[Federal Register Volume 64, Number 188 (Wednesday, September 29, 1999)]
[Rules and Regulations]
[Pages 52428-52433]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-25252]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-41905; File No. S7-27-98]
RIN 3235-AH48
Purchases of Certain Equity Securities by the Issuer and Others
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (Commission) today is
adopting 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 amendment
modifies the Rule's timing condition during the trading session
immediately following a market-wide trading suspension. In particular,
the safe harbor now is 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 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.
EFFECTIVE DATE: October 29, 1999.
FOR FURTHER INFORMATION CONTACT: James A. Brigagliano, Assistant
Director; and Joan Collopy, Attorney; Office of Risk Management and
Control, Division of Market Regulation, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-1001, or at
(202) 942-0772.
SUPPLEMENTARY INFORMATION:
I. Introduction
On October 29, 1998, in response to a petition for rulemaking
(Petition) \1\ filed by the New York Stock Exchange, Inc. (NYSE), the
Commission proposed to amend the Rule 10b-18 timing condition during
the trading session immediately following a market-wide trading
suspension (Proposing Release).\2\ The amendment would
[[Page 52429]]
extend the safe harbor to Rule 10b-18 bids or Rule 10b-18 purchases \3\
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. 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.\4\ At such times, an issuer
and its affiliated purchasers \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 on January 9, 1998 and is publicly
available in File No. 4-409 in the Commission's Public Reference
Room. 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.
\2\ The amendment, as proposed and adopted, 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 suspension ordered by the Commission pursuant to Section
12(k) of the Exchange Act. Rule 10b-18(a)(15). For example, the
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). See generally, Securities Exchange Act
Release No. 40617 (October 29, 1998), 63 FR 59911 (November 6, 1998)
(Proposing Release).
\3\ 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).
\4\ Section 12(k) of the Exchange Act gives the Commission
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 to suspend summarily
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.
\5\ The safe harbor is also available for affiliates of the
issuer (affiliated purchasers). In this release, the term ``issuer''
includes affiliated purchasers.
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We received letters from seven commenters in response to the
Proposing Release, all of which supported the amendment.\6\ After
considering the comments, we are adopting the amendment to Rule 10b-18
substantially as proposed.
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\6\ The comment letters and a summary of comments prepared by
the Division of Market Regulation have been placed in Public File
No. S7-27-98, which is available for public inspection in the
Commission's Public Reference Room. Comment letters were received
from the New York Stock Exchange, Inc. (NYSE); American
International Group, Inc. (AIG); Morgan Stanley & Co. (Morgan
Stanley); Intel Corporation (Intel); the National Association of
Securities Dealers, Inc. (NASD); BellSouth Corporation (BellSouth).
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II. Rule 10b-18 Safe Harbor
Before Rule 10b-18 was adopted, issuers conducting 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. Since 1967, the Commission has periodically
considered whether, and how, to regulate an issuer's market repurchases
of its securities.\7\ As adopted in 1982, Rule 10b-18 provides 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 its bids for or purchases of its common stock that comply with the
Rule's conditions.\8\ 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.\9\
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\7\ 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. Rule 13e-2 would have been a
proscriptive rule with disclosure requirements, purchasing
limitations and general anti-fraud 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).
\8\ Adopting Release, supra note 1, 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.,
note 5.
\9\ 17 CFR 240.10b-18(c).
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The following Rule 10b-18 safe harbor conditions both ensure that
the price of an issuer's repurchases will be set by independent market
forces and offer clear guidance concerning the scope of non-
manipulative issuer repurchasing:
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.\10\ This provision deters an issuer from creating the
appearance of widespread broker-dealer interest and trading activity in
its security.
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\10\ 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 price condition specifies the highest price an issuer
may bid or pay for its common stock.\11\ 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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\11\ 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, excluding
block purchases, in an amount up to 25 percent of the trading volume in
its shares.\12\ Although excepted from the volume condition, all other
Rule 10b-18 conditions apply to block purchases.\13\
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\12\ For nonreported securities, volume may not exceed one round
lot on a single day or on such day plus the five preceding days, 1/
20th 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).
\13\ 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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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.\14\ 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 significant indicators of the current market
value of the security. Therefore the safe harbor does not cover opening
bids and purchases and bids and purchases near or at the close of
trading by the issuer.
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\14\ 17 CFR 240.10b-18(b)(2).
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III. NYSE Petition and Proposed Amendment to Rule 10b-18
Last year, the Commission approved a proposal by the NYSE and other
self-regulatory organizations to amend their rules establishing
``circuit breakers.'' \15\
[[Page 52430]]
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.\16\ The
new circuit 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.\17\ It is likely
these circuit breakers will 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 an
issuer 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.\18\
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\15\ See Circuit Breaker Approval Order, supra note 2. (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).
\16\ Id.
\17\ Id. NYSE Rule 80B (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 NASD 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.
\18\ See Petition, supra note 1.
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In its Petition, 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.
We have noted before that issuers rarely buy back their securities
with improper intent, at least in the absence of a significant
corporate transaction by the issuer,\19\ but generally conduct
repurchase programs for legitimate business reasons.\20\ We also
recognize 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 risks of
liability under the general anti-manipulation provisions of the
Exchange Act. Expanding the safe harbor during the trading session
following a market break may encourage issuers to participate in
reestablishing equilibrium between buying and selling interests.
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\19\ For example, Rule 10b-18's safe harbor is not available
during the Regulation M restriction period and during mergers,
acquisitions and tender offers. 17 CFR 240.10b-18(a)(3).
\20\ See Proposing Release, supra note 2. See also, Clifford P.
Stephens and Michael S. Weisbach, ``Actual Share Reacquisitions in
Open-Market Repurchase Programs,'' Journal of Finance, February 1998
(observing that firms increase their repurchasing depending on the
degree of perceived undervaluation of its stock and on expected cash
flow).
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IV. Response to Comments on the Proposed Amendment to Rule 10b-18
In the Proposing Release, the Commission sought comment on whether
the proposed amendment provides an appropriate safe harbor condition
for issuers and their affiliated purchasers during periods of severe
market downturns. The Commission also sought comment on whether the
proposal raised a risk of manipulation and whether legal or policy
reasons would suggest the Commission should consider a different
approach.
The Commission received letters from seven commenters in response
to the Proposing Release. All commenters supported the proposal's
revision of the timing condition as facilitating short-term liquidity
and providing issuers flexibility during periods of severe market
downturns. Most commenters observed that the presence of issuers
provide an important source of liquidity, or buy-side interest, during
volatile markets when investors may wish to liquidate their securities
holdings. Several commenters observed that the proposal would also
assist specialists and market makers in eliminating sell-order
imbalances and reestablishing market equilibrium.\21\ Commenters stated
that Rule 10b-18's silence as to the scope of permissible issuer
activity during volatile markets in practice prevents issuers from
buying back their shares during severe market declines.\22\
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\21\ Letters from Morgan Stanley and BellSouth.
\22\ See Memo from Larry Bergmann To Public Files (S7-27-98),
dated November 10, 1998, regarding, among other matters, the Rule
10b-18 timing condition.
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Four commenters recommended raising the volume limits following a
trading suspension as a more effective means of enhancing liquidity and
restoring market equilibrium.\23\ One commenter noted that the
resetting of circuit breakers meant that they would be triggered only
in severe market declines and argued that the liquidity provided by
issuer repurchases should benefit the market in instances of less
extreme volatility.\24\ This commenter, therefore, recommended that the
volume limit be scaled in a manner that would allow increases in issuer
repurchases to occur in tandem with market-wide price declines short of
current circuit breaker levels, such as a 350 point decline in the
DJIA.
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\23\ Letters from AGI, Morgan Stanley, Intel, and NASD.
\24\ Letter from the NASD.
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The Commission has considered these comments. As discussed above,
in proposing the amendment to Rule 10b-18, the Commission considered
the significant benefits of providing clear guidance to issuers about
the scope of permissible market activity following a market-wide
trading halt and of facilitating liquidity when sell-order imbalances
disrupt the orderly operation of the financial markets. The triggering
of a circuit breaker is an extraordinary event and reflects an abnormal
market condition. The circuit breaker levels indicate a market judgment
that ordinary market mechanisms can operate adequately under less
severe market conditions. Further, given that circuit breakers should
rarely be triggered, the expansion of the safe harbor's timing
condition is limited. At this time, the Commission considers the Rule
10b-18 volume condition, including the block exception, appropriate
limits that should continue to apply in the trading session following a
market-wide trading suspension and believes the expanded timing
condition as adopted today will effectively enhance liquidity.\25\
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\25\ See discussion of Rule 10b-18 volume limitation, supra Part
II. The Commission will reconsider the commenters' recommendations
about the volume condition, as well as the manner, timing and price
conditions in a forthcoming broad review of Rule 10b-18.
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After considering the comments, the Commission is adopting today
the amendment to Rule 10b-18 substantially as proposed. In particular,
the safe harbor now is available to an issuer that bids for or
purchases its
[[Page 52431]]
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.\26\ As
adopted, the safe harbor would also be available in the trading session
following a market-wide trading suspension declared pursuant to a
Commission emergency order.\27\ The 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.
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\26\ See discussion of proposal and accompanying footnotes,
supra Part I.
\27\ See discussion, supra note 4.
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V. Costs and Benefits of the Adopted Amendment
To assist the Commission in evaluating the costs and benefits that
may result from the proposal to amend Rule 10b-18, the Commission
sought comment on the costs for any necessary modifications to
information gathering, management, and recordkeeping systems or
procedures, as well as any potential benefits resulting from the
proposals to issuers, investors, broker-dealers and others. The
Commission also requested that commenters provide, if possible,
analysis and data to support their views. The Commission initially
identified certain costs and benefits relating to the proposals and
encouraged commenters to discuss any additional costs or benefits. The
Commission received letters from seven commenters concerning the
proposed amendment, however, none of the commenters responded
specifically to the request for comment on the cost/benefit analysis.
After considering the comments and the costs and benefits, the
Commission continues to believe that the amendment to Rule 10b-18
should be adopted. Since the Commission is adopting the amendment as
proposed, it is not making any changes that would increase the cost
estimates for compliance with the Rule.
A. Benefits
The Commission's amendment to Rule 10b-18 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 continue to believe that the specific benefits set forth
below would flow from the adopted amendment.
The Commission believes that the amendment will facilitate trading
in the issuer's securities by reducing issuer reluctance to purchase in
response to sell-order imbalances that may occur during periods of
severe market declines. By extending the safe harbor, the adopted
amendment may encourage issuers to purchase their securities at a time
when other market participants may be unable or unwilling to do so. We
therefore believe that extending the safe harbor to issuers during the
trading session following a market-wide trading suspension will improve
the liquidity of markets in the issuer's securities. The safe harbor,
as amended, also provides clarity as to the scope of permissible market
activity for issuers and the broker-dealers that assist issuers in
their stock repurchases.
The Commission does not have data to quantify the value of the
benefits described above. The Commission did not receive comments on
how it may quantify these benefits and did not receive comments
concerning any other benefits, not already identified, that may result
from the adoption of the amendment.
B. Costs
By extending the safe harbor in the trading session following a
market-wide trading suspension, the adopted amendment may encourage
issuers to purchase their securities at a time when other market
participants may be unable or unwilling to do so. Issuers would have to
comply with all the Rule 10b-18 conditions, including the price
provision which limits issuer bids and purchases to the higher of the
current independent bid or last independent transaction price.
Nonetheless, issuer bids for its security would compete against the
bids of other buyers in the market following a market-wide trading
suspension. Also, issuer bids may retard a further decline in the price
of the issuer's stock.
The adopted amendment to Rule 10b-18 would not increase or decrease
the current reporting burdens by imposing any new reporting,
recordkeeping, or other compliance requirements. In the Proposing
Release, the Commission noted that the Rule does implicitly require 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. Under the adopted amendment to Rule 10b-18, issuers would
continue to collect and keep such records should they make Rule 10b-18
purchases during the trading session following a market-wide trading
suspension. The Commission also notes that any costs related to
complying with Rule 10b-18, and the adopted amendment, are assumed
voluntarily because the Rule provides an optional rather than mandatory
safe harbor that issuers may use for purchasing their securities.
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\ In the Proposing Release, the Commission solicited
comment on the proposal's effect on competition, efficiency and capital
formation. The Commission received no comments specifically regarding
these issues. All commenters, however, did support the proposal's
revision of the timing condition as facilitating short-term liquidity
and providing issuers flexibility during periods of severe market
downturns.
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\28\ 15 U.S.C. 78c(f).
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The Commission has considered the amendment in light of the
standards cited in Section 23(a)(2) of the Act and believes they would
not likely impose any significant burden on competition not necessary
or appropriate in furtherance of the Exchange Act. As discussed above
in the Cost-Benefit Section, the Commission recognizes that issuers
bear a cost in order to demonstrate compliance with the Rule, but
issuers assume this burden voluntarily. Nonetheless, the Commission
continues to believe that the safe harbor, as amended, should improve
market efficiency by providing additional purchasers, namely issuers,
during a time of sell-order imbalance. This effect likely would enhance
market liquidity following a market-wide trading suspension.
The proposed amendment to Rule 10b-18 would not have any
anticompetitive effect because it would apply equally to all issuers
and the safe
[[Page 52432]]
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.
VII. Final Regulatory Flexibility Analysis
The Commission has prepared a Final Regulatory Flexibility Analysis
(FRFA) concerning the adopted amendment to Rule 10b-18 in accordance
with Section 4 of the Regulatory Flexibility Act (RFA).\29\
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\29\ 5 U.S.C. 604.
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A. Need for and Objectives of the Rule 10b-18 Amendment
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 proposal adjusted the Rule's time of
purchase condition but provided 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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The amendment to Rule 10b-18, as adopted, will allow issuers who
otherwise comply with the current Rule 10b-18 safe harbor conditions
governing manner, price and volume to use the amended 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 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 Rule 10b-18 amendment, by
modifying the safe harbor's timing condition during the trading session
following a market break, likely will improve liquidity and facilitate
market participants' ability to reestablish equilibrium between buying
and selling interests.
B. Significant Issues Raised by Public Comment
In response to the Proposing Release, the Commission received
letters from seven commenters. All commenters supported the proposal's
revision of the timing condition as facilitating short-term liquidity
and providing issuers flexibility during periods of severe market
downturns. Several commenters noted that since market declines are
beyond the control of individual issuers, the proposal, applicable only
in the trading session following a market-wide trading suspension, did
not raise the same manipulation concerns traditionally underlying the
safe harbor conditions.\31\ Many commenters observed that the presence
of issuers provides an important source of liquidity, or buy-side
interest, during volatile markets when investors may wish to liquidate
their securities holdings. Several commenters observed that the
proposal would also assist specialists and market makers in eliminating
sell-order imbalances and reestablishing market equilibrium.\32\
Commenters stated that Rule 10b-18's silence as to the scope of
permissible issuer activity during volatile markets in practice
prevents issuers from buying back their shares during severe market
declines.\33\
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\31\ Letter from Intel and the NASD.
\32\ Letters from Morgan Stanley and BellSouth.
\33\ See Memo from Larry Bergmann To Public Files (S7-27-98),
dated November 10, 1998, regarding, among other matters, the Rule
10b-18 timing condition.
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Four commenters recommended raising the volume limits following a
trading suspension as a more effective means of enhancing liquidity and
restoring market equilibrium.\34\ One commenter noted that the
resetting of circuit breakers meant that they would be triggered only
in severe market declines and suggested that the liquidity provided by
issuer repurchases should benefit the market in instances of less
extreme volatility.\35\ This commenter, therefore, recommended that the
volume limit be scaled in a manner that would allow increases in issuer
repurchases to occur in tandem with market-wide price declines short of
current circuit breaker levels, such as a 350 point decline in the
DJIA.
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\34\ Letters from AIG, Morgan Stanley, Intel, and the NASD.
\35\ Letter from the NASD.
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C. Small Entities Subject to the Rule
The adopted amendment may affect those small entity issuers and
affiliated purchasers that wish to avail themselves of the safe harbor
provisions in the trading session following a market-wide trading
suspension. Based on Exchange Act Rule 0-10(a), a small issuer is one
that has total assets of $5,000,000 or less on the last day of its most
recent fiscal year. Based on information about issuer repurchase
programs conducted in 1997, the Commission estimates that approximately
1,455 issuers could avail themselves of the safe harbor each year, of
which about 10 may be considered small entities.
In the IRFA, the Commission's staff estimated that 10 issuers that
are small entities may avail themselves of the safe harbor per
year.\36\ The Commission sought comment on the number of issuers
engaged in market repurchases of their stock and the number of such
issuers that are small entities. No commenters responded to these
estimates.
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\36\ Proposing Release, supra note 2, Part VII. This estimate
was based on informaiton about issuer repurchase programs conducted
in 1997.
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D. Projected Reporting, Recordkeeping and Other Compliance Requirements
The adopted amendment to Rule 10b-18 would not impose any new
reporting, recordkeeping, or other compliance requirements.
E. Agency Action To Minimize the Effect on Small Entities
Section 4(a) of the RFA \37\ 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. Pursuant to Section 3(a) of the RFA,\38\ the Commission
considered the following alternatives in connection with the adopted
amendment:
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\37\ 5 U.S.C. 604(a).
\38\ 5 U.S.C. 603(a).
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(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 adopted amendment, the Commission believes that
the establishment of different requirements for small entities is
neither necessary nor practicable, because the amendment provides a
voluntary safe harbor from liability for manipulation
[[Page 52433]]
under the Exchange Act. The amendment to Rule 10b-18, as adopted,
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.
VIII. Paperwork Reduction Act
Certain provisions of the amendment to Rule 10b-18 contain
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 (PRA); \39\ 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. An agency may not
sponsor, conduct, or require a response to an information collection
unless a currently valid OMB control number is displayed. In the
Proposing Release, the Commission solicited comment on its evaluation
of the proposal's estimated burden. The Commission received no comments
specifically addressing these issues.
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\39\ 44 U.S.C. 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 amendment to the
Rule's timing condition expands the safe harbor's availability during
the trading session following a market-wide trading suspension.
The adopted amendment to Rule 10b-18 would not increase or decrease
the current reporting burdens by imposing any new reporting,
recordkeeping, or other compliance requirements. In the Proposing
Release, the Commission noted that the Rule does implicitly require 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. Under the adopted amendment to Rule 10b-18, issuers would
continue to collect and keep such records should they make Rule 10b-18
purchases during the trading session following a market-wide trading
suspension. The Commission also notes that any costs related to
complying with Rule 10b-18, and the adopted amendment, are assumed
voluntarily because the Rule provides an optional rather than mandatory
safe harbor that issuers may use for purchasing their securities.
IX. Statutory Basis and Text of Adopted Amendment
The rule amendment is being adopted 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 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. 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:
(1) From the reopening of trading until the scheduled close of
trading; or
(2) 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 paragraphs (b) or (c) of this section.
By the Commission.
Dated: September 23, 1999.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-25252 Filed 9-28-99; 8:45 am]
BILLING CODE 8010-01-U
