Quick Answer
The issuer repurchase safe harbor protects an issuer and its affiliated purchasers from manipulation liability based solely on the time, price or amount of their repurchases, or the number of brokers used. Compliance is voluntary, the four conditions are tested daily, and failing any one removes all of that day's repurchases.
This is a safe harbor, not a rule of conduct. Missing a condition costs the protection for that day, and the rule says plainly that no presumption of violation arises from the miss.
What Does the Safe Harbor Protect, and On What Terms?
Repurchases meeting the four conditions shall not be deemed to have violated the anti-manipulation provisions of the Exchange Act's statutory manipulation prohibition or its antifraud statute, or the general antifraud rule, solely by reason of the time, price, or amount of the purchases, or the number of brokers or dealers used in connection with them.
The rule's own preliminary note adds four points about how it works:
- Compliance with the section is voluntary.
- 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.
- The safe harbor is not available for repurchases that, although made in technical compliance with the section, are part of a plan or scheme to evade the federal securities laws.
Exam Tip: Gotchas
- The protection is limited to four grounds. It covers a manipulation claim resting solely on time, price, amount, or the number of brokers used, and it protects nothing else about the repurchase.
- The daily test is all or nothing for that day. One failed condition removes every repurchase made that day, not merely the offending trade.
Which Purchases Count as Repurchases Under the Rule?
A covered purchase is a purchase, or any bid or limit order that would effect such a purchase, of an issuer's common stock, or an equivalent interest, including a unit of beneficial interest in a trust or limited partnership or a depository share, by or for the issuer or any affiliated purchaser, including riskless principal transactions.
Seven categories of purchase are excluded:
| Excluded purchase | Detail |
|---|---|
| Distribution restricted period | Effected during the applicable restricted period of a distribution subject to Regulation M's issuer and selling security holder rule |
| Issuer plan through an independent agent | Effected by or for an issuer plan by an agent independent of the issuer |
| Fractional shares | Effected as a fractional share purchase, a fractional interest in a security evidenced by a script certificate, order form, or similar document |
| Pending business combination | Effected from the time of public announcement of a merger, acquisition, or similar transaction involving a recapitalization, until the earlier of the completion of that transaction or the completion of the vote by target shareholders |
| Issuer purchases during a third-party tender offer | Effected under the Commission's rule on issuer purchases during a third-party tender offer |
| Issuer tender offers | Effected under a tender offer that is subject to, or specifically excepted from, the issuer tender offer rule |
| Third-party tender offers | Effected under a tender offer subject to the Exchange Act's third-party tender offer provisions and the rules thereunder |
The business-combination exclusion has its own carve-back. It does not apply to purchases effected during the transaction where the consideration is solely cash and there is no valuation period, or where all three of these hold:
- Total daily volume of covered purchases does not exceed the lesser of 25% of the security's four-week average daily trading volume (ADTV) or the issuer's average daily covered purchases during the three full calendar months preceding the date of the announcement of the transaction.
- The issuer's block purchases under the safe harbor's volume condition do not exceed the average size and frequency of its block purchases under that condition during those three full calendar months.
- The purchases are not otherwise restricted or prohibited.
Exam Tip: Gotchas
- A bid or limit order counts even if it never executes. The definition reaches any bid or limit order that would effect a covered purchase.
- The business-combination window closes on the earlier of two events. Completion of the transaction and completion of the target shareholder vote both end it, and the earlier one controls.
What Are the Four Daily Conditions?
| Condition | What it requires |
|---|---|
| One broker or dealer | Purchases must be effected from or through only one broker or dealer on any single day. The condition does not apply to purchases not solicited by or on behalf of the issuer or its affiliated purchasers. Where purchases are effected by or for more than one affiliated purchaser, or the issuer and one or more affiliated purchasers, on a single day, the issuer and all affiliated purchasers must use the same broker or dealer |
| Time of purchases | Purchases must not be the opening (regular way) purchase reported in the consolidated system; not effected during the 10 minutes before the scheduled close of the primary trading session in the principal market and the 10 minutes before the scheduled close in the market where the purchase is effected, for a security with an ADTV value of $1 million or more and a public float value of $150 million or more; and not effected during the 30 minutes before those two scheduled closes for all other securities |
| Price of purchases | Purchases must be effected at a price that does not exceed the highest independent bid or the last independent transaction price, whichever is higher, quoted or reported in the consolidated system at the time. For securities whose bids and prices are not in the consolidated system, the same higher-of test applies to prices displayed and disseminated on any national securities exchange or any inter-dealer quotation system that displays at least two priced quotations for the security. For all other securities, no higher than the highest independent bid obtained from three independent dealers |
| Volume of purchases | Total daily volume of purchases by or for the issuer and any affiliated purchasers must not exceed 25 percent of the ADTV for that security. Once each week, in lieu of purchasing under that limit for the day, the issuer or an affiliated purchaser may effect one block purchase if no other covered purchases are effected that day and the block purchase is not included when calculating the security's four week ADTV |
Two provisos qualify the first two conditions.
Where purchases are effected on the issuer's behalf by a broker-dealer that is not an electronic communication network (ECN) or other alternative trading system (ATS), that broker-dealer can access ECN or other ATS liquidity to execute repurchases on behalf of the issuer or any affiliated purchaser on that day without breaking the one-broker condition.
Purchases may also be effected following the close of the primary trading session until the termination of the period in which last sale prices are reported in the consolidated system.
Those purchases must be effected at prices that do not exceed the lower of the closing price of the primary trading session in the principal market and any lower bids or sale prices subsequently reported in the consolidated system, and all of the section's conditions must be met.
During that period the issuer may use one broker or dealer different from the one it used during the primary trading session. Its purchase may not be the opening transaction of the session following the close of the primary trading session.
Exam Tip: Gotchas
- The blackout applies in two markets at once. The 10-minute and 30-minute windows are measured before the scheduled close in the principal market and in the market where the purchase is effected.
- The 10-minute window needs both size tests. A security must have an ADTV value of $1 million or more and a public float value of $150 million or more, or it falls into the 30-minute window.
- The block allowance is weekly and exclusive. It is available once each week, and only where no other covered purchases are effected that day.
Which Definitions Drive the Conditions?
| Term | Definition |
|---|---|
| ADTV | The average daily trading volume reported for the security during the four calendar weeks preceding the week in which the purchase is to be effected |
| Principal market | The single securities market with the largest reported trading volume for the security during the six full calendar months preceding the week in which the purchase is to be effected |
| Affiliated purchaser | A person acting, directly or indirectly, in concert with the issuer for the purpose of acquiring the issuer's securities; or an affiliate who, directly or indirectly, controls the issuer's purchases of those securities, whose purchases the issuer controls, or whose purchases are under common control with the issuer's |
| Purchase price | The price paid per share as reported, exclusive of any commission paid to a broker acting as agent, or commission equivalent, mark-up, or differential paid to a dealer |
| Market-wide trading suspension | A market-wide trading halt of 30 minutes or more that is either imposed under the rules of a national securities exchange or national securities association in response to a market-wide decline during a single trading session, or declared by the Commission under its emergency trading-suspension authority |
The affiliated purchaser definition carries a two-part proviso. It does not include a broker, dealer, or other person solely by reason of that person effecting covered purchases on behalf of the issuer or for its account, and it does not include an officer or director of the issuer solely by reason of that person's participation in the decision to authorize those purchases.
A block is a quantity of stock that meets any one of three tests:
- Has a purchase price of $200,000 or more; or
- Is at least 5,000 shares and has a purchase price of at least $50,000; or
- Is at least 20 round lots of the security and totals 150 percent or more of the trading volume for that security or, where trading volume data are unavailable, is at least 20 round lots and totals at least one-tenth of one percent of the outstanding shares, exclusive of any shares owned by any affiliate.
No branch of that definition includes an amount a broker or dealer, acting as principal, has accumulated for the purpose of sale or resale to the issuer or to any affiliated purchaser, where the issuer or that affiliated purchaser knows or has reason to know it was accumulated for that purpose.
Nor does any branch include an amount a broker or dealer has sold short to the issuer or to any affiliated purchaser, where the issuer or affiliated purchaser knows or has reason to know the sale was a short sale.
A riskless principal transaction is one in which a broker or dealer, after having received an order from an issuer to buy its security, buys the security as principal in the market at the same price to satisfy that order.
The issuer's buy order must be effected at the same price per share at which the firm bought the shares, exclusive of any explicitly disclosed markup or markdown, commission equivalent, or other fee. Only the first leg of the transaction, the firm's purchase in the market as principal, is reported under the rules of a self-regulatory organization or under the Exchange Act.
The firm must also hold written policies and procedures to assure, at a minimum, three things:
- The issuer's buy order was received prior to the offsetting transaction.
- The offsetting transaction is allocated to a riskless principal account or the issuer's account within 60 seconds of the execution.
- Supervisory systems produce records that enable an accurate and ready reconstruction, in a time-sequenced manner, of all orders effected on a riskless principal basis.
Exam Tip: Gotchas
- The two average-volume windows are different lengths. This rule's ADTV runs four calendar weeks; its principal market runs six full calendar months. Neither matches Regulation M's own measuring windows.
- Commissions and mark-ups are stripped out of the purchase price. They therefore count toward neither the block thresholds nor the price condition.
- An officer who votes for a buyback is not thereby an affiliated purchaser. The exclusion is written "solely by reason of" that participation.
What Changes After a Market-Wide Trading Suspension?
The four conditions still apply to purchases effected during a trading session following the imposition of a market-wide trading suspension, with two changes:
- The time of purchases condition does not apply, either from the reopening of trading until the scheduled close of trading on the day the suspension is imposed, or at the opening of trading on the next trading day until the scheduled close of trading that day if a suspension was in effect at the close of trading on the preceding day.
- The volume condition is modified so that purchases must not exceed 100 percent of the ADTV for that security.
Finally, the rule declines to draw an inference from failure. No presumption shall arise that an issuer or affiliated purchaser has violated the statutory manipulation prohibition, the antifraud statute or the general antifraud rule because its covered purchases did not meet the conditions of the four daily conditions or the alternative conditions.
Exam Tip: Gotchas
- The alternative conditions relax two of the four, not all four. The one-broker and price conditions continue to apply after a market-wide trading suspension.
- Falling outside the safe harbor raises no presumption of a violation. The purchases are then judged on ordinary manipulation principles.
What Should You Check on Exam Day?
- Test each of the four conditions for the day in question, and treat a single failure as removing every repurchase made that day.
- Check ADTV value and public float value together before choosing the 10-minute blackout over the 30-minute one.
- Apply the price condition as the higher of the highest independent bid or the last independent transaction price, then check where the security is quoted.
- On a block, test the three thresholds separately, then check the weekly limit and the no-other-purchases condition.
- After a market-wide trading suspension, raise the volume limit to 100 percent of ADTV and drop the time condition only from the reopening, or the next day's open if it was in effect at the close, to the scheduled close.