DGL Revised 2020 Rule 104 Supporting Statement PMP 2019 Draft w comments from JG and DERA

DGL Revised 2020 Rule 104 Supporting Statement PMP 2019 Draft w comments from JG and DERA.pdf

Rule 104, 17 CFR 242.104 (Stabilizing and other activities in connection with an offering)

OMB: 3235-0465

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SUPPORTING STATEMENT
for the Paperwork Reduction Act
Current Information Collection Submission for
“Rule 104 of Regulation M”
(OMB Control No. 3235-0465)
A.

Justification

1.

Necessity of Information Collection
a.

Background

Congress granted broad rulemaking authority to the Commission in Sections 9(a), 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 104

Rule 104 governs stabilizing and certain aftermarket syndicate activities in connection with
a securities offering, and makes it unlawful for any person to stabilize, to effect any
syndicate-covering transaction, or to impose a penalty bid, in contravention of the rule’s provisions.
The rule provides a framework for underwriters and syndicate members to conduct stabilizing
transactions for the purpose of preventing or retarding a decline in the market price of a security to
facilitate an offering.
c.

Information Collection Requirements

Rule 104 requires disclosure and recordkeeping 1 of persons engaged in stabilization and
certain aftermarket activities. Regulation M as a whole 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.

The recordkeeping requirements under Rule 104 are through the application of Exchange Act Rule
17a-2, for which there is a separate Paperwork Reduction Act filing.

1

Rule 104 requires any person who enters a bid that such person knows is for the purpose of
stabilizing the price of any security to notify the market on which the bid is placed, and to disclose
the purpose of such bid to the person to whom the bid is entered (e.g., the specialist or executing
broker-dealer). Rule 104 also requires any person effecting a syndicate covering transaction, or
placing or transmitting a penalty bid, to disclose that fact to the self-regulatory organization (SRO)
with direct oversight authority over the principal market in the United States for the security for
which the syndicate covering transaction is effected, or the penalty bid is imposed. In addition,
when a person subject to Rule 104 conducts transactions in securities and the price of those
securities may be or has been stabilized, that person is required to send a purchaser, at or before
completion of the transaction, a document containing a statement required by Item 508(l) of
Regulation S-K. Lastly, any person subject to Rule 104 by virtue of effecting syndicate covering,
stabilizing, or penalty bid transactions is also subject to the recordkeeping requirements of
Exchange Act Rule 17a-2. Rule 17a-2 is covered in a separate Paperwork Reduction Act filing.
2.

Purpose and Use of the Information Collection

The records required pursuant to Rule 1042 may be used by the Commission in
examinations or investigations of underwriting activities and to review aftermarket activity. The
disclosure required in Rule 104 is also used by investors to evaluate a security for investment
purposes in light of possible stabilizing and related activities.
3.

Consideration Given to Information Technology

Improvements in telecommunication and data processing technology reduce regulatory
burdens that might otherwise result from Rule 104. 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 104 apply equally to all entities, regardless of the
entity's size. Although Rule 104 requires additional records 3 concerning stabilizing bids, the
2

See supra note 1.

3

See supra note 1.

Commission believes this imposes little, if any, additional burden because underwriters already are
required to keep detailed syndicate account records. Further, the Commission believes that
broker-dealers that act as distribution participants (and are thus subject to the rule) are unlikely to
qualify as small entities. The additional disclosure in the offering materials and notification to
SROs as required in the rule are generally the duty of the lead underwriter in an offering, which,
due to the amount of capital necessary to act in that role, is unlikely to qualify as a small entity.
6.

Consequences of Not Conducting the Collection
Not applicable.

7.

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

There are no special circumstances. This collection is consistent with the guidelines in 5
CFR 1320.5(d)(2).
8.

Consultations Outside the Agency

The required Federal Register notice with a 60-day comment period soliciting comments
on this collection of information was published. No public comments were received.
9.

Payment or Gift
Not applicable.

10.

Confidentiality
No assurance of confidentiality is provided.

11.

Sensitive Questions
Rule 104 does not collect, maintain, or disseminate any personally identifiable information.

12.

Burden of Information Collection

The Commission believes that stabilizing bids rarely occur, therefore there is no basis upon
which to calculate the third party disclosure burden of this requirement. In 2019, there were 805
firm commitment (and thus subject to Rule 104) offerings. The Commission estimates that
disclosing penalty bids to third parties would require six minutes per offering. In addition, the
Commission estimates that disclosure of syndicate covering transactions to third parties would also
require six minutes per offering. Using 805 respondents per year, as discussed above, the third
party disclosure would require an estimated 161 hours (12 minutes times 805 respondents divided
by 60 minutes per hour) over the course of a year.

Type of Burden
Third Party Disclosure

Number of
Respondents
805

Annual Time Burden Per
Respondent (Hours)
0.2

Aggregate Annual Time
Burden (Hours)
161

There are internal compliance costs associated with this rule. The Commission estimates
that a typical employee of a broker-dealer charged to ensure compliance with Commission
regulations receives compensation of $70.00 per hour. The $70.00 per hour figure for a Compliance
Clerk is from SIFMA’s Office Salaries in the Securities Industry 2013, modified by Commission
staff to account for an 1800-hour work-year and multiplied by 2.93 to account for bonuses, firm
size, employee benefits and overhead. Based on that estimate, the Commission estimates that the
total internal cost of compliance for all respondents to comply with Rule 104 is $11,270.00 ($70.00
per hour times 161 hours). The internal compliance cost per respondent is approximately $14.00
(i.e., $11,270.00 / 805 respondents).
13.

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

14.

Costs to Federal Government

The government does not experience significant costs based on the disclosure and
recordkeeping requirements of Rule 104. 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 decrease in total burden hours from 170 to 161 hours is due to a decrease in the number
of firm commitment offerings from 848 previously to 805 in 2019.
16.

Information Collection Planned for Statistical Purposes
Not applicable. The information collection is not used for statistical purposes.

17.

Approval to Omit OMB Expiration Date
The Commission is not seeking approval to omit the expiration date.

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.


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