances are critical, Section 4(1) of the Securities Act may not
be available for resales of these securities by promoters, affiliates,
and their transferees, regardless of the length of time they may have
held the securities. The design of the blank check companies is intended
to allow these persons to introduce large quantities of securities into
the public markets at the time of a business combination with an
operating company. These sales are distributive in character, not the
ordinary trading transactions Section 4(1) exempts. In addition, the
staff expresses the view that resale transactions of these securities,
where the initial distribution was not accomplished through registration
and conformance with Rule 419 under the Securities Act, cannot be done
under Rule 144 because a scheme to evade registration is involved making
the provision unavailable. The staff also cautioned about the
applicability of Rules 101 and 102 of Regulation M in these situations.
As a final matter, the staff noted that Rule 701 would generally not be
available to blank check companies.

####### Metropolitan Life Insurance Company - November 17, 1999

In a letter issued jointly with the Division of Market Regulation and
the Division of Investment Management, the Division responded to several
questions regarding the Company\'s proposed demutualization transaction,
the Reorganization. In the Reorganization, Metropolitan Life would
become a subsidiary of a newly-formed Holding Company. Policyholders\'
membership interests in Metropolitan Life would be extinguished, and
Policyholders would receive cash, policy credits or be allocated
Metropolitan Life common stock in exchange for their membership
interests. The Metropolitan Life common stock would in turn be exchanged
for an equal number of shares of Holding Company stock to be held
through a Trust. Policyholders\' allocated stock would be allocated
beneficial Interests in the Trust equal to the number of shares of
Holding Company common stock allocated to them. After one year,
Policyholders may withdraw all their allocated shares of Holding Company
common stock held in the Trust.

In its response, the Division stated, among other things, that:

1\. it would not recommend enforcement action to the Commission if
Metropolitan Life were to conduct the Reorganization without Securities
Act registration, in reliance on the exemption provided by Section
3(a)(10);

2\. it would not object if, after a registered initial public offering
of Holding Company common stock, the Trust registers the Trust Interests
on Exchange Act Form 8-A, including descriptions of the Interests, the
common stock and the rights issued under the stockholder rights plan
adopted by the Holding Company, and incorporating certain information
from the Holding Company\'s Form 8-A for the common stock and rights;

3\. it would not object if the Trust complies with Exchange Act Section
13(a) by filing financial statements of the Trust only, at the time of
mailing dividends and other distributions to persons holding Trust
beneficial interests. The financial statements will show distributions
the Trust received and paid during the period ending on the financial
statement date, and the Trust Shares and other assets held by the Trust
on that date. The financial statements will be audited, and will be
filed under cover of Form 10-K, in connection with the annual
distribution of cash dividends. Filings made in connection with
distributions will be on Form 8-K, and will include unaudited financial
statements. The Trust will also file reports on Form 8-K if there is an
event relating to the Trust that the Form requires;

4\. it would not object if, only with respect to Trust Shares, and not
with respect to any common stock acquired in open market purchases,

1.  neither the Trust, the Trustee, the Custodian of the Trust nor the
    Holding Company disseminates any proxy soliciting materials, annual
    and quarterly reports or information statements of the Holding
    Company to a Trust beneficiary in connection with a vote or consent
    of stockholders of the Holding Company, except in connection with a
    Beneficiary Consent Matter or upon request of any Trust beneficiary;

    the Trust, the Trustee, the Custodian of the Trust and the Holding
    Company follow the procedures described in the letter for the
    distribution of proxy soliciting materials, annual reports or
    information statements in connection with a Beneficiary Consent
    Matter (including the procedures that require mailing and other
    expenses to be reimbursed by a stockholder in certain circumstances,
    instead of following the reimbursement procedures outlined in Rule
    14a-7 under the Exchange Act) (in reaching its position regarding
    compliance with Rule 14a-7 with respect to any solicitation of Trust
    beneficiaries, the Division particularly noted the Holding
    Company\'s representation that it will always elect to mail, rather
    than to provide a shareholder list, with respect to a Beneficiary
    Consent Matter);

    none of the Holding Company, the Trust, the Trustee or Custodian of
    the Trust inquires as to the beneficial ownership of the Trust
    Shares, pursuant to Rules 14a-13, 14b-2 and 14b-1 under the Exchange
    Act, respectively, in connection with such votes or consents of
    stockholders of the Holding Company, or provides information in
    connection with those inquiries, except in connection with a
    Beneficiary Consent Matter;

5\. it will not object if Holding Company Board members provide Schedule
13D and Section 16(a) information as described in the request; and

6\. it agrees that a withdrawal of Trust Shares from the Trust by a
person holding Trust beneficial interests, after expiration of the
one-year period, is not an event that requires Securities Act
registration.

####### PetroSell.com, LLC - September 22, 1999

The Division agreed that it would not recommend enforcement action under
Section 5 of the Securities Act for Internet auctions offering and
selling whole interests in oil or gas properties exclusively to persons
actively engaged in oil or gas exploration or production. Counsel opined
that the auctions would not involve sales of securities within the
meaning of Section 2(a)(1) of the statute.

**Wit Capital- July 14, 1999**

The Division, without concurring in counsel's analysis, agreed not to
recommend enforcement action to the Commission under Section 5(a) or
5(b) against Wit Capital for its conduct of initial public offerings
using the procedures described in Wit's request.

Under the procedures, Wit circulates an e-mail notice conforming to Rule
134 after posting a preliminary prospectus in a segregated area within
Wit's web site. The segregated area in Wit's web site, the "cul de sac,"
separates information concerning the IPO from other information on Wit's
web site. A person entering the cul de sac cannot link to other sites on
the Internet, such as the issuer's web site. The cul de sac includes
only a notice conforming to Rule 134, the preliminary prospectus, and
information on Wit's general account and subscription procedures.

A person visiting the cul de sac who does not hold accounts with Wit
must open the account before submitting an offer to buy shares in the
IPO. A minimum of \$2,000 must be deposited to open the account. The
amount deposited is independent of the amount that may be required to
purchase shares and remains in the control of the investor. Persons
holding accounts who wish to participate in the offering may make offers
to buy through the subscription documents included in the cul de sac.
Offers to buy may specify the price the investor is willing to pay.
Offers to buy that do not specify a price are treated as limit orders at
the maximum estimated public offering price disclosed in the prospectus.

Approximately 48 hours before the anticipated effectiveness of the
registration statement, Wit sends an e-mail notice requesting
reaffirmation of the offers to buy. Persons who do not confirm their
earlier offers will not receive allocations. The confirmation will be
valid for a maximum of seven business days from this e-mail notice. A
further reconfirmation will be required at any time the public offering
price deviates from the estimate and at any time the preliminary
prospectus is recirculated.

After the registration statement is effective and shortly before the IPO
is priced using Rule 430A procedures, Wit will send an e-mail notice to
each bidder stating that the offering is about to price and that unless
the bidder withdraws the offer to buy within a brief period (the minimum
is an hour), Wit may accept the offer. Notices of acceptance are sent to
persons who have received allocations. The notice will be followed by a
confirmation that satisfies Exchange Act Rule 10b-10 and the final
prospectus required by Section 5(b)(2).

####### IPONET - July 26, 1996

With respect to public offerings, the Division addressed the application
of Securities Act Rule 134 to an electronic coupon or card. The Division
stated that the reference in Rule 134(d) to \"an enclosed or attached
coupon or card, or in some other manner\" would be equally applicable to
the acceptance of indications of interest via electronic coupon or card
as well as paper coupon or card. In this regard, the Division noted the
representation that Rule 134(d)\'s other requirements will be satisfied
in connection with the acceptance of such indications of interest.

The Division also addressed, in the electronic context, the definitions
of \"general solicitation\" and \"general advertising\" under Securities
Act Regulation D Rule 502(c). The Division took the position that the
initial qualification of accredited or sophisticated investors by means
of a generic questionnaire, followed by the subsequent posting of a
notice of a private offering in a password-protected page of IPONET
accessible only to IPONET members who previously qualified as accredited
investors, would not involve any form of \"general solicitation\" or
\"general advertising\" within the meaning of Rule 502(c).

In reaching this conclusion, the Division noted that (i) both the
invitation to complete the questionnaire used to determine whether an
investor is accredited or sophisticated and the questionnaire itself
will be generic in nature and will not reference any specific
transactions posted or to be posted on the password-protected page of
IPONET; (ii) the password-protected page of IPONET will be available to
a particular investor only after the supervisor of IPONET has made the
determination that the particular potential investor is accredited or
sophisticated; and (iii) a potential investor could purchase securities
only in transactions that are posted on the password-protected page of
IPONET after that investor\'s qualification with IPONET. In this regard,
the Division stated that it took no position as to whether the
information obtained by the supervisor is sufficient to form a
reasonable basis for believing an investor to be accredited or
sophisticated.

####### Real Goods Trading Corporation - June 24, 1996

The Division (as well as the Divisions of Investment Management and
Market Regulation) addressed the Company\'s proposed trading system that
would provide information about prospective buyers and sellers of Real
Goods Trading\'s common stock. The Division took the position that the
Real Goods Trading\'s activities in connection with the establishment
and maintenance of the trading system would not require that offers or
sales made through the trading system be registered under the Securities
Act. The Division of Investment Management took the position that Real
Goods Trading may engage in the activities specified without registering
under the Investment Advisers Act. The Division of Market Regulation
took the position that it would not recommend enforcement action under
Exchange Act Section 5, 6 or 15 if Real Goods Trading operates the
trading system in the manner specified without registration as a
national securities exchange under Section 6 or as a broker-dealer under
Section 15 of the Exchange Act.

In reaching these positions, the Divisions noted that (i) Real Goods
Trading will provide specified notices regarding operation of and
participation on the trading system that will be set forth or contained
on the screens and/or hard copy by which trading system information is
provided; (ii) Real Goods Trading is an Exchange Act Section 12
registrant and will retain that status or, if it should cease to be a
Section 12 registrant, otherwise undertake to make publicly available
the information required by Exchange Act Section 13(a) in the same
manner that buyers and sellers of Real Goods Trading\'s common stock
will obtain access to the trading system ([e.g.]{.underline}, electronic
mail, facsimile, mail, the Company\'s World-Wide Web site, etc.); (iii)
Real Goods Trading will keep records of all quotes entered into the
trading system and make those records available to the Commission and
the Pacific Stock Exchange (or any other regulated market on which Real
Goods Trading\'s securities are listed) upon reasonable request; (iv)
Real Goods Trading\'s advertising will comply with specified
representations; (v) neither Real Goods Trading nor any of its
affiliates will use the trading system, directly or indirectly, to offer
to buy or sell securities, except in compliance with the securities
laws, including any applicable registration requirements (absent an
available exemption therefrom); and (vi) neither Real Goods Trading nor
any of its affiliates will (a) receive any compensation for creating or
maintaining the trading system; (b) receive any compensation for the use
of the trading system; (c) be involved in any purchase or sale
negotiations arising from the trading system; (d) provide information
regarding the advisability of buying or selling Real Goods Trading\'s
common stock or any other securities; or (e) receive, transfer or hold
funds or securities as an incident of operating the trading system.

**F. [Rules 144, 145, and 144A]{.underline}**

#### Goldman Sachs- December 20, 1999

The Division agreed to the use of restricted or control securities under
pre-paid forward contracts. In the arrangement, a holder of restricted
or control securities currently eligible for sale under Rule 144 would
lend the securities to its counterparty. The lender would file a notice
on Form 144. The borrowing counterparty would then sell the maximum
number of shares of the same class into the public market in a manner
satisfying the brokerage transaction condition required by Rule 144(f)
and defined in Rule 144(g). The Division agreed that the borrowed
securities may then be treated as though they were not restricted or
control securities. Securities delivered to the lender to close the
contract would not be restricted securities within the meaning of Rule
144(a)(3).

**bamboo.com - December 20, 1999**

The Division stated that it would not recommend enforcement action to
the Commission if the Company exchanges its common shares for its
preferred shares paired with preferred shares of its wholly-owned
Canadian subsidiary without Securities Act registration, in reliance on
Section 3(a)(9). The Division also expressed the view that the holding
period under Rule 144(d)(4)(ii) for the common shares exchanged may be
the date the preferred shares of parent and subsidiary were acquired. In
reaching both positions, the Division noted especially that the
preferred shares of the subsidiary, which were inseparable from the
parent\'s preferred shares, represented no right except the right to
receive the common shares of its parent. The Division also noted that
the exchange did not add to the number of equity owners of the parent.

####### Harmony Trading Corp.- November 22, 1999

After disagreeing with some of counsel's conclusions under Rule 144(d)
and (k) and declining to express views on others, the Division expressed
its concern over circumstances where, after a company is formed without
either substantial capital or the prompt commencement of business, but
in proximity to the company's efforts to have its securities traded in a
public market, its closely-held securities are transferred to
significant numbers of persons. In these circumstances, the Division
suggested, resales of the transferred securities in claimed reliance on
Rule 144 may involve evasive schemes to avoid registration under the
Securities Act.

####### Juno Online Services, Inc. - November 17, 1999

A limited partnership agreement confers on the general partner the right
to reconstitute the business of the partnership as a corporation. When
the general partner exercises this authority, the limited partners who
had given up the right to vote on the transaction recasting the business
into a different organizational form may date their holding period under
Rule 144(d) for the common stock of the successor corporation to the
date of purchase and full payment for their limited partnership
interests. The general partner who made the investment decision must
date its holding period for the shares in the corporation to the date of
the succession.

####### EarthWeb Inc.- August 20, 1999

Portfolio restricted securities held by a closely-held limited liability
company are transferred in kind to its members ratably in accordance
with the equity represented by their membership interests. As is the
case with similar transfers by closely-held partnerships and
corporations, the holding period under Rule 144(d) for the securities
transferred to the members of the LLC will be the date of purchase and
full payment by the LLC from the issuer.

####### Jevic Transportation, Inc.- April 20, 1999

Common equity securities of a single issuer that carry different voting
rights are not "securities of the same class" for purposes of Rule
144(e), the rule's volume limitation.

####### Mandatorily Exchangeable Issuer Securities --

**October 25, 1999**

The Division addressed the eligibility of a security for resale under
Rule 144A, where that security, itself eligible to be resold in reliance
on Rule 144A(d)(3), is exchangeable at the issuer's election for
securities of unrelated issuers. The securities of the unrelated person
could be resold by the issuer of the overlying security in reliance on
Section 4(1), either because they were not restricted securities within
the meaning or Rule 144(a)(3) or because they could be sold in reliance
on Rule 144(k). The Division expressed the view that, under the
circumstances described, the overlying security would be eligible for
resale under Rule 144A. The Division expressed no view on the
application of the conversion premium test of Rule 144A(d)(3) to
securities of this description.

####### Net Roadshow, Inc. - January 30, 1998

The Division stated that it would not recommend enforcement action if
Net Roadshow transmits roadshows over its Internet web site solely to
\"qualified institutional buyers\" (\"QIBS\") within the meaning of
Securities Act Rule 144A(a)(1) on behalf of a QIB (or person acting on
its behalf) that purchases securities from an issuer for resale to other
QIBS under Rule 144A (\"Seller\").

The Division noted counsel\'s opinion that the activities described
would be consistent with Rule 144A(d)(1) and conditioned its position on
Net Roadshow\'s compliance with the following conditions in connection
with each roadshow.

\(1\) Net Roadshow will deny access to its web site for viewing a
particular roadshow (including any notice of the roadshow posted on Net
Roadshow\'s web site) to all but:

\(A\) New Roadshow\'s or the Seller\'s employees or authorized agents
for that roadshow; and

\(B\) the institutions for which the Seller has confirmed its reasonable
belief regarding their QIB status.

\(2\) The confidential password assigned to QIBS for a particular
roadshow will be unique to that roadshow, and will expire no later than
the date the related offering terminates.

\(3\) Each Seller\'s confirmation to Net Roadshow will include the
following:

> \(A\) a representation that the Seller is a QIB;
>
> \(B\) an adequate basis for the Seller\'s representation of its
> \"reasonable belief\" that::
>
> \(i\) each entity to which the Seller has assigned a confidential
> password is a QIB; and
>
> \(ii\) the offering to which the particular roadshow relates is not
> subject to Securities Act registration.

\(4\) Net Roadshow otherwise has no actual knowledge or reason to
believe, that:

> \(A\) the Seller is not a QIB;
>
> \(B\) any of the entities to which the Seller has assigned a
> confidential password is not a QIB; or
>
> \(C\) the securities offering to which a particular roadshow relates
> is subject to Securities Act registration.

\(5\) Net Roadshow is not an affiliate of any Seller or issuer of a
security that is the subject of a particular roadshow.

Finally, the Division stated that the Commission or staff may reevaluate
this no-action position in the future because regulatory responses to
legal issues raised by technological developments may evolve.

####### Verio Inc. - May 25, 1999

The Division expressed the view that, once Verio has fully and
unconditionally guaranteed a debt security of its wholly owned
subsidiary, holders of warrants to purchase Verio common stock who pay
the warrant exercise price by surrendering the guaranteed debt
instrument may use their holding periods on the warrants and debt
securities to calculate their holding periods for the common stock
received on exercise. In reaching its position, the Division
particularly noted that the addition of the Verio guarantee would allow
Verio and its wholly owned subsidiary to be considered the same issuer
for purposes of Rule 144(d)(3)(ii). The Division noted that warrant
holders paying the exercise price with any consideration other than the
guaranteed debt securities or other Verio securities would use the date
of exercise of the warrant and payment of its exercise price as the
beginning of the holding period for the Verio common stock received upon
exercise. The Division stated that *Amdahl Corp.* (February 27, 1999)
and *American Telephone and Telegraph Company* (May 1, 1999) no longer
represent the Division's view on this issue.

######## CommScan, LLC - February 3, 1999

The Division expressed the view that sellers may rely on the Company\'s
qualified institutional buyers list (\"QIB List\"), which would be
published on an Internet web site accessible only by registered
broker/dealers, as a method for establishing a reasonable belief that a
prospective purchaser is a \"qualified institutional buyer\" within the
meaning of Rule 144A(a)(1) under the Securities Act. Information
underlying inclusion of an entity in the QIB List must be as of a date
within 16 months before the date of sale of securities in the case of a
United States purchaser, and within 18 months before such date of sale
for a foreign purchaser.

####### The Petersen Companies, Inc. - July 16, 1998

The Division expressed the view that the Rule 144(d) holding period for
shares of Company common stock exchanged for limited liability company
interests in Petersen Holdings, L.L.C. ("Petersen") began on October 1,
1997, the date of the exchange. The Division stated that the holding
period could not "tack" to an earlier date because the agreement
Petersen interest holders signed when Petersen was formed, granting the
Company (in its capacity as Petersen's manager) the right to control all
aspects of any initial public offering, did not expressly contemplate
conversion from a limited liability company to corporate form in advance
of a public offering of securities, with holders of Petersen units
retaining no veto or other voting power with respect to the conversion.
The Division referred specifically to *Peapod, Inc*. (Nov. 10, 1997).

####### Peapod, Inc. - November 10, 1997

The Division took the position that limited partners of a partnership
and the shareholders of its corporate general partner could \"tack,\"
under Securities Act Rule 144(d), their holding periods for their
limited partnership interests and shares, respectively, onto their
holding periods for the shares of Peapod received in a conversion (and,
in the case of the general partner\'s shareholders, the general
partner\'s subsequent liquidation).

In the conversion,

1.  all the equity interests in the partnership were exchanged for
    Peapod shares;

    the partnership was dissolved; and

    all of the partnership\'s assets and liabilities were transferred to
    Peapod.

In reaching this conclusion, the Division noted in particular specified
agreements and their contemplation of the partnership\'s conversion to
corporate form in advance of, and to facilitate, the new corporation\'s
public offering.

####### Rite Aid Corporation - October 20, 1997

The Division expressed the view that, where securities originally issued
in a Securities Act Rule 145(a) transaction are transferred as gifts to
third parties by a person Rule 145(c) deems an underwriter, the donees
in the transfers who are not the issuer\'s affiliates may make
unregistered public resales of the securities in the same manner and to
the same extent as the donor.

####### Nextel Communications, Inc. - August 19, 1997

The Division stated that, where securities originally issued in a
Securities Act Rule 145(a) transaction are privately sold by a person
deemed an underwriter by Rule 145(c) (other than an affiliate of the
issuer), an unaffiliated purchaser of the securities may make
unregistered public resales of the securities to the same extent and in
the same manner as the private seller.

####### First Bank System, Inc. - July 30, 1997

The Division stated that when an affiliate pledgor defaults on a loan
that is collateralized by securities that are not \"restricted\" in the
hands of the pledgor, and the pledgee bank forecloses on the pledge, the
pledgee bank may sell those securities without regard to the holding
period requirement of Securities Act Rule 144.

**G. [Rule 701]{.underline}**

####### Morgan, Lewis & Bockius - November 3, 1999

The Division provided further guidance for issuers when transitioning
from former Rule 701 to the new version. The Division expressed these
views concerning the treatment of options:

1.  an issuer could rely on the grant date method for options granted in
    the 12 months before effectiveness of the revised rule up to the
    ceiling permitted under the old rule. Excess options - option grants
    over the ceiling in the old rule - could be considered against the
    available ceiling under the revised rule either when the excess
    options become exercisable or when they are actually exercised,
    whichever is most advantageous;

    the disclosure required by the revised rule where the \$5 million
    ceiling is exceeded must be provided to investors a reasonable time
    before the exercise of options, even if those options were granted
    long before the rule revision; and

    the "clean slate" method is appropriate only if the available
    ceiling under the revised rule is not exceeded when offers and sales
    under the former rule are combined with sales under the revised
    rule.

####### Occidental Petroleum Corporation - August 3, 1999

The Division expressed the view that a private subsidiary of Occidental,
a publicly reporting company, may use Rule 701 to offer or sell its
securities to its employees.

####### American Bar Association - August 3, 1999

The Division stated that, subject to preliminary note 5 to Rule 701, a
private subsidiary of a publicly reporting company may use Rule 701 to
offer or sell its securities, including deferred compensation
arrangements whether guaranteed or not guaranteed by the parent, to its
employees, officers, directors, partners, trustees, consultants or
advisors, or those of its parents or other majority-owned subsidiaries
of its parent.

####### American Bar Association - August 3, 1999

With respect to issues of transition from the former Rule 701 to the new
version, the Division expressed the view that the grant date method, the
effective date method and the exercisable date method described, each
appear to be appropriate ways of handling unexercisable options under
the new provision. The Division also concurred with the view that
options issued in reliance upon the prior version of Rule 701 regardless
of their exercisability would not be subject to the new disclosure
requirements at the time of the option grants.

**H. [Regulation S]{.underline}**

####### Initial Public Offerings of U.S. Companies on EASDAQ -- 

#### July 27, 1999

The Division took the position that it would not recommend enforcement
action if equity securities of non-reporting, U.S. companies are offered
and sold in initial public offerings offshore pursuant to Regulation S
in connection with a listing on EASDAQ without implementation of the
stop-transfer and other provisions set forth under Rule
903(b)(3)(iii)(B) , Rule 903(b)(3)(iv) and Rule 904(b)(1)(ii). In
reaching its position, the Division relied on counsel's opinion that the
alternative restrictions and arrangements described in the request
provide reasonable procedures to prevent public distribution of these
equity securities in the United States. The Division also noted that
U.S. firms are not permitted to participate in the EASDAQ market, either
as brokers or market-makers, and that no EASDAQ trading screens will be
placed in the United States.

####### Sales of Convertible Securities Under Regulation S -- 

#### August 26, 1998

The Division stated that it would not recommend enforcement action if
convertible securities of U.S. reporting companies that are eligible for
resale under Rule 144A and that are held in global certificated from (as
either registered or bearer securities) by a depository for a book-entry
clearance facility are offered and resold pursuant to Regulation S
without implementation of the stop-transfer provisions or other
procedures set forth under Rule 903(b)(3)(iii)(B)(4) of Regulation S, as
long as certain procedures are followed during the applicable
distribution compliance period. The Division stated that its view was
limited to convertible securities offered or resold under Regulation S,
and would not affect the applicability of Rule 903(b)(3)(iii)(B)(4) to
any equity securities issued upon the conversion of the convertible
securities during the distribution compliance period.

The Division also indicated that debt securities convertible into the
equity securities of a person other than the issuer ("exchangeable"
securities) would be considered convertible securities for Regulation S
purposes.

> **I. [Section 18(b)(4)(A) of the Securities Act]{.underline}**

#### David M. Katz, Esq. - April 24, 1997

The Division addressed one of the definitions of \"covered security\"
provided by Securities Act Section 18(b). Section 18(b)(4)(A) states
that a security is a \"covered security\" as to a transaction that is
exempt from Securities Act registration under Securities Act Section
4(1) or 4(3), provided that the issuer \"files reports\" with the
Commission under Exchange Act Section 13 or 15(d). The Division stated
that an issuer \"files reports\" for purposes of Section 18(b)(4)(A) if
it has completed a registered initial public offering under the
Securities Act, but has not yet been required to file any reports under
Section 13 or 15(d).

**J. [Securities Act Forms]{.underline}**

####### D\'Ancona Attorneys - March 6, 2000

The Division addressed General Instruction A.1(a)(5) to Form S-8, which
makes Form S-8 available for the exercise of employee benefit plan
options and the subsequent resale of the underlying securities by an
employee\'s \"family member\" (as defined in the instruction) who has
acquired the options from the employee through a gift or domestic
relations order. The instruction defines \"family member\" to include
\"a trust in which these persons have more than fifty percent of the
beneficial interest.\" For purposes of determining whether a trust
satisfies this test, the Division has said that:

1\. The phrase \"these persons\" includes the employee, as well as the
persons who, with respect to the employee, have one of the family
relationships otherwise specified in the instruction.

2\. A remainder interest in such a trust is not considered a
\"beneficial interest\" unless the person or persons with the remainder
interest have the power, directly or indirectly, to exercise or share
investment control over the trust.

3\. A determination whether a trust meets the \"more than fifty percent
of the beneficial interest\" test must be made at the time of the
registered transaction, whether that transaction is an option exercise
or the resale of the underlying security.

**K.** **[Section 12 of the Exchange Act]{.underline}**

####### Kinkos, Inc. - November 30, 1999

The Division stated that it will not raise any objection if Kinkos does
not comply with the registration requirements of Exchange Act Section
12(g) with respect to deferred share awards and stock options to be
granted under Kinkos\' employee stock incentive plan as proposed in the
request. In reaching this position, the Division particularly noted that
Kinkos will terminate any such award or option that does not
automatically expire upon termination of a holder\'s employment for any
reason. The position will remain in effect until the earlier of any
Trigger Date (as defined in the request) and the date at which Kinkos
otherwise becomes subject to the Exchange Act registration and/or
reporting requirements with respect to any class of its equity
securities.

**L. [Proxy Rules]{.underline}**

######### IBM - February 16, 2000

The Division declined to permit exclusion from the company\'s proxy
materials, on Rule 14a-8(i)(4) (personal grievance/benefit not shared by
other shareholders) and Rule 14a-8(i)(7)(ordinary business) grounds, a
proposal focusing on the policy implications of the company\'s
conversion from a traditional, defined-benefit pension plan to a
so-called \"cash-balance\" plan. With respect to the company\'s Rule
14a-8(i)(7) argument, the staff was persuaded that the widespread public
debate on the significant social and corporate policy issues raised by
conversion from defined-benefit to cash-balance retirement plans caused
the subject-matter of this particular proposal to fall outside the realm
of \"ordinary business\" matters subject to exclusion under Rule
14a-8(i)(7).

####### IBM - March 2, 2000

A different proponent requested that IBM\'s board establish a committee
of outside directors to prepare a report on the potential impact on the
company of pension-related proposals now under consideration by national
policymakers, \"including legislative proposals affecting cash balance
pension plan conversions.\" In granting the company\'s request for
no-action relief under Rule 14a-8(i)(7), the staff noted that the
proposal appears directed at involving IBM in the political or
legislative process relating to an aspect of IBM\'s operations (i.e.,
lobbying activities).\"

**The Coca-Cola Company - February 7, 2000**

The Division was unable to concur in the company\'s arguments regarding
the excludability, on Rule 14a-8(i)(7) and other grounds, of a proposal
requesting that \"the board adopt a policy of removing genetically
engineered crops, organisms, or products thereof from all products sold
or manufactured by Coca-Cola, where feasible, until long-term testing
has shown that they are not harmful to humans, animals, and the
environment, with the interim step of labeling and identifying these
products, and report to the shareholders by August 2000.\" In the
staff\'s view, the proposal raised significant policy issues
transcending the company\'s ordinary business operations.

####### Johnson Controls, Inc. - October 26, 1999

The Division addressed whether a proposal recommending certain
disclosure in the financial statements included in Johnson's
Commission-prescribed documents could be omitted from Johnson's proxy
material under Rule 14a-8(i)(7), as relating to Johnson's ordinary
business operations. In expressing its view that the proposal could be
omitted, the Division stated that it has determined that proposals
requesting additional disclosures in Commission-prescribed documents
should not be omitted under the "ordinary business" exclusion solely
because they relate to the preparation and content of documents filed
with or submitted to the Commission. This interpretive approach reverses
the Division's prior approach to such proposals. Beginning with *Johnson
Controls*, when evaluating such proposals the Division will consider
whether the subject matter of the additional disclosure sought in a
particular proposal involves a matter of ordinary business. Where it
does, the Division believes the proposal may be excluded under Rule
14a-8(i)(7).

####### Chevron Corporation - March 4, 1999

The Division took the position that it would not recommend enforcement
action if Chevron omitted a shareholder proposal requesting the board of
directors to review and report on Chevron's code of business conduct
under Rule 14a-8(i)(12)(ii). The Division noted that the current
proposal, when viewed together with the proposals submitted in 1996 and
1997, all appear to focus on Chevron's operations in Nigeria.
Furthermore, changing circumstances are not a consideration under Rule
14a-8(i)(12). On this basis, the Division continued to follow the
precedent established by a prior staff no-action letter issued to
Florida Progress Corporation on January 8, 1997.

####### General DataComm Industries, Inc. - December 9, 1998

The Division stated that it did not believe that General DataComm could
rely on Rule 14a-8(i)(7) as a basis to exclude a shareholder proposal
mandating a bylaw amendment on stock option repricing from its proxy
materials. The Division noted that in view of the widespread public
debate concerning option repricing and the increasing recognition that
this issue raises significant policy issues, its view is that proposals
relating to option repricing no longer can be considered matters
relating to a registrant's ordinary business. This letter reverses a
prior staff no-action letter issued to Shiva Corporation on March 10,
1998.

**M. [Section 16 Rules]{.underline}**

General Motors Corporation -- May 19, 2000

The Division addressed the application of Exchange Act Rule 16b-3 to
transactions occurring in the context of issuer exchange offers. In such
an exchange offer, the disposition to the issuer of shares of one class
of issuer stock would be eligible for exemption under Rule 16b-3(e). The
acquisition from the issuer of shares of a different class of issuer
stock would be eligible for exemption under Rule 16b-3(d).

In either case, the approval conditions of Rule 16b-3 may be satisfied
at any time before the company's acceptance of the tendered shares and
the issuance of shares of the other class, which may be after the date
on which the exchange offer expires. Approval will satisfy the rule's
specificity requirements if the issuer's board of directors or committee
of non-employee directors adopts resolutions that:

1.  name each tendering officer or director,

    approve the disposition based on the specific number of shares
    tendered by each named person,

    approve the acquisition of shares of the other class based on the
    exchange ratio set forth in the exchange document, and

    state that the dispositions and acquisitions are subject to
    reduction by applying proration methodology to be applied uniformly
    to all participants (except odd lot holders) if the offer is
    oversubscribed, describing that methodology.

#####  Baker Botts LLP -- July 13, 2000

The expiration of a put option more than six months following the date
on which it was written would be the exempt closing of a derivative
security position for the writer if no value is given in exchange for
the expiration. The expiration would not be considered a sale by the
writer, resulting from the decrease in a call equivalent position under
Rule 16b-6(a), that could be matched under Rule 16b-6(c)(2) with another
transaction by the writer. (The Division took the same position
regarding expiration of call options in [Sullivan &
Cromwell]{.underline} (June 24, 1993).)

**American Bar Association - October 15, 1999**

The staff addressed the application of Rule 16b-3(c) to open market
stock purchase plans that, under the standards of Securities Act Release
No. 4790, are not required to be registered under Section 5 of the
Securities Act. The Division said that the acquisition of issuer stock
pursuant to accumulated payroll deductions under such a plan is a
transaction with "an employee benefit plan sponsored by the issuer" for
purposes of Rule 16b-3(a) where:

1.  the issuer deducts funds from compensation;

    deducted funds accumulate for a regular, specified interval no
    shorter than a pay period;

    accumulated funds are invested in issuer stock; and

    the open market plan restricts participation to employees of the
    issuer and its parents or subsidiaries who would be eligible to
    purchase securities of the issuer under a registration statement on
    Form S-8.

Such an acquisition is exempt under Rule 16b-3(c) if the open market
plan meets the conditions of Rule 16b-3(b)(5), the definition of a Stock
Purchase Plan. Because subsequent sales or transfers of the securities
so acquired would be outside the plan, these transactions would not be
exempt under Rule 16b-3. Acquisitions pursuant to additional voluntary
contributions, although not exempt under Rule 16b-3, would not make the
exemption unavailable for acquisitions pursuant to payroll deductions.

####### Select Sector SPDR Trust - May 6, 1999

In a joint letter with the Division of Investment Management, the
Division addressed the application of Section 16(a) to shares issued by
the Trust, a registered open-end management investment company, in its
nine separate investment portfolios (the "Funds"). The Divisions stated
that, having expressed in this letter and in *PDR Services Corporation*
(December 14, 1998) their views as to whether insiders and five percent
beneficial owners of exchange-traded products, such as the shares issued
by the Funds, must file ownership reports under Sections 16(a) and
13(d), respectively, the Divisions will no longer respond to requests
for no-action relief in this area unless the request presents a novel or
unusual issue.

**American Bar Association - February 10, 1999**

The Division addressed the application of Exchange Act Rule 16b-3 to
transactions occurring in the following contexts:

1.  A transaction in issuer securities by the issuer's officer or
    director with the issuer's majority-owned subsidiary (or an employee
    benefit plan sponsored by a majority-owned subsidiary) will be
    considered a transaction with the issuer for purposes of Rule
    16b-3(a). However, the approval requirements of Rule 16b-3(d) and
    16b-3(e) must be satisfied at the issuer\--rather than the
    subsidiary\--level.

    The following salary limitations implement "benefit or contribution
    limitations set forth in the Internal Revenue Code" for purposes of
    Rule 16b-3(b)(2): (a) the annual compensation limit in Internal
    Revenue Code Section 401(a)(17); and (b) the Internal Revenue Code
    Section 415 exclusion from taxable compensation of salary that has
    been deferred into a non-qualified plan. A supplemental plan that
    permits employer contributions that otherwise would have been made
    to the related qualified plan but for either of these limitations
    will be an Excess Benefit Plan.

    The following plans are not Excess Benefit Plans because the amount
    of issuer securities acquired will be determined based on the amount
    of salary the officer or director chooses to defer:

    a non-qualified deferred contribution plan; and

    a supplemental plan that provides an employer matching contribution
    based on the employee's deferral of salary into a non-qualified
    plan.

    Periodic acquisitions of phantom stock under a non-qualified
    deferred compensation plan or a supplemental plan that is not an
    Excess Benefit Plan that are exempted by Rule 16b-3(d) may be
    reported on an aggregate basis on Form 5.

    Rule 16b-3 is available to exempt an officer's or director's
    indirect interest in transactions, reportable by the officer or
    director, between the issuer and the following entities if the
    approving entity for purposes of Rules 16b-3(d) and 16b-3(e) knows
    (and the document evidencing approval specifies) the existence and
    extent of the officer's or director's indirect interest and that the
    approval is granted for purposes of Rule 16b-3:

    a partnership or corporation;

    a member of the officer's or director's immediate family; and

    a trust.

####### Skadden, Arps, Slate, Meagher & Flom LLP -- 

#### January 12,1999

The Division addressed the application of Exchange Act Rule 16b-3 to
transactions occurring in the context of corporate mergers.

Where the conversion or cancellation is simultaneous with or immediately
before the related merger, each of the following transactions
constitutes a disposition to the issuer of target equity securities
eligible for exemption under Rule 16b-3(e), even if the acquiror pays
the merger consideration directly to target equity security holders:

-   the conversion of target nonderivative equity securities into
    acquiror equity securities, debt, cash or a combination of different
    forms of merger consideration; and

-   the conversion of target derivative securities into acquiror
    derivative securities or acquiror nonderivative equity securities,
    or the cancellation of target derivative securities for cash.

The approval conditions of Rule 16b-3(e) may be satisfied only by the
target.

The acquisition of acquiror equity securities (including acquiror
derivative securities) by officers and directors of the acquiror through
the conversion of target equity securities in connection with a merger
constitutes an acquisition from the acquiror eligible for exemption
under Rule 16b-3(d). This position applies equally to employees and
directors of the target who become officers and/or directors of the
acquiror before, or at the time of, the merger ("New Acquiror
Insiders"). The approval conditions of Rule 16b-3(d) may be satisfied
only by the acquiror.

In the case of both dispositions and acquisitions, the approval
conditions of Rule 16b-3 may be satisfied at the same time as, or
following, approval of the merger agreement by the respective issuer's
board of directors, as long as they are satisfied before consummation of
the merger. Guidance is provided as to the specificity required if
approval is granted by the full board or a committee of two or more
Non-Employee Directors. Approval of an acquisition may be granted before
a New Acquiror Insider becomes an officer or director of the acquiror.

**N. [Regulation D]{.underline}**

####### Mobile Biopsy, LLC- August 11, 1999

An issuer's communication to all physicians in North Carolina made with
a view to sales of the issuer's securities would be a general
solicitation within the meaning of Rule 502(c) under Securities Act
Regulation D.

**O.** **[Trust Indenture Act of 1939]{.underline}**

####### San Jacinto Holdings Inc.- April 14, 1999

Qualification of an indenture may not be made under the Trust Indenture
Act of 1939 after the effective date of an application for qualification
under Section 307 of the statute. The act generally does not admit
post-effective qualification procedures.