Vie Financial Group, Inc.
March 3, 2003
via e-mail: firstname.lastname@example.org
Jonathan G. Katz, Esquire
RE: Release Nos. 33-8160; 34-46980; IC-25845; File No. S7-50-02
Dear Mr. Katz,
Vie Financial Group, Inc. ("Vie") appreciates the opportunity to comment on the Proposal Release, which proposes various amendments to Rule 10b-18 under the Exchange Act (the "Rule"). For the reasons expressed in this letter, Vie strongly urges the Commission to provide an exception for issuers' volume weighted average price ("VWAP") transactions from the pricing condition of the Rule.
For over 20 years, the Rule's safe harbor has provided sound and specific guidance to issuers engaged in repurchases of their securities. Today's comprehensive review of the safe harbor provisions is warranted in light of the occurrence of many marketplace changes since the inception of the Rule, including the emergence of the VWAP as the ubiquitous trading benchmark and passive systems that achieve execution pricing at VWAP. Amending and updating the safe harbor is important as Vie concurs with the Commission's understanding that "issuers generally are reluctant to undertake any repurchases without the certainty that their repurchases come within the Rule's safe harbor."
An article in PLANSPONSOR cites that "[t]he most commonly accepted measurement of trade execution efficacy is called VWAP, or volume-weighted average price. VWAP is derived from adding up the dollars traded for each transaction (price times shares traded) and then dividing by the total shares traded for the day. Generally, it is broadly accepted that a trade below VWAP is a `good' trade, whereas a trade above VWAP may not be."1 Moreover, Elkins/McSherry, a leading global transaction cost consultant, found that "81% of institutional trading does not beat the volume weighted average price" in trading NASDAQ securities in the fourth quarter of 2002, and "75% of institutional trading fails to beat the volume weighted average price" in New York Stock Exchange listed securities in the same quarter.2 These findings derived from a study utilizing a database of 11 million trades, 211 billion shares, 1,300 investment managers, 1,900 brokers and 120 corporate and public pension plan sponsors. As a consequence, VWAP is the most widely recognized and accepted trading benchmark in the world, and is used daily by the largest and most influential broker-dealers and institutional trading operations to monitor and achieve superlative trading performance.
Vie, through its affiliate broker-dealers,3 offers, among other things, a growing array of VWAP execution products and services to institutional, broker-dealer, and corporate issuer customers. Vie's most utilized execution product at this time is a pre-opening VWAP match. This VWAP match takes place each morning before regular trading begins at 9:30 a.m. Eastern Standard Time. Customers receive binding match reports back before the opening. After the close of regular trading on the primary exchange at 4:00 p.m., each executed order matched during that day's pre-opening period will be priced based on the VWAP as Vie calculates from all primary market trades. Both buyer and seller in the VWAP match receive the same derivative and passively established VWAP. Vie also facilitates customer matches at other intra-day VWAP intervals. Pursuant to NASD rules, all VWAP transaction reports are identified with a special indicator to indicate that such transaction reports are "unrelated to the current or closing price of the security."4 In this regard, VWAP transactions provide no price discovery information nor influence the pricing direction of a security.
Corporate issuers and their brokers have expressed interest in Vie's VWAP match products and services for issuer repurchases, but have expressed reservations that a VWAP price, albeit inherently passive, cannot satisfy the pricing condition [Rule 10b-18(b)(3)(i)] of the safe harbor. In this regard, they note that because VWAP, by definition, is a price somewhere between the daily high and low price of a security, VWAP could be a price that exceeds the highest independent bid or the last independent transaction price quoted or reported in the consolidated system. Vie's counsel has had discussions with the Division of Market Regulation staff over the past several years for interpretive relief in this area, but the staff has consistently advised that Rule 10b-18 is a safe harbor whose provisions must be strictly adhered to in obtaining its protections without an interpretive stretch. The staff further stated that Rule 10b-18 simply was adopted at a time when passive VWAP executions were not around to be considered for inclusion within the safe harbor.
Indeed, the Proposal Release raises the efficacy of the current safe harbor's pricing condition for certain passive trades such as VWAP. In the last question under "Price of Purchases," the Commission questions "[s]hould Rule 10b-18's price condition apply where the issuer or its affiliated purchaser has no control, directly or indirectly, over the price at which a Rule 10b-18 purchase will be effected, for example, automated trading systems that utilize `passive' (independently-derived) pricing, such as the volume weighted average price (VWAP)...." For the reasons provided in this letter, Vie answers the Commission affirmatively that there should be an express exception for VWAP trades from the pricing condition of the safe harbor.
Vie suggests the following amendment can efficiently be inserted into the instant rulemaking initiative (new text underscored, deleted text struck-out):
Sec. 240.10b-18 Purchases of certain equity securities by the issuer and others.
(b) Conditions to be met. *****
(3) Price of purchases. (i) Rule 10b-18 purchases must be effected at a purchase price that does not exceed the highest independent bid or the last independent transaction price, whichever is higher, quoted or reported in the consolidated system;
(ii) For securities as to which bids and transaction prices are not quoted or reported in the consolidated system, Rule 10b-18 purchases must be effected at a purchase price that does not exceed the highest independent bid or the last independent transaction price, whichever is higher, displayed and disseminated on any national securities exchange or on any inter-dealer quotation system (as defined in Sec. 240.15c2-11) that displays at two priced quotations for the security. For all other securities, Rule 10b-18 purchases must be effected at a price no higher than the highest independent bid obtained from three dealers-; and
(iii) Rule 10b-18 purchases that are effected at a volume weighted average price (VWAP) in securities that are reported in the consolidated system may exceed the highest independent bid or the last independent transaction price quoted or reported in the consolidated system.*****
Vie looks forward to an amendment to Rule 10b-18 to permit corporate issuers to receive the benefits of effecting transactions at the VWAP while being afforded the protections of the Rule's safe harbor for their securities' repurchases. The suggested amendment would except issuers' VWAP transactions from only the pricing condition of the safe harbor. Issuers and their affiliated purchasers would remain responsible for compliance with all other conditions of Rule 10b-18 to secure the protections of the safe harbor.
Thank you for the opportunity to comment on this important amendment to Rule 10b-18. Please do not hesitate to contact me at (215) 789-3305 if you have any questions or comments about this suggested approach.