SEC Moves to Curb Stock Buybacks, Drawing Criticism From Companies and Investors

Securities and Exchange Commission Chair Gary Gensler at the U.S. Treasury Department in Washington, on Oct. 3, 2022. (Anna Moneymaker/Getty Images)

The Securities and Exchange Commission (SEC) moved to curtail the use of stock buybacks, drawing much criticism from corporate lobbyists.

The regulator on May 3 announced changes to share-repurchase disclosure rules that would increase transparency, competition, and efficiency in the $25 trillion marketplace for hedge fund and private equity fund advisors.

The new updates will amend Form PF, which was created in 2008–09 during the Great Recession to monitor risks in the rapidly growing private equity fund sector.

The rule was meant to enhance the quality of confidential regulatory disclosures by large equity and hedge fund advisors regarding their investment strategies and leverage so that investors will be able to better assess issuer buyback programs.

Meanwhile, the U.S. Chamber of Commerce (USCC) objected to the SEC’s move, saying that altering the rules to stock buybacks would actually be counterproductive and slow growth at at time when the economy faces uncertainty.

Stock buybacks plans are normally used as part of broader management strategies enabling companies to use excess cash to repurchase their stock as a means of efficiently managing extra capital.

Many critics oppose the use of share-repurchase plans, alleging that some companies fail to make additional investments into other segments of their business when they sell off their stock or even abuse the strategy to manipulate the timing of their repurchases to assist internal shareholders in selling off their stock.

SEC Adds Restrictions to Company Stock Buybacks

The SEC updates to share-buyback disclosures rules forces domestic and foreign companies to file quantitative disclosures forms for daily repurchases on a quarterly or semiannual basis, depending on the type of issuer.

Issuers will now have to periodically disclose the prior period’s daily buyback activity, including information such as the date of the purchase, the amount of shares repurchased, and the average purchase price for the date.

Additional disclosures will mandate further details stating the objectives or rationales for the buyback as well as the process or criteria used to determine the buyback amount.

“I think that this final rule, through the greater visibility into funds it will provide to regulators, will help protect investors and promote financial stability,” SEC chair Gary Gensler announced at a meeting ahead of the vote.

Financial advisors will also have to notify financial regulators within 72 hours of certain events, which may indicate significant stress or otherwise signal the potential for systemic risk and investor harm, such as significant margin calls or counterparty defaults.

Finally, the latest amendment will require new quarterly disclosures related to an issuer’s adoption and termination of certain trading arrangements.

The aim of the rule is to provide investors with more information to assess the purposes and effects of share repurchases, which last year amounted to nearly $950 billion, the SEC said.

“In 2021, buybacks amounted to nearly $950 billion and reportedly reached more than $1.25 trillion in 2022,” Gensler wrote in a SEC press release.

“Today’s amendments will increase the transparency and integrity of this significant means by which issuers transact in their own securities,” he added.

“Through these disclosures, investors will be able to better assess issuer buyback programs. The disclosures will also help lessen some of the information asymmetries inherent between issuers and investors in buybacks. That’s good for investors, issuers, and the markets,” Gensler concluded.

Chamber of Commerce Says New Rules Hurts Businesses and Retirees

The USCC said that share-repurchase programs promote strong capital markets and benefit everyday Americans and retirement account holders.

“Share repurchase agreements (also known as stock buybacks) improve returns for savers and investors across the economy while at the same time ensuring that capital flows to where it is most likely to result in investments that grow our economy and improve our standard of living,” said Tom Quaadman, executive vice president of the USCC’s Center for Capital Markets Competitiveness.

“Today’s rule by the Securities and Exchange Commission to disincentivize share repurchases will hurt the retirement savings of millions of Americans and result in slower economic growth, hurting the wages of working Americans.”

“Market regulations should reflect economic realities, and it is unfortunate that the SEC chose to prioritize political policies over American investors and the best interests of our economy. The U.S. Chamber [of Commerce] will carefully evaluate the impact of this rule and if it looks at all like the proposed rule, we will pursue litigation to protect investors.” Quaadman added.

The USCC believes that stock buybacks enhance company market transactions and provide retail investors with an economic benefit as large as $4.1 billion.

They said that any restrictions on stock buybacks would interfere with company governance, planning, and decision-making, thus reducing the ability of companies to improve their earnings.

The lobbyist group also opposes language in the White House’s fiscal year 2023 budget proposal, which would prohibit executives from selling their company shares for three years after the conclusion of a share repurchase program.

Reuters contributed to this report.