SEC Rule 10b-18 sets the requirements for corporate stock buybacks and the rule’s “safe harbor,” which allows companies to purchase their shares in the open market without concern that their activities could later be deemed to be manipulative under the law. One of the requirements of the Rule 10b-18 safe harbor is that brokers buying stock for an issuer must buy at a price that is no greater than the higher of the last independent bid price or the last sale price.
Recently issues around corporate stock buybacks have received increased attention, particularly when it comes to the market impact of buybacks and their ability to create long-term value for companies.
In March, the Investors Exchange LLC (“IEX”) filed a petition for rulemaking with the SEC to modernize Rule 10b-18 to allow executions priced at the midpoint of the NBBO to qualify for the rule’s safe harbor treatment; such executions are currently not an available option for corporate buyback orders.
Issuers effecting buybacks typically execute large orders over multiple days, with their executing brokers using “10b-18 configured algorithms” to facilitate their orders. The current rule often results in the posting of outsized orders on the bid, and in turn, the leakage of information about the issuer’s transaction. At the same time, such passive orders are also prone to “adverse selection” or crossing the spread (i.e., chasing other aggressive buyers), where a sale is executed at the offer, again indicating the presence of a large buy order.
As a result, Clearpool believes that the current Rule 10b-18 restrictions result in scenarios where information leakage and adverse selection deliver inferior execution quality. The restrictions inhibit broker-dealers from providing the best execution possible for their corporate clients and make it more expensive at the end of the day for companies to effect repurchases, ultimately impacting investors in those companies’ stocks.
We believe modernizing rules around the Rule 10b-18 safe harbor and allowing midpoint executions would allow issuers (and the brokers acting on their behalf) to effectively execute corporate buybacks with lower impact.
As an independent agency broker-dealer, Clearpool has an obligation to deliver best execution to its clients. We believe there is a need for the SEC to review the current trading rules surrounding buybacks, which have become antiquated as a result of advancements in electronic trading since the rules were adopted.
In June, SEC Commissioner Jackson gave a thoughtful speech raising several concerns regarding the current state of corporate buybacks and executives’ incentives to create long-term value. As Commissioner Jackson noted, Rule 10b-18 has not undergone any significant change in many years, despite significant changes to the ways companies choose to execute buybacks.
Consistent with recent calls for the SEC to review its rules and regulations around corporate buybacks, modernizing Rule 10b-18 in response to increased buyback volume and advancements in technology will ultimately benefit investors and the market as a whole.