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Executives are dumping shares straight into buyback announcements.

SEC Commissioner Robert J. Jackson Jr. appointed as SEC commissioner by Trump on January 11, 2018 wants to do something about that.

Let's tune into his speech on Stock Buyouts and Corporate Cashouts.

We all know what happened the last time a Republican-controlled government pushed through a corporate tax holiday in 2004. As that bill’s sponsors hoped, American companies repatriated billions of dollars of overseas cash. But corporations didn’t invest most of that money in innovation. They didn’t invest it in retraining their workforce or raising wages. Instead, executives largely used the influx of fresh funds for massive stock buybacks.

In the years leading up to the financial crisis, top executives at Bear Stearns and Lehman Brothers personally cashed out $2.4 billion in stock before the firms collapsed.

That’s why, when I was sworn in a few weeks after the Trump tax bill took effect, I asked my staff to take a look at how buybacks affect how much skin executives keep in the game. I was worried that lax corporate practices and SEC rules might lead to buybacks that give executives yet another chance to cash out at investor expense.

Skin in the Game Results

  • In 385 buybacks over the last fifteen months, a buyback announcement lead to a big jump in stock price.
  • In half of the buybacks, at least one executive sold shares in the month following the buyback announcement.
  • Twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day. So right after the company tells the market that the stock is cheap, executives overwhelmingly decide to sell.
  • On average, in the days before a buyback announcement, executives trade in relatively small amounts—less than $100,000 worth. But during the eight days following a buyback announcement, executives on average sell more than $500,000 worth of stock each day—a fivefold increase.

Dodd-Frank Skin in the Game

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In the wake of the financial crisis, Congress realized the importance of keeping executives’ skin in the game, so the Dodd-Frank Act included several provisions designed to give investors more information about whether and how managers cash out.

Well, that didn't work did it?

And what's left of Dodd-Frank is going by the wayside soon.

Rules Changes

Commissioner Jackson proposes some rule changes on executive selling.

If corporate managers believe that buybacks are best for the company, its workers, and its community, they should put their money where their mouth is. That’s why I’m here today to call on my colleagues at the Commission to update our rules to limit executives from using stock buybacks to cash out from America’s companies.

And I am also calling for an open comment period to reexamine our rules in this area to make sure they protect employees, investors, and communities given today’s unprecedented volume of buybacks.

Complete Confidence

I have complete confidence in the ability of corporate executive to avoid whatever rules the SEC comes up with.

Mike "Mish" Shedlock