Purchases of Certain Equity Securities by the Issuer and Others

Federal RegisterSep 29, 1999

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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;

(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.