February 18, 2003
Securities and Exchange Commission
Re: File No. S7-50-02-Proposed Rule: Rule 10b-18 and Purchases of Certain Equity Securities by the Issuer and Others (the "Proposing Release")
Ladies and Gentlemen:
We are submitting this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on the Commission's proposed rule (the "Proposed Rule") to (i) amend Rule 10b-18 ("Rule 10b-18") under the Securities Exchange Act of 1934 (the "Exchange Act") and (ii) require disclosure of all issuer repurchases of their equity securities.1 We appreciate the opportunity to comment on the matters discussed in the Proposing Release.
I. The Rule 10b-18 safe harbor should be available for issuer repurchases conducted in U.S. and non-U.S. markets, on a market-by-market basis.
The Commission has asked for comment on whether the safe harbor should apply to an issuer's repurchases of its common stock effected outside the United States. In our experience, issuers whose common stock is listed in markets inside and outside the United States, and particularly non-U.S. issuers, frequently conduct repurchases either only in the non-U.S. market, or in the U.S. and non-U.S. markets concurrently. There is uncertainty on the part of these issuers and their advisors about the circumstances in which issuer repurchases outside the United States may be viewed as manipulative under U.S. law. The Commission, since it is proposing to amend Rule 10b-18, now has an opportunity to address this issue. The Commission should do this by revising Rule 10b-18 to state that the safe harbor is available to issuers making repurchases in non-U.S. markets.
The Commission would not have to make extensive revisions to the rule in order to encompass repurchases in non-U.S. markets. The Rule 10b-18 safe harbor should be available to issuers who conduct repurchases on a given exchange outside the United States in compliance with the rule's conditions, as applied to its purchases on that exchange on that day, rather than as applied to its aggregate purchases on all exchanges on that day. For example, an issuer's repurchases would fall within the safe harbor if it used a different broker-dealer to effect its repurchases in different markets within a given 24-hour period, so long as the issuer used a single broker-dealer within each such market. Similarly, the issuer would comply with the volume condition if it kept its purchases within each market to 25% or less of the average daily trading volume ("ADTV") for that market.
We believe this market-by-market application is the best approach to extending the Rule 10b-18 safe harbor to cover purchases made in non-U.S. markets. Simply amending the rule to cover purchases effected on any exchange could have unintended consequences and be difficult to implement. For example, if ADTV for purposes of the volume condition were to be based on average daily trading volume of an issuer's common stock on a global basis, and an issuer makes repurchases equal to 25% of the global ADTV on an exchange where its common stock is much more thinly traded than on average across the globe, the issuer's repurchases could significantly affect prices on that local exchange in a manner inconsistent with the purpose of the safe harbor. In addition, if the price condition were to be applied globally, issuers whose shares trade on multiple exchanges with overlapping hours might find it difficult to determine the highest independent bid or the last reported transaction price at any given moment. In light of these and other potential technical challenges, an amendment that would simply apply the existing Rule 10b-18 conditions to the aggregate of an issuer's repurchase activity in all of the markets where the issuer's common stock trades could create problems that would outweigh any possible benefit from the change.
We understand that there may be markets in which strict compliance with the Rule 10b-18 conditions is not possible because of conflicting local law or exchange rules, or because one or more of the conditions is otherwise inapplicable in the local market. However, since Rule 10b-18 provides a non-exclusive safe harbor for issuer repurchases, the fact that an issuer fails to comply with a given condition in a given market should not be prejudicial.
II. The Commission should eliminate the merger exclusion from the definition of "Rule 10b-18 purchase," because its purpose is already adequately addressed by the exclusion relating to purchases during a Regulation M restricted period.
The definition of a "Rule 10b-18 purchase" currently excludes, among other things, issuer repurchases of their common stock "[p]ursuant to a merger, acquisition, or similar transaction involving a recapitalization."2 The Commission is proposing to modify the language of this exclusion to cover repurchases "[e]ffected during the period from the time of the public announcement of a merger, acquisition or similar transaction involving a recapitalization, until completion of such transaction."3 In the Proposing Release, the Commission states that the proposed change is intended "to make it clear that the exception for purchases effected pursuant to a merger includes purchases effected `during the period from the time of public announcement of the merger, acquisition, or similar transaction, until the completion of such transaction.'" The Commission further states in the Proposing Release that the new language helps address its concern that "[o]nce a merger or acquisition is announced, an issuer has considerable incentive to support or raise the price of its stock. Thus, the safe harbor should not apply to purchases made during this period."
We do not believe the exclusion from Rule 10b-18 for purchases by an issuer during the period between public announcement and completion of a merger involving use of the issuer's common stock as consideration is either necessary or appropriate. Any concerns about potentially manipulative behavior by an acquirer during this period are already adequately addressed by Proposed Rule 10b-18(a)(13)(i). That provision excludes from the definition of "Rule 10b-18 purchase" issuer repurchases "effected during the restricted period (as specified in [Rule 102 of Regulation M under the Exchange Act]) when the issuer or any affiliated purchaser is distributing (as defined in [Rule 100 of Regulation M]) the issuer's common stock or any other security for which the common stock is a reference security." Regulation M already prohibits a potential acquirer from purchasing its own common stock during precisely the period(s) during which that acquirer would have greatest incentive to seek to manipulate its share price, and the exclusion from Proposed Rule 10b-18 for purchases effected during the Regulation M restricted period appropriately recognizes this fact. Accordingly, no further exclusion from the safe harbor is warranted.
III. U.S. issuers should not be required to disclose the broker-dealers used to effect their repurchases.
The Commission is proposing to amend Regulations S-K and S-B, and Forms 10-Q, 10-K and 20-F under the Exchange Act, and proposed Form N-CSR under the Exchange Act and the Investment Company Act of 1940, to require disclosure of all issuer repurchases (including open market and private transactions) of any class of equity securities registered under Section 12 of the Exchange Act, regardless of whether the repurchases are effected in accordance with the Rule 10b-18 conditions.
Issuer disclosure in periodic filings of repurchases of their equity securities would provide investors with useful information about the level, frequency and purpose of such activity by an issuer and its affiliates. The proposal that the information be included in already existing periodic filings (i.e., on Forms 10-Q and 10-K for U.S. issuers and Form 20-F for non-U.S. issuers) and in tabular format should help ensure that the requirement imposes a relatively small burden on issuers while providing the market with adequate disclosure in an easy-to-read format, and we concur with the general terms of the proposed disclosure. However, there are certain aspects of the proposals that we urge the Commission to reconsider, as unduly burdensome to issuers or potentially misleading to investors.
The Proposed Rule would require U.S. issuers to disclose the names of the broker-dealers through which they execute their repurchases. Investors are unlikely to derive much value from knowing the names of these broker-dealers, other than to see whether a single broker-dealer was used to effect any purchases during the reporting period that happened to be made on the same day. The Commission states in the Proposing Release that the disclosure by U.S. issuers would provide the Commission with information that would permit it to "monitor more effectively the level and market impact of an issuer's repurchase activity." The identity of broker-dealers effecting issuer repurchase transactions, however, is unlikely to be a meaningful contributor to the "level and impact" of such activity.4 Rather, we believe the burden of requiring issuers to disclose the names of broker-dealers, which may be sensitive for commercial reasons (for both the issuer and the broker-dealer), far outweighs any benefit to investors or the Commission and, accordingly, that U.S. issuers should not have to include this information.
IV. The Commission should explicitly exclude from the proposed disclosure requirement certain transactions by participants in equity-based compensation plans and purchases by an "agent independent of the issuer."
Many equity-based compensation plans provide participants with the right to satisfy exercise price, tax withholding or similar obligations in equity securities rather than cash (i.e., either by having equity securities withheld by the issuer from the number otherwise deliverable or by delivering equity securities to the issuer). These transactions could be viewed as repurchases by the issuer. However, the exercise of these rights involves a net increase, rather than a decrease, in the number of equity securities outstanding, because the rights are only exercised by plan participants in connection with the delivery of at least some equity securities to the plan participants. In addition, these repurchases arise in connection with compensatory plans and therefore are motivated by considerations different from those present in issuer repurchases in other contexts. Moreover, the timing of the transactions is often outside the control of the issuer. We do not believe that these transactions are the types of repurchases that the Commission is seeking to have disclosed, and the burdensome nature of such disclosure to the issuer would far outweigh any possible informative value of such disclosure to an investor. We ask that the Commission clarify that the Proposed Rule excludes any such "repurchases" in the context of equity-based compensation plans from the required disclosure.
In addition, under existing rules acquisitions effected by an "agent independent of the issuer" in connection with an issuer employee benefit plan are exempt from the definition of "Rule 10b-18 purchase" and from the trading prohibition of Regulation M. Similarly, such acquisitions should be exempt from the proposed issuer repurchase disclosure rules. Such acquisitions are motivated by different considerations than other issuer repurchases and the inclusion of such acquisitions would tend to be more confusing than helpful. Requiring issuers to ascertain and disclose information concerning transactions engaged in by agents independent of the issuer might tend to involve issuers in those acquisitions to a greater extent than currently is the case. We ask that the Commission clarify that transactions effected by or for an issuer plan by an agent independent of the issuer be excluded from the disclosure required by the Proposed Rule.
V. The "alternative conditions" should be further modified to provide interim levels of market-wide relief and relief on a narrower basis.
The Commission should consider additional broadening of the "alternative conditions" that come into effect in times of severe market distress.5 While we support the Commission's proposal to modify the safe harbor "alternative conditions" to increase the volume limitation to 100% of ADTV in the trading session immediately following a market-wide trading suspension, we believe it may also be appropriate to introduce some measures to cover periods of market turmoil that are severe but nonetheless do not rise to the level of a market-wide trading suspension. Indeed, as the Commission notes in the Proposing Release, the events following the terrorist attacks on September 11, 2001, did not give rise to a market-wide trading suspension, so that the Commission was forced to act by emergency order to ease or suspend certain of the Rule 10b-18 conditions to facilitate issuers' provision of liquidity to the market at that time. Further modification of the alternative conditions to introduce more modest easing of the volume limitation in situations falling short of a market-wide suspension would have a stabilizing influence on the market and help foster investor confidence, since investors would know with greater certainty that issuers would have more latitude to provide liquidity to the market in trying times, without the need for any action to be taken by the Commission. Such modifications could include, for example, allowing the New York Stock Exchange and the Nasdaq National Market to set intermediate circuit breaker levels (which could be reviewed on an annual basis) at which an easing of the Rule 10b-18 volume limitation to some level between 25% and 100% would take effect.
In addition, we believe the Commission should consider providing relief from the volume limitation where there is a severe decline in the market price of an individual stock. The rule could, for example, provide alternative conditions where the price of an issuer's common stock declines by a stated percentage during a single trading session, or where the volume of trading in a single session exceeds ADTV by more than a specified percentage. The Commission could also consider providing alternative conditions for a particular sector of the market (such as bank stocks, transportation stocks and the like) when there is turmoil in that particular sector that is significantly greater than that in the market as a whole. For example, the Commission may wish to consider providing alternative conditions that would apply in the session following a session during which an index of stocks in a certain sector (such as a Dow Jones industry-specific index) declines by a specified percentage, both in absolute and relative terms compared to the average overall market decline during such session.
VI. Minor inconsistencies in the forms of the proposed disclosure tables should be corrected.
Finally, we note that, with respect to the form of the proposed tables, where the Commission refers to the number of shares in a column heading, it has included parenthetically the words "or units." However, the proposed heading for column (b), "Average Price Paid per Share," does not include this reference to units.6 Additionally, the table in proposed Item 15(e) of Form 20-F provides for disclosure of months one through three only, rather than providing a row for each of the 12 months during the period covered by an issuer's annual report on Form 20-F. These minor inconsistencies should be corrected in the final rule.
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We thank you for the opportunity to comment on the Proposed Rule. We would be happy to discuss with you our comments or any other matters you feel would be helpful in your review of the proposals. Please do not hesitate to contact Leslie N. Silverman or David I. Gottlieb in New York (212-225-2000) or Edward F. Greene in London (011-44-20-7614-2200) if you would like to discuss these matters further.