SEPTEMBER 23, 2008

SEC TAKES EMERGENCY ACTION TO RELAX ISSUER STOCK REPURCHASE CONSTRAINTS

The SEC’s commissioners concluded late last week that “there continues to exist the potential of sudden and excessive fluctuations of securities prices generally and disruption in the functioning of the securities markets that could threaten fair and orderly markets.” Based on this conclusion, reached on September 18, the SEC temporarily suspended the timing requirement and modified the volume conditions that constrain issuer stock repurchases.

Issuer Stock Repurchases

Securities Exchange Act of 1934 Rule 10b-18 is a safe harbor that governs issuer stock repurchases. Generally, issuers will only repurchase their own stock if they believe they can rely on the protection of Rule 10b-18. As a condition to the issuer relying on Rule 10b-18, a number of timing and volume conditions are imposed on the issuer’s stock repurchases.

As a result of the SEC’s Emergency Order, Release No. 34-58588 (the Emergency Order), the following timing and volume conditions for stock repurchases have been temporarily modified.

Prior to this Emergency Order, Rule 10b-18 issuer repurchases could not be:

  • the opening purchase (regular way) reported in the consolidated system;
  • effected during the 10-minute window for securities that have an Average Daily Trading Volume (ADTV) value of $1 million or more and a public float of $150 million or more:
    • before the scheduled close of the primary trading session in the security’s principal market and
    • before the scheduled close of the primary trading session in the market where the purchase was effected;
  • effected during the 30-minute window for all other securities:
    • before the scheduled close of the primary trading session in the security’s principal market and
    • before the scheduled close of the primary trading session in the market where the purchase was effected;1 and
  • effected by or on behalf of the issuer and any affiliated purchasers on any single day where the purchases exceed 25 percent of the ADTV for that security.2

Under this Emergency Order but only during the temporary window when it is in effect, issuers need not comply with the abovementioned timing conditions. Further, the volume condition has been modified temporarily so that such purchases must not exceed 100 percent of the ADTV rather than the abovementioned 25 percent. The SEC believes that these changes will provide issuers the additional flexibility and certainty necessary to provide an important source of liquidity during such times of market volatility.

This Emergency Order went into effect at 12:01 A.M. EDT on Friday, September 19, 2008 and will terminate at 11:59 P.M. EDT on Thursday, October 2, 2008, unless further extended by the SEC.

While these conditions are modified pursuant to this Emergency Order, issuers that comply with all of the conditions of the safe harbor, as modified, will be deemed not to have violated Section 9(a)(2) of the Exchange Act or Rule 10b-5 of the Exchange Act. Although the volume and timing conditions have been modified, please note that the manner and price conditions (paragraphs (b)(1) and (b)(3)) of Rule 10b-18 have not been modified. Please click here to review the entire Emergency Order Release.


(1) See Paragraphs (b)(2)(i), b(2)(ii) and (b)(2)(iii) of Rule 10b-18.

(2) See Paragraph (b)(4) of Rule 10b-18.