DGL REVISED Rule 101 Supporting Statement 2020 Renewal JRC v7

SUPPORTING STATEMENT
for the Paperwork Reduction Act
Information Collection Submission for
Rule 101 of Regulation M
(OMB Control No. 3235-0464)
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 101

Rule 101 of Regulation M governs underwriters, prospective underwriters, participating
broker-dealers, and their affiliated purchasers (distribution participants). Rule 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 1320.5(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

The information collected pursuant to Rule 101 is obtained and used by syndicate managers
to determine whether a security is excepted from the rule or to determine the applicable restricted
period; 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 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 2019, there were 805 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 2019,
approximately 805 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 634 broker-dealers annually act as
distribution participants in distributions covered by Regulation M. The FOCUS reports filed with
the Commission as of 9/31/2019 indicate that 634 broker-dealers were involved in activities that
could qualify them 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 25,360 hours (40 hours times 634 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 1,589 respondents
collect information pursuant to Rule 101 (805 firm commitment respondents plus 50 selfunderwritten offering respondents plus 100 affiliate exemption respondents plus 634 de minimus
exemption respondents). The Commission estimates that the total annual burden under Rule 101 is
27,215 hours (805 firm commitment hours plus 50 hours for self-underwritten offerings plus 1,000
hours to audit policies concerning affiliate information barriers plus 25,360 hours to draft policies
concerning de minimus exemptions). All hours in this collection are the recordkeeping type of
collection.
Burden Type
Restricted Period
ADTV Calculation
Self-Underwritten
Offering ADTV
Calculation
Audit of WSPs for
Info Barriers with
Affiliates
Firm Commitment
Underwritten
Offerings de
minimis policy
drafting
Total Aggregate
Burden Hours
Total Aggregate
Responses
Total Burden Hours
Per Response
(27,215 / 1,589)

Respondents Approximate Burden Hours Total Burden Hours
Per Response
805
1
805
50

1

50

100

10

1,000

634

40

25,360

27,215
1,589
17.127124

In addition, there are internal labor compliance 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 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 annual internal compliance cost to comply with Rule 101 is $1,905,050.00
($70.00 per hour times 27,215 hours).
13.

Costs to Respondents

There are no external capital, start-up, maintenance or operational 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 net decrease in annual burden hours from 30,218 to 27,215 is due to a decrease in the
number of respondents drafting the written policy required for the de minimis exception to Rule 101
from 712 to 634 combined with an increase in the number of firm commitment respondents from
688 to 805.
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 the 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.