The Securities and Exchange Commission adopted temporary rules that seek to keep stocks from plummeting when US markets open today after a terrorist attack on New York wiped out four days of trading.
The five-day emergency rules let public companies repurchase stock without following limits on how many shares they can buy or restrictions forbidding buybacks at the beginning or end of a trading day. The SEC, which polices US stock and bond markets, for the first time used congressionally granted emergency authority to temporarily change its normal rules to respond to a crisis.
"This will make it easier for companies to buy at a tense time when there are concerns that the markets may decline," said Stuart Kaswell, general counsel for the Securities Industry Association, a brokerage trade group.
The SEC, under new Chairman Harvey Pitt, acted to help get US markets back on their feet after devastation in New York's financial district, where bond broker Cantor Fitzgerald LP lost around 700 workers and Morgan Stanley Dean Witter & Co lost 22 floors of offices when the World Trade Center's landmark 110-story towers collapsed.
Using for the first time its emergency authority to temporarily change rules, the SEC's rule package also would let mutual funds borrow money from affiliated banks so that, if mutual fund investors rush to redeem shares, fund companies can pay them without being forced to sell stock.
"They're worried that people are going to come in after this terrible national catastrophe and all want to sell everything," said Marianne Smythe, former head of the SEC's investment management division and a lawyer at the Wilmer, Cutler & Pickering firm. "If you can borrow the money" to pay for fund redemptions, "then you are not going to have to go into the marketplace and sell securities and just add to the downdraft."
The SEC's action suspended for next week restrictions that limit company stock buybacks to 25 percent of a day's small trades. It also exempts companies from a rule saying that a company buyback can't be the first reported trade of the day and can't occur during the last 30 minutes of trading.
Some of the changes are aimed at solving technical or administrative issues, such as making sure accountants aren't charged with auditor independence violations if they help clients put back together records lost after two hijacked airliners were flown by terrorists into the World Trade Center's towers.
Independence rules normally forbid auditors from helping to prepare company records they will later audit.
Under the changes, companies for five days also can repurchase shares without running afoul of accounting rules that could force a large write-off if buybacks occur close to the time of a stock-swap merger. Having companies prepared to buy their own stock can help demonstrate confidence in a company and markets and can provide a ready buyer to bolster a stock's price if sell orders surge, experts said.
"Repurchases can be a source of liquidity for the market," SEC General Counsel David Becker said. "We want to prevent a situation where there are serious order imbalances."
Becker said he doesn't expect stocks to fall dramatically Monday, though he said companies have told the SEC that they find the temporary rules "extremely useful."
He also said he doesn't expect the SEC to extend the rules beyond next week.
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