Rule 101 Supporting Statement FY 2011

SUPPORTING STATEMENT
for the Paperwork Reduction Act
Information Collection Submission for
“Rule 101 of Regulation M”
A.

Justification

1.

Necessity of Information Collection
a.

Background

Congress granted broad rulemaking authority to the Commission in Sections 9(a)(2), 10(b),
and 15(c) under the Securities Exchange Act of 1934 (Exchange Act) to combat manipulative
abuses in whatever form they may take. In exercising its authority, the Commission has focused on
the market activities of persons participating in a securities offering and determined that securities
offerings present special opportunities for manipulation that require specific regulatory attention.
On December 20, 1996, the Commission adopted Regulation M, consisting of new Rules 100
through 105, which govern the activities of underwriters, issuers, selling security holders, and others
in connection with a securities offering. Regulation M significantly eased regulatory burdens on
offering participants by eliminating the trading restrictions for underwriters of actively traded
securities; reducing the scope of coverage for other securities; reducing restrictions on issuer plans;
providing a more flexible framework for stabilizing transactions; and deregulating rights offerings.
b.

Overview of Rule 101

Rule 101 of Regulation M governs underwriters, prospective underwriters, participating
broker-dealers, and their affiliated purchasers (distribution participants). Rules 101 applies only
during a "restricted period," which commences one or five business days prior to the day of the
pricing of the offered security and continues until the distribution is over. The length of the
restricted period is based on the trading volume of the offered security. Rule 101 excludes from its
coverage more actively-traded securities.
c.

Information Collection Requirements for Rule 101

Rule 101 requires persons participating in a distribution to collect certain information to
determine whether the rule would apply, and if so, for what period of time. Regulation M
incorporated many previously-existing requirements of the trading practices rules, together with
their information collection requirements. However, by removing many categories of activities,
securities, and persons from anti-manipulation regulation, Regulation M reduced the burdens of
anti-manipulation regulation.
(i).

Exceptions from Rule 101
(a).

Exclusion of Actively-Traded Securities

Rule 101 excepts securities with an average daily trading volume (ADTV) valued at $1
million or more. Rule 101 requires the ADTV to be calculated for the two full calendar months
preceding the filing of the registration statement. To use this exception, a distribution participant
must examine publicly available market data to calculate the ADTV.
(b).

Other Securities

The ADTV of other securities remaining subject to the restrictions of Rule 101 determines
the length of the restricted period for a particular security. As with excepted securities, distribution
participants and issuer participants may obtain publicly available data to calculate ADTV of a
particular security.
(c).

"Affiliated Purchasers"

Rule 101 applies to any "affiliated purchaser" of a distribution participant, issuer, or selling
security holder. Regulation M, however, provides an exception to the definition of affiliated
purchaser where the distribution participant or issuer participant have certain information barriers in
place. This exception requires the participant to establish, maintain, and enforce written policies
and procedures to prevent the flow of information between itself and its affiliates. Such participants
must also obtain an annual, independent assessment of the operation of such policies and
procedures.
(d).

De Minimis Exception

Rule 101 provides an exception for de minimis violations during the restricted period. This
provision excepts purchases of less than two percent of the ADTV of the security in distribution.
However, this exception is only available where the person making such bid or purchase subject to
the exception has maintained and enforced written policies and procedures reasonably designed to
achieve compliance with the other provisions of Rule 101.
2.

Purpose and Use of the Information Collection

A distribution participant (i.e., the syndicate manager) performs ADTV calculations to
determine whether a security is excepted from Rule 101, or to determine the applicable restricted
period. This information is not used by the Commission.
A distribution participant may establish information barriers to segregate the activities of
itself and its affiliates. Construction of these barriers permits the affiliates of a distribution
participant, issuer or selling security holder to be excepted from Rule 101. The annual audit assures
such distribution participant that the policies are effective. The Commission only examines the
policy and audit in investigations of potential violations of the rule.
A distribution participant may establish a written policy for the purpose of avoiding
violations of Rule 101 and specifically to benefit from the provision of the rule that excepts de
minimis violations. The Commission generally does not review a distribution participant's policy.

3.

Consideration Given to Information Technology

Improvements in telecommunication and data processing technology reduce regulatory
burdens that might otherwise result from Rule 101. The Commission is not aware of any technical
or legal obstacles to reducing the burden through the use of improved information technology.
4.

Duplication

The information required by each of the rules described herein does not duplicate that
required by any other federal regulation. At the time Regulation M and related amendments were
proposed, the Commission solicited and received comments without receiving any reference to
federal regulations that may duplicate the requirements mandated by Regulation M. The
Commission continues to believe that there is no duplication of the information required by the rules
described herein.
5.

Effect on Small Entities

The information requirements of Rule 101 apply equally to all entities engaging in an
offering, regardless of the entity’s size. The Commission believes that the requirements of Rules
101 are not unduly burdensome on small entities.
6.

Consequences of Not Conducting Collection
Not applicable.

7.

Inconsistencies With Guidelines in 5 CFR 1320.8(d)

The collection of information requested in the rules described herein is conducted in a
manner consistent with the guidelines in 5 C.F.R.1320.8(d).
8.

Consultations Outside the Agency

The Federal Register notice with a 60-day comment period soliciting comments on this
collection of information was published on February 10, 2011 (76 FR 7595). No comments were
received.
9.

Payment or Gift
Not applicable.

10.

Confidentiality
No assurance of confidentiality is provided.

11.

Sensitive Questions
No questions of a sensitive nature are asked.

12.

Burden of Information Collection
a.

Restricted Periods

The syndicate manager of each secondary offering calculates the ADTV to determine the
restricted period, if any, that must be observed under Rule 101. In 2009, there were 749 firm
commitment offerings. For each of these, the Commission estimates it takes approximately one
hour to calculate the ADTV and determine the applicable restricted period. Thus, in 2009,
approximately 749 hours in the aggregate are required for these calculations under Rule 101. In
addition, the Commission estimates that in approximately 50 self-underwritten offerings per year
the issuer would calculate the ADTV. Approximately 50 hours are required annually for these
calculations by issuers. In many circumstances, however, the collection of information is
unnecessary because the ADTV is self-evident (i.e., the ADTV is extremely high or extremely low).
This collection is a recordkeeping type of collection.
b.

Information Barriers

The Commission estimates that approximately 100 broker-dealers acting as distribution
participants in offerings covered by Regulation M seek to exempt the activities of an affiliate from
the regulations of Rule 101. The Commission estimates that the annual audit of the written policies
and procedures concerning information barriers takes approximately 10 hours, therefore
approximately 1,000 hours (10 hours times 100 broker-dealers) are required by this exemption.
This collection is a recordkeeping type of collection.
c.

De Minimis Exception

The Commission estimates that approximately 739 broker-dealers annually act as
distribution participants in distributions covered by Regulation M. The Commission estimates that
the written policy required for the de minimis exception from Rule 101 takes 40 hours to draft.
Approximately 29,560 hours (40 hours times 739 broker-dealers) is required by this exemption.
This collection is a recordkeeping type of collection.
d.

Total Respondent Burden

Based on the above calculations, the Commission estimates that a total of 1,588 respondents
collect information pursuant to Rule 101 (749 firm commitment respondents plus 100 affiliate
exemption respondents plus 739 de minimus exemption respondents). The Commission estimates
that the total annual burden under Rule 101 is 31,309 hours (749 firm commitment hours plus 1,000
hours to audit policies concerning affiliate information barriers plus 29,560 hours to draft policies
concerning de minimus exemptions). All hours in this collection are the recordkeeping type of
collection.

In addition, there are internal labor cost burdens associated with this rule. The Commission
estimates that a typical employee of a broker-dealer charged to ensure compliance with Commission
regulations receives annual compensation of $118,500. This compensation is the equivalent of
$56.97 per hour ($118,500 divided by 2,080 payroll hours per year). Thus, the Commission
estimates that the annual salary cost to comply with Rule 101 is $1,783,673.73 ($56.97 per hour
times 31,309 hours).
13.

Costs to Respondents
There are no external labor cost burdens, or other cost burdens, associated with this rule.

14.

Costs to the Federal Government

The government does not experience significant costs based on the recordkeeping required
pursuant to Rule 101. The information collected by the respondents is normally reviewed only
pursuant to an investigation, not as a matter of routine.
15.

Changes in Burden

The agency would like to inform OMB of a mistake in the information provided in
ROCIS in 2008. The 2008 ICR 200803-3235-031 supporting statement noted that the total
annual reporting burden was 31,355 hours, however the information was incorrectly entered as
31,046 hours in ROCIS. When the 2011 supporting statement was drafted, 31,355 was used as
the previous annual time burden for the baseline, and therefore there is a decrease of 46 annual
hours due to the decrease in the total number of respondents. The cost burden was incorrectly
reported as external costs instead of internal labor costs.
16.

Information Collection Planned for Statistical Purposes
Not applicable. There are no plans to require the publication of these records in the future.

17.

Display of OMB Approval Date

The Commission is not seeking approval to not display the expiration date for OMB
approval.
18.

Exceptions to the Certification for Paperwork Reduction Act Submissions
This collection complies with the requirements in 5 CFR 1320.9.

B.

Collecting Information Employing Statistical Methods
Not applicable.