Merrill Lynch, Pierce, Fenner & Smith Incorporated
February 27, 2003
Jonathan G. Katz, Secretary
Re: File No. S7-50-02/Proposed Amendments to Rule 10b-18
Dear Mr. Katz:
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") appreciates this opportunity to comment on the proposed amendments to Exchange Act Rule 10b-18 (the "Rule") and related rule proposals, as set forth in Release Nos. 33-8160; 34-46980; IC-25845 (December10, 2002) (the "Release").
The Release reflects extensive and thoughtful work on the part of the Securities and Exchange Commission (the "Commission") to update the Rule in light of market developments since its adoption in 1982. The Rule provides issuers with a "safe harbor" from liability for manipulation when they repurchase their common stock in the market in accordance with the conditions of the Rule. Many of the amendments the Commission has proposed are appropriate, minor refinements of the Rule and we support them. We also generally agree with the Commission's proposed new disclosure requirements. We strongly disagree, however, with the proposed elimination of the block exception in the volume condition of the Rule, primarily because the Commission has failed to demonstrate any need to so radically alter the Rule's safe harbor.
As the Release highlights, issuers repurchase their stock for many legitimate business reasons and the Rule has provided companies with clarity and certainty in implementing open-market stock repurchase programs. Over the years, companies have reacquired their shares to: invest excess cash at a higher rate of return; change the capital structure; increase earnings per share; use stock as acquisition currency; offset dilution of issuer plans, such as stock purchase, stock option, dividend reinvestment, or similar plans; eliminate smaller holdings and thus reduce servicing costs; buy out selected shareholders; and return capital to investors more efficiently than through dividends. In addition, in times of market stress, when individual stock prices are no longer true representations of the value of companies, issuers have used their repurchasing ability to provide much needed liquidity to the marketplace.
In our experience, issuers continually review the suitability, size and objectives of their repurchase programs. Changes in a company's financial picture, the overall performance of the market, Commission rules, accounting standards and tax treatment can trigger changes in issuer repurchase strategies. For example, changes in the accounting rules for "greenmail" and pooling-of-interest transactions, as well as the reversal of the traditional approach to stock options under Section 16(b) by the SEC in 1991, have impacted issuer purchases. In the near future, we expect issuers' objectives, amount of repurchases and methods of implementation to be affected by changes in the accounting of stock options and certain derivative transactions, as well as the proposed changes in the tax treatment of dividends.
The Rule has worked extremely well since its adoption for issuers pursuing objectives such as these. In addition, the Commission's ability and willingness to expand the safe harbor temporarily to respond to periods of extreme market stress (for example, informally during the October 1987 Market Break and with emergency orders in the market reopening after September 11, 2001) has provided issuers with assurance that they could provide meaningful liquidity for their stock in the face of extreme market conditions.
Because the safe harbor has operated so well since its adoption, we urge the Commission to exercise restraint in its efforts to update the Rule. The basic framework of the purchasing conditions of the Rule should remain intact, with some modest adjustments. Specifically, we agree with shortening the time period before the scheduled close of trading for those issuers that meet the proposed average daily trading volume ("ADTV") and public float tests. In addition, we agree with the proposal to simplify the price condition to apply regardless of where the securities are traded. And, we agree that the current price condition - requiring that a purchase be made at a price not to exceed the higher of the current independent bid or last independent transaction price - should remain. In addition, we generally support the Commission's proposed quarterly disclosure requirements.
We strongly disagree, however, with the Commission's proposal to eliminate the block exception to the volume condition, given the operation of the safe harbor over the last 20 years. In addition, we do not agree with the Commission's proposal to exclude from the safe harbor certain purchases during merger periods. This proposal is overly restrictive. Moreover, we recommend that the Rule govern the means that issuers use to effect repurchases only after they have concluded under relevant law that they can be in the market.
Before discussing our comments in more detail below, we note that we have provided certain historical background data and statistics on the issuer repurchase market that we have compiled in an Appendix to this letter. The information includes: (a) annual statistics on the total number of announcements and the estimated number of shares and dollar amount of stock repurchase programs; (b) an analysis of the announcements by method and, for open-market programs, by size, by exchange-listed and Nasdaq issuers and by percentage of shares outstanding; and (c) a comparison of the announcements relative to the New York Stock Exchange ("NYSE") and Nasdaq volume, blocks and turnover rate.
We have gathered this information from sources believed to be reliable but we cannot guarantee its accuracy. We hope that this additional information will be helpful to the Commission in considering the proposed changes in the safe harbor and is responsive to its request for this type of information. We will refer to some of the exhibits in our comments on the volume condition of the Rule.
Scope of the Safe Harbor
The Commission proposes an amendment to make explicit that the safe harbor would not apply to purchases effected "during the period from the time of public announcement of a merger, acquisition, or similar transaction involving a recapitalization, until the completion of such transaction". This amendment is inconsistent with what we believe should be the scope of the Rule. In addition, the proposed amendment is more restrictive than necessary.
In our view, issuers should not look to the Rule to determine whether, in the first instance, it would or would not be permissible to repurchase their stock. Various other provisions of the federal securities laws and other applicable law (for example, Regulation M, Rule 10b-5, Rule 13e-4, state corporation codes) can and do limit issuer repurchases in the open market, under certain conditions. Rule 10b-18 should govern issuer conduct only when an issuer has determined that, under other applicable law, it may repurchase its shares.
We would recommend that the Commission consider adding a preamble to the Rule, clarifying that issuers can rely on the safe harbor only when they are not prohibited by other applicable law from repurchasing their securities. We are concerned that the current reference in the Rule to Regulation M is misleading, because it is only one of many substantive rules governing when issuers may repurchase their shares. Such an approach would prevent the Rule from consisting of varying requirements and restrictions that are more appropriately addressed in other provisions of the securities laws.
We now turn to the specific question the Commission asked as to whether issuers should not have the benefit of the safe harbor for purchases effected during the period from announcement to completion of a merger, acquisition, or similar transaction. We see no reason to limit the safe harbor's availability more than during the Regulation M restricted period. Rule 102 of Regulation M restricts issuers and their affiliated purchasers from the day the proxy solicitation or offering materials first are disseminated to security holders until the completion of the distribution; that is, the time of the shareholder vote or the expiration of the exchange offer. By Commission interpretation of Regulation M, another restricted period applies during any period where the market price of the offered security will be a factor in determining the consideration to be paid; that is, a valuation period. The Regulation M restricted periods, combined with Rule 10b-5 and other applicable law, appropriately govern issuer repurchase activity and we see no policy rationale for extending the time during which an issuer is precluded from repurchasing its stock. This is especially true for issuers in certain industries, including utilities and banks that require extensive time periods to complete mergers and acquisitions to secure necessary regulatory approvals and other prerequisites to deal completion.
The Commission also proposes to codify the staff's position that the safe harbor is available for repurchases of all common equity securities. We agree with this clarifying amendment. In response to the Commission's question as to whether the safe harbor should be expanded to include other types of securities, including warrants, options and convertible debentures, we believe that application of the safe harbor's conditions to purchases of such securities would be strained at the very least. These securities are generally not as actively traded. In addition, as the Commission has recognized in numerous contexts, including when adopting Regulation M, these securities generally do not present the same potential for affecting the price of the underlying security.
The Commission asked a number of questions about the wisdom of making the safe harbor available to purchases effected outside the United States. We believe that such an expansion would likely increase uncertainty for issuers who choose to access liquidity outside the United States. The safe harbor was crafted based on the manner in which U.S. securities markets operate. We cannot conceive of a rule that could be crafted for universal application inside and outside the United States, particularly given the many rules in non-U.S. markets that govern issuer activity. We believe that issuers have a level of comfort accessing liquidity in non-U.S. markets that obviates the need for an expansion of the safe harbor. We also note that the Rule's volume limitation should be based only on U.S. volume.
The Commission also asked about whether the safe harbor should be narrowed to limit the types of issuers who could avail themselves of it. In particular, the Commission asked whether issuers whose securities are less liquid or are traded in less transparent markets should be eligible for the safe harbor. We believe that all issuers should be able to avail themselves of the safe harbor and that the volume, price, and manner of purchase conditions should remain the same for all issuers. We do agree, however, with the proposal to apply the ADTV and public float tests to determine how early before the end of the regularly scheduled trading day an issuer should withdraw from the market.
Proposed Elimination of the "Block Exception"/Volume Condition of the Rule
The Commission proposes to modify the treatment of block purchases in the volume condition of the Rule. We believe the basic framework of the Rule that has been in place should remain - a volume limit, calculated as a percentage of ADTV, with an exception from that limit for blocks. We strongly disagree with eliminating the block exception for the reasons outlined below.
Under the current volume condition, an issuer may make daily purchases in an amount up to 25% of the ADTV in its shares. Block purchases by an issuer are not subject to the 25% volume limitation, nor are the shares currently purchased by the issuer in block-size transactions included when calculating a security's ADTV. Under the proposed amendments, the Commission would eliminate the special treatment of block purchases.
As support for its proposed amendments, the Commission states that block purchases are conducted more frequently today then when Rule 10b-18 was adopted, and the block exception essentially negates the volume limitation of the safe harbor. The Commission then concludes that the block exception may allow issuers to dominate the market for their securities and raises the possibility that investors could be mislead about the integrity of the market as an independent pricing mechanism.
Although we understand the theoretical concerns of the Commission that issuer repurchases raise potential manipulative concerns, those concerns should be alleviated by almost 20 years of experience under the Rule with no apparent evidence of abuse. Moreover, our experience over the last several years has been that the number and estimated dollar amount of repurchase announcements has leveled off, as is evidenced by Exhibit I of the Appendix, and is decreasing relative to the total trading volume on the NYSE and Nasdaq (Exhibit VII of the Appendix). Thus, the impact of issuer repurchases on stock prices arguably has diminished. In addition, the percentage of the total estimated dollar amount attributed to repurchase programs of $1 billion and greater (Exhibits III and IV) - those "issuers whose securities are less susceptible to manipulation" - is increasing and represented more than 64% of the total in 2001 and 2002.
Furthermore, contrary to the Commission's assertions that block transactions are conducted more frequently today, our analysis shows that NYSE block transactions of 10,000 shares or more accounted for 41% of reported volume in 1982 and 44% in 2002. Nasdaq blocks of 10,000 shares or more accounted for 37% of Nasdaq volume in 1982 and only 28% in the first nine months of 2002 (Exhibit XII). We also take issue with the studies the Commission cites in footnote 52 of the Release to support the view that blocks can have a disproportionate impact on the market. These studies are not on point, as they are outdated and, more importantly, examine the impact of block transactions by investors not subject to the time and price conditions of the Rule.
The benefits to be achieved from aligning the Rule to theoretical concerns are substantially outweighed by the dislocations that might result from the Commission's proposed change. Eliminating the exception could fundamentally impact the willingness of companies to buy back their stock to implement their business goals, thereby reducing the availability of issuer liquidity to the marketplace. In our view, the greatest impact of the elimination of the block exception over the past five years would have been to dilute the liquidity provided to the markets during market breaks, especially by medium-sized and smaller issuers.
In addition, if the block exception were eliminated, issuers might not be able, even if so willing, to purchase all or a portion of a large block for sale in the open market by institutional investors, thereby potentially destabilizing the market for their stock. We are also concerned there could be a substantial increase in the number of private transactions between issuers and their largest institutional shareholders. This would remove these blocks from being exposed to and priced in the public marketplace. In such cases other public investor orders would lose an opportunity to participate in either the buy or sell-side of the block trade.
Given the lack of evidence of abuse and the real potential for dislocation, we believe that a far better course is for the Commission to retain the block exception, modified as we discuss below. We recommend that the Commission adopt its alternative approach of retaining the block exception but redefining "block" to mean at least 10,000 shares and $200,000, consistent with the NYSE and Nasdaq definitions. This would raise the amount of shares constituting a block under the Rule, so that only significantly large blocks would be executed outside the volume restrictions. This approach, combined with the new disclosures that would be available to the Commission and its staff, should allay any concerns of potential abuse.
In addition, we recommend that the Commission include certain issuer block purchases in the calculation of the ADTV. As we stated in our 1991 letter to the Commission staff1, we believe if an issuer chooses to count block purchases against its 25% ADTV limit, it should not have to exclude those block purchases from its subsequent ADTV calculations. Rather, only those blocks the issuer effects under the block exception should be excluded from the ADTV calculation.
In response to one of the Commission's questions on this aspect of the Rule, the current, four-calendar week period is sufficient to measure the ADTV of a security and has the benefit of being part of the framework of the Rule for the past 20 years. Any changes here would be unnecessary.
Manner of Purchases
The Commission did not propose to amend the single broker-dealer condition of the safe harbor but did ask whether the single broker-dealer condition needs to be amended to accommodate issuer repurchases through ECNs.
Issuers today can directly use an ECN that is a registered broker-dealer under the current manner of purchase requirement, so long as the pricing and other conditions of the Rule are satisfied. We see no reason to amend the requirements of the safe harbor to permit issuers both to use an ECN directly and another coordinating broker-dealer in any one day. If an issuer chooses to use a non-ECN broker-dealer to coordinate all its repurchase activity, that broker-dealer can access ECN liquidity on behalf of the issuer. Allowing an issuer to use both an ECN and a non-ECN broker-dealer in the same day seems to raise the same potential for overstating demand as allowing an issuer to access liquidity through more than one non-ECN broker-dealer on any given day.
Timing of Purchases
We support the Commission's proposed modification of the timing condition to permit issuers whose securities have an ADTV of $1 million or more during the four calendar weeks before the week of the Rule 10b-18 purchase and have a $150 million public float to repurchase their securities until 10 minutes before the scheduled close of regular trading. We believe that these proposed timing limitations adequately protect against an issuer having a disproportionate effect on the closing price for those more actively traded securities. In addition, we see no need to require less liquid issuers to withdraw for a longer period than one half hour before the close. We also see no reason to adopt ADTV and public float tests that differ from those in Regulation M. To do so would unnecessarily complicate the Rule.
It is not clear to us why the proposed amendment restricts a Rule 10b-18 purchase "after the termination of the period in which last sale prices are reported in the consolidated system". This strikes us as unnecessary and potentially confusing, because an issuer, under the proposed amendments, would be required to be out of the market either 10 minutes or 30 minutes prior to the close, depending on how actively its securities are traded. Leaving aside any changes that may be made to accommodate after-hours trading, the period after the termination in which last sale prices are reported necessarily would be outside the safe harbor.
In response to the last question on this aspect of the Rule, the current prohibition on an issuer effecting the opening transaction of the day should remain. The opening transaction of the day may set the tone for trading in the security for the remainder of the session. Thus, barring unusual circumstances, it is more appropriate for the safe harbor to exclude such opening transactions. We would urge the Commission, however, to consider an exception to allow issuers to participate in the reopening print after a "news pending" trading halt, if the reopening print would be at a price that is lower than the last reported sale. In such circumstances, issuers can provide much needed liquidity and presumably would participate only if they have satisfied themselves that they have met their obligations under Rule 10b-5.
We agree with the Commission's objective of applying a uniform pricing condition - at a price no higher than the current independent bid or last independent transaction price, whichever is higher.
Contrary to the concerns expressed in the Release, if the Commission were to change the price condition, it should be changed to a price no higher than the last independent transaction price as the only independent reference point used. The last independent transaction price is the simplest price point to which to refer. In addition, purchases no higher than the independent last sale price would only reflect the current price as they necessarily "follow" the market. In our experience, given the contours of the Rule's safe harbor, company buyback programs cannot change the direction of the price of the stock and cannot create price floors in a rising market, nor can they realistically prevent price declines. Finally, using the last independent sale price addresses the "flickering quote" phenomenon caused by decimalization and increasingly fragmented markets.
We would suggest another alternative to deal with the challenges of decimalized markets - permit repurchases on the principal exchange for an issuer's securities as long as those purchases were not higher than the last independent transaction price on that principal exchange. We note, however, that if Nasdaq were to be registered as an exchange, the Commission would need to further consider how this proposal would apply.
We would strongly disagree with a Rule amendment that would limit the price condition to a price no higher than the current independent bid. The pricing condition already puts issuers at a disadvantage to all other buyers in the marketplace. Limiting issuer purchases to the current independent bid would further, and unnecessarily, compound that situation. Indeed, such a condition may not operate to further the Commission's goals underlying the safe harbor. Moreover, in times of crisis, such as the 1987 Market Break or the market reopening after September 11, 2001, such a limitation could severely undermine issuers' ability to provide needed liquidity, if the highest price they could pay were based on the disappearing bids of other market participants.
The Commission also asked for comment on amending the safe harbor to accommodate issuer purchases effected through automated trading systems that utilize "passive" pricing such as VWAP. Such an amendment would require careful consideration, but, in all events, we would see no reason to distinguish between manually executed VWAP purchases and VWAP purchases executed through automated trading systems.
Riskless Principal Transactions
In response to the Commission's questions, the safe harbor should be available to riskless principal transactions - both those reported in accordance with the NASD's riskless principal trade reporting rule and those where the broker-dealer's purchases and resales to the issuer are at different prices.
For riskless principal trades where the trade price of only one leg is publicly reported, only that leg should meet the pricing conditions, as that is the only part of the transaction that has any potential market impact. In addition, these trades are essentially the equivalent of agency transactions on behalf of the issuer and should thus be treated equivalently under the Rule.
The Commission should use this opportunity to clarify the pricing condition of the Rule in respect of riskless principal transactions in which a broker-dealer purchases and resells the shares at different prices. Although the Nasdaq market has recently seen a marked increase in agency trading, riskless principal trades at different prices still frequently occur. For example, market makers may accumulate a position over the course of the day to facilitate a customer order and then resell to the customer at a price reflecting the market maker's average cost plus a spread or a transaction fee. The application of the pricing condition to a resale to an issuer client after such an accumulation converts a riskless principal order into one in which the market maker is truly at risk. Indeed, application of the pricing condition to the resale to the issuer would subject the dealer to market risk under both the time and price conditions of the Rule. One could argue that it is the accumulation by a dealer in the market to facilitate the issuer's order that should only be subject to the pricing condition of the Rule.
Applicability of the Safe Harbor During After-Hours Trading Sessions
Given the trend toward increased trading in extended sessions, we suggest that the safe harbor be extended to cover open-market purchases by issuers as long as the consolidated reporting system is open. Specifically, we recommend that extended hours purchases be permitted up to 30 minutes before the scheduled close of the consolidated tape and that purchases comply with the volume condition, remain with the single coordinating broker-dealer for that day, and be limited to purchases at a price no higher than the regular-trading-session closing price in the primary market. We note, however, that our views on this issue are based on the current limited activity in the after-hours trading sessions and might need to be revisited if there were significant growth in the after-hours market in the future.
We do not agree with the request in the Guzman & Co. Petition for Rulemaking that the safe harbor be amended to permit the use of a second broker-dealer during the after-hours session. Our reasoning is the same as that expressed above for not supporting an expansion of the Rule to allow the use of a second broker-dealer that is an ECN - namely, that introducing a second broker-dealer has the potential to create the appearance of a greater number of purchasers than would actually be the case.
Rule 10b-18 Alternative Conditions
The Commission proposes to modify the Rule's alternative conditions, which are applicable only in the trading session immediately after a market-wide trading suspension, by increasing the volume limitation to 100% of the ADTV for the security. The specific purpose of the proposed modification is to give issuers more flexibility to provide liquidity after a severe market disruption. The Commission specifically asks if the 100% level would offer appropriate liquidity.
Given our experience, the 100% level would be appropriate under such severe market conditions, only as long as the block exception is not eliminated. In the absence of the block exception, the Rule 10b-18 alternative conditions might not provide issuers with sufficient buying power to absorb the extreme selling pressure on substantially increased volume that often exists in these circumstances. Indeed, we believe that many issuers might not be willing to provide any liquidity to the market if they believed their repurchase activity would not provide at least some price support in a market-wide sell-off.
In addition, we would like to encourage the Commission to continue to use its emergency and exemptive authority as it wisely chose to do during the market reopening after September 11, 2001. The Commission's judicious use of its authority provided issuers with the additional comfort they needed to provide critical liquidity during that period of extreme market stress.
Proposed Disclosure Requirements
As a general matter, we agree with the Commission's proposal to require an issuer, on a quarterly basis, to disclose information, in a tabular format with footnotes, about all purchases of its Section 12-registered equity securities. In addition, the proposal would require disclosure in quarterly and annual reports of all repurchase authorizations approved by the issuer's board of directors. We agree with the Commission that, in general, the proposed additional disclosures should serve useful to investors. The information should also serve to assist the Commission in its future monitoring of issuer repurchases.
Specifically, the Commission proposes the disclosure to include: all issuer repurchases of its Section 12-registered equity securities (both open market and private transactions) for that quarter including the total number of shares purchased (reported on a rolling-month basis), the average price paid per share, the identity of any broker-dealer(s) used to effect the purchases, the number of shares purchased as part of a publicly announced repurchase plan or program, and the maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs.
The Commission also proposes disclosure of the principal terms of publicly announced repurchase plans or programs, including (a) the date of announcement, (b) the share or dollar amount approved, (c) the expiration date (if any) of the plans or programs, (d) each plan or program that has expired during the period covered by the table, (e) each plan or program that the issuer has determined to terminate prior to expiration, and (f) each plan or program under which the issuer has not purchased during the period covered by the table and whether the issuer still intends to purchase under that plan or program.
Finally, the tabular disclosure would have to include footnotes that briefly disclose the nature of the transaction for purchases made other than pursuant to open-market purchase plans. These would include, for example, privately negotiated purchases, purchases made by the issuer upon another person's exercise of outstanding put rights, and in other transactions through which the company purchases its Section 12-registered equity securities.
We are, however, concerned about the proposal to require issuers to disclose which broker-dealer they have been using for their open-market repurchases. We do not see the benefit of this information to the investing public. And the Commission would be able to determine this information through the self-regulatory organizations, on an as-needed basis. More importantly, we believe disclosure of this information to the market may disadvantage issuers in the implementation of their ongoing stock buyback programs. More specifically, the disclosure of the name of the broker-dealer at the end of the quarter may unnecessarily signal to the market and its participants the client of the broker-dealer for future purchases and may impair execution quality.
The Commission also asked for comment on whether the Rule should require issuers to maintain and make available to the Commission detailed trade-by-trade data on their repurchase activity. Historically, issuers have not sought such detailed information from the broker-dealers through whom they have effected their repurchase programs. Typically, broker-dealers provide daily summary information to issuers about the volume at each price level and the average purchase price of open-market stock repurchase activity. In addition, confirmations of the trades are provided in accordance with Rule 10b-10. As the Commission must well appreciate, collection and maintenance of such data would be very costly and burdensome for issuers without an apparent benefit, as this information is now available to the Commission through the broker-dealers who effect the purchases. The provision of trade details to issuers, beyond the required Rule 10b-10 information, would also be burdensome for broker-dealers.
Finally, the Commission asked for comment on making the availability of the safe harbor conditional upon an issuer's compliance with the disclosure requirements. To advance the Commission's objective of bringing greater clarity to the Rule, we believe the Rule's focus should be narrow - providing issuers with guidance on the timing, price, volume, and broker conditions, once they have determined it would be permissible to repurchase their stock. Thus, we would urge the Commission not to condition the Rule's safe harbor on complying with the disclosure requirements. The disclosure requirements should be stand-alone, mandatory requirements for all repurchases regardless of the method of repurchase.
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We thank the Commission for the opportunity to provide these comments. If you have any questions on the foregoing, please do not hesitate to call the undersigned or Peggy Willenbucher, First Vice President & Senior Counsel at (212) 449-4378.
cc: Alan Beller, Director, Division of Corporation Finance
As previously noted, we take this opportunity to provide certain historical data on buyback announcements that we hope will be helpful to the Commission. We have compiled this data from various public sources, including Bloomberg L.P. corporate news items, Securities Data Corp. lists of buyback announcements, and the NYSE and Nasdaq Fact Books. Our analysis of this data is informed by years of extensive stock repurchase activity (both pre- and post-adoption of Rule 10b-18). We have participated on an exclusive, rotating or block basis in over 2,100 open-market buyback programs, representing almost $600 billion of repurchase authorizations announced since 1986, including participation in approximately 33% of the announced programs of $500 million and greater.
To provide historical context, we have attached a number of exhibits that illustrate the trends we have seen in issuer repurchase activity since 1986 (when Merrill Lynch started to compile detailed data on repurchase announcements) as well as relevant NYSE and Nasdaq statistics since the adoption of the Rule in 1982. To assist the Commission and its staff in reviewing this material, we note the following. For open-market buyback programs announced as a share amount, estimated dollar amount equals the number of shares announced times the prior day closing price. For open-market programs announced as a dollar amount, the estimated number of shares equals the dollar amount divided by the prior day closing price. For private transactions, the dollar amount is either as specified in the announcement or estimated based on the prior day's closing price. For self-tenders, the estimated dollar amount equals: (a) the number of shares announced times the price for a fixed-price offer; and (b) the number of shares announced times the maximum price for a Dutch Auction offer. For exchange offers, the estimated dollar amount equals the number of shares announced times the stated value of the cash plus debt or stock equivalents of the offer.
Exhibit I provides a summary of the total number of announcements and the estimated dollar amount of stock repurchase programs for each year from 1986 through 2002. We highlight that our experience indicates there is a very high correlation between the trends in public announcements and actual implementations of stock repurchase programs. For example, buybacks were implemented at record levels on an ongoing basis during the bull market from 1994 through mid-2000, and with particularly concentrated activity during the October 1987 Market Break and the debt market crisis of August through October of 1998. However, despite the large number of announcements and increased activity in the weeks following September 11, 2001, the total number of announcements and the estimated dollar amount of such announcements declined in 2001 and again in 2002. In fact, the number of announcements in 2002 was the lowest since 1995 and the estimated dollar amount was the lowest since 1996.
Exhibit II provide details on the number of announcements, the estimated number of shares and the estimated dollar amount of repurchase programs by method (open-market, private, self-tender and exchange-offer) for each year from 1986 through 2002. Over the period, open-market programs, which are the subject of the safe harbor, accounted for 90.5% of the publicly announced programs, 88.7% of the estimated number of shares and 90.3% of the estimated dollar amount, including 96.8% of the estimated dollar amount in 2002.
Exhibit III shows the number of open-market repurchase programs by size (estimated dollar amount) of announcements in each year from 1986 through 2002.
Exhibit IV provides a summary of the percentage of total estimated dollars authorized for open-market buybacks accounted for (a) by the programs of $1 billion and greater as well as (b) by the 10 biggest announcements for each year from 1986 through 2002. We believe it is very significant that these larger programs, which according to the Release represent "issuers whose securities are less susceptible to manipulation," are representing an increasing percentage of the total dollars authorized. According to our data, in 2002 the 39 programs of $1 billion and greater accounted for almost 65% of the estimated dollar amount for open-market programs while the 10 biggest announcements accounted for almost 36% of the total.
Exhibit V provides details of the 10 issuers (with 12 new or expanded programs) with the largest open-market programs announced in 2002. It is significant to note that while these issuers accounted for almost 40% of the total authorized dollar amount, their programs on average represented only about 6% of the total trading volume of their securities in the consolidated transaction reporting system in 2002. Because most large companies tend to implement their programs on an ongoing basis over a number of years, however, it is reasonable to conclude that the 6% on-average figure stated above is likely to overstate the actual annual implementation of the programs.
It is interesting to note that the implementation of open-market buyback programs by the largest repurchasers has appeared to decline over the years when measured as a percentage of trading volume. For example, in 1963 General Motors repurchased 1,458,000 shares or almost 15% of all NYSE trading that year in GM stock. In that same year, Standard Oil (New Jersey) repurchased 1,045,000 shares or 15% of all its NYSE volume and General Electric reacquired 538,000 shares or about 14% of its volume.2
Exhibit VI provides summaries for each year from 1986 through 2002 of the total number of announcements, the estimated number of shares and the estimated dollar amount of open-market repurchase programs for exchange (NYSE, American Stock Exchange and Pacific Stock Exchange) and Nasdaq-listed issuers. Although over the years the percentage of announcements, shares and dollar amount for Nasdaq securities has increased, it is significant to note that in 2001 and 2002 combined, 32% of the estimated Nasdaq shares and 51% of the authorized dollars were accounted for by only 10 repurchase programs of $1 billion and greater.
Exhibit VII provides information on the total estimated number of shares authorized under open-market buyback announcements for NYSE and Nasdaq issuers and the combined NYSE and Nasdaq share trading volume for each year from 1986 through 2002. The total number of shares of repurchase authorizations has leveled off in the past several years while the combined NYSE and Nasdaq trading volume has continued to expand.
Exhibit VIII provides information on the estimated number of shares authorized under open-market buyback announcements for exchange-listed issuers and the share trading volume on the NYSE for each year from 1986 through 2002. The number of shares of repurchase authorizations has leveled off and in fact declined in 2001 and 2002, and buybacks are becoming a smaller percentage of annually increasing NYSE volume.
Exhibit IX provides information on the estimated number of shares authorized under open-market buyback announcements for Nasdaq issuers and the share trading volume on Nasdaq for each year from 1986 through 2002. It is important to note that in 2001 and 2002 combined, 32% of the estimated authorized repurchase shares for Nasdaq issuers were accounted for by only 10 repurchase programs of $1 billion and greater. In addition, the increasing trend in recent years to announce repurchase programs as an authorized dollar amount combined with the sharp drop in the Nasdaq Market since March 2000 has resulted in an increase in the estimated number of shares to be purchased. Finally, we attribute the decline in overall Nasdaq volume in 2002 in part to broker-dealers reporting only one "leg" of riskless principal transactions and an increase in the percentage of agency executions in Nasdaq securites.
Exhibit X shows the average percentage of shares outstanding for exchange-listed and Nasdaq issuers represented by announced open-market buyback programs for each year from 1986 through 2002. (Programs of unspecified share or dollar amount are not included). It is interesting to note the relative consistency of the percentage of outstanding shares authorized over the years.
Exhibit XI presents the average turnover rate of NYSE share volume for each year from the adoption of the Rule in 1982 through 2002. Because the average percentage of shares outstanding for open-market repurchase programs (Exhibit X) has remained relatively consistent over the years while the turnover rate has increased, it seems reasonable to conclude that repurchase programs represent a decreasing percentage of trading volume for companies listed on the NYSE. In addition, the average size of a trade on the NYSE has declined steadily from a high of 2,303 shares in 1988 to 666 shares in 2002, which is significant in considering the volume condition of the Rule.
Exhibit XII presents the percentage of total NYSE and Nasdaq volume accounted for by block trades (10,000 shares or more) for each year since the adoption of the safe harbor in 1982 through 2002. Although the percentage of volume of block trades to total report volume on the NYSE increased from 41% in 1982 to 52% in 1985, it has remained relatively consistent since then and was only 44% in 2002. On Nasdaq, the percentage of total volume from block trades increased steadily from 37% in 1982 to almost 49% in 1993, but has declined since then and was only 28% in the first nine months of 2002.
Announced Common Stock Repurchase Programs
(Estimated Share Amount in Billions)
NYSE & Nasdaq Combined Share Volume
(Shares in Billions)
Stock Repurchase Programs for Listed Securities
(Estimated Share Amount in Billions)
NYSE Share Volume
(Shares in Billions)
Stock Repurchase Programs for Nasdaq Securities
(Estimated Shares in Billions)
Nasdaq Share Volume
(Shares in Billions)
* January - September 2002.