I had really hoped that we might get a reprieve from the often unwarranted attention of legislators and policymakers on corporate share repurchases that has persisted for several years now, but the topic has come up yet again in a White House Executive Order that was issued last week. The Executive Order is titled “Prioritizing the Warfighter in Defense Contracting,” and it is mainly focused on the performance of defense contractors, but it notes that “[m]ajor defense contractors will no longer conduct stock buy-backs or issue dividends at the expense of accelerated procurement and increased production capacity.” The Executive Order goes on to state:

(d) The Chairman of the Securities and Exchange Commission shall consider whether to adopt amended regulations governing stock buy-backs under Rule 10b-18 that would prohibit use of the relevant safe harbor for defense contractors of the type identified by the Secretary pursuant to section 3 of this order.

If the SEC were to act on this directive, it would represent an unprecedented change to Rule 10b-18, in that the availability of the safe harbor would be conditioned on something other than the notion of providing protection from market manipulation claims in connection with share repurchases. It is unclear what impact such a change would actually have on the covered issuers, because Rule 10b-18 simply provides a non-exclusive safe harbor from liability for manipulation under Section 9(a)(2) of the Exchange Act and Rule 10b-5 under the Exchange Act solely by reason of the manner, timing, price, and volume of the repurchases, so any issuer could continue to conduct share repurchases without fear of market manipulation claims by simply limiting its repurchase activity outside of the context of the Rule 10b-18 safe harbor.

– Dave Lynn