New leadership at the Securities and Exchange Commission (SEC) is making it a priority to reverse the decline in the number of U.S public companies. Its method: reversing regulatory creep and reducing the onerous burdens of compliance that deter all but the largest companies from making initial public offerings (IPOs). With the number of U.S. publicly traded companies dropping 40 percent over the last three decades, the possible extinction of these companies is an urgent problem

One unheralded remedy is to reduce the regulatory risk for companies of repurchasing their own shares. Few rational people will want to invest in a company that cannot return capital to investors when it is successful. Short of liquidation or being acquired, companies return money to shareholders either by paying dividends or by repurchasing shares. As I explain in a recent article, one way to cut public-company costs would be to reduce the risk of stock repurchases by reforming the “safe harbor” of  SEC Rule 10b-18.[1]

Share repurchases offer a superior method of returning capital to shareholders in virtually every way. Both dividends and share repurchases return cash to shareholders, allowing companies to optimize their capital structures, reduce the agency costs of free cash flow and signal confidence about their ability to generate earnings to meet their operational and strategic needs.  It is well known, however, that share repurchases are more tax efficient and more flexible than dividend payments.

Less well understood is that share buybacks are more efficient than dividends where shareholders as a group differ about their views of a company’s future prospects. When some shareholders are more optimistic than others about the future, share repurchases can make both (relatively pessimistic) selling shareholders and (relatively optimistic) non-selling shareholders better off by effectuating a repurchase at a price higher than the selling shareholders think the stock is worth, but lower than the non-selling stockholders think the stock is worth.[2] Under such conditions, a share repurchase allows the non-selling shareholders to increase their percentage stake in a transaction that is accretive to them because the company is buying stock at what the optimistic shareholder believes to be a discount price. The share repurchase benefits the more pessimistic selling shareholders by allowing them to sell their shares at what they perceive to be a premium price. In simple terms, when shareholders have heterogeneous views about a company’s prospects, a share repurchase creates a win-win scenario for shareholders that a dividend payment cannot achieve.

In light of these distinct advantages, it is not surprising that share repurchases have outpaced dividends as the primary mechanism for returning capital to shareholders, with 2025 marking the fifth consecutive year that U.S. companies allocated more capital to buybacks than to dividend payments. Of course, share repurchases are not without controversy. But empirical evidence reveals that the claims that they harm employees, increase income inequality, or reduce corporate resilience are false. The data show that firms that buy back stock tend to pay employees more, better-fund their pension plans, and hold higher cash reserves, making them more resilient during economic downturns. Additionally, repurchases do not lead to higher CEO compensation or harm long-term investments.[3] In fact, scholars have found that the stock of companies conducting buybacks have outperformed companies that don’t repurchase their own shares.[4]

For many years, companies were highly reluctant to repurchase shares for fear of being sued by the SEC for stock market manipulation. The legal landscape was so uncertain, and the legal and regulatory risks so acute. that stock repurchases were rare.[5]  The SEC responded by promulgating a safe-harbor rule, SEC Rule 10b-18, which grudgingly opened the door to issuer share repurchases by providing companies with a roadmap for effectuating share repurchases without being charged with stock market manipulation.

The rule’s central provision requires companies to effectuate share repurchases without affecting share prices. This is a near-impossible task for any companies other than ones with the most liquid, high-volume stocks. In addition, complying with the rule often exposes share repurchases to the risk of being picked off by front-running hedge funds and high frequency traders.

As a result, the lion’s share of repurchases are done by the very largest “Mega Cap” companies, whose stocks trade in such massive volume that the companies can effectuate repurchases with little or no effect on their stock prices. By way of illustration, in the second quarter of 2025, repurchases by such companies accounted for 51.3% of all share repurchases in the U.S. Apple alone, the largest U.S. company by market capitalization, accounted for more than 10% of all stock buybacks in 2024.

Rule 10b-18 contains four sets of restrictions. First, a single broker-dealer restriction requires that all bids and purchases by the issuer and affiliated purchasers be made only through one broker or dealer on any single day. Next, there is a timing restriction that limits when during the trading day repurchases can occur. Issuer purchases must not be the first trade of the day and, for securities with an average daily trading volume (ADTV) of at least $1 million and a public float of at least $150 million, trades are prohibited during the 10 minutes before the close of trading both in the security’s principal market and in the market where the purchase is made. For all other securities, trades must be 30 minutes before the close of these markets. Third, there is a volume restriction that stipulates that aggregate purchases may not exceed 25% of the security’s ADTV, except that once per week, a repurchaser can make a single block trade in excess of 25% of the ADTV, provided that it does not make any other purchases on the same day. Finally, there is a restriction on the price that a company can pay to repurchase its stock. Specifically, issuer purchases must not be made at a price that exceeds the highest independent bid or the last independent transaction price, whichever is higher, that is quoted or reported in the consolidated (NBBO) system.

Compliance with SEC Rule 10b-18 is difficult for several reasons. The single broker-dealer requirement limits issuers’ ability to diversify trading strategies and avoid issues like information leakage or front-running by high-frequency traders. The timing restriction, requiring issuers to avoid trading both at the opening of trading and near the market close, limits companies’ flexibility and can make it harder to execute repurchases at favorable prices.

The restriction prohibiting companies from repurchasing shares at a price higher than the highest independent bid or the last independent transaction price creates especially difficult challenges for smaller companies with lower trading volumes, as their own repurchases can drive up the stock price, making it difficult to stay within the price limits. The volume limitations are also a disproportionate burden for smaller companies with lower daily trading volume because purchases can rapidly approach or exceed this limit, making it difficult to comply with the rule for a significant repurchase program.

In addition, market experts have pointed out that the rule makes repurchase orders predictable and subject to information leakage, which can lead to exploitation by high-frequency traders, who may front-run the company’s buyback orders, driving up prices and increasing costs for the issuer.  As the chief market policy officer at Brad Katsuyama’s IEX Exchanges observed, complying with Rule 10b-18 makes issuer repurchases “easily identifiable and slow moving, thus allowing them to be targeted by traders that can use faster, more sophisticated strategies to manipulate upward the price of the security, which then increases the prices that issuers must pay. …”[6]  As the global head of trading at a large asset manager put it: “When it comes to handling the corporate buyback, what’s painfully obvious to us is that the corporate buyback is probably the most gameable order in the marketplace. If you pursue liquidity in a corporate buyback algorithm, other participants can easily sense how the algorithm is going to react and try to trade in front of it.”[7]

The argument that Rule 10b-18 is overly restrictive is strongly supported by the fact that over the years regulators and courts have recognized that one can identify most, if not all, market manipulation by the presence of certain common characteristics, and legitimate issuer share repurchases are not accompanied by any of these hallmarks of manipulation.

Specifically, manipulation generally involves certain readily identifiable market behavior. Chief indicia of manipulation are the creation of fictitious trading accounts, the dissemination of false information, and transactions that create the illusion of market activity like wash sales, matched orders, “painting the tape,” spoofing, and similar behavior.

These practices are considered manipulative because they inject false information into the market, distort prices, and mislead investors. Courts and regulators often look for these behaviors when assessing claims of market manipulation. Stock repurchases do not involve any of these indicia of manipulation, and so stock market manipulation by issuers of securities is not a significant problem.

A modest suggestion for reducing the obstacles to stock repurchases is to amend SEC Rule 10b-18 to allow companies to execute share repurchases at or below the midpoint of the NBBO (i.e. at a price between the highest bid and the lowest offer) instead of at a price that does not exceed the NBBO. This change would especially benefit mid-cap companies whose share-trading volume and liquidity is lower than that of the mega-cap companies that currently do most of the share repurchasing on U.S. equity markets. Ideally, Rule 10b-18 would be amended to provide a safe harbor for issuers that does not require compliance with the restrictive conditions of the current rule and allows companies to use their best business judgment about the pricing and timing of their repurchases, subject to general application of the broad securities laws governing manipulation and trading on material non-public information.

ENDNOTES

[1] Jonathan R. Macey, Market Manipulation, Shareholder Heterogeneity and Stock Repurchases (February 15, 2026). Available at SSRN: https://ssrn.com/abstract=6241959 or http://dx.doi.org/10.2139/ssrn.6241959

[2] Onur Bayar, Thomas J. Chemmanur & Mark H. Liu, Dividends versus Stock Repurchases and Long-Run Stock Returns under Heterogeneous Beliefs, 10 REV. FIN. STUD. 578, 616 (2021). https://ssrn.com/abstract=2287322.

[3] Kose John, Subramanian R. Iyer & Ramesh P. Rao, Politics and Regulation of Share Repurchases: Theory and Evidence, S&P GLOB. MKT INTEL. 1, 4 (Sept. 27, 2024). Available at SSRN: https://ssrn.com/abstract=4969150 or http://dx.doi.org/10.2139/ssrn .4969150

[4] Dan Lefkovitz, Stock Buybacks Are Booming in 2025. That’s Bad News for Dividend Investors, Morningstar Indexes, October 8, 2025, https://indexes.morningstar.com/insights/perspective/bltb5182b9245a7714d/stock-buybacks-are-booming-in-2025-thats-bad-news-for-dividend-investors

[5] Xiongshi Li, Mao Ye & Miles Zheng, Price Ceilings, Market Structure, and Payout Policies, 155 J. FIN. ECON. 103818, 8-11 (2024), https://doi.org/10.1016/j.jfineco.2024.103818

[6] Letter from John Ramsay, Chief Market Policy Officer, Inv. Exch. LLC (IEX), to Brent J. Fields, Secretary, SEC (Mar. 27, 2018), https://www.sec.gov/files/rules/petitions/2018/petn4-722.pdf

[7] Id.

Jonathan R. Macey is Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law at Yale Law School and a professor in the Yale School of Management.