SEC stock buyback rule fuels fight over mandated disclosures

Depending on one's viewpoint, a new Securities and Exchange Commission rule requiring enhanced public company stock buyback disclosures is either a sensible move to provide added transparency for investors, or a threat to a crucial corporate tool.

"It seems that the SEC's rule is part of a broader strategy in DC from a certain perspective, more of the anti-business perspective, that stock buybacks are somehow insidious or carry with them negative consequences, when in reality they're good for the economy and good for the marketplace," said Evan Williams, Washington-based senior director of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness.

The Council of Institutional Investors backed the proposed version of the rule in a comment letter last year and said it was in favor of added buyback disclosures.

"We believe such enhancements could strengthen the market's ability to assign premia to companies that make capital allocation decisions optimizing the company's long-term performance and assign discounts to companies that do not," CII said.

With stock buybacks at an all-time high, the SEC on May 3 finalized a rule requiring companies to disclose daily stock buyback information either quarterly or semiannually. The required disclosures include the number of shares repurchased each day and the average daily price paid per share.

Companies also have to check a box indicating whether certain directors or officers traded in company securities within four business days before or after the public announcement of an issuer's buyback plan or program.

Moreover, the rule expands narrative buyback disclosure requirements to include a company's objectives or rationales for buybacks and the process or criteria used to determine the amount of repurchases; and any policies and procedures relating to buybacks and sales of the company's securities during a buyback program by its officers and directors, including any restriction on such transactions.

In response, the U.S. Chamber, the Texas Association of Business and the Longview Chamber of Commerce filed a lawsuit May 12 in the 5th U.S. Circuit Court of Appeals, New Orleans, arguing that the SEC rule disincentivizes companies from using stock buybacks and violates the Administrative Procedure Act and U.S. Constitution.

"The Chamber doesn't make decisions about suing a regulator lightly," Mr. Williams said. "We only bring only lawsuits against regulators when we believe that we can practically improve the outcome for our membership."

He added, "We're not suing the SEC because we think it would be fun. We're suing the SEC because we think that there are real practical consequences for the rule-making and want to make sure that those consequences are not realized."

But Stephen W. Hall, legal director and securities specialist with the Washington-based non-profit watchdog Better Markets, said the lawsuit fits a familiar pattern of business groups filing legal challenges against regulators.

"This is a pattern and practice that the Chamber and other corporate and industry groups are engaging in, which is to attack SEC rules on any number of legal theories in hopes of dismantling them," Mr. Hall said. "And it's sad because it runs counter to the public interest. These rules are beneficial — this one and others — but they're essentially trying to judicially nullify rules that the SEC is putting out for the public and for investors. It's a disheartening spectacle."

After the lawsuit was filed, an SEC spokeswoman said in an email that the commission "undertakes rule-making consistent with its authorities and laws governing the administrative process, and we will vigorously defend the challenged rule in court."

In April, a federal judge sided with the SEC in a separate lawsuit brought by the Chamber and two other business groups challenging the agency's 2022 rule-making on proxy-voting advice.

Global stock buybacks in 2022 reached an all-time high $1.3 trillion, 22% higher than the previous year, according to research from asset manager Janus Henderson Investors.

By sector, buybacks were paced by tech ($285.7 billion) and financial ($245.5 billion) companies, but the biggest contributor to overall growth in 2022 came from the oil sector, in which companies bought back $135.2 billion of their own shares, more than four times as much as 2021, noted Ben Lofthouse, London-based head of global equity income at Janus Henderson.

U.S. companies are the overwhelming leaders in the area, completing $932.4 billion in stock buybacks last year, up from $758.4 billion in 2021.

In 2018, stock buybacks in the U.S. jumped to $727.8 billion from $491.7 billion the previous year.

In 2017, Republicans passed a tax bill that cut the corporate tax rate to 21% from 35%, but when asked if the bill added to the growth in buybacks, Mr. Lofthouse said the increase was instead due to strong performances by tech companies that favor buybacks.

"The ultimate message is that companies are doing a pretty good job in aggregate of being disciplined with their cash for U.S. investors and often the worst outcomes for investors have been where companies invest their cash without discipline in large M&A or needless expansion into overcapacity," Mr. Lofthouse said.

The Chamber's Mr. Williams said buyback opponents typically view the practice as a binary choice between returning capital to shareholders or investing in the company and helping employees, but that's not accurate.

"While it might be nice to invest back into research and development or improve employee benefits, if you can't do those things sustainably because those were done with excess cash you actually lead to value destruction," he said.

He also worried that SEC rule's narrative disclosure requirements could get companies in trouble.

"In asking companies to disclose an objective or a rationale for a buyback, you're effectively asking them to speak to the political moment." Mr. Williams said. "You're asking them to say, 'We've chosen to empower our shareholders vs. empowering research and development or other stakeholders within our company.'"

David A. Brown, Washington-based partner at Alston & Bird LLP, said the SEC "is really using disclosures to put their thumb on the scale to disincentive share repurchases."

He added, "When you have to disclose what you purchase every single day there's an administrative burden and administrative cost to doing that."

But at the SEC's May 3 meeting, Chairman Gary Gensler said the rule "will increase the transparency and integrity of this significant means by which issuers transact in their own securities."

Better Markets' Mr. Hall said investors benefit from increased transparency.

"All that data is essential for investors to really get a fair picture of what their company is doing with its capital," he said. "That level of granularity is absolutely necessary to paint a meaningful picture on which investors can make decisions about whether they believe management is leading the company appropriately, what they want to do with their investments in the company, (and) whether they think their money would be better put elsewhere."

The SEC, Mr. Hall added, is "not trying to trample on corporate rights to conduct these repurchases, but it is making sure that investors are protected with the information that they need to understand what the companies they've invested in are up to."

The Chamber's Mr. Williams worries that companies may opt out of stock buybacks because such granular disclosures could be reverse engineered by sophisticated investors with artificial intelligence programs "to match corporate statements to buyback activity and try to delineate corporate strategy therefrom and then turn around and extrapolate that strategy."

Another potential hurdle to implementing a stock repurchase is the 1% excise tax established under the Inflation Reduction Act, a major climate, health care and spending bill, that Democrats passed in August. And this year, President Joe Biden in March unveiled a proposed budget to raise the buyback tax to 4%.

If such an increase were to be enacted, which seems unlikely in the near term, it would likely impact companies' buyback calculations.

"I think companies at the 1% will probably look at it as a cost of doing business," Mr. Brown said. "If you raise it to 4% that might make using the capital this way a little bit different and they might make different decisions."