SEC Proposes Issuer Stock Repurchase Amendments, New Rule To Clarify Regulatory Status of R&D Companies


Washington, D.C., November 26, 2002 -- The Securities and Exchange Commission today proposed amendments that would facilitate and increase disclosure of company repurchases of equity securities. The Commission also proposed a new rule to clarify the status of research and development companies under the Investment Company Act of 1940.

Proposed Amendments to Rule 10b-18's "Safe Harbor" and New Disclosure Provisions Regarding Issuer Repurchases of Equity Securities

The Commission proposed amendments to Rule 10b-18 under the Securities Exchange Act of 1934, which provides a "safe harbor" from charges of manipulation when an issuer purchases its common stock within the limitations specified in the rule.

The proposed amendments would simplify and update the safe harbor provisions to reflect market developments since the Rule's adoption. The principal proposed changes include:

  • easing the timing limitation to allow issuers of "actively traded" securities to stay in the market up to 10 minutes before the scheduled close of trading, instead of the current 30-minute limitation.
  • expanding the safe harbor for issuer repurchases when the market is severely distressed, by allowing an issuer to purchase up to 100% of its security's average daily trading volume during the trading session immediately following a "market-wide trading suspension."
  • eliminating the "block exception" from the volume limitation. To qualify for the safe harbor under the proposed amendments, issuers would have to include their block purchases in applying the rule's 25% average daily trading volume limitation. Issuers, however, would be able to include their block purchases in calculating a security's average daily trading volume, which would increase the amount that some issuers could repurchase under the safe harbor.

To enhance the transparency of issuer repurchases, the Commission also proposed that Regulations S-K and S-B under the Exchange Act, related Exchange Act Forms, including Form 20-F, and proposed Form N-CSR (for closed-end funds) be amended to require periodic disclosure of all issuer repurchases, including those made in reliance on Rule 10b-18.

Under the proposal, issuers would be required to disclose, among other things, the total number of shares repurchased during the past quarter, the average price paid per share, the identity of any broker-dealers used to effect the purchases, the number of shares purchased as part of a publicly announced repurchase plan or program, and the number of shares remaining to be purchased under the plan or program.

The Commission invites public comment on the proposed amendments, including the applicability of the safe harbor during after-hours trading sessions, what effects, if any, decimal pricing has had on the rule's operation, and the applicability of the safe harbor conditions with respect to electronic communication networks (ECNs) and alternative trading systems (ATSs). Comments should be received within 60 days of publication of the proposed amendments in the Federal Register.

Proposed New Rule 3a-8 Under the Investment Company Act of 1940 That Would Provide a Nonexclusive Safe Harbor from the Definition of Investment Company for Certain Research and Development Companies

The Commission proposed new Rule 3a-8 under the Investment Company Act to modernize the test that R&D companies use in determining their status under the Act.

R&D companies tend to have few tangible assets and often hold large amounts of capital in liquid instruments so that funds are readily accessible for research and development activities. Some R&D companies also enter into strategic alliances that may include a strategic investment, where one R&D company purchases a non-controlling securities position in another R&D company. As a result, an R&D company may inadvertently fall within the definition of investment company. The proposed rule would serve as a nonexclusive safe harbor from the definition of investment company in Section 3(a)(1) of the Act.

The analysis set forth in the proposed rule generally focuses on an R&D company's use of its capital and other indicia of the company's primary engagement in a non-investment business. Generally, a company would be eligible to rely on the rule's nonexclusive safe harbor if it:

  • has research and development expenses that are a substantial percentage of its total expenses for its last four fiscal quarters combined and that equal at least half of its investment revenues for that period;
  • has investment-related expenses that do not exceed five percent of its total expenses for its last four fiscal quarters combined;
  • makes its investments to conserve capital and liquidity until it uses the funds in its primary business subject to certain exceptions; and
  • is primarily engaged, directly or through a company or companies that it controls primarily, in a noninvestment business, as evidenced by the activities of its officers, directors and employees, its public representations of policies, and its historical development.

The Commission invites public comment on the proposed rule. Comments should be received by January 15, 2003.

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The full text of the detailed releases concerning the Commission proposals will be posted to the SEC Web site as soon as possible.


Last modified: 11/26/2002