of one or more orders to sell under Rule 154, and where it was inserted prior to the time any understanding was reached with respect to any proposed sale to be made in reliance on the rule, it will be regarded as a part of normal trading activity in the security. An understanding may have been reached, for this purpose, notwithstanding that the terms and conditions of the offering have not been agreed upon. When the controlling person and a broker-dealer have reached an understanding that the shares will be offered, the brokerdealer must from that time on discontinue his appearance in the "sheets" while executing the order. The broker-dealer must also refrain from initiating any other solicitations relating to the security being sold during the period in which the order is being executed.1

One problem which a broker seeking an exemption for a security traded only over the counter must consider is the extent of the market for such security and whether, in light of the character of such market, a transaction can be handled within the strict limitations of the rule. The addressing of inquiries to broker-dealers in the "sheets" is not deemed to be the solicitation of a prohibited buy order because of the 60-day written bid exclusion

1 Sales by a broker in reliance on Rule 154 could involve a distribution for purposes of Rule 10b-6 under the Securities Exchange Act of 1934 and, unless an exemption were available under that rule, bidding and purchasing activity would be prohibited thereunder until the distributions were completed.

contained in paragraph (d) of the rule. However,

a broker may not under any circumstances seek buyers among private investors or broker-dealers who have not appeared in the "sheets." General

3

As has been emphasized in other releases discussing exemptions from the registration and prospectus requirements of the Securities Act, the terms of an exemption are to be strictly construed and the claimant has the burden of proving its availability. In addition, persons receiving advice from the staff of the Commission that "no action" will be recommended if they proceed without registration in reliance upon the exemption should do so only with full realization that the staff's letter is based upon a represented statement of facts and that the tests so applied may not be proof against claims by purchasers of the security that registration should have been effected. Finally, the antifraud provisions under the various securities acts are applicable to the transactions notwithstanding the availability of an exemption from registration. By the Commission.

ORVAL L. DUBOIS Secretary

Similarly, if a broker leaves a sell order at a limit price with the specialist on the floor of an exchange, this is not deemed to be the solicitation of a prohibited buy order.

3 S.E.C. v. Ralston Purina Co., 346 U.S. 119, 126 (1953): S.E.C. v. Culpepper, 270 F. 2d 241, 246 (2d Cir. 1959); Gilligan, Will & Co. v. 8.E.C., 267 F. 2d 461, 466 (2d Cir. 1959); 8.E.C. v. Sunbeam Gold Mines Co., 95 F. 2d 699, 701 (9th Cir. 1938).

SECURITIES ACT OF 1933

The Securities and Exchange Commission published a release on January 19, 1966 (Securities Exchange Act Release No. 7793) concerning the beneficial ownership of sercuities held by family members. The staff of the Commission has received a number of inquiries about the application of the opinions expressed in the release to filings that had been made with the Commission prior to its publication. The text of the release is set forth in full below.

The Commission did not intend that opinions expressed in the release would be applied retroactively; accordingly, prior reports need not be amended. In order that ample time may be afforded to give effect to the opinions expressed in the release, it will be sufficient if reports, proxy solicitation material, registration statements and other material filed after May 1, 1966, reflect beneficial ownership as described in the release. Reports filed for the month of April under section 16(a) of

the Securities Exchange Act of 1934 should reflect beneficial ownership as described in the release. If no transactions occurred during that month, a report should nevertheless be filed under section 16(a) by May 10, 1966, if the last report filed does not reflect current beneficial ownership as described in the release.*

The Commission also wishes to point out that the opinions expressed in the release were directed to the information contained in reports and other material filed with the Commission. The fact that ownership of securities and transactions in those securities are reported under section 16(a) of the Securities Exchange Act of 1934 does not necessarily mean that liability will result there from under section 16 (b). The question whether liabilities under section 16(b) will arise from transactions is, of course, to be determined by the facts of each particular case in an appropriate action brought by the issuer or its security holders.

The text of Securities Exchange Act Release No. 7793 is as follows:

The Securities and Exchange Commission is publishing this release to restate and clarify the meaning of "beneficial ownership of securities" 2 under the securities acts administered by the Commission as such term relates to the beneficial ownership of securities held in the name of family members.

Although the discussion below relates to the reporting of beneficial ownership of securities under section 16(a) of the Securities Exchange Act of 1934 (Exchange Act), it should be noted that generally the same principles apply to disclosing beneficial ownership in registration statements,3

Similar reports should be filed by persons filing under section 30(f) of the Investment Company Act of 1940 and section 17 of the Public Utility Holding Company Act of 1935.

1 An early interpretation concerning beneficial ownership of securities held by members of a family was published in Securities Exchange Act Release No. 175 (April 16, 1935). This release supersedes Securities Exchange Act Release No. 175.

2 The term "beneficial ownership" as used herein includes both direct and indirect beneficial ownership.

3 E.g., Item 19, Principal Holders of Securities, Form S-1 under the Securities Act of 1933; Item 11, Principal Holders of Securities, Form 10 under the Exchange Act; Item 15, Twenty Largest Holders of Capital Stock, Form U5B under the Public Utility Act of 1935; Item 14 (b), Persons Owning Equity Securities of Registrant, Form N-8B-1 under the Investment Company Act of 1940.

Section 16(a) of the Exchange Act requires every person owning beneficially, directly or indirectly, more than 10 percent of a class of equity security registered on a national securities exchange or registered pursuant to new section 12(g) of the Act, or who is a director or an officer of the issuer of such security, to file an initial report disclosing the amount of each class of the issuer's equity securities, whether or not registered, which are beneficially owned by such person at the time the issuer's securities become registered, or at the time a person becomes such a director, officer or beneficial owner after registration. Thereafter, each such person must report any change in his beneficial ownership of the issuer's equity securities within 10 days after the end of each calendar month during which any change occurs." Persons

8

4 E.g., Item 5, Principal Holders of Securities, and Item 6, Directors of Registrant, Form 10-K under the Exchange Act; Item 8, Holders of Capital Stock, Form U5S under the Public Utility Act of 1935; Item 1.09 (b), Persons Owning Equity Securities of Registrant, Form N-1R under the Investment Company Act of 1940.

5 E.g., Item 5, Voting Securities and Principal Holders Thereof, and Item 6, Nominees and Directors, Schedule 14A under the Exchange Act.

E.g., Item 3(c) of Form BD under section 15(b) of the Exchange Act and Item 3(c) of Form AVD under section 203 (c) of the Investment Advisers Act of 1940.

E.g., Item 6, Voting Securities of the Trustee Owned by the Obligor or Its Officials, Form T-1; Item 4, Securities of the Obligor Owned or Held by the Trustee, Form T-2 under section 310 (b) (subsections 5, 6, 7, and 8), of the Trust Indenture Act of 1939.

Similarly, under section 17 of the Public Utility Act of 1935 periodic ownership reports disclosing the beneficial ownership of officers and directors of a registered holding company in all securities of their company and any subsidiary company thereof are required. Also, by virtue of section 30 (f) of the Investment Company Act of 1940, the provisions of section 16 of the Exchange Act attach to beneficial owners of more than 10 percent of any class of securities, other than short-term paper, issued by a registered closed-end investment company, officers and directors of such a company, as well as other persons, specified in section 30(f), having specified relationships with such a company.

The initial report form, designated Form 3, is required to be filed within 10 days after registration is effective or after a person becomes the beneficial owner of more than 10 percent of a registered class of equity security or a director or officer of the issuer of such security. Changes in beneficial ownership are required to be reported on Form 4. By virtue of Rule 72 under the Public Utility Act of 1935 and Rule 30f-1 under the Investment Company Act of 1940, Forms 3 and 4 are made applicable to the persons required by those acts to file periodic beneficial ownership reports.

required to file reports under section 16(a) are also subject to section 16 (b) and (c) of the Act.1

Thus, the determination of whether a person is the beneficial owner of securities held in the name of his spouse, minor children or other relatives is significant in deciding whether such securities should be included in the reports filed by officers, directors and beneficial owners pursuant to section 16(a). It is also significant in determining whether a person is subject to section 16 as the beneficial owner of more than 10 percent of a class of registered equity security.

Generally a person is regarded as the beneficial owner of securities held in the name of his or her spouse and their minor children. Absent special circumstances such relationship ordinarily results in such person obtaining benefits substantially equivalent to ownership, e.g., application of the income derived from such securities to maintain a common home, to meet expenses which such person otherwise would meet from other sources, or the ability to exercise a controlling influence over the purchase, sale, or voting of such securities. Accordingly, a person ordinarily should include in his reports filed pursuant to section 16 (a) securities held in the name of a spouse or minor children as being beneficially owned by him.

A person also may be regarded as the beneficial owner of securities held in the name of another person, if by reason of any contract, understanding, relationship, agreement, or other arrangement, he obtains therefrom benefits substantially equivalent to those of ownership. Accordingly, where such benefits are present such securities should be reported as being beneficially owned by the reporting person. Moreover, the fact that the person is a relative or relative of a spouse and sharing the same home as the reporting person may in itself indicate that the reporting person would obtain benefits substantially equivalent to those of ownership from securities held in the

1 Section 16(b) provides that profits realized by persons required to report pursuant to section 16 (a) from the purchase and sale, or sale and purchase, of any equity security, whether or not registered, of the issuer, within a period of less than 6 months inure to and are recoverable by or on behalf of the issuer. Section 16(c) prohibits the sale by such persons of any equity security of such issuer if the person selling the security or his principal (1) does not own the security sold, or (2) if owning the security does not promptly deliver it against such sale--sometimes referred to as selling against the box.

The words "or the ability to exercise a controlling influence over the purchase, sale" were inadvertently omitted from the release.

name of such relative. Thus, absent countervailing facts, it is expected that securities held by relatives who share the same home as the reporting person will be reported as being beneficially owned by such person.3

A person also is regarded as the beneficial owner of securities held in the name of a spouse, minor children or other person, even though he does not obtain therefrom the aforementioned benefits of ownership, if he can vest or revest title in himself at once, or at some future time.

In order to determine section 16(a) obligations to report options and similar rights, and securities held in a trust or other fiduciary capacity, the applicable provisions of the rules and regulations promulgated under section 16 should be consulted.

The final determination of the existence of beneficial ownership under section 16 is, of course, a question to be determined in the light of the facts of the particular case. It should be noted that although a report includes the holdings of other members of the family of the person filing reports, a person may avail himself of the privilege granted by Rule 16a-3 and disclaim that such report is an admission of beneficial ownership of any securities included in the report.

If special circumstances exist indicating that a person is not the beneficial owner of securities held in the name of members of his family, e.g., the person is divorced or legally separated from his spouse and does not receive any benefits of ownership from the securities held by such spouse or if he wishes advice as to whether he should report securities held by family members as being beneficially owned-he may write to the Securities and Exchange Commission, Washington, D.C. 20549, setting forth the relevant facts involved and request from the staff of the Commission an expression of opinion with respect to whether such securities should be reported as being beneficially owned.

By the Commission.

ORVAL L. DUBOIS Secretary

Where individual members of a family hold less than 10 percent of a class of registered equity security, but when combined in accordance with the standards herein discussed, such holdings exceed 10 percent, a single filing by the head of the family group as the beneficial owner of more than 10 percent of a class of registered equity security will suffice.

The Securities and Exchange Commission today called attention to two positions taken recently in matters of interest to issuers and others who file, or participate in the filing of, registration statements, proxy material and reports with the Commission. The first relates to questions raised on a request for acceleration of the effective date of a registration statement under the Securities Act of 1933 as a result of certain disclosures made by the issuer in its annual report to stockholders and in advertisements in news media. The second relates to questions raised on a request for clearance of proxy material under the Securities Exchange Act of 1934 as a result of circumstances under which convertible preferred shares may be considered residual securities in determining earnings per share applicable to common stock.

1. Questions Raised on Published Financial Information in Connection With Request for Acceleration

Issuers and underwriters generally request acceleration of the effective date of a registration statement to a specified date as soon as practicable after the filing of an appropriate correcting or completing amendment.1 The acceleration procedure enables issuers and underwriters to set the terms of the offering on the anticipated effective date in view of conditions then existing in the securities market and the granting of acceleration by the Commission on that date permits the sale

1 Section 8(a) of the Securities Act of 1933, as amended, provides that a registration statement shall become effective on the 20th day after it is filed (or on the 20th day after the filing of any amendment thereto) or such earlier date as the Commission may determine "having due regard to the adequacy of the information respecting the issuer theretofore available to the public, to the facility with which the nature of the securities to be registered, their relationship to the capital structure of the issuer and the rights of holders thereof can be understood, and to the public interest and the protection of investors."

in that same market of the securities subject to registration.

It has been the long standing policy of the Commission to cooperate with registrants requesting acceleration, giving due consideration to the standards set forth in section 8(a). However, each acceleration request is considered on the basis of the facts and circumstances relevant to it and in certain situations the Commission may deny acceleration. Several of such situations are set forth in the Note to Rule 460 of the General Rules and Regulations under the Securities Act. Other instances occur from time to time which cause the Commission to deny acceleration requests. There are set out below the circumstances relating to a recent case in which the Commission indicated it would not consider favorably a request for acceleration.

2

a. Comparison of "Pooled" and "Unpooled" Figures

A company with a registration statement on file at the Commission issued its Annual Report to Shareholders for fiscal year 1967. Page 1 of that report included a comparative summary purporting to indicate the amounts of sales, net income, and earnings per share for the years 1966 and 1967, together with figures showing substantial "percentage increases" in 1967 based on the amounts shown. References to these percentage increases were also made elsewhere in the report to shareholders.

Paid advertisements in magazines and newspapers also showed similar percentage increases in sales and net income of the company for the year 1967 when compared to 1966.

2 For example, see Securities Act Release No. 3844 (October 8, 1957), p. 19.

The figures used in the table (and in the advertisements) as a basis for determining the percentage increases were taken from the company's 1967 consolidated income statement which included the accounts of a significant company acquired in that year in a "pooling of interests" transaction and from the Company's 1966 consolidated income statement "as previously reported" without giving effect to retroactive inclusion of the related amounts of the acquired company.1

The substantial percentage increases in sales, net income and earnings per share obtained by such comparisons are misleading as a measure of the growth of the company in 1967. If the comparisons had been made with 1966 figures restated to include the accounts of the acquired company, there would have been reported for 1967 percentage declines in net income and earnings per share and only a nominal percentage increase in sales.

In the opinion of the Commission, it is misleading to make comparisons such as were made in this instance or to invite or draw conclusions as to improvement in a company's operations by comparing pooled figures for a particular year with unpooled figures for the prior year. Comparisons in such case should be made with financial data for the prior period restated on a combined (pooled) basis.2

b. Earnings Per Share Determination

The company had outstanding a class of convertible preferred shares, all held by the company's parent. These shares of stock were convertible into a substantially larger number of shares of common stock. This preferred stock is a "residual

1 A note to the table indicates that 1966 figures are "As reported before restatement for 'pooling of interests' in 1967."

2 See para. 5 of Opinion No. 10 issued by the Accounting Principles Board of the American Institute of Certified Public Accountants. The Commission also recognizes, as indicated in that Opinion, that were a "pooling of interest" has occurred, companies may wish to reconcile "restated" sales and net income figures with those previously reported. This may be done by presenting, in addition to restated income statements, separate statements of income for the same periods on a historical basis, i.e., “as previously stated," or by breaking down the sales and net income figures in the restated income statement for each period to show the amounts attributable in that period to the pooled companies. The financial statement section of the company's annual report to shareholders in this instance presented consolidated statements of income for 1966 on both a "restated" (pooled) basis and an "As Previously Reported" (unpooled) basis.

security" since it derived the major portion of its value from its conversion rights.3

In the present case, the earnings per share figures for 1966 and 1967 in the table on page 1 of the annual report to shareholders for fiscal year 1967 were presented both on the basis of average common shares outstanding, including residual securities, i.e., including common shares issuable upon conversion of the preferred stock (as in the registration statement and in the financial statement section of the shareholders' report), and also on the basis of average common shares "actually outstanding," without giving effect to inclusion of residual securities. The latter determination resulted in higher per share figures and it was only these higher figures which were commented on later in the annual report to shareholders.

In the opinion of the Commission, companies having only common stock and other residual securities outstanding should present earnings per share figures solely on the basis of equivalent outstanding common shares, including residual securities. In such circumstances the presentation of a second earnings per share figure based on outstanding common shares, excluding residual securities, is misleading. Where there are also outstanding options, warrants or convertible senior securities which may result in material dilution of earnings per share in the future, earnings per share figures should be presented on the basis of outstanding common shares including residual securities, and on a supplementary basis assuming exercise of the options or warrants and conversion of the senior securities.5

2. Convertible Preferred Stock as a Residual Security Upon Issuance in Acquisitions in the Determination of Pro Forma Earnings Per Share

A preliminary proxy statement filed with the Commission relating to a proposed merger indicated that the surviving company was to issue shares of both common and convertible preferred

3 Residual securities include common stock and any other security which ". . . clearly derives a major portion of its value from its conversion rights or its common stock characteristics..." Para. 33 of Opinion No. 9 of the Accounting Principles Board.

4 Para. 33 of Opinion No. 9 states: When used without qualification, earnings per share refers to the amount of earnings applicable to each share of common stock or other residual security outstanding..."

See para. 43 of Opinion No. 9 of the Accounting Principles Board.