WASHINGTON (CN) – The Securities and Exchange Commission plans to amend its rule that provides a safe harbor against claims of price manipulation to companies repurchasing their own common stock.
The changes to Rule 10b-18 are meant to recognize technological advancements made since the rule was adopted in 1982.
The commission proposes to eliminate the general exclusion rule under which any purchase of its own common stock by an issuer falls out of the safe harbor if the purchase violates any one of four manner, timing, price, and volume conditions specified in the rule. The speed of electronic markets have made it possible for a purchase order to be entered into the system that is within the safe harbor provisions to fall out by the time the order is actually executed. Under the proposed changes, the commission would look at the conditions just before the trade was executed, and as it was executed, to determine the propriety of the trade.
The commission states that its most important concern is the effect of automatic volume weighted average price systems (VWAP), which buy and sell a particular stock based on the price of each transaction multiplied by the number of shares traded in each transaction divided by the total number of shares traded in a day. The buy and sell price are programmed into the trading system without respect to the quoted price of a stock at the time of execution and may violate the price and volume constraints of Rule 10b-18. The commission requests input from the public on VWAPs and application of the rule to VWAP trades.
The rule currently forbids an issuer from entering the opening bid for its common stock in the principal market in which it is traded. The rule does not account for pre-and post-market electronic auctions, or secondary trading on other exchanges. The commission proposes to extend the opening bid exclusion to all pre-, post, and secondary markets.
The price restriction under the rule requires an issuer to buy its stock at a price that is no higher than the highest independent bid or last independent transaction price, whichever is higher. This effectively precludes VWAP transactions, which ignore the chronology of price in their calculations. The commission’s proposal would allow VWAP transactions if the automated “buy” price is set before the regular trading session begins and the price is based on a full day of trading volume. In addition, only stock qualifying under Regulation M-which sets certain minimum market capitalizations, trade volumes and float value of actively traded stocks-could be traded by a VWAP system and retain protection under the safe harbor.
All public comments on the proposed Rule 10b-18 changes must be received by March 1.