Summary of Comments:

Related to Proposed Rule 10b-18 and Purchases of Certain Equity Securities by the Issuer and Others

Securities Act Release No. 8160
Exchange Act Release No. 46980
Investment Company Act Release No. 25845
File No. S7-50-02

Prepared by:
Elizabeth A. Sandoe
Special Counsel
Office of Risk Management and Control
Division of Market Regulation

October 14, 2003

TABLE OF CONTENTS

1. List of Commenters
2. Overview
3. Scope of the Safe Harbor
1. Eligible Securities
1. Mergers
2. Securities
3. Repurchases Outside the United States
2. Purchases by or for Issuers and Affiliated Purchasers
4. Purchasing Conditions
1. Manner of Rule 10b-18 Purchases
2. Time of Purchases
3. Price of Purchases
4. Riskless Principal Transactions
5. Volume of Purchases
5. After-Hours Trading
1. Applicability of the Safe Harbor During After-Hours Trading Sessions
2. Guzman & Company Petition for Rulemaking
6. Rule 10b-18 Alternative Conditions
1. Proposed Amendment to Rule 10b-18 Alternative Conditions
2. NYSE Petition for Rulemaking
7. Disclosure
8. Closed-End Funds
9. Miscellaneous Comments

I. List of Commenters

A. POST-PROPOSAL

a) Academics

1. Professor David Ikenberry, University of Illinois ("Ikenberry")

b) Associations

2. American Bankers Association/Financial Services ("Clearing House") Roundtable/New York Clearing House Association, LLC
3. America's Community Bankers ("ACB")
4. Committee on Corporation Law of the Association ("Corp. Law Committee") of the Bar of the City of New York
5. Committee on Federal Regulation of Securities, ("Fed. Reg. Committee") Section of Business Law of the American Bar Association
6. Investment Company Institute ("ICI")
7. National Association of Real Estate ("NAREIT") Investment Trusts
8. Securities Industry Association ("SIA")
9. The Business Roundtable ("BR")

c) Asset Management Company/Investment Management Company

10. 10. Pembroke Management Ltd. ("Pembroke")
11. Sandler O'Neil Asset Management, LLC ("Sandler")

d) Broker-Dealers

12. CRT Capital Group LLC ("CRT")
13. Merrill Lynch, Pierce, Fenner & Smith, ("Merrill") Incorporated
14. Morgan Stanley ("Morgan")

e) Electronic Trading Services Provider

15. Vie Financial Group ("Vie")

f) Investment Advisor

16. T. Rowe Price Associates, Incorporated ("T. Rowe")

g) Issuers

17. Bank Mutual Corporation ("Bank Mutual")
18. Cardinal Health ("Cardinal")
19. Citigroup ("Citigroup")
20. Cousins Properties Incorporated ("Cousins")
21. Dell Computer Corporation ("Dell")
22. Emerson ("Emerson")
23. First Sentinel Bancorp ("First Sentinel")
24. First Virginia Banks, Inc. ("First Virginia")
25. Harbor Florida Bancshares ("Harbor")
26. Hibernia ("Hibernia")
27. Intel Corporation ("Intel")
28. LNR Property Corporation ("LNR")
29. NBTB Bancorp, Incorporated. ("NBTB")
30. OceanFirst Financial Corporation ("Ocean")
31. Quaker City Bancorp ("Quaker")
32. UMB Financial Corporation ("UMB")
33. Valero Energy Corporation ("Valero")
34. Wal-Mart Stores, Incorporated ("Wal-Mart")
35. Wells Fargo ("Wells")
36. World Acceptance Corporation ("WAC")
37. WVS Financial Corporation ("WVS")

h) Individuals

38. Sheldon Ray, Jr. ("Ray")

i) Law Firms

39. Cleary, Gottlieb, Steen & Hamilton ("Cleary")
40. Lathrop & Gage, LC ("Lathrop")
41. Skadden, Arps, Meagher & Flom, LLP ("Skadden")
42. Sullivan & Cromwell, LLP ("Sullivan")
43. Wachtell, Lipton, Rosen & Katz ("Wachtell")

II. Overview

We received letters from 43 commenters¹ representing 21 issuers, eight professional associations, five law firms,² three broker-dealers, two asset/investment management companies, one academic, one electronic trading services provider, one investment advisor, and one individual. The letters addressed several issues including: (1) the treatment of block purchases; (2) the availability of Rule 10b-18 once a merger is announced; (3) the proposed disclosure; (4) electronic communication networks (ECNs); (5) the time condition; (6) after-hours trading sessions; (7) the price condition; (8) volume weighted average price (VWAP) trading; (9) eligible securities; (10) the volume condition; (11) alternative volume limits; (12) repurchases outside the United States; (13) the "affiliated purchaser" definition; (14) riskless principal transactions; and (15) rulemaking petitions.

While the comment letters addressed many subjects, the two issues that elicited the greatest volume of comments were the proposed elimination of the block exception and the proposal to exclude repurchases from the safe harbor following a merger announcement until completion of the transaction. Commenters generally believed that the current rule adequately addresses these areas and that revision is unwarranted.

In general, commenters expressed support for the proposed disclosure with a few suggested refinements. However, approximately four commenters believed increased disclosure would not be useful to investors. Apart from the Commission's proposals, two commenters expressed support for more frequent disclosure. One commenter addressed the format and frequency of the proposed disclosure as it would apply to a particular subset of issuers, closed-end funds.

With respect to the manner of purchase condition, commenters discussed the treatment of electronic communication networks (ECNs). Most commenters believed that the safe harbor should accommodate purchases through electronic communication networks. With regard to the time of purchase condition, commenters generally expressed support for expanding the time condition to accommodate actively traded issuers. Some commenters raised suggestions concerning safe harbor eligibility in after-hours trading sessions.

Commenters discussed retaining the last independent transaction price alternative of the pricing condition in addition to the last independent bid as well as application of Rule 10b-18 to passive pricing systems. With respect to the volume condition, commenters discussed revising the definition of a block purchase and the application of the volume condition to thinly traded issuers. Some commenters discussed the scope of the safe harbor including the applicability of the safe harbor to equity securities, derivative securities, and repurchases outside the United States. Other topics addressed in the letters include riskless principal transactions, the definition of affiliated purchaser, and rulemaking petitions.

The responses are discussed in greater detail below.

III. Scope of the Safe Harbor

A. Eligible Securities

1) Mergers

• Sixteen commenters discussed the proposed amendment to the definition of a "Rule 10b-18 purchase" concerning mergers.³ These commenters held the general view that the unavailability of the safe harbor from the time of a merger announcement is unnecessarily broad and offered the following arguments in support of their position:
   
• Regulation M and other federal and state laws adequately address manipulative concerns; ⁴
   
• the incentive to manipulate is insufficient evidence to amend the safe harbor;⁵
   
• regulatory approvals for mergers may take several months and this would unnecessarily restrict the availability of the safe harbor for extended time periods;⁶
   
• foreign regulators may require announcement prior to any discussions with the target;⁷
   
• the proposed amendment is irrelevant in all cash mergers;⁸
   
• the proposed amendment is irrelevant after (1) the shareholder vote, (2) the exchange ratio is fixed, and/or, (3) the valuation period expires;⁹
   
• overlapping or multiple acquisitions would prevent issuers from relying on the safe harbor;¹⁰
   
• issuers may be reluctant to state an intention to purchase following a stock merger to limit dilution if the possibility of an overlapping acquisition may exist;¹¹
   
• the proposed amendment may be advantageous to hostile bidders who might continue to repurchase until making a formal offer;¹²
   
• an acquisition may not be material to the acquiror;¹³
   
• issuers are reluctant to repurchase outside the safe harbor;¹⁴
   
• the proposal would reduce liquidity and discourage repurchasing;¹⁵
   
• issuers would be unable to respond to selling pressure following a merger announcement;¹⁶
   
• the proposal would unduly affect capital allocation strategies;¹⁷
   
• issuers would be unable to repurchase at depressed prices if there is a depressant impact on the issuer's stock in a merger situation;¹⁸
   
• the proposed amendment would create an inability to use specific transaction structures, such as the acquiror offering stock to the target and engaging in a stock buyback program for an equivalent amount of stock subsequent to the merger announcement in order to prevent dilution;¹⁹
   
• issuers would crowd their repurchases into limited time periods rather than spreading them out over a longer time period;²⁰
   
• an absence of safe harbor repurchasing in connection with acquisitions would cause potential dilution to existing shareholders;²¹
   
• the inability to effect safe harbor repurchases in a pending merger transaction would represent a cost for potential acquirors to consider when determining the price at which the merger makes sense which may reduce the number of mergers as well as the merger consideration;²²
   
• potential ambiguity regarding the terms "announcement" and "acquisition;"²³ and
   
• the original purpose of the merger exclusion was to ensure issuer repurchase rules did not interfere with merger regulations and the "pursuant to a merger" language referred to purchases made in, or as part of the merger transaction.²⁴
   
• One commenter suggested that when a foreign regulator requires premature announcement of a merger, the safe harbor should be available until a letter of intent or acquisition agreement is executed or until a reasonable number days prior to the announcement of a tender offer.²⁵
   
• One commenter suggested that the safe harbor should be available to issuers making Rule 10b5-1 plans if the plan is adopted sufficiently in advance of a merger.²⁶
   
• Four commenters suggested confining the proposed treatment of mergers to the Regulation M restricted period.²⁷
   
• One commenter suggested allowing issuers with large daily trading volumes to repurchase post merger announcement with a 10% average daily trading volume (ADTV) volume limitation.²⁸
   
• One commenter suggested an alternative approach of enhanced and more frequent disclosure if specific rules are necessary with respect to mergers.²⁹
   
• One commenter suggested drafting a preamble to the safe harbor stating that issuers can rely on the safe harbor as long as they are not precluded from repurchasing by other applicable laws.³⁰
   
• One commenter suggested the safe harbor should be available for actively traded issuers until a solicitation period begins.³¹
   
• One commenter suggested making the safe harbor available during a solicitation period if the repurchasing terminates one week before the vote or other expiration of the period and the security is actively traded.³²
   
• One commenter proposed that the safe harbor remain available if there is no valuation period and shareholders are not making an investment decision.³³
   
• One commenter stated the merger exclusion should not apply to the acquired company.³⁴
   
• One commenter suggested creating an exception for non-material acquisitions and acquisitions where the consideration is not common stock.³⁵
   
• One commenter believed that creating exceptions for cash mergers and small acquisitions would unduly complicate the safe harbor.³⁶

2) Securities

• Four commenters discussed which securities should be safe harbor eligible.³⁷
   
• Three commenters believed that Rule 10b-18 should extend to common equity.³⁸
   
• One commenter believed that all issuers should be safe harbor eligible and subject to the same manner, price, and volume conditions.³⁹
   
• One commenter believed that application of the safe harbor to other securities, such as warrants and options, would be strained because these securities generally do not present the potential for affecting the underlying security's price.⁴⁰
   
• One commenter suggested that the safe harbor should not apply to non-exchange listed securities or non-Nasdaq listed securities because these securities: (1) have no true volume calculation, (2) have limited price transparency, and (3) have no definable open or close of their trading.⁴¹
   
• One commenter suggested that real estate investment trusts (REITs) and American depositary receipts (ADRs) should be eligible for the safe harbor.⁴²

3) Repurchases Outside the United States

• Three commenters supported the applicability of the safe harbor to repurchases outside the United States using a market-by-market application.⁴³
   
• One commenter stated that they did not believe a rule could be created for universal application both inside and outside the United States and that issuers are presently comfortable accessing liquidity outside the United States.⁴⁴

B. Purchases by or for Issuers and Affiliated Purchasers

• Three commenters discussed the definition of affiliated purchaser.⁴⁵
   
• Two commenters stated that the affiliated purchaser definition should not conform to the definition in Regulation M.⁴⁶ One commenter believed that expanding the definition to include affiliates engaged in a securities business would not be relevant to most issuers and thus would be largely unnecessary.⁴⁷ One commenter stated the current definition is workable and an expansion to mirror the Regulation M definition would unnecessarily complicate the definition.⁴⁸
   
• A third commenter suggested that the Commission clarify the affiliated purchaser definition with respect to the meaning of the phrases (1) "acting directly or indirectly in concert with the issuer," (2) "directly or indirectly controls," and (3) "solely by his participating in the decision to authorize the issuer to effect Rule 10b-18 repurchases."⁴⁹

IV. Purchasing Conditions

A. Manner of Rule 10b-18 Purchases

• Six commenters discussed ECNs.⁵⁰
   
• One commenter urged that issuers should not be permitted to use both an ECN directly and a non-ECN broker-dealer because this could create the perception of overstated demand.⁵¹
   
• One commenter suggested that (1) issuers be restricted to one market marker per day for solicited orders, and (2) issuers be permitted to use ECNs.⁵²
   
• With respect to ECNs, one commenter proposed allowing issuers to use multiple avenues for executing trades in a single day, rather than limiting an issuer to one broker-dealer.⁵³
   
• One commenter suggested that alternative trading systems (ATSs) and ECNs function as marketplaces, not as broker-dealers, and thus both the single broker-dealer effecting safe harbor purchases and the issuer should be able to use ECNs on a given day.⁵⁴
   
• Two commenters stated that if an issuer employs a single non-ATS/ECN broker-dealer on one day, the single broker-dealer condition should be fulfilled despite any purchases that non-ATS/ECN broker makes through one or more ATS/ECNs.⁵⁵

B. Time of Purchases

• Multiple commenters agreed that that the 10-minute timing condition prior to the close of the primary trading session for actively traded issuers using an ADTV and public float test was appropriate.⁵⁶
   
• One commenter stated that issuers should be permitted to effect purchases within the safe harbor at the opening.⁵⁷
   
• One commenter suggested that issuers with an ADTV of $1 million and a public float value of $150 million should be permitted to effect a Rule 10b-18 purchase as the opening transaction.⁵⁸
   
• One commenter stated it is appropriate for the opening transaction to be excluded from the safe harbor as it sets the tone for the trading session.⁵⁹
   
• One commenter suggested that issuers should be allowed to participate in a reopening print with the protection of the safe harbor when a reopening print following a news pending halt is lower than the last reported sale.⁶⁰
   
• One commenter proposed an expansion of the time condition to allow safe harbor purchases at the market's close pursuant to limit-on-close orders placed after a published sell imbalance under certain conditions.⁶¹
   
• One commenter requested clarification regarding the proposal to restrict a safe harbor purchase "after the termination of the period in which the last sale prices are reported in the consolidated system."⁶²

C. Price of Purchases

• Six commenters advocated retaining the last independent transaction price alternative to the pricing condition. ⁶³ Commenters gave the following reasons in support of this position: (1) issuers would have to prevent all other independent trades in order to create a floor price for their securities; (2) purchases at the last sale permit an issuer to follow the market, not lead it; (3) limiting issuers to a bid test would unduly restrict their ability to access liquidity in a fast moving market; and (4) the last independent transaction price provides a reliable mechanism for complying with the safe harbor in light of "flickering" quotes caused by decimalization.
   
• One commenter suggested a price limit that is the average independent price over a period of time, possibly a week.⁶⁴ The commenter stated that averaging would address a problem small issuers face, which is whether their stock will open on a given day.
   
• In response to decimalization, one commenter proposed permitting safe harbor repurchases on a security's principal exchange that are not higher than the last independent transaction price on that exchange.⁶⁵
   
• One commenter suggested using prices in the "principal market" as the reference point for the pricing condition rather than prices in the "consolidated system."⁶⁶
   
• One commenter proposed using the intra-day market high at the time of the issuer's repurchase as the safe harbor's price limit.⁶⁷
   
• With respect to automated routing systems, one commenter stated that an issuer should have to satisfy the pricing condition when its broker-dealer sends the order, but not when the order is executed.⁶⁸
   
• One commenter specifically urged the Commission to exempt VWAP transactions from the pricing condition because VWAP matches do not influence price or provide price discovery.⁶⁹ In a supplemental letter, the commenter stated: (1) listed security issuers should be able to repurchase within the safe harbor using a consolidated or primary market VWAP calculation; (2) the VWAP calculation period could begin between 9:30 and 10:00 a.m. Eastern standard time because many issuers will use VWAP only after seeing the market's initial direction; and (3) the block exception should be available to issuers repurchasing blocks at VWAP.⁷⁰
   
• Two commenters advocated excluding automated trading systems using VWAP or mid-point NBBO algorithms from the pricing condition.⁷¹
   
• Two commenters supported excluding passive pricing systems from the pricing condition where an issuer has no direct or indirect control over the price at which the purchase is effected.⁷²
   
• One commenter noted that the Commission should carefully consider any amendment to accommodate purchases effected through automated trading systems that utilize passive pricing and believed there was no reason to distinguish between purchases executed manually or through automated trading systems.⁷³

D. Riskless Principal Transactions

• One commenter stated that: (1) the safe harbor should be available to riskless principal transactions (i) reported in accordance with the NASD's riskless principal trade reporting rule, and (ii) where the broker-dealer purchases and resales to the issuer at different prices; and (2) the pricing condition should only apply to the publicly reported leg of the riskless principal transaction.⁷⁴
   
• Two commenters suggested that both legs of a riskless principal transaction should be safe harbor eligible if the open market leg complies with Rule 10b-18 and is the only reported leg.⁷⁵

E. Volume of Purchases

• One commenter stated that a four-week calendar period is a sufficient ADTV measurement.⁷⁶
   
• Four commenters believed that the 500-share alternative volume limit was too low.⁷⁷
   
• One commenter suggested that Rule 10b-18 did not address whether the specific transaction that exceeds the volume limitation violates the rule.⁷⁸
   
• One commenter suggested that 0.2% of an issuer's outstanding shares is an appropriate volume limit because the volume condition should be proportional to an issuer's size.⁷⁹
   
• Twenty-seven commenters discussed the proposal to eliminate the block exception and include block purchases in the 25% volume limitation and ADTV calculation.⁸⁰ Generally, these commenters were of the view that the block exception should be retained. In support of this position, commenters asserted the following arguments:
   
• companies with moderately or thinly traded ADTVs rely on block transactions to implement repurchase programs and without blocks these issuers would be unable to effect repurchases within the safe harbor's parameters or maintain effective and efficient repurchase programs;⁸¹
   
• the block exception does not allow issuers to dominate the markets;⁸²
   
• banking regulators limit the number of shares their regulated entities can issue. Thus, these entities are dependent upon repurchasing to fund benefit programs and if an entity is thinly traded it must purchase blocks to remain within the safe harbor;⁸³
   
• blocks are more efficient and less costly to acquire;⁸⁴
   
• blocks accommodate institutional transactions by providing liquidity and thereby sustain an issuer's market appeal;⁸⁵
   
• block transactions provide liquidity;⁸⁶
   
• the absence of the safe harbor for block purchases could lead to more private or otherwise off-market transactions;⁸⁷
   
• smaller repurchases might inaccurately indicate enhanced buying interest and generate a greater market impact than block purchases;⁸⁸
   
• elimination of the block exception would reduce issuers' ability to use block purchasing in repurchase programs as a capital management tool;⁸⁹
   
• repurchase programs will take much longer to complete because issuers will need to be in the market on more days;⁹⁰
   
• if the elimination of the block exception causes issuers to be in the market more frequently, issuers will be forced to repurchase their stock at expensive prices instead of purchasing blocks only when the price is low;⁹¹
   
• block repurchasing prevents volatility;⁹²
   
• elimination of the block exception is counter to the proposal's objective of expanding the safe harbor;⁹³
   
• the inclusion of block transactions in calculating ADTV will not appreciably increase the average ADTV;⁹⁴
   
• the price condition already prevents block transactions from influencing market price;⁹⁵
   
• there is no evidence that block transactions are manipulative, effect price, or are otherwise abusive, and smaller repurchases might inaccurately indicate an enhanced buying interest;⁹⁶
   
• anti-fraud and anti-manipulation rules protect investors,⁹⁷ and self regulatory organization (SRO) rules regulating the execution of block transactions make manipulation less likely;⁹⁸
   
• the block exception stabilizes markets in periods of severe market decline;⁹⁹
   
• excluding blocks from the ADTV calculation makes it easier for a broker-dealer to maintain an accurate count of repurchased shares;¹⁰⁰ and,
   
• the impact of issuer repurchases has diminished because the number and dollar amount of repurchase announcements is decreasing relative to trading volume.¹⁰¹
   
• Twelve commenters were in favor of raising the amount of shares in a block to the NYSE definition. ¹⁰²
   
• One commenter suggested redefining the term block to be 7,500 shares.¹⁰³
   
• One commenter suggested allowing issuers to make a single block purchase per day, and if needed, condition it on no other issuer repurchases that day.¹⁰⁴
   
• One commenter advocated limiting the amount of block purchases that can occur on one day.¹⁰⁵
   
• One commenter suggested limiting an issuer to 20 block purchases in a day for either all issuers or only mid-cap issuers.¹⁰⁶
   
• One commenter proposed raising the volume limit for small-cap companies with limited liquidity.¹⁰⁷
   
• One commenter suggested use of a "cooling off" period whereby an issuer would remain out of the market for one to two business days if its repurchases exceeded the 25% ADTV limit.¹⁰⁸
   
• One commenter proposed that closed-end funds should be permitted to purchase a maximum of 10,000 shares per day.¹⁰⁹
   
• One commenter suggested including block purchases in the ADTV calculation but excluding block purchases from the 25% volume limitation.¹¹⁰
   
• One commenter expressed concern that eliminating the block exception would negatively impact thinly traded issuers' shareholders and alternatively suggested raising the volume limit to 100% rather than eliminating the block exception.¹¹¹
   
• One commenter suggested increasing the volume condition from 25% to 35% of ADTV if the block exclusion is eliminated.¹¹²
   
• One commenter believed the block exception should be retained and suggested allowing issuers to choose the treatment of their block repurchases: (1) if an issuer chooses to rely on the block exception, the block purchases should not be included in trading volume for that day, resulting in a lower volume for subsequent periods, or (2) the issuer could treat a block purchase as any other purchase and include it in the ADTV calculation. ¹¹³
   
• One commenter similarly suggested retaining the block exception and also suggested that if an issuer chooses to count block purchases against its 25% volume limit, it need not exclude those block purchases from subsequent ADTV calculations.¹¹⁴
   
• One commenter believed that disclosing the authorization for its share repurchase program prevented deception in the marketplace because the marketplace was informed that the issuer would be a potential buyer.¹¹⁵
   

V. After-Hours Trading

A. Applicability of the Safe Harbor During After-Hours Trading Sessions

• One commenter requested clarification with respect to two issues: (1) whether the safe harbor is available in the after-hours OTC session (4:00-6:30 p.m.); and (2) whether the timing conditions with respect to the opening trade and the last 10-30 minutes before the close apply in after-hours OTC session.¹¹⁶
   
• One commenter proposed that the safe harbor be available as long as the consolidated reporting system is open, so that the safe harbor would be available up to 30 minutes prior to the close of the consolidated tape with a price limit that is no higher than the closing price of the regular trading session.¹¹⁷
   
• One commenter noted that the safe harbor should be available during after- hours trading sessions so long as repurchases are not executed at a price higher than the day's closing market price.¹¹⁸
   
• Two commenters urged that the safe harbor be available during after-hours trading sessions and made the following suggestions: (1) eliminate the opening trade prohibition in the after-hours trading session; (2) waive the timing prohibition concerning effecting purchases after the close of the consolidated system; (3) the safe-harbor should apply to after-hours trading on any national securities exchange, inter-dealer quotation system and ATS; (4) an issuer may use one broker-dealer during the after-hours trading session even if that broker-dealer is different from the broker-dealer used in the primary session; (5) transactions may be effected throughout the after-hours trading session until its close; and (6) transactions may be effected at the closing price of the primary session, subject to bids or sales subsequently reported in other markets.¹¹⁹

B. Guzman & Company Petition for Rulemaking

• One commenter opposed the Guzman request stating that the use of a second broker-dealer during the after-hours session would create the appearance of a larger purchasing group in the market than would actually exist.¹²⁰
   
• Two commenters believed that the single broker condition should apply separately in after-hours trading sessions.¹²¹
   
• One commenter opposed the Guzman proposal and supported the interpretation that transactions may be effected throughout an after-hours trading session: (1) until its close, and (2) at the closing price for the primary session subject to other markets' later bids or reported sales.¹²²
   
• One commenter advocated rejection of the Guzman petition but suggested confirmation that the safe harbor is available in after-hours trading sessions on any national securities exchange, inter-dealer quotation system, ATS, or ECN and that: (1) purchases should be permitted throughout the after-hours trading session, including the opening and through the close; (2) trading volume in the after-hours session that is reported in the consolidated system should be included in the ADTV calculation and volume limit; (3) the single broker-dealer condition should apply separately in the after-hours trading session; and (4) the price should be determined by reference to the consolidated system, including prices reported in the consolidated system from other markets at or after the close of that market.¹²³

VI. Rule 10b-18 Alternative Conditions

A. Proposed Amendment to Rule 10b-18 Alternative Conditions

• Six commenters expressed general support for the increased volume limit of 100% following a market-wide trading suspension citing reasons such as enhanced liquidity and issuer flexibility.¹²⁴
   
• Two commenters were concerned that the elimination of the block exception would effect whether the 100% volume limitation would be sufficient.¹²⁵
   
• One commenter noted that it may be difficult to conclude that any alternative volume level following a market-wide trading suspension could sufficiently address all situations.¹²⁶
   
• One commenter stated that the proposed volume limitation would be inadequate to absorb sales following a market-wide trading suspension, or in the case of a market-wide decline or volatile market.¹²⁷
   
• One commenter noted that the alterative volume condition did not provide issuers with the flexibility to provide liquidity in periods of volatility absent a suspension.¹²⁸
   
• One commenter suggested easing the volume condition in situations that do not rise to the level of a market-wide trading suspension, for example (1) at established intermediate circuit breaker levels, (2) when the price of an issuer's stock declines by a stated amount in a single trading session, (3) where the volume of trading in a single session exceeds ADTV by more than a stated percentage, and (4) when there is turmoil in a particular sector, such as a decline by a specified percentage in an industry-specific index.¹²⁹
   
• A third commenter stated that the Commission should view market situations other than market-wide trading suspensions on a case-by-case basis relying on the exemptive authority in Sections 12(k)(2) and 36 of the Securities Exchange Act of 1934.¹³⁰

B. NYSE Petition for Rulemaking

• One commenter asked that the Commission give the NYSE the opportunity to implement its petition concerning "special purchases" by independent trustees during periods of volatility.¹³¹

VII. Disclosure

• Sixteen commenters generally agreed with enhanced transparency of issuer repurchases through disclosure, some suggesting minor refinements.¹³² For example, commenters stated:
   
• "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."¹³³
   
• "We especially applaud the fact that the proposed amendments to Rule 10b-18 call for increased transparency of issuer repurchases by requiring disclosure of all such repurchases, regardless of whether such repurchases fall within the Rule 10b-18 safe harbor."¹³⁴
   
• "We agree with the Commission, that in general, the proposed additional disclosures should serve useful to investors."¹³⁵
   
• "Citigroup supports the Commission's efforts to . . . enhance the transparency of reporting of issuer shares repurchases."¹³⁶
   
• "Full and fair repurchase disclosures by issuers will ensure that all market participants are aware of the size and scope of the repurchase program."¹³⁷
   
• "In addition, requiring issuers to provide disclosure with respect to proposed and actual repurchases would make information that can be relevant in making investment decisions available to the market."¹³⁸
   
• Two commenters championed even greater disclosure in terms of frequency.¹³⁹ For example, commenters stated:
   
• "Perhaps more importantly, the infrequency of the new repurchase disclosures seems in stark contrast with the disclosure mandated by insider trading regulations. While one can construct a theoretical argument as to why a CEO, when choosing to buy stock on personal account, should disclose with near immediacy while buying on corporate account need only reveal so in a rather obtuse manner many months after the fact, this distinction is difficult to justify. The contrast is magnified when one considers the difference in sheer dollar volumes involved between the two cases . . . I would again encourage the Commission to ponder the monthly disclosure model in Canada . . .."¹⁴⁰
   
• "The severe lack of transparency in the U.S. on this issue is somewhat disturbing. Many jurisdictions require almost immediate disclosure of share buybacks while time lags here of over three months in some cases render the information's value to the public virtually meaningless. Two examples of frequent disclosure that the Commission may wish to consider are those of the U.K. and Hong Kong . . . it is comforting to have notice of a company's share repurchase (number of shares and prices) by the close of the London market the same day."¹⁴¹
   
• Other commenters believed that increased transparency of issuer repurchases through the proposed disclosure requirements would not be meaningful information to investors.¹⁴² For example commenters stated:
   
• "Such a far-reaching requirement to disclose every repurchase is unnecessary, burdensome and would provide information that is not meaningful to investors."¹⁴³
   
• "The Commission's proposal to require very detailed disclosure of issuers' repurchase activity would be unduly burdensome to issuers and it is unclear what additional value this kind of disclosure would provide to investors."¹⁴⁴
   
• One commenter made two suggestions: (1) require issuers to promptly announce the adoption of a repurchase program but not necessarily on Form 8-K, and (2) Item 703 should require disclosure of (i) the size of the program, (ii) the number of shares purchased to date, (iii) the number of shares purchased during the quarter, (iv) the manner of purchase, and (v) the average price paid.¹⁴⁵
   
• One commenter suggested disclosing only (1) the total number of shares purchased during a quarter, and (2) the average price paid.¹⁴⁶
   
• One commenter suggested annual disclosure of any new or existing repurchase program on Form 10-K, including the number of shares purchased and average price paid.¹⁴⁷
   
• One commenter suggested disclosure on Form 10-Q whenever a new repurchase plan is adopted or an existing plan is modified or cancelled.¹⁴⁸
   
• One commenter suggested that issuers initially disclose repurchase program parameters on Form 8-K.¹⁴⁹
   
• One commenter suggested use of an affirmative statement in filings with the Commission concerning whether or not repurchases were made in the period covered by the filing.¹⁵⁰
   
• One commenter suggested that transactions by or for an issuer plan by an agent independent of the issuer be excluded from the proposed disclosure.¹⁵¹
   
• One commenter suggested, in connection with equity based compensation plans, excluding from the proposed disclosure requirements transactions in which a plan participant has equity securities withheld by the issuer in order to satisfy exercise price, tax withholdings, or similar obligations.¹⁵²
   
• One commenter suggested that disclosure of non-safe harbor repurchases only be made to the Commission but not to the public.¹⁵³
   
• One commenter recommended that disclosure of when an issuer plans to commence repurchasing should be made only to the Commission but not to the public.¹⁵⁴
   
• One commenter stated issuers should not be required to state whether purchases were made pursuant to an announced plan or the number of shares that may yet be purchased under a plan.¹⁵⁵ However, if those disclosures are required, the commenter alternatively suggested that the Commission should provide a safe harbor from liability for misstatements arising from this disclosure and that issuers be permitted to state that their future repurchasing plans are subject to change.
   
• One commenter suggested that issuers be permitted to make their own disclosure decisions on a case-by-case basis under general anti-fraud provisions.¹⁵⁶
   
• Two commenters believed that transaction-by-transaction disclosure is unnecessary.¹⁵⁷
   
• Five commenters stated that a monthly breakout or daily reporting of repurchasing would not be meaningful to investors.¹⁵⁸
   
• Twelve commenters believed that disclosure of the broker-dealer's identity is unnecessary disclosure of confidential business information that could provide an informational advantage to other market participants.¹⁵⁹
   
• Two commenters suggested that the identity of the broker-dealer could be disclosed solely to the Commission, rather than to the public.¹⁶⁰
   
• Two commenters stated that disclosure of transactions exceeding a certain threshold would be misleading and incomplete.¹⁶¹
   
• Four commenters said quarterly disclosure is sufficient.¹⁶²
   
• Two commenters supported disclosure with some frequency greater than quarterly.¹⁶³
   
• One commenter stated that disclosure occurring more frequently than quarterly would be overkill.¹⁶⁴
   
• One commenter stated that it is unnecessary to provide the status of repurchase plans quarterly.¹⁶⁵
   
• One commenter stated that a monthly running total of the number of shares that may yet be purchased has little value.¹⁶⁶
   
• One commenter raised the issue of uneven disclosure among market participants, stating that mutual funds are not required to provide detailed information regarding their transactions.¹⁶⁷
   
• Three commenters asserted that current annual disclosure in financial statements regarding stockholders equity and the statement of cash flows or the quarterly discussion of repurchases in Management's Discussion and Analysis is sufficient without being unduly burdensome to issuers.¹⁶⁸
   
• One commenter believed that disclosure of repurchases might allow others to deduce an issuer's repurchase strategy.¹⁶⁹
   
• One commenter was concerned that disclosure of when an issuer plans to start repurchasing divulges trading strategy without benefiting investors.¹⁷⁰
   
• Two commenters suggested that prospective disclosure could be misleading and expose issuers to allegations of fraud or manipulation.¹⁷¹
   
• Three commenters stated that disclosure is appropriate only if material to investors.¹⁷²
   
• One commenter urged that disclosure should not be required for derivative securities.¹⁷³
   
• One commenter stated that disclosure of derivative programs such as short put program should be disclosed to investors.¹⁷⁴
   
• One commenter stated that disclosure should only apply to common equity.¹⁷⁵
   
• One commenter believed disclosure should be applicable to common and nonconvertible preferred stock.¹⁷⁶
   
• One commenter suggested footnote disclosure that repurchases were made within the Rule 10b-18 safe harbor.¹⁷⁷
   
• One commenter suggested that issuers should not be required to bifurcate disclosures based on whether or not repurchases were made in compliance with the safe harbor.¹⁷⁸
   
• One commenter stated that disclosure of non-safe harbor purchases has little or no value to investors.¹⁷⁹
   
• One commenter advocated that disclosure should not be conditioned on safe harbor compliance.¹⁸⁰
   
• One commenter suggested that foreign private issuers governed by different regulatory regimes should be given the option to provide the disclosure they provide in their home jurisdiction.¹⁸¹
   
• One commenter stated that disclosure concerning affiliated purchasers is already addressed under Section 16(a).¹⁸²
   
• One commenter expressed concern regarding the inconsistent treatment of the disclosure of insider trading and the disclosure of corporate share repurchases.¹⁸³

VIII. Closed-End Funds

• One commenter suggested that with respect to closed-end funds, the Commission eliminate Form N-23C-1 and no longer require repurchasing disclosure on Form N-SAR, and instead provide the proposed disclosure on Form N-CSR semi-annually.¹⁸⁴

IX. Miscellaneous Comments

• One commenter requested clarification that no change is intended with respect to the treatment of privately negotiated transactions.¹⁸⁵
   
• One commenter suggested that open market repurchase programs should have defined time and quantity terms instead of being infinite in terms of time and quantity.¹⁸⁶ This commenter also suggested that firms should confront their board of directors to obtain new authorizations to repurchase and inform the public about potential repurchases.¹⁸⁷

Endnotes

¹ Vie submitted a comment letter dated March 3, 2003 and a supplemental comment letter dated June 26, 2003.

² Skadden submitted its comment letter on behalf of Stephens Inc., a registered broker dealer.

³ BR; Cardinal; Clearing House; Citigroup; Cleary; Corp Law Committee; Dell; Fed. Reg. Committee; Intel; Merrill; Morgan; Sullivan; Valero; Wachtell; Wal-Mart; Wells.

⁴ BR; Cardinal; Citigroup; Clearing House; Cleary; Corp. Law Committee; Dell; Fed. Reg. Committee; Intel; Merrill; Sullivan; Valero; Wachtell; Wal-Mart; Wells.

⁵ BR; Cardinal; Valero; Wachtell

⁶ Cardinal; Citigroup; Clearing House; Corp. Law Committee; Fed. Reg. Committee; Intel; Merrill; Sullivan; Valero; Wachtell; Wells.

⁷ Wal-Mart.

⁸ Cardinal; Citigroup; Dell; Intel; Morgan; Valero; Wachtell; Wal-Mart.

⁹ Cardinal; Dell; Intel; Morgan; Sullivan; Valero; Wachtell; Wal-Mart; Wells.

¹⁰ Cardinal; Citigroup; Clearing House; Intel; Wachtell; Wells.

¹¹ Valero.

¹² Clearing House.

¹³ Dell; Intel; Morgan; Valero; Wal-Mart.

¹⁴ Cardinal; Clearing House; Fed. Reg. Committee; Intel; Wachtell; Wells.

¹⁵ Cardinal; Citigroup; Clearing House; Intel; Wachtell.

¹⁶ Clearing House.

¹⁷ Cardinal; Wal-Mart; Wells.

¹⁸ Clearing House.

¹⁹ Clearing House.

²⁰ Clearing House.

²¹ Wells.

²² Wells.

²³ Fed. Reg. Committee; Sullivan.

²⁴ Fed. Reg. Committee; Sullivan.

²⁵ Wal-Mart.

²⁶ Wal-Mart.

²⁷ Fed. Reg. Committee; Intel; Merrill; Sullivan.

²⁸ Intel.

²⁹ Clearing House.

³⁰ Merrill.

³¹ Sullivan.

³² Sullivan.

³³ Sullivan.

³⁴ Sullivan.

³⁵ Morgan.

³⁶ Valero.

³⁷ Fed. Reg. Committee (also requesting the Commission confirm that there is no substantive change to Rule 10b-18 by collapsing the definition of a Rule 10b-18 bid into a Rule 10b-18 purchase); Merrill; Morgan; SIA.

³⁸ Fed. Reg. Committee; Merrill; SIA (also suggesting the Rule 10b-18 definition of common equity and the NYSE definition of equity securities should be consistent).

³⁹ Merrill.

⁴⁰ Merrill.

⁴¹ Morgan.

⁴² Fed. Reg. Committee.

⁴³ Cleary; Fed. Reg. Committee; Sullivan.

⁴⁴ Merrill.

⁴⁵ Fed. Reg. Committee; Morgan; Sullivan.

⁴⁶ Fed. Reg. Committee; Sullivan.

⁴⁷ Sullivan.

⁴⁸ Fed. Reg. Committee.

⁴⁹ Morgan.

⁵⁰ Fed Reg. Committee; Merrill; Morgan; Sullivan; T. Rowe; WVS.

⁵¹ Merrill.

⁵² WVS.

⁵³ T. Rowe.

⁵⁴ Sullivan.

⁵⁵ Fed. Reg. Committee; Morgan.

⁵⁶ BR; Dell; Emerson; First Virginia; Hibernia; ICI; Intel; Merrill; SIA; T. Rowe.

⁵⁷ T. Rowe.

⁵⁸ Hibernia.

⁵⁹ Merrill.

⁶⁰ Merrill.

⁶¹ Morgan.

⁶² Merrill.

⁶³ Fed. Reg. Committee; Harbor; Intel; Merrill; SIA; Sullivan.

⁶⁴ WVS.

⁶⁵ Merrill.

⁶⁶ Fed. Reg. Committee.

⁶⁷ T. Rowe.

⁶⁸ Morgan.

⁶⁹ Vie (letter dated March 3, 2003).

⁷⁰ Vie (supplemental letter dated June 26, 2003).

⁷¹ Fed. Reg. Committee; SIA.

⁷² Morgan; Sullivan.

⁷³ Merrill.

⁷⁴ Merrill.

⁷⁵ Fed. Reg. Committee (stating both legs should be safe harbor eligible if executed at the same price exclusive of other fees); Sullivan.

⁷⁶ Merrill.

⁷⁷ ACB; ICI; UMB; WVS.

⁷⁸ Skadden.

⁷⁹ WVS.

⁸⁰ ACB; Bank Mutual; Cardinal; Citigroup; Cousins; CRT; Emerson; Fed. Reg. Committee; First Sentinel; First Virginia; Harbor; ICI; LNR; Merrill; Morgan; NAREIT; NBTB; Ocean; Pembroke; Quaker; Sandler; SIA; Skadden; Sullivan; T. Rowe; UMB; WAC.

⁸¹ ACB; Cousins; CRT; First Virginia; ICI; LNR; Morgan; NAREIT; Pembroke; Quaker; SIA; Skadden; Sullivan; UMB; WAC.

⁸² First Virginia.

⁸³ ACB; Bank Mutual.

⁸⁴ ACB; Bank Mutual; NAREIT; Ocean.

⁸⁵ ACB; Bank Mutual; Cardinal; Cousins; CRT; First Sentinel; LNR; NBTB; Ocean; Quaker; Skadden.

⁸⁶ Cardinal; Citigroup; Emerson; Merrill; Ocean; Quaker; SIA; Sullivan.

⁸⁷ Bank Mutual; Merrill.

⁸⁸ NAREIT; Skadden.

⁸⁹ First Sentinel; Harbor; Ocean; NAREIT; Sandler (stating that repurchasing is a safe method to deploy excess capital for small banks and thrifts).

⁹⁰ Bank Mutual; First Sentinel.

⁹¹ ACB; Bank Mutual; Harbor.

⁹² First Sentinel; Morgan; NBTB; Ocean; Quaker; SIA.

⁹³ ICI; T. Rowe.

⁹⁴ Cardinal.

⁹⁵ Cardinal; Harbor; UMB.

⁹⁶ Cardinal; Citigroup; Fed. Reg. Committee; ICI; Merrill; NAREIT; Ocean; Skadden; Sullivan.

⁹⁷ LNR; SIA.

⁹⁸ Skadden.

⁹⁹ Skadden.

¹⁰⁰ Skadden.

¹⁰¹ Merrill.

¹⁰² ACB (suggested increasing the amount of shares constituting a block to 10,000 shares or more); Fed. Reg. Committee; Emerson; First Virginia; LNR; Merrill; Morgan; NAREIT; Pembroke; Skadden; Sullivan; Vie (supplemental letter of June 26, 2003).

¹⁰³ UMB.

¹⁰⁴ Bank Mutual.

¹⁰⁵ ACB.

¹⁰⁶ LNR.

¹⁰⁷ First Sentinel.

¹⁰⁸ Harbor.

¹⁰⁹ ICI.

¹¹⁰ Skadden.

¹¹¹ Quaker.

¹¹² Morgan.

¹¹³ Fed. Reg. Committee.

¹¹⁴ Merrill.

¹¹⁵ LNR.

¹¹⁶ SIA.

¹¹⁷ Merrill.

¹¹⁸ T. Rowe.

¹¹⁹ Fed. Reg. Committee; Sullivan.

¹²⁰ Merrill.

¹²¹ Fed. Reg. Committee; Sullivan.

¹²² Fed. Reg. Committee.

¹²³ Sullivan.

¹²⁴ BR; Cleary (stating its support for broadening the alternative volume condition in periods of severe market distress); Dell; Fed. Reg. Committee; ICI; Merrill (stating the 100% level is appropriate as long as the block exception is retained and encouraged continued use of the emergency and exemptive authority used following the market reopening after September 11, 2001).

¹²⁵ Fed. Reg. Committee; Merrill.

¹²⁶ Fed. Reg. Committee (also stating that the current definition of "market-wide trading suspension" should be retained).

¹²⁷ Skadden.

¹²⁸ Citigroup.

¹²⁹ Cleary.

¹³⁰ Fed. Reg. Committee.

¹³¹ Sullivan.

¹³² Corp. Law Committee; Citigroup; Cleary; Cousins; Dell; Emerson; First Virginia; ICI; Ikenberry; Merrill; NAREIT; Ray; SIA; Sullivan; T. Rowe; WVS.

¹³³ Cleary.

¹³⁴ NAREIT.

¹³⁵ Merrill.

¹³⁶ Citigroup.

¹³⁷ WVS.

¹³⁸ ICI.

¹³⁹ Ikenberry; Ray.

¹⁴⁰ Ikenberry.

¹⁴¹ Ray.

¹⁴² BR; Cardinal; Fed. Reg. Committee; Intel.

¹⁴³ BR.

¹⁴⁴ Intel.

¹⁴⁵ Dell.

¹⁴⁶ Emerson.

¹⁴⁷ Emerson.

¹⁴⁸ Emerson.

¹⁴⁹ WVS.

¹⁵⁰ Intel.

¹⁵¹ Cleary.

¹⁵² Cleary; Fed. Reg. Committee (also suggesting that option exchange programs not be subject to disclosure).

¹⁵³ SIA.

¹⁵⁴ SIA.

¹⁵⁵ Sullivan.

¹⁵⁶ Fed. Reg. Committee.

¹⁵⁷ Merrill; NBTB.

¹⁵⁸ Dell; Emerson; Fed. Reg. Committee; Sullivan (supporting aggregate disclosure of quarterly purchases rather than on a month by month basis); WVS.

¹⁵⁹ Cleary; Dell; Emerson; Fed. Reg. Committee; Ikenberry; Merrill; Morgan; SIA; Sullivan; T. Rowe; Valero; WVS.

¹⁶⁰ SIA; WVS.

¹⁶¹ Dell; Ikenberry.

¹⁶² Dell; Intel; Morgan; Sullivan.

¹⁶³ Ikenberry; Ray.

¹⁶⁴ NBTB.

¹⁶⁵ Emerson.

¹⁶⁶ WVS.

¹⁶⁷ Intel.

¹⁶⁸ BR; Cardinal; Intel.

¹⁶⁹ Intel.

¹⁷⁰ SIA.

¹⁷¹ Fed. Reg. Committee (stating such disclosure could make it difficult for an issuer to revise its plans and alternatively suggested allowing issuers to furnish the Commission with their press releases announcing repurchase plans on Form 8-K); Sullivan (supporting disclosure of past purchases but not possible future purchases and raising interpretive concerns about what constitutes "plan" and how to interpret the term "announced.")

¹⁷² BR; Cardinal; Sullivan.

¹⁷³ Sullivan.

¹⁷⁴ Ikenberry.

¹⁷⁵ Morgan.

¹⁷⁶ Fed. Reg. Committee.

¹⁷⁷ Cleary.

¹⁷⁸ Fed. Reg. Committee.

¹⁷⁹ SIA.

¹⁸⁰ Merrill.

¹⁸¹ Sullivan.

¹⁸² Fed. Reg. Committee.

¹⁸³ Ikenberry.

¹⁸⁴ ICI.

¹⁸⁵ Lathrop.

¹⁸⁶ Ikenberry.

¹⁸⁷ Ikenberry.

http://www.sec.gov/rules/extra/s75002summary.htm