SEC Commissioner Robert J. Jackson Jr. advocated for the review and revision of SEC rules to limit executives from using stock buybacks to cash out at the expense of investors. Mr. Jackson was responding, in part, to the “unprecedented wave of buybacks” following the Trump Administration’s Tax Bill in December 2017.
In a speech at the Center for American Progress, Mr. Jackson expressed concern that current rules incentivize corporate executives to pursue “short-term stock-price spikes rather than long-term growth.” According to Mr. Jackson, the current regulatory approach is based on the belief that paying executives in stock incentivizes them to create long-term sustainable value. However, Mr. Jackson argued, that theory “only works when executives are required to hold the stock over the long term.” Mr. Jackson stated that sponsors of the recent Tax Bill believed incorrectly that the deduction would encourage corporations to invest that money in innovation or into their workforce. He observed that within the first quarter of 2018, American corporations bought back a record $178 billion in stock instead, often causing a spike in the companies’ share prices. During that same period, Mr. Jackson found, executives in those companies sold more of their own shares shortly after a buyback announcement than before, and without a requirement for the contemporaneous disclosure of their actions.
Mr. Jackson urged the SEC to (i) amend its buyback rules to deny “safe harbor” from securities-fraud liability to companies that allow executives to cash out during a buyback, and (ii) encourage corporate executives to “keep their skin in the game for the long term.” Mr. Jackson also called on corporate boards and their counsel to analyze the “implications of a buyback for the link between pay and performance” of their executives.
Additionally, Mr. Jackson requested an open comment period to allow the SEC to review stock buyback rules.
Lofchie Comment: The role of an SEC commissioner is to establish securities law policy, not to rewrite tax policy. Tax policy is driven by considerations that are somewhat larger than executive stock buybacks. From an economic standpoint, Commissioner Jackson’s observation that companies used the reduction in taxes to buy back their stocks, largely from U.S. investors, as opposed to investing in “innovation,” is an inconsequential one. If money sitting overseas is returned to U.S. investors, those investors can buy consumer goods (boosting the economy), invest in other companies (boosting the economy) or put their money in the bank (saving and bringing down the cost of lending). Buying back stock is not a destructive act.
As to securities law policy, the Commissioner first questions whether issuers should be prevented from making false assertions that they intend to buy back stock. Though that concern is somewhat inconsistent with the Commissioner’s assertion that issuers really were buying back massive amounts of stock, it seems perfectly reasonable for the SEC to investigate whether issuers may falsely assert that they will buy back their own stock when they have no intention of doing so. Second, the Commissioner expresses concern that executives who receive stock as part of their compensation resell it (an economically rational move, for example, assuming it would diversify the executive’s total investments), rather than maintaining their investment in their companies. The relevant question is whether there should be a mandatory period of time for which executives should be required to hold stock that they receive as part of their compensation. Assuming that this is a question for the SEC to answer, rather than one that should be left to each corporate board, the question would have relevance as to any executive holding corporate stock. Tying the issue to corporate buybacks diminishes the universality of the issue.
In short, the Commissioner could better advance his recommendations if he did so by arguing from a policy basis that is founded on the mission of the SEC, rather than by using uncertain claims (albeit claims worth looking into) as justification for what appears to be a partisan attack on the tax law.