Stock ticker with buyback announcement flowing across trading floor screens
governance

The Buyback Standard: How Rule 10b-18 Turned Markets Into One-Way ATMs

Sol Meridian ContributorsJuly 19, 202516 min

A 1982 SEC safe harbor made buybacks routine. Today they move hundreds of billions quarterly, driven by EPS targets and executive comp—with thin disclosure and lopsided gains. The tool isn't the problem; the incentives and opacity are.

Before 1982, routine open-market stock repurchases lived under a cloud: they could look like price manipulation. Then the SEC created Rule 10b-18—a "safe harbor" allowing companies to buy back their own shares without manipulation liability if they followed four daily conditions: manner of purchase, timing, price, and volume. Comply, and the buyback won't be deemed manipulative. The safe harbor isn't absolute immunity, but it normalized what had been risky. Forty years later, buybacks are not a marginal tactic but the governing norm of American corporate finance—oiled by tax advantages, invisible in budgets, and defended as "neutral" capital allocation.

The scale is vast. S&P 500 companies returned a record $1.6 trillion to shareholders in 2024—roughly three-fifths via buybacks—with Q4 repurchases alone above $240 billion. The 2022 Inflation Reduction Act imposed a 1% excise tax to narrow the gap between buybacks and dividends; the White House now asks Congress to quadruple it to 4%. Meanwhile, lawmakers have proposed rescinding the safe harbor entirely, shifting large repurchases to tender offers, and conditioning buybacks on labor standards. This isn't abstract finance theory; it's live politics about who gets the prosperity the enterprise generates.

This essay maps the legal plumbing, the macro pattern, the evidence on real effects, the hemispheric context (Europe, Latin America), and the policy kit to keep markets liquid without letting the cash machine run faster than the civic ledger.

I. The Door the SEC Opened

Rule 10b-18 established four conditions that create the safe harbor on any given trading day:

  1. Manner of purchase: Use a single broker-dealer per day; no purchases in opening or closing transactions (except for last half-hour exception).
  2. Timing: Stay out of the opening and last 10 minutes (30 minutes for actively traded stocks).
  3. Price: Don't exceed the highest independent bid or last independent sale price.
  4. Volume: Stay under 25% of the average daily trading volume in the preceding four weeks.

Fail one condition on a given day, and the safe harbor vanishes for that day. Comply, and the SEC won't challenge the purchase as manipulative solely because of how, when, or where it occurred. Importantly, the rule excludes special corporate events—tenders, mergers, distributions. And it's non-exclusive: firms can repurchase outside 10b-18 if they can defend the conduct under general anti-manipulation principles.

The SEC's staff FAQ underscores the point: the safe harbor "does not provide an issuer a presumption of non-manipulation"; nor does it confer blanket immunity for fraud or other violations. But function matters more than disclaimer. The rule's architecture—bright-line daily conditions—invited boards and CFOs to institutionalize repurchases as a permanent capital program, not an episodic tool.

II. From Exception to Operating System

In the four decades since 10b-18, buybacks migrated from rare to routine. As interest rates fell and executive pay tied itself to earnings-per-share (EPS) and stock awards, open-market repurchases became the gentlest lever: they manage dilution from employee options, smooth quarterly earnings, and deliver "shareholder yield" without the visible commitment of a dividend.

The numbers tell the story:

The 2022 Inflation Reduction Act's 1% excise tax was meant to narrow the advantage buybacks hold over dividends (capital-gains treatment vs. ordinary income for most investors). Congress's nonpartisan researchers documented the scope and carve-outs (purchases under $1 million/year; reductions by offsetting issuance). But the 1% bite hasn't changed the gravitational pull. The White House's FY2025 Budget proposed quadrupling the levy to 4%, explicitly "to address the continued tax advantage for buybacks and encourage long-term investment over giveaways to executives."

III. Do Buybacks Crowd Out Real Investment?

The literature is not monochrome—and that's why design matters.

EPS-motivated repurchases. Using a regression-discontinuity design around "just-miss / just-beat" EPS thresholds, Almeida, Fos, and Kronlund find that buybacks executed to avoid an EPS miss correlate with reductions in employment, investment, and cash reserves. The channel isn't "buybacks are always bad"; it's that when they're tied to earnings beats, incentives tilt toward short-term manipulation.

Macro investment shortfall. Gutiérrez and Philippon document "investment-less growth"—investment weak relative to profitability and valuation since the early 2000s, consistent with rising market power and governance that shortens managerial horizons. Their work doesn't pin the outcome solely on buybacks, but it explains the ecology that makes sustained repurchases attractive even when positive-NPV projects exist.

The counter-view. Fried and Wang argue that aggregate payout figures overstate any capital "drain." Firms also issue equity and accumulate cash; when netted, many sectors show no systematic starvation of good projects. The debate is empirical and ongoing—and highlights why granular, timely disclosure would help adjudicate case by case.

Political-economy critique. William Lazonick's long-running work—"Profits Without Prosperity" became a shorthand—frames buybacks as a driver of wealth concentration: sustained repurchases, married to stock-based executive pay, turn corporations into distribution engines for the already-wealthy at the cost of broad-based innovation. Agree or not, his critique helped put buybacks on Washington's agenda, much as Robert Reich's "greedflation" framing did for profit-driven inflation.

Interpretation. Buybacks are a tool. When valuation is low and projects are scarce, returning cash is rational. The problem is how incentive design—EPS targets, vesting cliffs—and opacity can push the tool toward short-termism even when better projects exist.

IV. Disclosure and the Opacity Problem

In 2023, the SEC adopted a "Share Repurchase Disclosure Modernization" rule requiring quarterly, daily-level reporting of repurchases—time-stamped data showing exactly when firms bought and how much. Industry sued. In December 2023, the Fifth Circuit vacated the rule, and the SEC removed the related EDGAR taxonomies. Result: disclosure reverted to the older, coarser regime—quarterly aggregates reported in 10-Ks and 10-Qs (Item 703).

If buybacks are supposed to be valuation signals—management saying "our stock is cheap"—then opacity breaks the signal. Without time-stamped data, the public can't verify whether repurchases cluster around EPS-reporting windows, executive award vesting, or strategic announcements. Insiders can time purchases when they have asymmetric information; outsiders must infer motives from headlines and quarterly totals.

The Fifth Circuit's reasoning turned on administrative procedure and cost-benefit rigor; the SEC's next attempt must address those gaps. But the policy need is clear: machine-readable, event-aligned disclosure is the price of legitimacy.

V. Distribution: Who Benefits?

The shareholder base skews toward the top wealth deciles; tax advantages reinforce the tilt. A dollar through buybacks typically does more for those owning appreciating assets than for workers paid in wages. That distributional asymmetry shows up politically: calls to quadruple the excise tax, proposals to condition buybacks on labor standards (Schumer-Sanders), and bills to rescind 10b-18 altogether (the Reward Work Act) gained traction precisely because the current regime looks like an invisible transfer upward.

When firms spend billions repurchasing shares while wages stagnate and training budgets shrink, the civic ledger—the account that tracks whether the humans who make the enterprise possible get sturdier lives—stays empty. Markets are instruments, not deities. The regulatory job is to amplify the signal when buybacks tell a true story ("our projects are funded; our stock is cheap") and dampen it when they tell a managed story ("we hit EPS; please don't look at the projects we skipped").

VI. Politics on the Table: Proposals and Guardrails

1. Raise the excise tax to 4%. The Administration's FY2025 Budget asks for a quadrupling of the current 1% levy. Economically, a modest excise nudges the mix toward dividends (more visible, taxed differently) and tests whether marginal buybacks are truly the best use of cash. Politically, it signals whose returns we prefer to privilege. Legislative viability depends on a coalition that sees distributional fairness as macro stabilizer.

2. Rescind or narrow Rule 10b-18. The Baldwin-backed Reward Work Act would repeal the safe harbor, shift large buybacks to tender offers (transparent, equal-access mechanisms), and add worker board representation. Petitions to the SEC similarly urge rewriting 10b-18 to limit volume and mandate richer disclosure. Upside: fewer stealth programs, less price shading. Risk: reduce benign liquidity, push firms into less flexible channels.

3. Condition buybacks on labor standards. Schumer and Sanders floated a "checklist" approach—$15 minimum wage, paid leave, health coverage—before buybacks are allowed. Pros: binds distributions to internal investment in people. Cons: complex to administer; risks turning capital policy into wage-law proxy.

4. Disclosure modernization (again). Restore and refine daily, time-stamped reporting with clear templates, safe harbors for good-faith errors, and EDGAR data fields that analysts can actually use. Many buyback defenders accept better disclosure; it's the low-hanging fruit.

5. Industrial policy guardrails. The Commerce Department discouraged CHIPS Act recipients from using public funds for buybacks; codifying such rules aligns subsidy optics with public purpose. Principle: if taxpayers co-fund the factory, returns should show up first as capacity, training, and wages—not as ticker acceleration.

6. Tender offers for scale. Keep small, liquidity-smoothing 10b-18 programs; require issuer tender offers (with equal treatment and broader windows) for large repurchases above a threshold—say, 2–3% of float in a quarter. This concentrates price discovery in fairer, transparent windows and reduces stealth drip effects.

VII. Outside the U.S.: Europe, Latin America, and the Global Lingua Franca

Europe. EU law permits buybacks within tighter corporate-law envelopes, typically requiring shareholder mandates and disclosure under frameworks like SRD II. Yet the trend is similar: higher interest rates supported record distributions in 2024, especially among banks. The European Central Bank noted that Eurozone banks returned over €70 billion in 2024, split between dividends and buybacks, raising questions about capital resilience and lending capacity during stress.

Spanish banks—Santander, BBVA, CaixaBank—embraced multibillion-euro programs, reflecting the global norm. When a Madrid-based bank announces a buyback, domestic holders benefit; but governance questions remain: What projects went unfunded? Were these genuine signals or EPS management?

Latin America. The political economy bends the story further. Petrobras's whipsaw between extraordinary dividends, on-again/off-again buyback programs, and cabinet reshuffles shows how state-linked firms convert payout policy into national politics. Brazil's pension funds, dependent on Petrobras returns, cheer distributions; labor unions and industrial-policy advocates decry the opportunity cost.

Chile's pension system—AFPs heavily invested in domestic equities—amplifies the distributional stakes. When Chilean multinationals like Falabella or Cencosud announce buybacks, returns flow disproportionately to formal-sector workers with pension accounts, widening gaps with informal labor.

Mexico's COFECE (competition authority) scrutinizes market power in staples; but financial buybacks remain lightly regulated. As nearshoring brings foreign capital, Mexican firms may adopt buyback norms faster—importing both the tool and its governance challenges.

Lesson. When strategic sectors mix with repurchases, transparency and guardrails matter twice. Global capital markets speak buybacks as a lingua franca; the question is whether national governance can keep the tool from becoming extraction.

VIII. Design: Keep the Tool, Fix the Incentives

A better regime doesn't ban the wrench; it stops you from using it as a hammer.

1. Price-integrity first.

2. Align pay with horizons.

3. Tax neutrality, not prohibition.

4. Industrial-policy guardrails.

5. Tender offers for scale.

6. Worker and place participation.

IX. Metrics That Decide If Reform Worked

  1. Investment response: Change in R&D and capex intensity vs. cash flow, frequent repurchasers vs. matched controls.
  2. Workforce outcomes: Median wage, training spend, internal mobility in firms with large buybacks vs. peers.
  3. Price integrity: Abnormal returns around disclosure events; award-vesting windows vs. repurchase timing.
  4. Distributional lens: Gini-adjusted shareholder distribution vs. employee equity growth.
  5. Liquidity: Bid-ask spreads and volumes before and after safe-harbor tweaks—ensure we didn't starve markets of depth.

If reforms don't improve at least three of five, iterate.

X. The Civic Ledger

Think of three ledgers: the price ledger (does the market see what's happening in time?), the real ledger (did productivity and innovation actually rise?), and the civic ledger (do the humans who make the enterprise possible get sturdier lives?).

Our current buyback regime passes the first by habit, fails the second too often when incentives misfire, and leaves the third to speeches. A modest excise, modern disclosure, incentive reforms, and tender-offer discipline for scale are not radical. They are housekeeping.

Markets are maps of preference and probability, not household gods to be appeased by ritual cash-burn. When repurchases tell a true story—"our projects are fully funded; our stock is cheap"—they're fine. When they tell a managed story—"we hit EPS; please ignore the ladder we just kicked"—they're not. The regulatory job is to amplify the first signal and dampen the second.

Keep the tool. Change the house rules. Fix the plumbing so capital policy reads as earned prosperity, not automatic privilege.

References

Regulatory framework:

Data:

Academic evidence:

Legislative proposals:

International:

Related Articles

governance

Blueprints and Blockades: Latin America's Planning Wins—and the Times They Were Stopped

Latin America did not lack planners or plans. It lacked uninterrupted time. Over the last century, the region produced sophisticated projects in transport, health, energy, and social protection. Many took root and quietly improved daily life. Others were intercepted—often by U.S. power, sometimes by U.S.-based firms—before they could mature.

governance

The Client Is the People: On Lawyers Who Mistake a President for a Republic

In the labyrinth of American law, the first wrong turn is often grammatical. Swap a singular for a plural—the President for the People—and a whole architecture shifts by degrees until courthouses feel like vestibules to a single man's will. What opens as error hardens into habit; what begins as advocacy calcifies into allegiance.

governance

What DOGE Actually Did: Ten Months of Fake Savings and Real Damage

What looks like subtraction is often scorched ground; what looks like reform is frequently a breach of law. Ten months in, DOGE's balance sheet is legible—and the arithmetic of claims versus facts reveals a permanent contest between institutions designed to be slow and appetites designed to perform.