America's Community Bankers
February 19, 2003
Jonathan G. Katz
Re: Rule 10b-18 and Purchases of Certain Equity Securities by the Issuer and Others
Dear Mr. Katz:
America's Community Bankers (ACB)1 is pleased to comment on the proposal issued by the Securities and Exchange Commission (SEC) to amend its rules that provide a "safe harbor" from liability for manipulation when issuers repurchase their common stock.2
Rule 10b-18 provides that certain anti-fraud provisions of the federal securities laws will not be considered to have been violated solely by reason of the manner, timing, price, or volume of an issuer's repurchases of common stock if the repurchases are made within the limitations of the rule. The SEC is proposing to amend its rule to simplify and update the safe harbor provisions in light of market developments. The amendments would simplify some of the rule's manner, timing, price and volume conditions that are required to be met before an issuer can obtain the protection of the safe harbor when repurchasing stock. Separate from the safe harbor amendments, the proposal also would require that issuers begin disclosing certain information about their repurchases of common stock in periodic reports.
As the SEC points out in its proposal, there are many legitimate business reasons why issuers wish to repurchase their securities. However, to avoid claims that the repurchases are being used to manipulate the market price of the shares, many issuers are reluctant to engage in stock repurchases unless they can meet the conditions of the safe harbor rule. ACB supports the SEC's efforts in broadening the safe harbor to allow more transactions to fall within its protection. We are concerned, however, about the proposal to eliminate the block exception from the volume limitations in the safe harbor.
The safe harbor includes a limit on the amount of securities an issuer may repurchase in the market in a single day to prevent the issuer from dominating the market for the securities. Under the current volume conditions, an issuer may engage in daily purchases of its securities in an amount up to 25 percent of the average daily trading volume for the securities. Block purchases, however, are not included in the volume limitation and are not included in determining a security's average daily trading volume. A block is defined as a quantity of stock that either (i) has a purchase price of $200,000 or more; (ii) is at least 5,000 shares and has a purchase price of at least $50,000; or (iii) is at least 20 round lots of the security and totals 150 percent or more of the trading volume for that security, or, in the event that trading volume data are not available, is at least 20 round lots of the security and totals at least one-tenth of one percent of the outstanding shares of the security, exclusive of any shares owned by any affiliate.
The SEC believes that market conditions no longer justify excluding block purchases from the volume limitation. The SEC refers to the increased frequency of block purchases and the fact that there is no limit on the number of block purchases that can be made on any single day. Therefore, the agency believes that the block exception could allow issuers to dominate the market for their securities in a way not contemplated by the safe harbor. The SEC has requested comments on whether the block purchase exception should be retained and whether a volume limitation that does not exclude block purchases is feasible with respect to repurchases of thinly traded securities.
The elimination of the block purchase exclusion will have an adverse effect on the ability of a community bank or savings association to repurchase shares for certain business purposes, will raise the cost of those repurchases, and may severely impact the market demand for the institution's stock. Community banks and savings associations repurchase stock on the open market for a variety of reasons, including the funding of employee stock option plans and to effect the most optimal use of capital resources. Savings associations that have converted from mutual to stock form are subject to banking regulations that limit the number of shares of common stock that can be issued initially and generally are not permitted to issue additional shares. These institutions, therefore, are particularly dependent upon the ability to repurchase shares to fund stock option and incentive programs. If the institution is thinly traded, it must resort to block purchases to repurchase shares and remain within the rule 10b-18 safe harbor.
In order for a thinly traded institution to meet the volume limits in the safe harbor without a block purchase exception, the repurchases would have to be made in smaller amounts over many more days. This will increase the cost and reduce the efficiency of stock repurchases. Purchasing smaller amounts of shares will result in higher prices for the shares and higher commissions than what can be negotiated in a larger share transaction. Also, an issuer would not be as able to acquire larger blocks of shares when market prices are relatively low. Most importantly, block purchases accommodate large institutional transactions, which help eliminate a concern by institutional investors that any investment in the bank or savings association stock will present liquidity issues. If purchasers know that an institution with thinly traded stock cannot engage in block transactions because of volume limitations, they will be less likely to invest in the institution's securities. This will have a very real, and potentially devastating, impact on the marketability of an institution's stock and make it even more difficult for thinly traded companies to attract investors.
From the investor's standpoint, they may be less able to recognize and assess the impact of many smaller purchases over time by an issuer than they can assess the impact of larger block purchases that are often disclosed. Furthermore, block repurchases can be less disruptive to the overall market than multiple smaller transactions over a larger number of days.
If the opportunity to use the block purchase exception is not available, thinly traded institutions will be left in a dilemma. They may choose to implement repurchase plans by repurchasing smaller amounts of securities over a longer period of time. If this proves too costly or inefficient, the institution may have to revise its employee incentive plans, or other business plans that require repurchases, or take the risk of repurchasing securities outside of the rule 10b-18 limits.
In light of the potential problems that elimination of the block purchase exception may have, we would encourage the SEC to retain the exception. The proposed alternative of allowing the repurchase of 500 shares a day will not be sufficient for many smaller institutions and the SEC has not identified any particular adverse market impact from the use of the exception. As an alternative, the SEC could retain the exception, but increase the amount of shares constituting a block by adopting a 10,000 or more share limit, or the SEC could limit the amount of block purchases that can occur on any one day.
ACB appreciates the opportunity to comment on this important matter. If you have any questions, please contact the undersigned at (202) 857-3121 or via e-mail at firstname.lastname@example.org, or Diane Koonjy at (202) 857-3144 or via e-mail at email@example.com.