From The Intercept:
The Securities and Exchange Commission has admitted that it has no ability to enforce the main rule intended to prevent market manipulation when companies buy back their own stock, and has no intention to do so.
SEC Chair Mary Jo White made the acknowledgement in a response to Sen. Tammy Baldwin, D-Wisc., who queried the agency about stock buybacks. Baldwin is one of a growing number of politicians — including presidential candidates Hillary Clinton and Bernie Sanders — who are citing buybacks as an example of deliberate financial engineering that bolsters concentration of wealth and keeps working-class wages stagnant.
Stock buybacks are an increasingly common practice in which corporations take profits, and instead of investing in facilities, research and development, or boosting worker wages, buy shares of their own stock on the open market, thereby boosting demand and driving up its price. Companies bought back over half a trillion dollars’ worth of their own shares last year.
The practice creates short-term rewards for executives who are paid in stock and stock options, and benefit from an increased price. They also make corporate earnings look better by reducing outstanding shares and increasing the commonly reported ratio of earnings-per-share.
“Corporations take profits, and instead of … boosting worker wages, buy shares of their own stock on the open market”
Prior to the Reagan era, executives avoided buybacks due to fears that they would be prosecuted for market manipulation. But under SEC Rule 10b-18, adopted in 1982, companies receive a “safe harbor” from market manipulation liability on stock buybacks if they adhere to four limitations: not engaging in buybacks at the beginning or end of the trading day, using a single broker for the trades, purchasing shares at the prevailing market price, and limiting the volume of buybacks to 25 percent of the average daily trading volume over the previous four weeks.
In White’s letter to Baldwin, dated July 13, she admits that the SEC doesn’t collect data that would let it know whether companies breach even these generous limits. “Performing data analyses for issuer stock repurchases presents significant challenges,” White writes, “because detailed trading data regarding repurchases is not currently available.”
Initially, Rule 10b-18 didn’t include any disclosure whatsoever on the part of companies. A 2004 revision requires companies to report monthly buyback totals at the end of each quarter, as part of their 10-Q SEC disclosures. But they do not have to disclose how much they repurchase on a particular day.
“The companies have that information, but the SEC doesn’t collect it,” said William Lazonick, a professor of economics at the University of Massachusetts at Lowell, who has done extensive research on buybacks, and who provided the White letter to The Intercept.
White writes in her letter that the rule is not really a rule at all. Baldwin’s “letter asks for a list of all investigations undertaken by the SEC into possible violations of Rule 10b-18,” White writes, but “because Rule 10b-18 is a voluntary safe harbor, issuers cannot violate this rule.”
“I wouldn’t have thought that she would put it that way, but she said it,” said Lazonick.