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January 13, 2023

New Tax Law Provides No Basis for Holding Back or Diluting

Important SEC Proposal That Would Improve Disclosures of Stock Buybacks

Better Markets filed a comment letter in response to the reopening of the comment period for the Securities and Exchange Commission’s proposal to modernize and improve disclosures about a company’s share repurchases.

Why It Matters. Stock buybacks, especially by the largest corporations, have grown dramatically in recent years, both in terms of dollar amount and percentage of net income. In fact, for the last two decades, corporate spending on buybacks has represented roughly half of total net income. This type of activity is increasingly viewed as a way for corporate executives to line their pockets at the expense of the long-term health of the company, its employees, and its shareholders— further contributing to financialization and undermining the real economy.

In December 2021 , the SEC issued a proposed rule designed to increase transparency around stock buybacks by requiring daily reports of share repurchasing activity by a company on a new Form SR. The SEC has reopened the comment period in light of additional analysis conducted by the Division of Economic and Risk Analysis (“DERA”) of any economic effects of a one percent excise tax on share repurchases, which was passed into law in the Inflation Reduction Act of 2022.

What We Said. It is certainly a hallmark of good rulemaking and government transparency to disclose new information, and related analysis, that is relevant to a pending rule proposal, and to allow the public to provide comments on how that new information may or may not impact the proposal.  In this case, the IRA’s one percent excise tax on share repurchase will have little or no effects on share repurchase activity; therefore, the Commission should not view the new law as having any impact on the proposed rule. However, even if the new law were to reduce share repurchase activity, it would thereby lead to a decrease in the aggregate costs associated with the proposed rule, while the benefits to investors would remain the same on a per issuer basis. Finally, nothing in the DERA Staff Memo warrants any kind of dilution of the requirements of the proposed rule, especially for small reporting companies, because the new tax law only applies to companies engaged in stock buybacks totaling over $1 million annually, and therefore, will not affect small companies.

Bottom Line. Better Markets reiterates its support for the Commission’s proposed rule to modernize and improve disclosures about a company’s share repurchases. The changes to the tax treatment of share repurchases by the IRA will have little or no economic impact on  the proposed rule and does not provide grounds to alter the basis or need for this important reform.

Read our full Comment Letter here or click the button below.


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