Buyback Policies from Top Candidates and Other Legislators

Democratic Presidential Candidates

Former Vice President Joe Biden

Biden has not made any specific policy proposals on buybacks at this point. Biden has commented more on the corporate tax rate, proposing to raise it from 21% to 28%.
In a September 2016 Wall Street Journal op-ed, How Short-Termism Saps the Economy, Biden had this to say on buybacks.

“The origins of short-termism are rooted in policies and practices that have eroded the incentive to create value: the dramatic growth in executive compensation tied to short-term share price; inadequate regulations that allow share buybacks without limit……Performance-based pay encourages executives to think in the short-term. Ever since the [SEC] changed the buyback rules in 1982, there has been a proliferation in share repurchases. Today buybacks are the norm.”

Senator Elizabeth Warren (D-MA)

Senator Warren is a staunch critic of corporate share repurchases. In October, Warren reintroduced the Accountable Capitalism Act. While the announcement had language critical of buybacks, the bill did not include any regulations directly restricting buybacks. The act does, however, restrict the sale of company shares by directors and officers of U.S. corporations for three years if the company executed a stock buyback program.

Warren also is a co-sponsor of the Reward Work Act, reintroduced in March 2019 by Senator Tammy Baldwin (D-WI) and co-sponsored also by Senator Sanders and Senator Gillibrand (D-NY). The proposed bill would repeal SEC Rule 10b-18 (“Safe Harbor” for Issuer Repurchases), effectively prohibiting open market share repurchases. The act does not prohibit or affect tender offers.

The Reward Work Act is the most sweeping and crippling regulation of buybacks submitted thus far. We estimate that greater than 90% of all buybacks are done through open market repurchases protected by Rule 10b-18 (including those done further under Rule 10b5-1).

Senator Bernie Sanders (I-VT)

Sanders is also strongly against share repurchases and has advocated for specific policy proposals. In February of 2019, Sanders and Senate Minority Leader Chuck Schumer (D-NY) wrote an op-ed in the New York Times: Limit Corporate Stock Buybacks in which they outline their case for limiting buybacks and the preconditions for a company to repurchase stock (if their plan was enacted).

No subsequent bill has been introduced but the senators proposed the following:

“Our bill will prohibit a corporation from buying back its own stock unless it invests in workers and communities first, including things like paying all workers at least $15 an hour, providing seven days of paid sick leave, and offering decent pensions and more reliable health benefits.”

If enacted, the $15 minimum wage component would affect market volumes however it may not drastically reduce activity. The buyback market is very top heavy, with the top 20 buyers accounting for over 50% of the S&P 500. Activity is heavily concentrated amongst the Tech and Financials sectors [already generally paying higher wages]. Top Financials repurchasers like JP Morgan, Wells Fargo, and Bank of America (the three collectively equal 10.2% of all S&P 500 buyback volume) already pay $15+/hour wages, as do other big buyers like Alphabet, Charter Communications and even some retail buyers like Costco and Target.

Senator Sanders also co-sponsored the Reward Work Act, along with Senator Warren, which would repeal SEC Rule 10b-18.

Senator Cory Booker (D-NJ)

In September 2019, Senator Booker along with Senator Bob Casey (D-PA) and Rep. Joe Kennedy III (D-MA) reintroduced the Worker Dividend Act. The goal of the legislation is to require companies repurchasing shares to also return a portion of their profits to employees in the form of a “worker dividend.” The specifics of the plan are as follows:

The Worker Dividend Act would apply to all publicly-traded companies with at least $250 million in U.S. earnings… The total value of a company’s obligation would be calculated as the lesser between the total amount of that year’s stock buybacks and 50 percent of the company’s profits above $250 million. That total obligation would then be distributed equally to each of the company’s employees.

For example: If Company A earns $2.25 billion in U.S. profits and repurchases $500 million in shares. Its worker dividend obligation would equal $500 million (the lesser of 50 percent of profits above $250 million—or $1 billion–and the amount of buybacks). If Company A has 100,000 employees, then each worker would receive a payment of $5,000. Company B earns $5.25 billion in U.S. profits and does not repurchase any shares. Its worker dividend obligation would be $0 (the lesser of $5 billion and $0).

Other Democratic Presidential Candidates:

No other specific plans nor legislation has been introduced or co-sponsored by any of the other remaining candidates. The following candidates have made these remarks (or tweets) on buybacks:

• Mayor Pete Buttigieg has made minimal comments on stock buybacks.
• Senator Kamala Harris (D-CA) has not co-sponsored any buyback legislation and has made minimal comments on the subject.
• Andrew Yang, July 2019, tweeted “Stock buybacks largely serve company executives” with a link to a strongly criticizing article in The Atlantic The Stock-Buyback Swindle. 
• Senator Amy Klobuchar (D-MN) has not co-sponsored any buyback legislation. In December of 2018, Klobuchar and Senators Van Hollen (D-MD) and Duckworth (D-IL) wrote an open letter to General Motors Chairman and CEO Mary Barra asking to cancel further stock buybacks in light of employee layoffs.

Other Legislators:

Senator Sherrod Brown (D-OH)

Senator Brown, the ranking member of the Senate Banking Committee, introduced buyback legislation in July of 2019. Similar to Booker’s bill, Brown’s Stock Buyback Reform and Worker Dividend Act would require U.S. companies to pay a “worker dividend”, but for any capital return event including dividend increases and special dividends. The plan specifically states:

• “Require public companies to issue a worker dividend to all non-executive workers… The worker dividend will be equal to $1 for every $1 million spent on stock buybacks, dividend increases and special dividends.

• Lower the permissible amount of stock buybacks a company can make; Impose reporting requirements to ensure transparency into corporations’ stock buybacks; Convert the safe harbor rule to a mandatory prohibition on excessive stock buyback activities; Establish an enforcement mechanism – including a 5-year moratorium on stock buybacks and a private right of action for employees – if a corporation fails to meet the worker dividend requirements.”

For example, a company that returned $10BN to shareholders in the form of a buyback, dividend increase, and/or special dividend, would be required to pay $10,000 to each non-executive employee.

Senator Marco Rubio (R-FL)

Senator Rubio is the lone Republican senator that expressed desire to legislate buybacks, although he hasn’t formally introduced a bill to Congress. In February, Rubio stated a plan to raise taxes on capital gains to discourage companies from repurchasing shares and to equalize the tax treatment between buybacks and dividends.

The only way we see something like this functioning is a blanketed raise of the capital gains tax. There’s no clear way to do so solely on buybacks: capital gains are taxed on realized profits from the selling shareholder, not when shares are purchased. Most buybacks are done in the open market where there is no distinction that the selling shares are being purchased by the issuer.

Conclusion:

The threat to limit buybacks by legislative means remains minimal. Thus far, no proposed legislation has even made it to a vote in a divided Congress, and Republican-controlled Senate. The Republican party has come out against any regulation restricting buybacks and under current conditions any legislative progress on the matter appears highly unlikely.

While the results of the presidential and congressional elections remain to be seen, even a Democratic majority may not be likely to pass buyback restrictive legislation. The corporate tax rate would likely be a higher priority, which would indirectly affect buyback volumes, but buyback repeal or regulations does not even though it has been discussed this primary cycle.

Nevertheless, companies should be prepared to explain and defend their repurchases in the court of public opinion, as the corporate practice garners more and more news attention.