Jan. 11, 2023
January 11, 2023 1. Would the Act's new excise tax affect the proposed amendments' potential economic effects? (12) If so, what would the specific impact (or impacts) of the new excise tax be? How would the new excise tax interact with the effects of the direct and indirect costs of the proposed amendments on issuers and investors? There should not be any direct effect of the excise tax on the proposed amendment's economic effects. Since the excise tax will reduce the frequency of buybacks, the forms required to report buybacks will simply be filed less often than they otherwise would have. 2. The Staff Memorandum estimates that, (13) based on year 2020 (2021) data, of the approximately 3,300 (3,600) issuers engaged in repurchases and subject to the proposed amendments, approximately 2,000 (2,300) issuers would be affected by the excise tax. Do you agree with these estimates? If you do not agree with these estimates, please explain why. Please also provide alternative estimates and explain why you believe those alternatives would be more accurate. I have no data on this matter and no reason to believe the estimates are inaccurate. The more interesting question is how many companies are engaged in buybacks specifically to manipulate the stock price to benefit executives whose compensation depends on share price or market capitalization. 3. Do you agree with the qualitative analysis in the Staff Memorandum of the likely directional effects of the new excise tax on share repurchases? (14) Is there other, additional research the staff should consider? If so, please discuss this research and why you believe it is relevant to the analysis. No comment. 4. What is the likelihood, if any, given the Act's new excise tax that issuers will replace share repurchases with dividends, including special dividends? (15) Is it administratively more costly to distribute a dividend, or special dividend, as a means to return cash to shareholders as compared to repurchases? If so, please discuss how the costs differ. It seems unlikely that companies will replace buybacks with dividends. Dividends do not factor into executive compensation milestones and may even reduce the share price. 5. The Staff Memorandum states that issuers subject to the proposed amendments, but that are exempted from the new excise tax, would not be directly affected by the new excise tax (but they may incur indirect effects). (16) Are there any additional impacts that the staff should consider? Would these issuers incur any indirect effects? For example, the Staff Memorandum includes as possible indirect effects competitive spillovers of a decrease in repurchases among issuers subject to the excise tax, or changes in investor sentiment regarding repurchases in response to the decline in share repurchases among a considerable number of issuers. Would competitive spillovers or changes in investor sentiment affect share repurchase activity by issuers subject to the proposed amendments, but that are exempted from the new tax? If so, what would these impacts be? What other indirect effects would occur? Investors are generally blind to the effects of stock repurchases. This is a major problem in the context of companies where stock buybacks are responsible for a large portion of the share price, such as Credit Acceptance Corporation (CACC) and GSX Techedu, Inc. (GOTU). Especially at smaller firms, buybacks are a red flag for financial fraud and frequent filing of forms reporting significant buybacks should trigger SEC investigations into the underlying reason(s) for those buybacks. 6. The Staff Memorandum states that the excise tax is not expected to change the direction of the expected economic effects of the proposed amendments with respect to any particular share repurchase that takes place, but that it may affect the total number of share repurchases that occur, and thus may affect the aggregate impact of the proposed amendments. (17) Do you agree? Please provide the reasoning for your response. I agree. Taxes simply aren't the same as reporting requirements. 7. The Staff Memorandum states that the categories of costs and benefits described in the Proposing Release would likely remain the same, but the magnitude may change as a result of the excise tax. (18) Do you agree with this assessment? If not, what other costs or benefits should be considered in assessing the potential economic effects of the proposed amendments? There will be a significant benefit to shareholders from additional disclosures around share buybacks. It is difficult to quantify them, but the additional signaling value is important in terms of evaluating company quality. Right now companies are able to hide their buyback strategies despite opaque quarterly or annual disclosures. 8. Do you agree with the conclusion in the Staff Memorandum that the general efficiency, competition, and capital formation considerations discussed in the Proposing Release are expected to continue to apply except for the potential competitive effects discussed in the Staff Memorandum? (19) Yes.