Cooling-Off Rule

Cooling-Off Rule

The phrase "cooling-off rule" is actually applied to three specific yet unrelated situations in the business world. The period between issuing prospectus and selling new stock or bond offerings is a cooling-off period where communication between underwriter and issuing company must be minimized or silenced altogether. In consumer-facing businesses, the cooling-off rule more commonly refers to a consumer protection law regulated by the Federal Trade Commission (FTC) that allows a buyer to release themselves from a purchase agreement within a set number of days of a purchase. A third usage refers to a period of time when government employees (specifically SEC or FINRA employees) who join the private sector should be prohibited from engaging in lobbying activities with the agency where they were formerly employed. The restriction is not officially known as the cooling-off rule; it is known as the SEC's Regulation M (not to be confused with a different Regulation M issued by the IRS).

This phrase gets used in multiple ways that have unrelated meanings so context is important for understanding the implication.

What Is the Cooling-Off Rule?

The phrase "cooling-off rule" is actually applied to three specific yet unrelated situations in the business world. The first usage of the phrase refers to the Securities and Exchange Commission (SEC) Regulation M, which specifies key points in the process of floating stock shares or issuing bond offerings. It stipulates a restriction on activity and communication during the period just before these issues are offered for sale to the public.

The second more common usage refers to a long-standing requirement regulated by the vendors to provide consumers with a three-day return period. A third usage refers to a period of time when government employees (specifically SEC or FINRA employees) who join the private sector should be prohibited from engaging in lobbying activities with the agency where they were formerly employed.

This phrase gets used in multiple ways that have unrelated meanings so context is important for understanding the implication.
The period between issuing prospectus and selling new stock or bond offerings is a cooling-off period where communication between underwriter and issuing company must be minimized or silenced altogether.
Consumers who make purchases for hundreds of dollars or more are allowed a cooling-off period where they can return their purchase within three days.
Government agencies also expect former employees not to lobby their old agency for a cooling-off period after employment.

Understanding the Cooling-Off Rule

When someone refers to the cooling-off rule regarding the issuance of new securities, they may loosely be referring to the SEC's Regulation M, so called because it refers to a "cooling-off period." The restriction is not officially known as the cooling-off rule; it is known as the SEC's Regulation M (not to be confused with a different Regulation M issued by the IRS).

The SEC's regulation refers to the time in between the day the preliminary prospectus is filed with the SEC and the day when the new security is actually available for sale or trade. This is also known as a quiet period because the underwriter and the issuing company are not allowed to discuss the issue with investors during this time.

Three-Day Return Policy

In consumer-facing businesses, the cooling-off rule more commonly refers to a consumer protection law regulated by the Federal Trade Commission (FTC) that allows a buyer to release themselves from a purchase agreement within a set number of days of a purchase. The number of days the buyer has to change their mind without incurring any penalty is different for various products and situations. Many businesses will allow for a longer grace period than three days, but they are not required to do so.

One particular exception to this cooling-off rule comes to bear in the purchase of motor vehicles. If a person buys a car from a dealership and completes the transaction at the physical location of the dealer's business address, then the three-day right of rescission is waived. The sale is final from the moment the contract of sale is signed.

However, if someone were to buy a car from an auto show or in any other location that was not the primary business location of the dealer, then the three-day cooling-off rule actually does apply. Since auto auction houses are actually dealers themselves, the location of the auction is their place of business, which is how such transactions are also considered final once purchased.

Lobbying Restrictions

The third usage for the phrase "cooling-off rule" refers to an expected practice that is much less concrete in nature. Government agencies, particularly those involved in finance, such as the SEC, FINRA, the U.S. Treasury Department, or other similar organizations, may find that many of their employees find their way into finance or investment banking careers.

In this capacity, their new employer might find an employee's former connections to government agencies quite valuable when it comes to getting clarification on rules and regulations. However, firms are expected to refrain from sending former employees into lobbying activities immediately after employing them. A one-year cooling-off period is expected.

Related terms:

Freed Up

Freed up is slang referring to when IPO underwriters are no longer obligated to sell at the agreed upon price, or money available after closing a position. read more

Freeriding

Freeriding is an illegal practice in which a trader buys and sells securities without having the money to cover the trade. read more

Federal Trade Commission (FTC)

The FTC is an independent agency that aims to protect consumers and ensure a competitive market by enforcing consumer protection and antitrust laws. read more

Initial Public Offering (IPO)

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. read more

Primary Market

A primary market is a market that issues new securities on an exchange, facilitated by underwriting groups and consisting of investment banks. read more

Regulation SHO

Regulation SHO is a Securities and Exchange Commission (SEC) regulation that updated policies that govern short sale practices. read more

Regulation M

Regulation M, also known as Subchapter M, is an Internal Revenue Service (IRS) regulation that allows regulated investment companies to pass taxes from capital gains, dividends, and interest distributions onto individual investors. read more

Rule 144A

SEC Rule 144A modifies a two-year holding period requirement on privately placed securities to permit qualified institutional buyers to trade. read more

Securities and Exchange Commission (SEC)

The Securities and Exchange Commission (SEC) is a U.S. government agency created by Congress to regulate the securities markets and protect investors. read more

Underwriter

An underwriter is any party that evaluates and assumes another party's risk for a fee in the form of a commission, premium, spread, or interest. read more