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Regulation

New research warrants revisiting SEC stock buyback rules, commissioner says

Robert Jackson Jr. is concerned about the reasons behind recent corporate stock buybacks.

The SEC should have an open comment period to revisit rules on stock buybacks by corporate insiders that "should do more to protect ordinary investors who save for the long run," SEC Commissioner Robert J. Jackson Jr. said Wednesday.

Mr. Jackson's call to update buyback rules came in a letter to Sen. Chris Van Hollen, D-Md., who requested more information on Mr. Jackson's research on the relationship between buybacks and executive stock selling, including whether the findings could be coincidental.

Further statistical analysis shows that executives sell far more stock when they announce a buyback than on an ordinary day, even after controlling for firms' policies on insider trading, Mr. Jackson said in the letter. The new research looked at all buybacks from January 2017 to the end of 2018.

Mr. Jackson's latest analysis also uncovered a new finding: Firms that let insiders sell on buyback announcements perform worse over the long term. "The analysis does not show whether insiders' sales cause lower-run returns or whether insiders correctly anticipate that returns will be lower so sell opportunistically," Mr. Jackson wrote. But the distinction should not matter because, "the opportunity to cash out stock-based pay gives executives reasons to pursue buybacks that do not produce long-term value," he said. "Those incentives deserve attention from the SEC."

Current SEC buyback rules "do nothing to distinguish between buybacks that allow executives to cash out and those that produce long-term value for investors," Mr. Jackson said in the letter.

Mr. Van Hollen and 20 other Democratic senators in June called on the SEC to revisit Rule 10b-18, which allows public companies to buy back their shares without fear of being charged with stock market manipulation.

On Monday, Mr. Van Hollen called for the SEC to host a roundtable and review current rules on buybacks, which he said have risen since tax reform was passed in 2017. "It's clear that the SEC must review its current buyback rules to do more to protect investors. I plan to introduce legislation in the coming weeks to ensure they will do just that," he said in a statement.

Before Rule 10b-18 was adopted in 1982, New York Stock Exchange-listed companies spent 2% of profits on buybacks; from 2004 to 2014, the largest U.S. companies have spent 51% of profits on buybacks, according to a Brookings Institution study cited by the senators. "It is imperative that the SEC revisit the evolution of Rule 10b-18 to ensure that corporate executives are not using the rule inappropriately," said the senators, who are considering drafting legislation requiring the SEC to begin considering revisions to the rule.