UPDATE: The U.S. Chamber of Commerce obtained a major victory for American businesses, investors, and retirement savers after the Fifth Circuit Court of Appeals vacated the Securities and Exchange Commission’s (SEC) stock buyback rule.
“The Fifth Circuit’s decision on buybacks is a big win for American businesses, investors, and retirees over government micromanagement," said Chamber President and CEO Suzanne P. Clark. "The court’s decision to vacate this rule underscores a much deeper problem as the SEC rushes to adopt a slew of ideologically driven rules: a failure to even consider the cost and impact these regulations will have on companies, U.S. capital markets, and investors. The Chamber is hopeful that the court’s decision will cause the SEC to take pause before it attempts to move forward on its more far-reaching and aggressive agenda.”
MORE: Chamber of Commerce v. SEC
Court rules SEC acted arbitrarily
On Oct. 31, 2023, the Fifth Circuit Court of Appeals found that the SEC acted arbitrarily and failed to justify its costs in its final rule on stock buybacks.
Tom Quaadman, Executive Vice President of the U.S. Chamber’s Center for Capital Markets Competitiveness (CCMC), released the following statement in response to the Chamber’s victory in its lawsuit against the Securities and Exchange Commission’s stock buyback rule.
“Yesterday’s decision by the Fifth Circuit is a victory for the ability of companies to make business decisions free from government micromanagement. Stock buybacks are an important tool for companies to grow their businesses and return value to shareholders — including millions of Americans saving for retirement. The court ruled that the SEC acted arbitrarily and failed to substantiate the costs and benefits of its rule, which reflects deeper problems regarding the commission’s rulemaking process."
Chamber sues SEC
The Chamber sued the SEC on May 12.
“Stock buybacks play an important role in the functioning of healthy and efficient capital markets,” said U.S. Chamber Executive Vice President and Chief Policy Officer Neil Bradley. “The SEC’s stock buyback rule doesn’t protect investors. Instead, it puts the thumb on the scale to discourage buybacks despite the fact that the repurchasing of shares improves returns for savers and investors across the economy.
Buybacks efficiently distribute capital to where it is most likely to result in the investments that grow businesses and add value for shareholders and Main Street investors. The Chamber’s lawsuit seeks to protect returns for investors as well as the ability of companies to make decisions free from government micromanagement.”
SEC finalizes rule
The SEC finalized a rule on May 3 curtailing the use of stock buybacks. The U.S. Chamber of Commerce supports responsible share repurchase programs, which promote strong U.S. 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 Chamber’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 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.”
What are stock buybacks?
When public companies have extra cash, they frequently repurchase their stock as a means of efficiently managing that excess capital. Before the Securities and Exchange Commission (SEC) created a means for companies to buy back their stock, there was considerable evidence that some managers would use surplus cash for projects or acquisitions that were not in the best economic interest of the company. Today, share repurchase plans (also called stock buybacks) are a tool used as part of broader management strategies that help companies make healthy financial decisions and provide value to investors.
What are the benefits of buybacks?
Despite these benefits, some policymakers have criticized the use of share repurchase plans, suggesting that when companies choose to buy back their stock, they choose not to make additional investments into other segments of their business, such as research and development (R&D). This, however, is a false choice: Companies do not choose to buy back their stock over their planned expenditures (e.g. R&D) but rather buy back their stock with surplus capital after already fulfilling those commitments. Stock buybacks provide companies with an efficient way to make smart business decisions and manage firm value when they have excess capital that cannot be reinvested in a way that is consistent with their strategic objectives.
Other calls for limiting share repurchase plans stem from criticisms suggesting that companies manipulate the timing of their repurchases to align with the periods when internal shareholders sell their stock. Recent studies, however, show that these arguments are based on flawed research and that, in fact, alignment between internal shareholder sales and share repurchase programs can be explained by the regular schedule and cadence of the corporate calendar rather than behavior meant to create an unfair advantage.
Eliminating buybacks would weaken markets
Limiting or eliminating share repurchase plans would weaken U.S. capital markets. Share repurchases have been shown to help facilitate orderly market trading, reduce transaction costs, reduce market volatility, and provide retail investors with an economic benefit as large as $4.1 billion. Moreover, proposals that would limit or prohibit stock buybacks risk interfering with company governance, planning and decision-making, thereby reducing the ability of companies to manage value.
U.S. Chamber's position
The U.S. Chamber supports policies that promote competitive, transparent, and liquid capital markets, including responsible share repurchase programs. Share repurchases promote strong U.S. capital markets and benefit everyday Americans and retirement account holders. What’s more, share repurchases help the broader economy by returning capital to shareholders who can then reinvest in innovative public and private companies of all sizes, creating efficient capital allocation across markets.
What’s next?
Share repurchase programs will continue to be a topic for debate among policymakers in Washington. The Securities and Exchange Commission recently proposed a rule for public companies that would have a cooling effect on share repurchase activity. The Chamber wrote to the SEC about its proposal, emphasizing the importance of share repurchase programs and encouraging the SEC to reconfigure the rule. In September 2021, legislation was introduced in the Senate that would impose a tax on stock buybacks. Meanwhile, President Biden’s FY 2023 budget proposal includes language that would prohibit company executives from selling their company shares for three years after the conclusion of a share repurchase program.
The Chamber continues to urge policymakers to consider the positive economic effects of share repurchases before acting to limit such programs.
Additional Resources:
- Center for Capital Markets Competitiveness letter to the SEC on its Proposal to Modernize Share Repurchase Disclosure
- Business Trades Coalition letter to the SEC on its Proposal to Modernize Share Repurchase Disclosure
- Study: Corporate Liquidity Provision and Share Repurchase Programs
- Study Addendum: Corporate Liquidity Provision and Share Repurchase Programs
- Blog Post: 3 Things You Need to Know About Stock Buybacks
