U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler testifies before the Senate Committee on Banking, Housing and Urban Development during an oversight hearing on Capitol Hill in Washington September 15, 2022.
Evelyn Hockstein Reuters
WASHINGTON — As investors focused on earnings and regional banks this week, the Securities and Exchange Commission quietly passed new rules requiring public companies to disclose far more information about share buybacks than ever before.
The new rules “will increase the transparency and integrity” of company stock buybacks overall and allow investors “to better assess issuer buyback programs,” SEC Chairman Gary Gensler said in a statement accompanying the updated disclosures.
Gensler also noted the rapid pace at which US corporate buybacks have grown in recent years, from a total of $950 billion in 2021 to more than $1.25 trillion last year.
This year could be just as big. Google parent Alphabet announced last month that its board of directors has approved $70 billion in share buybacks this year, which is the amount the company spent buying back its own stock in 2022. This week, Apple announced plans to buy back even more stock than Google: worth $90 billion this year, on the heels of a previous $90 billion in 2022.
The new disclosure rules come into effect when US companies report earnings for the fourth quarter of 2023, and slightly longer for foreign issuers.
What public companies are required to disclose
- A daily log of share repurchase activity, published as an attachment to the 10-Q reports and the annual 10-K report at the end of each quarter.
- A description of the reasons behind each buyback and the objectives of that buyback. The issuer must also explain the criteria it used to determine how many shares to repurchase.
- Whether certain directors or officers of the company bought or sold the shares in question within four days before or after the repurchase.
- More details on the Company’s stock dealing arrangements with its directors and officers, known as 10b5-1 plans. This includes the start and end dates, the total number of shares and the material terms of these plans.
The new rules, approved 3-2 by a commission vote on Wednesday, mark the end of a years-long battle over how much information the public and shareholders are entitled to know about the increasingly common practice of buying back their own shares become.
They also reflect a larger nationwide debate about stock buybacks, which typically increase the value of a company’s stock by reducing the total number of shares on the market.
Because top executive compensation is often tied to stock price performance metrics, over the past decade buybacks have become a relatively easy and quick means of increasing a company’s stock price, in many cases much easier than it is , increase sales or expand operations , or increase profits.
Markets have also seen an increase in the practice by public companies of issuing debt to buy back their own stock, a practice that some economists believe poses a threat to the long-term health of the US economy.
The changes, approved on Wednesday, weaken the SEC’s originally proposed disclosure rules that would have required publicly traded companies to report company insider trades on a daily basis. The commission said its final decision was influenced by concerns expressed in public comments that daily reporting was too expensive and time-consuming.
Public interest groups, many of whom have become increasingly critical of widespread corporate buybacks, welcomed the new rules.
“Share buybacks have grown significantly in recent years and are increasingly being used to enrich executives rather than reinvest capital to boost a company’s long-term productivity, profitability and employee well-being,” said Stephen Hall, legal director at the nonprofit Organization Better Markets. “This final rule will certainly increase the quantity, quality and timeliness of reporting on these controversial transactions.”
But industry advocates called the new rules onerous and unfair, and accused the SEC of trying to prevent companies from buying back their own stock.
“The Commission’s attempt to prevent these mundane, sane transactions through an overly complicated, expensive and unenforceable disclosure mandate is … a departure from its mission to improve capital formation and protect investors,” said Chris Netram, managing vice president of the National Association of Manufacturers.
There has been bipartisan support on Capitol Hill for tougher disclosure rules on buybacks since the SEC’s rulemaking process began more than a year ago.
Capital markets “provide the means by which companies raise capital and invest it productively for the benefit of their investors, workers, communities and ultimately our country as a whole,” wrote Sens. Tammy Baldwin, D-Wisc., and Marco Rubio, R-Fla. , in a letter to Gensler in 2022.
The explosion in corporate buybacks, they wrote, represents a shift “toward securities transactions for the purpose of financial engineering rather than raising capital for productive investment in commerce and industry.”
The SEC has repeatedly stated that it has no position on whether corporate stock repurchases are good or bad and that the new disclosure rules merely reflect the growing importance of repurchases as a key element of corporate strategy.