DGL REVISED 3_Rule 103 Supporting Statement - 2020 Renewal JRC v7

DGL REVISED 3_Rule 103 Supporting Statement - 2020 Renewal JRC v7.pdf

Rule 103, 17 CFR 242.103 (Nasdaq Passive Market Making)

OMB: 3235-0466

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SUPPORTI NG STATEMENT
for the Paperwork Reduction Act
I nformation Collection Submission for
Rule 103 of Regulation M
(OMB Control No. 3235-0466)
A.

Justification

1. Necessity of I nformation 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

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

I nformation 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 third 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 selfregulatory 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 I nformation 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 I nformation Technology

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.

Effect 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.

I nconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

There are no special circumstances. This collection is consistent with the guidelines in 5
C.F.R.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

Pursuant to Rule 103 distribution participants are required to disclose collected
information to third parties and to provide notification to the self-regulatory organization,
FINRA; however, the information is not directly collected by, or submitted to the SEC, and
therefore does not constitute a Privacy Act system of records.
12.

Burden of I nformation 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 307 secondary offerings of Nasdaq securities in 2019.
Assuming 307 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 third-party disclosure burden of Rule 103 is 307 hours per year.
Burden Type

Notice for Passive Market
Making in Nasdaq Securities

Number of
Offerings
307

Number of
Notices to
FINRA Per
Offering
1

Time Per
Notice (Hours)

Aggregate
Burden
(Hours)

1

307

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 aggregate internal cost of compliance for all of the respondents to comply with
Rule 103 is $21,490.00 per year ($70.00 per hour times 307 hours).

13.

Costs to Respondents

There are no external capital, start-up, operation, or maintenance cost burdens associated
with this rule.
14.

Costs 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.

Changes in Burden

The decrease in annual burden hours from 309 to 307 is due to the decrease in the
number of firm commitment secondary offerings of Nasdaq securities from 309 to 307.
16.

I nformation 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.

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


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