Rule 10b-18

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Rule 10b-18: Safe Harbor for Share Repurchases

Overview

Rule 10b-18 is an SEC safe-harbor rule that reduces potential liability for an issuer (and its affiliated purchasers) when repurchasing the issuer’s common stock, provided the issuer satisfies four specific conditions each day it repurchases shares. Compliance with the rule does not make repurchases mandatory, but it limits exposure under the anti‑fraud provisions of the Securities Exchange Act of 1934.

Purpose and history

  • Adopted in 1982 to provide a clear, routine framework for issuer buybacks.
  • Amended in 2003 to add disclosure requirements and clarify several provisions.
  • The rule is designed to allow companies to repurchase shares without being accused of market manipulation, so long as repurchases are conducted in a non‑manipulative manner and reported properly.

The four daily conditions

  1. Manner of purchase

  2. Repurchases must be effected by (or on behalf of) the issuer through a single broker or dealer on any given day.

  3. Timing of purchase

  4. Purchases are generally prohibited during the opening and closing portions of the trading day as defined by the rule.
  5. For issuers with average daily trading volume (ADTV) under $1 million or public float under $150 million: purchases cannot be made during the last 30 minutes of trading.

  6. For larger issuers: purchases cannot be made during the last 10 minutes of trading.

  7. Price condition

  8. Repurchases may not be made at a price higher than the highest independent bid or the last transaction price quoted (whichever is higher).

  9. Volume limitation

  10. The issuer (and its affiliates) cannot purchase more than 25% of the ADTV on any single day.

Important operational notes

  • Compliance must be met daily; failure to satisfy even one condition on a given day means repurchases that day are not covered by the safe harbor.
  • The safe harbor limits liability under Rule 10b-5 but does not immunize repurchases that are otherwise manipulative or intended to evade securities laws.

Reporting and disclosure requirements

Issuers must disclose repurchase activity in SEC filings:
– Quarterly (Form 10-Q) and annual (Form 10-K) reports must include a month-by-month table that typically shows:
* Total number of shares purchased each month
* Average price paid per share
* Total shares purchased under publicly announced repurchase programs
* Maximum number of shares (or dollar amount) authorized for repurchase under the program
– Foreign private issuers report similar information on Form 20-F.

When the safe harbor does not apply

  • The safe harbor is not available if repurchases are made to evade federal securities laws or are part of manipulative schemes.
  • Noncompliance with the four conditions removes the presumption of immunity and may increase regulatory and enforcement risk.

Practical guidance for issuers

  • Plan buybacks with a single broker-dealer execution strategy to satisfy the manner condition.
  • Monitor ADTV and public float to determine applicable timing windows.
  • Limit daily volumes to 25% of ADTV and track intraday pricing relative to independent bids and last trades.
  • Maintain contemporaneous documentation of intent and execution decisions.
  • Ensure timely and accurate disclosure in Form 10-Q/10-K (or Form 20-F) to meet reporting obligations.

Example

If an issuer’s ADTV is 1,000,000 shares, the maximum shares it may repurchase under the volume condition on any single day is 25% × 1,000,000 = 250,000 shares.

Key takeaways

  • Rule 10b-18 offers a safe harbor that can reduce enforcement risk for lawful, non‑manipulative repurchases when four daily conditions (manner, timing, price, and volume) are met.
  • Compliance is voluntary but requires careful planning and ongoing reporting.
  • The safe harbor will not protect repurchases intended to evade securities laws or that are otherwise manipulative.