[Federal Register Volume 63, Number 215 (Friday, November 6, 1998)]
[Proposed Rules]
[Pages 59911-59916]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29510]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-40617; File No. S7-27-98]
RIN: 3235-AH48
Purchases of Certain Equity Securities by the Issuer and Others
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (Commission)
(''Commission'') today is proposing for public comment an amendment to
Rule 10b-18 (Rule) under the Securities Exchange Act of 1934 (Exchange
Act). Rule 10b-18 provides a ``safe harbor'' from liability for
manipulation under Sections 9(a)(2) and 10(b) of the Exchange Act, and
Rule 10b-5 thereunder, when an issuer or affiliated purchaser of the
issuer bids for or buys shares of its common stock in compliance with
the Rule's conditions. In order to improve liquidity during severe
market downturns, the proposal would amend the Rule's timing condition
during the trading session immediately following a market-wide trading
suspension. In particular, the safe harbor now would be available to an
issuer that bids for or purchases its common stock either: from the
reopening of trading until the close of trading on the same day as the
imposition of the market-wide trading suspension; or at the next day's
opening, if the market-wide trading suspension was in effect at the
scheduled close of trading. The proposed safe harbor requires that the
issuer continue to comply with the Rule 10b-18 conditions governing the
manner, price and volume of market purchases of its common stock.
DATES: Comments should be submitted on or before December 7, 1998.
ADDRESSES: Interested persons should submit three copies of their
written data, views and opinions to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW, Washington,
DC 20549. Comments also may be submitted electronically at the
following E-mail address: rule-comments@sec.gov. All comment letters
should refer to File No. S7-27-98. All submissions will be made
available for public inspection and copying at the Commission's Public
Reference Room, Room 1024, 450 Fifth Street, NW, Washington DC 20549.
Electronically submitted comment letters will be posted on the
Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: James A. Brigagliano, Assistant
Director; Denise Landers, Attorney; and Jerome Roche, Attorney; Office
of Risk Management and Control, Division of Market Regulation,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549, or at (202) 942-0772.
SUPPLEMENTARY INFORMATION:
I. Introduction
In response to a petition for rulemaking (Petition) \1\ filed by
the New York Stock Exchange, Inc. (NYSE), the Commission is proposing
to amend Rule 10b-18 \2\ to modify the timing condition during the
trading session immediately following a market-wide trading
suspension.\3\ The proposal extends the safe harbor to Rule 10b-18 bids
or Rule 10b-18 purchases \4\ effected either: (i) from the reopening of
trading until the close of trading immediately following, and on the
same day as, a market-wide trading suspension; or (ii) at the next
day's opening, if the market-wide trading suspension was in effect at
the scheduled close of trading. At such times, an issuer or an
affiliated purchaser of the issuer (affiliated
[[Page 59912]]
purchaser) \5\ would still also have to comply with the manner, price
and volume conditions in Rule 10b-18 to satisfy the requirements of the
safe harbor.
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\1\ The Petition was filed with the Commission on January 9,
1998 and is publicly available in File No. 4-409 in the Commission's
Public Reference Room.
\2\ 17 CFR 240.10b-18.
\3\ The proposed amendment defines market-wide trading
suspension as either: (i) A market-wide trading halt imposed
pursuant to the rules of a national securities exchange or a
registered national securities association in response to a market-
wide decline during a single trading session; or (ii) a market-wide
trading halt ordered by the Commission pursuant to section 12(k) of
the Exchange Act. Proposed Rule 10b-18(a)(15). For example, the
proposed alternative safe harbor would apply in the trading session
following a trading halt pursuant to NYSE exchange rule 80B or
Market Closing Policy of the National Association of Securities
Dealers, Inc. (NASD). The Commission approved the NASD's market
closing policy statement, codified in IM-4120-3. Securities Exchange
Act Release No. 39846 (April 9, 1998), 63 FR 18477 (April 15, 1998)
(Circuit Breaker Approval Order). The Commission notes that it has a
standing request with the NASD that the NASD halt trading as quickly
as practicable whenever the NYSE and other markets have suspended
trading, which the NASD continues to honor. See Letter to Howard L.
Kramer, Senior Associate Director, Office of Market Supervision,
Division of Market Regulation, Commission, from Richard Ketchum,
Chief Operating Officer and Executive Vice President, NASD, dated
January 23, 1998.
\4\ Rule 10b-18 bid is defined as a bid for securities that, if
accepted, or a limit order to purchase securities, that if executed,
would result in a Rule 10b-18 purchase. 17 CFR 240.10b-18(a)(4). A
Rule 10b-18 purchase is defined as a purchase of common stock of an
issuer by or for the issuer, with certain exceptions. 17 CFR
240.10b-18(a)(3).
\5\ The safe harbor is also available for affiliates of the
issuer (affiliated purchasers). References to ``issuer'' in this
release include affiliated purchasers.
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The NYSE Petition stated that it had surveyed floor brokers,
upstairs traders and listed-company representatives. Those groups
agreed that expanding the Rule 10b-18 safe harbor to issuer repurchases
effected during the trading session following a severe market decline
could offer an important source of liquidity and provide balance to
selling activity. The Commission has previously noted that issuers
repurchase their securities for many legitimate reasons and that those
repurchases benefit shareholders and the marketplace by providing
additional liquidity.\6\ Based on these considerations, the Commission
is publishing for public comment this proposed amendment to Rule 10b-
18.
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\6\ Securities Exchange Act Release No. 19244 (Nov. 17, 1982),
47 FR 53333 (Nov. 26, 1982) (Adopting Release).
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II. Rule 10b-18 Safe Harbor
Before Rule 10b-18 was adopted, issuers effecting repurchase
programs were uncertain about their potential liability under the anti-
manipulation provisions of the Exchange Act. Those provisions offer
little practical guidance with respect to the scope of permissible
issuer market activity.\7\ Since 1967, the Commission has considered
periodically whether, and how, to regulate an issuer's market
repurchases of its securities.\8\ The Commission determined that a safe
harbor rule would prevent fraudulent, manipulative, and deceptive acts
or practices by issuers and others without imposing unnecessarily
complex and intrusive restrictions on issuer market repurchases.\9\
Rule 10b-18 grants a safe harbor from liability for manipulation under
Sections 9(a)(2) and 10(b), and Rule 10b-5, of the Exchange Act to an
issuer in connection with bids for or purchases of its common stock
that comply with the Rule's conditions. Because Rule 10b-18 is a safe
harbor, compliance with the Rule's conditions is voluntary. Thus,
issuer bids for or purchases of its common stock that do not comply
with Rule 10b-18 are not necessarily manipulative.\10\
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\7\ Id.
\8\ The Commission first proposed Rule 10b-10 to govern issuer
repurchases in connection with proposed legislation that became the
Williams Act Amendments of 1968. Pub. L. No. 90-439, 82 Stat. 454
(July 29, 1968), reprinted in Hearings on S. 510 before Senate
Committee on Banking and Currency, 90th Cong., 1st Sess. 214-216
(1967). The Commission then published for public comment proposed
Rule 13e-2 in 1970, 1973 and 1980, a proscriptive rule that would
have imposed disclosure requirements, purchasing limitations and
general antifraud liability. Securities Exchange Act Release Nos.
8930 (July 13, 1970), 35 FR 11410 (July 16, 1970); 10539 (Dec. 6,
1973), 38 FR 34341 (Dec. 13, 1973); and 17222 (Oct. 17, 1980), 45 FR
70890 (Oct. 27, 1980).
\9\ Adopting Release, supra note 6, at 53334.
\10\ 17 CFR 240.10b-18(c).
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The Commission adopted safe harbor provisions both to ensure that
the price of an issuer's repurchases would be set by independent market
forces and to offer clear guidance concerning the scope of non-
manipulative issuer repurchasing.\11\ Rule 10b-18, therefore, sets out
specific conditions that issuers must comply with while conducting
stock repurchases.
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\11\ Adopting Release, supra note 6, at 53334. Some conduct that
meets the safe harbor requirement of Rule 10b-18 may still violate
the anti-fraud provisions of the Exchange Act. For example, as the
Commission noted in 1982 when adopting Rule 10b-18, ``Rule 10b-18
confers no immunity from possible Rule 10b-5 liability where the
issuer engages in repurchases while in possession of favorable,
material nonpublic information concerning its securities.'' Id., n.
5.
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The manner of purchase condition requires an issuer to use
a single broker or dealer on any given day to bid for or purchase its
common stock.\12\ The goal of this provision is to prevent an issuer
from creating the appearance of widespread broker-dealer interest and
trading activity in its security.
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\12\ 17 CFR 240.10b-18(b)(1). This manner condition applies only
to Rule 10b-18 bids or Rule 10b-18 purchases solicited by or on
behalf of the issuer.
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The timing condition specifies that an issuer's purchase
may not be the opening transaction reported to the consolidated
transaction reporting system nor may purchases be made during the last
half-hour before the scheduled close of trading.\13\ Because they tend
to forecast the direction of trading and suggest the strength of
demand, purchases effected at the opening or close of trading are
generally considered to be a significant indication of the current
market value of the security. The Rule excludes opening bids and
purchases to prevent the issuer from setting the character of the day's
trading. The Rule similarly excludes bids and purchases near or at the
close of trading to prevent the issuer from influencing the closing
price for its security.
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\13\ 17 CFR 240.10b-18(b)(2).
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The price condition specifies the highest price an issuer
may bid or pay for its common stock.\14\ Because the price condition
generally limits the issuer to bidding for or buying its security at a
price that is no higher than the current independent published bid or
last independent transaction price, it ensures that the issuer would
not lead the market for its security through its repurchases.
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\14\ 17 CFR 240.10b-18(b)(3). The price limitation varies on
whether the security is a reported, exchange-traded, Nasdaq or other
security, and whether the bid or purchase is effected on an
exchange. Id.
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The volume condition is designed to prevent an issuer from
dominating the market for its securities through substantial purchasing
activity. Generally, the issuer may effect daily purchases up to 25
percent of the trading volume in its shares.\15\ Block purchases are
excepted from the volume condition, although all other Rule 10b-18
conditions apply to block purchases.\16\ Therefore, an issuer may
purchase one or more blocks as long as its non-block purchases amount
to no more than 25 percent of the security's trading volume.
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\15\ For nonreported securities, volume may not exceed one round
lot on a single day or on such day plus the five preceding days, \1/
20\th of the percent of outside shares. 17 CFR 240.10b-18(b)(4).
Trading volume is defined generally as the average daily trading
volume reported to the consolidated transaction reporting system or
to the NASD for the security in the four calendar weeks preceding
the week that the Rule 10b-18 purchase or bid is to be effected. 17
CFR 240.10b-18(a)(11).
\16\ Block is defined as a quantity of stock that either: (i)
has a purchase price of $200,000 or more; or (ii) is at least 5,000
shares and has a purchase price of at least $50,000; or (iii) is at
least 20 round lots of the security and totals 150 percent or more
of the trading volume for that security or, in the event that
trading volume data are unavailable, is at least 20 round lots of
the security and totals at least one-tenth of one percent (0.001) of
the outstanding shares of the security, exclusive of any shares
owned by any affiliate. Block does not include any amount a broker
or dealer, acting as principal, has accumulated for the purpose of
selling to the issuer or affiliated purchaser, if the issuer or
affiliated purchaser knows or has reason to know that such amount
was accumulated for such purpose, nor does it include any amount
that a broker or dealer has sold short to the issuer, if the issuer
or affiliated purchaser knows or has reason to know that the sale
was a short sale. 17 CFR 240.10b-18(a)(14).
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III. NYSE Petition and Proposed Amendment to Rule 10b-18
The Commission recently approved a NYSE proposal to amend its rule
establishing ``circuit breakers.'' \17\ Circuit breakers are
coordinated market-wide trading halts that are intended to avoid
systemic breakdown when a severe one-day market drop interferes with
the orderly operation of the financial markets.\18\ The new circuit
[[Page 59913]]
breaker rule sets trigger values representing a one-day decline in the
Dow Jones Industrial Average (DJIA) of 10%, 20%, and 30%. It also
modifies the duration of the market-wide trading halt depending on when
the circuit breaker is triggered.\19\ Given the new trigger values,
these circuit breakers would rarely be triggered, and only during
significant market declines when liquidity may evaporate. In
conjunction with the new circuit breaker rules, the NYSE asked the
Commission to expand the Rule 10b-18 timing condition to permit issuers
to bid for or purchase its security either: (1) At the reopening of
trading on the same day as the trading halt, and during the half hour
prior to the scheduled close of trading of such trading session; or (2)
at the next day's opening, if the market-wide trading halt is in effect
at the scheduled close of trading. The Petition did not propose to
change the other Rule 10b-18 conditions.\20\
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\17\ See Circuit Breaker Approval Order supra note 3. (Order
approving circuit breakers for rules governing market-wide trading
halts on the NYSE, American Stock Exchange, Boston Stock Exchange,
Chicago Stock Exchange, NASD, and Philadelphia Stock Exchange.
\18\ Id.
\19\ Id. NYSE Rule 80B governs the imposition of trading halts
on the NYSE due to extraordinary market volatility. Rule 80B
provides both the trigger values (circuit breakers) for trading
halts on the NYSE, which are expressed as a decline in the DJIA from
the closing value on the previous trading day, and the duration of
the trading halt for each circuit breaker. The circuit breakers
contained in Rule 80B have been coordinated with: (i) All other U.S.
stock exchanges and the National Association of Securities Dealers
with respect to trading of stocks, stock options, and stock index
options; and (ii) all U.S. futures exchanges with respect to the
trading of stock index futures and options on such futures, so that
all such markets would cease trading when a circuit breaker is
triggered by a decline in the DJIA.
\20\ See Petition, supra note 1.
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The NYSE acknowledged that Rule 10b-18 is neither mandatory nor the
exclusive means for an issuer to make repurchases without manipulating
the market price of its securities. However, it noted that in practice
many issuers are reluctant to undertake repurchases without the
certainty that their bids or purchases fall within the Rule 10b-18 safe
harbor. The NYSE highlighted the need for liquidity in the period
following a significant market decline, and suggested that issuer
repurchases offer a source of liquidity that could ease the stress of
volatile markets. In October 1987 and October 1997, the markets
experienced severe declines. At those times, numerous issuers sought
our guidance on the applicability of Rule 10b-18 in the following
trading session. The events following those market breaks underscore
the significant role of issuer repurchases in enhancing liquidity
during extreme market downturns and the need to clearly communicate the
applicability of Rule 10b-18 during such periods.\21\
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\21\ See, ``Bargain-Shopping Through Buybacks'', New York Times,
August 6, 1998, p. D 6.
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When the Commission adopted Rule 10b-18, it recognized that issuers
rarely buy back their securities with improper intent, but rather
generally conduct repurchase programs for legitimate business reasons.
The Commission also acknowledged the benefit of offering clear guidance
and certainty to issuers and broker-dealers concerning permissible
market activity when repurchasing their stock. The Rule 10b-18 safe
harbor allows issuers and their broker-dealer agents to bid for and
purchase their common stock within the Rule's conditions and thereby
avoid the substantial and unpredictable risks of liability under the
general anti-manipulation provisions of the Exchange Act. With an
expanded safe harbor during the trading session following a market
break, issuers may be encouraged to participate in reestablishing
equilibrium between buying and selling interests. Under the proposal,
the safe harbor would also be available in the trading session
following a market-wide trading suspension declared pursuant to a
Commission emergency order.\22\
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\22\ Section 12(k) of the Exchange Act gives the Commission
special authority to respond to market disruptions and extreme
market volatility that could result from a variety of contingencies.
Section 12(k)(1)(B) authorizes the Commission summarily to suspend
all trading in the markets, for up to ninety calendar days when such
suspension is required by the public interest and for the protection
of investors. The Commission has never invoked this provision of
section 12(k).
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The Commission weighed its concerns about potential manipulative
activity by issuers against the benefits of facilitating short-term
liquidity during periods of severe market turbulence. We found that the
balance tips in favor of enhanced liquidity. Thus, we are publishing
for public comment the amendment to Rule 10b-18 substantially as
proposed by the NYSE. Rule 10b-18 would continue to state that no
presumption of manipulation arises for issuer purchases of its
securities made outside the Rule 10b-18 conditions.\23\
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\23\ The proposed alternative safe harbor conditions would be
codified in Rule 10b-18(c); and current paragraph (c) would be
amended and redesignated as paragraph (d).
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IV. Request for Public Comment
The Commission seeks comment generally on adopting the proposal.
The Commission asks commenters to address whether the proposed
amendment provides appropriate safe harbor conditions for issuers and
affiliated purchasers in times of severe market downturns. The
Commission seeks comment on whether there are any risks of manipulation
that this proposal may raise. Commenters may also wish to discuss
whether there are any legal or policy reasons why the Commission should
consider a different approach.\24\ For instance, should volume limits
also be relaxed and/or should specific disclosure of issuer repurchases
be required? Further, should the time of purchase condition under the
proposed safe harbor be broader, narrower, or include different
parameters? The Commission encourages commenters to provide information
regarding the functioning of secondary markets during periods of market
volatility, the roles of market participants, and the advantages and
disadvantages of the proposed amendments. For purposes of the Small
Business Regulatory Enforcement Fairness Act of 1996, the Commission
also requests information regarding the potential impact of the
proposed amendment on the economy on an annual basis. If possible,
commenters should provide empirical data to support their views.
Comments should be submitted by December 7, 1998.
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\24\ Additionally, the Commission expects to consider broad
revisions to Rule 10b-18 in the near future, covering the manner,
timing, price and volume conditions in Rule 10b-18 and seeks comment
on Rule 10b-18 generally.
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V. Costs and Benefits of the Proposed Amendments
The Commission has identified certain costs and benefits relating
to the proposals, which are discussed below, and encourages commenters
to discuss any additional costs or benefits. In particular, the
Commission requests comment on the potential costs for any necessary
modifications to information gathering, management, and record-keeping
systems or procedures, as well as any potential benefits resulting from
the proposals for issuers, investors, broker-dealers, securities
industry professionals, regulators or others. Commenters should provide
analysis and data to support their views on the costs and benefits
associated with the proposals.
A. Benefits
The Commission preliminarily believes that the proposed amendments
generally would help improve the liquidity of markets for equity
securities following a market-wide trading suspension. Securities
sellers would benefit from improved liquidity while issuers could buy
shares at relatively low prices. We preliminarily believe that the
specific benefits set forth below
[[Page 59914]]
would flow from the proposed amendments.
The Commission preliminarily believes that the proposal will
facilitate trading in the issuer's securities by reducing issuer
reluctance to purchase in response to sell-side order imbalances that
may occur during periods of severe market declines. The proposed
amendments, by extending the safe harbor, may encourage issuers to
purchase their securities at a time when other market participants may
be unable or unwilling to do so. We preliminarily believe that
extending the safe harbor to issuers under the conditions following a
market-wide trading suspension will improve the liquidity of markets in
the issuer's securities. The Commission requests data and analysis on
what effect the proposed changes may have on the liquidity of these
markets.
The proposed safe harbor also provides clarity as to the scope of
permissible market activity for issuers and the broker-dealers that
assist issuers in their stock repurchases. If an issuer effects its
repurchases in compliance with the conditions of Rule 10b-18, it will
avoid what might otherwise be substantial and unpredictable risks of
liability under the anti-manipulative provisions of the Exchange Act.
The Commission does not have data to quantify the value of the
benefits described above. The Commission seeks comments on how it may
quantify these benefits and any other benefits, not already identified,
that may result from the adoption of these proposed amendments.
B. Costs
The Commission notes that the costs related to complying with Rule
10b-18, and the proposed amendment, are assumed voluntarily because the
rule provides an optional rather than mandatory safe harbor that
issuers may use for purchasing their securities.
The Rule implicitly requires an issuer seeking to avail itself of
the safe harbor to collect information regarding the manner, timing,
price, and volume of its purchases of the issuer's common stock, on a
transaction by transaction basis, in order to verify compliance with
the Rule's safe harbor conditions. We estimate that each year there are
approximately 1,455 issuers effecting 1,730 share repurchase programs;
or, on average, 1.2 repurchase programs per issuer, in accordance with
Rule 10b-18.\25\ For each such repurchase program, an issuer spends an
average of approximately 8 hours collecting the requisite information,
for a total burden of 13,840 burden hours. We estimate that each issuer
spends $670 per repurchase program to comply with the safe harbor
requirements.\26\ We have no way of estimating the average number of
market-wide trading halts per year or the number of issuers that would
avail themselves of the safe harbor in the subsequent trading session.
With regard to issuer repurchases permitted under the proposed
amendment to Rule 10b-18, the Commission anticipates that the
triggering of a market-wide trading suspension would occur
infrequently. However, the Commission estimates that, if one market-
wide trading suspension occurs each year, each issuer would incur an
additional burden of 1 hour for a cost, per issuer, of approximately
$83.75.\27\
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\25\ The Commission estimates that 1,225 issuers effect single
repurchase programs while 230 issuers effect multiple repurchase
programs.
\26\ The estimated average cost of $670 to comply with the
requirements of the safe harbor is composed of $96 for collection of
information by an issuer (4 hours at $24 per hour), $400 for review
of the information (4 hours at $100 per hour), and $174 for
printing, supplies, and copying (approximately 35% of the total
labor costs). The Commission estimates overhead based on 35% of
total labor costs based on the GSA Guide to Estimating Reporting
Costs (1973).
\27\ The estimated total average burden per issuer is 8 burden
hours per repurchase program. The estimated additional cost of
$83.75 per issuer is calculated from each issuer effecting an
average of 1 repurchase program per year at a cost of $670 per
repurchase program divided by 8 hours.
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The Commission seeks comments, data and analysis on the cost
estimates identified in this section and comments on any cost, not
already identified, on the proposed amendment.
VI. Effects on Efficiency, Competition, and Capital Formation
In adopting rules under the Exchange Act, section 23(a)(2) requires
the Commission to consider the impact any rule would have on
competition. Further, the law requires that the Commission not adopt
any rule that would impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act. Section
3(f) of the Exchange Act requires the Commission, when engaged in
rulemaking, and when considering the public interest, to consider
whether the action would promote efficiency, competition, and capital
formation.\28\
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\28\ 15 U.S.C. 78c(f).
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The Commission preliminarily believes that the safe harbor should
improve market efficiency by providing additional purchasers, namely
issuers, during a time of selling order imbalance. That effect could
enhance market liquidity following a market-wide trading suspension.
The Commission's preliminary view is that the proposed amendment to
the Rule 10b-18 would not have any anticompetitive effect because it
would apply equally to all issuers and the safe harbor would only be
triggered in extremely rare circumstances. Further, an issuer currently
is able to purchase its shares outside the Rule 10b-18 safe harbor
conditions without raising a presumption of manipulation.
The Commission requests comments on the effect on competition that
may result to issuers under the proposed amendments to the Rule.
Finally, the Commission seeks comment on what impact the proposals, if
adopted, would have on efficiency and capital formation.
VII. Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (IRFA) \29\ regarding the proposed amendments to Rule 10b-18.
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\29\ 5 U.S.C. Sec. 603.
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A. Reasons for the Proposed Action
On January 9, 1998, the NYSE filed a petition for rulemaking with
the Commission pursuant to Rule 192 of the Commission's Rules of
Practice.\30\ The NYSE requested that the Commission initiate
rulemaking proceedings to amend Rule 10b-18 to include in its safe
harbor bids and purchases made following a market-wide trading
suspension: (1) at the reopening on the day of the market-wide trading
suspension; (2) during the half-hour prior to the scheduled close of
trading on the day of the trading suspension; and (3) at the next day's
opening if the market-wide trading suspension is in effect at the
scheduled close of trading. The proposed conditions adjust the Rule's
time of purchase condition but also provide that the issuer must
continue to comply with the other Rule 10b-18 conditions governing the
manner, price and volume of market purchases of its common stock.
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\30\ See Petition, supra note 1.
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B. Objectives
The proposed amendments will allow issuers who otherwise comply
with the current Rule 10b-18 safe harbor conditions governing manner,
price and volume to use the proposed timing condition during the
trading session following an emergency market-wide trading suspension.
The events following the market breaks in October 1987 and October 1997
have underscored the significant role of issuer repurchases during
market
[[Page 59915]]
downturns and the need for clarity as to the applicability of Rule 10b-
18 in periods of extreme market downturns. On those occasions, issuer
repurchases provided an important source of liquidity that helped ease
market stress. The proposal, by modifying the safe harbor's timing
condition during the trading session following a market break, may
improve liquidity and facilitate market participants' ability to
reestablish equilibrium between buying and selling interests.
C. Legal Basis
The amendments to Rule 10b-18 are proposed pursuant to the
authority set forth in Sections 9(a)(2) and 10(b) of the Securities
Exchange Act of 1934.\31\
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\31\ 15 U.S.C. Sec. Sec. 78i(a)(2), 78j(b).
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D. Small Entities Subject to the Rule
The proposed amendments may affect those small entity issuers and
affiliated purchasers that wish to avail themselves of the safe harbor
provisions with the conditions following a market-wide trading
suspension. Based on Exchange Act Rule 0-10(a), a small issuer is one
that on the last day of its most recent fiscal year had total assets of
$5,000,000 or less. The Commission estimates that approximately 1,450
issuers will avail themselves of the safe harbor each year, of which
about 10 may be considered small entities. The Commission seeks comment
on the number of issuers engaged in market repurchases of its stock and
the number of such issuers that are small entities.
E. Reporting, Recordkeeping and Other Compliance Requirements
The proposed amendments would not impose any new reporting,
recordkeeping, or other compliance requirements.
F. Duplicative, Overlapping or Conflicting Federal Rules
The Commission believes that there are no rules that duplicate,
overlap, or conflict with, the proposed amendments.
G. Significant Alternatives
The Regulatory Flexibility Act directs the Commission to consider
significant alternatives that would accomplish the stated objective,
while minimizing any significant adverse impact on small issuers and
broker-dealers. In connection with the proposed rule, the Commission
considered the following alternatives: (a) the establishment of
differing compliance or reporting requirements or timetables that take
into account the resources available to small entities; (b) the
clarification, consolidation, or simplification of compliance and
reporting requirements under the rule for small entities; (c) the use
of performance rather than design standards; and (d) an exemption from
coverage of the rule, or any part thereof, for small entities.
With respect to the proposed amendments, the Commission believes
that the establishment of different requirements for small entities is
neither necessary nor practicable, because the proposal provides
voluntary safe harbor from liability for manipulation under the
Exchange Act. The proposed rule should not adversely affect small
entities because it does not impose any new reporting, recordkeeping or
compliance requirements. Therefore, it is not feasible to further
clarify, consolidate or simplify the rule for small entities.
H. Solicitation of Comments
The Commission encourages the submission of comments with respect
to any aspect of this IRFA. The Commission specifically requests
comments on the number of issuers conducting repurchase programs and
the number of such issuers that are small entities. Such comments will
be considered in the preparation of the Final Regulatory Flexibility
Analysis, if the proposed amendments are adopted, and will be placed in
the same public file as comments on the proposed amendments themselves.
Comments should be submitted in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Stop 6-9, Washington, D.C. 20549. Comments also may be submitted
electronically at the following E-mail address: rule-comments@sec.gov.
All comment letters should refer to File No. S7-27-98; this file number
should be included on the subject line if E-mail is used. Comment
letters will be available for public inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington,
D.C. 20549. Electronically submitted letters also will be posted on the
Commission's Internet web site (http://www.sec.gov).
VIII. Paperwork Reduction Act
Certain provisions of the proposed amendments contain ``collection
of information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (PRA); \32\ the Commission has submitted them to
the Office of Management and Budget for review in accordance with 44
U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection of
information is: ``Purchases of certain equity securities by the issuer
and others.'' This collection of information has previously been
assigned OMB Control No. 3235-0474.
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\32\ 44 U.S.C. Sec. 3501 et seq.
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Rule 10b-18 provides that an issuer or any affiliated purchaser of
an issuer will not incur liability under Sections 9(a)(2) and 10(b) of
the Exchange Act, or Rule 10b-5 under the Exchange Act if its purchases
of the issuer's common stock are made in compliance with the manner,
timing, price, and volume limitations of the rule. The proposed
amendments to the Rule provide conditions to the safe harbor applicable
during the trading session following a market-wide trading suspension.
An agency may not sponsor, conduct, or require response to an
information collection unless a currently valid OMB control number is
displayed.
The Rule implicitly requires an issuer or an affiliated purchaser
seeking to avail itself of the safe harbor to collect information
regarding the manner, time, price and volume of its purchases of the
issuer's common stock, on a transaction by transaction basis, in order
to verify compliance with the rule's safe harbor conditions. The
Commission estimates that each year there are approximately 1,455
issuers effecting 1,730 share repurchase programs, or on average 1.2
repurchase programs per issuer per year, in accordance with Rule 10b-18
safe harbor. For each such repurchase program, an issuer spends an
average of approximately 8 hours collecting the requisite information,
for a total burden of 13,840 burden hours.\33\ With regard to issuer
repurchases permitted under the proposed amendment to Rule 10b-18, the
Commission anticipates that the triggering of a market-wide trading
suspension would occur infrequently. However, for purposes of the PRA,
if we assume that, at most, one market-wide trading suspension occurs
each year, each issuer would incur an additional burden of 1 hour for a
cost per issuer of approximately $83.75.\34\ If 1,455 issuers engage in
repurchases following a market-wide trading halt and comply with the
safe harbor, then collectively these issuers would incur an additional
1,455 burden hours.
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\33\ This represents 1,730 repurchase programs requiring 8
burden hours for compliance.
\34\ This number was dervied by dividing the estimated average
cost of $670 per issuer per repurchase program to comply with the
safe harbor requirements by 8 hours. See, supra note 26.
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The issuer's decision to effect purchases of its common stock
within the safe harbor is voluntary. All records required to be
preserved are considered confidential and are not available to the
[[Page 59916]]
public. All records required under the proposed amendments to Rule 10b-
18 would be preserved for not less than 3 years, the first 2 years in
an easily accessible place.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
(i) Evaluate whether the proposed information collection is
necessary for the proper performance of the agency's functions,
including whether the information shall have practical utility;
(ii) Evaluate the accuracy of the agency's estimate of the burden
of the proposed collections of information;
(iii) Enhance the quality, utility, and clarity of the information
to be collected;
(iv) Minimize the burden of the collections of information on those
who are to respond, including through the use of automated collection
techniques or other forms of information technology.
Persons desiring to submit comments on the collection of
information requirements should direct them to the Office of Management
and Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
D.C. 20503, and should also send a copy of their comments to Jonathan
G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Stop 6-9, Washington, D.C. 20549 with reference to File
No. S7-27-98. OMB is required to make a decision concerning the
collections of information between 30 and 60 days after publication, so
a comment to OMB is best assured of having its full effect if OMB
receives it within 30 days of publication.
IX. Statutory Basis and Text of Proposed Amendment
The rule amendment is being proposed pursuant to Sections 2, 3,
9(a)(6), 10(b), 13(e), 15(c) and 23(a), 15 U.S.C. 78b, 78c, 78i(a)(6),
78j(b), 78m(e), 78o(c) and 78w(a).
List of Subjects in 17 CFR Part 240
Broker-dealers, Issuers, Securities.
For the reasons set forth in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation to Part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d),
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and
80b-11, unless otherwise noted.
* * * * *
2. Section 240.10b-18 is amended by adding paragraphs (a)(15) and
(d) and revising paragraph (c) to read as follows:
Sec. 240.10b-18 Purchases of certain equity securities by the issuer
and others.
(a) Definitions. * * *
(15) The term market-wide trading suspension means either:
(i) A market-wide trading halt imposed pursuant to the rules of a
national securities exchange or a registered national securities
association, in response to a market-wide decline during a single
trading session; or
(ii) A market-wide trading suspension ordered by the Commission
pursuant to Section 12(k) of the Act, 15 U.S.C. 78l(k).
* * * * *
(c) Conditions following a market-wide trading suspension.
(1) The conditions of paragraph (b) of this section shall apply in
connection with a Rule 10b-18 bid or a Rule 10b-18 purchase effected
during a trading session following the termination of a market-wide
trading suspension, except that the time of purchase condition in
paragraph (b)(2) of this section shall not apply, either:
(i) From the reopening of trading until the scheduled close of
trading; or
(ii) At the opening of trading on the next trading day, if a
market-wide trading suspension is in effect at the scheduled close of a
trading session.
(d) No presumption shall arise that an issuer or affiliated
purchaser of an issuer has violated the anti-manipulation provisions of
sections 9(a)(2) or 10(b) of the Act, 15 U.S.C. 78i(a)(2) or 78j(b), or
Sec. 240.10b-5, if the Rule 10b-18 bids or Rule 10b-18 purchases of
such issuer or affiliated purchaser do not meet the conditions
specified in paragraph (b) or (c) of this section.
* * * * *
By the Commission.
Dated: October 29, 1998.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-29510 Filed 11-5-98; 8:45 am]
BILLING CODE 8010-01-P
