Rule 104 Justification Memo 2011 (revised)

SUPPORTING STATEMENT
for the Paperwork Reduction Act
Current Information Collection Submission for
“Rule 104 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 Rule 104

Rule 104 governs stabilizing and certain aftermarket syndicate activities in connection with
an 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 purpose of
Rule 104 is to permit underwriters and syndicate members to conduct stabilizing transactions in
compliance with the rule’s pricing and other terms 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 recordkeeping1 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 antimanipulation regulation, Regulation M reduced the burdens of anti-manipulation regulation.
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
1

The recordkeeping requirement is through application of Rule 17a-2, in connection with which there is a separate
PRA filing.

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)
that has 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)
Regulation S-K. Last, any person that is 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 records2 required pursuant to Rule 104 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.

Reducing the Burden 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 records3 concerning stabilizing bids, the
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 broker2
3

Id.
Id.

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)

The collection of information requested in the rules described herein is conducted in a
manner consistent with the guidelines in 5 C.F.R.1320.5(d)(2).
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 February 10, 2011 (76 FR 7594). 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

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 2010, there were 745
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 to also
require six minutes per offering. Using 795 respondents per year, as discussed above, the third
party disclosure would require an estimated 149 hours (12 minutes times 745 respondents divided
by 60 minutes per hour) over the course of a year.

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 $139,360. This compensation is the equivalent of
$67.00 per hour ($139,360 divided by 2,080 payroll hours per year). Based on that estimate, the
Commission estimates that the annual salary cost to comply with Rule 104 is $9,983.00 ($67.00 per
hour times 149 hours).

13.

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

14.

Cost to Federal Government

The government does not experience significant costs based on the disclosure and
recordkeeping requirements of Rule 104.4 The information collected by the respondents is
normally reviewed only pursuant to an investigation, not as a matter of routine.
15.

Reason for Changes

The decrease in burden hours overall reflects a change in the agency’s estimate due to a
decrease in the amount of firm commitment offerings in 2010 from the firm commitment offering
calculation used in prior years. The increase in total annualized cost burden described in paragraph
13 above is due to inflation adjustments to the annual compensation for the typical employee
charged with compliance with Commission regulations. Note that there is no external cost related
to this rule, and the prior OMB Approval of costs amounting to $8,944 actually reflected internal
labor costs. In this current application, this is being corrected and therefore approval is not hereby
being requested for any costs (as all costs relate only to internal labor costs as described in
paragraph 13 above). Accordingly, there is actually no change in any external cost burdens that
would require OMB approval.
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.
4

Id.

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.