On January 26, the Securities and Exchange Commission proposed amendments to Exchange Act Rule 10b-18, which provides a safe harbor for an issuer’s repurchase of its equity securities on the open market. The proposed changes are intended to clarify and update the safe harbor provisions to reflect significant trading and market developments since the rule’s initial adoption in 1982.
Rule 10b-18 provides a safe harbor for an issuer’s purchases of its own shares on a given day, so long as the issuer satisfies certain manner, timing, price and volume conditions for all repurchases on that day. The SEC’s proposed changes include the following:
- Repurchases Using VWAP. The repurchase safe harbor is currently limited to purchases for which the bid or purchase price is no higher than the highest independent bid or last independent transaction price, whichever is higher. The proposed amendment would also allow for repurchases using the volume weighted average price (VWAP) of the security, provided that, among other items, (1) the security is an “actively-traded security” as defined in Rule 101(c)(1) of Regulation M, (2) VWAP purchases are entered into or matched before the regular trading sessions, and the execution prices of VWAP-matched trades are determined based on a full trading day’s volume, and (3) the issuer’s VWAP purchases do not exceed 10% of the security’s average daily trading volume and are not effected to manipulate the price or trading volume of the security.
- “Flickering Quotes” Exception. According to the current Rule 10b-18, if an issuer fails to meet all manner, timing, price and volume conditions with respect to any repurchase of its securities during a given day, then all of the issuer’s repurchases for that day are disqualified from the safe harbor. The SEC’s proposal excludes from this disqualification any instances where an issuer’s repurchase satisfies the rule’s price conditions upon entry of the order, but solely due to “flickering quotes” (rapid changes in the national best bid), fails to satisfy the rule’s price condition upon execution. In such event, only the nonconforming trade (and not all of the day’s repurchases) would be disqualified from the safe harbor.
- Additional Timing Restrictions. Rule 10b-18 presently states that an issuer’s repurchase may not be the opening purchase reported in the consolidated system to qualify for the safe harbor. The SEC’s proposal would add to such restriction opening purchases in the principal market for the security and in the market in which the purchase is effected. These changes are intended to diminish any effect that opening purchases in the relevant markets may have to signal the trading direction of a security.
- Merger Exclusion. With respect to special purpose acquisition company (SPAC) repurchases of its securities, the current safe harbor provision does not apply to purchases made from the public announcement of a merger or acquisition until the earlier of the closing of the transaction or the completion of the target’s shareholders’ vote on such transaction. The proposed amendment would set the end date for such excluded period as the completion of both the target’s and the SPAC’s shareholders’ votes with respect to the transaction. Other provisions permitting SPACs to avail themselves of the Rule 10b-18 safe harbor provided in the current rule will remain unaffected.
The SEC is also seeking comment on whether expanding the price condition of Rule 10b-18 to include repurchases through electronic trading systems that use passive or independently derived pricing mechanisms would be appropriate. Public comments on the proposed rule amendments must be received by the SEC within 60 days after their publication in the Federal Register.
Click here to view the full SEC release proposing these amendments.