[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