On January 26, 2010, the SEC published for comment proposed amendments to Rule 10b-18 under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”). Rule 10b-18 provides issuers with a safe harbor from liability for manipulation under Section 9(a)(2) and Section 10(b) of the Exchange Act in connection with repurchases of shares of their common stock that meet the conditions (as to manner, timing, price and volume) of the Rule.
The proposed amendments are intended to update the Rule to reflect current market trends and technological changes. Comments on the proposed amendments are due on March 1, 2010. The proposed amendments would, among other things, provide for the following:
- Timing Condition – an issuer would be prohibited from effecting the opening regular way purchase reported in both the principal market for its security and the market where the purchase is effected (in addition to the current requirement that an issuer may not effect the opening purchase reported in the consolidated system);
- Price Condition – if an issuer is purchasing on a volume-weighted average price (“VWAP”) basis, it may be excepted from the price condition if it satisfies certain requirements;
- “Flickering Quotes” Exception – where an issuer’s repurchase is entered in accordance with the Rule’s four conditions but is, immediately thereafter, executed in breach of the price condition solely due to so-called “flickering quotes,” only the noncompliant purchase would be disqualified; and
- Special Restrictions for SPAC Mergers – in connection with a merger or business combination involving a special purpose acquisition company (“SPAC”), the safe harbor would be unavailable until completion of the vote by both the target and the SPAC shareholders.
Amendments to Purchase Conditions
Timing of Purchases
Under the current Rule, an issuer’s repurchase of its common stock cannot be the opening regular way purchase reported in the consolidated system. The proposed amendment would add a requirement that an issuer’s purchase cannot be the opening regular way purchase reported in both the principal market for the security and the market where the purchase is effected.
The SEC explained that increased use of electronic opening crosses and opening auctions to establish a security’s official opening price has made a security’s opening purchase in both its principal market and the market where the purchase is effected a significant indicator of the security’s direction of trading, strength of demand and current market value.
Price of Purchases
Trading on the basis of VWAP has become widely accepted; however, the VWAP may cause the execution price of a purchase to be greater than the highest independent bid or independent transaction price at the time of the purchase, thus disqualifying the purchase from the safe harbor under the Rule as it currently exists.
The proposed amendments would allow greater flexibility for issuers to conduct repurchase programs within the safe harbor by excepting purchases effected on a VWAP-basis from Rule 10b-18’s price condition. To qualify for the exception, VWAP purchases must satisfy the following conditions:
- the purchased security must qualify as an “actively-traded security”, as defined in Regulation M;
- the purchase must be entered into or matched before the regular trading session opens;
- the execution price of the VWAP matched trade must be determined based on a full trading day’s volume;
- the purchase must not exceed 10% of the security’s average daily trading volume;
- the purchase must not be effected for the purpose of creating actual, or apparent, active trading in or otherwise affecting the price of any security;
- the VWAP assigned to the purchase must be calculated in a prescribed fashion;
- the VWAP assigned to the purchase must be determined based only on all regular way trades effected in accordance with the timing and price conditions of Rule 10b-18; and
- the VWAP purchase must be reported using a special VWAP trade modifier, such as a “W” modifier, to indicate to the market that such purchases are unrelated to the current or closing price of the security.
The proposing release also seeks comment on whether Rule 10b-18 should include a similar price exception for other alternative passive pricing systems, such as the mid-point of the national best bid and offer, also known as “NBBO” or “mid-peg” orders.
Amendments as to Scope
Flickering Quotes – an Exception to Price Condition
The current provisions of Rule 10b-18 provide that failure to meet any one of the four conditions with respect to any of the issuer’s repurchases during a single day will disqualify all of the issuer’s Rule 10b-18 purchases from the safe harbor for that day. The SEC recognizes that “flickering quotes,” which report the current national best bid price but can sometimes change as quickly as several times a second, have made it increasingly difficult for an issuer to ensure that every purchase of its common stock during the day will meet the Rule’s current price condition.
Accordingly, the proposed amendments would limit the Rule’s disqualification provision in instances where an issuer’s repurchase is entered in accordance with the Rule’s four conditions but is, immediately thereafter, executed outside of the price condition solely due to flickering quotes. In these instances, only the non-compliant purchase, rather than all of the issuer’s other Rule 10b-18 purchases for that day, would be disqualified.
Special Restrictions for SPACs under the “Merger Exclusion”
The proposed amendments would add a provision that extends the time during which the safe harbor is unavailable in connection with a SPAC business combination until the completion of the vote by both the target and the SPAC shareholders.
Under the current Rule, the safe harbor is not available for purchases effected from the time of public announcement of a merger, acquisition or similar transaction involving a recapitalization, until the earlier of the completion of such transaction or the completion of the vote by the target shareholders (the “merger exclusion”). The SEC is of the view that the SPAC structure can present unique conflicts of interest and significant financial incentives for SPAC management to repurchase stock of the SPAC, and therefore the proposed amendments would extend the prohibition on issuer purchases until completion of the vote of SPAC shareholders.
Request for Additional Comments
The SEC requested comment on a number of other questions, including the following:
- Should the safe harbor be available for issuer repurchases even when an issuer’s insiders are selling their own shares of the issuer’s stock?
- Should the safe harbor be made available to securities other than common equity, such as preferred stock, warrants, rights, convertible debt securities or other products? If so, what price, volume and time of purchase conditions should apply?
- Should the safe harbor be available for issuer repurchases involving security futures or option contracts?
- What, if any, manipulative concerns are raised by alternative or novel methods of repurchasing securities (e.g., use of derivatives, share accumulation programs or accelerated share repurchase plans)?
- Should the 25% daily volume limitation be raised or lowered?
- How, if at all, should the safe harbor conditions apply to an issuer’s repurchases of its common stock effected outside of the United States (e.g., on foreign exchanges)?