An OTC market maker in an NMS stock is bidding $25.00 for 500 shares when a customer gives it a limit order to buy 2,000 shares at $25.05, marked all-or-none, and asks that the order be shown in the market. What does Rule 604 of Regulation NMS require of the market maker?

It must publish a $25.05 bid for 2,000 shares, since the customer's request for display overrides the exception that all-or-none orders would otherwise have

Nothing: an all-or-none customer limit order is excepted from display whatever the customer asks, unlike a block-size order, whose exception gives way to a request

It must publish a $25.05 bid for 500 shares, since a condition on size limits the quantity displayed to the size of the market maker's own existing bid

Nothing until the order has stayed unexecuted for the rest of the session, after which the customer's request obliges the market maker to display it

During regular trading hours, with a national best bid and offer being disseminated, a market center receives two customer limit orders in an NMS stock: one marked immediate-or-cancel and one marked all-or-none. How does the covered order definition used for Rule 605 reports treat the two orders?

Both are covered orders, the definition excluding only orders priced at the opening or the close or submitted on a not held basis

Both are excluded, each carrying a customer instruction about partial execution that the definition treats as a request for special handling

The immediate-or-cancel order is a covered order counted in the report; the all-or-none order is excluded as an order requesting special handling

The all-or-none order is a covered order counted in the report; the immediate-or-cancel order is excluded as an order requesting special handling

In an oversubscribed issuer tender offer for part of a class, Rule 13e-4 lets the issuer depart from strict proration for holders who elect to have all or none of their tendered securities accepted. What must a holder tender to be able to make that election?

Every security of the class that it holds, the election being open to a holder that puts forward its whole position

At least one hundred securities of the class, holders of fewer being left to the separate treatment given to small holdings

Any number it chooses, the election attaching to whatever part of its position the holder decides to put forward in the offer

Every security it bought before the offer was announced, securities bought afterwards being left out of an electing tender

An issuer tender offer for part of a class is oversubscribed. Some tendering holders have elected to have all or none of their securities accepted; the rest made no election. Before Rule 13e-4 permits the issuer to accept any electing holder's tender, what must the issuer have done?

Accepted a pro rata part of every tender, the electing holders' tenders included, up to the amount it set out to buy

Accepted all the securities tendered by the holders who made no such election, the electing holders coming after them

Obtained each electing holder's written consent to a partial acceptance in case a full acceptance proves impossible

Reopened the offer so that the holders who made no election could reconsider their tenders in the light of the election

An interval fund's repurchase offer is oversubscribed beyond the amount the fund may take, so Rule 23c-3 requires it to repurchase pro rata. One holder elected to have all or none of its tendered stock accepted. If the fund uses the latitude the rule gives it for such holders, how is that holder's tender dealt with?

It is accepted in full or not at all according to the size of its holding, the largest electing holders being accepted first

It is cut back pro rata like every other tender, the election serving only to let the holder withdraw the reduced tender before it is paid

It is accepted in full or not at all, as decided by lot among the electing holders, rather than being cut back pro rata

It is accepted in full or not at all as the fund's board decides, choosing among the electing holders the tenders it prefers

According to the SEC's explanation of Rule 10b-9, what expectation do investors in an all-or-none or part-or-none offering rely on when they decide to buy?

That the issuer will pay them interest on their money for the period it is held before the offering closes or fails

That the securities will trade above the offering price once the offering closes, which happens only when demand fills the issue

That the underwriter has examined the issuer's business and will buy any securities left unsold at the offering price

That the investment presents an acceptable risk only if the issuer actually receives the proceeds to the extent represented

What conduct does Rule 10b-9 make a manipulative or deceptive device under Section 10(b) of the Exchange Act?

Representing that a security is offered on an all-or-none or similar refund basis when the offering is not made on the refund condition the rule specifies

Representing that a security is offered on an all-or-none or similar refund basis without first filing the offering's refund terms with the SEC for its review

Offering securities on a best efforts basis without representing to purchasers that all of their money will be refunded if not every security is sold in time

Failing to sell every security offered within the specified offering period after having represented to purchasers that the offering is being made on an all-or-none basis

An offering is represented as all-or-none on the terms Rule 10b-9 requires. Every unit is subscribed within the time allowed, but part of the money due to the issuer has not reached it by the date the offering terms fixed for payment. Where does the offering stand?

The condition has been met, because every unit was subscribed within the time allowed, and the late money can still be collected from purchasers afterwards

The condition has not been met, because the total amount due to the issuer was not received by the specified date, so purchasers are owed their refund

The condition has been met for the units already paid for, so the issuer keeps that money and refunds only the purchasers whose payments are still late

The condition has not been met, and the issuer must extend the payment date once so that the remaining subscribers are given a chance to pay in full

Under Rule 10b-9, how much of each purchaser's payment must the refund condition behind an all-or-none representation promise to return if the offering fails?

Whatever remains after the selling agent's commission on the units sold has been deducted

All of the consideration paid together with interest earned, refunded within thirty days

All of the consideration paid, or a specified amount of it, promptly refunded to the purchaser

Whatever amount the issuer's board decides on once the offering period has come to an end

An offering is represented as closing only if a minimum is sold, with purchasers' money otherwise refunded. Under Rule 10b-9, in what terms must that minimum be fixed?

As a specified number of purchasers subscribing within a specified time, whatever each one buys

As a specified dollar total raised within a specified time, whatever the number of units or the prices

As a specified percentage of the maximum sold within the period, the price being left to the agent

As a specified number of units of the security sold at a specified price within a specified time

An issuer's underwriters sign a firm commitment to buy every share offered, subject to customary conditions that include a market out. Does Rule 10b-9 govern the offering?

No: customary conditions such as a market out do not stop a firm commitment from taking the offering outside the rule

Yes: the exclusion requires a commitment free of every condition, so a firm commitment carrying a market out stays within the rule

Yes, until the market out lapses at closing, after which the commitment becomes firm and the rule stops applying to it

No, provided the underwriters also agree to buy back any securities purchasers return to them if the market out is exercised

Which of these arrangements takes an offering outside Rule 10b-9's restriction on all-or-none representations?

A commitment from underwriters to buy every security offered, conditional on at least half being sold by the agents

A binding commitment from the issuer's principal shareholder, who is not an underwriter, to buy every security offered

A best efforts agreement under which the agent undertakes to use its utmost diligence to sell every security offered

A firm commitment from underwriters to buy sixty percent of the issue, with the rest sold on a best efforts basis

Why did the SEC exclude firm commitment underwritings from Rule 10b-9 when it adopted the rule?

Underwriters in a firm commitment are subject to net capital rules that make a refund to purchasers unnecessary should the offering ever fail

Firm commitment offerings are registered under the Securities Act, whose liability provisions already reach any misstatement of the terms of the offering

Misleading representations about when purchasers get refunds do not arise where the underwriter is definitely obliged to take down and pay for the securities

Firm commitment offerings are sold to institutional purchasers, who can assess for themselves the conditions on which any refunds to them would be paid

Which persons can violate Rule 10b-9?

A managing underwriter that signs the underwriting agreement, the selling group being covered by other rules

A broker, dealer or municipal securities dealer participating in the distribution, and no other person at all

The issuer and the persons who sign its registration statement, the selling agents being covered by other rules

Any person, directly or indirectly, including the issuer, its officers and promoters as well as broker-dealers

Does Rule 10b-9's restriction on all-or-none representations apply to an offering that is exempt from Securities Act registration, such as a private placement?

Yes: the rule reaches a representation made in connection with the offer or sale of any security, registered or exempt

No: the rule applies to offerings registered under the Securities Act, an exempt placement being left to the states' own laws

No: a private placement has no public offering period, so the rule's requirement of a specified time cannot apply to it

Yes, but only if the placement is sold to investors who are not accredited, accredited investors being outside the rule

A dealer offers investors a block of outstanding municipal bonds in the secondary market and describes the trade as all or none. How did the SEC say Rule 10b-9 applies to such a trade?

It applies in full, so the dealer must refund the buyers unless every bond in the block is sold at a specified price by a specified date

It does not specifically apply to a secondary trade, though a material misrepresentation in the trade would still violate Rule 10b-5

It does not apply, and no antifraud rule reaches the description either, since a secondary trade involves no offering by an issuer

It applies only if the bonds came from a new issue that was sold within the ninety days before the trade, as a continuing distribution

In a best efforts all-or-none offering, which participating broker-dealers does Rule 15c2-4 bind in their handling of customers' money?

Each firm that has accepted the full sale price from a customer, a partial deposit being held at the customer's own risk until then

The managing agent alone, which answers for the handling of all the money collected by the members of the selling group

Every participating firm that accepts any part of the sale price, selling group members included, whatever its role in the distribution

Each firm that signed the agency agreement with the issuer, selling group members that did not sign it being outside the rule

A broker-dealer is selling in two best efforts offerings: one with no minimum, the other a minimum-maximum offering. How does Rule 15c2-4 require it to handle customers' payments in each offering?

Both: hold them by a method the rule allows until the offering period ends, whatever condition the offering carries or does not carry

No minimum: hold them by a method the rule allows until the period ends. Minimum-maximum: transmit them promptly to the issuer as they are received

Both: transmit them promptly to the issuer, the rule's holding methods applying only where the whole of the issue has to be sold for it to close

No minimum: transmit them promptly to the persons entitled to them. Minimum-maximum: hold them by one of the methods the rule allows for a contingent offering

A broker-dealer in an all-or-none offering wants to keep investors' payments under its own control rather than send them to an outside escrow agent. Does Rule 15c2-4 allow that?

Yes, if it promptly deposits them in a separate bank account that it holds itself, as agent or trustee for the investors, apart from its own funds

No: the payments must go to a bank that holds them in escrow for the investors, a participating broker-dealer never holding the account itself

Yes, if every investor consents in writing to the firm holding the payments for them in a bank account opened in the firm's own name

Yes, if it keeps them in its own operating account and posts a bond with a bank for the full amount it is holding for the investors

A broker-dealer in an all-or-none offering arranges for a bank to hold investors' payments in escrow under Rule 15c2-4. For that arrangement to meet the rule, what must be true of the bank?

It is affiliated with the broker-dealer, holding the funds for the investors under the firm's direction so that the firm can make the payments out itself

It has agreed in writing to hold the funds in escrow for the investors and to transmit or return them directly to those entitled

It has agreed orally to hold the funds in escrow for the investors, returning them to the broker-dealer, which then pays them on to those entitled

It is the issuer's own bank, holding the funds for the investors so that they can be released to the issuer at once when the last security is sold

In an all-or-none offering, a broker-dealer accepts investors' payments without handling them in either of the ways Rule 15c2-4(b) requires. The offering fails, and the firm promptly repays every investor in full. How does Rule 15c2-4 view the firm's conduct?

It violated the rule only if an investor can show a loss, the rule treating mishandled payments as fraud once harm results

It complied with the rule, which is concerned with whether investors get their money back in full and on time when an offering's contingency fails

It violated the rule in accepting and handling the payments that way, and repaying every investor in full does not cure the breach

It complied with the rule because the offering failed, mishandling mattering where payments reach the issuer too soon

Before the Securities Acts Amendments of 1975, why could Rule 15c2-4 not govern brokers and dealers handling payments in municipal securities underwritings?

Municipal securities were then outside the Exchange Act altogether, so that no provision of the Act reached any dealing in them at all

Municipal underwritings were then all made on a firm commitment basis, a form of distribution to which the rule has never applied at all

Municipal securities dealers were then regulated by the Municipal Securities Rulemaking Board, whose own rules displaced the SEC's rule

Municipal securities were then exempted securities, and Section 15(c)(2), under which the rule was adopted, did not apply to exempted securities

A bank registered as a municipal securities dealer accepts investors' payments in an all-or-none municipal bond offering that it is helping to distribute. Is it bound by Rule 15c2-4's requirements for handling those payments?

Yes: the rule was extended to bank municipal securities dealers and covers municipal underwritings other than firm commitments

No: the rule reaches registered broker-dealers, banks being left to the oversight of their own banking regulators instead

No: a bank dealing in municipal securities is outside the rule unless it underwrites corporate securities as well

Yes, but only where the bank holds the payments itself, a bank escrow being a method reserved for corporate offerings

Item 501 of Regulation S-K offers model cover-page language for a best efforts minimum-maximum offering. What does that language say the underwriters must do?

Buy any securities below the minimum that are left unsold, while owing just their best efforts on those above it

Sell the stated minimum if they sell any securities at all, with no more than best efforts owed toward the maximum

Sell the maximum number of securities offered within the period, refunding all payments to investors if the maximum is not reached in time

Use their best efforts throughout, with no obligation as to any number, the minimum binding the issuer and not them

An issuer's best efforts minimum-maximum offering has made no arrangement to place investors' funds in an escrow, trust or similar account. What does Item 501 of Regulation S-K require the prospectus cover to say about that?

That the underwriters will hold the funds themselves, with the rate of interest they will pay on them

Nothing about it, the item calling for a description of escrow arrangements that actually exist

That no such arrangement has been made, together with a description of the effect of that on investors

That investors may withdraw their subscriptions at any time, the lack of escrow giving them that right

Under the instruction to Item 508(a) of Regulation S-K, when must the plan of distribution describe the conditions precedent to the underwriters' taking the securities, such as a market out?

In no arrangement, the item calling for the names of the underwriters and the amounts each takes

In a firm commitment, where a market out could leave the issuer without the proceeds it was promised

In every arrangement, since investors need to know when any underwriter may withdraw from an offering

In an agency or best efforts arrangement; in a firm commitment the conditions need not be described

An underwriter holds an over-allotment option to buy additional shares from the issuer. How does Item 508(e) of Regulation S-K require the underwriting compensation table to present the option?

In a separate column of maximum-minimum figures, one assuming every option share is bought and the other assuming none is

In a single column assuming the option is exercised for half of its shares, the midpoint of the possible outcomes of exercise

In a footnote below the table, compensation the underwriter may never earn being left out of the table's own columns

In a set of columns showing the figures at each quarter of possible exercise, from a quarter of the shares up to all of them

A savings association subject to the FDIC's securities offering rules in 12 CFR Part 390 sells shares on a best efforts all-or-none condition, and not all the shares are sold within the offering period its offering circular disclosed. What follows under Section 390.418?

The association may extend the offering period once on its own decision, provided it tells investors of the new closing date in writing

The escrowed funds must be promptly refunded unless the FDIC, on a showing of good cause, approves an extension of the offering period

The association may close on the shares sold, refunding only those investors who ask for their money back within thirty days

The escrowed funds pass to the association, which must then offer the unsold shares again to the same investors in a new offering

A broker-dealer's underwriting is limited to acting as underwriter in all-or-none offerings, handling investors' funds in conformity with Rule 15c2-4(b)(2). This year it also effects twelve transactions for its own investment account. Is it a dealer for Rule 15c3-1's $100,000 dealer minimum?

No: transactions for a firm's own investment account count toward dealer status only once they exceed twenty in a calendar year

No: a firm whose underwriting conforms with Rule 15c2-4(b)(2) is outside the dealer definition whatever else it does

Yes: the carve-out for best efforts and all-or-none underwriters lasts while the firm engages in no other dealer activity

Yes, but because its underwriting is all-or-none; a best efforts underwriter making the same trades would stay outside

Item 501(b)(8) of Regulation S-K requires the outside front cover of a prospectus for a best efforts minimum-maximum offering to state certain terms beyond its description of the underwriting arrangements. Which of these must it state?

The number of securities already subscribed for and the total amount paid in by those subscribers to date

The interest investors will earn on their payments and the date by which any refunds will be made to them

The share of the offering each selling agent has undertaken to place and the sales target set for each agent

The date the offering will end and any minimum purchase requirements that apply to investors

All-or-None Orders and Offerings: Rule 10b-9, Rule 15c2-4 and AON Orders

What Does All-or-None Mean for Orders and Offerings?

All-or-none is a condition attached to a transaction that refuses any partial result: either the whole quantity is done, or nothing is. The same two words carry different legal consequences depending on where they appear. On a customer's order to buy or sell a stock, all-or-none is a handling instruction that tells the broker not to accept a partial execution. In a securities offering, all-or-none is a condition of the distribution under which investors get their money back unless every security offered is sold. In an issuer tender offer or an interval fund's repurchase offer, it is an election a tendering holder can make so that the holder's shares are bought in full or not at all.

Federal securities regulation addresses each use. Regulation NMS treats an all-or-none order as an order requiring special handling and excuses it from the limit order display obligation. Exchange Act Rule 10b-9 controls when anyone may represent that an offering is being made on an all-or-none basis, and Exchange Act Rule 15c2-4 controls what a broker-dealer must do with the money investors pay while an all-or-none or other contingent offering is still open. Regulation S-K requires the prospectus to describe the arrangement, and the tender offer and interval fund rules state how all-or-none elections are honored when an offer is oversubscribed.

The All-or-None Order Instruction

An all-or-none order is an order that the customer wants executed only at its full size. If the market can supply only part of the quantity at the stated price, the broker does not take that part; the order stays unexecuted and continues to work until the whole quantity is available on its terms or the customer cancels it. All-or-none is therefore a condition on quantity, not on time. It does not require immediate execution, which is what separates it from a fill-or-kill instruction, which must be executed in full at once or cancelled. An immediate-or-cancel instruction, by contrast, accepts whatever part can be filled immediately and cancels the rest.

A customer who attaches the instruction accepts the risk of no execution at all in exchange for avoiding a partial position. Regulation NMS describes this kind of instruction, in its definition of a covered order, as an order to be executed only at its full size, and groups it with other instructions by which a customer requests special handling for execution.

All-or-None Orders and the Limit Order Display Rule

Rule 604 of Regulation NMS, the limit order display rule, requires a specialist and an OTC market maker in an NMS stock to publish immediately a bid or offer reflecting the price and full size of a customer limit order it holds that would improve its own bid or offer, and to reflect the size of a customer limit order priced at its bid or offer and at the national best bid or offer where the order represents more than a de minimis change in size. The rule turns a customer's limit order into part of the public quotation.

Rule 604(b) lists the customer limit orders to which the display requirement does not apply. One of them, paragraph (b)(7), is any customer limit order that is an all-or-none order. The exception is stated without qualification. That distinguishes it from the block size exception in paragraph (b)(4), which applies only unless the customer placing the block order requests that it be displayed, and from paragraph (b)(2), which applies only because the customer has expressly asked, at the time of the order or under an individually negotiated agreement, that the order not be displayed. An all-or-none limit order is excepted because of what it is, not because of a request the customer made.

The practical result is that an all-or-none limit order that betters a market maker's published bid need not be added to that bid.

All-or-None Orders in Execution Quality Reports

Rule 605 of Regulation NMS requires market centers, and brokers and dealers above the rule's size threshold, to make available monthly reports of statistical information about their executions of covered orders in NMS stocks. What counts as a covered order is set by the definition in Rule 600(b). It reaches market orders and limit orders, and the definition expressly says that limit orders include immediate-or-cancel orders. It then excludes any order for which the customer requests special handling for execution, and among the examples it lists are orders to be executed at an opening or closing price, orders to be executed only at their full size, orders to be executed on a particular type of tick or bid, orders submitted on a not held basis and orders for other than regular settlement.

An all-or-none order is an order to be executed only at its full size, so it falls outside the covered order definition and outside the statistics a Rule 605 report presents. An immediate-or-cancel order, which also carries an instruction about partial execution, stays inside the definition because the definition names it. The two instructions are both conditions on how an order may be filled, but the rule treats one as ordinary and the other as special handling.

All-or-None Elections in Tender Offers and Interval Fund Repurchases

All-or-none also appears in the rules for offers in which an issuer buys back its own securities. Rule 13e-4(f)(3) requires that where an issuer tender offer is for less than all of a class and more securities are tendered than the issuer is bound or willing to take up, the securities it takes up be taken up as nearly as may be pro rata, according to the number each holder tendered. The rule then permits two departures from strict proration. The issuer may first accept all securities tendered by holders of fewer than a specified number of shares, below one hundred, who tender all their securities. It may also accept by lot the securities tendered by holders who tender all the securities they hold and who, when tendering, elect to have either all or none, or at least a minimum amount or none, accepted.

The all-or-none election carries two conditions. The electing holder must tender every security it holds, not a chosen part of its position. And the issuer may accept electing holders by lot only if it first accepts all securities tendered by holders who do not make the election. An electing holder who is selected by lot has its tender accepted in full; one who is not selected has nothing accepted, rather than receiving a prorated part that the holder said it did not want.

Rule 23c-3, under which an interval fund makes periodic repurchase offers, contains the same structure. If holders tender more than the repurchase offer amount, the fund may repurchase up to an additional two percent of its outstanding common stock; if it decides not to repurchase more than the offer amount, or if tenders exceed the offer amount plus that two percent, it must repurchase pro rata, but it may first accept tenders from holders of fewer than a specified number of shares below one hundred and may accept by lot the stock of holders who tender all their stock and elect all or none, or a minimum amount or none, after first accepting all stock tendered by holders who do not so elect.

All-or-None Offerings: The Contingency and Its Purpose

An offering is made on an all-or-none basis when it is conditioned on the sale of the entire issue: unless every security offered is sold within the offering period, the offering is cancelled and investors' payments are returned. A minimum-maximum offering, sometimes called part-or-none, is conditioned instead on a stated minimum. Both are contingent offerings, because the issuer is not entitled to the investors' money until a further event occurs.

The SEC has explained the investor-protection logic of the contingency. Investors in such an offering decide to buy on the expectation that the investment presents an acceptable risk if, but only if, the issuer actually receives the proceeds to the extent represented. A company that needs a stated amount to build a plant, for example, may be a sound investment fully funded and an unsound one half funded. The all-or-none or part-or-none representation assures subscribers that if the offering proves unsuccessful, because fewer than all, or fewer than the specified minimum, of the securities are sold, their funds or an indicated part of them will be promptly returned. The two federal rules that police that assurance work at different points: Rule 10b-9 governs the representation itself, and Rule 15c2-4 governs the money.

Rule 10b-9: The All-or-None Representation

Rule 10b-9 was adopted by the SEC in 1962 under Section 10(b) of the Exchange Act. It makes it a manipulative or deceptive device or contrivance for any person, directly or indirectly, in connection with the offer or sale of any security, to represent that the security is being offered or sold on an all-or-none basis unless the security is part of an offering or distribution being made on a refund condition. The rule therefore does not command anyone to structure an offering in a particular way; it attaches the consequences of a Section 10(b) violation to making the representation when the offering does not in fact carry the condition the representation implies.

The required condition has two parts, and both must be satisfied for the issuer to keep the money. All of the securities being offered must be sold at a specified price within a specified time, and the total amount due to the seller must be received by the seller by a specified date. Unless both happen, all or a specified amount of the consideration each purchaser paid must be promptly refunded. Selling every unit is therefore not enough: an offering in which every unit has been subscribed, but in which the subscription payments due to the issuer have not reached it by the specified date, has not met the condition, and the refund obligation is triggered.

The rule's wording also allows the refund condition to cover either all of the consideration or a specified amount of it. What it does not allow is a representation of all-or-none terms with no promptly payable refund condition behind it at all.

Part-or-None and Minimum-Maximum Representations

Paragraph (a)(2) of Rule 10b-9 extends the same discipline to any other basis on which all or part of the consideration paid will be refunded if all or some of the securities are not sold. That reaches the minimum-maximum or part-or-none offering, in which the issuer will close if a stated minimum is sold and may keep selling up to a maximum. Such a representation is permitted only if the offering is made on the condition that all or a specified part of the consideration will be promptly refunded unless a specified number of units of the security are sold at a specified price within a specified time, and the total amount due to the seller is received by a specified date.

The minimum is therefore measured in units sold at the specified price. An offering represented as closing only if 500,000 units are sold at ten dollars does not satisfy its condition by selling 500,000 units at a discounted price, or by reaching the dollar total through a larger number of units sold more cheaply. The price, the number of units, the time for selling them and the date for receipt of payment are all fixed in advance and all must be met.

The Firm-Commitment Exclusion From Rule 10b-9

Paragraph (b) of Rule 10b-9 provides that the rule does not apply to any offer or sale of securities as to which the seller has a firm commitment from underwriters or others for the purchase of all the securities being offered. The commitment may be subject only to customary conditions precedent, and the rule names market outs as one of them. A firm commitment containing a market out therefore still takes the offering outside the rule.

Two features of the exclusion matter in practice. The commitment may come from underwriters or from others, so it is the existence of a binding purchase commitment that counts, not the label of the person giving it. And the commitment must cover all the securities being offered. An offering in which underwriters commit to buy part of the issue while the rest is sold on a best efforts basis subject to a refund condition is not covered by a firm commitment for all the securities, and a representation that the offering is all-or-none remains subject to the rule.

When it adopted the rule, the SEC explained why the exclusion exists. The problem the rule addresses is misleading representations about the conditions under which purchasers will obtain refunds, and that problem does not arise in a conventional firm commitment underwriting, in which the underwriter has a definite obligation to take down the securities and pay the seller for them.

The Reach of Rule 10b-9

Rule 10b-9 applies to any person. It is not confined to brokers and dealers, so an issuer, its officers or a promoter who represents that an offering is all-or-none without the required condition is within it. It also applies in connection with the offer or sale of any security, with no exception for offerings exempt from Securities Act registration; a private placement marketed as all-or-none is subject to the same condition as a registered offering.

The rule is aimed at offerings in which investors rely on the issuer receiving the represented proceeds. In 1976 the SEC said that Rule 10b-9 would not specifically apply to secondary market transactions, in which potential purchasers are not relying on an all-or-none or similar representation about the proceeds an issuer will receive. The SEC added that material misrepresentations of any kind, in primary or secondary transactions, would still violate Rule 10b-5. The same release noted that Rule 10b-9 had applied to municipal securities since its adoption in 1962.

Rule 15c2-4: Which Firms and Which Distributions It Covers

Rule 15c2-4 was adopted under Section 15(c)(2) of the Exchange Act. It makes it a fraudulent, deceptive or manipulative act or practice for any broker, dealer or municipal securities dealer participating in any distribution of securities, other than a firm-commitment underwriting, to accept any part of the sale price of a security being distributed unless it handles the money as the rule requires. The trigger is accepting payment. Every participating firm that takes investors' money is bound, whether it is the managing agent or a member of the selling group, and the rule does not depend on whether the offering is registered.

The rule has two branches. Under paragraph (a), in a distribution that is not contingent, such as an ordinary best efforts offering with no minimum, the money or other consideration received must be promptly transmitted to the persons entitled to it, which ordinarily means the issuer or the selling holder. Under paragraph (b), where the distribution is made on an all-or-none basis or on any other basis that contemplates that payment is not to be made to the person on whose behalf the distribution is made until some further event or contingency occurs, the money must be held in one of the two ways the paragraph describes. A minimum-maximum offering is therefore within paragraph (b) as much as an all-or-none offering, because its proceeds are not payable to the issuer until the minimum is reached.

Firm-commitment underwritings are outside the rule altogether. In a firm commitment the underwriters have bought the securities and pay the issuer themselves, so the investors' payments are the underwriters' sale proceeds rather than money held for the issuer.

Rule 15c2-4: Holding Payments Until the Contingency Occurs

Paragraph (b) offers two methods. Under paragraph (b)(1), the broker-dealer itself may promptly deposit the money in a separate bank account, as agent or trustee for the persons who have the beneficial interests in it, until the event or contingency has occurred, and then promptly transmit or return the funds to the persons entitled to them. The rule does not require an independent escrow agent for this method: the account is the firm's, held in a fiduciary capacity for investors, and it must be separate from the firm's own funds.

Under paragraph (b)(2), the broker-dealer may instead promptly transmit all the funds to a bank that has agreed in writing to hold them in escrow for the persons who have the beneficial interests in them, and to transmit or return the funds directly to the persons entitled to them when the event or contingency has occurred. Under this method the bank, not the broker-dealer, pays the money out at the end of the offering, either to the issuer if the contingency is met or back to investors if it is not, and the bank's agreement must be in writing.

The SEC described Rule 15c2-4 as a prophylactic rule. It defines a practice as fraudulent without requiring proof that any investor lost money. A broker-dealer that places contingent-offering payments in its general operating account has violated the rule when it does so, even if the contingency later fails and every investor is repaid in full; the violation lies in the handling of the money while the outcome is uncertain, not in the eventual loss.

Rule 15c2-4 and Municipal Securities

Rule 15c2-4 did not always reach municipal securities. Before the Securities Acts Amendments of 1975, municipal securities were exempted securities under the Exchange Act, and Section 15(c)(2), which by its terms does not apply to exempted securities, could not support rules governing them. Once the 1975 Amendments brought municipal securities within Section 15(c)(2), the SEC first preserved the status quo with a temporary rule and then, in 1976, amended Rule 15c2-4 to extend it to bank municipal securities dealers, so that on the temporary rule's expiry it applied for the first time to municipal securities transactions effected by brokers and dealers.

The SEC explained that Rule 15c2-4 provides important protections to issuers and purchasers in best efforts and all-or-none offerings and should apply to underwritings other than firm commitment underwritings of municipal securities as well as corporate securities. A bank municipal securities dealer that accepts investors' payments in an all-or-none municipal offering is therefore bound by the same handling requirements as a registered broker-dealer in a corporate offering.

Net Capital and Customer-Protection Consequences

How a firm handles contingent-offering money also affects its status under the financial responsibility rules. Rule 15c3-1(a)(2)(iii) requires a dealer to maintain net capital of not less than $100,000, and for that purpose the term dealer includes any broker or dealer that effects more than ten transactions in any one calendar year for its own investment account. Rule 15c3-1's definition of a dealer for the purposes of its higher minimum capital requirement does not reach a firm whose underwriting is limited to best efforts or all-or-none underwritings conducted in conformity with paragraph (b)(2) of Rule 15c2-4, provided it engages in no other dealer activity. A firm planning to act in all-or-none offerings therefore chooses its method under Rule 15c2-4 with these consequences in view.

Prospectus Disclosure of All-or-None and Minimum Terms

Item 501(b)(8) of Regulation S-K governs what the outside front cover of a prospectus says about underwriting. If the offering is not made on a firm commitment basis, the cover must briefly describe the underwriting arrangements. The item offers model descriptions. For a best efforts offering, the underwriters are not required to sell any specific number or dollar amount of securities but will use their best efforts to sell the securities offered. For a best efforts minimum-maximum offering, the underwriters must sell the minimum number of securities offered if any are sold, and are required to use only their best efforts to sell the maximum number.

For an offering on a best efforts or best efforts minimum-maximum basis, the cover must also state the date the offering will end, any minimum purchase requirements, and any arrangements to place the funds in an escrow, trust or similar account. If the issuer has not made any of these arrangements, the cover must state that fact and describe the effect on investors. An issuer that keeps subscription payments without any escrow therefore cannot stay silent about it; the absence is itself a required disclosure.

Describing the Underwriting Obligation in the Plan of Distribution

Item 508(a) of Regulation S-K requires the plan of distribution to state briefly the nature of the underwriters' obligation to take the securities. Its instruction says that all that is required is whether the underwriters are or will be committed to take and pay for all of the securities if any are taken, or whether the arrangement is an agency or best efforts arrangement under which the underwriters take and pay for only such securities as they sell to the public. Conditions precedent to the underwriters' taking the securities, including market outs, need not be described except in the case of an agency or best efforts arrangement. In a firm commitment the market out need not be spelled out; in an agency or best efforts arrangement, including an all-or-none or minimum-maximum one, the conditions must be described.

All-or-none has a separate, narrower meaning in Item 508(e), which governs the table of underwriting compensation. Where the underwriter holds an over-allotment option to buy additional shares, the issuer must say the arrangement exists, state the number of additional shares, and present maximum-minimum information in a separate column of the table based on the purchase of all or none of the shares subject to the option. The table therefore shows the two end points, the option exercised in full and not exercised at all, rather than any partial exercise.

All-or-None Offerings by Savings Associations

Banking regulators impose their own escrow rule on securities offerings by the institutions they supervise. Part 390 of the Federal Deposit Insurance Corporation's regulations, which holds rules transferred from the former Office of Thrift Supervision, contains a subpart on securities offerings. Its Section 390.418 requires that any funds received in an offering sold on a best efforts all-or-none condition, or with a minimum-maximum amount to be sold, be held in an escrow or similar separate account until all of the securities are sold in the all-or-none case, or the stated minimum is sold in the minimum-maximum case.

The rule fixes what happens when the condition is not met. If the required amount is not sold within the time period for the offering disclosed in the offering circular, all funds in the escrow account must be promptly refunded, unless the FDIC approves an extension of the offering period upon a showing of good cause, and the extension is consistent with the public interest and the protection of investors. The association cannot extend the period on its own decision; the extension is the regulator's to grant.

Common Errors and Exam Traps

The most common error is confusing all-or-none with fill-or-kill. An all-or-none order requires the full quantity but not immediate execution, and may stay working; a fill-or-kill order requires both and is cancelled at once if it cannot be filled whole.

A second error is assuming that all-or-none in an offering is satisfied once every unit is subscribed. Rule 10b-9's condition also requires the total amount due to the seller to be received by a specified date, and the sales must be at the specified price within the specified time.

A third error is thinking that every contingent offering requires an independent escrow agent. Rule 15c2-4 permits a separate bank account held by the broker-dealer as agent or trustee for investors as one method, and a written escrow arrangement with a bank as the other.

A fourth error is treating the firm-commitment exclusion as lost whenever the underwriting agreement contains a market out. Rule 10b-9 expressly allows customary conditions precedent, including market outs; what it requires is a commitment for all the securities being offered.

Examination Relevance and Key Takeaways

All-or-none orders appear on the SIE and Series 7 examinations among order qualifiers, and all-or-none and minimum-maximum offerings appear among underwriting arrangements. Candidates should be able to distinguish all-or-none from fill-or-kill and immediate-or-cancel instructions, explain how an all-or-none limit order is treated under the display and execution quality rules, state the refund condition Rule 10b-9 requires before an offering may be called all-or-none and the firm-commitment exclusion, and describe the two methods Rule 15c2-4 allows for holding investors' payments until the contingency occurs.