The Buyback Blackout Period Myth. Don't Be Fooled.

Earlier this year, Deutsche bank released a chart, a proposal if you will. Why is it a proposal, I'll get to that in a moment. One of the things we aim to do at Finom Group (for who I am employed), as an exercise in rooting out facts, is to debunk myths in order to value information and data that inundates us as investors and/or traders. One such myth we were forced to debunk this year lands on the principle practice of share repurchase programs. So let's get to it! 


The following commentary was issued in Finom Group's weekly Research Report on March 24, 2019 titled "Yield Curve Inverts, Taking Equity Markets Down: What Next?" (Subscription required). The report aimed to outline the truisms and falsehoods surrounding share repurchase programs, otherwise known as buybacks. With the political temperature running hot for the subject matter, we aimed to focus on the mechanics.

"Earnings season is fast approaching and as such, the notion of how buyback blackout periods will affect the overall market has reared its ugly head.  We characterize it this way largely because of the lack of liquidity in the market place since late 2018. For an understanding of the SEC rules that govern share repurchases by corporates and executives, understand that the rules were created to remove liability from corporations while adding a layer of public disclosure for public market participants."  

  • Rule 10B-18 reduces liability for companies and their affiliated purchasers when the company or affiliates repurchase the company’s shares of common stock.
  • In 2003, the SEC amended the rule, requiring companies to disclose more detailed information on share repurchases on forms 10-Q, 10-K and 20-F.
  • Despite the safe harbor provision, the company must report repurchases in compliance with the various regulations.

"Market participants have largely been under the impression and found with the understanding that there is an SEC regulated blackout period for corporations.  The reality is that there are only 3 real rules offered by the SEC.  We suggest the term “offered” because the SEC rarely has ever levied a case against any buyback program. Here are the 3 rules governing buybacks."

"So here comes the funny part or the disturbing part of the SEC rules concerning blackout periods and/or share repurchase programs.  In the bullet points below, one can see that the SEC does not mandate that companies disclose when they are using rule 10b5-1. Can you believe that? It’s basically saying, “Here’s some rules we want you to follow, but because we have no real way to track, regulate and levy penalties we’re forced to institute an Honor System."

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