Emergency Rules in Effect
Federal regulators used their emergency powers Friday for the first time in an effort to ensure smooth trading during the expected reopening of U.S. stock markets Monday after a four-day shutdown.
“These markets are the world’s strongest and most vibrant, in spite of the heinous acts of last Tuesday,” the Securities and Exchange Commission said in a brief announcement. “Investors should be assured that U.S. markets will function effectively and fairly, and that market and investor protections are squarely in place.”
The agency said it was the first time it had invoked its emergency powers for such an action.
Under the new rules, the SEC said, corporations may buy back their own shares without meeting customary restrictions regarding the volume of shares and the timing of purchases. The move will allow more money to be pumped into the market.
In addition, mutual funds may borrow from and lend to related parties, and accounting firms may provide bookkeeping services to help brokerage firms that lost records in the World Trade Center area without violating rules requiring accountants to be independent of firms they audit.
Regulators want to restore confidence in the U.S. financial system by reopening the trading floors at the New York Stock Exchange, a mere five blocks from the devastated World Trade Center site in lower Manhattan’s financial district.
But the plan to resume trading Monday on the NYSE, the all-electronic Nasdaq Stock Market and the regional U.S. exchanges depends on the results from a test of market systems today.
Workers have been racing to replace the communications and power systems lost in the terrorist attack, and some experts aren’t convinced the damage will be repaired in time. However, NYSE Chairman Richard A. Grasso said Friday that he is confident the exchange will be ready.
Rep. Michael G. Oxley (R-Ohio), chairman of the House Financial Services Committee, called the SEC’s decision to ease restrictions on corporate stock buybacks critical to market stability.
Stock buybacks can help demonstrate confidence in a company and the market and can provide a ready buyer to prop up prices during a surge of sell orders. One day after the Dow Jones industrial average fell 7.2% on Oct. 27, 1997, IBM Corp. announced a $3.5-billion buyback authorization that helped stem the market dive.
Internet networking giant Cisco Systems Inc. said late Thursday that it plans to repurchase as much as $3 billion of stock during the next two years.
Analysts expect other companies to follow suit. On Friday, H&R; Block Inc., the world’s largest tax preparer, said the company had new authority to buy back 15 million common shares. And American International Group Inc., the biggest insurer, said its board authorized the repurchase of as many as 40 million shares, or almost $3 billion worth. H&R; Block said the repurchase wasn’t prompted by this week’s catastrophe, though it acknowledged that it might prove helpful Monday.
The SEC is expected to leave in place the current market system of so-called circuit breakers, which automatically halt stock trading when prices drop precipitously, exchange and industry sources said Friday on condition of anonymity. The trading curbs were established in response to the October 1987 market crash to temper wild price swings and are designed to be used only during a severe one-day market decline “of historic proportions.”
New rules adopted in 1998 raised the threshold for trading curbs to drops of 10%, 20% and 30% in the Dow industrials. Before that, curbs halted trading when the Dow fell 350 points, which was equal in April 1998 to about 4%, and 550 points, which was about 6%.
Drops of 10% and 20% trigger trading halts that can be temporary, depending on the time of day they occur. However, if the Dow falls 30% at any time during the trading session, the market will be closed for the rest of the day.
A 10% drop in the Dow would be equal to about 960 points. A 30% drop would be about 2,881 points.
Before the rules were changed, the market had fallen 20% in one day just once and 10% twice. The curbs had been activated only once: during the market meltdown of Oct. 27, 1997. Some market analysts have predicted that U.S. markets could slide 10% when trading opens Monday, with beleaguered airline and insurance stocks leading the way down.
The SEC is not expected to impose new restrictions on short selling, a technique used by investors who believe a stock’s price is about to go down.
Short selling could exacerbate any kind of market plunge Monday.
In a short sale, an investor borrows stock and sells it at current market prices, pocketing the proceeds. If the stock’s price then slides, the investor can buy the shares back for less and repay the lent stock. The profit is the difference between the original sale price and the buyback price.
In 1990 and 1996, Congress gave the SEC power to summarily take emergency action to “maintain or restore fair and orderly securities markets” and to grant exemptions from SEC rules.
The SEC has set up a hotline to help answer individual investors’ questions and address trading-related complaints: (800) 732-0330.
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Associated Press and Bloomberg News were used in compiling this report.
