Ban Stock Buybacks

SEC Rule 10b-18, adopted in 1982, provides a safe harbor from market-manipulation liability for open-market stock repurchases by issuers. In the year after the rule took effect, buyback volume tripled. S&P 500 companies spent $942.5 billion on stock repurchases in 2024 and $1.74 trillion across 2023 and 2024 combined. Statutory prohibition would restore the pre-1982 baseline, under which open-market repurchases were subject to liability under Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934.

What Rule 10b-18 does

Rule 10b-18 (17 CFR § 240.10b-18) provides issuers with a safe harbor from liability for manipulation under Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 when repurchases satisfy specific manner, timing, price, and volume conditions. The rule was adopted in November 1982, replacing the SEC’s 1980 proposed Rule 13e-2, which would have governed repurchases without providing a safe harbor. The 1982 rule did not change the underlying statute. It exempted qualifying repurchases from the manipulation enforcement that would otherwise apply under Sections 9(a)(2) and 10(b).

The Inflation Reduction Act of 2022 added IRC § 4501, a one percent excise tax on the fair market value of stock repurchases by publicly traded domestic corporations. The tax applies to repurchases after December 31, 2022, with a $1 million de minimis exception and a netting provision for stock issued during the same year. The excise tax reduced 2023 S&P 500 operating earnings by about 0.40 percent. Repurchase volume has not declined: 2024 buybacks reached $942.5 billion.

Research published in the Harvard Business Review by William Lazonick examined 449 S&P 500 firms listed continuously from 2003 through 2012. Those firms used 54 percent of their net income — approximately $2.4 trillion — on stock repurchases, with an additional 37 percent paid as dividends. Equity-based compensation accounts for the majority of executive pay at large publicly traded firms, so the share-price effect of repurchases flows directly into executive compensation.

The statute

Statutory prohibition replaces SEC Rule 10b-18 and IRC § 4501 with a categorical ban on open-market repurchases. The Reward Work Act (S.2605, 115th Congress; S.915, 116th Congress; sponsored by Senator Tammy Baldwin) provides the legislative template. The statute would include the following provisions:

• Repeal SEC Rule 10b-18 and the safe harbor for open-market issuer repurchases.
• Restore the pre-1982 treatment under Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934.
• Permit issuer-tender-offer repurchases under SEC Rule 13e-4, which require a fixed price, equal access for all shareholders, and full SEC disclosure filings.
• Permit repurchases under employee stock ownership plans and qualified retirement plans, consistent with the existing IRC § 4501(e)(2) exception.
• Direct the SEC to enforce manipulation liability for repurchases that fall outside the permitted categories under existing Exchange Act authority.

Precedent

Federal precedent exists in two forms. From 1934 through 1982, open-market issuer repurchases by listed companies carried manipulation liability under Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934 and were largely avoided by public companies. The SEC’s 1980 proposed Rule 13e-2 would have preserved that exposure with conditions. The SEC withdrew the proposal and adopted Rule 10b-18 in November 1982. The Reward Work Act (S.915, 116th Congress) and the Stock Buyback Accountability Act (S.413, 118th Congress) have proposed repeal or stricter limitation in successive Congresses. The IRA’s 1% excise tax (IRC § 4501) is a partial fiscal precedent for federal targeting of repurchase activity.

Through the early 1980s, share repurchases by US publicly traded companies operated under significantly tighter constraints than the post-Rule 10b-18 regime. United Kingdom companies remain subject to stricter approval requirements than US firms operating under Rule 10b-18. Roosevelt Institute analysis estimates that S&P 500 firms spent approximately $6.3 trillion on stock buybacks between 2003 and 2020, against approximately $4.3 trillion in capital expenditure over the same period.

First 100 days

Day one. The administration directs the SEC to initiate rulemaking to repeal Rule 10b-18 and directs the Department of Justice and the SEC to coordinate enforcement priorities for repurchases conducted outside the issuer-tender-offer framework.

Day thirty. The Department of the Treasury and the IRS publish proposed regulations to wind down IRC § 4501 in coordination with the legislative ban, to avoid an excise-tax gap during the transition. The SEC publishes a registry of all open-market repurchase programs announced in the previous 24 months, with dollar amounts and corresponding executive compensation disclosures.

Day ninety. The President signs the Reward Work Act into law. A companion executive order directs federal procurement preferences toward firms that have not engaged in open-market repurchases in the preceding three years.

Effect of the prohibition

Open-market issuer repurchases are removed from the set of permitted corporate uses of retained earnings. Cash that would otherwise be allocated to repurchases becomes available for capital expenditure, research and development, dividend payments, debt reduction, or labor compensation. Issuer-tender-offer repurchases under SEC Rule 13e-4 remain available for ordinary capital management, subject to the disclosure and equal-treatment conditions that distinguish them from open-market activity. The mechanical link between repurchase activity and the value of equity-based executive compensation is reduced accordingly.