Rule 103 Justification Memo FY 2011(revised)

SUPPORTING STATEMENT
for the Paperwork Reduction Act
Current Information Collection Submission for
“Rule 103 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

Rule 103 governs Nasdaq passive market making by distribution participants.
c.

Information Collection Requirements

Rule 103 requires notification and disclosure of passive market making activity in Nasdaq
securities. 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.
Rule 103 permits "passive market making" during a distribution of Nasdaq securities. A
distribution participant that seeks to use this exception is required to disclose to 3rd parties its
intention to engage in passive market making. Passive market making under Rule 103 cannot
exceed the purchase limitation of 30% average daily trading volume (“ADTV”) limitation or 200
shares, which ever is greater. Rule 103 requires passive market makers to notify the self-regulatory
organization (“SRO”) formerly known as the NASD (now succeeded by FINRA) in advance if they
intend to conduct such activity and submit information prescribed by that organization. Rule 103
also requires the disclosure pursuant to Item 508 under Regulation S-K with respect to the intended
passive market making activities.

2.

Purpose and Use of the Information Collection

The written notice submitted to the SRO pursuant to Rule 103 provides the SRO with the
opportunity to calculate the ADTV of the security in distribution for which the potential passive
market maker has been responsible. Rule 103 requires that FINRA make this calculation. The
prospectus disclosure required by Rule 103 informs potential investors that passive market making
may be conducted by the underwriters in the offering. Investors use this information in evaluating
the offering price of the securities in distribution.
3.

Consideration Given to Information

Improvements in telecommunication and data processing technology reduce regulatory
burdens that might otherwise result from Rule 103. 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 Rule 103 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.

Reducing Burden on Small Entities

The information requirements of Rule 103 apply equally to all entities engaging in Nasdaq
passive market making, regardless of the size of the entity. To the extent that Rule 103 affects
small entities, the Commission believes that the burdens are minimal compared to the expanded
business opportunities through passive market making now available for all Nasdaq securities.
6.

Consequences of Not Conducting the Collection
Not applicable.

7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

The collection of information requested in the rules described herein is conducted in a
manner consistent with the guidelines in 5 C.F.R.1320.5(d)(2).

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 7594). 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

In every firm commitment secondary offering of a Nasdaq security, the underwriters may
seek to engage in passive market making. The managing underwriter would inform FINRA,
receive the data, and inform the syndicate members of their passive market making status. The
Commission estimates that the written notice required to be provided to FINRA requires one hour
of preparation. There were a total of 298 secondary offerings of Nasdaq securities in 2010.
Assuming 298 is the number of offerings in a typical year and assuming that passive market making
is available under Rule 103 for all of these offerings, the Commission estimates that the total thirdparty disclosure burden of Rule 103 is 298 hours.
There are also 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 $139,360. This compensation is the
equivalent of $67.00 per hour ($139,360 divided by 2,080 payroll hours per year). Based on that
estimate, the Commission estimates that the annual salary cost to comply with Rule 103 is
$19,966.00 ($67.00 per hour times 298 hours).

13.

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

14.

Cost to Federal Government

The government does not experience significant costs based on the recordkeeping required
pursuant to Rule 103. The information collected by the respondents is normally reviewed only
pursuant to an investigation, not as a matter of routine.

15.

Reason for Changes

The increase in burden hours overall reflects a change in the agency’s estimate due to an
increase in the amount of firm commitment secondary offerings of Nasdaq securities in 2010 from
the firm commitment secondary offerings Nasdaq securities calculation used in prior years. The
increase in total annualized cost burden described in paragraph 13 above is due to inflation
adjustments to the annual compensation for the typical employee charged with compliance with
Commission regulations. Note that there is no external cost related to this rule, and the prior OMB
Approval of costs amounting to $12,038 actually reflected internal labor costs. In this current
application, this is being corrected and therefore approval is not hereby being requested for any
costs (as all costs relate only to internal labor costs as described in paragraph 13 above).
Accordingly, there is actually no change in any external cost burdens that would require OMB
approval.
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 Certification for Paperwork Reduction Act Submissions
This collection complies with the requirements in 5 CFR 1320.9.

B.

Collecting Information Employing Statistical Methods
This collection does not involve statistical methods.