Forum Archive Index - September 2001

["dsproul" <dsproul@corsairmarine.com>]

 

SOURCE: NEW YORK TIMES

 

September 15, 2001

S.E.C. Waives Some Rules to Try to Ease Market Volatility

By STEPHEN LABATON

ASHINGTON, Sept. 14 — Hoping to avoid a wave of panicked selling when the stock exchanges open next week, the government issued an order today waiving certain regulations to permit companies and executives to help prop up the prices of their shares.

Officials at the Securities and Exchange Commission said the temporary order, which will be in effect for next week if, as regulators hope, the markets reopen on Monday, will enable publicly traded companies to buy shares of their companies in the market without the normal restrictions on the volume and timing of those trades. The order will also permit company directors and senior executives who had issued sell orders shortly before the markets closed to re-enter the market and try to repurchase their company's stock.

Invoking its emergency powers for the first time, the agency also eased some accounting and capital rules and relaxed some lending restrictions imposed on mutual funds.

In a statement, the agency said it had issued the order "to facilitate the planned reopening of the U.S. equity markets on Monday."

"These markets are the world's strongest and most vibrant, in spite of the heinous acts of last Tuesday," the statement said. "The commission will monitor the situation. Investors should be assured that U.S. markets will function effectively and fairly, and that market and investor protections are squarely in place."

Securities experts said the order was wise and signaled the fears of regulators that trading will be turbulent when the exchanges open after being closed for the last four days. The rules being relaxed are intended to protect investors from price manipulations by publicly traded companies. They have been informally relaxed during periods of crisis.

"What the S.E.C. is telling us is that they are very concerned about order imbalances and that the market will start with tremendous quantities of sell orders that they are skeptical that market specialists will be able to handle," said Joel Seligman, co-author of a leading treatise on securities law and the dean of the Washington University School of Law. "They want the relevant firms and the controlling persons to be on the buying side of the market. As a precaution, this makes a lot of sense."

"This is such a novel time," he added. "There have been national emergencies before. I can't remember a national emergency involving the destruction of so many brokerage firms. That creates, appropriately, an unusually great concern with respect to volatility on Monday."

Other experts agreed.

"Given the magnitude of the tragedy that's occurred, it seems perfectly prudent," said Harvey Goldschmid, a former general counsel at the Securities and Exchange Commission who is a law professor at Columbia University. "The commission is fundamentally encouraging companies to buy their own shares, which is a way of keeping prices stable and discouraging any panic selling."

A senior official at the agency said the order was similar to signals the commission sent out after the market crisis of 1987. The agency indicated then that it would not take any legal action against companies that executed trades to counter any panic selling. The official said that he did not expect the commission to take any steps to curtail short-selling, a trading technique used by investors who are betting that the price of a stock will decline.

On Thursday, leaders from the major exchanges said they hoped to resume trading on Monday morning. Tests are scheduled for this weekend to see if power and telecommunications equipment has been sufficiently repaired to enable trading.

In addition to the relaxation of the rules, other regulations will remain in place to limit the volatility of the markets. These include the so-called circuit breaker rules put in place after the 1987 market decline. Those rules automatically halt stock trading when prices drop precipitously.

At the height of the market in April 1998, the commission required the circuit breakers to take effect when the market dropped by about 10 percent in a trading day.

Newer rules raised the threshold for halting trading when there were declines of 10 percent or more in the Dow Jones industrial average. The triggers are recalculated every quarter, and under the current guidelines the market would be temporarily halted if it experienced a drop of 1,100 points before 2:30 p.m.

Before the newer rules took effect, curbs halted trading when the Dow industrials fell 350 points, which was equal in April 1998 to about 4 percent, and 550 points, which was about 6 percent.

The changes were put into effect after the major exchanges expressed concern that the older limits were too low and could aggravate market instability by disrupting trading when it was not necessary.

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