Twenty Democratic Senators Urge SEC to Increase Stock Buyback Oversight
June 30, 2018
A group of 20 Democrat Senators, led by Senate Minority Leader Charles Schumer (D-NY) and Sens. Tammy Baldwin (D-WI and Chris Van Hollen (D-MD) have joined a letter urging to SEC Chair Jay Clayton to open a public comment period “to review how companies are conducting buybacks under Rule 10b-18 and whether corporate insiders are exploiting buyback to sell shares received as executive pay at inflated prices.”
SEC rule 10b-18, which was adopted in 1982, gave companies with a safe harbor protection against market manipulation when repurchasing shares. “Since that time, there have been significant changes in executive compensation practices, shareholder activism, and investing technology,” the June 28 letter states. It further argues “the explosion of stock buybacks has funneled corporate profits to wealthy shareholders and corporate executives instead of workers and long-term investments that spur sustained economic growth.”
Referencing research by Commissioner Robert Jackson that stock sales by insiders rose after the buyback announcements, the Senators stated “this phenomena means it is imperative that the SEC revisit the evolution of Rule 10b-18 to ensure that corporate executives are not using the rule inappropriately to enable advantageous sales of their own stock while ignoring the needs of their companies’ workers.”
The Senators also noted that Chairman Clayton had indicated that further exploration of whether buybacks are motivated by “some short-term interest” rather than the long-term interest of the company was warranted, and Commissioner Hester Peirce had indicated during her confirmation hearing that a review of the SEC’s rules in this area would be timely to look at the evidence about how buybacks are used and “whether, in light of this evidence, changes to the regulatory framework are needed.”
The letter is an indication that initiatives to encourage the SEC to review the rules around buybacks and either limit the circumstances surrounding buybacks or requiring greater disclosure justifying buybacks is likely to grow, at least for the present time.