One Block-Size Purchase Counts in ADTV Unless the Issuer Elects the Weekly Exception

The SEC staff hands out the number itself. Question 35 of the Division of Trading and Markets answers on Rule 10b-18 sets its own hypothetical: “An issuer's 25% ADTV limit on a particular day is 25,000 shares. If the issuer purchases 10,000 shares, can the issuer also buy a block of 15,000 shares on the same day and still fit within the safe harbor for that day?” The answer is yes, for an arithmetic reason: 10,000 plus 15,000 is 25,000, exactly the cap, so that block-size print needs no exception at all. Divide the cap by 25 percent and the denominator appears — a security whose four-week average daily trading volume is 100,000 shares. Five questions later, an issuer that has already bought 15,000 shares is refused a 30,000-share block.

The trade did not change. What changed is which of two branches inside one sentence of the volume condition the issuer stands on, and that branch decides whether those shares stay in the 100,000-share denominator. Reading the 25 percent as one flat cap builds a calendar that shrinks the issuer's own allowance — the same gap between a document and a count this journal traced through a buyback authorization that was not a purchase.

Two Branches in One Sentence

Paragraph (b)(4) carries both branches without a break. The first is the cap. Per the eCFR text of 17 CFR 240.10b-18: “The total volume of Rule 10b-18 purchases effected by or for the issuer and any affiliated purchasers effected on any single day must not exceed 25 percent of the ADTV for that security”. After a semicolon the sentence turns:

“However, once each week, in lieu of purchasing under the 25 percent of ADTV limit for that day, the issuer or an affiliated purchaser of the issuer may effect one block purchase if: (i) No other Rule 10b-18 purchases are effected that day, and (ii) The block purchase is not included when calculating a security's four week ADTV under this section.”

Purchase under the cap, or purchase one block a week with no volume cap for that day. That is how a 30,000-share block reaches an issuer whose cap is 25,000 shares, and the rule text states its price twice: condition (i) forecloses every other Rule 10b-18 purchase that day, and condition (ii) takes the block out of the four-week ADTV that sets the cap on the other days. ADTV is defined in paragraph (a)(1) as “the average daily trading volume reported for the security during the four calendar weeks preceding the week in which the Rule 10b-18 purchase is to be effected”. It is a trailing window, so condition (ii) follows the issuer for four weeks.

One frame before the arithmetic: failing a condition is not an offense, per paragraph (d) — “No presumption shall arise that an issuer or an affiliated purchaser has violated the anti-manipulation provisions of sections 9(a)(2) or 10(b) of the Act (15 U.S.C. 78i(a)(2) or 78j(b)), or § 240.10b-5 under the Act, if the Rule 10b-18 purchases of such issuer or affiliated purchaser do not meet the conditions specified in paragraph (b) or (c) of this section.” The four conditions buy a safe harbor against claims resting solely on time, price, amount or the number of brokers; losing it moves the question back to facts.

The Same Block-Size Trade, Two ADTV Answers

Two of the staff answers look contradictory on their own. Question 34 of the SEC Division of Trading and Markets answers to frequently asked questions concerning Rule 10b-18, a page carrying answers dated Oct. 11, 2017 over a review line of Dec. 2, 2016, says: “Under the amended Rule 10b-18, an issuer's total repurchases on any single day, including its block-size purchases, must satisfy the Rule's 25% ADTV volume limitation.” Then: “However, an issuer can include its block-size purchases when calculating its security's four-week ADTV.” The same answer then states the fork itself, and a third condition: when the block does not comply with the volume condition, “all other block purchases effected during that week must comply with the 25% volume condition.”

Question 36 asks the same-sounding question — “If an issuer relies on the ‘one block per week’ exception, would the issuer be able to include the block in its four-week ADTV calculation?” — and gets two sentences back: “No. An issuer must deduct those shares from its four-week ADTV calculation.”

The question text does the rest. Question 34 covers block-size purchases made under the volume condition, which stay in the tape figure the issuer averages; Question 36 covers a block bought under the weekly exception, which is what paragraph (b)(4)(ii) reaches. Same shares, same print, two treatments, and the only variable is the election. Question 35's 10,000 and 15,000 sit inside one 25,000-share cap; in Question 40 that cap is already spent. Question 40 puts the fork plainly: “An issuer must choose to either buy a block of shares or repurchase within its 25% ADTV limit, but may not do both.”

Now the numbers. Take a security reporting 100,000 shares a day across the twenty trading days of a four-week window, so 2,000,000 shares, and an issuer wanting one 20,000-share trade a week — at $10 a share, a block under two of the three tests below. Keep it inside the cap and nothing is deducted: 2,000,000 over 20 is 100,000 shares of ADTV, and next week's cap is 25,000. Elect the exception for those four trades and 80,000 shares come out: 1,920,000 over 20 is 96,000 shares, and 25 percent of that is 24,000. The cap falls by 1,000 shares a day, 4 percent, for trades the issuer was making anyway — and each block day discards, under condition (i), the 5,000 shares between the 20,000-share block and the 25,000-share cap.

The effect scales with the block. One 150,000-share block a week is 600,000 shares over the window; 1,400,000 over 20 is 70,000 shares of ADTV and the cap drops to 17,500, down 7,500 or 30 percent. The 2003 adopting release, Purchases of Certain Equity Securities by the Issuer and Others, Release Nos. 33-8335 and 34-48766, states the exclusion flatly — “Moreover, an issuer's block purchases are not included in determining a security's four-week ADTV under the Rule.” — and states what the cap is for: “The volume condition is designed to prevent an issuer from dominating the market for its securities through substantial purchasing activity.” An issuer buying in blocks is measured, for four weeks, against a market its own prints have left.

What Makes a Trade a Block: Three Tests and One Proviso

Paragraph (a)(5) defines a block through three tests joined by “or”, so one is enough. The first two are small: “a purchase price of $200,000 or more”, or “at least 5,000 shares” carrying “a purchase price of at least $50,000”. At $10 a share those are 20,000 shares and 5,000 shares. The third touches the denominator:

“Is at least 20 round lots of the security and totals 150 percent or more of the trading volume for that security or, in the event that trading volume data are unavailable, is at least 20 round lots of the security and totals at least one-tenth of one percent (.001) of the outstanding shares of the security, exclusive of any shares owned by any affiliate”

Then the proviso, which the rule attaches to each of the three tests:

“Provided, however, That a block under paragraph (a)(5)(i), (ii), and (iii) shall not include any 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 of the issuer if the issuer or such affiliated purchaser knows or has reason to know that such amount was accumulated for such purpose, nor shall it include any amount that a broker or dealer has sold short to the issuer or to any affiliated purchaser of the issuer if the issuer or such affiliated purchaser knows or has reason to know that the sale was a short sale.”

Question 37 settles what “the trading volume for that security” means in the third test: “An issuer may look to its security's ADTV during the four calendar weeks preceding the week of the repurchase for purposes of determining whether its block-sized purchase constitutes 150 percent or more of the trading volume for its security.” Put both percentages on that denominator: 150 percent of 100,000 shares is 150,000 against a 25,000-share cap, six times it, because 150 divided by 25 is 6, whatever ADTV is. The 20-round-lot leg is the floor under that floor — 2,000 shares where the round lot is 100 shares.

Which is why the first two tests matter. At $10 a share a $200,000 block is a fifth of the day's reported volume, well under the cap, so electing the exception for it buys nothing and pays the deduction anyway.

What the Denominator Lets In

A percentage cap is only as firm as the measurement rules, and the staff answers fix several edges. Zero-volume days stay in, with “a zero is added to the numerator” for each. Closed days do not: “However, if no trading occurred because a certain day was a holiday and the markets were closed, then that day would not be included in the denominator.” Question 5 keeps foreign volume out — “nor is foreign trading volume included” — and Question 9 keeps “privately negotiated (off-market) repurchases” out of both the safe harbor and the daily limitation. Odd lots go the other way: an issuer may “include the reported odd-lot transaction” in the four-week average, and this journal's walkthrough of an odd-lot print covers how it reaches the consolidated figure.

One edge carries further than the rest. ADTV appears in the rule twice over: as a share count in paragraph (b)(4), and as a dollar figure in the time-of-purchases condition, which puts a security in the 10-minute closing blackout instead of the 30-minute one when it has an “ADTV value of $1 million or more” and a “public float value of $150 million” or more. Paragraph (b)(4)(ii) deducts the block when calculating four-week ADTV “under this section”, and the time-of-purchases condition sits in the same section. On the numbers above, at $10 a share, 100,000 shares of ADTV is exactly $1,000,000, while the deducted figures of 96,000 and 70,000 shares are $960,000 and $700,000 — under the line, and on that reading into the 30-minute blackout. No staff answer transcribed here reaches that reading; the words that create it are “under this section”.

Seven Categories the Volume Cap Does Not Count

The cap counts Rule 10b-18 purchases, and paragraph (a)(13) removes seven categories from that term: a Regulation M restricted period, purchases by an independent agent for an issuer plan, fractional share purchases, the window from public announcement of a merger, acquisition, or similar transaction involving a recapitalization until the earlier of completion or the target vote, purchases under 240.13e-1, a tender offer subject to or excepted from 240.13e-4, and a section 14(d) tender offer. The fourth has its own structure: branch (A) for all-cash deals with no valuation period, and branch (B) with three conditions, the first of them another reading of the same 25 percent:

“The total volume of Rule 10b-18 purchases effected on any single day does not exceed the lesser of 25% of the security's four-week ADTV or the issuer's average daily Rule 10b-18 purchases during the three full calendar months preceding the date of the announcement of such transaction”

Inside a merger window, 25 percent of ADTV becomes one of two candidates for the cap, the other being the issuer's own three-month trailing average. An issuer that bought nothing in those three months has a cap of zero shares while its nominal allowance is still 25,000. Branch (B)(2) adds a parallel test for blocks, pegged to “the average size and frequency” of the issuer's own (b)(4) blocks over the same three months — so the election also builds the baseline a later merger window will measure.

One Suspension Day Reads the Same ADTV at 100 Percent

Paragraph (c) has two branches of its own. The first suspends the time-of-purchases condition for the reopening session after a market-wide trading suspension and, if the suspension holds at the close, the following day. The second rewrites the cap: “The volume of purchases condition in paragraph (b)(4) of this section is modified so that the amount of Rule 10b-18 purchases must not exceed 100 percent of the ADTV for that security.”

Same denominator, four times the allowance: 100,000 shares rather than 25,000 — not the block branch, and in as many prints as the issuer likes, with no election, no deduction and no single-purchase limit. It also sits below the 150,000-share floor of the third block test, so a block qualified that way takes more shares than the alternative condition hands over free. The first two tests carry no such floor, and the rule sets no ceiling on an elected block.

Concrete Framework

Four checks, in the order the numbers appear.

• Compute the denominator before the cap. Four calendar weeks; trading days in the denominator including zero-volume days; holidays out; foreign volume out; off-market repurchases out; odd lots in; every block bought under the weekly exception in those four weeks deducted. Then take 25 percent.
• Price the election rather than assuming it. The exception pays only when the intended size exceeds the cap. Below the cap it costs the rest of the day under condition (i) and the deduction under condition (ii) — on the worked example, 5,000 shares of same-day allowance plus 1,000 shares a day for four weeks.
• Carry the deduction forward four weeks. A 20,000-share block a week moved the cap from 25,000 to 24,000; a 150,000-share block moved it to 17,500. Check the dollar side: at $10 a share, 96,000 shares of deducted ADTV is $960,000, under the $1 million line between the 10-minute and 30-minute blackouts.
• Re-read the defined term before counting a trade. Purchases in the seven excluded categories do not consume the cap, and a merger window replaces the cap with the lesser of 25 percent of ADTV and the three-month average. One block per week means a calendar week: “The ‘one block per week’ exception applies to a calendar week.”

What Would Invalidate This

The reading above turns on the staff distinction between a block-size purchase made under the volume condition and a block purchase made under the weekly exception. If that is not the right reconciliation, the deduction reaches every block-size print and the arithmetic turns against every repurchasing issuer, not only the one that elects.

Four ranges went unverified. First, the blackout claim rests on “under this section” in paragraph (b)(4)(ii) reaching the dollar-valued ADTV in the time-of-purchases condition; no staff answer on that point turned up in the questions transcribed, so it is an inference from the rule's own words and nothing more. Second, the 2003 adopting release was read only through its first 100,000 characters, and the remainder may explain why blocks leave the denominator. Third, 20 round lots is 2,000 shares only where the round lot is 100 shares, which the rule text does not fix. Fourth, the price condition in paragraph (b)(3) and the proviso to the one-broker condition in (b)(1) were not transcribed in full, so this is not a complete account of the four conditions.

The arithmetic is the easy part to falsify: 2,000,000 less 80,000 over 20 days is 96,000, a quarter of which is 24,000; less 600,000, it is 70,000 and 17,500.