dicate short position that remains in connection with that distribution; (iii) any other person, when he has distributed his participation. A person, including an underwriter or dealer, shall be deemed for purposes of this subparagraph to have distributed securities acquired by him for investment.

(4) The term plan shall include any bonus, profit-sharing, pension, retirement, thrift, savings, incentive, stock purchase, stock ownership, stock appreciation, stock option, dividend reinvestment or similar plan for employees or shareholders of an issuer or its subsidiaries.

(5) For purposes of this section only, the term distribution means an offering of securities, whether or not subject to registration under the Securities Act of 1933, that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods.

(6)(i) The term affiliated purchaser

means:

(A) A person directly or indirectly acting in concert with a distribution participant in connection with the acquisition or distribution of 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

(B) An affiliate who, directly or indirectly, controls the purchases of such securities by a distribution participant, whose purchases are controlled by a distribution participant, or whose purchases are under common control with those of a distribution participant, or

(C) An affiliate that is a broker or a dealer, Provided, however, That this paragraph (c)(6)(i)(C) shall not include a broker or a dealer whose business consists solely of effecting transactions in "exempted securities" as defined in section 3(a)(12) of the Act, or

(D) An affiliate (other than a broker or a dealer) that regularly purchases securities, through a broker-dealer or otherwise, for its own account or for the account of others, or recommends or exercises investment discretion with respect to the purchase or sale of securities: Provided, however, That this paragraph (c)(6)(i)(D) shall not apply to

an affiliate that satisfies the following conditions:

(1) The affiliate is a separate and distinct organizational entity from, with no officers (or persons performing similar functions) or employees (other than clerical, ministerial, or support personnel) in common with, the distribution participant;

(2) The affiliate and the distribution participant have separate employee compensation arrangements; and

(3) The affiliate's bids for, purchases of, and inducements to purchase the securities subject to this section are made in the ordinary course of its busi

ness.

(ii) For purposes of this paragraph (c)(6), the term distribution participant

means

(A) The issuer or other person on whose behalf the distribution is being made, and

(B) An underwriter, prospective underwriter, dealer, broker, or other persons who has agreed to participate or is participating in the distribution.

(7) For purposes of paragraphs (a)(3)(xi) and (xii) of this section, the "minimum price" will be computed (i) In the case of a stock for which last sale information is reported pursuant to Rule 11Aa3-1 under the Act, (§ 240.11Aa3-1) by use of the average of the closing prices so reported during a two consecutive calendar week period commencing within thirty business days prior to the commencement of offers or sales of the securities to be distributed, (ii) in the case of stocks listed and registered on a national securities exchange for which last sale information is not available pursuant to Rule 11Aa3-1, by use of the average of the closing prices for such stock on such exchange during such period, or (iii) in the case of all other stocks, by use of the average of the best independent bids or the best independent closing bids during such period. For purposes of such paragraphs, the "minimum public float" will be computed by the total number of shares of the stock outstanding minus shares held by officers, directors, and any persons who, directly or indirectly, are the owners of ten percent or more of the stock in distribution.

(d) The provisions of this section shall not apply to any of the following securities:

(1) Exempted securities as defined in section 3(a)(12) of the Act, including securities issued, or guaranteed both as to principal and interest, by the International Bank for Reconstruction and Development; or

(2) Face-amount certificates issued by a face-amount certificate company, or redeemable securities issued by an open-end management company or a unit investment trust. Any terms used in paragraph (d)(2) of this section which are defined in the Investment Company Act of 1940 shall have the meanings specified in such Act.

(e) The provisions of this section shall not apply to any distribution of securities by an issuer or a subsidiary of an issuer to employees or shareholders of the issuer or its subsidiaries, or to a trustee or other person acquiring such securities for the account of such employees or shareholders pursuant to a plan, as that term is defined in paragraph (c)(4) of this section.

(f) The provisions of this section shall not apply to bids for or purchases of any security of an issuer, any security of the same class and series as such security, or any security immediately convertible into, or exchangeable or exerciseable for, any such security solely because the issuer or a subsidiary of such issuer has outstanding securities which are immediately convertible into, or exchangeable exerciseable for, such security.

or

(g) A bid for or purchase of any security made or effected by or for a plan shall be deemed to be a purchase by the issuer unless the bid is made, or the purchase is effected, by an agent independent of the issuer, as that term is defined in Rule 10b-18(a)(6) under the Act.

(h) The provisions of this section shall not apply to repurchases of equity securities pursuant to §270.23c-3 of this chapter by a closed-end management investment company. Any terms used in this paragraph (h) which are defined in the Investment Company Act of 1940 (15 U.S.C. 80a) shall have the meanings specified in such Act.

(i) The provisions of this section shall not apply to any distribution of

securities of a foreign government or a foreign private issuer, as defined in § 240.3b-4, eligible for resale under § 230.144A(d)(3) of this chapter, if such securities are offered or sold in the United States solely to a qualified institutional buyer, as defined in § 230.144A(a)(1) of this chapter, or to an offeree or purchaser that the seller and any person acting on behalf of the seller reasonably believes is a qualified institutional buyer, in transactions exempt from registration under section 4(2) (15 U.S.C. 77d(2)) of the Securities Act of 1933 or § 230.144A or Regulation D (§§ 230.501-230.508) of this chapter.

(j) This section shall not prohibit any transaction or transactions if the Commission, upon written request or upon its own motion, exempts such transaction or transactions, either unconditionally or on specified terms and conditions, as not constituting a manipulative or deceptive device or contrivance comprehended within the purpose of this section.

[20 FR 5075, July 15, 1955, as amended at 46 FR 15134, Mar. 4, 1981; 46 FR 15498, Mar. 6, 1981; 47 FR 53341, Nov. 26, 1982; 48 FR 10641, Mar. 14, 1983; 52 FR 3000, Jan. 30, 1987; 58 FR 18146, Apr. 8, 1993; 58 FR 19343, Apr. 14, 1993; 58 FR 19606, Apr. 15, 1993; 58 FR 60329, Nov. 15, 1993]

§ 240.10b-6A Passive market making.

(a) Scope of section. This section permits broker-dealers to engage in market making transactions in eligible securities without being in violation of the provisions of § 240.10b 6.

(b) Definitions. Unless the context otherwise requires, all terms used in this section shall have the same meaning as in the Act and §240.10b-6 thereunder. In addition, unless the context otherwise requires, the following definitions shall apply:

(1) The term ADTV means the average daily trading volume in an eligible security during the reference period, as obtained from the NASD. If a passive market maker excludes SOES volume from the calculation of its net purchases as defined in paragraph (b)(8) of this section, then SOES volume also must be excluded in determining the market maker's ADTV.

(2) The term 30% ADTV Limit means 30 percent of the market maker's ADTV.

(3) The term eligible security means a NASDAQ security that:

(1) Is the subject of a firm commitment, fixed price offering registered under the Securities Act of 1933 or is a related security;

(ii) Has a minimum price of five dollars per share and a minimum public float of 400,000 shares, as computed in accordance with §240.10b-6(c)(7); and

(iii) Has NASDAQ market makers that are underwriters or prospective underwriters, or affiliated purchasers of underwriters or prospective underwriters, that account for at least 30% of the total trading volume in such security, as reported to the NASD for the reference period.

(4) The term independent bid means a bid for a security displayed on NASDAQ by a market maker who is not participating in the distribution of that security or a related security, and is not an affiliated purchaser of such a participating market maker.

(5) The term NASD means the National Association of Securities Dealers, Inc.

(6) The term NASDAQ means the NASDAQ system as defined in $240.11Ac1-2(a)(3).

(7) The term NASDAQ security means a security that is authorized for quotation on NASDAQ, and such authorization is not suspended, terminated, or prohibited.

(8) The term net purchases means the amount by which a passive market maker's purchases exceed its sales. A passive market maker's SOES purchases and sales may be excluded from the calculation of net purchases if the adjustments to ADTV are made as required by paragraph (b)(1) of this section.

(9) The term passive market maker means a market maker that effects transactions in accordance with the provisions of paragraph (c) of this section.

(10) The term qualifying period means the period from the time that a passive market maker would otherwise be prohibited from effecting transactions in an eligible security under the terms of § 240.10b-6(a)(4)(xi)(A), until the earlier

of the time of commencement of offers or sales of the eligible security to be distributed or the time at which a stabilizing bid for such security is made pursuant to § 240.10b–7.

(11) The term reference period means the two full consecutive calendar months immediately preceding the date of filing of the registration statement under the Securities Act of 1933 pertaining to the security to be distributed.

(12) The term related security means:

(i) A security of the same class and series as, or a right to purchase, the security to be distributed or deemed to be in distribution; and

(ii) Any security deemed to be in distribution pursuant to §240.10b–6(b).

(13) The term SOES means the NASD's Small Order Execution System, as defined in the NASD Rules of Practice and Procedures for the Small Order Execution System.

(14) The term SOES mandatory exposure limit means the aggregate number of shares of the security equal to five times the maximum order size for that security that may be entered into or executed through SOES.

(15) The term transaction means a bid or a purchase.

(c) Conditions to be met-(1) General limitations. A passive market maker must effect all transactions in the capacity of a registered market maker on NASDAQ. Except as provided below, during the qualifying period, a passive market maker shall not effect a transaction in an eligible security at a price that exceeds the highest independent bid for the eligible security at the time of the transaction.

(2) Level of bid. A passive market maker may display its bid at a price not in excess of the highest independent bid for an eligible security.

(3) Requirements to lower the bid. If all independent bids for an eligible security are lowered below the passive market maker's bid, the passive market maker must lower its bid to a level not higher than the then highest independent bid; Except That:

(i) The passive market maker may continue to effect purchases at its bid at a price exceeding the then highest independent bid until the passive market maker purchases an amount of the

eligible security that equals or exceeds the SOES mandatory exposure limit for that security; and

(ii) A passive market maker may purchase all of the securities that are part of a single order that, when executed, results in the SOES mandatory exposure limit being equalled or exceeded.

(4) Purchase limitation. On each day of the qualifying period, a passive market maker's net purchases shall not exceed its 30% ADTV Limit; Except That a passive market maker may purchase all of the securities that are part of a single order that, when executed, results in its 30% ADTV Limit being equalled or exceeded. If a passive market maker's net purchases equal or exceed its 30% ADTV Limit, it shall immediately withdraw its quotations from NASDAQ, and it may not effect any transaction in the eligible security for the remainder of that day, irrespective of any additional sales during that day, unless otherwise permitted by § 240.10b 6.

(5) Limitation on displayed size. At all times, the passive market maker's displayed bid size may not exceed the smaller of the SOES mandatory exposure limit for the eligible security, or the passive market maker's remaining purchasing capacity under paragraph (c)(4) of this section.

(6) Identification of a passive market making bid. The bid displayed by a passive market maker shall be designated as such.

(7) Notification and reporting to the NASD. A passive market maker shall notify the NASD in writing in advance of its intention to engage in passive market making. A passive market maker shall submit to the NASD information regarding passive market making purchases in such form as the NASD shall prescribe.

(8) Prospectus disclosure. The prospectus for any offering in which any passive market maker intends to effect transactions in any eligible security shall contain the information required in §§ 228.502, 228.508, 229.502 and 229.508 of this chapter.

(d) Transactions at prices resulting from unlawful activity. No transaction shall be made at a price which the passive market maker knows or has reason to know is the result of activity which is

fraudulent, manipulative, or deceptive under the Act or any rule or regulation thereunder.

[58 FR 19606, Apr. 15, 1993]

$240.10b-7 Stabilizing to facilitate a

distribution.

(a) Scope of section. The provisions of this section shall apply to any person who, either alone or with one or more other persons, directly or indirectly, stabilizes the price of a security to facilitate an offering of any security. It shall constitute a "manipulative or deceptive device or contrivance", as used in section 10(b) of the Act, for any such 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, to effect, either alone or with one or more other persons, any transaction or series of transactions prohibited by this section.

(b) Definitions. Unless the context clearly indicates otherwise, for the purposes of this section the following terms shall have the meaning indicated:

(1) The term offering at the market shall mean an offering in which it is contemplated that any offering price set in any calendar day will be increased more than once during such day.

(2) The term transaction shall mean a bid or a purchase.

(3) The terms stabilize, stabilizes, stabilizing or stabilized shall mean the placing of any bid, or the effecting of any purchase, for the purpose of pegging, fixing or stabilizing the price of any security: Provided, however, That a bid shall not constitute a stabilizing bid unless or until it is shown in the market.

(c) Transactions must be necessary. No stabilizing bid or purchase shall be made except for the purpose of preventing or retarding a decline in the open market price of a security.

(d) Priority must be granted. Any person placing or transmitting a bid which he knows is for the purpose of stabilizing the price of any security shall disclose the purpose of such bid to the person with whom it is placed or to whom it is transmitted. Any person placing a stabilizing bid or effecting a

stabilizing purchase on a securities exchange shall grant priority to any independent bid at the same price irrespective of the size of such independent bid or the time when it is entered. Any person placing a stabilizing bid or effecting a stabilizing purchase otherwise than on a securities exchange shall grant priority to any independent bid at the same price placed with or transmitted to him irrespective of the size of such independent bid or the time when it is entered.

(e) Control of stabilizing. No sole distributor or syndicate or group stabilizing the price of a security nor any member or members of such syndicate or group shall maintain more than one stabilizing bid in any one market at the same price at the same time: Provided, however, That more than one such bid at the same price may be maintained otherwise than on a securities exchange by or for the account of such distributor, syndicate or group.

(f) Stabilizing at prices resulting from unlawful activity. No stabilizing shall be initiated at a price which the stabilizer knows or has reason to know is the result of activity which is fraudulent, manipulative, or deceptive under the act or any rule or regulation thereunder.

(g) Stabilizing prohibited in offerings at the market. No person shall effect any stabilizing transaction to facilitate any offering at the market.

(h) Stabilizing securities traded in more than one market. If a security is traded in more than one market, stabilizing shall not be initiated at any price which would be unlawful in the market which is the principal market for such security in the United States open for trading at the time when such stabilizing is initiated: Provided, however, That if the principal market for such security in the United States is a securities exchange, stabilizing may be initiated in any market after the close of such exchange at the price at which stabilizing could have been initiated on such exchange at the close thereof unless the person stabilizing knows or has reason to know that other persons have offered or sold such security at a lower price after such close, except that special prices available to any group or class of persons (including employees

or holders of warrants or rights) shall not limit the stabilizing price.

(i) Entering stabilizing bid on exchange prior to opening. No person shall place a stabilizing bid on a securities exchange prior to the time the opening quotations for the security on such exchange are available, unless he has been and is lawfully stabilizing such security at such price: Provided, however, That a stabilizing bid may be made immediately prior to the opening of a securities exchange at a price not in excess of the price at which stabilizing could have been initiated on such exchange at the previous close thereof, unless the person stabilizing knows or has reason to know that other persons have offered or sold such security at a lower price after such close, except that special prices available to any group or class of persons (including employees or holders of warrants or rights) shall not limit the stabilizing price.

(j) Stabilizing levels. (1) Except as provided in paragraphs (j)(2), (3) and (4) of this section, no person shall (i) begin to stabilize a security at a price higher than the highest current independent bid price for such security or (ii) raise the price at which he is stabilizing. If no bona fide market for the security being distributed exists at the time stabilizing is initiated, stabilizing may be initiated at a price not in excess of the public offering price.

(2) If the principal market for a security is a securities exchange and stabilizing is initiated on such exchange the initial stabilizing bid or purchase may be made at a price not in excess of the last independent sale price on such exchange if (i) the security has been traded on such exchange on the day when stabilizing is begun, on either of the two preceding calendar days, or on the last preceding business day, and (ii) the current asked price is equal to or above the last independent sale price. If both conditions set forth in paragraphs (j)(2) (i) and (ii) of this section are not met, no person shall begin to stabilize the security at a price in excess of the highest current independent bid price for such security: Provided, however, That if a stabilizing bid has been entered at such independent bid price and the first sale thereafter on