Dissenting Statement on Proposed Rules Regarding Share Repurchases
Dec. 15, 2021
Thank you to the staff for your work on this rule, and thanks especially for the time you spent working with my office and me. Today’s proposal is targeted at company share repurchases, otherwise known as “buybacks.” In 2020, U.S. public companies conducted over $700 billion of buybacks, and the figure in 2021 has already eclipsed that number. This proposal would require more timely disclosure on a new Form SR regarding a company’s purchases of its equity securities for each day that it, or an affiliated purchaser, makes a share repurchase. The proposal would also enhance the existing periodic disclosure requirements about these purchases.
While I appreciate the effort that the staff put into this rulemaking, I am not able to support it. This is disappointing because I believe that there are regulatory enhancements in this area that would benefit the marketplace. However, I believe that the proposed rule is not the right approach and could likely result in companies reducing their use of buybacks, even when they believe that conducting a buyback would be in the best interest of the company and shareholders; it could also have other negative effects on the market and investors.
Taking a step back, I think it is important to note that we cannot look at this proposal in isolation; rather, it is inextricably linked with the proposed rule on 10b5-1 plans that we just considered since both proposals involve rules that apply to issuers’ purchases of their own outstanding stock. We should have combined these two proposals so that we and commenters could better consider their individual and combined effects. In addition, I am skeptical that we can develop an appropriate baseline for the economic analysis of either rule, given that a realistic baseline should have taken assumptions about the markets with the companion rule either in place, or not in place. In other words, the baseline for the current rule looks different depending on whether the rule on 10b5-1 plans is adopted or not. If both are adopted, each will influence actions of boards and executives as well as affect the markets.
Buybacks have grown to be a political hot button issue. They are frequently a topic in financial news and in discussions by politicians. But it is important for us to understand how buybacks actually occur as well as the purposes they serve in our markets as we consider making changes to our rules.
Unfortunately, missing from today’s proposal is a detailed discussion about how a company makes a decision to conduct a buyback including: the levels of thought, analysis, and work done by company employees when they make recommendations to the board about whether a buyback is appropriate; the board’s process for approving a buyback; the delegation to management; and management’s execution of the buyback. I hope commenters provide this insight because I think it could help educate the Commission and the public about how buybacks are effectuated across different companies and also the diligence and care companies take when they make these decisions. I also believe this information could help illuminate how companies and boards address the risk of buybacks being misused by insiders.
My understanding is that a company can initiate a buyback for a multitude of reasons, including that the board believes the company has excess cash, which the shareholders can make better use of directly, or the company’s shares are undervalued in the market. Additionally, since a large part of executive compensation now takes the form of equity grants, buybacks can be partially about ensuring that executive compensation does not dilute other shareholders but better aligns the executives’ incentives with shareholders’ interests.
We must also understand the existing regulatory structure that governs buybacks. For example, companies’ management and boards of directors have fiduciary duties to shareholders. One of the main jobs of management and boards is to decide how to use the capital that shareholders have provided and the assets that a company owns. For a long time, companies have had to make the decision of whether it is better to use cash on hand to grow or whether the cash would be best redistributed to shareholders because they are in a better position to use it outside of the company. Buybacks and dividends are just two examples of this, and some have argued that companies should be redeploying money even more often than they do today.
Buybacks can have important benefits for shareholders and our capital markets. Receiving payments for shares, investors ostensibly redeploy the money elsewhere, investing in other companies that may have more valuable uses for the funds. Buybacks also can communicate information to shareholders about how a company believes its shares are valued.
What Problem are We Trying to Solve?
The proposal we are considering today provides a few justifications for new regulation of buybacks. One, which I do not believe is well enough substantiated in our analysis yet seems to be the most heavily discussed, is the concern that company insiders are using buybacks to manipulate companies’ stock prices as a way to increase the value of their own equity compensation.
Although today’s proposal includes considerable discussion of this purported problem, it includes very little discussion of substantial contrary evidence. Relegated to a footnote in the release is the mention of a study conducted by our own staff—less than one year ago!—containing analysis and findings running counter to the release’s premise about such a problem. This study, sent to Congress on December 23, 2020, stated, among other things, that “the relatively low incidence of firms having earnings-per-share (EPS)-based performance targets, as well as the rate at which boards of directors consider the impact of repurchases when setting EPS-based performance targets or determining whether they have been met, further supports the conclusion that efforts to increase compensation are unlikely to account for most repurchase activity.” More succinctly, the study found that it was unlikely that most buybacks were motivated by a desire to inflate share prices to benefit insiders compensated in stock.
It is surprising that, not even one year after reaching this conclusion, our staff would now find not only that buybacks are indeed often motivated by a desire to manipulate stock prices for executive gain but also that this has been occurring on such a scale as to merit a dedicated rulemaking to address it. In light of what we at the SEC actually know about buybacks, I cannot accept that we would propose these new rules to the extent they aim to prevent behavior our own staff has not found occurs.
I find another justification more compelling. This is related to a concern that issuers may initiate buybacks when (1) the board and management both believe that the company is undervalued and (2) the company may not inform the market or may provide insufficient information to the market about the buyback, in an appropriate amount of time. The issuer will therefore be able to buy its shares at a reduced price, exploiting this information asymmetry to the benefit of itself and external shareholders who do not sell (and to the detriment of those external shareholders who do decide to sell).
Dangers of Overcorrecting
Should we find a way to get a company’s intent to conduct a buyback and the relevant buyback information out into the market? Yes. Should we do it in a way that does not deter companies from conducting buybacks? Yes. Does this rule achieve that goal? Unfortunately, I do not believe it does.
I worry that the proposed daily reporting of buyback transactions will be overly burdensome to companies. They will likely reduce buyback activity below optimal levels and keep cash, even when they do not need it. Allowing some companies to hoard cash will not only hurt other companies, who could put the money to very good use, but will likely hurt the broader economy.
In the instances where companies would decide to continue repurchasing their shares in spite of the new proposed burdens, I also worry that the proposed daily activity reports could provide a roadmap for traders to figure out the company’s upcoming trades and trade ahead of them. This would artificially raise the stock price for everyone and reduce market efficiency.
I think a better approach to address the potential information asymmetries involved in stock buybacks would be for companies to disclose, ahead of time, their plans to do a buyback and provide the relevant buyback information in such disclosure. Companies could provide this information in a Form 8-K; if a company were to later decide not to conduct the buyback, or to modify the buyback in a material way, it could file a new Form 8-K. This approach would communicate necessary information to the market without creating a daily burden for companies, discouraging buybacks, or having the same foreseeable negative consequences for the market as those I discussed with this proposal. Unfortunately, that is not the rule before us today.
Finally, I am extremely concerned about the short comment period for this proposal. It will be only 45 days. There are several items included in this rule that would benefit from robust and thoughtful comment from the public. But our comment period will fall during several major holidays. It will also coincide with comment periods for five other proposed Commission rules. If you include the four new proposals on which we are voting today, the public is left with hundreds of questions on which we are seeking input in this short amount of time. I am not at all confident that this rushed schedule will provide the needed feedback that is essential to a well-functioning rulemaking process.
For these reasons, I respectfully dissent.
 See Wiltermuth, Joy, “Companies On Pace To Pencil in $1 Trillion in Share Buybacks in 2021, As Proposed New Tax Looms,” MarketWatch (Oct. 23, 2021), https://www.marketwatch.com/story/companies-on-pace-to-pencil-in-1-trillion-in-share-buybacks-in-2021-as-proposed-new-tax-looms-11634938002; see also Langley, Karen, “Buybacks Hit Record After Pulling Back in 2020,” Wall Street Journal (Dec. 12, 2021), https://www.wsj.com/articles/buybacks-hit-record-after-pulling-back-in-2020-11639263140?page=1.
 See Securities and Exchange Commission Proposed Rule, “Rule 10b5-1 and Insider Trading,” Rel. No. 33-11013, (Dec. 15, 2021), https://www.sec.gov/rules/proposed/2021/33-11013.pdf?utm_medium=email&utm_source=govdelivery.
 Securities and Exchange Commission, “Share Repurchase Disclosure Modernization” (Dec. 15, 2021), Rel. No. 34-93783, note 58, citing Staff of the Securities and Exchange Commission, “Response to Congress: Negative Net Equity Issuance” (Dec. 23, 2020), https://www.sec.gov/files/negative-net-equity-issuance-dec-2020.pdf (“There are several possible reasons why firms conduct repurchases, only some of which are consistent with efficient investment. Three facts suggest that the theories inconsistent with firm value maximization cannot account for the majority of repurchase activity. First, repurchase announcements are accompanied by stock price increases. This announcement effect does not dissipate over time, as one would expect if repurchases were based on efforts to manipulate share prices. Second, most of the money spent on repurchases over the past two years was at companies that either do not link managerial compensation to EPS-based performance targets or whose boards considered the impact of repurchases when determining whether EPS-based performance targets were met or in setting the targets, suggesting that other rationales motivated the repurchases. Third, option-based managerial compensation cannot account for the increased substitution from dividends to repurchases, since option pay has declined over the past 20 years. Collectively, these findings potentially suggest that most repurchase activity does not represent an effort to artificially inflate stock prices or influence the value of option-based or EPS-linked compensation.”)
 See id.
 See Electronic Submission of Applications for Orders under the Advisers Act and the Investment Company Act, Confidential Treatment Requests for Filings on Form 13F, and Form ADV-NR; Amendments to Form 13F, Rel. No. 34-93518 (Nov. 4, 2021), https://www.sec.gov/rules/proposed/2021/34-93518.pdf (comments due December 20, 2021); Updated EDGAR Filing Requirements, Rel. No. 33-11005 (Nov. 4, 2021), https://www.sec.gov/rules/proposed/2021/33-11005.pdf (comments due December 22, 2021); Proxy Voting Advice, Rel. No. 34-93595 (Nov. 17, 2021), https://www.sec.gov/rules/proposed/2021/34-93595.pdf (comments due December 27, 2021); Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants, Rel. No. 34-93614 (Nov. 18, 2021), https://www.sec.gov/rules/proposed/2021/34-93614.pdf (comments due January 3, 2022); Reporting of Securities Loans, Rel. No. 34-93613 (Nov. 18, 2021), https://www.sec.gov/rules/proposed/2021/34-93613.pdf (comments due January 7, 2022).
 See Securities and Exchange Commission, “Open Meeting Agenda - December 15, 2021,” https://www.sec.gov/os/agenda-open-121521 (noting that the Commission will consider rule proposals on: (1) Rule 10b5-1 and Insider Trading; (2) Share Repurchase Disclosure Modernization; (3) Money Market Fund Reforms; and (4) Security-Based Swap Positions)