January 29, 1999
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: File No. S7-27-98
Dear Mr. Katz:
We are writing in response to the Securities and Exchange Commissions ("Commission") request for comment on amendments to Rule 10b-18 ("Rule") under the Securities Exchange Act of 1934 ("Act"). The Rule provides issuers a safe harbor for the repurchase of their shares in the public markets. The proposed amendments would suspend the Rules timing condition during the trading session immediately following a market-wide trading suspension (referred to as "circuit breakers"). In particular, the safe harbor would be available to an issuer that bids for or purchases its common stock either: (1) from the reopening of trading until the close of trading on the same day as the imposition of the market-wide trading suspension; or (2) at the next days opening, if the market-wide trading suspension was in effect at the scheduled close of trading. The amendments would not affect the Rules conditions governing the price, volume and manner of market purchases by a company of its common stock.
We strongly support the proposal and urge the Commission to adopt the timing amendments. In addition, we would like to offer other suggestions with respect to the timing provisions of the rule, including recommending that the Commission consider expanding this approach to operational and certain order imbalance trading halts. 1 We also recommend that the prohibition against purchasing or bidding during the last half-hour of trading be shortened to the last 15 minutes of trading. Finally, we encourage the Commission to clarify and confirm that issuers do not need to collect and maintain information showing compliance with the purchasing conditions of the safe harbor on a trade-by-trade basis.
The Current Proposal
The proposed amendment to the safe harbor would allow issuers to participate on the re-opening of the markets after market-wide circuit breakers have been triggered by drops of 10%, 20%, or 30 % from the previous days close. Clearly during times of such extreme market stress, when liquidity is significantly contracted, issuers who are interested in repurchasing their shares can offer much needed liquidity. As history has shown, issuer repurchases in such market conditions can have a calming effect on the market and can stem the tide of panic selling. 2 At such times, issuers may be the primary buyers of their securities and their confidence can be a positive influence in otherwise very volatile markets.
For the reasons discussed below, we believe that the Commission should also: (1) clarify that issuers may participate in re-openings after operational trading halts and (2) expand the relief it has proposed from the current timing provisions of the rule to certain sell-side order imbalance halts.
Operational halts are called in the rare event that systems or operational issues make continued trading impossible or unwise. We believe that it is unlikely that the character of the market for a security would change as a result of such a halt. These halts do not result from a change in the supply and demand for a security and would not typically be expected to affect its direction or price. Thus, the first transaction upon re-opening of trading is unlikely to have the same impact on the character of the days trading as does the first trade of the day. Thus, we request that the Commission clarify that issuers may participate in such re-openings, as long as purchases are made in accordance with the price, volume, and close-of-trading time requirements.
Order imbalance halts are called because of an influx of orders on one side of the market. These imbalances can occur as the market adjusts to information disseminated by the issuer or as a result of events unrelated to issuer disclosures.
Allowing issuers to participate in the re-opening after sell-side order imbalance halts unrelated to issuer disclosures is justified for the same reasons as those allowing issuers to participate after a circuit breaker halt. During times of unusual selling pressure, unrelated to company developments, allowing the issuer to provide needed liquidity can help restore a fair and orderly market, provided the issuers repurchases are made in accordance with the price, volume, and close-of-trading requirements of the rule.
We understand that the Commission has historically viewed as problematic issuers participation in the opening and during the last half-hour of normal market hours, because of the tendency of those two periods to be strong signals as to the direction and current value of the security. Commission releases have expressed the Commissions concern that allowing the issuer to effect transactions during these times could inappropriately affect the character of the days trading. We believe, however, that in the case of circuit breaker, operational, and certain sell-side order imbalance halts the risk of the issuer having a disproportionate impact on the price discovery mechanism is sufficiently low to allow issuers participation in re-openings after such events. In addition, it is important to note that the current price and volume limitations in the Rule should offer adequate protection against an issuer leading the market for its security through its repurchases in the situations we describe above.
In addition to supporting the Commissions proposals to expand issuers ability to participate in certain market re-openings, we would like to suggest that the Commission consider shortening the half-hour long prohibition imposed before the close of trading. As the Commission is well aware, the pace of trading has accelerated greatly in the years since this prohibition was adopted. In todays trading environment, 30 minutes is an extremely long time. We believe that 15 minutes would provide a more than adequate buffer between any issuer repurchases and the closing price. In addition, the fact that issuers would still have to comply with the price and other restrictions of the Rule supports shortening the close-of-trading time requirement.
In its cost-benefit analysis, the Commission stated that the Rule implicitly requires an issuer to collect information regarding the manner, timing, price, and volume of its purchases of its common stock on a transaction-by-transaction basis to verify compliance with the Rules conditions. We agree that the Rule clearly applies to and provides protection for individual trades. Nevertheless, we are concerned that the language in the proposing release may inadvertently leave the impression that the issuer must collect and retain information on individual trades, beyond the information it receives in confirmations, which may reflect an average price. Industry practice has evolved such that issuers give orders to their brokers, pursuant to which their brokers must comply with the pricing, volume, and timing conditions of Rule10b-18. To collect additional information, issuers would not only unnecessarily duplicate the efforts of the brokers to whom they give their buy-back programs, but both issuers and brokers would incur significant additional costs to produce this information. It would increase costs significantly if the Rule were re-interpreted to require individualized, trade-by-trade information collection and retention. We hope the Commission will clarify in the adopting release that current industry practice is consistent with the Rule.
We understand that the Commission has been reluctant to expand the Rules applicability in the past. We believe, however, that the expansions we are recommending are limited in scope and do not present a significant risk of abuse. We recognize that the Rule is a safe harbor and, as such, does not strictly define all acceptable issuer repurchase conduct. 3 We believe, however, that issuers may be reluctant to participate at times other than those sanctioned in the safe harbor without the SECs explicit concurrence, just as they have been reluctant to participate after market-wide halts. Thus, we urge the Commission to consider broadening the proposed amendments as we have suggested in this letter.
We would be happy to discuss these matters in greater detail, if that would be helpful. Please feel free to call Raymond J. Dorado, Director and Counsel, Credit Suisse First Boston Corporation, at (212) 325-7258, Michael L. Crowl, Vice President and Associate General Counsel, Goldman, Sachs & Co., at (212) 902-7418, Charles J. Plohn, Jr., Managing Director, Merrill Lynch & Co., at (212) 449-4577 or Christine A. Sakach, Director and Senior Counsel, Merrill Lynch & Co., at (212) 449-2755.
Very truly yours,
Credit Suisse First Boston Corporation
Goldman, Sachs & Co.
Merrill Lynch & Co.
Salomon Smith Barney, Inc.
-- We are confining our comments to the timing provisions of the rule at this time. We look forward, however, to an opportunity to address other aspects of the rule in response to the Commission’s expected release re-examining the rule in its entirety.
-- Fortunately, such times of extreme market stress have been rare, such as October 19 -21, 1987, October 1997, and August through October, 1998. In these periods, however, we witnessed the benefits of issuers’ participation at crucial times to enhance market liquidity.
-- As the Commission recognized when it adopted Rule 10b-18, issuers rarely buy back their securities with improper intent. Because we believe that to be true, we believe that it is sometimes perfectly appropriate for issuers to effect repurchases outside of the safe harbor. Issuers’ natural reluctance to stray from the safe harbor is only aggravated, however, by statements such as the proposing release’s characterization of operating outside the safe harbor as presenting "substantial and unpredictable risks of liability under the general anti-manipulation provisions of the Exchange Act."