March 15, 2019
Sen. Chris Van Hollen (D-MD) requested an SEC Roundtable to explore the rules governing executive stock sales after a buyback, releasing a letter from SEC Commissioner Robert Jackson stating that “insider selling [after the announcement of a buyback] is associated with worse long-term performance.”
Commissioner Jackson’s letter responds to Sen. Van Hollen’s request for additional research regarding Jackson’s findings of an increase in executive stock sales after a company announces a buyback. Specifically, Sen. Van Hollen asked whether the sales were “coincidental because [a buyback] might coincide with periods when executives are permitted to sell their stocks.”
Jackson’s staff looked at insider sales prior to buyback announcements to gauge whether blackout restrictions applied. During the period studied (calendar years 2017 and 2018) they concluded that 38 percent of all public companies with insider stock sales restricted executives’ ability to sell before the buyback. Jackson reported “statistically significant” higher levels of trading by executives even when buybacks that were announced within 12 days of an earnings release (when blackout restrictions would apply) were removed from the data.
Jackson also cites indications of lower “long-term” performance where executives sell stock after a buyback. His research compares the performance of companies with high levels of executive stock sales to those with low levels of executive stock sales in the ten days after a buyback compared with 90 days after a buyback. He finds the stock price at companies with higher levels of buybacks is 8 percent lower after 90 days. However, since most investors look at long-term performance over at least a year, and most often at least three years, the value of this comparison is questionable. Jackson admits that this does not show causation, or even whether insiders anticipate lower future returns when they sell.
Van Hollen announced his intent to introduce legislation requiring the SEC to tighten its rules on insider sales. In the release, Sen. Van Hollen stated that the legislation would require the SEC to “review its current buyback rules to do more to protect investors.” Although more voices have called for the SEC to review its rules on buybacks, the issue is not currently a priority.