Rule 10b-6

Rule 10b-6 is a rule set forth by the Securities and Exchange Commission (SEC) that prohibits the purchase of stock by an issuer when the stock has not completed distribution. Rule 10b-6 is designed to prevent issuers from tampering with the market by bidding for shares before they are publicly available, which could artificially raise the price. The rule creates an even playing field between investors, brokers, dealers, issuers and underwriters for newly issued shares.

The rule prevents broker dealers and underwriters who may be privy to information about a new issue from investing before the general public can. In particular, l0b-6 prohibits the bidding and purchasing for "any person who has reasonable cause to believe that he will participate, has agreed to participate, or is participating, in a particular distribution of a security." A person could be said to be included under the rule as soon as they come into such type of knowledge that would qualify as "inside information."

When the rule was first proposed, it was quite controversial and attracted a formidable commentary of dissenting opinions during an official public comment phase of the rulemaking process. In particular, many took issue with the vague nature of the wording and indefinite nature of its applicability, especially how information would be judged to be "insider information" as it related to the status and progress of the public offering. As a possible resolution of this difficulty, it was suggested that the SEC choose a specific point in time prior to a distribution at which trading should cease. 

The finance industry at the time was nearly unanimous in their anticipation of difficulty in distinguishing to whom the prohibition applied, and the rulemaking commission had not reserved ad hoc power to grant exceptions. Critics recognized that the exemptions that were listed under the rule included no allowance for the continuation of normal trading, especially that which would not directly affect the price of the security in question.

The final form of rule l0b-6 adopted on July 5, 1955, included additions to the rule that were responsive to the criticism. However, the regulatory effect of the rule maintained its focus on trader market activities during a public offering. Only bidding and purchasing are prohibited, and the prohibition of these activities is absolute, extending to both exchange and over-the-counter market transactions. Later revisions of the rule included the reservation of ad hoc power for the SEC to grant exemptions as it saw fit.