March 8, 2019, | AtoZ Markets - Despite, the insider trading regulations were toughened, the SEC reports insider trading is still rising. The U.S. SEC Commissioner's Robert Jackson research outlines that many corporate executives sell significant amounts of their own shares after their companies announce stock buybacks.
Object of political discussion: SEC Reports Insider Trading Is Rising
The issue of share buybacks used to cause a broad political discussion before. Bernie Sanders of Vermont last month called for limits on stock buybacks. The politicians noted, that buybacks should only be allowed if a company "invests in workers and communities first," including raising wages, providing more sick leave and offering pensions. Recently a Democratic member of the SEC Commissioner Robert Jackson shared his report dedicated to the buybacks and insider selling.
SEC insider trading cases and stock buybacks are growing
According to the U.S. SEC commissioner Robert Jackson (pictured below), corporate executives earn more than their shares after their firms announce stock repurchases than on a regular day. Jackson noted that the stock prices of these companies are lower. According to the SEC research, share prices of the companies underperform the broader market in the long run.
As the commissioner of the SEC reports insider trading is still rising, Rober Jackson said: “My research found that corporate executives cash out much more of their personal stock immediately after announcing a buyback than on an ordinary day,” Jackson said. “The difference in performance between buybacks with executive cashouts and those without is meaningful: Ninety days after the buyback announcements, firms with insider cashouts underperform the other firms we study by more than 8 percent.”
Jackson noted, that SEC research does not show whether insiders’ sales cause lower long-run returns or whether insiders correctly anticipate that returns will be lower so they sell opportunistically.
“But from the perspective of ordinary American investors saving for retirement, I cannot see why that distinction should matter,” Jackson said. “The opportunity to cash out stock-based pay gives executives reason to pursue buybacks that do not produce long-term value.”
Van Hollen finds SEC insider trading reports “very troubling”
The U.S. SEC Commissioner presented his findings from the aforementioned SEC research in a letter to Sen Chris Van Hollen (D-MD), who had questioned SEC Chair Jay Clayton about the pattern of executives selling shares after announcing buybacks. Van Hollen called the SEC commissioner's findings "very significant and very troubling," and suggested one remedy might be to prohibit executive from selling their shares in a "specific period of time around a stock buyback." He called the behavior of managers making a profit at the expense of shareholders, "obviously wrong."
Current SEC insider trading rules do not concern buyouts
Jackson was supposed to announce the results of the study during a conference call with reporters. However, according to Van Hollen, the SEC's general counsel advised Jackson that taking part in the challenge could create problems regarding possible SEC actions in the future.
According to a study by Jackson, companies with insider vendors are inferior to other companies by more than 8 percentage points. "The sale of insiders in a buyout is associated with a deterioration in long-term results," writes Jackson. “It is well known that some buybacks lead to a long-term increase in stock prices, while others only lead to a short-term increase in prices. We show that when executives unload significant amounts of shares after a buyout announcement, they often benefit from short-term price increases due to long-term investors.”
As the SEC reports insider trading is still rising, Jackson noted that the current SEC rules "do not concern the incentives of insiders to pursue a buyout at the expense of American buy-and-hold investors." “One simple solution is to prohibit these corporate executives from selling their shares for a certain period of time prior to repurchasing the shares,” said Van Hollen. It is unclear how long this period may be, but he took the opportunity a couple of years. Van Hollen said the revision of the SEC rule is “too late”, and it’s time to re-open it and seek public opinion.
Cryptocurrencies will be one of the examination priorities
Another point of discussion this year is the regulation of cryptocurrency. In Europe, CySEC has considered to bring crypto under the new EU AML rules. In the US, one of the latest SEC reports on crypto regulation, has indicated that crypto examination are also set as a priority. The Office of Compliance Inspections and Examinations (OCIE) will track the “supply and sale, trading and management of digital assets”. In cases where a digital asset is classified as a security, the goal of the SEC regulatory compliance wing will be to ensure compliance with regulatory requirements.
In the future, market participants in the field of digital assets can expect more monitoring by the regulator. The OCIE will take steps to identify market participants offering, selling, trading and managing these products, or considering or actively seeking to offer these products, and then evaluating the scale of their activities. For firms active in the digital asset market, OCIE will conduct examinations on, among other things, portfolio management of digital assets, trading, security of client funds and assets, pricing of client portfolios, compliance and internal controls.
According to OCIE, areas that are given priority exam are selected on the basis of policy and risk assessment and various sector problems.
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