Quick Answer
Regulation M restricts bids and purchases during distributions. The usual restricted period starts 1 or 5 business days before pricing; a separate actively-traded exemption applies to qualifying distribution-participant activity. Issuers face fewer exceptions. Stabilization requires compliant pricing, disclosure, identification, and records. Final syndicate-account settlement is due 90 days after issuer delivery; corporate-debt syndicates also have a 30-day partial-payment requirement.
Regulation M is the rule that stops distribution participants from bidding for or buying the security they are distributing, so they cannot prop up its price during the offering. The principal supervising a distribution must ensure every desk knows when the restricted period begins, what activity is permitted, and what notice must go to FINRA.
Reg M's Core Definitions
| Term | Definition |
|---|---|
| Distribution | An offering of securities that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods |
| Distribution participant | An underwriter, prospective underwriter, broker, dealer, or other person who has agreed to participate or is participating in a distribution |
| Affiliated purchaser | A person acting in concert with a distribution participant, issuer, or selling security holder in acquiring covered securities, or an affiliate meeting the rule's control test |
| Stabilization | Bidding for or purchasing a security to peg, fix, or maintain its price |
| Reference security | A security into which the offered security converts, exchanges, or is exercisable, or whose value determines the offered security's value in whole or significant part |
An offering can be a distribution without a traditional syndicate. Participant status depends on a person's actual role; a financial interest alone does not establish participation.
For example, a firm that agrees to solicit investors for the offering participates in the distribution even if it does not buy shares for its own account.
If a scenario only calls a firm a financial adviser, examine the services it agreed to perform and its actual activities. A flat advisory fee or the absence of its name from the prospectus cover does not settle whether it is a distribution participant.
The Restricted Period
The restricted period is the window when distribution participants and issuers / selling security holders cannot trade in the offered security or its reference security. The length of the restricted period depends on the security's liquidity:
| Security Type | Restricted Period |
|---|---|
| Meets ADTV ≥ $100,000 AND public float ≥ $25 million | 1 business day before pricing |
| Does not meet those thresholds | 5 business days before pricing |
| Actively-traded (ADTV ≥ $1 million AND public float ≥ $150 million) | Separate exemption from the distribution-participant restriction; it does not automatically exempt issuer-side activity |
| Highly liquid investment-grade debt | Often exempt from the distribution-participant restriction entirely |
The restricted period begins the appropriate number of business days before pricing and runs through the completion of the participant's distribution (for an underwriter, its allocation has been distributed and any stabilization arrangements and trading restrictions tied to the distribution have ended).
Distribution-Participant vs. Issuer-Side Restrictions
| Restriction | Who It Covers | Key Difference |
|---|---|---|
| Distribution-participant restriction | Distribution participants (underwriters, dealers, others agreeing to participate) and their affiliated purchasers | More exceptions available (passive market making, certain odd-lot transactions, transactions in reference securities outside specific conditions) |
| Issuer-and-selling-shareholder restriction | Issuers and selling security holders and their affiliated purchasers | Fewer exceptions - issuer-side limits are stricter |
The principal must run the math on ADTV and public float value before the restricted period begins, and document the determination in the distribution notice filed with FINRA.
Exam Tip: Gotchas
- Reg M's restricted period is determined by ADTV AND public float value. Both thresholds must be met for the 1-day period. If either fails, the security falls into the 5-day period. The principal documents the determination in the distribution notice.
- Issuers face stricter rules than distribution participants. The issuer-side restriction has fewer exceptions than the distribution-participant restriction. The issuer's affiliates cannot rely on the same passive-market-making and reference-security exceptions that distribution participants get.
- The restricted period starts BEFORE pricing. It does not start at filing or at registration effective. The 1-day or 5-day window runs backward from the pricing date.
Stabilization
Stabilization is legal manipulation, the only kind permitted in a registered offering. Outside the stabilization rule's conditions, any bid intended to peg the price is illegal manipulation under the anti-manipulation provisions of the Exchange Act.
The conditions for permitted stabilization:
| Condition | What It Requires |
|---|---|
| Price ceiling | Apply the stabilization rule's initial, maintained, or increased-bid conditions, including its offering-price and principal-market stabilizing-bid ceilings |
| One bid per price | No more than one stabilizing bid in any one market at the same price at the same time |
| Prospectus disclosure | Stabilization must be disclosed in the prospectus (the standard disclosure language: "stabilizing bids may be entered which raise or maintain the market price") |
| Recordkeeping | Stabilizing transactions must be recorded with time of bids, transaction amounts, identity of contra-parties, retained and made available to the SEC |
| Identifying mark | On Nasdaq, stabilizing bids are identified through Nasdaq's stabilizing-bid mechanism |
Syndicate-Covering and Penalty Bids
The stabilization rule also permits two related activities:
- Syndicate-covering transactions: closing a syndicate short by buying back in the open market. They are separate from stabilizing bids, so the stabilizing-bid price ceiling does not automatically govern them. The manager must still follow the covering rules, including prior notice to the self-regulatory organization with authority over the principal market and the ban on manipulative conduct.
- Penalty bids: recouping selling concessions from syndicate members whose customers flipped (the syndicate manager keeps a list of which members' customers flipped and reduces those members' concessions)
These are not stabilization in the strict sense but are governed by the same anti-manipulation framework.
Exam Tip: Gotchas
- Stabilizing bids are LEGAL MANIPULATION. They are the only kind of price-pegging activity permitted in a registered offering. Outside the stabilization rule's strict conditions, a price-pegging bid is illegal manipulation.
- The initial-bid test is conditional. In an open principal market, the last independent transaction can set the initial ceiling when the rule's recent-trade and current-ask conditions hold; otherwise, the highest independent bid applies. The offering-price and principal-market stabilizing-bid ceilings also apply. Maintaining or increasing a bid has separate conditions; a current independent bid is not a universal ceiling for every situation.
- One bid per market at the same price. A syndicate cannot maintain two stabilizing bids in the same security in the same market at the same price at the same time. To move the bid, the stabilization rule lets the manager raise it (no higher than the highest current independent bid in the principal market) or reduce it.
Stabilization Recordkeeping
The stabilization regime imposes specific recordkeeping requirements for stabilizing activity:
- Time of each bid
- Transaction amounts (size, price)
- Identity of contra-parties (who took the other side)
- Retention and availability to the SEC
The records are typically kept by the syndicate manager and made available to FINRA and the SEC on examination.
Nasdaq Stabilization Mechanics
Two Nasdaq rules implement Reg M mechanics on the Nasdaq market:
| Rule | What It Does |
|---|---|
| Nasdaq stabilizing-bid mechanism | Stabilizing bids in Nasdaq-listed securities (procedural mechanics for entering and identifying a stabilizing bid in the system) |
| Nasdaq penalty-bid identification mechanism | Penalty bids and syndicate covering transactions in Nasdaq securities (notice and identification rules) |
These rules ensure stabilization activity is identifiable and surveilable by the exchange. A Nasdaq stabilizing bid is flagged in the system so that regulators can distinguish it from ordinary market making.
The Distribution-Notice Requirement
A member acting as manager (or similar capacity) of a Reg M-covered distribution must give written notice to FINRA before the restricted period begins. The notice includes:
| Item | What It Documents |
|---|---|
| Restricted period determination | Whether a 1-day or 5-day restricted period applies and the basis for the determination (ADTV and public float value math) |
| Restricted period commencement | Contemplated date and time of restricted-period commencement |
| Security identification | Security name and symbol |
| Distribution participants | Identification of distribution participants and affiliated purchasers |
Timing: Notice must be submitted no later than the business day prior to the first complete trading session of the restricted period.
If no member is acting as manager, each distribution participant is responsible for filing unless another member assumes the duty in writing.
Exam Tip: Gotchas
- The distribution notice is filed BEFORE the restricted period begins, not after. The notice is a precondition to the restricted period; a missing or late notice is itself a violation.
- The notice must document the ADTV / public float math. A distribution notice that asserts the 1-day period without showing the calculation is incomplete; FINRA wants the basis for the determination, not just the conclusion.
- A parallel notice regime applies to trade-reporting facilities. The distribution-notice rule combined with the trade-reporting-facility notice rule covers the full Reg M notice regime.
Settlement of Syndicate Accounts
FINRA's syndicate-account rule measures deadlines from delivery of the securities by the issuer to or for the account of the syndicate:
- Final settlement of accounts is due within 90 calendar days after that delivery date.
- For corporate-debt offerings, at least 70% of gross underwriting compensation is due within 30 calendar days, with the final balance due within 90 days.
- The settlement includes accounting for:
- Underwriting fees
- Selling concessions
- Expenses
- Stabilization losses (if any)
- Return of any letter-of-credit collateral
Late or incomplete settlements are FINRA-rule violations distinct from any underlying compensation issue.
Exam Tip: Gotchas
- Issuer delivery starts the clock. The rule defines that event as the syndicate settlement date. A later administrative closing of the manager's books does not restart or postpone the deadline.
- Failure to settle within 90 days is a separate FINRA violation. Even if the underlying compensation is correct, missing the 90-day deadline creates an independent syndicate-settlement problem.
- Stabilization losses are netted into the syndicate account. If the syndicate's stabilizing activity produced losses, those losses are charged to syndicate members as part of the syndicate-settlement accounting.
What Should You Check on Exam Day?
- Can you state the trading-volume and public-float thresholds that set the 1-day restricted period rather than the 5-day period?
- Can you distinguish the stabilization rule's initial-bid conditions from its maintaining and increasing conditions?
- Can you state the deadline for filing the distribution notice relative to when the restricted period begins?
- Do you know why issuer delivery starts the syndicate-account deadlines, even if the manager closes its books later?