Division of Market Regulation:
Answers to Frequently Asked Questions
Concerning Rule 10b-18
("Safe Harbor" for Issuer Repurchases)
Answers to these frequently asked questions were prepared by and
represent the views of the staff of the Division of Market Regulation
(staff). They are not rules, regulations, or statements of the
Securities and Exchange Commission (Commission). Further, the Commission
has neither approved nor disapproved these interpretative answers.
For Further Information Contact: James Brigagliano, Assistant
Director, Joan Collopy and Elizabeth Sandoe, Special Counsels, or
Elizabeth Marino, Attorney, in the Office of Trading Practices, Division
of Market Regulation, at (202) 942-0772.
Rule
10b-18, which was adopted in 1982, provides a voluntary "safe
harbor" from liability for manipulation under
Sections 9(a)(2) and
10(b)
of the Securities Exchange Act of 1934 (Exchange Act), and
Rule
10b-5
under the Exchange Act, when an issuer or its affiliated purchaser bids
for or purchases shares of the issuer's common stock in accordance with
the Rule
10b-18's manner, timing, price, and volume conditions.1
On November 10, 2003, the Commission adopted amendments to Rule
10b-18 in order to simplify and update the safe harbor provisions in
light of market developments since Rule
10b-18's adoption.2
Among other things, the amendments allow issuers of actively traded
securities to stay in the market longer at the end of the trading day,
extend the safe harbor to certain after-hours repurchases, apply a
uniform pricing condition for all issuers, increase the volume limit
following a market-wide trading suspension, modify the block exception,
and clarify the scope of the safe harbor with regard to mergers,
acquisitions, and similar transactions. To enhance the transparency of
issuer repurchases, the Commission also adopted amendments to
Regulations S-K and S-B under the Exchange Act, Exchange Act Forms 10-Q,
10-QSB, 10-K, 10-KSB, and 20-F (regarding foreign private issuers), and
Form N-CSR under the Exchange Act and the Investment Company Act of
1940, which require periodic disclosure of all issuer repurchases of
equity securities, regardless of whether the repurchases are effected in
accordance with Rule
10b-18. For information or questions with respect
to the disclosure amendments, please contact Sean Harrison, Special
Counsel, Office of Rulemaking, Division of Corporation Finance, at (202)
942-2900.
The staff has compiled the following questions and answers regarding
Rule
10b-18 to assist in the application and operation of the safe
harbor. The questions and answers do not necessarily contain a
discussion of all material considerations necessary to reach the
conclusions stated. Consequently, these questions and answers are
intended to provide general guidance, but do not constitute formal
interpretations of Rule
10b-18. The facts and circumstances relating to
a particular transaction may vary and the staff notes that even slight
variations may cause different answers. The Commission is not bound by
these statements and may interpret Rule
10b-18 as it deems necessary or
appropriate in the public interest for the protection of investors.
The Division may update these questions and answers periodically by
marking each modified or new question and answer as "modified" or
"new."
II. Answers to Frequently Asked Questions
Question 1:
If an issuer executes purchases that are in technical compliance with
the safe harbor conditions, will that protect the issuer from all
liability for such purchases?
Answer: No. Some issuer repurchase activity that meets
the safe harbor conditions may still violate the anti-fraud and
anti-manipulation provisions of the Exchange Act. For example, Rule
10b-18 confers no immunity from possible Rule 10b-5 liability where the
issuer engages in the repurchases while in possession of material,
non-public information concerning its securities, or where purchases are
part of a plan or scheme to evade the federal securities laws.
Therefore, regardless of whether an issuer's repurchases technically
satisfy the conditions of Rule
10b-18, the safe harbor would not be
available if the repurchases are fraudulent or manipulative, when all
the facts and circumstances surrounding the repurchases are considered (i.e.,
facts and circumstances in addition to the volume, price, time, and
manner of the repurchases). For example, the safe harbor would not be
available if the repurchases are made as part of a manipulative scheme
to influence the closing price of a company's securities, or are done to
mask other motives, such as inflating or manipulating short-term
earnings.
Question 2:
Is the safe harbor of Rule
10b-18 available for purchases by the
issuer of securities other than common stock, e.g., preferred
stock, warrants, options, or convertible debt?
Answer: No. The Rule
10b-18 safe harbor only applies to
open market purchases by an issuer of its common stock (or an equivalent
interest, including a unit of beneficial interest in a trust or limited
partnership or a depository share). It does not apply to any other type
of security -- even if related to the common stock (e.g.,
transactions in derivative securities such as warrants, options, or
single stock futures).
Question 3:
Is the safe harbor available for an issuer who effects both open
market and privately negotiated repurchases on the same day?
Answer: Yes. An issuer may effect privately negotiated
repurchases (which are outside the safe harbor) without jeopardizing the
availability of the safe harbor for its open market repurchases.
However, the issuer must consider the applicability of the general
anti-fraud and anti-manipulation provisions under the Exchange Act and
of any other relevant federal or state law regarding its privately
negotiated repurchases.
Question 4:
Is the Rule
10b-18 safe harbor available to an issuer who instructs
its broker-dealer to effect purchases in compliance with the safe harbor
if the purchases fail to satisfy the conditions of the Rule?
Answer:
No. To come within the safe harbor the purchases must satisfy the
Rule's manner, timing, price, and volume conditions. Failure to meet any
one of the four conditions will disqualify the issuer's purchases from
the safe harbor for the day.
Question 5:
The primary market for an issuer's common stock is in the United
States. However, the stock is also traded in one or more foreign
markets. Is the safe harbor available for the issuer's purchases outside
the United States?
Answer: No. The issuer may not claim the safe harbor for
repurchases made outside the United States; nor is foreign trading
volume included in a security's
ADTV
calculation for purposes of applying the safe harbor.
Question 6:
Is the safe harbor available to an issuer that effects Rule
10b-18
purchases of its common stock throughout the day in accordance with the
safe harbor conditions, but effects an open market purchase (otherwise
eligible for the safe harbor) of its common stock at the end of the day
outside the safe harbor limitations?
Answer: No. To come within the safe harbor, an issuer's
repurchases must satisfy (on a daily basis) each of Rule
10b-18's four
conditions. Failure to meet any one of the four conditions removes
all of the issuer's repurchases from the safe harbor for that day.
Question 7:
Is compliance with Rule
10b-18 the exclusive means by which issuers
may repurchase its stock in the market without engaging in manipulation?
Answer: No. Rule
10b-18 does not mandate the terms under
which an issuer may repurchase its shares without engaging in
manipulation. Rather, Rule
10b-18 sets forth conditions with which
issuers must comply in order to obtain a safe harbor from liability for
manipulation.
Paragraph (d) of Rule
10b-18 expressly provides that there is no
presumption of manipulation simply because the issuer's purchases do not
satisfy the Rule's conditions.
Question 8:
Is the Rule
10b-18 safe harbor available for repurchases by an issuer
with two separate classes of common stock publicly traded?
Answer: Yes. The issuer must treat each class of common
stock separately for purposes of Rule
10b-18.
Question 9:
If the issuer repurchases shares in a privately negotiated
(off-market) transaction, are these shares included in its
25%
ADTV limit for that day?
Answer: No. Rule
10b-18 does not cover privately
negotiated (off-market) repurchases, nor are these shares counted in an
issuer's daily volume limitation.
Question 10:
Is the safe harbor available for repurchases of OTCBB and Pink Sheet
securities?
Answer: Yes.
Question 11:
Is the safe harbor available to an issuer who recently conducted an
initial public offering?
Answer: No, the issuer would have to wait until four
weeks after its securities began to trade in order to claim the safe
harbor. This is because Rule
10b-18's volume condition is predicated
upon trading in the common stock for four full calendar weeks preceding
the week in which the purchase is to be effected.
Question 12:
Are Nasdaq Small Cap, OTCBB, and Pink Sheet securities reported in
the "consolidated system" for purposes of applying Rule
10b-18's price
condition?
Answer: Of the three, only Nasdaq Small Cap securities
are reported in the "consolidated system" (i.e., a
system that collects and publicly disseminates on a current and
continuous basis transaction or quotation information in common equity
securities pursuant to an effective transaction reporting plan or a
national market system plan). Bids and last sale prices for OTCBB and
Pink Sheet securities are displayed and disseminated on an "inter-dealer
quotation system," as defined in Exchange Act
Rule 15c2-11(e)(2), that displays at least two independent priced
quotations for the security. For all other eligible securities, the
issuer would need to look to the highest independent bid obtained from
three independent dealers (i.e., the "three quote rule").
Question 13:
Is the Rule
10b-18 safe harbor available for an issuer and the
broker-dealer who engage in an accelerated share repurchase plan or use
a forward contract to repurchase the issuer's stock?
Answer: Accelerated share repurchase plans and forward
contracts are private (off-market) transactions. Therefore, they are not
eligible for the Rule
10b-18 safe harbor, which applies only to open
market purchases. Moreover, the Rule
10b-18 safe harbor also is not
available for the broker's covering transactions, as these transactions
are not agency or riskless principal trades effected on behalf of the
issuer.
Question 14:
With regard to the "merger exclusion," how do you
calculate the three full calendar month "look back" period?
Answer: The calendar months run from the first of the
month until the end of the month, so that if a merger were announced on
January 15, 2004, an issuer would look back to its Rule
10b-18
repurchase activity during the three full calendar months of October,
November, and December.
Question 15:
With respect to the "merger exclusion," if 25% of an issuer's ADTV in
its stock is 50,000 shares, and the issuer's previous Rule
10b-18
repurchase activity during the three full calendar months prior to the
date of announcement of a merger is an average of 10,000 shares per day,
how many shares can the issuer repurchase within the safe harbor once
the merger is announced?
Answer: Because the issuer is limited to repurchasing the
lesser of 25% of the ADTV in its securities, or the daily average
amount of its own Rule
10b-18 repurchase activity during the past three
months prior to the date of announcement of the merger, the issuer may
purchase 10,000 shares per day.
Question 16:
If an issuer has just announced a merger, can the issuer rely on Rule
10b-18's amended "one block per week" exception during this
post-announcement period?
Answer: Yes, so long as the issuer does so in accordance
with its prior reliance on the amended "one block per week" exception
during the three-month "look back" period.
Question 17:
Does the three-month "look back" period include "black out" periods (i.e.,
periods in which the company refrains from repurchasing its shares
because of insider trading concerns) that may be self-imposed by the
issuer?
Answer: Yes. The three-month "look back" period includes
any "black out" periods that may have been self-imposed by the issuer.
Question 18:
Does the "merger exclusion" apply to both the acquiring company
(repurchasing its own shares and the target's shares), as well as the
target company (repurchasing its own shares and the acquiring company's
shares)?
Answer: Yes. During the post-announcement period, neither
the acquiring company nor the target company would have the safe harbor
available (other than in accordance with their pre-announcement Rule
10b-18 repurchase history) during this period for any repurchases of the
acquiring company's or the target company's securities.
Question 19:
How is the time period "completion of the vote by target
shareholders" measured if there are two different dates for the
respective companies' shareholder votes?
Answer: The "merger exclusion" would extend until both
shareholder votes have occurred.
Question 20:
An acquiror and a target company have signed a merger agreement.
Would the target be an "affiliated purchaser" of the acquiror?
Answer: Yes. The target company would be considered an
"affiliated purchaser" of the acquiror with respect to purchases of the
acquiror's securities after the signing of a merger agreement.
Question 21:
If an issuer announces a merger on February 15, would the issuer be
able to include trading volume that occurred in its securities during
the first two weeks of February?
Answer: For purposes of calculating the issuer's ADTV in
its securities, an issuer would always need to look to the trading in
its securities during the four calendar weeks preceding the week of the
repurchase (i.e., the four full trading weeks immediately prior
to the week containing February 15 in the above example). With respect
to the three-month "look back" provision, the period would be the three
full calendar months prior to February 15 (i.e., November 1
through January 31).
Question 22:
If an issuer has not made any Rule
10b-18 purchases during the
three-month "look back" period prior to the announcement of a merger (or
similar transaction), will it be permitted to effect Rule
10b-18
purchases during the post-announcement period?
Answer: No. If an issuer did not make any Rule
10b-18
purchases during the three-month period prior to the announcement of a
merger or similar transaction, it would not be permitted to make any
Rule
10b-18 purchases in the post-announcement period.
Question 23:
If a broker-dealer receives an order from an issuer to repurchase the
issuer's common stock in the open market within the safe harbor
limitations, can the broker purchase shares in the open market at $10.10
and resell them to the issuer at $10.12 and still be within the safe
harbor?
Answer: No. The safe harbor is available only for
riskless principal transactions where both legs of the transaction are
effected at the same price.
Question 24:
An issuer's employee stock option plan (ESOP) is administered by a
board of directors including officers and directors of the issuer. The
ESOP purchases shares of the issuer's common stock in the open market.
How should those purchases be treated under the Rule?
Answer: The ESOP would be deemed an affiliated purchaser
of the issuer. Any purchases it effects could qualify for the safe
harbor if all of the conditions are met. The ESOP's and the issuer's
purchases would have to be effected through the same broker or dealer
and all their repurchases would have to be aggregated to determine
whether the volume limitation has been met. However, the safe harbor
would not be available if the ESOP purchases are effected by or for the
ESOP by an "agent independent of the issuer."
Question 25:
A broker or dealer contacts an issuer to offer stock shortly after
the issuer announces the initiation of a repurchase program. The broker
or dealer is not acting as the issuer's agent for the repurchase
program. Can the transaction between the issuer and broker or dealer
comply with Rule
10b-18's single broker or dealer condition even though
the issuer has already retained another broker to effect Rule
10b-18
purchases that day?
Answer: Rule
10b-18 requires that the issuer use only one
broker or dealer for purchases of its stock on a single day (the "single
broker or dealer" condition). This condition, however, does not apply to
purchases that are not solicited by or on the behalf of the issuer. An
issuer may purchase from any number of brokers or dealers in
transactions not involving a solicitation by the issuer. Although the
term "solicited" is not defined in the Rule, disclosure and announcement
of a repurchase program would not necessarily cause subsequent purchases
to be considered solicited. Whether a transaction has been solicited
necessarily depends on the facts and circumstances of each case. An
issuer must make all its solicited purchases through the same broker or
dealer on a given day in order to comply with the "single broker or
dealer" condition.
Question 26:
The amended timing limitation applies an ADTV value test and a public
float value test in determining how long an issuer must be out of the
market before the scheduled close of trading. How does an issuer
calculate its ADTV value and its public float value?
Answer: In calculating the dollar value of ADTV, any
reasonable and verifiable method may be used. For example, it may be
derived from multiplying the number of shares (i.e., publicly
reported for a security during the four calendar weeks preceding the
week in which the Rule
10b-18 purchase is effected) by the price in each
trade, or from multiplying each day's total volume of shares by the
closing price on that day. "Public float value" (i.e., the
aggregate market value of common equity securities held by
non-affiliates of the issuer) is to be determined in the manner set
forth on the front page of Form 10-K, even if the issuer of such
securities is not required to file Form 10-K. For reporting issuers, the
public float value should be taken from the issuer's most recent Form
10-K or based upon more recent information made available by the issuer.
Question 27:
Is the safe harbor available for issuer repurchases effected after
the close of the regular trading session?
Answer: Yes. A limited safe harbor is available for Rule
10b-18 repurchases effected after the close of the primary trading
session until the termination of the period in which last sale prices
are reported in the consolidated system. The Rule
10b-18 purchase must
not be the opening transaction of the after-hours trading session, and
must be made at a price that does not exceed the lower of the
closing price of the primary trading session in the principal market for
the security and any lower bid or sale prices subsequently reported in
the consolidated system. The issuer must also stay within the Rule's
volume limitation, but may use a different broker or dealer to effect
after-hours purchases from that used for purchases during the primary
trading session.
Question 28:
An issuer's common stock is a Nasdaq NMS security. The highest
current independent published bid is $10.10; the last independent
transaction price reported was $10.15; and the offer is quoted at
$10.20. Can the issuer pay a price equivalent to the average between the
last independent transaction price and the offer, or any price in
between those two?
Answer: No. To qualify for the safe harbor, the issuer
cannot pay a price higher than the highest current independent published
bid or the last independent transaction price, whichever is higher,
reported or quoted in the consolidated system. The offer price is
irrelevant for purposes of determining the maximum permissible price for
a Nasdaq NMS security. In this case the issuer can pay up to $10.15 for
its common stock.
Question 29:
An issuer's common stock is quoted at $10.10 bid and $10.15 offer.
The last transaction was reported at $10.15. The issuer places a bid for
its stock. A new last transaction price is reported at $10.12. Can the
issuer pay $10.15 for its purchase?
Answer: No. The issuer can only pay the higher of the
highest current independent published bid or the last independent
transaction price reported. In this case, the last independent
transaction price reported prior to the execution of the issuer's order
is $10.12. Because the bid is $10.10, the highest price the issuer may
pay is $10.12.
Question 30:
An issuer's common stock is a Nasdaq NMS security. Market maker #1
has bid $10.15 for the stock; market maker #2 has a bid at $10.19. The
last independent transaction reported was at 10.16. What price can the
issuer pay for its purchase?
Answer: The issuer cannot pay a price higher than the
highest current independent published bid or the last independent
transaction price reported. In this case, the highest independent
published bid is $10.19 and the last independent transaction price is
$10.16. The maximum price the issuer may pay is $10.19; however, the
price paid must be exclusive of any commission paid to a broker acting
as agent, or commission equivalent, mark-up, or differential paid to the
dealer.
Question 31:
In order to qualify for the safe harbor, must Rule
10b-18's
conditions be satisfied at the time the order is entered, or at the time
the order is executed?
Answer: In order to qualify for the safe harbor, Rule
10b-18's conditions must be satisfied at the time the order is executed.
Question 32:
How has the volume condition changed under the amended Rule
10b-18?
Answer: Under the amended Rule
10b-18, an issuer's total
repurchases on any single day, including its block-size purchases, must
satisfy the Rule's 25% ADTV volume limitation. However, an issuer can
include its block-size purchases when calculating its security's
four-week ADTV. As amended, Rule
10b-18 also provides issuers with a
choice when making any particular block purchase. Either the block
purchase must comply with the 25% ADTV volume condition, like any other
repurchase, or the block purchase need not comply with the volume
condition, but the issuer can make no other repurchases on that day and
all other block purchases effected during that week must comply with the
25% volume condition.
Question 33:
An issuer's 25% ADTV limit on a particular day is 25,000 shares. If
the issuer purchases 10,000 shares, can the issuer also buy a block of
15,000 shares on the same day and still fit within the safe harbor for
that day?
Answer: Yes, as long as the issuer did not purchase any
more of its shares that day, the issuer would still be within its 25%
ADTV limit of 25,000 for that day.
Question 34:
If an issuer relies on the "one block per week" exception, would the
issuer be able to include the block in its four-week ADTV calculation?
Answer: No. An issuer must deduct those shares from its
four-week ADTV calculation.
Question 35:
An issuer purchases a block on Friday relying on the "one block per
week" exception to the volume condition. Is the safe harbor available to
that issuer the following Monday, if the issuer purchases a block that
Monday, in lieu of purchasing under the 25% ADTV limit?
Answer: Yes. The "one block per week exception" applies
to a calendar week. Thus, the "one block per week" exception would be
available for the block purchased on Friday and the block purchased the
following Monday, provided no other Rule
10b-18 purchases are made the
following Monday, and all other conditions under Rule
10b-18 are met.
Question 36:
If no trading occurs in an issuer's common stock for one or more
trading days during the four calendar weeks preceding the week in which
the Rule
10b-18 repurchase is effected, how should the issuer's ADTV in
its shares be calculated?
Answer: For trading days when no trading in the issuer's
stock took place, a zero is added to the numerator of the ADTV
calculation. The denominator is the total number of trading days,
including those days when the trading volume was zero, during the
four-calendar week period. However, if no trading occurred because a
certain day was a holiday and the markets were closed, then that day
would not be included in the denominator.
Question 37:
An issuer's 25% ADTV limit on a particular day is 25,000 shares. If
the issuer repurchased 15,000 shares, could the issuer buy a block of
30,000 shares (under the "one block per week" block exception to Rule
10b-18's volume condition) that same day and still fit within the safe
harbor?
Answer: No. Because the issuer already repurchased 15,000
shares that day, the issuer would be precluded from repurchasing under
the "one block per week" exception. An issuer must choose to either buy
a block of shares or repurchase within its 25% ADTV limit, but
may not do both. A block-size purchase of 10,000, however, is
permissible because it would not exceed the issuer's 25% ADTV limit (i.e.,
25,000 shares) for that day.
Question 38:
An issuer contacts a broker-dealer who owns a large amount of stock
not constituting a block. The issuer is aware that the broker-dealer
owns shares not amounting to a block. Can the broker-dealer purchase
additional stock to create a block in order to take advantage of the
"one block per week" exception?
Answer: No. The volume limitation cannot be avoided by
having the broker-dealer purchase additional stock to meet the block
definition. The block definition provides that a block shall not include
any amount that a broker or dealer, acting as principal, has accumulated
for the purpose of sale or resale to the issuer, if the issuer knows or
has reason to know that such amount was accumulated for such purpose.
Question 39:
A market maker acquires 2,000 shares of an issuer's common stock in
market making activities during one week. The following week, it
acquires another 3,000 shares. Can the market maker offer a 5,000 share
block to the issuer?
Answer: The Rule
10b-18 definition of "block" excludes
any amount that a broker or dealer, acting as principal, has accumulated
for the purpose of sale or resale to the issuer if the issuer knows or
has reason to know that the market maker had accumulated the block for
the purpose of reselling it to the issuer. Therefore, the issuer could
not avoid the volume limitation by treating the purchase as a block.
1 17 CFR
240.10b-18. See also Securities Exchange Act Release No.
19244
(November 17, 1982), 47 FR 53333, 53334 (November 26, 1982).
2 See
Securities Exchange Act Release No.
48766 (November 10, 2003), 68 FR
64952 (November 17, 2003) (also available at http://www.sec.gov/rules/final/33-8335.htm).
|
