Any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court, or by any official or agency of the United States, or by any State or Territorial banking or insurance commission or other governmental authority expressly authorized by law to grant such approval.

Neither of these exemptions applies to the provisions of section 306 of the Trust Indenture Act of 1939 requiring the qualification of an indenture in respect of any debt security.

So far as the new common stock contemplated by the plan is concerned, it is my opinion that there will be no exemption under either section 264 of Chapter X of the Bankruptcy Act or section 3 (a) (10) of the Securities Act of 1933 until final confirmation of a plan pursuant to section 221 of Chapter X. It seems clear that no security can be issued "pursuant to a plan," as required by section 264, prior to its confirmation under section 221. It seems clear also that the terms and conditions of the issuance and exchange of the new common stock cannot be said to have been "approved," as required by section 3(a) (10), until entry of an order of confirmation by the court. As I have stated in an earlier opinion (Securities Act Release No. 3000), in which I considered the similar problem of the applicability of section 3 (a) (10) to a plan approved by this Commission pursuant to section 11 (e) of the Public Utility Holding Company Act of 1935 but not yet approved or enforced by a District Court, it is my opinion that the approval contemplated by section 3(a) (10) is the total process of approval which is required by the particular statute relied upon to grant an exemption under that section. In the case of a reorganization under Chapter X of the Bankruptcy Act, the

total process of approval required for the issuance of any security pursuant to a plan is final confirmation by the court under section 221. Neither approval of a plan by the court under section 174 nor preliminary approval of a plan by this Commission under section 11 (f) of the Public Utility Holding Company Act of 1935 where a public utility holding company is involved, as in the present case, completes the total process of approval required.

What I have said thus far applies to the new debentures as well as the new stock. In addition, since the new debentures are subject to the Trust Indenture Act of 1939 as well as the Securities Act of 1933, and since neither the exemption in section 264 of Chapter X nor the exemption in section 3 (a) (10) of the Securities Act of 1933 applies to the Trust Indenture Act of 1939, a trust indenture for the new debentures will have to be effectively qualified with this Commission before there can be any whenissued trading in the new debentures.

Consequently, any dealer who makes use of the mails or any means of interstate commerce to sell or offer to sell new debentures or common stock on a when-issued basis prior to confirmation of a plan by the court will violate section 5 of the Securities Act of 1933 and section 306 of the Trust Indenture Act of 1939, and any dealer who makes use of the mails or any means of interstate commerce to sell or offer to sell new debentures on a when-issued basis prior to qualification of an indenture will violate section 306 of the Trust Indenture Act of 1939. This applies also to any broker who, as a result of a solicitation of a customer's order, sells or offers to sell "when issued" on an agency basis.

I might add that in my opinion the taking of an appeal from an ultimate district court order of confirmation would have no effect upon any of the opinions here expressed unless the order of the lower court were stayed pending the appeal.

SECURITIES ACT OF 1933

The Securities and Exchange Commission today made public a letter written by the Director of the Corporation Finance Division in response to an inquiry as to the circumstances under which warrants issued to underwriters and certain other persons may be registered under the Securities Act of 1933. The letter, which is self-explanatory, reads as follows:

DEAR SIR: Reference is made to your letter of March 10, regarding the registration of warrants under the Securities Act of 1933.

You state that your Company proposes to sell warrants to underwriters in connection with a public offering of stock of the same class as that called for by the warrants. Warrants are also to be issued to certain officers and controlling stockholders of the Company. The warrants are to be immediately exercisable and are to run for a period of 3 years. The exercise price of the warrants may or may not be the same as the offering price of the stock to the general public. For tax reasons, none of the warrants or stock subject thereto will be reoffered to the general public for at least 6 months after the effective date of the registration statement. You inquire whether, in the light of the foregoing facts, either the warrants or the stock subject thereto may be registered at the same time as the stock which is to be offered to the general public.

Assuming that the warrants are transferable, both the warrants and the stock subject thereto should be registered along with the stock to be offered to the general public. The life of the warrants is immaterial and it is likewise immaterial that the exercise price of the warrants may not be the same as the public offering price of the stock. Since it is not contemplated that either the warrants or the stock subject thereto will be distributed at the pres

ent time, the registration statement should include an undertaking to file a post-effective amendment, which shall become effective prior to the distribution, showing the terms of such distribution. In view of the term of the warrants, it appears that the use of section 10(b) (1)1 prospectuses may be required. Consequently, the registration statement should also include an undertaking to file such prospectuses as post-effective amendments.

Ordinarily non-transferable warrants are in the nature of private contracts and their registration is not required. However, even though the warrants are non-transferable, if they are to be issued under such circumstances as to constitute a public offering of securities, such warrants should be registered under the same circumstances as transferable warrants. In any event, the stock called for by non-transferable warrants should be registered along with the stock of the same class which is to be offered to the general public.

You inquire whether our conclusion with respect to registration would be different in the event the warrants were to be purchased by the underwriters from controlling stockholders rather than from the registrant itself. In such case, the warrants and the stock subject thereto should be registered under the same circumstances as apply to warrants sold by the registrant itself, and the same undertakings should be included in the registration statement. In addition, however, the registration statement would have to be signed by the controlling stockholders as the issuers of the warrants.

Very truly yours,

/sgd/ BALDWIN B. BANE,

Director, Corporation Finance Division

1 Now section 10 (a) (3), as amended Aug. 10, 1954.

SECURITIES ACT OF 1933

The Securities and Exchange Commission today made public an opinion of its General Counsel, Roger S. Foster, with reference to when-issued trading. The opinion follows:

In Securities Act Releases Nos. 3000 and 3011, the opinion was expressed inter alia, that an order of a United States District Court enforcing a plan under section 11 (e) of the Public Utility Holding Company Act of 1935, or confirming a plan under Chapter X of the Bankruptcy Act, establishes an exemption under section 3 (a) (10) of the Securities Act of 1933 for any securities issued pursuant to the plan in exchange for one or more outstanding securities, claims or property interests, or partly in such exchange and partly for cash; that upon

SECURITIES ACT OF 1933

the entry of such an order brokers or dealers may legally sell such securities on a whenissued basis; and that the taking of an appeal from such an order would not affect the exemption "unless the order of the lower court were stayed pending the appeal."

The effect of a stay of a court order depends, of course, upon the nature and conditions of the stay. Since experience with such plans indicates that the type of stay order normally sought would have the affect merely of delaying execution of the plan rather than setting aside even temporarily the effect of the court's approval or confirmation order, it is my opinion that any such stay order would not effect the exemption from the Securities Act any more than the taking of an appeal without a stay.

The Securities and Exchange Commission released today the following opinion of its General Counsel, Roger S. Foster, relating to the use of "hedge clauses" by brokers, dealers, investment advisers, and others.

My opinion has been requested concerning the legality of various types of "hedge clauses" which are used in the literature of brokers, dealers, investment advisers and others. While the language of these hedge clauses varies considerably in substance they state generally that the information furnished is obtained from sources believed to be reliable but that no assurance can be given as to its accuracy. Occasionally language is added to the effect that no liability is assumed with respect to such information.

All the statutes administered by the Commission provide that any condition, stipulation or provision which binds any person to waive compliance with their requirements shall be void. Apart from these provisions, moreover,

the courts have repeatedly held that a hedge clause or legend disclaiming liability has little, if any, legal effect as protection against civil liability where a person makes a representation which he knows, or in the exercise of reasonable care could have discovered, is false or misleading. See Equitable Life Insurance Co. of Iowa v. Halsey, Stuart & Co., 312 U.S. 410 (1941); People v. Federated Radio Corpora tion, 244 N.Y. 33, 154 N.E. 655 (1926); Tone v. Halsey, Stuart & Co., 286 Ill. App. 169, 3 N.E. 2d 142 (1936); Continental Insurance Co. v. Equitable Trust Co., 127 Misc. 45, 215 N.Y.S. 281 (1926); Wolfe v. A. E. Kusterer & Co., 269 Mich. 424, 257 N.W. 729. The question arises, therefore, whether the result, if not the purpose, of such a legend is to create in the mind of the investor a belief that he has given up legal rights and is foreclosed from a remedy which he might otherwise have either at common law or under the Securities and Exchange Commission statutes.

In my opinion, the anti-fraud provisions of

the Securities and Exchange Commission statutes are violated by the employment of any legend, hedge clause or other provision which is likely to lead an investor to believe that he has in any way waived any right of action he may have, assuming, of course, that the mails or other jurisdictional elements are involved. I refer to section 17(a) of the Securities Act of 1933, section 10 (b) of the Securities Exchange Act of 1934 and Rule X-10B-5 thereunder, section 15(c) (1) of that Act and Rule X-15C1-2 thereunder in the case of a broker or dealer effecting a transaction over the counter, and section 206 of the Investment Advisers Act of 1940 in the case of a registered investment adviser.

A legend in common use states in effect that the information is obtained from specified sources and is believed to be reliable but that its accuracy is not guaranteed. Assuming the truth of the representations as to the source of the information and the belief that it is reliable, it is my opinion that the mere use of this legend in connection with a communication supplying information is not objectionable. This does not mean, of course, that there would be any justification for representing to the investor, either when the information is supplied or thereafter, that the effect of the legend is to relieve the person using it from a liability under the above-mentioned statutory provisions and rules.

SECURITIES ACT OF 1933

The Commission today adopted an amendment of Rule 154 in the form set forth below. The amendment defines the term "brokers' transactions" as used in section 4(2)1 of the Securities Act of 1933 which exempts from the registration and prospectus requirements of the Act —

Brokers' transactions, executed upon customers' orders on any exchange or in the open or counter market, but not the solicitation of such orders.

PURPOSE OF AMENDMENT

As a result of the Commission's decision in the Ira Haupt & Company case (23 SEC 589 (1946)), doubt has arisen as to the scope of the exemption provided by section 4(2)1 for brokers' transactions effected on behalf of controlling persons.

Rule 154 as originally promulgated in Release No. 3421 (August 2, 1951) defined certain terms used in section 4(2)1 of the Act but did not attempt to define the term "brokers' transactions." In connection with the study

last year of recommendations for amendment of the various acts administered by the Commission (See H. Rept. 2508, 82d Cong., 2d Sess., S. Rept. 1036, 83rd Cong., 2d Sess., H. Rept. 1542, 83rd Cong., 2d Sess.), proposals were received from various groups for amendment of section 4 (2) 1 "so as to give relief from the popular interpretation" of the Haupt opinion. Neither the bill (S. 2846, 83rd Cong., 2d Sess.) reported to the Senate by the Banking and Currency Committee of the Senate and to the House of Representatives by the Interstate and Foreign Commerce Committee of the House nor as enacted (P. L. 577, 83rd Cong., 2d Sess.) contained any amendment of section 4(2). However, the Report of the Banking and Currency Committee stated: "Your committee is hopeful that the Securities and Exchange Commission will give favorable consideration to a rule which will deal effectively with the problem and understands that the Securities and Exchange Commission has such a rule

1 Section 4(2) is now section 4(4) as amended August 20, 1964.

under consideration." (Senate Report No. 1036, 83rd Cong., 2d Sess. (1954) at 7.)

The Commission, thereafter, in Release No. 3501 (May 3, 1954) announced a proposed amendment of Rule 154, defining certain terms for the purposes of section 4 (2)1 of the Act. The proposed amendment of Rule 154 which was circulated for comment on May 3, 1954, would have added to Rule 154 a definition of the term "brokers' transactions" appearing in section 4 (2). This proposal was designed to resolve the doubts of underwriters, dealers and brokers and to make clear that the availability of an exemption under section 4 (2) does not turn solely upon the question whether the selling stockholder is a controlling person but involves also a determination whether such controlling person, to the actual or constructive knowledge of the broker, is effecting a distribution of his holdings.

The Commission received numerous written comments and suggestions. After appropriate notice a public hearing was held on July 6, 1954, at which interested persons were afforded an opportunity to present their views orally. After careful consideration of the views, suggestions and comments submitted in writing and at the hearing, the Commission published for comment on September 13, 1954, in Release No. 3515, a revised proposal for amendment of Rule 154. The revised proposal, among other things, suggested certain percentage tests as ready guides for routine trading transactions. The Commission received additional comments, the substance of certain of which has been incorporated in the amended Rule 154 as set forth below.

1

The proposed amendment defines the term "brokers' transactions" as used in section 4 (2) 1 to include transactions of sale executed by a broker for the account of any person controlling, controlled by, or under common control with the issuer where the broker performs no more than the usual and customary broker's function; receives no more than the usual and customary commission; neither he nor, to his knowledge, his principal solicits orders to buy; and he is not aware of circumstances indicating that his principal is an underwriter or

engaged in a distribution of securities. For the purposes of this rule, the term "distribution" is defined as not applying to transactions which involve amounts not substantial in relation to the outstanding securities of the same class and the aggregate volume of trading in the security. To provide a ready guide for routine cases involving trading as distinguished from distributing transactions, the term "distribution" is further defined as not including a sale or series of sales of securities which, together with all other sales of securities of the same class by or on behalf of the same person within the preceding 6 months will not exceed approximately 1 percent of the outstanding shares or units of the security in the case of a security which is traded only otherwise than on a securities exchange and, with respect to a security which is admitted to trading on a securities exchange, the lesser of either 1 percent of the outstanding securities of the class or the aggregate reported volume of trading during any one week within the preceding 4 calendar weeks. It should be emphasized that some cases which do not fall within the scope of the specific formulas so provided may nevertheless, under the circumstances of a particular case, be "brokers' transactions" for which the exemption under section 4(2) would be available. In such cases brokers and their counsel may rely upon the general definition of "distribution."

In view of the significant problems in the area encompassed by the amended rule, the Commission intends to study closely its operation in order to make certain that its effects will be consistent with the purposes of the Act.

STATUTORY BASIS

This action is taken pursuant to the Securities Act of 1933, particularly sections 4(2) 1 and 19(a) thereof, the Commission deeming such action necessary to carry out the provisions of the Act.

TEXT OF AMENDMENT

Rule 154 is amended to read as follows:

1 Section 4(2) is now section 4(4) as amended August 20, 1964.