Division of Market Regulation:
Answers to Frequently Asked Questions Concerning Rule 10b-18 ("Safe Harbor" for Issuer Repurchases)

Answers to these frequently asked questions were prepared by and represent the views of the staff of the Division of Market Regulation (staff). They are not rules, regulations, or statements of the Securities and Exchange Commission (Commission). Further, the Commission has neither approved nor disapproved these interpretative answers. For Further Information Contact: James Brigagliano, Assistant Director, Joan Collopy and Elizabeth Sandoe, Special Counsels, or Elizabeth Marino, Attorney, in the Office of Trading Practices, Division of Market Regulation, at (202) 942-0772.

I. Introduction

Rule 10b-18, which was adopted in 1982, provides a voluntary "safe harbor" from liability for manipulation under Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934 (Exchange Act), and Rule 10b-5 under the Exchange Act, when an issuer or its affiliated purchaser bids for or purchases shares of the issuer's common stock in accordance with the Rule 10b-18's manner, timing, price, and volume conditions. ¹ On November 10, 2003, the Commission adopted amendments to Rule 10b-18 in order to simplify and update the safe harbor provisions in light of market developments since Rule 10b-18's adoption. ² Among other things, the amendments allow issuers of actively traded securities to stay in the market longer at the end of the trading day, extend the safe harbor to certain after-hours repurchases, apply a uniform pricing condition for all issuers, increase the volume limit following a market-wide trading suspension, modify the block exception, and clarify the scope of the safe harbor with regard to mergers, acquisitions, and similar transactions.

The staff has compiled the following questions and answers regarding Rule 10b-18 to assist in the application and operation of the safe harbor. The questions and answers do not necessarily contain a discussion of all material considerations necessary to reach the conclusions stated. Consequently, these questions and answers are intended to provide general guidance, but do not constitute formal interpretations of Rule 10b-18. The facts and circumstances relating to a particular transaction may vary and the staff notes that even slight variations may cause different answers. The Commission is not bound by these statements and may interpret Rule 10b-18 as it deems necessary or appropriate in the public interest for the protection of investors.

The Division may update these questions and answers periodically by marking each modified or new question and answer as " modified" or " new."

II. Answers to Frequently Asked Questions- Coverage

Question 1: If an issuer executes purchases that are in technical compliance with the safe harbor conditions, will that protect the issuer from all liability for such purchases?

Answer: No. Some issuer repurchase activity that meets the safe harbor conditions may still violate the anti-fraud and anti-manipulation provisions of the Exchange Act. For example, Rule 10b-18 confers no immunity from possible Rule 10b-5 liability where the issuer engages in the repurchases while in possession of material, non-public information concerning its securities, or where purchases are part of a plan or scheme to evade the federal securities laws. Therefore, regardless of whether an issuer's repurchases technically satisfy the conditions of Rule 10b-18, the safe harbor would not be available if the repurchases are fraudulent or manipulative, when all the facts and circumstances surrounding the repurchases are considered ( i.e. , facts and circumstances in addition to the volume, price, time, and manner of the repurchases). For example, the safe harbor would not be available if the repurchases are made as part of a manipulative scheme to influence the closing price of a company's securities, or are done to mask other motives, such as inflating or manipulating short-term earnings.

Question 2: safe harbor of Rule 10b-18 ..[applies to common stock only]
Question 3: Is the safe harbor available for an issuer who effects both open market and privately negotiated repurchases on the same day? Answer: Yes.......

Question 4: Is the Rule 10b-18 safe harbor available to an issuer who instructs its broker-dealer to effect purchases in compliance with the safe harbor if the purchases fail to satisfy the conditions of the Rule?  Answer: No. To come within the safe harbor the purchases must satisfy the Rule's manner, timing, price, and volume conditions. Failure to meet any one of the four conditions will disqualify the issuer's purchases from the safe harbor for the day .

Question 6: Is the safe harbor available to an issuer that effects Rule 10b-18 purchases of its common stock throughout the day in accordance with the safe harbor conditions, but effects an open market purchase (otherwise eligible for the safe harbor) of its common stock at the end of the day outside the safe harbor limitations?

Answer: No. To come within the safe harbor, an issuer's repurchases must satisfy (on a daily basis) each of Rule 10b-18's four conditions. Failure to meet any one of the four conditions removes all of the issuer's repurchases from the safe harbor for that day.

Question 7: Is compliance with Rule 10b-18 the exclusive means by which issuers may repurchase its stock in the market without engaging in manipulation? Answer: No. Rule 10b-18 does not mandate the terms under which an issuer may repurchase its shares without engaging in manipulation. Rather, Rule 10b-18 sets forth conditions with which issuers must comply in order to obtain a safe harbor from liability for manipulation. Paragraph (d) of Rule 10b-18 expressly provides that there is no presumption of manipulation simply because the issuer's purchases do not satisfy the Rule's conditions.
Question 8: two separate classes of common stock...

Question 9: If the issuer repurchases shares in a privately negotiated (off-market) transaction, are these shares included in its 25% ADTV limit for that day?
Answer: No. Rule 10b-18 does not cover privately negotiated (off-market) repurchases, nor are these shares counted in an issuer's daily volume limitation .

Question 10: Is the safe harbor available for repurchases of OTCBB and Pink Sheet securities ? Answer: Yes.

Question 11: ipo's

Question 12: Are Nasdaq Small Cap, OTCBB, and Pink Sheet securities reported in the "consolidated system" for purposes of applying Rule 10b-18's price condition?

Answer: Of the three, only Nasdaq Small Cap securities are reported in the "consolidated system" ( i.e. , a 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 a national market system plan). Bids and last sale prices for OTCBB and Pink Sheet securities are displayed and disseminated on an "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. For all other eligible securities, the issuer would need to look to the highest independent bid obtained from three independent dealers ( i.e. , the "three quote rule").

Question 13: Is the Rule 10b-18 safe harbor 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?

Answer: Accelerated share repurchase plans and forward contracts are private (off-market) transactions. Therefore, they are not eligible for the Rule 10b-18 safe harbor, which applies only to open market purchases . Moreover, the Rule 10b-18 safe harbor also is not available for the broker's covering transactions, as these transactions are not agency or riskless principal trades effected on behalf of the issuer.

Merger Exclusion

Question 14 to Question 22:  

Riskless Principal Transactions

Question 23: If a broker-dealer receives an order from an issuer to repurchase the issuer's common stock in the open market within the safe harbor limitations, can the broker purchase shares in the open market at $10.10 and resell them to the issuer at $10.12 and still be within the safe harbor? Answer: No. The safe harbor is available only for riskless principal transactions where both legs of the transaction are effected at the same price.

Single Broker or Dealer Condition

Question 25: A broker or dealer contacts an issuer to offer stock shortly after the issuer announces the initiation of a repurchase program. The broker or dealer is not acting as the issuer's agent for the repurchase program. Can the transaction between the issuer and broker or dealer comply with Rule 10b-18's single broker or dealer condition even though the issuer has already retained another broker to effect Rule 10b-18 purchases that day?

Answer: Rule 10b-18 requires that the issuer use only one broker or dealer for purchases of its stock on a single day (the "single broker or dealer" condition). This condition, however, does not apply to purchases that are not solicited by or on the behalf of the issuer . An issuer may purchase from any number of brokers or dealers in transactions not involving a solicitation by the issuer. Although the term "solicited" is not defined in the Rule, disclosure and announcement of a repurchase program would not necessarily cause subsequent purchases to be considered solicited. Whether a transaction has been solicited necessarily depends on the facts and circumstances of each case. An issuer must make all its solicited purchases through the same broker or dealer on a given day in order to comply with the "single broker or dealer" condition.

Timing Condition

Question 26: The amended timing limitation applies an ADTV value test and a public float value test in determining how long an issuer must be out of the market before the scheduled close of trading. How does an issuer calculate its ADTV value and its public float value?

Answer: In calculating the dollar value of ADTV, any reasonable and verifiable method may be used. For example, it may be derived from multiplying the number of shares ( i.e. , publicly reported for a security during the four calendar weeks preceding the week in which the Rule 10b-18 purchase is effected) by the price in each trade, or from multiplying each day's total volume of shares by the closing price on that day. "Public float value" ( i.e., the aggregate market value of common equity securities held by non-affiliates of the issuer) is to be determined in the manner set forth on the front page of Form 10-K, even if the issuer of such securities is not required to file Form 10-K. For reporting issuers, the public float value should be taken from the issuer's most recent Form 10-K or based upon more recent information made available by the issuer.

Question 27: Is the safe harbor available for issuer repurchases effected after the close of the regular trading session? [note by micro-does this apply to consolidated system only]

Answer: Yes. A limited safe harbor is available for Rule 10b-18 repurchases effected after the close of the primary trading session until the termination of the period in which last sale prices are reported in the consolidated system. [note by micro-as noted buy sunny- only Nasdaq smallcaps are in such] The Rule 10b-18 purchase must not be the opening transaction of the after-hours trading session, and must be made at a price that does not exceed the lower of the closing price of the primary trading session in the principal market for the security and any lower bid or sale prices subsequently reported in the consolidated system. The issuer must also stay within the Rule's volume limitation, but may use a different broker or dealer to effect after-hours purchases from that used for purchases during the primary trading session.

Price Condition Question 28 to 31 Nasdaq only?

Volume Condition

Question 32: How has the volume condition changed under the amended Rule 10b-18?

Answer: Under the amended Rule 10b-18, an issuer's total repurchases on any single day, including its block-size purchases, must satisfy the Rule's 25% ADTV volume limitation. However, an issuer can include its block-size purchases when calculating its security's four-week ADTV . As amended, Rule 10b-18 also provides issuers with a choice when making any particular block purchase. Either the block purchase must comply with the 25% ADTV volume condition, like any other repurchase, or the block purchase need not comply with the volume condition, but the issuer can make no other repurchases on that day and all other block purchases effected during that week must comply with the 25% volume condition.

Question 33: An issuer's 25% ADTV limit on a particular day is 25,000 shares. If the issuer purchases 10,000 shares, can the issuer also buy a block of 15,000 shares on the same day and still fit within the safe harbor for that day? Answer: Yes, as long as the issuer did not purchase any more of its shares that day, the issuer would still be within its 25% ADTV limit of 25,000 for that day.

Question 34 : If an issuer relies on the "one block per week" exception, would the issuer be able to include the block in its four-week ADTV calculation? Answer: No. An issuer must deduct those shares from its four-week ADTV calculation.

Question 35: An issuer purchases a block on Friday relying on the "one block per week" exception to the volume condition. Is the safe harbor available to that issuer the following Monday, if the issuer purchases a block that Monday, in lieu of purchasing under the 25% ADTV limit? Answer: Yes. The "one block per week exception" applies to a calendar week. Thus, the "one block per week" exception would be available for the block purchased on Friday and the block purchased the following Monday, provided no other Rule 10b-18 purchases are made the following Monday, and all other conditions under Rule 10b-18 are met.

Question 36: If no trading occurs in an issuer's common stock for one or more trading days during the four calendar weeks preceding the week in which the Rule 10b-18 repurchase is effected, how should the issuer's ADTV in its shares be calculated ...?

Question 38: An issuer contacts a broker-dealer who owns a large amount of stock not constituting a block. The issuer is aware that the broker-dealer owns shares not amounting to a block. Can the broker-dealer purchase additional stock to create a block in order to take advantage of the "one block per week" exception?

Answer: No. The volume limitation cannot be avoided by having the broker-dealer purchase additional stock to meet the block definition. The block definition provides that a block shall not include any amount that a broker or dealer, acting as principal, has accumulated for the purpose of sale or resale to the issuer, if the issuer knows or has reason to know that such amount was accumulated for such purpose.

Question 39: A market maker acquires 2,000 shares of an issuer's common stock in market making activities during one week. The following week, it acquires another 3,000 shares. Can the market maker offer a 5,000 share block to the issuer?

Answer: The Rule 10b-18 definition of "block" excludes any amount that a broker or dealer, acting as principal, has accumulated for the purpose of sale or resale to the issuer if the issuer knows or has reason to know that the market maker had accumulated the block for the purpose of reselling it to the issuer. Therefore, the issuer could not avoid the volume limitation by treating the purchase as a block.

¹ 17 CFR 240.10b-18. See also Securities Exchange Act Release No. 19244 (November 17, 1982), 47 FR 53333, 53334 (November 26, 1982).

² See Securities Exchange Act Release No. 48766 (November 10, 2003), 68 FR 64952 (November 17, 2003) (also available at http://www.sec.gov/rules/final/33-8335.htm ).

http://www.sec.gov/divisions/marketreg/r10b18faq0504.htm