SEC commissioner calls for updating stock buyback rules

A commissioner on the Securities and Exchange Commission (SEC) on Monday called on his colleagues to update and reexamine rules relating to stock buybacks following an increase in buybacks after the enactment of President Trump’s tax-cut law.

Robert Jackson, who was appointed by Trump to one of the SEC’s Democratic seats, expressed concerns about the fact that corporate executives are using stock buybacks as an opportunity to cash out the stocks they receive as part of their compensation.

“We give stock to corporate managers to convince them to create the kind of long-term value that benefits American companies and the workers and communities they serve,” Jackson said in a speech at the left-leaning Center for American Progress. “Instead, what we are seeing is that executives are using buybacks as a chance to cash out their compensation at investor expense.”

{mosads}

Corporate stock buybacks hit a record high in the first quarter of 2018, after the tax-cut bill passed in December, Jackson said. The law cut the corporate tax rate from 35 percent to 21 percent and provides low tax rates for the repatriation of companies’ foreign earnings.

Democrats have argued that the boom in buybacks shows that the tax law is designed to help wealthy shareholders and executives rather than the middle class. Republicans, on the other hand, have defended the buybacks, arguing that many people across the income spectrum hold stocks and that buybacks can make capital investments more efficient.

Jackson said that corporate executives often receive stock-based pay as an incentive to create value for the companies they run, but that this only works if executives are required hold the stock for a long period of time. Frequently, executives aren’t holding their shares for the long run.

Jackson said his staff looked at 385 stock buybacks that took place over the last 15 months and found that in about half of those cases at least one executive sold shares in the month after his or her company announced buybacks. The findings show that executives substantially increase their sales of shares following a buyback announcement and personally benefit from the boost in stock prices that occurs following the announcements. 

The commissioner said that executives’ behavior isn’t necessarily illegal but is “troubling, because it is yet another piece of evidence that executives are spending more time on short-term stock trading than long-term value creation.”

“It’s one thing for a corporate board and top executives to decide that a buyback is the right thing to do with the company’s capital,” Jackson said. “It’s another for them to use that decision as an opportunity to pocket some cash at the expense of the shareholders they have a duty to protect, the workers they employ, or the communities they serve.”

The SEC adopted rules in 1982 that give companies a “safe harbor” from securities-fraud liability if stock buybacks meet certain conditions. These rules were updated in 2003 and don’t include any limits on executives using buybacks and the safe harbor as a chance to cash out their shares.

Jackson said he thinks the SEC should update its rules so that the safe harbor is denied to businesses that allow executives to use a stock buyback to sell their own shares. He also said he wants to establish an open comment period “to reexamine our rules in this area to make sure they protect American companies, employees, and investors given today’s unprecedented volume of buybacks.”

Democrats hold two of the five seats on the SEC. When Jackson was asked if he thinks he can get a majority of the commission to vote for his proposals, he replied, “Hope springs eternal, man.”

Jackson said he works closely with SEC Chairman Jay Clayton, a Republican. He also said the more convincing he can be by presenting evidence of what’s happening in the markets, the more likely he’ll be able to persuade the other commissioners.

“I’m naive enough to imagine that that might happen,” he said.