Rule Atlas
FINRA Rule 2241: Regulation M: Rule 101 Distribution Participant Restrictions & Exceptions
Under FINRA Rule 2241 (FINRA / SEC Supervision & Net Capital), regulation M: Rule 101 Distribution Participant Restrictions & Exceptions establishes the authoritative rules tested on the FINRA Series 24. This lesson details Regulation M Rule 101, focusing on restrictions for distribution participants from bidding for or purchasing securities during a distribution, including key exceptions. VoraPrep verifies every threshold, worked table, and practice question below against the current FINRA Series 24 blueprint.
Core Statutory Concepts
| Exception Category | Conditions/Description |
|---|---|
| Actively Traded Securities | No restricted period for securities with an ADTV of at least $1 million and a public float of at least $150 million. This is a crucial exception for highly liquid stocks. |
| Investment Grade Non-Convertible Debt/Preferred | No restricted period for non-convertible debt securities, non-convertible preferred securities, and asset-backed securities rated investment grade or higher by a nationally recognized statistical rating organization (NRSRO). |
| De Minimis Transactions | Odd-lot transactions, purchases to satisfy customer orders that were not solicited by the distribution participant, and exercises of options, warrants, or rights. These are generally considered too small to impact the market. |
| Unsolicited Purchases | Purchases resulting from unsolicited orders originating from customers. The key is that the order must truly be unsolicited by the distribution participant. |
| Basket Transactions | Transactions in a basket of 20 or more securities, where the covered security does not comprise more than 5% of the value of the basket. |
| Research Reports | Dissemination of research reports that comply with FINRA Rule 2241 (formerly Rule 2711) and SEC Rule 139. |
| Rule 144A Transactions | Offers and sales of securities eligible for resale under Rule 144A to qualified institutional buyers (QIBs) are generally exempt from Regulation M. |
A lead underwriter for a significant secondary offering of common stock in a well-established company is preparing for the restricted period. The company's common stock has an Average Daily Trading Volume (ADTV) of $1,500,000 and a public float of $200,000,000. The underwriter also makes a market in the issuer's actively-traded corporate bonds. Which of the following actions by the underwriter would be permissible under Regulation M during the restricted period for the common stock offering?
Practitioner Application: Regulation M: Rule 101 Distribution Participant Restrictions & Exceptions
A lead underwriter for a secondary offering of a thinly traded biotech stock is also a market maker for that stock. Two days before the effective date, a large institutional client places an unsolicited order to buy a significant block of the biotech stock. The underwriter's trading desk wants to fill the order to maintain client relationships and market liquidity, but the compliance department raises concerns about Regulation M. What specific actions can the underwriter take, if any, to fulfill the order without violating Rule 101, considering the stock's trading volume and the unsolicited nature of the order?
- Regulation M, specifically Rule 101 (Restrictions on Distribution Participants), is designed to prevent manipulation of the market for a security during a distribution. It prohibits distribution participants (underwriters, prospective underwriters, broker-dealers, or other persons who have agreed to participate in a distribution) and their affiliated purchasers from bidding for, purchasing, or attempting to induce any person to bid for or purchase a covered security during a restricted period.
- Key Definitions: Covered Security: The security being distributed and any reference security (e.g., a convertible bond related to the underlying common stock). Distribution: 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. Restricted Period: The period during which the prohibitions of Rule 101 apply. Its length depends on the security's average daily trading volume (ADTV) and public float: 5 business days prior to pricing or the start of offers/sales, whichever is earlier, for securities with an ADTV of less than $100,000 and a public float of less than $25 million. 1 business day prior to pricing or the start of offers/sales, whichever is earlier, for securities with an ADTV of at least $100,000 and a public float of at least $25 million. No restricted period for actively traded securities.
Common FINRA Series 24 Distractors on FINRA Rule 2241
- 1Rule 101 prohibits distribution participants from bidding for or purchasing covered securities during a restricted period to prevent market manipulation.
- 2The restricted period is 5 business days for low ADTV/public float securities, 1 business day for moderate ADTV/public float securities, and no restricted period for actively traded securities.
- 3Actively traded securities are those with an ADTV of at least $1 million AND a public float of at least $150 million.
- 4Key exceptions include actively traded securities, investment-grade non-convertible debt, and unsolicited customer purchases.
- 5Unsolicited orders must truly originate from the customer without any inducement from the distribution participant.
Frequently Asked Questions: FINRA Rule 2241
What is the core rule under FINRA Rule 2241 (Regulation M: Rule 101 Distribution Participant Restrictions & Exceptions)?
Under FINRA Rule 2241 (FINRA / SEC Supervision & Net Capital), regulation M: Rule 101 Distribution Participant Restrictions & Exceptions establishes the authoritative rules tested on the FINRA Series 24. This lesson details Regulation M Rule 101, focusing on restrictions for distribution participants from bidding for or purchasing securities during a distribution, including key exceptions. VoraPrep verifies every threshold, worked table, and practice question below against the current FINRA Series 24 blueprint.
How is FINRA Rule 2241 tested on the FINRA Series 24?
Rule 101 prohibits distribution participants from bidding for or purchasing covered securities during a restricted period to prevent market manipulation. The restricted period is 5 business days for low ADTV/public float securities, 1 business day for moderate ADTV/public float securities, and no restricted period for actively traded securities.
Where can I practice FINRA Series 24 questions on Regulation M: Rule 101 Distribution Participant Restrictions & Exceptions?
Test yourself instantly with the free playable FINRA Series 24 question on this page, or launch VoraPrep's full FINRA Series 24 adaptive question bank, interactive lessons, and 1:1 exam simulator at voraprep.com/series24.