(ii) Effected at a price equal to the most recent offer communicated for the security by such registered specialist, registered exchange market maker or third market maker to an exchange or a national securities association ("association") pursuant to §240.11Ac11, if such offer, when communicated, was equal to or above the last sale, regular way, reported for such security pursuant to an effective transaction reporting plan:

Provided, however, That any exchange, by rule, may prohibit its registered specialist and registered exchange market makers from availing themselves of the exemption afforded by this paragraph (e)(5) if that exchange determines that such action is necessary or appropriate in its market in the public interest or for the protection of investors;

(6) Any sale of a security covered by paragraph (b) of this section on a national securities exchange (except a sale to a stabilizing bid complying with §240.10b-7) effected with the approval of such exchange which is necessary to equalize the price of such security thereon with the current price of such security on another national securities exchange which is the principal exchange market for such security;

(7) Any sale of a security for a special arbitrage acccount by a person who then owns another security by virtue of which he is, or presently will be, entitled to acquire an equivalent number of securities of the same class as the securities sold; provided such sale, or the purchase with such sale offsets, is effected for the bona fide purpose of profitting from a current difference between the price of security sold and the security owned and that such right of acquisition was originally attached to or represented bt another security or was issued to all the holders of any such of securities of the issuer.

(8) Any sale of a security registered on, or admitted to unlisted trading privileges on, a national securities exchange effected for a special international arbitrage account for the bona fide purpose of profitting from a current difference between the price of such security on a securities market not within or subject to the jurisdiction of the United States and on a se

curities market subject to the jurisdiction of the United States; provided the seller at the time of such sale knows or, by virtue of information currently received, has reasonable grounds to believe that an offer enabling him to cover such sale is then available to him such foreign securities market and intends to accept such offer immediately; (9) [Reserved]

(10) Any sale by an underwriter, or any member of a syndicate or group participating in the distribution of a security, in connection with an over-allotment of securities, or any lay-off sale by such a person in connection with a distribution of securities through rights pursuant to §240.10-8 or a standby underwriting commitment;

or

(11) Any sale of a security covered by paragraph (a) of this section (except a sale to a stabilizing bid complying with $240.10b-7) by any broker or dealer, for his own account of any other person, effected at a price to the most recent offer communicated by such broker or dealer to an exchange or association pursuant to §240.11Ac1-1 in an amount less than or equal to the quotation size associated with such offer, if such offer, when communicated, was (i) above the price at which the last sale, regular way, for such security was reported pursuant to an effective transaction reporting plan; or (ii) at such last sale price, if such last sale price is above the next preceding different price at which a sale of such security, regular way, was reported pursuant to an effective transaction reporting plan.

(12) For the purposes of paragraph (e)(8) of this section, a depositary receipt of a security shall be deemed to be the same security as the security represented by such receipt. For the purposes of paragraphs (e)(3), (4) and (5) of this section, the term "third market maker" shall mean any broker or dealer who holds itself out as being willing to buy and sell a reported security for its own account on a regular and continuous basis otherwise than on an exchange in amounts of less than block size.

(13) A broker-dealer that has acquired a security while acting in the capacity of a block positioner shall be deemed to own such security for the

purposes of Rule 3b-3 (§240.3b-3) and of this section not withstanding that such broker-dealer may not have a net long position in such security if and to the extent that such broker-dealer's short position in such security is the subject of one or more offsetting positions created in the course of bona fide arbitrage, risk arbitrage, or bona fide hedge activities.

(f) This rule shall not prohibit any transaction or transactions which the Commission, upon written request or upon its own motion, exempts, either unconditionally or on specified terms and conditions.

(Secs. 2, 3, 6, 9, 10, 15, 17 and 23, Pub. L. 78291, 48 Stat. 881, 882, 885, 889, 891, 895, 897 and 901, as amended by secs. 2, 3, 4, 11, 14 and 18, Pub. L. 94-29, 89 Stat. 97, 104, 121, 137 and 155 (15 U.S.C. 78b, 78c, 78f, 781, 78j, 780, 78q, and 78w); sec. 15A, as added by sec. 1, Pub. L. 75719, 52 Stat. 1070, as amended by sec. 12, Pub. L. 94-29, 89 Stat. 127 (15 U.S.C. 780-3); sec. 11A, as added by sec. 7, Pub. L. 94-29, 89 Stat. 111 (15 U.S.C. 78k-1); 15 U.S.C. 78a et seq., and particularly secs. 2, 3, 10(a), 10(b), 15(c), and 23(a), 15 U.S.C. 78b, 78c, 781(a)(6), 78j(a), 78j(b), 780(c), and 78w(a))

[40 FR 25444, June 16, 1975, as amended at 45 FR 12390, Feb. 26, 1980; 45 FR 79021, Nov. 28, 1981; 46 FR 49114, Oct. 8, 1981; 49 FR 9415, Mar. 13, 1984; 51 FR 8804, Mar. 14, 1986; 52 FR 24152, June 29, 1987; 58 FR 18146, Apr. 8, 1993]

CROSS REFERENCES: For interpretative release applicable to §240.10a-1, see No. 1571 in tabulation, part 241 of this chapter; for definition of "short sale", see §240.3b-3.

§ 240.10a-2 Requirements for covering purchases.

(a) No broker or dealer shall lend, or arrange for the loan of, any security registered on, or admitted to unlisted trading privileges on, a national securities exchange for delivery to the broker for the purchaser after sale, or shall fail to deliver a security on the date delivery is due, if such broker or dealer knows or has reasonable grounds to believe that the sale was effected, or will be effected, pursuant to an order marked "long," unless such broker or dealer knows, or has been informed by the seller (1) that the security sold has been forwarded to the account for which the sale was effected, or (2) that the seller owns the security sold, that it is then impracticable to deliver to such account the security owned and

that he will deliver such security to such account as soon as it is possible without undue inconvenience or expense.

(b) The provisions of paragraph (a) of this section shall not apply (1) to the lending of a security registered on, or admitted to unlisted trading privileges on, a national securities exchange by a broker or dealer through the medium of a loan to another broker or dealer, or (2) to any loan, or arrangement for the loan, of any such security, or to any failure to deliver any such security if, prior to such loan, arrangement or failure to deliver, a national securities exchange, in the case of a sale effected thereon, or a national securities association, in the case of a sale not effected on an exchange, finds (i) that such sale resulted from a mistake made in good faith, (ii) that due diligence was used to ascertain that the circumstances specified in §240.10a-1(d)(1) existed or to obtain the information specified in clause (2) thereof, and (iii) either that the condition of the market at the time the mistake was discovered was such that undue hardship would result from covering the transaction by a "purchase for cash" or that the mistake was made by the seller's broker and the sale was at a price permissible for a short sale under § 240.10a-1 (a) or (b).

(Sec. 10, 48 Stat. 891, as amended, 64 Stat. 1265, 15 U.S.C. 78j(a); sec. 23(a), 48 Stat. 901, as amended, 49 Stat. 704, as amended, 49 Stat. 1379, as amended, Pub. L. 94-29 §18 (June 4, 1975), 15 U.S.C. 78w(a))

[40 FR 25445, June 16, 1975]

CROSS REFERENCE: For interpretative release applicable to § 240.10a-2, see No. 1571 in tabulation, Part 241 of this chapter.

MANIPULATIVE AND DECEPTIVE DEVICES AND CONTRIVANCES

$240.10b-1 Prohibition of use of manipulative or deceptive devices or contrivances with respect to certain securities exempted from registration.

The term manipulative or deceptive device or contrivance, as used in section 10(b) (48 Stat. 891; 15 U.S.C. 78j(b)), is hereby defined to include any act or omission to act with respect to any security exempted from the operation of section 12(a) (48 Stat. 892; 15 U.S.C.

781(a)) pursuant to any section in this part which specifically provides that this section shall be applicable to such security if such act or omission to act would have been unlawful under section 9(a) (48 Stat. 889; 15 U.S.C. 78i(a)), or any rule or regulation heretofore or hereafter prescribed thereunder, if done or omitted to be done with respect to a security registered on a national securities exchange, and the use of any means or instrumentality of interstate commerce or of the mails or of any facility of any national securities exchange to use or employ any such device or contrivance in connection with the purchase or sale of any such security is hereby prohibited.

(Secs. 10, 12, 48 Stat. 891, 892; 15 U.S.C. 78j, 781)

[13 FR 8183, Dec. 22, 1948]

CROSS REFERENCES: For applicability of this section, see §§ 240.12a-4 and 240.12a-5. For regulations relating to employment of manipulative and deceptive devices, see §§ 240.10b-3 and 240.10b 5.

8240.10b-2 [Reserved]

$240.10b-3 Employment of manipulative and deceptive devices by brokers or dealers.

(a) It shall be unlawful for any broker or dealer, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, to use or employ, in connection with the purchase or sale of any security otherwise than on a national securities exchange, any act, practice, or course of business defined by the Commission to be included within the term "manipulative, deceptive, or other fraudulent device or contrivance", as such term is used in section 15(c)(1) of the act.

(b) It shall be unlawful for any municipal securities dealer directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, to use or employ, in connection with the purchase or sale of any municipal security, any act, practice, or course of business defined by the Commission to be included within the term "manipulative, deceptive, or other fraudulent

device or contrivance," as such term is used in section 15(c)(1) of the act.

(Secs. 10, 12, 48 Stat. 891, 892, as amended; 15 U.S.C. 78j, 781)

[13 FR 8183, Dec. 22, 1948, as amended at 19 FR 8017, Dec. 4, 1954; 41 FR 22824, June 7, 1976]

CROSS REFERENCES: See also §240.10b 5. For regulation relating to prohibition of manipulative or deceptive devices, see §240.10b-1. For the term "manipulative, deceptive, or other fraudulent device or contrivance”, as used in section 15(c)(1) of the act, see §§ 240.15c1-2 to 240.15c1-9.

§240.10b-4 [Reserved]

$240.10b-5 Employment of manipulative and deceptive devices.

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

(Sec. 10; 48 Stat. 891; 15 U.S.C. 78j)

[13 FR 8183, Dec. 22, 1948, as amended at 16 FR 7928, Aug. 11, 1951]

§ 240.10b-6 Prohibitions against trading by persons interested in a distribution.

(a) It shall be unlawful for any per

son,

(1) Who is an underwriter or prospective underwriter in a particular distribution of securities, or

(2) Who is the issuer or other person on whose behalf such a distribution is being made, or

(3) Who is a broker, dealer, or other person who has agreed to participate or is participating in such a distribution,

or

(4) Who is an "affiliated purchaser" as that term is defined in paragraph (c)(6) of this section,

directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, either alone or with one or more other persons, to bid for or purchase for any account in which he has a beneficial interest, any security which is the subject of such distribution, or any security of the same class and series, or any right to purchase any such security, or to attempt to induce any person to purchase any such security or right, until after he has completed his participation in such distribution: Provided, however, That this section shall not prohibit the following, if not engaged in for the purpose of creating actual, or apparent, active trading in or raising the price of any such security:

(i) Transactions in connection with the distribution effected otherwise than on a securities exchange with the issuer or other person or persons on whose behalf such distribution is being made or among underwriters, prospective underwriters, or other persons who have agreed to participate or are participating in such distribution;

(ii) Unsolicited privately negotiated purchases, each involving at least a block of such security, that are not effected from or through a broker or dealer; or

(iii) Purchases by an issuer effected more than forty days after the effective date of the registration statement covering the securities being distributed, or in the case of an unregistered distribution, more than forty days after the commencement of offers or sales of the securities being distributed, for the purpose of satisfying a sinking fund or similar obligation to which it is subject and which becomes due as of a date that does not exceed twelve months from the date of purchase; or

(iv) Odd-lot transactions and roundlot transactions that offset odd-lot transactions previously or simultaneously executed or reasonably anticipated in the usual course of business by a person who acts in the capacity of an odd-lot dealer; or

(v) Brokerage transactions: (A) Not involving solicitation of the customer's order, or

(B) Involving solicitation of the customer's order (1) in the case of securities qualified under paragraph (a)(4)(xi)(A) of this section, prior to the later of two business days before the commencement of offers or sales of the securities to be distributed or the time the broker-dealer becomes a participant in the distribution, or (2) in the case of other securities, prior to the later of nine business days before the commencement of offers or sales of the securities to be distributed or the time the broker-dealer becomes a participant in the distribution; or

(vi) Offers to sell or the solicitation of offers to buy the securities being distributed (including securities or rights acquired in stabilizing) or securities or rights offered as principal by the person making such offer to sell or solicitation; or

(vii) The exercise of any right or conversion privilege, set forth in the instrument governing a security, to acquire any security directly from the issuer, or the exercise of standardized call options that were acquired prior to the time a person became a participant in the distribution; or

(viii) Stabilizing transactions not in violation of § 240.10b-7; or

(ix) Bids for or purchases of rights not in violation of § 240.10b-8; or

(x) [Reserved]

(xi) Bids or purchases by an underwriter, prospective underwriter, or dealer, or by an affiliated purchaser, if all such bids or purchases are made:

(A) In the case of stock with a minimum price of five dollars per share and a minimum public float of 400,000 shares, or any security of the same class and series as such stock, or any right to purchase any such security, except for the exercise of standardized call options, prior to the later of two business days before the commencement of offers or sales of the securities to be distributed or the time such person becomes a participant in the distribution, or

(B) In the case of the exercise of standardized call options of securities qualified under paragraph (a)(4)(xi)(A) of this section, which call options were

acquired after the time such person becomes a participant in the distribution, prior to five business days before the commencement of offers or sales of the securities to be distributed, or

(C) In the case of other securities, prior to the later of nine business days before the commencement of offers or sales of the securities to be distributed or the time such person becomes a participant in the distribution, or

(D) In the case of unsolicited purchases, prior to the later of the date of commencement of offers or sales of the securities to be distributed or the time such person becomes a participant in the distribution; or

(xii) Bids or purchases by an issuer or other person on whose behalf a distribution is being made or by an affiliated purchaser (as defined in paragraph (c)(6) of this section), if all such bids or purchases are made:

(A) In the case of stock with a minimum price of five dollars per share and minimum public float of 400,000 shares, or any security of the same class and series as such stock, or any right to purchase any such security, except for the exercise of standardized call options, prior to two business days before commencement of offers or sales of the securities to be distributed, or

(B) In the case of the exercise of standardized call options on securities qualified under paragraph (a)(4)(xii)(A) of this section, which call options were acquired after the time that such person becomes a distribution participant, prior to five business days before the commencement of offers or sales of the securities to be distributed, or

(C) In the case of other securities, prior to nine business days before the commencement of offers or sales of the securities to be distributed, or

(D) In the case of unsolicited purchases, prior to the date of commencement of offers or sales of the securities to be distributed; or

(xiii) Transactions in nonconvertible debt securities or nonconvertible preferred securities: Provided, however, That at least one nationally recognized statistical rating organization, as that term is used in Rule 15c3-1 under the Act, [$240.15c3-1] has rated both the nonconvertible securities being distributed and those to be purchased in one

of its generic rating categories that signifies investment grade; or

(xiv) Market making transactions complying with §240.10b-6A.

(b) The distribution of a security (1) which is immediately exchangeable for or convertible into another security, or (2) which entitles the holder thereof immediately to acquire another security, shall be deemed to include a distribution of such other security within the meaning of this section.

(c) The following shall be applicable for the purposes of this section.

(1) The term underwriter means a person who has agreed with an issuer or other person on whose behalf a distribution is to be made (i) to purchase securities for distribution or (ii) to distribute securities for or on behalf of such issuer or other person or (iii) to manage or supervise a distribution of securities for or on behalf of such issuer or other person.

(2) The term prospective underwriter means a person (i) who has decided to submit a bid to become an underwriter of securities as to which the issuer or other person on whose behalf the distribution is to be made, has issued, directly or indirectly, an invitation for bids, or (ii) who has reached an understanding, with the issuer or other person on whose behalf a distribution is to be made, that he will become an underwriter, whether or not the terms and conditions of the underwriting have been agreed upon.

(3) A person shall be deemed to have completed his participation in a particular distribution as follows: (i) The issuer or other person on whose behalf such distribution is being made, when such distribution is completed; (ii) an underwriter, when he has distributed his participation, including all other securities of the same class acquired in connection with the distribution, and any stabilization arrangements and trading restrictions with respect to such distribution to which he is a party have been terminated: Provided, however, That an underwriter will not be deemed to have completed his participation if he has obtained an option in connection with that distribution pursuant to which he purchases from the issuer an additional amount of securities not necessary to cover any syn