Safe Harbor or Smoke Screen? Compliance and Disclosure Under Sec Rule 10b-18
Posted: 12 Nov 1997
Date Written: July 1997
Is a safe harbor without disclosure anything more than a smoke screen? The history of open market repurchase regulation began with lawsuits which alleged the use of repurchases to manipulate the market during mergers and acquisitions having terms contingent on stock price. After 13 years of debate over proposed regulations, the SEC instituted safe harbor Rule 10b-18, which remains today as the rule and guide for corporations wishing to protect themselves from charges of repurchase-related manipulation. In addition to replacing a proscriptive orientation, 10b-18 imposed none of the previously proposed disclosure requirements. Accordingly, irrespective of a company's assertions regarding compliance, the public (and the SEC) cannot observe compliance in the absence of additional disclosure. While the SEC might compel additional disclosure on a case-by-case basis, it is not clear how others could, in the face of an assertion of compliance, assemble enough evidence to begin a discovery action. Thus, while Rule 10b-18 may be a legitimate safe harbor for some, the absence of verifiability potentially makes it an effective smoke screen for others. Using privately disclosed data, we investigate claimed and actual 10b-18 compliance for NYSE and NASDAQ firms. Our finding that more than half of the 64 repurchase programs in our sample failed to comply with 10b-18, along with the self-selection argument that respondents are more likely to comply than non-respondents, suggests that 10b-18 may not be a significant factor in repurchase program execution. Our finding that firms which declared compliance failed to comply suggests that 10b-18's unobservable safe harboring may actually encourage misleading claims of compliance. While perhaps consistent with the cost-benefit analysis conducted in the deregulatory environment of the early 1980's, surely such an outcome was not intended by the legislative mandate given in the Williams Act.
JEL Classification: G18, K22
Suggested Citation: Suggested Citation