Rule 10b-18: Safe Harbor for Issuer Stock Repurchases

Rule 10b-18 is a voluntary Securities and Exchange Commission safe harbor that protects a public company from market manipulation liability when it repurchases its own common stock on the open market. Codified at 17 CFR § 240.10b-18, the rule shields the issuer and its affiliated purchasers from claims under Sections 9(a)(2) and 10(b) of the Securities Exchange Act and Rule 10b-5, provided four daily conditions on manner, timing, price, and volume are met.¹ Nothing about the rule is mandatory. A company that misses a condition on a given day loses the safe harbor for that day’s purchases and nothing more; enforcement is a separate question.

What the Safe Harbor Covers

The safe harbor reaches open-market purchases of an issuer’s common stock or an equivalent interest, such as a depository share or a limited partnership unit. Preferred stock, convertible debt, and options are not covered. Protection extends to the issuer and to any “affiliated purchaser,” meaning a person acting in concert with the issuer to acquire its securities or an affiliate that directly or indirectly controls the issuer’s purchase decisions. A broker executing trades for the issuer does not become an affiliated purchaser, and neither does an officer or director who merely voted to approve the program.¹

Several categories of repurchases sit outside the safe harbor no matter how carefully the four conditions are followed:

Repurchases made during a pending merger, acquisition, or similar recapitalization, from public announcement until the deal closes or shareholders vote.
Repurchases made through a tender offer governed by the Exchange Act’s tender offer rules.
Repurchases during a restricted period under Regulation M, which typically arises around a securities offering.
Accelerated share repurchase programs, which are private off-market transactions between the issuer and a dealer; neither the issuer’s initial purchase nor the dealer’s hedging trades qualify.²

Purchases outside the United States are ineligible, and foreign trading volume is excluded from the average daily trading volume calculation used for the volume condition.²

The Four Daily Conditions

The safe harbor works on a day-by-day basis. To earn protection for a given trading day, the issuer must satisfy all four conditions for every repurchase made that day. Missing one condition on a single trade voids the safe harbor for the whole day’s activity.

One Broker or Dealer

All repurchases on a single day must be routed through a single broker or dealer. If the issuer and one or more affiliated purchasers are both buying that day, they all have to use the same firm. Routing through multiple brokers could suggest broad market interest in the stock when the buying is really coming from one source.¹

Some practical carve-outs exist. Unsolicited purchases don’t count against the limit. The issuer’s broker can access electronic communication networks and alternative trading systems to fill orders, which still counts as one broker even though multiple venues are involved. After the primary trading session closes, the issuer may switch brokers for after-hours purchases, though those trades face their own price restrictions.¹

Timing

The issuer’s purchase cannot be the opening trade reported in the consolidated system. It also cannot occur inside a blackout window before the close:

For highly liquid securities (average daily trading volume of at least $1 million and a public float of at least $150 million), purchases must stop 10 minutes before the scheduled close of the primary trading session.
For all other securities, the blackout is 30 minutes before the scheduled close.

The blackout applies both in the stock’s principal market and in whichever market the purchase is being made.¹

After-hours purchases are still permitted until the consolidated system stops reporting last-sale prices, but each one must come in at or below the lower of the closing price or any subsequent bid or sale price. An after-hours purchase also cannot be the opening transaction of the next session.¹

Price

Every repurchase must be priced at or below the higher of the highest current independent bid or the last independent transaction price reported in the consolidated system at the time of the purchase. For securities not quoted in the consolidated system, the issuer looks to the highest independent bid or last independent sale on any national exchange or inter-dealer quotation system showing at least two priced quotes. For securities with no exchange or quotation-system pricing, the ceiling is the highest independent bid obtained from three independent dealers.¹ The company follows the market rather than leading it.

Volume

Total repurchases on any single day cannot exceed 25% of the stock’s average daily trading volume, calculated over the four calendar weeks before the week the purchase is made.¹

A separate block purchase exception lets the issuer buy one large block per week without regard to the 25% cap. The trade-off is significant: on any day the issuer uses the block exception, it cannot make any other repurchases under the safe harbor. Shares acquired through the block exception also cannot be counted when calculating the four-week average daily trading volume going forward.³

A “block” is defined as at least one of the following: a purchase of $200,000 or more, a purchase of at least 5,000 shares totaling at least $50,000, or a purchase of at least 20 round lots that represents 150% or more of the stock’s recent trading volume.⁴

The Merger and Acquisition Blackout

The M&A exclusion catches companies off guard often enough to deserve its own note. From the moment a merger, acquisition, or similar recapitalization is publicly announced, the issuer loses safe harbor protection for repurchases. The blackout continues until the deal closes or shareholders vote on it, whichever comes first.¹

Two narrow exceptions apply. If the deal is entirely cash-based with no valuation period linked to either party’s share price, the exclusion doesn’t apply. And even in a stock-for-stock deal, an issuer can keep buying under the safe harbor if its daily volume stays at or below the lesser of the normal 25% cap or its average daily buyback volume from the three full calendar months before the announcement, with block purchases staying within historical size and frequency.¹

What Happens if You Fall Outside the Safe Harbor

This is the most common point of confusion. Falling outside the safe harbor does not mean the company violated the law. The rule states explicitly that no presumption of manipulation arises when repurchases don’t meet the four conditions.¹ The safe harbor is a shield, not the boundary between legal and illegal conduct. A company that exceeds the volume cap or misses the closing blackout on a given day has simply lost its automatic defense for that day. The SEC would still need to prove manipulative intent to bring an enforcement action.

Operating without the safe harbor is riskier than most companies want to tolerate. Manipulation claims under Section 10(b) and Rule 10b-5 carry civil penalties, disgorgement, and the possibility of criminal prosecution in egregious cases. When buyback conduct is investigated, the SEC examines patterns: whether the company consistently exceeded volume limits, whether purchases clustered near earnings announcements, whether insiders sold while the company was buying. Losing the safe harbor doesn’t trigger these investigations on its own, but it removes the strongest defense once one begins.

Rule 10b5-1 Plans and the 1% Excise Tax

Rule 10b-18 and Rule 10b5-1 serve different purposes and are often used together. Rule 10b-18 protects against manipulation claims by governing how, when, and how much the company buys. Rule 10b5-1 provides an affirmative defense against insider trading claims by requiring that a trading plan be adopted when the company isn’t aware of material nonpublic information, with the trading parameters set in advance.

Companies most commonly use 10b5-1 plans when they want repurchases to continue during blackout or closed-window periods around earnings. During open windows, many issuers buy directly under 10b-18 without a 10b5-1 plan. When both are used, purchases under the 10b5-1 plan can also qualify for the 10b-18 safe harbor if the four conditions are met on each trading day.

Separately, since January 2023 a covered corporation owes a 1% federal excise tax on the fair market value of stock it repurchases during the tax year. A covered corporation is any domestic corporation whose stock trades on an established securities market. The tax base is reduced by the fair market value of stock the corporation issues during the same year, including shares issued through employee compensation plans. Purchases by specified affiliates the corporation controls (subsidiaries more than 50% owned) also count as repurchases.⁵ The tax applies regardless of whether the buyback follows Rule 10b-18. It taxes the economic act of repurchasing, not the manner of doing so.

Disclosure Requirements

Item 703 of Regulation S-K requires issuers to report share repurchase activity in periodic SEC filings, broken down by month for each fiscal quarter and presented in a tabular format.⁶ For each month, the filing must disclose the total number of shares purchased, the average price paid per share, how many shares were bought under a publicly announced plan, and the maximum number of shares or dollar value still authorized for repurchase.

These disclosures appear in Form 10-Q and Form 10-K on the standard filing deadlines for each form, and all submissions go through the SEC’s EDGAR system.⁷ Issuers must also provide a narrative explanation of each program’s objectives, the criteria used to determine how much to buy, and any policies governing insider trading by officers and directors during an active buyback program.

The SEC adopted an enhanced disclosure rule in 2023 that would have required daily rather than monthly reporting of buyback activity. The Fifth Circuit vacated that rule in December 2023, and the SEC confirmed that disclosure requirements reverted to the pre-existing framework.⁸ Monthly tabular reporting under Item 703 remains the standard.

1
eCFR. 17 CFR 240.10b-18 – Purchases of Certain Equity Securities by the Issuer and Others
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Securities and Exchange Commission. Answers to Frequently Asked Questions Concerning Rule 10b-18
3
Office of the Federal Register. Purchases of Certain Equity Securities by the Issuer and Others
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Securities and Exchange Commission. 17 CFR 240.10b-18 – Purchases of Certain Equity Securities by the Issuer and Others
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Office of the Law Revision Counsel. 26 USC 4501 – Repurchase of Corporate Stock
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eCFR. 17 CFR 229.703 – (Item 703) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
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Securities and Exchange Commission. Submit Filings
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Securities and Exchange Commission. Further Announcement Regarding Share Repurchase Disclosure Modernization Rule