DGL REVISED 2020 Rule 102 Supporting Statement PMP 2019 Draft w JG comments and DERA updates

Supporting Statement
for the Paperwork Reduction Act
Information Collection Submission for
Rule 102 of Regulation M
(OMB Control No. 3235-0467)
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 102

Rules 101 and 102 of Regulation M regulate bids for and purchases of offered securities and
certain other covered securities. Rule 102 covers a subset of the “distribution participants”
(including underwriters and selling group members) and affiliated purchasers covered by Rule
101—namely, 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 before 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. Unlike Rule 101, Rule 102 does not contain a general exception for
actively traded securities, but does include a limited exception 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
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.
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.
“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 of the
policies and procedures to prevent the flow of information between the distribution participant and
its affiliates assures such distribution participant that the policies are effective. The Commission
only examines the policies and the annual 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 1320.5(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

Rule 102 of Regulation M does not collect, maintain, or disseminate personally identifiable
information.
12.

Burden of Information Collection
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 Rule 102. In
2019, there were 805 firm commitment 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 2019, approximately 805 hours in the aggregate are required for these
calculations under Rule 102. In addition, the Commission estimates that in approximately 50 selfunderwritten 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.
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.
Total Respondent Burden.
The Commission estimates that a total of 955 respondents would collect information
pursuant to Rule 102 (805 firm commitment offering respondents plus 50 self-underwritten offering
respondents plus 100 affiliate exemption respondents). The Commission estimates that the total
reporting burden under Rule 102 is 1,855 hours (805 hours for firm commitment offerings plus 50
hours for self-underwritten offerings plus 1,000 hours to audit policies concerning affiliate
information barriers). The average annual time burden per respondent is approximately 1.942 hours
(1,855 hours / 955 respondents). All hours in this collection are the recordkeeping type of collection.
Type of Burden

Number of
Respondents

Recordkeeping

955

Number of Annual
Responses per
Respondent
1

Average Annual
Time Burden Per
Response (Hours)
1.942

Aggregate Time Burden
(Hours)
1,855

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
internal cost of compliance for all respondents to comply with Rule 102 is $129,850.00 ($70.00 per
hour times 1,855 hours). The internal compliance cost per respondent is approximately $135.97
(i.e., $129,850.00 / 955 respondents).
13.

Costs to Respondents

It is not anticipated that respondents will have to incur any capital and startup costs to
comply with the rule; nor is it anticipated that the respondents will have to incur any additional
operational or maintenance costs (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 or examination, 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 total burden hours is the result of a decrease in the number of firm
commitment offerings from 848 previously to 805 in 2019 (which, in turn, reduced the total number
of respondents from 998 previously to 955 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.

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