In May, a bill that would require the U.S. Securities and Exchange Commission (SEC) to study the rules governing corporate stock buybacks was debated by the House financial services subcommittee. The bill directs the SEC to study potential amendments to Rule 10b-18 that would address some perennial criticisms of the existing buyback regime.
Instead of hiring new workers or investing in new products, critics argue that corporations are using the money to spike their own share prices and reward investors and insiders. Among other topics, the draft bill directs the SEC to study whether to:
- Expressly limit the ability of an issuer to announce or implement a stock repurchase plan that such issuer does not intend to fulfill
- Restrict insiders from selling stock or exercising options following the announcement of a buyback
- Explore mandating a set of new disclosures around executive compensation tied to stock price of the company and other information
“In my view, the basic facts are already clear, and it is time for action,” said Heather Slavkin Corzo, director of capital markets policy for the AFL-CIO. “Congress must pass legislation to affirmatively address stock buybacks before companies spend trillions of dollars more to artificially boost their stock prices — trillions of dollars that could be invested in research and development, growth, and employee compensation and training.”
A parallel measure in the Senate would go even further than the House bill. The Senate version, known as the Reward Work Act, would repeal Rule 10b-18 outright. This bill would prevent companies from buying back stock on the open market and would instead require them to rely on tender offers.
In March, Robert Jackson, a Democratic SEC commissioner, shared the results of original research from his office on buybacks. That research found that insiders sell more stock on days when a company announces a buyback, and that “insider selling on buybacks is associated with worse long-term performance,” among other findings.
“It’s well known that some buybacks produce long-term stock-price increases while others lead only to a short-term price pop,” Jackson wrote. “We show that, when executives unload significant amounts of stock upon announcing a buyback, they often benefit from short-term price pops at the expense of long-term investors. SEC rules do not address insiders’ incentives to pursue buybacks at the expense of buy-and-hold American investors.”
To learn more about this bill and how it will impact existing buyback regime, contact a Weaver professional today.
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