2 Responses to “Blogroll addition: Jim Hamilton & Securities Regulation”

1. Louis says:

   September 19, 2008 at 7:42 pm

   Thks for bringing this blog to my attention. The part I particularly don’t understand is:

   In another emergency order, the SEC temporarily eased restrictions on the ability of securities issuers to repurchase their securities based on its determination that issuer repurchases can represent an important source of liquidity during times of market volatility.

   How repurchasing its shares can represent a source of liquidity? Repurchasing certainly protects or increases the shares price but not the liquidity. I read the actual Order via the link on that blog thinking that what was in fact meant was that an issuer could interrupt a share buy back program but this is not it. I just don’t understand.

2. jiHymas says:

   September 20, 2008 at 10:59 am

   I’ll take a stab at it … but remember that I am not the world’s greatest living expert on US Securities Regulation!

   The SEC allows issuers to buy back their own stock, but doesn’t want any price manipulation. Therefore, they established Rule 10b-18 in 2003, which sets out the rules whereby a company may repurchase its stock as long as there is a clear business purpose in doing so.

   If there is no clear business purpose in the buy-back, if the purpose of the buy-back is to mislead and defraud, then Rule 10b-18 is out the window and having followed it is no defense.

   Two of Rule 10b-18’s provisions have to do with timing and price:

   The timing condition restricts the periods during which the issuer may bid for or purchase its common stock. This condition excludes from the safe harbor purchases at the opening and during the last half hour of trading because market activity at such times is considered to be a significant indicator of the direction of trading, the strength of demand, and the current market value of the security.15 Therefore, where there is no independent opening transaction on a given trading day, the issuer is precluded from making purchases under the safe harbor for that day.
   …
   The price condition specifies the highest price an issuer may bid or pay for its common stock.16 Rule 10b-18’s current price limitations vary depending on whether the security is a reported, exchange-traded, Nasdaq, or other security, and whether the bid or purchase is effected on an exchange.17 The price condition is intended to prevent the issuer from leading the market for the security through its repurchases by limiting the issuer to bidding for or buying its security at a price that is no higher than the highest independent published bid or last independent transaction price. As such, the price condition uses an independent reference price that has not been set or influenced by the issuer but, instead, is based on independent market forces.
   …
   Under the current volume condition, an issuer may effect daily purchases in an amount up to 25 percent of the average daily trading volume in its shares (the “25% volume limitation”).20 However, the volume limitation does not include an issuer’s block purchases. Moreover, an issuer’s block purchases are not included in determining a security’s average daily trading volume (ADTV).

   The amendments:

   • Eliminate the timing condition – issuers may now purchase at the opening and in the last half hour
   • Increase the volume cap – they may now purchase 100% of the ADTV
   • Relax the price condition, so that, for instance, if they buy at the opening and that turns out to be the day’s highest price, they’re still OK

   These amendments will increase liquidity because they give the company more leeway to step in with a bid when there is panic selling in a thin market. One thing that is possible now that was not possible before is … say you’re a company with a $20 stock. You can now give your broker a permanent order to buy up to 1-million shares at $15 … a regular GTC order just like anybody can put in at their discount broker’s, albeit with more zeroes.