Risk & Compliance

SEC Extends Buyback Safe Harbor

The little-noticed stock repurchase provision has been extended by the SEC.
Stephen TaubOctober 2, 2008

When the Securities and Exchange Commission issued restrictions on short selling on September 18, it also modified rules related to stock repurchases, something that affects corporate issuers directly. However, at the time, the short-selling announcement grabbed the headlines, and the buyback provision went relatively unnoticed.

On Wednesday, the SEC extended the short-selling restrictions, and packaged along with the extension is the same repurchase provision. Once again, the SEC has provided companies with more flexibility regarding the timing and volume of their repurchases.

“Issuer repurchases can represent an important source of liquidity during these times of market volatility,” the SEC stated. Therefore extending the earlier order, “is in the public interest and necessary to maintain fair and orderly securities markets and for the protection of investors.”

After issuing its first order, the SEC noted that historically, issuers generally have been reluctant to make repurchases without knowing that their stock buybacks meet safe harbor conditions. To help issuers feel secure, the commission temporarily altered the timing and volume conditions related to the safe harbor provision, to “provide additional flexibility and certainty to issuers that consider executing repurchases during the current market conditions.”

Specifically, the SEC modified the purchase and volume conditions to say that the amount of purchases must not exceed 100 percent of the average daily trading volume for the security. “All other provisions of Exchange Act Rule 10b-18, including the manner and price of purchase conditions, are not altered by this order,” the SEC stated.

According to the Securities Lawyer’s Deskbook, to come within the safe harbor, an issuer’s repurchases must satisfy (on a daily basis) each of the section’s four conditions. Failure to meet any one of the four conditions will remove all of the issuer’s repurchases from the safe harbor for that day. According to investor information website Investopedia, the issuer or affiliate must purchase all shares from a single broker or deal during a single day.

An issuer with an average trading volume less than $1 million per day, or a public float value below $150 million, is unable to trade within the last 30 minutes of trading. Companies with higher average-trading-volume or public float value can trade up until the last 10 minutes. The issuer must repurchase at a price that does not exceed the highest independent bid or the last transaction price quoted. The issuer can’t purchase more than 25 percent of the average daily volume.