On July 5, 2007, we again proposed to amend several aspects of Rule 144 and Rule 145, including by further shortening the holding periods (the ``2007 Proposing Release'').\24\ We proposed to shorten the holding period requirement in Rule 144(d) for restricted securities of issuers that are subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the ``Exchange Act'')\25\ to six months. Restricted securities of issuers that are not subject to Exchange Act reporting requirements would continue to be subject to a oneyear holding period under Rule 144(d). We also proposed to relieve nonaffiliates of reporting issuers from having to comply with all conditions in Rule 144, except the current public information requirement, after a sixmonth holding period. Nonaffiliates of non reporting issuers would be allowed to resell their securities freely after a oneyear holding period. In addition, we proposed to:

We also solicited comment on amending the Form 144 filing deadline to coincide with the deadline for filing a Form 4 \26\ under Section 16 \27\ of the Exchange Act and permitting persons who are subject to Section 16 to meet their Form 144 filing requirement by
[[Page 71548]]
filing a Form 4.\28\ Finally, we proposed to eliminate the presumptive underwriter provision in Securities Act Rule 145, except for transactions involving a shell company, and to harmonize the resale provisions in Rule 145 with the Rule 144 provisions applicable to resales of securities of shell companies.
\26\ 17 CFR 249.104.
\27\ 15 U.S.C. 78p.
\28\ Section 16 applies to every person who is the beneficial owner of more than 10% of any class of equity securities registered under Section 12 of the Exchange Act, and each officer and director (collectively, ``reporting persons'' or ``insiders'') of the issuer of such security. Section 16(a) of the Exchange Act generally requires reporting persons to report changes in their beneficial ownership of all equity securities of the issuer on Form 4 before the end of the second business day following the day on which the transaction that caused the change in beneficial ownership was executed.

We received 32 comment letters from 30 commenters on the proposals in the 2007 Proposing Release.\29\ A majority of the commenters expressed support for the proposals in general.\30\ Several of these commenters expressed support for the proposed amendments to shorten the holding period requirement in Rule 144 for both affiliates and non affiliates of Exchange Act reporting issuers.\31\ Two commenters opposed shortening the holding period, as proposed.\32\
\29\ The comment letters on the 2007 Proposing Release are available on the Commission's public Web site at http://www.sec.gov/comments/s71107/s71107.shtml .
\30\ See, e.g., comment letters on the 2007 Proposing Release from Jesse Brill (dated Aug. 1, 2007) (``Brill 1''); Cleary Gottlieb Steen & Hamilton LLP (``Cleary Gottlieb''); Feldman Weinstein and Smith LLP (``Feldman''); Fried, Frank, Harris, Shriver, and Jacobsen LLP (``Fried Frank''); Barry Gleicher (``Gleicher''); Krieger & Prager, LLP (``Krieger''); U.S. Securities Lawyers in London (``London Forum''); Parsons/Burnett LLP (``Parsons''); Pink Sheets, LLC (``Pink Sheets''); Richardson Patel LLP (``Richardson Patel''); Roth Capital Partners (``Roth''); Society of Corporate Secretaries & Governance Professionals (``SCSGP''); Sichenzia Ross Friedman Ference LLP (``Sichenzia''); Sullivan & Cromwell LLP (``Sullivan''); Peter J. Weisman (``Weisman''); and Williams Securities Law (``Williams''); and a joint letter from the Securities Industry and Financial Markets Association, International Swaps and Derivatives Association, Inc. and Management Funds Association (``Financial Associations'').
\31\ See comment letters on the 2007 Proposing Release from the Committee on Federal Regulation of Securities of the American Bar Association (``ABA''); Feldman; Financial Associations; Fried Frank; London Forum; Richardson Patel; Roth; Sichenzia; SCSGP; Weisman; and Williams.
\32\ See comment letters on the 2007 Proposing Release from the North American Securities Administrators Association, Inc. (``NASAA'') and Marc I. Steinberg (``Steinberg'').

Some commenters expressed opposition to the proposed reintroduction of a provision that would toll, or suspend, for up to six months, the holding period during any period that a security holder engages in hedging activities with respect to any equity securities of the same class as the restricted securities or any securities convertible into that class (or, in the case of nonconvertible debt, with respect to any nonconvertible debt securities).\33\ The commenters thought that the tolling provision could have a negative effect on capital raising transactions. These commenters provided several recommendations on how we should modify the tolling provision, if we decide to adopt it. We received general support for the other aspects of the proposed amendments, including the proposals relating to Form 144, the elimination of the manner of sale requirements for debt securities and the codification of several staff interpretations.
\33\ See comment letters on the 2007 Proposing Release from ABA; Cleary Gottlieb; Feldman; Financial Associations; Richardson Patel; Sichenzia; and Weisman.
II. Discussion of Final Amendments
A. Simplification of the Preliminary Note and Text of Rule 144

In the 2007 Proposing Release, we noted that the current Preliminary Note is complex and may be confusing to some security holders. We proposed amendments to simplify and clarify the Preliminary Note to Rule 144 and to incorporate plain English principles. The proposed amendments to the Preliminary Note were not intended to alter the substantive operation of the rule. In addition, we proposed changes throughout the rule to make the rule less complex and easier to read.

We received a few comments on the proposed changes to simplify Rule 144 and the Preliminary Note. One commenter believed that the Preliminary Note to Rule 144 is no longer necessary, because the purpose and meaning of the rule are wellunderstood.\34\ Some commenters recommended that we further explain how Rule 144 can be used for the resale of control securities.\35\
\34\ See comment letter on the 2007 Proposing Release from ABA. \35\ See comment letters on the 2007 Proposing Release from ABA; Bulldog Investors; and Sutherland Asbill & Brennan LLP

(``Sutherland'').

We are adopting the amendments to the Preliminary Note with some modification from the proposed version. The revised Preliminary Note retains an explanation of the relationship among the exemption in Section 4(1) of the Securities Act, the Section 2(a)(11) definition of ``underwriter'' and the Rule 144 safe harbor. Consistent with the proposal, the revised Preliminary Note also clarifies that any person who sells restricted securities, and any person who sells restricted securities or other securities on behalf of an affiliate, shall be deemed not to be engaged in a distribution of such securities and therefore shall be deemed not to be an underwriter with respect to such securities if the sale in question is made in accordance with all the applicable provisions of the rule. The revised Preliminary Note further states that, although Rule 144 provides a safe harbor for establishing the availability of the Section 4(1) exemption, it is not the exclusive means for reselling restricted and control securities. Therefore, Rule 144 does not eliminate or otherwise affect the availability of any other exemption for resales.\36\ Consistent with a statement that was included in the original Rule 144 adopting release,\37\ we are adding a statement to the Preliminary Note that the Rule 144 safe harbor is not available with respect to any transaction or series of transactions that, although in technical compliance with the rule, is part of a plan or scheme to evade the registration requirements of the Securities Act.\38\ We also are adopting plain English changes throughout the rule text substantially as proposed.
\36\ We are moving the statements indicating that Rule 144 is a nonexclusive safe harbor from paragraph (j) of the rule, as it existed prior to the amendments, to the Preliminary Note.
\37\ Release No. 335223. In the original release adopting Rule 144, we stated:

In view of the objectives and policies underlying the Act, the rule shall not be available to any individual or entity with respect to any transaction which, although in technical compliance with the provisions of the rule, is part of a plan by such individual or entity to distribute or redistribute securities to the public. In such case, registration is required.
\38\ Similar language can also be found in other rules such as in the Preliminary Note to Securities Act Rule 144A [17 CFR 230.144A].
B. Amendments to Holding Periods for Restricted Securities
1. SixMonth Rule 144(d) Holding Period Requirement for Exchange Act Reporting Companies

As stated above, in 1997, we reduced the Rule 144 holding periods for restricted securities for both affiliates and nonaffiliates.\39\ Before the 1997 amendments, security holders could sell limited amounts of restricted securities after holding those securities for two years if they satisfied all other conditions imposed by Rule 144.\40\ Under Rule 144(k), nonaffiliates could sell restricted securities without being subject to any of the conditions in Rule 144 after holding their securities for three years. The 1997 amendments to
[[Page 71549]]
Rule 144 reduced the twoyear Rule 144(d) holding period to one year and amended the threeyear Rule 144(k) holding period to two years. \39\ See the 1997 Adopting Release.
\40\ These other conditions included the availability of current public information, the volume of sale limitations, the manner of sale requirements, and the filing of Form 144. See 17 CFR

230.144(c), (e), (f) and (h).

In the 1997 Proposing Release, we solicited comment on whether the Rule 144(d) holding period should be further reduced for both affiliates and nonaffiliates, and whether restrictions applicable to sales by nonaffiliates also should be reduced. We received numerous comments on this issue. Twelve commenters recommended that we further reduce the holding period to six months.\41\ Two other commenters thought that we should maintain the holding periods that we had just recently adopted.\42\ Eight commenters recommended that we gain more experience with the new holding periods before proposing further amendments to those holding periods.\43\
\41\ See comment letters on the 1997 Proposing Release from American Society of Corporate Secretaries (``ASCS''); Association for Investment Management & Research (``AIMR''); Association of the City Bar of New York (``NY City Bar''); Baltimore Gas & Electric (``BG&E''); Investment Company Institute (``ICI''); Charles Lilienthal (``Lilienthal''); Loeb &Loeb LLP; New York State Bar Association (``NY Bar''); Schwartz Investments, LLC (``Schwartz Investments''); Sullivan; Testa, Hurwitz & Thibeault, LLP (``Testa Hurwitz''); and Willkie, Farr & Gallagher LLP (``Willkie Farr''). The comment letters on the 1997 Proposing Release are available on the Commission's Web site at http://www.sec.gov/rules/proposed/s7797.shtml or in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549. Interested persons should refer to File No. S70797.
\42\ See comment letters on the 1997 Proposing Release from Argent Securities, Inc. (``Argent'') and The Corporate Counsel (``Corporate Counsel'').
\43\ See comment letters on the 1997 Proposing Release from ABA; joint letter from Goldman Sachs & Co., JP Morgan Securities, Inc., Morgan Stanley & Co., Inc., and Salomon Brothers Inc. (``Four Brokers''); Lehman Brothers Inc. (``Lehman Brothers''); Merrill Lynch & Co., Inc. (``Merrill Lynch''); Morgan Stanley & Co., Inc. (``Morgan Stanley''); Regional Investment Bankers Association (``Regional Bankers''); Securities Industry Association (``SIA''); and Smith Barney Inc. (``Smith Barney'').

In the 2007 Proposing Release, we again proposed to shorten the Rule 144(d) holding period for restricted securities held by affiliates and nonaffiliates.\44\ The proposal would have permitted both affiliates and nonaffiliates to publicly sell restricted securities of Exchange Act reporting issuers \45\ after holding the securities for six months, subject to any other applicable condition of Rule 144, if they had not engaged in hedging transactions with respect to the securities. Because of our concern that the market does not have sufficient information and safeguards with respect to nonreporting issuers, we proposed to retain the oneyear holding period for restricted securities of issuers that are not subject to Exchange Act Section 13(a) or Section 15(d) reporting obligations for both affiliates and nonaffiliates.
\44\ See the 2007 Proposing Release at Section II.B.2.a. \45\ Under the 2007 proposals, the sixmonth holding period would apply to securities of an issuer that is, and has been for at least 90 days before the sale, subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act.

Several commenters supported the proposal to shorten the holding period to six months for securities of reporting issuers.\46\ These commenters noted that the shortened holding period would increase liquidity for issuers, make capital investment more attractive, and decrease costs of capital for smaller companies without sacrificing investor protection.\47\ In this regard, one commenter noted that today's markets now function at an accelerated pace, and technology, particularly the Internet, has caused the markets to become more efficient.\48\ Two commenters advocated an even shorter holding period requirement than the proposed sixmonth period, with one commenter advocating a fourmonth holding period and the other a threemonth holding period.\49\ Two commenters opposed shortening the holding period requirement under Rule 144, as proposed.\50\
\46\ See comment letters on the 2007 Proposing Release from ABA; Feldman; Financial Associations; Fried Frank; London Forum; Richardson Patel; Roth; Sichenzia; SCSGP; Weisman; and Williams. \47\ See comment letters on the 2007 Proposing Release from Financial Associations; Pink Sheets; Richardson Patel; and Roth. \48\ See comment letter on the 2007 Proposing Release from ABA. See also letter to John W. White, Director, SEC Division of Corporation Finance, from Keith F. Higgins, Chair, Committee on Federal Regulation of Securities, ABA Section of Business Law (Mar. 22, 2007) (``the March 2007 ABA Letter''), available at http://www.sec.gov/comments/s71107/s71107.shtml .
\49\ See comment letters on the 2007 Proposing Release from Feldman and Weisman.
\50\ See comment letters on the 2007 Proposing Release from NASAA and Steinberg.

The purpose of Rule 144 is to provide objective criteria for determining that the person selling securities to the public has not acquired the securities from the issuer for distribution. A holding period is one criterion established to demonstrate that the selling security holder did not acquire the securities to be sold under Rule 144 with distributive intent. We do not want the holding period to be longer than necessary or impose any unnecessary costs or restrictions on capital formation. After observing the operation of Rule 144 since the 1997 amendments, we believe that a sixmonth holding period for securities of reporting issuers provides a reasonable indication that an investor has assumed the economic risk of investment in the securities to be resold under Rule 144. Therefore, we are adopting a sixmonth holding period for reporting companies, as proposed.\51\ Most commenters agreed that shortening the holding period to six months for restricted securities of reporting issuers will increase the liquidity of privately sold securities and decrease the cost of capital for reporting issuers, while still being consistent with investor protection.\52\ By reducing the holding period for restricted securities, these amendments are intended to help companies to raise capital more easily and less expensively. For example, by making private offerings more attractive, the amendments may allow some companies to avoid certain types of costly financing structures involving the issuance of extremely dilutive convertible securities. Many commenters supported the proposal to maintain the existing one year holding period for restricted securities of nonreporting issuers.\53\
\51\ See amendments to Rule 144(d). The amendments do not change the Rule 144(d) requirement that, if the acquiror takes the securities by purchase, the holding period will not commence until the full purchase price is paid.
\52\ See Section VI. of this release.
\53\ See comment letters on the 2007 Proposing Release from ABA; Brill 1; Financial Associations; Gleicher; Weisman; and Williams.

Under the amendments that we are adopting, the sixmonth holding period requirement will apply to the securities of an issuer that has been subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act for a period of at least 90 days before the Rule 144 sale.\54\ Restricted securities of a ``nonreporting issuer'' will continue to be subject to a oneyear holding period requirement.\55\ A nonreporting issuer is one that is not, or has not been for a period of at least 90 days before the Rule 144 sale, subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act.\56\ \54\ See new Rule 144(d)(1)(i). We also are making conforming amendments to paragraphs (e)(3)(ii), (e)(3)(iii) and (e)(3)(iv) of Rule 144.
\55\ However, nonaffiliates of nonreporting companies will no longer be subject to any other resale restrictions after meeting the oneyear holding period. See Section II.B.3 below.

\56\ See new Rule 144(d)(1)(ii).

We believe that different holding periods for reporting and non reporting issuers are appropriate given that reporting issuers have an obligation to file periodic reports with updated financial information (including audited financial information in annual filings) that are publicly available on EDGAR, the Commission's electronic filing system. Although nonreporting issuers
[[Page 71550]]
must make some information publicly available before resales can be made under Rule 144, this information typically is much more limited in scope than information included in Exchange Act reports, is not required to include audited financial information, and is not publicly available via EDGAR.\57\ For these reasons, we believe that continuing to require security holders of nonreporting issuers to hold their securities for one year is not unduly burdensome and is consistent with investor protection.
\57\ See 17 CFR 240.15c211.
2. Significant Reduction of Conditions Applicable to NonAffiliates

Before adoption of these amendments, both nonaffiliates and affiliates were subject to all other applicable conditions of Rule 144, in addition to the Rule 144(d) holding period requirement, including the condition that current information about the issuer of the securities be publicly available, the limitations on the amount of securities that may be sold in any threemonth period, the manner of sale requirements and the Form 144 notice requirement. However, pursuant to paragraph (k) of Rule 144 as it existed prior to the amendments that we are adopting, a nonaffiliate of the issuer at the time of the Rule 144 sale who had not been an affiliate during the three months prior to the sale, could sell the securities after holding them for two years without complying with these other conditions.

In the 2007 Proposing Release, we proposed to permit nonaffiliates to resell their restricted securities freely after meeting the applicable holding period requirement (i.e., six months with respect to a reporting issuer and one year with respect to a nonreporting issuer), except that nonaffiliates of reporting issuers still would be subject to the current public information requirement in Rule 144(c) for an additional six months after the end of the initial sixmonth holding period.

In general, commenters supported the proposal to reduce substantially the requirements for the resale of restricted securities by nonaffiliates under Rule 144.\58\ Noting the importance of the current public information condition, two commenters expressed support for the proposed retention of that requirement for the resales of restricted securities by nonaffiliates occurring between six months and one year after acquisition of the securities.\59\ Some commenters expressed support for removal of the manner of sale requirements and the Form 144 notice requirement,\60\ while a few objected to removal of those requirements.\61\ The commenters objecting to the removal of those requirements expressed concern about the transparency of Rule 144 transactions and the potential increase in violations of the holding period requirement if the manner of sale requirements and the Form 144 notice requirement were eliminated.\62\ The two commenters that opposed shortening the Rule 144(d) holding period also opposed the proposals to permit nonaffiliates to resell without being subject to any other condition (except the public information requirement, with respect to resales of securities of reporting companies) after they meet the holding period.\63\
\58\ See, e.g., comment letters on the 2007 Proposing Release from Brill 1; Cleary Gottlieb; Pink Sheets; and Weisman.
\59\ See comment letters on the 2007 Proposing Release from ABA and Weisman.
\60\ See, e.g., comment letters on the 2007 Proposing Release from ABA; BAIS; Cleary Gottlieb; Fried Frank; and SCSGP.
\61\ See comment letters on the 2007 Proposing Release from Argus Vickers Stock Research Corp. (``Argus''); Brill 1; and The Washington Service on the Form 144 requirement (``WS 2'').
\62\ See comment letters on the 2007 Proposing Release from Brill 1 and WS 2.
\63\ See comment letters on the 2007 Proposing Release from NASAA and Steinberg.

We are adopting the amendments for the sale of restricted securities by nonaffiliates after the holding period, as proposed.\64\ Under the amendments, after the applicable holding period requirement is met, the resale of restricted securities by a nonaffiliate under Rule 144 will no longer be subject to any other conditions of Rule 144 except that, with regard to the resale of securities of a reporting issuer, the current public information requirement in Rule 144(c) will apply for an additional six months after the sixmonth holding period requirement is met.\65\ Therefore, a nonaffiliate will no longer be subject to the Rule 144 conditions relating to volume limitations, manner of sale requirements, and filing Form 144.\66\
\64\ Under the amendments, paragraph (k) of Rule 144 has been removed. The conditions that nonaffiliates are required to meet for the sale of their securities under Rule 144 are now contained in paragraph (b)(1) of the rule.
\65\ Some commenters requested us to state that the Commission would not object if the restricted securities legend were removed from securities held by a nonaffiliate, after all the applicable Rule 144 conditions to resale have been met. See comment letters on the 2007 Proposing Release from Cleary Gottlieb; Financial Associations; and Weisman. In the past, the staff in the Division of Corporation Finance has expressed the view that ``it is not inappropriate for issuers to remove restrictive legends from securities that may be resold in reliance on Rule 144(k).'' See, e.g., Toth Aluminum Corporation (Oct. 31, 1988). Under the amendments that we are adopting, we do not object if issuers remove restrictive legends from securities held by nonaffiliates after all of the applicable conditions in Rule 144 are satisfied. However, the removal of a legend is a matter solely in the discretion of the issuer of the securities. Disputes about the removal of legends are governed by state law or contractual agreements, rather than federal law.
\66\ Although the Rule 144(e) volume limitations will no longer apply to resales of restricted securities by nonaffiliates as a result of the amendments, an affiliate pledgor, donor, or trust settlor will be required to aggregate the amount of securities sold for the account of a pledgee, donee or trust, as applicable, even when there is no concerted action, in accordance with Rule 144(e)(3)(ii), (iii), and (iv) in order to determine the amount of securities that is permitted to be sold under Rule 144.

We believe that the complexity of resale restrictions may inhibit sales by, and imposes costs on, nonaffiliates. Because Rule 144 is relied upon by many individuals to resell their restricted securities, we believe that it is particularly helpful to streamline and reduce the complexity of the rule as much as possible while retaining its integrity. We continue to believe that retaining the current public information requirement with regard to resales of restricted securities of reporting issuers for up to one year after the acquisition of the securities is important to help provide the market with adequate information regarding the issuer of the securities. In addition, we generally believe that most abuses in sales of unregistered securities involve affiliates of issuers \67\ and securities of shell companies. As discussed below, we are codifying the staff's current interpretive position that Rule 144 cannot be relied upon for the resale of the securities of reporting and nonreporting shell companies.\68\ \67\ Pink Sheets also noted in its letter that most of the abuses in transactions involving unregistered securities involve sales and purchases by affiliates of the issuers.

\68\ See Section II.E.6 of this release.

The final conditions applicable to the resale under Rule 144 of restricted securities held by affiliates and nonaffiliates of the issuer can be summarized as follows:
[[Page 71551]]
Nonaffiliate (and has not been an Affiliate or person selling on behalf affiliate during the prior three of an affiliate months) Restricted Securities of During sixmonth holding periodno During sixmonth holding periodno Reporting Issuers. resales under Rule 144 permitted resales under Rule 144 permitted. After sixmonth holding periodmay After sixmonth holding period but resell in accordance with all Rule before one yearunlimited public 144 requirements including: resales under Rule 144 except that

In 1990, we eliminated a Rule 144 provision that tolled, or suspended, the holding period of a security holder maintaining a short position in, or any put or other option to dispose of, securities equivalent to the restricted securities owned by the security holder.\69\ We eliminated this provision in conjunction with an amendment to broaden a security holder's ability to tack the holding periods of prior owners to the security holder's own holding period.\70\
\69\ See Release No. 336862 (Apr. 23, 1990) [55 FR 17933]. \70\ ``Tacking'' the holding period is the ability of the security holder to include, under certain circumstances, the period that securities were held by a previous owner as part of his or her own holding period for the purposes of meeting the holding period requirement in Rule 144(d). Further discussion about tacking appears in Section II.E.2 of this release.

We previously have expressed concern regarding the effect of hedging activities designed to shift the economic risk of investment away from the security holder with respect to restricted
securities.\71\ In the 1997 Proposing Release, we solicited comment on several alternatives designed to address these concerns.\72\ Seven commenters recommended that we adopt measures to eliminate or restrict hedging activities during the holding period.\73\ Six commenters recommended maintaining the status quo.\74\ Six other commenters suggested that we adopt a safe harbor for certain hedging activities that would be deemed permissible under Rule 144.\75\
\71\ For a discussion on hedging arrangements in prior releases, see Section IV.B of the 1997 Proposing Release and Section II.A of Release No. 337187 (June 27, 1995) [60 FR 35645].
\72\ See the 1997 Proposing Release. In that release, we proposed five different alternatives: (1) make the Rule 144 safe harbor unavailable to persons who hedge during the restricted period; (2) independently of Rule 144, promulgate a rule that would define a sale for purposes of Section 5 to include specified hedging transactions; (3) adopt a shorter holding period during which hedging could not occur without losing the safe harbor; (4) reintroduce a tolling provision in Rule 144 similar to the provision that was included prior to 1990; or (5) maintain the status quo with no specific prohibition against hedging.
\73\ See comment letters on the 1997 Proposing Release from ABA; AIMR; Argent; ASCS; Constantine Katsoris; Corporate Counsel; and Schwartz Investments.
\74\ See comment letters on the 1997 Proposing Release from Bear, Stearns & Co., Inc.; BG&E; Intel Corporation (``Intel''); PaineWebber Incorporated; Wilkie Farr; and XXI Securities.
\75\ See comment letters on the 1997 Proposing Release from Four Brokers; NY Bar; SIA; Merrill Lynch; Citibank; and Lehman Brothers.

In the 2007 Proposing Release, we acknowledged a concern about the effect of hedging activities in connection with the adoption of a six month holding period for securities of reporting issuers. We noted that, when we eliminated the tolling provision in 1990, the Rule 144 holding periods were longer.\76\ We also expressed the view that the proposal to shorten the holding period to six months could make the entry into such hedging arrangements significantly easier and less costly because these arrangements would cover a much shorter period.\77\ We therefore proposed to reintroduce a Rule 144 tolling provision that would have suspended the holding period for restricted securities of Exchange Act reporting issuers while a security holder engaged in certain hedging transactions.\78\ However, we proposed that any suspension due to hedging would not have caused, under any circumstances, the holding period to extend beyond one year. \76\ At that time, Rule 144 provided for a twoyear holding period before a security holder could sell limited amounts of restricted securities, and a threeyear period before a non
affiliate security holder could sell an unlimited amount of the securities.
\77\ See the 2007 Proposing Release at Section II.B.2.b. \78\ We proposed to exclude from the holding period any period in which the security holder had a short position or had entered into a ``put equivalent position,'' as defined by Exchange Act Rule 16a1(h) [17 CFR 240.16a1(h)], with respect to the same class of securities (or, in the case of nonconvertible debt, with respect to any nonconvertible debt securities of the same issuer).

Because the proposed tolling provision also would have worked in conjunction with the Rule 144 provisions that permit tacking of holding periods, a selling security holder would have been required to determine whether a previous owner of the securities had engaged in hedging activities with respect to the securities, if the selling security holder wished to tack the previous owner's holding period to the holding period of the selling security holder. The proposed provision would have tolled the holding period during any period in which the previous owner held a short position or put equivalent position with respect to the securities, however, there would have been no tolling of the previous owner's holding period if the security holder for whose account the securities were to be sold reasonably believed that no such short or put equivalent position was held by the previous owner.

In connection with the proposed tolling provision, we also proposed other related changes to Rule 144. First, we proposed to require that information be provided in Form 144 regarding any short or put equivalent position held with respect to the securities prior to the resale of the securities. The second proposal related to the manner of sale requirements in paragraphs (f) and (g) of Rule 144.\79\ \79\ We proposed to amend Note (ii) to Rule 144(g)(3) [17 CFR 230.144(g)(3)] to supplement the reasonable inquiry requirement by requiring a broker to inquire into the existence and character of any short position or put equivalent position with regard to the securities held by the person for whose account the securities are to be sold, if the securities have been held for less than one year, whether such person has made inquiries into the existence and character of any short position or put equivalent position held by the previous owner of the securities, and the results of such person's inquiries.

[[Page 71552]]

Several commenters objected to the proposed reintroduction of the tolling provision and suggested modifications to the proposed provision, if the Commission chose to adopt it.\80\ Commenters objecting to the proposed tolling provision provided the following reasons, among others, why the Commission should not adopt the proposed tolling provision:
\80\ See, e.g., comment letters on the 2007 Proposing Release from ABA; Cleary Gottlieb; Feldman; Financial Associations; Richardson Patel; Sichenzia; and Weisman.

After considering the comments, we are not adopting the proposed tolling provision and related amendments. We note, in particular, the comments asserting that, in the current environment, the tolling provision would unduly complicate Rule 144 and could require security holders or brokers to incur significant costs to monitor hedging positions for purposes of determining whether they have met the holding period requirement. This would frustrate our primary objectives to streamline Rule 144 and reduce the costs of capital for issuers. We will revisit the issue if we observe abuse relating to the hedging activities of holders of restricted securities.\90\
\90\ The Commission's staff has previously stated that, with respect to short sales in reliance on the safe harbor of Rule 144 where the borrower closes out using the restricted securities, all the conditions of Rule 144 must be met at the time of the short sale. See Questions 80 through 82 of Release No. 336099 (Aug. 2, 1979) [44 FR 46752, 46765]. In the Commission's view, the term ``sale'' under the Securities Act includes contract of sale. See Release No. 338591 (July 19, 2005) [70 FR 44722, 44765] and Release No. 3456206 (August 6, 2007) [72 FR 45094]. The Commission has previously indicated that, in a short sale, the sale of securities occurs at the time the short position is established, rather than when shares are delivered to close out that short position, for purposes of Section 5 of the Securities Act. See, e.g., Questions 3 and 5 of Release No. 338107 (June 21, 2002) [67 FR 43234] and Release No. 3456206 n. 46 (Aug. 6, 2007) [72 FR 45094, 45096]. C. Amendments to the Manner of Sale Requirements Applicable to Resales by Affiliates

Before today's amendments, the manner of sale requirements in Rule 144(f) required securities to be sold in ``brokers' transactions'' \91\ or in transactions directly with a ``market maker,'' as that term is defined in Section 3(a)(38) of the Exchange Act.\92\ Additionally, the rule prohibits a selling security holder from: (1) Soliciting or arranging for the solicitation of orders to buy the securities in anticipation of, or in connection with, the Rule 144 transaction; or (2) making any payment in connection with the offer or sale of the securities to any person other than the broker who executes the order to sell the securities.
\91\ Rule 144(g) defines the term for purposes of Rule 144. \92\ 15 U.S.C. 78c(a)(38).

In the 1997 Proposing Release, we proposed to eliminate the manner of sale requirements for the sale of both equity and debt securities alike, reasoning that the manner of sale requirements are not necessary to satisfy the purposes of Rule 144 and limit the liquidity of the security.\93\ Some commenters opposed this proposal, asserting that brokers help ensure that selling security holders are complying with the applicable Rule 144 conditions to resale.\94\ As discussed below, although we proposed to eliminate the manner of sale requirements only for debt securities and not equity securities in the 2007 Proposing Release, we requested comment on whether it would be appropriate to eliminate the manner of sale requirements for the sale of equity securities as well.
\93\ See Section III.C of the 1997 Proposing Release.
\94\ See comment letters on the 1997 Proposing Release from Corporate Counsel; Matthew Crain; Katsoris; Merrill Lynch; Regional Bankers; SIA; and Smith Barney.

The comments were mixed on this point. One commenter strongly discouraged the elimination of the manner of sale requirements for equity securities,\95\ while another supported such a change.\96\ One commenter did not object to retaining the manner of sale requirements for resales of equity securities of affiliates, on the grounds that affiliates generally find the assistance of a broker useful in navigating compliance with Rule 144 and thus brokers serve a useful function
[[Page 71553]]
that is not unduly burdensome.\97\ Instead of completely eliminating the manner of sale requirements, some commenters requested that we consider expanding the methods to sell the securities permitted by the manner of sale requirements.\98\ For example, two commenters discussed amending the requirement to permit sales through alternative trading systems such as electronic venues where the broker's identity is anonymous prior to trade execution.\99\
\95\ See comment letter on the 2007 Proposing Release from Barron.
\96\ See comment letter on the 2007 Proposing Release from Sullivan.
\97\ See comment letter on the 2007 Proposing Release from ABA. \98\ See, e.g., comment letters on the 2007 Proposing Release from ABA; Cleary Gottlieb; and Sullivan.
\99\ See comment letters on the 2007 Proposing Release from ABA and Sullivan.

In response to comments, we are adopting amendments to the manner of sale requirements that apply to resales of equity securities of affiliates.\100\ We last made substantive amendments to the manner of sale requirements in 1978.\101\ Since then, the growth of technological and other developments directed at meeting the investment needs of the public and reducing the cost of capital for companies have led us to refine the rules governing the trading of securities.\102\ We believe that it is appropriate now to adopt two amendments to the manner of sale requirements so that the restrictions better reflect current trading practices and venues.
\100\ Only affiliates are required to comply with the manner of sale requirements under the amendments that we are adopting. \101\ See Release No. 335979 (Sept. 19, 1978) [43 FR 43709] (Sept. 27, 1978) (the Commission amended Rule 144(f) to permit sales under the rule to be made directly to a market maker in lieu of selling through a broker).
\102\ For example, in the second quarter of 2007, alternative trading systems handled approximately $1.3 trillion in volume of matched orders. (These amounts do not include orders that flow through a system, but are ultimately executed elsewhere). We obtained this data from information provided in Form ATSR Quarterly Reports.

First, we are adopting a change to Rule 144(f) to permit the resale of securities through riskless principal transactions in which trades are executed at the same price, exclusive of any explicitly disclosed markup or markdown, commission equivalent, or other fee, and the rules of a selfregulatory organization permit the transaction to be reported as riskless.\103\ We believe that these riskless principal transactions are equivalent to agency trades.\104\ As with agency trades, in order to qualify as a permissible manner of sale under the revised rule, the broker or dealer conducting the riskless principal transaction must meet all the requirements of a brokers' transaction, as defined by Rule 144(g), except the requirement that the broker does no more than execute the order or orders to sell the securities as agent for the person for whose account the securities are sold. The broker or dealer must neither solicit nor arrange for the solicitation of customers' orders to buy the securities in anticipation of or, in connection with, the transaction, must receive no more than the usual and customary markup or markdown, commission equivalent, or other fee, and must conduct a reasonable inquiry regarding the underwriter status of the person for whose account the securities are to be sold.
\103\ See new Rule 144(f)(1)(iii). A ``riskless principal transaction'' is defined as a principal transaction where, after having received from a customer an order to buy, a broker or dealer purchases the security as principal in the market to satisfy the order to buy or, after having received from a customer an order to sell, sells the security as principal to the market to satisfy the order to sell. See new Note to Rule 144(f)(1).
\104\ See also, e.g., SEC Interpretation: Commission Guidance on the Scope of Section 28(e) of the Exchange Act, Interpretive Release No. 3445194 (Dec. 27, 2001) [67 FR 6]. This treatment is also consistent with NASD Rules 4632(d)(3)(B), 4642(d)(3)(B), and 6420(d)(3)(B).

Second, we are amending Rule 144(g) which defines ``brokers' transactions' for purposes of the manner of sale requirements. Under the definition of brokers' transactions, a broker must neither solicit nor arrange for the solicitation of customers' orders to buy the securities in anticipation of, or in connection with, the transaction. However, certain activities specified in three subparagraphs of Rule 144(g)(2) are deemed not to be a solicitation.\105\ We are adding another subparagraph covering the posting of bid and ask quotations in alternative trading systems that will also be deemed not to be a solicitation. This new provision permits a broker to insert bid and ask quotations for the security in an alternative trading system, as defined in Rule 300 of Regulation ATS,\106\ provided that the broker has published bona fide bid and ask quotations for the security in the alternative trading system on each of the last 12 business days.\107\ \105\ See Release No. 345452 (Feb. 1, 1974; amended Feb. 21, 1974). These subparagraphs, as amended, are contained in paragraphs (g)(3)(i), (g)(3)(ii), and (g)(3)(iii) of Rule 144. Under the amendments, the previous paragraph (g)(2) has been redesignated as paragraph (g)(3), and the previous paragraph (g)(3) has been redesignated as paragraph (g)(4).
\106\ 17 CFR 242.300.
\107\ See new Rule 144(g)(3)(iv).
D. Changes to Rule 144 Conditions Related to Resales of Debt Securities by Affiliates
1. Comments Received on Proposed Amendments Relating to Debt Securities

In the 2007 Proposing Release, we proposed to eliminate the manner of sale requirements in Rule 144 with regard to sales of debt securities by affiliates.\108\ We also requested comment on whether there were any other conditions in Rule 144, such as the volume limitations, to which debt securities should not be subject. In the 2007 Proposing Release, we included preferred stock and assetbacked securities in the ``debt securities'' category for purposes of the proposed elimination of the manner of sale requirements.
\108\ As noted in Section II.B.3 above, under the amendments that we are adopting in this release, the manner of sale
requirements do not apply to the resale of securities of a non affiliate under Rule 144. The manner of sale requirements also do not apply to securities sold for the account of the estate of a deceased person or for the account of a beneficiary of such estate, provided that the estate or beneficiary is not an affiliate of the issuer.

Four commenters expressly supported the proposal to eliminate the manner of sale requirements for resales of debt securities,\109\ and we did not receive any comments objecting to the proposal. We also did not receive any comments objecting to the proposed inclusion of preferred stock and assetbacked securities in the definition of debt securities. We received a few comments that we should expand the definition of debt securities for the purposes of proposed changes to the manner of sale requirements.\110\
\109\ See comment letters on the 2007 Proposing Release from ABA; Cleary Gottlieb; Financial Associations; and Sullivan. \110\ See comment letter on the 2007 Proposing Release from ABA stating that the definition of debt should exclude any requirement that the preferred stock have a liquidation preference in excess of par.
2. No Manner of Sale Requirements Regarding Resales of Debt Securities

We are adopting the amendments to eliminate the manner of sale requirements for resales of debt securities held by affiliates, as proposed.\111\ We agree that, as financial intermediaries, brokers serve an important function as gatekeepers for promoting compliance with Rule 144,\112\ and we are concerned that eliminating the manner of sale requirements for
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equity securities would lead to abuse. However, we do not believe that the fixed income securities market raises the same concerns about abuse,\113\ and are persuaded that the manner of sale requirements may place an unnecessary burden on the resale of fixed income
securities.\114\ Combined with the changes that we are making to the Rule 144(e) volume limitations, these amendments will permit holders of debt securities to rely on the Rule 144 to resell their debt securities in a way and amount that was not possible previously.
\111\ See 17 CFR 230.144(f). As discussed above, we also are eliminating the manner of sale requirements for resales of equity and debt securities by nonaffiliates.
\112\ Brokers also must comply with the criteria set forth in Rule 144(g) in order to claim the ``brokers'' transactions' exemption under Section 4(4) of the Securities Act.
\113\ We distinguish between debt and equity in the same way we distinguished debt and equity markets when we last amended Regulation S. There, we did not believe that the procedures and restrictions applicable to offerings of equity securities under Regulation S should be applicable to offerings of nonconvertible debt securities, reasoning that the nature of the trading markets for debt securities appears not to have facilitated similar abusive practices as the markets for equity securities. See Offshore Offers and Sales, Release No. 337505 (Feb. 17, 1998) [63 FR 9631]. \114\ The March 2007 ABA Letter noted that debt securities generally are traded in dealer transactions in which the dealer seeks buyers for securities to fill sell orders instead of through the means prescribed in Rule 144(f).

As proposed, our definition of debt securities in Rule 144 includes nonparticipatory preferred stock (which has debtlike characteristics) \115\ and assetbacked securities (where the predominant purchasers are institutional investors including financial institutions, pension funds, insurance companies, mutual funds and money managers) \116\ in addition to other types of nonconvertible debt securities. This definition of debt securities is consistent with the treatment of such securities under Regulation S.\117\
\115\ The definition of debt securities appears in amended Rule 144(a). ``Nonparticipatory preferred stock'' is defined as non convertible capital stock, the holders of which are entitled to a preference in payment of dividends and in distribution of assets on liquidation, dissolution, or winding up of the issuer, but are not entitled to participate in residual earnings or assets of the issuer.
\116\ See Release No. 338518 (Dec. 22, 2004) [70 FR 1506]. \117\ See 17 CFR 230.901 through 230.905 and Release No. 33 7505.

3. Raising Volume Limitations for Debt Securities

We also are adopting amendments to raise the Rule 144(e) volume limitations for debt securities. Before the amendments that we are adopting, under Rule 144(e), the amount of securities sold in a three month period could not exceed the greater of: (1) One percent of the shares or other units of the class outstanding as shown by the most recent report or statement published by the issuer, or (2) the average weekly volume of trading in such securities, as calculated pursuant to provisions in the rule.\118\ In res

FOR FURTHER INFORMATION CONTACT Katherine Hsu or Raymond A. Be, Special Counsels in the Office of Rulemaking, Division of Corporation Finance, at (202) 5513430, 100 F Street, NE., Washington, DC 20549.