What is 'Rule 10b-18'?

Rule 10B-18 is a Securities and Exchange Commission rule that provides a safe harbor, or reduces liability, for companies and their affiliated purchasers when the company or affiliates repurchase the company's shares of common stock. By applying Rule 10B-18, the SEC will not deem the company or purchasers in violation of anti-fraud provisions of the Securities Exchange Act of 1934; however, the repurchases must fall within the four conditions of the rule.

BREAKING DOWN 'Rule 10b-18'

Rule 10B-18 covers the manner of repurchase, the time of the repurchase, the prices paid and the volume of shares repurchased. Compliance with the rule is voluntary. However, to fall within the safe harbor, the repurchaser must satisfy each of the four conditions daily. Otherwise, repurchases will not fall under the safe harbor for that day.

Origin of Rule 10B-18

The SEC instituted the rule in 1982. This allowed a company's board of directors to authorize the repurchase of a certain amount of shares. Subsequently, the company could purchase shares as long as it adhered to four conditions.

In 2003, the SEC amended the rule, requiring companies to disclose more detailed information on share repurchases on forms 10-Q, 10-K and 20-F.

The Four Conditions

  1. Manner of purchase: The issuer or affiliate must purchase all shares from a single broker or deal during a single day.
  2. Timing: An issuer with an average trading volume less than $1 million per day or a public float value below $150 million cannot trade within the last 30 minutes of trading. Companies with higher average trading volume or public float value can trade until the last 10 minutes.
  3. Price: The issuer must repurchase at a price that does not exceed the highest independent bid or the last transaction price quoted.
  4. Volume: The issuer cannot purchase over 25 percent of the average daily volume.

The SEC also specified more detailed disclosure requirements for repurchases. In each quarterly report on Form 10-Q and in the annual report on Form 10-K, the company must provide a table showing, on a month-by-month basis: the total number of shares purchased, the average price paid per share, the total number of shares purchased under publicly announced repurchase programs and the maximum number of shares it can repurchase under these programs or the maximum dollar amount.

Although the rule provides safe harbor, the company must report repurchases in compliance with the various regulations. The safe harbor is not available if the company made repurchases to evade federal securities laws.

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