The amendments contained in the Share Repurchase Disclosure Modernization proposal rulemaking (hereafter referred to as the “Proposal”) would require more frequent and detailed disclosures regarding issuers purchasing of their own stock.
Under the current rules, issuers are required to periodically disclose aggregated information about share purchases on a quarterly basis in Form 10-Q and annually in Form 10-K. This information includes the monthly number of shares purchased; the average price paid per share; the total number of shares purchased as part of a publicly announced share repurchase program; the number of shares that may still be purchased under share repurchase programs; and several related footnote disclosures describing, for example, the principal terms of publicly announced share repurchase programs. The current rules also require footnote disclosure of the principal terms of all publicly announced share repurchase programs, the number of shares purchased other than through a publicly announced program, and the nature of the transaction.
The Proposal would principally require next day reporting of the number and average price of shares repurchased on new Form SR.1 Additional requirements include a description of the share repurchase program’s rationale, the criteria used to determine how many shares the company purchased, policies related to the trading of corporate insiders, and whether insiders traded in the 10-day period preceding the repurchase of shares.
We were commissioned by the United States Chamber of Commerce to assess the soundness of the economic analysis (“EA”) that accompanies the Proposal. As we demonstrate below, the EA contains numerous flaws. Most notably, the EA does not articulate a market failure that justifies the need for potential rulemaking; instead, it makes several observations about anticipated benefits but does not explicitly discuss whether the Proposal solves an actual problem. Rather, the EA primarily relies on simple economic reasoning to qualitatively assess potential benefits, such as greater transparency, regardless of whether an actual problem that warrants rulemaking exists. The EA also makes numerous conjectures about opportunistic behavior by issuers and insiders that are primarily supported by a flawed empirical analysis conducted by former SEC Commissioner Robert Jackson.
The Proposal describes two primary economic considerations for potential rulemaking: (1) the opportunistic use of share repurchases by management and (2) asymmetric information between insiders and external stakeholders. We begin by examining the economic baseline of the EA, which is the de facto alternative regulatory approach. The baseline is an essential part of the EA as it represents a reference point when comparing alternative rulemaking actions. We characterize how well the EA documents the existence of a market failure. We then identify instances where the EA fails to quantify aspects of the baseline as well as the incremental costs or benefits of Proposal, even though, in some cases, opportunities for quantification exist.
As part of our analysis, we review the relevant academic literature and assess whether the evidence supports the Commission’s interpretation of these studies. We note instances where the EA incorrectly or incompletely cites empirical studies. Although some of these deficiencies can be corrected, we conclude that, on net, the EA reflects an incomplete assessment of the academic literature that appears to be designed to frame the economic effects. Prior academic work argues that the baseline sets a benchmark for estimating the costs and benefits of the proposed rule because policy choices will vary based on how the current landscape and market failure is framed. See White, J. T. (2015). The evolving role of economic analysis in SEC rulemaking. Ga. L. Rev., 50, 293-325. 3. We note that certain economic effects are discussed in the Proposal’s introduction but are missing from the EA. Because the EA fails to explicitly articulate a clear market failure, the reader is forced to interpret the discussion in the introduction as the Commission’s description of the market failure. in a manner that supports the Proposal rather than to objectively assess it.
Our overarching conclusion is that the EA fails to convincingly identify the existence of a market failure. As such, the Proposal lacks merit and could lead to unanticipated consequences that are detrimental to the interests of issuers and investors.
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