What Was Rule 10b-6 and Why Was It Replaced?

For decades, Rule 10b-6 under the Securities Exchange Act of 1934 was an anti-manipulation provision governing participants in a securities offering. Its purpose was to prevent those with a vested interest in a distribution from artificially influencing the security’s market price. After more than forty years of application, the Securities and Exchange Commission (SEC) determined the rule had become overly complex and rigid. In 1997, the SEC rescinded Rule 10b-6 and replaced it with the more flexible framework of Regulation M.

Core Prohibitions of the Rule

Rule 10b-6 was triggered by a “distribution,” which is a public offering of securities. The rule applied to parties with a direct stake in the offering, including:

• The issuer of the security
• Any selling security holders
• The underwriters managing the offering
• Any brokers, dealers, or other persons who had agreed to participate in the distribution

The prohibitions also extended to “affiliated purchasers,” such as entities acting in concert with distribution participants or those under common control.

During a specified period, these interested parties were forbidden from bidding for or purchasing the security being distributed. They were also barred from attempting to induce any other person to purchase such securities. This restriction applied to transactions in both the over-the-counter market and on national securities exchanges. The goal was to prevent activities that could create a false sense of market demand or stabilize the price at an artificial level.

This restricted period, called a “cooling-off” period, did not have a single, uniform length, as its duration depended on the offering’s specific circumstances. The prohibitions would take effect a set number of business days before the anticipated commencement of the offering. The period would continue until the person’s participation in the distribution was complete.

The rule’s application was not limited to the exact security being offered. It also extended to any security of the “same class and series” and any “right to purchase” the security in distribution. This meant that trading in instruments like warrants and convertible securities was also restricted. This broad scope was intended to prevent indirect manipulation, where trading in a related security could have a similar effect on the price of the security being sold to the public.

Permitted Activities and Exceptions

Despite its broad prohibitions, Rule 10b-6 was not an absolute ban on all trading activity. The SEC recognized that a complete trading halt could disrupt normal market functions. Therefore, the rule carved out several exceptions for transactions that were unlikely to have a manipulative effect.

One exception was for unsolicited brokerage transactions. A broker-dealer involved in a distribution could execute an order to buy the restricted security if the order was not solicited from the customer. The rationale was that such unsolicited orders reflected genuine investor demand, not an attempt by the distribution participant to prop up the price.

The rule also permitted transactions between the participants in the distribution. For instance, an underwriter could purchase securities from the issuer without violating the rule. These transactions were considered necessary for the mechanics of the distribution process itself. The exceptions also allowed for the exercise of any right or conversion privilege to acquire the security being distributed.

The rule also contained provisions allowing for stabilizing bids under certain conditions, which were governed by the separate Rule 10b-7. These stabilizing activities were a regulated method to prevent or retard a decline in the market price of a security to facilitate an orderly distribution.

The Transition to Regulation M

By the mid-1990s, financial markets had evolved significantly since Rule 10b-6 was adopted in 1955. The rule was viewed as overly complex, and its one-size-fits-all approach was ill-suited for the growing diversity of securities and global capital markets. Over the years, the SEC had issued many no-action letters—written statements by SEC staff indicating they would not recommend enforcement action for specific conduct—to interpret the rule’s application. This created a complicated body of guidance that was difficult to navigate.

In response to these challenges, the SEC reviewed its trading practice rules, which resulted in the adoption of Regulation M in 1996. Regulation M was a complete overhaul designed to be more streamlined and targeted. It replaced Rules 10b-6, 10b-6A, 10b-7, 10b-8, and 10b-21, consolidating them into a single, integrated regulation.

Regulation M introduced a more flexible, risk-based approach. It replaced the rigid “cooling-off” periods of Rule 10b-6 with a system of one-day or five-day “restricted periods.” It also created a new framework that distinguished between the activities of distribution participants and the activities of issuers, placing them under two separate rules, Rule 101 and Rule 102, respectively. This new structure recognized that different parties have different incentives to affect the market.

Regulation M also explicitly exempted certain securities from the trading restrictions. For example, non-convertible debt and preferred securities are exempt if they meet certain quality standards. This reflects the SEC’s view that the markets for such securities are less susceptible to manipulation. The transition to Regulation M provided clearer rules that reduced regulatory burdens while still protecting against manipulative acts.