U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler, testifies before the Senate Banking, Housing and Urban Affairs Committee during an oversight hearing on Capitol Hill in Washington, September 15, 2022.
Evelyn Hockstein | Reuters
WASHINGTON — As investors focused this week on earnings and regional banks, the Securities and Exchange Commission quietly adopted new rules that will require public companies to disclose far more information about stock buybacks than they ever have before.
The new rules “will increase the transparency and integrity” of corporate stock repurchasing overall, and allow investors “to better assess issuer buyback programs,” SEC Chairman Gary Gensler said in a statement about the updated disclosures.
Gensler also noted the soaring rate at which U.S. corporate buybacks have grown in recent years, from a total of $950 billion worth in 2021, to more than $1.25 trillion worth last year.
This year could be just as big. Google parent Alphabet announced last month that its board had approved $70 billion in stock buybacks this year, matching the amount the company spent repurchasing its own shares in 2022. This week, Apple announced plans to buy back even more stock than Google: $90 billion worth this year, on the heels of a previous $90 billion in 2022.
The new disclosure rules will begin to apply when U.S. corporations report earnings for the fourth quarter of 2023, and to foreign issuers on a slightly longer timeline.
What public companies will need to disclose
- A daily log of share repurchase activity, disclosed at the end of each quarter as an exhibit in 10-Q reports and the annual 10-K report.
- A description of the rationale behind each buyback, and the goals of that buyback. The issuer will also need to explain the criteria it used to determine how many shares to repurchase.
- Whether certain directors or officers of the company bought or sold any of the shares in question within four days before or after the buyback.
- More details about company stock trading agreements with their 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.
Approved by a commission vote of 3-2 on Wednesday, the new rules mark the end of a yearslong battle over how much information the public and shareholders have a right to know about the increasingly common practice of companies repurchasing their own shares.
They also reflect a bigger debate nationwide about share buybacks, which typically increase the value of a company’s shares by reducing the total number of shares in the market.
With top executives’ compensation often linked to share price performance metrics, buybacks have emerged in the past decade as a relatively simple, quick means by which to raise a company’s stock price, much simpler in many cases than it is to grow sales, expand operations, or increase profits.
Markets have also seen an increase in the practice of public companies issuing debt in order to buy back their own shares, a practice that some economists believe poses a threat to the long-term health of the U.S. economy.
The changes approved Wednesday represent a softening of the SEC’s initial proposed disclosure rules, which would have required public companies to report trades by corporate insiders on a daily basis. The commission said its final decision was influenced by concerns raised in public comments, that daily reporting would be too expensive and time consuming.
Public interest groups, many of which have become increasingly critical of widespread corporate buybacks, applauded the new rules.
“Stock buybacks have grown substantially in recent years and increasingly they are used to enrich executives instead of re-investing capital to advance a company’s long-term productivity, profitability, and employee welfare,” said Stephen Hall, legal director at the nonprofit 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 deter companies from repurchasing their own shares.
“The commission’s attempt to discourage these commonplace, commonsense transactions via an overly complicated, expensive and unworkable disclosure mandate is … a departure from its mission to enhance capital formation and protect investors,” said Chris Netram, managing vice president of the National Association of Manufacturers.
On Capitol Hill, bipartisan support for stricter buyback disclosure rules has been apparent since the start of the SEC’s rulemaking process, more than a year ago.
Capital markets “provide the means by which companies raise capital and invest it productively for the good 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 of corporate buybacks, they wrote, represented a shift “toward transactions in securities for the purposes of financial engineering over raising capital to invest productively in trade and industry.”
The SEC has repeatedly stated that it does not have a position on whether corporate share buybacks are good or bad, and that the new disclosure rules merely reflect the growing importance of buybacks as a key element of corporate strategy.