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Regulation

SEC should revisit stock buyback limits, commissioner says

SEC Commissioner Robert Jackson
SEC Commissioner Robert Jackson

Corporate stock buybacks benefiting executives are growing to the point where the Securities and Exchange Commission should protect investors by revisiting outdated rules governing them, Commissioner Robert Jackson Jr. said Monday at a Center for American Progress event in Washington.

In the first quarter of 2018 alone, American corporations bought back a record $178 billion in stock. "Because we at the SEC have not reviewed our rules governing stock buybacks in over a decade, I worry whether these rules can protect investors, workers and communities from the torrent of corporate trading dominating today's markets," Mr. Jackson said. "Even more disturbing, there is clear evidence that a substantial number of corporate executives today use buybacks as a chance to cash out the shares of the company they received as executive pay."

Mr. Jackson said he is also asking his fellow commissioners to allow an open comment period "to re-examine our rules in this area to make sure they protect employees, investors and communities, given today's unprecedented volume of buybacks," he said.

According to research Mr. Jackson released Monday, stock buybacks are increasingly used by executives to cash out. His staff studied 385 buybacks over the last 15 months, matched to executive stock sales available in SEC filings.

One finding was a jump in stock price of more than 2.5% in the 30 days after the announcements studied. And in half of the buybacks studied, at least one executive sold shares in the month following the buyback announcement, and twice as many companies have insiders selling in the eight days after a buyback announcement than on any other trading day.

"Thus, executives personally capture the benefit of the short-term stock-price pop created by the buyback announcement," said Mr. Jackson. While such trading is not necessarily illegal, "it 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," he said.

SEC rules first adopted in 1982 and last updated in 2003 offer corporate executives a safe harbor from securities-fraud liability if the pricing and timing of buyback-related repurchases meet certain conditions. "In the meantime, the use of stock-based pay at American public companies has exploded," Mr. Jackson said at the event.

The growing practice of paying executives in stock to give them incentives to create long-term, sustainable value "only works when executives are required to hold the stock over the long term," he said.

Mr. Jackson also called on the SEC to complete rulemaking on several Dodd-Frank Act provisions that were designed to give investors more information about whether and how managers cash out. "Investors deserve to know when corporate insiders who are claiming to be creating value with a buyback are, in fact, cashing in," Mr. Jackson said.

Bartlett Naylor, financial policy advocate for watchdog group Public Citizen, commended Mr. Jackson for highlighting "one of the most profound misallocations of capital. Because executives are free from anti-manipulation rules, they've steered hundreds of billions in buybacks to pad millions onto their stock-fed paychecks. The SEC can and must fix this mess," Mr. Naylor said.