Rule 102 - Supporting Statement - 2011 Update

Supporting Statement
for the Paperwork Reduction Act
Submission of the Current Information Collection
“Rule 102 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 Rules

Rule 102 covers issuers and other persons on whose behalf a distribution is being made and
their affiliated purchasers ("issuer participants"). Rule 102 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 102, unlike Rule 101 of Regulation M, does not
contain a general exception for actively traded securities, although a limited exception is included
for certain actively-traded reference securities.
c.

Information Collection Requirements

Rule 102 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 102
(a).

Exclusion of Actively-Traded Securities

Rule 102 excepts reference securities with an average daily trading volume (ADTV) valued
at $1 million or more that are issued by an issuer whose common equity securities have a public
float value of at least $150 million. Rule 102 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 102 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 102 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.
2.

Purpose and Use of the Information Collection

A distribution participant (i.e., the syndicate manager) performs ADTV calculations to
determine whether a reference security is excepted from Rule 102, 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 102. 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.
3.

Consideration Given to Information Technology

Improvements in telecommunication and data processing technology reduce regulatory
burdens that might otherwise result from Rule 102. 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 102 apply equally to all entities engaging in an
offering, regardless of the entity’s size. The Commission believes that the requirements of Rule 102
are not unduly burdensome on small entities.
6.

Consequences of Not Conducting Collection

The information is collected as each transaction warrants and therefore there is no way to
require less frequent collection without undermining the purposes of the rule.
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 March 22, 2011 (76 FR 16018). 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 and issuer public
float value to determine the restricted period, if any, that must be observed under Rules 102. In
2010, there were 745 underwritten 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 2010, approximately 745 hours in the aggregate are required for these calculations under
Rule 102. 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 102. 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.

Total Respondent Burden.

The Commission estimates that a total of 895 respondents would collect information
pursuant to Rule 102 (745 respondents plus 50 self-underwritten offering respondents plus 100
affiliate exemption respondents). The Commission estimates that the total reporting burden under
Rule 102 is 1,795 hours (745 hours plus 50 hours for self-underwritten offerings plus 1,000 hours to
audit policies concerning affiliate information barriers). 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 102 is $102,261.15 ($56.97 per hour times
1,795 hours).
13.

Costs to Respondents

It is not anticipated that respondents will have to incur any capital and start up cost to
comply with the rule nor is it anticipated that the respondents will have to incur any additional
operational or maintenance cost (other than provided for in item no. 12) to comply with the rule.

14.

Costs to Federal Government

The government does not experience significant costs based on the recordkeeping required
pursuant to Rule 102. The information collected by the respondents is normally reviewed only
pursuant to an investigation, not as a matter of routine. There are only internal labor costs
associated with Rule 102 and no additional costs to the government.
15.

Changes in Burden

The decrease in burden hours overall is due to a decrease in the number of firm commitment
offerings in 2010 from the underwritten offering calculation used in prior years. The decrease in
total annualized cost burden is also due to a decrease in the number of firm commitment offerings in
2010 from the underwritten offering calculation used in prior years. There are no other changes in
the burden.

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.

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