Document ID: SEC-2010-0153-0001
Agency: sec
Document Type: Proposed Rule
Title: Purchases of Certain Equity Securities by the Issuer and Others
Posted Date: 2010-01-29T05:00Z

[Federal Register: January 29, 2010 (Volume 75, Number 19)]
[Proposed Rules]               
[Page 4713-4728]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29ja10-15]                         

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-61414; File No. S7-04-10]
RIN 3235-AH37

 
Purchases of Certain Equity Securities by the Issuer and Others

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is proposing amendments to Rule 10b-18 under the Securities 
Exchange Act of 1934 (``Exchange Act''), which provides issuers with a 
``safe harbor'' from liability for manipulation when they repurchase 
their common stock in the market in accordance with the Rule's manner, 
timing, price, and volume conditions. The proposed amendments are 
intended to clarify and modernize the safe harbor provisions in light 
of market developments since Rule 10b-18's adoption in 1982.

DATES: Comments should be received on or before March 1, 2010.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-04-10 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-04-10. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for public inspection and copying in the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. All comments received will be posted without change; we do not 
edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Josephine Tao, Assistant Director, 
Elizabeth Sandoe, Branch Chief, Joan Collopy, Special Counsel, Jeffrey 
Dinwoodie, Staff Attorney, Office of Trading Practices and Processing, 
Division of Trading and Markets, at (202) 551-5720, at the Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is requesting public comment 
on proposed amendments to Rule 10b-18 (the safe harbor rule for issuer 
repurchases) [17 CFR 240.10b-18] under the Exchange Act.

I. Introduction

    Issuers repurchase their securities for many legitimate business 
reasons. For example, issuers may repurchase their stock in order to 
have shares available for dividend reinvestment, stock option and 
employee stock ownership plans, or to reduce the outstanding capital 
stock following the cash sale of operating divisions or 
subsidiaries.\1\ Issuers may believe that a repurchase program is 
preferable to paying dividends as a way of returning capital to 
shareholders.\2\ Issuer repurchases also provide liquidity in the 
marketplace, which benefits shareholders.\3\
---------------------------------------------------------------------------

    \1\ Securities Exchange Act Release No. 19244 (Nov. 17, 1982), 
47 FR 53333, 53334 (Nov. 26, 1982) (``1982 Adopting Release''). See 
also Gustavo Grullon and David L. Ikenberry, ``What Do We Know About 
Stock Repurchases?,'' 13 Journal of Applied Corporate Finance, pp. 
31-51 (2000) (noting issuers repurchase their stock for several 
reasons, including to convey management's expectation of future 
increases in earnings and cash flow).
    \2\ See Securities Exchange Act Release No. 46980 (Dec. 10, 
2002), 67 FR 77594 (Dec. 18, 2002) (``2002 Proposing Release'').
    \3\ See id.
---------------------------------------------------------------------------

    At the same time, an issuer has a strong interest in the market 
performance of its securities. Among other things, an issuer's 
securities may be the consideration in an acquisition, or serve as 
collateral for financing. Since the market price determines the price 
of offerings of additional securities, an issuer may have an incentive 
to manipulate the price of its securities.\4\ One way that an issuer 
can positively affect the price of its securities is to purchase the 
securities in the open market.\5\ Because issuer repurchases could 
affect the market price of an issuer's stock, an issuer may be exposed 
to claims that the repurchases were made in a manipulative manner even 
when the repurchases were not intended to move market prices.
---------------------------------------------------------------------------

    \4\ Id.
    \5\ Id.
---------------------------------------------------------------------------

    Rule 10b-18 addresses this concern. In 1982, the Commission adopted 
Rule 10b-18,\6\ which provides issuers \7\ with a safe harbor from 
liability for manipulation under Sections 9(a)(2) and 10(b) of the 
Exchange Act, and Rule 10b-5 under the Exchange Act, when they 
repurchase their common stock in the market in accordance with the 
Rule's manner, timing, price, and volume conditions.\8\ Rule 10b-18's 
safe

[[Page 4714]]

harbor conditions are designed to minimize the market impact of the 
issuer's repurchases, thereby allowing the market to establish a 
security's price based on independent market forces without undue 
influence by the issuer.\9\
---------------------------------------------------------------------------

    \6\ 1982 Adopting Release, 47 FR 53333. Since 1967, the 
Commission has considered on several occasions the issue of whether 
to regulate an issuer's market purchases of its own securities. The 
Commission first proposed Rule 10b-10 to govern issuer repurchases 
in connection with proposed legislation that became the Williams Act 
Amendments of 1968. Public Law 90-439, 82 Stat. 454 (July 29, 1968), 
reprinted in Hearings on S. 510 before Senate Committee on Banking 
and Currency, 90th Cong., 1st Sess. 214-216 (1967). The Commission 
then published for public comment proposed Rule 13e-2 in 1970, 1973, 
and 1980. Rule 13e-2, which was later withdrawn with the adoption of 
Rule 10b-18, would have been a prescriptive rule with mandatory 
disclosure requirements, substantive purchasing limitations, and 
general anti-fraud liability. Securities Exchange Act Release Nos. 
8930 (July 13, 1970), 35 FR 11410 (July 16, 1970); 10539 (Dec. 6, 
1973), 38 FR 34341 (Dec. 13, 1973); and 17222 (Oct. 17, 1980), 45 FR 
70890 (Oct. 27, 1980) (``1980 Proposing Release'').
    \7\ The safe harbor is also available for ``affiliated 
purchasers'' of the issuer. In this Release, the term ``issuer'' 
includes affiliated purchasers. See 17 CFR 240.10b-18(a)(3), (a)(13) 
and (b).
    \8\ In other words, an issuer will not be deemed to have 
violated Sections 9(a)(2) and 10(b) of the Exchange Act or Rule 10b-
5 under the Exchange Act, solely by reason of the timing, price, 
volume, or manner of its repurchases, if the repurchases are made 
within the limitations of the rule. However, some repurchase 
activity that meets the safe harbor conditions may still violate the 
anti-fraud provisions of the Exchange Act. For example, as the 
Commission noted in 1982 when adopting Rule 10b-18, ``Rule 10b-18 
confers no immunity from possible Rule 10b-5 liability where the 
issuer engages in repurchases while in possession of favorable, 
material nonpublic information concerning its securities.'' 1982 
Adopting Release, 47 FR at 53334. See also Securities Exchange Act 
Release No. 48766 (Nov. 10, 2003), 68 FR 64952 (Nov. 17, 2003) at n. 
5 (``2003 Adopting Release'').
    \9\ See, e.g., 2003 Adopting Release, 68 FR at 64953.
---------------------------------------------------------------------------

    The safe harbor conditions are intended to offer issuers guidance 
when repurchasing their common stock in the open market. Rule 10b-18, 
however, is not the exclusive means of making non-manipulative issuer 
repurchases.\10\ As the Rule states, there is no presumption that an 
issuer's bids or purchases outside of the safe harbor violate Sections 
9(a)(2) or 10(b) of the Exchange Act, or Rule 10b-5 under the Exchange 
Act.\11\ Given the widely varying market characteristics for the stock 
of different issuers, it is possible for issuer repurchases to be made 
outside of the safe harbor conditions and not be manipulative.\12\
---------------------------------------------------------------------------

    \10\ See 1982 Adopting Release, 47 FR at 53334.
    \11\ See 17 CFR 240.10b-18(d). The safe harbor is available for 
repurchases of an issuer's common stock (or an equivalent interest 
including a unit of beneficial interest in a trust or a limited 
partnership or a depository share). See 17 CFR 240.10b-18(a)(13). 
See also 2003 Adopting Release, 68 FR at 64954. However, the safe 
harbor is not intended to define the appropriate limits to be 
observed by those persons not covered by the safe harbor nor the 
appropriate limits to be observed when repurchasing securities other 
than common stock.
    \12\ See 1982 Adopting Release, 47 FR at 53334.
---------------------------------------------------------------------------

    Since Rule 10b-18's adoption in 1982, there have been significant 
market changes with respect to trading strategies and developments in 
automated trading systems and technology that have increased the speed 
of trading and changed the profile of how issuer repurchases are 
effected. We understand that the increased speed of today's market 
activity, as evidenced by flickering quotes, has made it increasingly 
difficult for issuers to ensure that every purchase of its common stock 
during the day will meet the Rule's current price condition. As 
discussed below, currently, failure to meet any one of the four 
conditions under the Rule with respect to any of the issuer's 
repurchases during the day will disqualify all of the issuer's other 
Rule 10b-18 purchases from the safe harbor for that day. Moreover, the 
opportunity for issuers to effect repurchases using alternative trading 
strategies or pricing mechanisms, such as repurchases effected on a 
volume-weighted average price (``VWAP'') basis (i.e., where a 
security's price is generally derived from adding up the dollar amounts 
traded for each transaction in the security (price multiplied by shares 
traded) and then dividing by the total number of shares traded for the 
day), has increased significantly. However, because such transactions 
may be priced without reference to the quoted price of the stock at the 
time of execution and, thus, possibly above Rule 10b-18's current price 
limitation, many issuers that repurchase their shares using such 
trading strategies must forego the protections of the safe harbor for 
such purchases.
    In connection with the 2003 amendments to Rule 10b-18,\13\ the 
Commission sought comment as to whether Rule 10b-18's price condition 
should apply where the issuer has no control, directly or indirectly, 
over the price at which a Rule 10b-18 purchase will be effected, for 
example, ``passive'' or independently-derived pricing, such as the 
VWAP.\14\ While the Commission did not adopt an exception for VWAP 
transactions at that time, it stated that it would take into account 
commenters' recommendations, as well as current market practices 
involving VWAP transactions, in considering whether any future changes 
to Rule 10b-18 were appropriate.\15\ Since that time, we understand 
from the industry that VWAP has become one of the most widely 
recognized and accepted pricing mechanisms and trading benchmarks.\16\
---------------------------------------------------------------------------

    \13\ See 2003 Adopting Release, 68 FR 64952.
    \14\ See 2002 Proposing Release, 67 FR at 77594.
    \15\ See id., 67 FR at 77599. See also Comment letters from 
William A. Lupien, Director, and William W. Uchimoto, Executive Vice 
President and General Counsel, Vie Financial Group, Inc., dated June 
26, 2003, and William W. Uchimoto, Executive Vice President and 
General Counsel, Vie Financial Group, Inc., dated Mar. 3, 2003 
(suggesting that the Commission provide an exception from the Rule's 
pricing condition for issuers' VWAP transactions that meet certain 
specific VWAP calculation standards) (``Uchimoto Letter'').
    \16\ See, e.g., Uchimoto Letter (noting that VWAP is the most 
widely recognized and accepted trading benchmark). See also 
Securities Exchange Act Release No. 54003 (June 16, 2006), 71 FR 
36141, 36142 (SR-NASD-2006-056) (noting that VWAP is a benchmark 
often used by institutional investors to determine whether they 
received a good price for a large trade).
---------------------------------------------------------------------------

    Based on our experience with the operation of Rule 10b-18 and to 
respond to these market developments, we propose to revise Rule 10b-18 
as described below. The proposed amendments are intended to clarify and 
modernize the safe harbor provisions. In particular, our proposal to 
modify the price condition would provide issuers with greater 
flexibility to conduct their issuer repurchase programs within the safe 
harbor under conditions designed to reduce the potential for abuse. Our 
proposal to limit the general disqualification provision would also 
provide issuers with additional flexibility to conduct their share 
repurchase programs in fast moving markets. At the same time, our 
proposals to modify the timing condition and the ``merger exclusion'' 
provision \17\ under the Rule are intended to maintain reasonable 
limits on the safe harbor consistent with the objectives of the Rule to 
minimize the market impact of the issuer's repurchases, thereby 
allowing the market to establish a security's price based on 
independent market forces without undue influence by the issuer, and to 
promote safe harbor availability only during normal market conditions 
for an issuer.\18\
---------------------------------------------------------------------------

    \17\ See 17 CFR 240.10b-18(a)(13)(iv). As discussed below, the 
``merger exclusion'' precludes issuer repurchases effected during 
the period from the time of public announcement of a merger, 
acquisition, or similar transaction involving a recapitalization, 
until the earlier of the completion of such transaction or the 
completion of the vote by the target shareholders, including any 
period where the market price of a security will be a factor in 
determining the consideration to be paid pursuant to a merger, 
acquisition, or similar transaction. See also 2003 Adopting Release, 
68 FR at 64955.
    \18\ See 2003 Adopting Release, 68 FR at 64953.
---------------------------------------------------------------------------

II. Overview of Current Rule 10b-18 Conditions

    Rule 10b-18 provides a safe harbor for an issuer's purchases of 
shares of its common stock on a given day. To come within the safe 
harbor for that day, an issuer must satisfy the Rule's manner, timing, 
price, and volume conditions when purchasing its own common stock in 
the market.\19\ The current Rule provides that failure to meet any one 
of the four conditions removes (or disqualifies) all of an issuer's 
purchases from the safe harbor for that day.\20\
---------------------------------------------------------------------------

    \19\ 17 CFR 240.10b-18(b)(1)-(4).
    \20\ See Preliminary Note 1 to 17 CFR 240.10b-18.
---------------------------------------------------------------------------

A. Manner of Purchase Condition

    The manner of purchase condition requires an issuer to use a single 
broker or dealer per day to bid for or purchase its common stock.\21\ 
This requirement is intended to avoid the appearance of widespread 
trading in a security that could result if an issuer used many brokers 
or dealers to repurchase its stock.\22\ The ``single broker or dealer'' 
condition, however, applies only to Rule 10b-18 purchases that are 
``solicited'' by or on behalf of an issuer.\23\

[[Page 4715]]

Accordingly, an issuer may purchase shares from more than one broker-
dealer if the issuer does not solicit the transactions. An issuer must 
evaluate whether a transaction is ``solicited'' based on the facts and 
circumstances of each case.\24\
---------------------------------------------------------------------------

    \21\ 17 CFR 240.10b-18(b)(1).
    \22\ See 1980 Proposing Release, 45 FR at 70891.
    \23\ 17 CFR 240.10b-18(b)(1)(i).
    \24\ Although Rule 10b-18 does not define ``solicitation,'' the 
issuer's disclosure and announcement of a repurchase program would 
not necessarily cause a subsequent purchase to be deemed 
``solicited'' by or on behalf of an issuer. See 1982 Adopting 
Release, 47 FR at 53337.
---------------------------------------------------------------------------

B. Timing Condition

    The timing condition restricts the periods during which an issuer 
may bid for or purchase its common stock.\25\ Market activity at the 
open and close of trading is considered to be a significant indicator 
of the direction of trading, the strength of demand, and the current 
market value of the security.\26\ Accordingly, the timing condition 
precludes an issuer from being the opening (regular way) purchase 
reported in the consolidated system.\27\ The timing condition also 
excludes from the safe harbor purchases effected during the last half 
hour (or during the last ten minutes for actively-traded securities) 
before the scheduled close of the primary trading session in the 
principal market for the security and in the market where the purchase 
is effected.\28\ Rule 10b-18's limitation on bids and purchases near 
the close of trading for purposes of qualifying for the safe harbor is 
to prevent the issuer from creating or sustaining a high bid or 
transaction price at or near the close of trading. Where there is no 
independent opening transaction on a given day, an issuer is precluded 
from making purchases under the safe harbor for that day.\29\
---------------------------------------------------------------------------

    \25\ 17 CFR 240.10b-18(b)(2).
    \26\ 2003 Adopting Release, 68 FR 64953.
    \27\ 17 CFR 240.10b-18(b)(2)(i). For purposes of Rule 10b-18's 
timing and price conditions, Rule 10b-18(a)(6) defines 
``consolidated system'' to mean ``a consolidated transaction or 
quotation reporting system that collects and publicly disseminates 
on a current and continuous basis transaction or quotation 
information in common equity securities pursuant to an effective 
transaction reporting plan or an effective national market system 
plan (as those terms are defined in Sec.  242.600).''
    \28\ 17 CFR 240.10b-18(b)(2). Reliance on the safe harbor under 
Rule 10b-18 is precluded if a purchase is effected during the 10 
minutes before the scheduled close of the primary trading session in 
the principal market for the security, and the 10 minutes before the 
scheduled close of the primary trading session in the market where 
the purchase is effected, for a security that has an average daily 
trading volume (``ADTV'') value of $1 million or more and a public 
float value of $150 million or more; and purchases during the 30 
minutes before the scheduled close of the primary trading session in 
the principal market for the security, and the 30 minutes before the 
scheduled close of the primary trading session in the market where 
the purchase is effected, for all other securities. 17 CFR 240.10b-
18(b)(2)(ii) and (b)(2)(iii).
    \29\ See 2003 Adopting Release, 68 FR at 64954.
---------------------------------------------------------------------------

C. Price Condition

    The Rule's price condition specifies the highest price an issuer 
may bid or pay for its common stock.\30\ The price condition is 
intended to prevent an issuer from leading the market for the security 
through its repurchases by limiting the issuer to bidding for or buying 
its security at a purchase price that is no higher than the highest 
independent bid or last independent transaction price, whichever is 
higher, quoted or reported in the consolidated system.\31\ As such, the 
price condition uses an independent reference price that has not been 
set by an issuer.\32\
---------------------------------------------------------------------------

    \30\ 17 CFR 240.10b-18(b)(3).
    \31\ See 2003 Adopting Release, 68 FR at 64954.
    \32\ 17 CFR 240.10b-18(b)(3).
---------------------------------------------------------------------------

    For those securities that are not quoted or reported in the 
consolidated system, the issuer must look to the highest independent 
bid or the last independent transaction price, whichever is higher, 
that is displayed and disseminated on any national securities exchange 
or on any inter-dealer quotation system, as defined in Exchange Act 
Rule 15c2-11(e)(2), that displays at least two independent priced 
quotations for the security.\33\ For all other securities, the issuer 
must look to the highest independent bid obtained from three 
independent dealers.\34\
---------------------------------------------------------------------------

    \33\ 17 CFR 10b-18(b)(3)(ii).
    \34\ 17 CFR 240.10b-18(b)(3)(iii).
---------------------------------------------------------------------------

D. Volume Condition

    The volume condition limits the amount of securities an issuer may 
repurchase in the market in a single day.\35\ The volume condition is 
designed to prevent an issuer from dominating the market for its 
securities through substantial purchasing activity.\36\ An issuer 
dominating the market for its securities in this way can mislead 
investors about the integrity of the securities market as an 
independent pricing mechanism. Under the current volume condition, an 
issuer may effect daily purchases in an amount up to 25 percent of the 
ADTV in its shares, as calculated under the Rule (the ``25% volume 
limitation'').\37\ Alternatively, once each week an issuer may purchase 
one block of its common stock in lieu of purchasing under the 25% 
volume limitation for that day.\38\ The ``one block per week'' 
exception to the volume condition is intended to provide issuers with 
moderate or low ADTV greater flexibility in carrying out their 
repurchase programs.\39\
---------------------------------------------------------------------------

    \35\ 17 CFR 240.10b-18(b)(4).
    \36\ See 2003 Adopting Release, 68 FR at 64954.
    \37\ 17 CFR 240.10b-18(a)(1) (defining ADTV for purposes of the 
safe harbor). See also supra note 28 (noting that ``ADTV'' means a 
security's average daily trading volume).
    \38\ See 17 CFR 240.10b-18(a)(5) (defining ``block''). However, 
shares purchased by the issuer relying on the ``one block per week'' 
exception may not be included when calculating a security's four-
week ADTV under the Rule. See 2003 Adopting Release, 68 FR at 64960; 
17 CFR 240.10b-18(b)(4)(ii).
    \39\ See 2003 Adopting Release, 68 FR at 64960.
---------------------------------------------------------------------------

III. Proposed Amendments to Rule 10b-18

    In this release, we are proposing revisions to the safe harbor 
rule. In particular, we propose to:
     Modify the timing condition to preclude Rule 10b-18 
purchases as the opening purchase in the principal market for the 
security and in the market where the purchase is effected (in addition 
to the current prohibition against effecting Rule 10b-18 purchases as 
the opening purchase reported in the consolidated system);
     Relax the price condition for certain VWAP transactions;
     Limit the disqualification provision in fast moving 
markets under certain specific conditions;
     Modify the ``merger exclusion'' provision to extend the 
time in which the safe harbor is unavailable in connection with an 
acquisition by a special purpose acquisition company (``SPAC''); and
     Update certain definitional provisions consistent with the 
current Rule.
    We solicit any comment on our approach and the specific proposals. 
We also encourage commenters to present data in support of their 
positions.

A. Discussion of Amendments to the Purchasing Conditions

1. Time of Purchases
    We propose to modify Rule 10b-18's timing condition to preclude 
Rule 10b-18 purchases as the opening purchase in the principal market 
for the security and in the market where the purchase is effected.\40\ 
Currently, to qualify for the safe harbor, an issuer's purchase may not 
be the opening regular way purchase reported in the consolidated 
system.\41\ Under the current rule, an issuer's purchase, however, may 
be the opening purchase in the principal market for its security and 
the opening purchase in the market where the purchase is

[[Page 4716]]

effected, provided there is already an opening purchase reported in the 
consolidated system that day.\42\
---------------------------------------------------------------------------

    \40\ The proposed amendment would continue to limit an issuer 
from effecting a Rule 10b-18 purchase as the opening purchase 
reported in the consolidated system.
    \41\ See 17 CFR 240.10b-18(b)(2)(i).
    \42\ For example, if the principal market has a delayed opening 
in the issuer's stock and, therefore, is not the opening purchase 
reported in the consolidated system that day, the issuer would be 
able to effect a Rule 10b-18 purchase as the opening purchase in the 
principal market for its security that day.
---------------------------------------------------------------------------

    However, similar to transactions in the principal market for a 
security at the end of a trading day,\43\ the opening transaction in 
the principal market for a security and in the market where the 
repurchase is effected, can be a significant indicator of the direction 
of trading, the strength of demand, and the current market value of a 
security.\44\ This is particularly true considering the large trading 
volume that can occur at the principal market's open as the result of 
the increased use of electronic opening crosses and opening auctions to 
establish a security's official opening price for the day. However, we 
understand from industry sources that the dissemination of market data 
from these larger opening crosses has led to some confusion as to which 
opening transaction Rule 10b-18's opening purchase limitation applies 
when there is a delayed opening in the principal market for a 
stock.\45\ For example, when a small number of an issuer's shares 
prints as a regional exchange's opening transaction in the consolidated 
system and then immediately thereafter, a substantially larger number 
of the issuer's shares prints in the consolidated system as the 
official opening transaction in the principal market for the issuer's 
securities, we understand that some issuers are unsure as to which 
transaction is the relevant opening transaction for purposes of Rule 
10b-18's opening purchase limitation.\46\ Moreover, because the 
principal market's official opening price has become a widely-
recognized benchmark within the industry, we are concerned that this 
much larger official opening transaction in the principal market may be 
a more significant indicator of the direction of trading, the strength 
of demand, and the current market value of a security than the smaller 
regional exchange's opening purchase reported in the consolidated 
system that day.\47\
---------------------------------------------------------------------------

    \43\ See supra note 28.
    \44\ See, e.g., James Ramage, ``Primary Market Still Guides 
Open,'' Traders Magazine (June 2008) (``Primary Market''); Raymond 
M. Brooks and Jonathan Moulton, ``The Interaction between Opening 
Call Auctions and Ongoing Trade: Evidence from the NYSE,'' 13 Review 
of Financial Economics, pp. 341-356 (2004); Michael J. Barclay and 
Terrence Henderschott, ``A Comparison of Trading and Non-trading 
Mechanisms for Price Discovery,'' Journal of Empirical Finance 15, 
839-849 (2008).
    \45\ See, e.g., Security Traders Association, ``Special Report: 
STA's Perspective on U.S. Market Structure,'' at p. 10 (May 2008) 
(noting that competing venues can open the same stock using 
different processes and different order flows, which can create 
confusion for investors if the first reported price is different 
from the primary market's opening price) (``STA Special Report'').
    \46\ See, e.g., id. See also NYSE Trader ``Opening Trades 
Update--15 Sept. 2008'' (noting that different vendors will process 
trades marked with ``OPD'' (indicating an out-of-sequence, opening 
trade) differently for purposes of their VWAP calculations) at 
http://traderupdates.nyse.com/2008/09/as_previously_reported_
the_con.html.
    \47\ See, e.g., STA Special Report, supra note 45 at pp. 10-11. 
See also Primary Market, supra note 44.
---------------------------------------------------------------------------

    To address these developments, we propose to amend the Rule's 
opening purchase limitation. Specifically, the proposed amendment would 
continue to limit an issuer from effecting a Rule 10b-18 purchase as 
the opening purchase reported in the consolidated system. However, 
consistent with the limitations placed on purchases at the end of the 
trading day,\48\ the proposal would amend paragraph (b)(2)(i) of the 
Rule to also preclude the issuer from being the opening purchase in 
both the principal market for the security and in the market where the 
purchase is effected.
---------------------------------------------------------------------------

    \48\ See 17 CFR 240.10b-18(b)(2)(ii) and (b)(2)(iii).
---------------------------------------------------------------------------

    As discussed above, similar to transactions at the end of a trading 
day, the opening transaction in the principal market for the security 
and in the market where the repurchase is effected can be a significant 
indicator of the direction of trading, the strength of demand, and the 
current market value of a security. Thus, the proposed modification to 
the timing condition is designed to maintain reasonable limits on the 
safe harbor consistent with the objectives of the Rule to minimize the 
market impact of the issuer's repurchases, thereby allowing the market 
to establish a security's price based on independent market forces 
without undue influence by the issuer. The amendment also would allow 
issuers to carry out their repurchase programs more effectively by 
providing issuers with guidance in complying with Rule 10b-18 in the 
situation described above where the principal market has a delayed 
opening in a stock and another exchange's smaller opening transaction 
is reported in the consolidated system first. In such situation, the 
proposed amendments would require the issuer to wait until both of 
these opening transactions were reported in the consolidated system 
(rather than just the first transaction) before it could effect a Rule 
10b-18 purchase within the safe harbor that day.
    Q. Is the proposed opening purchase limitation appropriate? If not, 
why not? Are there other aspects of the limitation that the Commission 
should consider revising? If so, please explain in what way.
    Q. Are there aspects of the Rule's end of the day timing limitation 
that the Commission should consider revising? If so, please explain in 
what way. For example, for securities that have an ADTV value of $1 
million or more and a public float value of $150 million or more, Rule 
10b-18 currently excludes from the safe harbor purchases of such 
securities effected during the 10 minutes (rather than 30 minutes) 
before the scheduled close of the primary trading session in the 
principal market for the security, and the 10 minutes before the 
scheduled close of the primary trading session in the market where the 
purchase is effected.\49\ Should eligibility for the current end of the 
day timing limitation, i.e., 10 minutes before the scheduled close of 
trading, continue to be based on a security's ADTV and an issuer's 
public float? Should the current ADTV and public float value qualifying 
thresholds be raised to adjust for inflation? Are there alternative 
tests we should consider? For example, should the 10 minutes before the 
scheduled close of trading limitation be based on the securities 
offering reform standard? \50\ Further, does the 10 minute limitation 
adequately protect against an issuer affecting the closing price of its 
security? Please explain. Is a shorter or longer period warranted for 
an issuer whose security meets the applicable ADTV and public float 
thresholds? If so, please identify what time limitation would be 
appropriate and provide data and a detailed rationale supporting the 
suggested alternative, including how it will promote securities prices 
based on independent market forces without undue issuer influence.
---------------------------------------------------------------------------

    \49\ 17 CFR 240.10b-18(b)(2)(ii).
    \50\ See Securities Offering Reform, Securities Exchange Act 
Release No. 52056 (July 19, 2005), 70 FR 44722, 44731 at n. 88 (Aug. 
3, 2005) (setting a public float threshold of $700 million and 
noting that those issuers had $52 million ADTV).
---------------------------------------------------------------------------

    Q. Currently, repurchases of OTC Bulletin Board (``OTCBB'') and 
Pink Sheet securities do not have an opening purchase timing 
restriction under the safe harbor. Should Rule 10b-18's timing 
condition be amended to apply to repurchases effected in markets where 
there is no official opening of trading, such as on the OTCBB and Pink 
Sheets? If so, what opening timing limitation should be applied to such 
securities? Should such a limitation be based on normal market hours or 
such market's regular hours of operation

[[Page 4717]]

rather than the opening of trading? Should the current end of the day 
timing limitation be modified in any way with respect to OTCBB and Pink 
Sheets securities? If so, how? If not, why not? Please explain. In what 
way could market activity at the end of the trading day be considered a 
significant indicator of the direction of trading, the strength of 
demand, and the current market value of an OTCBB or a Pink Sheets 
security?
2. Price of Purchases
a. VWAP Transactions
    Rule 10b-18 limits an issuer to bidding for or buying its security 
at a purchase price that is no higher than the highest independent bid 
or last independent transaction price, whichever is higher, quoted or 
reported in the consolidated system at the time the purchase is 
effected.\51\ We understand that issuers would like to be able to 
repurchase their securities on a VWAP basis knowing that such purchases 
are within the safe harbor. However, because VWAP transactions are 
priced on the basis of individual trades that are executed and reported 
throughout the trading day, there may be instances where the execution 
price of an issuer's VWAP purchase effected at the end of that trading 
day (after the security's VWAP has been calculated and assigned to the 
transaction) exceeds the highest independent bid or last independent 
transaction price quoted or reported in the consolidated system for 
that security and, therefore, will be outside of the safe harbor's 
current price condition.
---------------------------------------------------------------------------

    \51\ 17 CFR 240.10b-18(b)(3).
---------------------------------------------------------------------------

    In order to provide issuers with additional flexibility to conduct 
repurchase programs using VWAP within the safe harbor, we propose to 
except from the Rule 10b-18's price condition Rule 10b-18 purchases 
effected on a VWAP basis, provided certain criteria are met. 
Specifically, the proposal would amend paragraph (b)(3) of the Rule to 
except those Rule 10b-18 VWAP purchases that satisfy the criteria set 
forth in proposed paragraph (a)(14) of the Rule.\52\
---------------------------------------------------------------------------

    \52\ Proposed Rule 10b-18(b)(3)(i)(a). The proposed amendment 
would except issuers' VWAP Rule 10b-18 purchases from only the 
pricing condition of the safe harbor. Issuers would remain 
responsible for compliance with all other conditions of Rule 10b-18 
to secure the protections of the safe harbor.
---------------------------------------------------------------------------

    To qualify for the proposed exception, the VWAP purchase must be 
for a security that qualifies as an actively-traded security (as 
defined under Rule 101(c)(1) of Regulation M).\53\ Similar to the Rule 
10b-18's timing condition, the proposed exception would incorporate 
Regulation M's standards and methods of calculating ADTV and public 
float value. Under Regulation M, issuers with a security that has an 
ADTV value of $1 million or more and a public float value of $150 
million or more are excluded from Rule 101 of Regulation M under its 
``actively-traded securities'' exception.\54\ The securities of issuers 
that have an ADTV value of at least $1 million and a public float value 
at or above $150 million are considered to have a sufficient market 
presence to make them less likely to be manipulated.\55\ Moreover, the 
public float value test is intended in part to exclude issuers from the 
``actively-traded securities'' category where a high trading volume 
level is an aberration.\56\
---------------------------------------------------------------------------

    \53\ Proposed Rule 10b-18(a)(14)(i). See also 17 CFR 
242.101(c)(1). 
    \54\ See 17 CFR 242.101(c)(1).
    \55\ See Securities Exchange Act Release No. 38067 (Dec. 20, 
1996), 62 FR 520 (Jan. 3, 1997).
    \56\ Id.
---------------------------------------------------------------------------

    Additionally, the VWAP purchase must be entered into or matched 
before the regular trading session opens, and the execution price of 
the VWAP matched trade must be determined based on a full trading day's 
volume.\57\ We believe that requiring the VWAP calculation to be based 
on a full day of trading would be the method of calculation that is the 
least susceptible to manipulation, because it would take into account 
the greatest volume of transactions occurring during regular trading 
hours.
---------------------------------------------------------------------------

    \57\ Proposed Rules 10b-18(a)(14)(ii) and (iii). Specifically, 
under proposed paragraph (a)(14)(iii) of Rule 10b-18 would require 
the execution price of the VWAP matched trade must be determined 
based on all regular way trades effected in accordance with the 
Rule's timing and price conditions that are reported in the 
consolidated system during the primary trading session for the 
security. See Proposed Rule 10b-18(a)(14)(iii).
     The proposed criteria are similar to the criteria contained in 
VWAP exemptive relief from former Rule 10a-1 under the Exchange Act. 
See, e.g., Letter from Larry E. Bergmann, Senior Associate Director, 
Division of Market Regulation, SEC, to Edith Hallahan, Counsel, 
Phlx, dated Mar. 24, 1999; letter Larry E. Bergmann, Senior 
Associate Director, Division of Market Regulation, SEC, to Soo J. 
Yim, Wilmer, Cutler & Pickering, dated Dec. 7, 2000 (``Wilmer, 
Cutler & Pickering''); letter from James Brigagliano, Assistant 
Director, Division of Market Regulation, SEC, to William W. 
Uchimoto, Esq., Vie Institutional Services, dated Feb. 12, 2003.
---------------------------------------------------------------------------

    To qualify for the exception, the issuer's VWAP purchase also must 
not exceed 10% of the ADTV in the security \58\ and must not be 
effected for the purpose of creating actual, or apparent, active 
trading in or otherwise affecting the price of any security.\59\ These 
conditions are similar to the conditions contained in the exemptive 
relief from former Rule 10a-1 granted for VWAP short sale 
transactions.\60\ We believe that such conditions would similarly work 
well in restricting the exemptive relief to situations that generally 
would not raise the harms that Rule 10b-18 is designed to prevent. 
Additionally, the VWAP must be calculated by first calculating the 
values for every regular way trade reported in the consolidated system 
(except those trades that are expressly excluded under proposed 
paragraph (a)(14)(iii) of the Rule, as described below), by multiplying 
each such price by the total number of shares traded at that price; 
then compiling an aggregate sum of all values; and then dividing this 
aggregate sum by the total number of trade reported shares for that day 
in the security that represent regular way trades effected in 
accordance with the conditions of paragraphs (b)(2) and (b)(3) of Rule 
10b-18 that are reported in the consolidated system during the primary 
trading session for the security.\61\ This method of calculating VWAP 
is consistent with the method of calculation contained in the exemptive 
relief from former Rule 10a-1 granted for VWAP short sale transactions, 
and it is consistent with industry practices for calculating VWAP for 
purposes of the Rule 10b-18 safe harbor. In addition, the VWAP assigned 
to the purchase must be based on trades effected in accordance with the 
Rule's timing and price conditions and, therefore, must not include 
trades effected as the opening purchase reported in the consolidated 
system (including the opening purchase in the principal market for the 
security and in the market where the purchase is effected) or during 
the last 10 minutes before the scheduled close of the primary trading 
session in the principal market for the security, and in the market 
where the purchase is effected. Moreover, the VWAP assigned to the 
purchase must not include trades effected at a price that exceeds the 
highest independent bid or the last independent transaction price, 
whichever is higher, quoted or

[[Page 4718]]

reported in the consolidated system at the time such trade is 
effected.\62\
---------------------------------------------------------------------------

    \58\ The VWAP exemptive relief from former Rule 10a-1 VWAP 
included the condition that a broker or dealer will act as principal 
on the contra-side to fill customer short sale orders only if the 
broker-dealer's position in the subject security, as committed by 
the broker-dealer during the pre-opening period of a trading day and 
aggregated across all of its customers who propose to sell short the 
same security on a VWAP basis, does not exceed 10% of the covered 
security's relevant average daily trading volume, as defined in 
Regulation M. See, e.g., Wilmer, Cutler & Pickering, id.
    \59\ Proposed Rule 10b-18(a)(14)(iv) and (v).
    \60\ See text accompanying supra note 57.
    \61\ Proposed Rule 10b-18(a)(14)(vi).
    \62\ Proposed Rule 10b-18(a)(14)(iii).
---------------------------------------------------------------------------

    In addition, the VWAP purchase also must be reported using a 
special VWAP (e.g., a ``.W'') trade modifier \63\ in order to indicate 
to the market that such purchases are unrelated to the current or 
closing price of the security. The special trade modifier requirement 
is intended to prevent the issuer's Rule 10b-18 VWAP purchase from 
providing any price discovery information or influencing the pricing 
direction of the security.
---------------------------------------------------------------------------

    \63\ Proposed Rule 10b-18(a)(14)(vii). For example, FINRA rules 
require VWAP transaction reports to be identified with a special 
modifier to indicate to the market that such transaction reports are 
unrelated to the current or closing price of the security. See FINRA 
Rule 6380A(a)(5)(E).
---------------------------------------------------------------------------

    The proposed VWAP exception from the Rule's price condition is 
intended to provide issuers and their brokers with greater certainty 
and flexibility in effecting qualifying VWAP transactions within the 
safe harbor. We believe that VWAP transactions meeting the above 
criteria would present little potential for manipulative abuse and, 
therefore, should be exempt from the Rule's price condition.\64\ In 
using VWAP as a pricing mechanism to effect repurchases, issuers 
relinquish control over the pricing of their executions, thereby 
reducing the risk of potential manipulation. In addition, the nature of 
the pricing is objective since VWAP is a commonly used benchmark that 
is based on independent market forces and is identifiable to all market 
participants.
---------------------------------------------------------------------------

    \64\ The staff has previously recognized the limited potential 
to influence the price of transactions effected pursuant to passive 
pricing mechanisms, such as the VWAP, by exempting such transactions 
from the former Rule 10a-1 under the Exchange Act. See, e.g., supra 
note 57.
---------------------------------------------------------------------------

    Q. Should the proposed VWAP exception be modified in any way? If 
so, please explain. Are all of the proposed criteria for the VWAP 
exception appropriate, or should any be eliminated or modified? What, 
if any, additional or alternative criteria should the Commission 
consider including in the proposed definition of a VWAP Rule 10b-18 
purchases in order to prevent any potential manipulative abuse?
    Q. Should a ``full day'' of trading be defined to permit VWAP 
purchases to be entered into or matched between 9:30 a.m. EST and 10 
a.m. EST (rather than requiring the VWAP purchase to be entered into or 
matched before the regular trading session opens)? Please explain.
    Q. Should we consider excepting VWAP purchases that are based on an 
intra-day VWAP (or a time-weighted average price, or ``TWAP''), such as 
a particular time interval from 9:30 a.m. EST through 1 p.m. EST, 
rather than on a full-day's trading volume? If so, please describe, in 
light of the objectives of the safe harbor, which time intervals would 
be appropriate.
    Q. Similar to the conditions contained in the exemptive relief from 
former Rule 10a-1 granted for VWAP short sale transactions, the 
proposed definition of a VWAP Rule 10b-18 purchase uses an ``actively-
traded'' standard. Should the proposed definition also include 
securities that also comprise the S&P Index, similar to the conditions 
contained in the exemptive relief from former Rule 10a-1 granted for 
VWAP short sale transactions? Should we consider requiring the 
securities offering reform thresholds,\65\ instead of the proposed 
``actively traded'' standard? Should a different standard be used?
---------------------------------------------------------------------------

    \65\ See supra note 50.
---------------------------------------------------------------------------

    Q. The proposed definition of a VWAP Rule 10b-18 purchase is based 
on all regular way trades reported in the consolidated system. Should 
the proposed definition also permit an issuer in listed securities to 
calculate the VWAP based only on trades occurring in the principal 
market for the security? Please explain. Would permitting issuers to 
use either a consolidated or a principal market calculation for their 
VWAP purchases be consistent with securities information vendor 
standards used in the dissemination of VWAP calculations to market 
participants?
    Q. Should the proposed exception distinguish between manually 
executed VWAP purchases and VWAP purchases executed through automated 
trading systems? If so, how?
    Q. Should we require an issuer to establish and maintain written 
policies and procedures reasonably designed to assure that the issuer's 
VWAP purchase was effected in accordance with the proposed criteria and 
that it has supervisory systems in place to produce records that enable 
the issuer to accurately and readily reconstruct, in a time-sequenced 
manner, all orders effected in reliance on the exception? If no, why 
not? Please explain. How long would it take to update systems and 
procedures in a manner that ensured compliance with the proposed 
exception? Please explain. What technological challenges, if any, would 
be encountered?
    Q. What types of costs, if any, would be associated with 
implementing the proposed exception? We seek specific comment as to 
what length of implementation period, if any, would be necessary and 
appropriate and, why, such that issuers would be able to meet the 
conditions of the proposed exception.
    Q. Do VWAP transactions create improper incentives for broker-
dealers, such that an exception should not be granted? If the proposed 
exception is adopted, are there ways to detect and limit the effects of 
such incentives?
    Q. How would trading systems and strategies used in today's 
marketplace be impacted by the proposed exception? How might market 
participants alter their trading systems and strategies in response to 
the proposed amendments? Please provide an estimate of costs if 
possible.
b. Other Alternative Passive Pricing Systems
    We are considering whether to except other passive pricing 
mechanisms from the Rule's price condition. We understand that some 
issuers may effect repurchases through electronic trading systems that 
use passive or independently-derived pricing mechanisms, such as the 
mid-point of the national best bid and offer (``NBBO'') or ``mid-peg'' 
orders. Under Rule 10b-18, matches to a mid-peg order involving an 
issuer repurchase will necessarily be above the highest bid and may 
also occur at a price above the last sale price and, therefore, would 
fall outside of the Rule's price condition, absent an exception. Thus, 
we seek comment regarding the appropriateness of expanding the proposed 
exception to include issuer repurchases effected through certain 
electronic trading systems that match and execute trades at various 
times and at independently-derived prices, such as at the mid-point of 
the NBBO. We believe it may be appropriate to expand the safe harbor to 
permit an issuer to submit a buy order that is ``pegged'' to the mid-
point of the NBBO at the time of execution (a ``mid-peg'' order) where 
the issuer's mid-peg order is matched and executed against a sell order 
that also is pegged to the mid-point of the NBBO at the time of 
execution, provided certain criteria are met, as discussed below. In 
the past, the Commission has granted limited exemptive relief in 
connection with these systems under former Rule 10a-1 under the 
Exchange Act because matches could potentially occur at a price below 
the last sale price.\66\
---------------------------------------------------------------------------

    \66\ See, e.g., Letter from Larry E. Bergmann, Senior Associate 
Director, Division of Market Regulation, SEC, to Andre E. Owens, 
Schiff Hardin & Waite, dated Apr. 23, 2003 (granting exemptive 
relief from former Rule 10a-1 for trades executed through an 
alternative trading system that matches buying and selling interest 
among institutional investors and broker-dealers at various set 
times during the day).

---------------------------------------------------------------------------

[[Page 4719]]

    Thus we are considering whether to except from Rule 10b-18's price 
condition purchases that are effected in an electronic trading system 
that matches buying and selling interest at various times throughout 
the day if, for example: (i) Matches occur at an externally derived 
price within the existing market and above the current national best 
bid; (ii) sellers and purchasers are not assured of receiving a 
matching order; (iii) sellers and purchasers do not know when a match 
will occur; (iv) persons relying on the exception are not represented 
in the primary market offer or otherwise influence the primary market 
bid or offer at the time of the transaction; (v) transactions in the 
electronic trading system are not made for the purpose of creating 
actual, or apparent, active trading in, or depressing or otherwise 
manipulating the price of, any security; (vi) the covered security 
qualifies as an ``actively-traded security'' (as defined in Rule 
101(c)(1) of Regulation M); and (vii) during the period of time in 
which the electronic trading system may match buying and selling 
interest, there is no solicitation of customer orders, or any 
communication with customers that the match has not yet occurred.
    These conditions parallel the conditions provided in the exemptive 
relief granted under former Rule 10a-1.\67\ Consistent with the relief 
granted under former Rule 10a-1 and the rationales provided in granting 
such relief, we believe it may be appropriate to expand the proposed 
VWAP exception to Rule 10b-18's price condition for purchases effected 
through these electronic trading systems due to the passive nature of 
pricing and the lack of price discovery. As such, we believe issuer 
repurchases effected through these passive pricing systems generally do 
not appear to involve the types of abuses that the Rule 10b-18 is 
designed to prevent.
---------------------------------------------------------------------------

    \67\ See, e.g., id.
---------------------------------------------------------------------------

    Although purchases effected using mid-point NBBO pricing algorithms 
may be passively priced, such purchases are not reported using any 
special trade modifier to indicate to the market that they are priced 
according to a special formula and, therefore, may be away from the 
quoted price of the stock at the time of execution. We, therefore, are 
concerned that a sizable purchase or series of purchases effected at 
the mid-point of the NBBO may result in the issuer leading the market 
for its security through its repurchases, which could undermine the 
purpose of the price condition. Thus, we seek comment below on what 
additional safeguards could be imposed to address the concern that such 
orders are not reported using any special trade modifier to indicate to 
the market that such transactions are priced at the mid-point of the 
NBBO.
    Q. Should the safe harbor's price condition be modified to except 
electronic trading systems that effect issuer repurchases at the mid-
point of the NBBO? For example, should the safe harbor permit an issuer 
to submit a buy mid-peg order that is ``pegged'' to the mid-point of 
the NBBO at the time of execution where the issuer's mid-peg order can 
only be matched and executed against a sell order that also is pegged 
to the mid-point of the NBBO at the time of execution? If so, should 
the exception be limited to repurchases of actively-traded securities 
effected through an electronic trading system that automatically 
matches and executes trades at random times, within specific time 
intervals, at an independently-derived mid-point of the NBBO price?
    Q. If such an exception were adopted, what other conditions should 
apply? For instance, should we require that sellers and purchasers must 
not be assured of receiving a matching order or know when a match will 
occur? Should we require that persons relying on the exception not be 
represented in the primary market offer or otherwise influence the 
primary market bid or offer at the time of the transaction, and that 
during the period of time in which the electronic trading system may 
match buying and selling interest, there is no solicitation of customer 
orders, or any communication with customers that the match has not yet 
occurred? What, if any, other criteria would be appropriate?
    Q. What, if any, additional safeguards could be imposed to address 
the concern that such orders are not reported using any special trade 
modifier to indicate to the market that such transactions are priced at 
the mid-point of the NBBO? Should we require mid-point priced trades to 
be reported with a special trade modifier? What technological 
challenges would be encountered as a result? How long would it take to 
update systems and procedures in order to mark such trades with a 
special trade modifier? Please explain.
    Q. What types of costs, if any, would be associated with requiring 
mid-point priced trades to be reported to the market with a special 
trade modifier? Please explain what length of implementation period, if 
any, would be necessary and appropriate to comply with such a 
requirement and why.
    Q. Are there other benchmark/derivatively priced transactions that 
should be excepted from Rule 10b-18's price condition? For example, 
should we consider excepting benchmark/derivatively priced purchases 
that qualify for the trade through exception in Rule 611(b)(7) of 
Regulation NMS? If so, please provide specific examples of transactions 
(and specific supporting criteria) where modifying the Rule's price 
condition would be appropriate. We also seek comment concerning the 
potential for manipulative abuse that permitting such transactions may 
present.
3. Volume of Purchases
    Under the current volume condition, an issuer may effect daily 
purchases in an amount up to 25 percent of the ADTV in its shares, as 
calculated under the Rule.\68\ Alternatively, once each week an issuer 
may purchase one block of its common stock in lieu of purchasing under 
the 25% volume limitation for that day (the ``one block per week'' 
exception).\69\ Rule 10b-18(a)(5) currently defines a ``block'' as a 
quantity of stock that either: (i) Has a purchase price of $200,000 or 
more; or (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 unavailable, is at least 20 
round lots of the security and totals at least one-tenth of one percent 
(.001) of the outstanding shares of the security, exclusive of any 
shares owned by any affiliate.\70\ When we adopted the ``one block per 
week'' exception in connection with the 2003 amendments to Rule 10b-18, 
we had retained the former Rule's ``block'' definition, including 
paragraph (iii) which references ``trading volume'' rather than 
``ADTV.'' However, Rule 10b-18, as amended in 2003, uses the term 
``ADTV'' instead of the former term ``trading volume.'' We therefore 
propose a non-substantive conforming change to Rule 10b-18 that would 
amend paragraph (a)(5)(iii) of the ``block'' definition to reference 
``ADTV'' instead of ``trading volume'' in order to make the definition 
consistent with the current Rule. We also request and encourage comment 
on the following:
---------------------------------------------------------------------------

    \68\ 17 CFR 240.10b-18(b)(4). See 17 CFR 240.10b-18(a)(1) 
(defining ADTV for purposes of the safe harbor).
    \69\ 17 CFR 240.10b-18(b)(4). See text accompanying supra note 
38 (regarding ``block'' purchases under Rule 10b-18).
    \70\ See 17 CFR 240.10b-18(a)(5).

---------------------------------------------------------------------------

[[Page 4720]]

    Q. We seek specific comment concerning the proposal to amend the 
definition of a ``block'' to reference ``ADTV'' instead of ``trading 
volume'' in paragraph (a)(5)(iii) of Rule 10b-18.
    Q. Is a volume limitation based on an ADTV calculation feasible 
with respect to Rule 10b-18 purchases of thinly traded securities? 
Should we raise (or lower) the volume limit for these securities? Would 
this increase the potential for manipulative activity in such 
securities?
    Q. Should we retain the current 25% volume limitation? Is the 25% a 
reasonable limitation that furthers the objectives of the Rule or 
should the volume limitation be reduced?
    Q. Should we retain the current ``one block per week'' exception? 
What, if any, modifications should be made to the definition of a 
``block'' purchase for purposes of this exception? For example, should 
we retain the current ``one block per week exception'' but increase the 
amount of shares constituting a block (for instance, should the amount 
of shares constituting a block conform to the markets' definition of a 
block trade,\71\ that is, typically at least 10,000 shares)?
---------------------------------------------------------------------------

    \71\ See, e.g., NYSE Rule 97.10 (defining a ``block'' as 
consisting of at least 10,000 shares, or a quantity of securities 
that has a current market value of at least $200,000).
---------------------------------------------------------------------------

    Q. Does the current ``one block per week'' exception enable issuers 
of thinly or moderately traded securities to avail themselves of the 
Rule 10b-18 safe harbor? If not, why not?
    Q. Should we modify the volume condition to allow issuers, for 
example, once a week to purchase up to a daily aggregate amount of 500 
shares, as an alternative to the 25% volume limitation? Would this 
allow issuers of thinly traded securities to carry out their repurchase 
programs more effectively? Please provide specific examples of where 
modifying the Rule's current volume condition with respect to thinly 
traded securities would be appropriate. We also seek comment concerning 
the potential for manipulative abuse that such transactions may 
present.
    Q. We encourage commenters to submit data regarding what percentage 
of individual issuer repurchase trading volume over the past three 
years has been effected in reliance on the current ``one block per 
week'' exception. The Commission requests data and analysis on what 
effect limiting the former block exception has had on such issuer's 
repurchasing activity.

B. Amendments Concerning Scope of the Safe Harbor

1. ``Flickering Quotes''
    Rule 10b-18 provides a safe harbor for purchases on a given day. To 
come within the safe harbor on a particular day, an issuer must satisfy 
the Rule's manner, timing, price, and volume conditions when purchasing 
its own common stock in the market.\72\ Moreover, the Rule provides 
that failure to meet any one of the four conditions with respect to any 
of the issuer's repurchases during the day will disqualify all of the 
issuer's Rule 10b-18 purchases from the safe harbor for that day (the 
``disqualification provision'').\73\ However, as noted above, we 
understand that the increased speed of today's markets, as evidenced by 
flickering quotes,\74\ has made it increasingly difficult for an issuer 
to ensure that every purchase of its common stock during the day will 
meet the Rule's current price condition. Accordingly, even if an issuer 
inadvertently effects a Rule 10b-18 purchase outside of the Rule's 
price condition \75\ due to flickering bid quotes in a market, the 
Rule's general disqualification provision would cause the issuer to 
forfeit the safe harbor for all of its Rule 10b-18 compliant purchases 
that day.
---------------------------------------------------------------------------

    \72\ 17 CFR 240.10b-18(b)(1)-(4).
    \73\ See Preliminary Note 1 to 17 CFR 240.10b-18.
    \74\ ``Flickering quotes'' occur when there are rapid and 
repeated changes in the current national best bid during the period 
between identification of the current national best bid and the 
execution or display of the Rule 10b-18 bid or purchase. In many 
active NMS stocks, the price of a trading center's best displayed 
quotations can change multiple times in a single second. See, e.g., 
Securities Exchange Act Release No. 51808 (June 9, 2005), 71 FR 
37496, 37522-23 (June 29, 2005) (providing an exception in Rule 611 
of Regulation NMS for flickering quotations).
    \75\ As discussed above, Rule 10b-18(b)(3) limits an issuer to 
bidding for or buying its security at a purchase price that is no 
higher than the highest independent bid or last independent 
transaction price, whichever is higher, quoted or reported in the 
consolidated system at the time the purchase is effected. 17 CFR 
240.10b-18(b)(3). See also 17 CFR 240.10b-18(b)(3)(iii) (price 
limits for securities for which bids and transaction prices not 
reported in the consolidated system).
---------------------------------------------------------------------------

    In order to accommodate the increasing occurrence of flickering 
price quotations in today's markets, we propose to limit the general 
disqualification provision in Rule 10b-18. Specifically, we propose to 
amend Preliminary Note 1 to Rule 10b-18 and paragraph (d) of the Rule 
to limit the Rule's disqualification provision in instances where an 
issuer's repurchase order is entered in accordance with the Rule's four 
conditions but is, immediately thereafter, executed outside of the 
price condition solely due to flickering quotes.\76\ In these 
instances, only the non-compliant purchase, rather than all of the 
issuer's other Rule 10b-18 purchases for that day, would be 
disqualified from the safe harbor.\77\ In this way, if an issuer's 
repurchase fails to meet the price condition due to flickering quotes, 
the issuer would not forfeit the safe harbor for all of its compliant 
purchases that day. This proposed limitation to the general 
disqualification provision would allow an issuer in fast moving markets 
to effect one otherwise compliant Rule 10b-18 purchase that was 
inadvertently purchased outside of the safe harbor, due to flickering 
quotes, without disqualifying all of the issuer's other purchases from 
the safe harbor for that day.
---------------------------------------------------------------------------

    \76\ See Proposed Preliminary Note No. 1 to Rule 10b-18.
    \77\ The disqualified non-compliant purchase would still count 
toward an issuer's daily volume limitation and would still have to 
satisfy the Rule's ``single broker or dealer'' and timing 
conditions, in order for the issuer's remaining purchases during 
that day to still qualify for the safe harbor.
---------------------------------------------------------------------------

    While we recognize that today's fast moving markets may still 
present challenges to issuers attempting to repurchase their securities 
within the safe harbor, Rule 10b-18(b)(3) would also continue to retain 
the ``last independent transaction price'' alternative (in addition to 
the highest independent bid), which should provide issuers with 
additional flexibility and a reliable mechanism in which to comply with 
the safe harbor's price condition in the event of flickering bid 
quotes.\78\
---------------------------------------------------------------------------

    \78\ We note, however, that trade prices also may flicker 
quickly, which can complicate compliance with Rule 10b-18's price 
condition because the last trade price printed to the Tape may not 
necessarily be the last trade price in terms of the actual order of 
trades.
---------------------------------------------------------------------------

    Q. Do flickering bid quotes make the Rule's ``highest independent 
bid'' alternative difficult to satisfy? Does the ``last independent 
transaction price'' alternative help issuers comply with Rule's price 
condition when there are flickering bid quotes? If not, why not? Please 
provide specific examples concerning the impact of quote flickering 
with respect to the Rule's price condition, including specific 
alternatives to address these concerns.
    Q. Should we condition reliance on the disqualification limitation 
on issuers executing their otherwise compliant purchase within a 
certain period of time (i.e., a second) after being entered? If so, how 
much time would be appropriate? Please explain.
    Q. Should we require issuers wishing to rely on the 
disqualification limitation to have specific data management

[[Page 4721]]

strategies to retain and recall order and trade history to demonstrate 
compliance with the safe harbor's price condition at the time of order 
entry? We understand that most broker-dealers already retain the 
appropriate market data, order status, and execution report elements to 
provide a ``snap shot'' of the market conditions at time of order entry 
versus execution. In order to rely on the safe harbor, what, if any, 
specific procedures should be established and enforced that would help 
issuers develop the necessary protocols to deal with the various market 
centers when flickering quotes appear or fast-moving markets occur in 
order to help reduce any unnecessary or undue reliance on the proposed 
limitation? How long would it take to develop these protocols, 
including updating systems and procedures in a manner that would help 
reduce any unnecessary or undue reliance on the proposed limitation? 
Please explain. What technological challenges, if any, would be 
encountered? What types of costs, if any, would be associated with 
implementing the necessary protocols?
    Q. We seek specific comment as to what length of implementation 
period, if any, would be necessary and appropriate and, why, such that 
issuers would be able to reduce any unnecessary or undue reliance on 
the proposed limitation.
    Q. Should we limit the number of times that an issuer may rely on 
the disqualification limitation, for example, once per day?
    Q. Should we specify the volume of purchases that are eligible to 
rely on the disqualification limitation to, for example, 1%, 2%, or 5% 
of ADTV?
    Q. Should we restrict use of the disqualification limitation during 
certain times of the day in order to maintain reasonable limits on the 
safe harbor consistent with the objectives of the Rule to minimize the 
market impact of the issuer's repurchases, thereby allowing the market 
to establish a security's price based on independent market forces 
without undue influence by the issuer? For example, should the 
limitation not be available for purchases effected immediately after 
the opening or just before the last half hour of trading?
    Q. What effect, if any, would the proposed disqualification 
limitation have on Rule 10b-18 purchases effected in reliance on the 
proposed VWAP exception? Similarly, what effect, if any, would the 
proposed VWAP exception have on issuers' ability to effect Rule 10b-18 
purchases in instances where there may be flickering quotes? Please 
explain.
2. ``Merger Exclusion'' Provision
    The proposed amendments also would add a provision that extends the 
time in which the safe harbor is unavailable in connection with a SPAC 
\79\ acquisition until the completion of the vote by the SPAC 
shareholders. Rule 10b-18 assumes normal market conditions.\80\ 
Accordingly, the definition of a ``Rule 10b-18 purchase'' excludes 
issuer bids and purchases made during certain corporate events because 
of the heightened incentive of an issuer to facilitate a corporate 
action, such as a merger. We do not believe that it is appropriate to 
make the safe harbor available when an issuer is under pressure to 
complete a merger or similar corporate action and may attempt to bring 
about a successful conclusion to the corporate action with issuer 
repurchases. Currently, paragraph (a)(13)(iv) of Rule 10b-18, which 
defines a Rule 10b-18 purchase, precludes purchases effected during the 
period from the time of public announcement of a merger, acquisition, 
or similar transaction involving a recapitalization, until the earlier 
of the completion of such transaction or the completion of the vote by 
the target shareholders (the ``merger exclusion'').\81\ Thus, 
ordinarily, it is the target shareholder vote that determines the 
completion of the merger exclusion period for purposes of Rule 10b-18.
---------------------------------------------------------------------------

    \79\ SPACs are shell, developmental stage, or blank-check 
companies that raise capital in initial public offerings (``IPOs'') 
generally for the purpose of acquiring or merging with an 
unidentified company or companies, or other entity, that will be 
identified at a future date (a ``target''). See generally 17 CFR 
230.419 (defining blank-check companies).
    \80\ 2002 Proposing Release, 67 FR at 77595.
    \81\ 17 CFR 240.10b-18(a)(13)(iv). This would include any period 
where the market price of a security will be a factor in determining 
the consideration to be paid pursuant to a merger, acquisition, or 
similar transaction. See 2008 Adopting Release, 68 FR at 64955.
---------------------------------------------------------------------------

    Paragraph (a)(13)(iv) illustrates the modernization of the safe 
harbor in 2003. The Commission adopted the amended merger exclusion in 
recognition of issuers' incentives to facilitate corporate actions with 
issuer purchases. The Commission adopted this modified provision of 
Rule 10b-18 out of concern for issuer activity designed to facilitate a 
merger, which had been highlighted by news articles suggesting that 
banks repurchased their respective securities in order to boost their 
stock price to enhance the value of their competing merger 
proposals.\82\ At that time, the concern about issuers facilitating 
corporate actions was on raising the market price of an issuer's stock 
in order to facilitate the merger or acquisition in a contested 
takeover. The exclusion advanced the goal of making the safe harbor 
available to an issuer only during those times when there is no special 
event that may impact an issuer's purchasing activity. Since 2003, 
securities markets and capital raising have evolved significantly, and 
we once again believe it is appropriate to modify the merger exclusion 
with respect to issuer purchases aimed at facilitating corporate 
actions. This proposal is triggered by the rapid growth of SPAC capital 
raising, and its objective is to maintain the integrity of the safe 
harbor by narrowing its use during corporate actions that can impact an 
issuer's purchasing activity.\83\
---------------------------------------------------------------------------

    \82\ See 2003 Adopting Release, 68 FR at 64955 n. 29.
    \83\ See FINRA Regulatory Notice 08-54: Guidance on Special 
Purpose Acquisition Companies. (stating that 22% of all IPOS in 2007 
were SPAC IPOs totaling $12 billion in raised capital).
---------------------------------------------------------------------------

    SPAC acquisitions can present unique conflicts of interest and 
significant financial incentives for SPAC management. For instance, a 
SPAC generally must complete its acquisition within 18 to 24 
months,\84\ which can put SPAC management under severe time pressure to 
identify an appropriate target and complete the acquisition. Typically, 
if an acquisition target is identified during this timeframe, both the 
SPAC shareholders and target shareholders are given the opportunity to 
vote on whether or not to approve the proposed acquisition. However, 
because of the special incentives and deferred compensation involved 
with a SPAC,\85\ if SPAC management believes that SPAC holders will 
vote against an acquisition, or to otherwise ensure that the 
acquisition will be approved, they may attempt to rely on Rule 10b-18 
to repurchase a substantial percentage of shares of the SPAC's common 
stock in the open market,\86\ thereby reducing the

[[Page 4722]]

possibility that the acquisition will be disapproved.\87\ These open 
market repurchases can also have the effect of supporting and/or 
raising the market price of the SPAC shares, and cause other investors 
to buy up shares in the SPAC in the open market when they might not 
otherwise have done so.\88\ Moreover, because the SPAC shareholder vote 
typically occurs much later than the vote by the target shareholders, 
this allows the SPAC management an even longer period of time in which 
to engage in substantial open market repurchases of the SPAC's stock in 
order to secure ``yes'' votes in favor of the proposed merger or 
acquisition. In view of this heightened incentive, we do not believe it 
is appropriate to provide a safe harbor for purchases made in 
connection with an acquisition by a SPAC during this period and, 
therefore, believe a longer exclusionary period is warranted.
---------------------------------------------------------------------------

    \84\ This 18- to 24-month deadline is designed to help investors 
by forcing a timely return of most of their capital (previously held 
in an escrow or trust account) if an acquisition is not completed 
within this timeframe and the SPAC must liquidate. See id.
    \85\ SPAC managers, as well as underwriters, often have 
significant financial incentives that may conflict with their 
investors' interests and may cause them to effect an acquisition 
regardless of the merit of the target or the potential for future 
success of the entity as a public company. For instances, the SPAC 
underwriters may be paid a portion of their fee, usually half, 
following the IPO, but the remainder is only paid upon the closing 
of an acquisition. In addition, SPAC managers may not be paid a 
salary but will receive an equity stake, roughly 20%, in the company 
post-acquisition.
    \86\ See, e.g., Douglas S. Ellenoff, ``Facilitating a Business 
Combination: The Valuation and Economics of a Proposed SPAC Don't 
Determine a Successful Outcome,'' Equities Magazine (Sept. 2009) 
(stating that SPAC sponsors and affiliates consider additional 
purchases of open market shares in order to implement a favorable 
approval process); Frederick D. Lipman, ``International and US IPO 
Planning: A Business Strategy Guide,'' at p. 218 and 223 (2008) 
(``Lipman'') (stating that business combinations that trade below 
the Trust's per share amount after announcement require the SPAC's 
sponsors or the target's owners to enter into agreements to 
incentivize the SPAC's public stockholders or potential investors to 
support the transaction'' and that ``SPAC sponsors may commit to 
spend funds to buy stock in the open market that can be targeted 
during the proxy process'').
    \87\ See, e.g., Lipman, id. at p. 217 (noting that getting the 
SPAC's stockholder vote and limiting exercises of conversions is by 
for the most difficult and uncertain part of the process and that 
this uncertainty affects the extent to which concessions will be 
made by the SPAC sponsors to complete the transaction--the greater 
the percentage of arbitrageurs holding the SPAC's stock and the less 
favorable the transaction is perceived, the greater the concessions 
that will have to be made). ``In most [SPAC] transactions, 
negotiations and deals need to occur during the proxy process 
because at the time of the IPO, it is not possible to foresee all 
the variables involved in the business combination that will affect 
how much stock will need to be turned over from no votes to yes 
votes.'' Id. at p. 218 (emphasis added)
    \88\ See, e.g., id. (stating that SPAC sponsors may enter into 
Rule 10b5-1 trading plans which require them to purchase up to a 
specified number of shares or dollar amount of shares at the 
prevailing market prices, and that these purchases are intended to 
support the market price of the stock during the proxy process and 
provide potential sellers the ability to dispose of their shares and 
achieve the same or greater return than if they were to vote against 
the transaction and exercise their conversion rights).
---------------------------------------------------------------------------

    Thus, we propose to add a provision that would increase the time in 
which the safe harbor is unavailable in connection with an acquisition 
by a SPAC until the completion of the vote by the SPAC's shareholders. 
Specifically, the proposal would amend the language of paragraph 
(a)(13)(iv) to provide that, in connection with a SPAC, Rule 10b-18's 
``merger exclusion'' would apply to purchases that are effected during 
the period from the time of public announcement of a merger, 
acquisition, or similar transaction until the earlier of such 
transaction or the completion of the vote by both the target 
shareholders and the SPAC shareholders.\89\ By extending the ``merger 
exclusion'' to the time of the vote by the shareholders of the SPAC 
(and not just the vote by the target shareholders), the proposal would 
maintain reasonable limits on the safe harbor and prevent it from being 
used in contexts where there is a heightened incentive to engage in 
substantial repurchase activity solely in order to facilitate a 
corporate action. The benefit of a safe harbor is only appropriate 
during ``normal'' market conditions.\90\
---------------------------------------------------------------------------

    \89\ Proposed Rule 10b-18(a)(13)(iv).
    \90\ See supra note 80. See infra note 106.
---------------------------------------------------------------------------

    We note, however, that SPACs would still have the ability to make 
safe harbor repurchases following an announcement of a merger or 
covered transaction (subject to Regulation M's restricted period and 
any other applicable restriction) so long as the total amount of the 
issuer's Rule 10b-18 purchases effected on any single day does not 
exceed the lesser of 25% of the security's four-week ADTV or the 
issuer's average daily Rule 10b-18 purchases during the three full 
calendar months preceding the date of the announcement of the merger or 
other covered transaction.\91\ Moreover, the issuer may effect block 
purchases pursuant to paragraph (b)(4) of the Rule (subject to 
Regulation M's restricted period and any other applicable restrictions) 
provided that the issuer does not exceed the average size and frequency 
of block purchases effected pursuant to paragraph (b)(4) of the Rule 
during the three full calendar months preceding the date of the 
announcement of such transaction.\92\
---------------------------------------------------------------------------

    \91\ See 17 CFR 240.10b-18(a)(13)(iv)(B)(1).
    \92\ See 17 CFR 240.10b-18(a)(13)(iv)(B)(2).
---------------------------------------------------------------------------

    Q. Given the significant financial incentives on the part of SPAC 
managers and underwriters to engage in repurchase activity solely to 
facilitate an acquisition, should the safe harbor in general continue 
to apply to issuer repurchases of SPAC securities? If so, should the 
Commission consider other modifications, either in addition to or 
instead of, the safe harbor conditions proposed here in the case of 
issuer repurchases of SPAC securities? If not, what specific types of 
costs or burdens, if any, would be associated with making the safe 
harbor in general unavailable to issuer repurchases of SPAC securities? 
Please explain. Please provide detailed comment regarding excepting all 
issuer repurchases of SPAC securities from the definition of a Rule 
10b-18 purchase. Are there other types of securities for which the safe 
harbor should not apply? We also seek specific comment concerning the 
potential for manipulative abuse that transactions in such securities 
may present.
3. Preliminary Note to Rule 10b-18
    We also propose a non-substantive amendment that would update 
Preliminary Note No. 2 to Rule 10b-18 to reference ``Item 16E'' 
(instead of ``Item 15(e)'') of Form 20-F. Preliminary Note No. 2 
currently states, ``[r]egardless of whether the repurchases are 
effected in accordance with Sec.  240.10b-18, reporting issuers must 
report their repurchasing activity as required by Item 703 of 
Regulations S-K and S-B (17 CFR 229.703 and 228.703) and Item 15(e) of 
Form 20-F (17 CFR 249.220f) (regarding foreign private issuers), and 
closed-end management investment companies that are registered under 
the Investment Company Act of 1940 must report their repurchasing 
activity as required by Item 8 of Form N-CSR (17 CFR 249.331; 17 CFR 
274.128).'' \93\ The proposed amendment would update this note by 
changing ``Item 15(e)'' to ``Item 16E'' consistent with the current 
Form 20-F.
---------------------------------------------------------------------------

    \93\ 17 CFR 240.10b-18.
---------------------------------------------------------------------------

4. Additional Request for Comments Regarding Scope of Safe Harbor
    Q. Should the safe harbor in general continue to apply to less 
liquid, less transparent securities, such as OTCBB and Pink Sheet 
securities? If so, should these securities be subject to more 
restrictive limitations in order to minimize the risk of manipulation 
by an issuer making market repurchases in these less liquid, less 
transparent securities?
    Q. Should the Rule 10b-18 safe harbor be available for issuer 
repurchases during periods when an issuer's insiders are selling their 
own shares of the issuer's stock? If not, please provide specific 
suggestions regarding what, if any, limitations should be placed on the 
availability of the safe harbor during such periods.
    Q. Should the Rule require that an issuer have current financial 
disclosures as a prerequisite to receiving the protection of the safe 
harbor? For example, should it be available to companies that do not 
make public filings of financial information, or are not current in 
required filings? If so, how should we require the issuer to 
demonstrate such compliance? Should such information be required to be 
made available on the issuer's website for the

[[Page 4723]]

investing public? What, if any, other requirements should be a 
prerequisite to receiving the protection of the safe harbor?
    Q. Item 703 of Regulation S-K requires disclosure of repurchases of 
all shares of a company's equity securities of a class registered under 
Section 12 of the Exchange Act regardless of whether an issuer relies 
on the safe harbor. Should compliance with the disclosure requirements 
of Item 703 be made a condition of using the safe harbor? Should Rule 
10b-18 contain a specific disclosure requirement as a condition of the 
safe harbor, similar to other Commission regulations that link a safe 
harbor with disclosure (e.g., Regulation D with Form D and Rule 144 
with Form 144)? What specific types of information would be useful to 
investors regarding an issuer's repurchase activity?
    Q. Would requiring specific disclosure as a condition of the safe 
harbor provide a useful way to monitor the operation of (or verify 
compliance with) the safe harbor? Would it provide useful information 
in assessing the level and market impact of issuer repurchases? If so, 
should the safe harbor require disclosure on a daily basis, or would 
more frequent disclosure (e.g., on a ``real time'' basis) be more 
meaningful to investors? If so, how should the disclosure be made 
(e.g., issuing daily press releases, posting daily notices on the 
issuer's website, or reporting such purchases to the tape using a 
special trade indicator)? Please provide specific suggestions.
    Q. Should the safe harbor require issuers to maintain (and provide 
to the Commission, upon request) separately retrievable written records 
concerning the trade details (trade-by-trade information) about the 
manner, timing, price, and volume of their Rule 10b-18 repurchases?
    Q. Should the safe harbor be made available to securities other 
than common equity, such as preferred stock, warrants, rights, 
convertible debt securities, or other products? If the safe harbor were 
to include such securities, what price, volume, and time of purchase 
conditions should apply? We seek specific comment concerning the 
potential for manipulative abuse that transactions in such securities 
may present.
    Q. Should the safe harbor be available for issuer repurchases 
involving security futures or option contracts (including the receipt 
or purchase for delivery of securities underlying such contracts)? 
Should the number of shares underlying an option or security futures 
contract (or other derivative security) entered into by an issuer count 
against an issuer's 25% daily volume limitation? What effect, if any, 
should taking delivery of common stock pursuant to a security futures 
contract or upon exercise of an option have regarding the Rule's other 
conditions (e.g., price, timing, and manner of purchase) with respect 
to the availability of the safe harbor for purchases effected in 
accordance with Rule 10b-18?
    Q. Currently, the Rule 10b-18 safe harbor is not available for an 
issuer and the broker-dealer who engage in an accelerated share 
repurchase plan or use a forward contract to repurchase the issuer's 
stock, or for the broker's covering transactions. What, if any, 
manipulative concerns are raised by alternative or novel methods of 
repurchasing securities (e.g., use of derivatives or share accumulation 
programs)? Please provide specific comment as to what limitations 
should apply to such repurchases to address these concerns.
    Q. Should the safe harbor apply to an issuer's repurchases of its 
common stock effected outside of the United States (e.g., on foreign 
exchanges)? If so, how should the safe harbor conditions apply to such 
purchases (e.g., should a security's ADTV include worldwide trading 
volume)?
    Q. Should the safe harbor only be available outside of the United 
States to foreign private issuers, or to foreign companies whose 
principal market is outside the United States? If so, are there certain 
conditions of Rule 10b-18 that should be modified or that should not 
apply at all with respect to purchases outside the United States and, 
if so, why?
    Q. Are there different conditions under Rule 10b-18 that should 
apply with respect to purchases outside the United States and, if so, 
why are those conditions more appropriate than the conditions currently 
proposed for Rule 10b-18?

IV. General Request for Comment

    We request and encourage any interested person to comment generally 
on these proposals. In addition to the specific requests for comment, 
the Commission invites interested persons to submit written comments on 
all aspects of the proposed amendments. The Commission also requests 
commenters to address whether the proposed Rule 10b-18 amendments 
provide appropriate safe harbor conditions in light of recent market 
developments. The Commission seeks comment on whether the safe harbor 
proposals raise any manipulation risks. Commenters may also discuss 
whether there are legal or policy reasons why the Commission should 
consider a different approach.
    The Commission encourages commenters to provide information 
regarding the advantages and disadvantages of each proposed amendment. 
The Commission invites commenters to provide views and data as to the 
costs and benefits associated with the proposed amendments. We also 
seek comment regarding other matters that may have an effect on the 
proposed amendments.

V. Paperwork Reduction Act

A. Background

    One provision of the proposed amendments to Rule 10b-18 would 
result in new ``collection of information'' requirements within the 
meaning of the Paperwork Reduction Act of 1995 (``PRA'').\94\ The 
Commission is therefore submitting this proposal to the Office of 
Management and Budget (``OMB'') for review in accordance with 44 U.S.C. 
3507(d) and 5 CFR 1320.11. The title for the collection of information 
requirements is ``Purchases of Certain Equity Securities by the Issuer 
and Others.'' If adopted, this collection would not be mandatory, but 
would be necessary for issuers that wish to avail themselves of the 
proposed VWAP exception to Rule 10b-18's price condition. Responses to 
the collection of information requirements of the proposed VWAP 
exception to Rule 10b-18's price condition would not be kept 
confidential. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid OMB control number. OMB has not yet assigned a 
control number to the new collection for the proposed VWAP exception to 
the Rule's price condition.
---------------------------------------------------------------------------

    \94\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

B. Summary

    In order to provide issuers with additional flexibility to conduct 
repurchase programs using VWAP within the safe harbor, we are proposing 
to except from the Rule 10b-18's price condition Rule 10b-18 purchases 
effected on a VWAP basis, provided certain criteria are met. Proposed 
Rule 10b-18(a)(14)'s definition of a ``Rule 10b-18 VWAP Purchase'' 
would require a new collection of information in that one of the 
requirements for qualifying for the exception is that the VWAP purchase 
must be reported using a special VWAP (e.g., a ``.W'') trade modifier 
\95\ in order to indicate to the

[[Page 4724]]

market that such purchases are unrelated to the current or closing 
price of the security.
---------------------------------------------------------------------------

    \95\ Proposed Rule 10b-18(a)(14)(vii).
---------------------------------------------------------------------------

C. Proposed Use of Information

    The information that would be collected under the special trade 
modifier requirement would help prevent the issuer's Rule 10b-18 VWAP 
purchase from providing any price discovery information or influencing 
the pricing direction of the security. The information collected also 
would aid the Commission in monitoring compliance with the proposed 
VWAP exception.

D. Respondents

    The collection of information that would be required by the 
proposed special trade modifier requirement of the proposed VWAP 
exception to Rule 10b-18 would apply to all 5,561 registered broker-
dealers effecting Rule 10b-18 VWAP on behalf of issuers in reliance on 
the proposed VWAP exception to Rule 10b-18's price condition. As 
discussed below, the Commission has considered the above respondents 
for the purposes of calculating the reporting burdens under the 
proposed amendments to Rule 10b-18. The Commission requests comment on 
the accuracy of these figures.

E. Total Annual Reporting and Recordkeeping Burdens

    Proposed Rule 10b-18(a)(14)'s definition of a ``Rule 10b-18 VWAP 
Purchase'' would require that the VWAP purchase must be reported using 
a special VWAP trade modifier.\96\ VWAP trade reports are already 
required to be identified with a special trade indicator or modifier to 
indicate that such transaction reports are unrelated to the current or 
closing price of the security.\97\ Thus, this identification is usual 
and customary in the conduct of this activity and no new burden would 
be imposed.\98\
---------------------------------------------------------------------------

    \96\ Id.
    \97\ For example, FINRA rules require VWAP transaction reports 
to be identified with a special modifier to indicate to the market 
that such transaction reports are unrelated to the current or 
closing price of the security. See FINRA Rule 6380A(a)(5)(E) 
(requiring members to append the applicable trade report modifier, 
as specified by FINRA, to all last sale reports that occur at a 
price based on an average weighting or another special pricing 
formula).
    \98\ 5 CFR 1320.3(b)(2).
---------------------------------------------------------------------------

F. Record Retention Period

    The proposed VWAP exception's special modifier requirement does not 
contain any new record retention requirements. All registered broker-
dealers that would be subject to the proposed special trade modifier 
requirement are currently required to retain records in accordance with 
Rule 17a-4(e)(7) under the Exchange Act.

G. Request for Comment

    We invite comment on these estimates. Pursuant to 44 U.S.C. 
3506(c)(2)(B), we request comment in order to: (i) Evaluate whether the 
collection of information is necessary for the proper performance of 
our functions, including whether the information will have practical 
utility; (ii) evaluate the accuracy of our estimate of the burden of 
the collection of information; (iii) determine whether there are ways 
to enhance the quality, utility and clarity of the information to be 
collected; and (iv) evaluate whether there are ways to minimize the 
burden of the collection of information on those who respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Persons submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090, with reference to File No. S7-04-10. 
Requests for materials submitted to OMB by the Commission with regard 
to this collection of information should be in writing, with reference 
to File No. S7-04-10, and be submitted to the Securities and Exchange 
Commission, Office of Investor Education and Advocacy, 100 F Street, 
NE., Washington, DC 20549-0213. As OMB is required to make a decision 
concerning the collections of information between 30 and 60 days after 
publication, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication.

VI. Costs and Benefits of the Proposed Amendments

    The Commission is considering the costs and the benefits of the 
proposed amendments. The Commission encourages commenters to discuss 
any additional costs or benefits. In particular, the Commission 
requests comment on the potential costs for any modifications to 
information gathering, management, and recordkeeping systems or 
procedures, as well as any potential benefits resulting from the 
proposals for issuers, investors, broker-dealers, other securities 
industry professionals, regulators, and others. Commenters should 
provide analysis and data to support their views on the costs and 
benefits associated with the proposed amendments.

A. Costs

    As an aid in evaluating costs and reductions in costs associated 
with the proposed amendments, the Commission requests the public's 
views and any supporting information. The Commission believes that the 
proposed amendments would impose negligible costs, if any, on issuers 
and would not compromise investor protection. The Commission notes that 
any costs related to complying with the proposed amendments to Rule 
10b-18 are assumed voluntarily because the Rule provides an optional 
safe harbor.\99\ The Commission, however, notes that issuer repurchases 
effected under the proposed VWAP exception, or other passive pricing 
mechanisms, may create costs to both issuers and market participants to 
update systems and enhance recordkeeping in order to comply with the 
proposed exception. Also, to qualify as a ``Rule 10b-18 VWAP Purchase'' 
under the proposed Rule 10b-18(a)(14), the VWAP purchase be reported 
using a special VWAP trade modifier.\100\ VWAP trade reports are 
already required to be identified with a special trade indicator or 
modifier to indicate that such transaction reports are unrelated to the 
current or closing price of the security.\101\ Thus, this 
identification is usual and customary and no new burden would be 
imposed. In addition, if adopted, an issuer may need to establish 
specific procedures that would help them develop the necessary 
protocols to deal with the various market centers when flickering 
quotes appear or fast-moving markets occur in order to help reduce any 
unnecessary or undue reliance on the proposed disqualification 
limitation. The Commission seeks estimates of such costs. The 
Commission also solicits comments as to whether the proposed

[[Page 4725]]

amendments would impose greater costs on issuers than the current Rule.
---------------------------------------------------------------------------

    \99\ See discussion in Section VII, infra, noting that, even 
with the proposed modification to the ``merger exclusion,'' all 
issuers, including SPACs, still have the ability to make safe harbor 
repurchase following an announcement of a merger or covered 
transaction (subject to Regulation M's restricted period and any 
other applicable restriction) so long as the total amount of the 
issuer's Rule 10b-18 purchases effected on any single day does not 
exceed the lesser of 25% of the security's four-week ADTV or the 
issuer's average daily Rule 10b-18 purchases during the three full 
calendar months preceding the date of the announcement of the merger 
or other covered transaction. See 17 CFR 240.10b-
18(a)(13)(iv)(B)(1). See also 2003 Adopting Release, 68 FR at 64955.
    \100\ Id.
    \101\ See, e.g., text accompanying supra note 97.
---------------------------------------------------------------------------

    The Commission also notes that the proposed modification to the 
``merger exclusion'' in connection with SPAC acquisitions may create 
costs to issuers in terms of not being able to effect all of their 
issuer repurchases within the safe harbor. We understand that this, in 
turn, could affect some SPACs' ability to complete an acquisition or 
other covered transaction. However, we preliminary do not believe that 
the proposed modification to the ``merger exclusion'' would 
significantly hinder a SPAC's ability to complete an acquisition or 
other covered transaction. The proposed modification is designed to 
maintain reasonable limits on the availability of the safe harbor 
consistent with the objectives of the Rule to minimize the market 
impact of the issuer's repurchases, thereby allowing the market to 
establish a security's price based on independent market forces without 
undue influence by the issuer. Moreover, even with the proposed 
modification to the ``merger exclusion,'' SPAC issuers, similar to 
other issuers, would still be able to effect other repurchases (i.e., 
privately negotiated repurchases) and certain ordinary course Rule 10b-
18 purchases following the announcement of a merger or covered 
transaction (subject to Regulation M's restricted period and any other 
applicable restriction) so long as the total amount of the issuer's 
Rule 10b-18 purchases effected on any single day does not exceed the 
lesser of 25% of the security's four-week ADTV or the issuer's average 
daily Rule 10b-18 purchases during the three full calendar months 
preceding the date of the announcement of the merger or other covered 
transaction.\102\ As such, we do not believe that the proposed 
modification to the ``merger exclusion'' would unfairly hinder a SPAC's 
ability to complete an acquisition or other covered transaction. In 
fact, by extending the ``merger exclusion'' to the time of the vote by 
the shareholders of the SPAC (and not just the vote by the target 
shareholders), the proposal would simply make the safe harbor 
unavailable to SPAC issuers during the period when the incentive to 
engage in substantial repurchases to facilitate a corporate action is 
greatest.\103\ We also note that some SPAC issuers may conduct 
privately negotiated repurchases for which the safe harbor is already 
unavailable. As such, this proposal would not trigger new costs for 
that purchasing activity. Nevertheless, the Commission seeks estimates 
of any potential costs associated with the proposed modification to the 
``merger exclusion,'' including the extent to which, if at all, the 
proposed modification would affect a SPAC's ability to effect issuer 
repurchases within the safe harbor or otherwise complete an acquisition 
or other covered transaction.
---------------------------------------------------------------------------

    \102\ See 17 CFR 240.10b-18(a)(13)(iv)(B)(1). See also 2003 
Adopting Release, 68 FR at 64955.
    \103\ Proposed Rule 10b-18(a)(13)(iv).
---------------------------------------------------------------------------

B. Benefits

    The proposed amendments would update the safe harbor in light of 
market developments since the 2003 Adopting Release, as well as provide 
issuers with greater flexibility to conduct their issuer repurchase 
programs within the safe harbor without sacrificing investor protection 
or market integrity. The proposed amendments would allow issuer 
repurchases under conditions designed to reduce the potential for 
manipulative abuse without either imposing undue restrictions on the 
operation of issuer repurchases or undermining the economic benefit 
such purchases provide investors, issuers, and the marketplace. In 
addition, the proposed amendments would provide clarity as to the scope 
of permissible market activity for issuers and the broker-dealers that 
assist them in their repurchasing. Many issuers may be reluctant to 
repurchase without the certainty that their activity comes within the 
safe harbor. If an issuer effects repurchases in compliance with Rule 
10b-18, it may avoid what might otherwise be substantial and 
unpredictable risks of liability under the anti-manipulative provisions 
of the Exchange Act. Therefore, the safe harbor may provide increased 
liquidity to the marketplace from issuers that would not repurchase but 
for the safe harbor.
    The proposed modification to the timing condition would maintain 
reasonable limits on the safe harbor consistent with the objectives of 
the Rule to minimize the market impact of the issuer's repurchases, 
thereby allowing the market to establish a security's price based on 
independent market forces without undue influence by the issuer. As 
such, the proposed condition would establish additional reasonable 
limits on issuer activity that may influence market prices at or near 
the open. In addition, the amendment would allow issuers to carry out 
their repurchase programs more effectively by providing issuers with 
guidance in complying with Rule 10b-18's opening purchase limitation, 
particularly when, for example, the principal market has a delayed 
opening in a stock and another exchange's smaller opening transaction 
is reported in the consolidated system first.
    The proposed VWAP exception from the Rule's price condition would 
provide issuers and their brokers with flexibility and greater 
certainty in effecting qualifying VWAP transactions within the safe 
harbor. The proposed VWAP exception to the Rule's price condition also 
may increase the likelihood that firms would engage in open market 
repurchases since the price condition would be less restrictive for 
such transactions. As such, the proposed VWAP exception may further 
provide increased liquidity to the marketplace.
    In addition, if an issuer's repurchase meets all of the conditions 
under Rule 10b-18 but fails to meet the Rule's price condition due 
solely to flickering quotes, the proposed limitation to the general 
disqualification provision would disqualify only this otherwise 
compliant Rule 10b-18 purchase, rather than disqualifying all of the 
issuer's other purchases from the safe harbor for that day. The 
proposed amendments to the disqualification provision under the Rule 
also may increase the likelihood that firms would engage in open market 
repurchases since the execution of an otherwise compliant Rule 10b-18 
purchase in a fast moving market would no longer jeopardize the 
availability of the safe harbor for all of an issuer's other Rule 10b-
18 purchases that day. As such, the proposed limitations to the general 
disqualification provision may further provide increased liquidity to 
the marketplace.
    The proposal to modify the ``merger exclusion'' under the Rule in 
connection with a SPAC acquisition, merger, or similar transaction is 
designed to maintain the integrity of the safe harbor by narrowing its 
use where an issuer is under considerable pressure to complete an 
acquisition, merger, or similar transaction and effects a substantial 
amount of open market repurchases solely to facilitate the intended 
merger or other covered transaction. Additionally, as discussed above, 
these open market repurchases can have the effect of supporting and/or 
raising the market price of the SPAC shares, and cause other investors 
to buy up shares in the SPAC in the open market when they might not 
otherwise have done so. Thus, the proposed modification would maintain 
reasonable limits on the availability of the safe harbor consistent 
with the objectives of the Rule to minimize the market impact of the 
issuer's repurchases, thereby allowing the market to establish a 
security's price based on independent market forces without undue 
influence by the issuer

[[Page 4726]]

and, therefore, help to promote price efficiency in the marketplace.
    The Commission encourages commenters to provide empirical data or 
other facts to support their views concerning these and any other 
benefits not mentioned here.

VII. Consideration of Burden on Competition and Promotion of 
Efficiency, Competition, and Capital Formation

    Section 3(f) of the Exchange Act requires the Commission, whenever 
it engages in rulemaking and is required to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to consider whether the action would promote efficiency, competition, 
and capital formation.\104\ In addition, Section 23(a)(2) of the 
Exchange Act requires the Commission, when making rules under the 
Exchange Act, to consider the impact such rules would have on 
competition.\105\ Exchange Act Section 23(a)(2) prohibits the 
Commission from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.
---------------------------------------------------------------------------

    \104\ 15 U.S.C. 78c(f).
    \105\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    We believe the proposed amendments would have minimal impact on the 
promotion of price efficiency and capital formation and preliminarily 
believe that these proposals would promote efficiency, competition and 
capital formation by enhancing market transparency, promoting liquidity 
in issuer securities and providing clarity to market participants 
engaging in issuer repurchases.
    First, the proposed modification to the timing condition would 
promote price transparency in issuer securities. The proposed 
modifications to Rule 10b-18's timing condition are designed to 
minimize the market impact of an issuer's repurchases during a period 
(the market open) where market activity is considered to be a 
significant indicator of the direction of trading, the strength of 
demand, and the current market value of the security. This additional, 
reasonable limit on issuer activity, consistent with the objectives of 
the Rule, would allow the market to establish a security's price based 
on independent market forces without undue influence by the issuer, 
thereby further promoting price transparency at the market open. 
Second, the proposed amendments to the Rule would promote increased 
liquidity in issuer securities, by providing issuers with additional 
flexibility to conduct their repurchase programs more effectively and 
within the safe harbor. For example, the proposed VWAP exception to the 
safe harbor's existing price condition may increase the likelihood that 
firms would engage in open market purchases, thereby potentially 
providing increased liquidity in issuers' securities. Finally, the 
commission preliminarily believes that the proposed amendments should 
improve market efficiency by providing greater clarity and uniformity 
of the safe harbor conditions. It is our understanding that significant 
market changes with respect to trading strategies and developments in 
automated trading systems that have increased the speed of trading 
(evidenced by flickering quotes) have made it increasingly difficult 
for issuers to operate within the Rule. As such, the proposed 
modifications to the Rule would clarify and modernize the Rule's 
provisions in light of market developments since the Rule's adoption, 
providing the market with additional comfort while engaging in issuer 
repurchases.
    In addition, we believe that the proposed modification to the 
``merger exclusion'' in connection with SPAC acquisitions would have 
minimal impact on the promotion of price efficiency and capital 
formation. While the proposed modification may impact an issuer's 
ability to effect all of their issuer repurchases within the safe 
harbor, the proposed modification is designed to maintain reasonable 
limits on the availability of the safe harbor \106\ consistent with the 
objectives of the Rule to minimize the market impact of the issuer's 
repurchases, thereby allowing the market to establish a security's 
price based on independent market forces without undue influence by the 
issuer. An efficient market generally promotes capital formation. 
Moreover, even with the proposed modification to the ``merger 
exclusion,'' SPAC issuers, similar to other issuers, would still be 
able to effect other repurchases (i.e., privately negotiated 
repurchases) and certain ordinary course Rule 10b-18 purchases 
following the announcement of a merger or covered transaction (subject 
to Regulation M's restricted period and any other applicable 
restriction) so long as the total amount of the issuer's Rule 10b-18 
purchases effected on any single day does not exceed the lesser of 25% 
of the security's four-week ADTV or the issuer's average daily Rule 
10b-18 purchases during the three full calendar months preceding the 
date of the announcement of the merger or other covered 
transaction.\107\ As such, we do not believe that the proposed 
modification to the ``merger exclusion'' would unfairly hinder a SPAC's 
ability to complete an acquisition or other covered transaction. In 
fact, by extending the ``merger exclusion'' to the time of the vote by 
the shareholders of the SPAC (and not just the vote by the target 
shareholders), the proposal would simply make the safe harbor 
unavailable to SPAC issuers when the incentive to engage in substantial 
repurchases to facilitate a corporate action is greatest.\108\
---------------------------------------------------------------------------

    \106\ As discussed above, because the benefit of a safe harbor 
is only appropriate during ``normal'' market conditions, and not 
where there is a heightened incentive to engage in substantial 
repurchase activity solely to facilitate a corporate action, we 
believe that extending the ``merger exclusion'' to the time of the 
vote by the shareholders of the SPAC (and not just the vote by the 
target shareholders) is warranted. See also supra note 80.
    \107\ See 17 CFR 240.10b-18(a)(13)(iv)(B)(1). See also 2003 
Adopting Release, 68 FR at 64955.
    \108\ Proposed Rule 10b-18(a)(13)(iv).
---------------------------------------------------------------------------

    The Commission has considered the proposed amendments in light of 
the standards cited in Section 23(a)(2) and believes preliminarily 
that, if adopted, they would not likely impose any significant burden 
on competition not necessary or appropriate in furtherance of the 
Exchange Act. We believe the proposed VWAP exception to the Rule's 
price condition, the proposed amendments to the Rule's opening purchase 
condition, and the proposed limitation of the general disqualification 
provision under the Rule might help to avoid undermining competition by 
increasing the likelihood that more issuers will be able to effect 
qualifying Rule 10b-18 repurchases within the safe harbor. In addition, 
we believe that the proposed modification to the ``merger exclusion'' 
in connection with a SPAC acquisition would have a minimal impact on 
competition as SPAC issuers, similar to other issuers, would still be 
able to effect other repurchases (i.e., privately negotiated 
repurchases) and certain ordinary course Rule 10b-18 purchases 
following the announcement of a merger or other acquisition. Moreover, 
Rule 10b-18 is a safe harbor rather than a mandatory rule, and as such, 
issuers choose whether or not to use it. Many issuers might be 
reluctant to repurchase without the safe harbor. Therefore, the safe 
harbor may provide increased liquidity to the marketplace from issuers 
that would not repurchase but for the safe harbor. Issuers also have 
the option to repurchase securities outside the Rule 10b-18 safe harbor 
conditions without raising a presumption of manipulation.

[[Page 4727]]

Moreover, the proposed version of the Rule 10b-18 safe harbor, like the 
current Rule, would apply to all issuers. Thus, we do not believe the 
proposed amendments would have a significant effect on competition 
because all issuers have the option of complying with the manner, 
volume, time and price conditions.
    The Commission requests comment on whether the proposed amendments, 
if adopted, would promote efficiency, competition, and capital 
formation. Commenters are requested to provide empirical data and other 
factual support for their views if possible.

VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \109\ we must advise the Office of 
Management and Budget as to whether the proposed regulation constitutes 
a ``major'' rule. Under SBREFA, a rule is considered ``major'' where, 
if adopted, it results or is likely to result in:
---------------------------------------------------------------------------

    \109\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C. and as a note to 5 U.S.C. 
601).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effect on competition, investment or 
innovation.
    If a rule is ``major,'' its effectiveness will generally be delayed 
for 60 days pending Congressional review. We request comment on the 
potential impact of the proposed amendments on the economy on an annual 
basis. Commenters are requested to provide empirical data and other 
factual support for their view to the extent possible.

IX. Regulatory Flexibility Act Certification

    Section 3(a) of the Regulatory Flexibility Act (``RFA'') \110\ 
requires the Commission to undertake an initial regulatory flexibility 
analysis of a proposed rule on small entities, unless the Commission 
certifies that the rule, if adopted, would not have a significant 
economic impact on a substantial number of small entities.\111\ 
Pursuant to Section 605(b) of the RFA, the Commission hereby certifies 
that the proposed amendments to Rule 10b-18, would not, if adopted, 
have a significant economic impact on a substantial number of small 
entities.
---------------------------------------------------------------------------

    \110\ 5 U.S.C. 603(a).
    \111\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    The proposed amendments are intended to clarify and modernize the 
safe harbor provisions. In particular, the proposal to modify the price 
condition is intended to provide issuers with greater flexibility to 
conduct their issuer repurchase programs within the safe harbor under 
conditions designed to reduce the potential for abuse. The proposal to 
limit the general disqualification provision is intended to provide 
issuers with additional flexibility to conduct their share repurchase 
programs in fast moving markets. At the same time, the proposals to 
modify the timing condition and the ``merger exclusion'' provision are 
intended to maintain reasonable limits on the safe harbor while 
furthering the objectives of Rule 10b-18. The Commission believes that 
the proposed amendments would impose negligible costs, if any, on 
issuers and would not, if adopted, have a significant impact on a 
substantial number of small entities. Based on Exchange Act Rule 0-10, 
a small issuer is one that on the last day of its most recent fiscal 
year had total assets of $5,000,000 or less. The Commission believes 
that the majority of issuers effecting repurchase programs are not 
small entities.\112\ Moreover, any costs related to complying with the 
proposed amendments to Rule 10b-18 would be assumed voluntarily because 
the Rule provides an optional safe harbor.
---------------------------------------------------------------------------

    \112\ The Commission's OEA estimates that, of the 2,218 issuers 
that announced repurchases during the years 2005 through 2008 (and 
that had total asset figures available), only 25 had assets below $5 
million. Source: Securities Data Company ``SDC'' database.
---------------------------------------------------------------------------

    We encourage written comments regarding this certification. The 
Commission requests that commenters describe the nature of any impact 
on small entities and provide empirical data to support the extent of 
such impact. In particular, the Commission requests comment on: (i) The 
number of small entities that would be affected by the proposed 
amendments to the Rule, (ii) the nature of any impact the proposed 
amendments would have on small entities and empirical data supporting 
the extent of the impact, and (iii) how to quantify the number of small 
entities that would be affected by or how to quantify the impact of the 
proposed amendments.

X. Statutory Basis and Text of Proposed Amendment

    The Rule amendments are being proposed pursuant to Sections 2, 3, 
9(a)(6), 10(b), 12, 13(e), 15, 15(c), 23(a) of the Exchange Act, 15 
U.S.C. 78b, 78c, 78i(a)(6), 78j(b), 78l, 78m(e), 78o, 78o(c), and 
78w(a).

List of Subjects in 17 CFR Part 240

    Brokers, Dealers, Issuers, Securities.

    For the reasons set forth in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for Part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise 
noted.
* * * * *
    2. Section 240.10b-18 is amended by:
    a. Revising the next to last sentence of the Preliminary Note 1;
    b. Revising the term ``Item 15(e)'' to read ``Item 16E'' in 
Preliminary Note 2;
    c. Revising paragraph (a)(5)(iii) and the introductory text of 
paragraph (a)(13)(iv);
    d. Adding paragraph (a)(14); and
    e. Revising paragraphs (b)(2)(i), (b)(3)(i) and (d).
    The addition and revisions read as follows:

Sec.  240.10b-18  Purchases of certain equity securities by the issuer 
and others.

* * * * *
    1. * * * Except as provided in paragraph (d)(2) of this section, 
failure to meet any one of the four conditions will remove all of the 
issuer's repurchases from the safe harbor for that day. * * *
* * * * *
    (a) * * *
    (5) * * *
    (iii) Is at least 20 round lots of the security and totals 150 
percent or more of the ADTV for that security or, in the event that 
ADTV data are unavailable, is at least 20 round lots of the security 
and totals at least one-tenth of one percent (.001) of the outstanding 
shares of the security, exclusive of any shares owned by any affiliate; 
Provided, however, That a block under paragraph (a)(5)(i), (ii), and 
(iii) of this section shall not include any amount a broker or dealer, 
acting as principal, has accumulated for the purpose of sale or resale 
to the issuer or to any affiliated purchaser of the issuer if the 
issuer or such affiliated purchaser knows or has reason to know that 
such amount was accumulated for such

[[Page 4728]]

purpose, nor shall it include any amount that a broker or dealer has 
sold short to the issuer or to any affiliated purchaser of the issuer 
if the issuer or such affiliated purchaser knows or has reason to know 
that the sale was a short sale.
* * * * *
    (13) * * *
    (iv) Effected during the period from the time of public 
announcement (as defined in Sec.  230.165(f) of this chapter) of a 
merger, acquisition, or similar transaction involving a 
recapitalization, until either the earlier of the completion of such 
transaction or the completion of the vote by target shareholders or, in 
the case of an acquisition or other covered transaction by a special 
purpose acquisition company (``SPAC''), the earlier of the completion 
of such transaction or the completion of the votes by the target and 
SPAC shareholders. This exclusion does not apply to Rule 10b-18 
purchases:
* * * * *
    (14) Rule 10b-18 VWAP purchase means a purchase effected at the 
volume-weighted average price (``VWAP'') by or on behalf of an issuer 
or an affiliated purchaser of the issuer that meets the conditions of 
paragraphs (b)(1), (b)(2), and (b)(4) of this section and the following 
criteria:
    (i) The purchase is for a security that qualifies as an ``actively-
traded security'' (as defined in Sec.  242.101(c)(1) of this chapter);
    (ii) The purchase is entered into or matched before the opening of 
the regular trading session;
    (iii) The execution price of the VWAP purchase is determined based 
on all regular way trades effected in accordance with the conditions of 
paragraphs (b)(2) and (b)(3) of this section that are reported in the 
consolidated system during the primary trading session for the 
security;
    (iv) The purchase does not exceed 10% of the security's relevant 
average daily trading volume;
    (v) The purchase is not effected for the purpose of creating 
actual, or apparent, active trading in or otherwise affecting the price 
of any security;
    (vi) The VWAP assigned to the purchase is calculated by:
    (A) Calculating the values for every regular way trade reported in 
the consolidated system during the regular trading session, except as 
provided in paragraph (a)(14)(iii) of this section, by multiplying each 
such price by the total number of shares traded at that price;
    (B) Compiling an aggregate sum of all values; and
    (C) Dividing the aggregate sum by the total number of trade 
reported shares for that day in the security that represent regular way 
trades effected in accordance with the conditions of paragraphs (b)(2) 
and (b)(3) of this section that are reported in the consolidated system 
during the primary trading session for the security; and
    (vii) The purchase is reported using a special VWAP trade modifier.
    (b) * * *
    (2) * * *
    (i) The opening regular way purchase reported in the consolidated 
system, the opening regular way purchase in the principal market for 
the security, and the opening regular way purchase in the market where 
the purchase is effected;
* * * * *
    (3) * * *
    (i) Does not exceed the highest independent bid or the last 
independent transaction price, whichever is higher, quoted or reported 
in the consolidated system at the time the Rule 10b-18 purchase is 
effected; Provided, however, that Rule 10b-18 VWAP purchases, as 
defined in paragraph (a)(14) of this section, shall be deemed to 
satisfy paragraph (b)(3)(i) of this section;
* * * * *
    (d) Other purchases. (1) No presumption shall arise that an issuer 
or an affiliated purchaser has violated the anti-manipulation 
provisions of section 9(a)(2) or 10(b) of the Act (15 U.S.C. 78i(a)(2) 
or 78j(b)), or Sec.  240.10b-5, if the Rule 10b-18 purchases of such 
issuer or affiliated purchaser do not meet the conditions specified in 
paragraph (b) or (c) of this section; and
    (2) A Rule 10b-18 purchase of an issuer or affiliated purchaser 
that meets the conditions specified in paragraph (b) or (c) of this 
section at the time the purchase order is entered but does not meet the 
price condition specified in paragraph (b)(3)(i) of this section at the 
time the purchase is effected due to flickering quotes shall remove 
only such purchase, rather than all of the issuer's other Rule 10b-18 
purchases, from the safe harbor for that day.

    Dated: January 25, 2010.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-1856 Filed 1-28-10; 8:45 am]
BILLING CODE 8011-01-P