Securities and Exchange Commission: Revision of Holding Period Requirements in Rules 144 and 145

Published by the Government Accountability Office on 1997-03-11.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Office of the General Counsel


      March 11, 1997

      The Honorable Alfonse M. D'Amato
      The Honorable Paul S. Sarbanes
      Ranking Minority Member
      Committee on Banking, Housing, and Urban Affairs
      United States Senate

      The Honorable Thomas J. Bliley, Jr.
      The Honorable John D. Dingell
      Ranking Minority Member
      Committee on Commerce
      House of Representatives

      Subject:   Securities and Exchange Commission: Revision of Holding Period
                 Requirements in Rules 144 and 145

      Pursuant to section 801(a)(2)(A) of title 5, United States Code, this is our report
      on a major rule promulgated by the Securities and Exchange Commission
      (Commission), entitled "Revision of Holding Period Requirements in Rules 144
      and 145" (RIN: 3235-AG53). We received the rule on February 21, 1997. It was
      published in the Federal Register as a final rule on February 28, 1997. 62 Fed.
      Reg. 9242.

      The final rule amends the holding period requirements contained in Rule 144 to
      permit the resale of limited amounts of restricted securities by any person after a
      1-year, rather than a 2-year, holding period. Also, the amendments permit unlimited
      resales of restricted securities held by non-affiliates of the issuer after a holding
      period of 2 years, rather than 3 years. The Commission believes that these changes
      should reduce the cost of capital, particularly for small business issuers. Parallel
      changes to the holding period provisions of Rule 145, which governs the resale of
      securities received in connection with reclassifications, mergers, consolidations and
      asset transfers, are also being made.

Enclosed is our assessment of the Commission's compliance with the procedural
steps required by section 801(a)(1)(B)(i) through (iv) of title 5 with respect to the
rule. Our review indicates that the Commission complied with the applicable

If you have any questions about this report, please contact James Vickers,
Assistant General Counsel, at (202) 512-8210. The official responsible for GAO
evaluation work relating to the Securities and Exchange Commission is
Jean Gleason Stromberg, Director, Financial Institutions and Markets Issues.
Ms. Stromberg can be reached at (202) 512-8678.

Robert P. Murphy
General Counsel


cc: The Honorable Jonathan G. Katz
    Securities and Exchange Commission

Page 2                                                               GAO/OGC-97-27

      ANALYSIS UNDER 5 U.S.C. § 801(a)(1)(B)(i)-(iv) OF A MAJOR RULE
                               ISSUED BY
                           (RIN: 3235-AG53)

(i) Cost-benefit analysis

While not required to prepare a cost-benefit analysis, the Commission reports that
the comments it received support the Commission's belief that the final rule will
reduce compliance burdens and costs without a significant impact on investor
protection. In addition, the Commission believes the final rule will promote market
efficiency, investment and capital formation by reducing the liquidity costs of
holding restricted securities and reducing issuers' cost of raising capital through the
sale of restricted securities.

The actual amount by which the volume of restricted shares privately placed and
resales of restricted securities will increase cannot be reliably predicted but will
depend on the response of investors and issuers to the shortened holding period
requirements. However, if the annual volume of resales reported increase by as
little as 1 percent per year, the dollar increase would exceed $100,000,000.

(ii) Agency actions relevant to the Regulatory Flexibility Act, 5 U.S.C. §§ 603-605,
607 and 609

The Commission prepared an initial regulatory flexibility analysis, which was
summarized in the preamble to the proposed rule, and a final regulatory flexibility
analysis, which is printed in its entirety in the preamble to the final rule.

Both analyses contain the information required by the act including the classes of
small entities subject to the rule and alternatives considered to reduce the burden
on small entities.

The final analysis concludes that the final rule will have a significant effect on a
substantial number of small entities and that the effect will be beneficial for small
entities which often sell securities in private placements by reducing the costs of
capital formation. The Commission is aware of 1,019 Exchange Act reporting
companies that currently satisfy the definition of "small business" under Rule 157.

The Commission points out that the final rule was recommended by participants in
the annual SEC Government-Business Forum on Small Business Capital Formation.

(iii) Agency actions relevant to sections 202-205 of the Unfunded Mandates Reform
Act of 1995, 2 U.S.C. §§ 1532-1535

The final rule, promulgated by an independent regulatory agency, is not subject to
title II of the act.

(iv) Other relevant information or requirements under acts and executive orders

Administrative Procedure Act, 5 U.S.C. §§ 551 et seq.

The final rule was promulgated using the notice and comment procedures of
5 U.S.C. § 553. A notice of proposed rulemaking was published in the Federal
Register on July 10, 1995. 60 Fed. Reg. 35645. The Commission received comments
in response to the proposed rulemaking which are discussed in the preamble to the
final rule. At the suggestion of certain commenters, the Commission made parallel
changes in Rule 145.

Paperwork Reduction Act, 44 U.S.C. §§ 3501-3520

The final rule does not impose information collection requirements subject to the
Paperwork Reduction Act.

Statutory authorization for the rule

The final rule is promulgated under the authority of sections 2(11), 4(1), and 19(a)
of the Securities Act, 15 U.S.C. §§ 77b(11), 77d(1), and 77s(a).

Executive Order No. 12866

As an independent regulatory agency, the Securities and Exchange Commission is
not subject to the review provisions of Executive Order No. 12866.

Page 2                                                              GAO/OGC-97-27