Blockage Factor Task Force

Blockage Factor Task Force File No. 2325 Discussion of Issues AcSEC’s April 30, 2002 Meeting TABLE OF CONTENTS Page Number Introduction ......................................................................................................1 Task Force Composition ..................................................................................1 Description of Task Forces’ Process ................................................................1 - 3 Description of Issues ........................................................................................4 - 16 Applicability...........................................................................................4 - 6 Methodology, Circumstance and Factors ..............................................7 - 9 Scope ...................................................................................................10 - 12 Defining Terms .....................................................................................13 - 16 Attachment A – Paper on Restrictions Attachment B – Task Force Composition Attachment C – Prospectus Blockage Factor Task Force File No. 2325 Discussion of Issues AcSEC’s April 30, 2002 Meeting Introduction As indicated in paragraphs 1 - 5 of the Prospectus, the purpose of the task force is to develop an SOP to address whether certain entities should be required to use a blockage factor to estimate the fair value of an unrestricted security that has a quoted market price in an active market. Additionally, based on the result of addressing the above issues the SOP will attempt to clarify or define the terms unrestricted security, active market, and quoted market price (For a copy of the Prospectus see Attachment C). Although the New York Stock Exchange defines a block as a position greater than 10,000 shares, in practice a block was always larger in size and was determined based on the size of the position compared to security’s average daily trading volume rather than based on the size of the position itself. Generally, a block refers to a position greater than 1,000,000 shares. Composition of the Task Force The task force is composed of thirteen (13) members as follows:    5 Public Accounting members 7 Industry members (3 Security Dealers, 2 Mutual Funds Sponsors, 2 Venture Capitals Sponsors) 1 Academic For a detail listing, see Attachment B. Description of Task Force Process The task force held eight meetings with various market participants to better understand the measurement techniques and methodologies used to determine block discounts. Those markets participants include security dealers, mutual funds, and investment 1 companies that invest in private equities. The task force also reviewed relevant academic research. Overall, the meetings revealed that although all market participants hold large positions their roles and investment strategies differs as follows: Security dealers use block traders to buy or sell a large quantity of shares in the public market. These buys and sells are usually not for proprietary purposes, but rather for customers. Thus, the block traders provide liquidity to those customers. The goals of a block trader are to earn a profit while providing liquidity to their customers while also avoiding risk. When approached by a customer looking to sell a large positions (or block), the block trader will make an offer to purchase those shares at a price that will reflect the value that they believe they can sell the shares at in the open market plus a profit. Included in the profit is a commission that the security dealer receives for selling shares. Most security dealers look to sell those positions very quickly, usually within a few days of acquisition. Most block traders avoid transactions so large that they require regulatory filings. Venture Capitalists hold investments for long-term appreciation and included in this group are private equity investors that may invest in later stage companies that are established and are no longer considered “ventures”. The VC will usually invest with a small group of other investors in a private entity. VCs look for capital appreciation and often the exit strategy for the VC is via the public market, thus a VC is frequently already a shareholder when a company does an initial public offering. Due to the small number of investors, VCs may hold a significantly large percentage of a company, large enough to require regulatory filings. Once VCs are free from restrictions and look to sell their shares, they do not necessarily use a block trader for several reasons, 1) regulatory requirements may make block traders unwilling to bid on the block of shares or may discount the price significantly and 2) the VC is not adverse to the risk of the investment and may not need the liquidity that the block trader provides. In those situations, some VCs may slowly sell shares in the public market when the share price achieves their desired level. Other VCs may never sell their securities; instead the shares are distributed to the partners of the fund. If liquidity or risk becomes an issue to a VC, then they may opt to use a block trader. Mutual Funds observed that their normal practice is to hold securities for longer periods than block trading desks of security dealers. They also observed that they are generally 2 able to dispose of large security positions at prices that approximate the quoted market prices. Mutual funds generally hold investments for long-term appreciation, and often accumulate and dispose of positions over long periods as shareholder flows, market conditions and investment decisions dictate. Mutual funds regularly have brokerage relationships with numerous firms and rarely use block-trading desks to dispose of large positions in single transactions. Mutual funds differ from VCs in at least two significant ways. First, mutual funds are more highly regulated and face liquidity restrictions imposed by the SEC. As a result, generally their portfolios are liquid; more widely diversified and hold fewer restricted securities. In addition, because mutual funds must stand ready to accept redemption requests on a daily basis, they often hold cash positions that can be used for such purposes. 3 ISSUES 1. Applicability Issue: Is the use of blockage factors appropriate? Description of the Issue: Based on the interviews held with market participants the task force believes that block discounts exist related to large holdings of equity securities. Block discounts occur mostly due to the relative lack of liquidity compared to smaller sized investments.  In the case of security dealers, this is evidenced by the fact that the holders (sellers) of large positions frequently negotiate and transact with a willing buyer (block trader) at less than the quoted market price. The large block is considered illiquid because the holders believe that the large position represents a position that could not be currently liquidated at the quoted market price, rather the position could be liquidated only over a period ranging from more than a day to several weeks. Although, block discounts are found to be common we have been told that they are usually small in size. We learned that the difference between the transaction price for a large position vs. the quoted market price could fluctuate between 2% - 15% below the current publicly quoted market price. However, most transactions are executed within a range of 3% to 5%. Transactions exceeding a 10% discount are rare. The task force also observed that the block trader might adjust its bid price upward from a “true” discount knowing that additional revenue will be generated due to higher transaction commissions. The block discount may not reflect precisely the fair value of a position but to some extent a business strategy. Although block-trading desks generally seek to avoid holding any block positions overnight the sale of a block may undertake a few days.  In the case of Venture Capitalists (VCs), the task force found sizeable block discounts to be common. Although, those discounts were often based on factors, such as, the size of the block and selling restrictions, we found that a distinction was not made relative to those factors when determining the discount. We found discounts range between 0 – 30% discount. We found that VCs often hold shares that have gone through recent IPOs, which are generally subject to 4 restrictions1. Because those restrictions preclude or otherwise limit the VC’s ability to affect immediate sales, VCs argue that a large position of recently issued shares could not be liquidated at the quoted market price. Additionally, even when those restrictions have lapsed, no longer precluding their sale, many VCs believe that holding a large position of unrestricted securities could not be liquidated at the quoted market price.  Mutual funds observed that, in practice, they are generally able to dispose of large security position at prices that approximate the quoted market price. The SEC precludes mutual funds from applying a block discount. Mutual funds are reluctant to apply a discount in any event, because of concerns about fairness among investors who are purchasing, redeeming and holding shares. The task force observed that investment companies’ practice is to hold securities for a longer period of time than block trading desks of security dealers, and this time frame appears to impact the approach to handling a block discount. Although block discounts are common, the task force observed that market participants seldom, if ever, experienced block premiums. The task force found that block traders were reluctant to transact with holders of a significantly large block of securities that may warrant public disclosure and regulatory filings. Additionally, the task force found that the academics’ conclusions are consistent with the information obtained during the interview process with market participants (described above). The academic research found that although block discounts are common they are generally relatively small in magnitude. Block discounts tend to be partially temporary (due to liquidity) and partially permanent (due to information). The research also found that although discounts are generally increasing in block size, they only do so up to the point at which a control premium become an important consideration, providing a natural floor on the size of the discount. Additionally, discounts differ based on factors related to the difficulty of executing the trade and the information conveyed by the trade. Although, there is a statistically reliable association between discount size and these factors, the explanatory power of the relation is generally low suggesting that it would be difficult to develop a model which would accurately predict discount size. 1 See Attachment A for detail on restrictions. 5 Task Force’s Sense: The task force believes that block discounts are real in the market place and that block trades occur with a block discount applied to them. The task force believes that if a liquid security has a quoted market price, the computation of its fair value should be the product of that price and quantity of shares (multiplication method), however, the task force also believes that under certain circumstances a security with a quoted market price may be sufficiently illiquid that computing its fair value using the multiplication method could overstate the value of the security. Therefore, the task force believes that an adjustment to the quoted market price (block discount) may be required to appropriately reflect a clearing price. See task force thoughts about block premium in Issue No. 3. 6 2. How to Measure Blockage Factors (Measurement Practice and Methodology) Under what circumstances and factors would the application of block discount be required? Description of the Issue: As previously indicated the task force held meetings with market participants to better understand measurement techniques and methodologies used to determine block discounts. Those meetings revealed the following pricing methodologies and practices:  The task force observed that a security dealers’ objective is to estimate a price (fair value) for a block that would allow the block to be absorbed by an active market within relatively short period of time (generally, within 24 hours, maximum of two days). In our meetings, we learned that neither pricing models nor set ranges of discounts are used to determine bid prices. We were told that the many variables involved to price block trades does not allow for pricing models or standard discounts. Therefore, block traders appear to use subjective methods, based on experience and judgment, that take into account numerous factors, including: – – – – – – – – Risk involved, size of the position and trading daily volume, volatility of the stock Information effect: market awareness of the trade and the message the market infers Types of securities (e.g., blue chip vs. technology, industry of the company) Types of markets/exchanges where the securities are traded Restrictions/lockups on the stock Client – past experience, intent Competition for the transactions Ability to hedge the position and whether the transaction can be pre-sold The methodology is complex and highly subjective. Because of the subjectivity involved it would appear that different block traders might estimate different prices for the same block trades. Therefore, our interview did not reveal a quantitative methodology that would be sufficiently operational and reliable to produce comparable results when applied by various preparers. 7  The task force observed that Venture Capitalists’ (VCs) objective is to hold securities for a relative long period. As indicated previously, although the discount reflects the effect of holding a large block, the leading factor in applying and determining the size of discounts for a security with a quoted market price is based on impediments to sales. The task force observed that depending on the type of impediments, VCs generally and consistently apply predetermined standard percentages when determining a block discount. Those percentages range between 0% -35%. discounts. Selling restrictions appeared to drive the largest Additionally, although those percentages seemed somewhat consistent among the VCs interviewed, the task force found the percentages were best supported by judgment and experience. The type of restrictions that give rise to the block discounts are as follows: – – – – Selling restrictions Legal restrictions Contractual restrictions Board of Directors Representation, - considered to have insider information See task forces thoughts about restrictions indicated in Attachment A.  Mutual Funds do not apply block discounts as indicated in Issue No.1. The Task Force Sense: As stated in Issue No.1, because the task force believes that under certain circumstances it may be necessary to adjust a quoted market price of a security to reflect a fair value. The task force considered various measurement alternatives as follows:  Some task force members believe that block discount is not measurable rather it is inherently subjective in nature. Therefore, a block discount should be Although those task force determined based on facts and circumstances. members acknowledge that this approach would rely on judgment, they believe that fair value is an estimate and therefore such judgment would be appropriate if applied in good faith. Therefore, they believe that, similar to other subjective valuations, a good faith estimate should be used. Those task force members 8 believe that the SOP should establish criteria required to be met or indicators or factors to consider or perhaps presumptions that would identify when a block discount should be required. Those indicators or factors would be similar to ones used by security dealers. Other members believe that although measuring block discounts is subjective, preparers may be able to predict discounts ranges based on history. Others believe block discounts are justified when a block has been acquired at a discount.  Some task force members, although they acknowledge that block discounts are real in the market place, believe that, because we cannot develop a methodology sufficiently operational and reliable that would produce comparable results, that the use of block discounts should be prohibited.  Some believe that although block discounts are real, they observed that the discounts are minimal that they do not merit an adjustment. Therefore the use of block discounts should be prohibited.  Some believe that the task force should develop different pricing alternatives depending on the investment strategy of the holders. For example, a blocktrading desk focused on immediate sale of inventory might have a different approach than entities for which investments are “available for sale”. 9 3. Scope Issues: Should the project address both block discounts and block premiums? Description of the Issue: As indicated in Issue No.1, the meetings held by the task force with market participants evidenced that transactions frequently reflected block discounts. However market participants did not appear to adjust prices for block premiums. The task force’s only evidence of transactions involving a block premium was documented in the academic research. The academic research indicates that block premiums, usually tends to be very situation-specific and do not occur until an unrelated investor takes an action – that action occurs when investors wish to increase their ownership interest by acquiring a block large enough to “convey influence “. Also, in considering whether to include block premiums within the scope of the project, the task force members discussed whether adjusting the quoted market price of a security to reflect a control premium constitutes a gain contingency as defined in FASB Statement No. 5, Accounting for Contingencies (FASB No. 5)1. Task Force’s Sense: The task force believes that because block premiums are seldom applied in practice, there is lack of any data involved in valuing block premiums. Therefore, premiums represent amounts that do not appear to be subject to reliable estimate. The task force also believes that the realization of a gain above the quoted market price of a security (adjusted for a control premium) is uncertain. Thus, a block premium potentially represents a gain contingency as defined by FASB No. 5. Furthermore, the task force believes that block premiums are not based solely on the inherent economics of the block position rather, they are based on the actions of an outsider that wishes to increase their holdings to a position that would either convey influence or control. Based on the reasons indicated above the task force believes block premiums should not be included within the scope of this project. 1 Paragraph 1 of FASB No. 5 defines a contingency as an existing condition involving uncertainty as to possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur. Paragraph 17, specifically addresses gain contingency, stating that contingencies that might result in gains usually are not reflected in the accounts because to do so might be to recognize revenue prior to its realization 10 Should the project address fixed income securities? Description of the Issue: Because of differences between equity and fixed income securities, the task force considered whether the project should address both equity and fixed income securities. The task force observed differences between the markets in which equity and fixed income securities trade. Equity securities trade primarily on an exchange, whereas fixed income securities trade primarily in a dealer market. It was also observed that, although the US treasury market is a deep and liquid market, a substantial percentage of fixed income securities, such a corporate bonds, have relatively thin markets. Because of those differences the task force struggled with the definition of a quoted market price for a fixed income security. In the instance of US treasury securities, which are actively traded and have readily available quotes, the issue of block discounts appeared to be moot, as discounts were not taken in practice. However, the values of many fixed income corporate securities are obtained from pricing services. Some members believe that quotes obtained from a pricing service do not constitute quoted market prices but rather are indicators of price. They observe that although, those quotes are based on actual transactions, the quotes may be several days’ old. Therefore, in those instances the quotes were used as a starting point to estimate a price. Then the task force questioned whether a downward adjustment to prices obtained from pricing services constitutes a block discount. See discussion of quoted market price in Issue No. 4. Other task force members believe that because pricing services use price matrices to estimate values, which are based on actual transactions, those estimated values are the equivalent of quotes and should be considered a quoted market price. Then the question is whether those securities, with stale quotes, are trading in an active market. This created a discussion about the definition of an active market. The task force observed that fixed income securities with similar characteristics, for example credit quality and maturity, tend to be viewed by the marketplace as quasisubstitutes for each other. Although this fungibility is not complete, it appears to reduce the difficulties associated with disposing a large block in a particular fixed income issue. By contrast, one issuer's equity securities are not viewed as substitutes for another. The 11 task force concluded that an "active market" is more difficult to define in the context of fixed income markets, because of the difficulty in determining whether to define the market in terms of trading in an individual security as opposed to a group of similar securities. Task Force’s Sense: The task force believes that fixed income securities should be excluded from the scope of the project because of one or more of the following: 1) the perceived absence of divergence in practice, 2) an estimated value obtained through a pricing service using price matrices would likely not be considered a quoted market price as it is not directly representative of the market price 3) because of the difficulty in defining an active market in terms of trading in an individual security as opposed to a group of similar securities 12 4. Defining active market, quoted market price, and unrestricted security. The task force believes that clarifying or defining the terms active market, quoted market price, and unrestricted security will help users apply the SOP with a greater degree of consistency. Active Market Description of the Issue: The task force considered paragraph 3, of FASB No. 115, Accounting for Certain Investments in Debt and Equity Securities, in clarifying or defining the term active market, however, the task force observed that FASB No. 115 does not define active market rather it indicates whether there is a readily determinable price. The task force also looked to both the AICPA Audit and Accounting Guides, Audits Investment Companies and Brokers and Dealers in Securities; although the term is extensively used, it is not explicitly define. The task force deliberations on active market revealed that the following concepts or factors might be considered in defining active market. An active market should be based on the size of an investor’s holding relative to:     The public float The aggregate amount of securities outstanding The volume of trading in the security How often it trades The task force further observed that although a particular security may trade in a liquid market (exchange) that trades actively, the security itself does not necessarily trade actively (on daily basis). The opposite is also true: a particular security may trade actively on a relatively illiquid market (exchange) in which few securities trade actively. Additionally, as indicated in Issue No. 3, the task force had difficulty defining what constitutes an active market in the context of fixed income markets, because fixed income securities with similar characteristics, for example credit quality and maturity, tend to be viewed by the marketplace as quasi-substitutes for each other. This fungibility appears to reduce substantially the difficulties associated with disposing a large block in a particular fixed income issue. 13 Task Force’s Sense: The task force concluded that whether a security is considered to be active or not, does not depend on whether the exchange the security trades in is active or not, but rather it should be based on the individual activity of the security. Therefore, the task force believes that the phrase that should be defined is an actively traded security. The task force has not concluded on a definition. The following questions remain unanswered: 1) should the SOP define the term or should the SOP only provide indicators and 2) how frequently should a security trade to be considered active. In attempting to answer those questions the task force was concerned with 1) the availability and reliability of information that might be required to perform a test to determine whether a security is active 2) the possibility that a narrow definition may create the opportunity that a security could move in an out of the scope of the project 3) whether the determination of active market would be operational for holders of large number of positions. 14 Quoted Market Price Description of the Issue: In attempting to define quoted market price the task force looked to the following the AICPA Audit and Accounting Guides’ definitions of a quote and market price. The AICPA Audit and Accounting Guide, Broker and Dealers in Securities, in the glossary defines a quote as “The price of a security. It may be the price of the last sale made on an exchange or the current bid and ask price. Market price is defined as “Usually means the last reported price at which a security has been sold”. The AICPA Audit and Accounting Guide, Audits of Investment Companies, in the glossary defines a market price as “Usually the last reported price at which a security has been sold or, if the security was not traded or if trading prices are not reported, a price arrived based on recent bid and asked prices”. Task Force’s Views: Although the task force has not concluded on the definition of quoted market price, the following represents the task force preliminary definition. Quoted market price- A price that is readily available to market participants using actual transaction prices at or closely in proximity to the price at the end of the valuation day which are sufficiently current to represent the price at which a current transaction would occur. An estimated value obtained through a pricing service using price matrices would not be considered a quoted market price because it is not directly representative of the market price. It was noted that the exclusion of certain pricing services from the definition does not imply that those services are not reliable or do not represent fair value. However, some task force members believe that the above definition is too narrow because it excludes price matrices. They observe that price matrices are based on actual transactions and therefore should be considered a quoted market price. 15 Some task force members believe that the task force should not redefine quoted market price because narrowing such definition by eliminating the word “usually” from the definition will create operational ramifications. Therefore, they believe that the task force should not modify the AICPA guides definitions but should instead focus on defining active market. Other task force members believe that perhaps the task force should focus on defining just quote or quoted price. Unrestricted Securities See Attachment A for a discussion on unrestricted securities. 16 Attachment A Blockage Factor Task Force File No. 2325 Unrestricted Securities AcSEC’s April 30, 2002 Meeting Background The task force looked to the following definitions of a restricted security and considered whether those definition should be applied in determining whether an investment is within the scope of the proposed SOP. The task force observes that footnote 2 of paragraph 31 of FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, contains a narrow definition of what constitutes a restricted stock. Additionally, the task force observes that AICPA Audit and Accounting Guide, Audits of Investment Companies, also contains a narrow definition of a restricted security2, which mirrors the SEC’s Accounting Series Release No. 113 (ASR 113)3, Statement Regarding “Restricted Securities”, definition. During the meetings held with market participants the task force learned, that some preparers, especially Venture Capitalists (VCs), frequently encountered FASB 115 defined-restrictions as well as other regulatory, legal, and contractual restrictions. Those restrictions often preclude their ability to freely liquidate all or a portion of their positions. 1 Restricted stock, for the purpose of this Statement, means equity securities for which sale is restricted by governmental or contractual requirement (other than in connection with being pledged as collateral) except if that requirement terminates within one year or if the holder has the power by contract or otherwise to cause the requirement to be met within one year. Any portion of the security that can be reasonably expected to qualify for sale within one year, such as may be the case under Rule 144 or similar rules of the SEC, is not considered restricted. 2 A portfolio security that may be sold privately, but that is required to be registered with the SEC or to be exempted from such registration before it may be sold in a public distribution. A private placement stock is frequently referred to as letter stock. 3 ASR 113 indicates certain securities, that do not involve any public offering, are exempt from registration requirements of Securities Act. Those securities exempted from the act are referred to restricted securities, because they cannot be resold to the public without prior registration. Those securities are also referred to as “investment letter securities”. 17 The task force observes that a narrow definition of a restriction would include more investments within the scope of the proposed SOP than would a broader definition that include other regulatory, legal, and contractual restrictions. A broader definition would exclude investments with any type of a restriction; therefore having less effect on current practice, in particular for VCs. The task force believes that the current definition of restricted securities as indicated in the accounting literature is incomplete. Therefore, the task force attempted to develop a broader definition. (See pages 20-21 for a detail description of the common types of restrictions encountered by VCs) In considering a broader definition, the task force was concerned with operational issues of restrictions such as lock-ups, volume restrictions and blackout periods. The task force observed that restrictions not only expire, but they may be reimposed without prior notice in the case of blackout periods and volume restrictions, therefore allowing the possibility for securities to shift in and out of the scope of the project once those restrictions have lapsed. The task force was also concerned, relative to volume restrictions, that securities within a block some may be restricted and some may not, therefore requiring the block to be bifurcated. Task Force’s Sense: Based on limited discussions the task force’s initial thoughts about the definition of an unrestricted security is that the definition should exclude all investment subject to various types of restrictions such as legal, contractual, and regulatory at the time of measurement including restrictions that do not operate continuously. Additionally, the task force believes that in situations where the restriction applies only to a portion of a block, although it may be impractical that position should be bifurcated between that which is restricted and that which is unrestricted. Additionally, the task force will include examples to help preparers applied the definition and determine whether they are within the scope or not of the proposed SOP. Based on the discussion the following represents the task forces preliminary definition of an unrestricted security. 18 An unrestricted security is one that is free from any legal, regulatory or contractual constraints that constitute an impediment to the sale of the security. 19 Overview of Common Selling Restrictions of Publicly Traded Securities Certain holders of securities that are publicly traded are subject to selling restrictions. These restrictions are generally imposed either by agreement with the issuer or its underwriters or by the United States securities laws. These restrictions may limit or prohibit an investor from freely selling its shares in the open market. Contractual restrictions: Common contractual selling restrictions are lock-up agreements and blackout periods. Lock-up agreements Lock-up agreements are contractual agreements between the issuer (or its underwriters) and the pre-IPO shareholders. The agreement prohibits shareholders from selling their interest for a period of time after the IPO, typically for six months. The purpose of the lock-up agreement is to guard against downward pressure on the stock price immediately following the IPO. Blackout periods Certain “insiders” of a public company are privy to insider information. Insiders may be limited to a handful of executive officers or may include many employees, board of director members and significant shareholders. Issuers often prohibit their insiders from selling their shares except during certain "window periods" that open some period of days after SEC filings under Forms 10K and 10Q. Securities Law restrictions: SEC Rule 144 governs sales of securities by an issuer’s “affiliates”, and by other persons who obtained the securities in private placement transactions. This is a complex rule with many restrictions and interpretive positions. This paper will highlight the more significant restrictions. An Affiliate (or "control person") is defined as a person or entity that directly or indirectly controls the management and/or activities of the issuing company. Affiliate relationships usually include:  Senior management  Board of director members  Certain large shareholders Control Securities are securities acquired by an Affiliate in any manner, including open market purchases. Restricted Securities are securities acquired by any party in non-public transactions from the issuer or from an Affiliate of the issuer. Securities acquired by Affiliates in private placement transactions can have both “Restricted” and “Control” status. Resales under Rule 144 Rule 144 permits sales of Control Securities and Restricted Securities, subject to certain conditions as described below. A holder of Control or Restricted Securities can sell under Rule 144 if the issuer has been subject to SEC reporting requirements for at least 20 90 days before the proposed sale, and has filed all required reports during the 12 months before the sale (or as long as the issuer has been required to report, if less than 12 months). The main conditions to selling under Rule 144 are as follows: Holding Period  Restricted Securities must be held for at least one year after they are fully paid. The holding period begins when the securities are acquired (and fully paid) from the issuer or an Affiliate. The securities need not be held by the same person for the entire period; if a non-affiliate transfers the securities in a private transaction to another non-affiliate, the transferee inherits the holding period of the transferor. Securities held longer than one year but less than two years can be sold subject to the volume restrictions described below. After two years, the securities can be sold without regard to the volume limitations, so long as the seller is not an Affiliate and has not been an Affiliate for the three months prior to the sale (the “Unlimited Resale Provision”). Control Securities are not subject to a holding period (unless the securities are also Restricted Securities), but they are always subject to the volume restrictions.  Volume Restrictions  Control Securities, and Restricted Securities that have been held for at least the one-year holding period, can be sold subject to volume restrictions. These securities can be sold in any three-month period in an amount equal to the greater of:   1% of the class of shares outstanding The average weekly reported trading volume for the four-week period prior to the date of the sell order. Other Restrictions Rule 144 also imposes restrictions on the manner in which Control Securities and Restricted Securities can be sold (broker’s transactions on an agency basis, or principal transactions if the broker is a market maker), and imposes SEC filing requirements to report sales (on Form 144). These restrictions do not apply to Restricted Securities held more than two years and sold under the Unlimited Resale Provision. Summary Holders of a significant number of an issuer’s shares are often subject to both contractual and regulatory restrictions. These restrictions may prohibit sales of securities for set periods of time (lock-ups or SEC holding periods) or may only prohibit sales for certain sometimes-unpredictable time periods (blackout periods). Lastly, when shareholders are not under a contractual or legal prohibition to sell, shareholders may be limited in the number of shares that they may be able to sell (SEC volume restrictions). 21 Attachment B Blockage Factor Task Force File No. 2325 List of Task Force Members AcSEC’s April 30, 2002 Meeting James Johnson, Chair Joan Amble Joseph Croasdale Peter Desmond Steve Haley Tom Jones Mark Lang Don MacNeal Esther Mills Mark Osterheld Michael Riccardi Ken Russell Arthur Tollefson Deloitte & Touche LLP G.E. Capital JP Morgan Ernst & Young LLP Morgan Stanley Goldman Sachs University of North Carolina Arthur Andersen LLP Merrill Lynch Fidelity Investments Tudor Investment Corporation KPMG LLP PricewaterhouseCoopers LLP 22