SEC Commissioner Jackson Calls For Restrictions On Executive Sales During Stock Buybacks

Author:Mr Cydney Posner
Profession:Cooley LLP

In remarks Monday before the Center for American Progress, SEC Commissioner Robert Jackson discussed his recent research on corporate stock buybacks, in the light of the substantial increase in buybacks following the 2017 Tax Cuts and Jobs Act. His focus: to call on the SEC to update its buyback rules "to limit executives from using stock buybacks to cash out from America's companies." If executives are so convinced that "buybacks are best for the company, its workers, and its community," Jackson suggested, "they should put their money where their mouth is."

Jackson began his address with a historical reference to the 2004 corporate tax holiday, which was designed to encourage American companies to repatriate "billions of dollars of overseas cash. But corporations didn't invest most of that money in innovation. They didn't invest it in retraining their workforce or raising wages. Instead, executives largely used the influx of fresh funds for massive stock buybacks." As widely predicted, Jackson continued, in the first quarter of 2018 after the new tax cuts were signed into law last year, American corporations spent a record $178 billion buying back their own stock instead of making "long-term investments in innovation or their workforce that our economy so badly needs." (And according to CNBC, May alone saw a record $171.3 billion in buybacks, with $51.1 billion announced so far in June. CNBC also reports that Wall Street analysts expect full-year buybacks to total as much as $800 billion.)

Given that the rules governing stock buybacks have not been reviewed in more than a decade, Jackson expressed concern over their adequacy and called for "an open comment period to reexamine our rules in this area to make sure they protect employees, investors, and communities given today's unprecedented volume of buybacks."

But Jackson's particular bête noire in this regard was the "clear evidence that a substantial number of corporate executives today use buybacks as a chance to cash out the shares of the company they received as executive pay, especially those shares designed to link executive pay with long-term performance. Jackson observes that grants of equity comp typically result in higher levels of pay, in exchange for which "investorsand the economy as a wholetie executives' fortunes to the growth of the company." To Jackson, allowing executives to cash outat prices often inflated by the company's buyback announcement and open-market purchasing...

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