SEC Rule 10b-18, adopted in 1982 and largely intact today, allows corporate executives to execute open-market share repurchases, also known as stock buybacks, without fear of liability for market manipulation. Stock buybacks artificially inflate share prices to extract value in the short-term for shareholders and corporate insiders, while diverting capital from value-creating, long-term investments, like raising wages and improving benefits for workers or investments in innovation.
This month, the SEC requested comments on a proposed rule to modernize stock buyback practices. Ideally, the proposed rule would begin to reshape corporate governance to better fit the interests of all stakeholders, including workers and the public infrastructure that have enabled record corporate profits, not just shareholders and senior executives. To that end, Director of Roosevelt’s Corporate Power program Niko Lusiani and Roosevelt Fellow Lenore Palladino submitted comments to help ensure that the new rules wield public power to rein in corporate power, increase transparency, and empower agencies with the information needed to reclaim an economy that works for the many, not the few.
Lusiani’s comment discusses how unlimited share repurchases distort stock prices and highlights how senior executives, as shareholders, have free reign to conduct buybacks that enrich themselves. Instead of investing in workers, innovation, and growing productivity, senior management conducts buybacks to boost earnings per share, increasing their personal profits in the process. Lusiani explains that the SEC’s proposed Rule would increase transparency and so is a step forward for corporate governance, and the collection of data would empower future progressive regulation in the US.
Palladino’s comment explains that while requiring regular disclosure of stock buybacks and compelling firms to explain their rationale for executing buybacks are improvements over the current regulatory regime, the SEC’s buyback restrictions still lag by global comparison and contain loopholes regularly exploited by shareholding executives. Palladino emphasizes that the SEC must go further to restrict buybacks and that to do so, the SEC should repeal Rule 10b-18 and embrace its history of proposed Rules designed to curb stock buybacks.
Niko LusianiDirector, Corporate Power
Niko Lusiani is the director of the corporate power Program at the Roosevelt where he leads research focused on corporate power and its impact on the economy.
Lenore PalladinoSenior Fellow
As a senior fellow at the Roosevelt Institute, Lenore works on public policies related to corporate governance, labor, capital markets, and financial technologies.