SunTrust Banks Inc., after watching the value of its hostile bid for Wachovia Corp. dwindle to near parity with rival First Union Corp.’s friendly offer, decided in mid-June it needed to shore up its position.

The response from the SunTrust board came June 13: a stock buyback program that, combined with an existing authorization, would comprise up to seven million shares. SunTrust’s stock price has rebounded, tallying about 5.5% in gains in the two succeeding weeks.

But almost from the moment of that announcement, there were questions on Wall Street about whether SunTrust could carry through on its pledge. That is because of Regulation M, a Securities and Exchange Commission rule governing activities while potential mergers are in play.

Now, according to sources familiar with the proceedings, it appears that the SEC may have begun at least asking some questions. Though neither SunTrust nor the SEC would confirm that any conversations on the topic have taken place, other sources said the SEC has notified SunTrust that it is subject to Regulation M, apparently dealing yet another blow to SunTrust’s efforts to press its hostile bid.

Introduced in the mid-1990s to replace more restrictive regulations, “Reg M is a bright-line rule that prevents certain activity,” including manipulating a stock in situations like mergers, said Jessica Forbes, a partner at Fried Frank Harris Shriver & Jacobson in New York, who spoke generally on the subject.

Under Reg M, First Union, for example, is prevented from buying back its shares from the time it mails out its own proxy until the expiration of its agreement with Wachovia in mid-January — what the regulation refers to as a restricted period. That is because First Union is offering its shares to pay for the transaction, and Reg M applies to the distribution of stock.

Securities lawyers, many of whom would speak only on condition of anonymity, said in interviews this week that SunTrust might be barred from buying its own shares because of the same rule, particularly now that it has mailed its own proxy materials to shareholders.

SunTrust, which as a hostile bidder does not have a formal agreement with Wachovia, is publicly holding to its stance that its offer is not subject to the rule. “The general assumption had been that Reg M was not applicable, and that still would be our general operating assumption,” SunTrust spokesman Barry Koling said Wednesday.

“We would not comment on any discussions we may or may not be having with the SEC,” Mr. Koling said. “We wouldn’t comment on daily activity. At the end of the quarter, we will report what we have bought back.”

John Heine, a spokesman for the SEC, declined to comment.

Of course, share repurchase authorizations almost never come with an obligation. Rather, boards invariably give company executives discretion over when and whether to expend their buyback budgets. For that reason, unless SunTrust or the SEC were to comment, the only way to gauge whether the rule had been applied would be to check on how much stock SunTrust is buying up — a figure that could become known in a couple of weeks.

If SunTrust has been forced to give up on the buybacks, this would be one more tactic foiled as it battles for the support of Wachovia shareholders. The latter are scheduled to vote Aug. 3 on Wachovia’s merger deal with First Union.

This month the Atlanta company was thwarted in its attempts to get Wachovia’s bylaws changed to allow 10% of shareholders to call a special meeting. On June 14, North Carolina’s governor and lawmakers, showing a sympathy for in-state corporations, swiftly enacted a statute to close off that option.

Whether it is actively buying shares or not, the market’s impression that it is may be benefiting SunTrust’s stock. That makes the market’s next reaction critical. The spread between SunTrust’s offer — an exchange of 1.081 of its shares for each share of Wachovia — and First Union’s — an exchange of 2 shares for every Wachovia share – had slid from 17% all the way into negative territory before the recovery took the premium back up to almost 4%.

Meanwhile, SunTrust and First Union executives have been crisscrossing the country, meeting with Wachovia’s largest institutional shareholders — a pivotal voting block.

“It’s trench warfare now, and they’re battling one investor at a time,” said Michael Mayo, an analyst at Prudential Securities.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.